Celanese Q2 2024 Earnings Call Transcript

Good morning, Josh. Thanks for the question. If we look at our Q3 guidance, I would say, we're generally expecting things to be unchanged in terms of overall market conditions. We do expect a little bit of growth in auto builds in the second half, particularly in China, which I think is consistent with what others in the industry are saying, but generally everything else is pretty stable. We're not expecting a lot of downturns.

That said, we do continue to expect some moderate growth in our volumes based on the strength of our product pipeline. We also expect some continued growth in margin based on synergy pull-through and also pull-through of lower cost raw materials in inventory. So I would say, we don't need market improvement. I guess maybe other than that, a little bit in auto, in order to achieve our second half outlook from an Engineered Materials standpoint.

I think a lot of it is the work around the integration. We now have access to customers with Celanese materials that we previously didn't have, because of the contacts that our heritage DuPont had. It's particularly in non-China, parts of Asia. And similarly we have some outlets for some of the heritage M&M materials that we didn't have before.

And I think it's really, again, the project pipeline. I mean, we've been working now for, well, for a long time, but with the entire portfolio for 18 months to really identify those new customers, those new orders, those new areas within existing customers and make sure that we're strong across all the platforms and auto, ICE, Engineered Materials and hybrids. And we called out last quarter earnings, in fact, some of the applications we're getting on EVs with nylon, which is, which is an area where DuPont didn't necessarily play.

Yeah. If you do the math, you would expect that we need some additional lift in the fourth quarter. I would put it down to a few things. We, it should be our largest quarter of synergy capture, for the Engineered Materials. We should start seeing more of a full year run rate on Clear Lake, as we'll have gotten through all the effects of the supplier outages and a little bit from Hurricane Beryl in the third quarter. So that will be an uplift there.

I would also say, our mix has changed. So with the acquisition of M&M, we now have a higher presence in China. And so we wouldn't expect as much seasonality, now in the fourth quarter, as we've typically seen with the heritage Celanese portfolio. So all of those things come together. Again, we're not, other than this a little bit of uptick that's being predicted in auto. We are not really expecting material conditions to change. So, it really will be the results of kind of the self-help, the activities that we've undertaken over the last 18 months.

Yeah. The one thing I'd add to that, Mike is, is the work we're doing in the commercial organization, in the Engineered Materials business. We integrated the commercial teams in the early part of Q2 last year, and the average length of time that projects sit in our pipeline is about 18 months to 24 months. So we're really coming up on that kind of first 18 months plateau here at the end of this year in the fourth quarter and going into next year. And given kind of the trajectory we've seen on the success of the volume lift from Q1 to Q2, we're really starting to see the benefit of that model play out with bringing M&M into that EM business. And so you do have a little bit of an element of that as well from how we see the pipeline developing at the end of the year.

Yeah. Look, things can always get worse, right? And we've seen that, but I would also say, things, things have been certainly very challenging this year, and the results that we're delivering this year are really based on the remarkable efforts of our teams and their ability to innovate, the resilience that they've shown, and really looking under every rock for sources of value. So, if it gets worse, that will continue. I would say, Europe for all practical measures has been in a near recessionary kind of condition. So, we think it's going to be stable based on what we can see in our order books right now, certainly for Q3.

As we go into 2025, we will continue to have self-help, which will help lift us in '25. I think if you look at '25, we can think about the run rate that we'll see in the second half of the year continuing through '25. Then we'll have another tranche of M&M synergies on top of that, as well as full productivity from Clear Lake next year and probably some additional interest rate benefits as well. So I think, the things that we've seen this year will continue to compound into next year and raise the 2025 results. But frankly, it's just too early to tell what the fundamental economic conditions are going to be in 2025, yet.

Thanks for the question, Mike. We are still in force majeure. The units obviously are restarted, running well, but it is a longish supply chain in the western hemisphere. So we're in force majeure till we can reestablish those supply chains into Europe, which is the work going on currently. But we fully expect that we'll lift the force majeure sometime in this quarter.

