Q1 2022 Celanese Corp Earnings Call

Greetings and welcome to the Celanese first quarter 2022 earnings conference call and webcast.

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Question and answer session will follow the formal presentation.

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I would now like to turn the call over to Brendan I ask Vice President of Investor Relations. Thank you you may begin.

Welcome to the Celanese Corporation first quarter 2022 earnings Conference call. My name is Brandon I ask Vice President of Investor Relations and with me today on the call our lawyer Curt Chairman of the Board and Chief Executive Officer, Scott Richardson, Chief Financial Officer.

Those corporation distributed its first 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 comments.

Form 8-K reports containing all these materials have also been submitted to the FCC.

Because we published our prepared comments yesterday, we'll now open the line directly for your questions. Darrell. Please go ahead and open the line for questions.

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We ask that you please limit yourself to one question and one follow up quick question. One moment. Please while we poll for your questions.

Our first questions come from the line of Josh Spector with UBS. Please proceed with your questions.

Hi, Thanks for taking my question I was just curious on the engineered materials.

EBIT guidance I was wondering what's baked in there in terms of volumes sequentially and you're pretty clear about the auto pull forward, but wonder if there's any other puts and takes around that assuming you're getting incremental pricing, but I assume you are assuming some volume moderation for QQ and then similarly for the rest of the year thinking about how you're kind of framing up volume expectations for auto end market.

And otherwise thanks.

Yeah.

Yeah. Thanks, Josh as we look at full year. So if we look at 'twenty one to 'twenty two we are assuming some.

Some volume in there some of that is for Santa brain, but there's a couple of percent growth in base business as well and that really comes about as we see improvement in 'twenty two versus 21 and in a lot of the availability of a lot of our raw materials, so things like glass fiber or things like.

Flame retardants, even some resins that we called out last year now that we are getting better supplies of those were able to increase our volumes and that really accounts for the base volume increase and I said, we do have volume increase in there as well for for saying a prayer I would say, yeah, we called out auto to be flat.

Year on year, So we're not assuming a large increase in volume to auto although we do continue to see margin growth and in materials into auto as we continue to to high grade the materials, we sell into auto, but I would say really strength across all sectors.

All of them growing a little bit in that volume.

And then I guess, just specifically on <unk> and that sequential volume move are you thinking that volumes are up or down into <unk>, given some of the macro headwinds.

Yeah.

Yeah, I think in Q2, we're expecting a little less volume again, we called out that we had about what we think was $10 million to $15 million of volume pull forward from <unk> to <unk> <unk>.

Again, I think we called it out in our nodes really that was driven by a <unk>.

Demand being down in <unk> in terms of auto builds but people wanted to go ahead and rebuild inventory you might recall that we had said fourth quarter. We saw a lot of inventory reduction as people went to end the year and so we think people. We're just rebuilding inventory Q1 and unless we see a rapid demand, which we're not forecasting for all.

<unk> and <unk>, then we would expect to have see you now.

About $10 million to $15 million not show up in second quarter, If you will.

Okay. Thank you.

Thank you. Our next question is coming from the line of P. J <unk> with Citi. Please proceed with your questions.

Yes, hi, good morning, Lori and Scott.

Does dupont's business improve your ESG profile or keep it the same and can you explain can you maybe talk a little bit about nylon recycling, especially at the end of life in applications like autos and what role will accelerates play.

Yeah.

Thanks P J.

Dupont our assessment, so far and you know obviously, we have more learning to do but our sensor and Dupont is their ESG profile. It is similar to ours they've had similar efforts in place to reduce the footprint of their facilities. They have similar efforts in place to purchase renewable energy for them.

Our electricity needs. We know they've also worked on recycling and making available recycled materials to those customers that want them. So I would say you know I don't think they're necessarily far ahead of where we were in celanese, but I also don't think they're behind so I think we have a good common platform to work from obviously, there's going to be some.

Things, we find they're doing better there's going to be some things we were doing better. So I think you know it wont really just help accelerate our journey.

When it comes to recycled nylon, but the challenge has always been how do you find high enough quality nylon. So that the material you provide can meet the customer specification. So in celanese, we've done that by securing airbags, scrappage, which is pretty consistent quality, we use that in Europe to make a recycled nylon in India, We're a REIT.

Cycle Fishy nuts.

From the Ocean and clean those when we make that into a recycled nylon.

So for other used to say in auto the challenge is really how do you collect it and how do you separate it because you know collection itself as an issue as it is with all recycled materials, but then the issue is in the auto and other applications a lot of times, you know, they're put together with other materials or different difficult to.

Separate I think it's a challenge we have as an industry and one we're just starting to look at some of our more recent discussions around that as we've been talking to customers and.

