Hello, welcome to Celanese's Q4 2022 earnings call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, please press star one again to be placed into question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, VP of Investor Relations, Brandon Ayache. Please go ahead, Brandon.
Thank you, Kevin. Welcome to the Celanese Corporation fourth quarter 2022 earnings conference call. My name's Brandon Ayache, Vice President of Investor Relations, and with me today on the call are Lori Ryerkerk, Chair of the Board and Chief Executive Officer, and Scott Richardson, 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, today we'll discuss non-GAAP financial measures. 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 prepared comments. Form 8-K reports containing all these materials have also been submitted to the SEC.
Since we published our prepared comments yesterday, we'll go directly to your questions. Kevin, let's go ahead and please open it up for questions.
Thank you. As a reminder, that's star one to be placed into question queue. Our first question today is coming from John McNulty from BMO Capital Markets. We do ask you ask one question, one follow-up, then return to the queue. John, please go ahead.
Yeah, good morning, Lori. Thanks for taking my taking my question. Look, obviously a lot of moving pieces out there, but the tough first quarter outlook for $1.50-$1.75 of EPS makes the full year call for $12-$13 look like a pretty chunky jump. I guess, can you help us to bridge that jump in earnings and help us to understand what some of the big buckets are that you expect to turn up or take a noticeable step up?
Thanks, John. Yeah, look, we realize that looks like a big jump up, but, you know, let's kinda go through the math. We really need to deliver about $350 for the last three quarters of the year in order to hit that $12-$13 guidance. If you look at that, while that seems like a big jump, it's not unknown territory to us. In fact, that's where we've been every quarter in the last two years up until this quarter. If I look at just the jump up from Q1 to Q2, you know, let's start with acetyls. In acetyls, I would expect, you know, a $50 million-$100 million increase in Q2 off of Q1. We'll start with natural gas.
You know, natural gas pricing has come down significantly at the end of the fourth quarter and in the first quarter, especially in the U.S. That's a big help for us in acetyls. It's our largest plant in Clear Lake. We have a lot of other facilities in the U.S. that benefit from that lower natural gas pricing. With coal staying higher in China and with crude being reasonably high and steady, you know, that really benefits margins for our U.S.-based production, which is a large portion of our acetyls. If you look just at this natural gas pricing, if it were to hold through the second quarter, you know, that alone is probably more than $20 million of uplift in the second quarter.
If we look at things like the Frankfurt VAM restart, that is being restarted a little bit early based on the good increase we've seen here, going into March. For constructions, paints, and coating in Europe, a little bit quicker recovery than we expected. That Western seasonality coming off, that's probably another $10 million. You just have the normal, you know, good economics we typically experience in the second quarter. We see destocking really being over. We're past Chinese New Year. We see improvement in construction activities worldwide. You know, we expect to see that same kind of volume rebound. You know, as well as productivity. I mean, we, last year, in 2022, saw productivity at the high range of our historic 100-150.
We expect we'll be in a similar level this year, you know, and adding on additional productivity from M&M for the EM site. You know, that all goes in there. We feel very comfortable right now with where energy pricing is, that we're actually probably towards the higher end of that range for the acetyls bump up in the second quarter. Then if we look at Engineered Materials, including M&M, again, Q2 is typically a stronger quarter for Engineered Materials as well, for a lot of the same reasons. You know, Well, you know, first, let me start with this. I mean, you know, we have seen, just like natural gas in acetyls, we have seen a significant drop in raw material costs in the first quarter, which is extending through into the second quarter.
This lower raw material cost has let us build lower, or not build, but now replace higher cost inventory with lower cost inventory. That alone, as we go into the second quarter, is gonna be about a $40 million lift for the EM, M&M portfolio combined as we have the second quarter. We have the typical, you know, the destocking is pretty much finished here at the end of the first quarter. We actually see really good improvement here in March in our order books. We see we are past Chinese New Year, we start seeing the lift from that. To give you an idea, we have seen, you know, February, we started the month slow, we are still seeing orders coming in today for February deliveries.
You know, this is a big deal. Usually at this time in the month, our orders have stopped, and we don't see new orders come in until the next month. We're still seeing orders for EM, for M&M for February. Our March book, quite frankly, has filled up for both the legacy EM and the legacy M&M businesses, consistent with the order book that we were seeing in March of 2022. I think these are all really strong proof points to say, you know, we are seeing the demand recovery coming now as we're moving through the end of February and into March. We expect that build to continue to grow through the second quarter. You know, we are seeing a modest improvement in automotive production.
Well, builds are pretty much flat, but people are not destocking anymore. We're seeing order patterns restore closer to normal levels for automotive. This is very typical with what we also saw coming out of the end of 2021 and into 2022. You know, I think we feel really good about an uplift in EM in the magnitude of $50 million-$100 million as well. On top of that, we also will have additional synergies from the M&M acquisition, and we expect another uplift of $10 million-$20 million in synergies in the second quarter off first quarter as well. Like I said, that scales, again, productivity continues.
