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spk09: Greetings and welcome to the Celanese Corporation's second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brandon Ayash, Vice President of Investor Relations. Thank you. You may begin.
spk19: Thank you, Daryl. Welcome, everyone, to the Celanese Corporation's second quarter 2021 earnings conference call. My name is Brandon Ayosh, Vice President of Investor Relations. With me today on the call are Lori Ryerkirk, Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer. Celanese Corporation distributed its second quarter earnings release via Business Wire and posted prepared comments about the quarter on our Investor Relations website yesterday afternoon. As a reminder, we will discuss non-GAAP financial measures today. You can find definitions of these measures as well as reconciliations to the comparable GAAP measures on our website. Today's presentation will also include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found at the end of the press release as well as prepared comments. Form 8K reports containing all of these materials have also been submitted to the SEC. Because we published our prepared comments yesterday, we'll now go ahead and open the line for your questions. Darrell, go ahead and please open the line.
spk09: Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We ask that you please limit yourself to one question and one follow-up question. One moment, please, while we poll for your questions. Our first questions come from the line of Duffy Fisher with Barclays. Please proceed with your questions.
spk10: Yes, good morning, and congrats on a nice quarter and a big raise. I guess two questions for you. First one, Lori, I think either on the Q4 call this year, the Q1 call, you talked about one meaningful slug of new acetic acid capacity hitting the market this year at a competitor. And that was going to be around mid-year, as I recall. So one, I just want to see, you know, have they been marketing that product? Is it producing? And what impact have you seen that have on the market? Or do you anticipate that having on the market?
spk14: Yeah, thanks, Steffi. Yeah, so we do still expect that to hit. It's not started up yet. It hasn't hit the market yet. It's about 500,000 tons in China from Hawaii. So we do expect it to hit. I would say, you know, it may contribute to moderation as we go forward in third quarter and into fourth quarter. But if you think about it, you know, 500,000 tons is just really a little bit over a year's growth. So it probably won't have a significant impact in the market we're in today.
spk18: Yeah, and Duffy, I think it's important to remember this is not a new player for the Chinese market. They have two plants already in the market. So it's somebody who's in the market who's adding more capacity.
spk20: Fair enough.
spk10: And then just as a follow-up, I mean, if you look, obviously your guidance for the year has gone up a lot from earlier this year. When you think about your decision-making, your ratios, net debt to EBITDA, dividend payout based on earnings, how do you think about that change from where you started to where you are today? What's the right level to think about as something you would kind of call structural to make capital decisions off of? What's the right level of profitability to think about?
spk14: Yeah, I think as we go forward, if we start thinking about 2022, We're really thinking about, you know, a foundational level of earnings for Acetyl kind of in the 900 to a billion range, you know, growing into that range over the next two years. You know, we're really thinking about engineer materials closer to 700, and then if you add Sandoprene on top of that, you get to kind of that 750 to 800 range. And then you think about acetic acid, you know, right around, you know, 60 million a quarter. And so I think that would be kind of the right level. I would consider those pretty foundational levels of earnings at this point in time.
spk10: Great. Thanks, guys. Thank you.
spk09: Our next questions come from the line of Doncham Punjabi with Baird. Please proceed with your questions.
spk12: Thank you. Good morning, everybody. Laurie, in your prepared comments, you made some comments on China's acidic acid pricing and how it progressed throughout the second quarter and into the third quarter. Is that decline a function of purely a supply normalization, or is demand in the region starting to moderate? I guess I'm just trying to get a macro pulse on China in context of the narrative that, you know, it's in the market but a slowing in the region.
spk14: Yeah, I think it's a little bit of both. So I think we are seeing some supply stability or, you know, Of course, it varies day by day, but we are seeing some supply stability as we've come out of URI and Western Hemisphere supplies have been more stabilized. Now, we have been in a period of higher turnaround in the Western Hemisphere this last quarter, so we expect some of those plants to come back online. As some of you called out, there are some turnarounds happening in the third quarter in China, but I would say kind of within the normal level. So I think, you know, I'd say supply has certainly stabilized since first quarter. But I would also say, you know, demand, while it continues to be robust, we are seeing some pockets of lower demand potentially going forward with COVID and the Delta variant, and especially in Southeast Asia. So I think it's a little bit of both. I think what's interesting, though, is if you look at the moderation that was called out in China pricing, You know, it's really a very slow moderation compared to what we saw, say, in 2018. And we think that is because it is demand-driven as much as supply-driven, whereas 18 months you got the supply back, it dropped very quickly. And, you know, if you look at recent prices, I mean, prices in China have been really stable over the last, call it, week. And, you know, we think that's more indicative of the slow moderation we expect to see through the remainder of the year.
spk12: Okay, that's helpful. And then in terms of, you know, the inventory rebuild, I mean, what phase of the rebuild are we in at current? And then also your comments on 4Q earning seasonality being minimal. Can you just expand on that as well?
