Celanese Corporation

Greetings and welcome to the Selenese First Quarter 2024 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Cunningham, Vice President of Investor Relations. Thank you. You may begin.

Thanks, Diego. Welcome to the 70s Corporation First Quarter 2024 Earnings Conference Call. My name is Bill Cunningham, Vice President of Investor Relations. With me today on the call are Lori Reierkirk, Chairman of the Board and Chief Executive Officer, Scott Richardson, Chief Operating Officer, and Chuck Tyrus, Chief Financial Officer. Southeast distributed its first quarter earnings released via Business Wire and posted prepared comments on our investor relations website yesterday afternoon. As a reminder, we'll 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 both the press release and prepared comments. Form 8K reports containing all of these materials have also been submitted to the SEC. With that, Diego, let's please go ahead and open it up for questions.

Thank you. At this time, we'll conduct our question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. Please limit yourselves to one question and one follow-up question for each time that you queue. You can press star 2 on your phone if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question comes from Ghanshyam Punjabi with Baird. Please state your question.

Hey, guys. Good morning. I guess, you know, Laurie, just first off, just given all the various moving parts globally and so on and so forth, maybe you can just share with us your updated view on the macroeconomic construct globally, your vision of the U.S., Europe, and China in context of the previous headwinds, the peace talking, and just weaker growth, et cetera. Thanks.

Morning, John. Thanks.

Morning.

Look, on the macro, what I would say is, look, it's generally unchanged from what we've been saying in the past few quarters. I would say we haven't seen any big positives or negatives this quarter from what we had expected. We called out last quarter, we really thought we were at the end of destocking. I think the movements this year, what we're seeing in the order book, the stability of the order book has proven that to be true. In China specifically, I'd say, as we said last quarter, China for China is pretty steady. It's okay. It's the exports that are lagging to primarily Europe, but also other regions of the world. We're not seeing some of the pull-through of material because of that lag in exports. The U.S. remains pretty steady, I would say, across all the sectors. And Europe, although we did see a little improvement since the middle of last year, I would still say, you know, it remains lackluster and below normal levels in Europe. I would also say as we move forward, we're really not seeing some of the seasonal uplift we would have expected at the end of the first quarter and the second quarter. Overall, I'd say, you know, all the sectors are pretty steady. I think the notable sector in terms of poor demand continues to be construction, paints and coatings, et cetera. And, you know, although I do think there we would expect as we move into the second half that we maybe start to see some recovery there. I think PPG called out this quarter that they've had 11 quarters of flat to down. And they're in second quarter expecting to see low single-digit growth and some further growth in second half. So, you know, we hope that's true. If so, we should see a little bit of recovery there as we moved into the second half. I mean, I would characterize it, you know, much like we did even a year ago, which is we still think people are still spending. They're still spending on experiences, on travel. you know, airlines are having a good time, but they're not spending on goods yet. It will normalize at some point, but we're not seeing that normalization yet.

That's comprehensive, Lori. Thank you for that. And just in terms of the related question as to what would actually kickstart demand from your perspective, would it just be as simple as interest rates being, you know, reduced on a global basis? And then, you know, related to that, you had called that new capacity a Over the last six months, you know, specific to the comments on Chinese acetic acid, et cetera, is that capacity more disruptive than you thought, or is it just that demand was weaker than you thought initially?

Yeah, look, I think in terms of kick-starting, it's really just, you know, when do people get confident in the environment again? When do we see a shift back to normalized spending on durable goods? Clearly, we could use some Europe recovery would be really helpful. But it's nothing more than that. Like I said, consumers are spending. We just need them to start spending on durable goods again. And again, I do think that will happen in time. I think your question on China, what I would say is I would say the new capacity, has it been more disruptive? then we thought, I would say yes, because the demand for that which was being planned to go in has not developed. So there were some downstream consumers that were being built at the same time. They've been delayed. Obviously, they've been delayed because the demand for those products are delayed. So it is ultimately a demand answer. The good news there is, though, we are seeing some acetic acid flowing into new applications like Capilactam and others. Again, I think it's a temporary phenomena. If you look at what's been added, even what's to come, you know, this is not such a large number that I think we're back where we were 20 years ago. I think it's just a question of, you know, demand normalizing and catching up with the supply we have now.

