Celanese Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 24, 2023

There are 15 speakers on the call.

Operator

As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, VP of Investor Relations, Brandon Einach. Please go ahead, Brandon.

Speaker 1

Thank you, Kevin. Welcome to the Celanese Corporation 4th quarter 2022 earnings conference call. My name is Brandon Iosch, Vice President of Investor Relations. With me today on the call are Laurie Reierkirk, Chair of the Board and Chief Executive Officer and Scott Richardson, Chief Financial Officer. As a reminder, today we'll discuss non GAAP financial measures.

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 both the press release as well as prepared comments. Form 8 ks reports containing all these materials have also been submitted to the SEC.

Operator

Thank you. Our first question today is coming from John McNulty from BMO Capital Markets. And we do ask you ask one question, one follow-up, then return to the queue. John, please go ahead.

Speaker 2

Good morning, Laurie. Thanks for taking my questions. So look, obviously a lot of moving pieces out there, but the tough 1st quarter outlook for $1.50 to $1.75 of EPS makes the full year call for $12 to $13 look like a pretty chunky jump. I guess can you help us to bridge that jump in earnings and help us to understand what some of the big buckets are that you expect to turn up or take a noticeable step up.

Speaker 3

Thanks, John. Yes, look, we realized that looks like a big jump But let's kind of go through the math. We really need to deliver about $3.50 for the last three quarters of the year In fact, that's where we've been every quarter in the last 2 years up until this quarter. But if I look at just the jump up from Q1 to Q2, let's start with Acetyls. So in Acetyls, I would expect A $50,000,000 to $100,000,000 increase in Q2 off of Q1.

Speaker 3

We'll start with natural gas. So natural gas Pricing has come down significantly at the end of the Q4 and in the Q1, especially in the U. S. That's a big help for us in Acetyls, our largest Plants in Clear Lake, we have a lot of other facilities in the U. S.

Speaker 3

That benefit from that lower natural gas pricing And with coal staying higher in China and with crude being reasonably high and steady, that really benefits margins for our U. S. Based production, which is a large portion of our asset yields. So if you look just at this natural gas pricing, if it were to hold through the Q2, that alone is probably more than $20,000,000 of uplift in the second quarter. And then if we look at things like the Frankfort BAM restart, that is being restarted a little bit early based on The good increase we've seen here going into March for constructions, paints and coating in Europe a little bit quicker recovery than we So that Western seasonality coming off, that's probably another $10,000,000 And then you just have the normal Good economics we typically experience in the Q2.

Speaker 3

So we see destocking, really being over. We're past Chinese New Year's. We see improvement in construction activities worldwide. And so we expect to see that same kind of volume rebound. As well as productivity, I mean, we last year in 2022 saw productivity at the high range of our historic 100 to 150.

Speaker 3

We expect we'll be in a similar level this year and adding on additional productivity from M and M for the EM site. So that all goes in there. So we feel very comfortable right now with where pricing is that we're actually probably towards the higher end of that range for the acetyl bump up in the second quarter. And then if we look at Engineered Materials including M and M, again Q2 is typically a stronger quarter For engineer materials as well, for a lot of same reasons. We do see the Well, first, let me start with this.

Speaker 3

I mean, we have seen just like natural gas in Asset Hill, we have seen a significant drop in raw material costs in the Q1, which is extending through into the 2nd quarter. This lower raw material cost has let us build lower or not build, but now replace higher cost inventory with lower cost inventory. So that alone as we go into the Q2 is going to be about a $40,000,000 lift for the EM, M and M portfolio combined as we go into as we have the Q2. And then again, we have the typical the destocking is pretty much Can finish here at the end of the Q1. We actually see really good improvement here in March in our order book.

Speaker 3

We see we are past Chinese New Year, so we start seeing the lift from that. I mean to give you an idea, we have seen February, we started the month slow, but we are still seeing orders coming in today for February delivery. This is a big deal. Usually at this time in the month, we our orders have stopped and we don't see new orders come in until the next month. But we're still seeing orders for EM for M and M for February.

Speaker 3

And our March book quite frankly has filled up for both the legacy EM and the legacy M and M This is consistent with the order book that we received in March of 2022. So I think these are all really strong proof points to say, we are seeing the demand recovery coming now as we're moving through the end of February and into March. And we expect that bill to continue to grow through the Q2. We are seeing a modest improvement in automotive production. But people are not destocking anymore.

