Q2 2022 Celanese Corp Earnings Call
Okay.
Greetings and welcome to the Celanese second quarter 2022 earnings call and webcast.
This time, all participants are in a listen only mode.
Question and answer session will follow the formal remarks, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now I'd 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's second quarter 2022 earnings Conference call. My name is Brandon Niosh, Vice President of Investor Relations with me today on the call are Laurie Ryan Kirk Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer.
Celanese Corporation distributed its second quarter earnings release via business wire and posted prepared comments about the quarter on our Investor Relations website yesterday afternoon.
As a reminder, we will discuss non-GAAP financial measures today, you can find definitions of these measures as well as reconciliations to their 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 of these materials have also been submitted to the SEC.
Because we published our prepared comments yesterday, we'll now open.
Now I'll turn the call over to Laurie for some introductory comments.
Thanks, Brendan and thanks to everyone joining us on the call today.
Given the macro uncertainty in the world right now I wanted to take a few minutes to set the tone for this call and reemphasize the priorities we have as a company.
That's what we prepared the earning materials, we've put out yesterday I tried to emphasize two longtime qualities of celanese and its employees and I want to reemphasize them today.
Number one we are fully committed to our objective and number two we are focused on executing on those things that we can control.
To this point, we are committed to executing our business model to maximize earnings and cash generation. We are committed to rapidly integrating and synergize, our Santa brain and Eminem acquisition, and we are committed to swiftly executing our deleveraging plan after closing the Eminem.
Acquisition.
Above all else, we remain committed to these objectives, even in the most challenging of environments.
Clearly the recent macro dynamics have done little to help but this is nothing new we have not and will not use them as excuses over the last few years. Our teams have delivered exceptional even record performance, while dealing with the global pandemic severe constraints on raw materials and global logistics record level.
The cost inflation and now add to that list a rapid rise in interest rates, we know how to respond to external challenges by executing against that which we can control.
Our engineered materials and acetyl chain teams each delivered record earnings across the first half of 'twenty 'twenty. Two there are operational excellence and commercial agility has driven record adjusted earnings per share performance across the first half of 'twenty to 'twenty, two and a very strong full year outlook even without the.
Benefit of share repurchases this year.
Our finance team successfully secured permanent financing for the <unk> acquisition, and a very challenging market and are taking controllable actions to ensure the resiliency of our deleveraging plan.
Our integration teams are rapidly synergize in Santa Crane, and making significant progress and Eminem pre integration work we.
We cannot predict what the world will present us with in the future right now, we see very little firsthand indications in our order, but that warrant the severity of market headlines that we are all reading and the market response, we have experienced.
But I don't want to spend our time on this call today speculating on the things our team cannot control, whether that's business performance outside of Celanese are uncertain macro conditions in the future and why we do not expect the worst I want to be clear that we will be positioned and prepared for it.
We are eager to close the Eminem acquisition, which we are targeting for the fourth quarter of this year.
I've had the chance to meet many of them are now employs over the last few months I've been very impressed by their capability their passion for the business and their excitement about the new company. We are forming there will be an important part of our success and I'm excited to welcome them to Celanese. We are excited about the opportunity we will have as one team.
To drive growth and value creation in engineered materials going forward above all else I am confident in the momentum Celanese is building to deliver long term growth and value for shareholders with that I'd like to ask there I'll go ahead and open up the session for Q&A.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, we ask that you. Please limit yourself to one question and one follow up question. One moment, please Bobby Paul for your question.
Okay.
Our first questions come from the line of Vincent Andrews with Morgan Stanley . Please proceed with your questions.
Thank you and good morning, everyone.
Sorry, just reading the prepared remarks, I may have misunderstood it but it doesn't seem like you're assuming below plan to EBITDA are.
For Eminem next year, but just that youre going to have the higher interest expense.
Is that is that correct or is it just that you think some of the work you can do can allow you to have cash flow. That's on plan in which case, you know EBITDA kind of becomes less relevant or what is it that your latest thinking is on that right now.
Yeah. Thanks for the question Ben said look our real focus has been on I'm really focusing on cash flow and how and steps that we can take to offset the additional pretax interest of about 250 million that we're anticipating.
You know I'd have to say I'm really pleased with our team for having completed the financing and what what's been a very difficult environment to do that so we are really pleased with where we are on financing.
But we have been looking at you know how do we offset that from a cash flow basis, and so you know we're looking at capital. We're looking at working capital. We're looking at other forms of generating cash obviously, our better performance within Celanese this year and our belief that continuing through next year.
Well also help in terms of really offsetting that on a cash performance I think if we look at you know dupont's Eminem performance I mean, we're seeing the same numbers you are so we don't have any insight into Q2, I'm you know and I would say you know we are disappointed but that said you know we we assume they've had some of the same headwinds we've had any.
M inflation currency, I'm, certainly Asia, automotive, which they're exposed to and the volatility. There. So you know we're gonna be watching their performance I have to say personally I'm more interested in what they do in the second half and the momentum that they can build as we move through the second half and towards the time of the acquisition.