I think, you know, we feel quite comfortable in the guidance that we've provided for Q2 based on everything that we see happening now in terms of raw material, energy pricing, and recovery of markets as indicated by our order books for March.
Got it. No, that's, that's hugely helpful color. I guess just as the follow-up, just maybe a quick one on the, on the debt redomiciling, it sounds like you're kind of part of the way there now. I guess, you know, can we think about all this being done by the first half of the year? Is that the right way to think about, or are you guys waiting for something in particular to maybe change in the markets? Like, I guess, how should we think about that? Because it does seem like the rates are lower as you're, as you're starting to refinance some of this debt out.
Yeah. Thanks, John. I think, you know, we're gonna be opportunistic here. I think we're looking and making sure we have the right opportunities. I mean, currencies were moving in the right direction. We didn't wanna make those changes when the dollar was certainly at its strongest, because then as things move, you know, certainly, from an absolute debt perspective, it would go against us. We're gonna continue to look for the right opportunities there. We're certainly targeting to get it done here in the first half. Just depending on some of those movements and where the dollar is at, it may linger into the early part of the second half.
Thank you. Next question is coming from Ghansham Panjabi from Baird. Your line is now live.
Thank you. Good morning, everybody. Yeah, Lori, in your prepared comments, you talked about some of the competitiveness on the EM side. I think it was specific to palm, you know, imports from or exports from Asia into Europe, et cetera. How do you see that dynamic playing out, you know, as the rest of the year unfolds? Is it as simple as China reopens and there's more localized demand, and so that takes care of that? Or what are you thinking about at this point on that?
Yeah. Thanks, Ghansham. Yeah, look, you're exactly right. I think there's two factors. We're really starting to see, you know, early in first quarter, we still had some material moving over from Asia. We expect that will be mostly done in the second quarter. For the two factors, one that you called out, as we see demand picking up in Asia, there's less incentive to put things on a boat and move it to Europe. Secondly, with these low energy prices that we're seeing and the ability to replace our higher cost inventory with lower cost inventory, you know, that's resulting in better pricing for our European customers. You know, the arbitrage we expect will be closing here at the end of the first quarter and into the second quarter.
You know, that I think really helps restore the supply-demand dynamics. That, of course, we are seeing much higher demand now starting to, or really seeing demand pick up in Europe here in March, in particular, and we expect that to continue into the second quarter. With higher demand, you know, lower pricing for the customers because of energy and raw material costing, and then higher demand in China making it less attractive to ship across, we think those three factors actually combined, should resolve the situation in second quarter.
Okay. Great. In terms of the, sort of the macroeconomic construct, you know, China you touched on in terms of momentum, just given the sequence of events there. Europe, you know, you just touched on that as well. What about North America as an offset, as it relates to a slowdown sequentially? How do you see that evolving in 2023?
Yeah. I would say North America has been a bit sluggish in the first quarter so far. We have seen more recovery in Europe as we go into March than we have so far in North America. We don't have any reason to think, you know, North America also isn't gonna get there in the second quarter. I mean, auto builds are strong. We see signs that the destocking is over. Again, natural gas pricing in the U.S. and raw material pricing should make us expect North America to come back strongly as well.
Thank you. Next question is coming from Jeff Zekauskas from JPMorgan. Your line is now live.
Thanks very much. Can you tell us what the EBITDA of the M&M business was in 2022? You know, in the old days, I think you guys thought it was $900 million in EBITDA. Plainly, it's operating at a much, much lower level. Can you diagnose what happened? That is, are these structural problems or raw material problems? You know, how much of the nylon is sold at monthly contract prices? You know, right now of the M&M business.
Jeff, in 2022, you know, at the time of the purchase, we expected 2022 to come in at about $500 million of EBIT, EBITDA. You know, obviously, with the year-end challenges in M&M, that number was a little bit lower than that. Now, you know, I think, you know, we had thought originally that in 2022 they'd be at $800 million. That's been a more typical number for M&M. We believe we could grow that to $900 million. Now we're saying $700 million for next year. If you look at what happened in 2022, I think there was a number of factors.
You know, first is with a take-or-pay contract that they had for raw materials, although they saw weakening demand, they continued to produce, and that led to a lot of inventory, and that's gonna tie into what I'm gonna say about fourth quarter. Raw materials were fairly high for the year, compressing margin for nylon for the M&M assets as well. We saw a lot of demand destruction, and we saw it especially in Asia, we saw it a lot on standard grades. I think as we talked about last quarter, you know, what we saw was a desire to maintain margin in M&M, but as a result, they lost a significant volume on standard grades by trying to hold prices when other prices were coming down, so volume loss.