Speaker 3

So we're seeing order patterns restore closer to normal levels for automotive. And this is very typical with what we also saw coming out of the end of 'twenty one and into 'twenty two. So I think we feel really good about an uplift in EM in the magnitude of $50,000,000 to $100,000,000 as well. And then on top of that, we also will have additional synergies from the M and M acquisition and we expect another uplift of $10,000,000 to $20,000,000 in synergies, in the second quarter of Q1 as well. And like I said, Neste sales, again, productivity So I think we feel quite comfortable in the guidance that we've provided for Q2 based on everything that We see happening now in terms of raw material, energy pricing and recovery of market as indicated by our order books for March.

Speaker 2

Got it. No, that's hugely helpful color. And then I guess just as the follow-up, just maybe a quick one on the debt redomiciling, it sounds like you're kind of part of the way there now. I guess, can we think about all this being done by first half of the year, is that the right way to think about it? Or are you guys waiting for something in particular to maybe change in the markets?

Speaker 2

I guess how should we think about that because it does seem like the rates or lower as you're starting to refinance some of this debt out?

Speaker 4

Yes. Thanks, John. I think we're going to be opportunistic here. I think we're looking and making sure we have the right opportunities. I mean currencies were moving in the right direction.

Speaker 4

We didn't want to make those changes when the dollar was certainly at its strongest because then as things move, certainly From an absolute debt perspective, it would go against us. So we're going to continue to look for the right opportunities there. And we're certainly targeting to get it done here in the first half. But just depending on some of those movements and where the dollar is at, it may linger into the second the early part of the second half.

Operator

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

Speaker 5

Thank you. Good morning, everybody. Yes. Laurie, in your prepared comments, you talked about some of the competitiveness on the EM side. I think it was specific to palm, imports from or exports from Asia into Europe, etcetera.

Speaker 5

How do you see that dynamic playing out as the rest of the year unfolds? Is it as China reopens and there's more localized demand and so that takes care of that or what are you thinking about at this point on that?

Speaker 3

Yes. Thanks, Ghansham. Yes, look, you're exactly right. I think there's 2 factors and we're really starting to see early in Q1, we still had some material Moving over from Asia, we expect that will be mostly done in the Q2 and for the two factors. One that you called out, as we see demand picking up in Asia, there's less incentive to put things on a boat and move it to Europe.

Speaker 3

But secondly, with these low energy prices that we're seeing and the ability to replace our higher cost inventory with lower cost inventory, that's resulting in better pricing for our European customers. And so, the arbitrage we expect we'll be closing here at the end of the Q1 and into the Q2. And so that I think really helps restore the supply demand dynamics. That and of course we are seeing much higher demand now starting to really seeing demand pick up in Europe here in March in Actually combined should resolve the situation in the Q2.

Speaker 5

Okay, great. And then in terms of the sort of the macroeconomic construct, China, you touched on in terms of momentum, just given the sequence of events there. Europe, you just touched on that as well. What about North America as an offset as it relates to a slowdown sequentially, how do you see that evolving in 2023?

Speaker 3

Yes. So I would say North America has been a bit sluggish In the Q1, so far, we have seen more recovery in Europe as we go into March than we have so far in North America, but we don't have any reason to think North America also isn't going to get there in the quarter. I mean, auto bills are strong. We see signs that the destocking is over. Again, natural gas pricing in the U.

Speaker 3

S. And raw material pricing should expect North America to come back strongly as well.

Operator

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

Speaker 6

Thanks very much. Can you tell us what the EBITDA of the M and M business was in 2022? And in the old days, I think you guys thought it was $900,000,000 in EBITDA.

Speaker 3

And

Speaker 6

problems or raw material problems.

Operator

And how much of

Speaker 6

The nylon is sold at monthly contract prices and right now of the M and M business.

Speaker 3

Yes. So Jeff, in 2022, we had expected back at the time of purchase, we expected 2022 to come in at about $500,000,000 of EBITDA. Obviously with the year end challenges in M and M that number was a little bit lower than that. Now, I think we had thought originally that in 2022 they'd be at 800. That's been a more typical number for M and M.

Speaker 3

We believe we could grow that to 900. Now we're saying 700 for next year. If you look at what happened in 2022, I think there was a number of factors. First is with a Take or pay contract that they had for raw materials, although they saw weakening demand, they continue to produce and that led to a lot of inventory and that's going to assets as well. But we saw a lot of demand destruction.

Speaker 3

And we saw it especially in Asia, we saw it a lot on standard grades. And I think as we talked on standard grades by trying to hold prices when other prices were coming down, so volume loss. At the same time, they weren't raising prices Premium grades, which they could have been doing with raw material pricing going up. And these are things that we've had to work on. So we've really been working on pricing over the last 3 months, trying to drive more volume in standard grade, trying to raise pricing in other grades, we've really been working the product pipeline, we've been working cross selling.

