Q3 2021 Celanese Corp Earnings Call
Hello, and welcome to the Celanese Q3, 2021 earnings call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Brandon I ask Vice President Investor Relations. Please go ahead. Thank.
Thank you, Kevin and welcome to the Celanese Corporation's third quarter 2021 earnings Conference call. My name is Brandon I ask Vice President of Investor Relations with me today on the call are Lori Wright Kirk Chairman of the board and Chief Exec.
Officer, and Scott Richardson, Chief Financial Officer.
Celanese Corporation distributed its third 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.
Most of these measures as well as reconciliations to the comparable GAAP measures on our website.
Today's presentation will also include forward looking statements. Please review the cautionary language regarding forward looking statements, which can be found at the end of the press release as well as prepared comments.
Form 8-K reports containing all these materials.
Finishing also been submitted to the SEC.
'cause we published our prepared comments yesterday, we'll go ahead and open the line for your questions. Kevin. Please go ahead and open the line.
Thank you when I became ducking your question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad BP.
I'd like to remove your question.
Have all Mchugh that star Q for participants using speaker equipment may be necessary to pick up your handset before pressing star one.
But you asked you asked one question and one follow up then return to the queue. Our first question today is coming from Vincent Andrews from Morgan Stanley. Your line is now live.
Thank you and good morning.
Everyone. Just in engineered materials, you only had a modest volume hit sequentially. Despite you know obviously the auto situation got more challenging and.
In the quarter and you found other high value places to put that volume. So I guess as we think about you know 2022, and 2023 and that auto volume.
Question back.
Presumably you know you're not going to.
I guess my question is is that incremental on top of where you've already put this other volume or do you anticipate shifting some of that having to shift some of that volume back to your auto customers.
Yeah. Thanks for the question Ben said I mean, if we look at Q3, you know auto.
Comes from we're down pretty significantly globally like 12% down from the prior quarter.
And certainly that had some impact on us what I would say is though it had less impact on it.
And just given the nature of where we are I mean, if we really look at our Q3 volumes they were down into.
Bill only about 1% and there's a couple of reasons for that one is if you look at you know we have shifted our portfolio more to electric vehicles electric vehicles are actually up about 35% year on year in terms of builds and we expect that to continue into next.
The auditor and because we have so much more exposure now to electric vehicles. So think about lithium ion battery separator film, which is growing 40% year on year.
Yeah, even though only about 10% to 15% of our portfolio now goes to electric vehicles. That's still did went a long way.
And kind of negating the impact we saw from the overall decline in auto builds so what I would say is yes, why we did shed some volume out of auto. We also have the shift within auto which allowed us to keep you know really get through the quarter with very little volume loss.
Indian market and we.
<unk> some more shift into other applications like industrial and electrical which were strong during the quarter, but I was actually more of the ship was probably within auto into the E V, which is consistent with the strategy that we laid out at the end of 2019, Yeah, and then we wouldn't expect to give that volume up as audit recovers.
We did see 82% and 23. So you know we think about the auto recovery kind of being on top of that.
Yeah, and then if you think where that volume is going to come from because we didn't run pretty full in Q3, but we did lose about eight kt of production in Q3 due to the unavailability of raw materials be that resin in our glass.
And two fiber our flame retardants, so as we as those issues resolve themselves hopefully through the end of the year and into next year. That's the additional volume that we'll be able to put into both auto and our other end use applications.
Great and then if I could just ask on the the $100 million you know it was 50 in.
Yeah, I mean 50 M a C.
You know how does that trend or what in your your sort of 22 and 'twenty three assumptions does that.
Are you assuming that that sort of normalizes and you get it back or are you just sort of assuming it stays the same.
Yeah, I think just as we assume product.
Prices in EBIT margins are.
Normalized as we move through Q2022 so probably towards the second half of 2022, and we're assuming normalized prices in 2023, we also assume that those inflationary pressures and energy and raw materials will also normalize in that time so think.
Got it.
Margins normalizing through the second half of 2022 and be normalized for 2023.
Makes sense. Thank you very much yeah.
Thank goodness question today is coming from John Roberts from UBS. Your line is now live.
Thank you do you or your syngas.
[noise] about hiring Nanjing need to make structural changes to avoid the industry curtailments in the future.
Yeah look I mean, I think it's an interesting question I mean, it's hard to know what structural changes you would make.
Simply because the entire economy.
China is based on coal gasification.
Supply. So you know we don't really know what to expect in terms of energy curtailments in the future I you know what I would say is look we have seen this happened in China from time to time as a result of their blue Sky initiatives, whether it's for the Olympics or some other thing and so you know we're not going to speculate on what's driving this energy curtailment.
But you know while we expect some of the curtailments to be moderate in the fourth quarter. We don't really know what to expect yet for next year. So I think it's a little early to address that you know what I would say is we are a little different than some of our competition in in China.
Just in terms of what.
<unk> are our syngas provider does so you know they have some choices that they can make about where this thing gasco, whether it comes to us or whether it goes into olefins and you know frankly, what right now economically it makes more sense for it to come to us.
And then back on the engineered plastics question.
Well to get specced into new applications. So I assume that rapid pivot to make up the lost auto volume that was existing applications that you've had that just searched.
