Operator: Greetings, and welcome to the Celanese Q2 2026 Earnings Call and webcast. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to Bill Cunningham. Thank you, Bill. You may begin.
William Cunningham: Thanks, Darryl. Welcome to the Celanese Corporation Second Quarter 2026 Earnings Conference Call. My name is Bill Cunningham, Vice President of Investor Relations. With me on the call today are Scott Richardson, President and Chief Executive Officer; and Chuck Kyrish, Chief Financial Officer. Celanese distributed its second quarter earnings release via Business Wire and posted prepared comments as well as a presentation on our Investor Relations website yesterday afternoon. As a reminder, we'll discuss non-GAAP financial measures today. You can find definitions of these measures as well as reconciliations to the comparable GAAP measures on our website. Today's presentation will also include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found at the end of both the press release and the prepared comments. Form 8-K reports containing all these materials have also been submitted to the SEC. With that, Darryl, let's please go ahead and open it up for questions.
Operator: [Operator Instructions] Our first questions come from the line of Patrick Cunningham with Citi.
Patrick Cunningham: I was hoping you could talk through the normalization of some of the supply-related opportunities in the Acetyl Chain, perhaps it's a bit more pronounced than we expected. How would you characterize the operating environment, Western Hemisphere versus Eastern Hemisphere? And we've also started to see some upward movement in Asia spreads in recent weeks. So what is driving that? And is any of that contemplated in expectations for the balance of the year?
Scott Richardson: Yes. Thanks for the question, Patrick. I think our team showed a really strong resiliency and flexibility in the quarter. And I think it was evidenced by the opportunities we had that the global production and supply chain network that we have here at Celanese really in both businesses gave us some benefits in the quarter. And in Acetyl Chain specifically, the team took actions as we got the end of Q1, the early part of Q2 to ensure that we're going to be able to provide our customers with a reliability of supply. And I think we certainly did that kind of up and down the value chain, particularly in parts of the world that were more acutely impacted by the supply chain crisis like Europe. Team did a good job of that. We called out an expectation of moderation in the second half of the year, and that was contemplated in kind of our $6 guide back when we did our call in May. I think as we look at things today, I wouldn't say that moderation has been any more acute than what we expected. I think what we have seen happen is just some changes a little bit in the environment. And we ended up getting a little bit more benefit in the second quarter than we had originally guided to. Some of that was a slight amount of EM prebuying that we called out. Q3, maybe a little lower than we had originally guided to, really driven by the fact that we've been able to accelerate the plant closure in Lanaken and pull forward a little bit the EM closures as well, which is driving more of an inventory absorption hit in the second half than originally anticipated. In addition, because Ibn Sina didn't operate in the second quarter -- for much of the quarter, our equity earnings is going to be about $10 million lower than we had originally anticipated this year, which is all pretty much hitting in the third quarter. So that's really kind of that dynamic of Q2 to Q3. But from an expectation perspective, the moderation that we had anticipated is about as expected.
Patrick Cunningham: Understood. Very helpful context. And then just on the EM grow and fortify strategy, you've been calling out data centers, medical, electronics. Maybe it would be helpful to get some context on the base levels of revenue here of this potential growth platform. How do you plan to grow and protect market share in these high-value applications? And what sort of long-term growth rates do you expect there?
Scott Richardson: Yes. I think our overarching objective in the Engineered Materials business is to ensure that we're aligning what we believe is the unique capabilities and products that we have with a deep understanding of key end markets and having segment strategies that go deep. The macro end uses that we go into, when you look at them at a very high level, don't have maybe a lot of growth. But when you really dig in and get to some of the subsegment areas, there are really great pockets of opportunities there. And we've been reorienting our team in terms of a focus standpoint now for more than a year to ensure that we can really penetrate these subsegment areas. And so when you kind of look at electronics, for example, today, that's about 10% of the revenue of the Engineered Materials business, but actually makes up about 10% to 15% of the contribution margin that we make in the business. Medical is less than 10% of the revenue, but about 20% of the contribution margin that we make. So these 2 segments are not just foundational today for us, but where -- with the amount of growth that we're seeing and the work that we're doing to be aligned around the right customers and to be able to penetrate what we think is going to be kind of differentiated opportunities that we're going to be able to really have good long-term sustainable business and growth, we think that sets up really nicely for the future.
