Q4 2022 Celanese Corp Earnings Call

Hello, and welcome to someone he says Q4 2022 earnings call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, please press star one again to be placed into question queue as.

As a reminder, this conference is being recorded its now my pleasure to turn the call over to your host VP of Investor Relations Brendan I ask. Please go ahead, Brandon. Thank you, Kevin and welcome to the Celanese Corporation fourth quarter 2022 earnings Conference call. My name is Brandon and I ask Vice President of Investor Relations and with me today on the call.

<unk> are Lori <unk> chair of the board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer.

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

As a reminder, today, we'll discuss non-GAAP financial measures 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 both the press release as well as prepared comments.

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

Since we published our prepared comments yesterday, we'll go directly to your questions. Kevin. Let's go ahead and please open it up for questions.

Thank you as a reminder, that star one to be placed in the question queue.

Our first question today is coming from John Mcnulty from BMO capital markets and we do ask you asked one question. One follow up then return to the queue. John . Please go ahead.

Yeah. Good morning, Lori Thanks for taking my taking my question so.

Obviously, a lot of moving pieces out there, but the the tough first quarter outlook for $1.50 to $1 75 of EPS makes the full year call for 12 to $13 look like a like a pretty chunky jump I guess can you help us to bridge that jump in earnings and help us to understand what some of the big buckets are that you.

Back to turn up or take a noticeable step up.

Thanks, John Yeah, but we realize that looks like a big jump up but you know, let's kind of go through the math, we really need to deliver about $3 50 for the last three quarters of the year in order to hit that 12 to $13 guidance. So if you look at that well that seems like a big job it's not.

Known territory to us in fact, that's where we've been every quarter in the last two years up until this quarter, but if I look at just the jump up from Q1 Q on Q2, you know, let's start with asset yield. So in acetyl I would expect you know a 50 to 100 million.

Our increase in Q2 office Q1, we'll start with natural gas. So you know natural gas pricing has come down significantly at the end of the fourth quarter and in the first quarter and especially in the U S. That's a big help for us in asset sales our largest plant in clear Lake we have a lot of other facility in the U S at <unk>.

<unk> from that lower natural gas pricing and with coal staying higher in China, and with crude being reasonably high and steady you know that really benefits margins for our U S based production, which which is a large portion of our acetyl. So if you look just at the natural gas pricing.

If it were to hold through the second quarter, you know that alone is probably more than $20 million of uplift in the second quarter.

And then if we look at things like the Frankford Bam restart them that is being restarted a little bit early based on the good increase we've seen here going into March Fork.

For constructions paints and coding in Europe , a little back quicker recovery than we expected so that western seasonality coming off that's probably another 10 million and then you just have the normal.

Good economics, we typically experienced in the second quarter. So we see destocking I'm really being over we're past Chinese new years, we see improvement in construction activities worldwide.

And so you know we expect to see that same kind of volume rebound.

You know as well as productivity I mean, we last year in 2020 twos are productivity at the high range of our historic 100 to 150 <unk>.

We expect we'll be in a similar level. This year, you know and adding on additional productivity from Eminem for the M sites. So that all goes in there. So we feel very comfortable right now with where energy pricing is that we're actually probably towards the higher end of that range for the acetyl bump up in the second quarter.

And then if we look at engineered materials, including Eminem again, Q2 is typically a stronger quarter for for engineered materials as well for a lot of the same reasons you know we do see the.

Well first let me start with this I mean, you know we have seen just like natural gas and.

Acetyl do we have seen cigna.

A significant drop in raw material costs in the first quarter, which is extending through into the second quarter. This lower raw material costs is let us build lower or not build but now replace higher cost inventory with lower cost inventory. So that alone as we go into the second quarter is going to be about a $40 million left.

For the E M M and M portfolio combined as we go into as we have the second quarter and then again, we have the typical you know the Destocking is it is pretty much finished here at the end of the first quarter.

We actually see really good improvement here in March and our order books.

We see we are past Chinese new year. So we start seeing the lift from that I mean to give you an idea. We have seen you know February we started the month slow, but we are still seeing orders coming in today for February deliveries. So you know this is a big deal usually at this time in the mud.

We are our orders have stopped and we don't see new orders come in until the next month, but we're still seeing orders for E. M for Eminem for February and March, but quite frankly, it has filled up for both the legacy E M and the legacy Eminem businesses consistent with the order book that we received in March of 'twenty.

'twenty two so I think these are all really strong proof points to say you know we are seeing the demand recovery coming now as we're as we're moving through the end of February and into March and we expect that they ought to continue to it continued to grow through the second quarter. You know we are.

<unk> seen a modest improvement in our AR and automotive production bills are pretty much flat, but people are not destocking anymore. So were seeing order patterns restore closer to normal levels for automotive and this is very typical with what we also saw coming out of the end of 'twenty, one and into 'twenty two.

