Greetings and welcome to the Celanese Corporation Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce, Brandon Ayache, Vice President of Investor Relations. Thank you. You may begin..

Thank you, Daryl. Welcome to the Celanese Corporation second quarter 2021 earnings conference call. My name is Brandon Ayache, Vice President of Investor Relations. With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer; and Scott Richardson, Chief Financial Officer.

Celanese Corporation distributed its first quarter earnings release via Business Wire and posted prepared comments about the quarter 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 the press release as well as prepared comments.

Form 8-K reports containing all these materials have also been submitted to the SEC. Because we have published our prepared comments yesterday, we'll now open it up for your questions. Kevin, please go ahead and open the line..

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from the line of Duffy Fischer with Barclays. Please proceed with your question..

Yes. Good morning and congrats on a nice quarter and a big raise. I guess two questions. First one Lori I think either on the Q4 call this year, the Q1 call, you talked about one meaningful slug of new acetic acid capacity hitting the market this year at a competitor and that was going to be around midyear as I recall.

So what I just want to see have they been marketing that product? Is it producing and what impact that you see not have on the market or do you anticipate that having on the market?.

Yes, so we do still expect that to hit if not started up yet. It hasn’t hit the market yet. It's about 500,000 tons in China from Hawaii.

So we do expect it to hit I would say -- it may contribute to moderation as we go forward in the third quarter and into the fourth quarter, but if you think about it 500,000 tons just really a little bit over a year's growth, so probably won't have a significant impact in the market we're in today..

Yeah and Debbie I think it's important to remember this is not a new player for the Chinese market. They have two plants already in the market. So it somebody's who is in the market is adding more capacity..

Fair enough. And then just a follow-up, if you look obviously your guidance for the year has gone up a lot from earlier this year.

When you think about your decision-making, your ratios, net debt to EBITDA, dividend payout based on earnings, how do you think about that change from where you started to where you are today? What's the right level to think about is something you would kind of call structural to make capital decisions also? What's the right level of profitability to think about?.

Yeah, I think as we go forward, if we start thinking about 2022, really thinking about foundational level of earnings for as such [ph] kind of in the $900 million to $1 billion range growing into that range over the next two years, we're really thinking about engineer materials closer to $700 million and then if you add [indiscernible] on top of that, you get to the kind of that $750 million to $800 million range and then you think about acetic acid right around $60 million a quarter and so I think that would be kind of the right level.

I'd consider those pretty foundational level of learning at this point in time..

Great. Thanks guys..

Thank you. Our next question comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed with your questions..

Thank you. Good morning, everybody. Lori, in your prepared comments, you made some comments on China acetic acid pricing and how it progressed throughout the second quarter and into the third quarter.

It that decline a function of purely a supply normalization or is demand in the region starting to moderate? I guess I am just trying to get its micro pulse in China in context of the narrative that it's in the market, but it's slowing in the region?.

Yeah, I think it's a little bit of both. So I think we're seeing some supply ability or -- of course it varies day by day but I think since supply stability as we come out of Yuri [ph] and Western Hemisphere, supply is a bit more stabilized. Now we have been in the period of higher turnaround of this Western hemisphere this last quarter.

So we expect some of those plants to come back online. As some of you called out, there are some turnarounds happening in the third quarter in China, but I would say kind of within the normal level. So I think I'd say supply has certainly stabilized first quarter.

But I would also say demand while it continues to be robust, we are seeing some pockets of lower demand potentially going forward with COVID and the Delta variant and especially in Southeast Asia. So I think it's a little bit of both.

I think what's interesting though, is if you look at the moderation that was called out in China pricing, it's really a very slow moderation compared to what we saw say in 2018. And we think that is because it is demand driven as much as supply driven, whereas 18 months you've got the supply back it dropped very quickly.

And if you look at recent prices, prices have been -- China been really stable, over the last call it week. And we think that's more indicative of the slow moderation we expect to see through the remainder of the year..

Okay. That's helpful.

And then in terms of the inventory rebuild, what phase of the rebuild are we in that current? And then also your comments on 4Q earnings seasonality being minimal? Can you just expand on that as well?.

Yeah, so inventory rebuild, I can say we're in the pre rebuild phase still. I mean, everybody is talking about wanting to rebuild, but we are not seeing volumes being rebuilt in the [indiscernible] supply chain or really in the EM supply chain as well.