Yeah look you know, we're seeing strong demand across all sectors of engineered materials. So I would say any volume we can make what we can.
It takes them with an existing customer for an existing application.
You know that said in the Q3, we had 815 project wins, we continued to grow quarter on quarter in terms of the number of project wins, we have and the value of those project wins in Q3 was up 11% versus the prior year or so.
Can sell you know we are getting new projects all the time they tend to be higher margin projects that were able to close and they're higher volume projects. So yeah. If you look at that going forward and just said you know our ability to shift between areas.
We're essentially in a sold out position will continue to be where we can continue to ship volume.
So our high margin.
Products, Yeah, John if you recall a couple of years ago. When Laurie came in one of the first things. We did was due a robust strategy refresh and what came out of that was the the high growth program focus that Tom Kelly and engineered materials team talked about at our Investor day.
<unk> a lot of that effort around five G electric vehicles medical et cetera, which started two years ago, and we're really starting to see the pipeline payoff from that here now a couple of years into that work and so.
I'd say its a there is always some short term stuff, but a lot of this is things we've now been working.
So a couple of years.
Thank you.
Thank you. Our next question is coming from just the caucus from JP Morgan Your line is in Hawaii.
Thanks very much.
Our average acetic acid prices.
In China and Europe in average prices.
And for China and Europe.
Likely to be higher in the fourth quarter than they were in the third or comparable.
Yeah, Yeah, Great question, Jeff We hope we can answer that.
As you know as we look towards the fourth quarter for pricing I think you know we did see.
<unk> Q3 moderate from Q2, I mean down about 15% in China.
Similarly, we saw western hemisphere prices for acetic acid go up 15%. So I think you know right now after the brief surge we had in prices following the energy curtailment of CD gases has settled in now.
So that $1000 per ton price. So that's a little above Q3, but I do expect it's going to continue to moderate over the quarter. So I guess on average our best view at this point, it's probably Q4 will look similar to Q3 in terms of averages.
For acetic acid I think Bam the little.
Little trickier, we have seen a surge in Bam pricing.
Following the energy curtailment is not.
Not just our Bam capacity, which was shut down for a few weeks, but others Bam capacity was shut down because these are more highly energy intensive processes in the acetyl chain. So we have seen more.
Lots of Bam capacity in China, with the higher raw materials, we've seen some of that capacity slow to come back or additional capacity say down so land prices remain quite high I mean, you know record levels well over $2000 at a time and I think you know, we're not seeing any falloff in demand for.
Survey and for downstream Bam derivatives.
Because there are such low inventories as you may be hearing from others on their calls in the chain. So I would expect Bam pricing to remain quite high in Q3, but I would expect that to stay at that level or possibly even a little stronger as we go.
Go into Q4, which was offset any thoughts any further softening we see in acetic acid.
So there's been all kinds of outages.
2021 from weather and then we had outages in China or curtailments in China.
All of these different.
Events led you to have a different view of where the <unk> and <unk> pricing might be at the end of next year that is have they structurally changed the way that you expect the industry to evolve.
And then secondly, with all of the outages.
Which is that you've had this year how much more.
Acetyl volumes can you produce next year than you produced this year at a normal operating rate.
Okay.
Yeah.
So how the outages affected my view of the industry I.
I think the answer is no.
What.
We'll continue to change it.
The supply demand balance gets tighter and tighter and we've been calling that out for a few years I mean every year demands it goes up 600.
600, Kt and so that's like one plan every year and nobody has been.
Building plant. So we are steadily now in that structural utilization kind of mid 80% to 90, which means instantaneous utilization when you account for turnaround and unplanned downtime and everything is in that high 90, mid 90% to 100%.
That's.
That's going to continue so it is that structural change in the industry, which effects, where I think we'll settle I don't think we're going to settle acetic acid prices down in the <unk>.
300 range, where we used to see it settled I think it is going to be higher than that because structurally it's just a much tighter industry.
And I think what you see as the outages really reinforce that point, because we very rapidly see the run up in pricing anytime there is the slightest bubble. So I think it's not the outages that have changed my view is I think the outages have reinforced our view that structurally this is a tightening market that is going to enjoy.
<unk> had good margins for some period of time and we've talked about in other quarters.
There is not but we had a little bit of capacity come on in China. This year.
With a y.
<unk> gone she.
We have our capacity coming on in 2023, which of course, we will.
Run.
To meet the market demand.
And have a lot of flexibility to take it up and down depending on what's going on with the market.
Theres nothing else currently being built and so and yet demand is going to continue to grow. So it is going to settle higher but I think it's really the over reliance structure versus say the outages.
So what does that mean in terms of availability I mean, yes, we were down this year for the.
The free event and of course, we.
Had some supplier issues for some time following the freeze event other than that actually our units run very reliably. This year I do think as you know as we move into future years.
<unk>, we will be back at a normal pattern of turnarounds. So while I think there is some incremental capacity available to us next year I wouldn't say, it's probably really significant.
From a volume standpoint.
Okay, great. Thank you so much Laurence.
Thank you our next question.
<unk> is coming from Duffy Fischer from Barclays. Your line is in our lives.
Yes, good morning.
Maybe a little bit to follow on the last question and also.
Tying into several of the big customers on the coding side of action called Audi Emulsions.