Speaker 3

We really the team has been doing Great job working all of these things to really drive back to where we believe we should be at that $800,000,000 EBITDA run rate by the end The 2023. Obviously these things take a few quarters to get going, but we do think we'll be back at that maybe kind of historical level, DuPont Had of 800 by the end of 2023. So in terms of the contract, I'm not really sure, Jeff, to tell you the truth in terms of what percentage of the M and M contracts are monthly versus

Speaker 6

Right. So in terms of getting the $700,000,000 in EBITDA this year, you'd have to average, I don't know, 200 or so for the next for the second, 3rd and 4th quarters. How does the profitability lift from 80 to 90 to that 2 hundred level, how do you accomplish that? Especially because when you read about Nylon 66, The general commentary from consultants is that there's overcapacity and margin pressure. Proving it, what are these dynamics that are listing it in an adverse environment, if the environment is adverse?

Speaker 3

End of the $100,000,000 to $135,000,000 range for synergies. We've achieved about $10,000,000 of that. We think we'll get about $10,000,000 of that in the Q1, that leaves But let's just think about average for the next three quarters. So it's about $40,000,000 right there from synergy uplift that gets you to the kind of $120,000,000 to 1 range. And then we are getting volume recovery.

Speaker 3

As I said, our March order book is now for M and M Basically where it was in March of 'twenty two for M and M and that was still the 1st part of the year was better for M and M. So we have Gotten some volume recovery from Zytel in particular and in Asia. Again, auto builds are very consistent and they're not still back to 2019 levels, but they're consistent. And so we think with volume recovery, We have been pushing through pricing on differentiated products, right. So if you look at all of those things, if you look at as well, not counted as synergy, but regular productivity at our M and M plants.

Speaker 3

We expect Probably get another, I don't know, dollars 40,000,000 $50,000,000 from that this year. So if you look at all those things and start adding up those volumes and a recovery, M and M was affected in 4th quarter and early part of Q1 with the very same factors we were, right, with the same destocking, with the same seasonality and slowdown. And we are seeing them recover from that as well again in March and as we move forward into the Q2.

Operator

Your next question is coming from Josh Spector from UBS. Your line is now live.

Speaker 7

Yes. Hi. Thanks for taking my question. I guess first, I wanted to ask on the Taste JV. Can you talk about how much close, if that's related with that or not.

Speaker 7

It seems like a big number if it is. So can you clarify?

Speaker 3

Yes, absolutely. So we expect to net $400,000,000 to $450,000,000 that we can apply towards debt reduction from the about the JV structure that we've agreed to with Mitsui. If I back up a bit, we also at the same time announced The extension of our joint venture for the Fairway Methanol joint venture. This has been a great joint venture for us. Matsui has proven to be a really great partner.

Speaker 3

And I think it's been really financially beneficial for both companies as well, as well as strategically beneficial. And we see Food Ingredients being in addition to that strong relationship that we built with them through the years. This is really what we were Looking for we've looked at this product for some time and thought it's not necessarily a core piece of our portfolio, but it is Four piece of our operations in Frankfurt. And so by doing a joint venture, we think one will really benefit from the expertise that Mitsui has in food and nutrition, and their ability to market and help us On that end, we think they will also benefit from us continuing to be able to integrate into our Acetyl Chain. We provide acetic acid and now into the Fairway joint venture.

Speaker 3

And we'll continue to benefit from the strong partnership that we have as well as the manufacturing synergies because we will continue to operate the joint venture and it is very embedded into our Frankfurt operations. And it allows both of us to participate in growth in what we think will be continue to be a high growth market for food ingredients, sorbates and sweeteners as you know especially as one of the few if maybe only Western company providing sweeteners anyway of this type, We see a lot of positive movement in terms of volume and demand and pricing going forward. So again, we're really excited about it. And just to reiterate to answer your question, we do expect to be able to pay off another $400,000,000 to $450,000,000 of debt as a result of this joint venture.

Speaker 4

Yes. And then, Josh, With regards to the covenants, the way our covenants are structured is gain on sale of assets is included in EBITDA. And so because this has a very low book basis And while it's an efficient transaction, that $400,000,000 $450,000,000 will be largely gained. So you get the gain that goes into the EBITDA Keith, using then the cash proceeds to pay down debt at the same time and there's a partial offset obviously in EBITDA from the 70% that would go to Mitsui. But That math then works out to be, because it's in EBITDA, about a 0.7 reduction for the debt covenant purposes.

Speaker 7

Okay, thanks. And I appreciate that. Maybe just one clarification there is that, that gain, are

Speaker 8

Can you just give

Speaker 7

us an idea of what the core free cash flow you're expecting at this point, some of the movements between working capital restructuring, etcetera?

