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spk04: Greetings. Welcome to Celanese's fourth quarter 2021 earnings column webcast. At this time, all participants are in listening mode. In question and answer session, we'll follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll now turn the conference over to Brandon Ayosh, Vice President, Investor Relations. Brandon, you may now begin.
spk05: Thank you, Rob. Welcome to the Celanese Corporation fourth quarter 2021 earnings conference call. My name is Brandon Ayosh, Vice President of Investor Relations, and with me today on the call are Lori Ryderkirk, Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer. Celanese Corporation distributed its fourth 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 gap measures on our website. Today's presentation will also include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found at the end of the press release as well as the prepared comments. Form 8K reports containing all these materials have also been submitted to the SEC. Because we published our remarks yesterday, we'll go ahead and open the line for questions. Rob, please go ahead and open the line. Thank you.
spk04: At this time, we'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone indicates that your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So that we may address questions from as many participants as possible, we ask that you limit yourself to one question and one follow-up. One moment, please, while we poll for questions. Thank you. And our first question today comes from the line of John Roberts with UBS. Please receive your questions.
spk16: Thank you. You mentioned you're not expecting another shutdown at Nanjing or any disruptions from the Olympics. Do you think China can get from a zero COVID strategy to an endemic COVID environment like the U.S. and Europe without a lot more disruptions?
spk00: That's an interesting question, John. We're really not, you know, when we said we weren't expecting any disruptions, it was really around energy curtailments or things like we saw in the October timeframe. You know, also with Chinese New Year's and Beijing, a little bit differently than we've seen prior to 2020, we're not seeing as many total shutdowns during that period as China worries about their economy and wants to see recovery. So we've modeled in only mild seasonality across our businesses for Chinese New Year's and for the Olympics. The COVID question is an interesting one. I'd say COVID seems well under control in China, at least from officially reported. But we would also say our experience in our plants and our offices is COVID is under control. And I think you've seen some recent comments by the Chinese government where they are starting to back away from their zero COVID strategy and more towards managing this endemic. So I do believe, you know, I think the outcome of all of what I've just said is, you know, my personal belief is that we will see a fairly smooth transition in China as they go, as is much of the rest of the world, towards more of managing this endemic versus sticking with their, you know, zero COVID policy.
spk16: Okay. And... Could you talk a little bit about the M&A outlook? Saniprene appears off to a good start, but what are the areas of selenese that you're most interested in expanding? Is it another polymer like Saniprene, or is it maybe something in Asia after the polyplastics transaction, or maybe something in chemicals like the redispersible polymers deal you did?
spk00: Yeah. So, look, Saniprene, we are really excited about Saniprene. The transition went really well over December. Even just one month in, we're already starting to see delivery from synergies that are ahead of schedule. We're excited about what we see from the product and where we see the possibilities for cross-selling as well as new applications for Santaprene. And of course, we're really excited about not just the assets we acquired, but the people we acquired and the great job that they've done really coming into Celanese and becoming part of the Celanese family. So you're right, Santaprene we think has been A great success so far, and we anticipate it just gets better from here. And, you know, makes us excited about a future M&A as well and our ability to continue to do larger and larger M&A. In answer to your question about what type of M&A, I would say yes. We are looking at everything that you mentioned. We're looking at additional polymers, additional geographies. We are looking at acquisitions across both engineer materials and the acetyl chain and So I would say, you know, our lens is still fairly wide open in terms of the types of M&A that we would consider and in terms of size all the way from bolt-on to transformational. So we think it's quite an exciting time for us for M&A. You know, not only do we still have the financial capability to do a significant amount of M&A, but we also believe we have the management and employee bandwidth and capability. And again, especially with some of the acquisitions we've done with Elotex and Santa bringing even more talent to take on additional M&A going forward.
spk14: Thank you.
spk04: Our next question comes from the line of Jeff Tsakakis with JPMorgan. Pleased to see you with your questions.
spk06: Thanks very much. In your script describing M&A, you said that you were considering a wide range of opportunities within your desired investment grade rating. Does that indicate that your acquisition aspirations are more modest rather than transformative?
spk00: I wouldn't make that assumption, Jeff. If you look at our actual financial capability, if you look at the cash, the free cash flow we had this year at 1.3, next year we'll be at 1.4. If you look at our cash flow, we actually think we have a very large capacity to take on debt. We're very low levered right now. We could take on significant debt and we could take on, you know, with the cash flow we have, we could pay off that debt. So I wouldn't I wouldn't say that means our ambitions are modest. I'd say actually we're in the best time in our history to actually take on any range of M&A and still do it within our investment grade rating.
spk06: Okay, great. Thank you very much.
spk04: Our next question is from the line of Duffy Fisher with Barclays. Please just use your question.
spk07: Yes, good morning. First question is just on the acetyls chain. When you look at the different steps from acetic acid down to VAM and some of the other derivatives, where do you see the supply-demand being the tightest over the next couple years? And where do you think either you or the industry might make some announcements around new capacity in that chain over the next couple years?