Not necessarily in auto but also in some other applications, saying, Hey, if you could do this entire component out of one material. It may cost you a few cents more but it would make it more recyclable and so I think that's what we're gonna have to look at going forward is how do we work with our customers to maybe simplify the amount of polymer.

Are the types of polymers being used inside an application to make it easier to recover and recycle those materials.

Okay.

Great. Thank you I know one quick question on DRAM, you mentioned that you know things are really tight with the euro five plans down in North America I believe.

You know how does how does this situation normalize into Q in second half. Thank you.

Yeah. So look we expect that to normalize in second half I'm sorry in the second quarter two of those Bam plants, where ours. So one turnaround in clear Lake is due as well as the turnaround in Bay City.

So we know those are coming back up and we should expect them to be back to full rates in second quarter. So we expect that to improve what that should do though is increased demand and for acetic acid, which provide a little bit of support for acetic acid pricing going forward, especially with.

China acetic acid pricing and Bam price continues to be high partly because of that but also just because of a big demand for Bam and I think you can see that in other People's reports that are really calling out strong second quarters as well as strong second half and some of the big Bam consumers. So you know I would expect the supply demand situation to normal.

Second quarter, which really just should help us with the CD gas you know holding up acetic acid pricing.

Thank you.

Thank you. Our next question is coming from the line of Jeff Zekauskas with J P. Morgan. Please proceed with your question.

Thanks very much.

I think you used to say that your financing costs for the mobility acquisition or about 3% how much higher or are they now or how much higher do you foresee.

Yes, Jeff I think we're still we're still working through that obviously I mean benchmark rates have moved up.

A lot's going to depend upon.

Where things are at when we go to market.

It also is we're working on things in terms of how we want to optimally structure in terms of our regional that mix.

We're gonna look at maturities are and kind of.

Optimize that as well so I think while we do expect to be higher than the 3%. If we were to go to market right. Now I think the overall interest cost we believe is not going to be materially different.

With the higher cash flow, we do expect to come in with lower debt at closing is the current expectation.

Then with bringing synergies dis synergies forward a bit.

In year, one we ultimately.

Believe you know from an accretion perspective, we're going to be at or above what we had originally signaled earlier this year.

Thank you for that you have a big acetyl chain expansion.

Coming on in the United States next year.

Are you taking steps now are beginning to take steps to think about the curtailment of your offshore capacity and how do you think about that.

Yeah.

So the answer is we're not thinking about taking steps to her offshore capacity, we really like having the footprint, where we have three different raw material provider. So coal in China oil in Singapore and gas in the U S. We think having that global flexibility is very help.

All we really saw the benefit of that during the freeze in 2021. So currently we do not have any plans to alter our footprint consistent with the expansion of clear Lake.

Great. Thank you so much.

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, everyone. Scott I wanted to ask you your prepared comments talk about Youre looking at.

Incremental ways to improve your own free cash flow, which is already you know kind of best in class in terms of conversion.

But then wondering.

As you look at the M and M acquisition, what did you think of their cash conversion and have you already identified you know kind of pre close, but theres going be opportunities to improve our free cash flow generation of that asset as well.

Yeah, I mean, I think one of the big differences between the asset portfolios. Obviously is the Eminem business, having a really strong a localized presence in Asia, particularly outside of China. You know when we put the networks together, we think that's going to be a really good opportunity over time to optimize that.

Supply chain and that should give us a really nice inventory benefit over time. So I think that's probably the number one focus area I would say Vincent as we as we get the businesses integrated is focusing really on optimizing the manufacturing footprint.

Between regions, which hopefully will allow.

Allow us to have less product on the water.

We've had our own organic investments at celanese going into Asia to help with that but we do think the combined portfolio should give us some some ample opportunity there.

Okay and then.

And maybe just.

In terms of Santa train it it sounds like the synergies are going very well there, but I didn't I don't think I read that you were increasing them as it is it possible you wind up increasing the synergies there.

Look I think that's a good possibility I think we're kind of running at double the rate of synergy capture here early on in the integration. That's good because that pull forward you know cash flow earlier, which is which is good from an NPV value, but I think as with all of these acquisitions as we get into them.

And as we really learn the details you know not everything plays out the way, we think but in general we always find more to go after and more opportunities that we didn't identify at the time of the deal. So I don't have an updated number for you at this time, but you know I would say, we're definitely one optimistic about the timing in which we can deliver the already identified.

Synergies as well as being optimistic about being able to deliver even more synergies over time.

Okay. It sounds great. Thanks very much.

Okay.

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

Hey, good morning.

You know really nice start to the year end and raised outlook it.

Just curious in terms of the acetyl chain I was I've been impressed of how while your team can figure out where to make the most money. So.

Just curious when you think about what they've done in April and what were their sort of allocating their volume heading into two Q could you give us a little bit of color on what's driving.