Speaker 4

Yes. So for adjusted EPS, we will go ahead and exclude that gain as we do And then on free cash flow, we had previously said $1,500,000,000 of free cash which included about a $200,000,000 improvement overall in working capital. If we see that same $200,000,000 improvement in working capital and we saw inventories move up a little bit just with the lower demand in the 4th quarter, then we would see free cash flow likely a little lower than that 1.5% just because of the lower earnings that we have. We're still working through kind of exactly how the working capital will play out this year. But if we see something in that range, we would expect to be a little bit lighter than the 1.5.

Operator

Thank you. Next question is coming from Michael Leithead from Barclays. Your line is now live.

Speaker 9

Great. Thanks. Good morning, guys. First question on pension, your $12 to $13 a share EPS guide, I believe, includes $100,000,000 hit year over year on pension. When you talked last quarter about $13 to $14 a share, how much pension were you impact were you expecting at that time?

Speaker 4

Yes. Thanks, Mike. So I'm actually going to kind of put some of the other buckets in here that changed from our previous $13 to $14 guidance. D and A actually came in about $75,000,000 better than we expected, but it was eaten up by Pretty good chunk by that pension. So it kind of approached that amount.

Speaker 4

It's a little lower than that $75,000,000 but it was approaching that. And so I think when you kind of largely neutral those 2 things together, but it was in that range.

Speaker 9

Got it. Okay. That's helpful. And then maybe just more of a segmentation or clarification question, but it seems like M and M EBITDA, if I'm reading correctly, is sort of allocated earnings in EM and some centralized or other costs in other. So if you do deliver, say, dollars 7.25 EBITDA from the M and M business Is it correct to interpret that we'll actually see it reported as something like $825,000,000 or so higher in EM EBITDA, but also I don't know $100,000,000 or so higher other costs to offset that.

Speaker 9

Is that the correct interpretation?

Speaker 4

Yes, I think that's right, Mike. It's certainly in that range. I mean, at the end of the day, we need to get no matter what It's falling in. We need to go deliver the EBITDA, over time that we said this business would deliver. So it is about getting the base business back up into those ranges that we had originally said at the time of the deal and that $800,000,000 EBITDA, including the other costs in there, and then driving synergies on top of that.

Speaker 4

So this year with where demand is at, given some of the higher cost inventory that had to be worked off at the beginning of the year, it's going to be a little bit lower. But then building that back and then putting synergies on top of that is exactly what Tom Kelly and the team are focused on.

Speaker 9

Great. Thank you.

Operator

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

Speaker 9

Hi, and good morning, everyone. Just a quick clarification around the subject matter of the prior Question. For M and M in the Q4, you had guided to $50,000,000 to $60,000,000 of EBITDA. And then there are kind of two numbers discussed in the prepared remarks. 1 is $56,000,000 1 is 39, Which is the actual apples to apples comparison, the 39 or the 56?

Speaker 4

It's the 39, yes.

Speaker 1

Okay. And then if

Speaker 9

I could ask, this This is the Q1 I can remember and I don't know how long where your volume in automotive was below build and that takes us through a variety of good, bad or indifferent auto environments. So I just if you have any further color on sort of why that happened? Because I kind of remember other times where things were tough, but your team found a way to your innovation or your activations or what have you. So what happened this time that was different?

Speaker 3

So actually, Vincent, Q4 of 2021 was exactly like We have the same issue. We were lower than builds because of destocking. And I think there's a number of things that happen. I mean people hit the end of the year, they want to make working capital numbers, so they destock at the end of the year for a year in inventory control. Prices have been coming down because raws are down and natural gas was falling.

Speaker 3

So that made people more Confident in pricing going forward, so they believe prices going forward are less than they are now. And so they choose to draw down their inventory in anticipation of lower prices. I think the supply chain issues have been largely resolved around the world and so people are more confident about being able to buy material, so why we saw a lot of build of stock in 2022 because people were worried about getting resins. I think we see going forward, people feel The supply chain issues are largely resolved. So the dynamic is actually very similar at the end of 2022 as it was at the end of 20 21.

Speaker 3

I would say a little bit what's different is usually the Q4, as a magnitude with a little bit was more in 2022, I'd say primarily because of Asia and usually in Asia we have a pretty good Q4 in advance of Chinese New Year's. But this year because of the resurgence of COVID in Asia, things were quite slow in Asia in Q4 as well. And so I'd say the dynamic was a little bit more pronounced this year. Obviously Europe was even a little bit slower just on the malaise we've seen in Europe all year. But the dynamic was very similar and I think the reasons for destocking were very similar to what we saw at the end of 2021.