spk00: I would say the entire view of the chain is pretty tight right now. Just look at utilization. Acetic acid had been pretty close to 100%. Now, that did moderate a little bit in the fourth quarter, but still 85% to 90% utilization in acetic acid. We see that being about the same this quarter and maybe tightening a little bit as we go through the year. But we do have some new capacity coming on sometime in the next few months with the second phase of YY, Guangxi. VAM is very tight. I would say VAM has been around 100% utilization for some time now. It was a little bit better in the fourth quarter, but again, in first quarter, we see it being really tight again as we have some outages, especially in China, for turnarounds as well as some maintenance downtime. So I think BAM is going to continue to be very tight. We've announced some expansions in BAM. There's been a few other ones, but I think the demand in BAM continues to grow quite rapidly. If you go into our downstream products like emulsions and RDP, I would say the demand is huge right now. There's some really interesting things happening in the market now around increased energy efficiency requirements, and we make Some systems that are made of, if you think about kind of five layers of emulsions and RDP powders to make thermal insulation systems for putting on the externals of buildings. And so, especially in Europe, you know, we're just seeing a demand, quite frankly, that the industry can't keep up with right now. So I'd say, you know, those utilization rates are definitely, you know, in 100% and staying that way. So I do think we'll see some expansion. I think as we've called out before, acetic acid, any major expansions will take a while. We're at least four to five years out from any other expansions there, other than our old clear lake capacity that will come on first half of 2022. 2023, sorry, I get the wrong right year, 2023. And I think we've called out some BAM expansions. We've called out some VAE expansions we're making. We are looking to expand RDP as well. And I suspect we'll see others in the industry doing so, but I will say it's still into a very tight market, and I think these are markets that will all continue to be very tight for the next, I'm going to say, at least four to five years.
spk08: Great. Thanks.
spk07: And then maybe as a follow-up, Since you get at acetic acid from kind of all three of the carbon starting points, can you talk about what's happening to the cost curve for acetic acid, you know, with all the different energy price moves we've seen in the last half year? What will 22 look like different than 21 from a cost curve standpoint?
spk00: I think if you look at the last year, we've seen everything go up. I mean, natural gas has gone up, including in the Gulf Coast of the U.S. Coal has gone up in China. Oil has clearly gone up. And so although everything has gone up, and with that we see methanol prices going up, I would also say it hasn't changed the relative order of attractiveness. U.S. Gulf Coast natural gas, even at $6 a million BTU, as we saw during times in the fourth quarter, is still the most attractive source of raw materials for acetic acid. You know, coal, oil kind of stay almost in parity, and it goes back and forth. But I'd say they're about the same usually, but still significantly more expensive than acetic acid. So I don't really see the priority. I mean, Gulf Coast production remains the priority, followed by then, you know, Nanjing and Singapore for us. And I don't really see that changing. And I think, you know, what that means is, even with higher natural gas prices, because the marginal capacity in acetic acid is coming out of China, which is coal price, you'll continue to see prices that support good margins in the acetyl chain as we go forward over the next few years.
spk15: Yeah, definitely. The only thing to add is I think what has changed from a relative basis is freight and logistics costs. And with our network of having the three assets, that just gives us the ability to really be well-positioned to meet customer needs around the world. So while the cost for others has moved up who only have one plant, our network just gives us a nice advantage there to take advantage of the fact that those logistics costs have moved up pretty rapidly.
spk04: Great. Thank you, guys.
spk15: Thank you.
spk04: Our next question is from the line of Bob Court with Goldman Sachs. Please receive your questions.
spk17: Good morning, Laura. This is actually a mic sitting in for Bob this morning. And I was wondering in your prepared comments, you kind of talked about an expectation of acetyl industry pricing moderating in the first quarter. I was wondering if you could give us perhaps maybe a bit more color around the magnitude of moderation you may be baking into your guide.
spk00: Sure. Look, we call out moderation in the first quarter and really throughout the remainder of this year, really assuming we don't see the amount of supply disruption that we had in this year. I mean, this year between the freeze and the freeze, some large turnarounds in the U.S. in particular, then the curtailment in China in October. You know, we had quite a lot of disruption in the supply chain for acetic acid. And with that, it tends to keep prices higher with the uncertainty that's out there. on top of what's been very robust demand for acetic acid and acetyl chain products this year. So as we go into 2022, and we saw it in the fourth quarter, we saw after the peak in October, driven by the curtailments in China and kind of more the perception of the curtailments in China, we saw very rapid moderation through November and December. And we expect that the first quarter is actually probably kind of flattish with where we ended the year. But then we do expect further curtailment as we go through the rest of the year, assuming no big supply disruptions. Obviously, if we get into a period where we have major supply disruptions, you know, we could see some price support, again, for higher acetic acid prices. But that is the basis for our assumptions this year.
spk17: Okay, thanks. And then just as a quick follow-up, if memory serves me, there typically is like a seasonal, I guess, rebound in pricing in kind of that second, third quarter. Do you anticipate that or do you see the moderation continuing through what has historically been a seasonal rebound?
