Q3 2022 Celanese Corp Earnings Call

Greetings and welcome to the Celanese Corporation third quarter 2022 earnings call and webcast. At this time all participants are in a listen only mode.

A question and answer session will follow the formal remarks.

What should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded I would now like to turn the call over to Brendan <unk> Vice President of Investor Relations. Thank you you may begin thank.

Thank you Daryl welcome to the Celanese Corporation third quarter 2022 earnings Conference call. My name is Brandon <unk>, Vice President of Investor Relations.

With me today on the call are Lori Raya, Kirk Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer.

Celanese Corporation distributed its third quarter earnings release via business wire and posted prepared comments about the quarter on our Investor Relations website yesterday afternoon.

As a reminder, we will discuss non-GAAP financial measures today.

You can find definitions 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 the 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 go ahead and open the line directly for your questions. Darrell. Please go ahead and open the line for questions.

Thank you we will now be conducting a question and answer session. We would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

You May press Star two if you 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 while we poll for your questions.

Yeah.

Our first question is coming from the line of Josh Spector with UBS. Please proceed with your questions.

Yeah, Hi, Thanks for taking my question I guess now that you've owned the asset for a few days here wondering if you can give us some context on the performance. This year from an EBITDA perspective also maybe some historical context, given Dupont embedded some corporate support.

Segment, how has that performed and then also when you look at next year you gave the comments of 800 million.

To get to that business pre synergies what are the major lifts that it takes to get there from the current run rate.

Yeah.

Thanks for the question Jonathan that play a lot of questions. So let me see if I can.

Navigate all of that.

So.

Our third quarter performance I mean, Dupont will be reporting shortly obviously, what they report not apples to apples necessarily because it does include <unk> as well.

But I think it's fair to say in third quarter much like the first two quarters.

Eminem is not performing in line with our expectations of the business or even in line with how they performed in 2021.

And you know I think you saw that in the numbers, we called out for fourth quarter and I think if you think about fourth quarter I mean fourth quarter is typically a low quarter for us as well.

Do get seasonality in the fourth quarter, we expect Dupont has seen the same seasonality.

We see some of the concerns we've had on dupont's performance continuing with the Eminem asset in in the fourth quarter as well. So it's again, it's only been three days, but I would say you know as we've gotten to and get a clearer view.

<unk> performance.

Think there's there's a couple of reasons, we see for their underperformance. This year. So you know.

Overall poor demand backdrop in Asia and Europe .

Not dissimilar I think in Europe from what we've seen but I think we've had a little bit more upside in Asia on autos and then they have seen.

<unk> dynamics.

That is really impacting more of the standard business of which we believe they've had a bit more than versus the differentiated business and I would say also insufficient commercial flexibility to really pivot and respond to the market.

And the need to do different things in the market maybe as quickly as we have you know I think.

Also their current contract for sourcing for nylon has been a bit challenging in this economic environment and you know I think it boils down to there's really been.

You know our margin compression that occurred.

Especially in the nylon area and.

Surprisingly in some cases they are it's not that they havent raised price. It's actually the fact that they didn't adjust price downward stay competitive and they've lost lost volume they've also had some.

Pretty significant foreign currency headwinds, which are different than we've experienced due to the fact that therefore current you know they're a bit more exposed than we are with the way they write their contracts. So if we think about moving forward now into the rest of the fourth quarter that we've closed and moving into next year.

I'll talk a little bit about how we'll address each of these on the foreign currency headwind.

An impact of almost over $20 million for us alone in November and December on the Eminem asset and so I think we really were looking at how do we optimize our commercial practices to to address the sales currency exposures. So what's denominated in local currency and in Watson in U S dollars. We also.

Can you use some of our debt to look at converting more of our U S dollar debt to a lower rate currencies like the euro or the one or the yen, which will help us lower our borrowing rate. So it will help the overall financial condition of the company I think when we look at key raw materials and the purchasing requirement.

We will be able to exercise some of the flexibility we have.

Within celanese to really utilize some of the Eminem.

Polymer polymer capacity. So if you think about it.

As a fairly large take or pay contract currently for raw materials for nylon.

And so they've been producing a lot of material, but they've been building inventory, we can actually start buying that using that inventory using that excess production for celanese.

Which will be net net better for both companies together I think also remember we called out at the time of the deal or the actually the contract for Raj has been renegotiated and a new contract will come in place at the first of 2023. This new contract has less take or pay requirements. So that.

Will give us more flexibility and optionality going forward. So let us think about it is it will really let us start.

Oh, it's one element of starting to run these larger nylon portfolio more in a more integrated flexible commercially agile way much like the transition we went through as Tom a few years ago much like the transaction, we went through with acetyl Sameer before that.

On the volume side I think we have a lot of opportunities between Eminem and they are just selling these assets to really deploy our combined commercial team to cross sell not just online, but other products, including other selling these products. So as we've gotten to really look at where all of our products are going there's only.