Your EBIT outlook near term.

Yeah, I think if we look at second quarter industry dynamics, probably look fairly similar to first quarter in that you know China is still a little congested because the COVID-19 and inability of ships and things to move out in China.

We see inventories continue to be high there.

So you know pricing probably I you know you can see.

See where it is today so.

So we see that continuing we do see some help for acetic acid pricing with Bam come returning.

Into operation, which we've called out for first quarter.

But that you know that counteracted with everything else again, you know you can see where the pricing is today, but we do continue to see really good demand and really good pricing in the western hemisphere that hasn't changed the congestion in China, obviously keeps on material point out. So there is continues to be high demand in the western hemisphere, and we continue to see.

High demand for Bam and the downstream derivatives and we're going into the summer season, which is typically an even higher period for those molecules. So you know I I'd say you know on average you know what we saw in the first quarter.

Probably similar profile into where things go, but we do have moderating prices in China, which will also drive our second quarter outlook.

Got it and then I apologize if I missed this Scott did you.

You mentioned when you think you will close the financing is there some flexibility to do it earlier versus later.

Yeah, we will have flexibility Mike I mean, right now you know we're going to look at where the market is that and when we think it's going to be the most opportunistic time to go but right now we're still planning on sometime in the summer.

Okay, great. Thank you.

Thank you our next questions come from the line of Samsung Punjabi with Baird. Please proceed with your questions.

Thank you good morning, everybody and welcome back.

Can you.

Would you sort of take us through what's going on in China, you know, obviously, a lot going on with the curtailments last year that affected the city gas it and then.

The Olympics, and so on and in China Covid.

Or do you sort of see the market evolving in context of some chatter about Chinese stimulus et cetera, I guess, what are you seeing on a real time basis.

Yeah, well you know, let me start with Covid you know, we haven't seen any I would say very good.

Any significant direct impact from Covid, obviously, some of our folks have been locked out in Shanghai, they've had to go back to working from home. We have an RTP plant near Shanghai, that's been shut down for a few weeks, we've been able to cover that in our network. So I'd say the direct impacts have been pretty small I would say we've had more impact do.

The issues around warehouses and logistics and you see the pictures of Shanghai Harbor, just material is not getting in getting out now Nanjing, where we're basically located that's been fine we've been able to get things in and out but I'd say you know what the secondary impact its our customers inventories are building they can't get product to export.

Some cases, they can't get products imported in that they need. So it's just it's slowed things down a bit in China. You know that said you know we are monitoring the impact on our operations and they have been really minimal to date any impact that we've had so we've not built anything into our guidance.

Assuming no further slowdown in China and that supported right now by our order books, which continued to be very strong as we look into the second quarter.

Got you and then on the EM segment.

I think you're guiding towards the EBIT at the highest higher end of the original guidance.

But really <unk> was a partial pull forward from Q2 as well so I guess, what's driving that.

Upgraded view specific to E M.

Operating profit for the year.

Yeah, I think I mean, if you look at it we call it a $10 million pull forward that would have said, we would've had a 200 million one Q, which means then we'd have a 200 million in second quarter about it falls into the second quarter. So 800 is kind of just you know we're not seeing a lot of seasonality. These days any EM. It's pretty you know everything is pretty full demand is high.

So we're expecting that to continue through the second half.

Obviously, theres a lot of uncertainty in the second half around Covid.

Around China, what's going to happen there again, we're not seeing that impact yet so we're not building that into our outlook a lot of uncertainty around Europe again, no direct impact that we're seen yet, but obviously if consumer confidence goes down or you know energy prices continue to rise we may see changes in our customer profile. So there is some uncertainty in the second half.

But I would also say generally you know third quarter tends to be a good quarter for that so that's on the other side and we have forecast automotive flat and IHS still expects to see automotive growth in the second half. So if we get any growth that you know a counter actions some of that other uncertainty. So just looking at given all that uncertainty.

Second half, we're basically saying second half looks like first half and that gets us to 800.

Okay perfect. Thank you so much.

Thank you our next questions come from the line of Mike <unk> with Barclays. Please proceed with your question.

Great. Thanks, Good morning, guys.

Lori could you maybe just staying on E. M for a minute can you maybe just talk a little bit more about your ability to outgrow the auto OEM market.

When you look out over say the next year or so just given your customer mix or even where channel inventory levels are how would you size or think about your auto volume growth relative to sort of kind of that industry growth rate of auto new builds.

Yeah.

Yeah look it's a great question and you know.

Let me just start with a few numbers for first quarter, because I think it will help put things in perspective, if you look at our global auto builds for the first quarter. They were actually down 7% from Q4 and this is industry data.

But a lot of that was in China like 20% of that was in China again, reflecting the COVID-19 lockdown situation there.