So I would say there is a desire to rebuild, but both businesses are still supply constrained not demand constrained. And so I'd say, we still have a long way to go on the rebuild. I would say, in fact our anticipation is that it will last well into 2022. And then sorry, your last question there. Your second part of your question, I just….

The 4Q earnings seasonality..

Yeah. Thank you. Yeah. And that's exactly the reason we're saying we expect less seasonality in 4Q, because we do expect as prices continue to moderate slowly, we will see people starting to rebuild as supply is available.

So if you think for example about paints and coatings, right, that's a market where you typically see a good bit of seasonality in the fourth quarter, but we know our paints and coatings, customers have no inventory.

So we anticipate they will use the fourth quarter to rebuild their supplies in order to be ready for another spring and painting season.

So we really are expecting much less seasonality in acetic and then slightly, we usually see some drop-off in the Western hemisphere in the fourth quarter and for all the reasons because we've been supply constrained most of the year. We expect automotive as well as other end users to be stronger than typical in the fourth quarter..

Awesome. Thanks so much..

Thank you. Our next question is coming from the line of John Roberts with UBS. Please proceed with your questions..

Thank you.

Could you talk a little more about the fiberglass shortage ever since PPG sold its business to Nippon? We really don't hear much about fiberglass for plastic reinforcement?.

Yeah, we have seen a real shortage here in fiberglass. I'm not sure I can really articulate all the reasons between how it started, but what we do know is really all of the players right now in fiberglass are short.

And while we do see players stabilizing, we still expect it to be well into the fourth quarter or even into next year before we see a complete stabilization of the fiberglass market..

Okay.

And then I don't know if you can answer this second one, but when CRM Tech [ph] and Celanese were both part of Hertz [ph], do you have any old timers that know whether the two businesses work closely together? I know selling these plastics today is a lot different than it was back then?.

I don’t know the answer to that, but Scott may have more hit through that..

Yeah John, it was really operated very separately, as you will know, Hertz was a very large company and had a lot of different components to it and it was operated very separately..

Okay. Thank you..

John, I'd just say something more on that. As you know we don't comment on any kind of specific opportunities or rumors or speculation, but I would just remind the group kind of not specific to CeramTec. We are always looking at a very broad range of opportunities.

And over any given quarter, we explore and evaluate many, many opportunities, most of which never come to completion. So our focus remains on opportunities that go well within our business models and really meet our disciplined or return criteria and our requirements around synergies. So I'm not saying we would never do something like CeramTec.

The material doesn't need to be of thermoplastic, but it does need to fit the model and it does need to meet our M&A criteria..

Thank you. Our next question comes from the line of Bob Koort with Goldman Sachs. Please proceed with your questions..

Thank you very much. I was wondering if we could talk on the -- in the EM business, the COVID impacts were sort of affecting the auto cycle and production rates and healthcare markets.

Can you give us a little update on what happened through the quarter and how you see the path for those particular end markets into the second half?.

Sure, so for EM, I would characterize the end-market as all of the markets has recovered to pre-COVID levels at this point in time with the exception of medical implants and as you said auto, which is really more due to shortages of chips, microchips and also some shortages of resins in Q2.

In fact, we're seeing growth above 2019 levels in industrial and channel and electronics and some of the other sectors. So if we look at implants, which is kind of your question, implants have improved across second quarter, we expect them to continue to recover through the end of the year and really be back at normalized rates in 2022.

I will say other areas of medical though, we have seen really good growth in this year, including like long dose drug delivery, diabetes applications etcetera. So medical overall, I would say has recovered. It's just specifically the implant business, which is our GUR business, which will be into 2022 before we see full normalization.

Auto, which is the other big end-market as we called out in our comment was down 8% in the quarter, but that's versus North America dropping bill to 12% and in Germany dropping bill to 15%, which was our two largest end markets and so we think we've been helped there.

Autos have prioritized premium vehicles, which we talked about that in the past and we have the majority of our content in premium vehicles, but we're also seeing a real help from our programs that we put in place specifically around electric vehicles.

So if you think about it in the EU, 17% of all electric vehicle sales are now sorry, of all vehicle sales are now electric vehicles and so that project pipeline where we've grown, those volumes have really helped us. We've also as we called up and expanding our content in electric vehicles.