About a 20% overlap in terms of the companies that are buying from us. So that was a really large space for us to go into the companies that each other has been in and really start cross selling the entire portfolio versus just what we had traditionally.

You know pricing them.

Again, you know margin compression there, we actually think theres some opportunity in pricing to do it in a more differentiated way. So if you. If you really look you know R. R.

And so far is Eminem took a fairly comment response on pricing to everything.

Whereas we like to look at it a couple of different tranches. So if we're really differentiate differentiated product.

Product, we will always push pricing because we have the opportunity to do that for a more standard grade products. There may be places where are you in fact have to reduce pricing in the current environment in order to maintain the same volume and I think for US and then cross selling is another opportunity, but I think for us it's really instead of having one rule about we want them.

Maximize margin percent or we want to maximize revenue or maximize volume for us. It is always looking at value how do we maximize the margin dollars.

Cheap from the products that we have out there and then finally I don't know this is one handset finally on inventory you know Eminem has built.

A pretty large excess of finished goods and inventory over 2022 as they've seen some drop off in market share and as they've continued to produce because of their raw material contract that.

That is burdening, our November and December EBITDA as we start trying to take measures to get that inventory more in line, but longer term it will allow us to manage our inventory levels again more like palm so that our pricing and our cost becomes more contemporary with each other so we don't see as much.

Kind of a disconnect.

Between cost and pricing as we go forward. So again, we'll take these actions now we've already started all of that but.

But you know it will take some time I'd say to get the business performing.

Our expectations. So if we look at next year. If we look at our you know I'd say 800 million of EBITDA that we aspire to for next year and that we're really pushing the team to achieve on the on the M and M assets I mean, it is a it is a big lift I mean, it's coming from them about what we think is gonna be around 500.

<unk> this year.

For the Eminem assets are in EBITDA to 800 about what's really big I would remind you, though that with the celanese VM portfolio. We went from $5 71 last year in 2021 to 800. This year. So it's not that much bigger than we've already demonstrated that we know how to.

Due and we already have a lot a lot of actions underway.

And how we're going to do that we're gonna be helped by 4% higher auto builds next.

Next year, I think that's pretty consistently called out by everyone.

And we've already been pre qualifying the Eminem nylon into R. R.

Our applications our heritage Celanese application. So we have a great start on that Tom has already been meeting with all of the business teams and Eminem to really do the deep dive. So he really I can understand the nature of underperformance what the opportunities are for next year. So I'd say, we're off to a very strong start.

Yes, 800 is a lift but again not unachievable given our demonstrated performance in our own portfolio.

Okay.

Very helpful. Thank you.

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

Thank you Laurie Q4, EPS is annualizing at roughly $7 per share could you just got help us bridge us to the $14 upper end of the range for next year.

Yeah, I mean again I don't think you can look at Q4 and multiply that times four and get to a number for next year in terms of EBIT of Q4, we are seeing a.

Okay.

Lot of headwinds a lot of challenges.

In Q4 again because of the really the slump, we've seen in China with painting coatings and construction with the ongoing COVID-19 lockdown.

Situation in Europe , where we've also seen the drop there you know the U S has held up pretty well, but I think in some of the destocking that we've seen especially in acetyl and the fact that as still does that basically bumping and bouncing around at its cost curve.

These are conditions that we don't believe can last forever. So while we think first quarter may be challenging.

We do see line of sight to would be somewhat better than fourth quarter again, because we have a lot of things coming in with Eminem that we're having to manage in the fourth quarter, but I think by first quarter, we start to see a realization that some of the synergies will have had a chance to start making some of the moves I just talked about.

And then we really do expect the second half of the year to be back around that 13% to $14 range and again, a big portion of that is a left I. Just described on Eminem, but we have continued growth in our own engineered materials business. In addition to the 4% higher auto builds we will see at <unk>.

Our lift next year on <unk>.

We are sold out.

For EV lithium ion battery separator film that demand is only going up so that will allow us to raise margins in <unk> next year LCP.

<unk> are also going up next year as we see high demand into <unk> application next year, we'll get the full benefit from Sandoz brain and KEPCO and Santa <unk>, We do expect it to be back to the levels. We had called out at the time of the deal in terms of.

Returns on Santa frame, and then medical which we saw this quarter returned to pre COVID-19 levels.

We are predicting continued growth in medical both in terms of.

In terms of orthopedics, but also in terms of the other applications like vital dose and medical devices. So we see a lot of growth opportunities next year in the Eminem portfolio and our heritage Celanese portfolio, and we do see strengthening across the opportunity strength that across the acetyl chain.

As we move on through the year I would also say we will have a good uplift next year in our total earnings as we talked about last quarter, we have been doing a lot to really restructure our acetate tow business, we're starting to run it more like we do a derivative of the acetyl chain and much like we saw when we.

They're doing that with Bam and emulsions that allows us to build a more optionality.

More flexibility, which will which will increase our earnings you know historically, we've run that tow business.

We really focus on customer customer value.

Quality and reliability of supply when China went independent that reliability of supply became less important to our customers because there was an overhang in other regions.

