Q2 2021 Celanese Corp Earnings Call
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Yeah.
Greetings and welcome to the Celanese Corporation's second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. I mean, what you require operator assistance during the conference. Please press star zero on your telephone keypad as a.
Minder This conference is being recorded.
Now my pleasure to introduce Brandon I ask Vice President of Investor Relations. Thank you you may begin.
Thank you Daryl welcome everyone to the Celanese Corporation second quarter 2021 earnings Conference call. My name is Brandon IR, Vice President of Investor Relations with me today on the call are Lori Wright Kirk Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer.
Celanese Corporation distributed its second quarter earnings release via business wire and posted prepared comments about the quarter on our Investor Relations website yesterday afternoon.
As a reminder, we will discuss non-GAAP financial measures today.
You can find definitions of these measures as well as reconciliations to the comparable GAAP measures on our website.
Today's presentation will also include forward looking statements.
Please review the cautionary language regarding forward looking statements, which can be found at the end of the press release as well as prepared comment.
<unk> 8-K reports containing all these materials have also been submitted to the SEC.
Because we published our prepared comments yesterday, we'll now go ahead and open the line for your questions. There I'll go ahead and please open the line.
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We ask that you please limit yourself to 1 question and 1 follow up question..1 moment. Please while we poll for your questions.
Our first questions come from the line of Duffy Fischer with Barclays. Please proceed with your questions.
Yes, good morning, and congrats on a nice quarter and other big race.
I guess 2 questions for you first 1 Laurie I think either on the Q4 call. This year. The Q1 call you talked about 1 meaningful slug of new C to cash in capacity hitting the market. This year at a competitor and that was going to be around mid year as I recall. So 1 I just wanted to see you know have they been marketing net.
Product is it producing and what impact that you've seen that have on the market or do you anticipate that having on the market.
Yeah. Thanks, Duffy, yes, so we do still expect that to hit its not start started up yet it hasn't hit the market yet it's about 500000 tons in China from Hawaii.
So we do expect it to hit I would say you know it may contribute to moderation as we go forward in third quarter and into fourth quarter, but if you think about it you know 500000 tons, just really a little bit over a year its growth so.
Probably won't have a significant impact in the market. We're in today, Yeah, and Duffy I think it's important to remember this is not a new player for the Chinese market they have.
<unk> had 2 plants already in the market. So it's somebody who's in the market who's adding more capacity.
Fair enough.
And then.
Just as a follow up.
I mean, if you look obviously your guidance for the year has gone up a lot.
From earlier this year when you think about your decision, making your ratios net debt to EBITDA dividend payout based on earnings.
Or would you think about.
That changed from where you started to where you are today, what's the right level to think about it as something you would kind of call structural to make capital decisions off of what's the right level of profitability to think about.
Yes, I think as we go forward you can start thinking about 2022, we're really thinking about you know a foundational level of earnings for acetyl kind of in the $900 to $1 billion range growing into that range over the next 2 years, we're really thinking about.
Engineered materials closer to 700, and then if you add standard <unk> on top of that you get to the kind of that 750 to 800 range and then you think about acetic acid.
Around.
$60 million a quarter.
And so I think that would be kind of the right level I would consider those pretty foundational levels of earnings at this point in time.
Great. Thanks, guys.
Thank you our next questions come from the line of Ghansham Panjabi with Baird. Please proceed with your questions.
Thank you good morning, everybody.
Laurie in your prepared comments you made some comments on China acetic acid pricing and how it progressed throughout the second quarter and into the third quarter is that decline a function of purely a supply normalization or is demand in the region starting to moderate.
I'm, just trying to get into the macro policy in China in context of the narrative.
It's in the market about a slowing of the region.
Yeah, I think it's a little bit of both.
I think we are seeing some supply stability are.
Of course, it varies day by day, but are things in supply stability as we've come out of Yuriy and western hemisphere supplies have been more stabilized now we have been in a period of higher turnaround in the western hemisphere. This last quarter. So we expect some of those plants come back online.
Suddenly you called out there are some turnarounds happening in the third quarter in China, but I would say you know kind of within the normal level.
So I think I'd say supply has certainly stabilized.
First quarter.
But I would also say demand while it continues to be robust we are seeing some pockets of lower demand potentially going forward.
With Covid and the Delta variant and especially in Southeast Asia. So I think it's a little bit of both I think what's interesting though is if you look at the moderation that we've called out in China pricing.
It's really a very flow moderation compared to what we saw say in 2018, and we think that is because it is demand driven as much as supply driven whereas 18 months you got the supply back it dropped very quickly and if you look at recent prices I mean prices in China have been really stable over the last call it weak and we think.
