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Operator
Hello, and welcome to Selenese's Q4 2022 Earnings Calling Webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, please press star one again to be placed into question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, VP of Investor Relations, Brandon Ayosh. Please go ahead, Brandon. Thank you, Kevin.
Brandon Ayosh
Welcome to the Celanese Corporation 4th Quarter 2022 Earnings Conference Call. My name is Brandon Ayash, Vice President of Investor Relations, and with me today on the call are Lori Ryerkirk, Chair of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer. Celanese distributed its 4th Quarter earnings release via Business Wire and posted prepared comments on our Investor Relations website yesterday afternoon. As a reminder, today we'll discuss non-GAAP financial measures. 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 both the press release as well as prepared comments. Form 8K reports containing all of these materials have also been submitted to the SEC. Since we published our prepared comments yesterday, we'll go directly to your questions. Kevin, let's go ahead and please open it up for questions.
Operator
Thank you. As a reminder, that's star one to be placed in the question queue. Our first question today is coming from John McNulty from BMO Capital Markets, and we do ask you to ask one question, one follow-up, then return to the queue. John, please go ahead.
John McNulty
Yeah, good morning, Laurie. Thanks for taking my question. So, look, obviously a lot of moving pieces out there, but the tough first quarter outlook for $1.50 to $1.75 of EPS makes the full-year call for $12 to $13 look like a pretty chunky jump. I guess, can you help us to bridge that jump in earnings and help us to understand what some of the big buckets are that you expect to turn up or take a noticeable step up?
Laurie
Thanks, John. Yeah, look, we realize that looks like a big jump up, but let's kind of go through the math. we really need to deliver about 350 for the last three quarters of the year in order to hit that $12 to $13 guidance. So if you look at that, while that seems like a big jump, it's not unknown territory to us. In fact, that's where we've been every quarter in the last two years up until this quarter. But if I look at just the jump up from Q1 to Q2, you know, let's start with acetyls. So in Acetyls, I would expect a $50 to $100 million increase in Q2 off of Q1. We'll start with natural gas. So natural gas pricing has come down significantly at the end of the fourth quarter and in the first quarter, especially in the US. That's a big help for us in Acetyls, our largest plants in Clear Lake. We have a lot of other facilities in the US that benefit from that lower natural gas pricing. And with coal staying higher in China and with crude being reasonably high and steady, that really benefits margins for our US-based production, which is a large portion of our acetyls. So if you look just at this natural gas pricing, if it were to hold through the second quarter, that alone is probably more than $20 million of uplift in the second quarter. And then if we look at things like the Frankfurt BAM restart, that is being restarted a little bit early based on the good increase we've seen here going into March. For constructions, paints, and coating in Europe, a little bit quicker recovery than we expected. So that Western seasonality coming off, that's probably another $10 million. And then you just have the normal... good economics we typically experience in the second quarter. So we see destocking really being over. We're past Chinese New Year's. We see improvement in construction activities worldwide. And so we expect to see that same kind of volume rebound. You know, as well as productivity. I mean, we last year in 2022 saw productivity at the high range of our historic 100 to 150. We expect we'll be in a similar level this year, you know, and adding on additional productivity from M&M for the EM site. So, you know, that all goes in there. So we feel very comfortable right now with where energy pricing is, that we're actually probably towards the higher end of that range for the acetyl bump up in the second quarter. And then if we look at engineered materials, including M&M, again, Q2 is typically a stronger quarter for engineered materials as well, for a lot of the same reasons. We do see the, well, first, let me start with this. We have seen, just like natural gas, Acetyls, we have seen a significant drop in raw material costs in the first quarter, which is extending through into the second quarter. This lower raw material cost has let us build lower, or not build, but now replace higher cost inventory with lower cost inventory. So that alone, as we go into the second quarter, is going to be about a $40 million lift for the EM, M&M portfolio combined. as we go into, as we have the second quarter. And then, again, we have the typical, you know, the destocking is pretty much finished here at the end of the first quarter. We actually see really good improvement here in March in our order books. You know, we see we are past Chinese New Year, so we start seeing the lift from that. I mean, to give you an idea, we have seen, you know, February, we started the month slow, but we are still seeing orders coming in today for February deliveries. So, you know, this is a big deal. Usually at this time in the month, our orders have stopped and we don't see new orders come in until the next month. But we're still seeing orders for EM, for M&M, for February. And our March book, quite frankly, has filled up. for both the Legacy EM and the Legacy M&M businesses consistent with the order book that we received in March of 2022. So I think these are all really strong proof points to say, you know, we are seeing the demand recovery coming now as we're moving through the end of February and into March. And we expect that bill to continue to grow through the second quarter. We are seeing modest improvement in automotive production. Bills are pretty much flat, but people are not destocking anymore. We're seeing order patterns restore closer to normal levels for automotive. This is very typical with what we also saw coming out of the end of 21 and into 22. You know, I think we feel really good about an uplift in EM in the magnitude of $50 to $100 million as well. And then on top of that, we also will have additional synergies from the M&M acquisition, and we expect another uplift of $10 to $20 million in synergies in the second quarter, our first quarter as well. And like I said, NASA deals, again, productivity continues. So I think, you know, we feel quite comfortable in the guidance that we've provided for Q2 based on everything that we see happening now in terms of raw material, energy pricing, and recovery of markets as indicated by our order books for March.