In terms of restitution. We're really just focused right now and have been focused in the second quarter on working with our suppliers to understand what the issues were, how we could get through them more quickly, how to address reliability issues going forward, how to make sure that we maintain really good relationships? That's really been our focus now. And we'll have discussions about any, any form of restitution later.

Oh, I'm sorry. I just missed it. Yeah. So, this quarter, second quarter, I would say, it was about $35 million. And then next quarter we'll see another $5 million to $10 million.

As you called out, Mike, I mean, we definitely saw price pressure on raw nylon, polymer, this last quarter. It has definitely gone down, and it's, it's affected some of the margin uplift we expected from pull-through. That said, I think this really points out the benefit of the strategy, we took though to shutdown standard grade polymerization at Uentrop. And really be able to give ourselves flexibility in terms of where we choose to source raw nylon, polymer and compounded for our customers. So that's really paid off. We would have seen more of a hit this past quarter, if we, if we hadn't done that.

I would say, on the other products, not as much pricing pressure as margin pressure as we've seen some increase in raw materials, especially think about palm [Phonetic], where we've seen some, some increase in ethylene. So those being the two biggest, I would say, again nylon, its priced, but mitigated by the steps that we've taken; palm, we've seen pressure on ethylene pricing.

Yeah. Thanks for the question, Jeff. Yeah, with the suppliers that we have, and we've talked about multiple suppliers, was really around several different raw materials that we source.

Yeah. We're not talking about the specific materials, Jeff. I mean, at the end of the day, we talked about acetic acid, and we buy several different raw materials for that.

Yeah. Honestly, Jeff, it really does fluctuate week-to-week region-to-region. And we are looking at kind of where the different markets are at, and kind of where they're trending based upon kind of where the fundamental supply/demand dynamics are. And that is, is going to be kind of one way in one geography for the first part of the quarter and maybe a little different.

I would say, in general, we tend to be pivoting more as we talked about last quarter, in Asia more further downstream. We've seen more opportunities in our emulsions as well as our redispersible powders business to be able to grow in some of those areas. We talked in the prepared comments about some of the, out of a kind substitution that we've been successful driving there with the expanded capacities that we have.

In addition, with those expanded capacities, we've been able to really work with our customers in India, specifically to kind of help develop that market and really start to drive there. So that has been a nice growth area for us more on the Asia side. And I would say, it's a little more balanced than where we're selling in the Western hemisphere.

On a real-time basis, Ghansham, I would say, stable is the right word. Again, I go back to auto. Auto actually has been a little stronger in the US and Asia. Europe has weakened year-on-year. But globally, auto has been pretty stable. And we do see, especially in China, some further strengthening in the second half. Consumer and electronics, again, pretty stable globally. But in our own, own portfolio because of what we've been able to do through the project pipeline, and the good work by our teams on the ground, we are starting to see some growth in consumer and electronics. We've had strong Q-on-Q growth in medical implants, which is a little bit unique to us and as expected.

And we really are not destocking the cadence and consistency of orders. It continues to improve. We've got a few percent growth from that. And really, I would say, overall, I call the market stable, but we're starting to see a little bit of volume growth in Engineered Materials, anyway just because of the project pipeline and the revenue synergies, et cetera.

I think in acetyls, again, stable is the right word. It is just, it is stable for construction, paints and coatings, specifically that sector at a, at a very low rate. And we thought we'd start to see some seasonal uptick there. We have not seen that in the second quarter, and we're not anticipating it now for the third quarter as well. And I think that, that's true for, for all regions.

But to put it in perspective, for the company as a whole, I'd say, remind you that 25% of what we make is auto. And auto has been stable to slightly up this year. Everything else is less than that. So, we're really seeing the value, I think in our portfolio, the diversity of our portfolio and the ability that has to help us stabilize earnings and buying pockets of improvement.

Chuck, so you would take that.

Yeah, Ghansham. I would say, actually there are a couple of things in our components of our free cash flow in '25, which will get better. It's a very heavy year for cash taxes. I've tried to talk about a lot and explain. Cash tax will be significantly lower next year. Our cash interest will continue to drive lower next year as we, as we pay off our debt. I don't see our capex changing materially while we're hearing our deleveraging phase, right? So we've done a lot of work on, on our inventories as well. So, there's actually a few things, next year, that we built in cash positives versus 2024.

