Celanese Corporation

Greetings and welcome to the Celanese Corporation third quarter 2022 earnings call and webcast. At this time, all participants are in a listen-only mode. Our question and answer session will follow the formal remarks. 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. I would now like to turn the call over to Brandon Ayash, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Daryl. Welcome to the Celanese Corporation Third Quarter 2022 Earnings Conference Call. My name is Brandon Ayosh, Vice President of Investor Relations. With me today on the call are Lori Reierkirk, Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer. Celanese Corporation distributed its third 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 the 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 go ahead and open the line directly for your questions. Darrell, please go ahead and open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 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 question has come from the line of Josh Spector with UBS. Please proceed with your questions.

Yeah, hi. Thanks for taking my question. I guess now that you've owned the M&M assets for a few days here, Wondering if you can give us some context on the performance this year from an EBITDA perspective. Also, maybe some historical context given DuPont embedded some corporate and it's not the full segment. How is that performed? And then also, when you look at next year, you gave the comments of $800 million to get to that business pre-Synergies. What are the major lists that it takes to get there from the current run rate? Thanks.

Thanks for the question, Josh. That's actually a lot of questions. So let me see if I can navigate all that. So, you know, on third quarter performance, I mean, DuPont will be reporting shortly. Obviously what they report, not apples to apples necessarily because it does include Delrin as well. But I think it's fair to say in third quarter, much like the first two quarters, you know, M&M is not performing in line with our expectations of the business. or even in line with how they performed in 2021. And I think you saw that in the numbers we called out for fourth quarter. And I think if you think about fourth quarter, I mean, fourth quarter is typically a low quarter for us as well. We do get seasonality in the fourth quarter. We expect DuPont to see the same seasonality. I think we see some of the concerns we've had on DuPont's performance continuing. with the M&M asset in the fourth quarter as well. So again, it's only been three days, but I would say as we've gotten to get a clearer view of M&M's performance, I think there's a couple reasons we see for their underperformance this year. So overall, poor demand backdrop in Asia and Europe. Not dissimilar, I think, in Europe from what we've seen, but I think we've had a little bit more upside in Asia on auto than they have seen. Competitive dynamics that has really impacted more the standard business, of which we believe they've had a bit more than versus the differentiated business. And I would say also insufficient commercial flexibility to really pivot and respond to the markets and the need to do different things in the market maybe as quickly as we have. You know, I think also their current contract for sourcing for nylon has been a bit challenging in this economic environment. And, you know, I think it boils down to there's really been, you know, a margin compression that's occurred, especially in the nylon area. And surprisingly, in some cases, it's not that they haven't raised price, it's actually the fact that they didn't adjust price downward. stay competitive, and they've lost volume. They've also had some pretty significant foreign currency headwinds, which are different than we've experienced due to the fact that they're a bit more exposed than we are with the way they write their contracts. So if we think about moving forward now into the rest of the fourth quarter that we've closed and moving into next year, I'll talk a little bit about how we'll address each of these. So on the foreign currency headwinds, that's an impact of over $20 million for us alone in November and December on the M&M assets. And so I think we're looking at how do we optimize our commercial practices to address the sales currency exposures, so what's denominated in local currency and what's in U.S. dollars. We also can use some of our debt to look at converting more of our U.S. dollar debt to lower rate currencies like the euro or the yuan or the yen, which will help us lower our borrowing rate, so it will help the overall financial condition of the company. I think when we look at key raw materials in the purchasing requirement, We will be able to exercise some of the flexibility we have within Celanese to really utilize some of the M&M polymer capacity. So if you think about it, M&M has a fairly large take-or-pay contract currently for raw materials for nylon. And so they've been producing a lot of material, but they've been building inventory. We can actually start buying that, using that inventory, using that excess production for Celanese which will be net-net better for both companies together. I think also, remember, we called out at the time of the deal, there's actually the contract for ROS has been renegotiated, and a new contract will come in place at the first of 2023. This new contract has less take-or-pay requirements, so that will give us more flexibility and optionality going forward. So I think about it as it will really let us start It's one element of starting to run this larger nylon portfolio in a more integrated, flexible, commercially agile way, much like the transition we went through with POM a few years ago, much like the transition we went through with Acetyls some year before that. On the volume side, I think we have a lot of opportunities between M&M and the Heritage Felonies assets to really deploy our combined commercial team. to cross-sell not just nylon, but other products, including other selling these products. So as we've gotten to really look at where all of our products are going, there's only about a 20% overlap in terms of the companies that are buying from us. So that leaves a really large space for us to go into the companies that each other has been in and really start cross-selling the entire portfolio versus just what we had traditionally. You know, pricing... Again, you know, margin compression there. We actually think there's some opportunity in pricing to do it in a more differentiated way. So if you really look, you know, our analysis so far is M&M took a fairly common response on pricing to everything, you know, whereas we like to look at it in a couple different tranches. You know, so for really differentiated products, we will always push pricing because we have the opportunity to do that. For more standard grade products, there may be places where you, in fact, have to reduce pricing in the current environment in order to maintain the same volume. And I think for us, and then cross-selling is another opportunity, but I think for us it's really instead of having one rule about we want to maximize margin percent or we want to maximize revenue or maximize volume, for us it is always looking at value. How do we maximize the margin dollars being achieved from the products that we have out there? And then finally, and I know this is a long answer, finally on inventory, you know, M&M has built, you know, a pretty large excess of finished goods in inventory over 2022. As they've seen some drop-off in market share and as they've continued to produce because of their raw material contract, that is burdening our November and December EBITDA as we start trying to take measures to get that inventory more in line. But longer term, it will allow us to manage our inventory levels, again, more like POM, so that our pricing and our cost becomes more contemporary with each other so we don't see as much kind of disconnect between cost and pricing as we go forward. So, again, you know, we'll take these actions now. We've already started all of that. But, you know, it will take some time, I'd say, to get the business performing to our expectations. So if we look at next year, if we look at the, you know, I'd say $800 million of EBITDA that we aspire to for next year and that we're really pushing the team to achieve on the M&M assets, I mean, it is a big lift. I mean, it's coming from about what we think is going to be around $500 this year for the M&M assets in EBITDA to $800. That looks really big. I would remind you, though, that with the Selenese EM portfolio, We went from 571 last year in 2021 to 800 this year. So it's not that much bigger than we've already demonstrated that we know how to do. And we already have a lot of actions underway and how we're going to do that. We're going to be helped by 4% higher auto bills next year. I think that's pretty consistently called out by everyone. And we've already been pre-qualifying the M&M nylon into our applications, our heritage felonies applications. So we have a great start on that. Tom has already been meeting with all of the business teams in M&M to really do the deep dive so we really can understand the nature of underperformance, what the opportunities are for next year. So I'd say, you know, we're off to a very strong start. Yes, 800 is a lift, but again, not unachievable given our demonstrated performance in our own portfolio.