John McNulty
Got to know that's a hugely helpful color. And then I guess just as the follow-up, just maybe a quick one on the on the debt re-domiciling. It sounds like you're kind of part of the way there now, I guess. Can we think about all this being done by the first half of the year? Is that the right way to think about it? Or are you guys waiting for something in particular to maybe change in the markets? I guess, how should we think about that? Because it does seem like the rates are lower as you're starting to refinance some of this debt out.
Gus
Yeah, thanks, John. I think, you know, we're going to be opportunistic here. I think we're looking and making sure we have the right opportunities. I mean, currencies were moving in the right direction. We didn't want to make those changes when the dollar was certainly at its strongest, because then as things move, you know, certainly from an absolute debt perspective, it would go against us. So we're going to continue to look for the right opportunities there, and we're certainly targeting to get it done here in the first half. But just depending on some of those movements and where the dollar is at, it may linger into the early part of the second half.
Operator
Thank you. Next question is coming from Ghanshyam Punjabi from Bear Driven. He's now live.
Gancham
Thank you. Good morning, everybody. Laurie, in your prepared comments, you talked about some of the competitiveness on the EM side. I think it was specific to POM, you know, imports from or exports from Asia into Europe, etc., How do you see that dynamic playing out, you know, as the rest of the year unfolds? Is it as simple as China reopens and there's more localized demand and so that takes care of that? Or what are you thinking about at this point on that?
Laurie
Yeah, thanks, Gancham. Yeah, look, you're exactly right. I think there's two factors and we're really starting to see, you know, early in first quarter, we still had some material moving over from Asia. We expect that will be mostly done in the second quarter. And for the two factors, one that you called out, as we see demand picking up in Asia, there's less incentive to put things on a boat and move it to Europe. But secondly, with these low energy prices that we're seeing and the ability to replace our higher cost inventory with lower cost inventory, that's resulting in better pricing for our European customers. And so, you know, the arbitrage we expect will be closing here at the end of the first quarter and into the second quarter. And so, you know, that I think really helps restore the supply-demand dynamics. And, of course, we are seeing much higher demand now starting to – are really seeing demand pick up in Europe here in March in particular, and we expect that to continue into the second quarter. So with higher demand, lower pricing for the customers because of energy and raw material costing, and then higher demand in China making it less attractive to chip across, we think those three factors actually combined should resolve the situation in the second quarter.
Gancham
Okay, great. And then in terms of the sort of the macroeconomic construct, so China you touched on in terms of momentum, just given the sequence of events there. Europe, you just touched on that as well. What about North America as an offset as it relates to a slowdown sequentially? How do you see that evolving in 2023?
Laurie
Yeah, so I would say North America has been a bit sluggish in the first quarter so far. We've seen more recovery in Europe as we go into March than we have so far in North America. But we don't have any reason to think North America also isn't going to get there in the second quarter. I mean, auto bills are strong. We see signs that the stocking is over. Again, natural gas pricing in the U.S. and raw material pricing should make us expect North America to come back strongly as well.
Operator
Thank you. Next question is coming from Jeff Sikorskas from J.P. Morgan. Your line is now live.
Jeff Sikorskas
Thanks very much. Can you tell us what the EBITDA of the M&M business was in 2022? And, you know, in the old days, I think you guys thought it was 900 million in EBITDA. And plainly, it's operating at a much, much lower level. Can you diagnose what happened? That is, are these structural problems or raw material problems? And how much of the nylon is sold at monthly contract prices and, you know, right now of the M&M business.
Laurie
Yeah. So, Jeff, in 2022, you know, we had expected back at the time of the purchase, we expected 2022 to come in at about $500 million of EBITDA. Obviously, with the year-end challenges in M&M, that number was a little bit lower than that. Now, I think we had thought originally that in 2022 they'd be at 800. That's been a more typical number for M&M. We believe we could grow that to 900. Now we're saying 700 for next year. If you look at what happened in 2022, I think there was a number of factors involved. You know, first is with the take-or-pay contract that they had for raw materials. Although they saw weakening demand, they continued to produce, and that led to a lot of inventory. And that's going to tie into what I'm going to say about fourth quarter. Raw materials were fairly high for the year, compressing margin for nylon for the M&M assets as well. But we saw a lot of demand destruction. And we saw it, especially in Asia, we saw it a lot on standard grades. And I think as we talked about last quarter, what we saw was a desire to maintain margin in M&M. But as a result, they lost a significant volume on standard grades by trying to hold prices when other prices were coming down, so volume loss. At the same time, they weren't raising prices on premium grades, which they could have been doing with raw material pricing going up. And these are things that we've had to work on. So we've really been working on pricing over the last three months, trying to drive more volume in standard grade, trying to raise pricing in other grades. We've really been working the product pipeline. We've been working cross-selling. The team's been doing a great job working all of these things to really drive back to where, you know, we believe we should be at that 800 million EBITDA run rate by the end of 2023. Obviously, these things take a few quarters to get going, but we do think we'll be back at that maybe kind of historical level DuPont had of 800 by the, again, by the end of 2023. So if you... In terms of contract, I'm not really sure, Jeff, to tell you the truth, in terms of what percentage of the M&M contracts are monthly versus three months or six months or something longer.
