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Edited Transcript of CE earnings conference call or presentation 28-Apr-20 2:00pm GMT

Q1 2020 Celanese Corp Earnings Call

DALLAS May 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Celanese Corp earnings conference call or presentation Tuesday, April 28, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Abraham Paul

Celanese Corporation - VP of IR

* Lori J. Ryerkerk

Celanese Corporation - Chairman, President & CEO

* Scott A. Richardson

Celanese Corporation - Senior VP & CFO

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Conference Call Participants

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* Aleksey V. Yefremov

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* Frank Joseph Mitsch

Fermium Research, LLC - Senior MD

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* James Michael Sheehan

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* John Patrick McNulty

BMO Capital Markets Equity Research - Analyst

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Matthew Porter DeYoe

BofA Merrill Lynch, Research Division - VP

* Matthew Robert Lovseth Blair

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research

* Michael Joseph Sison

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Patrick Duffy Fischer

Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst

* Prashant N. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals & Agriculture Research and MD

* Robert Andrew Koort

Goldman Sachs Group Inc., Research Division - MD

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Greetings, and welcome to the Celanese Corporation's First Quarter 2020 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Abe Paul, Vice President of Investor Relations. Please go ahead.

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Abraham Paul, Celanese Corporation - VP of IR [2]

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Thank you, Brock. Welcome to the Celanese Corporation First Quarter 2020 Earnings Conference Call. My name is Abe Paul, Vice President, Investor Relations. With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer; Scott Richardson, our Chief Financial Officer.

Celanese Corporation distributed its first quarter earnings release via Business Wire and posted prepared remarks about the quarter on our Investor Relations website yesterday after market close. As a reminder, we will discuss non-GAAP financial measures today. You will find the 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 the prepared comments document. Form 8-K reports containing all of these materials have also been submitted to the SEC.

I will turn the call to Lori for opening remarks before we open the line directly for your questions. Lori?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [3]

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Thank you, Abe. Thank you, Abe. Before we turn it over for questions, I would like to take a moment or two to make just a few comments. We all recognize the unprecedented challenges the world is facing right now. On behalf of Celanese, I want to extend our sympathy to all of those affected by the coronavirus pandemic and express our gratitude to those who are working tirelessly on the front line to keep us all safe. I want to acknowledge and thank our employees across the world. Each one has been impacted in some way and amid their very individual circumstances, they have collectively performed exceptionally well. I particularly want to thank our manufacturing employees around the globe who have kept our plants running to make and ship products to our customers. I also want to acknowledge our employees working from home, who are still supporting customers, closing deals, signing contracts and closing our books.

Our first quarter earnings per share of $2.29 reflects their efforts and was not far off from our original expectations before all this happened. The first quarter was tough, and the reality is the second quarter is shaping up to be far more challenging. Simply put, we do not yet know how far demand will ultimately drop or how long this will last. We have tried to be transparent in sharing where we have visibility. Fortunately, one of our great strengths at Celanese is a culture of resiliency and a can-do attitude. I would like to thank Mark, who recently announced his retirement as our Executive Chairman, for his support of me throughout the CEO transition but also for fostering over many years the development of this remarkable Celanese culture. Our culture is one of action. We have a lot we are working on to counter these challenges. I outlined much of that work yesterday in the script and we are looking forward to doing much more.

In this environment, we are focused on 3 imperatives: first, keeping our employees safe and healthy; two, driving resilient cash flow in 2020; and three, positioning us for growth as we move into recovery. As a result of our work over many years, we are exceptionally well positioned today to weather this environment. Celanese is leaner, more nimble and a more diversified company today than it has been at any other time in its history. Above all, in my almost 1 year at Celanese, I have gained trust in our people and their ability to rise together to meet challenges. They have done it many times in our past and I am confident they will do it again. We are collectively focused on driving long-term shareholder value and positioning ourselves for robust growth when these challenges passed.

On a lighter note, like many of you, we are all doing this from our homes today. So please be a bit patient if we have lags or speak over each other or if you hear any strange noises in the background. With that, Abe, I'll turn it back over to you.

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Abraham Paul, Celanese Corporation - VP of IR [4]

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Thank you, Lori. Brock, you may now open the line directly for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from PJ Juvekar of Citigroup.

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Prashant N. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals & Agriculture Research and MD [2]

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Hope everybody is well. I have a question for you. You guys were making a long-term move to add downstream capacity VAM emulsions in the U.S. With oil prices falling and natural gas prices kind of hanging in there, what's your take on the U.S. advantage? And how is -- how do you think the future regional capacity for Celanese breaks down?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [3]

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Thanks, PJ. Yes, it's a question we've been looking at ourselves, but let me try to put it a bit in perspective. We think the U.S. gas, even at these low oil prices, will continue to be well advantaged. So just to put that in perspective, if we look at the difference between, let's say, acid production, between Clear Lake and Nanjing, our cost of production at Clear Lake is half of Nanjing even at low oil prices. And Singapore, which is affected by low oil prices, but it just comes down slightly below the cost at Nanjing. So you still have a 2:1 advantage at Clear Lake. And that advantage rolls through VAM and VAE and everything else. So while we don't have as much advantage now in the U.S. Gulf Coast versus other producers, it is still a big advantage versus producing out of coal or producing out of a low oil environment.