Very helpful. Thank you.

Thank you. Our next questions come from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.

Thank you. Laurie, Q4 EPS is analyzing at roughly $7 per share. Could you and Scott help us bridge this to the $14 upper end of the range for next year?

Yeah, I mean, again, I don't think you can look at Q4 and, you know, multiply that times four and get to a number for next year in terms of EBIT. You know, Q4, we are seeing a, you know, a lot of headwinds, a lot of challenges. In Q4, again, because of the really slump we've seen in China with paintings, coatings, and constructions, with the ongoing COVID-19 lockdown, the situation in Europe where we've also seen the drop there. You know, the U.S. has held up pretty well. But I think in some of the stocking that we've seen, especially in acetyls, and the fact that acetyls is basically bumping and bouncing around its cost curve, You know, these are conditions that we don't believe can last forever. So while we think first quarter may be challenging, we do see line of sight to be somewhat better than fourth quarter, again, because we have a lot of things coming in with M&M that we're having to manage in the fourth quarter. But I think by first quarter, we start to see realization of some of the synergies. We'll have had a chance to start making some of the moves I just talked about. And then we really do expect the second half of the year to be back around in that $13 to $14 range. And again, a big portion of that is a lift I just described on M&M, but we have continued growth in our own engineer materials business. In addition to the 4% higher auto bills, we will see a GUR lift next year. GUR is sold out for EV, so if you mind battery separator film. That demand is only going up, so that will allow us to raise margins in GUR next year. LCP margins are also going up next year as we see high demand into 5G applications. Next year, we'll get the full benefit from Santaprene and Kepco. And Santaprene, we do expect it to be back to the levels we had called out at the time of the deal in terms of returns on Santaprene. And then medical, which we saw this quarter return to pre-COVID levels, we are predicting continued growth in medical, both in terms of You know, in terms of orthopedics, but also in terms of the other applications like vital dose and medical devices. So we see a lot of growth opportunities next year in the M&M portfolio, in our heritage felonies portfolio, and we do see strengthening across the opportunity to strengthen across the acetyl chain. as we move on through the year. I would also say we will have a good uplift next year in our tow earnings. As we talked about last quarter, we have been doing a lot to really restructure our acetate tow business. We are starting to run it more like we do a derivative of the acetil chain. And much like we saw when we started doing that with BAM and emulsion, that allows us to build in more optionality and more flexibility, which will increase our earnings. Historically, we've run that tow business really focused on customer value, quality, and reliability of supply. When China went independent, that reliability of supply became less important to our customers because there was an overhang in other regions. Now that it's timed up again, we're at 90% utilization in tow outside of China. And so that with the raw material and the energy volatility has given us an opportunity now to really go in, put in new contract structures that allow us to better accommodate changes in raw material and energy pricing, really enhance the business models in tow, take some costs out of tow by integrating it into the acetic acid team, while still maintaining that reliability of supply and that strong customer focus that we've had. So the result is we will be seeing much improved profitability in 2023, along with greatly improved flexibility.

And do you have a forecast for tow next year, an early look at the improved profitability?