Speaker 3

And again, January started slow. We've seen improvement here as we've gotten through the second half of February and order books are looking consistent with March of 2022 order books for March of 'twenty three. So we feel like we've gotten past these dynamics into the market and high margins. We feel like we're back on that trajectory as of March.

Speaker 4

Okay. Thank you for all

Speaker 9

the detail. I appreciate it.

Operator

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

Speaker 10

Hey, good morning. If I did the math for 23 for adjusted EBIT for EM, looks like you need to be between 1.2 to 1.3 and Acetyl chain 13 to 14. But I guess my question is if you think about where they could be longer term, maybe 25%, 26%, where do you think EM should be able to get to? And then if the 13% to 14% is the new foundational, what would the mid cycle as potential be a couple of years out.

Speaker 3

Yes, that's a lot of questions. I'll roll into one. Mike, let me see if I can parse that apart. So if we look at $23, there's a lot of ways we can get to the $12 to $13 and there's A lot of things that could happen in terms of energy price and everything else. I would think of it as going forward, we including 2023, We expect EM and Acetyl to contribute roughly evenly for the next few years.

Speaker 3

This year it might be a little stronger on Acetyls than EM as we work through Kind of the restoration of M and M based earnings and start to capture synergies. But I would say for the next several years, I would consider them roughly equal because we also have Clear Lake project coming on this year, which is going to add another $100,000,000 to Acetyl. We have some BAM expansions and other things So, I think that's a good starting place. If we look at foundational level of earnings, what I would say is, Today, we think it's about $1,000,000,000 to $1,100,000,000 that was before TOE. TOE is going to be You know, at or above kind of the 250 that we called out at the time of the Investor Day in 'twenty one.

Speaker 3

So that kind of puts you in that 1.25 to 1.35 range, which is pretty consistent with the numbers you saw, but then again we will add $100,000,000 on a full year basis for Clear Lake. But that is again the foundational level of earnings. So we're still operating at very high capacity utilization in asset yields Despite the softness, despite everything else, even in the Q4, our utilization was 70% in China, but 90% global basis. That's still pretty high and that's I think where we're going to see maybe a little more volatility in acetyls as the market Going to react more quickly to outages due to turnaround or unplanned outages or movements in raw material Pricing. So I can't really say what I think the mid range is, but I would just say there's definitely we've seen in Acet Hill, we can see a pretty Sharp spike up in a very short period of time as the market reacts to short and medium term changes.

Speaker 10

Great. Thank

Speaker 3

you. Thank

Operator

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

Speaker 11

Good morning, Laurie. Laurie, obviously in the prepared remarks, a lot of commentary around destocking, restocking and the like. I was hoping you could give us some historical context as you look at your portfolio. In terms of destocking, historically, how long have your destocking cycles lasted? What did the restock look like once the destocking was over and the like?

Speaker 11

I'm just trying to get some sort of perspective in terms of where inventory levels are right now, what the bounce back could look like and the like?

Speaker 3

Yes. So, I would say historically, we've seen destocking last kind of a quarter, especially in EM, maybe a little bit less than in acetyls because they don't have as much inventory. And I would say I wouldn't even say we're necessarily seeing restocking at this point. I would say we're seeing a return to normal levels of demand. Typically when we see restocking is when prices start to go up and people start getting worried that prices in the future are going to be higher than they are today, so they take the opportunity to build inventory in advance of an anticipated price increase.

Speaker 3

Again, as I said earlier, I think with where we are today, where raws are down, natural gas is The anticipation in the market is that prices are going to go lower or stay low. And so I don't think we'll really see restocking until we see a turn up. But we do see a return to normal levels of demand starting now in March.

Speaker 11

Understood. Understood. As a follow-up on the Acetyl Chain side, you guys talked about how pricing through the quarter was Chinese pricing at cost curve levels. Yet despite that you guys obviously idle some facilities, Yes, you generated around 25%, 26% EBITDA margins. So, I am just trying to get a better sense of Celanese's cost curve positioning as it sits right now?

Speaker 3

Yes. So I think there's a couple of components to that. I think in China specifically, while I believe throughout the end of Q4 and into the beginning of Q1, we were at the Cost curve in China, in terms of the industry, our cost position is a bit better than that. And it has to do with The scale of our operations, the technology that we have and therefore improved cost basis we have versus the vast majority of the producers in China. So we continued even when the rest of the industry was at the cost curve to make even a small amount of margin in China.