If you look at where our biggest customers are they tend to be in the U S, which actually grew from Q4 to Q1 and in Germany, which also grew and so you know that if you kind of have to look at the various regions and the specific customers to really makes sense. So I.

Would say, although we're even outgrowing in this case, we outgrew even those segments that we're in and again, we do think a portion of that is pull forward from second quarter into first quarter, just given everybody, having low inventories and expecting kind of outsized demand going forward. There is certainly <unk>.

Went up demand for auto going forward.

Having said that though we generally have been able to outgrow automotive builds as you know our folks have worked really hard to develop new products are high margin products for customers for light weighting for Evs has been a big push for us in the last few years and really making sure. We're good.

Adding into those customers that are growing and that are you know as they are developing new new designs new generations of automobiles that we have a large content in that so I'd say you know we do have the ability to grow faster than global auto builds go faster even than the segment auto build and it's really down to you know are great folks it yeah.

And their ability to innovate and work with our customers to really provide unique solutions.

Great. That's Super helpful. And then maybe just secondly in the prepared remarks, there's a line about your internal initiatives to unlock incremental cash to help with deleveraging and I think one area touch storm was opportunistic divestitures and I. Appreciate you probably don't want to front run anything, but any context or.

On size or scale of what you would be looking at would be helpful. And would you consider making another go at potentially monetizing the acetate tow business as part of that.

Yeah, what I would say, it's called opportunistic because that's what it is I would think about it in terms of the same way we did P. B C. A few years ago someone you know it was it was an asset we liked it was an asset that we thought was strategic to our portfolio on the other hand someone offered us a good bit of money versus more.

Then it was value to us and so you know we're in the same situation with some other parts of our portfolio. Most of them have good return, but if there is someone out there that values them more highly of course, we would consider and I would say it can be small could be larger.

But you know those are the sorts of things that we're looking at yeah, we're putting most of our energy really towards small what I would call cash harvesting projects I mean, it could be in the surface of $5 million project doesn't seem like a lot on you know Tom lock working capital et cetera, but when you start adding up a number of these very quickly you can get to a mature.

It'll number and so our team is working a pretty robust list of things and we're going to continue to do everything we can to unlock cash and take on less debt at close and maybe if I can come back to tell you know we've talked in the past about tow and we've talked about why we think it will be hard to divest toe for all the reasons it was hot.

A few years ago.

That said you know, we clearly are not satisfied with the way the business is performing financially right now specifically.

Specifically you know, we're not happy with the kind of financial exposure, we have with what have historically been three year contracts and what that gives us in terms of lack of agility and lack of ability to pass pricing on and in high inflation environments. Like we're seeing now so you know while of course, we would consider a divestiture just like we would anything.

Actually what we're really looking at is how do we develop more optionality in our tow business similar to what we've developed over the years and our acetyl chain and do that in a way to really help us improve profitability of the tow business as we move on in the coming years.

Great. Thank you.

Thank you. Our next question does come from the line of Chris on Amit with Alembic Global. Please proceed with your questions.

Good morning, Lori and Scott.

Laurie in the prepared remarks, there was a line about how the bump up in your full year guidance is.

Sort of predicated amongst other things on.

A degree of easing of raw material constraints. So I just wanted to sort of get your views on that.

Where are you guys seeing constraints on the raw material side, when you're being conservative in.

Your outlook in terms of availability.

Did this have some sort of a higher.

Raw material price baked in so just just any clarity around that.

Yeah. Thanks Hassan for the question really referred to and I mentioned it just a few minutes ago, but I probably wasn't clear we did have significant raw material constraints last year in engineered materials, specifically and it wasn't it was a little bit around rather than some of the resins PBT things that that we purchase but more importantly, it was.

Things, we used to not worry much about like glass fiber and flame Retardants, where we just couldn't get enough to make the products that our customers demand. It we saw that starting to ease last year I would say you know if I look kind of the lower end of our range. We assume that those those continued what we saw in the first quarter.

It is those constraints have been largely mitigated.

Great work by our procurement team and others to really find alternative sourcing and so we've largely mitigated that which then means we can produce more volumes of materials that our customers want which then moves us to the higher end of our range and engineered materials.

Understood understood and a bit more of a macro question.

Look I mean, you know.

We see a very impressive sort of bump up in your full year guidance and at least the verbiage of your prepared remarks.

Sounds like you are pretty confident in achieving that now I mean, as I sit there and sort of some of the pundits out there talking about recessions and you know maybe a potential recession in Europe and slowing down in China.

You guys are in all these sort of important markets be it China be of Germany.

You know, which obviously is impacted by geopolitics.

What are you guys seeing relative to these sort of recessionary theater pundits out there that gives you more confidence.