At the same time, they weren't raising prices on premium grades, which they could have been doing with raw material pricing going up. You know, these are things that we've had to work on. You know, we've really been working on pricing over the last three months, trying to drive more volume in standard grades, trying to raise pricing in other grades. We've really been working the product pipeline. We've been working cross-selling. We've really, you know, the team's been doing a great job working all of these things to really drive back to where, you know, we believe we should be at that $800 million EBITDA run rate by the end of 2023.
Obviously, these things take a few quarters to get going, but we do think we'll be back at that maybe kind of historical level DuPont had of $800 by the end of 2023.
So-
And in terms-
Sorry.
In terms of contracts, I'm not really sure, Jeff, to tell you the truth in terms of what percentage of the M&M contracts are monthly versus three months or six months or something longer.
In terms of getting the $700 million in EBITDA this year, you'd have to average, I don't know, $200 or so for the next, for the second, third and fourth quarters. How does the profitability lift from $80 to $90 to, you know, that $200 level? How do you accomplish that? Especially because, you know, when you, when you read about Nylon 6.6, you know, the general commentary from consultants is that, you know, there's overcapacity and margin pressure. You know, is the background getting tougher, but it's your own, you know, innovation or ways to change the business that's improving it? You know, what are these dynamics that are lifting it in an adverse environment, if the environment is adverse?
Yeah. Look, a big piece of it is synergy capture. If you look at our outlook now, which is at the upper end of the $100 million-$135 million range for synergy, we've achieved about $10 million of that. We think we'll get about $10 million of that in the first quarter. That leaves $120 million for three more quarters. That's about a $40 million per quarter average uplift. Now, obviously, it's a little bit more skewed towards the back end, but, you know, let's just think about average for the next three quarters. It's about $40 million right there from synergy uplift. That gets you to the kind of $120 million-$130 million range. Then, you know, we are getting volume recovery.
As I said, our March order book is now for M&M, basically where it was in March of 2022 for M&M. That was still, you know, the first part of the year was better for M&M. We have gotten some volume recovery in, you know, from Zytel in particular, and in Asia. Auto builds are very consistent and, you know, they're not still back to 2019 levels, but they're consistent. We think with volume recovery, we have been pushing through pricing on differentiated products, right? If you look at all of those things, if you look at productivity as well, not counted as synergy, but regular productivity at our M&M plants, you know, we expect to, you know, probably get another, I don't know, $40 million-$50 million from that this year.
If you look at all those things and start adding up those volumes and the recovery, you know, M&M was affected in fourth quarter and early part of first quarter with the very same factors we were, right? With the same destocking, with the same seasonality and slowdown. We are seeing them recover from that as well, again, in March and as we move forward into second quarter.
Thanks so much.
Thank you. Next question is coming from Josh Spector from UBS. Your line is now live.
Yeah. Hi. Thanks for taking my question. I guess first I wanted to ask on the Taste JV. Can you talk about how much cash you'll be getting into from that combination? I was a bit confused by the comments in the release about 0.7 times leverage reduction 12 months post-close, if that's related with that or not. Seems like a big number if it is. Can you clarify?
Yeah, absolutely. We expect to net $400 million-$450 million that we can apply towards debt reduction from the Food Ingredients deal. You know, we think, you know, I have to say, we're really excited about this deal. We're really excited about the JV structure that we've agreed to with Mitsui. If I back up a bit, you know, we also at the same time announced the extension of our joint venture for the Fairway Methanol joint venture. This has been a great joint venture for us. Mitsui has proven to be a really great partner, and I think it's been really financially beneficial for both companies as well, as well as strategically beneficial.
We see food ingredients being an addition to that, you know, strong relationship that we built with them through the years. You know, this is really what we were looking for. You know, we've looked at this product for some time and thought, you know, it's not necessarily a core piece of our portfolio, but it is a core piece of our operations in Frankfurt. By doing a joint venture, we think, one, we'll really benefit from the expertise that Mitsui has in food and nutrition, and their ability to market and help us, you know, on that end. We think they will also benefit from us continuing to be able to integrate into our acetyl chain. We provide acetic acid and crotonaldehyde in now into the Fairway joint venture.
We'll continue to benefit from the strong partnership that we have as well as the manufacturing synergies, 'cause we will continue to operate the joint venture, and it is very embedded into our Frankfurt operations. It allows both of us to participate in growth in what we think continue to be a high growth market for Food Ingredients, Sorbates and Sweeteners. As, you know, especially as one of the few, if maybe only, you know, Western company providing sweeteners anyway of this type, you know, we see a lot of positive movement in terms of volumes and demand and pricing going forward. Again, we're really excited about it.
Just to reiterate, to answer your question, you know, we do expect to be able to pay off another $400 million-$450 million of debt as a result of this joint venture.