Speaker 3

And then of course, we're benefited by the fact that we have a very large Facility in the U. S. Gulf Coast. So when we saw natural gas prices coming off in towards the second half of the Q4 and as we've gone into the Q1 with low natural gas prices, that is a big margin uplift for us versus people who are producing out of coal or even Crude at these kind of prices and that opens up windows for us to move material to Europe and other parts of the world out of the Gulf Coast. And so I think it is that global optionality that we have, that global footprint as well as the optionality we have to move things up and down that really allow us to continuously deliver high level of margins from what some might consider Commodity business, it certainly does not give commodity returns.

Operator

Thank you. Next question is coming from P. J. Juvekar from Citi. Your line is now live.

Speaker 12

Yes. Hi. Good morning, Laurie and Scott. Laurie, do you have a long term view on the competitiveness of your European assets. And what I mean by that is European VAM capacity was shut down.

Speaker 12

Is that the marginal capacity that goes in and out with the market like what Singapore plant used to do in acetic acid. Can you just take a step back and explain to us sort of the marginal capacity in Europe and your plans there?

Speaker 3

Yes. No, thanks for the question, PJ. Look, Maybe to clarify, so BAM going down in Frankfurt wasn't because BAM couldn't make money It was just we saw the demand go down so much towards the end of the year. I mean BAM demand in December was down or in the 4th quarter was more than 50% off Q3. So we had a really huge demand destruction In the Q4 because of pricing, because of the weather, because of destocking, because of all of those things.

Speaker 3

And so but even at that, I mean, we could have run them profitably. It is not Normally the most expensive, BAM production in our network, but because of the high pricing and we were seeing in Europe last year, it just made sense because total capacity for the globe was down. It just made sense that we cut shutdown Matt's facility that was challenged due to energy pricing and move material from other lower cost energy locations. But we're starting it up now. I mean, the March order book for VAM in Europe is really the strongest we've seen in 6 months.

Speaker 3

So now we need IPH and it makes sense. We're going to be about I think that the order book right now is about 85% is what we saw in the Q3. So it makes sense to start a van. We have lower energy prices. So again, Frankfurt returns to Not being the highest priced one.

Speaker 3

So again, this is the beauty of a global network. We have the optionality to take units Down to skew where we make it based on what is most cost competitive at the time based on where the demand is at the time And that just happened to be Frankfurt last year, but it could be something different in the next year. But that's why we like having all of this

Speaker 12

Great. Thank you. And then on M and M, it seems like it was really under managed in last 1 year of ownership. Do most of M and M's issues are reside in more on nylon area? And can you upgrade M and M I think you had more EV exposure than them.

Speaker 12

And so is there a natural upgrade there? Thank you.

Speaker 3

Yes. So I would say if you look at the portfolio from M and M, certainly nylon was the most I think elastomers was more robust and even within the nylon portfolio probably high temperature nylons and some others didn't see the impact, it was more I would say in ZYTEL and the PA66 line. And as we've called out before, I mean there were many issues around decisions being made around pricing, both positive and negative, maintaining volume in standard grades and those sorts of things. And there were very high raw material costs and take or pay contract that requires them to take it. So I think there's just a lot that went into that underperformance in 2022.

Speaker 3

But the good news is these are things that are fixable and this is what Tom and his team have been working very hard on in the last 3 months is moving the pricing, Getting the inventory down in the Q4, which certainly hurt us in the Q4, but will help us now as we go forward in 2023 and are able to sell lower cost basis inventory, more in line with pricing. So I think the good news is going forward, this is all stuff that is And we are working rapidly to do so.

Speaker 4

Yes. The earnings power of this combined portfolio hasn't changed from when we announced the deal a year ago. If anything, I think it's we're even more convicted around that going forward. There is near term challenges and we've been over the last several quarters very clear about the disappointment in the performance It is requiring a big lift in the near term, but the long term earnings power of these combined portfolios then combined with the Acetyl chain, as you look out 3 to 4 years, it's very substantial.

Operator

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

Speaker 2

Yes. Good morning. Laurie, can you elaborate on the 1,300,000 ton expansion of acetyl capacity at Clear Lake? What are you baking into your numbers with regard to timing of the start up and operating rate given the current market conditions? And then any thoughts on how you would see that earnings trajectory evolving through this year and into 2024 would be helpful.

Speaker 3

Yes. So, the project itself is going well. We are still call it roughly half of the year. At the time we did the project, we called out while we have the ability to run 1,300,000 tons additional. We really did it as a productivity project.

Speaker 3

So savings that we get from being able to move volumes directly to Europe, savings that we get from, catalyst savings, energy savings, etcetera. So of that $100,000,000 a year credit, we probably will only see about $25,000,000 of that this year, because we have start up costs, we have ramp up I'm all that sort of thing. So I'd expect to see about $25,000,000 of that credit this year. And then next year we should be at the full 100. Now having said that, to the extent that demand delivers continues to grow robustly and energy prices continue to be so favorable on the Gulf Coast, it will make sense to try to run the unit for volume as well, what point that will be at?