Now that has tightened up again, you know we're at 90% utilization in tow outside of China, and so that with the raw material and the energy volatility has given us an opportunity now to really go in and put in new contract structures that allow us to better accommodate changes in raw material and energy pricing.

Really enhanced the business models and toe take some cost out of tow by integrating it into the acetic acid team and while still maintaining that reliability of supply and that strong customer focus that we've had so the result is we will be seeing a much improved profitability in 2023 along with.

<unk> greatly improved flexibility.

Have you ever forecast for toner sure an early look at the improved profitability.

No I you know what I would say is if you look at what.

What we called out for tow and in 2023 in the Investor day, we will be at or above that.

Very good thank you very much.

Thank you. Our next question is coming from the line of Ghansham Panjabi with Baird. Please proceed with your questions.

Thank you and good morning, everyone.

I guess first off Laurie just in your prepared comments you were talking about inventory Destocking and is it as simple as we just went from a world of just two little to too much very quickly and so that's what's exaggerating some of the weakness that you're seeing.

And then related to that can you just give us a timeline into.

Your visibility that this will last through the first quarter if not longer.

Yeah Ghansham. Thanks for the question I think you have it exactly right I mean, I think we went from everybody being worried about not being able to get molecules in and kind of buying whatever they could get their hands on to all of a sudden you know all the production issues were resolved.

Demand started going down and people realize there was availability and they have high cost inventory in tankage, they want to bring that down.

Before the end of the year and you know they assume that the molecules will be there just like when we see prices rising people start buying because they think it will be more expensive tomorrow right now they've seen prices falling so they quit buying because they think it will be cheaper tomorrow, but I think a few things behind why you know why we've gotten into this I mean, we are seeing improved.

Logistics, we are seeing improvement in port congestion and the ability to move.

Materials around the globe, we are seeing improved product availability theres been less outages and disruptions in the last quarter than we've been having over the previous few years, we are seeing the weaker demand outlook, both again because of paints and coatings, which I talked about specifically in Europe , and China, but also just some.

Seasonality that we see in this area and again falling prices I think is a is a big effect on People's mental view of what they think so I do think this is likely to extend into first quarter 'twenty three typically when we see that flip is as we get through Chinese New year's then we start to see.

<unk> <unk>.

Demand coming up again, and we start to see activity coming up again, and then as you get warming in the Western Hemisphere, you start to see coming out. So that's why I feel pretty confident saying, we expect to see that start to turn the other direction.

You know sometime after the first quarter, yes, the one area, where we don't see a lot of excess inventory ghansham is in automotive and I think that's an area. We're focused very closely on our we don't have that value chain. That's full so we're not seeing big Destocking, we're seeing some level of seasonality here in the fourth quarter, that's more like normal but.

We do expect the fact that auto has been at relatively low levels from a build standpoint. The last two years that to kind of hold flat or slightly increase as we work our way into next year. So that's an area that we feel good about that we're not going to see major weakness as we work our way into the first half of next year.

Hey, Thanks for that and then maybe for you Scott on the on the $1 1 billion of discretionary free cash flow that you've targeted for 2023.

What are the levers you can pull to deliver on that number in the scenario of the week.

Since you're anticipating through one Q.

Pushes a bit longer to the middle of the year.

Yes, I think.

As we have scenario planned that out ghansham, we feel very confident in our ability to get to that level under a variety of different outcomes that could be there.

A lot of that is.

Working capital build that we've had over the last 18 months has been fairly sizable we've seen a similar build in the MRM business and therefore.

If we were to see.

A deeper decline in the first half of next year that would likely be a much heavier.

Alexian of that working capital. So we feel very strong about that we continue to analyze I think we've talked on these calls in the past about a quarterly review of capital and looking at what our businesses need both in the near term and long term to better match that capital spend we brought that capital down on a combined basis already.

<unk> are around $600 million of capital next year, we lowered the capital this year down to $5 50, and so those are levers that we'll continue to evaluate depending on where the demand landscape is.

Thanks Scott.

Okay.

Thank you. Our next question is coming from the line of Jeff Zekauskas with Jpmorgan. Please proceed with your questions.

Thanks very much.

You gave an idea of acetic acid prices in China.

As being close to $400 a ton can you give us some reference prices and trends and jam across your geographies.

Yeah, I think that's one of the big differences, we saw in third quarter, Jeff as we saw them in China, which had still been running.

You know quite attractively I'd say, you know kind of <unk>.

1400, 1500 really come down to about $1000 a ton.

By the end of the third quarter, which is we believe pretty much at the cost curve.

In China, So that's been a big change and again tied directly to paints and coatings as you know a large percentage of our emulsions go into paints and coatings I mean to give you an idea we saw about a 15% 15% to 20% drop in emulsion demand globally.

In the third quarter.

In Europe I think we're also starting to see.

Some compression of margins for <unk> acid and Bam I don't have the exact number for them right now in Europe .

The tip of my tongue, but in Europe , I mean, sorry in the U S. It's holding up a bit better although we start to see some softening there again I think the softening outside of China.

