Earnings Call Transcript
Celanese Corp (CE)
Earnings Call Transcript - CE Q4 2021
Operator, Operator
Greetings. Welcome to Celanese’s Fourth Quarter 2021 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I’ll now turn the conference over to Brandon Ayache, Vice President, Investor Relations. Brandon, you may now begin.
Brandon Ayache, Vice President, Investor Relations
Thank you, Rob. Welcome to the Celanese Corporation fourth quarter 2021 earnings conference call. My name is Brandon Ayache, Vice President, Investor Relations. And 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 fourth 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 of these materials have also been submitted to the SEC. Because we published our remarks yesterday, we’ll go ahead and open the lines for questions. Rob, please go ahead and open the line.
Operator, Operator
Thank you. At this time, we’ll now be conducting a question-and-answer session. Thank you. And our first question today comes from the line of John Roberts with UBS. Please proceed with your questions.
John Roberts, Analyst (UBS)
Thank you. You mentioned you’re not expecting another shutdown at Nanjing or any disruptions from the Olympics. Do you think China can get from a zero COVID strategy to an endemic COVID environment like the U.S. and Europe without a lot more disruptions?
Lori Ryerkerk, Chairman & Chief Executive Officer
That’s an interesting question, John. We said we weren’t expecting any disruptions. It was really around energy curtailments or things like we saw in the October timeframe. Also with Chinese New Year and Beijing, it’s a little bit different than we’ve seen prior to 2020. We’re not seeing as many total shutdowns during that period as China worries about their economy and wants to see recovery. So we’ve modeled in only mild seasonality across our businesses for Chinese New Year and for the Olympics. The COVID question is an interesting one. I’d say COVID seems well under control in China, at least from official reporting. From our experience in our plants and our offices, COVID is under control. I think you’ve seen some recent comments by the Chinese government where they are starting to back away from their zero COVID strategy and more toward managing endemic. So my personal belief is that we will see a fairly smooth transition in China as they move, as much of the rest of the world has, toward managing endemic versus sticking with a zero COVID policy.
John Roberts, Analyst (UBS)
Okay. And could you talk a little bit about the M&A outlook. Santoprene appears off to a good start. But what are the areas of Celanese that you’re most interested in expanding? Is it another polymer like Santoprene? Or is it maybe something in Asia after the poly plastics transaction? Or maybe something in chemicals like the redispersible polymers you did?
Lori Ryerkerk, Chairman & Chief Executive Officer
Yes. Santoprene, we are really excited about Santoprene. The transition went really well over December. Even just one month in, we’re already starting to see delivery up from synergies that are ahead of schedule. We’re excited about what we see from the product and where we see the possibilities for cross-selling, as well as new applications for Santoprene. And of course, we’re really excited about not just the assets we acquired, but the people we acquired and the great job they’ve done in coming into Celanese and becoming part of the Celanese family. So you’re right. Santoprene, we think has been a great success so far, and we anticipate it just gets better from here. It makes us excited about future M&A as well in our ability to continue to do larger and larger M&A. To answer your question about what type of M&A, I would say yes. We are looking at everything that you mentioned. We’re looking at additional polymers and different geography. We are looking at acquisitions across both Engineered Materials and the Acetyl Chain. So our lens is still fairly wide open in terms of the types of M&A that we would consider and in terms of size, all the way from bolt-on to transformational. We think it’s quite an exciting time for us for M&A. Not only do we still have the financial capability to do a significant amount of M&A, but we also believe we have management and employee bandwidth and capability. Especially with some of the acquisitions we’ve done like Elotex and Santoprene, they bring in even more talent to take on additional M&A going forward.
John Roberts, Analyst (UBS)
Thank you, Lori.
Operator, Operator
Our next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your questions.
Jeffrey Zekauskas, Analyst (JPMorgan)
Thanks very much. In your script describing M&A, you said that you are considering a wide range of opportunities within your desired investment-grade rating. Does that indicate that your acquisition aspirations are more modest, rather than transformative?
Lori Ryerkerk, Chairman & Chief Executive Officer
I wouldn’t make that assumption, Jeff. If you look at our actual financial capability, if you look at our cash and the free cash flow we had this year at $1.3 billion, next year will be at $1.4 billion. If you look at our cash flow, we actually think we have a very large capacity to take on debt. We’re very low levered right now. We could take on significant debt and with the cash flow we have, we could pay off that debt. So I wouldn’t say that our ambitions are modest. We’re in the best time in our history to take on any range of M&A and still do it within our investment-grade rating.
