Celanese Corporation (NYSE:CE) Q1 2024 Earnings Call Transcript

Celanese Corporation (NYSE:CE) Q1 2024 Earnings Call Transcript May 9, 2024

Celanese Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Celanese’s 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. [Operator Instructions] 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.

Bill Cunningham: Thanks, Diego. Welcome to the Celanese Corporation’s first quarter 2024 Earnings Conference Call. My name is Bill Cunningham, Vice President of Investor Relations. With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer, Scott Richardson, Chief Operating Officer, and Chuck Kyrish, Chief Financial Officer. Celanese’s 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 8-K report containing all of these materials has also been submitted to the SEC. With that, Diego, let’s please go ahead and open up the questions.

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Q&A Session

Operator: Thank you. At this time, we’ll conduct a question and answer session. [Operator Instructions] Our first question comes from Ghansham Panjabi with Baird. Please state your question.

Ghansham Panjabi: Hi, guys. Good morning. I guess, Lori, 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 update of view on the system macroeconomic construct globally with the U.S, Europe, and China in context from the previous headwinds and de-stocking and just weaker growth, et cetera? Thanks.

Lori Ryerkerk: Good morning, Ghansham. Thanks.

Ghansham Panjabi: Good morning.

Lori Ryerkerk: 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 de-stocking. I think the movement 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 and also other regions of the world. And we’re not seeing some of the pull through of material because of those fat lagging exports.

The U.S. remains pretty steady, I would say, across all the sectors. And Europe, although we did see a little of improvement since the middle of last year, I would still say, 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 uplifts we would have expected at the end of the first quarter and the second quarter. Overall, I’d say, 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 although I do think there, we would expect as we move into the second half that we maybe start to see every 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 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 much like we did even a year ago, which is we still think people are still spending, if they’re still spending on experiences on travel, 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.

Ghansham Panjabi: 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 reduced on a global basis? And then, related to that, you had called that new capacity over the last six months, 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?

Lori Ryerkerk: Yes, look, I think in terms of kickstarting, it’s really just, when do people get confident in the environment again? When do we see a shift back to normalize spending on durable goods? Clearly, we could use some Europe recoveries 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 been more disruptive than 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 caprolactam and others. So again, I think it’s a temporary phenomena. If you look at what’s been added, even what’s to come, 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 demand normalizing and catching up with the supply we have now.

Ghansham Panjabi: Perfect. Thank you so much.

Operator: Thank you. And our next question comes from Mike Leithead with Barclays. Please state your question.

Mike Leithead: Great. Thank you. Good morning, team. I wanted to up sail and ask about full year guidance. Lori, it seems like from your remarks just now, the macro conditions are maybe still a bit uninspiring. So the bridge from sort of the $5 that is funded out of EPS in the first half to about $650 at the midpoint of second half. Is that all controllable felony actions or do you need the world to get a bit better from here to hit those numbers?

Lori Ryerkerk: Thanks, Mike. I would characterize it as we will hit those numbers with just controllable actions. And if you think about it, M&M synergies are heavily loaded and compounding as we go through the year. So now that we have full visibility into the data, everything due to our S/4HANA upgrade for the M&M assets, and also the results of like the Uentrop 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 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.

And I would also say, our turnaround cost in the first half is about double what is going to be in the second half. So we get some tailwind there as well. So 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 de-stocking, as we’ve said before. So I think, I still feel very confident that we will be within that range for full year.

Mike Leithead: Great. That sounds cool. And just as a follow-up question on engineering material, 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 a broad race across the fourth quarter?

Chuck Kyrish: I would talk — thing 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. Raws [ph] have come down as well, and we’ve been really mismatched here in engineering materials for more than a year on where 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 an upgrade of mix as we work our way through this year and then into 2025 to address that.

Mike Leithead: Thank you.

Operator: Thank you. And our next question comes from Jeff Zajkowski with JP Morgan. Please state your question.