spk00: What I would say, Mike, is usually we see a seasonal softening around Chinese New Year's as consumers are shut down in China during that period of time and a lot of factories shut down for a couple weeks so folks can stay in station. We're really – we're not – putting much of that in our forecast for first quarter because we have a minor amount of seasonality that we've put in first quarter. So as a result of not seeing much seasonality in first quarter, I wouldn't expect much rebound in second quarter and third quarter just because we've not baked in much of a dip in the first quarter.
spk18: Okay, thanks a lot.
spk04: Thank you. Our next question comes from the line of Mike Sisson with Wells Fargo. Pleased to see you with your question.
spk01: Hey, good morning. Laurie, just curious, in the third quarter prepared remarks, you talked about 23, and I know 23 is more of a guideline versus specific guidance at this point. But do you still feel good about sort of that $15 in 23 and growth beyond that? We do, Mike.
spk00: You know, we've called out greater than $15 EPS this year. And, you know, for those of you who've done the math, you probably realize that our numbers, if you add them up, come a little bit closer to 16 if you look at what we've called out for individual businesses. Look, we're just trying to be prudent with the 15. We're feeling good about 2022. And what we see there, if conditions continue to exist and we start seeing improvement in supply chain and some of those things, obviously our number could move well above 15 for 2022. And therefore, even with more moderation in asset tills in 23, offset by growth in engineer materials in 23, we feel really good at that greater than $15 number for 2023 and for the years beyond.
spk01: Got it. And then I guess for EM, you're looking for a good year in organic volume growth again. um any changes to your sort of view on auto i i think it did come in a little bit better as you noted in the fourth quarter and and how does that affect your outlook for or how's that embedded in your outlook for 22. yeah great question um really for automotive
spk00: I would say Q4 didn't come back as strongly in automotive as most of the tiers and other people predicted. It did come back a little bit in Q4, but not nearly to the extent we expected. I mean, if you just look at Q4 of this year, you know, it's still well below Q4 of 2020. So there's still a lot of recovery to come in auto. Now, we are not, in our modeling, we're not projecting as much recovery in auto as maybe IHS is. So if IHS is right, which we hope they are, that will be additional upside for us. We're assuming actually auto volumes are pretty flat in 2022 versus 2021. Now we continue to increase content into auto, so our sales in auto continue to go up, but we are projecting fairly flat total auto builds. But again, that leaves us upside if we do see autos coming back more strongly like IHS is predicting.
spk01: Got it. Thank you.
spk04: Next question from the line of Gancham Punjabi with Baird. Please proceed with your question.
spk11: Thank you, and hello, everyone. Laurie, maybe you're just picking up on the comments on China. You know, as you sort of think about 4Q and the acetic acid and, you know, BAM pricing fade that you referenced in your prepared comments in the region, is that just, I mean, realizing there's a lot going on, is that just a function of the economy having slowed in China with real estate, etc.? ? And, you know, that continues in the first quarter. And then, you know, just your view in terms of the recent stimulus measures that have been announced in the country, how do you see that sort of playing forward for Celanese beyond the first quarter? You've given very specific guidance for 1Q, but just on the acetyl chain, beyond that would be helpful as well.
spk00: Yeah, if we go back to fourth quarter, it was really an interesting phenomena. If you look, you know, in October, we saw Coal prices run up due to some geopolitical things that were going on. With that, we saw methanol pricing run up. And then we had the curtailments being announced in China. And I think there was a huge concern that acetic acid plants, BAM plants, were going to shut down. And so we saw price shoot up to $1,300 per metric ton. That was a very short impact, though. It was kind of a one-week phenomenon. And then when people realized not much acetic acid was being shut down, we saw acetic acid prices come down back to that $8.50 and then even into the $7.50 range as we moved into the end of the year. Now, that's still good pricing for acetic acid. We haven't really seen much softening in demand. in China. So despite the things we read about the economy, the construction slowdown, we haven't seen much softening in demand in China. And that's why we're saying really for first quarter, we think we're probably going to be fairly steady at about that same range of level that we saw at the end of the fourth quarter. And I think as we go through the rest of the year, we're calling out moderation. And again, we're just calling that out on assuming supply stabilizes throughout the world and the supply chain and demand remains fairly steady. And that really is our outlook for China. To your further question, you know, even at slower economic growth, a lot of that is coming in high tech. It's coming in more social media platforms and things like that, that China is intentionally wanting to shut down. We're seeing China clamp down a little bit on real estate and some of the speculative stuff that was going on in China. But we're not seeing much impact on industrial. We're not seeing much impact on consumer demand. And we're not seeing much impact even on a lot of the construction segments that we're in. you know, like people redoing buildings and adding insulation and all those sorts of things. So our outlook is still pretty robust for China throughout the entirety of the year in 2022.
spk11: Very helpful. Thanks. And then on the EM margins, you know, down somewhere between 500 and 600 basis points below 18 and 19 levels. I know the mix has changed a bit, but is the prior high-water mark still a realistic sort of pro forma for the acquisitions, including Santoprene?