And obviously, we're very focused as we look at synergies and early synergy capture and you know looking at what steps similar to what we did with them to brain what steps can we take immediately upon closure of the acquisition to try to get their earnings up to the level that we expected at the time of the deal.
And just as a follow up could you just talk a little bit about sort of the differential in acetic acid pricing between Asia and in the United States. It just seems to be at a pretty pretty pretty wide level. What was your expectation for sort of how that spread is going to play out.
Yeah, you know I think what we saw in the second quarter is you know utilization, although it was pretty robust in Asia. We saw some demand come off during due to COVID-19 all the producers, we're operating pretty well. So we did see demand softening as we move our I'm sorry price softening as we move through this.
Second quarter and as we look at the third quarter, we expect it to probably stay in that kind of $458 per ton that we're still seeing for China acid I think the story in the Western Hemisphere is a little different you know demand has continued to be fairly strong really everywhere in the western hemisphere.
And you know we have had some producer outages in the western hemisphere, continuing into now the third quarter. So I think that's where you see the price differential and maybe what's a little different as you know.
You know with the logistics issues in the world today and availability of boats I think it's been a little bit harder for people to move some of our competitors I would say to move Asia out of Asia and into other other areas of the world, which has kept that differential high and I expect that differential to continue as we move into third quarter.
Thank you very much.
Thank you. Our next question is come from the line of Mike <unk> with Barclays. Please proceed with your questions.
Great. Thanks, Good morning, first one Laurie I was hoping you could expand upon in the prepared remarks, you talked about a strategic overhaul of the acetate tow business, just how youre thinking about potentially.
Rethinking your commercial approach there.
Yeah.
Sure you know if we look at our performance of acetate tow I mean, you know while historically you know we were really focused on delivering our customers with you know kind of unparalleled quality and security of supply them, both of which came with longer term contracts. We've clearly seen in this period of a wrap.
Third raw material escalation price escalation and rapid escalation of energy pricing them that this this method of using fixed contracts is it's really unsustainable I mean overall demand remains fairly robust in the industry, but we clearly cannot and will not.
Continue to run a business that is that is a losing money. So you know we would like to build even more optionality in that business, we need to become more nimble, we need to move towards more dynamic pricing and so much like we did in past years, with Bam and emulsions and Rd P. M.
We really wanted to read and look at what our commercial contract how do we source how do we manufacture them all of the logistics. It's everything is how do we produce or provide enhanced optionality versus what we have today were really confident theres value in.
So like we said we have experience having done that with some of the downstream derivatives of acetic acid and we think by running this business in a similar way, we'll be able to deliver much.
Greater value in the years ahead.
Great that's super helpful.
And then maybe second just for Scott I, just wanted to clarify some of the interest expense comments you made in the prepared remarks. So if I just read it correctly I believe youre adjusting the Eminem interest out of adjusted EPS, but that's still included in your free cash flow guidance is that correct and just what is the incremental interest versus maybe what you thought last quarter.
That race.
Yeah. So we are gonna just ahead of close that out of EPS, Mike to correct on that but we have included it because we have not adjusted free cash flow. So it is included there as that cost of carry and that cost me carry is still very similar to what we had originally baked into the deal even though interest.
Cost have risen.
The ability to reinvest that money ahead of close now we're in a higher return than it than expected previously so the net interest on the carry is is basically about the same as what we had originally anticipated for the deal. So overall interest cost based on the financing right now on an annualized basis going forward post close we would.
Back to be in that $250 million per year range and yeah. We are continuing to look for ways to bring that down and we have some plans that we plan to implement my implement in subsequent quarters.
Great. Thank you.
Thank you. Our next question is coming from the line of Jeff Zekauskas with J P. Morgan. Please proceed with your questions.
Thanks very much.
In your debt financing.
Do you have an ability to easily refinance our.
The different portions of the debt if interest rates come down.
Or are you yet right.
Yeah, So Jeff what what do we did on that financing is we did try to wait a good portion of that financing to the short end of the curve on the on the fixed debt. So we have a larger amount on the two and three year, which will allow us to either not just refinance, but hopefully delever and pay.
That off with the cash flow in the early parts of the deal. We also have term loans, which are variable.
In the amount of about one $5 billion as well, which will give us the ability to refinance that earlier on we're also looking at different cross currency options on a go forward basis.
As we look to and get better understanding of where earnings are going to be in the next several years. We do have the ability to do some cross currency swaps like we had previously done a few weeks ago to two additional euro opportunities as well as Yan opportunities to best match, where.
Where the AR earnings exposure will be.
Uh huh.
My second question when you think about the acetyl chain in 2023, yes, we again go into it.
<unk> economic slowdown.
We seem to be in a different place because oil prices are so much higher.
They stay at where we are or whether they come down somewhat.
When you think of the.
The earnings level or the earnings power of the acetyl chain into 2023 recession.
Where do you think we would be.
Or what range.
Okay.
Yeah, I think the question really asking Jeff as you know where do we see a level of foundational earnings and you know, although we may be in a recessionary environment next year. I think you know personally I think it will be more shallow and the impact on our business, while we're not immune to it. We think is at this point manageable. So they you know if you look at the first half of this.