No. You know, what I would say is if you look at what we called out for tow in 2023 in the investor day, we will be at or above that.

Very good. Thank you very much.

Thank you. Our next question has come from the line of Ghanshyam Punjabi with Bayer. Please proceed with your questions.

Thank you. Good morning, everyone. I guess first off, you know, Laurie, you know, just in your prepared comments, you were talking about inventory destocking. And, you know, is it as simple as we just went from a world of just too little to too much very quickly? And so that's what's exaggerating some of the weakness that you're seeing. And then related to that, can you just give us a timeline into your visibility that, you know, this will last through the first quarter, if not longer?

Yeah, look, Ganshan, thanks for the question. I think you have it exactly right. I mean, I think we went from everybody being worried about not being able to get molecules and kind of buying whatever they could get their hands on to all of a sudden, you know, all the production issues were resolved, demand started going down, and people realized there was availability, and they have hype across inventory and tank age. They want to bring that down. before the end of the year, and they assume that the molecules will be there. Just like when we see prices rising, people start buying because they think it will be more expensive tomorrow. Right now, they've seen prices falling, so they quit buying because they think it will be cheaper tomorrow. But I think a few things behind why we've gotten into this. I mean, we are seeing improved logistics. We are seeing improvement in port congestion and the ability to move materials around the globe we are seeing improved product availability there's been less outages and disruptions in the last quarter than we've been having over the previous few years we are seeing a weaker demand outlook both again because of paints and coatings which I talked about specifically in Europe and China but also just some seasonality that we see in this area And again, falling prices, I think, is a big effect on people's mental view of what they think. So I do think this is likely to extend into first quarter 23. You know, typically when we see this flip is as we get through Chinese New Year's, then we start to see demand coming up again and we start to see activities coming up again. And then as you get warming. in the Western Hemisphere, you start to see it coming up. So that's why I feel pretty confident saying, you know, we expect to see this start to turn the other direction, you know, sometime after the first quarter.

Yeah, the one area where we don't see a lot of excess inventory, Gancham, is in automotive. And I think that's an area we're focused very closely on. We don't have that value chain that's full. So we're not seeing big Z stocking. We're seeing some level of seasonality here in the fourth quarter that's more like normal, but we do expect the fact that auto has been at relatively low levels from a build standpoint the last two years, that to kind of hold flat or slightly increase as we work our way into next year. So that's an area that we feel good about, that we're not going to see major weakness as we work our way into the first half of next year.

Okay, thanks for that. And then maybe for you, Scott, on the one plus billion of discretionary free cash flow that you've targeted for 2023, What are the levers you can pull to deliver on that number in the scenario that, you know, the weakness you're anticipating through 1Q pushes a bit longer into the middle of the year? Thanks.

Yeah, I think, you know, as we've scenario planned that out, Gonsham, we feel very confident in our ability to get to that level under a variety of different outcomes that could be there. And a lot of that is, you know, the working capital build that we've had over the last 18 months has been fairly sizable. We've seen a similar build in the M&M business. And therefore, you know, if we were to see a deeper decline in the first half of next year, there would likely be a much heavier collection of that working capital. So we feel very strong about that. We continue to analyze. I think we've talked on these calls in the past about a quarterly review of capital and looking at what our businesses need, both in the near term and long term. to better match that capital spend. You know, we brought that capital down on a combined basis already, expecting around $600 million of capital next year. We lowered the capital this year down to $550. And so those are levers that we'll continue to evaluate depending on where the demand landscape is.

Thanks, Scott. Thank you. Our next questions come from the line of Jeff Tsakakis with JPMorgan. Please proceed with your questions.

Thanks very much. You gave an idea of acetic acid prices in China as being close to $400 a ton. Can you give us some reference prices and trends in VAM across your geographies?

Yeah, I think that's one of the big differences we saw in third quarter, Jeff, is we saw VAM in China, which had still been running you know, quite attractively, I'd say, you know, kind of $1,400, $1,500, really come down to about $1,000 a ton by the end of the third quarter, which is, we believe, pretty much at the cost curve in China. So that's been a big change. And again, tied directly to paints and coatings as, you know, a large percentage of our emulsions go into paints and coatings. I mean, to give you an idea, we saw about a 15% – 15% to 20% drop an emulsion demand globally in the third quarter. In Europe, I think we're also starting to see some compression of margins for acid and BAM. I don't have the exact number for BAM right now in Europe on the tip of my tongue. But in Europe, I mean, sorry, in the U.S., it's holding up a bit better, although we start to see some softening there. Again, I think the softening outside of China is more on destocking necessarily than absolute demand. But in China, which I think is the easiest reference price, we see VAM coming down to about $1,000 per ton, which, again, is probably right at the cost curve for VAM in China.

And then just to follow up, I think in Scott's script, He said that he's confident in paying down debt in 23 across a wide variety of macro scenarios. And then you say that in the most challenging one, you have a detailed playbook. Can you give us an idea what the detailed playbook is and what a most challenging scenario would be like?

