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

Q2 2019 Celanese Corp Earnings Call

DALLAS Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Celanese Corp earnings conference call or presentation Tuesday, July 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

* Lori J. Ryerkerk

Celanese Corporation - CEO & Director

* 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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* Aleksey V. Yefremov

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

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* David L. Begleiter

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

* 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 Robert Lovseth Blair

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

* Michael Joseph Sison

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

* P.J. Juvekar

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

* Patrick Duffy Fischer

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

* 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 Celanese Corporation's Second 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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Thank you, Rob. Welcome to the Celanese Corporation Second Quarter 2019 Earnings Conference Call. My name is Chuck Kyrish, Vice President, Investor Relations and Treasurer. With me today are Lori Ryerkerk, Chief Executive Officer; Scott Richardson, Chief Financial Officer; and Todd Elliott, Senior Vice President, Acetyl Chain.

Celanese Corporation distributed second 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'll discuss non-GAAP financial measures today. You can find definitions of these measures as well as reconciliations to the comparable GAAP measures on our website.

Today's presentation will 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 these materials have also been submitted to the SEC. Since we published our prepared comments yesterday, we'll 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 Dave Begleiter -- David Begleiter with Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [2]

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Lori, just on your implied Q4 guidance, what's driving the expected improvement in Engineered Materials? And how much of improvement do you expect in that segment in that -- in Q4?

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

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Thanks, David. If we look towards second half through third quarter into fourth quarter, we do see indications that kind of the acute destocking that we've seen in first and second quarter is unlikely to continue. And acetyls, although inventories are high, really represents only a few weeks, and we see some indications that there's some movement there.

On Engineered Materials, again, talking to some of our key customers, some of the folks and Tier 2s and Tier 3s in the supply chain, especially to automotive and things, we see indications that stock levels have pulled down quite significantly in the first half, and we don't expect that to continue. So we're not forecasting restocking, expecting to see demand going back to more normal levels. And we're suggesting that would have not as much seasonality than in fourth quarter because we've already seen the destocking occur this year.

Just by way of evidence on that, if we look at our order book for July, it's already about 10% higher than it was in April at this time. So that's really the basis for our outlook for the rest of the year.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [4]

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That's very helpful. And just update maybe on the M&A pipeline and the transformational transaction that was discussed at the last earnings call.

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

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So we continue to look at all levels of M&A, David, both kind of small bolt-on acquisitions as well as the more transformational activity that Mark is busy looking at. On the bolt-ons, while we have still many prospects we're looking at, while we haven't found any better delivering at the value we would like it to complete this year, but that activity will come through. And as I said, Mark continues to work on the transformational M&A. But as we told you all before, that will come when it comes and a little bit uncertain on that timing.

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Operator [6]

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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 [7]

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In your Engineered Materials business, your equity income was down in second quarter year-over-year, and you have some strong comparisons coming up. What's the trajectory of equity income? I know that there are timing issues having to do with oil prices.

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

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Yes. So if we look at equity income year-over-year, we saw about a $27 million decline there. Actually, almost 2/3 of that, $16 million of it was really due to affiliates. And of the affiliates, $10 million was due to turnaround timing at Ibn Sina. So clearly, we expect that to reverse itself. We had some weakness in other affiliates in the first -- in the second quarter and in the first half as I think we described last quarter, specifically around our China affiliates that are -- were more exposed to auto. We've seen some strengthening of that in second quarter.

So I think going forward, again, we'll see the reversing of that turnaround timing at Ibn Sina. We are seeing some strengthening in our affiliates' performance. And then the remainder of that, kind of the additional $10 million year-on-year is just general market conditions, which, as I described to David's question, we do start to see some signs of starting to recover some of the demand as we go into the second half.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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Is acetic acid pricing in China getting better sequentially and might it make a difference to your returns in the third quarter?

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

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Certainly, if it gets better, it will make a difference to our returns in the third quarter. I think indications we've had in the last few weeks is we are starting to see some firming of pricing in acetic acid. Things move around though, so whether that's sustained or not I think is a question.

Todd, do you want -- do you have any comments you want to make around acetic acid pricing going forward?

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [11]

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Yes, Jeff. The demand situation in China is probably the most important thing to watch. We saw demand come off by at least 10%, probably more than that, for acetic acid sequentially Q1 to Q2. That's an industry comment, not a Celanese comment. But that's weighed on demand conditions, of course, and then therefore pricing conditions and pulled down utilization rates in the second quarter.