So our plans have not changed. We will continue on pace with our VAE and our VAM expansions. We are taking -- we are slowing the acetic acid reconfiguration project, as we noted in the script. Those productivity gains and the reason for doing that project are still intact, but we will pause it for a period of time to allow us to take advantage of these low oil cost environment and what that means for our Singapore operation.

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Prashant N. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals & Agriculture Research and MD [4]

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Great. And a quick question for either you or Scott, Mark Rohr talked about for some time, a potential RMT transaction. Given the pandemic and Mark's upcoming retirement, would you think a probability of a large transaction is lower now?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [5]

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Yes, PJ, let me take that. Look, our first priority has been and will always remain generating the most possible value for the shareholders, and we constantly look at options to do so. I think in the current environment that we're seeing demand environment, this is difficult to do. Clearly, if you're looking at cash still, that's very difficult in this environment as everyone's valuations are down. We do, though, think there continues to be room for mergers of equals or RMTs, and we think there'll be even more opportunities for these things as we move towards full recovery.

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Operator [6]

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The next question is from Duffy Fischer of Barclays.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [7]

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I was wondering if you could just give us some help around the decremental margins. You gave some helpful quantitative numbers around what you think demand's going to do, acetyl is down 15% to 25%. But say, at the 15% level versus a 25% level, is there going to be a difference in the decrementals and kind of same thing for EM, if you would? Just walk through how should we think about the profitability relative to the sales fall.

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [8]

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Yes. So let me talk a little bit about the guidance we gave for Q2. So what we indicated in the script is we do expect to see in Q2, Engineered Material volumes down 25% to 35% versus Q1. Now with that, about 2/3 of that volume is still relatively sticky in terms of pricing. So we would expect those margins to maintain, possibly even get a little better as raws continue to go down. At the same time, about 1/3 of it is tied to raws. So we'll see those prices go down but margins generally stick around the same.

For acetyls, we project a volume decline of 15% to 25% in Q2 from Q1. A couple of things around that. India lockdown, Southeast Asia lockdown, we're just not seeing the volume demand there. And margins there tend to follow methanol and other things a bit. So probably expect to see our margins going down somewhat, but we would still expect acetyl margins in the mid-teens or so. So we do expect some margin compression in AC, expect margins to be similar in EM but down with the volume. And if you look at what that -- just to maybe put some numbers around it, we saw a $25 million to $30 million hit in Q1 just from Asia. And Asia represents 20% of our overall business. And that was really in February and March. So consider that, we've lost $10 million to $15 million per month on 20% of our business.

It's not unreasonable to expect we would see a similar impact in Q2 on the other 80% of our business in the Western Hemisphere. So if you do the math on that, we do expect somewhere between $150 million to $250 million impact on Q2 EBIT on the combination of volume and margin degradation. And how that -- as we go forward into Q3, Q4, we've done a lot of scenario planning, as I'm sure every company has. We think it's unlikely we're going to see a V-shape recovery. So coming back in Q3. But we do -- we have done scenario planning around it, U-shape or an L-shape. And broadly, expect Q3 to also be down, but some recovery in Q4. But again, we don't really know how broad this is going to be. We don't know the degree of the downturn, nor do we know the duration and of course, Asia recovery, how fast that actually happens is a big factor.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [9]

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Okay. And then could you speak to how your JVs have performed vis-à-vis how you performed, particularly in EM? I know at times over the last several years, Celanese has made the comment they felt some of those JVs were a little bit undermanaged on the cost side. So maybe just kind of walk through how you think they're doing versus the markets?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [10]

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Yes. Let me start and then Scott may have some comments as well. I mean so in general, I mean in first quarter, our JVs look good, but generally, our JVs report on a quarter lag. So we would expect some downturn in the second quarter for our JVs that may not show up so much until third quarter. Ibn Sina may be slightly down more because it has a closer tie to crude. But that number and those JV numbers are baked into that $150 million to $250 million impact that we expect in Q2. Scott, do you want to add something?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [11]

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Yes. And I think -- yes. I think, Duffy, as we look at what our JVs are doing, they're very focused on cost right now as well. I mean they're not immune to this environment. Particularly our 2 JVs that are focused in Asia, we're hit with some of the softness in demand that we saw in Q1 as well and that will flow through a little bit into the second quarter, but hopefully, we'll start to see continued demand improvement, which will help them there. But that doesn't mean that they take their foot off the gas on working the cost side of the equation as well.