spk00: Yeah, I'd say, you know, look, our expectations for acquisitions is the same. Just given the nature of the business, you know, when we got Santoprene, it came in with a little bit lower margins. But, you know, we're very confident that as we work through the year, as we see recovery in auto, as we have a chance to take commercial actions around water, pricing and other things with Santaprene that we'll be able to get them up to the expectations we have for the rest of our business, and that would be our expectations for any other acquisitions that we look at that we get back to similar levels of margins.
spk15: Yeah, and I think, Gansham, with what we saw from a run-up in energy costs broadly across the EM portfolio, we knew it was going to take some time, and as we called out in the prepared remarks, We do expect to get ahead of that here by the end of the first quarter, and then you should see margins improve here in both with Sanoprene and in the base business in the second half of the year. Awesome. Thanks so much.
spk04: Thank you. Our next question is from the line of Kevin McCarthy with Vertical Research Partners. Please receive your questions.
spk08: Good morning. Laurie, I was wondering if you could talk through the energy spike in Europe as energy costs there quadruple or quintuple. How are you dealing with that in practical terms and with regard to efforts to recover? How much might be permanent price increases versus surcharges? How should we think about the energy pig moving through the Python as the year progresses?
spk00: I love the way you put that. That's great. We haven't talked about it in those terms, but that is what it feels like right now. So, you know, look, the spikes we saw in third quarter and then the even greater spikes that we saw in fourth quarter are really unprecedented, as I think was pretty clear from the chart. And, I mean, it's been really volatile. Typically, if you look, we do some hedging around energy prices in other parts of the world and even in Europe, but we really do it to get security of supply. We do it to reduce volatility. We often do hedge in the fourth quarter and first quarter in the winters when we know we're more likely to get price increases. With what happened in Europe, it was so unprecedented and so came at such a fast rate. We really didn't have that opportunity at all. So that's why we had to pass through those costs to our consumers. We chose to do it through a surcharge because to reflect to our customers, it is temporary and it is based on an unusual set of events. Look, no one likes a price increase, but I think that by doing it as a surcharge, our customers understand that this is a temporary measure, and we're really not seeing any tangible loss of volume from customers, one, because everybody's experiencing these price increases, and two, some of the supply logistics constraints right now make it really hard for people to source from other places. But as we go forward, we do expect prices to moderate again. We are taking some steps to try to protect ourselves in the future from these kinds of run-ups. And some of the price increases we've had that were just price increases based on other raw materials, we'll see the benefit of those for some time to come. Because these are value-priced items. Those price increases will stick for a while. The surcharge will go away when the energy price goes away. But as we called out in our remarks, we do expect with the increases we've had to add on the surcharges that sometime in the first quarter we'll be recovering all of the additional energy pricing that we've experienced.
spk08: Okay. Thank you for that. And then secondly, I wanted to ask about your range of $15 plus or call it 15 to 16 for 2022 surcharges. just recognizing that it's a really dynamic external environment with lots of dislocations. Just broadly, what do you think are the two or three biggest swing factors that could allow you to over-deliver or under-deliver versus that target level?
spk00: Well, the number one factor, and it's what we saw this year, is acetic acid pricing and acetyl value chain pricing. I mean, while we can do a lot with commercial actions and with the agility and kind of the commercial expertise of our teams, and we do that by managing volumes around the world and up and down the chain, base pricing still matters. And so to the extent we see supply tightness, whether they be from weather events, whether they be from unplanned shutdowns, supply tightness in a market that is at, let's say, 85% to 90% utilization it reflects very quickly in increased prices in the acetyl chain. So to the extent that we have more disruption in volatility in the acetyl chain markets this year, we'll see pricing go up, and that would give us additional uplift on that outlook for the year. Inflation is obviously an issue as a supply chain, and so we're assuming the supply chain restrictions we see this year moderate over the course of the year. We're not assuming they're perfect, but we are assuming they're starting to moderate over the course of the year. If we see that not happen, that will have some impact, but as you saw, those numbers are in the 10s and 20s of millions in a quarter, not hundreds like we would see acetyl pricing. And then for EM, I think auto recovery is a big issue. Again, we've assumed pretty flat auto between 21 and 22 based on chip shortages. But if we see that resolve, then there's some good upside for engineer materials in there for increased sales into auto.
spk08: Perfect. Thanks so much.
spk04: Thank you. Our next question is from the line of Vincent Andrews with Morgan Stanley. Please receive your questions.
spk10: Thank you, and good morning everyone. You know, you mentioned in the prepared comments in the acetyl chain that your RDP business, you know, the volumes were up, I think you said 25% versus their historical peak and that you'd be shifting more of your mix there, and I guess broader emulsions in 22. So could you just talk to us a little bit about what's happening in RDP that was allowing that volume performance? Is it something you were doing with the asset under new ownership? Is it the market? Is it both? Where's the demand coming from in terms of segments, or is it shifting from other products? But just give us a little more color on what's happening there.