Operator: Our next questions come from the line of Ghansham Panjabi with Baird.
Ghansham Panjabi: Just as a follow-up to Patrick's question and going back to the AC segment. Obviously, it's been a very volatile year. But Scott, as you sort of zoom out, how have things changed relative to the pre-war baseline as you think about the various product lines and geographies you have exposure towards? Just trying to disaggregate some of the complexity on a day-to-day basis versus from a high-level standpoint, what's actually been happening.
Scott Richardson: Yes. Thanks, Ghansham. We've said for a long time that the majority of our profitability in the Acetyl Chain occurs in the Western Hemisphere. And that -- this is not new. When we kind of look back over the last 15 years, that kind of 80% plus profitability being generated by the West have kind of played out for, call it, 12 of the last 15 years. So this is not a new environment that we're in. We did see margins in Asia kind of move up in the 2021 through 2023 time frame. But outside of that, this has kind of been the environment we've been dealing with for a long period of time. And the team has kind of really been pivoting the operating model in a way with more and more of our tons being sold in the form of downstream derivatives because we have more differentiation there. We're able to create some more unique innovation opportunities and to be able to drive through and be able to keep the profitability where it has been even where the macro backdrop isn't strong. But we have this ability to flex up where needed. And with the capacity that we have in the Western world and be able to flex that like we did in the second quarter, this kind of goes back to that coiled spring analogy that I used last quarter. When we have the ability to flex that up, we will, and we see the benefits that come from that. The profitability increase that we saw from Asia from, call it, the end of February through to where we are today was very much short-lived. And really by the middle part of Q2, we were kind of back to pre-war margins. We are not back to those pre-war levels from a margin standpoint in the Western world, and we expect the markets to remain relatively constructive here through the balance of the year, albeit supply chains have found a way to normalize to some extent. And so while product may not be flowing out of the Middle East, it is flowing from other places. And so that does create some more compression in the margins, but they still are at higher levels in that business. And the team continues to do everything it can to contract business where we were able to get additional business because of our reliability of supply, we're really partnering with customers to be able to get business under contract for next year and beyond.
Ghansham Panjabi: Okay. And maybe a question for Chuck on free cash flow and the $700 million to $800 million guidance for 2026. How have the moving parts there, working capital, et cetera, changed relative to your view 3 months ago as it relates to that guidance?
Chuck Kyrish: Yes. Thanks, Ghansham. Not a lot has changed. We're very confident in the free cash flow range that we've put out there in the second quarter, $140 million of free cash flow is actually pretty good considering the amount of working capital we've built up in the quarter, almost $200 million use of cash in the quarter. Understandable, it's basically accounts receivable. We sit today at year-to-date, a use of cash of almost $300 million in working capital. So that will normalize over the second half, Ghansham. And we're seeing that now, right? So I think we've talked about earnings increase of this year benefiting free cash flow both in this year and next year, and that's still the right assumption. Right now, I'd probably say working capital for the year, Ghansham, is somewhere between neutral, meaning 0 to slightly positive. So not a lot changed. I feel really good about the free cash flow range. And I'd also point out, though, that as we look ahead, I would consider the $700 million to $800 million of free cash flow as our sort of baseline sustainable level. As we look into next year, we are not done on our working capital reduction efforts, particularly looking to take more structural inventory out of Engineered Materials. We do expect cash cost of restructuring activities, which is adjusted out of our EBITDA, those will continue to decline a bit next year. And again, we do expect some of the benefit of '26 to '27. So confident in the free cash range of this year, and I would really consider that sort of our baseline sustainable level over the next few years.
Operator: Our next questions come from the line of Jeff Zekauskas with JPMorgan.
Jeffrey Zekauskas: Your Acetyl Chain volumes were flat year-over-year in the quarter. Why didn't they grow in that I would expect that in the June quarter, you had capacity available, you were low cost. There are competitor outages. Why wasn't volume better?
