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Edited Transcript of CE earnings conference call or presentation 23-Apr-19 2:00pm GMT

Q1 2019 Celanese Corp Earnings Call

DALLAS Jun 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Celanese Corp earnings conference call or presentation Tuesday, April 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chuck Kyrish

Celanese Corporation - Treasurer & VP of IR

* Mark C. Rohr

Celanese Corporation - Executive Chairman & President

* Scott A. Richardson

Celanese Corporation - Senior VP & CFO

* Todd L. Elliott

Celanese Corporation - SVP of Acetyls

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Conference Call Participants

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* Angel Octavio Castillo Malpica

Morgan Stanley, Research Division - Research Associate

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - 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

* Matthew Robert Lovseth Blair

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

* Matthew Stephen Skowronski

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Michael James Leithead

Barclays Bank PLC, Research Division - Research Analyst

* Michael Joseph Sison

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Nicholas Cecero

Jefferies LLC, Research Division - Equity Associate

* P.J. Juvekar

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

* Robert Andrew Koort

Goldman Sachs Group Inc., Research Division - MD

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Presentation

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Operator [1]

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Greetings and welcome to Celanese First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Chuck Kyrish. Thank you. You may begin.

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Chuck Kyrish, Celanese Corporation - Treasurer & VP of IR [2]

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Thanks, Rob. Welcome to the Celanese Corporation First Quarter 2019 Earnings Conference Call. My name is Chuck Kyrish, Vice President, Investor Relations and Treasurer. With me today are Mark Rohr, Chairman and Chief Executive Officer; Scott Richardson, Chief Financial Officer; and Todd Elliott, Senior Vice President, Acetyl Chain.

Celanese Corporation distributed its first quarter 2019 earnings release via Business Wire and posted a slide presentation and prepared remarks about the quarter in the Investor Relations section of our website yesterday after market close.

Today's presentation will include forward-looking statements. Please review the cautionary language regarding forward-looking statements which can be found on Slide 2 of the slide presentation under important information.

We will also discuss non-GAAP financial measures today. You can find definitions and other important information and reconciliations to the comparable GAAP measures on our website in the Investor Relations section. Form 8-K reports containing all these materials are also available on the SEC's EDGAR system and our website.

Because we published our prepared comments yesterday, we will 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 comes from John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [2]

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In Engineered Materials, the affiliates underperformed the wholly owned operations. There's obviously some big regional differences between wholly owned and affiliates. But could you remind us of some of the application and plastic mix differences between the 2?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [3]

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Yes, John. This is Mark. I'll start that, maybe Scott Richardson could add some comments. But we did see our affiliates struggle a bit in the quarter. I think the real issue there is that, if I can say this, they don't have the product breadth or the global reach that we do, selling primarily into China and selling into limited applications. So we continue to work with them to see if we can help them improve that performance.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [4]

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Yes. John, just to add a little bit more color, if we looked out on a year-over-year basis, almost the entire decline in the equity earnings for Engineered Materials was due to our poly plastics affiliate and really is, as Mark said, largely related to demand in China.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [5]

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And then could you remind us how much you paid for the Linde syngas unit? Or is that going to be in the cash flow statement when the Q comes out?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [6]

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Yes, it is. It's lumped together there, John. We haven't said exactly what that amount was. It will be in the cash flow statement with our Next Polymers acquisition as well. It's a very low capital kind of optionality type investment that we made, which we commented on last quarter.

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Operator [7]

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The next question comes from Mike Sison with KeyBanc Capital Markets.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [8]

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Nice start to the year. And Mark, congrats and hope you have a lot of fun things lined up going forward. But I guess I wanted to ask how Lori's role will differ from yours, if any, and in terms of focusing on extracting value for the company and given the -- given your portfolio of businesses?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [9]

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Sure, Mike. Well, you know our business pretty well. And the thing about Celanese is that we have a great, great business machine out there that brings a number of opportunities to us. And the ability of that machine to bring opportunities actually has the capability to overwhelm our internal mechanisms, be they unit operations, be the logistic systems and processes, our ability to innovate as fast as we need to. And I spent a lot of my time on that. And I am sure that Lori's going to spend a lot of her time working those areas. We think, in many ways, it's the next frontier for Celanese, to learn how to go from 20,000 [FTs] to 30,000, manage that better than we do 20,000 is going to be a big part of us continuing to drive value going forward. So I think that's a major area of focus for her.

The second one I would say is that when you look at the opportunities before us, deploying cash continues to be the main focus of -- my main focus and will be hers as well. And we have more and more opportunity [surfacing] and M&A that are bigger and structurally more complex. And Lori brings a lot of capabilities and skills really to facilitate that and help that be a reality for Celanese, which will be a big part of unlocking shareholder value. So I'd say those 2 things are top of mind, but you'll get a chance to meet her soon and ask those same questions.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [10]

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Okay. Great. Then in terms of your outlook for 2Q, you noted that it should look similar to 1Q, but it does sound like the acetyl chain industry operating rates could improve given outages you noted in your prepared remarks. And then I guess thoughts on Engineered Materials, your outlook still looks for good organic volume growth given project wins. And just wonder -- wondering what may be headwinds that you see in 2Q that you wouldn't see a normal say improvement sequentially?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [11]

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Yes. Well, good, I'll start that, and I'm sure that Todd and Scott will add some comments here. But let me -- one of the things that's not readily apparent is internally the things that we deal with. So in Q2, we have a number of turnarounds in front of us. Those turnarounds will cost us $25 million or $30 million, so call it $0.15 to $0.20 of headwinds baked in there.

