Celanese Corporation (NYSE:CE) Q3 2023 Earnings Call Transcript

Celanese Corporation (NYSE:CE) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Hello, and welcome to the Celanese Q3 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Brandon Ayache, Investor Relations. Please go ahead.

Brandon Ayache: Thanks, Kevin. Welcome to the Celanese Corporation Third Quarter 2023 Earnings Conference Call. My name is Brandon Ayache, Vice President of Investor Relations. And with me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer; and Scott Richardson, Chief Financial Officer. Celanese distributed its third quarter earnings release via Business Wire and posted prepared comments on our Investor Relations website yesterday afternoon. As a reminder, we will discuss non-GAAP financial measures today. You can find definitions of these measures as well as reconciliations to the comparable GAAP measures on our website. Today’s presentation will also include forward-looking statements.

Please review the cautionary language regarding forward-looking statements, which can be found at the end of both the press release as well as the prepared comments. Form 8-K reports containing all of these materials have also been submitted to the SEC. Before opening it up for your questions, let me turn it over to Lori to provide a few introductory comments.

Lori Ryerkerk: Thanks, Brandon. So we have done and announced a lot recently. So I just wanted to take a minute or two to emphasize again exactly what we are all working so hard to achieve at Celanese. I can confidently say that at no point in our history, has there been a greater opportunity for Celanese to deliver significant earnings growth as in the next few years. In the Acetyl Chain, we continue to enhance our earnings power and optionality with projects like the acetic acid expansion at Clear Lake, and the methanol expansion also at Clear Lake which will dramatically strengthen our sustainable product offerings. Of course, in Engineering Materials, we continue to integrate and synergize the M&M acquisition, which transforms EM into the preeminent global specialty materials provider.

This important and valuable work has been made more challenging in the demand backdrop that remains exceptionally weak and volatile. Our visibility into future macro conditions is limited. Regardless, our teams have worked tremendously hard to deliver three consecutive quarters of earnings growth since closing the M&M acquisition and to position us to meaningfully exceed our full-year objective to reduce net debt by $1 billion in 2023. The work has not been easy, and I sincerely thank each of our employees for their individual contributions and dedication. Quite frankly, while the work is moving forward at pace, the macro environment has temporarily masked some of the underlying financial benefit of our actions to strengthen our business. But we remain resolute in continuing to take decisive and controllable actions.

Our most recent actions, including the announced changes to our leadership team and manufacturing footprint, are evidence of our ongoing commitment to drive earnings growth and execute against our delevering plan. The purpose behind the changes I have made in our executive leadership team is to enhance the alignment of our individual strengths and experience to accelerate and deliver on the many value-enhancing opportunities before us. Scott, Chuck and Ashley are exceptionally well prepared for their new roles, and I am confident these changes will immediately enhance the value we drive as a collective leadership team. I speak for our leadership team and broader Celanese in saying we are fully engaged and committed to delivering on the opportunities before us.

With that, Kevin, let me turn it back over to you to open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is coming from Mike Leithead from Barclays. Your line is now live.

Michael Leithead: Great. And congrats to Scott, Chuck and Ashley on the new roles. Laurie, I wanted to start on Engineered Materials pricing. I think in the prepared remarks, you made a comment that pressure has widened throughout the year, but nothing indicates that structural. So can you maybe just talk a bit more about your confidence here or maybe what you have seen in previous down cycles versus now? Just what gives you the confidence in making that comment?

Lori Ryerkerk: Yes. If I think about pricing, and again, I’ll split it into two. What we have really seen is pretty good price stability and differentiated products. What we have seen them is more of the volume impact there associated with consumer able consumer electronics, there, we have just seen a pretty significant volume decline as we have seen consumer demand come off this year as people have shifted their spending to more services and experiences. Where we have really seen the price pressure is for more standard grade materials where we are seeing quite a bit of length in the industry in terms of supply, softer demand and everyone having to take price action to come down. What I would say is one of the reasons we are taking the steps that we have announced around [indiscernible] is really to better position our supply with the current demand scenario by shutting down some of our higher cost operating capacity filling those customer needs with lower cost capacity we already have or even purchases, if that is lower.

And then in the future, as we see demand start to come back to what I would consider a more normalized level, we should be able to provide that demand from other assets that we already have in our network and through no and low-cost debottlenecks. So I think we are in a kind of unique position structurally with very little exports out of China. A very soft, soft environment in Europe and feel confident in time, it will come up. I mean, auto is a great example. Auto has been very solid this year. We expect that to continue. Medical has been solid. So I think we really are just seeing a reflection of consumer preference and consumer spending, which we believe is temporary and off the highs that we saw in 2021.