We're watching it very closely. We've pivoted our business to derivatives, mainly vinyl acetate and emulsions, and have grown that space by 9% sequentially on volumes. And that's lifted the overall acetyl business by about 2% sequentially. But to your point, we're watching China price. We're heavily involved, of course, in that part of the world. And demand is a key thing to watch at this stage.

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Operator [12]

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Next question comes from Bob Koort with Goldman Sachs.

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

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I was wondering if you could give us some breakdown of your CapEx. You talked about $0.5 billion in 2021. Can you give us those buckets in terms of maintenance or cost reduction activity and then [gross] spending and maybe some of the highlight projects that are in there?

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

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Sure. Thanks, Bob. So if we look at where we are, and let me just start with '19. So in '19, we're about -- we're approaching $400 million in CapEx. If you look at where that's being spent, about 50% of it is in EHS and what I call maintained margin projects, so turnaround, reliability-related projects, maintaining the equipment to basically maintain where we are. About 25% of it is in cost reduction projects. And I think what's significant about that is that's about 3x more than we've had in previous years. And that really reflects our continued focus on helping ourselves, if you will, through productivity by doing relatively minor investments so that yields large future cost savings. And then about 25% is in revenue generation.

Now as you go forward and you see that number getting closer to $500 million, all of that growth is really in revenue generation. So it really is -- and/or productivity. So it is projects like methanol expansion. It's projects like the VAM expansions we've done. We have some additional compounding lines starting up as we go forward as well as some debottlenecking activity in various polymers in the U.S. and in Europe and in Asia actually, in all 3 regions. So the real growth is all in revenue-generating activities, either volume and/or productivity. And in almost all cases, we can trade all productivity for volume.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [15]

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I think on a go-forward basis, I think what I would bake in there on that is about $150 million of MOB-type CapEx, and the rest is exactly what Lori talked about from a cost reduction and rev gen standpoint. But we look at the entire bucket of CapEx, and the returns we generate on that entire bucket inclusive of MOB at 20% -- greater than 20% return. So that's kind of what I would bake in on a go-forward basis.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [16]

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And can I ask on the EM side? You guys had some pretty explosive growth there 4, 6, 8 quarters ago. It started to slow, and then you're also battling maybe raw material pressures and being more selective on your pricing. Well, this quarter, it looked like both volume and price got dinged. I guess I could see the volume side, but can you talk a little more about what's going on in price and maybe how your pricing in EM correlates to what's happening in the raw material?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [17]

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Yes. So if we look at Engineered Materials, we do see -- as we talked about, we've seen a decline in auto demand. We've seen a decline in electronics demand. Clearly, in some areas, especially nylon, for example, and elastomers, which has been heavily challenged by those declines, we have seen a lot of competitors in the market driving price down, and we've seen a lot of pricing being done to compete for volume. Now we haven't followed that all the way down. And obviously, that's why our volumes are somewhat off in those areas. But we have seen some pricing pressure, especially in those areas and especially as it applies to automotive.

What I would say there, nylon and elastomers are heavily impacted by the M&A we had over the last 2 or 3 years. So that's also kind of year-on-year and quarter-on-quarter. We're not -- we haven't had any significant M&A in the last year. So that is a change from, say, the past several years.

And what we see with our affiliates is why we're happy overall with their financial performance, a lot of the volume that came in with -- sorry, not with our affiliates, but with our acquisitions. A lot of the volume that came in with our acquisitions were not as differentiated as our base portfolio, not generated using the same project model, and therefore, not as sticky as some of our base portfolio. So as we've gotten into this more challenging economic backdrop, we've seen some of those volumes not be as resilient as our base portfolio. Over time, we expect that to change as we are developing those volumes consistent with our business model, but we have seen those influences come together in this quarter.

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Operator [18]

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Our next question comes from Vincent Andrews with Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [19]

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Just a question around your capacity in acetyls in Asia. There were some reports during the quarter that you were taking your own utilization rates down. So could you discuss that a little bit and then help us understand where rates are now in the third quarter and where you expect them to be?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [20]

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Yes. So maybe I'll start and ask Todd to weigh in more specifically. I mean in generally, in acetic acid in China, we are seeing demand decline of more than 10% in the second quarter, and that put China capacity utilizations around 70%. And that's versus if you go back, say, a year ago, that was well into the mid-80s or even a little bit higher. So for certain, utilization is significantly down in China in general.