More on Destocking.

Necessarily than than absolute demand, but in China, which I think is the easiest reference price, we see them coming down to about $1000 per ton, which again is probably right at the cost curve for <unk> in China.

Okay.

Just a follow up.

And I think and got the script.

He said that he is he's confident and paying down debt and 23.

Across a wide variety of macro scenarios and then you said that in the most challenging when you have a detailed playbook.

Can you give us an idea.

What the detailed playbook is and what are the most challenging scenario would be like.

Yes, Jeff I think there was two two times I think over the past 15, or so years, where we've had to really pull back hard with a heavy focus on near term cash and I think that was coming out of the economic crisis 2008, nine and then again in the early days of Covid in 2020 and.

Really focuses around cash collection and harvesting of cash.

Which as I mentioned before we feel very comfortable with as we work our way into the first part of next year and then it's a heavy focus on capital and what capital needs. Our manufacturing teams have done a great job being able to flex as needed even on large capital projects and if you recall.

We passed the clearly you can see because acid expansion back in 2020, and then we're able to utilize that time to lower the overall cost of that project, but significantly reduce the capital and we were able to bring our capex spend which was expected to be north of $500 million in 2020.

Down to around 300 million and so we are.

In.

Process as I mentioned earlier I'm looking at where those levers are for 2023, both across our legacy portfolio as well as the Eminem Capex spend so that we can focus really around near term productivity as well as cost reduction and if there are projects that can be passed we will do.

To that.

Great. Thank you so much.

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

Thank you and good morning, everyone.

Laurie I think in the script, you said, the 13% to $14 plus of EPS for next year did not assume a recession because youre not seeing that in your order book can you give us a sense of what a what a recessionary range for 'twenty three would be if we do indeed go into a recession is at.

12 to $14 10 to $12 what would you think at a high level.

Yeah look Vincent I don't really have a number for that.

You know I think if we just look at current demand conditions, and especially at auto I.

I think everybody is pretty consistent in taking auto is continuing to go up next year I don't find that surprising that's consistent with what we're hearing from customers. I mean, we've had three years of very low auto production, we think theres still a lot of pent up demand we think.

We think supply will continues to be the determining factor for auto so the supply of chips and other materials is what will be the determining factor now obviously as interest rates go up there may be some regions, where that that has some impact but quite frankly, we think auto with especially with them.

<unk> is now a significant part of our portfolio again, it's really an upside for next year and so I think in that way.

If we do go into recession, I mean, it's a little bit different this time in that.

Usually in a recession I mean, a couple of things usually in a recession you see energy start to come down and then prices listen this case energy is staying up because of geopolitical concerns. So that's a little bit different we're seeing full employment.

Especially here in the U S, which is why I think we're not seeing some of the impact in the U S. Because although people are being hit by inflation. There is full employment. So it doesn't feel as hard as most recessions, where you see a lot of layoffs and people without job and then I think the third thing is auto I mean auto is usually one of the leading indicators of a recession and a drop in demand for <unk>.

And in fact, we see it going the other way in this recession. So we haven't really modeled what I would call a recessionary.

Scenario and because.

Because we just don't see it happening even if technically mathematically its calculated as recession, we don't see that the other thing I would add to that Vincent is with the synergies that we have we've already increased our synergy number for year one.

To have between 101 hundred $35 million of of full achieved synergies next year and if we see continued demand decline in non auto segment.

We'll look for ways at which to flex and accelerate further synergy. So we do feel very confident of being able to get to that range that we put in the prepared comments.

And as a follow up the prepared comments had a discussion of what you've already done with the plant footprint.

Particularly in the ACO kill chain.

With some reductions, but how are you thinking about how youre going to run the chain in 'twenty, three and I guess in particular, how is the clear lake expansion.

Coming in and how could that play a role in 'twenty three.

Yeah. So I think if we look at.

This year, we you know we have already reduced our rates in the acetyl chain in China and in Singapore.

Down to 50 or 70% of of our capacity and we did that because we see demand we don't want to build a lot of inventory we have.

<unk> seen demand come off so we've already taken that step in some areas.

We've gone down to as little as 30% of operating capacity like in in emulsions, where we've seen the big drop there. So I think we've been really proactive in managing our response, that's obviously a cost savings, but we're really focused on aligning our actions with the customer demand. Similarly in Frankfurt given the high court.

<unk>.

Energy costs in Frankfurt, and the softening demand in Europe , we've reduced our palm rates at Frankfurt.

Again to align to align our demand with our customer demand with our own production and we've made the decision for the Fam plant in Frankfurt to go ahead, and keep that unit down until we see demand coming back I mean, the good news is all of these steps were taken this is still economic capacity was still make money. If we ran it but we just don't.

See enough demand. So we can optimize our chain better buy movie molecules around the globe and using lower cost capacity, particularly in the U S. Gulf coast to meet some of these global demand now that we have less global demand and so youre going to continue to see actions like that as I as we go into 2020.