Perfect. Thank you so much.

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

Great. Thank you. Good morning, team. I wanted to dovetail and ask about full-year guidance. Laurie, it seems like from your remarks just now, the macro conditions are maybe still a bit uninspiring. So, did bridge from sort of the $5 or just under that of VCS in the first half to about $650 at the midpoint in the second half, is that all controllable felonies actions, or do you need the world to get a bit better from here to hit those numbers?

Thanks, Mike. I would characterize it as we will hit those numbers with just controllable actions. If you think about it, M&M synergies are heavily loaded and compounding as we go through the year. Now that we have full visibility into the data, everything due to our S4 HANA upgrade for the M&M asset. And also the results of like the Uintrope shutdown and some of the other footprint actions we took last year, we really start to see those synergies grow and compound as we move through the year. So that's a major impact. The Clear Lake expansion, while we did have a little bit of help in the first quarter from that, you know, that will also continue to grow as we move through the year. Debt service is another one, which is more heavily loaded into the second half of the year. I would also say our turnaround cost in the first half is about double what it's going to be in the second half, so we get some tailwind there as well. I would say everything we know now says we're well in that range, just based on what we know. We've not really built in any recovery other than the end of the stocking, as we've said before. So I think, you know, I still feel very confident that we will be within that range for a full year.

Great. That's helpful.

And just as a follow-up question on engineered materials, I think in the prepared remarks, you talked about continued pricing pressure. I was hoping you could unpack that somewhat. Just where exactly are you seeing the most pricing pressure today? And was that a nylon-specific comment or more broad-braced across the portfolio?

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

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

Thanks very much. When you look at your engineered materials volumes year on year, they're down 12%. Maybe global auto production is down 1%. And when you look at the demand for the coatings companies, you know, maybe it's down low single digits.

why is engineered materials you know have a larger volume decrement yeah Jeff I would really point to some of the the real standard spaces we participated in last year really to start moving some of the inventory levels that we had as we finished 2022 and And that's really more of the driver than anything else. We also saw a little more seasonality in the medical sector here this year versus what we saw last year. So those are the main drivers.

And then, you know, sort of the reverse is the acetyl chain, where, you know, volumes are up year on year, you know, 11%. And I take it that what you want to do is run your clear lake expansion more or less full out. You know, is that part of the reason why volumes are up? And, you know, do you expect know as a base case for your volumes to be up 10 or or more this year and and maybe could you comment on filter toe you know in that we saw really strong numbers out of eastman but you know your your acetyl chain doesn't seem to be um you know growing it's just an ebit very

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

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

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

Good morning. Nice start to the year. For 2Q, will EM volumes or I guess it still looks like it's going to be down year over year. For the third and fourth quarter for EM, do you need volumes to improve year over year to sort of hit the outlook and how much, if at all?

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

And then a little bit of a longer-term question. Sales in EM running about $6 billion Maybe a little bit better than that. But longer term, when demand does recover, China, goods, et cetera, does this be a $7 billion business? And what would the operating leverage trying to get volume come back look like on that growth?

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

Thank you.

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

Thank you. I'm starting to read a bit that some of the trade complexities in the Red Sea area are starting to resolve themselves. And so I guess, one, would you agree with that? And two, if the case and if the shipping channels become a little less challenged, how would that impact your businesses, good, bad, or indifferent?

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

Okay. And if I could just ask a follow-up on the nylon business. In the prepared remarks, there was a comment about higher variable costs for higher velocity products. That's quite a mouthful. Could you just unpack that for me?