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Operator [12]

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Our next question is from Bob Koort of Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [13]

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Lori, you surprised me a little bit with your commentary about how much better your cost position is in Clear Lake than in Nanjing. Can you talk about how much it's compressed, though? Or maybe what the broader industry cost curve has done over the last 2 or 3 months? Is it substantially flattened? Or maybe characterize some of that for us?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [14]

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I would say we haven't seen a big shift in coal pricing so that's really what drives Nanjing. So we wouldn't -- we haven't really seen compression between Clear Lake and Nanjing, the real compression is versus oil base. So like Singapore, where everything is really priced out of bunker fuel. So that's really where we've seen the compression or not as much advantage as we used to have between U.S. natural gas-based and oil based. So Singapore, some of the European producers, for example, they tend to be oil based. That's where we've seen the compression. But again, what we've seen, at least in the low oil environment so far is just we still have kind of a 2x advantage in the Gulf Coast as we do in other locations.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [15]

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Got it. And then I guess China's economy is directed in a different way or managed in a different way, but it seems like that recovery is in the manufacturing sector, at least it started pretty aggressively. How would you anticipate any cues from China informing what might happen in the western markets for you as we go through the second and the third quarter?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [16]

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Yes. So I think what we need to watch for in China -- well, a couple of things. So I mean, you're right, people are up and starting to run again in China. We see some China internal demand recovering. I would say 2, watch out and maybe the reason we're a little bit more pessimistic on AC at this point than others is, we are starting to see inventory build in China. So people are running but there's not a lot of exports yet from China. And so we are starting to see some buildup there. And so I think until you see more of the Western Hemisphere start to recover and you see consumer confidence come back, maybe some of the stimulus packages, especially for auto, that are coming on, that's really going to drive the demand around the world, allow China to start exporting again. I think that's what we need to wait and see. And as of right now, we really haven't seen a resumption yet of China exports. Again, not a big impact on us directly but a big impact on some of our customers around the globe.

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Operator [17]

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The next question comes from Jeff Zekauskas of JPMorgan.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

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Can you hear me?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [19]

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Yes. I can hear you, Jeff.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [20]

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Yes.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [21]

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With oil prices coming down, some of your competitors probably have a lower cost structure than they did before. Does that lead to a weaker supply-demand balance in acetic or VAM?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [22]

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Let me talk about again, about China because I think that's generally the swing producer. We saw a lot of China production online in the fourth quarter. We've actually seen some reduction in utilization in the first quarter because of the very low pricing that we're seeing. I think people are choosing to run at lower rates, not necessarily shut down but running at lower rates. So I think the thing is that price is just so low. So especially in China, we're at maybe $300 per metric ton today. We saw that price down in the $260 range early in April. It was at $300 or less in March. That's just not a price where folks can run out of a coal base, and it's not a great price even out of an oil base as compared to natural gas.

So I think the advantage is there, it's less. I don't think it will impact our Clear Lake, but it is causing some producers to slow down, which is a good thing. And we've actually seen the price start creeping up again in the last few weeks from where it was. So there seems to be some discipline in the market not to produce into a losing situation. But again, it depends how long this goes on. But right now, I would say coal is the marginal producer, which is China. And we are seeing some discipline in that market. We're seeing prices slowly come back up.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [23]

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Yes. Jeff, just to add to that, I think it's important to remember that our view of oil is that we're relatively agnostic as a corporation to higher low oil pricing. And you are going to get some compression in some areas but you're going to get expansion in other areas. I think as Lori just talked about on acetic acid, we don't see a lot of movement in that cost curve. On VAM, you do get some compression but that's offset by some of the gains you get out of Singapore acetic acid.

On the Engineered Materials side of the equation, as Lori stated, about 2/3 of the pricing there is pretty sticky. So you hold pricing even as raws come down, but that's partially offset by our dividend out of Ibn Sina. So with those puts and takes, we feel like we can still generate pretty agnostic returns in any environment.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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Can you talk about why you've deferred your larger capital projects? What the rationale is behind that? And how much operating income or EBITDA do you lose because of the deferral?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [25]

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Yes. So we've reduced our CapEx projection for this year by about $150 million, could be a bit more. Of that, I'd say about 1/3 of it is associated with the delay of the Clear Lake acetic acid expansion. Again, the reason for doing that is because with these low oil prices, Singapore becomes a much more -- not more attractive than Clear Lake, but attractive enough that we decided it was better to preserve cash in this period of time, not knowing how long and how deep this would be. We can choose to start that project up at any time once we see -- start to see recovery. But for right now, we've just said 18 months.

We've also -- for our China localization projects that we were looking at, we've pushed it out a bit because obviously, we have a bit of a demand slowdown for our Engineered Materials, and we see that taking a little while to recover. So we've pushed it out a bit and we've also had some things changed where we now are looking at minimizing costs by using some of our existing footprint, preferably. So that's about another 1/3 of that $150 million. And then we have 1/3 that's kind of everything else, and a lot of that is just project rescoping that occurred naturally. Projects that we said, you know what, to preserve cash, we can just push them out 1 year. So we're really just trying to be cautious, because we don't know how deep and how long this can go, to make sure that we are preserving cash for the organization to maintain a good free cash flow.

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Operator [26]

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The next question is from Mike Sison of Wells Fargo.

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [27]

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Glad to hear everybody is safe and sound. Lori, I just wanted a little bit of clarification. I think you said for 2Q, adjusted EBIT could be down $150 million to $250 million. Was that relative to Q1 or 2Q '19?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [28]

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Relative to Q1.