Michael Leithead: And then a question for Scott, maybe on free cash flow. I think in Lori’s 2024 outlook she laid out in the prepared remarks, maybe $300 million or $400 million of earnings improvement next year you guys are probably getting a similar type of amount of working capital benefit this year. So as we think about free cash generation next year, is relatively flat year-on-year, a good starting point today or is there further working capital or other cash benefits you think you can get next year?

Scott Richardson: Yes. Thanks, Mike. We are going to work to ensure that as we see earnings growth that we put that as much to the bottom line of free cash flow as possible. We called out CapEx being $100 million lighter next year as well. I think the variable will be working capital. And it depends upon kind of what happens with raw material pricing as well as depending on kind of where sales are what happens with the accounts receivable line. But we are going to do everything we can to continue to bring inventory down next year. There could be an opportunity for further reduction depending on what happens with demand as well as in the raw material landscape.

Operator: Next question is coming from Jeff Zekauskas from JPMorgan. Your line is now live.

Jeffrey Zekauskas: I think Eastman’s filter tow profits are up I don’t know, $225 million through the nine-months. There was no mention of filter to in your remarks. How is that business doing? And how is it affecting the acetal chain earnings?

Lori Ryerkerk: Jeff, as you know, we are running that as an end-to-end chain now. We are treating to as we do other downstream derivatives. What I would say is we are seeing similar impacts in tow. Now we are seeing in the second half a reset of contract pricing, which is bringing those margins down slightly from the first half, but that was anticipated with the way the contracts are set up. But I would say we are still on track to exceed the $245 million that we set out earlier this year target for sale.

Jeffrey Zekauskas: You are closing your German nylon facility. Is that about 15% of your nameplate capacity in nylon? And what utilization rate are you running at in nylon generally?

Lori Ryerkerk: Yes. So [Untrip] (Ph) actually is one of the four plants that we have for nylon and it represents right at 25% of our total capacity. I don’t have the overall total utilization numbers in front of us. But I would characterize this, Jeff, as much like we have done with Palm and other assets where we have really worked on concentrating our footprint taking out either underutilized or less profitable assets in order to shift volume into lower cost, more profitable assets, getting more flexibility in our networks in terms of purchasing either of polymer or different raw materials, depending on where we produce, that is what we are trying to be able to hear with the intro shutdown is we knew going into the deal that we believe DuPont had excess capacity.

Now that we have had some time to look at it, we believe shutting down the Introp is the best way to really adjust our cost basis on nylon while still maintaining compounding in Europe, which is necessary for our customers. But I would say this is very consistent with what you have seen us done over the last 10 or so years in Celanese where we have probably shut down over 15 facilities in the last 10-years as we have implemented these models.

Operator: Next question is coming from Mike Sison from Wells Fargo. Your line is now live.

Michael Sison: You haven’t told I need to do more math these days. So if I add up sort of your bridges that you gave for 2024 and just use the lower end of the inventory stuff. It looks like a no volume growth, you could do $12 or better. Is that the right math? And then can you help us on what or how to frame up volume and inflation or deflation upside for 2024?

Lori Ryerkerk: Yes, Mike, we laid out the various buckets. So I think you can do the math. I mean, just to reiterate, we do expect to get more than $150 million in additional M&M synergy. With some of the acceleration of the manufacturing footprint optimization. Hopefully, we can exceed that amount as well since we didn’t have all of that baked in. We should get another $100 million once we get clear like acetic acid started up. . Debt service goes down by about $50 million. We will have less inventory reduction next year, so less margin impact from that. And then I think, as you are saying, the big issue there is really going to be what is the benefit we see for flushing through higher cost inventory. And this could be a very big number.

It will depend on what happens with raws. As you know, we are in quite a volatile raw material environment right now. And then what happens with demand going forward. If demand stays low, then I think these are the things we are focused on because these are what we can control. if demand goes up, obviously, we will get more margin, but we will also probably see some increase again in working capital. So I would just say there is still a lot of volatility and uncertainty around next year, and that is why we are just really focusing on those big buckets that we outlined that are in our control.

Michael Sison: Got it. And then when you think about 2024, what do you think could happen to China, Auto and some of your end markets? Any initial thoughts when you talk to customers of what the demand environment could be next year?