Yeah. Josh, with regards to the covenants, the way our covenants are structured is gain on sale of assets is included in EBITDA. Because this has a very low book basis, and while it's an efficient transaction, that $400 million-$450 million, you know, will be largely gained. You get the gain that goes into the EBITDA piece, using then the cash proceeds to pay down debt at the same time. There's a partial offset, obviously, in EBITDA from the 70% that would go to Mitsui. You know, that math then works out to be, because it's in EBITDA, about a 0.7 reduction for the debt covenant purposes.
Okay, thanks. No, I appreciate that. Maybe just one clarification there is that gain, are you gonna exclude that from your adjusted EBITDA? That's in the, I guess, the debt accounted for EBITDA. In your comments about free cash flow, you know, you reiterated the $1 billion +. Can you just give us an idea of what the core free cash flow you're expecting at this point, some of the movements between working capital restructuring, et cetera?
For adjusted EPS, we will go ahead and exclude that gain as we do have past transactions. On free cash flow, we had previously said $1.5 billion of free cash flow, which included about a $200 million improvement overall in working capital. You know, if we see that same $200 million improvement in working capital and we saw inventories move up a little bit just with the lower demand in the fourth quarter, then we would, you know, see free cash flow likely a little lower than that one and a half just because of the lower earnings that we have.
We're still working through kind of exactly how the working capital will play out this year, but if we see something in that range, we would expect to be a little bit lighter than the $1.5 billion.
Thank you. Next question is coming from Michael Leithead from Barclays. Your line is now live.
Great. Thanks. Good morning, guys. First question on pension. Your $12-$13 a share EPS guide, I believe, includes a $100 million hit year-over-year on pension. When you talked last quarter about $13-$14 a share, how much pension impact were you expecting at that time?
Thanks, Mike. I'm actually gonna kind of put some of the other buckets in here that change from, you know, our previous $13-$14 guidance. You know, DNA actually came in about $75 million better than we expected, but it was eaten up, you know, by a pretty good chunk by that pension. It kind of approached that amount. It's a little lower than that $75 million, but it was approaching that. I think, you know, when you it largely neutral those two things together, but it was in that range.
Got it. Okay. That's helpful. Then maybe just more of a segmentation or clarification question, but it seems like M&M EBITDA, if I'm reading correctly, is sort of allocated between earnings and EM and some centralized or other costs and other.
If you do deliver, say, $725 of EBITDA from the M&M business this year, is it correct to interpret that we'll actually see it reported as something like $825 or so higher in EM EBITDA, but also, I don't know, $100 million or so higher other costs to offset that? Is that the correct interpretation?
I think that's right, Mike. It's in, it's certainly in that range. I mean, at the end of the day, we need to get no matter what bucket it's falling in, we need to go deliver the EBITDA over time that we said this business would deliver. It is about getting the base business back up into those ranges that we had originally said at the time of the deal in that $800 million EBITDA, including the other costs in there, and then driving synergies on top of that. You know, this year with where demand is at, given some of the higher cost inventory that had to be worked off at the beginning of the year, it's gonna be a little bit lower.
Building that back and then putting synergies as on top of that is exactly what, Tom Kelly and the team are focused on.
Great. Thank you.
Thank you. Next question is coming from Vincent Andrews from Morgan Stanley. Your line is now live.
Hi, and good morning, everyone. Just a quick clarification around the subject matter of the prior question. For M&M in the fourth quarter, you had guided to $50 million-$60 million of EBITDA, and then there are kind of two numbers discussed in the prepared remarks. One is 56, one is 39. Which is the actual apples to apples comparison, the 39 or the 56?
It's the 39.
The 39.
Yeah.
Okay. Okay. If I could ask, this is the first quarter I can remember, and I don't know how long, where your volume in automotive was below build. That takes us through a variety of good, bad, or indifferent, auto environments. If you have any further color on sort of why that happened, because I can remember other times where, you know, things were, things were tough, but, you know, your team found a way to, you know, your innovation or your activations or what have you. What, what happened this time that was different?
Actually, Vincent, fourth quarter of 2021 was exactly like this. We had the same issue. We were lower than build because of destocking. I think, you know, there's a number of things that happened. I mean, people hit the end of the year. They wanna make work, make working capital numbers, so they destock at the end of the year for a year in inventory control. You know, prices have been coming down because raws are down and natural gas was falling, so that made people more confident in pricing going forward. They believe prices going forward are less than they are now, and so they choose to draw down their inventory in anticipation of lower prices.
I think, you know, the supply chain issues have been largely resolved around the world, people are more confident about being able to buy material. Why we saw a lot of build of stock in 2022 because people were worried about getting resin. You know, I think we see going forward, people feel the supply chain issues are largely resolved. The dynamic is actually very similar at the end of 2022 as it was at the end of 2021. I would say a little bit what's different is usually the fourth quarter, as a magnitude was a little bit more in 2022, I'd say primarily because of Asia. Usually, in Asia, we have a pretty good fourth quarter as in advance of Chinese New Year.
