The operator has welcomed listeners to the Celanese Corporation's second quarter 2023 Earnings Conference Call and introduced Brandon Ayache, Vice President of Investor Relations, Lori Ryerkerk, Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer. The operator has asked listeners to review cautionary language regarding forward-looking statements and opened up the line for questions. The first question was asked by Ghansham Panjabi with Baird, and he asked for more color on how things are evolving in China in terms of stimulus.

Lori Ryerkerk states that although demand in China has not recovered significantly, there are signs of tightening supply and utilization is at 90%. She also notes that stimulus has not had a major effect yet, but there are pockets of strength in the auto industry and weaknesses in electronics and consumer goods, which is limited by exports out of China. Ryerkerk mentions that they are managing supply to accommodate the complex current operating environment.

Lori Ryerkerk states that there is no visibility into 2024 yet, but there are several known factors that will give an uplift in 2024, such as the inventory draw down, the $150 million M&M synergies, the SAP integration, and the lack of destocking. Additionally, the $100 million contribution from Clear Lake asset and the debt reduction will lead to lower interest expenses in 2024.

In the second quarter, weaker demand in industrial and electronics markets caused half of the gap between expected and actual earnings. This was due to customers taking lower volumes of differentiated products, while Standard Grade products were sold at lower margins and prices. Inventory drawdown in M&M was the other half of the gap.

In the fourth quarter, Celanese is expecting to see the impacts of their additional cost control initiatives, M&M synergies, and a robust quarter due to destocking. These factors are expected to lead to an EPS increase from the midpoint of $2.25 in the third quarter to slightly north of $3 in the fourth quarter.

Lori Ryerkerk reported that VAM utilization is in the mid-80s globally, the lowest it has been in many years. Europe is still the most challenged geography, with weak demand in paints and coatings, construction, and building. In the US, VAM has seen some recovery in packaging, while China has seen some rebound in industrial uses. However, there has been no rebound yet in construction and building in China, though this may change in the second half with the stimulus announced.

Scott Richardson discussed the two objectives the company needs to reach in order to retain their investment-grade rating: reducing net debt by $1 billion in 2023 and achieving three times levered towards the end of 2024 into early 2025. Lori Ryerkerk then discussed how the company plans to go after commodity markets that DuPont walked away from, but noted that it will take until the end of 2024 or even 2025 to recover all of that volume.

DuPont's Zytel has been used for standard grade markets, but contracts need to roll out for M&M to take full advantage of the opportunity. The JV has liberated some additional cash, and M&M remains confident in its ability to generate sufficient cash flow through earnings and inventory drawdown to meet all debt requirements and commitments. They will remain opportunistic for future divestments and opportunities, but their focus is on what they can control.

Scott Richardson discussed the company's plan to reduce their CapEx to $500 million this year and $400 million next year, which would allow for higher earnings and robust free cash flow generation. He also noted that they are looking to opportunistically take advantage of the current market to lower their debt maturities in 2024 and 2025 to match up with the lower levels of cash flow they are currently experiencing. The company's focus for this plan is on bonds and term loans.

Vincent Andrews and Michael Sison discuss the outlook for the fourth quarter, with Lori Ryerkerk explaining that they expected an uplift in acetyl last quarter, but it did not happen due to settling back to cost curve levels. Additionally, there was an inventory impact in M&M and continued destocking in industrial and E&E. Despite this, they remain confident in their guidance for the rest of the year.

Lori Ryerkerk and Scott Sison discussed the destocking lasting longer than previous cycles and the potential restock over the next couple of years. Ryerkerk noted that the deep destock speaks to the uncertainty people feel about the market and the particularly high uncertainty in Europe and the China export market. She also noted that the US markets have reasonably recovered and there is not much destocking left, but the uncertainty lies in the China export market.

Lori Ryerkerk explains that due to the current global situation, there has been a deeper destocking of inventory. However, she believes that once demand recovers, customers will not want to be in the same situation they were in at the end of 2020 and will start to restock. To help generate new opportunities and volume sales, the company is moving from exclusive distribution arrangements in the West to dual or multi-distribution approaches, in order to reach a wider range of customers and end markets.