Our own capacity, I'll let Todd come on, on that, but I will say we did see some other producers in China take units down entirely and take capacity back in response to that as that, combined with kind of historically low level of pricing, made it unaffordable for folks to run.

Maybe, Todd, you have a few comments on operations?

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [21]

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Yes, sure. Thanks. Yes, thanks, Vincent. Thanks, Lori. Vincent, we flex our acetyls network on a daily basis. I mean this is what we do every day and every week and every month, trying to get the maximum value we can in each of the products, and we did a great deal of that in Q2. Our activations were up 30% sequentially, and this is our measurement of really actions and decisions that we take to flex our network in the best way.

So remember, we had a couple of turnarounds in the system in Q2. We had a vinyl acetate turnaround in Bay City as well as in Nanjing, so that kept VAM rates lower in those 2 units. Acetic acid-wise, if you look out a little bit, we do have turnarounds -- the first part of a turnaround in Singapore before the end of this quarter Q3 and then mainly into Q4. So without giving specific rates by unit, I think the key takeaway is our flexibility, our ability to pivot, whether acetic acid or derivatives, is really the differentiation that we would point to.

So we intentionally moved plus 5% of our acetic acid tonnage downstream to our derivatives. So we shifted to VAM, shifted to emulsions, 5% sequentially. That allowed autos to grow VAM and emulsions by 9% volumetrically from Q1 to Q2 and then therefore lifting the overall chain by 2% sequentially. So those choices, those options and choices are what we would point to. And really, the end result is profitability of $189 million. And if you take out the turnaround that I mentioned before, which were about $15 million of headwind in the quarter, puts us about that $200 million run rate for the business on a quarterly basis while keeping EBIT margins above 20%.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [22]

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Okay. That's helpful. If I could just ask on EM, on the volume side of the equation, you called out a couple of things that a little more color would be helpful. One, it sounded like in the first quarter, there was an inventory build from some of the health care customers. Could you just kind of help us understand how that volume does swing around from quarter-to-quarter? It seemed like in the first quarter, volume was strong if I go back and look at the comments from then. So how does that work if their volume shifts around? And then secondly, I think there was a comment that volume was also hurt by a mix effect, if you could just help us understand what that is.

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [23]

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Thanks, Vincent. And actually, those are -- those are really the same thing. It continues to be a very strong sector for us, but it is a very -- relatively small volume sector with very high margins. And so actually, small swings in volume can have a very big impact on our earnings. And what we saw in the first quarter is we did see customers, particularly in the U.K., building volume in anticipation of a Brexit move, clearly it didn't happen, worrying about tariffs and availability and everything else relative to Brexit. And it does -- again, it's not a huge volume, but it swings a good bit of the margin.

If you look at our EM kind of quarter-to-quarter, first quarter to second quarter, of what we say is the volumetric impact, it -- of that volumetric impact, so 7% total volumetric impact, 4% of that was actual EM volume, 3% was just the mix with most of that being medical. So just the fact that medical volumes got moved into the first quarter from second quarter, we see this from time to time. It was particularly big first and second quarter, but medical tends to be a bit lumpy. We get a big order once we get FDA approval. And people well stock up as they prepare for run and then go down. So it tends to be a bit lumpier maybe doing some of our other business but we did see the first to second quarter primarily because of the Brexit impact.

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Operator [24]

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Our next question comes from Mike Sison with KeyBanc.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [25]

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Nice quarter there. In terms of the Acetyl Chain, I'm just curious, you guys, as you've talked about, do a good job pivoting between upstream/downstream, geographically. And so as you think about the second half of the year, where do you think you're going to need to pivot to make your earnings outlook for the year? And maybe it's hard to say, but just any current -- are you going to stay downstream, that type of thought?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [26]

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Yes. Thanks, Mike. So on the Acetyl Chain, quite frankly, we're quite pleased with where we are. I mean continuing to turn in 7 consecutive quarters above 20%. And I think the second quarter is really just a good example of the strength of the model in acetyls and the ability to have authorization to continuously do activations, as Todd just described, most value at wherever it exists, but beyond the chain.