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [29]

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Q1, okay. And then when you think about adjusted EBIT margins for the Acetyl Chain in the mid-teens for 2Q, what is the -- what is more important in getting those margins up? Is it the volume? Is it the pricing? And then if pricing is going to go up, what do you think drives that? Is it more oil going up? Is it more recouping the volume? Just sort of -- just some color on what could get those margins better as the year unfolds.

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [30]

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Yes. I think it's -- they're all related, but I think it is more around the pricing. I mean look, the last time we saw the low $300 per metric ton pricing for acetic acid was in 2016. So it's been a long time since we've seen this level of numbers. So I think it really is more about seeing the pricing go up. Now, that really means demand recovery for acetic acid, again, really dependent on China for that. I think that's where we'll see the recovery in the margins. But clearly, as we have demand recovery, we get some volume recovery that helps the prices go up. Again, we're pretty agnostic to what happens to oil in this scenario. We -- that's the beauty of our model, the beauty of having 3 different sources of the acetic acid around the globe that we can pull on depending on what's the best source and the lowest cost source. So I don't see oil price being a big factor for us. But certainly, China demand, China exports, reopening of India and Southeast Asia, these are going to be the big factors that can help drive those margins back up.

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Operator [31]

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The next question is from Vincent Andrews of Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [32]

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Good to hear everybody's voice. Sounds like everyone is doing well. Wondering if you could just comment on what you're seeing or what you're thinking about the outlook for demand for VAM and for emulsions in the second quarter and maybe into the third quarter. Just wondering if you're going to have the same amount of flexibility going forward to shift product out of acid into those other 2 materials.

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [33]

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Yes. So we have certainly taken advantage of that flexibility even in the first quarter. I mean if you look in the first quarter from the fourth quarter, we sold 17% less tonnage into China as they dealt with COVID. We moved that and we built -- we sold 27% more tonnage into the Western Hemisphere. We moved 8% more tonnage to VAM and emulsions. We have seen VAM and VAE hold up pretty well. We actually see some impact on that into the second quarter. We see the demand remaining strong for paints and coatings at least so far, especially for exterior paint. Now maybe not as much for interior paints as people aren't wanting to line up at Home Depot and wait to go in. And -- but we are seeing the advantage of that capacity that we've been able to add.

So I think in Q2, yes, we expect certainly some pricing pressure on VAM and VAE and emulsions. And we hope we'll start to see some more seasonal recovery in demand as we see economies starting to reopen but generally, stronger than acetic acid.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [34]

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And then if I could just ask you on Engineered Materials, I appreciate and respect your comments on the ability to hold price in that 2/3 of that business feed. That's certainly what we've seen in the past in lower raw material environments. I'm just asking, with volume expected to be down 30%, 35%, is there no mechanism for customers to come to you and ask for lower prices? Is it purely -- is it fully contracted? Or is it just not something you have to worry about?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [35]

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I mean of course, people can always ask. Again, if we go back to what we see, about 1/3 of that volume is really sticky and that we're the only person specked in. So those -- they tend to not be price sensitive. They don't have another option. The next 1/3 maybe has a couple of people specked in. We've not seen a lot of movement that way. I mean perhaps we will. As we come out up, we haven't. The 1/3 that tends to be more price-sensitive is more the standard-type grades and those tend to follow raws a bit more anyway. But we have seen some of the sectors continue to be very robust, right? Medical pharma, paints and coatings to a certain extent, packaging from the acetyl side, food and beverage has been robust. So we expect those to continue and not to see a lot of price pressure there.

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Operator [36]

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The next question is from Ghansham Panjabi of Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37]

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So Lori, just on the EM segment, specific to the first quarter, both volumes and margins were quite resilient considering the late quarter sort of slowdown, globally. Was there any pull forward in demand from 2Q? I mean you mentioned that the team generated high single-digit volume growth in the Western Hemisphere. Just trying to clarify that.

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [38]

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No. We really didn't see any pull forward. Auto actually was doing quite well in January and February in the Western Hemisphere. We actually have seen auto up a few percent in both Europe and Asia. And that really helped drive some of the volumes in the first and second quarter. Obviously, consumer goods were down in the first quarter but generally, January, February, even the first part of March were pretty good, where the Western hemisphere was able to offset some of the decline that we saw out of Asia. And even the Asia decline during that period was fairly moderate. Now obviously, that all changed kind of the second half of March. And that's why we're projecting the 25% to 30% down for EM in the second quarter. But I really didn't see much volume pull forward, yes.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [39]

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Okay. And just more broadly, I mean, you have obviously given us an assumption for each of the segments from a volume standpoint for 2Q. Can you give us a sense as to what you're embedding in terms of how June kind of plays out? I mean clearly, most of the world is on lockdown for at least, let's say, half the quarter, but how are you thinking about the back part of the quarter and kind of the exit run rate into the third quarter?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [40]

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Yes. Look, we're really -- we just looked at the second quarter as a whole. We're really assuming we don't see much recovery even through June. And if we look at auto for example, China autos restarted but it's a bit slow. Europe is kind of starting this week but a pretty low rate. VW, for example, in the ID.3, one of their platforms that we have a lot of content in, is making 50 cars a day versus what they typically make 150 cars a day. The U.S., the autos are just now starting to announce they're going to restart originally, some May 4, some May 11 most of big plants not until May 18. So we really don't see them coming up closer to full rates until late June or even early July. So that's the assumption that we baked in. Obviously, if they get started sooner, that's good.