spk00: Yeah. Look, we've seen very strong demand and pricing from the construction sector, specifically for emulsions and powders. So whether it be paints and coatings or these insulation systems that I talked about earlier, We are seeing very strong demand there. And as a lot of countries put in additional energy efficiency requirements or greenhouse grass footprint reduction requirements, we expect that we will continue to see very strong demand continue for emulsions and powders. I think what's changed there is with our acquisition of Elitex, which let us get into the RDP market, we've been able to take those assets. We've been able to de-bottleneck them quickly. We've been able to run them harder. Because we're vertically integrated, we will run them full because we still see the value of the acetic acid that's going into them. Coming out as RDP may be something that someone who's not vertically integrated would struggle to do. And so we've just been able to run them harder. We've also been able to get more, I guess I'd say, innovative in terms of marketing our emulsions and RDP together as a package which allows customers in some of these things like the thermal insulation systems to buy a system of products that works for their needs versus having to go source them independently. And so commercially, that's been a big win for us and something we think is really going to secure this sector and, you know, improve the margins of this sector going forward.
spk10: Okay. And if I could just ask a follow-up on the auto comments. When you're talking about autos for 2022, you're obviously speaking to your own volume and what your expectations are. You also mentioned in the prepared remarks about the tiers were doing some destocking in the fourth quarter. I just wanted to understand whether was that just sort of typical fourth quarter destocking for working capital purposes? Was that just a function of they'd built too much inventory in 2021 versus what the chips allowed them to do? And is that destocking done or is that something that could be a feature of this year as well?
spk00: Yeah, great question. Our belief is we saw really good demand still in third quarter despite a low level of auto bills in third quarters. Our belief is the tiers were continuing to build inventory and anticipation of a really robust fourth quarter. With chip availability being what it was, fourth quarter did come back, but not as strongly as everybody expected. And then it was year-end, so the tiers chose to just do some destocking over the quarter so that they didn't have year-end inventories quite as high. We still believe inventories are very low in the tiers, and so we don't expect that to be an ongoing phenomena. We think it was simply a year-end phenomena. We expect to see demand come back robustly in first quarter and on through the rest of the year. based on improved auto builds, but also based on the tiers needing to rebuild inventory.
spk04: Okay. Thank you very much. Appreciate all the thoughts.
spk00: Thank you.
spk04: Our next question comes from the line of PJ Juvecar with Citi. Pleased to see you with your questions.
spk13: Yeah, hi. Good morning, Lori and Scott. Hi, PJ. You know, in China, you know, you and your competitors were impacted by dual control. And I think dual control has ended now. And they built up their coal inventories and dual control has ended. What does that mean for more acetyls production in China? Do you see that happening?
spk00: Yeah, I definitely see the ability for that to happen. If we look at the curtailment in China, we lost about 25,000 tons of lost production. About half of that was BAM and the other half was a combination of acetic acid and other derivatives. So that was about 20 to 25 million of lost margin due to that curtailment. So assuming we don't have any curtailment, then that's obviously volume that we can produce into the system. And our expectation is the same as yours. We don't see any indications we'll have curtailments this year either. Okay.
spk13: And then Europe has been difficult for many companies as, you know, oil prices went up and there was limited pricing. How is your European operation holding up in general as a region? And can you just make any comments on what you're seeing going forward? Thank you.
spk00: Yeah, I don't think we've really seen any major impacts on our business from the increase in oil pricing. I mean, as we've called out before, generally, we do better with higher pricing. In acetyls, I can get past you immediately. It takes a little bit longer in EM. But generally, we do better with higher pricing. The real impact we've had this year has been from natural gas in Europe. And the impact that that's had on specifically our EM operations in Europe, as well as our tow operations in Europe, where we just, in those contracts, haven't had the opportunity to pass on the additional cost of natural gas and utilities based on natural gas through to the consumer real time. We've had a lag in that pass-through pricing.
spk15: But I do think, PJ, the one thing that we do love is having in-region capacity. And our assets in Europe are running at a high rate. With the supply chain issues and the issues around logistics and product coming in from other regions, that has helped us be able to sustain and offset some of these increases in raw materials.
spk13: Great. Thank you.
spk04: Our next question comes from the line of David Begleder with Deutsche Bank. Pleased to see you with your question.
spk03: Thank you. Good morning. Laurie, in the prepared comment, you call out some turnaround costs. in-app appeals in both Q1 and Q2. Can you quantify those costs?
spk00: Yeah, if we look at 2021, we had a total of right around $40 million in turnaround costs. And in 2022, we expect that to be about the same. Last year, it was spread across a wider variety of assets. This year, our large turnarounds will be the two we called out. We have an as Fairway has a turnaround in the first quarter, and then we have a Clear Lake acetic acid plant turnaround that starts at the end of the first quarter and goes into the second quarter.
spk03: Very good. And just back to M&A, if you are unable to make a transformational acquisition in EM, would you ramp up organic spending in that business?