Thats more indicative of the flow moderation, we expect to see through the remainder of the year.
Okay. That's helpful. And then in terms of the inventory rebuild I mean, what phase of the rebuild.
Net current and then also your comments on <unk> earnings seasonality being minimal can you just expand on that as well.
Yeah, so inventory rebuild I can say, we're in the pre rebuild phase still I mean, everybody is talking about wanting to rebuild but we are not seeing volume being rebuilt in the acetyl supply chain are really in the supply chain as well.
So I would say there is a desire to rebuild but both businesses are still supply constrained.
Not demand constrained and so I'd say, we still have a long way to go on the rebuilds I would say in fact, our anticipation is that will last well into 2022.
And then sorry last question.
Yeah.
Sure.
Yes, you had a second part of your cash.
Or any seasonality sorry, yes. Thank you yes.
Exactly the reason, we're saying we expect less seasonality in fourth Q.
Because we do expect as prices continue to moderate slowly we will see people starting to rebuild as supply is available.
If you think for example, about the paints and coatings right. That's a market where you typically see a good bit of seasonality in fourth quarter, but we know our paints and coatings customers have no inventory. So we anticipate they will use the fourth quarter to rebuild their supply in order to be ready for another spring painting season.
So we really are expecting much less seasonality in acetyl and then any slightly we usually see some drop off in the western hemisphere.
In the fourth quarter and for all the reasons because we've been supply constrained most of the year, we expect automotive as well as other end uses to be stronger than typical in the fourth quarter.
Awesome. Thanks, so much thank you.
Okay.
Thank you. Our next question is come from the line of Jon Roberts with UBS. Please proceed with your questions.
Thank you could you talk a little more about the fiber glass shortage ever since PPG sold its business to Nip home, we really don't hear much about fiberglass for plastic reinforcement.
Yes, we have seen a real shortage here in fiberglass I'm not sure I can really articulate all the reasons between how it started but what we do know is really all other players right now and fiberglass are short.
And while we do see player.
Players stabilizing we still expect it to be well into the fourth quarter or even into next year before we see a complete stabilization over the other fiberglass market.
Okay, and then I don't know if you can answer the second 1, but when <unk> Tec and Celanese were both part of <unk> do you have any old timers debt know, whether the 2 businesses work closely together renew celanese plastics today, so a lot different than it was back then.
I don't know the answer to that but Scott may may have more history than yes, Jon. It was really operated very separately as you will know <unk> was a very large company and had a lot of different components to it and it was operated.
Separately, okay. Thank you.
Yes.
Yes, Jon I'd, just say something more on that.
As you know, we don't comment on any kind of specific opportunities rumors or speculation, but I would just remind the group kind of not specific to <unk>. We are always looking at a very broad range of opportunities.
And over any given quarter, we explore and evaluate many many opportunities most of which never come to completion. So our focus remains on opportunities that fit well within our business model and really meet our disciplined return criteria and our requirements around synergies so.
Not saying, we would never do something like us are amtech.
Other material doesn't need to be at thermo plastic.
But it does need to fit the model and it doesn't need to meet our M&A criteria.
And congrats on the quarter.
Thanks.
Thank you. Our next question comes from the line of Bob Court with Goldman Sachs. Please proceed with your questions.
Thank you very much.
I was wondering if we could talk on the in the EM business. The COVID-19 impacts were sort of affecting the Otto cycle and production rates and the health care markets can you give us a little update on what happened through the quarter and how you see the path for those particular end markets into the second half.
Sure.
I would characterize the end markets as you know all of the market has recovered to pre COVID-19 levels. At this point in time with the exception of medical implants, and as you said auto which is really more due to shortages of chip microchips and also some shortages of resins in Q2.
In fact, we're seeing growth above 2019 levels in industrial and channel in electronics and some of the other sectors.
So if we look at implants, which is kind of your question implant have improved across second quarter, we expect them to continue to recover through the end of the year and really be back at normalized rate in 2022, I will say other areas of medical though we are seeing really good growth in this year, including like long dose drug.
Delivery diabetes applications et cetera, So medical overall I would say has recovered its just specifically the implant business, which is our <unk> business, which will be into 2022 before we see full normalization.
Auto which is the other big end market as we called out in our comment was down 8% in the quarter, but that versus North America, dropping below the 12% and in Germany drop and builds a 15% which is our 2 largest end market and so we think we have been helped there auto to prioritize premium.
Vehicles, we've talked about that in the past and we have the majority of our content and premium vehicles.
We're also seeing a real help from our programs that we've put in place specifically around electric vehicles. So if you think about it in the EU <unk>, 17% of all electric vehicle sales are now.