Yeah, Jeff, I think there are two times, I think, over the past 15 or so years where we've had to really pull back hard with a heavy focus on near-term cash. And I think that was coming out of the economic crisis, 2008-9, and then again in the early days of COVID in 2020. And that really focuses around cash collection and harvesting of cash, which, as I mentioned before, we feel very comfortable with as we work our way into the first part of next year. And then it's a heavy focus on capital and what capital needs. Our manufacturing teams have done a great job being able to flex as needed, even on large capital projects. If you recall, we paused the clear lake acetic acid expansion back in 2020, and then we're able to utilize that time to lower the overall cost of that project, but significantly reduce the capital and we were able to bring our capex spend, which was expected to be north of $500 million in 2020, down to around $300 million. And so we are in process, as I mentioned earlier, of looking at where those levers are for 2023, both across our legacy portfolio as well as the M&M capex spend, so that we can focus really around near-term productivity, as well as cost reduction. And if there are projects that can be paused, we will do that.

Great. Thank you so much. Thank you.

Our next questions come from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.

Thank you, and good morning, everyone. Laurie, I think in the script you said the $13 to $14 plus of EPS for next year did not assume a recession because you're not seeing that in your order book. Can you give us a sense of what a recessionary range for 23 would be if we do indeed go into a recession? Is it, you know, $12 to $14, $10 to $12? What would you think on a high level?

Yeah, look, Vincent, I don't really have a number for that. You know, I think if we just look at current demand conditions and especially at auto prices, You know, I think everybody's pretty consistent in thinking auto is continuing to go up next year. I don't find that surprising. That's consistent with what we're hearing from customers. I mean, we've had three years of very low auto production. We think there's still a lot of pent-up demand. We think supply will continue to be the determining factor for auto. So supply of chips and other materials is what will be the determining factor. Now, obviously, as interest rates go up, there may be some regions where that has some impact. But, you know, quite frankly, we think auto, which especially with M&M is now a significant part of our portfolio again, is really an upside for next year. And so I think in that way, you know, if we do go into recession, I mean, it's a little bit different this time in that, you know, usually in a recession, I mean, a couple things. Usually in a recession, you see energy starts to come down. And then prices, which is in this case, energy is staying up because of geopolitical concerns. So that's a little bit different. We're seeing full employment, especially here in the U.S., which is why I think we're not seeing some of the impacts in the U.S., because although people are being hit by inflation, there is full employment. So it doesn't feel as hard as most recessions where you see a lot of layoffs and people without jobs. And then I think the third thing is auto. I mean, auto is usually one of the leading indicators of a recession and a drop in demand for autos. And in fact, we see it going the other way in this recession. So we haven't really modeled what I would call a recessionary scenario. And because we just don't see it happening, even if technically, mathematically, it's calculated as recession, we don't see that.

The other thing I would add to that, Vincent, is with the synergies that we have, we've already increased our synergy number for year one. expect to have between $135 million of full achieved synergies next year. And, you know, if we see continued demand decline in non-auto segments, then we'll look for ways at which to flex and accelerate further synergies. So we do feel very confident of being able to get to that range that we put in the prepared comments.

Okay. And as a follow-up, the prepared comments had a discussion of what you've already done with the plant footprint discussion. particularly in the acetyl chain with some reductions. But how are you thinking about how you're going to run the chain in 23? And I guess in particular, how is the Clear Lake expansion coming and how could that play a role in 23? Yeah.

So I think if we look at, you know, this year, we, you know, we have already reduced our rates in the acetyl chain in China and in Singapore and down to 50% or 70% of our capacity. And we did that because we see demand. We don't want to build a lot of inventory. We've seen demand come off. So we've already taken that step. In some areas, we've gone down to as little as 30% of operating capacity, like in emulsions where we've seen the big drop there. So I think we've been really proactive in managing our response. That's obviously a cost savings, but we're really focused on aligning our actions with the customer demand. Similarly, in Frankfurt, given the high cost, energy cost in Frankfurt and the softening demand in Europe, we've reduced our POM rates at Frankfurt, again, to align our demand, the customer demand with our own production. And we've made the decision for the BAM plant in Frankfurt to to go ahead and keep that unit down until we see demand coming back. I mean, the good news is all of these steps were taken. This is still economic capacity. It would still make money if we ran it, but we just don't see enough demand. So we can optimize our chain better by moving molecules around the globe and using lower cost capacity, particularly in the U.S. Gulf Coast. to meet some of these global demands now that we have less global demand. And so, you know, you're going to continue to see actions like that as we go into 2023. What I would say is, you know, look, BAM is ready in Frankfurt. When we, you know, start to see this come back, hopefully by the end of the first quarter, we'll be able to start that unit up. Everything else is just a matter of lifting the rate. So that's a day's decision to do it. So that's easy. And on Clear Lake, what I... What I would say about Clear Lake is we are on track to mechanically complete and start up the unit in the first half. We intend to do so. Again, the justification for that project was productivity. We've called out about $100 million a year in productivity. So even if we see no need to run additional capacity in the Gulf Coast, we will run that unit for productivity and get the $100 million run rate savings, I should say. The first year will obviously be that much. but run that unit for productivity. And then we have the option, if we see something similar happen, as we saw happen in 21, where we see a run-up in demand or if there are operating issues around the globe, you know, we can start running that unit at higher rates and get even additional margins from that.