Jeff Sikorskas
Right. So in terms of getting the $700 million in EBITDA this year, you'd have to average, I don't know, $200 or so for the second, third, and fourth quarters. How does the profitability lift from 80 to 90 to you know that 200 level how do you uh accomplish that especially because you know when you when you read about nylon 66 you know the general commentary from consultants is that you know there's over capacity and margin pressure you know is the background getting tougher but it's your own you know you know, innovation or ways to change the business that's improving it. What are these dynamics that are lifting it in an adverse environment, if the environment is adverse?
Laurie
Yeah. So, look, a big piece of it is synergy capture. If you look at our outlook now, which is at the upper end of the 100 to 135 range for synergies, We've achieved about 10 million of that. We think we'll get about 10 million of that in the first quarter. That leaves 120 for three more quarters. So that's about a 40 million per quarter average uplift. Now, obviously, it's a little bit more skewed towards the back end, but let's just think about average for the next three quarters. So it's about 40 million right there from synergy uplift. That gets you to the kind of 120 to 130 range. And then, you know, we are getting volume recovery. As I said, our March order book is now for M&M basically where it was in March of 22 for M&M. And that was still, you know, the first part of the year was better for M&M. So, you know, we have gotten some volume recovery. in, you know, from Zytel in particular and in Asia. Again, auto builds are very consistent and, you know, they're not still back to 2019 levels, but they're consistent. And so we think with volume recovery, we have been pushing through pricing on differentiated products, right? So if you look at all of those things, if you look at productivity as well, not counter to synergy, but regular productivity, at our M&M plants, you know, we expect to, you know, probably get another, I don't know, 40, 50 million from that this year. So if you look at all those things and start adding up those volumes and the recovery, you know, M&M was affected in fourth quarter and early part of first quarter with the very same factors we were, right, with the same destocking, with the same seasonality and slowdowns. And we are seeing them recover from that as well, again, in March and as we move forward into second quarter.
Jeff Sikorskas
Thanks so much.
Operator
Thank you. Next question is coming from Josh Pector from UBS. Your line is now live.
Josh Pector
Yeah, hi. Thanks for taking my question. I guess first I wanted to ask on the TasteJV, can you talk about how much cash you'll be getting from that combination? I was a bit confused by the comments in the release about 0.7 times leverage reduction 12 months post-close, if that's related with that or not. It seems like a big number if it is, so can you clarify?
Laurie
Yeah, absolutely. So we expect to net $400 to $450 million that we can apply towards debt reduction from the food ingredients deal. You know, we think, you know, I have to say we're really excited about this deal. We're really excited about the JV structure that we've agreed to with Mitsui. If I back up a bit, you know, we also at the same time announced the extension of our joint venture for the Fairway Methanol joint venture. This has been a great joint venture for us. Mitsui has proven to be a really great partner. And I think it's been really financially beneficial for both companies as well, as well as strategically beneficial. And we see food ingredients being an addition to that, you know, strong relationship that we built with them through the years. You know, this is really what we were looking for. You know, we've looked at this product for some time and thought, you know, it's not necessarily a core piece of our portfolio, but it is a core piece of our operations in Frankfurt. And so by doing a joint venture, we think, one, we'll really benefit from the expertise that Mitsui has in food and nutrition and their ability to market and help us on that end. We think they will also benefit from us continuing to be able to integrate into our acetyl chain. We provide acetic acid and protein aldehyde now into the fairway joint venture. And we'll continue to benefit from the strong partnership that we have, as well as the manufacturing synergies, because we will continue to operate the joint venture, and it is very embedded into our Frankfurt operations. And it allows both of us to participate in growth in what we think will continue to be a high-growth market for food ingredients, sorbets and sweeteners, especially as one of the few, if maybe only, Western company providing sweeteners anyway of this type. we see a lot of positive movement in terms of volumes and demand and pricing going forward. So again, we're really excited about it. And just to reiterate, to answer your question, we do expect to be able to pay off another $400 to $450 million of debt as a result of this joint venture.