All vehicle sales are now electric vehicles.
And so that project pipeline, where we've grown that those volumes have really helped us. We've also as we called up and expanding our content and electric vehicle. So we talked about the 20 kilogram content that we have.
In Europe for 1 of our Evs, which is 4 times our average ICD just giving other idea just <unk> alone is 6 to 8 kilograms per electric vehicle. So really big space that we have we have really good Palomar has to go into those spaces. So as you go to the second half.
We do expect growth again in Q3, as we see tip recovery and we've had resin recovery.
We probably won't be back to Q1 levels in Q3, but anticipate we'll be back to Q1 levels.
For auto by Q4, and we continue to see.
Net.
2% growth across other end users as we move through the end of the year.
And as a follow up Laurie I think in the past you've talked about some parts of the M had had become a little bit more commoditized was there any over earning over margin products during the second quarter or is there still.
Margin upside on some of those more.
Mainstream products there. Thank you.
No I think there's still more upside on margin of our products.
A few if you look at our margin percent. This quarter, we had a few impacts there that brought our margin down slightly from last quarter. Some of it was increased spend in the plan as we needed to add more people to deal with the increased demand.
We also had higher energy costs, especially in Europe, and then logistics and transportation as I'm sure you're hearing from other was certainly a big headwind this past quarter and we will continue to be a headwind probably through the end of the year and even into early next year. So I think as we see.
Labor market stabilize as we see logistics and transportation stabilize I think we would expect to get back to previous levels of margin.
Going forward I would also just say Bob.
Real difference here from what we've seen in the past us.
Our constraint in Q2 and continuing in Q3 is not demand driven it's really supply constrained our ability to make resin that get the additives specialty glass fiber as we called out.
Which has continued to deteriorate as we move through the second quarter and into 3 third quarter, it's really supply constrained. So there is also more.
More volume upside as we go forward and are able to resolve the supply constraints, yes, Bob and I just want to clarify and I think what we've said in the past. These are really does what you alluded to your standard applications. They have more competition in them, but these are still engineered solutions and.
We obviously work on kind of the more value in use premium side for our new project pipeline, but that standard part of the portfolio is always going to be a real critical element.
And really building blocks to get in the door in a lot of places.
Gotcha. Thank you very much.
Thank you. Our next question comes from the line of Jeff Zekauskas with J P. Morgan. Please proceed with your questions.
Thanks very much.
Given that theres been so much supply volatility volatility in demand.
Has your have your cost cutting programs executed along the lines that you've expected or have many of the cost savings has been deferred to next year I understand prices are up a lot and you're making a lot of money, but in terms of the way that you've been trying to make your operations more efficient are things delayed.
Yes, no great question. So we had outlined before we expect it to get we are targeting $100 million to $150 million growth productivity.
Are on track to deliver 150 million of gross productivity. This year. So those are cost savings I would say.
Other years, we might have outperformed that I mean, certainly we did last year. This year I'd say, we're going to hit that $1.50, but what we're also seeing is a lot of opportunity and revenue optimization. So plant optimization small debottleneck projects. So we are focusing more on how do we get more molecules out because we are supply constrained.
But we will still deliver at that kind of historical level of cost productivity as well, yes, Jeff we typically break productivity into 4 buckets Rev. Gen.
I would say manufacturing cost reduction procurement cost reduction and then I would say more kind of SMA type reduction I mean, SMA bucket is very small this year. The procurement bucket is very small to share where we've shifted it.
In 2021 is more on manufacturing costs and Rev. Gen has already talked about.
And then how much.
For my follow up.
When you talked about your acquisition criteria.
Are your acquisition and you talked about your acquisition criteria being return base does that mean that the direction of your acquisitions really may go in the direction of diversification over time, because that is should we view celanese is really not being bound by.
Wanting to have more polymers, but really trying to find other businesses, if they're available where the industry structures are good and you. Thank you.
Our returns are higher.
Yeah look I don't I don't think we're going to go.
<unk>.
Acquire something completely out of our lane.
Our criteria is we want to be able to deliver synergies.
And we want to do that it means we have to either be familiar with the end market would be able to use our model.
So I wouldn't say it doesn't have yet thermo plastics or other areas, we could think of but I would still want them to have.
In markets that we're familiar with and where we think our current sales force and commercial teams in manufacturing team could could add value to or we can apply them to our for engineered materials model. Our acetyl model. So they may be new materials to us, but they will have some connection to our exist.
<unk> business.
Great. Thank you so much thank you Sir.
Thank you. Our next question is come from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.
