Celanese Q2 2023 Earnings Call Transcript

Presentation

[Operator]

Greetings. Welcome to the Celanese Second Quarter 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.

At this time, I would like to hand the call over to Brandon Ayache, Vice President of Investor Relations. Thank you. You may begin.

[Brandon Ayache, Vice President of Investor Relations at Celanese]

Thank you, Darren. Welcome to the Celanese Corporation Second Quarter 2023 Earnings Conference Call. My name is Brandon Ayache, Vice President of Investor Relations.

With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer; and Scott Richardson, Chief Financial Officer. Celanese distributed its second quarter earnings release via Business Wire and posted the prepared comments on our Investor Relations website yesterday afternoon.

As a reminder, we'll discuss non-GAAP financial measures today. You can find definitions of these measures as well as reconciliations to the comparable GAAP measures on our website. Today's presentation will also include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found at the end of both press release and prepared comments. Form 8-K reports containing all of these materials have also been submitted to the SEC. As we published our prepared comments yesterday, we'll go ahead and go directly to questions.

Darren, please go ahead and open up the line for questions.

Questions and Answers

[Operator]

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Our first questions come from the line of Ghansham Panjabi with Baird. Please proceed with your questions.

[Ghansham Panjabi, Analyst at Robert W. Baird]

Hey, guys, good morning. I guess, first off, Lori, in your prepared comments you had some comments about China and some of the trends that you saw in 3Q. I was just hoping you could give us a little bit more color in terms of how things are evolving at that point in context of all the chatter about stimulus, etc. Are you starting to see any signs of that permeating through to your business?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Thank you, Ghansham. When we look at China, it's been a difficult year in China, clearly, as we've seen depressed demand, consistent with the rest of the world but probably more pronounced in China. I think what we see different now as we start moving through the year, and we saw some signs of it early in 2Q already, is despite lower demand conditions, conditions especially for the acetyl chain seem a bit tighter.

And the reason I say that is when we saw some unexpected outages in the second quarter and here really in July, we did see pretty rapid price response to those outages, which suggests that there's not a lot of spare inventory or spare capacity in that area. And if you look at utilization for acetyls, for China -- for global, it's around 90%, about the same in China.

So again, that suggests to us that although demand hasn't recovered significantly, there is enough demand mix with the supply that we are in a place where we can see some price movement up as we see supply growing. I would say we're not seeing a lot of response yet to the stimulus. We hear a lot about it. We haven't seen a lot of response yet. But we think it's coming. And there are some pockets of strength in China, in particular, auto has remained pretty strong in China and the broader Asia area. But we see the pockets of weakness as well, electronics, especially consumer electronics, consumer goods, and I would say, challenged by the situation in Europe and the core economy in Europe, which is limiting exports out of China, which is also, I think, putting a damper on production of goods in China.

[Ghansham Panjabi, Analyst at Robert W. Baird]

Okay. Terrific. Thanks for that Lori. And then in terms of the current operating environment, obviously, it's very complex. And you're pulling the levers that you need to in terms of managing supply, et cetera. In the scenario that this sort of complexity spills over into 2024, what are some of the other internal offsets we should keep in mind as it relates to the variances '24 versus '23 from an earnings standpoint?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Ghansham, I think it's a good point. We really have no visibility into 2024 at this time. So, we don't really know what demand is going to look like in 2024. If I had to guess, I'd say it's going to be better than 2023, but we don't know.

But there are a few things we do know that we know will give us an uplift, and we are confident will give us an uplift in 2024. So, if you start with the engineering materials side, with the amount of inventory draw down we're doing this year, we will be able to have completely flushed through our higher cost inventory as we move into 2024, which will give us lower variable costs in 2024.

We'll see less hits to our P&L from the inventory reductions. We'll see those in 2023. We don't anticipate a lot of those continuing into 2024. So that will be an uplift. We have an additional $150 million of M&M synergies, which will hit next year. That's helped by our first quarter SAP integration, which will get everything on the system and give us additional opportunities for synergy as we get everything fully integrated and cost takeout.

And of course, with the lack of destocking, I would expect to see next year since we'll have taken so much destocking this year, in addition to that lift we'll get from share recovery, we should continue to see M&M volume recovery in particular.

On the acetyl side, we know at a minimum, we have at least this additional $100 million contribution from Clear Lake acid that we have next year. And then with the more than $1 billion debt reduction that will take this year, we'll have lower interest expenses next year. So again, if you take all those factors, those are things that we feel very confident will lift our earnings from '23 to '24 regardless of what happens to demand.