So you know I think we feel really good about it up left in a hum in the magnitude of 50 to 100 million as well and then on top of that we also will have additional synergies from.

From the <unk> acquisition, and we expect another uplift of 10 to 20 million in synergy.

In the second quarter, our first quarter as well.

And like I said not sales getting productivity continues so I think we feel quite comfortable in the guidance that we've provided for Q2 based on everything that we see happening now in terms of raw material energy pricing and recovery of markets as indicated by our order books for March.

Got it.

That's hugely helpful color.

And then I guess, just as a as the follow up just maybe a quick one on the on the debt re dominant styling. It sounds like you're kind of part of the way there now I guess you know.

Can we think about all of this being done by the first half of the year is that the right way to think about or are you guys waiting for something in particular to maybe change in the markets like I guess, how should we think about that because it does seem like the rates are are lower as you're as you're starting to refinance some of this debt out.

Yeah.

John I think you know.

We're gonna be opportunistic here I think were looking and making sure. We have the right opportunities I mean currencies were moving in the right direction, we didn't want to make those changes when.

The dollar was certainly added strongest because then we're as things move.

Certainly from an absolute debt perspective, it would go against us So where we're going to continue to look for the right opportunities there and we're certainly targeting to get it down here in the first half, but just depending on the on some of those movements and where the dollar is that it may linger into the second the early part of the second half.

Thank you next question is coming from Ghansham Panjabi from Baird. Your line is now live.

Thank you good morning, everybody.

Yeah, Laurie in your prepared comments you talked about.

Some of the competitiveness on the <unk> side I think it was specific to <unk>.

Ports from exports from Asia into Europe et cetera.

Do you see that dynamic playing out.

The rest of the year unfolds is it as simple as China, reopens and Theres more localized demand and so that takes care of that or.

But what what are you thinking about at this point on that.

Yeah. Thanks, Ghansham, Yeah look you're exactly right I think there's two factors and we're really starting to see you know early in first quarter, we still had some material moving over from Asia. We expect that will be mostly done in the second quarter and for the two factors one that you called out as we see demand picking up in Asia.

Ah Theres less incentives to put things on a boat and move it to Europe , but secondly, with these low energy prices that we're seeing and the ability to replace our higher cost inventory with lower cost inventory you know, that's resulting in better pricing for our European customers and so you know if the arbitrage we expect we'll be closing here.

At the end of the first quarter and into the second quarter and so you know that I think really helps restore the supply demand dynamics that and of course, we are seeing much higher demand now starting to you I really seen demand pick up in Europe here in March in particular, and we expect that to continue into the second quarter.

So with higher demand, you know lower lower pricing for the customers because of energy and raw material costing.

And then higher demand in China, making it less attractive to ship across we think those three factors actually combine should resolve this situation in second quarter.

Okay, Great and then in terms of the sort of the macroeconomic construct so China you touched on in terms of momentum just given the sequence of events there Europe .

You just touched on that as well what about North America, its an offset as it relates to the slowdown sequentially. How do you see that evolving in 'twenty three.

Yeah. So I would say North America has been a bit like us in the first quarter. So far we have seen more recovery in Europe as we go into March and we have so far and in North America, but we don't have any reason to think you know North America also isn't going to get there.

In the second quarter I mean auto builds are strong we see signs that the stocking is over I'm again natural gas pricing in the U S and raw material pricing.

It should make production very attractive in the U S. So I think you know I think we may be a month or two behind Europe , and I expect North America to come back strongly as well.

Thank you next question is coming from just the cross cuts from J P. Morgan. Your line is now live.

Thanks very much.

Can you tell us what the.

EBIT da of Eminem business was in 2022.

And you know in the old days.

Thank you guys thought it was $900 million in EBITDA.

And.

Plainly, it's operating at a much much lower level can you diagnose what happened that is are these structural problems or raw material problems.

And and you know how much how much of the nylon is sold at monthly contract prices.

And you know.

Right now I've thought eminent.

<unk> business.

Yeah, So Jeff in in 'twenty 'twenty. Two you know we had expected up back at the time of the purchase we expected 2022 to come in at about 500 million of EBIT EBITDA.

Well you know.

Obviously with the year end challenges in Eminem that number was a little bit lower than that.

Now I you know I think you know we.

We had thought originally that in 2022 they'd be at 800 that that's been a more typical number for Eminem. We believed we could grow that to 900 now we're saying 700 for next year. If you look at what happened in 2022, I think there was a number of factors.

You know first is with a take or pay contract that they had for raw material. Although they saw weakening demand. They continue to produce and that led to a lot of inventory and that's going to tie into what I'm going to say about fourth quarter.

Raw materials were fairly high for the year compressing margin for nylon for the Eminem asset as well, but we saw a lot of demand destruction and we saw it especially in Asia. We saw it a lot on standard grades and I think as we talked about last quarter. You know what we saw was a desire to maintain margin.