spk14: Yeah. So, you know, inventory rebuild, I can say we're in the pre-rebuild phase still. I mean, everybody's talking about wanting to rebuild, but we are not seeing volumes being rebuilt in the Acetyl supply chain or really in the EM supply chain as well. So I would say there is a desire to rebuild, but both businesses are still supply constrained, not demand constrained. And so I'd say, you know, we still have a long way to go on the rebuild. I would say, in fact, our anticipation is it will last well into 2022. And then, sorry, your last question. Yeah, you had a second part to your question.
spk12: The fourth Q is earnings seasonality, sorry.
spk14: Yeah, thank you. Yeah, and that's exactly the reason we're saying we expect less seasonality in fourth Q. Because we do expect as prices continue to moderate slowly, we will see people starting to rebuild as supply is available. So if you think, for example, about paints and coatings, right, that's a market where you typically see a good bit of seasonality in fourth quarter. But we know our paints and coatings customers have no inventory. So we anticipate they will use the fourth quarter to rebuild their supplies in order to be ready for another spring painting season. So we really are expecting much less seasonality in acetyls. And then in EM, you know, slightly, we usually see some drop off in the western hemisphere. in the fourth quarter. And for all the reasons, because we've been supply constrained most of the year, we expect automotive as well as other end uses to be stronger than typical in the fourth quarter.
spk12: Awesome. Thanks so much.
spk14: Thank you.
spk09: Thank you. Our next question has come from the line of John Roberts with UBS. Please proceed with your questions.
spk04: Thank you. Could you talk a little more about the fiberglass shortage? Ever since PPG sold its business to Nippon, we really don't hear much about fiberglass for plastic reinforcement.
spk14: Yeah, you know, we have seen a real shortage here in fiberglass. I'm not sure I can really articulate all the reasons between how it started, but, you know, what we do know is really all of the players right now in fiberglass are short. And while we do see you know, players stabilizing, we still expect it to be, you know, well into the fourth quarter or even into next year before we see a complete stabilization of the fiberglass market.
spk04: Okay. And then I don't know if you can answer this second one, but when Ceramtech and Celanese were both part of Herxt, do you have any old timers that know whether the two businesses work closely together? I know Celanese Plastics today is a lot different than it was back then.
spk14: I don't know the answer to that, but Scott may have more history than I do.
spk18: Yeah, John, it was really operated very separately. As you well know, Herx was a very large company and had a lot of different components to it, and it was operated very separately.
spk04: Okay, thank you.
spk14: You know, John, I'll just say something more on that. As you know, we don't comment on any kind of specific opportunities, rumors, or speculation, but You know, I would just remind the group kind of not specific to CeramTech. You know, we are always looking at a very broad range of opportunities. And over any given quarter, we explore and evaluate many, many opportunities, most of which never come to completion. So our focus remains on opportunities that fit well within our business models and really meet our discipline return criteria and our requirements around synergies. So I'm not saying we would never do something like a CeramTech. The material doesn't need to be a thermoplastic, but it does need to fit the model, and it does need to meet our M&A criteria.
spk04: Thanks, and congrats on the quarter.
spk14: Thanks.
spk09: Thank you. Our next question has come from the line of Bob Cort with Goldman Sachs. Please proceed with your questions.
spk07: Thank you very much. I was wondering if we could talk in the EM business you know, the COVID impacts were sort of affecting the auto cycle and production rates and the healthcare markets. Can you give us a little update on what happened through the quarter and how you see the path for those particular end markets into the second half?
spk14: Sure. So, you know, for EM, I would characterize the end markets as, you know, all of the markets has recovered to pre-COVID levels at this point in time, with the exception of medical implants. And as you said, auto and which is really more due to shortages of chips, microchips, and also some shortages of resins in Q2. In fact, we've seen growth above 2019 levels in industrial and channel and electronics and some of the other sectors. So if we look at implants, which is kind of your question, you know, implants have improved across second quarter. We expect them to continue to recover, you know, through the end of the year and really be back at normalized rates. in 2022. I will say other areas of medical, though, we have seen really good growth in this year, including like long-dose drug delivery, diabetes applications, et cetera. So medical overall, I would say, has recovered. It's just specifically the implant business, which is our GUR business, which will be into 2022 before we see full normalization. I think auto, which is the other big end market, as we called out in our comments, was down 8%. in the quarter, but that's versus a North America drop in bills of 12% and a Germany drop in bills of 15%, which is our two largest in markets. And so, you know, we think we've been helped there. Autos have prioritized premium vehicles. We've talked about that in the past, and we have the majority of our content in premium vehicles. But we're also seeing a real help from our programs that we put in place specifically around electric vehicles. So if you think about it, in the EU, 17% of all vehicle cells are now electric vehicles. And so that project pipeline where we've grown that, those volumes have really helped us. We've also, as we called out, been expanding our content in electric vehicles. So we talked about the 20-kilogram content that we have in Europe for one of our EVs, which is four times our average ICE. Just to give you another idea, just GUR alone is six to eight kilograms per electric vehicle. So a really big space that we have. We have really good polymers to go into those spaces. So as we go to the second half, we do expect growth again in Q3 as we see chip recovery and we've had resin recovery. We probably won't be back to Q1 levels in Q3, but anticipate we'll be back to Q1 levels for auto by Q4. And we continue to see that few percent growth across other end uses as we move through the end of the year.