Gus
Yeah. And then, Josh, with regards to the covenants, the way our covenants are structured is Gain on sale of assets is included in EBITDA. And so because this has a very low book basis, and while it's an efficient transaction, that $450 million will be largely gained. So you get the gain that goes into the EBITDA piece, using then the cash proceeds to pay down debt at the same time. And there's a partial offset, obviously, in EBITDA from the 70% that would go to Mitsui. But, you know, that math then works out to be, because it's in EBITDA, about a 0.7 reduction for the debt covenant purposes.
Josh Pector
Okay, thanks. I appreciate that. Maybe just one clarification there is that that gain, are you going to exclude that from your adjusted EBITDA? And that's in the, I guess, the debt accounted for EBITDA. And in your comments about free cash flow, you know, you reiterated the billion plus. Can you just give us an idea of what the core free cash flow you're expecting at this point, some of the movements between working capital, restructuring, et cetera?
Gus
Yes. So for adjusted EPS, we will go ahead and exclude that gain as we do have past transactions. And then on free cash flow, we had previously said $1.5 billion of free cash flow, which included about a $200 million improvement overall in working capital. You know, if we see that same $200 million improvement in working capital and we saw inventories move up a little bit just with the lower demand in the fourth quarter, then we would, you know, see free cash flow likely a little lower than that 1.5 just because of the lower earnings that we have. So we're still working through kind of exactly how the working capital will play out this year. But if we see something in that range, we would expect to be a little bit lighter than the 1.5.
Operator
Thank you. Next question is coming from Michael Lighthead from Barclays. Your line is now live.
Michael Lighthead
Great. Thanks. Good morning, Gus. First question on pension. Your $12 to $13 a share EPS guide, I believe, includes $100 million hit year over year on pension. When you talked last quarter about $13 to $14 a share, how much pension were you impacting at that time?
Gus
Yeah, thanks, Mike. So I'm actually going to kind of put some of the other buckets in here that changed from, you know, our previous $13 to $14 guidance. You know, DNA actually came in about $75 million better than we expected, but it was eaten up, you know, by a pretty good chunk by that pension. So it kind of approached that amount. It's a little lower than that $75, but it was approaching that. And so I think, you know, when you kind of largely neutral those two things together, but it was in that range.
Michael Lighthead
Got it. Okay. That's helpful. And then maybe just more of a segmentation or clarification question, but it seems like M&M EBITDA, if I'm reading correctly, is sort of allocated between earnings and EM and some centralized or other costs and other. So if you do deliver, say, 725 EBITDA from the M&M business this year, Is it correct to interpret that we'll actually see it reported as something like 825 or so higher in EM, EBITDA, but also, I don't know, 100 million or so higher other costs to offset that? Is that the correct interpretation?
Gus
Yeah, I think that's right, Mike. It's certainly in that range. I mean, at the end of the day, we need to get, no matter what bucket it's falling in, we need to go deliver the EBITDA over time that we said this business would deliver. So it is about getting the base business back up into those ranges that we had originally said at the time of the deal in that $800 million EBITDA, including the other costs in there, and then driving synergies on top of that. So this year with where demand is at, given some of the higher cost inventory that had to be worked off at the beginning of the year, it's going to be a little bit lower. But then building that back and then putting synergies on top of that is exactly what Tom Kelly and the team are focused on. Great. Thank you.
Operator
Thank you. Next question is coming from Vincent Andrews from Morgan Stanley. Your line is now live.
Vincent Andrews
Hi, and good morning, everyone. Just a quick clarification around the subject matter of the prior question. For M&M in the fourth quarter, you had guided to $50 million to $60 million of EBITDA, and then there are kind of two numbers discussed in the prepared remarks. One is $56 million, one is $39 million. Which is the actual apples-to-apples comparison, the $39 million or the $56 million? It's the $39 million. Okay. And then if I could ask, this is the first quarter I can remember in I don't know how long where your volume in automotive was below build, and that takes us through a variety of good, bad, or indifferent markets. um auto environment so i just if you have any further color on sort of why that happened because i kind of remember other times where you know things were things were tough but you know your team found a way to you know your innovation or your activations or what have you um so what what happened this time that was different
Laurie
So actually, Vincent, fourth quarter of 21 was exactly like this. We had the same issue. We were lower than bills because of destocking. And I think, you know, there's a number of things that happen. I mean, people hit the end of the year. They want to make working capital numbers. So they destock at the end of the year for a year in inventory control. You know, prices have been coming down because RAS are down and natural gas was falling. So that made people more confident in pricing going forward. So they believe prices going forward are less than they are now. And so they choose to draw down their inventory in anticipation of lower prices. I think the supply chain issues have been largely resolved around the world. And so people are more confident about being able to buy materials. So while we saw a lot of build stock in 2022 because people were worried about getting resins, I think we see going forward, people feel the supply chain issues are largely resolved. So the dynamic is actually very similar at the end of 2022 as it was at the end of 2021. I would say a little bit what's different is usually the fourth quarter, um, as a magnitude with a little bit was more in 2022. I would say primarily because of Asia and usually, uh, in Asia, we have a pretty good fourth quarter as in advance of Chinese new years. But this year, because of the resurgence of COVID in Asia, you know, things were quite slow in Asia in fourth quarter as well. And so I'd say the dynamic was a little bit more pronounced this year. Obviously, Europe was even a little bit slower just on the malaise we've seen in Europe all year. But the dynamic was very similar, and I think the reasons for destocking were very similar to what we saw at the end of 21. And again, January started slow. We've seen improvement here as we've gotten through the second half of February, and order books are looking consistent with March of 2022 order books for March of 23. So we feel like we've gotten past these dynamics and now are on a more normal trajectory where we will meet or exceed, which is typically what we've done. You're right. We're very good at that. Our teams are very creative about pushing more volumes into the market and high margins. You know, we feel like we're back on that trajectory as of March.
