Celanese Corporation (NYSE:CE) Q4 2023 Earnings Call Transcript

Celanese Corporation (NYSE:CE) Q4 2023 Earnings Call Transcript February 21, 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: Hello, and welcome to the Celanese Q4 2023 Earnings Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Brandon Ayache, Vice President, Investor Relations. Please go ahead, Brandon.

Brandon Ayache: Thanks, Kevin. Welcome to the Celanese Corporation fourth 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; Scott Richardson, Chief Operating Officer; and Chuck Kyrish, Chief Financial Officer. Celanese distributed its fourth quarter earnings release 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 the prepared comments. Form 8-K reports containing all these materials have also been submitted to the SEC. With that, Kevin, let’s go ahead and open it up for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question today is from Josh Spector from UBS.

Joshua Spector: I was wondering if you could talk about your expectations for the M&M business in 2024 and kind of both near term and longer term. So in the first quarter, you seem to call out some improvement. I’m not really sure if that’s an assumption of market improvement or price cost improvement in earnings. So I wanted to clarify that. And then second, kind of how do you layer on the cost savings versus market and everything else where you expect to exit the year?

Lori Ryerkerk: Yes. Thanks for the question, Josh. If we look at first quarter, we do expect a really meaningful lift in M&M earnings in the first quarter and in fact, expect first quarter to be our highest quarterly EBITDA since the acquisition. I think that’s a number of things. The biggest factor is really starting to see the pull through of lower raw materials and lower fixed costs that we were generating this year but needed to move the volume through, that’s the higher cost materials through inventory. So I’d say that’s over half of the improvement we expect to see in the first quarter. We do expect recovery in auto versus the seasonal destocking that we experienced in the fourth quarter which was an issue for M&M. And then we start to see some of the initial fixed cost improvements from the footprint optimizations that we initiated last year and announced, although I would expect those to become more meaningful in the second half of the year and actually into next year as well.

And so we do see evidence for that is we are seeing variable margin improving in January as we start to see that inventory pull through of lower raws and fixed costs. So we feel pretty confident in that. And for some key areas like Zytel, we saw that really bottom for fourth quarter, and we’re starting to see the recovery there. So I’d say we feel good about the first quarter and the meaningful uplift that we’ll have in M&M next year as well. Fundamentally, I would say we continue to see M&M as a really great business. All the reasons that we bought it are still there. We have just been a very difficult backdrop that has made it hard to get the full value of the synergies as well as some of the volume recovery and growth that we had counted on.

I think if you looked at it today in what would be a more normal demand backdrop, we would find that M&M would be accretive.

Operator: Next question is coming from Kevin McCarthy from Vertical Research Partners.

Kevin McCarthy: Lori, I think you completed an SAP implementation just a few weeks ago. Can you comment on how that’s going so far, kind of level of integration across the company? And remind us of what the benefits might be as your TSAs roll off?

Lori Ryerkerk: Yes. Thanks for the question, Kevin. So we did do our SAP integration, the last version of that went live February 1. Maybe I should actually start out by thanking the over 1,600 people in the organization who have worked on the SAP integration, not full time, obviously, but had some role in it. And really, we often think about SAP integration as an IT effort, but it’s really a full business effort, including the finance, customer service, commercial businesses. It goes across everybody. And our folks have worked very hard to make this a success in only 15 months after we did the integration, which I think is fast by any standard. And then after they had already integrated the heritage Celanese businesses earlier last year onto the same SAP S/4 platform.

So really excited to get this done. I would say this is probably the last major step in our integration. And will really help us now as we keep layering on the various processes to the platform, will really help us achieve the next level of synergy including getting rid of the TSA from DuPont, but also the synergies of people being able to work together on one platform, being able to have better access to the data et cetera. I’d say the integration went very smoothly. So supply chain production are all on the new platform running well. We’re able to take an order. We’re able to produce the chip in order and we’re able to get paid for an order. So that was the first order of business. And now we’re gearing up for our first month and close on the new platform.

But again, I think it’s been remarkably smooth, great kudos to the extended team that made that happen. And I’d say so far on the integration, we’ve seen no surprises.

Kevin McCarthy : And then secondly, if I may, can you comment on your input cost outlook for 2024? And if those costs trended flat from here, what sort of benefit or tailwind might we expect for this year?

Lori Ryerkerk: So I would say, I mean, if you’re talking about raw material costs, I mean, certainly, raws have come down versus where we were a year ago. And who knows what will happen, but we also know that we are now pulling through the lower cost of raw and lower fixed costs that we built on. I would say ’24 is very much a year of being able to deliver on the actions that were taken in ’23. And so I think that is built in, obviously, to our outlook for the year. I think the important thing that we’re focused on, and we’ve talked about all year, is we want to continue to control what’s controllable. At Celanese, we’re really good at execution. I think you see that with what we’ve done so far. All of the projects we were able to take on at the same time. And so really, as we move into ’24, we see the benefits of that execution in ’23 as well as all the steps we have in ’24.

Operator: Our next question today is coming from Jeff Zekauskas from JPMorgan.

Jeffrey Zekauskas: You said that the synergies in the M&M business would be $150 million. Does that mean that the adjusted EBIT growth in M&M should be at least $150 million in 2024 year-over-year?