spk07: And on a follow-up, Lori, I think in the past you talked about some parts of EM had become a little bit more commoditized. Was there any over-earning, over-margined products during the second quarter, or is there still margin upside on some of those more mainstream products there?
spk14: Thank you. I think there's still more upside on margin of our products. If you look at our margin percent this quarter, we had a few impacts there that brought our margin down slightly from last quarter. Some of it was increased spend in the plant as we needed to add more people to deal with the increased demand. We also had higher energy costs, especially in Europe. And then logistics and transportation, as I'm sure you're hearing from others, was certainly a big headwind this past quarter and will continue to be a headwind probably through the end of the year and even into early 2020. Karen White- Next year. So I think, you know, as we see labor market stabilize as we see logistics and transportation stabilize. I think, you know, we would expect to get back to previous levels of margin going forward. I would also just say, Bob, the real difference here from what we've seen in the past is our constraint in Q2 and continuing in Q3 is not demand-driven. It's really supply constraint. It's our ability to make resins, get the additives, especially glass fiber, as we called out, which has continued to deteriorate as we move through second quarter and into third quarter. It's really supply constraint. So there is also more demand. more volume upside as we go forward and are able to resolve those supply constraints.
spk18: Yeah, Bob, and I just want to clarify, and I think what we've said in the past, these are really what you alluded to are standard applications. You know, they have more competition in them, but these are still engineered solutions. And, you know, we obviously work on kind of the more, you know, value and use premium side for our new project pipeline, but that standard part of the portfolio is always going to be a real critical element and really building blocks to get in the door in a lot of places.
spk07: Gotcha. Thank you very much.
spk09: Thank you. Our next question has come from the line of Jeff Sakakis with JP Morgan. Please proceed with your questions. Thanks very much.
spk08: Given that there's been so much supply volatility and volatility in demand, have your cost-cutting programs executed along the lines that you've expected or have many of the cost savings been deferred to next year? I understand prices are up a lot and you're making a lot of money, but in terms of the way that you've been trying to make your operations more efficient, are things delayed?
spk14: Yeah, great question. So we had outlined before we expected to get, you know, we were targeting 100 to 150 million gross productivity. We are on track to deliver 150 million of gross productivity this year. So those are cost savings. I would say, you know, other years we might have outperformed that. I mean, certainly we did last year. This year I'd say we're going to hit that 150. But what we're also seeing is a lot of opportunity in revenue optimization. So plant optimization, small to bottleneck projects. So, you know, we are focusing more on how do we get more molecules out because we are supply constrained. but we will still deliver at that kind of historical level of cost productivity as well.
spk18: Yeah, Jeff, we typically break productivity into four buckets, rev gen, you know, I would say manufacturing cost reduction, procurement cost reduction, and then, you know, I would say more kind of S&A type reduction. I mean, S&A bucket is very small this year. The procurement bucket is very small this year. Where we've shifted it in 2021 is more on manufacturing costs and REBGEN, as Lori talked about.
spk08: And then for my follow-up, when you talked about your acquisition criteria, and you talked about your acquisition criteria being return-based, Does that mean that the direction of your acquisitions really may go in the direction of diversification over time? That is, should we view Selenium as really not being bound by, you know, wanting to have more polymers, but really trying to find other businesses if they're available where the industry structures are good and you think that the returns are high?
spk14: Yeah, look, I don't think we're going to go, you know, out and acquire something completely out of our lane. You know, one of our criteria is we want to be able to deliver synergies. And, you know, we want to do that. It means we have to either be familiar with the end market, be able to use our model. So what I'm saying is, you know, it doesn't have to be a thermoplastic. There are other areas we could think of. But I would still want them to have, you know, in markets that we're familiar with. and where we think our current, you know, Salesforce and commercial teams and manufacturing teams could add value to, or we could apply them to our engineered materials model or our ASTIL model. So they may be new materials to us, but they will have some connection to our existing business.
spk09: Great. Thank you so much.
spk14: Thank you.
spk09: Thank you. Our next questions come from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.