Eminem, but as a result, they loss of significant volume on standard grades by trying to hold prices when other prices were coming down so volume loss at the same time, they werent raising prices on premium grades, which they could have been doing with raw material pricing going up.

And you know these are the things that we've had to work on so you know we've really been working on pricing over the last three months.

I'm trying to drive more volume and standard grade trying to raise pricing and in other grades we've really been working the product pipeline. We've been working cross selling we've really you know the team has been doing a great job working all of these things to really drive back to where we believe we should be at that 800 million EBITDA run.

Rate by the end of 2023, obviously these things take a few quarters to get going but we do think we'll be back at that maybe kind of historical level Dupont had of 800 by the again by the end of 2023.

So I didn't know if you.

In terms of the contract.

I'm not I'm not really sure Jeff.

The truth is in terms of what percentage of the Eminem contracts are month labor, it's a three month or six months or something longer.

Right. So in terms of getting the $700 million in EBITDA. This year you'd have to average I don't know.

200, or so for the next for the second third and fourth quarters.

How does the profitability lift from 80 to 92.

You know that to 200 level, how do you accomplish.

Accomplished.

Especially because you know when you when you read about nylon six six.

The general commentary from consultants is that there is overcapacity in margin pressure.

It is the background getting tougher, but it's your own.

Uh huh.

Innovation or ways to change the business that's approving it.

What are these dynamics that are lifting attendant adverse environment, if the environment is adverse.

Yeah. So look it's a big piece of it is synergy capture if you look at our outlook now which is at the upper end of the 100 to 135 range for synergies we've achieved about $10 million that we think will get about $10 million of that in the first quarter that at least 120 for three more quarters. So that's about a $40 million per key.

<unk> average uplift now obviously, it's a little bit more skewed towards the back end, but you know, let's just think about average for the next three quarters. So that's about 40 million right. There from synergy uplift that gets you to that kind of 120 to $1 30 range.

And then you know we are getting volume recovery as I said, our March order book is now for Eminem basically where it was in March of 'twenty, two for Eminem and that was still the first part of the year was better for Eminem. So you know we have gotten some volume recovery and Ah you know.

From Vitale in particular and in Asia again auto builds are very consistent and you know theyre not go back to 2019 levels, but they are consistent and so we think with volume recovery, we have been pushing through pricing on differentiated products right. So if you look at all of those.

Things, if you look at productivity as well not counted as synergy but regular productivity at.

At our Eminem plans you know we we.

We expect to probably get another I don't know $40 million to $50 million from that this year. So if you look at all of those things and start adding up those volumes and a recovery you know Eminem was affected in the fourth quarter and early part of first quarter, where the very same factors. We were right with the same destocking with the same seasonality and slowdown.

And and we are seeing them recover from that as well again in March and as we move forward into the second quarter.

Thanks, so much.

Thank you. Your next question is coming from Josh Spector from UBS. Your line is now live.

Yeah, Hi, Thanks for taking my question I guess first I wanted to ask on the taste JV can you talk about how much cash you'd be getting into from from that combination a bit confused by the comments in the release about seven times leverage reduction 12 months post close if that's related with that or not it seems like a big.

Or if it is so can you clarify.

Yeah, absolutely so we expect to.

Net $400 million to $450 million that we can apply towards debt reduction from the food ingredients are from the food ingredients still you know we think you know I have to say, we're really excited about this deal. We're really excited about the JV structure that we've agreed to with Mitsui.

Lee if I back up a bit you know we also at the same time announced the extension of our joint venture for the Fairway methanol joint venture. This has been a great joint venture for US Mitsui has proven to be a really great partner and I think it's been really financially beneficial for both companies as well as well as strategically benefit.

And we see food ingredients being in addition to that strong relationship that we felt with them through the years.

This is really what we were looking for you know we've looked at this this product for some time and thought you know it's not.

Necessarily a core piece of our portfolio, but it is a core piece of our operations in Frankfurt and so by doing a joint venture. We think one will really benefit from the expertise that mitsui has in food and nutrition and their ability to market and help US you know on that end.

We think they will also benefit from us continuing to be able to integrate into our acetyl chain, we provide acetic acid and crotonaldehyde into the and now into the fairway joint venture and we'll continue to do you benefit from the strong partnership that we have as well as the manufacturing synergies because we will continue to operate the joint venture.

It is very embedded into our Frankfurt operation and it allows both of us to participate in growth in what we think will be continue to be a high growth market for food ingredients. So we're based in sweeteners as you know, especially as one of the few if maybe only western company, providing sweeteners anyway.

You know, we see a lot of positive movement.

In terms of volumes and demand in pricing going forward. So again, we're really excited about it and just to reiterate to answer your question, we do expect them.

To be able to pay off another $400 million to $450 million of debt as a result of this joint venture Yeah, and then Josh with regards to the covenants. The way our covenants are structured is a gain on sale of assets is included in the EBITDA and.