Thanks so much. Thank you. Our next question has come from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Yes, good morning. Lori, can you speak to a bridge between the rough run rate of $500 million that you referenced for M&M this year to the target of $800 million that you have for 2023? I appreciate that you've owned it just a few days, and I imagine it's difficult, but You know, in formulating that $800 million number, what are you baking in for, you know, things like price-cost spread or normalization of volumes or perhaps, you know, the cross-selling or other company-specific actions that you mentioned? Any broad strokes related color there I think would be really helpful.

Yeah, look, I don't have a bridge. As you said, we've only owned it three days. So we're still working on what are we learning? What can we immediately go do about it? So we're really been focused on, you know, not worrying so much about what happened in the past, but okay, how can we do this differently in the future? But I would say it's really more based on our own experience of what levers to pull. I mean, there's some things like foreign currency. You know, that was about $20 million in November, December that we think we can go rectify, maybe not in November, December, but you know, in next year. And so, you know, you annualize that, that's, you know, I don't know, I just make up a number here, you know, so that's 50 million or something. And then, you know, if you look at volume, they've lost about 15% market share. If we can through pricing and through cross-selling recover that, that's a fairly large number. Remember, the DuPont number in 2021 for EBITDA was 750, something like that, in the 700s. So just recovering the volume that they had sold and taking care of some of the other factors that didn't exist in 21, like the currency, I think pretty quickly gets us back to 800. So those are the things that we're focused on. And then as Scott said, You know, we will start to see some synergies as early as January 1st. We will have some synergies from office closures where we have overlapping office sites like Seoul and Singapore and others. So, you know, there are synergies that will come in there as well. I mean, obviously, we'll account for those separately. But I think, you know, and then we have a new raw material contract that will come into play in January, which will give us flexibility, which will also be a source of value for us. So, you know, I wish I could give you a better bridge. We just don't have it to that level of detail yet, because at this point, we're really trying to identify, you know, what's the 10 levers to go pull? Let's get those in actions, and then we'll quantify them all. But again, based on our own experience, based on where DuPont was in 21, you know, we feel this is the list we can make to get to 800 if we get the organization really focused on it and really pushing towards it.

Fair enough, and I appreciate the color there. My second question is more in the spirit of clarification and maybe housekeeping for Scott. What is the amount of transaction-related amortization that's embedded in the incremental DNA of 350 million that you referenced And moving forward, would you intend to include that or exclude that from your adjusted EPS in 2023?

Yeah, so of that 350, Kevin, the best way to think about right now is about a third of that would be base business depreciation and then two-thirds amortization. And that's an estimate right now. We'll be working through that here. in the fourth quarter, and we would not be adjusting that out of our adjustment, so we'll include that. You know, we will certainly provide color as to what that amount is, but we don't plan to adjust it out.

Okay. Excellent. Thank you.

Thank you. Our next questions come from the line of Mike Lighthead with Barclays. Please proceed with your questions.

Great. Thanks. Good morning, guys. First, just two quick ones on asset deals. First, the sequential decline in EBIT for asset deal chain and 4Q, obviously prices are down, volumes are down. But can you just help us with if in 4Q there's any sort of one-timey, either fixed cost absorption hit as you're running your assets lower or high cost inputs running through that shouldn't carry forward into 23? And second, you mentioned industry margins being unsustainably low. I guess When you look at previous times, kind of we've gone through this in the industry, what's sort of the usual time before that resolves itself or you see supply-demand start to balance itself out?

Yeah, there's really no, I'd say, one-time things. I mean, you know, we've just seen deterioration through third quarter in terms of pricing and in terms of demand, again, specifically China, Europe, less so in the U.S., especially as I called out that drop in emulsions demand now that is like 15% to 20% down globally versus where we've been. So I could only describe the fourth quarter conditions as now kind of sub-foundational. Again, we think mostly it's seasonal. We think it's destocking. There is an end to destocking because people – so I don't think it can get much worse, let's be honest. And one of the reasons is when we see it in our order books, I mean, orders have stabilized again now at this lower level, but they've stabilized again. And so that's why we're saying, look, we think this continues through the first quarter. And then as we move back into the construction season, hopefully we see some movement in China and COVID, but we've said that before. And as maybe people gain more confidence in Europe and again construction season comes back, we do expect towards the end of the first quarter to start seeing recovery into more of a foundational level.

Great. That's helpful. And then second for Scott, I just wanted to dig in on the M&M currency exposure issue. I think obviously you have pretty good visibility into the M&M country mix ahead of close. Was it a net hedging issue at M&M or a mismatch of sales and COGS currency? Just trying to get a sense of what was different when you got under the hood there.