spk21: Thank you, and good morning. Scott, I just wanted to ask you on the free cash flow. I appreciate the comments about the working capital build in the quarter, but as we look out of this year and into next year, and you gave sort of preliminary EPS view on 22, how should we be thinking about working capital and free cash flow generation as conditions normalize? I guess I'd just mean it in terms of where is it going to be, number one, and then number two, you know, given everything that's going on with raw materials and availability and so forth, you know, is there any consideration being given to hold more raw materials so that you can be sort of better positioned or opportunistic when we continue to see supply disruptions?
spk18: Yeah, let me take the last part of that first, Vincent. I think I would say we don't take a one-size-fits-all. I mean, I think it really depends upon the business and the material and where we're at and how we see things you know, going forward and particularly how our business is performing. And certainly reliability of supply in certain materials is very important for us right now. And so we may choose to hold a little bit more raw material if possible, if we can get it in certain areas of tightness. We are not going to be bound by that working capital number because our working capital efficiency is has historically been very strong, and we can bring that down fairly quickly if necessary in the future. I think in terms of how we see that working its way, our greater than $1.2 billion for the year assumes we get some of that working capital back towards the end of the year, but certainly not all of it and certainly not back to how we started the year. And so a lot will depend upon what happens with raw materials and as well as our pricing. I mean, one of the important characteristics here is accounts receivable, and with what we've seen in pricing in Asia in acetyls, which tends to have slightly longer payment terms, we're carrying a little more accounts receivable today than what we have historically. So as that normalizes, we'll get some of that back, and so there will be a catch-up likely into next year.
spk21: Okay, and just as a follow-up, there were also comments in the release about sort of the Chinese price will be coming down, but there'll still be strength in Europe and India because I think there was a reference that there's typically a lag. Just wanted to better understand sort of what causes that dynamic where it doesn't get arbed out pretty quickly that you could have serious price discrepancies between those three areas.
spk14: Yeah, well, if you think about it, I mean, there's not much acetic acid production in India. So basically that material comes out of China or Singapore or somewhere else in the world. So you have a shipping delay, but price is done at the load. Same for Europe. Most of the material going into Europe comes either from the U.S. or from Asia. And so you have that shipping delay as well. It's really just as simple as that.
spk21: Okay. Thanks very much. Mm-hmm.
spk09: Thank you. Our next questions come from the line of John McNulty with BMO Capital Markets. Please proceed with your questions.
spk03: Yeah, thanks for taking my question. Laurie, in the prepared remarks, you had indicated the 2023 goals were likely going to come in around or in 2022. Can you just clarify whether that is inclusive or exclusive of Santa Preen and if it's really just a reflection of kind of the current markets and your comfort in the demand fundamentals or if it does include the M&A?
spk14: Yeah, look, we'll give better guidance in October as we have more time to work through this. I would say, you know, the $13 to $14 earning per share that we had for 23, we're now pulling into 22. You know, I would look at it as it's that range with or without Sanofreen. Now, I mean, Sanofreen is definitely a value accretive to us, but we did model in all of our cash being used for stock purchases. So, you know, while there's some uplift, I would say, you know, I'd look at Santaprene as taking this closer to the high end of that range, you know, whereas without Santaprene, we would have been at the lower end of that range.
spk03: Got it. Fair enough. And then I guess just as a follow-up, you know, the guide is actually a pretty tight range for the rest of the year. And I guess just given the volatility that you're seeing in all the markets, I guess I'm curious how you get comfortable with such a tight range on such a big base. Is it Have you locked in in terms of some of the commodity prices? Have some customers reached out to try to maybe lock in things for the year? Or, you know, I guess how do you get as much comfort as you have in such a volatile market?
spk14: Yeah, look, you know, if you look at Q3 guidance, I would say, you know, from knowing what our books are, we're halfway through the quarter already from our standpoint. So, you know, we can get pretty comfortable with Q3. And then I think for the full year, it's a little bit different that, you know, again, we're really supply constrained. It's not a demand constraint. So even with some volatility in the market, you know, we still can only sell the amount of material we have and we know how much material we have. So, I mean, yes, there could be big splings and acetyls and that could change it, but, you know, We just gave, it was a narrow range, admittedly, but we just kind of said, here is what our projection is, given that, you know, we are fairly close to the end of the year.
spk18: Yeah, and John, I think we tried to outline in the prepared remarks, you know, some of the assumptions we've made to get to that range. So as those change a little bit, then, you know, we'll update that in October.
spk03: Got it. Fair enough. Thanks for the color. Thank you.
spk09: Our next question has come from the line of Hassan Ahmed with Olympic Global. Please proceed with your questions.
spk00: Morning, Laurie. Laurie, question around regional demand trends. Obviously, it seems the pace of vaccination is very different by region, particularly in Asia, still some lockdowns continuing over there. And then on top of that, you sort of overlay some of these supply chain constraints that you guys were talking about, others have talked about as well. So, A, what are you guys seeing in terms of demand growth disparities between regions? And then on a go-forward basis, what does this tell you about demand growth? I mean, are we going to be in a period of above-normal demand growth as more and more parts of the world sort of start normalizing and sort of lockdowns start waning?