[Ghansham Panjabi, Analyst at Robert W. Baird]

Thanks so much.

[Operator]

Thank you. Our next questions come from the line of Michael Leithead with Barclays. Please proceed with your questions.

[Michael Leithead, Analyst at Barclays]

Great, thank you, good morning. First question, when you look at the weakness in Engineered Materials during 2Q and into 3Q, can you help us roughly understand how much is just due to weaker end demand versus how much is due to weaker price? And other than POM, can you talk about where you're seeing the most competitive pricing pressure today?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Sure. Thanks, Mike, for your question. As we look at Q2, if we look at what we had guided to versus our performance, I mean, clearly, we were below what we had expected in the quarter. I'd say half of that gap came from the M&M side. About half of that was really the inventory drawdown in M&M, which we really hadn't anticipated, so the earnings associated with that. And the other half is really just the weak demand, again, especially industrial and electronics.

And how I would try to describe what's happened in demand if you look at differentiated products, that's really where we've seen lower volumes. We've seen our customers taking lower volumes of differentiated products, again, because they don't have the end market for their goods. And we haven't moved price on differentiated. We've been able to hold price, but we've just seen the volume drop off.

We have chosen to take molecules instead of moving them and therefore not needing them in differentiated. We've gone ahead and increased sales into the standard grade market, where we are able to capture volume but at a lower margin or a lower price. So, it is a combination of volume and price and it is a big factor of mix in terms of less differentiated, more standard grade, again, allows us to keep volume which we think is important as we move towards recovery, but we've had to take some price concessions to make that happen.

And in terms of what molecules -- I mean, POM is certainly the big one, I'd say, for the heritage selling these molecules. We've had a few others, especially those more differentiated molecules that go into electronics, connectors and that sort of thing, which have also had a volume impact. I think it's short term. I think we'll see recovery there. And then on the M&M side, it's nylon. And again, I would say it's that switch from differentiated standard grade is more significant in terms of earnings than necessarily the volume -- any volume impact.

[Michael Leithead, Analyst at Barclays]

Okay. That's super helpful. And then just second, if I look at your updated EPS guidance, it seems to imply going from about $2.25 at the midpoint in the third quarter to slightly north of $3 in 4Q. So, can you just help us understand what you think kind of gets sequentially better there in the fourth quarter?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Sure. As we move from the third quarter to the fourth quarter, there's a couple of things happening. One is we have initiated about an additional $60 million to $80 million of cost control. And most of that impact will show up in the fourth quarter since this is work that we've been doing just the last few months. So most of that will show up in the fourth quarter. You have additional M&M synergies, which show up in the fourth quarter versus third quarter. And then we are expecting a pretty robust fourth quarter.

In fact, right now, we would say we would expect fourth quarter to be our best quarter of the year. So partly, we think that's on destocking. We think destocking in the Western Hemisphere should be over for the most part in the third quarter, probably a little bit of destocking carrying into the fourth quarter from Asia. We also think we'll have less seasonality. Because we've had so much destocking across the year, we wouldn't expect the usual amount of seasonal destocking that we see in the fourth quarter.

And the last factor I would say is given the acquisition of M&M, we are now more heavily weighted towards Asia and China than we were before. And typically, fourth quarter is a very strong quarter in Asia and China as we go before Chinese New Year, which will more than offset any seasonality we would expect to see in the Western Hemisphere.

[Michael Leithead, Analyst at Barclays]

Great, thank you.

[Operator]

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

[Jeff Zekauskas, Analyst at J.P. Morgan]

Thanks very much. Can you talk about VAM volume growth or contraction by geography, please?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Thanks, Jeff. On VAM, Jeff, in general, the markets have been a little weak for VAM, as we've seen. I would say Europe is still our most challenged geography. Really, there's not been a rebound in paints and coatings, construction and building as we continue to see the economy really drag on VAM. I think globally, the indication of this is we do see VAM utilization has moderated into the mid-80s on a global basis, which is the lowest we've seen for many years, I would say, I mean, really since early COVID.

We are seeing some recovery in VAM in the U.S., I'd say, especially -- or in the Americas, I should say. Especially in packaging, packaging continues to be pretty strong. And that's one of our bigger end markets in the Americas. And then in China, although we see some of the more industrial uses of VAM coming back, again, not seen a lot of rebound yet in construction and building, although with some of the stimulus that's been announced, perhaps that has to come here in the second half.