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

OK. Thanks very much.

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

This is James Cannon. I'm for Josh. You, in your prepared remarks, talked about the price-cost benefit in the first half. Are you expecting much flow-through in the second half, or does lower pricing kind of erode that?

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

OK. So just as a follow up to that, I think if I look back a quarter or two, you gave in your prepared remarks comments on price cost being potentially the highest part of the year-over-year bridge. Is that still possible? Or just given where we stand, is that maybe a little bit more in question?

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

Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Please, to your question.

Thank you, and good morning, everyone. In your prepared remarks, you talked about two key synergy drivers for engineered materials, namely the shutdown of Nylon 6-6 in Germany and the SAP ramp. Can you address those and maybe translate it to how much earnings uplift You might be anticipating in the second quarter through the fourth quarter. It didn't sound like there was much in the first quarter from those items.

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

Okay, thank you for that. And then secondly, for... Chuck, perhaps, can you talk about how your free cash flow outlook has evolved? And specifically, I'm interested in any guidance you might be able to provide on cash taxes or the expectation, therefore, in 2024. It sounded like maybe there's some timing issues around taxes we should be thinking about.

Yeah, good question, Kevin. Yeah, let me walk through how we're thinking about 24 cash flow. Now, I would say we do expect the same cadence as we saw last year, where our cash flow will be second half weighted. Teams are working hard to generate a total result for the year that's roughly consistent with last year. It'll be subject to a few timing elements, of course. Outside of EBITDA growth, I would point to these drivers. We are working really hard to produce a working capital benefit to pre-cash flow this year. And that would be driven by further inventory reductions. Right now, we've assumed $100 million working capital benefit for the year. And it'll depend on a few factors. I would say working capital, though, it'll be back-end loaded. It should be a use in the first half, particularly as we're preparing for some of these footprint actions, and then a source in the second half. Either way, I would point out that's a significant headwind to free cash flow versus 2023, as we had a tremendous year in working capital benefit to free cash flow last year. That was really driven by about $400 million positive cash from reducing our inventory. So I just wanted to point that out. You're right. It is an unusual year for us for cash taxes. In total this year, there'll be about $300 million. That's higher year over year by $75 million. One unusual item that we have that will hit us in the second quarter, we're going to pay almost all of a roughly $90 million transfer tax that's related to the previously announced debt redomiciliation projects that are currently in execution phase and are key to our cash repatriation plans. We'll pay this one-time tax in the second quarter, but we would expect to be able to recoup that tax in future years through the associated foreign tax credits. It is a big payment here in the first half, so I did want to call that out. I mean, if you think about cash tax of the $300 million, three-quarters of that will be in the first half. I would say cash cost of Synergy should be $100 to $150 million this year. That's higher year over year by $25 to $75 million, which will just kind of depend on what that final number ends up being and the timing of some of those actions. Positive offsets to free cash flow this year, year over year, lower cash interest by about $50 million, and a benefit of $100 to $150 million in lower CapEx versus last year. So I hope that helps in terms of some of the drivers in our thinking and especially the timing associated with those.

Very much so. Thank you, Chuck.

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

Thanks. Good morning, everyone. Now that Clear Lake is up and running, is rationalization of your asset deals, assets firmly off the table, or is that an option to be considered for this tough supply-to-main environment?

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

Thanks, Laurie. And as a follow-up, it used to be fairly transparent to investors to see outgrowth in engineered materials versus in markets. It's been harder to judge through the last few quarters. Are there any metrics such as winds, I don't know, your size of your pipeline that you can point us to to kind of demonstrate that you keep outperforming your end markets or that that outperformance will resume perhaps in future periods?

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

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

Thank you. And our next question comes from Aaron Viswanathan with RBC Capital Markets. Please state your question.

