Celanese Corp - Series A (CE) — Q2 2022 Earnings Call Transcript

Thank you, Darrel. Welcome to the Celanese Corporation Second Quarter 2022 Earnings Conference Call. My name is Brandon Ayache, Vice President of Investor Relations. Joining me on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer. Celanese Corporation released its second quarter earnings via Business Wire and posted comments about the quarter on our Investor Relations website yesterday afternoon. As a reminder, we will discuss non-GAAP financial measures today. You can find definitions of these measures and reconciliations to the comparable GAAP measures on our website. Today's presentation will also include forward-looking statements. Please review the cautionary language regarding these statements, which can be found at the end of the press release as well as the prepared comments. Form 8-K reports containing all of this information have also been submitted to the SEC. Since we published our prepared comments yesterday, we'll now turn the call over to Lori for some introductory comments.

Thanks, Brandon, and thanks to everyone joining us on the call today. Given the macro uncertainty of the world right now, I wanted to take a few minutes to set the tone for this call and reemphasize the priorities we have as a company. As we prepared the earnings materials we put out yesterday, I tried to emphasize two long-time qualities of Celanese and its employees, and I want to reemphasize them today. Number one, we are fully committed to our objectives. And number two, we are focused on executing on those things that we can control. To these points, we are committed to executing our business model to maximize earnings and cash generation. We are committed to rapidly integrating and synergizing our Santoprene and M&M acquisitions. And we are committed to swiftly executing our deleveraging plan after closing the M&M acquisition. Above all else, we remain committed to these objectives even in the most challenging of environments. Clearly, the recent macro dynamics have done little to help us. This is nothing new. We have not and will not use them as excuses. Over the last few years, our teams have delivered exceptional, even record, performance while dealing with the global pandemic, severe constraints on raw materials and global logistics, record levels of cost inflation and now add to that list a rapid rise in interest rates. We know how to respond to external challenges by executing against that which we can control. Our Engineered Materials and Acetyl Chain teams each delivered record earnings across the first half of 2022. Their operational excellence and commercial agility have driven record adjusted earnings per share performance across the first half of 2022 and a very strong full-year outlook, even without the benefit of share repurchases this year. Our finance team successfully secured permanent financing for the M&M acquisition in a very challenging market and are taking controllable actions to ensure the resiliency of our deleveraging plan. Our integration teams are rapidly synergizing Santoprene and making significant progress in M&M pre-integration work. We cannot predict what the world will present us with in the future. Right now, we see very little first-hand indications in our order book that warrant a severity of market headlines that we are all reading and the market response we have experienced. But I don't want to spend our time on this call today speculating on the things our team cannot control, whether that's business performance outside of Celanese or on certain macro conditions in the future. And while we do not expect the worst, I want to be clear that we will be positioned and prepared for it. We are eager to close the M&M acquisition, which we are targeting for the fourth quarter of this year. I've had the chance to meet many M&M employees over the last few months. I have been very impressed by their capability, their passion for the business and their excitement about the new company we are forming. They will be an important part of our success, and I'm excited to welcome them to Celanese. We are excited about the opportunity we will have as one team to drive growth and value creation in Engineered Materials going forward. Above all else, I am confident in the momentum Celanese is building to deliver long-term growth and value for shareholders. With that, I'd like to ask Darrel to go ahead and open up the session for Q&A.

Lori, just reading the prepared remarks, I may have misunderstood it, but it doesn't seem like you're assuming below plan EBITDA for M&M next year but just that you're going to have the higher interest expense. Is that correct? Or is it just that you think some of the work you can do can allow you to have cash flow that's on plan, in which case EBITDA kind of becomes less relevant? Or what is it that your latest thinking is on that right now?