Three what I would say is you know look Bam is ready in Frankfurt when we start to see this come back hopefully by the end of the first quarter, we will be able to start that unit up.

Everything else is just a matter of lifting the rates. So that's the day's decision to do it so that's easy.

And I like what I.

What I would say about clear like is we are on track to mechanically complete and start up the unit in the first half we intend to do so.

Again, the justification for that project with productivity, we've called out about $100 million a year in productivity. So even if we see no need to run additional capacity in the Gulf Coast, We will run that unit for productivity and get the $100 million savings run rate savings I should say the first year will obviously be that much.

But run that unit for productivity and then we have the option if we see something similar happen as we saw happen in 'twenty, one where we see a run up in demand or if there are operating issues around the globe. We can start running that unit at higher rates and get even additional.

Margin from that.

Thanks, so much.

Thank you. Our next question is coming from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.

Yes, good morning.

Lori can you speak to a bridge between the rough run rate of $500 million that you referenced for Eminem. This year to the target of 800 million that you have for two.

2023, I appreciate that you've owned it just a few days and I imagine it's difficult, but formulating that 800 million number what are you baking in for things like price cost spread or normalization of volumes or perhaps.

The cross selling our other company specific.

Actions that you mentioned any any broad strokes.

Related color there I think would be really helpful.

Yeah look I don't I don't have a bridge as he said we've only owned it three days. So we're still working on what are we learning what can we immediately go do about it but we're really been focused on.

Not not worrying so much about what happened in the past, but okay. How can we do this differently in the future, but I would say its really more based on our own experience of what levers to pull I mean, there are some things like foreign currency that.

That was about $20 million in November December that we think we can go rectify maybe not in November December but in.

Next year and so you annualize that that you know I don't know I just make up a number here you know so that's $50 million or something and then you know if you look at volume they've lost about 15% market share if we can through pricing and through cross selling recover that that's a fairly large number remember there the dupont.

In 2021 for EBITDA was seven.

750, something like that in the 700, so just recovering the volume that they had sold and taking care of some of the other factors that didn't exist in 'twenty one like the currency I think pretty quickly gets us back to 800. So those are those are the things that we're focused on and then as Scott said, we well.

Start to see some synergies as early as January one.

We will have some synergies from office closures, where we have overlapping office sites like so and.

Our Singapore and others. So there are synergies that will that will come in there as well I mean, obviously, we'll count account for those separately.

But I think and then we have a new raw material contracts that will come into play in January which will give us flexibility, which will also be a source of value for us.

I wish I could give you a better bridge, we just don't have it to that level of detail yet because at this point, we're really trying to identify what is the 10 levers to go pull let's get those actions and then we'll we'll quantify them all but again just based on our own experience based on where Dupont was in 'twenty one.

We feel this is the lift we can make to get to 800, if we get the organization really focused on it and really pushing towards it.

Fair enough and I appreciate the color. There. My second question is more in the spirit of clarification, and maybe housekeeping for Scott.

What is the amount.

<unk> transaction related amortization, that's embedded in the incremental DNA of $350 million that you referenced and moving forward would you intend to include that or exclude that from your adjusted EPS in 2023.

Yes, so of that $3 50, Kevin the best way to think about right. Now is about a third of that would be our base business depreciation and then two thirds amortization and that's an estimate right now we'll be working through that here in.

In the fourth quarter, and we would not be adjusting that out of our adjustments. So we will include that we will.

Certainly provide color as to what that amount is but we don't plan to adjust it out.

Okay excellent. Thank you.

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

Great. Thanks, Good morning, guys.

First just two quick ones on asset yields versus the sequential decline in EBIT for us. If you will change in <unk>. You. Obviously prices are down volumes are down but can you just help us with in <unk>. There was any sort of one timey either fixed cost absorption hit as you're running your assets or high cost inputs running through but shouldnt carries.

Forward into 'twenty three.

And second you mentioned industry margins being unsustainably low I guess when you look at previous times kind of we've gone through this industry, what's sort of the usual time before that resolves itself or you see supply demand start to balance itself out.

Yeah, that's really no.

I'd say, one time things I mean, we've just seen deterioration.

Through third quarter in terms of pricing and in terms of demand again, specifically China you're.

Less so in the U S.

Especially as I called out that drop in emulsions demand now that is like 15%, 20% down globally versus where we've been so I can only describe the fourth quarter conditions is now kind of some foundational.

Again, we think.

Partly mostly its seasonal we think it's destocking there isn't in the Destocking because people. So I don't think it can get much worse, let's be honest.

Because one of the reasons is when we see it in our order books I mean orders have stabilized again now at this lower level, but they stabilized again and so that's why we're saying we think that's continued through the first quarter and then as we moved back into the construction season, hopefully we see some movement in China on Covid, but we've said that before.

And as maybe people gain more confidence in Europe and again construction season comes back we do expect towards the end of the first quarter to start seeing recovery into more of a foundational level.

Great that's helpful.