Great. Thanks for taking my questions. I guess first off, just curious about your comments around volume. It sounded like the activity in Q1 was seemingly getting slightly better in the earlier part of the quarter and then maybe it stalled out in March. And then, are you seeing a similar pattern here of things maybe getting better in April? I mean, how would you kind of characterize Q2 thus far versus your comments and then what you saw in Q1? Thanks.

Yeah. Look, I would say from a volume standpoint, both for a city gas and an EM, it was, you know, very much as expected in Q1 throughout the quarter.

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

Okay, thanks for that. And then just a question about the second half and as you look into 25. So it looks like you'll be – ending the year on a, say, 660 rate for EPS for the second half. If you were to annualize that, maybe you're $13.25 or so. If you add some volume and maybe some deleveraging on top of that, it seems like you could get close to $14. Is that kind of how you're thinking about $25? I know it's a ways off, but just maybe got some Wanted to get your initial thoughts. Thanks.

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

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

Thank you. Thank you. Good morning. Laurie, there was a competitor outage in acetyl starting, I think, late, late February. I believe it's still on allocation of amine acid. Did you benefit, and are you still benefiting from that competitor situation?

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

Understood. And just on M&M synergies, what were they in Q1, what will they be in Q2, and what should be the cadence in the back half of the year?

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

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

Yeah, thanks for taking my question. So I guess the first one is on raw materials. So I believe for EM, you were expecting as much as $150 million benefit as kind of lower costs rolled through the system. It looks like you're going to have $20 in the second quarter, and it's comparable to what you saw maybe in the first. So is that still a reasonable outlook just based on where raws are right now that You know, you could see $100 million, $110 million of benefit in the back half of the year, or have things gotten better or worse? I guess, can you help us to think about that?

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

Okay, and then I guess the second question would just be in the acetyl chain business, obviously there's some new capacity in the markets beyond just yours that are impacting the business. It looks like there's more capacity coming on next year potentially as well. So I guess if we don't see much of an improvement in the overall demand environment, are there other levers that you can pull in your acetyl chain business to drive incremental profitability in Or are we at a point now where it's really going to be about the market improving and developing from a demand perspective?

Yeah, so let me make a few comments on that, John. If we look at this year, there were two large, I'd say world-scale capacities added in acetic acid in China. And again, the impact of those has been a bit more than we thought because some of the companion downstream consumers that were supposed to come on at the same time have been delayed due to just overall demand in the market. Next year, there's really only one smaller unit coming on that we're aware of in acetic acid, some other capacity a little bit in VAM. It's not enough that it should have a major impact, but we're still not at the whim of the market. I mean, we still find opportunities to use both our global and our chain flexibility to really maximize our earnings in this market and try to maintain that level of foundational earnings. I'd say the other good opportunity, which is developing for us, is our ability now to provide sustainable products into the market based upon the CCU project that we've put in at Clear Lake. Now that we have our ISCC certification for methanol as low-carbon material, we're able to offer that to all of our customers in kind of whatever acetic acid products they desire, and we are seeing a lot of interest in that. We also have a sustainability advantage for VAE, which customers are interested in for kind of its low odor, low VOC emissions. So I think there are some opportunities we have that are unique to us that others do not currently have at this period in time, and we see that demand starting to grow and hope that will become a more significant part of our portfolio.

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

Thank you. It sounded like the sequential change in EM earnings was nylon up sequentially and other plastic earnings down sequentially. Was the sequential decline in the other plastics due to the downturn or price pressure or what drove that?

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

And then I wasn't thinking that medical was that seasonal. What's driving the seasonality in medical?

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

Okay. Thank you.

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

Hi, this is Dan Rizwan from Lawrence. Thanks for getting me in. We talked a lot about the Clear Lake expansion. I was wondering if an expansion in Singapore or someplace like that would be necessary given the growth that's potentially there in India over the next, I don't know, few years to decade.