Yes. Thanks for the question, Vincent. Look, our real focus has been on really focusing on cash flow and steps that we can take to offset the additional pretax interest of about $250 million that we're anticipating. I'd have to say I'm really pleased with our team for having completed this financing in what's been a very difficult environment to do that. So we are really pleased with where we are on financing. But we have been looking at how we can offset that from a cash flow basis. And so we're looking at capital, we're looking at working capital. We're looking at other forms of generating cash. Obviously, our better performance within Celanese this year and our belief in that continuing through next year will also help in terms of really offsetting that on a cash performance. I think if we look at DuPont's M&M performance, I mean, we're seeing the same numbers you are so we don't have any insight into Q2. And I would say we are disappointed. But that said, we assume they've had some of the same headwinds we've had in inflation, currency, certainly Asia automotive, which they're exposed to and the volatility there. So we're going to be watching their performance. I have to say, personally, I'm more interested in what they do in the second half and the momentum that they can build as we move through the second half and towards the time of the acquisition. And obviously, we're very focused as we look at synergies and early synergy capture and looking at what steps similar to what we did with Santoprene, what steps can we take immediately upon closure of the acquisition to try to get their earnings up to the level that we expected at the time of the deal.

And just as a follow-up, could you just talk a little bit about sort of the differential in acetic acid pricing between Asia and the United States? It just seems to be at a pretty wide level. What was your expectation for sort of how that spread is going to play out?

Yes. I think what we saw in the second quarter is utilization, although it was pretty robust in Asia, we saw some demand come off due to COVID. All the producers were operating pretty well. So we did see demand softening as we moved, or sorry, price softening as we moved through the second quarter. As we look at the third quarter, we expect it to probably stay in that kind of $450 per ton that we’re still seeing for China acid. I think the story in the Western Hemisphere is a little different. Demand has continued to be fairly strong, really everywhere in the Western Hemisphere. And we have had some producer outages in the Western Hemisphere continuing into now the third quarter. So I think that’s where you see the price differential. And maybe what’s a little different is – so with the logistics issues in the world today and availability of boats, I think it’s been a little bit harder for people to move – some of our competitors, I would say, to move out of Asia and into other areas of the world, which has kept that differential high. And I expect that differential to continue as we move into the third quarter.

First one, Lori, I was hoping you could expand upon, in the prepared remarks, you talked about a strategic overhaul of the Acetate Tow business. Just how you're thinking about potentially rethinking your commercial approach there?

Sure. If we look at our performance of Acetate Tow, I mean, while historically, we were really focused on delivering our customers with kind of unparalleled quality and security of supply, both of which came with longer-term contracts, we've clearly seen in this period of rapid raw material price escalation and rapid escalation of energy pricing, that this method of using fixed contracts is really unsustainable. I mean, overall demand remains fairly robust in the industry, but we clearly cannot and will not continue to run a business that is losing money. So we would like to build in more optionality to that business. We need to become more nimble. We need to move towards more dynamic pricing. And so much like we did in past years with VAM and emulsions and RDP, we really want to relook at what are our commercial contracts, how do we source, how do we manufacture, all the logistics is everything, how do we produce or provide enhanced optionality versus what we have today. We're really confident there's value in doing so. Like we said, we have experience having done that with some of the downstream derivatives of acetic acid. And we think by running this business in a similar way, we'll be able to deliver much greater value in the years ahead.

And then maybe second, just for Scott. I just want to clarify some of the interest expense comments you made in the prepared remarks. So if I just read it correctly, I believe you're adjusting the M&M interest out of adjusted EPS but that's still included in your free cash flow guidance. Is that correct? And just what is the incremental interest versus maybe what you thought last quarter pre-debt raise?

Yes. So we are going to adjust ahead of close that out of EPS, Mike, so you're correct on that. But we have included it because we have not adjusted free cash flow. So it is included there as that cost of carry. And that cost of carry is still very similar to what we had originally baked into the deal. Even though interest costs have risen, the ability to reinvest that money ahead of close, now we're in a higher return than expected previously. So the net interest on the carry is basically about the same as what we had originally anticipated for the deal. So overall, interest cost, based on the financing right now on an annualized basis going forward, post close, we would expect to be in that $250 million per year range. And we are continuing to look for ways to bring that down, and we have some plans that we plan to implement in subsequent quarters.

In your debt financing, do you have an ability to easily refinance the different portions of the debt if interest rates come down? Or you're more constrained?

Yes. So Jeff, what we did on that financing is we did try to weight a good portion of that financing to the short end of the curve on the fixed debt. So we have a larger amount on the 2 and 3-year, which will allow us to either not just refinance but hopefully deleverage and pay that off with the cash flow in the early parts of the deal. We also have term loans which are variable in the amount of about $1.5 billion as well, which will give us the ability to refinance that earlier on. We're also looking at different cross-currency options on a go-forward basis. As we look to and get better understanding of where earnings are going to be in the next several years, we do have the ability to do some cross-currency swaps like we had previously done a few weeks ago to additional euro opportunities as well as yen opportunities to best match where the earnings exposure will be.