Speaker 3

I couldn't say at this point. It's going to depend on Demand in raw material and energy economics. But if that were to happen, that clearly is a higher return case for that project that We had with just the base productivity number that was baked in there.

Speaker 2

I see. That's helpful. And then secondly, if I may, a couple of Financial questions for Scott. Will you comment on your 'twenty three capital expenditure budget? And with regard to the Q1, what level of interest expense are you baking into your EPS guide?

Speaker 4

Yes. So, capital, we still expect to be in kind of that $550,000,000 to $600,000,000 range. And that Where we land there will really be dependent upon where we see the demand recovery as well as the outlook into the out years. And as we We continue to really put the combined EM and M and M portfolios together. And From an interest expense standpoint, we're in that kind of $600,000,000 again that $550,000,000 to $600,000,000 range for the year and we'll have about a quarter of that here in the Q1.

Speaker 2

Thank you very much.

Operator

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

Speaker 13

Yes. Hi, good morning and congrats Mark Murray if you're listening. Laurie, I wanted to ask about the level of auto builds that you have embedded in the guide for the year and where you think Celanese can perform relative to that level of industry auto builds?

Speaker 3

Yes. So we're assuming our 2023 forecast is basically assumed Flat in 'twenty three to the second half of twenty twenty two. So that's kind of like at a $85,000,000 range, Which really aligns pretty well with the IHS outlook this year, which they're forecasting an increase of 3.6% that percent up, Asia up about 2% with China being the weakest point at 1%. Still, I would say, we're still though 5% lower than 20 But we do believe that that we're pretty consistent with IHS on this. We believe auto builds are going to be constrained by chip availability, not by demand, we think the pent up demand is still there.

Speaker 3

And so to the extent chips would be more available, I think autos will build. Other years as we've seen sometimes they're not as available and but we're assuming kind of flat to second half twenty twenty I would say, we would expect our contribution ourselves into auto to be maybe a couple percent above that and that's based upon a few things. One is, the locations where we're stronger. So, historically we've been stronger in the U. S.

Speaker 3

And EU. Now with M and M, they've always been a bit stronger in Asia, but even having said that, I think we think we'd be a few percent above that. The other thing is the presence that we have in electric vehicles. I mean, we over 10% of our sales by volume go into electric vehicles from the heritage, EM portfolio. And we continue to see that EVs are growing at a faster rate than ICE if you look at the forecast going forward.

Speaker 3

So based on that, I would assume a couple percent kind of low single digit Percent that we would expect to be over the build rate in terms of our auto growth.

Speaker 13

Got you. Thank you. And I know maybe a question for Scott. I know that the comment was the M and M inventory levels were really high and elevated given the take or pay contracts ended the year at $2,800,000,000 in terms of your inventories, how should we think about that the impact of maybe inventory reduction on working capital in 2023.

Speaker 4

Yes. As I said earlier, Frank, on the free cash flow question, we'd like to see at least a $200,000,000 Reduction, which will largely come out of inventory, as we work through the year. I mean, that's going to largely be dependent on a few things. 1, being able to bring absolute volumes down. 2, depending on what were to transpire with raw materials.

Speaker 4

And I think with energy and gas already coming down that will give us some wind at our back. But we really would like to see the volumetric reduction kind of contribute to that $200,000,000 in total and then any pricing reduction be on top of that. So we're kind of hoping to and planning for that $200,000,000 reduction right now.

Speaker 5

Thank you so much.

Operator

Our next question today is coming from Matthew Diouf from Bank of America. Your line is now live.

Speaker 8

Good morning, everyone. I know you adjusted term loan covenants, but do you still have to hit the 3x net debt to EBITDA by year end 2024 that was stipulated by the rating agencies and look, if I just use consensus EBITDA and hand up consensus EBITDA, I can probably well be wrong, but like You gave yourself some accumulative cash flow generation over the next 2 years, but that consensus EBITDA puts you at like 3.5%, 3.3%. So Is there a concern internally about this? And do you start thinking about other asset sales? Is that necessary?

Speaker 3

Look, I don't think there is a concern internally as we've said since the time we did the deal. I mean, there are always levers that we can Do. I mean from an asset sales standpoint, again, we don't feel we're in a position we have to do an asset sale. I mean we did Food Ingredients because We have the right partner with the structure we wanted that would give us both benefits and allow us both to participate in the growth in that business. And so the timing was right to do that.