Yeah, I think, you know, we expect the annual impact this year to be about $100 million, which is not unlike the impact that we have in totality at Celanese today. And so it's a little higher weighting than what we see in our base engineered materials business. And I would kind of chalk it up to two things. One, a lot more costs in dollars in terms of what moves through. And then more sales in local currencies, whereas Selenies typically would sell in some of those countries on a dollar basis. So those are the two things we're looking at, you know, from a business risk perspective of where we can make changes and where we can combine, you know, the power of, you know, the kind of in-country businesses that we have going forward. And I would also say, you know, there's certain things that, you know, at the enterprise level we can do to help mitigate that. Laurie alluded to some of those earlier. And we'll be looking at that as well. And hopefully we should get some run rate benefit in the early part of next year from those actions.

Great. Thank you. Thank you. Our next questions come from the line of Mike Sasson with Wells Fargo. Please proceed with your questions.

Hey, good morning. In terms of your outlook for 23, does that assume the normal foundational benefits adjusted EBIT for the acetyl chain in that, I think it's the billion to billion one range?

Yeah, Mike, obviously we were a little hesitant to even give 23 guidance, but so what I would say is, so for 2023, if we think on the low end of what we're thinking of for acetyl, I would say, you know, we're assuming First quarter is sub-foundational and then recovering. If you think about that, second quarter is probably foundational, third quarter, fourth quarter. Let me just talk about foundational a little bit and what that means. We always meant foundational was meant to capture the low end of the typical range. We didn't really capture recessionary conditions. As I said, we're kind of seeing that in Acetyl. And so, again, we believe fourth quarter this year and early 2023 will be sub-foundational. And then we have some seasonality in the fourth quarter. So, again, it's for a year average. But I think, you know, if you analyze even Q4, what we're calling out for Acetyl, that's 900. And that's sub-foundational. So, I think if you look at You know, what does foundational really mean? It's probably more in the 1.1 to 1.2 area, with 1.2 being after we finish the Clear Lake expansion. So just for some clarity. So I would say next year is kind of on average for the year at that foundational level or a little bit lower at the lower end. As we all know, this market can move very quickly if we have some industry outages or anything else that causes, because we are still at pretty high utilization in the asset tail chain. But that's how we're thinking about next year and how we're thinking about it relative to foundational earnings.

Got it. And the base adjusted even, I'm sorry, the base engineering materials business, 22, you're close to the $800 million adjusted even. I think you mentioned you felt there could be some growth. And maybe just maybe talk about what type of growth and where you'll see it from and, you know, if you have any specifics, great.

Yeah. So, you know, the growth that we're expecting there is, you know, double digit, I would, you know, say. It's It's the things I called out earlier, Mike. I mean, it's the growth in auto. It's the margin lift in GUR due to full utilization. It's the margin lift in LCP due to high utilization and growing 5G applications. It's getting the full value from Santa Pre now that we've had the opportunity to take pricing actions and other actions to get Santa Pre and getting the full value of Kepco for the year as well as kind of double-digit growth that we've been seeing in medical. So, you know, I'd say those are the biggest factors driving that double-digit growth in margins for the heritage cell and EZM business.

Great. Thank you.

Thank you. Our next questions come from the line of John McNulty with BMO Capital Markets. Please proceed with your questions.

Yeah, thanks for taking my question. So maybe a question for Scott. When you look to better match the interest lines and the debt to kind of counter the FX impacts, can you speak to, at least based on current rates, what that might mean for your interest expenses? Does it send it up a bit? Does it send it down? I guess, how should we be thinking about that?

Well, I think in those currencies where we have exposure of any size, I think it would lower the overall interest expense. However, John, we're going to be careful with when we do that. Obviously, those currencies have depreciated pretty substantially this year. And so, you know, there's a balance between interest expense versus then, you know, depending on when you move that over, do you end up having, you know, ultimately more leverage as that currency decreases? So we're going to be balanced in how we look at that, but we do see some opportunity as we get into next year to help with some of that business exposure.

Got it. Fair enough. And then on the M&M front, in terms of the – it sounds like they've been really running pretty hard just because they kind of had to with take or pays and what have you. I guess, can you quantify what the inventory build is versus kind of what you view as normal and how much – we could see in terms of working capital, at least just out of that asset alone?

Yeah, I don't know that we have those numbers. And again, we're going to be taking some steps in the fourth quarter that will continue into next year to use DuPont material to replace our own purchases of polymer and different things. So I don't think we have a really firm number on that yet.

Yeah, John, normal is different as we go forward because you're putting these two portfolios together. And And so we're looking at, you know, what is the optimal mix? It's going to be different by region as well, depending on, you know, where our business has historically been from mainly a nylon standpoint. But we're really looking at how we can leverage the power, really, of both portfolios that we're bringing together right now.

Fair point. Makes sense. Thanks very much for the call.

Thanks, John.

Thank you. Our next questions come from the line of PJ Juvicar with Citi. Please proceed with your questions.