This year, because of the resurgence of COVID in Asia, you know, things were quite slow in Asia in fourth quarter as well. I'd say the dynamic was a little bit more pronounced this year. Obviously Europe was even a little bit slower just on the malaise we've seen in Europe all year. The dynamic was very similar, and I think the reasons for destocking were very similar to what we saw at the end of 2021. Again, you know, January started slow. We've seen improvement here as we've gotten through the second half of February, and order books are looking consistent with March of 2022 order books for March of 2023.
We feel like we've gotten past these dynamics and now are on a more normal trajectory where we will meet or exceed, which is typically what we've done. You're right, we're very good at that. Our teams are very creative about pushing more volumes into the market at high margins. you know, we feel like we're back on that trajectory as of March.
Okay. Thank you for all the detail. I appreciate it.
Thank you. Next question is coming from Michael Sison from Wells Fargo. Your line is now live.
Hey, good morning. You know, if I did the math for 2023 for adjusted EBIT for EM, looks like you need to be between $1.2 billion-$1.3 billion and acetyl chain $1.3 billion-$1.4 billion. I guess my question is, if we think about where they could be longer term, maybe 2025, 2026, you know, where do you think EM should be able to get to? If the $1.3 billion-$1.4 billion is the new foundational, what would the mid-cycle acetyl chain potential be, you know, a couple years out?
Yeah, that's a lot of questions all rolled into one, Mike. Let me see if I can parse that apart. You know, if we look at 2023, you know, there's a lot of ways we can get to the $12-$13 and, you know, there's a lot of things that could happen in terms of energy price and everything else. I would think of it as going forward, including 2023, we expect EM and acetyls to contribute roughly evenly for the next few years. This year it might be a little stronger on acetyls than EM, as, you know, as we work through kind of the restoration of M&M-based earnings and start to capture synergies.
I would say for the next several years, I would consider them roughly equal, 'cause we also have the Clear Lake project coming on this year, which is gonna add another $100 million to acetyls. We have some VAM expansions and other things coming on. I think that's a good starting place. If we look at foundational level of earnings, you know what I would say is, today we think it's about $1 billion-$1.1 billion. That was before tow. Tow is gonna be at or above kind of the $250 million that we called out at the time of the Investor Day in 2021. That kinda puts you in that $1.25 billion-$1.35 billion range, which is pretty consistent with the numbers you saw.
Again, we'll add $100 million on a full year basis for Clear Lake. That is again, the foundational level of earnings. We're still operating at very high capacity utilization in acetyl despite the softness, despite everything else. You know, even in the fourth quarter, our utilization was, you know, 70% in China, but 90% global basis. That's still pretty high, and that's I think, where we're gonna see maybe a little more volatility in acetyl as the market is gonna react more quickly to outages due to turnaround or unplanned outages or movements in raw material pricing.
I can't really say what I think the mid-range is, but I would just say, you know, there's, you know, we've seen in acetyl, we can see a pretty sharp spike up in a very short period of time as the market reacts to short and medium term changes.
Great. Thank you.
Thank you. Next question is coming from Hassan Ahmed from Alembic Global. Your line is now live.
Morning, Lori. Lori, obviously in the prepared remarks, a lot of commentary around, you know, destocking, restocking and the like. Was hoping you could give us some historical context as you look at your portfolio. You know, in terms of destocking, you know, historically, how long have your destocking cycles lasted? What did the restock look like, you know, once, you know, the destocking was over and the like? I'm just trying to get some sort of perspective in terms of, you know, where inventory levels are right now, what the bounce back could look like, and the like.
Yeah. You know, I would say historically, we've seen destocking last kind of a quarter, especially in EM, maybe a little bit less in acetyl because they don't have as much inventory. I wouldn't even say we're necessarily seeing restocking at this point. I would say we're seeing a return to normal levels of demand. Typically, when we see restocking is when prices start to go up and people start getting worried that prices in the future are gonna be higher than they are today, so they take the opportunity to build inventory in advance of an anticipated price increase. Again, as I said earlier, I think with where we are today, where raws are down, natural gas is low, you know, the anticipation in the market is that prices are gonna go lower or stay low.
I don't think we'll really see restocking until we see a turn up. We do see a return to normal levels of demand starting now in March.
Understood. Understood. As a follow-up, on the acetyl chain side, you know, you guys talked about how pricing, you know, through the quarter was, you know, Chinese pricing at cost curve levels. Yet, you know, despite that, you know, you guys obviously idle some facilities, yet you generated around 25%-26% EBITDA margins. I'm just trying to get a better sense of Celanese's cost curve positioning as it sits right now.
I think there's a couple components to that. I think, you know, in China specifically, while I believe throughout the end of the fourth quarter and into the beginning of the first quarter, we were at the cost curve in China. In terms of the industry, our cost position is a bit better than that, and it has to do with the scale of our operations, the technology that we have, and therefore, you know, improved cost bases we have versus the vast majority of the producers in China. We continued, even when the rest of the industry was at the cost curve, to make even a small amount of margin in China. Of course, we're benefited by the fact that we have a very large facility in the U.S. Gulf Coast.