My second question. When you think about the Acetyl Chain in 2023, if we again go into a pronounced economic slowdown, we seem to be in a different place because oil prices are so much higher, whether they stay at where we are or whether they come down somewhat. When you think of the earnings level or the earnings power of the Acetyl Chain in a 2023 recession, where do you think we would be or what range?

Yes, I believe the core of your question, Jeff, is about our foundational earnings level. Although we may encounter a recession next year, I personally anticipate it will be relatively mild, and while we are not entirely shielded from its effects, we consider the impact on our business to be manageable at this point. If we look at the first half of this year and the trailing 12 months, we've maintained a $2 billion annual earnings level for the Acetyl Chain, which clearly is not foundational. We have experienced some exceptional conditions in recent years and do expect some moderation. About a year ago, our guidance indicated a foundational earnings level of approximately $1 billion annually, prior to the increase from the Clear Lake expansion. Over the last few years, we have enhanced our business significantly, adding notable optionality, including Elotex and RDP capabilities, and improving our commercial agility in the Acetyl Chain. We have also noted improved global supply-demand conditions, even in China where prices have returned to more typical levels, though we are still operating at around 85% to 90% utilization there. Overall, we are quite confident that we've raised our foundational earnings above that $1 billion annual level. As I mentioned regarding China, we are seeing some moderation in acetic acid, and I expect that we'll begin to see similar trends in the Western Hemisphere, with some moderation in sectors like paints and coatings while still remaining robust compared to historical levels. I don’t have a precise number at this moment, but we are continuously monitoring this and would like to assess how the third quarter unfolds. As usual, we plan to provide guidance for 2023 around October.

Curious if you could talk about some of the end market volumes that you're seeing at EM, kind of as you went from the end of second quarter into 3Q. So like auto, consumer durables, where are you seeing more weakness and how pronounced that weakness is in that market versus your performance?

Yes. I think if we look at EM, we are seeing slight softness, I'd say, across all regions. I mean, in Asia with the COVID lockdowns, we saw a little bit of softness there, although surprisingly, auto continued to be very strong for us in Asia, even though the market was down, I think, 13% in China in terms of builds, we were actually up about 8%. I would say in Asia, we need a little more visibility kind of post the COVID recovery here now to really assess the fundamental demand that's going to exist for some of the other areas. I'd say in the U.S., we're seeing consumer spending stay up, really holding up the best of all of the regions, which is supporting certainly auto build but also industrial demand and some of the electronics and electricity. And then in the EU, I'd say we're seeing some signs that inflation and energy uncertainty is starting to impact demand but fairly weak signals at this point. If you look at the different end markets, in auto, what I would say is right now, it's pretty hard for us to imagine a scenario where demand is what's going to drive auto. We really think it's going to continue to be driven by availability of raw materials, specifically chips. Our outlook is chip availability gets slightly better every quarter and will continue to do so through the end of '23. We believe demand is pretty robust. We're seeing that in all segments of the world, big backlogs, low inventories. So auto, we think, is just really being driven by chip availability, and that's true in all sectors. I think maybe the thing to think about in auto though is new autos today use a lot more chips, especially EVs. And so although more chips are becoming available as they are prioritized to more premium autos and to EVs, that probably still translates to less auto builds than maybe traditionally would have been seen from that. I think the real softness we've seen has been more in appliances and consumer electronics, maybe not surprising because everybody seems to have bought a new computer and a new phone during COVID, and I think there's not a pent-up demand there. So I would characterize it though as modest softness, just a few percent. Could also be the impact of inflation. Medical, I would say, actually, our medical business as a total is back at pre-COVID levels in terms of level of earnings. And that is even without implants being back at their pre-COVID levels. So we're seeing much stronger demand in medical for other elements of our medical portfolio like long-dosage delivery devices and that sort of thing. And then you asked about EM but I would just say on the acetyl side, the softness we're seeing is more in paints and coatings and construction. But I would say that's off a historical high versus necessarily of what we would consider a typical level of demand.