We're expecting raw materials -- we're probably seeing raw materials and methanol to go up, those kinds of things, and net-net, that will probably whack us for another $10 million. And John asked a great question on affiliates, and we see that affiliate number sliding a bit further. So before we even started this quarter, we've got at least $0.25 of unusual headwinds that we didn't have in the first quarter of the year -- or quite as strong in the first quarter of the year.

So I think on one hand, it's easy to say, "Well, life will be good," and you build from this point. I think the first half of this year is going to be a struggle, and I think maintaining numbers in the flat is a push for us. So I certainly wouldn't recommend anyone go higher than that number for the quarter. I just don't see that right now materializing.

If I take a stab at EM quickly, yes, we're pushing price really hard and we're pushing our mix really hard. And the repercussions of that will not be that great as long as business starts to recover. We don't expect a full recovery in EM to start until -- more in the second half of the year as well. You look at that and auto-build projections, those things, we're still down in the second quarter. We should start some rebound going in the third quarter. So our fundamental belief is, Mike, is that we've got a bit more [ground] here before we get into the back half of the year, where things will -- should be starting to improve. But Todd, do you want to make some comments on AC this quarter?

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [12]

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Yes. It's Todd Elliott regarding Acetyl. We actually had a pretty good March as we wrapped up Q1. Most of our -- or almost 40% of our business occurred in March as we look at that profile. So we ended on a pretty good note as we wrapped up Q1.

But as we get into the second quarter, Mark mentioned that Celanese has turnarounds. It's pretty typical for the industry to have turnarounds during the second quarter. We've got turnaround at Bay City, Texas already underway on VAM. Same thing in Nanjing, China on VAM. We've got about a week -- a little more than a week in Frankfurt on VAM as well, so that will present a headwind that we've got to navigate around. We've got a fantastic network to do that with.

I think the bigger issue right now is just how China will unfold from a demand perspective as the quarter materializes. It's a little bit of a slow start in April. There have been a series of safety checks and audits following the explosion in Yancheng in Jiangsu province at the end of March. That's put, probably appropriately so, a damper on operations throughout their province. So that's affected some of the downstream demand at the start of the quarter. So we've got to see how that unfolds, but we'll certainly activate our network around these things and try to deliver the quarter kind of in line with Q1.

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Operator [13]

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Our next question comes from Bob Koort with Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [14]

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Mark and Todd, you guys have talked in the past about maybe some of your competitive -- competitors in China being subject to some challenges with their environmental or economic profile, et cetera. In light of the recent developments in China and maybe a little bit more discipline in enforcement, does this hasten your expectation of seeing some capacity out in China and maybe tightening operating rates even sooner and for longer?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [15]

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You know what, and again, I'll start this and Todd maybe you can provide some specific color on some of the closures and stuff they're talking about from industrial parks. But Bob, the movement in China is fundamentally, one, in my personal view, is of driving inflation. And if you think about that, the economy needs higher pricing to get a decent return on the over-investments they've made for a long period of time.

So when I kind of worked through that myself, what I see them doing is putting pressure on the 150,000 or so state-run enterprises there to continue to lift those earnings there. So that means environmental restrictions that are going in, that means safety restrictions, and you've seen those sort of occur episodically.

So we've gone through a period of safety events that seems like every 6 months to 9 months, and they continue to ratchet up the impact of that and they're directing now. We have read publicly about a number of closures of chemical parks that are going to occur directly with that. That will impact some of our competitors, we think. But Todd, do you want to carry on with that?

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [16]

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Yes. Just a specific follow-up on this situation in Jiangsu. So remember, before we talk about other provinces going through steps to examine environmental policy, that continues, but in Jiangsu, we had not yet seen anything specifically around park policy. So what we're hearing, I'm not seeing anything published yet, but we're hearing that Jiangsu will reduce the number of chemical parks from 49 down to 20 starting sometime in 2020 forward. How that ultimately is laid out and executed and started, it remains to be seen and the specifics remain to be seen.

But that's a significant development, a key set of steps following the tragedy in Jiangsu. So that's probably the most impactful in our space. We've got to watch that. So think about where parks are near the Jiangsu River or close to population centers. And as that gets more specific in terms of details, we'll share that.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [17]

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Yes. And the only thing I'd add to that, Bob, is yes, it impacts our competitors, but it also could impact our customers too. And so there is, I would say, a near-term demand impact of -- on our customers as well as we see these audits and scrutiny continuing to ramp up.