Jeff Zajkowski: 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, maybe it’s down low single digits. Why is engineered materials have a larger volume decrement?

Chuck Kyrish: Yes, Jeff, I would really point to some of 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 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.

Jeff Zajkowski: Okay. And then, sort of the reverse is the acetyl chain, where volumes are up year-on-year, 11%. And I take it that what you want to do is run your Clear Lake expansion more or less full out. Is that part of the reason why volumes are up? And do you expect as a base case for your volumes to be up 10% or more this year? And maybe could you comment on filter tow? In that we saw really strong numbers out of Eastman, but your acetyl chain doesn’t seem to be growing it just a bit very much?

Lori Ryerkerk: Jeff, maybe let me just make a few comments and then I’ll let Scott add more detail. I mean, what I would say is, we don’t have a strategy to run as till 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’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 to 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, I think we’re seeing this. I would suggest you were seeing enjoying the same markets for tow that our competitors are, but of course it is now in our Acetyls chain and we have more decision points that we can make around is to really maximize the value of the chain.

Scott Richardson: Yes. 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 2022. 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’s business.

Jeff Zajkowski: Thanks so much.

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

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

Scott Richardson: I think as we work into Q2, my volumes will move up a little over where they were in Q1 on a year-over-year basis, relatively flattish. 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 we will see an expectation that volumes move up, really driven by two things in the second half. One, just as de-stocking has ended and that kind of normal flow-through, not a real significant re-stocking 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 we went really to an integrated commercial model in engineer materials in April of last year.

The average length of time projects in our pipeline takes 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.

Michael Sison: 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 get $7 billion business, and what would the operating leverage trying to get volume come back look like on growth?

Lori Ryerkerk: Yes, 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 Acetyl from a market standpoint. And then after that, while Acetyl will continue to grow at kind of 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. So, I would think about it that way. So ultimately there’s no, like, in number. The number continues to grow, but that’s the growth rate we expect.

Michael Sison: Thank you.

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

Vincent Andrews: 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?

Lori Ryerkerk: Hey, Vincent, thank you. Look, I would say we’ve been pretty indifferent so far. What we found is shipping channels and subway there can be a temporary disruption pretty quickly re-normalize 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.

Vincent Andrews: Okay. And I have just 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?

Scott Richardson: Yes, 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.

Vincent Andrews: Okay. Thanks very much.

Operator: And our next question comes from Josh Spector with UBS. Please state your question.

James Cannon: Hey, guys. This is James Cannon on for Josh. In your prepared remarks, talked about the price-to-cost benefit in the first half. Are you expecting much flow-through into the second half, or does lower pricing kind of erode that?

Scott Richardson: 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 thought 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.

James Cannon: Okay. 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?

Scott Richardson: 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 raws develop in the middle part of the year to see what then gets expensed towards the back half of the year.

James Cannon: Got it. Thank you.

Operator: Our next question comes from Kevin McCarthy with Vertical Research Partners. Please state your questions.

Kevin McCarthy: Yes. Thank you, and good morning, everyone. In your prepared remarks, you talked about two key synergy drivers for engineered materials, namely, shutdown in Nylon 66 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.

Lori Ryerkerk: Yes. Look, I would characterize it as, for the footprint actions we’ve taken, and there’s been a number of smaller actions that we’ve taken as well, not including Macklin [ph] 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 Uentrop, which is the biggest piece of that. So, there’s that. And then, I would say, on the SAP, you know, the direct impact, I mean, obviously we get rid of the TSA, but we’ve had to add our own people. So, 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 planning and scheduling and forecasting of demand in future materials.

And so, again, all of that kind of gets rolled into our synergy number, and we’re looking for the full year at the 150 lift from last year

Kevin McCarthy: 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?