Yeah. So I'll start out by just reiterate we have not assumed any significant demand destruction in our guidance that we've given them. So we haven't assumed any demand destruction from inflation or from our customers being impacted by inflation and that's really based on what we're seeing right now.

Which is yes, there's a little bit of bumpy nuts.

We're seeing more issue, though from logistics constraints, especially maritime constrained, especially in China than we are kind of any inflationary pressure at this point in time and so that's our assumption obviously, we're going to continue to monitor in all regions.

But we continue to believe you know unless something changes significantly through the remainder of the year that you know logistics will continue to be a bigger issue for us than inflation very.

Very helpful. Laurie. Thank you so much.

Yeah.

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

Thank you and good morning, Lori just on E. M. You mentioned surcharges in the quarter, how much the price in the quarter was surcharges versus more permanent or structural and how you decide whether to put in place a more structural or more of a surcharge type increase.

Great question, David I look I would say for the quarter you know the price increases have really been to cover the additional costs just to offset the raws in energy. So you know, we typically pass through price increases with raws because those tend to go.

Up more slowly come down more slowly we have a surcharge for energy what I would tell you right now is between our price our pricing movements.

Cover raws and the surcharge were fully covering those increases.

That's what you're seeing in the pricing now what we see on the other side is when.

When energy comes down that's going to go back to our customers within a month. That's how we designed it to give our customers assurance that you know they could get back to normal as raws goes down as we always have pricing will eventually go down with it but there tends to be a little bit of a lag, but I would say you know right now we're just trying to maintain margins.

And.

Our customers have worked really well with us and working around the constraints. We have had in terms of logistics in terms of raw material working with us on pricing and.

And so we want to continue to be able to serve those customers going forward. So there may be some lag in pricing, but again, our objective has been to just maintain margins during this period not necessarily to grow that.

And Scott just on the Eminem centuries, you mentioned, an acceleration of year one synergies.

What what's driving that and could you actually quantify what that could be for us going forward.

Yeah, I mean, I think some of the things we talked about early on was that we hadn't baked in a lot of tax synergies, particularly.

Early in the deal data and we've been working on those types of things are early days and we think we'll be able to bring those forward and you know some of those what I would call kind of backend things tend to be able to happen faster and we're more confident in that now than were where we were.

I also think we've done some pre integration work both internally here and we've had some contact with.

With the EM team largely focused on business continuity and day, one but in those interactions. We are extremely excited there's a lot of energy with the teams. It's a great group of people coming over from from Eminem.

And we're really excited about the combined portfolio and being able to really partner with customers and and accelerate some of the things we talked about.

On both the cost and revenue side of things as we go forward. So just such a great complementary businesses with you know people that are really excited to get after it.

Thank you.

Thank you our next questions come from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your questions.

Good morning, Scott It looks like your cash flow is trending roughly $300 million for the better.

On an apples to apples basis, allowing you to absorb your deal related and transaction fees.

Can you speak to what what you're embedding in that number are these days for working capital this year and in other swing factors aside from earnings variances.

Yeah, Kevin we're not changing really the working capital assumptions materially versus what we assumed at the beginning of the year. So assume kind of the same type of inflationary environment that we've been in now if that were to turn a bit.

And and we get relief. There then we will have a fairly sizable working capital pick up that we have not baked in to that number I mean that increase that we put out there is really driven by two things higher earnings as well as the reduction of capex by about $50 million.

Okay. Thank you very much.

Okay.

Thank you.

The next questions come from the line of Matthew Deyoe with Bank of America. Please proceed with your question.

Good morning.

I just wanted to hash out a little bit the performance in EBITDA. So I know JV income increase certainly.

And I know price was up 7% sequentially and you had santo premium, but it seemed like you got all of the tailwind is without any raw material headwinds or anything that we've kind of discussed. So is there something that we're missing from there that I'm missing from an operating leverage standpoint was it was lower acid a tailwind actually to raws.

Yeah.

Yeah, you know again, if we look at and Matthew I'm, sorry, I'm, assuming your question was kind of fourth quarter to first quarter, yes, exactly sorry, Okay. Yeah. I think look we had record revenues for the quarter. We saw demand remains strong we had the growth, especially in auto again, some of that being pulled forward from <unk>.

Second quarter.

Our volumes were up two thirds of it saying a prayer, but about a third of it everything else.

Our price was up but actually I would say our price our price was up but it was offset by the rising raws and rising energy you know we saw energy going up continuing to go up in Europe for the quarter.

We saw raw materials going up for the quarter ethylene costs were up globally.

Which certainly has a big impact and in engineered materials.

So you know I would say, we actually continue to see increases in all of those areas.

And just and that's really surprised kind of got netted out with raw materials.