Jeffrey Zekauskas, Analyst (JPMorgan)
Okay, great. Thank you very much.
Operator, Operator
Our next question comes from the line of Duffy Fischer with Barclays. Please proceed with your question.
Duffy Fischer, Analyst (Barclays)
Yes, good morning. First question is just on the Acetyl Chain. When you look at the different steps from acetic acid down to VAM and some of the other derivatives, where do you see the supply demand being the tightest over the next couple of years? And where do you think either you or the industry might make some announcements around new capacity in that chain over the next couple of years?
Lori Ryerkerk, Chairman & Chief Executive Officer
I would say the entirety of the chain is pretty tight right now. Just look at utilization. Acetic acid had been pretty close to 100%. It did moderate a little bit in the fourth quarter, but still 85% to 90% utilization in acetic acid. We see that being about the same this quarter and maybe timing a little bit as we go through the year. We do have some new capacity coming on sometime in the next few months with the second phase of the Yancheng project. VAM is very tight. VAM has been around 100% utilization for some time now. It was a little bit better in the fourth quarter. But again, in the first quarter, we see it being really tight again, as we have some outages, especially in China for turnarounds as well as maintenance downtime. So I think VAM is going to continue to be very tight. We’ve announced some expansions in VAM. There’s been a few other ones, but I think the demand in VAM continues to grow quite rapidly. Then if you go into our downstream products, like emulsions and RDP, I would say the demand is huge right now. There’s some really interesting things happening in the market around increased energy efficiency requirements. We make systems that are made of, if you think about kind of five layers of emulsions and RDP powders to make thermal insulation systems for putting on the externals of buildings. Especially in Europe, we’re seeing demand that the industry can’t keep up with right now. So those utilization rates are definitely at 100% and staying that way. I do think we’ll see some expansion. As we’ve called out before for acetic acid, any major expansions will take a while; we’re at least four to five years out from any other expansions there other than our Clear Lake capacity that will come on in 2023. We’ve called out some VAM expansions and some VAE expansions we’re making. We are looking to expand RDP as well. I suspect we’ll see others in the industry doing so. But it’s still a very tight market. I think these markets will continue to be very tight for the next, at least, four to five years.
Duffy Fischer, Analyst (Barclays)
Great, thanks. And then maybe as a follow-up, since you get at acetic acid from kind of all three of the carbon starting points, can you talk about what’s happening to the cost curve for acetic acid with all the different energy price moves we’ve seen in the last half year? What will 2022 look like different than 2021 from a cost curve standpoint?
Lori Ryerkerk, Chairman & Chief Executive Officer
If you look at the last year, we’ve seen everything go up. Natural gas has gone up, including in the U.S. Gulf Coast; coal has gone up in China; oil has clearly gone up. Although everything has gone up and with that methanol prices have gone up, it hasn’t changed the relative order of attractiveness. U.S. Gulf Coast natural gas, even at elevated levels we saw during the fourth quarter, is still the most attractive source of raw materials for acetic acid. Coal and oil stay almost in parity and go back and forth, but they’re usually about the same and still significantly more expensive than Gulf Coast natural gas. I don’t really see that priority changing. Gulf Coast production remains the priority, followed by our Nanjing and Singapore positions, and I don’t really see that changing. What that means is, even with higher natural gas prices, because the marginal capacity in acetic acid is coming out of China, which is coal-based, you’ll continue to see prices that support good margins in the Acetyl Chain as we go forward over the next few years.
Scott Richardson, Chief Financial Officer
Duffy, the only thing to add is I think what has changed from a relative basis is freight and logistics costs. With our network of having the three assets, that gives us the ability to be well-positioned to meet customer needs around the world. So while the cost for others has moved up who only have one plant, our network gives us a nice advantage to take advantage of the fact that logistics costs have moved up pretty rapidly.
Duffy Fischer, Analyst (Barclays)
Great. Thank you, guys.
Lori Ryerkerk, Chairman & Chief Executive Officer
Thank you.