As being problematic from a pricing and sourcing.
Standpoint.
When you look at how tight you see things over the next couple of years. When you look at the size of those customers.
Should we expect some meaningful sized new announcements over the next year.
Other on <unk>, where you would maybe ship in <unk> acid or.
Would there be anybody that would look at doing kind of a integrated acetic acid in the van project in the U S.
Yeah. It's an interesting question Duffy I mean, let me kind of take the last part.
I wouldn't expect anybody to do in acetic acid demand to V. A newbuild.
Newbuild.
I, just don't think economically I mean that probably.
Just the acetic acid part of that is probably at least the $2 billion investment and then you add on the Bam and VA might even double that depending on the size of the facility. So I think that's a pretty big lift for just about anybody not to mention the space the infrastructure the.
Permitting and everything I mean this is the.
This is a five to seven year prospect if someone were to start now so that's a ways out there. So I'm not I'm not worried about that like I said, we have $1 3 million tons coming on in 2023, which is basically the equivalent of two world scale plants for acetic acid and Youll recall we.
We've announced a series of Bam and via E expansions glue.
Globally around the world trying to meet what we do see is it.
Continuing strong demand I mean part part of the problem right now of course is with the freeze with other outages things have gotten behind at one.
As people restock the world will normalize again as you'll see as Cedric asset prices come down that will lead eventually to lower band prices and lower VA prices.
Energy is a big factor. So I mean, I think it's going to normalize even short of a lot of new capacity being added but.
Point to see the need for more capacity to come online, which is a need we think we're best positioned to me given our great technology or lower our energy efficient technology and our integration.
Not just within our plants, but also our networks globally that allow us to really optimize and provides secure supply to our.
Customers around the globe.
Great. Thank you and then maybe just a second one on the $15 for next year can you walk us through are there any meaningful changes that would be in that number.
Cash flow that would get spent on a buyback.
Maybe a change in the tax rate I'm, just to understand kind of like what's the base assumption.
Functions for that $15 for next year other than where spreads go.
Yeah, Let me, let me just kind of walk through it and come in some of the things we are assuming in that number. So what we've said is next and adjusted EPS next year of at least $15 that is based on belief our acetyl.
This will have an ebay between one two and one 4 billion.
As I said, a little earlier in the call that assumes we see relatively strong pricing, we're expecting in the fourth quarter continuing into.
Into the first half of the year, where you are in that range indicates where it might be different places.
As we think it might start to moderate whether it's a little bit before the.
The third quarter, whether it's into the third quarter.
We do though expect to see moderation to normalized normalized pricing sometime mid year and I said similar volumes to what we did this year because we think with.
And around normal.
Normalized levels of turnarounds and everything I, just assume kind of similar volumes for <unk>.
We are expecting $700 million to $800 million of EBIT.
That does include Santa <unk>.
It does include the organic growth both from our project model and our growth model.
But also the bishop to EUR expansion, but I would say, it's also dampened a bit by our expectation that auto builds will not recover next year. So we're expecting auto builds at the same level, we're seeing auto builds in 2021 and that affects our normal materials into auto.
And but I'd also.
Also will affect <unk>, because it is 65% into auto and then in tow we expect it to be pretty consistent with this year, because we expect it to continue to be challenged by acetic acid pricing at least in the first half of the year and and also by energy pricing.
I will say if you add all those up.
You might come up with a number of slightly over 15. So what you should be aware of is we do expect other to go up.
We expect less pension income next year with maybe a softening in the market.
Which will then raise our bu other.
So if you look at that in terms of free cash flow I mean free cash flow we're basically.
We think even with a lower expectation on EBIT earnings driven primarily by moderation in acetyl.
We do expect about the same level of free cash flow So lower earnings, but we do would then get that working capital normalization.
That shows up as free cash flow our book.
If we see them.
The moderation in acetyl and would you expect slightly higher Capex, we're still thinking capex around $600 million next year.
But we won't have the EU payment so kind of look at all of that that washes out to basically free cash flow in the same level, we expect to see this year.
Great.
Okay.
Thank you. Our next question is coming from Hassan Ahmed from Alembic Global Your line is now live.
Morning Glory.
Yes, I can take a look at your your sort of prepared remarks in the guidance you gave for the acetyl chain.
You know, we're looking for sustainably sort of over a $1 billion in 'twenty, two and 'twenty three EBIT and you cited rightly saw a bunch of different reasons why you feel that's doable.
One of them was the.
The sort of <unk>.
Uplift in the cost cuts so just.
Wanted to sort of.
Get your thoughts around what's going on over there, obviously I see what's happening with the raw material side of things and the like and you cited sort of escalation in pricing for calculus, and the like as well. So just on a relative basis I am trying to get a better sense of how much.
How.
Or we should think about your cost advantage relative to competitors improving in this sort of new raw material slash gutless Cotswold.
Yes, I think.
I'll just back up a little bit hits on if you look at like a decade ago, our foundational earnings for acetyl.
<unk>, we're in that $300 million to $400 million and then if you go in recently.
Even last year, we were saying we think our foundational earnings are around $800 million and that was that was based on continued rationalization of our footprint expansion activities, we had done.
Work, we had done to improve the productivity of our sites, whether it be energy efficiency or catalyst recovery systems and things that lowered our cost of production.