Second for Scott I, just wanted to dig in on the Eminem currency exposure issue.

Obviously, you have pretty good visibility into the Eminem country mix ahead of call. So was it a net hedging issue of Eminem or mismatch of sales and Cogs currency.

Trying to get a sense of what was different when you got under the Hood there.

Yes, I think yes.

We expect the annual impact this year to be about $100 million, which is not unlike the impact that we have in totality at celanese today, and so it's a little higher weighting than what we see in our base at engineered materials business and I would kind of chalk it up to two things one a.

A lot more cost in dollars in terms of what moves through and then.

More sales in local currencies, where as celanese typically would sell.

In some of those countries on a dollar basis. So those are the two things we're looking at.

From a business risk perspective of where we can make changes and where we can combine.

Power of.

The kind of in country businesses that we have going forward.

I would also say there are certain things that at the enterprise level, we can do to help mitigate that Lori alluded to some of those earlier and we will be looking at that as well and hopefully we should get some run rate benefit in the early part of next year from those actions.

Great. Thank you.

Okay.

Thank you our next questions come from the line of Mike Sison with Wells Fargo. Please proceed with your question.

Hey, good morning.

In terms of your outlook for 'twenty three does that assume the normal foundational adjusted EBIT for the acetyl chain and that I think it was like a $1 billion billion won.

<unk>.

Sure.

Yeah, Mike.

Obviously, we were a little hesitant, even give 'twenty three guidance, but.

So what I would say is.

So for 'twenty 'twenty three if we think on the low end of what.

What we're thinking of for acetyl I would say we're assuming.

First quarter.

Some foundational.

And then recovering so if you think about that.

Second quarter is probably a foundational third quarter fourth quarter. Let me just talk about foundation with a little bit on what that means. So we always meant foundational was meant to capture the low end of the typical range. We didn't really capture recessionary conditions as I said, we're kind of seeing that in acetyl.

And so again, we believe quarter fourth quarter. This year and early 2020 through will be sub foundational.

And then we have some seasonality in the fourth quarter. So again, it's we're a year average, but I think if you analyze even Q4, what we're calling out for asset Hills, that's 900 and that sub foundational. So I think if you look at.

What is foundational really mean, it's probably more in the one one to 1.2 area with.

One <unk> after we finish the clear Lake expansion.

Got it.

Just for some clarity so I would say next year, it's kind of an average for the year at that foundational level or a little bit lower at the lower end as we all know this market can move very quickly. If we have some industry outages or anything else that causes because we are still at pretty high utilization in the acetyl chain.

So, but that's what how we're thinking about next year and how we're thinking about it relative to foundational army.

Got it in the base adjusted EBIT I'm, sorry, the base and your materials business.

22, you're close to the $800 million adjusted even I think you mentioned you felt there could be some growth and maybe just maybe talk about what.

What type of growth and where you'll see it from and and if you have any specifics great.

Yeah. So you know the growth that we're expecting there is.

Double digit.

I would say.

It.

It's the things I called out earlier, Mike I mean, it's the growth in auto.

Margin lift in <unk> due to full utilization, it's the margin lift in LCP due to high utilization and growing <unk> applications, it's getting the full value from Santa <unk> now that we've had the opportunity to take pricing actions and other actions to get sand in particular, so and getting the full value of kept go for the year.

Year, as well as kind of a double digit growth that we've been seeing in medical.

I'd say those are the biggest factors driving that double digit growth in margins for the heritage Celanese am business.

Great. Thank you.

Thank you our next questions come from the line of John Mcnulty with BMO capital markets. Please proceed with your questions.

Yeah. Thanks for taking my question. So maybe a question for Scott when you look to better match, the interest lines and the debt too.

Count or the FX impacts I guess can you speak to at least based on current rates what that might mean for your interest expenses. It doesn't send it up a bit to send it down I guess, how should we be thinking about that.

Well I think in those currencies, where we have exposure of any size I think we would it would lower the overall interest expense. However.

However, John we're going to be careful with when we do that obviously those currencies have depreciated pretty substantially this year and so there's a balance between interest expense versus then.

Depending on when you move that over do you end up having ulf.

Ultimately more leverage as that currency move so we're going to be balanced in how we look at that but we do see some opportunities we get into the next year to help with some of that business exposure.

Got it fair enough and then on the Eminem front in terms of it sounds like <unk> been really running pretty hard because they kind of had to do with take or pays and what have you.

I guess can you quantify what the with the inventory build is versus kind of what you view as normal and how much we could see in terms of working capital release, just out of that asset alone.

Yeah, I don't I don't know that we have those numbers and again, we're going to be taken some steps in the fourth quarter.

That will continue into next year to use Dupont material to place our own purchases of polymer and different things. So I don't I don't think we have a really firm.

Number on that yet John normals different as we go forward because youre, putting these two portfolios together and and so we're looking at what is the optimal mix is going to be different by region as well, depending on where our business has historically.

Basically been from mainly in nylon standpoint, but we're really looking at how we can leverage the power really of.