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [18]

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Yes. Just to follow that, so the specific kind of watch out downstream, MCAA, monochloroacetic acid, acetate esters, pharmaceutical intermediates, kind of a whole host of downstream applications, are slow as these safety checks unfold and inventory levels are brought down. Probably the one bright spot would be terephthalic acid over to PET. That's held up pretty strong here in this period. But to Scott's point, that's put a damper on April, but we'll see how that unfolds here as we get into May and June.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [19]

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And could I ask an EM question, Mark? It seemed like maybe over the last few quarters, you guys have been working hard on getting your price to offset raw materials. And I suspect towards the end of last year when oil went down, maybe some of your customers not only were destocking from macro fears and trying to tighten up their inventories, but also maybe hoping they'd see some relief on price. So, we've had oil rally now. I'm wondering if you could give us a sense of where you see customer inventories destocking/restocking or ability to defer purchases in light of volatility in pricing?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [20]

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Well, there was -- you called that right, Bob, there was definitely destocking going on as people wanted to -- had a view generally that prices were going to come down. And of course, we rallied in the right kind of way. You continue to drop higher prices through that period of time. So we're now in that kind of aftermath of that and waiting for a fundamental demand to pick up, which it seems to be in some areas. But again, it's a bit too early to tell with that.

As it relates to pricing, Bob, what we've really done is yes, generally, you always make sure you work hard to cover [raws]. Really, what we've done is we went out and starting last year, did just a really hard look where we're adding the most value and where we felt we were impacting customers in the most important way. We wanted to make sure that we're getting -- our shareholders are getting the right compensation for that.

So we were very direct in -- with pricing into those areas where we felt that the value was really being brought by Celanese and the uniqueness of our applications and the molecules we had. So that approach is still ongoing and we don't intend to move away from that. You've asked me in the past, do we lose volume when we do that? And the answer is sure, but we're really looking at a way to drive money. So everything that we do relative to pricing and/or if we elect not to participate on volume is a thoughtful process we go through to try to maximize the value back to our shareholders.

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Operator [21]

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Our next question comes from David Begleiter with Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [22]

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Mark, would you expect EM volumes to be up year-over-year in Q2?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [23]

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Oh, geez. I don't know. Scott, do you have a view on that? I don't know if that -- I don't watch it either.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [24]

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Well, I mean I think -- yes, I think we're going to be flattish, David, right now. I mean we're still working -- as Mark just talked about, we're still working the price equation very hard. The one thing that is going to change probably slightly from Q1 into Q2 is we'll probably have a little less destocking that occurs.

I mean it takes a good 6 months or so. When oil fell as hard as it did for that to kind of work its way through the value chain. And while our volumes were down year-over-year, kind of in the 3% range, a lot of our customers that we've talked to were kind of in -- down, more kind of 10% to 15% range. And we were able to offset that largely through the new project wins that we had that started to flow through in the quarter. So I would say, at this point, we're kind of looking at flattish.

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [25]

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Yes, the good wildcard -- the big wildcard, at least from the discussions I'm involved in daily on this really is China. China, if you look at projections in China, there was a view that in this quarter, they'll start digging out of a hole that all those end in China and start the recovery down mid-teens sort of number in the first quarter, down less the second quarter then actually being positive in the back half of the year to end up down 3% to 4%. So that, that has got to start happening. If that starts happening, we're in good shape. Let's say that doesn't happen, then you may see a little volume weakness as we go through this quarter.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [26]

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Got it. And Mark, in yours and Scott's comments, you mentioned actively considering strategic transformational options for your businesses. Has anything changed of late? Or have discussions picked up recently to drive these comments?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [27]

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Well, I think we have -- when I look at the bolt-ons, let's just talk about that for a minute. We're seeing the size of bolt-ons increase, and those are opportunities, if that makes sense. So we're working a few now that would be in that $30 million to $70 million of EBITDA kind of range to $100 million. We have been doing that deals that have been sub-$30 million in EBITDA. So that's encouraging for us.

We continue to work hard to position Celanese to be able to take advantage of transformational opportunities, and that's a big personal thrust of mine. So as Lori comes in and takes over the helm as CEO, I'm going to be devoting myself to that along with -- and Puckett our new general counsel, so we'll be working that hard. And we're optimistic that as this deal -- this year unfolds and we get into next, there'd be more opportunities become available, and we'll work hard to see if we can capture one of those for Celanese.

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Operator [28]

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Our next question comes from Vincent Andrews with Morgan Stanley.

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Angel Octavio Castillo Malpica, Morgan Stanley, Research Division - Research Associate [29]

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This is Angel Castillo on for Vincent. Just a quick question for me on -- around your comments on VAM in terms of focusing on -- when VAM [developed] in the Western Hemisphere and your ability to sell more in this area. I was just curious because my understanding was that at least on the U.S., incremental VAM would likely be exported. So just in light of your expansion and again the comments on the Western Hemisphere, I was wondering if you were able to sell your capacity in the U.S.? Or what are the particular factors that facilitated for you to be able to sell in the region?

