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Edited Transcript of CE earnings conference call or presentation 18-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Celanese Corp Earnings Call

DALLAS Apr 18, 2017 (Thomson StreetEvents) -- Edited Transcript of Celanese Corp earnings conference call or presentation Tuesday, April 18, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher W. Jensen

Celanese Corporation - CFO and EVP

* Mark C. Rohr

Celanese Corporation - Chairman, CEO and President

* Patrick D. Quarles

Celanese Corporation - EVP and President of Acetyl Chain & Integrated Supply Chain

* Scott McDougald Sutton

Celanese Corporation - COO

* Surabhi Varshney

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Conference Call Participants

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* Aleksey V. Yefremov

Nomura Securities Co. Ltd., Research Division - VP

* Arun S. Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Bobby Geornas

Susquehanna Financial Group, LLLP, Research Division - Associate

* David L. Begleiter

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

* David Wang

Morningstar Inc., Research Division - Analyst, Basic Materials

* Frank J. Mitsch

Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst

* Ghansham Panjabi

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

* Hassan I. Ahmed

Alembic Global Advisors - Partner and Head of Research

* Jeffrey J. 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

* Laurence Alexander

Jefferies LLC, Research Division - VP and Equity Research Analyst

* Matthew Michael Stevenson

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Michael James Leithead

Barclays PLC, Research Division - Research Analyst

* 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

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Celanese First Quarter 2017 Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Surabhi Varshney, Vice President of Investor Relations. Please go ahead.

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Surabhi Varshney, [2]

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Thank you, Anita. Good morning, and welcome to the Celanese Corporation First Quarter 2017 Earnings Conference Call. My name is Surabhi Varshney, Vice President, Investor Relations. With me today are Mark Rohr, Chairman and Chief Executive Officer; Chris Jensen, Executive Vice President and Chief Financial Officer; Scott Sutton, Chief Operating Officer; and Pat Quarles, Executive Vice President and President, Acetyl Chain.

Celanese Corporation's first quarter 2017 earnings release was distributed via Business Wire yesterday after market close. The slides for the call and our prepared comments for the quarter were also posted on our website, www.celanese.com, in the Investor Relations section.

As a reminder, some of the matters discussed today and included in our presentation may include forward-looking statements concerning, for example, Celanese Corporation's future objectives and results. Please note the cautionary language contained in the posted slides.

Also, some of the matters discussed and presented include references to non-GAAP financial measures. Explanations of these measures and reconciliations to the comparable GAAP measures are included in the press release and on our website in the Investor Relations section under Financial Information. The earnings release and non-GAAP reconciliations have been submitted to the SEC on a Form 8-K. The slides and prepared comments have also been submitted to the SEC on a separate Form 8-K.

This morning, we'll begin with introductory comments from Mark Rohr and then open up for your questions. I'd like to turn the call over to Mark now.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [3]

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Thank you, Surabhi, and welcome to everyone listening in today. Our prepared comments were released with earnings yesterday, so I'll limit my comments then open the line for your questions.

In the first quarter of 2017, we generated GAAP earnings of $1.30 per share and the second-highest ever adjusted earnings of $1.81 per share. In the Acetyl Chain, raw material prices were sharply higher sequentially and the Chain business responded well by driving price increases globally. We remain aggressive in our commercial approach and selective in when and where we place our acetyl molecules. This has allowed us to expand core income margins every month this quarter, up 200 basis point sequentially to 13.6% overall. For the first quarter, the Acetyl Chain generated core income of $108 million.

Materials Solutions had another record quarter generating core income of $243 million. Advanced Engineered Materials segment income of $143 million was an all-time high and growing [ph] 35% sequentially driven by double-digit organic growth and contributions from the SO. F.TER. acquisition. We also closed 513 projects in the quarter, which puts us well on track to achieve our target of 1,900 projects for the year. The SO. F.TER. integration is progressing well and we expect to close a previously announced NILIT Plastics acquisition in May.

Consumer Specialties segment income in the quarter was $100 million, with 46% segment income margin. Total volume increased sequentially due to unique carryovers from 2016 as we transition contracts, but was offset by decline in pricing due to lower industry utilization rates previously discussed. We continue to expect 2017 earnings from Consumer Specialties to reset at $0.40 per share lower than 2016 and stabilize from there. During the quarter, we invested $128 million to repurchase shares and, along with dividends, we returned $179 million to our shareholders. I also want to congratulate our team this quarter for the results and their tireless efforts in support of customers and shareholders.