Year and you'd look at the trailing you know the trailing 12 months you know we've been out of $2 billion a year level for the acetyl chain and clearly that its not foundational clearly we've seen some fairly exceptional conditions. These last few years. So we do expect moderation you know if you go back a year or so we were guiding to about 1 billion.
A year prior to the lift from the clear Lake expansion as our foundational earnings you know and we've continued to improve our business over the last few years you can always built in a lot of additional optionality. We added deal attacks in the RTP capability, we've continued to enhance our commercial agility in acetyl chain and you.
We have seen improved global supply demand balances and we see that even in China today, where I mean prices certainly have have moderated I'd say back to more typical levels, but we're still at kind of an 85% to 90% utilization in China. So you know overall, we feel very confident we've lifted off.
Foundational earnings above that $1 billion a year level.
You know.
Clearly like I said in China, we're seeing the assay citric acid moderation I expect at some point, we'll start to see some of that in the western hemisphere as well vary somewhat the moderation in for example, you know paints and coatings, but still robust historical so I I don't have an exact number at this point what I would tell you as you know.
We continue to look at this and you know we'd like to kind of see how the third quarter develop and as we typically do we'll be coming out with some guidance for 2023.
In the October time frame.
Okay, great. Thanks, so much.
Thank you. Our next question is comes from the line of Josh Spector with UBS. Please proceed with your questions.
Yeah, Hi, Thanks for taking my question I'm curious if you could talk about some of the end market volumes that you're seeing in kind of as you went from the end of second quarter into three core. It's just re queue. So like auto consumer durables, where youre seeing more weakness and how pronounced that weaknesses are in that market versus <unk>.
Your performance thanks.
Okay.
Yeah, I think if we look at yeah. You know we are seeing a slight softness I'd say across all regions I mean in Asia with the Covid Lockdown, we saw a little bit of softness there. Although surprisingly auto continued to be very strong for us in Asia, even though the Mar.
It was down I think 13% in China in terms of built we were actually up about 8%.
In Asia, we need a little more visibility kind of post the COVID-19 recovery here now to really assess the fundamental demand that's going to exist for some of the other areas.
I'd say you know in the U S. We're seeing consumer spending stay up really holding up the best of all of the regions, which is supporting certainly auto bill, but also industrial demand in some of the electronics.
Electricity and then Andy you I'd say, we're seeing some signs that inflation and energy uncertainty is starting to impact demand, but you know fairly weak signal Celsis point. If you look at the different end markets you know in auto what I would say is you know right now it's pretty hard for us to.
In a scenario where demand is what's going to drive auto we really think it's going to continue to be driven by availability of raw materials, specifically chips and our outlook is you know chip availability get slightly better every quarter and we'll continue to do so through the end of 'twenty three and we believe that.
What will we believe demand is pretty robust, we're seeing that in all segments of the world's big backlogs low inventories.
So auto we think it's just really being driven by by chip availability and that's true in all sectors. I think maybe the thing to think about an auto though as you know new autos do they use a lot more chips, especially E b and so all the more chips or become available as they are prioritized to more premium autos and and to E D.
That probably still translates to less auto bills that maybe traditionally would've been seen from that I think the real softness we've seen has been more in.
Sciences, and consumer electronics, maybe not surprising because everybody seems to have bought a new computer and a new phone during COVID-19 and I think you know, there's there's not the pent up demand there, so I and I would characterize it though as modest softness just a few percent could also be the impact of inflation and medical.
Well I would say actually our medical business as a total is back at pre COVID-19 levels in terms of level of earnings and that is even without implants being back at their pre COVID-19 level. So we're seeing much stronger yeah, much stronger demand in medical for other elements of our <unk>.
Medical portfolio like long dosage delivery devices and that sort of thing and then you asked about him, but I would just say you know on the acetyl side the weak the softness we're seeing is more in paints and coatings.
And construction, but I would say that's off of historical high versus necessarily what we would consider a typical level of demand.
Thanks, So just in terms of E. M earnings I think you know some of your competitors so they've been a bit more vocal about the FX impact and how that changed their outlook.
Did anything change from your perspective versus your planning basis, obviously rates are worse, so I'm not sure what was embedded in your guidance. Thanks.
Yeah, I mean, certainly we're seeing the FX impact in engineered materials. If you look at say this second quarter of this year versus last year, it's about $10 million just for E. M. So we're certainly seen it it was a little higher this quarter than we had originally planned but you know I think I'll wait to the tunes of a couple of million dollars.
For for a and I you know like I think this is really where you see the strength of our of our pipeline model in engineered materials as well as you know really the commercial agility of our E. M employees I mean, they have been out there you know.
Managing product mix, managing pricing and doing all those things to really cover or are they in the cost of raw materials and cover the forex headwinds that we've been seeing throughout this quarters in all the quarters.
In front of that and all the quarters to come and I think that's where you really see the strength of of Celanese and and the people are telling me.
Okay.
Okay. Thank you.
Okay.
Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your questions.
Hi, everyone. Good morning.