[Jeff Zekauskas, Analyst at J.P. Morgan]

Okay. And then for Scott, are there any hard objectives that you need to reach in order to retain your investment-grade rating? Or are there no hard objectives?

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Yeah. I think, Jeff, we've been talking very consistently going back to when we announced the deal in 2022 about two focus areas. The first is reducing net debt by $1 billion in 2023 and then achieving three times levered towards the end of '24 into early '25. And I think those continue to be where we're focused on. I think that first objective, as we called out in the prepared comments.

We're very confident given the cash flow that we're going to generate this year of hitting that $1 billion of debt reduction and then with the additional proceeds coming in from the Food Ingredients transaction, that will allow us to actually go up another $450 million above that from a debt reduction perspective.

So definitely on track and tracking ahead for that first objective and then continuing to build plans and a focus around cash generation and harvesting as well as the EBITDA lift into '24 that Lori talked about a few minutes ago to be able to get to that second objective.

[Jeff Zekauskas, Analyst at J.P. Morgan]

Great, thank you so much. Thank you. Our next questions come from the line of Josh Spector with UBS. Please proceed with your questions.

[Josh Spector, Analyst at UBS Group]

Yeah, thanks for taking my question. Just, in your prepared remarks, you talked about the mix impact within M&M, and just recall one of your opportunities to grow earnings, you're going to go after some of the more commodity markets that maybe DuPont walked away from. Has anything there changed in terms of that mix impact or really where you can go after different shares? Any of that taking place this year? Or is that more of a longer-term target now?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

No, I wouldn't say the longer-term target. It's just -- it will take us probably through the end of '24 or maybe even in '25 to recover all of that volume. I mean, some of the strength you see in M&M volume is starting to get some of that standard grade back. Again, we've had some offsets though as we've had lower demand for differentiated grades. But we have been able to go after and get some of that standard grade back.

I mean, the good news is DuPont's has really been speced into all of these standard grades at some point. So it's not a question of having to recertify. But some of the standard grade markets do work on contracts. So we need to wait for people's contracts to roll out so we can get the opportunity to go in there.

So, I would say we're on track with our plan to recover standard grade, more commodity grades, if you will, to use your words, materials. But it is something that will take us several years to get it back fully, again, just because of the way the business is contracted.

[Josh Spector, Analyst at UBS Group]

Thanks, and just on the cash side, I guess, I mean, with the JV, you liberated some additional cash, I mean, how do you think about the opportunities there over the next year or so? Are there any other opportunities that you could maybe accelerate because of the uncertain demand environment? Or should we think about improvement being more organic based? Thanks.

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

So I'll let Scott comment on the math. What I would say is, look, we remain confident in our ability to generate sufficient cash flow through earnings and through inventory drawdown and other steps to meet all of our debt requirements and commitments. And so, we'll continue to be opportunistic as we always have been in terms of future divestments and opportunities. That really hasn't changed, again, because we have a lot of confidence in our ability to meet our cash commitments.

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Yeah. And I think while we'll be opportunistic on possible other deals, our focus really is on what we can really control. And we've been now talking most of this year about reducing our inventories and harvesting cash from the balance sheet and then focusing on cash, our capex, bringing that down to $500 million this year, and then as we put in the prepared comments, lowering even further down to $400 million next year.

And so, with that and then the expectation of higher earnings, we do believe that as we continue to work our way through the second half of this year and then into next year, the free cash flow generation will be robust and then we will use that cash to continue to aggressively lower that.

[Josh Spector, Analyst at UBS Group]

Thank you.

[Operator]

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

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you and good morning, everyone. Scott, I'm wondering if you can give us any more color on your comments in the prepared remarks about being able to term the debt out and remove the refi risk from the next several years.

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Yeah. I mean, we put the maturities in place that we did a year ago because that's what was available to us. And what that yielded was higher levels of maturities coming up in 2024 and 2025. And so, as we said at the time, we would be opportunistic around what we could do to bring those towers down. As we look at the landscape, we think there could be an opportunity for us to bring those down and really match up the maturities over the next few years with the lower levels of cash flow that we're at with where the economy is right now, but still very robust. And so, bringing those down to the levels of free cash flow generation in the next couple of years.

[Vincent Andrews, Analyst at Morgan Stanley]

And that would be straight debt? Or are you considering a convertible type thing or anything like that?

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Scott Richardson

Our focus in the past has really been around bonds and term loans, and we think that's been the right structure for us from a capital perspective. We've looked at everything, but that's our current focus.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay, thank you very much.