Looking forward to the rest of the year, Advanced Engineered Materials will contribute meaningfully to sales and earnings in 2017 through growth from new project commercialization and emerging benefits of SO. F.TER. and NILIT integrations. The Acetyl Chain is strategically positioned to take advantage of the evolving industry and raw material environments and it'll also advance growth. While total headwinds muted industrial demand and certainly raw materials were a challenge, we're off to a very good start for the year and we expect earnings per share growth of 8% to 11% this year, with the second half about $0.20 higher than the first.

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Surabhi Varshney, [4]

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Thank you, Mark. (Operator Instructions) Anita, let's go ahead and get started with the Q&A please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Laurence Alexander with Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP and Equity Research Analyst [2]

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Two quick ones. How much of a drag was VAM year-over-year? And do you expect the lost volumes or the volumes that you sacrificed to come back in the back half of the year or in 2018? And then, on acetate tow, can you speak to your relative leverage to regular cigarettes versus heat-not-burn cigarettes and what that -- what those products might have as an impact?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [3]

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Yes. So I'll start, maybe have Pat, who's here, make a few comments on VAM. But if you look at the wall quarter-to-quarter, the VAM impact was pretty material for us fourth quarter into first quarter and probably half of the downside we saw on a margin basis. So when I think through that, the other half being TSO and some other things that are going on, so VAM was pretty material impact. Pat, you want to comment maybe on a forward look of -- for VAM?

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Patrick D. Quarles, Celanese Corporation - EVP and President of Acetyl Chain & Integrated Supply Chain [4]

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Yes, sure. Laurence, this is Pat Quarles. Yes, Mark's right. I mean, fairly material versus last year. If you think about what happened to us in China with the extraordinarily strong ethylene, which were based on per gram process versus carbide producers more tied to coal, we had very strong ethylene in the first quarter. Put us in a situation where we'd rather just not participate in the market in China during that period and take a little pressure off of other people's drive to export, which we think benefits us in the rest of the world. So that was really what drove our decision making in the first quarter. As we get into the second quarter, ethylene remains high in China. That dynamic really hasn't changed. What's changing, of course, is just overall utilization of the system because the multitude of outages that we and others are having in the market. And we're actively meeting customer demand, both through our Western Hemisphere assets as well as actually bringing molecules in from China to meet those commitments we have elsewhere.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [5]

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And Laurence, your other question, if I understood, was really around e-cigarettes and maybe smokeless tobacco and the trends there? Is that what -- is that your question?

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Laurence Alexander, Jefferies LLC, Research Division - VP and Equity Research Analyst [6]

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Exactly, more on the smokeless tobacco side. I think e-cigarettes have been flogged almost to death.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [7]

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So I'll ask Scott Sutton, if he'll take a shot at that.

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Scott McDougald Sutton, Celanese Corporation - COO [8]

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Yes, Laurence. Look, I mean, the reality is today is that a small part of our tow business actually goes into heat-not-burn devices. It's something on the order of 1%. Most of our business goes into traditional cigarettes and super slim cigarettes. However, what's going into heat-not-burn is growing very quickly. And on top of that, we have quite a number of projects in our Engineered Materials pipeline for thermoplastics to go into those heat-not-burn devices.

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Operator [9]

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Our next question comes from Robert Koort of Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [10]

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For Mark or maybe Pat, you guys had mentioned previously an acceleration in AI profits in the second half. I'm wondering if you can help us, if that cadence still holds and what causes the uplift in the second half?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [11]

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Yes. We do -- we're seeing profits accelerating now as we go through in this raw material inflation that's going on, really, driven by China, but around the world. So we're expecting that to continue as we go through the year. Pat, you want to maybe (inaudible)?

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Patrick D. Quarles, Celanese Corporation - EVP and President of Acetyl Chain & Integrated Supply Chain [12]

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Yes, sure. Yes. So as you think through kind of market dynamics, you heard me say before, right, a variety of outages going on. We're in the middle of that, we and others. That is actually continue throughout the second quarter and into the third quarter. So our expectation is, from our businesses' results, we'll see margin expansion as we're currently seeing in the second quarter. But we're constrained on supply, right, because our Clear Lake unit is out for a period of time. And as that returns in the third quarter, we expect to still have pretty good market dynamics and we'll get the benefit of volume contribution in the back half of the year, and that's what gives us that profile, Bob.