And then affiliates were up in the first quarter kind of typical with seasonality, but also good performance at cap and infra serve in particular.

Yes, I wanted to.

Ask you about that so I mean I used to think of KEPCO is something like $27 million contribution annually I think.

And thats going to move to the one is is that still right.

Because I know that moves into the line item by <unk>. So I just want to make sure I have that number right and then.

As we move into <unk>.

You know what do you expect on the direction from.

For JV income.

Okay.

Yeah, Let me handle the kept question first so I think if you. If you look at what we said is on an incremental run rate basis. Once we get the synergies fully realized we'd expect to have about $25 million to $40 million incremental Matthew now Q2, Q3 are going to be what I would call. It.

Transition quarters, So really Q4 is when youre going to start to see that.

Kind of things really flow through with the new flows as we expect.

And then I think we'll start to get in that first year. Those synergy, we'll probably get about half of that number would be my guess so you can kind of there'll be a few million maybe incremental in the fourth quarter and then into Q1.

So for our affiliates in Q2, we expect that to be you know roughly flat with Q1.

Thank you.

Thank you our next questions come from the line of Arun Vishwanathan with RBC capital markets. Please proceed with your question.

Great. Thanks for taking my question.

I guess first off I'm, just when you think about the Q2 guidance for M. A C.

<unk> the 425 in the full year at one six obviously it assumes a moderation that.

And second half and in Q2 and Q1 I think he went into the quarter seeing.

Potentially forecasting some moderation, which didn't necessarily materialize and that's been the case for a number of.

Prior quarters as well so when you think about the rest of the year, maybe if you can just lay out some of the drivers that you see that drives that moderation.

Obviously, there's some issues around China, there's some issues with feedstock costs coming down, but what else I guess would you cite as to.

Some of those drivers.

Yeah look I would say in Q1, we did see moderation I mean from peak to trough to peak in Q4 to the trough in Q1. We saw you know about a 600 dollar per ton reduction in asset pricing, China, even average to average it was about 300. So I think we are seeing moderation in.

China asset what I would say is that has been you know rough boy you know pretty much in eastern phenomena. So we've been able to take volumes and pivot to the west where we saw margins maintained in the western hemisphere, and we've been able to pivot to the downstream and you know with strong demand for that.

Continuing but also we noticed especially most of these products really first of all part powders E. B, a I mean, I think we called it out in the comments, but you know for the first time ever you know 25% of earnings.

In our city gas it we're really.

Due to just RDP and I'm also has products. So that's a pretty amazing if you think about it. So I mean, that's that's the power of our model.

As as we look at it I mean, you know another way to think about this I mean, we refer a lot to 2018 as you know in 2018, 78% of our earnings in the acetyl chain came from acetic acid.

This quarter, 50% of our earnings came from acetic acid. So I think what we've called out which is a moderating acetic acid is absolutely true the number of supported for the first quarter, we expect that to further moderate as we move into the second quarter and you know in time.

Western hemisphere prices will start to trend down and margins trending down as well.

Ethylene prices is going to continue to increase in second quarter. So that's going to cause a little bit of further margin compression and that that will continue we believe as we go through the year now.

Yeah.

We said that for a while Fortunately the moderation has started later and gone slower than we anticipated in our original outlook, which is why we've been able to raise our outlook on acetyl chain.

I would also say you know we talk a lot about foundational earnings and I think previously we'd called out getting to a foundational level of earnings in the second half of this year I think.

Typically called foundational earnings we had been saying 1 billion.

Slightly above, but I think as we're seeing the industry fundamentals change the supply demand continue to be tight even with the addition of a little bit of extra capacity in China, we've really seen the strength of our model to continue to develop especially our ability to generate good margins and income out of our downstream derivatives are stronger western.

Demand, we've seen are very bullish outlook by our customers.

Plus we have investments coming on clear Lake early next year other Bambi AE expansion towards the end of next year all that additional optionality, we're getting clearly we think those foundational earnings our level of earnings are growing.

Well above that $1 billion and so you know altogether.

Say why we are starting to moderate and returning to a more foundational level of earning that foundational level of earnings has increased measurably versus where we used to be.

Great. Thanks, and similarly would you say that the foundational level of earnings was also increase when most of your markets I'm, including elective surgeries come back. Thanks.

Yeah look I think what we're seeing in E. M is the really great work by our folks over all of the many last years to really grow our pipeline model grow our programs move more of our molecule then too.

Al you applications higher margin applications, where we are maybe one or two people, who can provide that material, which gives us more pricing power or the ability to work with our customers to pass through the higher raws that were seeing moving into higher end market.

I think youre seeing really kind of all the results of that work that's been going on for several years really coming to fruition and getting us to a level of earnings.