[Operator]

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

[Michael Sison, Analyst at Wells Fargo & Company]

Hey, good morning. In the last quarter, you had a -- you gave us a bridge to get that extra dollar per share, a couple of things, M&M integration, unwinding high-cost inventory, lower natural gas and a couple of other things. So, when you think about that dollar, is -- could you just give us a little bit of color of how that has changed in the sense that is it -- you still have that dollar, but there's a bunch more minuses that sort of get you to the third quarter and fourth quarter outlook?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Mike, if you look at that, we really -- we were seeing some uplift in acetyls last quarter when we gave our outlook. We had expected that to probably continue over the quarter. Obviously, acetyls had a good quarter. They came in at the bottom end of the range, but not further up in the range because we did see some settling back, if you will, to below -- kind of at cost curve levels.

And then in Engineered Materials, as I said, what we really saw is we saw a bit more of an inventory impact in M&M. We saw this really continued destocking and especially in industrial and E&E. And we had last -- again, for the same reasons as acetyls, when we did our earnings call last quarter, we really were seeing strong order books in April and saw that as an indication of some recovery happening across the quarter. And again, in May and June, we saw that really not happen.

So I think we -- certainly, while we're just pointing our performance, I think we understand it. And I think we feel very confident, though, in the guide that we've given for the rest of the year.

[Michael Sison, Analyst at Wells Fargo & Company]

Got it. And then again, if you take a look at your outlook the prior quarter, fourth quarter would have been somewhere around 350 [Phonetic]. And I think there was some confidence that, that would be a good run rate heading into 2024, meeting $14-some like EPS. So, when you think about the new run rate of $3 in the fourth quarter, I know predicting next year is a little bit early, but how do you think about that $3 in the fourth quarter as it relates to a run rate potential for '24?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Look, I don't -- again, just looking at the actions I laid out earlier, the things that are within our control, I think that's a very reasonable expectation.

[Michael Sison, Analyst at Wells Fargo & Company]

Thank you. Thank you. Our next questions come from the line of Hassan Ahmed with Alembic Global. Please proceed with your questions.

[Hassan Ahmed, Analyst at Alembic Global Advisors]

Good morning, Lori and Scott. In your prepared remarks, you guys talked about the destocking lasting longer than previous cycles. Now obviously, having lived through '08, '09, the COVID lockdown period and the like, I mean, multiple lessons must have been learned. So, my question really is that as you think about the restock being a longer duration, destock certainly seems like a deeper destock what potentially over the next couple of years, do you think the restock will look like? And I guess where I'm going with this is, has the sort of inventory appetite of your customers changed materially, living through all the craziness of the last decade or so?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

That's a really interesting question, Hassan. It's always hard to predict some of our customer behavior. I think we are seeing a very deep destock. And I think that speaks to the uncertainty people feel about the market, I think again especially the uncertainty in Europe and what that means just not for the European market, but also for the China export market. If we look at U.S. markets, I would say, reasonably recovered, probably not a lot of destocking left. I would tell you, though, China for China is doing okay, but China for export is really where that uncertainty lies. And we see value continue to be taken out of the chain as well as all of the -- everything into Europe.

So it's a very kind of unusual global situation that we have right now as a result. I think -- and with low prices, people assume prices are staying low so there's no reason to carry inventory. There's a lot of availability of material. So, there's no reason to carry inventory. But we also saw post-COVID how this can change very quickly. As soon as prices start to increase, as soon as we start to see consistent demand recovery, I do believe customers won't want to be back in the same situation they were at the end of 2020, and we'll start to see people wanting to restock.

So maybe a direct answer to your question, I think it is a deeper destocking because of the accumulation of just global macroeconomics, geopolitics and everything else. But I have no reason to think we won't see a recovery at some point. And I think -- I don't think people have gotten comfortable with a lower level of inventory once demand comes back. I think there's just a lot of uncertainty about what is that timing of demand recovery.

[Hassan Ahmed, Analyst at Alembic Global Advisors]

Very helpful. And as a follow-up, on the EM side of it, again in your prepared remarks, you guys talked about moving from exclusive distribution arrangements in the West to dual or multi-distribution approaches. How do you see the impact of that sort of playing out near term as well as on a go-forward basis?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Yeah, I think it's really a matter here of we are such a much bigger company now that continuing to have single distributors in these major geographies is probably not giving us the breadth and the reach to the amount of customers, we need to be reaching to generate the new opportunities and volume sales that we desire to have. So, this is just about we need to have multiple partners to really get to the full range of customers and the full range of end markets.