And you know now we're saying we think that base level is greater than $1 billion and so it's really the same thing I mean, it's.
It is productivity it is energy efficiency, but it also is this market dynamic that I was talking about if you go back a decade, we've had really over built in China, we but the industry had overbuilt in China, and we were at low Utilizations I mean mid sixties.
Mid 70 now are at much higher level of utilization with no new capacity other than our own on the horizon and maybe a few other little things around the globe and so we are just in a much tighter area of supply demand, which we expect will continue for the next five to seven years unless someone else to build new capacity.
But it will take them that long and that's really why we're saying that foundational early any kind of a low as we think we will achieve in any given time is now at about that $1 billion level.
Now, obviously that could change it with them.
Global economic recession, or something but I'm, just a normal economic conditions, we think that.
The floor and I think that I think it's really demonstrate also the power of the model that we've developed over these last 10 years, where we are able to you know as we did in the third quarter, we had a 15% decline in the price of acetic acid in China.
We were able to recover that with the price in the western hemisphere, because we still had tightness in the western hemisphere, and we had 8% less.
Earnings from asset globally in the third quarter than we did in second quarter, but we were able to recover that in.
Margins for <unk>, and <unk> and other downstream derivatives, because you know and having that flexibility to shift geographically and having that ability to flex in the chain is what gives us confidence that unlike many of our competitors, who don't have that flexibility, we will be able to deliver that.
$1 billion of foundational things.
Going forward.
Very helpful very helpful and as a follow up.
Ken reverting back to your prepared remarks.
Your commentary about.
You know relatively tepid long term sort of supply grow with iPhone Super interesting.
Particularly as you sort of talked about China would love for you to dig a bit deeper into that I mean, you're.
You're talking about.
The whole sort of capital cost advantage in China has dwindled the whole permitting process is far more complex I mean to me that sounds super bullish not just for.
The acetyl chain, but for commodity chemicals in general.
No I think that's right I mean look were not that many years ago. We would have said there was a large advantage to building in China, just from a speed of build and our cost of build.
As China has developed.
As they've developed.
A stronger working class.
I would say that that advantage doesn't exist anymore not in the same way now look we're still bullish on China, we still.
This about our operations, there, but but that advantage of being in China.
Just from just as a place to be because of low.
Sure cost material it doesn't really exist anymore. Now there are other reasons to be in China. Like we are which is making things in China for the China market, which continues to be you know.
It's a great market, but making things in China for export not so attractive anymore and I think that's true for other other commodities.
As well and for other regions of the world as well and I think also with the supply chain issues that we've all experienced this year I think our strategy of making locally for local demand has proven to be a good one and probably one we'll see other start to follow as well.
Very helpful. Thank you so much.
Thank you next question is coming from Michael Sison from Wells Fargo. Your line is now live.
Hey, good morning, nice quarter again.
In terms of your commentary on the cost curve for the acetyl chain.
Where are we now in terms of the advantages as the rest of the world three or four times.
It is more expensive or higher just curious how that has changed relative to the footprint you have in the states.
Yeah look still although we have seen increases in natural gas in the United States.
You know acetyl is produced in the United States, especially for us at clear Lake with.
Our technology with the economy of scale.
It's still very much on the lower end of the cost curve and I and I would say quite significantly.
China coal had gotten more expensive, even then than Singapore for awhile, because Singapore was oil base, but coal has gone up.
Oil has gone up so I would say what we've seen is while the entirety of the cost curve has gone up it hasnt really changed the dynamic about the very large advantage that we have in the Gulf coast of the U S.
Versus the rest of the world.
Got.
Got it and then for for your outlook for 'twenty, two and E. M. I think you commented organic growth of mid to high single digits in 'twenty, two and maybe in 'twenty three.
That assumes auto doesn't grow in 'twenty, two and then.
And 23 do you think auto grows in that growth rate is higher.
Yeah, I think on a simplistic level, yes, I mean, I think look we have growth in 2022, just not in auto we have growth in medical we have growth in electrical but I mean, we also do expect to have some lingering impacts of the shortages of resin glass and flame Retardants as we go into 2022.
I would expect a higher level of growth in 2023 based on the re growth in auto and hopefully the full resolution of all of those supply chain issues.
Great. Thank you.
Thanks, Mike.
Thank you. Your next question today is coming from Ghansham Panjabi.
Baird. Your line is now live.
Thank you good morning, everybody.
I guess relative to your outlook for AC segment from three months ago.
Is it purely the curtailments in China and the impact on pricing that is driving the upgraded view on <unk> or is there anything else as it relates to demand or mix would've been higher feedstock costs.
And then related to that just your thoughts on how you see curtailments playing out for <unk>, specifically and the risk on the first quarter as well.
Yeah look we have baked in already for fourth quarter. So let me start there I mean look we're seeing moderate very modest curtailments in fourth.
So I mean, the differences in third Q. It had it all happened in about 15 days in the fourth quarter.
The provinces no the number they've been able to optimize more and so we're seeing it only really modest curtailments in fourth quarter and and you know it's a period typically worry if seasonality and we weren't expecting much.
This year, but you know I would say that's fully baked into our fourth quarter, but clearly those curtailments and the impact they're having on others.