Operator, Operator
Our next question is from the line of Bob Koort with Goldman Sachs. Please proceed with your questions.
Unidentified Analyst (Mike, on behalf of Bob Koort), Analyst (Goldman Sachs)
Good morning, Lori. This is actually Mike, sitting in for Bob this morning. I was wondering in your prepared comments, you kind of talked about an expectation of acetyls industry pricing moderating in the first quarter. I was wondering if you could give us perhaps a bit more color around the magnitude of moderation you may be baking into your guide.
Lori Ryerkerk, Chairman & Chief Executive Officer
Sure. We call out moderation in the first quarter and really throughout the remainder of this year, assuming we don’t see the amount of supply disruption that we had this year. This year, between the free and some large turnarounds in the U.S., and the curtailment in China in October, we had quite a lot of disruption in the supply chain for acetic acid. That tends to keep prices higher with the uncertainty on top of robust demand for acetic acid and Acetyl Chain products this year. As we go into 2022, and we saw it in the fourth quarter, after the peak in October driven by the curtailments in China and the perception of the curtailments, we saw rapid moderation through November and December. First quarter is probably kind of flattish with where we ended the year, but then we do expect further moderation as we go through the rest of the year, assuming no big supply disruptions. If we get into a period with major supply disruptions, we could see some price support again for higher acetic acid prices, but that is the basis for our assumptions this year.
Unidentified Analyst (Mike, on behalf of Bob Koort), Analyst (Goldman Sachs)
Okay, thanks. And just as a quick follow-up, if memory serves me, there typically is a seasonal rebound in pricing in the second and third quarter. Do you anticipate that or do you see the moderation continuing through what has historically been a seasonal rebound?
Lori Ryerkerk, Chairman & Chief Executive Officer
Usually, we see a seasonal softening around Chinese New Year as production and consumers are shut down in China during that period of time. We’re not putting much of that in our forecast for the first quarter because we’re modeling only a minor amount of seasonality. As a result of not seeing much seasonality in the first quarter, I wouldn’t expect much rebound in the second and third quarter, because we’re not baking in much of a dip in the first quarter.
Unidentified Analyst (Mike, on behalf of Bob Koort), Analyst (Goldman Sachs)
Okay, thanks a lot.
Operator, Operator
Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your questions.
Michael Sison, Analyst (Wells Fargo)
Hey, good morning. Lori, just curious in the third quarter prepared remarks, you talked about 2023, and I know 2023 is more of a guideline versus specific guidance at this point. But do you still feel good about that greater than $15 EPS and growth beyond that?
Lori Ryerkerk, Chairman & Chief Executive Officer
We do. We’ve called out greater than $15 EPS. For those who’ve done the math, our numbers come closer to $16 if you add them up by business. If you look at what we’ve called out for individual businesses, we’re trying to be prudent with the $15 call-out. We’re feeling good about 2022. If conditions continue and we see improvement in supply chain and other things, our number could move well above $15 for 2022. Even with more moderation in acetyls in 2023, offset by growth in Engineered Materials, we feel really good about that greater than $15 number for 2023 and beyond.
Michael Sison, Analyst (Wells Fargo)
Got it. And then for Engineered Materials, you’re looking for another good year in organic volume growth. Any changes to your view on auto? I think it did come in a little bit better in the fourth quarter. How does that affect your outlook for 2022?
Lori Ryerkerk, Chairman & Chief Executive Officer
For automotive, Q4 didn’t come back as strongly as most tiers predicted. It did come back a little in Q4, but still well below Q4 of 2020. There’s still a lot of recovery to come in auto. In our modeling, we’re not projecting as much recovery in auto as IHS is. If IHS is right, that will be additional upside for us. We’re assuming auto volumes are pretty flat in 2022 versus 2021. We continue to increase content into auto, so our sales into auto continue to go up. But we are projecting fairly flat total auto builds. That leaves upside if autos come back more strongly like IHS is predicting.
Michael Sison, Analyst (Wells Fargo)
Got it. Thank you.
Operator, Operator
Next question is from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Ghansham Panjabi, Analyst (Baird)
Thank you, and hello, everyone. Lori, maybe just picking up on the comments on China, as you sort of think about 4Q in the acetic acid and VAM pricing fate that you referenced in your prepared comments in the region, is that just a function of the economy having slowed in China with real estate, et cetera, and that continues in the first quarter? And then your view in terms of the recent stimulus measures that have been announced in the country. How do you see that playing forward for Celanese beyond the first quarter? You’ve given very specific guidance for 1Q, but on the Acetyl Chain beyond that would be helpful as well.