Yeah. I would think about it, really in, in four buckets. So the first bucket is, what you called out the $45 million or so associated with our supplier issues this year. There's probably another $40 million on top of that of Clear Lake productivity because of the timing of when all this happened relative to our startup, et cetera, that, that $100 million of productivity. We won't get there's about $40 million more of that. So that's about half of that, of that step-up that we would expect, have expected to get to foundational earnings, for, in that dollar.

And then the other part of that, sorry, I'm thinking about '25, let me back up. So for your question, which is really about the dollar we went down. Again, it's the same, but so we have about, nearly half of it is coming from that. Then we have, I'd say, the issues we're having around construction, paints and coatings. And it's really more there a question of, of margins in the acetyl business.

And then on the EM side, which is the third bucket, it is really the question of what are we able to pull through on raw materials, because as we've talked about with palm, margins being compressed and nylon margins being compressed, but one, because of raw materials; one, because of pricing. We had said we may get as much as 150 pull-through in, of lower raw materials. We're probably only going to get about half of that this year. So I would think about it that way.

Yeah. So when you think about '25, as I said, the run rate we see in the second half, I think is a good indicator as a base for '25. And then you think about, we also, of course, in the second half, we will get the majority of that Clear Lake supplier issues will have been cleared off. We'll start getting some more productivity.

So, if you look forward, I would think about synergies. We will definitely have a good tranche of synergies next year, similar to what we've had this year and last year. And then we should have, we should have a little bit of additional help from turnarounds as well. And then, of course, we have some additional help from interest rates.

Vincent, it's, it's hard to say. I mean, we make adjustments all the time to our production. And so we'll continue to look at that. I mean, it's a call that happens daily just about in the acetyl team is what we should be making where based on, on where the markets are going. So, I don't see this necessarily changing it. You're right. We didn't see much price response with the shutdown are with the loss of production during that time. But I think that just reflects how really weak the demand environment is for constructions and coatings. Scott, do you have something?

Yeah. I mean, how I would add to that, Vincent, is it's kind of going back to what we talked about earlier is, we're constantly looking at, at matching rates with where that demand is, and where we can maximize that really on a weekly and monthly basis. And assuming that we are able to, to get back the key raw materials where we had multiple suppliers that had issues on that, then it's going to give us the ability to have that optionality to kind of operate the chain as we normally do. And so we're rebuilding our inventories now and getting that flexibility back and to be able to get that flex, which is just going to kind of depend kind of where things are from month to month.

Yeah. I think if you just look at the low margins that are associated right now, I mean, China has been basically at the cost curve. So all these new units have started up and they may be slightly advantaged that, that given the low demand in China, especially in some of the areas like construction, but also EBA, where we've seen quite a downturn here recently. That material, quite frankly it's more affordable for them to ship it, and put it in other parts of Asia, than necessarily to get it to China. So, I think it's the economic of taking that demand into Asia, which has left the channel to Europe more to the US.

Yeah. Look, Matt, I would just say, we really never comment on what specific assets or processes that we are in. We are actively working multiple opportunities now on various assets. We've always been very clear, that if our assets are worth more to someone else than they are to us, we are open to look at divestment. And of course, the timing of that is unpredictable. So, I can't comment on any, any specifics.

Yeah. The only thing I'd add is, we have stated that we do like having an integration in methanol, somewhere between about 40% and 50% of our total needs. And we think that gives us kind of a nice balance from being in the market, much like we articulated we're now doing with nylon. We like being able to buy and make a little bit and be in the market for a portion of that. For methanol, we consistently relook at what that right balance is. And we've landed right in that kind of 40% to 50% range.

Are you talking interest expense?

Yeah. I would, there's some moving parts in there. There's some short-term revolver draw and there is, there is the debt paydown. When you look at it, some of those bonds that we're paying down have really low coupons. One of the maturities will swap down to 1%. At the same time, you've got cash that you're using to pay that down, that's actually making really good rates. So, I do expect a decline in interest, a slight decline in the second half of the year, I'd say, in both Q3 and Q4, the interest expense on a net basis should be a few million lower than you see in Q2.