So we talked about the 20 kilograms content that we have in Europe for one of our EVs, which is four times our average ICE. Just to give you another idea, just GUR alone is 6 kilograms to 8 kilograms per electric vehicle. So really big space that we have, we have really good polymers to go into those spaces.

So as we go to the second half, we do expect growth again in Q3 as we see chip recovery and we've had resin recovery. We probably won't be back to Q1 levels in Q3, but anticipate we'll be back to Q1 levels for auto by Q4. And we continue to see that few percent growth across other end users as we move through the end of the year..

And on a follow-up Lori is, I think in the past, you talked about some parts of the EM had become a little bit more commoditized. Was there any over earning, over margin products during the second quarter, or is there still a margin upside in some of those more mainstream products there? Thank you..

No, I think there's still more upside on margin of our products. We had a few -- if you look at our margin percent this quarter, we had a few impacts there that brought our margin down slightly from last quarter. Some of it was increased then in the plants as we needed to add more people to deal with the increased demand.

We also hire energy cost, especially in Europe and then logistics and transportation, as I'm sure you're hearing from other was certainly a big headwind this past quarter and will continue to be a headwind probably through the end of the year and even into early next year.

So I think as we see labor market stabilize, as we see logistics and transportation stabilize. I think we would expect to get back to previous levels of margin going forward. I would also just say, Bob, that the real difference here from what we've seen in the past is our constraints in Q2 and continuing in Q3 is not demand driven.

It's really supply constraint. It's our ability to make resin, get the additive, especially glass fiber as we called out, which has continued to deteriorate as we move through second quarter and into third quarter. It's really supply constraint. So there is also more volume upside as we go forward and are able to resolve those supply constraints..

Yeah Bob, I just want to clarify [indiscernible] what you eluded to are standard applications.

They have more competition in them, but these are still engineered solutions and we obviously work on the more value news premium side for our new project pipeline but that standard part of the portfolio is always going to be a real critical element and really building blocks to get in the door a lot of places..

Thank you. Our next question is coming from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question..

Thanks very much.

Given that there's been so much supply volatility and volatility in demand, have your cost-cutting programs executed along the lines that you've expected or have many of the cost savings been deferred to next year? I understand prices are up a lot and you're making a lot of money, but in terms of the way that you’ve been trying to make your operations more efficient, are things delayed?.

Yeah, no, fair question. So we had outlined, before we expected to get -- we're targeting $100 million to $150 million growth productivity. We are on track to deliver $150 million of growth productivity this year. So those are cost saving. I'd say [indiscernible] performed that. Certainly we did last year.

This year I think we're going to hit that $150 million. We're also seeing is a lot of opportunity and optimization. So planned optimization, small to bottleneck projects. So we're focusing more on how do we get more sure [ph] because we are supply constraint, but we will deliver at that kind of historical level of cost productivity as well..

Yeah Jeff, we typically break productivity into four buckets. [indiscernible] I'd say manufacturing cost reduction, procurement cost reduction and then I'd take more kind of S&A type reduction.

S&A bucket is very small this year, the procurement bucket is very small this year, where we shifted it in 2021 is more on manufacturing cost and [indiscernible] that Lori talked about..

And then for my follow-up when you talked about your acquisition criteria or your acquisition and you talked about your acquisition criteria being return base, does that mean that the direction of your acquisitions really make a win the direction of diversification over time? That is should we view Celanese as really not being found by wanting to have more polymers, but really trying to find other businesses if they are available where the industry structures are good and you think that the returns are high?.

Yeah, look I don’t think we're going to go out and acquire something completely out of our lane. One of our criteria is we want to be able to deliver synergies and to do that it means we have to either be familiar with the end market, be able to use our model or on a base, doesn’t have the thermal classis.

So other areas we could think of but I would still want them to have in markets that we're familiar with and where we think our current sales force and commercial teams and manufacturing teams could add value to or we could apply them to our engineered materials model or our actual model.

So they maybe new materials to us, but they will have some connection to our existing business..

Thank you. Our next question is coming from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions..

Thank you and good morning. Scott, just wanted to ask you on the free cash flow. I appreciate the comments about the working capital build in the quarter, but as we look out of this year and into next year and you gave some preliminary EPS view on '22.

How should we be thinking about working capital and free cash flow generation as conditions normalize and I guess I just mean it in terms of where is it going to be, number one.