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

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Is there anything -- for Scott, is there anything specific to the SO. F.TER. earnings stream this quarter that depressed the margins so substantially? Or is that something we should expect at a similar level going forward?

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Scott McDougald Sutton, Celanese Corporation - COO [14]

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Yes. Bob, this is Scott. So yes, I mean, SO. F.TER. is getting to the point where it's closer to being fully integrated, so you do see some depression on margin percentage for a while. Over time, we'll be able to bring those up, but that is primarily what was responsible for the little lower margin percentages in our Advanced Engineered Materials business in the first quarter.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [15]

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Yes, Bob. We've -- I don't know if we missed it or didn't communicate it well enough, but we've talked about these businesses you're bringing in being at the very low double-digit kind of margin levels when they first come on. So contributions of maybe $0.10 for this quarter from SO. F.TER -- for this year from SO. F.TER. And much, much less than that in NILIT, it'd be like $0.10 next year. So you're looking at a multiyear process of getting these businesses up to margin levels that are more consistent and what we would expect in this arena.

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Operator [16]

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Our next question is from Duffy Fischer with Barclays.

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Michael James Leithead, Barclays PLC, Research Division - Research Analyst [17]

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This is actually Mike Leithead sitting in for Duffy. I guess, Mark, obviously a strong start to the year, but a lot of moving pieces you've acknowledged kind of with raw material volatility, mixed signals on global demand. I guess, when you look broadly across your portfolio, do things today feel better than when the year started? Or maybe there are, I guess, some incremental headwinds you have to fight through?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [18]

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No. I -- they feel better. I mean, the raw material movements have been sharper perhaps than we anticipated. Those are my words. If you look at it on a full year basis, well, on a full year basis, we're expecting as much as $200 million, maybe $250 million in inflation year-over-year, full year kind of look at that. So you're going to have movements and we've just had a little chunk of that so far in the first quarter. Certainly, less than $40 million of gross raw material inflation. So we're looking at a pretty volatile raw material environment, Mike, and that's okay. We don't mind volatility. We always like -- of course, we can't predict it, but a little volatility is not a bad thing. So as we go through this year, we're going to see some movement quarter-to-quarter in margins and maybe it's a little bit of reflection of that volatility. But no, we're pretty excited about how the year is stacking up.

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Michael James Leithead, Barclays PLC, Research Division - Research Analyst [19]

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Great. And then just one more quickly on the volume growth in AEM. Can you help size for us the impact of SO. F.TER this quarter? I guess I'm just trying to get a better idea of how well the base business performed in the quarter for AEM.

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Scott McDougald Sutton, Celanese Corporation - COO [20]

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Yes, yes, sure. I mean, one thing here, Mike. I don't want to get too specific on continuing to break out SO. F.TER. because it is becoming integrated, but what I will say is that without SO. F.TER, the number of projects are still an all-time record. The growth in volume is still double-digit regardless of whether you look a year ago or the quarter before. So SO. F.TER. contributed right on plan, but still, the organic business is the big driver.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [21]

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So half and half or less is what I would say for SO.F.TER., yes.

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Scott McDougald Sutton, Celanese Corporation - COO [22]

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Yes. Well, yes, in terms of volume and projects, clearly the organic business is the big driver. In terms of profit contribution, SO. F.TER. probably contributed 30% of the profit growth.

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Operator [23]

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Our next question is from Frank Mitsch with Wells Fargo Securities.

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Frank J. Mitsch, Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst [24]

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You mentioned some of the outages. Clear Lake, both, I guess, the acidic acid unit and the methanol unit are offline. And I saw that you guys are also running your Singapore facility at reduced rates here in Q2. Can you talk a little bit about what you're sizing the financial impact of these outages are?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [25]

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No. We're not going to break it down that way. What we'll say is that it's a 6-week kind of outage. I think the gross expenditures will press $50 million. The entire complex is down. So not only the Celanese sites here, but also the other site partners. It's a -- by any measure, it's a very big outage and we're replacing a lot utility pipeline -- utility kind of systems in the process. So no, we haven't broken that down in there, Frank.

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Frank J. Mitsch, Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst [26]

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Well, so it's -- so 6 weeks and you're saying the capital cost about $50 million?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [27]

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In expense.