Thank you and good morning, Scott just wanted to ask you on the free cash flow I. Appreciate the comments about the working capital build in the quarter, but as we look out of this year and into next year. You gave some sort of preliminary EPS view on 'twenty, 2 how should we be thinking about.
Working capital and free cash flow generation as conditions normalize them I guess I just mean in terms of where is it going to be number 1 and then number 2 given everything that's going on with raw materials and availability and so forth is there any consideration being given to to hold more raw materials.
That you can be sort of a bet.
Better positioned or opportunistic when we continue to see supply disruptions.
Yeah, Let me take the last part of that first events that I think I would say, we don't take a 1 size fits all I mean, I think it really depends upon the business and the material and where we're at and how we see things.
Going forward and particularly how our business is performing and certainly reliability of supply in certain materials is very important for US right now and so we may choose to hold a little bit more raw material if possible. If we can get it in certain areas of tightness.
We are not going to be bound by that working capital number because our working capital efficiency has historically been very very strong and we can we can bring that down fairly quickly if necessary in the future I think in terms of how we see that working its way are greater than $1.2 billion for the year.
As soon as we get some of that working capital back towards the end of the year, but but certainly not all of it and it's certainly not back to how we started the year and so a lot will depend upon what happens with raw materials.
And as well as our pricing I mean, 1 of the important characteristics series accounts receivable and with what we've seen in pricing in Asia in asset deals, which tends to have slightly longer payment terms.
<unk>, a little more accounts receivable today than what we have historically so as that normalizes, we will get some of that back and so there will be a catch up likely into next year.
Okay, and just as a follow up there were also comments and their beliefs.
About sort of the Chinese price will be coming down, but it will still be strength in Europe, and India. Because I think there was a reference to there is typically a lag just wanted to better understand sort of what causes that dynamic where.
It doesn't get armed out pretty quickly that you could have serious price discrepancies between those 3 areas.
Yeah, well, if you think about it I mean theres not seek asset production in India. So basically that material comes out of China, or Singapore or somewhere else in the world. So you have a shipping delay but price has done.
Same for Europe, most of the material going into Europe, either from the U S are from Asia.
And so you have that shipping delay as well, it's really just as simple as that.
Okay. Thanks very much.
Yes.
Thank you our next questions come from the line of John Mcnulty with BMO capital markets. Please proceed with your questions. Yes. Thanks for taking my question Laurie in the prepared remarks, you had indicated.
The 2023 goals, we are likely going to come in around 2022.
Can you just clarify whether that is inclusive or exclusive of Santa <unk>. If it's really just a reflection of kind of the current markets.
Comfort and the demand fundamentals are if it or if it does include the M&A.
Yeah look we'll give better guidance in October as we have more time to work through this I would say the 13% to $14 earnings per share that we had for 'twenty 3 we're now pulling into 'twenty 2.
I would look at it it's that range with or without banner free now.
Santa free is definitely value accretive to us, but we didn't model in all of our cash being used for stock purchases. So there.
While there is some uplift I would say I've looked at Santa free and it's taking it's closer to the high end of that range.
Without Santa free we would've been at the lower end of that range got it fair enough and then I guess just as a follow up.
Guidance.
It's actually a pretty tight range for the rest of the year and I guess, just given the volatility that you're seeing in all the markets I guess I'm curious how you get comfortable with such a tight range on such a big base is it have you locked in in terms of in terms of some of the commodity prices have some customers reached out to try to maybe lock in things.
For the year or I guess, how do you how do you get as much comfort as you have in such a volatile market.
Yes look.
Look at Q3 guidance I would say you know from knowing what our books are we're halfway through the quarter already from our standpoint. So we can get pretty comfortable with Q3, and then I think for the full year, it's a little bit different that again, we're really supply constrained it's not a demand constrained so even with some vol.
<unk> in the market.
Still can only sell the amount of material, we have and we know how much material. We have so I mean, yes, there could be big swings in acetyl and that could change it but we just gave the game with a narrow range admittedly, but we just kind of said here is what our projection is given that we are fairly close to the end of the year and Jon I think we tried to outline in the prepared.
Remarks, you know some of the assumptions, we have made to get to that range. So as those change a little bit then we'll update that in October got it fair enough. Thanks for the color.
Yes.
Okay.
Thank you. Our next question is coming from.
Hassan Ahmed with Alembic Global. Please proceed with your question.
Good morning Laurie.
Good morning question around regional demand trends.
Obviously, it seems the base effects nation is very different by region, particularly in Asia.
Still some lockdowns continuing over there and then on top of that you sort of overlay. Some of these supply chain constraints that you guys were talking about others have talked about as well.
So and.
What are you guys seeing or.
Demand growth to Scott is between regions and then on a go forward basis.