spk00: So we're still planning on high organic spending. I mean, we're planning on $600 million capital next year. Part of that is completion of the Panther project in the acetyls business, but most of the rest of that is really in engineering materials where we'll be spending about the same amount we spend for Panther as we do some of our expansion projects and new builds in China and, well, really all parts of the world. So I'd say, you know, the M&A is not having a big impact on our view of organic investment, organic investments continues to be our highest return, and so we've ramped those projects up, you know, as we see our ability to strategically and efficiently deploy capital. So I don't think that will make a difference in terms of our organic investment.
spk05: Understood. Thank you.
spk04: Thank you. Our next question comes from the line of Hasan Ahmad with Olympic Global. Pleased to see you with your question.
spk12: Morning, Laureen Scott. You know, a question around you guys' sort of relative degree of, call it, satisfaction with your upstream integration. I mean, obviously, we've seen some seismic shifts over the last couple of months, be it the European natural gas situation, the new five-year plan presented in China, obviously looking for significant curtailments in coal usage. So as you've sort of seen all of those things, Does that make you sort of rethink maybe, you know, the integration strategy? Maybe you guys should be more integrated. I don't know how you guys are thinking about that with some of these goings-on.
spk00: Hassan, I assume you're thinking more about integration in terms of upstream.
spk12: Upstream integration, correct, yes.
spk00: Into the acetyl chain, yes.
spk12: Indeed.
spk00: Yes. So, look, right now we produce about 40% of our own methanol. We kind of like that balance of being able to produce methanol or buy methanol, depending where the markets are and what the sources of value are. We're pretty happy with that. We constantly reevaluate and look at opportunities to go further upstream. But I would say, you know, right now we're pretty happy at about that 40% range we're at.
spk15: Yeah, and with the methanol expansions we've already announced this on, I mean, that's going to be able to take and help us with some of the growth that we expect largely in the acetyl chain over the next several years.
spk12: Understood, understood. And just also wanted to revisit M&A. I mean, you guys talked about, you know, considering anything from bolt-on to transformational. I just wanted to get a better sense of if you guys have a preference for – preference or not for certain regions – Only reason I bring that up is, you know, there seem to be some chunky assets in Europe, you know, that are either spinning off, looking to be acquired. You know, I'm thinking in terms of the DSM Plastics Unit, you know, the Lanxess HPM business. I mean, the question really is, you know, you guys have a sizable presence in Europe as is. You know, would you consider doubling down on Europe? Would you be dissuaded by that? You know, just regionally, how are you thinking about M&A?
spk00: Hassan, I would say I am geographically agnostic. I am, you know, it is all about value for me, so we look at all M&A targets for the opportunity to create value for Celanese. I mean, clearly we want it to be a good strategic fit, but we really look at synergies and all the other aspects of a deal to make sure it is something that we believe will create outside value for Celanese and our shareholders.
spk12: Very helpful. Thank you.
spk04: Our next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your question.
spk09: Yeah, good morning. Thanks for taking my question. So in the asset deal chain, you guys demonstrated this past quarter, again, the kind of ability to flex the global network to take advantage of kind of regional changes in price and what have you. I guess, how did you do that given all the freight and logistics constraints that are out there? And I guess, you know, as those start to alleviate, does that give you even more shots on goal or more opportunities to How should we be thinking about that?
spk00: I think you're right. I mean, I think fourth quarter continues to demonstrate the real strength of the business model we have in Acetyl. I think there you really see kind of the breadth of our manufacturing footprint being present in three different geographies, the agility of our supply chain. It's made us really good, I would say even better, at adapting to and capitalizing on disruptions, which we've seen a lot this year. And I think the performance of our Acetyl team is really impressive this year. If you look at all of the opportunities we had to not be agile, they've really taken advantage of it and created a lot of value for the company this year. I think you see that we've We really focused on China this year because prices were very high, but at the very end of the year, the team was able to shift AC sales more to the Western Hemisphere where prices held up longer. In fact, the fourth quarter, we saw the highest percent of our volume going into the Western Hemisphere that we have this year. It was about a 10% swing from China to the Western Hemisphere. Similarly, we saw swings out of acetic acid and more into VAM emulsions and RDP. And I think that is the value of what we have with kind of end-to-end value chain as well as geographic diversity. I would say, look, we've had some issues around supply chain, logistics, and freight, like many of them, like many folks have. But I would also say our team has been amazingly resilient and flexible in you know, securing ships, securing whatever they needed to do, and making sure we could move things as we needed to to really maximize the value of that chain. Look, like anybody, it took us a little bit longer in some cases to fill out those value chains, but I would say, you know, we're through that now and have the lead times in place to really be able to continue to take advantage of that.
spk09: Got it. That's helpful. And then maybe a question for Scott around, again, the M&A commentary. And I guess just given the significant cash flows that you guys have been throwing off, maybe more so than some expected, I guess, can you help us to understand what or how much you can stress or flex the balance sheet and still keep your investment grade rating? Can you go north of four times? Is that kind of a leveraged hurdle that's doable in your mind, just given the strength of the cash flows? I guess, how should we think about that?