[Hassan Ahmed, Analyst at Alembic Global Advisors]

Very helpful, thank you so much Lori. Thank you. Our next question is come from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your questions.

[Kevin McCarthy, Analyst at Vertical Research Partners]

Yes, good morning. Just a follow up on the balance sheet discussion. Scott, you ended the quarter with $1.3 billion in cash, and I believe you have another $450 million coming in from the Nutrinova deal. Is it your intention to just continue to accumulate cash to address your senior unsecured notes due in July of 2024? Or would you prefer to refinance them over the next few quarters instead of paying them off with cash?

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Yeah, Kevin, I think we're not in the business of holding cash right now. We want to find ways at which to reduce that debt as quickly as we can. We still have term loans that we have coming up. And so, we can utilize that cash for the term loans. I would also remind you, we do have a $300 million interest payment in the third quarter. So, we will use the cash we have on hand for that. And then we have maturities coming up still later this year that we will handle as well.

We've talked very openly about having cash in other geographies that we need to move back to the U.S., and we're building those pipelines now, and we expect to be able to get that cash back here to the U.S. by the end of the year. And then once we get our systems integrated in the first part of next year, that will give us an ability to operate the company at a much lower amount of cash, probably right around $500 million. So, I think with that, that's going to free up a lot of opportunity for us to use that cash for deleveraging, given the maturities we have coming up plus the term loans we have outstanding.

[Kevin McCarthy, Analyst at Vertical Research Partners]

I see. Thank you for that. And then on a related note, your balance sheet reflects approximately $1.5 billion as the sum of short-term debt and current portion of long-term debt. That actually ticked up a little bit. Sequentially, I would have thought that it would go the other way with the term loan paydown of $370 million. Can you speak to what's in there in terms of how much you might have drawn on the revolver and what you might owe affiliates at this point?

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Yeah. Mainly it's ticked up, Kevin, just because of foreign exchange, mainly the euro moved up a little bit. But that's the big delta there.

[Kevin McCarthy, Analyst at Vertical Research Partners]

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

[Matthew DeYoe, Analyst at Bank of America]

Thank you. It seems like a sharp acceleration in the China macro, I don't know, maybe needed to improve the POM and PA66 trade flows. Like is that right? And does the recent PA66 capacity expansions within Asia China make that business recovery more challenging?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Look, our outlook is really not based on any increase in demand. We have a little bit of improvement of destocking occurring in the rest of the year, again, based on our view of the market. But we really aren't forecasting any uptick in demand in any particular region. So, I wouldn't say that's needed to meet our $9 to $10 range for the year. Certainly, would be welcome, but I wouldn't say it's needed.

And I would say the expansions in nylon, nylon has always been pretty well supplied. There's been plenty of compounders, there's been plenty of polymerization out there, the expansion that you've seen or maybe more on the upstream side, the raw material side of that. So, I don't see that, that really changes our dynamics much around nylon. We continue to focus our nylon on more differentiation, getting into highly differentiated products, looking for new applications, new end markets that share regain based on our good customer relationships, especially in standard grade, that's what I talked about earlier, the regain of share over the next couple of years with those and really taking advantage of our integrated value chain and our option to be in or out of the polarization market depending on where things are. So I'd say I think we're positioned well to either make or buy it, whatever works out. And our value really comes from differentiation.

Maybe if I can give you some examples because we've often gotten this question around nylon relative to EVs. We've recently actually just completed two new contracts for EV parts made from nylon. One is for major OEM, we have a part now going into EV motor mounts, which will use Zytel. And then we have a second application we just finished for the AC compressor bracket, which is made from Zytel which is going into EVs.

And why this is important is we talked about at the time of the deal but may have gone unnoticed is there are a lot of applications for nylon into EVs, especially as you think about EVs being quiet. People want less noise, you need less vibration. And polymer parts, and in particular in nylon, for those that require strengths, are great parts to replace metal and other things, not just for lightweighting but also to give consumers the experience they want from an EV.

And so, we're already starting to see some successes using the Celanese knowledge of the EV market in our contact with those customers and applying Zytel to those and winning some new businesses there.

[Matthew DeYoe, Analyst at Bank of America]

I appreciate that. I guess I wasn't necessarily worried about the 9% to 10% number this year in recovery, more just in general with repairing some of these markets, like particularly, I guess, POM. Because it's not one we have a ton of line of sight into from a supply/demand basis. Is it really just trade flows from China, and China is kind of sitting on the cost curve into Europe? Or is there -- and if that's the case, I guess, what reverse is that?