Lori Ryerkerk: Yes. Again, if you can tell me what December is going to look like, maybe I would be better at thinking about 2024. I mean things are very uncertain and volatile at this point. I would say on Auto, consistent with the forecast you are seeing on auto build, we expect to see some moderate growth in Auto, really across all sectors, a couple of percent. And our growth should track that. We expect medical continue to be strong. I would say, based on conversations with customers, I would expect some moderate growth across next year as we start to see some demand coming back. But I would also say the timing of when that starts and the pace at which that happens is very uncertain. So certainly a lot less conviction at this point on next year than we might usually have at this point given the volatility we are seeing.

Operator: Next question today is coming from Josh Spector from UBS. Your line is now live.

Joshua Spector: So I wanted to follow up on the price cost or like the inventory or lower cost inventory that can flow through. I guess, Lori, you sound a bit more uncertain on that, but it still could be large I guess if you look at where pricing is in fourth quarter, is that a level if that holds, you would actually get a spread benefit into next year? Or do you need pricing to move up from here? Just wondering around the kind of moving parts there.

Lori Ryerkerk: No. Look, even I think at the pricing we are seeing now, we are starting to see some pull through of that lower cost inventory, and we see that as a moderate impact on our quarter-on-quarter growth. So I think even at these pricing, we would expect to continue to see some portion of that pull-through. . Obviously, if we saw pricing increase, that would help more, but we also have to consider what the price of rods going in, and we are seeing some upward pressure on raw materials this quarter as well. But look, I would say in all cases, we expect some impact from that flushing through of higher cost inventory. It is just the magnitude will depend on raws as well as future pricing.

Joshua Spector: Okay. Yes. I guess just maybe depend that when you talk about it being the biggest bridge item, if pricing stays where it is, is that a true statement? Or does that come down?

Lori Ryerkerk: I would say pricing in raws stay where they are, that would still be a true statement. .

Operator: Next question today is coming from Vincent Andrews from Morgan Stanley. Your line is now live.

Vincent Andrews: I just wanted to ask a couple of things. One, in Acetyl’s in the third quarter, there clearly was a benefit despite a bunch of headwinds from outages in Asia. So I’m wondering if you have any way of sort of sizing that in the third quarter and what you anticipate in the fourth quarter? It seems like there is some comments that you are still going to have some higher pricing flowing through in the fourth quarter. And I’m just wondering if that is just sort of a delay of inventory flowing through or what? And then secondly, on the tax rate, I understand why it is lower this year and that it was originally contemplated in the lower guidance. But if the demand environment is going to stay not all that different from where it is today at least through the first half of next year, does that mean you have a lower-than-normal tax rate next year as well?

Lori Ryerkerk: Yes, Vince, let me see if I can answer that. What I would say is we did see a positive influence from the higher Asia pricing that we saw as a result of supply outages in the third quarter. Most of those occurred in the last few weeks of the year. I would think of those as pretty much offsetting the impact of the contract pricing reduction that we had called out and the turnaround impact that we saw. . What I would say is, going into the fourth quarter now, we have seen that price drop back to closer to the cost curve, maybe slightly above it. So we have kind of lost that benefit in China. We will see a little bit of benefit, although significantly less of that in the Western Hemisphere in the fourth quarter. because typically, Western Hemisphere pricing lags by about a quarter. So we will see some benefit, but not to the same extent that we saw the benefit in the third quarter.

Scott Richardson: And then on the tax rate, Vincent, a lot is just going to depend upon the geographic mix of earnings, if things stay exactly as they are this year, then certainly, we could be at lower levels. If we things normalize back to kind of what I would say is the normal mix of geographic demand, then we’d be back more next year in that kind of 12% range.

Operator: Next question today is coming from David Begleiter from Deutsche Bank. Your line is now live.

David Begleiter: First, congratulations to Scott Truck & Ashley. Lori and Scott, just on EM pricing. Pricing is up about 38% in 2021, 2022, should be down this year, maybe around 8%. If we do go back to pre 2021 cost levels, do we retain some portion of this price increase? And if so, why is that the case?

Lori Ryerkerk: That seems like a very long time ago, Dave. What I would say is the good news is we are seeing volumes come back. And so in some areas, like medical, like auto, we are kind of back to 2019 levels. I think – so pricing similar, our margins probably similar. Again, consumer demand, durable goods, electronics, very, very soft. Pricing for differentiated grades, okay, I think that is something that we can keep I think with the kind of the current low demand and therefore, the long supply for some of those standard grades, we are going to need to see some more demand before we can get the pricing back up to those kind of levels.