When we saw natural gas prices coming off in, you know, towards the second half of the fourth quarter, and as we've gone into the first quarter with low natural gas prices, that is a big margin uplift for us versus people who are producing out of coal or even crude at these kind of prices. That opens up windows for us to move material to Europe and other parts of the world out of the Gulf Coast. I think, you know, it is that global optionality that we have, that global footprint, as well as the optionality we have to move things up and down the chain that really allow us to continuously deliver, you know, high level of margins from what some might consider a commodity business. It certainly does not give commodity returns.
Thank you. Next question is coming from PJ Juvekar from Citi. Your line is now live.
Yes. Hi, good morning, Lori, and Scott. Lori, do you have a long-term view on the competitiveness of your European assets? What I mean by that is, you know, European VAM capacity was shut down. Is that the marginal capacity that goes in and out with the market, like what Singapore plant used to do in acetic acid? Can you just take a step back and explain to us sort of the marginal capacity in Europe and your plans there?
Yeah. No, thanks for the question, PJ Look, you know, maybe to clarify, VAM going down in Frankfurt wasn't because VAM couldn't make money in Frankfurt. It was just we saw the demand go down so much towards the end of the year. I mean, VAM demand in December was down, or in the fourth quarter was more than 50% off Q3. We had a really huge demand destruction in the fourth quarter because of pricing, because of the weather, because of destocking, because of, you know, all of those things. Even at that, I mean, we could, we could have run VAM profitably.
It is not normally the most expensive VAM production in our network. Because of the high pricing and we were seeing in Europe last year, it just made sense because total capacity for the globe was down. It just made sense that we shut down that facility that was challenged due to energy pricing and move material from other lower cost energy locations. We're starting it up now. I mean, you know, the March order book for VAM in Europe is really the strongest we've seen in six months. Now we need IPH, and it makes sense. We're gonna be about, you know, I think the order book right now is about 85% of what we saw in the 3rd quarter. It makes sense to start a VAM. We have lower energy prices.
Again, Frankfurt returns to, you know, not being the highest priced one. Again, this is the beauty of a global network. We have the optionality to take units down, to skew where we make it based on what is most cost competitive at the time, based on where the demand is at the time. You know, that just happened to be Frankfurt last year, but it could be something different in the next year. That's why we like having all of this optionality around the globe.
Great. Thank you. On M&M, you know, it seems like it was really undermanaged in last one year of ownership. Do most of M&M's issues are residing more on nylon area? You know, can you upgrade the M&M portfolio? Because I think you had more EV exposure than them. Is there a natural upgrade there? Thank you.
I would say if you look at the portfolio from M&M, you know, certainly nylon was the most challenged. I think elastomers was more robust. Even within the nylon portfolio, probably high temperature nylons and some others, you know, didn't see the impacts. It was more, I would say in Zytel and the PA66 line. You know, as we've called out before, I mean, there were many issues around decisions being made around pricing, both positive and negative, maintaining volume in standard grades and those sorts of things. You know, there were very high raw material costs and a take-or-pay contract that required them to take it. You know, I think there's just a lot that went into that underperformance in 2022.
The good news is these are things that are fixable, and this is what Tom and his team have been working very hard on in the last three months, is, you know, moving the pricing, getting the inventory down in the fourth quarter, which certainly hurt us in the fourth quarter, but will help us now as we go forward in 2023, and are able to sell lower cost basis inventory, more in line with pricing. You know, I think the good news is going forward, this is all stuff that is fixable and we are working rapidly to do so.
The earnings power of this combined portfolio hasn't changed from when we announced the deal a year ago. If anything, I think we're even more convicted around that going forward. There is near-term challenges and we, and we've been, over the last several quarters, you know, very clear about the disappointment in the performance, and it is requiring a big lift in the near term. The long-term earnings power of these combined portfolios and combined with the acetyl chain as you look out three to four years, is very substantial.
Thank you. Next question is coming from Kevin McCarthy from Vertical Research Partners. Your line is now live.
Good morning. Lori, can you elaborate on the 1.3 million ton expansion of acetyl capacity at Clear Lake? What are you baking into your numbers with regard to timing of the startup and operating rate, you know, given the current market conditions? Any thoughts on, you know, how you would see that earnings trajectory evolving through this year and into 2024 would be helpful.
Yeah. The project itself is going well. We are still anticipating an on time, on budget startup, mid this year. You know, we expect to have it running for, let's just call it roughly half of the year. At the time we did the project, we called out, while we have the ability to run 1.3 million tons additional, we really did it as a productivity project. Savings that we get from being able to move volumes directly to Europe, savings that we get from, catalyst savings, energy savings, et cetera. You know, of that $100 million a year credit, we probably will only see about $25 million of that this year, because, you know, we have start-up costs, we have ramp up times, all that sort of thing.