And just in terms of EM earnings, I think some of your competitors have been a bit more vocal about the FX impact and how that changed their outlook. Did anything change from your perspective versus your planning basis? Obviously, rates are worse but I'm not sure what was embedded in your guidance.

Yes. I mean, certainly, we're seeing the FX impact in Engineered Materials. If you look at, say, this second quarter of this year versus last year, it's about $10 million just for EM. So we're certainly seeing it. It was a little higher this quarter than we had originally planned but I think only to the tune of a couple of million for EM. And look, I think this is really where you see the strength of our pipeline model in Engineered Materials as well as really the commercial agility of our EM employees. I mean, they have been out there managing product mix, managing pricing, doing all those things to really cover the cost of raw materials and cover the FX headwinds that we've been seeing throughout this quarter and all the quarters in front of it and all the quarters to come. And I think that's where you really see the strength of Celanese and the people at Celanese.

I guess for my first question, on your comments, Lori, in your prepared comments about inventory levels having sort of normalized in many end markets, verticals along the supply chain, does that, by definition, create less opportunities for the AC segment in terms of just sort of flexing the chain and maximizing molecular profitability? Or is that not the case?

Yes, I would describe it as our focus in the Acetyl Chain has done an excellent job of adapting over the past couple of years to respond to the differences in Western Hemisphere economics compared to China, and to move materials as far down the chain as we can. In light of soft pricing in China, as you saw last quarter, we transferred a significant amount of material from Asia to Europe, and we did this in the first quarter as well. We will continue to pursue this strategy. However, we are likely approaching the limits of our flexibility in making these changes since we are operating at full capacity in our downstream derivatives, including VAM, VAE, and RDP. We will keep taking commercial actions to exploit other opportunities in the market, but it seems we have been pushing the limits of our options within the Acetyl Chain, particularly looking at the second quarter.

And then on the recession sort of scenario, how do you see volumes playing out for your EM segment in context of the fact that many end markets such as autos, which are quite large, number fully recovered? And would you expect also the same for M&M? I understand you don't own it yet and so on, but just given the nature of the end market matrix for that business as well.

My perspective on the automotive sector is that we likely have about three years of pent-up demand. For instance, if you order a car in Europe, it can take a year to receive it. In Japan, the wait might extend to one or two years. Even in the U.S., there can be significant delays, particularly for specific models. This situation indicates substantial pent-up demand in the automotive market, especially for premium vehicles and electric vehicles, where we have a stronger market presence. Typically, in a recession, we would anticipate a decline in demand, but given the prolonged period of high demand, I believe the auto market will be relatively stable. Looking ahead to the end of 2023, I don't foresee any factors significantly affecting auto demand aside from the ongoing chip shortage and other raw material constraints, primarily related to chips. While we might see a decline in consumer durables as people postpone purchases like consumer electronics, I anticipate that medical and pharmaceutical sectors will remain stable. Currently, we are not observing negative effects in industrial sectors or areas like 5G infrastructure, which I expect to continue to thrive. In terms of power generation, the increasing shift towards electric vehicles and enhanced infrastructure should also remain unaffected. The primary areas I see softening are in consumer durables and electronics, which make up a relatively small portion of our portfolio. Although we don't own M&M, it's known that about half of their materials are used in automobiles, so I expect this market to stay strong even amid a recession.

It was a good quarter and we have a positive outlook. Lori, with the additional financing, I know you manage to mitigate many challenges effectively, but I believe you anticipate that the deal will add a couple of dollars in the first year. Is that still the expectation? Also, are there strategies in place to counterbalance the EPS dilution from the deal or the financing?

Yes, Mike, it's too early for me to provide a definitive answer on that. Right now, we're focused on maximizing cash flow. We also see significant opportunities in the size and timing of our synergies. Similar to what we did with Santoprene, we believe we can accelerate some initiatives and increase the synergies in the first year. We're also assessing the performance of our businesses to gain a clearer perspective on 2023. Therefore, from an accretion standpoint, it’s just too early to say. However, I anticipate that we will have a revised update to share with all of you around October.

You mentioned in your prepared remarks that there has been some disappointment in the M&M results so far. Considering the business's performance, do you see the challenges as primarily external due to tougher end markets, or are there aspects of their operations that you believe could be quickly improved to yield better results?