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [30]

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Yes. You want me to start that, Mark? Yes, the expansion in Clear Lake, which we brought online in December of last year, so we had 150,000 tons of capacity, that's a key value step amongst several that were underway within Acetyl. So the workaround that started way before the plant ultimately was commissioned. And that was to position our business in the most sort of attractive way as we think about contract mix around the world, key customer growth and mix around the world. So yes, we did ship some of our profile a little more to the Western Hemisphere following that start-up. So again, an intentional step, a key part of our value enhancement efforts, and that will continue into 2019 and beyond.

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Angel Octavio Castillo Malpica, Morgan Stanley, Research Division - Research Associate [31]

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Good. And then in terms of your comments on China, you mentioned the high inventory obviously has continued to -- [marked on] there, at least on the acetic side. Just curious, your thoughts as to how long it will take for the industry to work out of that inventory? And then also just in regards to your comments about a slow start to April, I was wondering if you could give us more color. Is that entirely related to the plant explosion? Or were there other things that you're seeing that is perhaps causing more of a slow start?

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [32]

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Yes. I mean there's lots of trade question marks -- those persist. But I think the main event followed the explosion and the subsequent audit and focused on inventory control throughout the country, really just more specifically in the province of Jiangsu. So that's what we're watching. Now like I said before, we had -- 40% of our business in Q1 happened in March. We thought we were starting to dig out of the softness at the start of the quarter. So I would point to that, point to derivatives off of acetic acid I mentioned 3 before. Those are probably the ones to watch and that's linked to the inventory build that we saw in the quarter.

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [33]

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Yes. Yes. So there's still adequate inventory. Again we think it's working its way down, but it's not down yet, if that was the nature of your question. So there's still plenty of -- not plenty, there's still excess material out there, and I think that needs to be resolved. The way it will be resolved is the Chinese economy has to pick up a bit. It will pick up whenever there's a trade agreement, in my opinion. So I think we saw the favorable trade discussion going on in March. We saw business pick up in China as a result of that. Then with the explosion, it slowed us back down again. I think there's still this waiting aspect going on -- personally going on in China. So hopefully, we can get that resolved in the next month or 2, and I think that will be good as we enter the second half of the year.

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [34]

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Yes. And the other piece is the turnaround as I mentioned before. So in addition to ours, there are multiple industry turnarounds in Q2. So that will play a role in the inventory dynamics as well. We count something like 17 of the 36 acid plants will be in turnaround in Q2. So many of those are in China, but that will have a role in the inventory dynamics.

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Operator [35]

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Our next question comes from P.J. Juvekar with Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [36]

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So question on, Mark, question on acetyls. In the last quarter, you announced rationalization of acetic capacity in Asia. And then you announced expansions in the U.S. of VAM, acid and now methanol. So it seems like you're moving production back to the U.S. presumably because of the energy advantage here. So is that true? And will you be exporting some of that material back to Asia?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [37]

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Yes. Yes. Well, no. That's definitely heck, yes, that's exactly what we're doing. When you look at the economics of that, it's pretty profound for us. The assets we have in China are -- and Singapore are higher cost than the asset base we have in Europe. And not only is it higher cost, if you look at just the script today for nat gas, out 5, 6 years, when you just roll that out, you can see that favorability lasting for a very, very long period of time.

I just want through some economics the other day that shows how solar power is actually offsetting incremental gas being consumed for utilities in the state of Texas. I mean so we have this low-cost energy base here on the U.S. Gulf Coast that's pretty phenomenal. And the moves we're making really are moves to, as Todd had said, he says it much better than I can, it'll step us up from the base of, let's say, $800 million to kind of our trough earnings level for this business, back up above $1 billion.

About $100 million of that is locked up in the acetic acid, primarily productivity just associated with that switch from Asia to the U.S. And then you add on top of that incremental methanol, incremental VAM, those kinds of things. All those contribute towards -- again without any change in the basic business, closing that gap gets you back to $1 billion and of course, $1 billion and beyond goes from that. So yes, that's what we're doing. So most of that material will end up offshore. The demand in the U.S. is not really increasing.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [38]

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Great. And then post-all these expansions in the U.S., how integrated would acetyls be with your EM business? And how quickly can Scott separate these 2 businesses if you decide to take any strategic action on any of the pieces?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [39]

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Yes. The businesses are not -- is not -- there's organizational integration and it has to be separated. And there's efficiencies associated with a single instance of SAP and those kind of things that you have to work through -- there's some tax -- things you have to work through. And I think once before, we talked about the penalty associated with that of being well north of $100 million per year, so call it $1 billion of negative net present value.

There's been a lot of work that Mr. Richardson has led over the years and we really dramatically dropped that down -- maybe it's $50 million today. And we'll continue to work that down. But I think we're getting it to a point where should an opportunity arise that would facilitate value creation step that way, it would be certainly possible without the kind of huge negative consequences that corporations often see when that happens.

At the same time, we're seeing investment opportunities. And they see we're being very thoughtful with those. Every one we're doing is incremental at very, very low cost to us. But certainly, it's getting to that point where it could do something else, we could do something else that would make sense for that organization and for our shareholders.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [40]

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Yes. I mean depending on the deal, P.J., that we'd do if we got to that point, it's probably kind of 6-ish months process for us to get something pulled off.

