Celanese Q1 2024 Earnings Call Transcript

[Operator Instructions] And our first question comes from Ghansham Panjabi with Baird. Please state your question.

Good morning, Ghansham. Thanks.

Look, on the macro, what I would say is, look, it's generally unchanged from what we've been saying in the past few quarters. I would say we haven't seen any big positives or negatives this quarter from what we had expected. We called out last quarter, we really thought we were at the end of destocking. I think the movements this year, what we're seeing in the order book, the stability of the order book has proven that to be true. In China, specifically, I'd say, as we said last quarter, China for China is pretty steady. It's okay. It's the exports that are lagging to primarily Europe, but also other regions of the world and we're not seeing some of the pull-through of material because of that lag in exports. The U.S. remains pretty steady, I would say, across all the sectors. And Europe, although we did see a little of improvement since the middle of last year, I would still say it remains lackluster and below normal levels in Europe.

I would also say as we move forward, we're really not seeing some of the seasonal uplift we would have expected at the end of the first quarter and into second quarter. Overall, I'd say all the sectors are pretty steady. I think the notable sector in terms of core demand continues to be construction, paints and coatings, etc. And although I do think there, we would expect as we move into the second half that we maybe start to see the recovery there. I think PPG called out this quarter that they've had 11 quarters of flat-to-down. And they're in second quarter, expecting to see low single-digit growth and some further growth in second half. So we hope that's true. If so, we should see a little bit of recovery there as we moved into the -- into the second half. I mean, I would characterize it much like we did even a year ago, which is we still think people are still spending, they're still spending on experiences on travel. You know, airlines are having a good time, but they're not spending on goods yet. It will normalize at some point, but we're not seeing that normalization yet.

Yeah. Look, I think in terms of kick-starting, it's really just when do people get confident in the environment again? When do we see a shift back to normalized spending on durable goods? Clearly, we could use some China -- or I'm sorry, some Europe recovery would be really helpful. But it's nothing -- it's nothing more than that. I -- like I said, consumers are spending. We just need them to start spending on durable goods again. And again, I do think that will happen in time.

I think your question on China, what I would say is, I would say the new capacity has it been more disruptive than we thought. I would say, yes, because the demand for that, which was being planned to go in, has not developed. So there were some downstream consumers that were being built at the same time. They've been delayed. Obviously, they've been delayed because the demand for those products are delayed. So it is ultimately a demand answer. The good news there is though we are seeing some acetic acid flowing into new applications like caprolactam and others. So again, I think it's a temporary phenomenon. If you look at what's been added, even what's to come, this is not such a large number that I think we're back where we were 20 years ago. I think we -- it's just a question of demand normalizing and catching-up with the supply we have now.

Thank you. And our next question comes from Mike Leithead with Barclays. Please state your question.

Thanks, Mike. I would characterize it as we will hit those numbers with just controllable actions. And if you think about it, M&M synergies are heavily loaded and compounding as we go through the year. And so now that we have full visibility into the data, everything due to our S/4HANA upgrade for the M&M assets. We -- and some -- and also the results of like the shutdown and some of the other footprint actions we took last year, we really start to see those synergies grow and compound as we move through the year. So that's a major impact. The Clear Lake expansion, while we did have a little bit of help in the first quarter from that, you know, that will also continue to grow as we move through the year.

Debt service is another one, which is more heavily loaded into the second half of the year. And I would also say our turnaround cost in the first half is about double what it's going to be in the second half. So we get some tailwind there as well. So I would say everything we know now says we're well in that range just based on what we know. We've not really built in any recovery other than the end of destocking as we've said before. So I think we -- I feel very -- still feel very confident that we will be within that range for full year.

I would talk -- think about that, Mike, in terms of it's really continued from what we saw in the fourth quarter of last year, really no significant changes there. Raws have come down as well. And we've been really mismatched here in Engineered Materials for more than a year-on where kind of pricing for standard grade materials was versus the cost structure. And as you saw with some of the margin expansion we alluded to in the prepared comments, we're definitely catching-up there. But we're not seeing a lot of ability to move pricing here in those spaces. So the team is focused, however, really around continuing to move the pipeline and work on upgrade of mix as we work our way through this year and then into 2025 to address that.

Thank you. And our next question comes from Jeffrey Zekauskas with J.P. Morgan. Please state your question.