I think an interesting point and maybe a bit to your question, if you look at the very low pricing we're seeing in acetyls from China, less than $400 a ton, the last time we saw this level of pricing was back in first quarter of '17. And if you look at the earnings in first quarter '17 for acetyls, it was $109 million. You compare that to the second quarter now at $189 million, we've had an $80 million uplift in the value of the Acetyl Chain and basically the same economic condition based on the strength of the model and the folks deploying it and the focus on productivity and all the other steps. Put another way, margins on acetyls went from 14% in first quarter '17 to now 22% in second quarter '19. So I think that really speaks to the strength of the Acetyl Chain.

Really, to achieve that $10.50 view for the year, it's really just continuing to activate that model and continuing to deliver on that $200 million level quarter-on-quarter. And obviously, if we were to get for whatever reason a good run-up in the prices of acetic acid in China in particular, that would just be more on top of that.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [27]

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Got it. And then as a quick follow-up, in terms of EPS, you did about -- you did $5 in the first half and adjusted EBIT about close to $800 million. So you look at the second half, you need a little bit more obviously in EPS $5.50. Does your adjusted EBIT have to go up a lot in the second half to do better? Or is it -- and maybe just a thought on how the second half adjusted EBIT looks relative to the first half.

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

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Yes. Again, we are assuming some improvement in market conditions based on my earlier comments. So obviously, EBIT will go with that. But clearly, also on an EPS basis, we're helped by the share buybacks that we've had in the first half of this year as well as last year. But let me turn it over to Scott to maybe give a more complete answer.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [29]

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Yes. I think that's really the point. I think we do need a slight improvement in the adjusted EBIT. And I think Lori talked earlier about how we expect that -- given the destocking we saw in the first half, that we believe the second half can be better, order book starting out in July a little better than what we saw, particularly in second quarter. And then just what we saw in the first half of this year, we're currently not baking in the same level of Q4 seasonality. So when you kind of take all these things into consideration, you should have slightly a better adjusted EBIT in the second half, plus the benefit of the buybacks we did in the first half and what we expect to do in the second.

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Operator [30]

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Our next 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 [31]

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Methanex is going forward with its third unit in Geismar. Todd, could you give us an update on the Clear Lake methanol expansions that you're doing with Mitsui?

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

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Yes. Thanks, John. We announced last quarter, our plan is to take that unit up to 1.7 million tons. That would be operational sometime in 2022. We're pleased with the output of that unit. That continues to contribute value as it's running above the original design capacity. But we're on track, again, to raise that up by about 150,000 tons. That would be shared with our partner and, again, on track towards 1.7 million by 2022. And we'll update that specific timing as we work through the progress. We did receive the requisite permit from Texas to proceed down the path there.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [33]

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Okay. And then, Lori or Scott, in the Engineered Materials business, could you share with us how much the automotive business was actually down during the second quarter? Was it down double-digit percent?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [34]

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So if you look at actual automotive builds, we actually saw about a 3% drop, most of that coming entirely out of Asia. U.S. was actually up a little bit on the strength of [trucks], that EU was down. Of course, [bills] is interesting, but what really matters to us is what the demand for product is. And there, in our discussion with the Tier 2 and 3 suppliers to auto in all regions, we were hearing from some of our key customers and distributors declines of 20% to 30% on volume. So clearly, an indication to us that destocking was continuing into the second quarter.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [35]

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Were you down in line with those Tier 2 discussions that you had?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [36]

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No. Our EM volume -- actual volume was down about 4% in total for EM.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [37]

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Yes. And John, auto -- the auto piece of that was just maybe about a percentage point higher than that.

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Operator [38]

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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 [39]

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Lori, as the center of gravity for acetyls shifts to the U.S. and at the same time for EM, the focus of growth seems to be China, does that mean that there will be less integration between the 2 businesses going forward?

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

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It -- well it's an interesting question, P.J. I don't think there's less integration going forward. I mean we have raw materials available in China. There's plenty of acetic acid producers. It just may mean that less of our own material was going into EM in China, but we continue to have a growing EM business in the U.S. So I don't see it having a significant change in terms of the amount of integration between the 2 businesses.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [41]

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Okay. And as acetic acid prices dropped, you nicely pivoted to VAM and emulsions. And so that's a great tactical move from your team. But when do competitors catch up with that move? Or are they not that flexible? Because I would imagine that these are big large companies that are global and they should be able to do the same thing.