Speaker 3

And I would say we will continue to be opportunistic with Both our legacy businesses as well as our acquired businesses. If and when we have the right buyer at what we think is the fair price, of course, we would consider it. But We believe that although this year has started slow, the recovery we expect to see this year, our ability to generate cash from working capital and others that we will be able to meet the expectations of the rating agencies this year as well as next year and into the future. Scott?

Speaker 4

Yes. I mean, look, we viewed this as a near term challenge that required a near term solution and that was to amend the covenants. We're still pushing to get to that 3 times leverage at the end of 2024. And it really starts with, as Lorie talked about, generating cash, generating cash to pay down debt, lower that interest I talked about the M and M incremental interest of $550,000,000 to $600,000,000 We have legacy interest of $60,000,000 to $70,000,000 Lower that by paying down debt, and then also find ways at which to lower that interest cost through redomiciling some of that debt as we talked about earlier on the call. So it is really just about systematically bringing the debt down through cash generation.

Speaker 8

Thank you. I appreciate that. And then on the So like I know acetic acid is pretty stable from a supply perspective outside of yourself and what you're doing clearly, but Since you're calling for like decent fan and EVA capacity growth over the next 2 years, does that impact your spreads? I know demand growth there has been pretty good. Does that get absorbed?

Speaker 8

How do we think about that?

Speaker 3

Yes. So if you look at what's happening, There are some bills going on. So at Seq Asset, we do expect one startup in 2023, late 2023 In China, we're also expecting a few BAM start ups between 2023 2024. But if you look at the typical growth that we see for the Acetyl chain, We need a full plant kind of every other year. So I don't think the rate of growth that we're seeing is inconsistent with the With the growth in the world, we are still at fairly high utilization.

Speaker 3

Again, I think the fact that we are at high utilizations will keep the volatility a bit more. So we'll do as we saw in Q4, you may during periods of low demand and seasonality go to the cost curve, but that can recover quite quickly. But I don't see it having a major impact on our margins going forward on kind of a long term or

Operator

Thank you. Our next question is coming from David Begleiter from Deutsche Bank. Your line is now live.

Speaker 14

Thank you. Laurie, in the comments you mentioned some destocking in the Americas and paints and coatings and construction applications, can you give

Speaker 2

a little more color on what

Speaker 14

you've seen there and where we are in that process?

Speaker 3

Yes. So what we typically see seasonality because obviously when it's cold and snowy And so that's typical. I would say also this year because we're coming off a period of high pricing for many of these materials because of the higher raws and the higher energy we saw during 2022. I think people took the opportunity much like we did in EM for example to draw down some of their inventory through the end of the year and get rid of Higher cost inventory to make room for lower cost inventory going forward with anticipation of lower energy and raw material costs and pricing. So I think that's really the dynamic that we saw this year.

Speaker 3

Again, in the U. S, we haven't Really seen the pickup yet as we have say in Europe, but I think it will come. There's no kind of structural reason that we think paints, coating and constructions is going to be off in 2023 versus 2022.

Speaker 14

Understood. And just in acetyls, you referenced a $60,000,000 earnings increase versus the last trough. Can you try to bridge that gap? What's improved in your operations? Because you've always been a good operator in this business, but you seem to have take a step up since over the last couple of years as well.

Speaker 3

Yes. Look, I think it's a number of things. We've continued to invest in our assets both foundationally, so investing in reliability and quality, energy savings, productivity. So we've Continue to improve our cost basis. From that, we've improved our contracts in many of our areas for raw materials for the acetyl chain.

Speaker 3

I would say it's really the improvement in productivity, the improvement in contracting, as well as some of the minor kind of Capacity adds, that capacity creep that we've had across our facilities, which gives us additional optionality and the addition of Elotec, which gives us further optionality down into the chain, which is especially helpful as we move into these kind of slower winter months.

Speaker 1

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

Operator

Certainly. Our final question today is coming from Jadeep Pandya from On Field Research. Your line is now live.

Speaker 5

Hi, thanks a lot for taking my question. Just basically wanting to understand in the context of Capacity shutdowns in the upstream side in nylon chain. How do you see yourself with regards to positioning in the value chain? Is this fundamentally more for you or is it fundamentally more negative for you

Speaker 11

in this context? Thank you.

Speaker 3

Well, prior to the acquisition of M and M, obviously, we were a big buyer of nylon and would have been Unhappy to see shutdowns in the upstream because that was lower price. But now that we both polymerize as well as compound nylon, I would say generally I would consider this help for us as it tightens up the amount of nylon being produced and should raise value across the chain.

Operator

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

Speaker 2

Thank you. I'd like to thank everyone for calling in today.

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Earnings Conference Call
Celanese Q4 2022
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