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Yeah, Matthew, I think it's important -- we have a lot of history here in POM. And these situations tend to be temporary, where co-producers in the market have made too much material and they move it into other regions even if they just have to get rid of that material. Our cost to serve in Europe and the U.S. is really unparalleled with our facilities in Bishop, Texas as well as there in Frankfurt, Germany. And with that, our ability to win sustainably has been proven out over time. These do tend to be temporary fluctuations. So, we do not expect that this is something that is going to continue for the foreseeable future.

[Matthew DeYoe, Analyst at Bank of America]

Thanks for that.

[Operator]

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

[Arun Viswanathan, Analyst at RBC Capital Markets]

Great, thanks for taking my question. Just going back to the guidance. So now the new midpoint is around $9.50, and if you just go through the Q3, that $2.10 to $2.50 with $2.30 at the midpoint, it kind of implies around $3 for Q4. So, you noted that Q4 is going to be your strongest quarter. Could you just maybe bucket out that bridge between $2.30 and $3 from Q3 to Q4? We can do the math, but I just wanted to hear it from you as well as to how the two segments kind of play out. Thanks.

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Yeah, look, I would say -- I would expect for the year, we've called out Acetyl Chain will be a foundational level of earnings. So, you can pencil in 1.3 million for the Acetyl Chain. So essentially a second half very similar to the first half. And then in Engineered Materials is where we'll see the lift. And again, about half of that coming from -- or maybe a little more -- probably about half of that coming from M&M., really, as we continue to regain share as we continue to move pricing on differentiated grades, and then you also have the other half coming from EM as we see the end of destocking really here in the Americas and a little bit of recovery and other -- well, not really recovery but end of destocking in other markets.

We also get a little bit of -- the biggest piece of this, though, and a lot of this will be in EM, is the $60 million to $80 million of additional cost and productivity activities that we've undertaken, most of which will show up in the fourth quarter. And again, you'll also have the help in M&M from the additional uplift of synergies in the fourth quarter versus the third quarter and a little bit of help from lower interest expense on debt paydown. So, all of those together accumulate to make fourth quarter what should be our best quarter of the year.

[Arun Viswanathan, Analyst at RBC Capital Markets]

All right. Thanks for that. And just as a follow-up then. So you'll be exiting the year at maybe a $3 run rate, gets you kind of back into that $11 to $12 range for next year. Is that the right way to think about it? I mean, are you seeing the end of this destocking cycle? And was there any risk to that view? Would it be maybe an automotive kind of slowdown from the strike or anything like that? Or is there -- what are some of the risks to maybe not achieve that level of earnings power as you look into '24?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Again, if I go back to what I went through earlier, if I look at '24, I don't -- look, I think that number that you're laying out there is not a bad number from kind of a base. But if you look, there are a lot of things -- and that just assumes steady demand with the end of '24 which, again, we're not -- with the end of '23. And again, we're not forecasting any great uptick in demand at the end of '23. We're just forecasting into destocking. So, I don't see a lot of destocking continuing to occur next year.

And again, if we look at just those things we can control, we will be in a better position from a variable cost standpoint as we flush high-cost inventory out of the system this year. We will not have the inventory, the level of inventory reduction hit next year, which will help next year. We have the additional $150 million of M&M synergies. And we have the additional $100 million from Clear Lake assets. So, I would say, if you take the fourth quarter and annualize it, I would see that more as a floor than as our expected level of performance for next year.

[Arun Viswanathan, Analyst at RBC Capital Markets]

Great, thanks.

[Operator]

Thank you. Our next questions come from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you, good morning. Lori, do you have an updated forecast for M&M EBITDA for the full year?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Scott, do you have that number?

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Yeah, David, I think as we put out the Q3 number, it's another lift off of where we were in the second quarter, which was a lift off of the first quarter. As we go into Q4, as Lori mentioned, we would expect another lift up. So that kind of puts you in that range, when you add up kind of all of those numbers, somewhere in that $500 million to $600 million range. We're going to try to get to the top end of that range or even exceed it, depending on where Q4 lands, but that's kind of where we'd be. But you're getting a lot closer on a quarterly basis as you end the year to kind of that quarterly accretion level that we talked about last quarter.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Understood. And Lori, just on the additional $60 million to $80 million of cost reductions, is that permanent? Is it somewhat temporary? And is it -- a little more color on that would be helpful. Thank you.