Yeah, Jeff I would really point to some of the real standard spaces we participated in last year, really to start moving some of the inventory levels that we had as we finished 2022. And that's really more of the driver than anything else. We also saw a little more seasonality in the medical sector here this year versus what we saw last year. So those are the main drivers.

Yeah Jeff, maybe let me just make a few comments and then I'll let Scott add more detail. I mean, what I would say is we don't have a strategy to run acetyl necessarily at higher volume. The justification for the Clear Lake expansion was really in productivity, right, energy catalysts, shipping by shipping more out-of-the U.S., less out of Asia. So that's not the strategy. Now having said that, we will run all of our assets where it makes sense from a demand standpoint and from an economic standpoint. So I wouldn't say that that's the biggest factor there. What I'd say on tow is we did see a significant uplift in tow this year. That uplift is continuing into this year. And if you look at our first quarter volumes, I think some people have called out more seasonality. We really saw first quarter, you know within the typical seasonality for tow, which is minor. We're talking 1% or 2%. So I think we're seeing -- I would suggest you were seeing enjoying the same markets for tow that our competitors are, but of course, it's -- it is now in our acetyls chain and we have more decision points that we can make around it to really maximize the value of the chain.

Yeah, let me just add. I think as Lori said, until 2024, very similar to 2023, not a continued lift, very stable there. When you look at a year-over-year basis Q1 to-Q1, Jeff, the main driver volumetrically is really just where the industry is. If you recall where we were in the first quarter of last year, we were coming off very high energy prices in Europe in the fourth quarter of '22. European demand was relatively soft. In addition, we were still seeing China dealing with COVID in the early part of the years, which impacted volumes. So that's really the main driver on a quarter-over-quarter basis here in the acetyl business.

Thank you. And our next question comes from Michael Sison with Wells Fargo. Please state your question.

I think as we work into Q2, Mike, volumes will move up a little over where they were in Q1. On a year-over-year basis, relatively flattish. Any differences are more mix-related, as I talked about earlier with kind of where we were on moving nylon last year to really get our inventory levels down. And we will see an expectation that volumes move-up really driven by two things in the second half. One, just as destocking has ended and that kind of normal flow-through, not a real significant restocking or anything, but just slightly higher levels of volume coming from that in the second half. But more importantly, really commercialization of our pipeline. And we went really to an integrated commercial model in Engineered Materials in April of last year. The average length of time projects in our pipeline takes is about 18 months. So we expect kind of the efforts the commercial team has been putting in now for the last year really start to start to take hold and see the value coming towards the end of this year from that.

Yeah. Look, I don't know the exact number where that could end-up. I mean, the way I would characterize it is we expect over the next year or so that EM basically starts contributing at the same level as acetyls from a margin standpoint. And then after that, while acetyls will continue to grow at kind of GDP, GDP-plus a little bit, we would expect margin growth for EM to still be in that roughly 10% range that we've had in the past. So I would think about it that way. So ultimately, there's no like in number, the number continues to grow, but that's the growth rate we expect.

Our next question comes from Vincent Andrews with Morgan Stanley. Please state your question.

Hey, Vincent, thank you. Look, I would say we've been pretty indifferent so far. What we found is shipping channels and stuff where there can be a temporary disruption pretty quickly renormalize in a new way. So I -- we haven't really seen an impact so far. And similarly, I wouldn't expect a big impact if we see some of the issues resolved. I think the market is pretty quick to correct itself.

Yeah. Vincent, it's really related more to the Palm business and it's really the flow-through of methanol since we weren't producing as much of our own methanol in the first quarter. It's the flow-through of that higher-cost product into Palm that gets sold here in the second quarter. That's really the main impact.

And our next question comes from Josh Spector with UBS. Please state your question.

Yeah. I wouldn't expect lower pricing to erode that, James. A lot will depend upon what happens with the raw material complex. We kind of know for the first half what the flow-through of that's going to be. So a lot just depends upon how raws develop in the second half to see how much of that continues or not.

It's definitely still possible based on what we're seeing for the first half. And then again, we'll just have to see how raws develop in the middle part of the year to see what then gets expensed towards the back half of the year.

Our next question comes from Kevin McCarthy with Vertical Research Partners. Please state your question.