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Operator [41]

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The next question is from Matthew DeYoe of Bank of America.

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Matthew Porter DeYoe, BofA Merrill Lynch, Research Division - VP [42]

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So if we look back at 2015 and 2016, the Acetyl Chain business generated about $600 million in annual EBITDA. Perhaps directionally, you're pointing there in 2Q, but you have some outages and whatnot. So why or why not is it possible that the company kind of returns in that EBITDA in that segment? Yes. Well, I'll start there.

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [43]

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Yes. Look, we typically assume -- we think our acetyls business is kind of a base level of earnings in a normal environment between $180 million and $200 million. So if you look at our earnings in first quarter, just call it, $140 million for easy math, we had about -- we had $15 million in there for the -- that we didn't have for the fairway turnaround. There was $15 million to $20 million of COVID impact. And then first quarter, typically, we see $10 million to $15 million of seasonality. So that gets us in that $180 million to $190 million range that we would expect to see from acetyls. So I think what we've shown is versus even '16, '17, we have fundamentally shifted the acetyls base level of earnings, again, kind of up to that $180 million to $190 million. But with COVID, with the turnaround load in the first quarter, we saw a slightly lower number in the first quarter.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [44]

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Yes, Matthew, I think it's important to remember a lot of the steps that we've taken over time in the acetyl business to get us to that higher level of earnings, reducing the fixed cost footprint, consolidating manufacturing at our large integrated facilities, continuing to lower the S&A cost structure in the business, and then further going downstream. In the past, we used to sell about 60% of our acetic acid as acetic acid. And now we only sell closer to 40%, and we moved that downstream into VAM emulsions and now into redispersible powders through the Elotex acquisition. So those very purposeful steps taken over time have led to that higher level of earnings in normalized environments.

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Matthew Porter DeYoe, BofA Merrill Lynch, Research Division - VP [45]

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Okay. And then price in EM was down like 5% year-over-year in 1Q. I would imagine it's probably going to be a little bit worse than that in 2Q. To some extent, I guess, it's not surprising, given the moves we've seen in oil. But if I look back to the last time, crude really collapsed in '15, '16, we never saw price kind of eclipse the minus 4 number. Is this because prices is sticky in some of the newly acquired businesses? And you talked a little bit about that margin level and I would imagine things move down in 2Q. But that mid-30s, is that what you'd consider normal from here?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [46]

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Yes. I think there's two things there. So we did have the raw material pass-through on that kind of 1/3 of the business that is more directly tied to raws. I think that's similar to what you would have seen in '16. There was also an element, Q1 '19 was really an exceptional EM quarter, and there's some timing elements there around contracts for medical and pharma, some high-margin businesses that showed up in Q1, which is different than Q1 '20, which is -- so Q1 '19, we had some big contracts that showed up in the books. Q1 '20 is, I would say, more normal. So there is that variation there. I mean we would expect, as raws continues to be low and as we see volumes come off, some further impact to margins for Engineered Materials and volumes, like I spoke about earlier. But I don't think the Q1 '19 to Q1 '20 change that you're seeing is representative because there was some uniqueness in Q1 '19.

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Operator [47]

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The next question is from John Roberts of UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [48]

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And congratulations, Lori on assuming the Chairperson role. The smokers seem to be more susceptible to the more severe COVID-19 symptoms. You're guiding for stable cig tow for the rest of this year but do you think this, over the next 12, 24, 48 months will accelerate the decline in cig tow over time?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [49]

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It's a good question and one we've asked ourselves. But I have to say, tow has proven to be probably our most resilient sector. People who smoke tend to do it no matter what. And if anything, maybe they do it more when they're home. So just a bit anecdotally, in January and February, when this was really hitting China, we actually saw tow production -- cigarette production, sorry, up 4% in China and sales in China actually went up by 1%, which doesn't sound -- versus 2019, which doesn't sound like a lot, but in a business where we expect a couple of percent decline per year, that was certainly a reversal of the trend. We haven't seen similar numbers yet for Europe and for the Americas. So we have to wait and see. But as of right now, at least in our conversations with the cigarette producers and others, they are not seeing a big change in demand profile.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [50]

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Okay. And then in Engineered Materials, you noted some challenges in getting new applications qualified with the social distancing and a lot of your customers having employees working from home. Do you think you have that solved or will have it solved over the next couple of months? Or will it be constraining at any -- in any way or because demand is so weak, it's just not going to be on a constraining part of the supply chain or the value-added?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [51]

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Yes. I mean look, it's a great question. And certainly, with COVID, we have found many new ways of working. I would say our employees or even our sales people, everyone, continue to be highly productive and effective at home. Interestingly enough in EM, while we have had some issues getting new projects qualified, we have been able to continue to progress many other projects. So a lot of our customers have lab staff working, they're doing it. In some cases, our lab group, our technology and innovation group has actually been working with some of the customers to qualify the materials on our lab equipment. And so sometimes we're -- we've actually taken over and done some of the testing for them at our facilities for those customers who couldn't use their. So our folks have been really creative to keep some stuff going.