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Operator [41]

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Our next question comes from Duffy Fischer with Barclays.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [42]

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It's Mike Leithead on for Duffy this morning. On acetyls, first, I was hoping maybe you could remind us what your backwards integration into methanol would be after the recently announced methanol and acetic acid expansion? And second, is it fair to assume with your methanol expansion announced that a potential investment in a second methanol unit is off the table right now?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [43]

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Well, I'll -- Todd, do you want...

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [44]

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I'll start and you can add to it.

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [45]

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Okay.

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [46]

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On the -- we've talked about roughly a 50-50 balance make/buy. That includes as well our affiliate investment in Saudi. But the profile in the Americas is, of course, more heavily weighted towards make as we think about the methanol unit in Clear Lake, you see these -- our derivatives in the Americas. But this will nudge us up a little bit.

We started that unit back in '15 with an original design nameplate of about 1.3 million tons. Now we're looking at 1.7 million tons once these expansions are finished. So low cost, great returns on capital also allows us to do some things in support of our integration here in Clear Lake. We acquired carbon monoxide which we talked about before. We have the expansion around the corner with acetic acid. So all that adds to our configurability options there in Clear Lake.

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [47]

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And Mike, and all I would say to is that, as a cross point, we could be full in the United States and we're totally integrated, and it would be to our advantage at that point. So there's still room to do that beyond the 1.7 million -- beyond the increment that we pushed out with this last expansion. So yes, we've got great partners in hand with Mitsui. We have other friends in the industry who would like to do something with us. So we are certainly not -- it's not the top thing on our list today, but it is something we continue to evaluate and look at. And we'll be willing to take that step with -- if the economics -- where that really make sense to our shareholders.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [48]

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Yes. I mean that's the important point. If we focus on high-return investments, and for things like methanol, it's got to really makes sense from a return perspective. And when we did the plant in Clear Lake a few years ago, just as a reminder, we got 50% of the capacity for less than 50% of the capital given some of the assets we were bringing there at the site. So we continue to look for advantageous investments that are going to be really opportunistic for Celanese.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [49]

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Great. That's helpful. And then I guess just following up on the return element, you talked about superior returns inorganic -- or sorry, in organic investment for Celanese. I was hoping maybe you could touch on the relative investment opportunity set between the 2 businesses, EM and acetyls, either in terms of higher returns for either business or just a broader opportunity set for you guys today.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [50]

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No. I mean we've been very clear in both businesses. We really target greater than 20% returns on investments, and we don't really look at either one differently from that perspective. And a lot of what we're doing in acetyls, we've talked at length about focusing on the opportunities in the Gulf Coast for incremental investments that really is justifies with productivity.

And then in Engineered Materials, a lot of these are really incremental capital. So if we're putting compounding lines in for Engineered Materials, it generates a lot of value that's just paying back in a couple of years. So that's really where we're prioritizing our investments right now. I think we said we've got kind of 9 projects or so going right now in Engineered Materials from a capital perspective. All of those are pretty small when you look at each one individually, but as a collective program, it's pretty sizable with again a return profile that's greater than 20%.

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [51]

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Yes. And I think the next generation for us too and EM is going to be to restructure our polymer base to better fit the consumption demands that we see in the future. So right now, we're very heavily U.S. and European based in our base polymer production. And we're seeing continued opportunities in Asia, and we see that growth quite dramatically which we currently satisfy from the U.S. So we think there is a whole new round of opportunities that are surfacing and that will be part of the new 3-year plan to think and talk about. We will make that investments out there and Todd is just talking about some of these guys. So we do believe that our investment opportunities are getting greater as we grow this company, and I don't think it's pretty evenly split between the 2.

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Operator [52]

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Our next question comes from Jeff Zekauskas with JPMorgan.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [53]

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In Jiangsu, over a longer period of time, do you worry that environmental constraints may either close your capacity or limit your capacity in some way or limit the capacity of your suppliers, your customers? Do you view these environmental efforts over a longer period of time as a clear positive or a clear negative or neutral or you can't tell for your business there?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [54]

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Well, Jeff, that's a great question. Yes. So when we -- first off, we're in the Nanjing Park, and it's considered one of the top 2 or 3 parks, maybe the fourth most favorable park in the entire country. So it's a very good park. It's well managed.

The role that companies like Celanese play there and BASF and others is we partner with the politicians really to support their move to become more focused on safety and environmental stewardship. So we play a key role in really helping them put forth the kind of regulations and protocols we have as a corporation and the other multinationals do on that park and on -- organizations that work there.

So they -- that relationship is really positive. So could it end inappropriately for a park like that? I suppose it could, but what we do is pretty unique. And I have a hard time believing that anytime in the near future, it -- these moves to improve China really represent a threat to that park or a real threat to our asset base there.