Yes, thank you, Lori and Scott. You talked about asset deals, and you always do a great job in managing the situation globally through utilization of different plants. I have a question on the Frankfurt plant. It's your highest cost. Do you think there is a chance that it becomes a stranded asset? You know, what kind of headwinds do you expect in Europe, given your large footprint there in Europe as well as in Germany?

PJ, just a clarification. You're talking about the Frankfurt BAM plant or our palm plant?

BAM plant, sorry.

BAM. Okay, thank you. I just wanted to be clear if I answered the right question. You know, look, we have five BAM assets globally. Historically, Frankfurt has not been our highest plant. cost plants. So let me just be clear on that. And even today, we could run it, and it could run at a profit, but it's just volume we can get somewhere else more cheaply right now because of the very high prices that we had been seeing in terms of European energy. And quite frankly, when it gets cold, we expect to see those prices again. So I don't really see a possibility of it becoming a stranded asset. I mean, it's only been about three months ago, we were running every single plant we had all out and still not able to meet the demand. So I do think demand is going to come back. And I think we will need all the plants we have. And, you know, Frankfurt BAM has always been a very profitable plant. This is just a unique situation with the European energy prices we're seeing. coupled with the fairly rapid drop in demand that we've seen because of other, you know, the geopolitical factors, the China COVID, and then winterization kind of all coming together at the same time. So I don't really see any possibility that becomes a stranded asset.

Yeah, PJ, I would just add that this theme of the power of our network is very important. Whether it's VAM, whether it's acetic acid, whether it's POMP, And now as we bring M&M in, nylon, PBT, et cetera, we have created, we believe, a lot of value over time by flexing these networks. And having those assets in Europe are great assets. And so bringing that concept and leveraging that as we bring these portfolios together with M&M is something that we're going to be working hard here in the fourth quarter to see how we want to operate as we get into next year for that business as well.

Okay. Okay. And then secondly, you know, you mentioned you made a lot of comments on M&M, and we appreciate that. One of the things you say in your prepared comments is that that business had lagged in pricing since 2021. So maybe is there a one-time step up in pricing that maybe we have underappreciated?

Yeah, look, I think, you know, and I talked a little bit about this earlier. I think... Their total pricing hasn't necessarily lagged. I think it's really distinguishing between the differentiated business where you had room to move pricing and the more standard business where, in fact, we've seen a lot of price pressures from competitors where, in fact, maybe it would have been better to take down pricing and not lose so much market share. So I think it's just a more fine-tuned approach to pricing that we want to take. I wouldn't necessarily say it just means prices will go up. It will really be about trying to maximize the margin dollar contribution versus any other signal.

Great. Thank you.

Thank you. Our next question has come from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.

Morning, Laurie and Scott. You know, I'm just trying to sort of get a better sense, I know it was asked earlier, of what you actually feel cross EBITDA would be. I mean, I know that the guidance that you guys gave for Q4, you know, obviously a seasonally weak quarter. So obviously Q4, you know, one can sort of extrapolate that. To me, it just seems like Q3 was the worst of everything. You had destocking, high energy prices, be it in Europe and the like, acetic prices coming down as hard as they did. Is it fair to assume that the 600 and change million in quarterly EBITDA that you guys generated in Q3 is possibly the right run rate annualized number to think about in terms of trough EBITDA?

Sorry, Hazan, I'm just trying to understand your question better. The 600 and change in EBITDA for acetyls?

No, just, I mean, overall, as a company, what do you think, you know, your trough EBITDA number would be?

I mean, I'll be honest with you, Hassan. I mean, we really look at each environment differently. I mean, troughs, recessions, et cetera. I mean, it's hard to put labels on different things. I mean, at the end of the day, I think what we stated we're pushing towards to get to for next year, just given the current condition, would suggest that somewhere in that Q3 range is probably somewhere close to that. But I think, you know, every situation is different. It's really about making sure that we are managing the business on a daily basis, you know, to maximize earnings and maximize cash flow and value creation.

Fair enough. Fair enough. And now just moving on from that, you know, more specific on the acetyl chain, you know, you talked about pricing being around $400 a ton, you know, hitting sort of – the cost curve side of things and the like. So two things. One is are you, you know, in the industry seeing sort of shutdowns at these levels? That's the first part of it. The second part of it is that, you know, in your prepared remarks, you obviously talked about, you know, operating rates for you guys in China and Singapore being, you know, 50% to 70%, you know, the – emulsions business, you know, reducing the tons sold by 15% and the like, yet your volume sequentially were only down 4%. So just trying to reconcile that as well. So two parts, you know, one, shutdown, and two, you know, why your volumes weren't weaker than what your commentary suggested.