I guess for my first question you know on on your commentary in your prepared comments about.
Inventory levels have any sort of normalized in many end markets vertical during the supply chain is that by definition creates less opportunities for the AC segment in terms of just sort of flexing the chain and maximizing molecular profitability or or is that not the case.
Yeah.
Yeah, I would characterize as Ghansham I think you know that our our folks in the acetyl chain have done a tremendous job I'm really flexing the chain over the last you know call. It two years to really respond to the difference in you know western hemisphere, economics versus China and to really move that much.
Down the chain as we can.
You know what I would say is as we see soft China pricing you saw last quarter, we moved a lot of material out of Asia into Europe , and we did that in the first quarter as well and we'll continue to do that what I would say is though we're probably we are reaching our limits of how much more flexibility.
Are you having to change it because we're really fall in downstream derivatives were running full capacity and Bam B E. E. R. D. P continues to take commercial actions to try to take advantage of other opportunities we see in the market.
But I think you know, we've really really been pushing the boundaries of the Optionality, we have within the AC chain, if he really especially if you look at second quarter.
Okay terrific and then you know on the recession sort of scenario.
How do you see volumes playing out for you.
And in context of the fact that many end markets such as autos, which are quite large number fully recovered and would you expect also the same for Eminem I understand you don't own it yet and so on but just given the nature of the end market matrix for that for that business as well.
But my view on auto and I, just talked about it a little bit my view on auto is you know, we probably have three years' pent up demand in auto I mean, if you order a car in Europe , you wait a year to get it if you order one in Japan anyway, one to two years, even in the U S. I mean, you can wait quite a long time, if you're looking for something specific so I think theres a lot of pent up.
Demand in auto and especially for premium vehicles, which we have a stronger presence in in Evs, which we have a stronger presence than.
While in a recessionary environment you would normally expect that given we have been so long now and have this large pent up demand I think auto is gonna be relatively unaffected again I don't see anything through the end of 'twenty two 'twenty three that's going to impact auto demand other than the shortage of chips.
And in other raw materials, but primarily chips them I think we will continue to see softness if we go into a more recessionary environment on consumer durables things that people can put off buying consumer electronics people will wait to buy you know their next iPhone, but medical and pharma is a very resilient market I don't.
Expect to see any impact there and we're not seeing any impact in industrial and some of the electronics into five G and things like that and I really expect those build out for five G. In that sort of thing to continue for power generation I mean with the way the world's moving more electric vehicles, nor infrastructure more.
You know Internet of thing I don't really see those being impacted so the real impact I expect is is what we're starting to see some softening in which is consumer durables and consumer electronics, which you know for US is a fairly small part of our portfolio again, I don't own Eminem, but we do know that the vast majority you know that kind of fits.
Per cent of their materials roughly goes into auto so I would expect that to continue to be a pretty robust market as we go forward, even in a recessionary environment as well.
Thanks, so much.
Thank you our next questions come from the line of Michael Sison with Wells Fargo. Please proceed with your questions.
Hey, good morning, a nice quarter and an outlook alright, I guess.
What would the other financing and I know you guys do a really good job of offsetting a lot of negatives, though I think you had hoped the deal would be accretive a couple a couple of dollars and in the first year.
Is that I mean, it seems like hard to do but it is it still going to be accretive and in other things for you to do to offset.
The EPS dilution of the deal of the of the financing.
Yeah, Mike I would just say, it's it's too early for me to give you a definitive answer on that I mean, we are really we think them as I said right now we've been focused on the cash side of that equation I'm really maximizing cash flow and we do see we have meaningful opportunities also in the size and timing of our.
Synergies, we think as we've done with Santa plane, we'll be able to pull things forward and increase the amount of synergies we can get in the first year as I said on the cash side working capital capital expenditures.
The performance of our businesses, we need to get a better view on 'twenty 'twenty three.
Which we're working through right now so I would say from an accretion standpoint, it's just too early to call, but again I would expect we should have a revised update we can share with all of you in the October timeframe.
Got it and then.
It sounds you noted in the prepared remarks that you know the disappointment eminent yourself. So far when you sort of I know you don't have the business yet, but when you think about.
How the business has performed.
Sort of see it as more.
External and and the end markets there are more difficult or is it maybe some ways. They operate that you can you know immediately improving and the results maybe should have been better.
Hi.
That's a tough question to answer Mike like we you know within Celanese, we expect our business to be world class operators, we expect them to be commercially agile, we sell our products into highly differentiate in specified into applications. So you know, we work very hard and celanese too.
Really preserve profitability, despite external disruptions and through periods of volatility.
You know.
We as we kind of say you know, we we you'll never hear someone in celanese to use the excuse of four underperforming by saying that the market is cyclical or that we had too many headwinds I think that's how we operate and celanese now we know there's a lot of great people coming from EM and EM, but I think we know the value of our models and we know you know we.
No the value of our culture, and we believe we'll be able to apply that all to Eminem and get differentiated differentiated performance from that asset as well. So that's really our focus as we worked through integration and move towards the close.
Thank you.