What does this tell you about demand growth I mean are we going to be in a period of above normal demand growth as more and more parts of the world sort of start normalizing and sort of Lockdowns Scott waning.
Yeah, I would say at this point in time, I mean, certainly as we started coming out of Covid, we thought kind of move around the globe, where Asia was strong earlier and then the Americas and Europe with with flow is to recover I would say at this point demand is pretty.
Normalized around the globe in terms of being pretty consistent across regions.
Interesting enough I mean, while we are worried about the delta area, we haven't seen it have much impact yet although that is a concern as I said, we see.
Some signs that there may be some impact from southeast Asia, but I would say in general debt.
<unk> pretty consistent right now in terms of in terms of recovery.
Understood.
Now moving on to the toll business obviously.
It was very strong volume growth sequentially in Q2.
And I guess in sort of the written remarks, you guys talked about some of the Q1 demand sort of going to carrying forward into Q2, how are you guys thinking about.
Demand growth for volume growth in that business in the back half of the year.
Yeah, I mean really the volume growth in Q2 was in fact, what you just called out which is we work with customers in Q1 because of the free and our shortage of acetic acid. So we worked with customers in Q1 to push demand into Q2, and so if you look.
Back at Q1, we had reduced volumes in Q1, those volume showed up in Q2, I think we actually see volume being stable through the rest of the year.
Kind of at the average I would expect the second half volume to look kind of like the first half volume.
Earnings will be less because.
I think asset pricing remains high relative to historical we have higher energy costs, especially in Europe, and just the timing of our dividends from from our Chinese JV, which typically are heavily weighted to the first half.
Very helpful. Thank you so much.
Thank you. Our next question is come from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.
Thank you Laura just on the M&A pipeline, excluding sorry, amtech, how is that pipeline today.
So I would say our M&A pipeline remains very robust we continue to look at deals of all size. I mean, you saw that with Santa free which is the big bolt on.
<unk>, which was a small bolt on and then even some divestitures. We did so I think we remain very active looking at our portfolio, where we want to add where we need to take away.
I would say, we're very actively looking at deals of all sizes, we certainly have the financial capacity as well as the management capacity to continue to look at additional M&A.
Through the rest of this year and into next year.
Hello, just in the prepared comments, you've laid out a number of projects many of which come online in the next couple of years.
How is that next tranche of projects in your mind at 24 through 'twenty 5 'twenty 6 project slate looking in.
Different than the current 1 that we're in right now.
Yeah, So really the only thing we have kind of on the books at this point in time for that period is the <unk> expansion in EU, which we expect to come online in 2020 for I would say given that we're just in 2021. We're just now starting to look at what will our demands and the b.
In that period of time.
Thank you.
Thank you. Our next question will come from the line of Michael <unk> with Wells Fargo. Please proceed with your questions.
Good morning, this is Richard actually on for Mike.
So my first question is on engineered materials. It looks like you were able to get a 7% increase in price in the second quarter.
Also talk about <unk>.
There were some challenges in raw material cost inflation.
How much of the price increase was.
To offset the costs higher costs and <unk>.
How much was that just part of.
Adding value to your customers.
Yes, I would say look our team has worked really aggressively through starting in the fourth quarter of last year actually to really push price knowing that we saw this increase in raw material pricing coming.
So I would say that was the primary reason for the price increase.
But we did raise price more than with our materials, increasing I think that's a question of mix I mean, what we are in a very tight supply constrained situation. So we have been prioritizing our higher margin product and our higher market higher margin region.
To really maximize the return that we get for the molecules that we have available to sell to the market.
Okay as a fall.
Flow up on the acetyl chain you gave.
Some color in terms of pricing coming down in the second half what's your view on spreads obviously, your low cost, but I guess your Asian competitors.
Get squeezed as if prices continue to force how do you think about that heading into.
At the end of this year.
Yes, certainly.
If you look at China. For example, our technology is certainly advantage versus the Baxalta technology or some of the others.
If prices fall they will get squeezed in terms of margin clearly our capacity on the Gulf Coast, which uses natural gas as the most cost effective in the world.
And so we will still maintain that advantage on margins versus competitors as prices continue to moderate.
Uh huh.
Thank you. Our next question comes from the line of P. J <unk> with Citi. Please proceed with your question.
Yes, hi, good morning, Mark.
Can you talk about your elastomers acquisition from Exxon what are the interest as you were targeting.
And why do you think in your mind Exxon is getting out.
And is there any supply coming online with the supply demand there or is there any new supply coming online in China or elsewhere.
Yeah, we're really excited about this acquisition I mean, you'll have to ask Exxon why theyre getting out I'll give you my opinion, which is like they've only had this businesses 1980 that with the JV. They acquired it fully in I think about 2000.