spk14: Yeah, I would say at this point in time, I mean, certainly as we started coming out of COVID, you know, we saw it kind of move around the globe where, you know, Asia was strong earlier and then the Americas and Europe was slowest to recover. I would say at this point, demand is pretty normalized around the globe in terms of being pretty consistent across regions. Interestingly enough, I mean, while we were worried about the Delta variant, we haven't seen it have much impact yet, although that is a concern. As I said, we see, you know, some signs that there may be some impacts in Southeast Asia. But I would say, in general, the globe is pretty consistent right now in terms of recovery.
spk00: Understood. And now moving on to the tow business, obviously, you know, very strong volume growth sequentially in Q2. And I guess in sort of the written remarks, you guys talked about some of the Q1 demand sort of carrying forward into Q2. How are you guys thinking about demand growth or volume growth in that business in the back half of the year?
spk14: Yeah, I mean, really, the volume growth in Q2 was, in fact, what you just called out, which is, you know, we work with customers in Q1 because of the freeze and our shortage of acetic acid. So we work with customers in Q1 to push demand into Q2. And so, you know, if you look back at Q1, we had reduced volumes in Q1. Those volumes showed up in Q2. I think, you know, we actually see volumes being stable through the rest of the year, kind of at the average. You know, I'd expect the second half volumes to look kind of like the first half volumes. Earnings will be less because, you know, acetic acid pricing remains high relative to historical. We have higher energy costs, especially in Europe. and just the timing of our dividends from our Chinese JV, which typically are heavily weighted to the first half.
spk00: Very helpful. Thank you so much.
spk09: Thank you. Our next question has come from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.
spk13: Thank you. Laurie, just on the M&A pipeline excluding Ceramtech, how is that pipeline today?
spk14: So, you know, I'd say our M&A pipeline remains very robust. We continue to look at deals of all size. I mean, you saw that with, you know, Santa Preen, which is a big bolt-on, Grupo Azadi, which was, you know, a small bolt-on, and then even some divestitures we did. So I think, you know, we remain very active looking at our portfolio, where we want to add, where we need to take away. I would say we're very actively looking at deals of all size. We certainly have the financial capacity as well as the management capacity to continue to look at additional M&A, you know, through the rest of this year and into next year.
spk13: Hello. Just in the prior comments, you laid out a number of projects, many of which come online over the next couple of years. How is that next tranche of projects in your mind, that 24 through 25, 26 projects late looking in? Is it different than the current one we're in right now?
spk14: Yeah, so really the only thing we have kind of on the books at this point in time for that period is the GUR expansion and EU, which we expect to come online in 2024. I would say, given that we're just in 2021, we're just now starting to look at what will our demands and needs be in that period of time.
spk13: Thank you.
spk09: Thank you. Our next question has come from the line of Michael Sasan with Wells Fargo. Please proceed with your questions.
spk05: Good morning. This is Richard actually on for Mike. So my first question is on engineered materials. It looks like you were able to get a 7% increase in price in the second quarter. You also talked about sourcing challenges and raw material cost inflation. How much of the price increase was to offset the cost, higher costs? Or how much was that just part of adding value to your customers?
spk14: Yeah, I would say, look, our teams worked really aggressively through starting in fourth quarter of last year, actually, to really push price, knowing that we saw this increase in raw material pricing coming. So I would say that was the primary reason for the price increase. but we did raise price more than we saw our raw materials increasing, and I think that's a question of mix. I mean, we are in a very tight supply-constrained situation, so we have been prioritizing our higher-margin products and our higher-margin regions to really maximize the return that we get for the molecules that we have available to sell to the market.
spk05: Okay, and as a follow-up, On the asset sales chain, you gave some color in terms of pricing coming down in the second half. What's your view on spreads? Obviously, you're low cost, but I guess your agent competitors could get squeezed if prices continue to fall. So how do you think about that heading into the end of this year?
spk14: Yeah, I mean, certainly, you know, if you look at China, for example, you know, our technology is certainly advantaged versus the carboxyl technology or some of the others. You know, as prices fall, they will get squeezed in terms of margin. Clearly, our capacity on the Gulf Coast, which uses natural gas, is the most cost effective in the world. And so, you know, we will still maintain that advantage on margins versus competitors, you know, as prices continue to moderate.
spk09: Thank you. Our next questions come from the line of PJ Juvicar with Citi. Please proceed with your question.
spk01: Yes, hi, good morning. Good morning. Can you talk about your elastomers acquisition from Exxon? You know, what are the industries you are targeting? And why do you think, in your mind, Exxon is getting out? And is there any supply coming online? What's the supply demand there? Is there any new supply coming online in China or elsewhere?