I'd expect to see about $25 million of that credit this year. Next year, we should be at the full $100 million. Having said that, to the extent that demand delivers, you know, continues to grow robustly, and energy prices continue to be so favorable on the Gulf Coast, it will make sense to try to run the unit for volume as well. What point that will be at, I couldn't say at this point. It's gonna depend on demand and raw material and energy economics. If, you know, if that were to happen, that clearly is a higher return case for that project than we had with just the base productivity number that was baked in there.
I see. That's helpful. Secondly, if I may, a couple of financial questions for Scott. Will you comment on your 2023 capital expenditure budget? With regard to the first quarter, what level of interest expense are you baking into your EPS guide?
Capital we still expect to be in kind of that $550 million-$600 million range. You know, Where we land there will really be dependent upon, you know, where we see, you know, the demand recovery as well as the outlook into the out years, and as we continue to, really put the combined EM and M&M portfolios together. You know, From an interest expense standpoint, you know, we're in that kinda, again, that $550 million-$600 million range for the year, and we'll have about a quarter of that here in the first quarter.
Thank you very much.
Thank you. Next question today is coming from Frank Mitsch from Fermium Research. Your line is now live.
Yes. Hi, good morning, and congrats, Mark Murray, if you're listening. Lori, I wanted to ask about the level of auto builds that you have embedded in the guide for the year and where you think Celanese can perform relative to that level of industry auto builds.
Yeah. We're assuming our 2023 forecast is basically assumes flat in 2023 to the second half of 2022. That's kind of like at a $85 million range, which really aligns pretty well with the IHS outlook this year, which, you know, they're forecasting an increase of 3.6%. That takes you to almost exactly the same number. That really is assuming, you know, U.S. and Europe about 5% up, Asia up about 2%, with China being the weakest point at 1%. Still, I would say, you know, we're still though 5% lower than 2019. We do believe that, you know, we're pretty consistent with IHS in this. We believe auto builds are gonna be constrained by chip availability.
Mm-hmm.
Demand. We think the pent-up demand is still there. To the extent chips would, you know, be more available, I think autos will build. Other years, as we've seen, sometimes they're not as available. We're assuming kind of flat to second half 2022. You know, I would say, you know, we would expect our contribution ourselves into auto to be, maybe a couple percent above that, and that's based upon a few things. One is, you know, the locations where we're stronger. So, historically, we've been stronger in the U.S. and EU. Now, with M&M, they've always been a bit stronger in Asia. Even having said that, I think, you know, we think we'd be a few percent above that.
The other thing is the presence that we have in electric vehicles. I mean, over 10% of our sales by volume go into electric vehicles from the Heritage EM portfolio. You know, we continue to see that EVs are growing at a faster rate than ICE if you look at the forecast going forward. You know, based on that, I would assume, you know, a couple percent, you know, kind of low single digit percents, that we would expect to be over the build rate in terms of our auto growth.
Gotcha. Thank you. I know maybe a question for Scott. I know that the comment was the M&M inventory levels were really high and elevated given the take-or-pay contracts ended the year at $2.8 billion in terms of your inventories. How should we think about that the impact of maybe inventory reduction on working capital in 2023?
Yeah. As I said earlier, Frank, on the free cash flow question, you know, we'd like to see at least a $200 million reduction, which will largely come out of inventory, as we work through the year. I mean, that's gonna largely be dependent on a few things. One, being able to bring absolute volumes down. Two, depending on what were to transpire with raw materials. You know, I think with energy and gas already coming down, that will give us some wind at our back. We really would like to see the volumetric reduction kinda contribute to that $200 in total and then any pricing reduction be on top of that. You know, we're kinda hoping to and planning for that $200 million reduction right now.
Thank you so much.
Thank you. Next question today is coming from Matthew DeYoe from Bank of America. Your line is now live.
Morning, everyone. I know you adjusted term loan covenants, do you still have to hit the 3x net debt to EBITDA by year-end 2024 that was stipulated by the rating agencies? Like, if I just use consensus EBITDA and, you know, hand up consensus EBITDA can very well be wrong. Like, you know, you give yourself some cumulative cash flow generation over the next two years, that consensus EBITDA puts you at, like, 3.5, 3.3. Is there a concern internally about this? Do you start thinking about other asset sales? Is that necessary?
Look, I don't think there is a concern internally. As we've said since the time we did the deal, I mean, there are always levers that we can do. I mean, from an asset sale standpoint, again, we don't feel we're in a position we have to do an asset sale. I mean, we did Food Ingredients because we had the right partner with the structure we wanted that would give us both benefits and allow us both to participate in the growth in that business. So the timing was right to do that. I would say, you know, we will continue to be opportunistic with our businesses, both our legacy businesses as well as our acquired businesses. If and when we have the right buyer at what we think is a fair price, of course, we would consider it.