Maybe 2010 sometime in that first decade.
Look this is not 1 of their core businesses Exxon as an oil and gas commodity chemical player. This is a highly specialized business and I'm sure why they enjoyed the margins and returns from it it's not it doesn't really fit their model of what theyre trying to do and having come out of an exon specialty business.
Our goal to run them in a way that can be highly competitive with other. So my guess is they realized that was more valuable to us than it was to them.
If you look at end market it is largely into auto.
Thank.
Things that need to be recyclable or long life, our soft touch or light weighting.
There are also applications for it.
And 2 medical applications into construction think sales around windows and skyscrapers.
And so as we look at it we think it's a really good fit for us to cross sell with our automotive side. We think there are some really exciting new applications and medical going forward that given our knowledge now of the medical and pharma industry, we can exploit.
And so we think there is a lot of opportunity there to really apply these materials to businesses, we already know already understand and already know how to access the market.
Our willingness to do deal with complexity.
Just different than Exxon.
We deal with small orders every day, that's not something Exxon wants to do.
I think we see a lot of value uplift opportunity here and what we consider very profitable in markets. As we go forward in terms of the new capacity, we are not aware of any new capacity coming on in this area. It is a highly specialized material and we don't we don't see any now we don't anticipate.
Any for the future. This in fact Exxon had grown the capacity of this business and just the last couple of years.
I think in the Newport facility.
P. J just on that last point I think it's important to remember I mean, this really is an engineered solution and supply demand utilization lot less important here and there.
Businesses much like our other engineered materials businesses because of the value in use element and the uniqueness and differentiation of what this material in this brand brings to customers and now it's really 1 a day real attractive elements to this to be really complementary to our engineered materials business.
Great.
And Laurie overall the question on the tightness in logistics and labor Mark because that you've talked about you think they are locked into 2022.
Is that a U S phenomenon or is it happening in Europe as well.
Why do you think this is taking a long time to get ironed out.
It is at the logistics part of the issue or is it the labor market can you just talk a little bit more about debt. Thank you.
Yeah, I think there are really 2 separate things I mean, I would say the logistics and transportation issues are global I mean, certainly the level, we see a lot of problems for people trying to get things out of China, but I would say really whatever what youre going its pretty hard right now whether it's by ship or on the ground are real there is just a lot of volume.
Being moved around the world.
Not sure I can explain all the reasons why but certainly people are moving more things around I mean, just even the amount of things you buy on Amazon These days.
Yes.
We just see a real a real constraint there and Thats really what I was referring to I think it's well into next year and possibly even after Chinese new year before we really start to see stabilization in those market.
Labour phenomenon discussed has really been more of an issue in the U S than in other parts of the World. We haven't had as many issues in Asia. For example, we had the issues in China, but in the U S. I think we just we see people, we're hiring to expand and run our plants are being hired by Amazon to run.
Our warehouses for example, and so it's just a very competitive labor market and we've had we've had to make adjustments as we wanted to add shifts and do things that would let us expand rather quickly too.
Our labor rates.
I think in time this will stabilize as we see more people going back to work in the U S.
I think this will also stabilize but I do think I'd probably on this it will take into next year as well.
Thank you.
Thank you our next questions come from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your questions.
Yes, good morning.
Laurie I thought your guidance and engineered materials was quite constructive, but I wanted to peel, the onion, a little bit more with regards to the glass fiber shortage.
Can you talk about.
The upside opportunities in the downside risks related to that supply shortage for example.
On the volume side, how much might you be constrained what are you baking into guidance there.
On the price side I guess my question would be is there opportunity to.
Capitalized by raising price in the engineered products that might require a glass fiber I assume thats.
Certain polyesters and maybe some strength in some nylon grades maybe you could just elaborate on whats going on there.
Yeah.
It could be a little bit more clear on the characterization I mean, if we look at second quarter.
We would estimate we probably.
Loss as much as $5 million revenue due to the problems around glass fiber.
As well as a little bit the logistics transportation issues. If we looked at third quarter that number is probably going to double.
But we do expect it to resolve and we get some of those volume back starting in the fourth quarter and going into 2022.
Look we are seeing in glass fiber makers coming back.
We are seeing the volume go up.
Glass fiber that goes into polymer is a very small percentage of the glass fiber market, but it's probably 1 of the more profitable segment for them. So we do expect to start seeing more glass fiber coming back towards us.
As we move into fourth quarter.
Look I think long term as this goes on it has been an opportunity for us to convert people to other polymer.
Our polymers that also have glass fibers that we prioritized because they're higher margin polymer so.