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

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

Thanks. That's really helpful. And then with costs, we talked again a lot about price costs with raw materials, but I was just wondering what's happening with labor and potentially transportation costs if they're kind of elevated and going higher and if that could have a kind of a negative impact towards the second half of the year.

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

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

Thank you very much.

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

Hi. Good morning. This is Eric Zhang. I'm for Patrick. On the incremental excess supply in China acetic acids, do you have an outlook on when the delayed downstream startups will be resolved? And once that is resolved, Do you expect it to have a meaningful uplift in acetic acid pricing in China?

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

Okay, got it. Thank you.

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

Yes, thank you very much. So firstly, I want to ask a little bit on engineering materials and specifically your autos exposure. You know, as we're seeing more and more automakers delay their EV plans and sticking with IC engines, even just a few months ago. How does this change, I guess, your plan and your potential margin uplift? And also, are you seeing any impacts for consumers trading down to lower priced models as well?

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

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

Great, thank you. And I also want to ask to go back a little bit on the China Acetyls capacity expansion. I assume some of these downstream projects that were supposed to absorb the acid demand are on the polyester chain, but at least in our estimates, there are a bunch of VAM and EVA projects as well. So certainly as they come online, they will absorb more of the acidic acid, but you do participate in these markets and you did have a comment that prepared remarks that you have much higher variable margins, I believe, in the downstream projects. So as this capacity comes online, on a net basis, would that actually be good for you or could it be a source of margin pressure because you may lose some margin on your downstream business?

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

Yeah, and I would just add, I think, you know, when new capacity starts up, whether it's acetic acid, BAM, et cetera, you know, it's going to come in and it's going to have a near-term impact. But, you know, those things then even out over, you know, the subsequent quarters. And our business is really about flexing our global network and that full value chain. And so one quarter, we're going to make money one way. The next quarter, we're going to make money a different way. And that really is the uniqueness of this kind of integrated value creation model that we have within the Acetyl chain.

Great. Thank you very much.

Diego, we'll make the next question our last one, please.

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

Morning, Lorraine Scott. You know, again, wanted to revisit the acetyl chain, particularly in China. You know, I mean, reading through your prepared remarks, it just seemed like, you know, the first quarter was like, you know, a tale of two cities. You know, it seemed you guys started very strong and then by February pricing started weakening. Just trying to understand the dynamic behind that. I mean, it seems, you know, the two new facilities that you guys talked about, you know, they've been around for, you know, call it five or six months. So what really caused that change between the first half of Q1 and the second half?

Well, Hassan, you may recall, I mean, typically in China, Q1 is seasonally a lower demand quarter because of Chinese New Year's. So if you look at total, you know, if you look at acetic acid pricing specifically in China, I mean, what we did see in Q1 was the lowest price since fourth quarter of 20. And again, not unexpected, very much in line with what we've expected. And again, it is based on the lower demand. I would also tell you, even though that new capacity maybe came on two quarters ago, it takes a while for them to ramp up and to really get into the market. So I would say it's shaping up very much as expected. I would also say this is normal, as Scott said, that there is some minor disruption in the market when these come online, but things do settle down over time.

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

Very helpful. And as a follow-up, you know, if I could just sort of hit on the 2024 guidance again, maybe in EBITDA terms. I mean, you know, over the last couple of months, you talked about some of the drivers, and I just want to make sure numerically I'm thinking about them, or they're trending as you guys had stated a couple of months ago. I mean... You know, you talked about the M&M synergies being, call it, 150 million EBITDA-wise, worth of a tailwind, Clear Lake expansion being around 100 million. And then, obviously, you know, you had some offsets in terms of headwinds from some of the outages that you had last year. So, I mean, you know, as you sort of sit there and think about some of those headwinds and tailwinds, incrementally year on year, how much of a boost will we get from some of these controllables and new capacity additions?

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

Very helpful. Thank you so much.

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

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

Thank you. And with that, we conclude today's conference. All parties may disconnect. Have a good day.