Similarly, we've continued to provide great customer service. I want to share with you an example we had. We actually had a customer in Germany who had a molding issue, and our technologists were able to get on the phone via iPad and basically troubleshoot the problem using iPad video with the customer. So our folks have been really creative. While we certainly have -- we still closed the number of projects in the first quarter we expected to, we aim to do the same in the second quarter. We're just having to be really creative and really flexible in how we work and what work we do for our customers to make it happen.

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Operator [52]

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The next question is from John McNulty of BMO Capital Markets.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [53]

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With regard to the acetic acid markets in China specifically, have you seen any permanent closures? And I guess how long would we have to see this recessionary environment drag on before we might actually start to see some of maybe the more marginal capacity just get permanently shut down? What are your thoughts on that?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [54]

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So I would say to date, we have not seen any permanent closures. And part of the reason for that is, I think a lot of the acetic acid capacity in China is tied to downstream uses at the same company. So they're part of the value chain for other companies, not necessarily VAM, VAE, but maybe going into plastic bottles or this sort of thing. So what we've seen, though, is we have seen people slowing down capacity. So only matching their capacity to what they internally consume. I think it will take a bit longer at these kind of prices before we'd see people permanently shut down, but we have definitely seen people take go -- run at lower rates, which has helped. We were really low in terms of China utilization in the first quarter. Those numbers are still low, just below 70%, but slowly coming back up as people cut back on runway rates to more match their downstream -- internal downstream consumption. So I don't know how long it's going to be, but I think it will be longer before we'd see any permanent shutdown of spare capacity in China.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [55]

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Yes. And, John, we're focused on what we can do to control things. So we're controlling our own operating rates. We're focused on productivity, as Lori talked about. We're focused on what we can do from near-term cost reduction actions. So those items that we have control over ourselves is where our focus needs to be. So that as we see the changes in demand pivot in the coming months, we're well positioned to take advantage of that.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [56]

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Great. And then just, I guess, with regard to the Engineered Materials platform, I guess, the magnitude of the sales drop seems a little bit on the higher end, I guess, than what we were thinking, especially considering you do serve some pretty defensive markets as well, like on the health care side. So I guess can you give us -- in terms of how you're thinking about the buckets of your cyclical portion of that business and the maybe defensive side, what you're thinking in terms of the volumes for those?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [57]

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Yes. I mean on the kind of resilience side, I mean, obviously, I talked about tow, that's 15% of our revenue. And then we have medical pharma, food beverage, even 5G, packaging, that's kind of another 10% to 15% of our revenue. But some of our big users like for the entire company, auto is about 15%. Until people start up, although they're sticky businesses, and they will come back and order from us, they're just not taking volume. So that's really what's built into that as well as consumer electronics. And people are just not buying big durable consumer goods right now. They're worried about jobs, they can't get out, all these kinds of things. So I would say it's not so much that we see people shifting away from our Engineered Materials. It's just they're not running, so they're not ordering.

If you look at even in Q1, we saw -- we lost about $10 million in volume in orders just in March due to cancellations, about 50% in Asia and 50% in other places. And in Q2, automotive, the big decline drop. I mean April was 50% lower in terms of automotive demand from -- for us than it was in 2019. And in the Americas, that was 80% lower. So it's -- these are sticky businesses that if they're not running, they're not ordering. Now in non-auto, we're nearly flat with 2019. So again, it's just that balance of those highly resilient, those that have kept running and had high demand. And those that haven't been as resilient like auto, where we've just seen the demand basically go to 0 for a period of time.

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Operator [58]

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The next question is from Kevin McCarthy of Vertical Research Partners.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [59]

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With regard to your CapEx program, I think you indicated you're deferring capacity expansions for methanol and acetyls by about 18 months. Do you still plan to reduce capacity in Asia? And if so, would the acetyl capacity reduction there be concurrent with the new time line?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [60]

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Yes. So our plan all along has been -- it was really we justified the product -- the project on productivity. So our plan would be to reduce capacity in Asia in that same time frame, so in that '20 to mid-2023 time frame. Again, it could be a shutdown of the facility or it could just simply be a reduction in facility. And that's a decision we'll make some time later once we see kind of how raw material dynamics and demand even out over the next few years.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [61]

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Okay. And then on Page 9 of your prepared remarks released last night, I just had a clarifying question maybe. You're talking about the free cash flow improvement there of $300 million to $400 million. And I think it's equated to a 40% decline in adjusted EBIT for Acetyl Chain and EM. I guess my clarification is, is that 40%, in fact, your forecast? Or are you just sizing the magnitude of the free cash flow improvement there?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [62]

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Yes. Kevin, we're just sizing it for Q2 through Q4. That's really what that point was about.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [63]

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Very good. And if I may, I want to sneak in another one for you, Scott. There's a reference to, I think, a tax relief provision that's expected to benefit you by $40 million to $50 million. Can you just talk a little bit about that and when you would expect that cash in the door?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [64]

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Yes. This is mostly just timing, Kevin, and it's -- a lot of the stimulus packages that have been passed around the world. Actually, the lesser of that number is the U.S. We have a pretty substantial impact from German payroll tax deferrals. So it's really just deferment to 2021 or 2022 on payroll taxes.