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Yeah. If I look at the $60 million to $80 million, some of it is definitely one time. So, if you look about half of it is related to production actions. So, these are things that are focused on the fact that we have lower demand and so better optimizing when we're taking turnarounds, how we're doing turnarounds. I mean, if we don't need the capacity right -- back right away, for example, we can do it without overtime and just take a bit longer to do a turnaround. We are idling facilities, not so much entire facilities, but say, lines within a compounding unit. So that allows us not to staff as much, power savings, etc. So reduced over time, reduced use of contractors, again, really in response to demand. So, I would say those are onetime or temporary actions. They're not things that -- hopefully, demand comes back and then these are things that we can reverse.

And the other half, I would say, these tend to be -- a lot of them tend to be small and a lot of these are onetime as well. So, continuing to really reduce travel across Celanese, which is worth a few million, reduction in promotional and marketing spend, a few million as well. So again, most of these are temporary. Look, there are some things there which is acceleration of the synergies that we have laid out for the acquisition of M&M. So, where we have redundant positions, for example, in the organization, going ahead in removing those redundancies now versus maybe having waited until later in the year or even into next year.

And so, I'd say it's probably, just guessing off the top of my head, kind of two-thirds things that I'd say are more temporary in nature and related to the reduction in demand that we're seeing and our focus on maximizing cash in this period of time. And then the other one-third would be kind of acceleration of steps we had planned to take later in the year and into next year.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you.

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Thank you. Our next questions come from the line of Duffy Fisher with Goldman Sachs. Please proceed with your questions.

[Duffy Fisher, Analyst at The Goldman Sachs Group]

Yeah, good morning. Could you just comment, have you seen any change in behavior in polyplastics since you sold your half to [Indecipherable]? And are they part of the kind of competitive dynamics issues that you called out in those increased imports into Europe?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Yeah, I don't think we've really seen any difference in their behavior. I mean, nothing different than we're seeing in the rest of the industry in response to kind of the macro conditions that we're all experiencing right now.

[Duffy Fisher, Analyst at The Goldman Sachs Group]

Fair enough. And then sequentially or year-over-year, what did Ibn Sina contribute to 2Q? And then what does that do in the back half of the year?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Yeah. So year-over-year, Ibn Sina, that's probably the easier way for me to think about it. '22 was high -- higher crude prices, higher methanol prices. We had a really healthy contribution from Ibn Sina. This year, I believe Ibn Sina going to be in that $60 million to $70 million less in contribution than last year -- for the full year. It's because our total for all of the joint ventures is about $100 million less in '23 versus '22. And that's the combination of Ibn Sina and KEPCO -- moving KEPCO to a manufacturing joint venture.

[Duffy Fisher, Analyst at The Goldman Sachs Group]

Great, thank you, guys.

[Operator]

Thank you. Our next questions come from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your questions.

[Unidentified Participant, at Celanese]

This is Ryan on for Alexsey. Just on -- my first question here is you flagged the $30 million to $35 million headwind in EM from destocking during Q2. Now based off your commentary on the call, I presume this is something that would continue in 3Q. But is something that you could get partially back in 4Q [Technical Issues] as destocking kind of ends here?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Ryan, I'm sorry, you were breaking up a little bit. I believe your question, is the $35 million headwind that we had in second quarter due to destocking, would we expect to recover that in the third quarter or sometimes later. Was that your question?

[Unidentified Participant, at Celanese]

Yeah, that was it.

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Okay. Great. I wouldn't necessarily say we expect to recover it. It's a onetime thing. Now some time in the future, do you get some benefit from restocking as we see demand come back strongly and people want to return to inventory levels, certainly. But I don't have any idea when that would be, and that's kind of a hard thing to track. I would expect third quarter destocking will be a similar level to second quarter in terms of the financial implications. So, I wouldn't expect big -- further big pluses or minus, maybe a little bit more down in the third quarter because we'll have more finished goods destocking and less raw material and intermediate good destocking, but not hugely significant. So, I wouldn't expect a second to third quarter big change relative to destocking.

[Unidentified Participant, at Celanese]

Understood. Got it. Thank you. And then just my second question is, you flagged the delayed start up at Clear Lake due to some component defects. I understand the financial impact of it is $25 million. But are there any material costs that go along with this?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

No. It's really the impact of not being able to get our synergies. I mean, obviously, with the lower demand profile, there is capacity in the world. So we don't anticipate a big impact there. And the cost of the site itself is covered by the manufacturer since the manufacturer is responsible for the defect. Thank you. Our next questions come from the line of John McNulty with BMO Capital Markets. Please proceed with your questions.