Scott Richardson: Yes, Jeff, I think a lot of it's mix. We've continued to see some destocking in the acetate tow part of the value chain. So that volume was lower on a year-over-year basis, which was kind of offsetting the gains that we saw in the vinyls chain. So we definitely did, to your point, see higher volumes there, but you're seeing a level of offset from the acetate tow segment. Q2 last year, we did see some level of seasonal improvement from Q1 into Q2 in kind of the emulsion side of things as well. So from a comp basis, it was already a slightly higher quarter Q2 to Q2, but those are the dynamics that are playing out there.
Jeffrey Zekauskas: In Engineered Materials, exclusive of the divestiture, if you had to describe your volumes to the auto sector, and all of your volumes to the non-auto sector, what would those growth rates be in the quarter?
Scott Richardson: Yes. So auto kind of moves with builds for the most part, Jeff. And so on a year-over-year basis, we saw builds down year-over-year Q2 to Q2. And so you saw an impact there of a few percentage points, which kind of is offset by the volumes we've seen in other places and some of our penetration into some of the growth areas of automotive like we called out like electric drive units. So I think when you kind of look at the macro side, auto down year-over-year because volumes, when you exclude the divestiture were pretty much flattish year-over-year. And so those are kind of everything non-auto was up and then auto kind of moving with builds.
Operator: Our next questions come from the line of David Begleiter with Deutsche Bank.
David Begleiter: Scott, on EM, you've announced a few price increases. So where do you stand on price cost in Q2? And where do you think it will be in the back half of the year on price cost in EM?
Scott Richardson: David, I said on the last call that one of the most important things that we were going to have to get ahead of was the rising raw material costs in Engineered Materials. And the team worked tirelessly to do that through the quarter. And we exited the quarter, Q2, I think, on a really strong level from a price perspective that sets us up. And you saw kind of that margin expansion that we were able to get because of pricing that we largely got in the second half of Q2. And that positions us to be able to offset a chunk of that raw flow through that we're now seeing here in the third quarter. So I think we said this was going to be a second half impact from raw materials, and that's definitely what we're seeing. With raws, raws have been a little bit volatile here. We saw come down, some raws went back up a little bit. And so we'll kind of see how this flows through into the fourth quarter, but we're definitely going to see some of that compression relative to Q2 happen in the third quarter as expected.
David Begleiter: Great. And just on your Q3 guide, what gets you to the top of the range and what gets you to the lower end of the range?
Scott Richardson: Yes, David, we've got thousands of million dollar things that flow through our P&L every single quarter. And so there's a lot of different elements that can get you to the top or bottom end. Let me talk about kind of where our priorities are because I think that kind of answers the question. I think, one, it is this -- what I just answered. It really is kind of maintaining and being able to hold pricing to be able to offset as much of these raw material inflation that we're going to see in the Engineered Materials business, continuing to be able to provide a reliability of supply to our customers in the Western world really in both businesses as supply chains have a level of volatility still that are out there and being able to move a little bit more volume, but also kind of maintain a higher level of margins than we had when we started 2026. And then I think the third area is continuing to focus on the productivity of the business really across both of our segments here and tenaciously working the cost side of that equation. And the growth piece is really now we're on a multi-quarter trajectory of being able to drive mix improvement in the Engineered Materials business. And so we fully expect that, that will continue here. But I would kind of those first 3 priorities are certainly critical to be able to come in at the higher end of the range.
Operator: Our next questions come from the line of Kevin McCarthy with Vertical Research Partners.
Kevin McCarthy: Scott, I think you indicated there was still some destocking pressure in the second quarter in the acetate tow business. Can you discuss the outlook for the back half there in terms of sales and earnings and the impact of the upcoming closure of Lanaken?
Scott Richardson: Yes. I mean I think the tow business saw some stabilization, certainly ahead of the planned Lanaken closure. But -- and we saw what I would call kind of a moderation of that destocking in the second quarter. The order patterns certainly are beginning to normalize a bit versus where they were last year. But we do expect some level of destocking based upon conversations with customers to continue to occur here in the back half of the year. But certainly, that pace of change that we've seen in the business has slowed considerably in tow. So we feel good about kind of where that goes as we work our way into 2027 because of the cost actions that we're taking. And so we expect to have the plant closed here in the quarter and which is faster than we had originally anticipated. That is going to drive an inventory absorption hit at a higher level in the second half of the year, but we felt like that was the right answer because it's going to give us a cleaner 2027, and those costs will certainly get some cost benefit in the fourth quarter, but those costs will certainly be much better in '27 than they were in 2026.