And then number two, given everything that's gone on with raw material and availability and so forth, is there any consideration being given to hold more raw materials so that you can be better positioned or opportunistic when we continue to see supply disruptions?.

Yeah let me take the last part of that first and then -- I think I'd say we don't take a one at all [ph].

I think it really depends upon the business and the material and where we're at and how we see things going forward and particularly how our business is performing and certainly reliability of supply in certain materials is very important for us right now and so we may choose to hold a little bit more raw material if possible if we can get it in certain areas have tightened it.

We are not going to be bound by that working capital number because our working capital efficiency has historically been very strong and we can bring that down fairly quickly if necessary in the future.

In terms of how we see that working its way greater than $1.2 billion for the year assumes we get some of that working capital back towards the end of the year, but certainly not all of it and certainly not back to how we started the year and so a lot will depend upon what happens with raw materials and as well as our pricing.

One of the important characteristic here is accounts receivable and with what we've seen in pricing in Asia in asset yields which tends to have slightly longer payment terms, we're carrying a little more accounts receivable today and what we have historically.

So as that normalizes, we'll get some of that back and so there will be a catch up likely into next year..

And just as a follow-up there were also comments in their belief about sort of the Chinese price will be coming down, but there will still be strengthen in Europe and India because I think there was a reference, so there is typically a lag.

Just wanted to better understand sort of what causes that dynamic where it doesn't get our doubt pretty quickly that you could have serious price discrepancies between those three areas?.

Yeah, look if you think about it, there is not much acetic acid production in India and basically that material comes out of China or Singapore somewhere else in the world. So you have a shipping delay that prices go low.

I think for Europe most of the material going into Europe comes either from the US or from Asia and so you have that shipping delay as well. It's really just as simple as that..

Thank you. Our next question is coming from the line of John McNulty with BMO Capital Markets. Please proceed with your questions..

Thanks for taking my question. Lori, in the prepared remarks you had indicated the 2023 goals were likely going to come in around or in 2022.

Can you just clarify whether that is inclusive or exclusive of standard premium if it's really just a reflection of kind of the current markets and your comfort in the demand fundamentals or if it does include the M&A?.

Yeah, look we'll give better guidance in October as we've more time to work through this. I would say the $13 to $14 earnings per share that we had for '23 went up a point into '22.

I would look at this it's that way into with or without santoprene, I mean santoprene is definitely a value accretive to us but we model in all of our cash being used for stock purchases.

So while there is some uplift, I would say I'd look at santoprene to taking this closer to the high end of that range whereas without santoprene we would be at the lower end of that range..

And then just as a follow-up, the guide that you have -- actually a pretty tight range for the rest of the year and I guess just given the volatility that you're seeing in all the markets like I guess I'm curious how comfortable with such a tight range on such a big base? Is it -- have you locked in, in terms of some of the commodity prices, have some customers reached out to try to maybe lock in things for the year or I guess how do you get as much comfort as you have in such a volatile market?.

Yeah, look if you look at Q3 guidance, I'd say from knowing what our books are, we're half way through the quarter already from our standpoint. So we can get pretty comfortable with Q3. I think for the full year, it's a little bit different that again could really supply constrain if not a demand constraint.

So even with the volatility in the market we still can only sell the amount of material we have and we know how much material we have. So yes, it could be big swings in asset yields and that could change a bit.

We just gave -- it was a narrow range admittedly, but we just kind of said, here is what our projection is given that we are fairly close to the end of the year..

Yeah and John I think we tried to outline in the prepared remarks some of the assumptions we make to get to that range. So as those change a little bit, then we'll update that in October..

Got it. Fair enough. Thanks for the color..

Thank you. Our next questions come from the Hassan Ahmed with Alembic Global. Please proceed with your question,.

Good morning, Lori. Lori, a question around regional demand trends, obviously it seems the base of vaccination is very different by region, particularly in Asia, still some lockdowns continuing over there.

And then on top of that, you sort of overlay some of these supply chain constraints that you guys were talking about, others have talked about as well.

So A, what are you guys seeing in terms or demand growth disparities between regions and then on a go-forward basis, what does this tell you about demand growth? Are we going to be in a period of above normal demand growth as more and more parts of the world sort of start normalizing and lockdowns start waning?.

Yeah, I would say at this point in time, certainly as we've started coming out of COVID, we thought saw its move around the globe, where Asia was strong earlier and then the Americas and Europe was slow as to recover. I would say at this point, demand is pretty normalized around the globe in terms of being pretty consistent across region.