You know, we believe that although this year has started slow, the recovery we expect to see this year, our ability to generate cash from working capital and others, you know, that we will be able to meet the expectations of the rating agencies, you know, this year, you know, as well as next year and into the future. Scott?
Yeah. I mean, look, we viewed this as a near-term challenge that required a near-term solution, and that was to amend the covenants. You know, we're still pushing to get to that 3x lever at the end of 2024. It really starts with, as Lori talked about, generating cash. Generating cash to pay down debt, lower that interest cost. I talked about the M&M incremental interest of $550 million-$600 million. We have legacy interest of $60 million-$70 million. Lower that by paying down debt, and then also find ways at which to lower that interest cost through, you know, re-domiciling some of that debt, as we talked about earlier on the call. It is really just about systematically bringing the debt down through cash generation.
Thank you. I know, I appreciate that. On the VAM and EVA side, like I know acetic acid is pretty stable from a supply perspective outside of yourself and what you're doing clearly, but it sounds you're calling for like decent VAM and EVA capacity growth over the next two years. Does that impact your spreads? I know demand growth there has been pretty good. Does that get absorbed? How do we think about that?
Yeah. If you look at what's happening, you know, there are some builds going on. You know, at acetic acid, we do expect one start-up in 2023, late 2023 in China, and we're also expecting a few VAM start-ups between 2023 and 2024. If you look at the typical growth that we see for the acetyl chain, you know, we need a full plan kinda every other year or so. I, you know, I don't think the rate of growth that we're seeing is inconsistent with the growth in the world. We are still at fairly high utilization. Again, I think the fact that we are at high utilizations will keep the volatility a bit more.
We'll do as we saw in fourth quarter, you may, during periods of low demand and seasonality, go to the cost curve, but that can recover quite quickly. But I don't see it having a major impact on our margins going forward on kind of a, you know, long-term or full year basis.
Thank you. Our next question is coming from David Begleiter from Deutsche Bank. Your line is now live.
Thank you. Lori, in the comments, you mentioned some destocking in the Americas and paints and coatings and construction applications. Can you give a little more color on what you're seeing there and where we are in that process?
Yeah. Look, we typically see seasonality because obviously when it's cold and snowy and things, people aren't painting outside. You know, that's typical. I would say also this year, because we're coming off a period of high pricing for many of these materials because of the higher raws and the higher energy we saw during 2022, I think people took the opportunity, much like we did in EM, for example, to draw down some of their inventory through the end of the year and get rid of higher cost inventory to make room for lower cost inventory going forward with anticipation of lower energy and raw material costs and pricing. I think that's really the dynamic that we saw this year.
Again, in the U.S., we haven't really seen the pickup yet, as we have, say, in Europe. I think, you know, it will come. There's no, there's no kind of structural reason that we think paints, coating, and constructions is gonna be off in 2023 versus 2022.
Understood. Just in acetyl, as you reference a $60 million earnings increase versus the last trough, can you try to bridge that gap? What's improved in your operations? Because you've always been a good operator in this business, but you seem to have taken a step up since over the last couple of years as well.
Yeah. Look, I think it's a number of things. You know, we've continued to invest in our acetyl assets, both foundationally, so investing in reliability and quality, energy savings, productivity. We've continued to improve our cost basis. From that, we've improved our contracts in many of our areas for raw materials for the acetyl chain. I think, you know, that's probably the primary improvement we've seen in acetyls over the last few years. The operating model we use in acetyl is taking advantage of that end-to-end as well as geographic optionality is really strong. It's running really well.
I would say it's really the improvement in productivity, the improvement in contracting, as well as some of the minor, you know, kind of, capacity adds, that capacity creep that we've had across our facilities, which gives us additional optionality and the addition of Elotex. Which gives us further optionality it, down into the chain, which is especially helpful as we move into these, You know, kind of slower winter months.
Kevin, we'll take one more question, please.
Certainly. Our final question today is coming from Jaideep Pandya from On Field Research. Your line is now live.
Hi, thanks a lot for taking my question. Just basically wanting to understand in the context of capacity shutdowns in the upstream side in nylon chain, how do you see yourself with regards to positioning in the value chain? Is this fundamentally more positive for you, or is it fundamentally more negative for you in this context? Thank you.
Prior to the acquisition of M&M, obviously we were a big buyer of nylon and would have been unhappy to see shutdowns in the upstream 'cause that would lower price. Now that we both polymerize as well as compound nylon, I would say generally I would consider this a help for us as, you know, it tightens up the amount of nylon being produced and should raise value across the chain.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.
Thank you. I'd like to thank everyone for calling in today. As always, we're around if you have any follow-up questions. Kevin, please go ahead and close out the call.
Certainly. 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.