Vincent Andrews
Okay. Thank you for all the detail. I appreciate it.
Operator
Thank you. Next question is coming from Michael Sisson from Wells Fargo. Your line is now live.
Michael Sisson
Hey, good morning. You know, if I did the math for 23 for adjusted EBIT for EM, it looks like you need to be between 1, 2 and 1, 3 and an acetyl chain 1, 3 to 1, 4. But I guess my question is if we think about where they could be longer term, maybe 25, 26, you know, where do you think EM should be able to get to and then If the 1.3 to 1.4 is the new foundational, what would the mid-cycle astral chain potential be a couple years out?
Laurie
Yeah, that's a lot of questions all rolled into one, Mike. Let me see if I can parse that apart. So if we look at 23, there's a lot of ways we can get to the $12 to $13, and there's a lot of things that could happen in terms of energy price and everything else. I would think of it as Going forward, including 23, we expect EM and acetyls to contribute roughly evenly for the next few years. This year, it might be a little stronger on acetyls than EM. as we work through kind of the restoration of M&M-based earnings and start to capture synergies. But I would say for the next several years, I would consider them roughly equal. Because we also have the Clear Lake project coming on this year, which is going to add another $100 million to Acetyl. We have some BAM expansions and other things coming on. So I think that's a good starting place. If we look at foundational level of earnings, you know, what I would say is, you know, today we think it's about $1 to $1.1 billion. That was before tow. Tow is going to be, you know, at or above kind of the $2.50 that we called out at the time of the investor day in 21. So that kind of puts you in that $1.25 to $1.35 range, which is pretty consistent with the numbers you saw. But then again, we'll add $100 million on a four-year basis for Clear Lake But that is, again, the foundational level of earnings. So we're still operating at very high capacity utilization in acetyls. Despite the softness, despite everything else, even in the fourth quarter, our utilization was 70% in China, but 90% global basis. That's still pretty high. And that's, I think, where we're going to see maybe a little more volatility in acetyls as the market is going to react more quickly to outages due to turnaround or unplanned outages or movements in raw material pricing. So I can't really say what I think the mid-range is, but I would just say, you know, there's definitely, you know, we've seen in Acetils, we can see a pretty sharp spike up in a very short period of time as the market reacts to short and medium-term changes.
Operator
Great. Thank you. Thank you. Next question is coming from Hassan Ahmed from Olympic Global. Your line is now live.
Hassan Ahmed
Morning, Laurie. Laurie, obviously in the prepared remarks, a lot of commentary around, you know, destocking, restocking, and the like. I was hoping you could give us some historical context as you look at your portfolio. You know, in terms of destocking, you know, Historically, how long have your destocking cycles lasted? What did the restock look like once the destocking was over and the like? I'm just trying to get some sort of perspective in terms of where inventory levels are right now, what the bounce back could look like, and the like.
Laurie
Yeah, so I would say historically we've seen destocking last kind of a quarter. especially in EM, maybe a little bit less in acetyls because they don't have as much inventory. And I would say, I wouldn't even say we're necessarily seeing restocking at this point. I would say we're seeing a return to normal levels of demand. Typically when we see restocking is when prices start to go up and people start getting worried that prices in the future are going to be higher than they are today. So they take the opportunity to build inventory in advance of an anticipated price increase. Again, as I said earlier, I think with where we are today, where raws are down, natural gas is low, you know, the anticipation in the market is that prices are going to go lower or stay low. And so I don't think we'll really see restocking until we see a turn up. But we do see a return to normal levels of demand starting now in March.
Hassan Ahmed
Understood, understood. And as a follow-up, on the acetyl chain side, you know, you guys talked about how pricing, you know, through the quarter was, you know, Chinese pricing at cost curve levels. Yet, you know, despite that, you know, you guys obviously idled some facilities, yet you generated around 25%, 26% EBITDA margins. So I'm just trying to get a better sense of Selenese's cost curve positioning as it sits right now.