And so because this has a very low book basis, and while it's inefficient transaction that 400 and $450 million.

It will be largely gain so you get the gain that goes into the EBITDA piece. Using then the cash proceeds to pay down debt at the same time and there was a partial offset obviously in EBITDA from the 70% that we'd go to mitsui, but that math works out to be because it's in EBITDA about a 0.7 reduction.

<unk> for the debt covenant purposes.

Okay. Thanks, I appreciate that and maybe just one clarification. There is that that gain are you going to exclude that from your adjusted EBITDA and that's in the I guess the debt accounted for EBITDA and in your comments about free cash flow. You know you reiterated the 1 billion plus can you just give us an idea of what the core free cash flow.

We're expecting at this point some of the movements between working capital restructuring et cetera.

Yeah. So for adjusted EPS, We will go ahead and exclude that gain as we do have past transactions and then on free cash flow. We had previously said $1.5 billion of free cash flow, which included about a $200 million improvement overall in.

Working capital you know.

If we see that same 200 million dollar improvement in working capital and we saw inventories move up a little bit just with the lower demand in the fourth quarter than we would see free cash flow likely a little lower than that one and a half just because of the lower earnings that we have so we're still working through kind of exactly how the working capital will play out this year, but.

If we see something in that range, we would expect to be a little bit lighter than the one five.

Thank you. Your next question is coming from Michael <unk> from Barclays. Your line is now live.

Great. Thanks, Good morning, guys first question on pension.

12, and $13 a share EPS gone I believe includes $100 million hit year over year on pension when you talked last quarter about 13 to 14 or share how much pension where you impact through you're expecting at that time.

Yeah, Thanks, Mike so on that.

It's really going to kind of put some of the other buckets in here that unchanged from our previous 13 to 14 dollar guidance.

You know DNA actually came in about $75 million better than we expected.

But it was eaten up.

By a pretty good chunk by that pension so it kind of approach that amount is.

It's a little lower than that 75, but it was approaching that.

And so I think when you kind of largely neutral those two things together.

But it was in that range.

Yeah.

Got it Okay. That's helpful. And then maybe just more of a segmentation of clarification question, but it seems like Eminem EBITDA from reading correctly sort of allocated between earnings and E M and some centralized or other cost and other so if you do deliver say 725 of EBITDA from the eminent business. This year is it correct to interpret that.

We'll actually see it reported or something like a 25 or so higher in E. M. EBITDA, but also I don't know 100 million or so higher other costs to offset that is that the correct interpretation.

Yeah, I think that's that's right Mike. It's it's certainly in that range I mean at the end of the day, we need to get no matter what bucket, it's falling and we need to go deliver the EBITDA over time that we said this business would deliver so it is about getting the base business back up into those.

Ranges that we had originally said at the time of the deal and that $800 million EBITDA, including the other costs in there and then driving synergies on top of that so you know this year with where demand is that given some of the.

Higher cost inventory that had to be worked off at the beginning of the year, it's gonna be a little bit lower but then building that back and then putting synergies is on top of it on top of that is exactly what Tom Kelly and the team are focused on.

Great. Thank you.

Yeah.

Thank you next question is coming from Vincent Andrews from Morgan Stanley . Your line is now live.

Hi, and good morning, everyone. Just a quick clarification around the subject matter of the prior question for Eminem in the fourth quarter, you had guided to $50 million to $60 million of EBITDA and then they're kind of two numbers discussed in the prepared remarks. One was 56, one is 39, which is the actual apples to apples comparison. The 39 are the 56.

It's the 39, yeah, Okay, Okay, and then if I could ask this.

This is the first quarter I can remember and I don't know how long where your volume in automotive was below builds and that takes us through a variety of good bad or indifferent auto environment. So I. Just if you have any further color on sort of why that happened because I kind of remember other times, where you know things where things were tough, but you know your team.

Found a way to you know where your innovation or your activations or <unk> or what have you.

So what what happened this time that was different.

So actually.

And then second and fourth quarter of 'twenty, one what exactly like this we had the same issue we were lower than bills because of Destocking and I think you know there's a number of things that happened I mean people hit the end of the year, They Wanna make where it make working capital numbers. So they destock at the end of the year or a year and.

Tori control.

Prices have been coming down because raws are down and and natural gas with falling to that made people more confident in pricing going forward. So they believe prices going forward are less than they are now and so they chose to draw down their inventory in anticipation of lower prices. I think you know the supply chain issues have been largely resolved.

Around the world and so people are more confident about being able to buy material. So why we saw a lot of build stock in 2022, because people were worried about getting resin you know I think we see going forward people feel that supply chain issues are largely resolved. So the dynamic is actually very similar at the end of 2022.

As it was at the end of 2021 I would say a little bit what's different is usually the fourth quarter.