Lori Ryerkerk, Chairman & Chief Executive Officer
In the fourth quarter it was an interesting phenomenon. In October we saw coal prices run up due to geopolitical things. Methanol pricing ran up and with curtailments being announced in China, there was concern that acetic acid plants and VAM plants would shut down. Prices shot up to $1,300 per metric ton, but that was a short, one-week phenomenon. When people realized not much acetic acid was being shut down, acetic acid prices came down to around $850 and even into the $750 range by year-end. That’s still good pricing for acetic acid. We haven’t seen much softening in demand in China despite headlines about the economy and construction slowdown. So for the first quarter, we think pricing will be fairly steady at about the same range we saw at the end of the fourth quarter. As we go through the rest of the year, we’re calling out moderation, assuming supply stabilizes and demand remains fairly steady. Regarding China specifically, even at slower economic growth, a lot of that slowdown is in high tech and social media platforms and intentional clampdowns. We’re not seeing much impact on industrial or consumer demand, and not much impact on construction segments that we’re in, like building insulation. So the outlook for China is still pretty robust for 2022.
Ghansham Panjabi, Analyst (Baird)
Okay. Very helpful. Thanks. And then on EM margins down somewhere between 500 and 600 basis points below 2018-2019 levels, I know the mix has changed a bit. But is that previous high watermark still realistic, pro forma for the acquisitions, including Santoprene?
Lori Ryerkerk, Chairman & Chief Executive Officer
Our expectations for acquisitions is the same. Santoprene came in with a somewhat lower margin profile, but we’re confident that as we work through the year, see recovery in auto, and take commercial actions around pricing and other things, we’ll be able to get Santoprene up to the expectations we have for the rest of our business. That would be our expectation for any other acquisitions — that we get them back to similar margin levels.
Scott Richardson, Chief Financial Officer
With the run up in energy costs broadly across the EM portfolio, it’s going to take some time to recover. As we called out, we expect to get ahead of that by the end of the first quarter. You should see margins improve both with Santoprene and the base business in the second half of the year.
Ghansham Panjabi, Analyst (Baird)
Awesome. Thanks so much.
Operator, Operator
Thank you. Our next question is from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your questions.
Kevin McCarthy, Analyst (Vertical Research Partners)
Good morning. Lori, I was wondering if you could talk through the energy spike in Europe, as energy costs there quadruple or quintuple. How are you dealing with that? And with regard to efforts to recover, how much might be permanent price increases versus surcharges? How should we think about the energy pricing moving through the P&L as the year progresses?
Lori Ryerkerk, Chairman & Chief Executive Officer
The spikes we saw in third quarter and even greater spikes in fourth quarter are unprecedented and very volatile. Typically we do some hedging around energy prices, often to secure supply and reduce volatility, and sometimes we hedge in the fourth quarter and first quarter. With the situation in Europe, it was so unprecedented and came so fast that we didn’t have the opportunity to hedge effectively in advance. We passed those costs to customers via a surcharge because it reflects the temporary, unusual nature of the events. Customers understand the surcharge is temporary. We’re not seeing a tangible loss of volume from customers: everyone is experiencing these price increases, and supply logistics constraints make it hard to source from other places. As we go forward, we expect prices to moderate again. We are taking steps to try to protect ourselves in the future from these kinds of run-ups. Some price increases tied to other raw materials will stick. The surcharge will go away when energy prices go away. But as we called out, with the surcharges, sometime in the first quarter we expect to be recovering all the additional energy pricing we’ve experienced.
Kevin McCarthy, Analyst (Vertical Research Partners)
Okay, thank you. And secondly, on your $15-plus range for 2022, recognizing this is a dynamic external environment, what are the two or three biggest swing factors that could allow you to over-deliver or under-deliver versus that target?