When you get out beyond, let's say, a park like -- a big industrial park like -- a chemical park like Nanjing, you get to a lot of industrial parks. Industrial parks don't run that way. They have lots of mom-and-pop or smaller operations there, and those are the ones that seem to be feeling the most pressure now. So I think it's really more our customers that could be impacted as time goes on in that regard. And right now we don't have a way really to assess that, but it's something we're going to keep our eyes on.

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

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Yes. Jeff, when we started planning for that site 15 years ago, we really tried to build it both from our own construction but also our upstream gasification suppliers' construction with an eye towards the future. So if China had an environmental regulation very similar to what we see in the Western Hemisphere, that's what we built for. And so it's not to say that, to Mark's point, that you couldn't see some crackdown possibly in the future, but we really did build that plan with an eye for the future.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [56]

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Okay. Great. And in Engineered Materials, was there a few percentage points of volume growth from acquisitions in the quarter year-over-year? I don't know, 4%, 3% benefit?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [57]

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There was a little bit from mix that rolled in this quarter versus last quarter. Year-over-year, Scott, I'm looking at...

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [58]

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Yes. It was pretty small, Jeff. I mean, it was -- it's more like 1% to 2% is probably in there. So as I talked about earlier, year-over-year, when you look out on a straight volume basis, it was 3%. What we're hearing from our customers and their demand is down considerably more than that. So if you pull that acquisition, roll that through there, it's more kind of the base is probably 4% to 5% down. We feel pretty good about that given the environment that we were in, that we were able to offset that with new projects.

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Operator [59]

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Our next question comes from Ghansham Panjabi with Robert W. Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [60]

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I guess first off and going back to the first quarter results, sort of relative to your initial guidance at the time of the 4Q earnings report, what truly surprised you in the upside in the first quarter? And then related to that, Mark, in your prepared comments, you mentioned confidence and an improvement in China and just broader underlying demand. Is that embedded in your reiteration of guidance for 2019? I'm just trying to clarify.

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [61]

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Yes. So what I would say is that we guided pretty flat. We were starting the year very, very slowly. And so we were focused solely on what we could bring to the table. And so what I was pleased about is that we brought a lot to the table through incremental productivity, through incremental sales, through mix shift that occurred in our portfolio. There was a lot of work that went into that. And you add on top of that a stronger March than we really kind of anticipated. So that kind of lifted us up a bit above -- over that initial kind of view we had.

Now as we're entering this quarter and I just outlined, I think you've heard, there's probably $0.25 of headwinds today that we didn't have last quarter that are real. So we're starting out not at $2.60. We're starting out more like $2.30-ish. I mean it's that kind of spot and we've got to build back into that.

What my optimism for the year is really centered upon is that I really do believe that China is going to improve as we get into this year and end this year. I do believe it almost seems like the machine is trying to get started only for something to knock it off course.

And we know the Chinese people well. We know that region well and our customers well. So there's a desire for them to do better. And my belief is as you get into the back half of this year, that we'll see that machine come alive and start to grab more of a foundation, which is not only good for us, but it's good for our affiliates and things like that.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [62]

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Great. And for my second question, kind of going back to the EM segment. Volume is down 3% in the first quarter. Obviously, comparisons are much more difficult given years of outsized growth and the choppiness in the macro. But the trend line is nonetheless weaker over the past few quarters. I guess going back to the 4,000 projects guidance for this year, what sort of visibility do you have towards that number that gives you confidence of being able to hit that?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [63]

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Well, I think there remains this overall press to differentiate. Customers very much want to do new things and serve markets a better way. And so what you actually see is you see that trend increasing. The flip side of that is that the numbers tend to start weighing down to be a little bit smaller in size because people are less confident in that. So we're -- we feel very good about the 4,000. We feel very good about that contribution. And that is not a function of us thinking that the business itself is going to get better, the market's going to get better should -- the need for customers to differentiate themselves versus their competition.

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Operator [64]

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Our next question comes from Laurence Alexander with Jefferies.

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Nicholas Cecero, Jefferies LLC, Research Division - Equity Associate [65]

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This is Nick Cecero on for Laurence. So for Engineered Materials, you mentioned that the projects used in battery separators is expected to double again in 2019. Just wondering if we should expect the current cadence of growth to continue over the next 3 to 5 years. And then maybe you can just size the potential market opportunity here.

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [66]

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Todd, do you want to try that?

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [67]

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Yes. So we do see that trend continuing. That growth trajectory is extremely strong in that end use. It's probably one of the really good bright spots for us in China. We are in the process of finalizing an expansion of our GUR ultra-high molecular weight polyethylene unit there in Nanjing, which will help satisfy that demand in the near term. But we're already looking at what is the next wave of investments because we don't see that growth trajectory changing given the focus around electric vehicles in China and these batteries playing a critical role in that growth.