Scott Richardson: Yes. David, I would just add, I think given some of the structural changes that we are making, we do think we should be able to hold that price as we get back to kind of normalized raws. And I think one of the things we have talked about is now with the Engineered Materials business and the acetyls business being about the same size, as we see in more normalized demand environment, the raw material landscape move up and down, we should see some countermovement in margins in EM versus acetyl. So overall, it should kind of fundamentally lower earnings volatility for the enterprise as a whole once we get back into kind of normalized conditions.

David Begleiter: Very good. And just on Clear Lake, the expansion for next year, how should we think about the ramp-up to the $100 million of normalized annualized earnings should be half of that next year in that range or something more or less?

Lori Ryerkerk: Yes. Look, the Clear Lake asset expansion will start up within the first quarter. And so I would expect that ramp up to start kind of immediately after the startup.

Operator: Next question is coming from Kevin McCarthy from Vertical Research Partners. Your line is now live.

Kevin McCarthy: Lori, I think in your prepared remarks, it mentioned that you ceased production at certain Engineered Materials facilities in Brazil, Argentina and Germany beyond the nylon shutdown that you discussed previously, can you just put that into context for us fairly clear on whether these are temporary idlings or more permanent structural changes. Maybe you could talk through kind of where you are in that asset rationalization process today.

Lori Ryerkerk: Yes. I would say for the majority of the ones that we have named, so the ones in Argentina and Brazil and Europe, these are more permanent shutdowns. Now we are taking temporary actions in things like VAM in Frankfurt and others. We are really – we are using that as flex capacity to meet the current demands on the network, which is lower than normal, but where we will need that capacity when we come up again. But the ones we have announced recently, I would consider those structural changes to really redefine where we are on the cost curve by taking out our highest cost producers.

Kevin McCarthy: Okay. That is helpful. And then I wanted to follow up on synergies. Can you tell us what the synergy-related benefit was in 3Q and what you are expecting in 4Q? And then when we look at the targeted tailwind of $150 million next year, would you describe that as ratable or ramping throughout the course of 2024?

Lori Ryerkerk: Yes. So Q3 was actually a little bit lower than we anticipated because some of our – I would say, at the lower end of the kind of 10% to 15% sequential uplift we had expected on synergies. Because with our volumes a little bit lower, some of our synergies are volume related. Again, we expect a sequential synergy increase in the fourth quarter. But the real synergies will start to come in after we do the completion of our cut over to SAP next year in the first quarter. And after we take some of the shutdowns that we announced, for example, the shutdowns and new growth that will happen in January and February. So the synergies will definitely ramp across 2024, but I would say starting more into the second quarter and through the end of the year.

Scott Richardson: Yes, Kevin. In the third quarter, synergies were around $30 million in total, which was incrementally up about 10% 11% off of Q2. .

Operator: Next question today is coming from Hassan Ahmed from Alembic Global. Your line is now live.

Hassan Ahmed: Already in your prepared remarks, you guys talked about maximizing the make versus buy flexibility. I mean to me, the legacy sort of Celanese portfolio, you pretty much optimized that side of things. So is it fair to assume that a lot of this sort of optimization work will be on the EM side of it? So that is part one of the question. And the second part is that it seems that right now, there is a fair bit of idling or permanent shuttering going on. Could this also mean in the future some Greenfield build-outs happening as well?

Lori Ryerkerk: Yes. Thanks for the question, Hassan. So what I would say is we are really focused on building the flexibility across all of our products. And so we are not just looking at make versus buy flexibility, but we are also looking at sourcing flexibility for raw material, regional flexibility, flexibility and contract commitments much as we did with tow. More multisourcing versus single sourcing. Specifically for PA66, yes, we want the flexibility to make versus buy, especially in this low demand period where we can often buy cheaper than we can make in Europe, in particular, because of higher energy costs and higher fixed costs, higher raws there. But I would say this has been a consistent theme in Celanese and one we are just now applying to the Heritage portfolio.

So I think – but I would say we have also applied this and asked TILs some of our contracting around raw materials and others. I mean it is a way we continue to deliver value uplift year-on-year even without a large amount of volume growth. So I think we expect that to continue. And I think as a result of that, you will continue to see some footprint optimization continuing over the next few years. And I would say in terms of Greenfield, I wouldn’t anticipate any sign in the next many years, a lot of Greenfield builds. I think what you will continue to see us take advantage of the footprint we have and the opportunities to do no and low-cost debottlenecks around the world, much like the Clear Lake expansion, where we are basically doubling the size of our unit for $400 million.

So we think we have a lot of opportunity already on the ground to significantly expand our footprint without major investments.