spk15: Well, John, I mean, every deal is going to be unique and different. And, you know, I think a lot depends upon, you know, how much EBITDA we're buying and then, you know, what the makeup of the various, you know, assets would be that would be in that type of situation. So, I mean, I would say it really depends. And, you know, I think we are really focused on making sure we generate a lot of cash. And, you know, Lori talked about synergies being critical in any deal. And I think, you know, depending on levels of synergies, it's going to really dictate, you know, what we could do from a balance sheet perspective. And it really comes down to cash generation. We feel really good about 2022 at $1.4 billion into We think that cash generation, with the growth in earnings that we project in the coming years, is going to continue to be quite robust.
spk09: Fair enough. Thanks for the call.
spk04: Thank you. Our next question is from the line of Matthew Blair with Tudor Pickering Hall. Pleased to see you with your questions.
spk20: Hey, good morning. Maybe sticking on the M&A topic, Laurie, I thought the comments that you're looking at M&A in the acetyl chain were pretty interesting, just given your large market position. Would this be something more downstream, like emulsions, or do you think you could consolidate acetic acid and BAM capacity in other parts of the world?
spk00: That's a fair question, Matthew. Look, we do have a large position already in the acetyl chain. So I think as we look at M&A for the acetyl chain, it is things more like ELITEX. So further downstream in the value chain, that is more likely possibility than, say, any kind of a big M&A around acetic acid or some of those products where we already have a fairly large position.
spk20: Got it. And then in the prepared comments, it noted that you're immediately sold out of the Bishops GUR plant that just started up. Are there any low-cost expansion opportunities here, or is it pretty much set at 15 KT?
spk00: We have been doing the low-cost expansions as we can. Our engineers are looking very hard at that. Obviously, GUR markets have continued to expand and grow at a rate much faster than anticipated. We grew nearly 40% this last year. And so the expansion that we built in Bishop, which we expected would last us 12 to 18 months of growth capacity, is now already sold out. So we continuously look for small expansions. The next large expansion we've already announced will be in Europe in 2024. Hopefully, we'll find some more before that, but we are pushing as hard as we can to grow as fast as we can in that area, but just limited right now by our ability to get metal in the ground.
spk20: Great. Thank you very much.
spk04: Thank you. Our next question is from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
spk19: Great, thanks for taking my question. Congratulations on another strong year. I guess just two questions. So first off, could you just update us maybe on any parts of your portfolio that are still lagging, maybe thinking within the elective procedure side on EM? When do you expect that to get back to normal levels?
spk00: We saw... Thanks, Arun. We saw good growth, actually, in implants this year, you know, about a 20% improvement over 2020. But you are right. It is still lagging. We're still kind of 15% to 20% below where we were in 2019. You know, looking at what the implant makers are saying, you know, we don't expect full recovery of implant volumes until we really get into 2023 at this point.
spk19: Okay, thanks for that. And I just wanted to, again, go back to the question of deployment of cash. I mean, there's, again, there's quite a robust trajectory here from the billion four and potentially growth from there over the next couple of years as you bring on these investments. So does it make sense at least to potentially accelerate the capital return in light of, you know, still high valuation multiples? Or are you looking to, you know, continue the inorganic growth side?
spk15: Well, I think, I mean, as Laurie said earlier, I mean, our focus is always on organic growth first. Those are historically our highest return projects. And, you know, we've got $600 million earmarked this year for capital growth. to invest back in ourselves. And then what we've historically done is take that free cash flow, and this year at $1.4 billion, and then deploy that to service the dividend, and then for repurchases and M&A. And that's with where the dividend is at, that's likely going to be somewhere in the billions, probably more than a billion dollars of capital that we'll be able to deploy back with that for M&A and for repurchases. I think that focus really hasn't changed, and given with that cash generation, we think it just presents more opportunity for us.
spk01: Okay, thanks.
spk04: Thank you. The next question is from the line of Alex Yaframov with KeyBank. Please receive your questions.
spk18: Thanks. Good morning. You have a fairly sizable nylon compounding business. As you look at transition to EVs, do you think nylon has risks related to content loss because of its use in high heat applications, or is there still a net content gain because of new nylon applications?
spk00: It's a great question, and one we're hearing a lot. Our belief is we don't expect a decline in nylon with the move to EVs. There are a lot of applications for nylon in EVs, so the high-speed connectors, the powertrain, and obviously the body, the interior nylon is really good for light weighting and still being able to get strength and dimensional stability. In fact, we've had a few new applications using nylon into EVs. So we have a cell strand application that's going into a tailgate on an electric vehicle, for example. So it's lightweight. It has good appearance, high strength. It saves money because it's one piece versus two pieces. So we really see more, you know, I would say at least equal if not more opportunities for nylon into EVs as we're in conventional vehicles.