Kevin McCarthy: Very good. And then as I look at the balance sheet, it strikes me that you've done a nice job of deleveraging pretty consistently over the last 5 quarters or so. My sense is that you're still evaluating additional opportunities for divestitures, Scott. So we would welcome any updated thoughts that you might have on that topic as well as kind of your joint ventures and how you're looking at those strategically?
Scott Richardson: We are committed to the $1 billion target of divestitures by the end of 2027, Kevin. That hasn't wavered. We are about halfway there after the Micromax transaction we announced last year and closed earlier this year. We're working a portfolio of items of various sizes, to be honest with you, some smaller, some a little bit larger, and we believe a combination of those will get us that additional $500 million, and we're still very confident about announcing at least one deal by the end of this year. So that's been very consistent for us, and we feel good about how those projects are proceeding.
Operator: Our next questions come from the line of Frank Mitsch with Fermium Research.
Frank Mitsch: I want to come back to the third quarter guidance, $1.35 to $1.75. We're roughly 40% through the quarter. How much visibility do you have on your order books for the balance of this quarter?
Scott Richardson: Yes. I think each business is different, Frank. I mean acetyls continues to be a couple of weeks of where you can build that confidence on where the order book is. That hasn't changed. It's been pretty consistent for the last several years. In the Engineered Materials business, we have pretty good visibility 3, 4 weeks out, but that can also change a bit. So I think that's pretty consistent. So we have a pretty decent idea of how things will finish out through August. But September is really important for us. In September, the last month of every quarter tends to be the strongest quarter, particularly in the Engineered Materials business. And so the team is certainly prepared coming out of what is typically a slower part of the year in August with vacations in Europe as well as in Asia and then is ramping up for a really strong September. So that's -- we'll have a lot better idea here in the next 2, 3 weeks, but that's kind of where things stand right now.
Frank Mitsch: All right. Understood. And can you speak to the total company turnaround expenses that you faced in the second quarter and your expectations for the third quarter and fourth quarter for that matter?
Chuck Kyrish: Yes. Yes, Frank, really, the biggest turnaround expense in the quarter was Engineered Materials, right? We talked about $15 million. That obviously will not reoccur. We do have some other smaller turnarounds, but that's the biggest one to sort of highlight. And if you think about that as part of that was some pretty big moves in inventory absorption quarter-to-quarter. I mean, EM, if you think about Q1 to Q2, they had to offset about $65 million of total absorption plus turnaround and still more than offset that, obviously, by driving margin expansion. So I would focus on that POM turnaround, $15 million or so plus some other smaller ones.
Frank Mitsch: All right. And so the balance of the year looks relatively clean in terms of turnaround expenses.
Chuck Kyrish: Yes, that's right.
Operator: Our next questions come from the line of Vincent Andrews with Morgan Stanley.
Vincent Andrews: I'm wondering if you could just give us an update on Frankfurt and what your plans are for the asset. It sounds like it will probably run for the rest of the year, at least just given the ongoing dislocations. But is it part of your broader strategy to sort of maintain some of the share that you've gained this year from a reliability perspective? Or what's your overall thought process with that, and I suppose the rest of the footprint?
Scott Richardson: Yes. I think the agility that the team showed in Q2 was really strong. The response on Frankfurt, that plant had been down for more than 6 months. We had to go through and put equipment back into service there. The team was able to get it back up and operating in about 5 weeks from the time at which we said go. So the agility and speed at which they were able to -- once we made that decision, get the plant back up and operating and then move the supply chain around to make sure we had raw materials was a pretty herculean effort. And I'm certainly proud of the group of how they responded. And now as we look forward, Frankfurt will operate depending on where demand is at. And we will match kind of our supply needs and where the demand is on whether or not Frankfurt operates for the balance of the year or not. And we haven't made that decision because I think a lot depends upon kind of where demand is at and where industry supply ends up landing here in the third and the fourth quarter. So that's kind of what we're weighing right now, Vincent. That's no different than past decisions. Frankfurt as well as the Singapore unit are assets that we have been block operating now for several years based upon where our needs are.