Thank you. Our next question is coming from the line of P. J do you have a car with Citi. Please proceed with your questions.
Yeah, Hi, good morning, Lori and Scott a quick question on your natural gas exposure in Europe .
You gave some details about Germany.
Your your crush to gas deal.
But if the supply is severely curtailed in the winter.
Is it possible that maybe you can shut down your Frankfurt plant and supply that supply those customers from either Europe or Asia.
Yeah look you know as we said in our notes you know our natural gas exposure in Europe is focused in Frankfurt, Germany, and I, you know I would say, 30% of our global cells come out of Germany.
In 2021 and that that's pretty typical normally and you know because of trash or cash. We also have projects that we can use fuel oil and I P. H I think you know it's not it is highly unlikely we would want to or would shut would need to shut down.
P H in the winter obviously on an I still you know we have the option to bring materials from Asia from Europe , but we don't produce a lot of that there. It's really just the palm production is the main is the main thing we make as well as some other things in I P. H I G.
Don't think it's highly likely we will need to we may run at reduced rate I think is the more likely thing in and again Thomas the Big energy consumer there are a lot of the other things we produce there don't use nearly the amount of energy So and I think you know there are other places in Europe are out outside of Germany.
That may be more impacted although we are working to look at the plans to mitigate them at all of our critical locations in Europe . Yeah. Flexing capacity is something we do every day P. J I'm, we've talked a lot about it in the us steel business, but we do it in engineered materials as well and so if there is opportunities where we have excess capacity that is lower.
Cost in other regions. We can we can move that around if the logistics are there as already mentioned in and we will always look to maximize profitability if that opportunity exists.
Great. Thank you and then in automotive you know when they can.
Chemical companies and Ive got a thought that there was a quick snapback, but as you rightly said there are constraints on the chip side and all that.
So what's the more realistic outlook can you talk about maybe like a global number.
That is more reasonable.
Well you may recall, when we went into this year, we actually despite IHS had been a fairly optimistic number I don't remember what it was 8% or maybe even higher than that of build growth from 'twenty. One to 'twenty. Two we actually based R. 22 forecasts on flat auto builds from 'twenty one to 12.
Two and I think if you look at where we are I think we're just we're just under 2% growth now according to IHS for global auto builds and although theyre still calling out 4%. We still think we still think our flat was a pretty good predictions.
And again, because we really base it on chip recovery and the fact that vehicle to use more chips. Now. So you know you need more recovery in chips in order to fill the same number of vehicles. So we still think flat <unk> versus 'twenty. One is a pretty good estimate you know maybe a few percent of growth here in the.
Can have as we see chip, becoming more and more available.
But I think flat and you know the interesting thing is here in North America, you would think with energy prices that though we'd be start to see the transition to more demand for more fuel efficient vehicles, but in fact, we're not we're still seeing plenty of trucks and Suvs being the primary models being built.
And again these tend to be higher and more premium vehicles and require a lot of chips.
Great. Thank you for the color.
Thank you. Our next question is coming from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your questions.
Yes, good morning.
Scott I was wondering if you could address your latest thoughts on the capital budget last quarter, I think you indicated $550 million, but in reading the prepared remarks last night it sounds like you're actively evaluating options to.
Reduced that number what kind of levers could you pull if necessary and do you have any early thoughts on how that number could trend in 'twenty three as you complete your expansion at clear Lake.
Yeah, So I think that $550 million range for this year is still likely where we'll be as we look forward next year I mean, we and our original modeling a with the combined enterprise with Eminem, we had we baked in a higher amount of capital then we would likely need and as we continue to.
Understand that business better I think there there's going to be additional opportunities to bring that capital number down. So we will provide a little more color on where we think that's going to be on a combined basis as we get into October but it likely is going to be one of those important elements to offset that incremental $250 million of interests.
That we talked about in the prepared remarks, so I think we won't be able to offset it all through capital versus our original plan, but we'll certainly be able to get a good chunk of it from capital.
Okay, and then Lori.
If I could add to that I mean, because you did ask where might it come from I think like we saw this year.
You know given the large number of assets that we are getting from Dupont, we will be evaluating.
Where do we think we'll be able to get more capacity more efficiently out of the Dupont assets versus new build and so you know we'll be evaluating that and we do think there are some synergy opportunities. There and then I think like you saw US do during Covid, you know with higher material pricing right now for steel and everything else as always.
To see it coming down with you know trying to get a clearer view of demand in 2020 three we think theres going to be some opportunity to delay some of the larger capital projects and use that time like we did with clear lake to get some efficiencies and savings in terms of construction cost then and how we actually contract for the construction of the.
Those are those facilities. So you know I'd say, it's nothing dramatic we're not cutting into the bone, we still think that use of capital for organic growth is a really good use of cash, but we are going to be cautious with how we invest in light of the uncertainty around the economics for next year.
Okay.
So in reading your remarks, it sounds like you're comfortable enough with the order books as you see them here in July anyway, but you know in a scenario where the macro environment continued to move against us so to speak.
How do you think about portfolio composition in other words do you see any levers that you could pull are in in terms of noncore assets that may may be useful to accelerate the process of deleveraging if necessary.