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [42]

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Yes. So the interesting thing is I think there aren't any competitors who can do the same thing. I mean that's the beauty of our integrated model. I mean there's a lot of competitors who make acetic acid. There are competitors who make VAM, and there are competitors who make emulsions. There's not many who make all 3 from the start of the value chain at the CO and methanol all the way through emulsions. And that's really where our model is, I think, differentiated from others, and it's strong. It allows us to give less volatile results in this level of earnings is because we are fully integrated to the chain and fully integrated geographically, which not all of our competitors are. So we have the ability as we did this quarter to reduce our exposure to Asia and increase our sales into the Western Hemisphere where margin -- available margins were higher for VAM and emulsions.

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Operator [43]

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Our next question comes from Duffy Fischer with Barclays Bank.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [44]

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A question around Lori's comment that you're $80 million a quarter better now in this kind of a tough acetic or acetyls market than you were in Q1 of '17. It would strike me that, that's got to be one of 3 factors, either better realized price versus the posted price, better cost or you're selling more volume into the market. Can you break it down into those 3 buckets, that $80 million? Where does the majority of it come from? And how much do you think is structural versus maybe just some transitory fortunate business?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [45]

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Well -- so Duffy, I mean, I think -- look, we work very hard for these results. So what I would tell you is I don't have the exact breakdown in front of me. I mean it's a little bit of all of it. But it really is the ability to flex our model and make choices about where we take value out of the chain. So it's certainly price, and the price we're realizing for VAM and emulsions, if you will, versus acetic acid. But I think the point is it is the strength of the value chain, the strength of the geographic model and the talent of our folks, if you will, to be able to constantly flex and make decisions every day about where to extract value in that chain, which makes us confident that we can continue to deliver these results even in periods of low margin environment like we've seen in the second quarter.

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

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Yes. And Duffy, I could add, remember, we've added integration with methanol. We've added integration more recently with carbon monoxide. We expanded our vinyl acetate unit in Clear Lake by 150,000 tons. And we've achieved more options, frankly, with this global network that Lori just outlined. So it's really the combination of that and the real-time use of data which provides us insights to make these calls, these activations to effect these decisions that contribute to the result. We believe it's repeatable, and we're going to look at additional value steps going forward. John asked the question about the methanol expansion. There's other value addition steps that we're pursuing and look to layer those on top of (inaudible) accounts.

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [47]

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Thanks, Todd. And I think we shouldn't ignore productivity. I mean for Celanese, we are delivering about $100 million a year in productivity [set]. So again, roughly kind of 50-50. That -- certainly doing that year-on-year-on-year is making us more competitive as well, lowering our overall cost base.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [48]

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Great. And then does the market believe that the coal gasification explosion at Yima is going to be a big deal for the acetic acid and the acetyls market in China?

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

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Todd?

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [50]

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Yes, Duffy, I think it's too early to get into that. And it's a terrible, terrible thing. Many lives lost and multiple injury in there. And Henan province, there's something like 11% of domestic Chinese capacity in that province. So it's a -- from a country perspective, that province was a big producer. This particular unit was only a couple hundred thousand tons, so call it 2% or so of domestic capacity. So we're watching that. We're -- it will remain to be seen what the province does across the other units there in Henan and whether steps to be taken to curtail operations there. We're focused on what we can do with our customers to keep our efforts and business connected and ultimately work the Q3.

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Operator [51]

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Our next question comes from Laurence Alexander with Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [52]

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Two quick ones. First, on the uptick in the order book that you've seen recently, can you give a sense for how broad-based is it or if there's any particular regions that are stronger than others in terms of the pace of improvement? And secondly, on productivity and turnarounds, is there any lumpiness that we should be thinking about for 2020 and 2021 in terms of timing of outages going forward?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [53]

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Yes. So on the order book, we're seeing it fairly broadly. I would say because of the declines we saw in second quarter, I mean it's probably more noticeable in some of those grades, nylon, elastomers that I talked about, seeing good recovery in palm, good recovery in LTP into electronics. So I'd say it's pretty broad across the different grades that we make in the order book. And then it's also pretty spread between the regions at this point.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [54]

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Yes. On turnarounds, Laurence, we're doing that work right now on kind of flanging that up across the corporation as we do turnaround planning, and we'll provide more insight into that probably in October.

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Operator [55]

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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 [56]

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Lori, congrats again on your new role.