That we think we can maintain going forward through a wide variety of economic scenarios. Yeah in that model continues to evolve with the acquisitions coming in I mean, the Santa <unk> acquisition has proved proven to be additive to the model.

The team is bringing different ideas the synergies are coming in strongly there and then we would expect to replicate that with Eminem as well as a way to continue to hone and take the best of these acquired businesses and continued really take to grow that model there any M and elevate those.

All earnings talk to to a much higher level.

Thanks.

Yeah.

Thank you. Our next question is coming from the line of Laurence Alexander with Jefferies. Please proceed with your questions.

Good morning, So a question on the comments around like appreciating the regional mix.

Hum.

As you think longer term sort of after the clear lake expansion, what would be kind of the minimum levels of coal and oil base.

Our vertical integration you would like to keep it in the portfolio.

And can you also tie that to how you're thinking about the next few rounds of technology innovation cycle. My impression is you've been making faster progress, reducing capex and opex on the natural gas price projects is that true or are you getting the same progress on all three platforms.

Yeah, Let me answer your first question on the regional mix as we bring in clear Lake and one we think it's great because it's based on natural gas, which even with the increases in natural gas continues to be we believe the lowest cost producer of acetic acid in the work.

<unk> today, so that's great optionality for us to have.

But we get the credit for that project, even if we run at the same rates today and take it in the form of productivity, which is catalysts and other chemical savings. So we like the optionality that clear Lake, but we also like the optionality of having material in China and material in Singapore remember, a big a big portion of our Val.

<unk> proposition to our customers is the fact that we produce what we need in our region in that region and so the fact that we can produce in China for China and surrounding areas in Singapore for kind of Asia outside of China, India and other areas really has helped us, especially as we've gone through these issues around logistics and <unk>.

Thing else, because we're not having to put everything we make on a boat and taken somewhere else a lot of stuff can stay within the region, where we've had a lot less logistics challenge because obviously, we still ship to Europe , and so there's still an element of that but it's very different than someone who has one plant in one place and is trying to serve the world World from there. So we like.

Having the regional mix.

We believe our technology makes us one of the cheapest producers from coal in China coal base to seek out there there's going to continue to be the marginal producer in the world today, even at these high oil prices because we also had higher oil prices, Singapore continues to be an attractive place to produce acetic acid. So we think all three of our plants continue to be well.

Positioned to be competitive to make a C. D. I think going forward and again, we like the optionality that having three different facilities and kind of three unique places in the world brings us.

On the innovation front Laurence I would say our focus really is on aggressively looking at energy reduction projects across the globe.

As gas prices oil prices coal is all moved up you know our energy costs have moved up and we're looking at ways at which we can lower that so in this environment. Those paybacks are become more attractive and so our team is doing a great job of bringing those projects forward.

And then just the European carbon border adjustment program is that a net benefit or headwind for celanese once it's implemented.

Yeah, I'm not sure if it's in a I don't know, how we would be relative to our competition I mean, what I would say is you know our facilities in Europe tend to be highly energy efficient. So if you look at our European facilities, they produce only 20% of our scope one and two greenhouse gas emissions.

But they represent about 40% of ourselves. So I can't tell you exactly how that works out with the border adjustment, but I can tell you you know we think when you look at all of the proposals under that fit for 55 that were pretty well positioned given that we have a pretty efficient footprint already in Europe to start from.

Thank you.

Okay.

Thank you our next questions come from the line of Alexia <unk> with Keybanc capital markets. Please proceed with your questions.

Thanks, Good morning, everyone in your prepared remarks, you're talking about improved product mix and engineered materials.

Is one of the reasons for raising guidance could you maybe elaborate a list.

Yeah, it's a little bit in line with what I said earlier that we've really focused on the years of adjusting our portfolio into higher margin higher value end applications.

So maybe a specific example is you know say last year versus this year as you know last year, we call up without a lot of the time, how medical but really specifically implants, because we werent seen elective surgery.

Recover as quickly.

You know what was a drag on our earnings last year and now if we look at 2022, we are really see non first quarter. If that's a seasonal thing with implants people wait till theyre met their deductible, but we're seeing second quarter and beyond implants coming back to their pre COVID-19 levels of day.

Man and so therefore, that's a positive product mix impact because that's a higher margin application than maybe other G. U R applications that they would go into so you know and we're seeing that in multiple places, where we're seeing demand for our higher margin materials come up. We're also have got new business, which has come.

On that are higher margin and higher end use applications and so for the same volume we achieve a higher margin and that's reflected in our comments and product mix.

Thank you Lori and then a follow up for Scott.

What what kind of discussions you've had with rating agencies and what's your level of confidence you kind of playing out different scenarios for the back half of the year that youll retain our investment grade rating.

Yeah, I mean look we've had very open discussions with the rating agencies you know when we we starting when we were first announced the deal and you know we feel good about that.