Interestingly enough, while we were worried about the Delta variant, we haven't seen it have much impact yet. Although that is a concern, as I said, we see some signs that there may be some impacts in Southeast Asia, but I would say in general the globe is pretty consistent right now in terms of recovery..

Understood. And now moving on to the tow business, obviously very strong volume growth sequentially in Q2 and I guess in sort of the written remarks you guys talked about some of the Q1 demand sort of carrying forward into Q2.

How are you guys thinking about demand growth, volume growth in that business in the back half of the year?.

Yeah, really the volume growth in Q2 was in fact what you just called out, which is, we work with customers in Q1 because of the freeze and our shortage of acetic acid. So we worked with customers in Q1 and to push demand into Q2. And so, if you look back at Q1, we had reduced volumes in Q1, those volumes showed up in Q2.

I think, we actually see volumes being stable through the rest of the year kind of at the average. I'd expect the second half volumes to look kind of like the first half volumes. Earnings will be less because, acetic acid pricing remains high relative to historical.

We have higher energy costs, especially in Europe and just the timing of our dividends from our Chinese JV which typically are heavily weighted to the first half..

Very helpful. Thank you so much..

Thank you. Our next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your question..

Thank you. Lori just on the M&A pipeline, excluding CRM Tech [ph].

How is that pipeline today?.

So I'd say our M&A pipeline remains very robust. We continue to look at deals of all size. You saw that with, santoprene, which is a big bolt on [indiscernible], which was a small bolt on, and then even some divestitures we did. So I think, we remain very active looking at our portfolio, where we want to add, where we need to take away.

I would say we're very actively looking at deals of all size. We certainly have the financial capacity, as well as the management capacity to continue to look at additional M&A, through the rest of this year and into next year..

Well, just in the prepared comments, you laid out a number of projects, many of which come online over the next couple of years.

How has that mix trench of projects in your mind at 24 through 25, 26 projects late looking in, is it different than the current one that we're in right now?.

Yeah, so really the only thing we have kind of on the books at this point in time for that period is the GUR expansion in EU, which we expect to come online in 2024. I would say, given that we're just in 2021, we're just now starting to look at what will our demand be in that period of time..

Thank you. Our next question is coming from the line of Michael Sison with Wells Fargo. Please proceed with your questions..

Good morning. This is Richard actually on for Mike. So my first question is on engineering materials. It looks like you were able to get a 7% increase in price. In the second quarter you also talked about sourcing challenges and raw material costs and inflation.

How much of the price increase was to offset the costs, higher costs and were, how much was that just part of adding value to your customers?.

Yeah, I would say look, our team has worked really aggressively through -- through starting in fourth quarter of last year, actually to really push price, knowing that we saw this increase in raw material pricing coming. So I would say that was a primary reason for the price increase. But we did raise price more than with our raw materials increasing.

And I think that's a question of mix. I mean, what we are in a very tight supply constraint situation. So we have been prioritizing our higher margin products and our higher margin regions to really maximize the return that we get for the molecules that we have available to sell to the market..

Okay. And as a follow-up on the asset sale chain, you gave some color in terms of pricing coming down in the second half. What's your view on, on spreads? Obviously you're low cost, but I guess your Asian competitors could get squeezed as if, if prices continue to fall.

How do you think about that heading into the end of this year?.

Yeah, I mean, certainly if you look at China, for example, our technology is certainly advantage versus the debacle to technology or some of the others, as prices fall, they will get squeezed in terms of margin. Clearly our capacity on the Gulf coast, which uses natural gas is the most cost effective in the world.

And so, we will still maintain that advantage on margins versus competitors, as prices continue to moderate..

Thank you. Our next question has come from the line of P.J. Juvekar with Citi. Please proceed with your question..

Yes. Hi, good morning.

Can you talk about your Elastomers acquisition from Exxon? What are the industries you're targeting and why do you think in your mind, Exxon is getting out? And is there any supply coming online with the supply demand there? Is there any new supply coming online in China or elsewhere?.

Yeah, look, we're really excited about this acquisition. I mean, you'll have to ask the Exxon why they're getting out. I will give you, my opinion, which is what they've only had this business since 1980s, that was a JV. They acquired it fully in, I think about 2000, maybe 2010, sometime in that first decade.