So that people can get their product. So I think I think there is some upside here.
And we've been able to convert some of it to higher margin product, but I think long term. It is about a third of our portfolio that uses glass fiber. So it is a pretty important raw material for us going forward and we've taken steps commercially to secure supply of glass fiber.
In future years, so hopefully we don't run into that problem again.
That's really helpful. And then secondly, if I may.
Do you have plant maintenance turnarounds.
In the third quarter or in the fourth quarter that.
And that we should be keeping in mind for modeling purposes.
No I mean, we always have small turnarounds and maintenance items, but the total for this year is only $30 million for the entirety of the year is split pretty evenly between the first happened in the second half. So it's not anything of note is that you're going to notice in terms of our volumes on our costs.
Perfect. Thank you very much thank you.
Thank you. Our next question is come from the line of Alex <unk> with Keybanc. Please proceed with your questions.
Yes.
Thank you good morning, everyone.
You mentioned in your prepared remarks, 8%.
Impact on automotive volumes did that number include the shortages of fly long glass fiber, PBT et cetera, or where those raw material shortages. Some additional impact on top of that and if so how large was that.
Yes, no that was inclusive of everything that was both demand from auto as well as constraints, we had due to resin and an additive supply.
So if we're trying to normalize for if your volumes for current state of demand, it's at 8% and maybe automotive there is a third of your business so something.
So something like 2.5% should.
It should be added.
Top line.
When everything is running well.
Is that the right way to think about price yes.
Yes, Mark Yeah, roughly that's about right I mean, if you think about it for this for this kind of demand.
You just need to see a few percent increase and everything else in order to stable. So that's about right.
Thank you Laurie.
A quick question on margins.
Should we look at second quarter margins as sort of the benchmark for the rest of the year or will these margins be rising.
Yeah, I think based on what I had just said earlier about the impact we saw from supply shortages in logistics and things I would expect Q3 to look pretty much like Q2, probably from a margin standpoint, because we do see especially the glass fiber issue continuing well through Q3 I would expect.
Q4 margins to look more like Q1 again.
Yeah.
Thank you.
Thank you. Our next question is come from the line of Matthew Deyoe with Bank of America. Please proceed with your questions.
Thank you.
In the past I feel like you've been calling for a more normal EBIT and acetyl chain next year, which maybe implies something like $700 million to $800 million number, but I think.
If I heard correctly in an answer to things Duffy's question earlier, you seem to support something closer to 902.1 billion.
Do I have that wrong or is the more optimistic view just a function of the better demand backdrop that you've been kind of talking about.
No look I think as we work through this year and we've seen the impact of various day debottleneck in productivity products and continuing to to optimize our our model for acetyl. The addition of the low tax and other things.
We really feel like we've lifted the foundational level of earnings from kind of that 700 to 800 to now 800 to 900.
And with expecting some goodness to continue in acetyl margins into 2022 that put us at that kind of 900 range for asset sales.
Understood.
And.
Similarly, I guess, if I'm remembering correctly I think the.
The comment used to be that breaking up the company would result in something like $15 million of dis synergies, but that you had constantly been trying to work that number down is it.
So around that number or do I have that number wrong or is it higher now or lower.
Fair enough.
I think $50 million still a good number to use I mean, I don't I honestly don't see it really going a lot lower I think we used to think it was even higher I think $50 million is probably.
The right range to use for the level of dis synergies, we would expect if we bought the company.
Thank you Mark.
Yes.
Thank you our next questions come from the line of Frank Mitsch with Birmingham Research. Please proceed with your question.
Good morning, and congrats on the quarter.
Laurie in the release had mentioned that you were able to bring back the clear Lake facility during the quarter I'm wondering how much you may have lost by not having it through the entire quarter.
Yeah, I don't have an exact number I think if you look at the <unk> the residual impact.
Winter storm Yuri in quarter, 2 we think it was probably about a $30 million impact and that's from higher raws energy inventories I mean, primarily all of that was in AC.
Got you and can you comment just in general on the.
Overall industry operating rates in the acetyl chain that youre seeing right now.
Yes, I mean, so if we look at.
Q2.
I'd say.
We think in.
Globally utilization was up just over 90% Chuck.
China, just under 90%, but we also know that there was much higher intermittently and probably close to a 100%.
And many times during the quarter.
<unk> globally also at 100% basically for the quarter.
With this capacity coming on in China in August as anticipated.
We actually think utilization will remain at similar levels again, because there is pent up demand in the chain. There is a need to rebuild inventory, but I would say right now we still think we're somewhere around that 90% range globally, and probably should continue to be so during third quarter.
Terrific. Thank you.