Laurie
Yeah, so I think there's a couple components to that. I think, you know, in China specifically, while I believe throughout the end of the fourth quarter and into the beginning of the first quarter, we were at the cost curve in China in terms of the industry, our cost position is a bit better than that. And it has to do with the scale of our operations, the technology that we have, and therefore, you know, improved cost bases we have versus the vast majority of the producers in China. So we continued, even when the rest of the industry was at the cost curve, to make even a small amount of margin in China. And then, of course, we're benefited by the fact that we have a very large facility in the U.S. Gulf Coast. And when we saw natural gas prices coming off in towards the second half of the fourth quarter. And as we've gone into the first quarter with low natural gas prices, that is a big margin uplift for us versus people who are producing out of coal or even crude at these kind of prices. And that opens up windows for us to move material to Europe and other parts of the world out of the Gulf Coast. And so I think it is that global optionality that we have, that global footprint, as well as the optionality we have to move things up and down the chain that really allow us to continuously deliver high-level margins from what some might consider a commodity business. It certainly does not give commodity returns.
Operator
Thank you. Next question is coming from PJ Juvicar from Citi. Your line is now live.
spk00
Yes, hi. Good morning, Lori and Scott. Laurie, do you have a long-term view on the competitiveness of European assets? And what I mean by that is, you know, European VAM capacity was shut down. Is that the marginal capacity that goes in and out with the market, like what Singapore plant used to do in acetic acid? Can you just take a step back and explain to us sort of the marginal capacity in Europe and your plants there?
Laurie
Yeah, no, thanks for the question, PJ. Look, you know, Maybe to clarify, so VAM going down in Frankfurt wasn't because VAM couldn't make money in Frankfurt. It was just we saw the demand go down so much towards the end of the year. I mean, VAM demand in December was down, or in the fourth quarter, was more than 50% off Q3. So we had a really huge demand destruction there. in the fourth quarter because of pricing, because of the weather, because of destocking, because of all of those things. But even at that, I mean, we could have run VAM profitably. It is not normally the most expensive VAM production in our network. But because of the high pricing we were seeing in Europe last year, It just made sense because total capacity for the globe was down. It just made sense that we shut down that facility that was challenged due to energy pricing and move material from other lower cost energy locations. But we're starting it up now. I mean, you know, the March order book for VAM in Europe is really the strongest we've seen in six months. So now we need IPH. And it makes sense. We're going to be about... I think that the order book right now is about 85% of what we saw in the third quarter. So it makes sense to start a BAM. We have lower energy prices. So again, Frankfurt returns to not being the highest priced one. So again, this is the beauty of a global network. We have the optionality to take units down, to skew where we make it. Based on what is most cost competitive at the time, based on where the demand is at the time, And that just happened to be Frankfurt last year, but it could be something different in the next year. But that's why we like having all of this optionality around the globe.
spk00
Great. Thank you. And then on M&M, it seems like it was really under-managed in the last one year of ownership. Do most of M&M's issues reside in more nylon area? And can you upgrade the M&M portfolio? Because I think you had more EV exposure than them. And so is there a natural upgrade there? Thank you.
Laurie
Yeah. So I would say if you look at the portfolio from M&M, certainly nylon was the most challenged. I think elastomers was more robust. And even within the nylon portfolio, probably high temperature nylons and some others you know, didn't see the impact that was more, I would say, in Zytel and the PA66 line. And, you know, as we've called out before, I mean, there were many issues around decisions being made around pricing, both positive and negative, maintaining volume in standard grades and those sorts of things. And, you know, there were very high raw material costs and a take or pay contract that required them to take it. You know, I think there's just a lot that went into that underperformance in 2022. But the good news is these are things that are fixable. And this is what Tom and his team have been working very hard on in the last three months is, you know, moving the pricing, getting the inventory down in the fourth quarter, which certainly hurt us in the fourth quarter, but will help us now as we go forward in 2023 and are able to sell lower cost basis inventory more in line with pricing. So I think the good news is going forward, this is all stuff that is fixable, and we are working rapidly to do so.
Gus
Yeah, the earnings power of this combined portfolio hasn't changed from when we announced the deal a year ago. If anything, I think we're even more convicted around that going forward. There is near-term challenges, and we've been, over the last several quarters, very clear about the disappointment in the performance. and it is requiring a big lift in the near term, but the long-term earnings power of these combined portfolios then combined with the acetyl chain as you look out three to four years is very substantial.
Operator
Thank you. Next question is coming from Kelly McCarthy from Vertical Research Partners. Your line is now live.
Kelly McCarthy
Yes, good morning. Laurie, can you elaborate on the 1.3 million ton expansion of acetyl capacity at Clear Lake What are you baking into your numbers with regard to timing of the startup and operating rate given the current market conditions? And then any thoughts on how you would see that earnings trajectory evolving through this year and into 2024 would be helpful. Yeah.