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

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Thank you.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [58]

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I guess going back to your EPS guidance reiteration for '19 and sort of the embedded expectation for improved demand fundamentals as per your comments in the press release, are you basically assuming that the inventory destocking that pressured the first half is now behind you? Or are you assuming any sort of acceleration in end market volumes, including in the EM segment?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [59]

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Yes. So that assumption is we are assuming that destocking is pretty much behind us. Now we're not assuming any restocking, if you will. We're really assuming a return to normal demand in the third and fourth quarter and some assumption around not seeing the amount of seasonality in fourth quarter we usually see for destocking because we believe the destockings already occurred.

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

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Okay. That's helpful. And then just in terms of some of the supply chain [super] market, such as electronics perhaps moving away from China into other parts of the world, including Southeast Asia, at least directionally, how are you sort of balancing your focus on expanding your EM footprint in China, which you called out in your prepared comments, versus some of the other regions across Southeast Asia more broadly?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [61]

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Yes. So we are very focused on expanding auto in China and not just our sales. I mean I think if you go back historically, most of -- our EM business in China really started with following big auto, if you will, into China, and people that we supplied in other regions of the world, whether it be Europe or the U.S., basically supplying the same materials into China. And so it was very much on a -- exporting materials from the U.S., exporting from Europe into China.

So if you look at it, the large percentage of our EM materials, in fact, quite the majority, are not just produced but also compounded outside of Asia and then imported into Asia and into China. That worked when we were doing a lot of auto and things that had long lead times and things that had pretty long life. But if you look at our business now and especially as you go into consumer and electronics and things that maybe even change every 6 months to a year, it's just not a supply chain that can meet our customer demands to get products more quickly, development more quickly. So we are already -- have a couple of projects going in this year to add compounding lines in China. And our future capital program over the next few years is focusing on adding poly as well as additional compounding in China really to shorten the supply chain to meet the needs of our current customers in China and the rest of Asia.

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Operator [62]

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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 [63]

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Lori, in your prepared remarks, you had highlighted the ability to accelerate some of the actions around cost cutting. Can you quantify or give us the magnitude as to what you can pull forward to 2019 this year?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [64]

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Yes. So we pulled forward about $60 million, let's call it, of capital projects, capital spend. So give you an example, these are things like retrofitting and refurbishing natural gas boilers to get better energy efficiency at plants. I mean these are things that we won't necessarily see the payout this year, but we'll see the payout next year and the years that follow.

But to give you an idea, on productivity, the combination of capital projects and other productivity where we had been doing a run rate of about $100 million a year on productivity, that number for this year will be between $150 million to $200 million. So we've been able to pull in, call it, $50 million to $100 million on a full year basis now. Obviously, not all was implemented January 1, so we won't get all of it this year, but call it, $50 million to $100 million.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [65]

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Got it. That's helpful. And then with regard to EM, I guess how much -- or what percent roughly of your products can be kind of swapped out quickly if there's competition around pricing? Because it does sound like that may have been a little bit of an issue. And then how much of it is really kind of specked in and is really tough to displace around random price cuts or lapses in discipline?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [66]

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I'm not sure I know the exact numbers. I'll ask Scott to back me up here. But right now, I would say, it's probably 1/3 of it is really very sticky, I mean very, very hard. 1/3 of it is specked in, but probably others could be -- are either already specked in or could be. And then 1/3 of it is more of what I'll call me-too kind of product, which is easier for people to come in and out of based on price.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [67]

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Yes. I think that's exactly right, John. We're -- I mean about 1/3 of the business is a little bit more transactional. It's still an engineered solution. So it's not something that changes, I mean, from 1 day to the next. But it can be switched out. The reality of it too is we can also switch out between polymer base. So that's an opportunity for us as well, depending on where various raw materials are. And given the breadth of our portfolio now and the fact that we have over 20 different polymer families that we can go into, it just gives us a lot more flexibility in this market, depending where raw materials are in the more transactional spaces. But it continues to be important for us as we build our project pipeline and really start to try to put more focus on that specked-in sticky business that Lori talked about.

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Operator [68]

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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 [69]

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Question on the acetyls industry. As we look at some of the trends, it seems to us that there's a relatively large number of outages across the industry in recent months, recent quarters. My question is do you agree with that? And if so, do you have a sense for how much or how many of these outages are maintenance-related among your competitors versus caused by economic reasons with market prices sinking? Do you see competitors throttling back simply because they go cash negative, for example?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [70]

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Yes. Thanks, Kevin. It's always a little bit hard to say, but let me ask Todd to follow up my comment. We know in China that some capacity has been intentionally shut down due to combination of demand and pricing. Second quarter is traditionally a fairly heavy turnaround quarter as well. So certainly in the U.S. and in Asia, we see some taken out.