Hassan Ahmed: Very fair. And just switching gears a little bit. Look, I completely sort of understand that visibility is extremely low right now. But just thinking beyond sort of the near term, I mean with some sort of historical context as well, I mean, this destock has been unprecedented, both in terms of absolute volume declines, as well as the ongoing duration of it. So just as you sort of sit there and look at the legacy Celanese portfolio as well as the history of living through these destocks with the acquired businesses, I mean what could a potential eventual restock look like?

Lori Ryerkerk: Yes. Look, at some point, I think there will be some restocking when that happens, I would say, highly uncertain. Right now, we are just happy to see people starting to return to normal order patterns in some polymers in particular. I think as TILs we are seeing more I think I would think about restocking as being a few percent. But again, I think that could be spread across a pretty significant period as I think people will be nervous to rapidly raise stock after what we have been through the last year.

Operator: Next question is coming from Alex Yefremov from KeyBanc Capital Markets. Your line is now live.

Aleksey Yefremov: I wanted to return to the M&Ms synergies in your 2024 bridge. The $150 million improvement, does it depend on volume improvement or demand improvement or is it independent of it?

Lori Ryerkerk: So the $150 million, what I would say is, look, initially, I would say there was some volume improvement in that because some of the synergies are volume related. I think that is why you see us continuing to accelerate some of our manufacturing footprint work to better align current demand with our supply, and we will get synergies from there. So I would say we are fully committed to delivering well over the $150 million this year. The blend may be slightly different than we had set out, say, a year ago at the time of the deal. But we think we have sufficient activities underway to deliver that.

Aleksey Yefremov: Thanks, Lori. And then staying with EM, you just announced shutdown of some assets. Have you seen the industry and your peers either idle or announced permanent shutdown on some maybe significant polymer chains?

Lori Ryerkerk: Yes. I think if we look at the industry, probably specifically PA66 is where we have seen the most activity. We have seen some additional capacity being built out in Asia, particularly in China for nylon Polymer, which has increased market length in a period of lower demand. And therefore, we have had some increased competition, depressed pricing you have seen all those impacts. I think what you see, though, is much like our shutdown, we start to see other industry participants take action. So we have seen a nylon intermediate producer announced a shutdown of one of their largest assets here in the last month, which represents about 10% of the intermediate production. So I think you see the intermediate using this as an opportunity to take out some of the legacy higher-cost assets and different parts of the world that have become quite high cost and work towards rebalancing.

Again, when demand returns, I think we will be in a much better position, but I do think you have seen a number of commercial actions going on across the industry to address that.

Operator: Next question is coming from Frank Mitsch from him Fermium Research. Your line is now live.

Frank Mitsch: Maybe if I could ask the destock question a little differently. You mentioned in the release the prepared remarks that you are seeing it end here in the fourth quarter in the Americas and Asia, that will continue in Europe. What gives you the confidence that we are going to be finally done in the Americas and Asia and such that 2024, we are going to see underlying demand growth in those regions?

Lori Ryerkerk: Yes. Look, I think our confidence really comes from, obviously, conversations with our distributors and our direct customers as well. but also just the buying patterns we are seeing in the U.S. I mean, we don’t have a lot of visibility into future purchasing because what we are finding is when now, especially in the Americas, when people want to buy, they want it now. Would suggest to us that they are fully destocked because they don’t have inventory in their chain that they can pull on. . And I think in the U.S. at least, we are starting to see some recovery, especially in those areas that have been weak like consumer durables, electronics, to maybe more normal demand patterns. So I think it is the customer buying patterns that I would trigger off of to say we feel pretty confident that we are at the end of destocking in the U.S. I would say less so in China.

China, I would describe as consumer demand in China for China is – come back to, I would say, near normal levels. But obviously, China export volumes are still very weak, which is a significant portion of the China demand. And then in Europe, I would just say, outside of auto, we really just don’t see any improvement in Europe as I think consumer confidence remains very low in light of the War in the Ukraine and higher energy prices and higher inflation. We are just not seeing that behavior start to pick up in Europe, yes.

Frank Mitsch: Got you. That is very helpful. And then the early look at 2024 suggests that there is a bunch of onetime cost actions that you took in 2023 that will not be repeated, so that should set up an easier comp. I’m just curious if you could kind of quantify or provide an order of magnitude of that and perhaps if plant turnarounds also play a role in some expectations for 2024 to be better than 2023. Any color there would be very helpful.