That's a difficult question to answer, Mike. Within Celanese, we expect our business to be world-class operators and commercially agile. We sell our products into highly differentiated and specified end applications. We work very hard to preserve profitability despite external disruptions and periods of volatility. At Celanese, we don't make excuses for underperformance based on market cyclicality or headwinds. That's how we operate. We recognize the talent coming from M&M, and we value our models and culture. We believe we can apply that to M&M and achieve differentiated performance from that asset as well. Our focus is on integration as we move toward the close.

Quick question on your natural gas exposure in Europe. You gave some details about Germany and your Trash-2-Cash deal. But if the supply's severely curtailed in the winter, is it possible that maybe you can shut down your Frankfurt plant and supply those customers from either Europe or Asia?

Yes. As mentioned in our notes, our natural gas exposure in Europe is centered in Frankfurt, Germany. In 2021, about 30% of our global sales came from Germany, which is typically the case. With the Trash-2-Cash initiative, we have projects that allow us to use fuel oil in IPH. It is very unlikely that we would need to shut down IPH during the winter. Regarding acetyls, we can source materials from Asia or Europe, but our production there is minimal, primarily focused on palm production and a few other items in IPH. Therefore, it is unlikely that a shutdown will be necessary. More probably, we may operate at reduced rates, especially since IPH is a significant energy consumer, while many other products produced there require less energy. Additionally, there are other regions in Europe outside of Germany that may face greater impacts, but we are actively working on strategies to mitigate risks at all our key facilities in Europe.

Yes. Flexing capacity is something we do every day, P.J. We've talked a lot about it in Acetyl business but we do it in Engineered Materials as well. And so if there are opportunities where we have excess capacity that is lower cost in other regions, we can move that around if the logistics are there, as Lori mentioned, and we will always look to maximize profitability if that opportunity exists.

Great. And then in automotive, many chemical companies and others saw that there is a quick snapback. But as you rightly said, there are constraints on the chip side and all that. So what's the more realistic outlook? Can you talk about maybe like a global bill number that is more reasonable?

Well, look, you may recall when we went into this year, we actually, despite IHS having a fairly optimistic number, I don't remember what it was, 8% or maybe even higher than that, of build growth from '21 to '22, we actually based our '22 forecast on flat auto builds from '21 to '22. And I think if you look at where we are, I think we're just under 2% growth now according to IHS for global auto builds. And although they're still calling out 4%, we still think flat was a pretty good prediction. And again, because we really based it on chip recovery and the fact that vehicles use more chips now, so you need more recovery in chips in order to fill the same number of vehicles. So we still think flat versus '21 is a pretty good estimate. Maybe a few percent of growth here in the second half as we see chips becoming more and more available. But I think flat. The interesting thing is here in North America, you would think with energy prices that we'd start to see the transition to more demand for more fuel-efficient vehicles. But in fact, we're not. We're still seeing plenty of trucks and SUVs being the primary models being built. And again, these tend to be higher and more premium vehicles and require a lot of chips.

Scott, I was wondering if you could address your latest thoughts on the capital budget. Last quarter, I think you indicated $550 million, but in reading the prepared remarks last night, it sounds like you're actively evaluating options to reduce that number. What kind of levers could you pull if necessary? And do you have any early thoughts on how that number could trend in '23 as you complete your expansion at Clear Lake?

I believe the $550 million range for this year is still where we're heading. Looking ahead to next year, in our initial projections with the combined enterprise including M&M, we factored in a higher capital amount than we actually need. As we gain a better understanding of that business, I think there will be more opportunities to reduce that capital number. We will share more details on our expectations for a combined basis as we approach October. However, this will be a key component in offsetting the additional $250 million of interest mentioned in our prepared remarks. While we may not fully offset it through capital compared to our original plan, we should still be able to cover a significant portion of it with capital.

Okay. And then, Lori, there will be additional opportunities to reduce that capital number. We will offer more details on our projections for a combined basis as we approach October. However, it will likely be a crucial factor in balancing the additional $250 million of interest we mentioned in the prepared remarks. While we may not fully offset it through capital compared to our original plan, we will definitely manage to cover a significant portion of it with capital.