Lori Ryerkerk, Chairman & Chief Executive Officer
The number one factor is acetic acid pricing and Acetyl Chain pricing. Base pricing still matters. To the extent we see supply tightness — weather events, unplanned shutdowns, supply tightness in a market at 85% to 90% utilization — prices can increase quickly and drive upside. Inflation and supply chain constraints are another factor; we’re assuming those moderate over the course of the year, but if they don’t, there will be impacts. For Engineered Materials, auto recovery is a big issue. We’ve assumed fairly flat auto between 2021 and 2022 because of chip shortages, but if that resolves faster, there’s significant upside for Engineered Materials.
Kevin McCarthy, Analyst (Vertical Research Partners)
Perfect. Thanks so much.
Operator, Operator
Thank you. Our next question is from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.
Vincent Andrews, Analyst (Morgan Stanley)
Thank you. Good morning, everyone. You mentioned in the prepared comments in the Acetyl Chain that your RDP business volumes were up about 25% versus their historical peak and that should be shifting more of your mix toward emulsions in 2022. Could you talk a bit about what’s happening in RDP that allowed that volume performance? Is it asset optimization, new ownership, market-driven demand, or shifting from other products? Where’s the demand coming from?
Lori Ryerkerk, Chairman & Chief Executive Officer
We’ve seen very strong demand and pricing from the construction sector specifically for emulsions and powders — paints and coatings and insulation systems. As countries put in energy efficiency and greenhouse gas footprint requirements, demand for emulsions and RDP powders continues. With our acquisition of Elotex, which let us get into the RDP market, we’ve been able to remove bottlenecks, run assets harder, and vertically integrate. We run them full because we see the value of acetic acid going into RDP coming out as RDP; someone who isn’t vertically integrated might struggle to do that. We’ve also packaged emulsions and RDP together, which allows customers to buy a system of products for thermal insulation systems instead of sourcing independently. Commercially that’s been a big win and should secure and improve margins going forward.
Vincent Andrews, Analyst (Morgan Stanley)
Okay. And on the auto comments: you mentioned tiers were doing some destocking in the fourth quarter. Was that typical fourth-quarter working capital destocking, or were they drawing down inventory because builds were constrained by chips and they had built too much inventory earlier in 2021? Is that destocking done, or could it persist into 2022?
Lori Ryerkerk, Chairman & Chief Executive Officer
Our belief is tiers continued to build inventory in anticipation of a robust fourth quarter. With chip availability constrained, fourth quarter didn’t come back as strongly as expected. They chose to destock over the quarter so they didn’t have year-end inventories that were too high. We still believe inventories are very low in the tiers. We don’t expect that to be an ongoing phenomenon. We think it was a year-end phenomenon. We expect demand to come back robustly in the first quarter and through the rest of the year as auto builds improve and tiers need to rebuild inventory.
Vincent Andrews, Analyst (Morgan Stanley)
Okay. Thank you very much. Appreciate all the thoughts.
Lori Ryerkerk, Chairman & Chief Executive Officer
Thank you.
Operator, Operator
Our next question comes from the line of P.J. Juvekar with Citi. Please proceed with your questions.
P.J. Juvekar, Analyst (Citi)
Hi, good morning, Lori and Scott.
Lori Ryerkerk, Chairman & Chief Executive Officer
Hi P.J.
P.J. Juvekar, Analyst (Citi)
In China you and competitors were impacted by dual control. Dual control has ended now and they built up their coal inventories. What does that mean for more acetyls production in China? Do you see that happening?
Lori Ryerkerk, Chairman & Chief Executive Officer
Yes, I definitely see that ability. If we look at the curtailment in China, we lost about 25,000 tons of production; about half of that was VAM and the other half was a combination of acetic acid and other derivatives. That was about $20 million to $25 million of lost margin due to the curtailment. Assuming no curtailments, that’s volume we can produce into the system. Our expectation is the same as yours: we don’t see indications we’ll have curtailments this year.
P.J. Juvekar, Analyst (Citi)
Okay. And Europe has been difficult for many companies as energy prices went up with limited pricing. How is your European operation holding up in general, and what do you see going forward?
Lori Ryerkerk, Chairman & Chief Executive Officer
We haven’t really seen major impacts on our business from the increase in oil pricing. Generally, we do better with higher pricing in acetyls that can get passed through quickly; it takes longer in EM. The real impact this year has been natural gas in Europe and the impact on our EM operations in Europe and our tow operations in Europe, where contracts haven’t allowed real-time pass-through of natural gas-related utility cost increases. There has been a lag in pass-through pricing.