Lori Ryerkerk: Yes. I think we had called out a couple of quarters ago, $60 million to $80 million of onetime actions that we were taking this year to really offset some of the softness we were seeing in the second quarter. And we are achieving those across third quarter and fourth quarter. What I would say is those are really related to actions we have taken to idle lines to cut costs out of facilities that aren’t running full. . If demand does not pick up. Obviously, we will continue to realize those benefits next year as well. if demand picks up, we will be more than happy to spend that money again in order to capture the margin that will come from the increased demand. So I don’t see that as a big factor either way in our bridge from 2023 to 2024 because we will either get it in earnings or we will continue to see it as cost savings.

Scott Richardson: Yes, Frank, and I would say our focus is really on now actioning other things that are going to be more permanent in nature, given some of the things we called out in the prepared comments, so we can make kind of more sustainable cost reductions and really the lower the overall fixed cost base of the company. And that then gives us an ability to withstand lower demand environment in the future and get much greater leverage on the fixed cost that we have.

Operator: Next question is coming from the Arun Viswanathan from RBC Capital Markets. Your line is now live.

Arun Viswanathan: So I’m just looking at the bridge for 2024 and again, obviously, [indiscernible] Never questions have been asked here. But if we think about Q3 EBITDA around $625 million in Q4, looking a little bit similar from your segment commentary makeup. You are exiting the year at maybe like a $2.5 billion run rate you have maybe $100 million coming from the AC uplift and then $150 million from incremental synergies and then maybe a couple of other items, including the lack of an inventory hit. So that puts us at maybe $2.8 billion or between $2.8 billion and $3 billion. Are we thinking about that correctly as far as EBITDA goes. And is volume the main driver that would push you above that range?

Lori Ryerkerk: Yes. We have called out what those factors are, I would say, the big unknown at this point remains demand and pricing, particularly raw material, which, as we have seen this year, can cause quite a lot of volatility. Hopefully, we will be able to give a better guidance next quarter.

Arun Viswanathan: Okay. I appreciate that. And maybe I can just ask one on the balance sheet. So obviously, a lot of progress there as well as restructuring the debt profile and redomiciling. Do you expect any other further opportunities there? And I guess, could you just reiterate what your target leverage level is maybe as you exit 2024?

Scott Richardson: Yes, Arun, I mean our focus right now has continued to accelerate cash generation and aggressively repay debt. We have obviously moved the maturities out since we last talked a quarter ago. But certainly, now our focus is on bringing down overall net debt. We are going to be focused on repatriating cash and using that cash to reduce debt. And then with the cash generation, we should – next year, between repatriation, cash gen, we should be able to reduce debt by almost $2 billion net debt reduction, certainly well north of $1 billion. So I think from that standpoint, that is where the focus is today. We don’t have a need really to adjust maturities or refinance. Certainly, if markets change, we will be opportunistic around that. But we are going to continue to focus on every single quarter marching down and bringing our leverage levels down with a target to get to three times as quickly as possible.

Operator: Next question is coming from Laurence Alexander from Jefferies. Your line is now live.

Laurence Alexander: When you think about kind of the improving the productivity in the Acetyls through shrinking capacity and I guess, also it is parts of EM. If you think about the next three, four-years, if there is no significant surge in demand. How much of your capacity could be optimized or rationalized through shifting through process improvements at your larger facilities and debottlenecking and upgrading the network? In other words, how far are we in this upgrading process? And at what point would you need to start considering just sort of new Greenfield projects?

Lori Ryerkerk: Yes. Let me take them as two separate. I would say on Acetyls, we have done a lot of work over many years now to really reduce the number of facilities that we have. And really have larger, very efficient facilities strategically located regionally. And our activities, including the big expansion at Clear Lake, but we have also had many, many small expansions in many of our downstream derivatives to basically keep us at the same or greater volumes and certainly much higher margins as a result. I would say we have also done that work in the Heritage EM portfolio over the last, call it, 10-years as we adopted the new models and the project pipeline models and you have seen a lot of those actions in the announcements we have made over the last 10-years.

I think now for us, that is now taking the M&M portfolio and applying that same mindset to that. So I don’t really have a number yet what that means in terms of capacity that we would take out. Again, I don’t really see any time in the near to medium future any need for Greenfield because we have sufficient capacity even with some of the strategic shutdowns in our existing network, and we have a team that is exceptionally good at finding low and no cost debottlenecks to our existing assets to add very efficiently and inexpensively additional capacity.

Operator: Our next question today is coming from Salvador Tiano from Bank of America. Your line is now live.