Laurie
So the project itself is going well. We are still anticipating an on-time, on-budget startup mid this year. So we expect to have it running for, let's just call it roughly half of the year. At the time we did the project, we called out, while we have the ability to run 1.3 million tons additional, we really did it as a productivity project. So savings that we get from being able to move volumes directly to Europe, savings that we get from catalyst savings, energy savings, et cetera. So of that $100 million a year credit, we probably will only see about $25 million of that this year because we have startup costs, we have ramp up time, all that sort of thing. So I'd expect to see about $25 million of that credit this year. And then next year, we should be at the full 100. Now, having said that, to the extent that demand delivers, you know, continues to grow robustly and energy prices continue to be so favorable on the Gulf Coast, it will make sense to try to run the unit for volume as well. What point that will be at, I couldn't say at this point. It's going to depend on demand and raw material and energy economics. But if that were to happen, that clearly is a higher return case for that project than we had with just the base productivity number that was baked in there.
Kelly McCarthy
I see. That's helpful. And then secondly, if I may, a couple of financial questions for Scott. Will you comment on your 23 capital expenditure budget? And with regard to the first quarter, what level of interest expense are you baking into your EPS guide?
Gus
Yeah, so capital, we still expect to be in kind of that 550 to 600 range. And, you know, where we land there will really be dependent upon, you know, where we see, you know, the demand recovery as well as the outlook into the out years. And as we continue to really put the combined EM and M&M portfolios together. And then, you know, from an interest expense standpoint, you know, we're in that kind of, you know, 600, you know, again, that $550 to $600 million range for the year, and we'll have about a quarter of that here in the first quarter.
Kelly McCarthy
Thank you very much.
Operator
Thank you. Next question today is coming from Frank Mitch from Fermium Research. Your line is now live.
Frank Mitch
Yes, hi. Good morning, and congrats, Mark Murray, if you're listening. Laurie, I wanted to ask about the level of auto-builds that you have embedded in the guide for the year and where you think Sony's can perform relative to that level of industry auto-builds.
Laurie
Yeah, so we're assuming our 2023 forecast is basically assumed flat in 23 to the second half of 2022. So that's kind of like at an 85 million range, which really aligns pretty well with the IHS outlook this year, which they're forecasting an increase of 3.6%. That's almost exactly the same number. And that really is assuming, you know, US and Europe about 5% up, Asia up about two, with China being the weakest point at 1%. Still, I would say, you know, we're still, though, 5% lower than 2019. But we do believe that that, you know, we're pretty consistent with IHS in this. We believe auto bills are going to be constrained by chip availability, not by demand. We think the pent-up demand is still there. And so to the extent chips would be more available, I think autos will build. Other years, as we've seen, sometimes they're not as available. But we're assuming kind of flat to second half 2022. I would say we would expect our contribution ourselves into auto to be maybe a couple percent above that. And that's based upon a few things. One is you know, the locations where we're stronger. So historically, we've been stronger in the U.S. and E.U. Now, with M&M, they've always been a bit stronger in Asia. But even having said that, I think, you know, we think we'd be a few percent above that. The other thing is the presence that we have in electric vehicles. I mean, we, over 10% of our sales by volume go into electric vehicles from the Heritage EM portfolio. And, you know, we continue to see that EVs are growing at a faster rate than ICE, if you look at the forecast going forward. So, you know, based on that, I would assume, you know, a couple percent, you know, kind of low single-digit percent that we would expect to be over the build rate in terms of our auto growth.
Frank Mitch
Gotcha. Thank you. And... And I know maybe a question for Scott. I know that the comment was the M&M inventory levels were really high and elevated given the take-or-pay contracts ended the year at $2.8 billion in terms of your inventories. How should we think about the impact of maybe inventory reduction on working capital in 2023?
Gus
Yeah, as I said earlier, Frank, on the free cash flow question, you know, we'd like to see at least a $200 million reduction, which will largely come out of inventory as we work through the year. I mean, that's going to largely be dependent on a few things. One, being able to bring absolute volumes down. Two, depending on what were to transpire with raw materials. And, you know, I think with energy and gas already coming down, that will give us some wind at our back. But we really would like to see the volumetric reduction kind of contribute to that 200 in total and then any pricing reduction be on top of that. So, you know, we're kind of hoping and planning for that $200 million reduction right now.
Frank Mitch
Thank you so much.
Operator
Thank you. Next question today is coming from Matthew Dial from Bank of America. Your line is now live.
Matthew Dial
Morning, everyone. I know you addressed the term loan covenants, but do you still have to hit the 3x net debt to EBITDA by year end 2024 that was stipulated by the rating agencies? And look, if I just use consensus EBITDA and, you know, hand out consensus EBITDA, I can very well be wrong. But like the You know, you give yourself some cumulative cash flow generation over the next two years, but that consensus EBITDA puts you at like 3.5, 3.3. So is there a concern internally about this? And do you start thinking about other asset sales? Is that necessary?