[John McNulty, Analyst at BMO Capital Markets]

Yeah, good morning. Thanks for taking my questions. So, the cash generation, Scott, it looks like your [Technical Issues] pull down capex for next year. Are levers as we look to '24 that you still feel like you can pull? Is there more kind of to ring out of the working capital side of things? Are there other integration costs that can maybe be pushed off? I guess, how should we be thinking about some of the puts and takes for free [Technical Issues] coming in next year?

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Yeah, I think we've been very open about our priority to free cash flow here in '23, John, and that doesn't change going into 2024. We put the $400 million number out for next year, that's the first step. On the inventory side of things, $400 million to $450 million reduction this year. There will likely be more opportunity going into next year just given how much raw materials have come up over the course of the last several years, which we expect kind of volumes to be at good levels as we finish this year from an inventory standpoint. But there will likely be more value opportunity as we work our way into next year to convert more working capital there.

And then continuing to focus aggressively on terms and looking for other working capital opportunities, the teams are really focused heavily on that cash side. And then when you kind of then layer in the elements of controllable EBITDA growth that Lori has mentioned several times on the call, we feel very good about the opportunity to continue to drive free cash flow going next year.

[John McNulty, Analyst at BMO Capital Markets]

Got it. Okay. Fair enough. And then just a question on EM's differentiated products. Have you -- it sounds like, so far, you haven't seen much in the way of pricing pressure there. Do you expect to see any as you kind of look out over the next, whatever, call it, 12 months, just given the level of deflation that we've seen across so many industries so far?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

No, John, not really. Like I said, we've seen some demand softness just based on our customers' demand softness for their products. But again, we would expect that this is temporary and that will come back. And we've not seen -- as we typically don't see a lot of pressure on pricing for our differentiated products.

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Darren, we will pick one more question please.

[Operator]

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

[John Ezekiel Roberts, Analyst at Credit Suisse Group]

Thank you. How is the Food Ingredients business performing into the deal closing? We've got some pretty broad weakness in the Food Ingredients overall market.

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Yeah, I think our Food Ingredients is performing as expected and as we laid out at the beginning of the year. We really haven't had any issues there.

[Scott Richardson, Executive Vice President and Chief Financial Officer at Celanese]

Yeah, John, that business tends to be pretty resilient through most economic conditions.

[John Ezekiel Roberts, Analyst at Credit Suisse Group]

And then with the recent rise in oil prices, is there any risk to the Singapore unit being curtailed later in the year if oil continues up?

[Lori Ryerkerk, Chairman of the Board and Chief Executive Officer at Celanese]

Look, I would say no more than it ever is. I mean, we constantly flex or Singapore and our Nanjing units, depending on economics, depending on regional demand and the cost to supply those regional demand. At this level of crude pricing and coal pricing in China, I don't see that dynamic changing significantly.

[John Ezekiel Roberts, Analyst at Credit Suisse Group]

Thank you.

[Operator]

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Brandon Ayache for closing comments.

[Brandon Ayache, Vice President of Investor Relations at Celanese]

Thank you. We'd like to thank everyone for listening in today. As always, we're around for any follow-up questions you have. Darren, you may now close on the call.

[John Ezekiel Roberts, Analyst at Credit Suisse Group]

[Operator Closing Remarks]

Participants

Corporate Executives

• Brandon Ayache, Vice President of Investor Relations
• Lori Ryerkerk, Chairman of the Board and Chief Executive Officer
• Scott Richardson, Executive Vice President and Chief Financial Officer

Analysts

• Ghansham Panjabi, Robert W. Baird
• Michael Leithead, Barclays PLC
• Jeff Zekauskas, J.P. Morgan
• Josh Spector, UBS Group AG
• Vincent Andrews, Morgan Stanley
• Michael Sison, Wells Fargo & Company
• Hassan Ahmed, Alembic Global Advisors
• Kevin McCarthy, Vertical Research Partners
• Matthew DeYoe, Bank of America Co.
• Arun Viswanathan, RBC Capital Markets
• David Begleiter, Deutsche Bank Aktiengesellschaft
• Duffy Fisher, The Goldman Sachs Group, Inc.
• Unidentified Participant
• John McNulty, BMO Capital Markets
• John Ezekiel Roberts, Credit Suisse Group AG