Yeah. Look, I would characterize it as for the footprint actions we've taken and there's been a number of smaller actions that we've taken as well, not including Mechelen, which we've just announced, because that will really show up in next year's number. We expect about a $50 million synergy lift on a full year basis from those. And you're right, I mean we're just now starting to see the benefit of Untro, which is the biggest piece of that so there's that. And then I would say, on the SAP, you know, the direct impact, I mean, obviously, we get rid of the TSA, but we've had to add our own people. So that's a smaller number than you might think, although significant. The real -- the real benefit is that we now have one view of the data and we have everything in one system, and it is really helping us with our planning and scheduling and forecasting of demand in Engineered Materials. And so again, we're -- all of that kind of gets rolled into our synergy number and that number for the full year is 150 lift from last year.

Yeah, good question, Kevin. Yeah, let me walk-through how we're thinking about '24 cash-flow. I would say we do expect the same cadence as we saw last year where our cash flow will be second half weighted. Teams are working hard to generate a total result for the year that's roughly consistent with last year. It will be subject to a few timing elements, of course. Outside of EBITDA growth, I would point to these drivers. We are working really hard to produce a working capital benefit to free cash flow this year and that would be driven by further inventory reductions. Right now, we've assumed a $100 million working capital benefit for the year. It will depend on a few factors. I would say working capital, though it will be -- it will be back-end loaded. It should be a use in the first half, particularly as we're preparing for some of these footprint actions, and then a source in the second half.

Either way, I would point out, that's a significant headwind to free cash flow versus 2023 as we had a tremendous year in working capital benefit to free cash flow last year, that was really driven by about $400 million positive cash from reducing our inventory. So I just wanted to point that out. You're right, cash tax, it is an unusual year for us for cash taxes. In total, this year, there'll be about $300 million. That's higher year-over-year by $75 million. One unusual item that we have that will hit us in the second quarter, we're going to pay almost all of a roughly $90 million transfer tax that's related to the previously announced debt [Indecipherable] projects that are currently in execution phase and are key to our cash repatriation plans. We'll pay this one-time tax in the second quarter, but we would expect to be able to recoup that tax in future years through the associated foreign tax credits. It is a big payment here in the first half. So I did want to call that out. I mean, if you think about cash tax of the $300 million, 3/4 of that will be in the first half. I would say cash cost of synergies should be $100 million to $150 million this year. And that's higher year-over-year by $25 million to $75 million, which will just kind of depend on what that final number ends up being and the timing of some of those actions. Positive offsets to free cash flow this year, year-over-year, lower cash interest by about $50 million and a benefit of $100 million to $150 million in lower capex versus last year. So I hope that helps in terms of some of the drivers in our thinking and especially the timing associated with those.

Thank you. And our next question comes from Aleksey Yefremov with KeyBanc Capital Markets. Please state your question.

I would -- Alesksy, thank you. I would say we're pretty satisfied with where we are with our footprint for acetyls. I mean, everything we have is specifically designed to serve a certain region and set of customers and we like having the optionality and flexibility that we have. We've also continued to build-out our downstream. You saw the announcement about new VAE in China, some of the RDP debottlenecks we're doing. And that really is all about how do we continue to build the foundational level of earnings in acetyl and really kind of stabilize our earnings from acetyls. But if you look at just specifically acetic acid, for example, Clear Lake clearly, we believe the lowest-cost, lowest carbon footprint, really important to meet our needs in the U.S. and now into Europe. China really serves China again because of our technology there, we believe, one of the lowest-cost producers in China. And then Singapore meets the needs for the rest of Asia, particularly India and some other areas. And is still very competitive with other sources of supply into that region. So again, I would say, we're always looking at our footprint, what we need to add if there's opportunities to debottleneck, but also opportunities to rationalize. But right now, I would say our footprint is pretty fit for purpose.

Look, I would say the pipeline is our winning factor, if you will, for Engineered Materials and what has allowed us to outperform in our sector. I think that continues to be true, especially now that we're one year since we went into a common system for both our heritage assets as well as our acquisition of M&M. And we do continue to look at it very closely. I will tell you the number of projects being generated is consistent. More importantly, the value of the projects that are being generated is very strong. But maybe I'll ask Scott if he has any more details on that, he wants to add.