Scott Richardson, Chief Financial Officer
I do think the one thing we like is having in-region capacity. Our assets in Europe are running at a high rate with supply chain issues and logistics challenges around product coming in from other regions. That has helped us sustain operations and offset some raw material increases.
P.J. Juvekar, Analyst (Citi)
Great, thank you.
Operator, Operator
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
David Begleiter, Analyst (Deutsche Bank)
Thank you. Good morning. Lori, in the prepared comments, you called out some turnaround costs in acetyls in both Q1 and Q2. Can you quantify those costs?
Lori Ryerkerk, Chairman & Chief Executive Officer
If we look at 2021, we had a total of around $40 million in turnaround costs, and in 2022 we expect about the same. Last year it was spread across more assets. This year our large turnarounds will be the two we called out: Fairway has a turnaround in Q1 and then we have a Clear Lake acetic acid plant turnaround that starts at the end of Q1 and goes into Q2.
David Begleiter, Analyst (Deutsche Bank)
Very good. And just back to M&A: If you are unable to make a transformational acquisition in EM, would you ramp up organic spending in that business?
Lori Ryerkerk, Chairman & Chief Executive Officer
We’re still planning on high organic spending. We’re planning about $600 million of capital next year. Part of that is completion of the Panther project in acetyls, but most of it is in Engineered Materials where we’ll be spending on expansion projects and new builds in China and other parts of the world. Organic investment continues to be our highest-return use of capital, so M&A won’t change our organic investment plans.
David Begleiter, Analyst (Deutsche Bank)
Understood. Thank you.
Operator, Operator
Our next question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.
Hassan Ahmed, Analyst (Alembic Global)
Good morning, Lori and Scott. A question around your degree of satisfaction with upstream integration. With the European natural gas situation and the new five-year plan in China and potential curtailments in coal usage, does that make you rethink the integration strategy? Should you consider being more integrated upstream? How are you thinking about that?
Lori Ryerkerk, Chairman & Chief Executive Officer
Assuming you mean upstream integration into the Acetyl Chain, we currently produce about 40% of our own ethanol. We like that balance of being able to produce or buy methanol depending on market conditions. We constantly reevaluate opportunities to go further upstream, but right now we’re happy at about that 40% range.
Scott Richardson, Chief Financial Officer
With the methanol expansions we’ve announced, that will help us with growth in the Acetyl Chain over the next several years.
Hassan Ahmed, Analyst (Alembic Global)
Understood. Just wanted to revisit M&A. You talked about considering anything from bolt-on to transformational. Do you have a regional preference? There are some chunky assets in Europe being spun — would you consider doubling down on Europe given your presence there, or are you geographically agnostic?
Lori Ryerkerk, Chairman & Chief Executive Officer
I’m geographically agnostic. It’s all about value for us. We look at all M&A targets for opportunities to create value for Celanese. We want a good strategic fit, but we really focus on synergies and the other aspects of a deal to ensure it creates value for shareholders.
Hassan Ahmed, Analyst (Alembic Global)
Very helpful. Thank you.
Operator, Operator
Our next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your question.
John McNulty, Analyst (BMO Capital Markets)
Good morning. In the Acetyl Chain you demonstrated the ability to flex the global network to take advantage of regional price changes. How did you do that given freight and logistics constraints? And as those constraints alleviate, does that give you even more opportunities?
Lori Ryerkerk, Chairman & Chief Executive Officer
Fourth quarter really demonstrated the strength of our business model in acetyls. The breadth of our manufacturing footprint across three geographies and the agility of our supply chain made us better at adapting to and capitalizing on disruptions. The acetyl team performed impressively this year, taking advantage of opportunities to create value. We focused on China earlier in the year when prices were high, but at year-end the team shifted sales more to the Western Hemisphere where prices held up longer. In Q4 we saw the highest percent of our volume going into the Western Hemisphere this year, roughly a 10% swing from China to the West. We also shifted from acetic acid into VAM, emulsions, and RDP where appropriate. Despite supply chain and freight issues, our team secured what was needed to move products and maximize value. We took a little longer in some cases to fill out value chains, but we’re through that and have lead times in place to continue to take advantage.