spk15: Yeah, Alex, I also wouldn't underestimate the power of recycled nylon. And this has been one of the things that we have gained through acquisition is and we've been really growing that EcoMid part of our nylon portfolio as, you know, our customers look for more and more recycled content. Nylon is a great material to recycle, and, you know, the opportunities that we have in the portfolio of grades that we continue to grow has been a really nice area of acceleration for us.
spk00: I would also say there's a lot of nylon in things associated with EVs like the charging stations and other electrification components. So, you know, outside the vehicle itself, we see a lot of new applications developing for nylon.
spk18: That's great. Thanks a lot. And on excess inventories of your EM products at the tier suppliers, Do you have a sense if they have, I don't know, one or two or five months of that excess inventory? And also, do you yourselves have any excess auto product inventory?
spk00: So I'll take the last one first. We do not have excess inventory. We have hardly any inventory at all. This has been a year where we could pretty much sell anything we could make. Our belief is the tiers aren't sitting there with a lot of inventory. Again, we think it was a year-end phenomena that they decided to just draw down what little bit that they had, and we don't expect that to continue into 2022.
spk18: Thank you.
spk04: Thank you. Our next question is from the line of Steve Richardson with Evercore ISI. Please proceed with your question.
spk02: Hello. Hi. This is Keyshawn Riddick on behalf of Steve. Going back to commodity volatility, with nat gas prices still being high domestically and abroad, how quickly are costs flowing through? Are they a little bit faster than expected? And I guess particularly on the EM side, as you mentioned, that there's been a bit of a lag on the ability to pass on higher costs.
spk00: Great question. And we've called out a little bit. We started doing energy surcharges at the end of third quarter. With those surcharges, we were able to recover about $20 million worth of energy costs in the fourth quarter, but energy costs skyrocketed far beyond what we expected, so we had about $15 million uncovered by those surcharges in the fourth quarter. We do expect with those surcharges now flowing through that we will get recovery of that you know, sometime in the first quarter we'll be at a point where we're recovering all of that. And then we expect energy prices to be fairly flat for us as we go through the first quarter. So we expect, again, sometime in the first quarter we should be fully recovering all of that.
spk02: Thank you so much. And then just a follow-up. You mentioned, obviously, the autos rebound in particular, the chip shortage being a possible swing factor for companies. $15 guidance possible upside. Can you give a little bit more color as to what auto OEMs are saying about the shortage? Just overall, this feels like the chip shortage continues to last for longer than expected. Thank you.
spk00: Yeah, look, you know, I think the OEMs are predicting faster recovery, and some are probably having more success getting chips than others. I would say we tend to look at IHS. IHS is predicting kind of mid-high single-digit growth globally into next year from this year, which will still be mid-high single digits behind where we were pre-COVID. So they're not predicting full recovery, but let's say kind of half of the way there. Our own outlook is more conservative based on what we're seeing and what we're hearing around chip shortages So that's where the upside is. If IHS is right, which we all hope they are, that chips come back more quickly and we see that kind of recovery, then we'll have additional upside in our auto volumes as well.
spk05: Rob, let's make the next question or the last one, please.
spk04: Sure. That question will be coming from the line of Jadeep Pandya with OnField Investment.
spk14: Thank you so much. The first question is really around your DUR expansion. Could you just tell us, like, you know, is this mainly going into the separator market? And if so, is it more the dry versus the wet separator? Because obviously there's a huge growth in PVDF in front of us. So just wanted to understand your potential further expansions in GUR in this regard. And then the second question really is sort of around, you know, your comments around M&A. I mean, you've outlined, you know, the sort of – strength of the acetyls platform now in terms of also sustainability so do you think that selenese in terms of the structure as it is today with em and acetyls is the way to go forward if there is a transformational deal or should we think that you know if there is a transformational deal a separate path for those two businesses could is also very much on the cards thanks a lot
spk00: Great. So let me take your first question. So the Bishop DUR, you know, started up kind of at the end of 2021. That volume is essentially going to support the lithium ion battery separator film growth that I called out earlier, and it is wet, for those of you that that's been used before. So again, we are looking to expand in every way as quick as we can. Those markets continue to grow very strongly, but our next major expansion in GUR will be in 2024 in Germany with an expansion that we have there. And then on your second question about M&A, Look, we continue to value having our businesses together. I think we see the advantage of that this year, and I think we'll see the advantage of that if we do big at M&A, that we get this great cash flow from Acetyl, which give us more flexibility and capability to support larger M&As. Obviously, we think we have talent advantages for having a bigger group. and other advantages because a lot of materials coming out of the asset till chain gets used in engineered materials. So we like having the businesses together. As I've said on this call before, we never say never. If at some time we think we would need to separate them to realize the value of the assets, we, of course, would always consider doing what's best for the shareholder. But at this point in time, we see having these businesses together as we go forward.
spk04: Thanks a lot, Lou. Thank you. At this time, I'll now turn the call over to Brandon Ayash for closing remarks.
spk05: Thanks, Rob. We'd like to thank everyone for listening in today. As always, we're around after the call if you have any follow-up questions at all. Rob, please go ahead and close out the call.
spk04: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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