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Operator [68]

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Our next question comes from John McNulty with BMO Capital Markets.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [69]

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In the prepared remarks, you had pointed to 7 project expansions in the EM segment. Can you kind of help us to think about the earnings power tied to them and the cadence at which they may come in over the next couple of years?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [70]

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Well, I'd love to, John. I don't have the data in front of me. So you should think of all these as being small and being incremental, all adding millions, not tens of millions of dollars to that process, all baked into that push. We have to grow this thing $100 million per year, which we've been doing in that scenario. So I think it's -- these are small incremental step chains that make us going from the 6 90 up in the 7 70 or so this year. Whatever that number turns out to be 7 60 and then up from that into 8 50, 8 60 next year. It's all part of that.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [71]

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Yes. And it's really what allows us to satisfy the demand growth that we have from the project wins that we've been very -- talking about in great detail over the last several years. And so I mean to Mark's point, these are 5-ish million dollar type projects, each one of them, plus, minus. So we're not talking a huge capital for each one.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [72]

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Got it. And then I guess with regard to M&A, you indicated, I guess again in the prepared remarks, that the pipeline was strong for both businesses. Aside from the syngas unit that you just acquired, I don't really recall a whole lot happening in the acetyl chain. I guess how should we be thinking about the opportunities for M&A there? And what types of either assets or ventures you might be considering or looking at?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [73]

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Well, we think, in that arena, there's partnership opportunities that are available to us, at least in theory, on paper. We have come very close to acquiring businesses that would be derivative-light businesses that would fit our emulsions business well and the portfolio of products we sell there well. There's upstream opportunities there that could involve M&A. So you need to think of it as trying to extend that chain laterally and also back integrated in that chain.

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Operator [74]

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Our next question comes from Kevin McCarthy with Vertical Research Partners.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [75]

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Mark, would you comment on the size of your investment to expand methanol at Clear Lake by 25% as well as the timing of that project?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [76]

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The timing is several years. I think 2, 2.5 years because there's -- you got -- the next turnaround. We haven't talked about the dollar amount, but it's well, well less than $100 million.

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [77]

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Probably [shrink.]

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [78]

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Yes.

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [79]

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Yes. So Kevin, think of the timing similar to the start-up timing with the expanded acetic acid unit. So there's configuration benefits with both of those units starting up about the same time. There's some recapture on the CO2 side at the site and hydrogen benefit at the site. So there's all kinds of integration benefits associated with this. And to Mark's point, capital is de minimis and would be funded through the venture itself.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [80]

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Great. And then I wanted to clarify a comment you made earlier regarding potential cost to separate your businesses at $50 million to $100 million. How did you reduce that cost? And as a clarification, is it operational cost or is it inclusive of potential tax effects as well?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [81]

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It's sort of all of the above. I mean we look at all of the implications, everything from the credit arrangements we have and changing of those arrangements out there, the cost of the SAP systems. Now you reconfigure those systems with positive and negative relative to that. People that have joint jobs and how we deal with men and women like that and the way to take care of them.

So every aspect of that, we've looked at. And we felt pretty good that the 100, and it was actually a number higher when we first starting looking at that. We saw ways that we can invest money and improve our ongoing operating efficiency and get that number lower. So our path has been on through productivity to pull that down. And we think contemporary number today is closer to 50 for that ongoing impact. And Scott and others are working to even get that lower over time. So that's how we did it. It's not -- there's no magic in it, it wasn't one thing. There's hundreds of small things that we just had to go after.

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Operator [82]

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Our next question comes from Frank Mitsch with Fermium Research.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [83]

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Nice start to the year, gentlemen. On the acetate tow side of the house, the expectation when you offered guidance for the first quarter was that it would be equivalent to the third quarter of last year, which was around $65 million. You came in at $72 million. Now I noticed in the slides, you talked a little about affiliate dividends perhaps being a little bit larger. Can you talk and -- but you also mentioned that business, you believe, has returned to a stabilized earnings profile. Can you provide a little more color on what went right there and what should our expectations be for that business?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [84]

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Yes. Really, quarter to quarter, we had -- I mean there's -- a couple of things came in a bit higher than we thought. Price eked up a little bit and there was just some sort of return to a normalized pricing. So it was pretty flat year-over-year, but it was improvement quarter-to-quarter. We had some energy favorability of a few million bucks in there. Spending was down as part of our productivity initiatives came in. And those things all added up to some pretty good money.

And then on top of that, the equity earnings came in a bit higher. So that was the pop-up that you saw there. I mean, they will settle back down in that mid-60 kind of range. And we think, run out the year, we have continued to look for ways to add productivity, do more productivity in that arena, and we think we'll need to do keep these earnings flat next year. But I don't know if that's enough color for you, but I think the business is performing the way we thought it would. And we expect to be flat as we end this year year-over-year.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [85]

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Terrific. And just a clarification. Mark, obviously, you indicated that you thought China was going to improve. And just curious, is a trade deal necessary for you guys to hit that $10.50 number or not?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [86]

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Well, yes, that's a great question. And I want you to please understand that I'm talking -- this is a feeling, just having got back from there recently. And the team has spent a lot of time over there. But we -- if you look at the data coming out of China, what you see is you see starts and stops of things. It's like momentum starts to build and then something knocks it off course and momentum starts to build and something knocks it off course.