John McNulty, Analyst (BMO Capital Markets)
Got it. And a question for Scott on M&A: Given the strong cash flows, how much can you stress the balance sheet and still keep an investment-grade rating? Could you go north of 4x leverage? How should we think about that?
Scott Richardson, Chief Financial Officer
Every deal is unique. It depends on how much EBITDA we’re buying and the makeup of assets. We’re focused on generating cash and on synergies, which are critical. Levels of synergies will dictate what we could do from a balance sheet perspective. We feel really good about 2022 at $1.4 billion of free cash flow. That cash generation together with projected earnings growth in the coming years gives us robust capacity.
John McNulty, Analyst (BMO Capital Markets)
Fair enough. Thanks for the color.
Operator, Operator
Our next question is from the line of Matthew Blair with Tudor Pickering Holt. Please proceed with your questions.
Matthew Blair, Analyst (Tudor Pickering Holt)
Good morning. Sticking on M&A, Lori, you said you’re looking at M&A in the Acetyl Chain. Given your large market position, would that be more downstream like emulsions, or could you consolidate acetic acid and VAM capacity in other parts of the world?
Lori Ryerkerk, Chairman & Chief Executive Officer
We already have a large position in the Acetyl Chain. So as we look at M&A for the Acetyl Chain, it’s more likely to be further downstream in the value chain, similar to Elotex, rather than big transactions around acetic acid where we already have a significant presence.
Matthew Blair, Analyst (Tudor Pickering Holt)
Got it. In the prepared comments you noted you’re immediately sold out of the Bishop GUR plant that just started up. Are there low-cost expansion opportunities there or is it pretty much set at current capacity?
Lori Ryerkerk, Chairman & Chief Executive Officer
We’ve been pursuing low-cost expansions where possible and our engineers are working on that. GUR markets have grown much faster than anticipated — about 40% last year. The expansion in Bishop was expected to last 12 to 18 months of growth but is already sold out. The next large expansion we’ve announced will be in Europe in 2024. We’ll continue to look for more opportunities, but we’re constrained by the ability to get metal in the ground right now.
Matthew Blair, Analyst (Tudor Pickering Holt)
Great. Thank you very much.
Operator, Operator
Our next question is from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
Arun Viswanathan, Analyst (RBC Capital Markets)
Thanks for taking my question. Congratulations on another strong year. First, could you update us on any parts of your portfolio that are still lagging, especially elective procedures in EM? When do you expect that to get back to normal levels?
Lori Ryerkerk, Chairman & Chief Executive Officer
We saw good growth in implants this year, about a 20% improvement over 2020, but it’s still lagging roughly 15% to 20% below 2019 levels. Based on what implant makers are saying, we don’t expect full recovery of implant volumes until 2023.
Arun Viswanathan, Analyst (RBC Capital Markets)
Okay. Second question on deployment of cash: given the robust free cash flow trajectory and high valuation multiples, does it make sense to potentially accelerate capital return? Or will you continue to pursue inorganic growth?
Scott Richardson, Chief Financial Officer
Our focus is organic growth first since historically that’s our highest-return use of capital. We have $600 million earmarked for capital investment this year. Historically we take free cash flow — this year $1.4 billion — and deploy it to service the dividend, repurchases, and M&A. That’s likely to be more than $1 billion available for M&A and repurchases. That focus hasn’t changed and our cash generation presents more opportunity.
Arun Viswanathan, Analyst (RBC Capital Markets)
Okay. Thanks.
Operator, Operator
Our next question is from the line of Aleksey Yefremov with KeyBanc. Please proceed with your questions.
Aleksey Yefremov, Analyst (KeyBanc)
Thanks. You have a sizable nylon compounding business. With the transition to EVs, do you think nylon faces risks of content loss due to different heat applications, or will nylon maintain or grow content because of new applications?
Lori Ryerkerk, Chairman & Chief Executive Officer
We do not expect a decline in nylon with the move to EVs. There are many applications for nylon in EVs — high-speed connectors, the powertrain, interiors — nylon is good for lightweighting while maintaining strength and dimensional stability. We’ve had new applications using nylon in EVs, for example a cell structural application going into a tailgate on electric vehicles. It’s lightweight, has good appearance and high strength, and can save cost by combining parts into one. We see at least equal, if not more, opportunities for nylon in EVs than in conventional vehicles.