Vincent Andrews: Okay. And as a follow-up, you outlined all these sort of I think it was 20 subsegments within EM that you think you can push further into and that are attractive for a variety of different reasons. Are there any in particular that you feel like you're undershared in where you feel like now that you maybe take a more aggressive tack, you'll see sort of a quicker success in? Or is it all about the same?
Scott Richardson: I mean, Vincent, you've known us for a long time. And one of the mantras we talk a lot here at Celanese is we can always do more. And I think technology and innovation is happening and is moving so rapidly right now that I think it's really irrelevant what our current share and penetration is because that opportunity set as we go forward is changing so fast. And I'll use kind of data centers and servers and data centers as an example here. We've been supplying connectors and other materials into servers for a long period of time. But when you kind of break down an AI data center server, it's very different. The chip that's used in each of these servers is extremely expensive. And as you kind of -- as they build these things, protecting that chip to ensure that you have protection from signal loss that you maintain the speed that's required, that you can maintain thermal management through that system. It creates 3x the amount of opportunity for our materials in terms of connectors. It creates opportunities around the thermal management system, wire and cable applications. And so it's the multiplying effect of being able to leverage kind of where -- with some of our key customers where we've historically gone and as they're innovating, it just presents kind of new ground for us to be able to penetrate with our materials. And so that's kind of the mindset that we're having to -- that we're really driving now with our commercial teams. And I -- we had our commercial team leaders in Dallas last month and I got an opportunity to spend with them and the energy that was there and the accountability that they're driving with their teams around the commitments they're making to really penetrate and drive growth for us is really exciting. And it's -- it really is a value play. And you've seen that come through in terms of the mix enrichment that has been happening now for about a year in the business, and we think we can multiply this as we go forward.
Operator: Our next questions come from the line of Hassan Ahmed with Alembic Global.
Hassan Ahmed: Scott, you guys mentioned, obviously, the lag effect of raw material costs impacting H2. Just could you sort of expand on the lag effect of pricing benefits as well? I guess, asked a different way. Obviously, you guys were pretty aggressive with price hikes through the course of Q2. And I would imagine some contracts are a little longer duration. So as those contracts reset, I would expect some benefit coming from there. So maybe what percentage of your EM contracts are longer duration? What percentage of your AC contracts are longer duration? Any sense around that would be great.
Scott Richardson: Yes. I mean the acetyl business is a business that moves in real time, Hassan, for the most part. And you don't have significant lag effects. And we saw kind of the peak of raw materials flowing through the acetyl business really in the first half of Q2. So a lot of kind of that lag effect is, I would say, kind of already occurred in the acetyl business. EM, because the raws tend to sit in inventory longer, we didn't really see much of that flow through in Q2, and it's really kind of coming through now in the third quarter. And so I would say the majority of that price, I talked about last quarter the importance of exiting Q2 at kind of that peak price level, and I feel like we did that. And that's not to say we won't have some lingering effect of positive price here in the quarter. But I would say the majority of it, I think we've achieved. But we'll continue to push there. And a lot of it depends upon where scarcity occurs and where we can -- where we see opportunities and where we're really well positioned. We talk a lot about our global footprint in acetyls, but our Engineered Materials footprint is extremely geographically diverse as well. And because of our strategy of kind of moving to where compounding is such a critical part of that business and buying more of our polymers versus making with some of the changes we've made in our footprint actions over the last couple of years, that just creates more flexibility and nimbleness for us to be able to be a reliable supplier to our customers in the EM business as well. So we'll continue to look for opportunities on price, but I would say a lot of that, I think we achieved coming out of Q2.
Hassan Ahmed: Very helpful. And as a follow-up, I mean, you guys talked about the sort of restructuring and nylon optimization being around a $50 million annualized benefit and then the Lanaken side of things, another $20 million to $25 million. So from a P&L impact perspective, when should we start seeing that benefit? I mean, will we see an element of that benefit in the back half of this year? And how does 2027 look with regards to capturing that?
Chuck Kyrish: Yes. Thanks, Hassan. Look, I think the EM footprint actions, think about $30 million, $35 million and then Lanaken $20 million to $25 million. We'll probably get 1/3 or so of the Lanaken cost savings this year and roughly half of the nylon restructuring this year. And so we'll get the rest of that next year, but it really sets us up for lower cost structure in the future and certainly great for our cash flow.