So I see that as an economy it's not sliding down. It's already taken that step down. It is trying to recover. And there's not a good reason for it to be down. I mean if you go there and you see that -- I mean it's a thriving economy still today, a $14 trillion economy that's going to grow 6%. That's probably twice the economic contribution globally to the world than is the U.S.

So to me, getting that incremental $800 billion or so coming from incremental growth from the Chinese economy is going to be critical not only for China, but it's also critical for the world. So I do believe that for the world to get better, China needs to recover. And I do think to jump-start the economy in China, the trade deal needs to happen.

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Operator [87]

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Our next question comes from Jim Sheehan with SunTrust Robinson.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [88]

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Regarding larger scale M&A. Is that all in EM? Is that all in the engineered plastics area? Or would you consider other kinds of businesses? And then on acetate tow, you once considered a joint venture there. What's your strategy for enhancing shareholder value from that business?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [89]

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Yes. So yes, when you look at the bigger deals we're looking at, they tend to be more EM-oriented, and that's a little bit of a balanced equation. If you look at AC, we have more control on the growth destiny of AC, which may need fewer partners. We have -- already have a machine and we can elect to work with people or just do our own investments in. And so they tend to be more EM-oriented, that's what I would say there.

Yes. As regards to AC, we continue to look for ways to try to involve others in that. We think that's the right thing to happen over a longer period of time. Having said that, that business is directionally starting to improve. And we do believe, if we can get through the next year or 2 with flat economics, we'll see a period of time without -- whether we do a deal or not with somebody else, we'll see this business start to get back on course to improve naturally.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [90]

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Yes. And Jim, as we look at deals in Engineered Materials, they -- we really are focused on deals in the engineered thermoplastics space, so other materials or similar materials to what we have today.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [91]

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Terrific. And how should we think about the earnings lift from the 15,000-ton expansion in Nanjing?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [92]

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Yes. It's a few cents on a full year basis, Jim. It's kind of embedded in the projections that we gave as part of our 3-year plan last year.

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Operator [93]

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Our next question comes from Arun Viswanathan with RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [94]

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Just real quickly on the dissynergies that you've cited there the [$50 million]. Would you like to see that, I guess, go to breakeven before any kind of -- you proceed forward with any kind of action in a JV transaction or a separation?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [95]

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Arun, you were talking about the tow business or the AC business?

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [96]

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The AC business.

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [97]

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Okay. Yes. Yes. Well, I'm -- you guys don't like me very much with this comment. But I think you don't make money by just blowing something up. You make money only if you catalyze unique growth profile. Right now, we have that underway for AC. We're not holding back money for AC. So I think until we started holding back money from a growth point of view, it -- the shareholders are getting the full value for that within the portfolio. So we would see it as part of some catalytic event, I do believe. Or if there was a need for a lot more money we're going to put in place, then you could rationalize that's the right thing to do to bring in a partner and do something else to try to unlock that shareholder value.

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Operator [98]

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Our next question is from Aleksey Yefremov with Nomura.

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Matthew Stephen Skowronski, Nomura Securities Co. Ltd., Research Division - Research Analyst [99]

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This is Matt Skowronski on for Aleksey this morning. Just following up with Kevin's question. In the past, you mentioned that CapEx in out years, to 2020 plus, it's going to be around $400 million. Is that still a good number to think about now that you have these expansion projects going on?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [100]

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No. It's drifting up and I don't know -- I'm looking at Scott. I don't think we've rolled out a number there. But we'll update that shortly, I think. Clearly, the acetic acid expansion is in there, and that wasn't included originally when we said it was in the $400 million. So it will be up a bit.

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Matthew Stephen Skowronski, Nomura Securities Co. Ltd., Research Division - Research Analyst [101]

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Understood. And then within engineering materials, is destocking limited to autos? Or were there other end markets?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [102]

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Primarily auto.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [103]

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Yes. Auto, electronics would be probably the 2 biggest where we saw it. We really didn't see much impact in our medical business. And consumer goods has actually held pretty up well also. So it's really mainly cell phones, other electronics and automotive.

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Operator [104]

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Our last question is from Matthew Blair with 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 [105]

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Just one for me. You mentioned a pretty heavy turnaround schedule in Q2. It also seemed like you had some downtime in Q1. Does this mean that your turnaround schedule for the back half of 2019 is pretty light? And can you provide any numbers around that?

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Mark C. Rohr, Celanese Corporation - Executive Chairman & President [106]

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Yes. AC is pretty light. We have -- I think we have EM outage planned in the third or fourth quarter as well. But yes, we tend to -- like most companies -- we tend to do more in the second quarter. And so it's pretty normal for us, that $30 million, $40 million kind of hit in the quarter.

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Operator [107]

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Ladies and gentlemen, at this time, we've reached the end of the question-and-answer session. I would now like to turn the call back to Chuck Kyrish for closing comments.

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Chuck Kyrish, Celanese Corporation - Treasurer & VP of IR [108]

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So we thank you for your questions and for listening in today. Certainly, we're available after the call to address anything further that you have. And that will wrap us up. Rob, you can close us out.

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Operator [109]

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