Yeah. I mean, we gave a stat last quarter about the fact that we created about 20% more revenue opportunity per sales employee in the second half of last year compared to what we did in second half of '22. And so that is, I think, a really good proof point to how things are moving. The only other thing I'd add is we've been doing a lot of really cleaning up of this new kind of integrated business over the course of the last 18 months. And that will start to stabilize as we get the footprint actions in-place and really get our inventories now kind of back-in line with where they need to be. So I think it will be a little more visible, Aleksey, as we get into the end of this year and into the next year as to being able to see that outperformance versus the various end-markets.

And our next question comes from Arun Viswanathan with RBC Capital Markets. Please state your question.

Yeah. Look, I would say from a volume standpoint, both for acetic acid and EM, it was very much as expected in Q1 throughout the quarter.

And then as we look to Q2, the order book is in-line with the guide we put together right now, Arun. I mean we're through the month of April and we have good visibility here to May. So I think we feel comfortable with the comments we put in the prepared comments.

Yeah. Look, we've had so much variability in the last few years, I hesitate to go much further out than a quarter these days. But look, I think if you look at the run-rate in the second half because it's built on controllable actions, not built on-market that not an unreasonable place to start as you start thinking about '25.

Our next question comes from David Begleiter with Deutsche Bank. Please state your question.

Yeah. I would say, while there was some temporary in pricing, it was pretty small and fairly short-lived. So I would not say we're seeing any benefit from it continuing and the benefit was pretty small during the quarter. And I think that just is reflective of really the lower demand that we've been seeing globally that an outage of that magnitude really didn't move the market very much. And again, I think it's not as much a question supply, but just demand is really still not back at normalized levels, particularly even in the Western Hemisphere.

I don't have an exact number here in front of me. I mean, I would tell you Q1 is definitely the lightest and they continue to build and compound as we move through the year.

Our next question comes from John McNulty with BMO Capital Markets. Please state your question.

Yeah, John, as I said earlier, definitely in-line to be in that range based upon what we're seeing for the first half. And again, a lot just depends upon how things move-in the middle part of the year to see how our cost structure will develop as we get into the second half.

Yeah. So let me make a few comments on that. John, if we look at this year, there were two large -- I'd say world-scale capacities added in acetic acid in China. And again, the impact of those has been a bit more than we thought because some of the companion downstream consumers that were supposed to come on at the same time have been delayed due to just overall demand in the market. Next year, there's really only one smaller unit coming on that we're aware of in acetic acid, some other capacity, a little bit in VAM. Again, it's not enough that it should have a major impact. But we're still not at the whim of the market. I mean we still find opportunities to use both our global and our chain flexibility to really maximize our earnings in this market and try to maintain that level of foundational earnings.

I'd say the other good opportunity, which is developing for us is our ability now to provide sustainable products into the market-based upon the CCU project that we put in at Clear Lake. Now that we have our ISEC certification for methanol as low-carbon material. We're able to offer that to all of our customers in kind of whatever acetic acid products they desire, and we are seeing a lot of interest in that. We also have a sustainability advantage for VAE, which customers are interested in for kind of its low older, low VOC emissions. So I think there are some opportunities we have that are unique to us that others do not currently have at this period in time and we see that demand starting to grow and hope that will become a more significant part of our portfolio.

Our next question comes from John Roberts with Mizuho. Please state your question.

I would focus on the turnaround costs, John. I mean, that was really the largest driver is really offsetting the nylon.

It's -- honestly, John, it's kind of what we always see. In some years, it's more acute than others and we saw it come down a little more than what we saw last year from Q4 into Q1. And it's really just the timing of how our customers build inventory for the new year. And it's -- Q4 ends up usually being one of our strongest quarters and Q1 tends to be weaker, which kind of goes counter to how everything else moves, but that's kind of been the historical seasonality really in most of our medical business.

Our next question comes from Laurence Alexander with Jefferies. Please state your question.

Yeah, we don't see that on the horizon. You know, it probably wouldn't -- if there were more of an increase in-demand, it probably wouldn't necessarily make sense to expand the Singapore plant. But for what we have right now and for that developing market in India, Singapore is sufficient. And we have options to bring material into Singapore from other parts of the world should we see that demand increase.

Yeah, Dan, the only thing I'd add is on a downstream basis, the VAE expansion that we've just done is as much for growth in Southeast Asia and India as it is for China, honestly. We already have a VAE plant in Singapore. That plant was actually supplying some demand in China. We're now able to kind of shift that network really to service growing customers in our VAE demand such as paints and coatings, mortars and adhesives.