Salvador Tiano: Yes. Firstly, I want to ask a little bit, as you said, the shutdowns in Engineered Materials are a big part of the $150 million synergies. So I’m just wondering where do these actions in your original plans when you acquired the upon assets or were they more, I guess in response to recent market conditions. And I guess if the latter, why will the synergy target increase given that this will be incremental actions?

Lori Ryerkerk: Yes, great question. Look, we knew at the time of the acquisition or we believed at the time of the acquisition that DuPont had more than sufficient capacity to meet normal demand conditions and requirements. And we assume that some would be more efficient or less efficient than others, we just didn’t know which assets those would be. So we have needed this time we have had since the acquisition to really look at how all of these plants are operating what their cost structures look like and where the most opportunities are to really fine-tune our footprint to build in the most flexibility, the most synergy, the lowest cost footprint, like I said, much as we have done with Celanese over the last 10-years. So the actions you are seeing us taking now is really addressing that overcapacity now that we have been able to identify where that is.

Some of the temporary shutdowns and line shutdowns and things were taken are more in response to the near-term demand environment, leaving the flexibility for the future. But the things like [indiscernible] Nitro and Argentina and those that we have announced, they are more permanent in nature.

Salvador Tiano: Okay. Perfect. And I also would like to ask a little bit about your Q4 guidance and assessments. I think there is a lot of the questions regarding what the demand destruction in the stock installing, et cetera. But I think the what makes, I guess, your outlook a little bit different than most of the companies that have reported so far is that you made the comment, if I understood correctly, you expect a more muted destocking in Q4 than normal, whereas I would say the vast majority of your competitors expect the same, if not a more intense stocking quarter? Why do you differ versus, I guess, most of the other chemical companies here?

Lori Ryerkerk: Yes. I mean I can’t really comment on what anybody else believe is going to happen. As I called out earlier, we based our views on what we are hearing from our customers, what we are hearing from our distributors, big customer order patterns that we are seeing in our experience with those order patterns. Certainly, it helps that half of our volume in engineered material is going into automotive, and we expect automotive to be quite solid across Q3 to Q4. So we are really just dealing with the other portions of our demand when we are looking at what is the impact for the fourth quarter. So again, I can’t really say why it would be different. But certainly, our share of auto may be one of those impacts.

Operator: Next question today is coming from Andrew Keches from Barclays. Your line is now live.

Andrew Keches: Just to clarify the comment earlier on the debt repayment. So it sounds like you said cash flow will be used to handle the maturities now that you have reprofiled. But that excess cash you are running, can you just remind us where your operating needs are? And can you get all the way down there in 2024?

Scott Richardson: Yes. Thanks, Andrew. Cash balance is a little north of $1.3 billion right now, and we will be repatriating that cash now in the coming months. And then once we get integrated on 1 system, which we expect to happen in the early part of next year, then we will be able to start moving that cash balance down to where we think we can – minimum needs would be right around $500 million. So we definitely are confident that we will be able to get to that $500 million level during 2024.

Andrew Keches: Okay. Great. And then I just didn’t catch the answer on the leverage metric. I know you said three times in the past. Are you putting a horizon or a time line on that at this point?

Scott Richardson: No. I mean, look, we had originally targeted the end of 2024, and we are going to do everything we can to get close to that. And last quarter, we said may bleed into the early part of 2025, a lot just depends upon what happens with our cost reduction plans, which is another reason why we continue to take aggressive action on getting controllable earnings improvement from cost reduction and then where the macro and the demand plans that we have. The other things that teams are doing, largely in Engineered Materials is really working the revenue synergy side. And the revenue synergy side of bringing M&M into our project pipeline model, will start to yield opportunities and close wins as we get further into 2024. So the pace and speed at which we are able to execute on those plans will certainly help us accelerate that deleveraging plan.

Operator: Next question is coming from Patrick Cunningham from Citi. Your line is now live.

Patrick Cunningham: How are you thinking about potential portfolio actions, let’s say, if demand does not get better from here? Is there anything that maybe stands out as separable or where you can structure a similar deal as the Food Ingredients JV?

Lori Ryerkerk: Yes. I think as we have called out in past calls, we are going to continue to be opportunistic and disciplined in our approach to divestment. We continue to look at a number of assets from both the heritage Celanese as well as the M&M portfolio as possible divestiture target. But we really need to understand what the future potential of those assets are and what the value to us is and then identify other parties that will value them more than we value them. So I would say we continue to look for opportunities, but we will be selective about what we do, so it doesn’t impact long-term growth as well as making sure we get fair value for it.