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Operator [65]

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The next question is from Alex Yefremov of KeyBanc.

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Aleksey V. Yefremov, KeyBanc Capital Markets Inc., Research Division - Research Analyst [66]

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Lori, just to clarify, the EBIT decline sequentially, you mentioned $150 million to $250 million range. Was that for the company overall? Or for EM segment only?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [67]

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No. That's for the company overall.

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Aleksey V. Yefremov, KeyBanc Capital Markets Inc., Research Division - Research Analyst [68]

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Understood. And turning to acetyls, just based on benchmark margins, we're estimating that they were quite healthy in March and April, if we look at acetic acid versus methanol or VAM versus ethylene and acetic acid. Is that in fact true when you look at your business? And if so, are you expecting these -- this level of margins that we saw in March and April to persist in the latter parts of second quarter?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [69]

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Scott may want to provide some detail as well. But again, if we look at -- we actually saw prices drop very low at the end of March and in early April. And at those kind of prices, margins in Nanjing, where you have methanol coming out of coal, are not that good. Clear Lake, out of gas, still a margin, but significantly compressed from the margins that we've had in the past. So I think we continue to see that challenge with acetyl margins going forward, even in a low methanol environment, again, because price tends to fall a little bit.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [70]

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Yes. I think we did see a lot of compression in the first quarter, as Lori stated, Aleksey. And in the last week, we've seen a slight bit of expansion, but we saw these periods and pockets at various points in the first quarter as well. So until we see, I think, more robust exports moving out of China and demand improving in other parts of the world, I don't think you're going to see a big change in that dynamic.

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Aleksey V. Yefremov, KeyBanc Capital Markets Inc., Research Division - Research Analyst [71]

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If I just may clarify, you do expect your acetyls margins to decline sequentially?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [72]

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I think we expect to see things relatively flat right now, Aleksey. At least that's what we're baking in, given that demand landscape that we talked about. And I think it's important, we're more or less on the floor here for methanol in China, given where the coal producers' cost structure is and given where methanol prices are at. So we may see things move a little bit in the upstream feedstock landscape. But material movements up or down, given the inventory levels and given the cost structure, we just don't see things moving a lot.

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Operator [73]

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The next question is from Frank Mitsch of Fermium Research.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [74]

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As I parse through the various forecasts and understanding this isn't an exact science, it's -- and where you think the coronavirus impact is, I mean, obviously, a very significant impact here in 2Q. But as I look at the numbers, is it fair to say that as things stand today, you think the impact from coronavirus, if we were to say parse up 100% for the balance of the year, it would be like 50% impact in Q2, I don't know, 30% Q3 and 20% Q4? How are you currently thinking about the pace of the impact for the balance of the year?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [75]

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Yes. Look, we've done a lot of scenario planning. And again, we don't expect a V-shape recovery, so we do expect some continued impact. We've looked at a U-shape recovery, which we'll start to see some recovery in December. We've looked at L-shape, which has it going down into 2021. I think the answer is, we don't know. Even with things opening up, we have yet to see a couple of things. When does the Western Hemisphere automakers return to full production. When will we see enough relaxing of social distancing in the U.S. and Europe for people to go back to painting. And then as well as allow for construction to go back to seasonally normalized levels. And then as I said earlier, when do we see that improvement in China export because that's -- we're not seeing that yet. So even though China is running, we're not seeing enough demand outside of China to really resume the pace of China export.

So I think there's still a lot unknown, a lot related to consumer confidence. Stimulus packages can help. We're waiting to see how that goes. But I don't think we can really predict accurately at this point what we will see in third and fourth quarter.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [76]

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Got you. But I was looking at the comment from Scott about the acetyls and EM being off 40% for the balance of the year. And so it just seemed to me that it was a bit more front-end loaded in terms of the impact for the second quarter and perhaps, in terms of a year-over-year negative impact, it would be lessened for the balance of the year. But at this point, do you think it's maybe a little bit too premature to offer that?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [77]

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Yes. That 40% was really illustrative of what that magnitude of cash flow reduction would equate to. So that's how I'd read that.

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Operator [78]

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The next question is from Matthew Blair of Tudor, Pickering & Holt (sic) [Tudor, Pickering, Holt].

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [79]

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Glad to hear everyone is safe. I wanted to touch on that 5% volume gain in acetyls, which I think occurred despite some turnarounds. Would you say that was just normal quarter-to-quarter volatility? Or do you have a strategy to try to take share in this weak market and offset some of the price declines?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [80]

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Yes. So we had the volume gain from fourth quarter. Remember, in fourth quarter, we had the issue at our Clear Lake plant and it was down. And so we had more volume available in Clear Lake obviously, in Q1 than we did in Q4. So that volume uptick really reflects the additional production in Clear Lake offset slightly by the COVID impact in Asia.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [81]

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Sounds good. And then any sense on the timing of the $150 million to $250 million working capital benefit that you expect? Would that be mostly in Q2 or kind of spread throughout the year?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [82]

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Scott, do you want to answer that?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [83]

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Yes. So I think most -- there's going to be a chunk of that, that is Q2 as we see the more acute demand impact that Lori talked about happening in the current environment, and we will gain working capital here. So we will see that. We do expect with really actions that we're taking, and this is not a new thing for us. We've been heavily working capital actions around accounts receivable, accounts payable over the last several years. And this environment really gives us that opportunity to push hard on the inventory side of the equation also. So there's some sustainable actions that we're taking in addition to just kind of the drop from sales coming off. So we'll gain a lot of working capital in the second quarter, but we do expect some of those actions to yield benefits in the back half also.