Now having run operations for 35 years, I can tell you people make a lot of decisions around extending maintenance outages and doing the metaphor [pacing [things when economics are like they are now. So it's why it's always a little bit unclear about how much is economic versus how much is maintenance. But certainly, we've seen both.

Todd, you may have more specifics you can provide.

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [71]

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Yes. Kevin, it's a good question. And to Lori's point, it's hard to know the exact figure. But if we were to try and track utilization rates with that demand drop sequentially by over 10% in acetic acid Q1 to Q2, we believe that would have pulled utilization rates down on a global basis to just under 80%, so call it around 79%, with China actually dipping under 70% utilization rates. So on the heels of that, to your question, to your point, we do believe kind of intentional curtailment occurred late in Q2. We would call a run rate typically around 300,000 tons of sort of normal outages. We think that might have doubled if you kind of ramp it up and factor all that in. Again, hard to be absolutely precise here.

But there had to have been some intentional actions. We certainly do our part with our own network, and that's what we do to take care of our customers and also to maximize value for shareholders all the time. So there were some curtailments indeed. And as we go into Q3, it's important to track and watch and really sets the tone for improvement as we go into second half of the year. But demand is critically important. We've got to focus on demand conditions, and starting to see that industrial space, particularly in China, starting to recover, and that will help a lot really all of our businesses.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [72]

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That's pretty helpful. And then as a follow-up, again, sticking with acetyls, what are your latest thoughts on rationalization of Celanese's capacity in Asia? Do you need to get through IMO 2020 and really see how the fuel markets react in Singapore?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [73]

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Yes. That's exactly right. I mean we've announced our intention to do an acetic acid reconfiguration. We are still progressing with that project. But ultimately, the decision -- it is based on productivity, by the way. It is based about utilizing lower raw material costs in the U.S. Gulf Coast and taking capacity out of Asia. But that decision, where to take capacity out of Asia, will depend on exactly what you said. Where do we end up with bunker fuel pricing? What does that mean for Singapore capacity? Where does coal pricing go? What does that mean for Nanjing margins? And we'll make that decision at that time based upon where we are on both of those.

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Operator [74]

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

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [75]

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I just wanted to go back to the guidance for both Q3 and Q4. I guess that looking at Q3 as between Q1 and Q2 would put it maybe at $2.50, and then your statement is to [stay path] to the $10.50, so that would improve maybe around $3. Just -- I just wanted to understand that path a little bit more. I guess the mechanics would be both acetyls and EM going up and margins and price and volume. Where do you see the greatest confidence in that path? Is it in EM or acetyls? And where do you see the risk factors as well?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [76]

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Yes. So the thing we've said, we really feel confident in our ability to continue to do -- deliver acetyls in the $200 million range. Clearly, if we see firming in acetic acid pricing as we've had some indications, if that sustains, that could be further upside for acetyls. And for all the reasons we discussed earlier around destocking, et cetera, we continue -- we expect to see recovery in Engineered Materials as we go forward through the end of the year. And then, of course, since we're talking earnings per share, we also have the impact of the share buyback and seeing kind of the full year impact to that on the numbers.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [77]

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Okay. And do you also expect to update your longer-term targets that you provided last year for '18 through '20 at some point?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [78]

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Yes. So we're working now through a strategy refresh. We'll be working through that through the end of the year. Clearly, part of that will be to look at 2020 again and kind of relook at our view for 2020. So hopefully, in the October time frame, we will have that. Certainly, as we work through the strategy and to the end of the year, we'll have a view on 2020 as well as the out years beyond that, yes.

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Operator [79]

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Our next question comes from Aleksey Yefremov with Nomura.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [80]

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In Engineered Materials, how should we think about your margin sustainability? What was the level of margins for wholly owned business in the first half representative of what you could see in the second half?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [81]

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No. I -- look, I think for all the reasons we described, I think we expect second half to be stronger for Engineered Materials than it was for first half. I think certainly for our acquired businesses, we expect further strengthening in those business models and the delivery against the model for those going forward as well as the general improvement we see in market conditions with not anticipating further destocking. So I think for our own [install] businesses as well as for our affiliates, but especially for our own businesses, we expect a stronger second half than first half.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [82]

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Yes. And Aleksey, just typically, volumes are strongest in Asia in Q4. Margins are a little bit lower there versus the Western Hemisphere just with Chinese New Year in Q1 kind of moving into that time frame. So typically, our Q4 margins are a little bit lower, so that would be something to keep in mind as well.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [83]

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Great. As a follow-up, you guided third quarter between first -- somewhere between first and second quarter. Should we think about that guidance as sort of the midpoint? Or are you kind of closer to the first quarter level or second quarter level and you are thinking about 3Q?