Operator: Our next questions come from the line of Matthew DeYoe with Bank of America.
Matthew DeYoe: On EM growth rates, clearly, a fair amount of the discussion, at least on some of the GLP-1 pens. You put out a $500 million TAM, and I appreciate some of this TAM commentary. How do we think about the ebb and flow there with the pill, the GLP-1 pill kind of coming in? Is that kind of expected in this $500 million range? And then in autos, Scott, like you used to outgrow auto builds pretty consistently. And I know things have changed a bit with the mix and where the volumes are coming from. But can you take a step back and give us an idea of why the decel in autos is now more transferable or why you're not outgrowing as much as you used to? And if there's a path to getting back to IHS plus growth rates, what is it?
Scott Richardson: Yes. Thanks for the question, Matt. We've talked now for a while about our focus in Engineered Materials really being about value over volume. And I think with more polymer capacity coming on in China, our ability to be able to keep up with the pace of growth of standard grade materials particularly in China, is going to be challenged. And so we're less focused on the volumetric piece, particularly into automotive. We're more focused on share gains, penetration and really getting the volume and value in some of the non-auto spaces. So I think when we look at the value that we're getting in the mix enrichment, even specifically in the automotive segment, we feel really good about the penetration and the wins that we're seeing there. And that, we think, is much more important. And then we have now for the last 1.5 years, been taking very corresponding actions around our plant footprint to ensure that we've got the right matchup of the capacity needs with where we think the business is going, going forward. So I'm less worried about kind of are we outgrowing auto or not. The key is, is our revenue really outpacing and so far, it certainly is. And then when you look at drug delivery, we're really excited about the trends that we're seeing in drug delivery, and it's bigger than just GLP-1. When you think about patient monitoring and at-home health, self-administering that we're starting to see, there is a real growing trend around injectables, but also continuous glucose monitoring, continuing to be an important area of growth. And so I think this is -- you're going to continue to see changes. And the growth rates that we called out and the size of markets does contemplate based upon discussions with our customers, kind of GLP-1 pills and what that means going forward. So I think we've got a pretty conservative view there, to be very honest, Matt, and we're going to continue to work. And there will be other therapies and treatments that are going to be rolling out here over the next several several years that will be administered at home through injectables beyond GLP-1, and we're excited about the opportunities there also.
Operator: Our next questions come from the line of Abigail Eberts with Wells Fargo.
Abigail Eberts: Looking at your closure in South Korea for EM and then Lanaken in AC, are there other potential candidates for rationalization on your horizon?
Scott Richardson: Abigail, I'd repeat what I said earlier. There's always more that can be done. We've talked about 3 priority actions for us as a company, increasing the free cash flow of the corporation and aggressively deleveraging the balance sheet, intensifying our cost improvements and driving productivity every day and then driving top line growth in these subsegment and pockets of our end markets that are growing and have uniquely higher growth rates and matching that with our own capabilities. That second bucket doesn't ever go away. And we've done a lot of the bigger footprint actions. And so but there's still more that we'll look at. And a lot of it depends upon kind of where -- how markets develop, how our position changes and where we can be successful with our kind of our whole value chain and continuing to strengthen our specialty compounding leadership that we have on a global basis is really the key priority. And where we get our polymers is going to tweak and change and making sure we're as efficient with that compounding network as possible. So there are additional opportunities. I would say they're probably smaller in nature as we go forward. They're probably more in the $5 million to $10 million per site range. But as we work those, we'll certainly talk more and more about it. But there are a lot more additional cost improvement things that we're working. We're finding ways at which to be more efficient right now with our supply chain, for example. Now that we've kind of made the footprint actions, we're positioning for growth in a different way. You have to then reset your supply chain. And we think we can pull costs out over the next several years, not just from an inventory reduction standpoint that Chuck talked about, but also kind of hard costs from our cost to serve and still provide the reliability of supply to our customers that they expect. So I think it may morph away from plant footprint changes to other kind of efficiency improvements that we have across the network going forward.
Operator: Our next questions come from the line of Laurence Alexander with Jefferies.