If I could add to that, I mean, because you did ask where might it come from. I think like we saw this year, given the large number of assets that we are getting from DuPont, we will be evaluating where we think we'll be able to get more capacity more efficiently out of the DuPont assets versus new build. And so we'll be evaluating that, and we do think there are some synergy opportunities there. And then I think like you saw us do during COVID, with higher material pricing right now for steel and everything else, although we start to see it coming down, with trying to get a clearer view of demand in 2023, we think there's going to be some opportunity to delay some of the larger capital projects and use that time, like we did with Clear Lake, to get some efficiencies and savings in terms of construction costs and how we actually contract for the construction of those facilities. So I'd say it's nothing dramatic. We're not cutting to the bone. We still think use of capital for organic growth is a really good use of cash. But we are going to be cautious with how we invest in light of the uncertainty around the economics for next year.

Okay. And then Lori, in reading your remarks, it sounds like you're comfortable enough with the order books as you see them here in July anyway. But in a scenario where the macro environment continued to move again, so to speak, how do you think about portfolio composition? In other words, do you see any levers that you could pull in terms of noncore assets that may be useful to accelerate the process of deleveraging, if necessary?

Yes. We constantly evaluate our portfolio. Over the years, we've made several strategic moves, including the divestiture of PPC and smaller divestitures related to PPE and other composites. Currently, we have ample financing capacity on our balance sheet to fund the deal with cash and committed debt, so there's no immediate need to sell anything. However, we remain open to opportunities. Interestingly, we've received a significant number of inquiries about some of our assets, which is more than we've seen in recent years. While the equity market may have slowed, we are getting many calls, allowing us to assess our assets and explore potential opportunities for monetization, similar to what we did with Polyplastics. This is something we are considering, but it is not urgent.

You called out the performance of Santoprene in the quarter. How did POM do? You've got a key competitor that's orphaned right now. I would think this is a pretty good environment for you to gain some share in POM.

Yes. Look, I'd say in POM, I think POM is performing as we had it for the year, expected it to perform. It continues to go into a lot of high value end applications. And I wouldn't say we see any real difference in demand or margins on POM now versus what we expected.

And then how did Ibn Sina do in the quarter? I would think this was a really good environment for them.

Yes. So obviously, with higher methanol prices last quarter, we saw that roll through in Ibn Sina. I think we called that out in our comments. We had a good bump up from Ibn Sina but mostly offset, all but about $5 million, offset by the KEPCO restructuring. And so it's done well. Again, remember, Ibn Sina is on a one-quarter lag so we should continue to see help from Ibn Sina as we move into the third quarter as well.

A question around the trajectory of volumes within the Acetyl Chain. I take a look at the sequential uptick in volumes from Q4 to Q1, and it was 8%, even though if I remember correctly, there were a couple of turnarounds in Q1. And then I take a look at the sequential sort of downtick. In Q2, it was a 3% downtick. So I'm just trying to get a better sense of that trajectory from Q4 to Q1 to Q2, obviously keeping in mind the Europe situation, which is obviously prevalent in the first quarter as well.

Yes. The transition from Q1 to Q2 is quite clear. While we experienced some minor turnarounds in Q1 at Clear Lake, we faced more significant issues in Q2, leading us to declare force majeure due to raw material shortages from some suppliers for Clear Lake. This difference in volume from Q1 to Q2 is primarily attributed to the force majeure situation at Clear Lake.

And now just on the strategic overhaul that you guys talked about within Acetate Tow. I mean, would a potential sale be considered? Obviously, have memories of you guys sort of working down that part earlier, but that was obviously a very different time as well. But would that be something that you guys would think about as well? And maybe potentially some of these inbound calls, are they related to the AT business as well?

Look, what I'd say is when we've talked about it on these calls before, we would certainly consider a sale but we think we would come up against the same problems with anti-competition in Europe that we had previously on the deal that was contemplated. So I'd say we're really focused at this point on actions that we can take that are under our own control to improve the performance of that business.

Yes. To add to that, we have created significant value by operating Acetyl Chain as an integrated value chain, ensuring that the full value of the upstream is reflected in how we price the downstream derivatives. We believe there is much more enterprise value to be generated by continuing to operate that business in a more integrated manner moving forward.