Look, I think we've seen over the last several years, you know, pressures on labor cost as has everybody. But I would say through productivity steps and others, that's managed, that's baked-in. And I'm not seeing any significant pressure there for the second half of the year.

Yeah. And on transportation, I mean, this is a common theme we've seen now for a while. And I think that has impacted product movements around the globe for the industry broadly. So really nothing is different now or in the second half than what we've been seeing here for a while.

Thank you. And our next question comes from Patrick Cunningham with Citi. Please state your question.

Yeah. Look, the projects that we were aware of, I think are a quarter or two delayed. I mean, the real question of course, is that demand for those products has to be driven by more demand for exports, quite frankly. And so how long that takes to resolve is really tied to consumer spending, general view of the economy, people's confidence in buying goods again. So I would say while we do expect that capacity to be -- to start-up, whether or unfold or whether it will just replace other capacity remains to be seen. The other thing that I said earlier, which I'd emphasize again is there are some new uses in China of acetic acid that should start taking some of this capacity like caprolactam. So you know, it's -- I can't give you a number now, but I would say, I think we're still several quarters away from starting to see any significant movement in that.

Thank you. Our next question comes from Salvator Tiano with Bank of America. Please state your question.

Let me try to answer the first part and then I'll let Scott take the second part. I would say, look, as long as consumers are buying vehicles, we're happy. You know, EVs do have about a 10% higher content available to us in ICEs, but we still have a very large position in ICE vehicles. As to the extent people are converting to hybrids, hybrids are about 25% -- 20% more content available to us than ICE. So while there are some shifts and shifts in which products, as long as people are buying vehicles, like I said, we're happy.

Yeah. And we have to continue to work our pipeline really to touch on all three areas, whether it's battery-electric, hybrids or ICE, just because each market is developing a little differently. I mean, in China now, over 20% of the market is EV. And so we still have to continue to focus EV there pretty heavily. So it is important that we kind of build that broadly speaking. We have not seen a significant change in terms of the types of vehicles and what our customers are buying and really an impact to our business at all. And in fact, I mean, if you look at things on a year-over-year basis, which is probably the right way to look at it, auto builds were up, I think, around 2% or so globally, our business, our volumes were up about 4% on a year-over-year basis into auto. So I think from that perspective, specifically, we feel like the project pipeline model continues to deliver value for us.

Look, I would simplify it and just say, any additional demand for acetic acid, no matter which end-market it's into is good for us. So again, because we do sell a lot of asset to others as well.

Salvator, I would just add, I think when new capacity starts up, whether it's acetic acid, VAM, etc, it's going to come in and it's going to have a near-term impact. But those things then even out over the subsequent quarters. And our business is really about flexing our global network and that full value chain. And so one quarter, we're going to make money one-way. The next quarter, we're going to make money a different way. And that really is the uniqueness of this kind of integrated value-creation model that we have within the acetyl chain. Great. Thank you very much. Diego, we'll make the next question, our last one, please.

Thank you. And that final question comes from Hassan Ahmed with Alembic Global. Please state your question.

Yeah. Let me just add, Hassan. I think it's important to remember, we have the single largest -- our single unit -- the largest single unit turnaround in the history of the corporation in the first quarter, largely hitting the acetyl chain business. We had some of these dynamics in China, yet the business still generated 28% EBITDA margin. So it's a very resilient business that finds a way to still deliver value even when we see market disruptions or when we see higher costs from things like turnarounds.

Yeah. Again, I think if you look at versus 2023, those things that you called out, out, M&M synergies at $150 million expansion, we've asked them to still deliver $100 million for the year. And we probably have another -- an offset of about $100 million, maybe a bit more for higher turnaround-related expenses as well as some of the non-repeatable impacts from last year. I think the two factors you're not factoring in there is, you know, we will have lower debt services year as we paid down over $1.5 million of our net debt. And that's probably another 50 or so. And then we'll have lower cost flowing through from our inventories with all of the inventory we took out last year and be able to flush out some of that higher-cost inventory. And as we said, that may be the single biggest factor this coming year as well.

Thank you. And there are no further questions at this time. I'll hand the floor over to Bill Cunningham for closing comments.

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

[Operator Closing Remarks].