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.