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [84]

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I think we're still fairly early as we start the quarter. And so I think it can really be how demand materializes. I think there's been some pretty public announcements from some of that, for example, automakers taking summer shutdowns. But we do expect to kind of more or less see destocking coming to an end as we talked about. So it's in that range. And as we work our way through the quarter, we'll have better idea on where we finish, but it's somewhere in that range.

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Operator [85]

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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 [86]

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Share buybacks were pretty robust in the quarter. Are you still targeting around a 7% share count reduction for the year? It does seem like you're on track to do even more possibly.

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Scott A. Richardson, Celanese Corporation - Senior VP & CFO [87]

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Yes. Jim, we've been very open about the fact we're going to be opportunistic with share buyback. We expect this year to be in the range of where we were in 2018. We did $800 million in 2018, and we expect to be in that general range. We're finishing the first half at $500 million. In the last 12 months, we bought back about 9% of the outstanding shares.

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

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And on the full year outlook, $10.50, you're assuming an acceleration towards in the fourth quarter. If you don't see that uptick, what kind of downside do you see for full year 2019?

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Lori J. Ryerkerk, Celanese Corporation - CEO & Director [89]

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Yes. So if we were to see market conditions continue similar to the first half, then we would expect our earnings per share to be down 3% to 5%.

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Operator [90]

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Our last question comes 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 [91]

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Could you talk about how the month of June performed relative to the entire second quarter for both Acetyl Chain and Engineered Materials? It kind of sounds like maybe June was the strongest month of the quarter in EM but potentially one of the weakest months in Acetyl Chain. Is that the right way to think about it?

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

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Yes. So let me talk about EM. So typically, the last month of the quarter is the strongest quarter for EM. That's just typical, so just the way people run their businesses. So definitely, I think June was -- actually probably not our strongest month in the second quarter, but it was a good quarter for us in June.

Interestingly enough, we actually saw increase in auto in China in June, the first increase in sales -- in terms of auto sales that's occurred for -- since May of last year in China. We do -- we don't necessarily think that's sustainable because it was based on some very heavy discounting going on in China to move vehicles that won't meet the new air emission standards that are going into play.

So June was a bit of an interesting month. So some areas of strength, some areas of weakness. I'd say, for EM, not a good month for the end -- a good month but not atypical for the end of the quarter.

I think in acetyls, I don't know that it was significantly different. I can ask Todd to comment. I don't actually think it was particularly strong or weak as comparison to the rest of the quarter.

Todd, do you have any...

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [93]

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No, that's good. I think that's right, Lori. I mean the middle month was probably the lowest of the 3 but not, to your point, pretty balanced overall.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [94]

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Great. And then, Todd, could you talk about the Chinese VAM market so far in Q3? It looks like pricing might have come off quite a bit already this quarter. There's been some reports of economic run cuts from some of the major producers, including Celanese. Do you have any more color there?

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Todd L. Elliott, Celanese Corporation - SVP of Acetyls [95]

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Well, again, similar to the comments from before with respect to our operational activities, so we will flex our units as we see the match with customer needs, customer demand, costs, profitability. So we'll do that in all units around the world. So that flexibility is important for us. So I wouldn't -- I would not characterize VAM China as declining at this point. I think it's been fairly healthy as we go Q2 to Q3. More to come, and certainly we got to watch the development over the course of the quarter. But no, I think that was a little too severe of a characterization in terms of the Q-to-Q drop. So we're working hard to deliver the quarter in Q3 as we outlined before.

The one thing we do have to navigate through, we do have a turnaround in Q3 in Frankfurt on VAM. So we've got probably a $10 million headwind there that we've got to work around, but that's probably the one thing to -- from an operational perspective we've got to work through.

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Operator [96]

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

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Chuck Kyrish, Celanese Corporation - Treasurer & VP of IR [97]

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Thanks, Rob. Certainly, I would like to thank everyone for listening in today and the good questions. As usual, we're around after the call to address other questions that you have. And Rob, you can -- with that, you can close us out.

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Operator [98]

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