As the magnitude was a little bit with more in 2022, I'd say, primarily because of Asia and usually are in Asia, we have a pretty good fourth quarter.

In advance of Chinese new year's but this year, because there's a resurgence of Covid in Asia, you know things were quite slow in Asia in fourth quarter as well and so I'd say the dynamic was a little more pronounced this year, obviously Europe was even a little bit slower, but just on the malaise, we've seen in Europe all year.

Sure.

But the dynamic was very similar and I think the reason for Destocking were very similar to what we saw at the end of 'twenty, One and again you know January started slow we've seen improvement here as we've gotten through the second half of February and order books are looking consistent with March 2022 words.

Books for March 23, so we're we feel like we've gotten past these dynamics and now are on a more normal trajectory, where we will meet or exceed which is typically what we've done and you're right. We're very good at that our teams are very creative about pushing more volumes into the market and high margin, we feel like we're back on that trajectory as of March.

<unk>.

Okay. Thank you for all the detail I appreciate it.

Thank you next question is coming from Michael system from Wells Fargo. Your line is now live.

Hey, good morning.

If I did the math for 'twenty three for adjusted EBIT for <unk>. It looks like you need to be between one two to one three in the acetyl chain one three to one four but I guess my question is if the if you think about.

Where they could be longer term.

Maybe 25 26, you know where do you think E M should be able to get to and then if the one three to one four as the new foundation of what would the mid cycle.

It'll change potential be a couple of years out.

Yeah, that's a lot of questions all rolled into one Mike Let me see if I can I can parse that apart. So you know if we look at 'twenty three you know theres a lot of ways, we can get to the 12 to $13 and you know there's a lot of things that could happen in terms of energy pricing and everything else I would I would think of it as it goes.

Ford, we including 23, we expect E M N acetyl to contribute roughly evenly for the next few years.

This year it might be a little stronger on acetyl any M. As you know as we work through kind of the restoration of Eminem base earnings and starts to capture synergies, but I would say for the next several years I would consider them roughly equal because we also have the clear lake.

Project coming on this year, which is going to add another 100 million to asset Hills, we have dam expansions and other things coming on so I think that's a good starting place if we look at that foundational level of earnings and you know what I would say as you know today, we think it's about one to 1.1.

Bill yet.

That was before toe to toe is gonna be you know at or above kind of the $2 50 that we called out at the time of the Investor day in 'twenty. One so that kind of puts you in that one five to 135 range, which is pretty consistent with the numbers you saw but then again, we will add a million $100 million on a full year basis for clear.

Right.

But that that is getting the foundational level of earnings. So we're still operating at very high capacity utilization and acetyl. Despite the softness despite everything else even in the fourth quarter, our utilization was 70.

70% in China, but 90% of global basis, that's still pretty high and that's I think we're going to see maybe a little more volatility in acetyl. There's the market is going to react more quickly to outages due to turn around or unplanned outages or movements in and raw material pricing. So I can't really say, what I think the mid range is.

But I would just say you know there's there's definitely we've seen an asset hills, we can see a pretty sharp spike up in a very short period of time as the market reacts to to short and medium term changes.

Great. Thank you.

Thank you next question is coming from our Solomon from Alembic Global Your line is Iowa.

Good morning Laurie.

Larry obviously in the prepared remarks, a lot of commentary around you.

Destocking restocking and the like.

Was hoping you could give us some historical context as you look at your portfolio.

Uh huh.

In terms of Destocking.

Historically, how long have your destocking cycle lasted what did the restart looks like you know what.

<unk>.

The destocking was over and the like I'm, just trying to get some sort of perspective in terms of you know.

Where inventory levels are right now what the bounce back would look like.

And and the like.

Yeah. So you know I would say historically, we've seen destocking last kind of quarter, especially in E. M, maybe a little bit lesson and out details because they don't have as much inventory.

And I would say I wouldn't even say we're necessarily you see restocking at this point I would say, we're seeing a return to normal levels of demand typically when we see restocking is when prices start to go up and people start getting worried that prices in the future are going to be higher than they are today. So they take the opportunity to.

You build inventory in advance of an anticipated price increase again as I said earlier I think with where we are today, where raws are down natural gas is low you know the anticipation in the market is that prices are going to go lower or stay low and so I don't think we'll really see restocking until we see a turn up.

But we do see a return to normal levels of demand starting now in March.

Understood and as a follow up on the acetyl chain side.

You know you guys talked about how pricing for the quarter was you know Chinese pricing cost curve levels.

Yet despite that you know you guys, obviously I do some facilities.

Yet you generated around 25, 26% EBITDA margins. So I'm, just trying to get a better sense of.

Centimeters cost positioning as it sits right now.

Yeah. So theres I think Theres a couple components to that I think you know in China, specifically, while I believe throughout the end of the fourth quarter and into the beginning of the first quarter. We were at the cost curve in China in terms of the industry our cost.