Chuck Kyrish: Yes. Good question, Kevin. Yes, 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 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 free 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 connections 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, cash tax. 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. If you think about cash tax of the $300 million, three-quarters of that will be in the first half. I would say cash costs of synergies should be $100 to $150 million this year. That’s higher year-over-year by $25 million to $75 million, which we’ll just kind of depend on what that final number ends up being in the timing of some of those actions, a positive offset to free cash flow this year, a lower cash interest by about $50 million and a benefit of $100 to $150 million in lower CapEx versus last year. I hope that helps in terms of some of the drivers and how we’re thinking and especially the timing associated with those.

Kevin McCarthy: Very much. So, thank you, Chuck.

Operator: Thank you. Our next question comes from Aleksey Yefremov with KeyBanc Capital Markets. Please state your question.

Aleksey Yefremov: Thanks. Good morning, everyone. Now that Clear Lake is up and running, is rationalization of your asset yields assets firmly off the table? Or is that an option to be considered as this tough supply to the environment?

Lori Ryerkerk: Aleksey, thank you. I would say, we’re pretty satisfied with where we are with our footprint for asset yields. I mean, everything we have is specifically designed to serve a certain region instead of our customers, and we like having the optionality and flexibility that we have. We’ve also continued to build out our downstream. We saw the announcement about new VAE in China, some of the RDP debottlenecks that we’re doing, and that really is all about how do we continue to build the foundational level of earnings in asset yields and really kind of stabilize our earnings from asset yields. But if you look at just specifically, acetic acid for example, Clear Lake, clearly, 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 needs 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 debottleneck, but also opportunities to rationalize. But right now, I would say our footprint is pretty good for purpose.

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

Lori Ryerkerk: Look, I would say the pipeline is our winning factor, if you will, for engineered materials and what is the loudest 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.

Scott Richardson: Yes. 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 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. And 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, Aleksey 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.

Aleksey Yefremov: Thank you.

Operator: And our next question comes from Arun Viswanathan with RBC Capital Markets. Please state your question.

Arun Viswanathan: Great, thanks for taking my questions. I guess first off, just curious about 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’s sold 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.

Lori Ryerkerk: Yes, look, I would say from a volume standpoint, both for Acetyl acid and EM, it was very much as expected in Q1 throughout the quarter.

Scott Richardson: 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.

Arun Viswanathan: 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, you know, ending the year on 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 bucks. So 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.

Lori Ryerkerk: Yes, we’ve had so much variability in the last few years I hesitate to go much further out than a quarter of 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 not an unreasonable place to start as you start thinking about ’25.

Arun Viswanathan: Thanks.

Operator: Our next question comes from David Begleiter with Deutsche Bank. Please state your question.

David Begleiter: Thank you. Good morning. Lori there was a competitor outage in Acetyl yield starting, I think, late, late February. I believe it’s built on allocation of VAM and acetyl. Or did you benefit and are you still benefiting from that competitor situation?

Lori Ryerkerk: I would say, while there was some temporary run up in pricing, it was pretty small and barely short lived. So I would not say we’re seeing any benefit from it continuing. And the benefit was pretty small during the quarter. 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 a question supply, but just demand is really still not back at normalized levels, particularly even in the western hemisphere.

David Begleiter: 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?

Lori Ryerkerk: 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.

David Begleiter: Thank you.

Operator: Our next question comes from John McNulty with BMO Capital Market. Please state your question.

John McNulty: Yes, 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 got, 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 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?

Scott Richardson: Yes, 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.

John McNulty: 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 or are we at a point now where it’s really going to be about the market improving and developing from a demand perspective?

Lori Ryerkerk: Yes. 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. Again, 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 from methanol as low carbon material, we’re able to offer that to all of our customers in kind of whatever acetic acid product 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.

John McNulty: Great. Thanks very much for the call.

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

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

Scott Richardson: I would focus on the turnaround cost, John. I mean, that was really the largest driver is really offsetting the nylon.

John Roberts: And then I wasn’t thinking that medical was that seasonal. What’s driving the seasonality in medical?

Scott Richardson: 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.

John Roberts: Okay. Thank you.