Both portfolios that we're bringing together right now.

Fair point makes sense, thanks, very much for the color. Thanks, Sean.

Yeah.

Thank you our next questions come from the line of P. J <unk> with Citi. Please proceed with your questions.

Yes, Thank you Lori and Scott you talked about.

The deals and you always do a great job in managing the situation globally to utilization of different clients.

On the Frankfurt.

<unk> cost.

You think there is a chance that it becomes a stranded asset.

You know what kind of headwinds do you expect in Europe , given your large footprint, there and in Europe as well as in Germany.

P. J just clarification, you were talking about the Frankford Bam plant or our Pom plant.

Hello, I'm, sorry, Sam Okay. Thank you I just wanted to be clarifying.

Question, you know what we have.

Five Bam asset globally, historically Frankfurt has not been our highest plant cost plants. So let me just be clear on that and even today, we could run it and it could run at a at a profit but it just it's just volume we can get somewhere else more cheaply right now because of the very high prices that we had been seen.

In terms of European energy and that quite frankly, when it gets cold we expect to see those prices again, so I don't really see a possibility of it becoming a stranded asset I mean, it's only been about three months ago. We were running every single plant, we had all out and still not able to meet the demand. So I do think demand is going to come back.

And I think we will need all the plants, we have and Frankfurt band. It has always been a very profitable plant. This is just a unique situation with the European energy prices, we're seeing coupled with the fairly rapid drop in demand that we see because of other.

The geopolitical factors.

The China, Covid, and then Weatherization kind of all coming together at the same time, so I don't really see any any possibility that becomes a stranded asset yes P. J I would just add this theme of the power of our network is very important whether it's banned whether it's acetic acid, whether its palm and now as we bring Eminem in.

<unk> pvt et cetera.

Have created we believe a lot of value over time by flexing These networks and having those assets in Europe are great assets and so.

Bringing that that concept and leveraging that as we bring these portfolios together with Eminem is something that we're going be working hard here in the fourth quarter to see how we want to operate as we get into next year for that business as well.

Okay. Okay, and then secondly, you mentioned you made a lot of comments on M&A.

I appreciate that one of the things you say in your prepared comments is that.

Business has been a lag in pricing for 2021.

Maybe is it a one time step up in pricing that maybe we have underappreciated.

Yeah look I think.

Talk a little bit about this earlier I think.

Their total pricing hasn't necessarily lagged I think it really distinguishing between the differentiated business, where you had moved room to move pricing and the the more standard business, where in fact, we've seen a lot of price pressures from competitors, where in fact, maybe it would've been better.

Two.

Take down pricing and not lose so much market share. So I think it's just a more fine tuned approach to pricing that we want to take I wouldn't necessarily say it just mean prices will go up it will really be about.

Try to maximize the margin.

<unk> contribution.

Any other signal.

Great. Thank you.

Thank you. Our next question is coming from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.

Good morning, Laurie and trust.

I'm, just trying to sort of get a better sense I know it was asked earlier.

What do you actually feel trough EBITDA would be.

No that the guidance that you guys gave for Q4, obviously, a seasonally weak quarter.

So obviously Q4, one can sort of extrapolate that.

To me it just seems like Q3 was the worst of everything right. I mean, you have destocking high sort of energy prices be it in Europe and the like.

But she took prices coming down as hard as they did so I mean is it fair to assume that the 600 and change.

Million in quarterly EBITDA that you guys generated in Q3 is possibly the right run rate.

<unk> number to think about in terms of trough EBITDA.

I'm sorry.

Sorry, I have not I'm, just trying to understand your question better the 600 and change in EBITDA for <unk>.

Just I mean.

Overall as a company what do you think.

Your trough EBITDA number would be.

I mean I'll be honest with you Hassan I mean, we really look at each environment differently, I mean trough recessions et cetera, I mean, its hard but labels on different things I mean at the end of the day I think the.

What we stated we're pushing towards to get to for next year, just given the current condition.

I'd suggest that somewhere in that Q3 range is probably somewhere close to that but I think a lot every situation is different and it's really about making sure that we are managing the business on a daily basis.

Maximize earnings and maximize cash flow and value creation.

Fair enough fair enough and now just moving on from that.

A more specific on the acetyl chain.

You talked about pricing being around $400 a ton.

Hitting sort of.

The cost side of things and the like so so two things one is are you.

In the industry is seeing sort of shutdowns at these levels.

That's the first part of it the second part of it is that.

In your prepared remarks, you obviously talked about.

Operating rates for you guys in China, and Singapore, being 50% to 70%.

<unk>.

Emotions business.

Reducing the <unk>.

Unsold by 15% and the like.

Your volumes sequentially were only down 4%. So just trying to reconcile that as well so two parts one shutdown and two.

Why your volumes was weaker than what your commentary suggested.

Yeah. So I would say we saw the decline through the quarter. So the start of the quarter was actually at a at a much higher pricing the average price for third quarter or the average.