Ultimately, we're focusing on what we can control and the raise of earnings guidance.

Got upside in kind of where where things are coming out right now.

We also have.

Added Fitch daily.

They launched here a couple of weeks ago, and you know as we kind of looked at it and given the size that the company is getting too and we looked at peer companies. Most companies have three rating agencies, so bringing pet drawn and those conversations were very good as well just recently and they are.

Issued a first time credit rating, a triple b minus with a stable outlook. So we feel good about where things are and we feel really good about kind of where we're going to be at close really driven by the increased free cash flow in the improved earnings.

Thank you.

Thank you. Our next question is coming from the line of Matthew Blair with Tudor Pickering Holt. Please proceed with your questions.

Hey, Good morning, Laurie you mentioned that the two outages so when he's had in the first quarter.

Your steel chain.

Is there like a loss profit number that we can put on that or do you think the lower volumes were simply made up with higher pricing.

Yeah. So the majority of the all the outages in the first quarter were outages that we were anticipating so they were planned turnarounds in clear Lake.

For Bam for methanol for asset some of them, we pulled forward from second quarter due to some unanticipated issues, but because we knew the outages were coming up we were able to buy material from others. We store inventory, we make sure that we're covered for our customers that we can provide them.

What they need during those periods of time, so you really don't see a.

A really big impact from that and even from a cost standpoint.

The turnaround cost standpoint last year, we spent about $40 million and turn around we'll spend about the same this year about half of that was in the first quarter, but again with our average level of spending and it's not something that's really going to show up in any given quarter in a in a meaningful way. So I think because of the planned nature of these events.

You know there really covered within our guidance and with and within.

The outlook than kind of our ability to predict in a quarter.

Great I'll leave it there thanks.

Don will take one more question please.

Thank you. Our final question is coming from the line of Steve Richardson with Evercore ISI. Please proceed with your questions.

Hello, Hi, this is Sean on for Steve Laurie It was interesting to see your Capex guidance trying to reduce to 550. So I was wondering if you could speak a little bit more to that just in terms of was it due to cost savings or a push of some capex into 'twenty three I know, it's a bit so to speak on that but whatever insight you can.

Provide would be great. Thank you.

Sure.

Look on Capex, we've called that out before we think organic growth through Capex is really our best use of cash we get high 20 plus percent returns.

On our cash Capex and we're very deliberate about how we spend that money very disciplined.

It's also something we manage real time, so Scott and I meet every quarter with the businesses and really go through where we are our capex, what new projects have emerged.

Or do we need to reconsider and so I would say what you are seeing the $50 million reduction that we called out was really it was really an outcome of that disciplined process, adding on the layer of the Dupont Eminem acquisition. So with Dupont Eminem for example were getting a significant amount of compounding in Asia. Some of our Capex, we had earmark. This.

Year was to expand compounding in Asia, and clearly we don't want to go build something abroad, which we've just bought something that will meet our needs and we think theres. Some extra capacity. There. So what I would say is we've deferred any decision on some of the Capex, where we believe there may be overlap with Dupont. So we don't spend money that we believe.

Regret later, but I would say, it's a living thing we may come back in another quarter and have a further reduction or we may have an AD because again, we believe capex is a really good use of our money, we get really high returns and so we'll continue to manage it as we always have done in a very disciplined way.

Great. Thank you and just in terms of a quick follow up you mentioned targeting cash harvesting projects. So with the recent restructuring of the JV.

Could you speak on the posture of the JV actually unlocking additional value and should we expect to see additional announcements moving forward for other JV.

So let me I'll ask Scott to specifically comment on the KEPCO JV there.

They're what I would say is you know.

We took a big step last year already with P. B with the sale of CPC.

And some of our other JV I would say, we like the way we structured we believe we get good value out of those JV.

So you know I wouldn't think that's the only target I mean, we're really looking at all of our businesses as I said Opportunistically, if something emerges where it makes more sense to sell to somebody we would consider it but our first focus of course is just continuing to grow earnings and continue to grow cash flow on a very.

Robust and healthy base business, Yeah, we've talked openly for a number of years about unlocking more value here and you know Pi plastics was a sale of three years ago, we felt like that was the most opportunistic.

A plan, we had to be able to really unlock a lot of value there for cap as we looked at that and worked with our partner it was restructuring that venture.

We will continue to look and be opportunistic if we can find ways with our partners to add more value for the Sony shareholders.

Great.

Thank you that is all the time, we ask the questions today I would now like to turn the call back over to Brendan I asked for any closing comments.

Thank you we'd like to thank everybody for listening in today.

As usual we're available after the call for any follow up questions. Please go ahead and close out the call.

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

Enjoy the rest of your day.

Yeah.