Operator: Our next question comes from Laurence Alexander with Jefferies. Please state your question.

Dan Rizzo: Hi, this is Dan Rizzo from Laurence. Thanks for getting me in. We talked a lot about the Clear Lake expansion. I was wondering if an expansion in Singapore or some place 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?

Lori Ryerkerk: Yes, we don’t see that on the horizon. 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. And we have options to bring material into Singapore from other parts of the world. Should we see that demand increase?

Scott Richardson: 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.

Dan Rizzo: 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 that could have a kind of a negative impact towards the second half of the year?

Lori Ryerkerk: 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.

Scott Richardson: Yes, 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.

Dan Rizzo: Thank you very much.

Operator: Thank you, and our next question comes from Patrick Cunningham with Citi. Please state your question.

Eric Zhang: Hi, good morning. This is Eric Zhang on 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 to have a meaningful uplift in acetic acid pricing in China?

Lori Ryerkerk: Yes, well, 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 again. 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 caprolactam. 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.

Eric Zhang: Okay, got it. Thank you.

Operator: Our next question comes from Salvator Tiano with Bank of America. Please state your question.

Salvator Tiano: Yes, thank you very much. So firstly, I want to ask a little bit on engineered materials and specifically your auto’s exposure. As we’re seeing more and more automakers delay their EV plants and sitting with ICE engines even just a few months ago, how does this change against your plan and your potential marginal uplift? And also, are you seeing any impacts for consumers trading down to lower priced models as well?

Lori Ryerkerk: 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. 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 25% — 20% more content available to us than ICEs. So, while there are some shifts and shifts in which products, as long as people are buying vehicles, like I said, we’re happy.

Scott Richardson: Yes. And we have to continue to work our pipeline really to touch on all three areas, whether it’s battery electric, hybrids or ICE, just because 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, 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.

Salvator Tiano: Great, thank you. And I also want to ask to go back a little bit on the China Acetyl capacity expansion. I assume some of these downstream projects that were supposed to absorb the acid demand around 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 acetic acid, but you do participate in these markets and you did have a comment that prepared remarks that you have much higher variable margins, so 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?

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

Scott Richardson: Yes. And I would just add, when new capacity starts up, whether it’s acetic acid, VAM, et cetera, it’s going to come in and it’s going to have a near-term impact. But those things then even out over 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.

Salvator Tiano: Great, thank you very much.

Brandon Ayache: Diego, we’ll make the next question our last one, please.

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

Hassan Ahmed: Good morning, Lori and Scott. Again, wanted to revisit the Acetyl chain, particularly in China. I mean, reading through your prepared remarks, it just seemed like the first quarter was like a tale of two cities. 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, the two new facilities that you guys talked about, they’ve been around for call it five or six months. So what really caused that change between the first half of Q1 and the second half?

Lori Ryerkerk: Hassan, you may recall, I mean, typically in China, Q1 is seasonally lower demand quarter because of Chinese New Year’s. So if you look at total — 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.

Scott Richardson: Yes, let me just add, Hassan, 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 acetyl chain business. We had some of these dynamics in China, yet the business still generated 28% EBITDA margin. 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.

Hassan Ahmed: Very helpful. And as a follow-up, if I could just sort of hit on the 2024 guidance again, maybe in EBITDA terms, I mean, 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 their trending, as you guys had stated a couple of months ago. I mean, 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 had some offsets in terms of headwinds from some of the outages that you had last year. So, I mean, 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?

Lori Ryerkerk: Yes, again, I think if you look at versus 2023, those things that you called out M&M synergies that 150, Clear Lake expansion, we’ve asked them to still deliver $100 million for the year. And we probably have another, 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 services year as we’ve paid down over a million and a half of our net debt. And that’s probably another 50 or so, and then we’ll have lower cost flowing through from our inventory 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 that may be the single biggest factor this coming year as well.

Hassan Ahmed: Very helpful. Thank you so much.

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

Bill Cunningham: 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.

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