Scott Richardson, Chief Financial Officer
Also don’t underestimate recycled nylon. We’ve gained capabilities through acquisition and have been growing the recycled nylon part of our portfolio. As customers ask for more recycled content, nylon is a great material to recycle, and that has been an area of acceleration.
Aleksey Yefremov, Analyst (KeyBanc)
Thanks. On excess inventories of EM products at tier suppliers, do you have a sense of how many months of excess inventory they have, if any? Do you yourself have any excess auto product inventory?
Lori Ryerkerk, Chairman & Chief Executive Officer
We do not have excess inventory; inventory levels are low. This year we could pretty much sell anything we made. We believe tiers aren’t sitting with a lot of inventory; again, it appears to have been a year-end phenomenon. We don’t expect that to continue into 2022.
Aleksey Yefremov, Analyst (KeyBanc)
Thank you.
Operator, Operator
Our next question is from the line of Steve Richardson with Evercore ISI. Please proceed with your question.
Unidentified Analyst (Keyshawn, on behalf of Steve Richardson), Analyst (Evercore ISI)
Hello, this is Keyshawn calling on behalf of Steve. Regarding commodity volatility with natural gas prices still being high domestically and abroad, how quickly are costs flowing through? In particular, you mentioned a lag on the OEM side to pass on higher costs. Any color on timing would be helpful.
Lori Ryerkerk, Chairman & Chief Executive Officer
We started doing energy surcharges at the end of Q3. Those surcharges allowed us to recover about $20 million of energy costs in Q4. Energy costs in Q4 rose beyond what we expected, leaving about $15 million uncovered in Q4. We expect with those surcharges now flowing through that we will recover that amount sometime in Q1 and by that point we should be fully recovering the additional energy costs. We expect energy prices to be fairly flat for us through Q1.
Unidentified Analyst (Keyshawn, on behalf of Steve Richardson), Analyst (Evercore ISI)
Thank you. A follow-up: you mentioned autos and chip shortages as a swing factor for the $15 guidance. Can you give more color on what OEMs are saying about the shortage? It feels like the chip shortage could last longer than expected.
Lori Ryerkerk, Chairman & Chief Executive Officer
OEMs are predicting a faster recovery and some are having more success securing chips than others. We tend to look at IHS, which predicts mid to high single-digit growth globally next year versus this year, which still leaves builds behind pre-COVID levels. Our outlook is more conservative based on chip shortages, but if chips come back faster as IHS expects, that will be upside for our auto volumes.
Brandon Ayache, Vice President, Investor Relations
Rob, let’s make the next question, please.
Operator, Operator
That question will be coming from the line of Sanjeev Panda with On Field Investments.
Unidentified Analyst (Sanjeev Panda), Analyst (On Field Investments)
Thank you. First question is around your GUR expansion. Is this mainly going into the separator market? If so, is it more for dry versus wet separators? There’s huge growth in PVDF ahead of us, so I wanted to understand your potential further expansions in GUR for battery separators. Second question: regarding your comment about M&A and the strength of the acetyl platform and sustainability, do you think Celanese as structured with EM and Acetyls is the best way forward for transformational deals, or could separation also be on the table?
Lori Ryerkerk, Chairman & Chief Executive Officer
Let me take the first. The Bishop GUR plant started up at the end of 2021; that volume is essentially going to support lithium-ion battery separator film growth and it is a wet process for those asking. We are looking to expand as quickly as we can. The next major GUR expansion is announced for Europe in 2024. On M&A, we continue to see advantages of having the businesses together; we saw that this year. The cash flow from acetyls gives us flexibility to support larger M&A and we see talent advantages from having a larger group. Many materials from the Acetyl Chain get used in Engineered Materials, so we like having the businesses together. We never say never — if we thought separating the businesses would better realize value, we would consider it. But today we see having them together as the best path forward.
Unidentified Analyst (Sanjeev Panda), Analyst (On Field Investments)
Thanks a lot, Lori.
Operator, Operator
At this time, I’ll now turn the call over to Brandon Ayache for closing remarks.
Brandon Ayache, Vice President, Investor Relations
Thanks, Rob. We’d like to thank everyone for listening in today. As always, we’re around after the call if you have any follow-up questions at all. Rob, please go ahead and close up the call.
Operator, Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.