Lori Ryerkerk: Thanks, Jeff. No, because a number of factors there. So the synergies we’re expecting for this year is $150 million, only about 40% of those actually show up in M&M. The vast majority of them do show up in the EM profile, but some of them also show up in BU other and other areas.

Jeffrey Zekauskas: Maybe to reframe it a different way. Do you expect the M&M business to grow its EBIT exclusive of the synergies?

Lori Ryerkerk: Yes. So yes, thank you. I probably misunderstood your first question. We do expect growth across both our heritage EM businesses and a significant uplift in M&M businesses even exclusive of synergies for the year. I mean if you think about our outlook for the year of $11 to $12 and think about, we call out $100,000 — sorry, $100 million more in acetyls, the remainder of the uplift from the $9 we were at this year really comes from that integrated EM business.

Operator: Your next question today is coming from Mike Sison from Wells Fargo.

Michael Sison: Just wondering if you could help bridge us from 1Q to the remaining quarters? I know there seems to be a lot more headwinds in Q1, more of the synergies and everything, all the positives are coming in 2Q to 3Q. So when you think about going from $2 to a lot higher in the remaining three quarters and how does that sort of happen? And then, are the last three quarters basically equal in EPS is kind of the way to look at it?

Lori Ryerkerk: Yes. Thanks for the question, Mike. The way I look at it is, if we look at what we’re expecting to achieve in Q1, if you do the math, it says we need 300 to 340 in each of the remaining quarters. I would expect that to ramp up more in the second half, but I would still expect a pretty good ramp in the second quarter as well. So think about it this way. You don’t have the turnarounds in Q2 that you had in Q1. So that’s a $50 million lift. And then in EM, the vast majority of the additional lift in that quarter comes from EM and it’s really synergies and flow-through of lower cost inventory. It’s returning too. We have some seasonality in medical is always low in the first quarter, that should come back in the second quarter.

Then in AC, you start to see the benefits of the project as we move through the second quarter. So I would say, we do expect a significant uplift in Q2 but even more uplift in Q3 and Q4. I would expect Q3 to be the highest quarter because we would expect some seasonality again in Q4.

Michael Sison: Got it. And then as a quick follow-up. Several companies have impaired assets from acquisitions over the last couple of years. Now I know M&M has underperformed, but are there any parts from M&M close to that in terms of impairment levels? And if so, what are the areas?

Scott Richardson: Yes, Mike. We’ll look at that when that time comes. We’ve taken a look at that at the EM level and have not seen markers on that, that would cause us at this point in time. I think that’s a possibility.

Operator: Next question is coming from Ghansham Panjabi from Baird.

Ghansham Panjabi: Lori, just on a high-level basis, what sort of global macroeconomic backdrop are you embedding as it relates to your guidance? Obviously, interest rates are still high. ISM, very mix globally, China, who knows. It still sounds that like there’s pockets of destocking, et cetera, on the durable goods side. How do you sort of factor all that in as it relates to the evolution in 2024?

Lori Ryerkerk: Yes. Look, I would say, at this stage, we are really focused on what we can control. So what we’ve assumed in our $11 to $12 guide is we see the kind of the diminishing of destocking. So we are assuming that we are getting to the destocking. We are not though assuming a really big uptick in demand or restocking. So I would say we’re still assuming kind of below normal demand patterns, but without the destocking. So we are — that is kind of the one upside that we’re assuming. That’s maybe a few percent at the most. And otherwise, it’s really — our outlook is really focused on what we can control. I would say if we look at the market, I mean, good news is, I think, as we’re starting ’24 although I’d like to say we’re back in normal demand patterns, we’re not.

But look, we are starting to see some easing of some of the demand and competitive challenges we had. We called out, we’re seeing less movement in materials out of Asia into Europe. So that indicates to us that local demand is improving in China. And we see that. I would say in China, generally, we feel like demand for China consumption is approaching normal order patterns and normal levels. But the exports of goods out of China is still depressed, especially into Europe. So there’s still some downside on demand there. I think in the Americas, we’re seeing demand come back gradually. We saw some improvement in Industrial in the fourth quarter, but then we saw the reduction in auto, which was seasonal destocking. I expect that to come back in the first quarter.

But again, not anticipating a huge uptick in demand there for consumer goods and electronics. In Europe, I’d say, similar to the U.S., but probably even a longer time frame and before we could return to demand. I mean, the other thing I would add though is, look, we are seeing some improvement in construction kind of normalizing. So that’s good, and that’s supported by a slight movement upward in terms of VAM pricing as well.

Ghansham Panjabi: Okay. Super helpful. And then for the second question, the outages in 2024 that seem front-end loaded, but would those bulk just sort of pull forward just given weaker demand? Or was that sort of in line with the original plan?

Lori Ryerkerk: No, I’d say it’s very much in line with the original plan. In fact, a little bit, we’ve pushed back a little out of ’23 into ’24 with the delay in the project at Clear Lake. But I would say these are planned turnarounds. These are turnarounds that occur on an every three years in the case of VAM, four years in case of methanol. And so very much as planned. And I would also say they’ve gone very well. We’ve gotten through all the major discovery work and no surprises. So feel like we’re on track to meet our plans around those turnarounds.

Operator: Your next question is coming from Aleksey Yefremov from KeyBanc Capital Markets.