Look, this is not one of their core businesses. Exxon is an oil and gas commodity chemical player. This is a highly specialized business and I'm sure why they enjoy the margins and returns from it. It's not, it doesn't really fit their model of what they're trying to do.

And, and having come out of an Exxon specialty business, it's, they struggle to run them in a way that can be highly competitive with others. So my guess is they realized that was more valuable to us than it was to them.

If you look at in-market, it is largely into auto think, think -- things that need to be, recyclable or long life or soft touch or light weighting. But there are also applications for it into medical applications, into construction, things seals around windows and skyscrapers.

And so as we look at it, we think it's a really good fit for us to cross sell. With our automotive side, we think there are some really exciting new applications in medical going forward that given our knowledge now as a medical and pharma industry, we can exploit.

And so we think there's a lot of opportunities there to really apply these materials to businesses we already know already understand and already know how to access the market. Again, our willingness to do -- deal with complexity is, is just different than Exxon. We, we here deal with small orders every day. That's not something Exxon wants to do.

They, so I think we see a lot of value uplift opportunity here and what we consider very profitable in markets as we go forward. In terms of the new capacity, we are not aware of any new capacity coming on in this area. It is, is a highly specialized material. And we don't, we don't see any now we don't anticipate any for the future.

This in fact Exxon had grown the capacity, this business in just the last couple of years I think in the Newport facility..

Yeah PJ, just on that last point, I think it's important to remember, this really is an engineered solution and supply-demand utilization lot less important here in these businesses much like other engineered materials businesses because of the value and used element and the uniqueness and differentiation of what this material and this brand brings to customers and it's really one of the real attractive element.

So that should be really complementary to our engineer materials business..

And Lori overall a question on the tightness and logistics and labor markets that you talked about, you think they will last into 2022? Is that a US phenomenon or is that happening in Europe as well and why do you think this is taking long time to get ironed out? Is it the logistics part of the issue or is it the labor market? Can you just talk a little bit more about that? Thank you..

Yeah, I think they're really two separate things.

I would say the logistics and transportation issues are at the level certainly global, we see peak a lot upon people trying to get out of China as you know but I'd say really whatever you're going is pretty hard right now, whether it's by ship or on the ground or rail, there is just a lot of volume being moved around the world.

Not sure I could explain all the reasons why, but certainly people are moving more things I mean just the amount of things you buy at Amazon these days. We just see a real constraint there and that's really what I was referring to.

I think it's well into next year I think possibly even after Chinese New Year before we really start to see stabilization in those market. The labor phenomenon I discussed is really been more of an issue in the US than in other parts of the world.

We haven't had as many issues in Asia for example, nor we have the issues in China but in the US I think we just -- we see people we're hiring to expand and run our plans are also being hired by Amazon to run their warehouses for example and so it's just a very competitive labor market and we have to make adjustments as we wanted to add shifts and do things that would want us expand rather quickly to our labor rates.

But I think in time, this will stabilize as we see more people going back to work in the US. I think this will also stabilize and I do think probably this will take into next year as well..

Thank you. Our next question is coming from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your questions..

Yes. Good morning. Lori, I thought your guidance in engineered materials was quite constructive, but I wanted to peel the onion a little bit more with regard to the glass fiber shortage.

Can you talk about the upside opportunities and the downside risks related to that supply shortage for example, on the volume side, how much might you be constraining or what is your guidance there? And then on the price side, I guess my question would be, is there opportunity to capitalize by raising price in the engineered products that might require glass fiber? I assume that's certain polyesters and maybe sell strands of some nylon grades.

Maybe you could just elaborate on what's going on there?.

Yeah, let me speak a little bit more clear on the characterization, if we look at second quarter, we would estimate, we probably walk as much as $5 million revenue due to problems around glass fiber as well as a little bit the logistic transportation issues.

If we look at third quarter, that is probably going to double, but we do expect it to resolve and we get some of those volumes back starting in the fourth quarter and going into 2022. We are seeing glass fiber makers coming back but we are seeing the volumes go up.

Glass fiber that goes into polymer is a very small percentage of the glass fiber market, but it's slightly more profitable segment. So we do expect to see start seeing more glass fiber coming back towards as we move into fourth quarter.

Look, I think long term as this goes on, it has been an opportunity for us to convert to other polymers or polymers and also glass fibers that we prioritize as higher margin polymers so that people can get their product.