<unk> is a bit better than that and it has to do with the scale of our operations. The technology that we have and therefore improved cost bases, we have versus the vast majority of the producers in China. So we continue even when the rest of the industry was at the cost curve to make even.

Amount of margin in China, and then of course, we are benefited by the fact that we have a very large facility in the U S. Gulf coast. So when we saw natural gas prices coming off.

And you know at towards the second half of the fourth quarter and as we've gone into the first quarter with low natural gas prices that is a big margin uplift for us versus people, who are producing out of cool or even crude at these at these kind of prices and that opens up windows for us to move material to Europe and other parts of the world out of the Gulf.

Off the coast and so I think it is that global Optionality that we have that global footprint as well as the Optionality, we have to move things up and down the chain that really allow us to continuously deliver high level of margins from what some might consider a commodity business. It's certainly does not give commodity.

Returns.

Thank you next question is coming from P. J <unk> from Citi. Your line is that a lot.

Yes, hi, good morning Lori.

And Scott I'm Laurie do you have a long term view on the competitiveness of your European assets.

And what I mean by that is you know European revamp capacity was shut down is that the marginal capacity that goes in and out with the market like what's the Singapore plant used to do in acetic acid can you just take a step back and explain to us sort of the marginal capacity in Europe and your plans there.

Yeah, nothing for the question P J.

Maybe to clarify so them going down in Frankfurt wasn't because bam couldn't make money in Frankfurt. It was just we saw the demand go down so much towards the end of the year I mean, Bam demand and December was down in the fourth quarter with more.

Then 50% off Q3, so we had a really huge demand destruction in the fourth quarter because of pricing because of the weather because of Destocking because of you know all of those things.

And so.

But even at that I mean, we could we could have run them profitably is not normally the most expensive Bam production in our in our network, but because of the high pricing and we were seeing in Europe last year. It just made sense because total capacity for the globe was down.

It made sense that we cut shut down that facility that was challenged due to energy pricing and moving material from other lower cost energy location.

But we're starting it up now I mean, the March order book for Bam in Europe is really the strongest we've seen in six months. So now we need IV H and it makes sense, where we're gonna be about you know I think that the order book right now is about 85% of what we saw in the third quarter. So.

So it makes sense to start a band we have lower energy prices. So again Frankfurt returns to to you know not being the highest priced one. So again. This is the beauty of our global network. We have the optionality to take units down to skew where we make it based on what is most cost competitive at the time.

And based on where the demand is at the time and you know that just happened to be Frankfurt last year at but it could be something different in the next year, but that's why we like having all of this optionality around the globe.

Great. Thank you and then on Eminem.

It seems like it was really under managed and the last one year of ownership.

Do more.

My name's issues are residing more in myeloma area.

And you know can you upgrade the eminent portfolio because I think you had more exposure.

So is there any sort of imagine that upgrade there. Thank you.

Yeah. So I would say if you look at that portfolio from from Eminem certainly nylon was the most challenged I think elastomers was was more robust than and even within the nylon portfolio, probably high temperature nylon and some others didnt.

We didn't see the impact that was more I would say in an vitale in the P 866 line.

And you know as we've as we've called out before I mean, there were there are many issues around decisions being made around pricing, both positive and negative maintaining volume and standard grades and those sorts of things and.

And you know there were very high raw material costs and take or pay contract that required them to take it. So you know I think there's just a lot that went into that underperformance in 2022, but the good news is these are things that are fixable and this is what Tom and his team have been working very hard on in the last three months is you know moving the pricey.

Getting the inventory down in the fourth quarter, which certainly hurt us in the fourth quarter, but will help US now as we go forward in 2023 at are able to sell lower cost basis inventory more in line with pricing. So I think the good news is going forward. This this is all stuff that is fixable.

And we are working rapidly to do so yeah. The earnings power of this combined portfolio Hasnt changed from when we announced the deal a year ago. If anything I think it's we're even more convicted around that going forward. There is near term challenges and we've been over the last several quarters.

Very clear about the disappointment in the performance and it is requiring a big lift in the near term, but the long term earnings power of these combined portfolios and then combined with the acetyl chain as you look out three to four years is very substantial.

Thank you next question is coming from Kevin Mccarthy from vertical Research partners. Your line is now live.

Yes. Good morning, Lori can you elaborate on the one 3 million tonne expansion of acetyl capacity at clear Lake what are you baking into your numbers with regard to timing of the start up and operating rate you know given the current <unk>.

Market conditions, and then any thoughts on.

How you would see that earnings trajectory evolving through this year and into 2024 would be helpful.

Yeah. So the project itself is going well, we are still anticipating an on time on budget start up mid this year. So we expect to have it running for it let's just call it roughly half of the year at the time, we did the project we called out.