Well.
As well as extend once we had in third quarter has changed our view of how long does pricing situation is going to last people are.
Not going to be able to rebuild inventories now in the fourth quarter and so I think it just pushes that higher range of pricing.
Further into 2022 as we do fully expect people once prices start to moderate even at what are still fairly high prices they will want to rebuild.
Inventory, especially because we're already going to be going into the next construction season at the end of Q.
So I think that really accounts for the change in our outlook for 2022.
Just this continued level of higher pricing and higher margins for acetyl extending longer into.
Into the year now than what we thought a quarter ago.
Got it and that thesis points you.
Alright.
I was going to say that the thesis points you laid out in your prepared comments.
Specific to China, and the capacity additions in the unlikely nature of that just based on that.
The world hasn't changed over the past decade.
Along with the economics does that also impact on the same basis your own supply chain and your own access to material et cetera have you sort of thinking about that risk aspect.
Yeah.
I mean, we've had some.
Some.
Issues around materials for additives and that applies to powders and things as well things you never even hear about or think about but I would say.
In a major way we make.
35% to 40% of our own CEO.
We start Barry.
How far up in the value chain and we'd go very far to the end. So again I think what we're seeing now in raw material. I mean, why certainly has impacted us I think we've also had more ability to deal with that because we have more choices in the chain, where we can make decisions that ultimately help.
Pain or even in some cases improve our margins relative to others.
Thanks, so much.
Thank you. My next question today is coming from P. J <unk> from Citi. Your line is now live.
Yes, hi, good morning, Laura.
Laurie.
A couple of things on your asset deals changed commentary that sort of piqued my interest.
You talk about catalyst cost going up due to precious metals pricing hub.
How big is the catalyst cost and is it just the raw material inflation issue with precious metals or is that a availability.
Issue of catalyst.
And the second question there you talk about.
You know the capital advantage to build capacity in China versus U S is now negligible.
Which is very interesting because as you know still cost the same everywhere and always have cheap labor and.
China was exporting deflation all these years do you think that's behind us.
Is it permanent.
<unk>.
Yeah, Let me talk about catalyst cost burden.
We haven't really shared the numbers, but earlier in the year, let's go back to like first quarter second.
We actually saw costs for some catalysts, we use precious metal think rhodium thing platinum thing. These sorts of things we actually saw it increased by 10 times versus what we had had in previous year now a lot of the same materials go into other applications.
Quarter catalytic converters.
And.
Back when auto was really picking up we really saw a lot of competition for that limited supply of precious metal.
Interestingly enough with not surprisingly also with the reduction in auto Bill not so many.
Converters being built we've actually seen some moderation back to maybe not only five times what it is so I would say precious metals.
That's easy, but we have seen some moderation and I think the volatility we're seeing in pricing. There is just typical of the volatility we're seeing around the world where a lot of pent.
Lytic manned people really wanting to Purdue, but a lot of I would say almost worth any issues around supply chain logistics and other and everything else, which is keeping all of these markets quite volatile, but I would say volatile at a much higher level than we enjoyed say just even two years ago. Okay.
And then on the steel side, yes.
Still feel kind of costs the same around around the world I mean, he used to be an advantage in China.
Probably due to some government.
Support I think that's a lot of that has gone now so I think cost of materials in China is really not that much less labor.
Not necessarily versus the U S, but versus maybe other parts of Asia.
You know the labor has more normalized I mean, I think labor is still a bit more expensive in the U S. But you also get a bit more productivity in the U S. So I'm, just saying that the difference in whereas it used to almost be a two.
Two to one advantage to build in China versus the U S for or any other part of Asia and you could do it and you could get through permitting and things more quickly that benefit has vanished is there still a 10% advantage maybe.
But it's not it's not as large as it used to be and.
And that's really what I was.
Two in my previous comments, but again it still makes sense to build in China. If you're building for materials that are going to be consumed in China, because you get around any tariff issues or a trade war issues transportation logistics issues. So it can still make sense to build in China, I'm, just saying youre not we would not see the advantage of building in China.
Referring to something we're going to export to some other part of the region or some other part of the world.
Right right, but the demographics in China do you expect some of these labor costs rising that will continue in the future.
Look I think as the as the.
The war for talent.
<unk> continues in all parts of the World now.
I expect we are in for a period of inflation labor costs really in every region of the world.
Alright, great. Thank you for the color. Thank you. Thank you.
Thank you. Your next question today is coming from Bob <unk> from Goldman Sachs.
<unk> Your line is now live.
Thanks, so much.
Or you mentioned you thought maybe all of those would be flat is that an industry comment or because your EV mix is getting richer you can still grow and what's the latest on the medical stuff I know during the peak of Covid you had some diminished demand because of the deferral of elective.
Fox from yourselves that end markets trending at the moment.
Yeah look I would say, we expect auto builds to be flat year on year. If you look at the industry and globally now I think that changes region to region. I think Asia is doing a bit better I think Europe soon a bit worse I think the U S.
Proceed between there I think that's pretty consistent though with an industry view on auto builds I think while we all hope the chip shortage was going to improve I think now every most things you read by knowledgeable people say, it's probably the end of next year before that starts to improve so our expectation is auto.
As they build will continue to be flat year on year our own.