So I think there is some upside hear and we've been able to convert some of its higher-margin product, but I think long-term, it is about a third of our portfolio that uses glass fiber. So it is a pretty important raw material for us going forward. And we've taken steps commercially to secure supply of glass fiber in future years.

So hopefully we don't run into this problem..

That's really helpful.

And then secondly, if I may do you have plant maintenance turnarounds in the third quarter or the fourth quarter that we should be keeping in mind for modeling purposes?.

No, we always have small turnarounds and maintenance items, but the total for this year is only $30 million, for the entirety of the year is split pretty evenly between the first half and the second half. So it's not anything of note of that you're going to notice in terms of our volumes are our costs..

Perfect. Thank you very much..

Thank you. Thank you. Our next question has come from the line of Aleksey Yefremov with KeyBanc. Please proceed with your questions..

Thank you. Good morning, everyone. You mentioned in your prepared remarks, 8% sequential impact on automotive volumes.

Did that number include the shortages of nylon, glass fiber PBT, etcetera, or were those raw material shortages some additional impact on top of that? And if so, how large was that?.

Yeah, no, that was inclusive of everything, Aleksey. That was both, demand from auto as well as constraints we had due to resin and additive supplies..

So if we were trying to normalize for if few volumes for current state of demand, it's that 8% and maybe automotive is a third of your business.

So something like 2.5% should be added to topline when everything is running well, is that the right way to think about things?.

Yeah, roughly that's about right. If you think about it for this kind of demand, you just need to see a few percent increase in everything else in order to stay stable. So that's about right..

Thank you, Laurie. And quick question on EM margins.

Should we look at second quarter margins as sort of the benchmark for the rest of the year or will these margins be rising?.

Yeah, I think, based on what I had just said earlier about that, the impact that we saw from supply shortages, logistics and things, I would expect Q3 to look pretty much like Q2, probably from a margin standpoint, because we do see, especially the glass fiber issue continuing well through Q3. I would expect Q4 margins to look more like Q1 again..

Thank you. Our next question is coming from the line of Matthew DeYoe with Bank of America. Please proceed with your questions..

Thank you. In the past, you've been calling for a more normal EBIT and asset yield chain next year, which may be implied something like the $700 million to $800 million number. But I think if I heard correctly in an answer to I think Duffy's question, earlier you seem to support something closer to $900 to $1 billion.

Do I have that wrong or is it more optimistic view, just a function of the better backdrop that you've been kind of been talking about?.

I think, as we've worked through this year and we've seen the impact of various bottlenecks and productivity products and continuing to optimize our model for asset yields the addition of the US tax and other things, we really feel like we've lifted the foundational level of earnings from kind of that $700 million to $800 million to now $800 million to $900 million and we're expecting some goodness to continue in asset yield margins into 2022, that put us at that kind of $900 million range for asset yields..

Understood and similarly, I guess if I'm remembering correctly, I think the comment used to be that breaking up the company would result in something like $50 million of these synergies, but that you're constantly been trying to work that number down, is it still around that number? Do I have that number wrong or is it higher now or lower or is there any difference?.

I think $50 million is still a good number to use. I don't, I honestly don't see it really going a lot lower. I think we used to think it was even higher. I think $50 million is probably the right range to use for the level of the synergies we would expect if we -- for the company..

Thank you. Our next question is coming from the line of Frank Mitsch with Fermium Research. Please proceed with your question..

Good morning and congrats on the quarter. Lori, in release, it mentioned that you were able to bring back the Clear Lake facility during the quarter.

I was wondering how much you may have lost by not having it through the entire quarter?.

Yeah, I don't have an exact number. I think if you look at the residual impacts of winter storm, in quarter two we think it was probably about a $30 million impact and that's from higher rods [ph] energy inventories. Primarily all of that wasn’t easy..

Got you.

And can you comment just in general on the overall industry operating rates in the asset yields chain that you're seeing right now?.

Yeah, so if we look at Q2, I would say we think globally, utilization was up just over 90%, China just under 90%, but we also know that they were much higher intermittently and probably close to a 100% at many times during the quarter. BAM [ph] globally also add 100% basically for the quarter.

With this capacity coming on in China in August as anticipated, we actually think utilization will remain at similar levels again, because there is pent up demand in the chain, there is a need to rebuild inventory.

But I would say right now we still think we're somewhere around that 90% range globally and probably should continue to be so during third quarter..