Laurence Alexander: When you look at your full year kind of estimate, what do you think is kind of the embedded net impact of all of the costs around the divestitures, the inventory adjustments, kind of the net working capital swings and absorption that you've had to go through the downtime. Just when we're thinking about what the actual comparable basis for 2027, is it really [ $6 ]? Or is it a significant difference from that in one direction or the other?
Chuck Kyrish: Laurence, let me hit some of the -- by business, some of the things that we're going to see this year. If you recall, so EM entered this year with a need to offset a variety of headwinds. $45 million of absorption hit from reducing inventory as part of our nylon optimization, $35 million of adjusted EBIT loss from the Micromax divestiture, which was very good for our deleveraging and about $10 million of equity earnings decline really related to the temporary disruptions at Ibn Sina. Despite that, we do expect EM to grow adjusted EBIT at double-digit rates, I think closer to 15% than 10%. So really nice job for them offsetting that. And AC, obviously, we've talked about the team pivoting and capturing value from the supply disruptions as the most reliable supplier to drive our Western Hemisphere profitability. They did also have an incremental $20 million of absorption that will hit them in the second half. So really great work from the team to drive significant earnings growth on top of that. As I mentioned, I think the working capital, we entered the year with $100 million target of inventory reduction in Engineered Materials. That's underway. It's being kind of masked right now by some of the increase in raw material prices that you see flowing through inventory. But we think that we'll have a strong year of free cash flow. We'll capture most -- some of that benefit this year and some next year. So we enter next year also with -- we've laid out the cost reductions on a slide in our presentation of $80 million to $100 million of cost reductions as we go into next year, which will kind of help us offset any change in the business conditions. So I hope that helps with some of the big pieces of how we think about 2026 and going forward.
Operator: Our next questions come from the line of John Roberts with Mizuho.
Unknown Analyst: This is Saurabh on behalf of John Roberts. The first question I have is, do you see the Ibn Sina joint venture gradually ramping as the Strait closure continues? Or is it most flatlined until there is significant reopening?
Scott Richardson: Yes. So the plant is running again. And so there are sales now happening in the third quarter. So that will yield a higher level of dividend expected into Q4. So that -- we definitely see a ramping up happening already. Now obviously, there is a lot of volatility still in that part of the world. And so we'll have to continue to monitor it. But we do expect to see kind of a lift back up in Q4 versus what we have rolling through in the third quarter.
Unknown Analyst: Got it. And I think the second question I have is just the technology road map on data center is continuously evolving. So in terms of your content, how are you in conversations with your customers in the journey?
Scott Richardson: I mean we have sales that are happening. So it's not just conversations with customers. It's real hardcore intimate development work that's happening because our customers are trying to innovate. The speed at which the changes are happening and the speed at which the chips are changing is pretty dynamic. And so it requires us to stay ahead. We're doing new product development and some of our key polymers as well to stay ahead of that so that we can meet the needs of our customers and what the requirements are. The technical requirements here are hard. They're tough. And so that is giving us opportunities to be able to bring a much wider solution set to kind of these servers that are supplying into these data centers and then thinking broader about data centers in general and thinking about the cooling systems that are going into them. And then I think it's just creating a very different discussion with our heritage customers in the electronics end use spaces, but then also with some new customers that we haven't historically called on. So I think we've got, as we said, 30 different subsegments. There's a number of them that are really specifically focused on kind of this data center build-out because it is really driving strong returns from our customers, and we're able to be able to leverage that into wins that are already happening.
Operator: Our next questions come from the line of Josh Spector with UBS.
Joshua Spector: I wanted to ask about some of the corporate cost lines. And I guess I'll apologize in advance since I think these questions have rubbed the wrong way in the past when I've asked about them. But when I look at SG&A and I look at the other activities line, both of them are up about $30 million in the first half year-over-year. I'm sure some of that's timing and some other moving factors, but I'm curious how you'd expect that to trend into second half? Is there any giveback? Does that come down? And I guess, I mean, how does this square with some of the functional cost savings you guys are laying out in your slides?