Aleksey, our focus is really on kind of controlling the things that we can control, as Lori mentioned earlier, and launching new projects from our pipeline model. As Lori mentioned, we are assuming very similar landscape in Q3 overall to what we saw in Q2. So we're not necessarily baking that in to our base. It really is about the raw materials flowing through. And also as we launch new projects and new opportunities getting a mix uplift from that. So, I see that being the larger portion of margin expansion.

Yeah. Look, Aleksey, I would expect about half roughly this year and then the other half next year, in addition.

Yeah. What we said in the past is our maintenance right now, most years is going to run between $300 million and $350 million, and then the balance of capital we would spend each year is going to be for productivity and growth. So really kind of the earnings growth piece of it.

I would just kind of remind you that as we've said historically, we have been able to generate a high teens, low 20% return our entire bucket of capital. So, that tends to be, we do focus on returns overall on all of our capital, but maintenance is in that $300 million to $350 million range.

Yeah. It's really the run rate that we're on, and the actions that we've taken. I mean, most of the synergies this year are on the cost side of the equation. There are some revenue synergies, as I alluded to earlier, but it's mainly cost and the actions that we've taken. We made several announcements around our manufacturing footprint. Those are rolling in. The Uentrop facility has been shutdown, and we're kind of ramping up servicing customers from other locations now. We'll have the next site, which will come out of the network here in the fourth quarter.

And so with some of those announcements as well as some of the actions we've taken on the functional side of things, such as implementation of our IT systems on an integrated basis, the benefits of that really were always more second half weighted than first half weight.

Overall, each product line has a different kind of percentage that's weighted towards spot versus contract. And each region is a little bit different. I would say, on the acetate tow side of things, things are a little lower percentage that is spot versus contract. Most of that business is contract. In our other product lines, in acetic acid, VAM, emulsions for example, it's different by region. And so I think just with the constraints that we had due to some of the supplier outages, we just, we didn't have the same flexibility that we typically do to be able to flex our value chain in the Western Hemisphere, which limited some of those opportunities.

It's been very stable. Our medical business has been a key growth area for us. It has been an area focused really around growing in the areas where we can be successful in picking some of the winning spaces, but we've talked a lot about implants. We've also talked a lot about drug delivery, continuous glucose monitoring, a lot of different megatrends there that have been useful for our polymers and we've been working these opportunities for a long period of time.

Our medical implant business in general, certainly is getting better each year, but you are going to have some fluctuations from quarter-to-quarter. So I said, that's really not demand-related. It's just kind of more normal, normal order patterns. And our business outside of implants has been extremely stable and growing.

I don't think what we've experienced this on would change our view. I mean, we always want to have the flexibility. If you look at this past quarter, we were unable to make because of our supplier issues in some instances. And so we actually went into the market to buy to the extent we could, but at a higher cost. I mean, that's not ideal, but our first priority is to keep our customers whole and to meet our contractual commitments with our, with our customers. So in reliability situations or turnarounds or whatever, having that ability is good.

And then the other side of that is like we've seen in nylon when the margins for raw polymer got so low. It is really helpful that we had taken the steps to shutdown Uentrop and put ourselves to where we could be buying raw polymer on the market in what was a very low, low-price situation, certainly lower than we would have been able to make it ourselves. So again, I don't think our view is changing at all, in terms of wanting to always have that ability to make or buy depending on the economic situation. And also help us through periods of operational shortages.

I mean, look, nylon is no different than the rest of our portfolio in Engineered Materials. You kind of have three categories of business there. You have a standard grade category; you have kind of a spec-in category, where you have more competition; and then you have the really specialty new applications area. And it's really important that we play in all three buckets there, just because customers oftentimes are buying all three, and, and we want to make sure we're also filling out our assets.