spk14: Yeah, look, we're really excited about this acquisition. I mean, you'll have to ask Exxon why they're getting out. I will give you my opinion, which is, look, they've only had this business since 1980s. It was a JV. They acquired it fully in, I think, about 2000, maybe 2010, sometime in that first decade. You know, look, this is not one of their core businesses. Exxon is an oil and gas commodity chemical player. This is a highly specialized business. and I'm sure why they enjoy the margins and returns from it, it doesn't really fit their model of what they're trying to do. And having come out of an Exxon specialty business, they struggle to run them in a way that can be highly competitive with others. So my guess is they realized it was more valuable to us than it was to them. If you look at in-market, it is largely into auto. you know, think things that need to be, you know, recyclable or long life or soft touch or light weighting. But there are also applications for it into medical applications, into construction, you know, things sealed around windows and skyscrapers. And so as we look at it, we think it's a really good fit for us to cross-sell with our automotives side we think there are some really exciting new applications in medical going forward that given our knowledge now as medical and pharma industry we can exploit and so we think there's a lot of opportunities there to really apply these materials to businesses we already know already understand and already know how to access the market again our willingness to do deal with complexity is just different than Exxon. We deal with small orders every day. That's not something Exxon wants to do. So I think we see a lot of value uplift opportunity here in what we consider very profitable in markets as we go forward. In terms of new capacity, we are not aware of any new capacity coming on in this area. It is a fairly highly specialized material. And we don't see any now. We don't anticipate any for the future. This, in fact, Exxon had grown the capacity of this business in just the last couple of years, I think, in their Newport facility.
spk18: Yeah, PJ, just on that last point, I think it's important to remember, I mean, this really is an engineered solution. And, you know, supply to manualization, a lot less important here in these businesses, much like our other engineered materials businesses, because of the value and use element in and the uniqueness and differentiation of what this material and this brand brings to customers. And that was really one of the real attractive elements to this to be really complementary to our engineering materials business.
spk01: Great. And Lori, overall question on the tightness and logistics and labor markets that you talked about, you think they'll last into 2022. Is that a U.S. phenomenon or is that happening in Europe as well? And You know, why do you think this is taking a long time to get ironed out? Is it the logistics part of the issue or is it the labor market? Can you just talk a little bit more about that? Thank you.
spk14: Yeah, I think they're really two separate things. I mean, I would say, you know, the logistics and transportation issues are global. I mean, certainly global. We see a lot of problems for people trying to get things out of China, you know, but I would say really whatever way you're going is pretty hard right now. Whether it's by ship or off the ground or rail, there's just a lot of volume being moved around the world. Not sure I could explain all the reasons why, but certainly people are moving more things around. I mean, just even the amount of things you buy on Amazon these days. We just see a real constraint there, and that's really what I was referring to. I think it's well into next year, possibly even after Chinese New Year, before we really start to see stabilization in those markets. The labor phenomenon I discussed has really been more of an issue in the US than in other parts of the world. We haven't had as many issues in Asia, for example, nor have we had the issues in China. But in the US, I think we've just We see people we're hiring to expand and run our plants are also being hired by Amazon to run their warehouses, for example. And so it's just a very competitive labor market. And we've had to make adjustments as we've wanted to add shifts and do things that would let us expand rather quickly. to our labor rates. But, you know, I think in time this will stabilize as we see more people going back to work in the U.S., you know, I think this will also stabilize. But I do think probably on this it will take into next year as well.
spk01: Thank you.
spk09: Thank you. Our next questions come from the line of Kevin McCarthy with Invertible Research Partners. Please proceed with your questions.
spk06: Yes, good morning. You know, Lori, I thought your guidance in engineered materials was quite constructive, but I wanted to peel the onion a little bit more with regard to the glass fiber shortage. Can you talk about, you know, the upside opportunities and the downside risks related to that supply shortage? For example, you know, on the volume side, you know, how much might you be constrained? What are you baking into guidance there? Then on the price side, I guess my question would be, is there opportunity to capitalize by raising price in the engineered products that might require glass fiber? I assume that's certain polyesters and maybe cell strand and some nylon grays. Maybe you could just elaborate on what's going on there.
spk14: Yeah, maybe to be a little bit more clear on the characterization, I mean, if we look at second quarter products, You know, we would estimate we probably lost as much as $5 million revenue due to problems around class fiber, you know, as well as a little bit the logistics transportation issues. If we looked at third quarter, that number is probably going to double. But we do expect it to resolve and we get some of those volumes back starting in the fourth quarter and going into 2022. Look, we are seeing glass fiber makers coming back. We are seeing the volumes go up. Glass fiber that goes into polymer is a very small percentage of the glass fiber market, but it's probably one of the more profitable segments for them. So we do expect to start seeing more glass fiber coming back towards us as we move into fourth quarter. Look, I think long-term as this goes on, it has been an opportunity for us to convert people to other polymers. or polymers that also have glass fibers that we've prioritized because they're higher margin polymers so that people can get their product. So I think there is some upside here. And we've been able to convert some of it to higher margin products. But I think long term, it is about a third of our portfolio that uses glass fiber. So it is a pretty important raw material for us going forward. And we've taken steps commercially to secure supply of glass fiber in future years. So hopefully we don't run into this problem again.