Yeah.
Yeah look you know, it's something we look at all the time, we're always reviewing our portfolio and as you've seen we've made a number of news over the last several years, whether it's an opportunistic move like the P. P. C divestiture that we did or some of the smaller divestitures, we did around P. P and some other.
So you know what I would say is you know first we have sufficient financing capacity on our balance sheet today to finance the deal with cash and committed debt. So we don't need to sell anything in the near term.
And.
You know and now although.
I guess that said you know we will be opportunistic we interestingly enough.
We have actually had a reasonable large amount of inbound calls about some of our assets versus what we've typically seen in the last few years. So although the equity market has slowed down we are getting a lot of calls and that has given us the opportunity to look at a variety of our assets and really see if there's some opportunistic.
Our ability to monetize any of those again similar to what we did for poly plastics. So I you know, it's something we're looking at but not something we have to do.
Understood very helpful. Thank you.
Yeah.
Thank you. Our next question does come from the line of John Roberts with Credit Suisse. Please proceed with your questions.
Thank you.
Call you called out the performance of Santa premium in the quarter, how did palm to them you've got a key competitor. That's orphaned right now I would think this is a pretty good environment for you to gain some share in pompe.
Yeah look I'd say on Pompe I, you know I think Tom it's performing as we had it for the year are expected it to perform them. You know it continues to go into a lot of high value end applications.
And I wouldn't say, we see it any real difference in demand or margins on palm now versus what we expected.
And then how did they been had been seen it do in the quarter I would think this was a really good environment for them.
Yeah, So obviously with higher methanol prices last quarter, we saw that roll through I never seen that I think we called that out in our comments, we had you know a.
A good bump up from ibn Sina, but mostly offset all but about 5 million offset by the KEPCO restructuring.
And so it's done well again remember it means he knows on a one quarter lag. So we could should continue to see held for amendment is seen as we move into the third quarter as well.
Okay.
Yes.
Thank you our next questions come from the line of Hassan Ahmed with Alembic Global. Please proceed with your questions.
Morning, Glory and Scott.
You know a question around the trajectory of volumes within our within the acetyl chain.
Take a look at the sequential uptick in volumes from Q4 to Q1 and it was 8%.
Even though if I remember correctly there were a couple of turnarounds in Q1, and then I take a look at the sequential sort of downtick in Q2. It was at 3% don't take so I'm just trying to get a better sense of that trajectory from Q4 to Q1 to Q2.
Obviously, keeping in mind, you know the Europe situation, which is obviously prevalent.
In the first quarter as well.
Yeah, but the Q1 to Q2, it's fairly straightforward I mean, we we did well we did have some small turnarounds in Q1 at clear Lake we had some larger impacting Q2, which then we had to declare force majeure or because of raw material.
Outages at some of our raw material suppliers for clear Lake So that really that difference in volume you see Q1 to Q2.
It's really it's really caused by that force majeure events in clear Lake.
Understood understood and now just on the strategic overhaul that you guys talked about within acetate tow I mean would a potential sale B you know considered I am obviously you know.
I have memories of are you guys sort of walking down that bought earlier, but that was obviously a very different time as well, but would that be something that you guys would think about as well and and and and maybe potentially some of these inbound calls are they are they related to the a T business as well.
Well, what I'd say is you know when we've talked about it on these calls before we would certainly consider S. L. But would think we would come up against the same problems with anti competition in Europe that we had previously on the deal that was contemplated so I I'd say.
We're really focused at this point on actions that we can take that are under our own control to improve the performance of that business.
Yeah, and that's not just to add to that it's we've had a lot of value. That's been created by operating a steel chain is an integrated value chain and ensuring that in the downstream derivatives. The full value of the upstream is captured in contained in how we price the products and so we believe there's a lot more overall.
<unk> enterprise value to be created by operating that business more integrated on a go forward basis.
Very helpful. Thanks, guys.
Thank you. Our next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.
Oh. Thank you good morning, Lawrence got back to Eminem what have you.
Over the last few months you integration work that makes you more.
Positive about the combination or anything you've learned that may be not as hopeful as you would have thought initially.
Yeah, a couple of things you know what.
One I have to say, having gotten to meet a good number of people now in the Eminem organization I am very positive about the people who will be joining the company their passion for the business and frankly their excitement about joining celanese and this opportunity we have to really make this world later in engineer.
Your material.
Company by putting our assets together and so you know I think with any large M&A you always have to worry about the cultural integration and I would say.
You know what we see is for the folks who work in Eminem, we think they are actually much closer to us in terms of culture than we probably thought before obviously, there's things we need to look out for and all of that but but we're actually pretty we're very excited about the folks that we're getting and how theyre going to you know how we can come together to really take the both basket.
Both companies and really have an outstanding engineered materials business I would say also as we continue to dig into synergies and Scott may want to comment more but as we dig into synergies you know the synergies that we had called out a real there. There we think we'll be able to probably get more and we think we'll probably be able to get them faster.
So we're working through all those steps now.