Lori and Scott, back to M&M. What have you learned over the last few months in your integration work that makes you more positive about the combination? Anything you've learned that may be not as hopeful as you would have thought initially?

Yes. I've had the chance to meet several team members from the M&M organization, and I'm very optimistic about the talent joining our company. They are passionate about the business and excited about the opportunity at Celanese. We have a strong potential to enhance our position as a leader in Engineered Materials by combining our assets. With any significant merger and acquisition, there are always concerns regarding cultural integration, but we find that the M&M team aligns closely with our culture, perhaps more than we expected. While there are areas to be mindful of, we are genuinely excited about the people we are bringing on board and how we can collaborate to elevate both companies and strengthen our Engineered Materials division. As we delve deeper into identifying synergies—which Scott might elaborate on further—we find that the synergies we anticipated are indeed real and present. We believe we can achieve even more, likely at a faster pace, and we are currently navigating through those processes. Thus, we see greater value to be unlocked. We are also optimistic about building our business further by leveraging our proven pipeline model and the opportunities it presents.

Yes. Just on that synergy point, I think we had originally baked in $150 million in the first year and $150 million in the second year of cost to achieve synergies. We think we're actually going to be able to spend less than that in year one especially and still get at or above the original synergy target of $75 million in that first year. So there's a lot more lower-cost synergies or no cost synergies early on as we model that out, which we're excited about. And then one other thing to add is just the commercial teams. I think what we've learned is how we're structured, how M&M is structured, very similar in terms of how to approach customers, yet kind of maybe the governance of how we do it and they do it is very complementary. So there's some things that we believe are going to be things that enhance and evolve our model. And we've talked now for five, six years about the continual evolution of our pipeline model and we think bringing M&M in is going to be a nice accelerator in that evolution, which should create some market opportunities going forward.

And just quickly, Acetate Tow, what's been the reaction from your customers to this new strategy or is it too early to get full feedback yet?

Yes, I think it's too early. I mean, we're still working internally to develop our models and how exactly that works. So we'll see more, I guess, in the second half as we go out with some changes to our customers.

We have observed a significant number of acetyl outages over the last 24 months, affecting not just Celanese but the entire industry, and at a frequency that is unusual. What is the underlying issue? Is it that everyone has taken ownership of their CO units, leading to this problem? Are these units underinvested in? Why do we keep experiencing these outages?

That's an interesting question, and I need to review the data because based on my memory, I would actually say that our acetyl units at Celanese are currently operating more reliably than they have in the past. I would need to examine the industry numbers to confirm this. I don't notice any common issues. Following COVID, many facilities were pushed to operate at full capacity due to a sudden surge in demand. As a result, turnarounds may have been delayed, leading to unplanned downtime. However, I don't see any systemic failures within the system that would indicate a broader issue. It could simply be a matter of timing or a recent tendency to perceive current situations as worse than they were in the past.

The one thing I would add though, Matthew, I think it's important, we brought this up on other calls is we are starting to see with some of the logistical challenges, we're seeing more Western Hemisphere downstream demand come back online and the demand is higher. And yet it's harder to get product out of Asia, particularly China, into the Western Hemisphere. And I think we've talked now for a number of years about the need for capacity in Asia to flow to the Western Hemisphere to keep things balanced. And that's been really challenged in this period of time. And so I think without that coming over into the West, that has kind of made some of these outages more visible in the market than maybe what they had been historically.

That's a fair point, yes. And then how much revenue did KEPCO, switch and Santoprene add to EM in the second quarter?

So versus second quarter last year, Santoprene, about $15 million versus last year when we didn't have Santoprene.

And KEPCO was pretty minimal. It's pretty immaterial. It's not far off from that Santoprene number, but it was pretty minimal.

And then, was KEPCO a full quarter or was there a partial quarter there?

It's a partial quarter because there's still inventory that needed to be sold out of the JV so it was pretty small in the quarter.

But remember, then it actually came out of equity earnings as well, so it's kind of netted out in the total bottom line.

Sure. I was just trying to get a clear read on volumes for EM on the quarter.

Sure.

With all the volatility in oil, nat gas and coal, has the cost curve changed for acetyls? And do you have a sense on operating rates by region?