spk06: That's really helpful. And then secondly, if I may, do you have plant maintenance turnarounds in the third quarter or the fourth quarter that we should be keeping in mind for modeling purposes?
spk14: No. I mean, we always have small turnarounds and maintenance items. But the total for this year is only $30 million for the entirety of the year, and it's split pretty evenly between the first half and the second half. So it's not anything of note that you're going to notice in terms of our volumes or our costs.
spk06: Perfect. Thank you very much.
spk14: Thank you.
spk09: Thank you. Our next question has come from the line of Alex Yefremov with KeyBank. Please proceed with your questions.
spk20: Thank you. Good morning, everyone. You mentioned in your prepared remarks 8% sequential impact on automotive volumes. Did that number include the shortages of nylon, glass fiber, PBT, et cetera, or were those raw material shortages some additional impact on top of that? And if so, how large was that?
spk14: Yeah, no, that was inclusive of everything. That was both, you know, demand from auto as well as constraints we had due to resin and additive supplies.
spk20: So if we're trying to normalize sort of your volumes for current state of demand, it's that 8% and maybe automotive is a third of your business. So something like 2.5% should be added to top line when everything is running well. Is that the right way to think about things?
spk14: Yeah, roughly that's about right. I mean, if you think about it for this, For this kind of demand, you just need to see a few percent increase in everything else in order to stay stable. So that's about right.
spk20: Thank you, Lori. And a quick question on EM margins. Should we look at second quarter margins as sort of the benchmark for the rest of the year, or will these margins be rising?
spk14: Yeah, I think, you know, based on what I had just said earlier about the impact we saw from supply shortages and logistics and things, you know, I would expect Q3 to look pretty much like Q2 probably from a margin standpoint because we do see, especially the glass fiber issue continuing well through Q3. I would expect Q4 margins to look more like Q1 again.
spk09: Thank you. Thank you. Our next question has come from the line of Matthew Deyo with Bank of America. Please proceed with your questions.
spk15: Matthew Deyo Thank you. In the past, I feel like you've been calling for a more normal EBIT and acetyl chain next year, which maybe implied something like the 700 to 800 million dollar number. But I think if I heard correctly in an answer to Duffy's question earlier, you seem to support something closer to 900 to a billion. Do I have that wrong, or is the more optimistic view just a function of the better demand backdrop that you've been kind of talking about?
spk14: No, look, I think, you know, as we've worked through this year and we've seen the impacts of, you know, various debottlenecks and productivity products and continuing to optimize our model for acetils, you know, the addition of Elotex and other things, You know, we really feel like we've lifted the foundational level of earnings from kind of that 700 to 800 to now 800 to 900. And, you know, with expecting some goodness to continue in acetyl margins into 2022, you know, that put us at that kind of 900 range for acetyl.
spk15: Understood. And Similarly, I guess if I'm remembering correctly, I think the comment used to be that breaking up the company would result in something like $50 million of disenergies, but that you had constantly been trying to work that number down. Is it still around that number? Do I have that number wrong? Is it higher now or lower? Is there any update there?
spk14: I think $50 million is still a good number to use. I mean, I honestly don't see it really going a lot lower. I think we used to think it was even higher. I think $50 million is probably, you know, the right range to use for the level of disenergies we would expect if we split the company.
spk15: Thank you, Mark.
spk09: Thank you. Our next questions come from the line of Frank Mitch with Birmingham Research. Please proceed with your questions.
spk02: Good morning, and congrats on the quarter. Laurie, in the release, it mentions that you were able to bring back the Clear Lake facility during the quarter. I'm wondering how much you may have lost by not having it through the entire quarter.
spk14: Yeah, you know, I don't have an exact number. I think if you look at the residual impacts of winter storm URIE, In quarter two, you know, we think it was probably about a $30 million impact, and that's from, you know, higher RAS, energy, inventories. I mean, primarily all of that was in AC.
spk02: Gotcha. And can you comment just in general on the overall industry operating rates in the acetyls chain that you're seeing right now?
spk14: Yeah. I mean, so if we look at Q2, I would say, you know, we think in – globally utilization was up just over 90%. China just under 90%, but we also know that there was much higher intermittently and probably close to 100% at many times during the quarter. BAM globally also at 100% basically for the quarter. With this capacity coming on in China in August as anticipated, You know, we actually think utilization will remain at similar levels, again, because there is pent-up demand in the chain. There is a need to rebuild inventory. But I would say, you know, right now we still think we're somewhere around that 90% range globally and probably should continue to be so during third quarter.