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Operator [84]

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The next question is from David Begleiter of Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [85]

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Lori and Scott, on the acetyls base earnings, $180 million to $190 million, I know you said you're agnostic to oil price changes. But why isn't there some variability at a $25 oil price versus a $50 oil price for the base level of earnings in that segment?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [86]

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Yes. So David, I think what we'd say as a company, we're fairly agnostic. I mean you will see a little bit of an impact in AC, which is probably why my bridge, including seasonality, gets you to the lower end of that $180 million to $200 million. Clearly, you will see some impact in AC. But that said, we see some -- a little bit of offset in EM, where our prices don't typically -- for about 2/3 of our volume, the prices don't track down with raws. And so we get a little bit of expand -- margin expansion in EM that offsets the compression of margins we see in AC.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [87]

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Understood. And just in EM, just in the affiliates, what's happening with Ibn Sina, given the low MTBE margins these days?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [88]

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Scott, do you want to answer that?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [89]

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Yes. So David, our dividend there is on a 1 quarter lag. So what came through in Q1 is what we saw from Q4. And then likewise, you're stepping through into Q2. So we're going to see most of that impact in the second half of the year that we're seeing, MTBE follows oil. So pricing is coming down and we will get some compression there. On the flip side, in the EM segment, you'll get upside from where we get margin expansion where we have pretty sticky pricing, as we talked about earlier.

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Operator [90]

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The next question is Laurence Alexander of Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [91]

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Do you see any opportunities to -- or do you have any interest in acquiring ups and downs from acetyls assets and then pulling them into your network to further optimize or will give you more degrees of freedom? And secondly, can you remind us where you are on the innovation cycle in acetyl? I mean roughly how many years be before we see significant innovation in OpEx and CapEx on new projects?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [92]

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Yes. You broke a little, but let me answer the first one. So I mean clearly, we just completed the acquisition of Elotex, that is adding down to the back end of our Acetyl Chain with redispersible powders. We're really excited to close that deal despite having to do it remotely. I mean it is a fast-growing market. And we think it's a great addition. So we do continue -- I think it's just an example. We do continue to be very interested in continuing to expand our Acetyl Chain where it makes sense to deliver greater shareholder value, which we think Elotex fit that.

In terms of innovation, I mean, we continue to be very flexible with our Acetyl Chain. We like the model that we have, which gives us a lot of optionality and gives us a lot of ability to pivot. I gave the examples earlier of the amount of tonnage we can move geographically as well as tonnage downstream. Our teams continue to innovate constantly around VAM and emulsions and offering new products to our customers. So I think we're doing very well there.

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Operator [93]

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The next question is from Jim Sheehan of SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [94]

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When we look at natural gas prices in Asia and specifically China, they're moving lower into the region actually of coal prices. I'm wondering how you think that's impacting the competitive dynamics in China. How sustainable might that be? And does that really affect the Acetyl Chain at all?

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [95]

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Yes. I can't -- I don't really know much about natural gas into Asia these days. So I can't say how sustainable that will be. What I will tell you is acetic acid equipment in China is built around coal to methanol base. It would take an amount of investment in order to convert that to natural gas, the methanol base. So I don't see that happening quickly. I think you would have to have a very sustained period of competitive and low natural gas prices as well as some assurity of continued supply before you saw people willing to make that investment away from coal to natural gas.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [96]

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Yes. Jim, natural gas is earmarked for personal consumption. There's very little chemical production based upon natural gas, and we just haven't seen a policy shift in that direction.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [97]

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Okay. And on social distancing, you talked about the impacts that might have on new project development. I'm wondering about -- maybe you could comment on how it's affecting your integration of acquisitions like Elotex.

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [98]

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Yes. Well, social distancing, besides the fact that we have about 2,000 people working from home these days, we still have another 5 -- roughly 6,000 people working in our plants. And so we have learned how to operate with social distancing using personal protective equipment as needed. I think that's gone very well, and we've been very fortunate we've had no cases of COVID-19 transmitted at work. And so I think we can learn to operate in this way. I think it's been good. I think people -- other -- we see the same thing in other industries and socially, people are learning to work this way. But we just need to get consumer confidence back.

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Operator [99]

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That concludes our time for questions today. I would like to turn the call back over to Abe Paul for closing remarks.

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Abraham Paul, Celanese Corporation - VP of IR [100]

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Thank you, Brock. We thank you for your questions and listening in today. As usual, we are available after the call for further questions you might have. Brock, feel free to close out the call at this time.

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Operator [101]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Lori J. Ryerkerk, Celanese Corporation - Chairman, President & CEO [102]

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Thank you.