What that means for celanese, though maybe I should call that out because I think it's important as actually we expect our auto volumes to be up 15% next year versus where they were this year, just really as driven by the.
But we have again the higher exposure that we have in Evs and we used to have evs have a higher kilogram per vehicle. The presence we have in lithium ion battery separator films enhanced by the expansion in Bishop that will finish here at the end of the year. So.
Again industry wide, we expect flat.
<unk> built we expect though our volume into auto to continue to grow by 15% next year.
And I think your last question, Bob, but I had a little problem hearing.
I think it was really around elective procedures and medical for medical and what we're seeing there yeah. So what I would say is on medical elective.
<unk> had been flat this year, we kept calling out we expected them to increase we also didn't expect the delta variant and so what we've really seen is there is still flat.
We're seeing a little bit of pickup in some regions, but I would say nothing of significance.
In terms of our orthopedic.
Dave.
Side of the medical business, what I will say, though is we have seen.
A notable pickup in our business for other medical and pharma and its really on the back of our focus we put on this in our strategy in 2019 trying to expand our presence in other parts of medical.
So in pharma and we did see an increase in that in third quarter, which is really what help kind of keep our mix.
Pretty steady versus second quarter, and just as an example of the kind of projects that we're bringing in now in medical outside of Orthopedics, We've actually just closed closed the deal.
Provide pom into dry powder inhaler for a company in India. So this is for an inhaler uses dry powder uses our pom. This is a high value application.
With a pretty with pretty good not just good margins, but good volumes going forward. So that's.
Two we're starting to see more growth higher margin business things like inhalers things like wearable diabetes devices, obviously still continuing to grow our vital those long dose delivery platform. I mean, we are seeing really good growth in these segments and expect that to continue.
That's really going to next year and beyond.
Perfect. Thanks, so much.
Thank you. Your next question today is coming from David Begleiter from Deutsche Bank. Your line is now live.
Thank you good morning.
Going back to your cost curve comments in China, how much of this change do you think is permanent if any.
'twenty our plants. There you think are at risk for them, perhaps permanent shutdown.
Okay.
Well.
Well I mean.
This is my personal belief.
The advantage to build in China.
Has disappeared and I think thats probably.
Any of them in it I think it's like we see generally as well as developing economies get more developed and get and strive to get a bigger middle class try to strive to increase wages strive to improve the quality of life for people in that company.
Do lose their cost advantage over time now they've gained in productivity.
So I don't think I don't think its that its got a switch I don't think it's going to be a cheaper to build in other parts of the world, but I think I don't think China is ever going to go back to being the super low cost producer that it wasn't that that's not necessarily a bad thing right. We see China also moving to create more high value materials more.
More things in China to meet the growing demand of the population in China. So I just don't think there will always be the huge low cost export or that they werent before but we've seen many economies go through that right and so who knows what the next economy will be but there is still there is still the second largest economy in the world. So there's no doubt China will remain a very important.
Important part of the world balance of certainly the chemical and polymer world balanced in terms of where things come from.
David and I think if you really looked at technology difference that we've talked about for a long period of time on just the straight variable cost. The advantage that we have is still there and with some of the challenges.
<unk>, we see in coal and just fundamental usage of coal and that being more and more restricted over time in China at those plants operated at a slightly lower level Laurie talk about catalysts catalysts.
You usage of these disadvantaged technologies is higher than what ours is so we're seeing the cost.
Increased theyre seeing the cross increased at a greater rate and so that should hopefully and that's kind of why we've signaled strength as we work our way into 2022 is we do think that there is some changes here that we do believe are sustainable. When then you layer on the fact that you would.
The supply demand utilizations are getting into the 90% range.
In the back half of the year due to the cost you mentioned you mentioned that should be similar pressures next year do we return back to maybe in 'twenty two 'twenty three prior levels of core earnings once these costs normalized.
David We lost about half of your question do you mind re asking that fourth Im sorry, I say tell he has had a step down in earnings here in.
In the back half of the year due to inflation.
You've highlighted additional these pressures continuing into next year would you expect a return to normalized levels of tow earnings perhaps in 2023.
Yeah look I think that's a very reasonable assumption I mean, the real issues other than the issue we had with.
Losing Belarus.
Volumes this quarter, but will place those volumes into other application next quarter.
You know the things really driving the the lower level of total margin is acetic acid pricing is natural gas pricing. So as we get to 2000.
23, as well just as we expect normalization for acetic acid, we would expect normalization in pricing and we would expect to see margins for tow come up to the level, we've seen as well of course without will give us two years to pass through pricing actions on multiyear contracts.
Thank you.
Your next question is coming from Kevin Mccarthy from vertical research partners. Your line is not a lot.
Yes, good morning, Laurie I had a few related questions on natural gas I think you made the point in your prepared remarks that due to low levels of inventory you know the costs are flowing through maybe a little bit faster.
And would otherwise be the case and so.
With regard to your four Q earnings guidance do you think that natural gas or energy inflation will be a net positive negative or neutral and then the second part would be related to recovery of those costs.
I think you mentioned that you're implementing surcharges. So perhaps you could comment on where youre doing that if it's Europe or other places in which products.
Yes, so if we look at natural gas I mean, obviously natural gas has an issue in the U S where we purchased about.