spk02: Terrific. Thank you.
spk09: Thank you. Our next question has come from the line of Matthew Blair with Tudor Pickering Holtz. please proceed with your questions.
spk11: Hey, thanks for taking my question here. Congrats on the results. The clear release comments listed out nine discrete organic growth projects. What is the big picture EBITDA number for all these projects in total?
spk18: Yeah, Matthew, I don't think we've called that out specifically for each project. You know, we inherently included that in you know, our investor day guide for 2023, and then we indicated there was additional uplift into 24 and 25. You know, we will, as we, you know, update that outlook going forward, we'll provide a little more clarity on kind of how that materializes in those out years. But we haven't specifically given a number for all the projects.
spk11: Got it. That's it for me. Thanks.
spk09: Thank you. Our next questions come from the line of Lawrence Alexander with Jefferies. Please proceed with your questions.
spk17: Good morning. Just two quick ones. Given the supply chain lags and the stronger demand and low inventory levels, how resilient do you think the asset to your value chain will be if there is a direct hit in the Gulf Coast from a hurricane this season compared to like the normal hurricane impacts? Secondly, can you give a sense for how the competitive intensity and process R&D in Acetyls is evolving? Are the Chinese doing the work? Are you seeing a competitive gap closing, or do you see it widening now that BP shifted the business over to INEOS?
spk14: Yeah, you know, on your first one on hurricanes, I mean, who can say, right? I mean, where it hits, what it takes down in addition to acidic acid plants, does it take down consumers? You know, it's hard to say. I would say, you know, in a tight market, any disruption gets amplified with even higher prices and more panic buying and other things. So in a very tight market, a hurricane right now, even the threat of one probably would cause some upward movement in the market. But you know, it's really hard to predict what the overall impact would be. I think as a competitive gap, I think, look, we continue to invest in R&D. I know our competitors do as well. I would say we think we continue to have advanced technologies, NSEIC asset, NBAM, and emulsion. We don't really see that gap closing. We think, you know, everybody continues to move up, but we don't really see that gap closing at this point in time.
spk19: Thank you. Darrell, let's make the next question or last one, please.
spk09: Thank you. Our final questions come from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your questions. Great. Thanks for taking my question here.
spk16: Just wanted to follow up a little bit more on that long-term outlook on the AC chain then. So do you think we've kind of entered a structurally higher area of earnings power in You know, I know that you guys have changed your plans as far as, you know, your footprint optimization. But is there a scenario where you'd see, you know, continued global capacity additions? And would you participate in that? You know, it does appear that there are pockets of production shortages globally, you know, as you mentioned, India and elsewhere. So I guess maybe if you could provide a little bit longer-term view on your, you know, capacity and maybe the industry's capacity as well. Thanks.
spk14: Yeah, so it's kind of a broad question, but let me try to break it down. So, you know, I discussed some of the things we did that we think improved our foundational earnings in terms of productivity and capacity to bottlenecks, et cetera, and strengthening of our chain and strengthening of our model. You know, I think it's also fair to say that we believe that the Aztel industry dynamics has improved over the long term. So if you think about it, just growing at kind of GDP, you know, between 18 and 21, we saw nearly a million tons in demand growth for the industry. And during that time, we didn't add any new capacity. So it is a more tightly constrained market than it was, say, back in 18, the last time we had a price run up. We have a little bit of capacity coming on stream here in China that we talked about. And of course, we have a lot of capacity, our own capacity coming on. 1.3 million tons coming on in 2023. So those are the big capacity ads that are out there. But even if you add those together, it's kind of three or four years of growth in a very tight market. And again, we don't intend to run our capacity unless it makes sense to do so. So I think the market dynamics have definitely improved over the last few years and continue to improve with just normal GDP growth. that could motivate people to get into the market, but I would say it's a very expensive market to get into. I mean, you know our 1.3 million tons of capacity that we're adding at Clear Lake, we're spending $315 million to do so. But if we look at Greenfield's bill, like they're doing in China, our own estimates of building that plant in China, because they don't have the infrastructure and everything else, is well in excess of $2 billion. that's a big hump for people to get over. You know, you have to have availability of syngas, you have to have access to hydrogen, you have to have, you know, a good energy source. I mean, it's a big hurdle for people to get over. It's a little better in the Gulf Coast of the US, but again, you know, we already have a lot of players in the Gulf Coast. We don't see any new capacity coming on immediately. Even if someone were to start today, they're still four or five years out from adding new capacity. So we see, for the foreseeable future, this remaining a pretty robust, tight market.
spk09: Thanks. Thank you. There are no further questions at this time. I would like to turn the call back over to Brandon Ayash for any closing remarks.
spk19: Thank you. We want to thank everybody for listening in today. As always, we're available after the call for any further questions you might have. Darrell, let's go ahead and please close out the call.
spk09: Thank you for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.
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