Yes, I don't think the cost curve has really switched. I mean, the only place I would say you really see kind of things really out of whack, I mean, things have tended to move in parity, but the thing that's really out of whack, of course, is natural gas in Europe. Compared to oil, if you look at natural gas prices today with the cutback in the Nord Stream and everything, I mean, it's probably the equivalent of $350 oil. Now again, not a big factor for us on acetyls but bigger factor for Engineered Materials. So I would say for acetyls, the cost curve continues to be, even at these higher natural gas prices in the U.S., still a significant advantage in U.S. Gulf Coast, acetyl production and then oil in Singapore and coal in China remain about the same. And then again, Europe is a little bit upside down but that's not a big factor for us on acetyls.

Yes. I think it's also important to think about landed cost curve because ultimately that's what really matters. And because of that logistical dynamic that I talked about a few minutes ago, I mean, that certainly is holding things up because it's really expensive to move product right now, even if you can get the boats out of China into Europe or the U.S.

And then, Lori, I think you mentioned the currency headwind of about $10 million in the second quarter. Do you have a similar number for 2022 that's embedded in your guidance?

Yes. So the $10 million was just for EM. If you actually look at quarter-to-quarter, currency was almost $25 million just from Q1 '22 to second quarter '22. So we do have a number embedded in the full year guidance. I'm not sure what it is right off the top of my head, but Scott, you may have it?

Yes. I mean, just from a general rule of thumb, about a $0.01 change in the euro is call it about $7 million of earnings per quarter. So it's sizable on an annualized basis. And as Lori talked about earlier in the call, the teams both in Engineered Materials and Acetyls have done a phenomenal job of offsetting that. So it's sizable and it's been a pretty significant impact on us for the full year. We've effectively baked in very similar euro rates to what we're seeing today into our back half guidance.

I guess first off, you went through some nice commentary in your prepared remarks on natural gas in Europe, and you just kind of addressed that a little bit as well as being somewhat out of whack. But I guess, given some of those actions you have taken, it does appear that you're expecting this level of pricing to remain on a structurally higher basis into the foreseeable future. Is that the case? And I guess, if so, how do we think about EM and the impact from these higher costs in the next couple of years?

Yes. Look, I think the energy surcharge that was put in place by the Engineered Materials group has been very effective in helping us maintain margins. And our customers understand it and aren't necessarily happy but have been willing to pay it, and we haven't seen any major impact on volume because of the higher price. Now as we move forward and if we continue to stay at this kind of $60 per million Btu we're seeing today as we move into the winter period, I do think we will see energy pricing, not necessarily the pass-through on our materials, but just energy pricing for producers of goods in Europe being negatively impacted by energy, whether it be price or even availability at a certain point in time. And I think that's more likely that price at their own facilities is more likely to lead to demand destruction for EM than necessarily the energy cost pass-through that we're putting on our product.

And then as a follow-up, similarly, you noted there is a CapEx reduction here and potentially even greater in '23. Could you just describe that a little bit more? And I guess, you said you'd get to the 3x leverage in a couple of years. I'm just wondering if you have greater levers to reduce CapEx by even more to stay on track with that deleveraging or if it's not really dependent on that.

Yes, we could reduce our capital expenditures by half if necessary, as we have done before during the COVID pandemic. However, we will not cut so much that it affects the safe and reliable operation of our facilities. I don't think such cuts will be needed to achieve our financial goals related to this deal. We always have the option to delay or cancel projects if necessary. Nevertheless, we are focused on the long-term health of the business, with various expansions planned in Engineered Materials and polymers we expect from our base polymers, not just those coming from DuPont. We also aim to continue our expansions in VAE and VAM, and we will complete the Clear Lake project. Although we can make further adjustments if we face a significant recession or major demand decline—which we aren’t currently anticipating—we are discussing a potential $50 million reduction this year and possibly another $50 million to $100 million next year. These adjustments seem reasonable given the deal's context and the current high costs for contractors, steel, and other materials, so a slight delay seems sensible.

Yes. Just to provide a little more color for you, Arun. We had baked in $800 million of combined capital in 2023 for our base business plus M&M. And just given some of the dynamics that Lori talked about, we don't see needing to spend nearly that level. So we know we're going to be able to get a chunk of that back in cash to be able to offset some of the higher interest expense we talked about.

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