The China asset for third quarter was around 430 and now we're down around 400. So we've continued to continue to see pricing declines. So I'd say the start of the quarter was stronger than we started to see a pretty rapid and I think that's why you didn't see the volumes dropped so much the actions we've taken to really cut our rates have happened here.

Here at the very end of the quarter and going into October .

So I probably wasn't clear on that and so I think that's why you don't see it as much in the volume.

But.

Again around 400 to your first question, though.

I would say we have seen others take actions to slow down as we have but not yet to shut down.

But given that the pricing I mean, we are still the most economic producer I would say you got hit in China. We know this is at the cost curve. So we know others are struggling.

Given if this goes on longer you may see people continue to slowdown or shutdown, even if only temporarily.

Very helpful. Thank you so much.

Thank you. Our next question is come from the line of Matthew Blair with Tpa. Please proceed with your questions.

Hey, Laurie you mentioned that.

Autos your build rates are outpacing industry averages.

Specially in North America, and Europe could you talk about your total auto build rate and how that compares to global averages and overall the reception that you're getting with EV penetration.

Yeah.

So on on autos.

I think IHS thought were 6%.

Growth rate, we have seen.

We think it's a little bit less than that.

But I think we have outpaced auto builds.

<unk> significantly across all of our businesses.

I'm trying to remember the number off the top of my head but.

Let me answer the easy question first so E b.

About for the for the legacy <unk> business.

For more than 10% of our volume into auto goes into EV and.

And obviously from a value standpoint, it's much higher than that because these tend to be high in applications. The majority of that is lithium ion battery separator films or <unk>, which is what we will see margin expansion in next year because it is sold out and limited you compare that for the industry.

These make up about eight 5% of the fleet.

<unk> today, so even just in the EV space, where several percent higher.

Then the rest of the industry, and then and as I said everywhere else.

We see that we continue to outpace.

Outpace the industry so industry growth rate just given so Europe was down in the third quarter North America was up a bit we were a bit better in both of those than the industry.

In Asia, I think maybe to give you an idea.

Asia as a strong industry growth about 21% and Asia, 30% in China and with the additional volume from KEPCO the growth be the project pipeline in the Dr expansion stuff, we've done in Asia localization.

We were up well really 27% globally, a lot of that in in Asia, and all of our regions were up about 20% versus last year and again, we think that's a chip availability, but it also shows the strength of our project pipeline in our portfolio and the fact that we tend to be stronger.

And stronger into high end applications, which have not been as challenged as maybe some of the other models.

Sounds good I'll leave it there thank you.

We'll go ahead and make the next question our last one please.

Thank you our final questions come from the line of Matthew <unk> with Bank of America. Please proceed with your questions.

Good morning, everyone.

As we look at the cadence from <unk> of next year, you had kind of mentioned a fairly sharp inventory correction.

Working through the pipe do you expect that will continue into next year.

I guess, how much of this $800 million do you think will come from second half earnings versus first half earnings if we try to think about the arc.

Thanks for that business.

Yeah, I think just given the time it takes we start actions immediately these are already started and.

But all of these things take some time and so I would definitely expect the you know the heritage <unk> business earnings to be more heavily backend loaded in the year than in the first part of the year, just just to give us time to kind of work through the changes we need to do.

Get all of the get all of the commercial team coming from Eminem onto the pipeline model, which we'll be happy to be here across the first quarter.

More of a second half load than first half and the inventory pull down likely more first half Matthew as we work to get that material into the legacy <unk> assets.

Yeah.

Understood.

I guess, if I could just squeeze one more in in the past you've talked about rationalizing foreign capacity on the startup of clear Lake.

But that talk kind of Wayne and I wasn't sure if that was because the macro is better.

Or you had rewritten and some of the raw material contracts in Singapore, So I guess.

With the macro where it is should we think about rationalizing forward capacity is still on the table and if it is not or are the productivity savings of $100 million still reasonable if the macro remains soft.

Yes, let me start with the last question first the productivity of $100 million, it's still stable even in a softer macro.

Was really based on on running two units not quite as full it had catalyst savings and other things in it. So that that continues to exist we didn't need any growth and we will always run clear Lake.

More full due to the raw material advantages there so I don't think.

The project credit associated with with the clear Lake expansion are not at risk again, because they were based on productivity as I said earlier, if we see an upswing in the market and we can run it even fuller.

That's just actually additional credit that will get at that time.

In terms of the global footprint and we talked about this gosh, probably over a year ago or so we really with the change in the contract we've gotten in Singapore utilities other contracts that we have in China, we like having optionality that optionality to new things around depending on what's going on to accommodate for when we have.

Turnarounds and those sorts of things by shifting production to other parts of the world that has more than paid off for us and so we like having that optionality in our footprint. So I wouldn't expect any major changes in that going forward.

Thank you for that.

Thank you we have reached the end of our question and answer session I would now like to turn the call back over to Brendan <unk> for any closing comments. Thank you Daryl we'd like to thank everybody for listening in today as always from around if you have any follow up questions.

Please go ahead and close out the call.

Yes.

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