And you know so therefore, we think there is even more value to be had and I think some of the things that the premises. We had around how we can you know continue to commercially build that business take advantage of the pipeline modeling those things I think we again feel very positive about the value that can be generated with those mom.
<unk> and using the pipeline model that that way of you so effectively here and felony yeah. Just on that synergy point I think we had originally baked in $150 million in the first year and $150 million in the second year of cost to achieve synergies. We think we're actually going to be able to spend less than that in in your one especially.
And still get at or above the original synergy target of $75 million in that first the first year or so.
There's a lot more lower cost synergies or no cost synergies early on as we model that out which we're excited about and then one other thing to add is just the commercial teams I think what we've learned is how.
How we're structured how Eminem is structured very similar in terms of how to approach customers yet kind of maybe the the governance of of how we do it and they do it is very complimentary. So theres. Some things that we believe are going to be.
Things that enhance and evolve our model and we've talked now for five six years about the continual evolution of our pipeline model and we think bringing M. N M and it's going to be a nice accelerator in that evolution, which should create some some market opportunities going forward.
Oh, great. That's very helpful and just quickly acetate tow or what's been the reaction from your customers to this new strategy or is it too early to get full feedback yet.
Yeah, I think it's it's too early I mean, we're still working internally to.
Develop our models and how exactly that works.
So, we'll we'll see more I guess in the second half is as we go out with some changes to our customers.
Thank you very much.
Yeah.
Thank you. Our next question is come from the line of Matthew <unk> with Bank of America. Please proceed with your questions.
Good morning, everyone.
<unk>.
So.
Just in general seeing a pretty significant number of acetyl outages over the last 24 months not just selling these kind of industry wide and at a frequency we're not used to seeing so.
What's the issue here I mean is this like everybody took ownership to the C O units and it's become a problem where they underinvested in how a Y O y.
But it keeps going down.
<unk>.
I. It's interesting question that I have to see the data cause I'm not if I'm looking thinking of my own memory, I'd actually say within Celanese R. S until units are running probably more reliably than they have in their history. So you know I'd have to look at the industry numbers to see if that really accurate I don't think there's any com.
When themes here I mean, I do think.
Coming out of Covid, we saw people running our facilities very hard because there was that sudden uptick in demand and so I think turnarounds or pushed off and those sorts of things and you're seeing people now either having to take those turnarounds or maybe haven't pushed a bit too long and having unplanned downtime.
But I, there's nothing other kind of systematic kind of failure of the system that I see that would support that there is an issue I think it may just be timing and maybe just recency bias in terms of.
What do you think you can things are worse today than they were in the past.
The one thing I would add though Matthew I think it's important we brought this up on other calls is we are starting to see with some of the logistical challenges, we're seeing more western hemisphere downstream demand come back online and and the demand is higher and yet it's harder to get product out of Asia, particularly China into the western hemisphere.
And I think we've talked now for a number of years about the need for capacity in Asia to flow to the western hemisphere to keep things balanced and that's been really challenged in this period of time, and so I think without that coming over into the west that has kind of made some of these outages.
More visible in the market than maybe what they had been historically.
That's a fair point yeah.
And then.
How much revenue did KEPCO switch and Santa print AD to E M in the second quarter.
The first and second quarter last year, Santa Preneed about $15 million.
Versus last year, when we didn't have time to train and KEPCO was pretty minimal.
It's pretty immaterial, it's not far off from that Santa brain number, but it's it was pretty minimal.
And that was kept at KEPCO.
Pepco was that like a full quarter or was there a partial quarter there its a partial quarter because there there's still inventory that needed to be sold out of the JV. So it was a it was pretty small in the quarter.
But remember I spent it actually came out of equity earnings as well so.
Its kind of netted out in the total bottle line.
Sure I was just trying to get a clear read on volumes for am on a quota share.
Yeah.
Thank you. Our next question is come from the line of Matthew Blair with T. P. H. Please proceed with your questions.
Hey, good morning.
With all the volatility in oil gas and coal how does the cost curve changed for a suitable and do you have a sense on operating rates by region.
Yeah, I don't I don't think the cost curve has really switched I mean, the only place I would say you really see a kind of things really out of whack I mean things have tended to move in parity, but the thing Thats really out of whack of course is natural gas in Europe compared to oil if you look at natural gas prices today with the cut back.
The Nord stream and everything I mean, it's probably the equivalent of $350 oil now again, not a big factor for us on an asset deals, but bigger factor for for engineered materials. So I would say you know for us until the cost curve continues to be even at these higher natural gas prices in the U S still.
A significant advantage in U S Gulf Coast.
As steel production and then oil in Singapore and coal in China remain about the same and then again Europe is a little bit upside down, but that's not a big factor for us without the deal. Yeah. I think it's also important to think about landed cost curve, because ultimately, that's what really matters and because of that.
Logistical dynamic that I talked about a few minutes ago, I mean that certainly is holding things up because it's really expensive to move product right now even if you can get the boats out.
Out of China into Europe , or the U S.
Got it and then Laurie I think you mentioned the currency headwind of about $10 million in the second quarter do you have a similar number for 2022, that's embedded in your guidance.