We have the ability to run at one 3 million tons of additional we really did it as a productivity projects. So the savings that we get from being able to move volumes directly to Europe . The savings that we get from catalyst savings energy savings et cetera. So you know out of that 100.

Ear credit, we'd probably will only see about $25 million of that this year.

Because we have startup cost we have ramp up time are all that sort of thing. So I would expect to see about $25 million of that back credit. This year and then next year, we should be at the full 100, now having said that to the extent that demand deliver continues to.

To grow robustly and energy prices continue to be so favorable on the Gulf coast. It will make sense to try to run the unit.

For volume as well what point that we'll be at I Couldnt say at this point, it's going to depend on demand and raw material and energy economics, but if you know if that were to happen that clearly is a higher return case for that project that we had with just the base productivity number that was baked in there.

I see that that's helpful. And then secondly, if I may a couple of financial questions for Scott When you comment on your 23 capital expenditure budget and with regards to the first quarter or what what level of interest expense are you baking into your EPS.

Right.

Yeah. So capital, we still expect to be in kind of that $5 50 to 600 range and you know that where we land there will really be dependent upon where we see the demand recovery as well as the outlook into the out years and as we continue to.

Really put the combined M and Eminem portfolios.

Together and then from an interest expense standpoint, you know we're in that kind of.

600, you know again that $5 $50 million to $600 million.

Range for the year, and we will have about a quarter of that here in the first quarter.

Thank you very much.

The next question today is coming from Frank Mitsch from premium Research. Your line is now live.

Yes, hi, good morning, and congrats Mark.

Marie if you are listening.

Laura I wanted to ask about.

The level of auto builds that you have embedded in the guide for the year end and where you think.

Some of these kind of performed relative to that level of industry auto builds.

Yeah. So we're we're assuming or 2023 forecast is basically assumes flat in 'twenty three to the second half of 2022, So that's kind of like at $85 million range, which which really aligns pretty well with the IHS outlook. This year.

Air, which they're they're forecasting an increase of three 6% that she's got almost exactly the same number and that that really is assuming you know U S and Europe about 5% up Asia up about to you with China being the weakest point at 1% still.

Still I would say you know, we're still about 5% lower than 2019, but we do believe that that worked.

We're pretty consistent with IHS and this we believe auto builds are going to be constrained by chip availability not by demand, we think that pent up demand is still there.

And so to the extent chips.

Be more available I think autos will build.

What other years as we've seen sometimes they're not as available and but we're assuming kind of flat for the second half 2022.

You know I would say.

We would expect our contribution ourselves into auto to be a maybe a couple of percent above that and that's based upon a few things. One is you know where the locations where we're stronger. So historically, we've been stronger in the U S and eat you note with Eminem, they've always been a bit stronger in Asia, but.

Even having said that I think you know we think we'd be a few percent above that.

Thing is the.

Presence that we have in electric vehicles, I mean, we over 10% of ourselves by volume go into electric vehicles from the heritage E M portfolio.

And we continue to see that E. M. E vs are growing at a faster rate than I see if you look at the forecast going forward. So based on that I would assume you know a couple of percent you know kind of low single digit percent that we would expect to be over the build rate in terms of our.

Auto growth.

Got you thank you and.

And I know, maybe a question for Scott I know that.

The comment was Eminem inventory levels, where were really high and elevated.

Given the take or pay contracts ended the year at $2 8 billion in terms of your inventories how do how should we think about.

That the impact of maybe inventory reduction on working capital in 'twenty three.

Yeah.

Yeah as I said earlier, Frank on the free cash flow question, we we'd like to see at least 200 million dollar reduction, which will largely come out of inventory as you work through the year I mean, that's going to largely be dependent on a few things one being able to bring absolute volumes down to depending on what were to transpire with.

Raw materials, and you know I think with with energy and gas already coming down that will give us some wind at our back.

But we really would like to see the volumetric reduction kind of contribute to that 200 are in total and then any any pricing reduction be on top of that so yeah, we're kind of hoping and planning for that that 200 million dollar reduction right now.

Thank you so much.

The next question today is coming from Matthew Deyoe from Bank of America. Your line is now live.

Sure.

Good morning, everyone.

I know you just the term loan covenants, but do you still have to hit the three <unk> net debt to EBITDA by year end 2024 that was stipulated by the rating agencies.

But if I just use consensus EBITDA in your hand up.

Feedback very well be wrong, but like you gave yourself some cumulative cash flow generation, which over the next two years, but that consensus EBITDA puts you at like 3533. So.

Is there a concern internally about this in.

Do you start thinking about other asset sales.

Necessary.

Look I don't think there is a concern internally as as we've said from the time, we did the deal I mean, we there are always levers that we can do I mean from an asset sales standpoint again, we don't feel we're in a position we have to do an asset sale I mean, we did food ingredients because we have the right partner with the.

Structure, we wanted that would give us both benefits and allow us both to participate in the growth in that business.