Patrick Cunningham: Got it. And then just on the Eco [indiscernible] CC brand with products containing recycled CO2. What sort of relative premiums do you expect to achieve? And would you be fulfilling incremental demand there, or is that more of just optionality with the rest of the portfolio?

Lori Ryerkerk: Look, I think you have said it best in terms of optionality. We actually started that project just on credit, and it was justified based just on additional methanol for use in Clear Lake and really the cost advantage of make versus buy for methanol on an average basis. So that was the justification for the project. Since the time we started the project, obviously, markets have continued to develop for more sustainable products for lower carbon footprint products. And we do believe for certain that there will be a premium that will be available for more sustainable products. I would say not so much, I don’t anticipate we will be in the biomethanol market. Our intent is to take that methanol and further convert it into lower carbon downstream derivatives.

So they lower carbon – acetic acid, lower carbon BAM or carbon BAE, lower carbon, palm and other polymers. And that is really where we think the advantage is as end users will see more value in being able to have low carbon. So think of it simply as be able to, through this project, put CO2 in the paint on your wall, that would otherwise would’ve been into the atmosphere. I mean, that is where we see the premium coming is from people who want to have that impact on their environmental footprint.

Operator: Next question is coming from Jaideep Pandya from On Field Research. Your line is now live.

Jaideep Pandya: The first question is really on the nylon chain. There is a lot of upstream capacity in monomers and polymers coming in Asia. So could you just tell us like maybe on a fundamental basis, how do you add value in your nylon sort of portfolio? And in the long run, why would you actually want to be more in the polymerization. Why wouldn’t you want to be more downstream asset-light use this capacity that is coming in Asia and create more product differentiation. That is my first question. And then on the Acetyl side, there is capacity, again coming in China, some of the plants have been laid this year and ramping into next year. So how do you see demand supply balance in acid and VAM next year?

Lori Ryerkerk: Thanks for the question. As I said earlier, we do see the polymerization capacity and some intermediate capacity coming on stream in China. We have seen some other industry shutdowns going on. But we remain really excited about PA66. Again, a lot of what’s coming on is polymer. A lot of the value is adding in compounding. A lot of our PA66 goes into highly differentiated products, where we are the sole suppliers. And we see a lot of future potential for PA66 in EV, for example, uniquely to EVs lately, we have had applications for battery cell frames and in-place, high-voltage connector, brackets and mounts for electric motors. So we see the EVs continuing to extend to the extent that we see some moderation in EV production.

We think that will be in favor of hybrids and hybrids have even more PA66 content. So that is only a good thing for us. And then if you look at the next five-years, we also see electricity demand more than doubling, partly driven by EVs, but also driven by the electrification of everything. And there will be a strong pull on PA66 for that in building out electrical infrastructure. But again, you don’t tend to be integrate materials. These tend to be highly differentiated. They need fire retardants, they need all sorts of different things. And that is where we really see the value being added is in the differentiation achieved through compounding. And look, we always want the flexibility to make versus buy because we do see these markets swing because of outages and other things going on.

So this is really about building more optionality into this chain in a way that M&M didn’t have because they had a very cumbersome take-or-pay. They have a lot of overcapacity, they had single sourcing. We have been systematically resolving these issues so that we will have a flexible and highly optional PA66 chain where we think we can achieve significant value uplift.

Brandon Ayache: Kevin, we will take the next question is our last one, please.

Operator: Our final question today is coming from John Roberts from Mizuho. Your line is now live.

John Roberts: After the start-up of Clear Lake BAM in early 2024, do you have the option of permanently closing the VAM unit in Frankfurt or you need to maintain some optionality and flexibility by only doing temporary closures. And excluding any onetime upfront cost, is there a significant cost difference between a permanent closure in operating Frankfurt and the stop and start mode?

Scott Richardson: Yes, John, we are building a new acetic acid plant in Clear Lake on a BAM unit. So we did the expansion in Clear Lake and BAM a number of years ago. So we feel really good about our current network in BAM.

John Roberts: And do you think the prolonged Delrin divestment process contributed to some of the weakness in the Engineered Materials market?

Lori Ryerkerk: Yes. Hard to say, but I don’t – we haven’t really seen that that has been an impact at all in terms of impacting the pulp market.

Operator: We have reached the end of our question-and-answer session. I would like to turn the floor back over to Brandon for any further closing comments.

Brandon Ayache: Thank you, Kevin. We’d like to thank everyone for listening in today. As always, we are around for any follow-up questions that you have. Kevin, please go ahead and close the call.

Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.