Chuck Kyrish: Yes, Josh, let me talk about other activities because that is definitely running higher in 2026 than it has recently. The primary reason for that is an adjustment that we made to our compensation expense accruals, which was really due to the timing of the change in business conditions and the timing of the increased earnings forecast during the year. I would say compensation expense is higher than average this year. It was lower than average last year, which also helps explain the year-over-year change. So going forward in other activities, I would think about that as roughly $75 million a quarter after '26, recognizing there's a number of things in there that can cause some variability, but I think the $75 million a quarter after 2026 is a good place to start.
Joshua Spector: So maybe that's unrelated. So is that the same thing that's impacting SG&A then, so then we'd expect that to go up and then that's the right base into next year?
Chuck Kyrish: Yes. Yes, that's a lot of it.
William Cunningham: Darryl, we'll make the next question our last one, please.
Operator: Our final questions will come from the line of Arun Viswanathan with RBC Capital Markets.
Arun Viswanathan: Maybe I can ask the medium-term earnings question slightly differently. So I think when you went into Q2, you're thinking about $3 for the back half of '26. It seems like maybe there was a slight outperformance in Q2 at that $2.45, but you're still kind of targeting $6 for the year. So Chuck, you ran through some of the puts and takes on a onetime front. But also, as you look into Q2, obviously, there's normalization on methanol and some other drivers. So when you put all that together, it seems like '27 could maybe be in a similar range of $6? Or do you see the onetime add-backs and maybe some of the other cost reductions more than offsetting the methanol and other kind of price upside that you saw this year?
Chuck Kyrish: Yes. Arun, I think that the objective is we've taken action for $80 million to $100 million of cost reductions for next year, right? The objective is to offset any changes and further moderation in business conditions for next year. We've got a lot to do. We'll know a little bit more later in the year. But with these actions we've taken, the $80 million to $100 million, we'll continue to look for more and continue also to drive growth in Engineered Materials, right? So we haven't talked about 2027 yet, but certainly we are taking actions to drive that as high as we can going forward.
Arun Viswanathan: And just on that note, as a follow-up, would you be aggressively taking -- or would you be taking actions to accomplish even more aggressive deleveraging if business conditions continue to moderate? And would you like -- would you -- is the objective to be below 3x eventually? Or maybe how does that kind of relate to the deleveraging plan?
Scott Richardson: Yes. Arun, let me start, and I'll turn it over to Chuck to talk about long-term deleveraging. The 3 priorities I talked about earlier are going to continue to be our focus areas, increase cash flow, drive as much cash flow as we possibly can. I think what we've proven out over the last year as well as so far this year and what Chuck talked about on kind of a baseline that we're going to build off of $700 million to $800 million of cash flow going forward, we feel like our ability to generate cash here at Celanese is strong, and we can build on that and grow it. And that's going to come from continuing to drive aggressive cost reduction activities, productivity every single day. And then the last is really kind of adding this top line growth piece and the focus really around the value opportunities in Engineered Materials. We haven't talked on the call really about the opportunities in acetyls. But in our emulsions and redispersible powders business, there are some applications, albeit small, but they're starting to really grow where we have unique chemistry advantages in areas like tile adhesive, insulation systems, some of the evolving waterproofing technologies that we're seeing, the chemistries that we have are providing unique solutions to our customers there, and we're spending a lot of time and effort on really trying to expand these and make sure that we're well positioned to really help kind of drive some of that growth going forward that's going to be unique to Celanese. So I think that -- what that does is it yields more and more cash every single year to deleverage the balance sheet and give us more flexibility going forward.
Chuck Kyrish: Yes. That's right. I mean the aggressive actions of what Scott's talked about, driving free cash flow executing smart divestitures. I would point you to what we've laid out in terms of our net debt. We're going to finish this year around $10 billion. Next year, we feel really good about finishing at $9 billion, right? So making very good progress. And then the other side of the equation is EBITDA. If we can drive EBITDA growth, that will even speed that further. We still think about the long-term leverage for this balance sheet around 3x net debt to EBITDA. We're going to cross 5 this year. And the next threshold is we're shooting for is to get to 4, right? So as we drive to that long-term leverage target, that's our focus area and driving our own free cash flow and executing these smart divestitures.
William Cunningham: Well, thank you, and we'd like to thank everyone for listening in today. As always, we're available after the call for any follow-up questions. Darryl, please go ahead and close out the call.
Operator: Ladies and gentlemen, thank you so much. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