And so the timing was right to do that and I would say you know we will continue to be opportunistic with our businesses, both our legacy businesses as well as our acquired businesses, if and when we have the right buyer at what we think is a fair price for US we would consider it but you know we believe that although this year has started slow the recovery.

We expect to see this year, our ability to generate cash.

Cash from working capital and others you know.

That we will be able to meet the expectations of the rating agencies. This year.

You know as well as as well as next year and into the future Scott I.

I mean look we viewed this as a near term challenge that required a near term solution and that was to amend the covenants.

We're still pushing to get to that three times levered at the end of 2024.

And and it really starts with US we're talked about generating cash generating cash to pay down debt lower that interest costs I talked about the Eminem incremental interest of 550 to 600 million. We have legacy interests of 60 to 70 million lower that by paying down debt.

And then also find ways at which to lower that interest cost through re domicile and some of that debt as we talked about earlier on the call. So it is really just about systematically bringing the debt down through cash generation.

Okay.

Thank you and I appreciate that.

And then.

On the van and then Eva side, so like I know acetic acid is pretty.

Stable from a supply perspective outside of outside of yourself. What are you doing clearly, but it sounds like calling for like decent famine and EMEA capacity growth over the next two years does that does that.

Packed your spreads I know demand growth there has been pretty good does that get absorbed how do we how do we think about that.

Yeah. So if you look at what's happening.

There are some builds going on so seek asset we do expect one startup in 2023 late 2023 in China and we're also expecting a few bam startups between 'twenty three 'twenty four.

But if you look at the the typical growth that we see for where the acetyl chain.

We need a full planned kind of every other year or so so I you know I don't think the rate of growth that we're seeing is inconsistent with the growth in the world. We are still at fairly high utilization.

Again, I think the fact that we are at high Utilizations will keep the volatility a bit more so we'll do as we saw in fourth quarter. You made during periods of low demand and seasonality go to the cost curve, but that can recover quite quickly.

But I don't see it having a major impact on our on our margins going forward on on kind of a long term or full year basis.

Thank you. Our next question is coming from David Begleiter from Deutsche Bank. Your line is now live.

Thank you Laurie and the comments you mentioned some destocking in the Americas in paints and coatings and construction applications keep give a little more color on what you're seeing there and where we are in that process.

Okay.

Yeah. So we look we.

Really see.

Seasonality, because obviously when it's cold and snowy in thing people arent painting outside.

And so.

You know that that typical I would say also this year, because we're coming off a period of high pricing.

For many of these materials because of the higher raws and the higher energy we saw during 'twenty 'twenty. Two I think people took the opportunity much like we did in E. M. For example to draw down some of their inventories through the end of the year and get rid of higher cost inventory to make room for lower cost inventory.

Going forward with anticipation of lower energy and raw material costs and pricing.

So I think that's really the dynamic that we saw this year again in the U S. We haven't really seen the pickup yet as.

We have say in Europe , but I think our I think it will come there's there's no. There's no structural reason that we think paints coatings and construction is going to be off in 2023 versus 2022.

Understood and just an asset he was referencing a 60 million dollar earnings increase personal last trough.

Can you try to bridge that gap, what's improved in your operations because you've always been a good operator in this business, but you seem to have.

Taking a step ups and so over the last couple of years as well.

Yeah look I think it's a number of things we've continued to invest in our acetyl assets both foundational Lee so investing in reliability and quality energy savings productivity. So we've continued to improve our cost basis from that we've improved our contracts in.

Many of our areas for raw materials for the acetyl chain I think that's probably the primary improvement we've seen in our skills over the last few years. The operating model. We use in acetyl is taking advantage of that in the end as well as geographic Optionality.

Is really strong it's running really well, but I would say, it's really the improvement in productivity the improvement in contracting as well as some of the minor kind of capacity adds at capacity creep that we've had across our facilities, which gives us additional optionality and the addition of Isla attacks.

Which gives us further optionality it down into the chain, which is especially helpful. As we move into these kind of slower winter months.

Kevin we'll take one more question please.

Certainly our final question today is coming from Judy Pandya from on field Research. Your line is now live.

Yes.

Hi, Thanks, a lot for taking my question.

Just basically wanting to understand in the context of capacity shutdowns in the upstream side in nylon chain, how do you see yourselves with regards to positioning in the value chain is fundamentally more positive for you or is it fundamentally more negative for you.

In this context from Hugh.

Well prior to the acquisition of Eminem, obviously, we were a big buyer of nylon and and would've been unhappy to see shutdowns in the upstream because that would lower price, but now that we both polymerize as well as compound nylon I would say generally I would consider that.

A help for us as it tightens up the amount of nylon being produced and should raise value across the chain.

Thank you we reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.

Thank you we'd like to thank everyone for calling in today as always we are around if you have any follow up questions. Kevin. Please go ahead and close out the call.

That does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.