Thank you. Our next question is coming from the line of Matthew Blair with Tudor Pickering Holt. Please proceed with your questions..

Hey, thanks for taking my question here. Congrats on the results. The pre-release comments listed out nine discreet organic growth projects.

What is the big picture EBITDA number for polys projects in total?.

Yeah, Matthew, I don't think we've called that out specifically for each project. We inherently included that in our Investor Day guide for 2023 and then we indicated there was additional uplift into '24 and '25.

We will, as we update that outlook going forward, we'll provide a little more clarity on kind of how that materializes in those out years but, but we haven't specifically given a number for all the projects. .

Got it. That's it for me. Thanks..

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question..

Good morning. Just two quick ones.

Given the supply chain lags and the stronger demand and low inventory levels, how resilient do you think the acetic value chain will be if there was a direct hit in the Gulf Coast from a hurricane to season compared to like the normal hurricane impacts? And secondly, can you give a sense for how the competitive intensity and process R&D and asset yields is evolving? Are the Chinese sort of doing the work, are you seeing the competitive gap closing or do you see it widening now that BP shifted the business over to NES [ph]?.

Yeah. On your first one on hurricanes, who can say right, where it hit, what it takes down in addition to acetic acid plants, does it take down consumers, it's hard to say. I would say in a tight market, any disruption gets amplified with even higher prices and more panic buying and other things.

So in a very tight market, a hurricane right now, even the threat of one probably would cause some upward movement in the market, but it's really hard to predict what the overall impact would be. I think there a competitive gap. I think look, we continue to invest in R&D. I know our competitors do as well.

I would say we think we continue to have advantage technologies in acidic acid, in BAM, in emulsion. We don't really see that gap closing. We think everybody continues to move up, but we don't really see that gap closing at this point in time..

Daryl, make the next question, last one please..

Thank you. Our final question is coming from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your questions..

Great. Thanks for taking my question here. Just wanted to follow up a little bit more on that long term outlook on the AC chain then.

So do you think we've kind of entered a structurally higher area of earnings power? I know that you guys have changed your plans as far as your footprint optimization, but is there a scenario where you'd see continued global capacity additions and would you participate in that? It does appear that there are pockets of production shortages globally as you mentioned India and elsewhere.

So I guess maybe if you could provide a little bit longer term view on your capacity and maybe the industry's capacity as well. Thanks..

Yeah. So, it's kind of a broad question, but let me try to break it down. So as just one of the things we did that we think improved our foundational earnings in terms of productivity and capacity debottlenecks etcetera and strengthening of our chain and strengthening of our model.

I think it's also fair to say that we believe that the acetic industry dynamics has improved over the long-term. So if you think about it just growing at kind of GDP between '18 and '21, we saw nearly a million tons in demand growth for the industry and during that time, we didn't add any new capacity.

So it is a more tightly constrained market than it was say back in '18, the last time we had a price run up. We have a little bit of capacity coming on stream here in China that we talked about and of course we have a lot of capacity, our own capacity coming on 1.3 million tons coming on in 2023. So those are the big capacity ads that are out there.

But even if you add those together, it's kind of three or four years of growth in a very tight market. And again, we don't intend to run our capacity unless it makes sense to do so.

So I think the market dynamics have definitely improved over the last few years and continue to improve with just normal GDP growth that could motivate people to get into the market. But I would say it's a very expensive market to get into.

You know our 1.3 million tons of capacity that we're adding at Clear Lake, we're spending $315 million to do so, but if we look at Greenfield build, like they're doing in China, our own estimate of building that plant in China, because they don't have the infrastructure and everything else is well in excess of $2 billion, that's a big hump for people to get over.

You have to have availability of syngas, you have to have access to hydrogen. You have to have a good energy source. It's a big hurdle for people to get over. It's a little better in the Gulf Coast of the U.S., but again we already have a lot of players in the Gulf Coast. So we don't see any new capacity coming on immediately.

Even if someone were to start today, they're still four or five years out from adding new. So we see for the foreseeable future, this remaining a pretty robust tight market..

Thank you. There are no further questions at this time. I would like to turn the call back over to Brandon Ayache for any closing remarks..

Thank you. We want to thank everybody for listening in today. As always we're available after the call for any further questions you might have. Daryl, let's go ahead and please close out the call..

Thank you for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day..