<unk> 55 million Btu annually, but it's also a real issue in Europe, where we don't necessarily purchase much natural gas directly but we certainly.
It is a factor in many of our raw material costs as well as the factor in our.
<unk> and other things that we purchased from others and so.
Has been a significant.
Difficult.
<unk> this year.
Third quarter.
Step up from second quarter in fourth quarter, we do.
Back to see another call it 25% increase in the U S and a nearly doubling of natural gas prices in the EU.
This well.
A significant factor for us in the fourth quarter now with the surcharges.
With other things, we do expect we'll be able to recover.
Some of that I think though.
We will see for example, any another 20 million increase with the.
Well Barton, we're recovering some but it means we're probably just going to be flat to third quarter to fourth quarter not every contract and we put a surcharge on not every molecule we will have a surcharge.
Some contracts are fixed for a short period of time, so we won't be able to recover everything that we do think we will be able to basically mitigate the impact.
Search of the increase from third quarter to fourth quarter.
We stay in the winter months next year, we would expect first quarter to be kind of the same level of pricing we see in.
In the fourth quarter, but again, well have been able to pass more of those costs on so we should see a bit of help.
<unk>, we move into next year as it comes to the impact of natural gas prices on our overall margins.
I see Thats helpful. And then secondly, if I may.
Wanted to ask about the eight kilo tons of.
Production lost in the EM segment, you commented on.
Availability issues around glass fiber flame Retardants resins wondering if you could kind of talk through those and are they getting any better or worse as far as you can tell in the fourth quarter and beyond what's your outlook there in terms of ability to produce.
Yes look and.
Unfortunately, I think it's going to be similar in the fourth quarter, we don't really see an improvement I mean glass fiber demand is.
Surged and the ability of the providers to respond to that especially post free.
It's just.
It's just hard to get them get them back on and get the production up.
We really see probably an improvement in GAAP glass fiber in the fourth quarter, we do expect to start seeing some improvement next year.
Suddenly flame Retardants I mean that was a little even more complicated because pretty much all of the yellow box for us thats used to make flame Retardants comes out of Yunnan Province in China, which.
Curtailed as part of the energy curtailments in Q3 and will probably be impacted in the fourth quarter. So that situation is not going to get better.
Probably again this year, hopefully we will get better next year.
But they're right now it's just a single source of this raw material and it happens to be in China. So we need.
We need a bit more time to understand what the energy curtailments are going to mean going forward really know when that issue is going to resolve itself and resins I would say are mostly resolved at this point in time I don't expect resin availability to be as much of an issue in the fourth quarter and certainly not as we move into next year.
Perfect.
Thanks, so much.
Okay.
Thank you. Our next question is coming from Matthew Deyoe from Bofa. Your line is that right.
Thanks.
I don't expect you to comment on market rumors but.
There was one earlier.
The summer about.
More or less a ceramics for medical and industrial products company.
Without talking about that one more specifically I guess can you help us.
Frame out the scope at which youre looking through evaluation.
M&A and kind of what.
Would fit into the model and what wouldn't fit because it seems like.
The the.
The search is fairly wide I guess that's.
If we can start there.
Yeah look I think as it comes to M&A, whatever you're hearing I would assume we're looking at everything anything that is related to end markets that we currently serve anything.
That's related to resin that we currently produce or might want to our polymers that we might want to produce.
I would just assume if there is a rumor is something that if you see something we're probably looking at it now that said, we look at everything with a lot of discipline and we look at it through the lens that we laid out.
<unk> at Investor Day, So we look at we really focus on can we achieve synergies with that what do we think is our unique ability to create value creation from it. So is it something that we can provide our business models are.
Pipelines are growth models too.
You know all of those criteria is where do we think it is on the value chain, we look at but we look at everything we choose very few things to pursue.
And so maybe I'll just stop at that.
I will say, though is we think we have a lot of managerial and financial bandwidth in order to complete.
Transactions of any size.
Our multiple transactions of a smaller size. So at the time of the Investor Day, We said, we outlined about a $6 billion.
Having a $6 billion available on our balance sheet in order to do M&A.
I will tell you even with the expected close of Santa frame here in December we still think we have about $6 billion available to us on our balance sheet because of our higher earnings that we've had this year and what that's meant.
In terms of cash generation, and the and where our balance sheet is that so I mean assume we look.
Thing assume we continue to look at it through the criteria, we laid out in Investor day, and know that we have a very large part of money ready to go when we find the right opportunity and we have a management team that is ready to.
Both.
Negotiate and integrate.
At every thats helpful. Thanks.
She doesn't want to talk about a little bit on the EM side was the Nat gas costs I guess I was little surprised as downstream ops would have that much exposure directly to Nat gas is that just a reflection of like European energy costs moving up.
Or is there some is nat gas more directly.
Its stock.
Sure.
Or is it just the ceded pass through I guess I'm just wondering.
Well I mean, if you think about it in the U S. Just about everything is a derivative of natural gas so even in the U S. We've seen almost a doubling of that gas cost from last year to this year.
The current price this year, but if you think about the Oh, it's think about methanol in the U S. These are all natural gas derivatives. So there is there is a.
Kind of a direct correlation to raw material feedstock.
Natural gas, though for us still from a energy.