Yeah, so I would say, you know, we saw the decline through the quarter. So the start of the quarter, you know, was actually at a much higher pricing. The average price for third quarter or the average, you know, ISIS China asset for third quarter was around 430. And now we're down around 400. So we've continued to see pricing decline. So I'd say, you know, the start of the quarter was stronger than we started to see it pretty rapid. And I think that's why you didn't see the volumes drop so much. The actions we've taken to really cut our rates have happened here at the very end of the quarter and going into October. So I probably wasn't clear on that. And so I think that's why you don't see it as much in the volumes. But, you know, again, around 400. To your first question, though, I would say we have seen others take action to slow down, as we have, but not yet to shut down. But given that this gets pricing, I mean, you know, we are still the most economic producer of acetic acid in China. We know this is at the cross curve, so we know others are struggling. I think if this goes on longer, you may see people continue to slow down rates or shut down, even if only temporarily.

Very helpful. Thank you so much.

Thank you. Our next question has come from the line of Matthew Blair with TPH. Please proceed with your questions.

Hey, Laurie, you mentioned that in autos, your build rates are outpacing industry averages, especially in North America and Europe. Could you talk about your total autos build rate and how that compares to global averages and overall the reception that you're getting with EV penetrations?

Yeah, you know, I think so on autos, you know, I think IHS thought we're at 6% growth rate. We have seen, you know, we think it's a little bit less than that. But I think we have outpaced auto builds pretty significantly across all of our businesses. I'm trying to remember the number off the top of my head, but... Let me answer the EV question first. So EV, you know, we're about, for the legacy EM business, we're more than 10% of our volume into auto goes into EV. And obviously, from a value standpoint, it's much higher than that because these tend to be high-end applications. The majority of that is lithium-ion battery separator film, so GURs. which is what we will see margin expansion in next year because it is sold out and limited. You know, you compare that for the industry, EVs make up about 8.5% of the fleet of the build today. So, you know, even just in the EV space, we're several percent higher than the rest of the industry. And as I said, everywhere else, you know, we see that we continue to outpace EVs outpace the industry. So, you know, industry growth rate, just give it, you know, so Europe was down in the third quarter. North America was up a bit. We were a bit better in both of those than the industry. And in Asia, I think maybe to give you an idea, you know, Asia saw strong industry growth, about 21% in Asia, 30% in China. And with the additional volume from KEPCO, the growth in EVs, the project pipeline, the GR expansion, the stuff we've done on Asia localization, we were up, well, really 27% globally, a lot of that in Asia, and all of our regions were up about 20% versus last year. And again, we think that's on chip availability, but it also shows the strength of our project pipeline and our portfolio and the fact that we tend to be stronger in EV and stronger into high-end applications, which have not been as challenged as maybe some of the other models.

Sounds good. I'll leave it there. Thank you.

Darrell, we'll go ahead and make the next question or last one, please. Thank you. Our final questions come from the line of Matthew Deyo with the Bank of America. Please proceed with your questions.

Morning, everyone. As we look at the cadence for M&M of next year, you kind of mentioned a fairly sharp inventory correction that's working through the pipe. Do you expect that will continue into next year? And I guess how much of this $800 million do you think will come from second-half earnings versus first-half earnings if we try to think about the arc for that business?

Yeah, I think, look, just given the time it takes, you know, we start actions immediately. These are already started. But all of these things take some time. And so I would definitely expect the heritage M&M business earnings to be more heavily back-end loaded in the year than in the first part of the year, just to give us time to kind of work through the changes we need to do. get all of the commercial teams coming from M&M onto the pipeline model, which will be happening here across the first quarter. Definitely more of a second half load than first half.

Yeah, and the inventory pulled down likely more first half, Matthew, as we work to get that material into the legacy Selenese assets.

Understood. I guess if I could just squeeze one more in. In the past, you talked about rationalizing foreign capacity on the startup of Clear Lake, but that talk kind of waned, and I wasn't sure if that was because the macro was better or you had rewritten some of the raw material contracts in Singapore. So I guess with the macro where it is, should we think about rationalizing foreign capacity as still on the table? And if it's not, are Are the productivity savings of the $100 million still reasonable if the macro remains soft?

Yeah, let me start with the last question first. The productivity of $100 million is still stable, even in a softer macro. It was really based on running two units not quite as full. It had catalyst savings and other things in it. So that continues to exist. We didn't need any growth, and we will always run Clear Lake – you know, more full due to the raw material advantages there. So I don't think, you know, the project credits associated with the Clear Lake expansion are not at risk, again, because they were based on productivity. As I said earlier, if we see an upswing in the market and we can, you know, run it even fuller, you know, that's just actually additional credit that we'll get at that time. And, you know, in terms of the global footprint, and we talked about this, gosh, probably over a year ago or so, You know, we really, with the change in the contracts we've gotten as Singapore utilities, other contracts that we have in China, we like having optionality. That optionality to move things around depending on what's going on, to accommodate for when we have turnarounds and those sorts of things by shifting production to other parts of the world, that has more than paid off for us. And so, you know, we like having that optionality in our footprint. So I wouldn't expect, you know, any major changes in that going forward.

Thank you for that. Thank you. We have reached the end of our question and answer session. I would now like to turn the call back over to Brandon Ayash for any closing comments.

Thank you, Darrell. We'd like to thank everybody for listening in today. As always, we're around if you have any follow-up questions. Darrell, please go ahead and close out the call.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy your weekend.