And so it is, while the competitiveness in the standard grades is definitely there, there's still really good opportunities kind of in that, that spec-in and specialty area. I mean just a simple data point in the first half of the year, we actually closed over 400 projects in our nylon business using the pipeline model. That's a significant step-up from the second half of last year. And so it's a good proof point that what we're doing there and really the commercial team's focus on working with customers and building really nice differentiated business for the long-term is going to pay off.

We're going to have to participate in the basic blocking and tackling part of the marketplace. But having that flexibility, Lori, just talked about is so critical in us kind of building this more contemporary nylon model, that can be overall successful and can continue to grow.

Yes. A large chunk of that is, is some of the footprint actions that we've taken, and we've been building inventory now for a number of quarters. So, I wouldn't look at it as kind of being a big benefit in Q2, in particular. It's kind of been a gradual uptick. We also just have some kind of normal. We have certain products that have campaign runs. And so you'll have a little bit of an uptick from time-to-time and then a downtick. So, I wouldn't look at it as being materially different for that piece than what we've typically seen.

Yeah. So let me clarify itself, because probably my comments weren't clear before. If you look at '23, we had $100 million of synergies, than if you look at '24, $150 million. And so my comment was, look, I don't have an exact number yet for '25, because we've been very focused on '24. But I think our synergy should be based on the actions that we're taking here this year in the same range as the last two years. So somewhere in that range.

And then the remainder of the step-up in '25 is really the improved performance of acetyls with no force majeure, a full year of CLK productivity, and then we should have some further interest rate reductions. So those are the things that I know about for 2025. But as I said, it's still too early to give any number with confidence on 2025.

We are expecting some uptick. Some moderate volume increase, I would say, in volumes into automotive.

I mean, tow business has been very stable, Patrick. And the contracted piece of the business has performed as expected. Again, as I mentioned earlier, the non-contracted part is a small percentage. It's just we did see a little bit of inventory reduction from our customers in that part of the, of the sector during the second quarter. So, it, we don't expect it necessarily to continue going forward.

Look, we're really proud of the team. I mean, the team has come together and embraced a different way of operating here. And we're taking the ideas really across each function in the organization to really go and build out a model that we can be proud of that can deliver greater than 25% EBITDA in any economic environment. And that's our target. We're early innings. I mean, we've had some good success. We're seeing margin expansion, as we talked about. We're seeing nice wins coming from our project pipeline, but we have to continue to work the cost side of the equation. We have to continue to focus on really bringing our organization together to embrace the pipeline model and continue to elevate the returns that we're getting overall from the business.

So depending on what the market gives us, we're going to have to pit it, much like we do in other parts of our business, both in acetyls and EM. And it's building those muscles to be able to adapt as things change from quarter-to-quarter.

John, that's really not where we're seeing the pressure from. I mean, there's a lot of consistent players in the plastics market. So, I wouldn't say that's been a material issue.

Diego, we'll make the next question, our last one, please.

I would think about it as, we weren't able to capture it here. There's no guarantee it will be there next year. If you think about the cost of inventory we're building right now is, will be what we see in the first half of next year, at least, in the Engineered Materials. So, I can't count on that for next year. I mean, we just have to see how cost of inventory goes for the rest of this year.

So John, some of the uses that those plants were expected to serve were things like caprolactam, which is new, PVOH, EVA, I'm not sure about the caprolactam plan, if I'm honest. But PVOH, I think, is up and okay. EVA is up from what we know, but honestly, EVA demand right now or not EV demand, but utilization of the EVA plants has gone to 70% [Phonetic] or below from what we know. So again, just because of the softness right now in solar panels. And so I think while it may be up, we're not seeing those plants consuming the volume of VAM that we would normally expect.

Yeah. John, really, the real cause of that is the end-use demand, particularly paints, coatings, construction and some of the solar space, as Lori mentioned, are just are weak. And so yes, while we've seen capacity come on in acetic acid and pricing kind of move up and down, our margins have been largely stable now for quite a while. We've seen compression in VAM margins because that construction sector as well as solar has been so weak. So, I think that's more of kind of where that compression has been seen.

Thank you. We'd like to thank everyone for listening in today. As always, we're available after the call for any follow-up questions. Diego, please go ahead and close out the call.