Yeah. So the $10 million was just for E. M. M. If you actually look at.
You know quarter to quarter currency was almost 25 million just from Q1 'twenty two to keep to the second quarter 'twenty. Two so we do have a number embedded in the full year guidance I'm not sure. What it is right off the top of my head, but Scott you, Matt Yeah, I mean, just from a general rule of thumb about a one cent change.
And the Euro is you know call it about $7 million of earnings per quarter. So it's sizable on an annualized basis and as Lori talked about earlier in the call. The teams both in engineered materials and I still have done a phenomenal job of offsetting that so so it's sizable and it's been a pretty significant impact on us.
For the full year, we've effectively baked in.
Similar euro rates to what we're seeing today are into our back half guidance.
Great. Thank you.
Thank you. Our next question is coming from the line of Arun Viswanathan with RBC capital markets. Please proceed with your questions.
Thanks for taking my questions good morning.
I guess first off you know you you went through some nice commentary in your prepared remarks on natural gas in Europe , and just kind of address that a little bit as well as being somewhat out of whack, but.
Yes, Oh, you know given some of those actions you have taken it does appear that.
You know you're you're you're expecting this this level of pricing to remain.
On a structurally higher basis, you now and into the foreseeable future or is that is that the case and I guess, if so how do we think about <unk> and the impact from these higher costs in the next couple of years.
Yeah look I think the.
Energy surcharge that was put in place by the engineered materials group has been very effective in helping us maintain margins and our customers understand it and you know arent necessarily happy that had been willing to pay it and we haven't seen any major impact on volumes because of the higher right now as we.
Move forward and if we continue to stay at this kind of $60 per million Btu, we're seeing today as we move into the winter period.
You know I do think we will see energy pricing not necessarily the pasture on our materials, which is energy pricing for producers of goods in Europe being negatively impacted by energy, whether it be price or even availability at a certain point in time and I think that's more likely that price at their own.
<unk> is more likely to lead to a demand destruction for E M than necessarily the energy cost pass through that we're putting on our products.
Okay. That's helpful and then there's the <unk>.
Follow up you know similar you you noted.
There is a capex reduction here.
Now and potentially even greater than 23 could you just describe that a little bit more.
And I guess are you know you said you'd get to the three times leverage you know.
And in a couple of years I'm, just wondering if you have greater levers to reduce capex by even more to just stay on track with that deleveraging or if its not really dependent on that thanks.
Yeah look we could cut our capex in half if we needed to we've done it before we did it when COVID-19 happened, we're not going to cut it so far that we can maintain and run our facilities in a safe and reliable way I also don't think it's gonna be necessary to do that in order to meet the financial objectives that we set out around this still but.
We always have those levers to further delay projects are cancelled project.
Getting where we're really looking at what is the long term health of this business and Theres a lot of you know in engineered materials. There's a lot of expansions, we want to do and polymers that you know aren't coming over from Dupont since our base polymers just like in acetyl, we want to continue our expansions in VA and Bam of course, we're gonna clip finished the clear like product projects.
So you know there are additional levers if we were to need them. If we were to get into you know a significant recession, which we're not really seeing the signs up now and significant demand destruction. Obviously, there are more levers we can pool, but.
But the kind of levers that kind of levels. We're talking about now 50 million. This year, maybe 50 million to 100 million next year. You know these kind of levels are things that we think it makes sense to do just in light of the deal and the opportunity we may have to more efficiently produce from the Dupont assets and in.
Light of current high prices for contractors for steel and for all of those other things just by delaying a bit yeah, just to provide a little more color for you yet.
We had baked in $800 million of combined capital in 2023 for our base business, plus Eminem and just given some of the dynamics that Lori talked about we don't see needing to spend nearly.
That level and so we know we're going to be able to get a chunk of that backing cash should be able to offset some of the higher interest expense we talked about.
Great. Thanks Daryl.
I will make the next questioner last one please.
Thank you our final questions come from the line of Steve Richardson with Evercore ISI. Please proceed with your questions.
Hello, Hi, this is al Keyshawn on for Steve. So I'm looking at engineered materials has undergone quite an impressive transformation. So I'm just wondering if you could touch a little bit more on what drove your E. M results, especially in China in terms of your EV exposure and where do you see that going through year end.
Yeah.
Yeah.
Said earlier, you know, we actually saw a very high demand in China, Despite a slowdown a significant slowdown in auto build.
Because of the issues with Covid I'm I think Theres a couple of thing was one you know it's a great folks in China, who are out there. We also tend to you know and really continuing to push the commercial models and new volume, which comes through in the project pipeline.
It's also the fact that we tend to go in premium vehicles, which tend to be prioritized over other vehicles, and then certainly evs in China, where we have a very large presence E. V has continued to be prioritized by the automakers and we continue to see a lot of material going into the into the EV market, especially.
For G U R into lithium ion battery separate or film.
Yeah.
Great. Thank you so much.
Okay.
Thank you that is all the time, we have for 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 and as always we're available after the call for any follow up questions.
Please go ahead and close up the call.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
The rest of your day.