<unk> standpoint like boiler. This is very small because actually if the asset is exothermic Pete integrated with others downstream so not.
Kind of the inverse of what you think it is a big deal for raw materials, we tend to be able to pass that through not such a big deal in terms of direct cost of energy in our U S.
Creation in Europe.
Again more.
More E M exposure most E tends to be lower energy intensity. So think compounding really doesn't require much energy, but something like pom requires a lot of energy.
You think about Pom right you have.
<unk> to crystallize that you have to dry it.
That takes a lot of energy. So there we really do see the direct impact of natural gas which is.
Almost doubled from third quarter to what we expect in the fourth quarter and is kind of four times, what it was in the third quarter or in the second quarter. There you see a very.
He direct relationship and one that's a little harder to pass through because it really has to do with steam steam costs and electricity costs and all those sorts of things.
Understood. Thank you.
Thank you. Your next question today is coming from Frank Mitsch from.
Ari Research your line is now live.
Hey, good morning, and congrats on the nice results just curious what the step down that we're seeing in the acetate tow market can you comment on where you feel that fits within the <unk> portfolio.
Yes, Brian I mean, as you know we constantly look at everything in our portfolio.
And look at where we think the long term trends are and how it what does that mean for.
Long term long term margin resolved and the fit in our portfolio, what I would say on tow and similar to my previous comments is it's the step down we're seeing right now is we.
Uniquely tie to the price of the CDK.
<unk> and <unk>.
And.
Energy prices around the globe and clearly the biggest piece of that being energy prices in Europe and for Lanoxin plant.
We do believe that we'll see a normalization of pricing, both both raw materials and energy and with that we expect to continue.
We enjoy high margins.
In toe, but like all of our portfolio will continue to watch that and make make our strategic decisions. Accordingly, as we move through the next few years, yes, and Frank I mean, I think it's important to remember I mean this is still between both the base business and the dividends that come out of the JV.
<unk> generates a lot of cash for us and that cash can then be deployed for higher growth applications. So we saw last year the importance of having this business. When we saw the downturn very solid results very solid cash flow generation and yes, we're seeing some near term compression, but as Lori said, we do expect some level of normalization.
<unk>.
That's very helpful and just a clarification in terms of your energy costs year over year.
Just reading through the prepared remarks, so its $20 million negative impact in Q3, and an additional $20 million negative in Q4, So we should assume like year over year.
Higher energy is going to cost you $40 million is that correct.
Yeah look I.
I would say we've also seen the impact of those higher energy impact on raw material and thats, probably closer to $250 million a year on year.
But we've been able to offset all of that.
Anticipate offsetting all of that except about 20.
Hum.
Through pricing initiatives and other initiatives.
Got you very helpful. Thank you.
Kevin Let's make the next question our last one please.
Certainly our final question today is coming from Laurence Alexander from Jefferies. Your line is now live.
Good morning.
Two quick ones then.
<unk> touch on given the.
Improved structural outlook for asset yields.
Why not pull forward capex to sort of fill in the pipeline the industry pipeline in 2026 2028.
And on carbon pricing.
Okay.
Can you extend the carbon prices move higher.
Are your E M.
Customers, giving you any sense of how that factors into pricing for your products.
Are you seeing any kind of favorable mix shifts or negative from that and similarly within asset sales is there.
Certainly.
Carbon prices, where some of your attitude chamber comes disadvantage relative to substitutes.
Yeah.
In response to your first question not just for acetyl, but for a week.
We continue to look at our ability to pull forward all of our projects because why margins are high.
We love when we believe that that structural demand is there. Similarly in <unk>, we can sell everything we can make right now so and we expect that to continue as the desire for high quality.
Need products like we make continues to grow so we actually look at what we constantly have been looking at how do we pull all of these up.
The limitations are really the actual time it just takes to do a project between permitting which unfortunately has been slowed down in most parts of the world because of Covid.
All the way to just the ability to get raw materials materials, and we've talked a little bit about steel buy concrete everything there is so much demand right now for.
<unk> projects that were finding it difficult to pool, our projects up in a meaningful way, but we'll continue to look at that and we'll continue to update you as we move through the year.
And then on your second question you know what I would say is for most of the high value products that we produce.
Construct.
Customers just want the product I mean, we've had that we've had three consecutive quarters of price increases in the kind of the first time in our history and what we find is that is not impacting the desire by customers to take product. So I think in the inflationary environment, we're all experiencing on everything people.
Understand.
You may not like it but they understand why we're having to push the price increases to cover raw materials and energy.
And again have not seen any loss of volume due to pricing I would say the same thing really in in.
Asset in downstream acetyl chain.
People have it as you know.
The demand for construction project products and packaging and all these things that acetyl go into is only increasing and even at the higher prices I mean people maybe have been a bit slower too.
Retail inventory at these prices, but there is no material anyway available to retail inventory.
Change again.
Not.
Our customers would take more at these prices if we could produce more holistically about that.
Thank you.
Thank you we reached end of our question and answer session I would like to turn the floor back over to management for any further or closing.
<unk> settlements, thanks, Kevin we'd like to thank everyone for listening in today as always we're available after the call. If you have any further questions Kevin.
Kevin. Please go ahead and close up the call.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day.
Thank you for your participation today.