Scott Richardson explains that the company is not in the business of holding cash and that they want to reduce their debt as quickly as possible. They plan to use the cash they have on hand for the upcoming $300 million interest payment and maturities coming up later this year. Additionally, the company is building pipelines to move cash back to the US by the end of the year. Once their systems are integrated in the first part of next year, they will be able to operate with a much lower amount of cash. This will free up opportunity to use the cash for deleveraging.

Scott Richardson and Kevin McCarthy discussed the term loan paydown of $370 million, which was mainly due to foreign exchange. Lori Ryerkerk then clarified that their outlook was not based on any increased demand, and that the recent PA66 capacity expansions within Asia-China would not significantly change the nylon dynamics.

Celanese is focusing on differentiation and getting into highly differentiated products, as well as looking for new applications and end markets to regain share. They are taking advantage of their integrated value chain and are positioned to either make or buy whatever works out. They have recently completed two contracts for EV parts made from nylon, such as motor mounts and AC compressor brackets, which are important for EVs needing less noise and vibration. Celanese is using their knowledge of the EV market to win new businesses.

Scott Richardson explains that fluctuations in supply and demand in the market are usually temporary, and POM's cost to serve in Europe and the US is unparalleled. Lori Ryerkerk adds that the Acetyl Chain should remain at a foundational level of earnings, while the lift in earnings will be seen in the Engineered Materials segment in the second half of the year.

Lori Ryerkerk discusses the potential for the company to reach $11 to $12 earnings power in 2024. This is based on the end of destocking in 2023, steady demand, and the additional cost and productivity activities undertaken by the company. She also mentions the uplift of synergies and lower interest expense in the fourth quarter as contributing factors.

Lori Ryerkerk explains that the additional cost reductions of $60 million to $80 million will include some one-time costs related to production actions, while the other half are expected to be permanent. She also states that M&M EBITDA for the full year is expected to be in the range of $500 million to $600 million, with the fourth quarter expected to be higher than the previous quarters.

Celanese is taking temporary measures to save money and maximize cash flow due to lower demand. These include reducing overtime, idling lines within a compounding unit, reducing travel, promotional and marketing spend, and accelerating synergies from the acquisition of M&M by removing redundant positions. Two-thirds of the measures are temporary and related to the reduction in demand, while the other third are accelerations of steps that were planned to take later in the year and into the next year.

Lori Ryerkerk and Duffy Fischer discussed the impact of Ibn Sina and KEPCO on the company's finances for the full year of 2023. Ryerkerk stated that the contribution from Ibn Sina will be $60 million to $70 million less than in 2022, and that the total for all joint ventures will be $100 million less in 2023 than 2022. Additionally, Ryerkerk noted that there was a $30 million to $35 million headwind in EM from destocking during the second quarter, and it is unclear if this will be recovered in the third or fourth quarter.

Lori Ryerkerk answered a question about the recovery of the one-time destocking charge, saying that while there may be some benefit from restocking in the future, she does not have an idea when that would be. She also stated that the financial impact of a delayed start up at Clear Lake due to component defects would be $25 million, with no material costs. Scott then discussed the cash generation, noting that they have pulled down CapEx for the next year and that there may be more to be done in terms of working capital and integration costs to be pushed off.

Scott Richardson and Lori Ryerkerk discussed the priority of free cash flow and the potential for inventory reduction in the upcoming year. They also discussed the focus on terms and working capital opportunities, as well as controllable EBITDA growth in order to drive free cash flow. When asked about pricing pressure for EM's differentiated products, Ryerkerk said that they have not seen much pressure and expect the demand to return.

John Roberts asked about the performance of the Food Ingredients business and the potential risk of the Singapore unit being curtailed due to rising oil prices. Lori Ryerkerk and Scott Richardson both assured that the Food Ingredients business is performing as expected and that the Singapore unit is resilient, with no more risk than usual. Brandon Ayache then thanked everyone for listening in and offered to answer any follow-up questions. The teleconference concluded with the operator thanking everyone for their participation.

This summary was generated with AI and may contain some inaccuracies.