Laurie
Look, I don't think there is a concern internally. As we've said since the time we did the deal, I mean, there are always levers that we can do. I mean, from an asset sales standpoint... Again, we don't feel we're in a position we have to do an asset sell. I mean, we did food ingredients because we had the right partner with the structure we wanted that would give us both benefits and allow us both to participate in the growth in that business. And so the timing was right to do that. And I would say, you know, we will continue to be opportunistic with our businesses, both our legacy businesses as well as our acquired businesses. If and when we have the right buyer at what we think is the fair price, of course we would consider it. But we believe that although this year has started slow, the recovery we expect to see this year, our ability to generate cash from working capital and others, that we will be able to meet the expectations of the rating agencies this year as well as next year and into the future. Scott? Yeah.
Gus
I mean, look, we viewed this as a near-term challenge that required a near-term solution, and that was to amend the covenants. We're still pushing to get to that three times leverage at the end of 2024. And it really starts with, as Larry talked about, generating cash, generating cash to pay down debt, lower that interest cost. I talked about the M&M incremental interest of $550 to $600 million. We have legacy interest. of 60 to 70 million, lower that by paying down debt, and then also find ways at which to lower that interest cost through redomiciling some of that debt, as we talked about earlier on the call. So it is really just about systematically bringing the debt down through cash generation.
Matthew Dial
Thank you, I appreciate that. On the FAM and EVA side, I know acetic acid is pretty stable from a supply perspective outside of yourself and what you're doing, but it sounds like calling for decent FAM and EVA capacity growth over the next two years. Does that impact your spreads? I know demand growth there has been pretty good. Does that get absorbed? How do we think about that?
Laurie
Yeah, so if you look at what's happening, you know, there are some builds going on. So, you know, at SeqAcid, we do expect one startup in 2023, late 2023. In China, we're also expecting a few BAM startups between 23 and 24. But if you look at the typical growth that we see for... for the Acetyl chain, we need a full plant every other year or so. So I don't think the rate of growth that we're seeing is inconsistent with the growth in the world. We are still at fairly high utilization. Again, I think the fact that we are at high utilization will keep the volatility a bit more. So we'll do, as we saw in fourth quarter, you may, during periods of low demand and seasonality, go to the cost curve. But that can recover quite quickly. But I don't see it having a major impact on our margins going forward on kind of a, you know, long-term or full-year basis.
Operator
Thank you. Our next question is coming from David Begleiter from Deutsche Bank. Your line is now live.
David Begleiter
Thank you. Laurie, in the comments, you mentioned some destocking in the Americas and paints and coatings. and construction applications. Can you give a little more color of what you see in there and where we are in that process?
Laurie
Yeah, so we typically see seasonality because obviously when it's cold and snowy and things, people aren't painting outside. And so that's typical. I would say also this year, because we're coming off a period of high pricing, for many of these materials because of the higher raws and the higher energy we saw during 2022. I think people took the opportunity, much like we did in EM, for example, to draw down some of their inventories through the end of the year and get rid of higher cost inventory to make room for lower cost inventory going forward with anticipation of lower energy and raw material costs and pricing. So I think that's really the dynamic that we saw this year. Again, in the U.S., we haven't really seen the pickup yet, as we have, say, in Europe, but I think, you know, it will come. There's no kind of structural reason that we think paints, coatings, and constructions is going to be off in 2023 versus 2022.
David Begleiter
Understood. And just in asset deals, you referenced a $60 million earnings increase versus a last trust. Can you try to bridge that gap? What's improved in your operations? Because you've always been a good operator in this business, but you seem to have taken a step up since the last couple of years as well.
Laurie
Yeah, look, I think it's a number of things. You know, we've continued to invest in our asset tail assets, both foundationally, so investing in reliability and quality, energy savings, productivity. So we've continued to improve our cost basis. From that, we've improved our contracts in many of our areas for raw materials for the acetyl chain. I think that's probably the primary improvement we've seen in acetyls over the last few years. The operating model we use in acetyls, taking advantage of that end-to-end as well as geographic optionality is really strong. It's running really well. But I would say it's really the improvement in productivity, the improvement in contracting, as well as some of the minor kind of capacity adds, that capacity creep that we've had across our facilities, which gives us additional optionality, and the addition of ELOTEX, which gives us further optionality down into the chain, which is especially helpful as we move into these kind of slower winter months.
Operator
Kevin, we'll take one more question, please. Certainly. Our final question today is coming from Jadeep Pandya from Onfield Research. Your line is now live.
Kevin
Hi. Thanks a lot for taking my question. Just basically wanting to understand in the context of capacity shutdowns in the upstream side in nylon chain, how do you see yourself with regards to positioning in the value chain? Is this fundamentally more positive for you or is it fundamentally more negative for you in this context? Thank you.
Laurie
Well, prior to the acquisition of M&M, obviously we were a big buyer of nylon and would have been unhappy to see shutdowns in the upstream because that would lower price. But now that we both polymerize as well as compound nylon, I would say generally I would consider this a help for us as it tightens up the amount of nylon being produced and should raise value across the chain.
Operator
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.
Brandon Ayosh
Thank you. I'd like to thank everyone for calling in today. As always, we're around if you have any follow-up questions. Kevin, please go ahead and close out the call.
Operator
Certainly. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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