Yeah.
Thank you our next questions come from the line of Matthew Blair with Tudor Pickering Holt. Please proceed with your questions.
Hey, Thanks for taking my question here and congrats on the results. The <unk> comments listed out 9 discrete organic growth projects.
It is the big picture EBITDA number for <unk> for all these projects in total.
Yeah, Matthew I don't think we've called that out specifically for each project.
Project, we inherently included that in our Investor Day Guide for 2023, and then we indicated there was additional uplift into 'twenty 4 'twenty 5 we will as we.
Updating that outlook going forward, we will provide a little more clarity on kind of how that materializes in those out years, but but we haven't specifically given a number for all of the projects.
Got it that's it for me thanks.
Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your questions.
Good morning, just 2 quick ones, given the supply chain lags and the stronger demand and low inventory levels.
How resilient do you think the.
If you have to acknowledge chain will be if there was a direct cash on the Gulf coast from Hurricane season.
Compared to like the normal hurricane impacts.
Secondly, can you give us a sense for how the competitive intensity in process R&D and asset sales is evolving.
Are the Chinese sort of doing the work are you seeing the competitive gap closing or do you see it widening now that BP shifted the business over to Andy Us.
Yes.
Yeah on your first 1 on Hurricanes, I mean, who can say right I mean, where it hit what it takes down in addition to acetic acid plants as it take down consumers.
It's hard to say I would say in a tight market any disruption gets amplified with even higher prices and more panic buying and other things. So in a very tight market a hurricane right now even the threat of 1 probably would cause some upward movement in the market, but it's really hard to predict.
What the overall impact would be I think other competitive GAAP I think but we continue to invest in R&D I know our competitors do as well I would say, we think we continue to have advantage technologies and acetic acid inbound and our molson.
We don't really see that gap closing, we think everybody continues to move up but we don't really see that GAAP closing at this point in time.
Okay. Thank you.
Daryl let's make the next question our last 1 please.
Thank you. Our final question comes from the lineup Arun Viswanathan with RBC capital markets. Please proceed with your questions.
Great. Thanks for taking my question here.
Just wanted to follow up a little bit more on that long term.
Outlook on the AC chain then.
So do you think we've kind of entered a <unk>.
Structurally higher area of earnings power.
I know that you guys have changed your plans as far as.
Our footprint optimization, but.
Is there a scenario where you'd see.
Continued global capacity additions.
And would you participate in that.
It does appear that there are pockets of production shortages globally.
Mentioned in India and elsewhere so.
Maybe if you could provide a little bit longer term view on your <unk>.
Capacity and maybe the industry's capacity as well thanks.
Yeah. So it's kind of a broad question, but let me try to break down.
That's 1 other things we did that we think improved our foundational earnings in terms of productivity and capacity bottlenecks et cetera, and strengthening of our chain and strengthening of our model I think it's also fair to say that we believe that the acetyl industry dynamics has improved over the long term. So if you're thinking about just growing at kind of <unk>.
Between 18, and 21, we saw nearly a million tons and demand growth for the industry and during that time, we didn't add any new capacity. So it is a more tightly constrained market than it was say back in 2018. The last time, we had a price rise we have a little bit of capacity coming on stream here in China that we talked about.
And of course, we have a lot of capacity our own capacity coming on 1.3 million tons coming on in 2023. So those are the big capacity adds that are out there, but even if you add those together, it's kind of 3 or 4 years of growth in a very tight market and again, we don't intend to run our capacity unless it makes sense.
To do so so I think the market dynamics has definitely improved over the last few years and continue to improve with just normal GDP growth.
That could motivate people to get into the market but.
But I would say, it's a very expensive market to get into I mean, you know our 1.3 million tons of capacity that we're adding at clear Lake, we're spending $350 million to do so, but if we look at greenfield build like they are doing in China, our own estimate of building that plant in <unk>.
China, because they don't have the infrastructure and everything else is well in excess of $2 billion. That's a big help for people to get over.
Non-GAAP availability of syngas, you have to have access to hydrogen.
You have to have good energy source.
It's a big hurdle for people to get over it a little better in the Gulf coast of the U S. But again, we already have a lot of players in the Gulf coast. So.
Don't see any new capacity coming on immediately even if someone were to start today theyre still 4.5 years out from adding new capacities that we see for the foreseeable future. This remaining a pretty robust type market.
Thanks.
Thank you there are no further questions at this time I would like to turn the call back over to Brandon I asked for any closing remarks.
Thank you we want to thank everybody for listening in today.
As always we are available after the call for any further questions you might have.
Darryl its guidance, please close up the call.
Thank you for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time.
Have a great day.