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Frank J. Mitsch, Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst [28]

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And at this point, with reduced production of VAM, I mean, I'm guessing that the market is going to be pretty damn tight when you come back in. Is that not how we should be thinking about AI once we get past these outages? Because you also had some major outages over in Asia, not you, per se, but the industry.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [29]

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You put 2 qualifiers on there, pretty and damn. So I think it's going to be pretty tight, I don't know if it's damn tight. But so yes, the market is tightening up a little bit. That's right.

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Patrick D. Quarles, Celanese Corporation - EVP and President of Acetyl Chain & Integrated Supply Chain [30]

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Frank, this is Pat. I mean, I think you see that expressed in the profile that we talked about, the cadence across the quarters, right. And that's exactly those dynamics you're talking about that are reflected there.

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Operator [31]

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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 [32]

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So China has been shutting down a lot of coal disk capacity in various chemicals, whether it's urea, caustic. How is it impacting the Acetyl Chain, given the backward integration into coal? And could that suggest sort of a turning point in acetyls in the future?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [33]

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Yes. I think, and Pat might add some clarity in here too, but when you look at it at a very high level, I think China is holding true to their perspective that coal gasification as it relates to our business is not going to be increased in China. It's going to wane. And so you're seeing evidence of that starting to occur. You're also seeing China push in support indirectly sort of higher coal pricing as well, if for nothing else, to fund the kind of investments they need to start cleaning up their technology around coal. So we're seeing that as setting a higher foundation, raw material cost foundation for China, which is a very good thing. The other thing we've talked about in the past is the addition of MTO in China and the impact that that's having on methanol. And when -- as Pat and Scott remind me all the time, as China gets the MTO really running, then they really are a net importer. Methanol is going to come from somewhere else. It's not going to come from China, nor is methanol likely to be built in China. So my personal view is that, that sorts -- versus, let's say, the last several years, that's going to reset us a couple of years going forward to a higher base level cost position for those materials in China, which, net-net, is good for the industry.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [34]

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And just secondly, on filter tow, your prices are down 8%, volumes down 2%. Do you believe that 2017 could be sort of a final year of destocking and that you could see at least volumes begin to improve in 2018? Or is that too optimistic?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [35]

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Yes, I think we've said 50/50 on the average at $0.40 between volume and price. So you're going see a little bit of movement around that as it settles as we go through this year. I don't know how to really answer your question. I think we do really believe that it's going to set the foundation and we hope that next year doesn't – (inaudible) to deteriorate next year. They shouldn't, but that's kind of where are. I don't know, Scott, if you have any...

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Scott McDougald Sutton, Celanese Corporation - COO [36]

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Yes. No. I think that that's right. I mean, 2017 is at or near our floor and we're working actions to help that.

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Operator [37]

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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 [38]

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Mark, in Q1, you beat expectations, but you did not raise full year guidance. You mentioned some challenges in raw materials. Was there anything else besides raw that held you back from perhaps raising guidance for the full year?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [39]

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No. I just didn't want to roll it out there. But I think our year is back end-loaded. And if you look at that, there's a lot more loaded in the back end of the year and that means that, that just increases your risk. So I thought it was prudent not to roll it in. Let's see how we perform this quarter and our view from there and we'd be in a better position to call the full year then.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [40]

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Understood. And question for Scott. Scott, just on the auto exposure in AEM, given some weakness in that end market, can you discuss your exposure and how you might offset that end market weakness going forward?

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Scott McDougald Sutton, Celanese Corporation - COO [41]

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Yes. I mean, we're certainly less exposed to auto than we used to be. It's still a critical segment to us, maybe it's 1/3 or less of our exposure there. But again, our big driver is our model and our project pipeline system and we have a tremendous number of projects that are in the auto area that aren't necessarily dependent on overall auto volume growth.

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Operator [42]

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Our next question comes from Jeff Zekauskas, JP Morgan.

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Jeffrey J. Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [43]

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Last year, you had a really strong quarter in Acetyl Intermediates where your volumes grew mid-single-digits. And this year, in the first quarter, they were down low double-digits. And methanol prices also really lifted year-over-year. And I think you transfer raw materials at cost from AI to AEM. So was some of the margin deterioration in AEM due to higher raw materials costs that were embedded in Acetyl Intermediates, both from the change in volume and from the change in methanol prices?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [44]

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No. Our – I'll ask Chris to weigh in, but our transfer price is pretty darn close to market, Jeff. So we don't -- we work hard to try not to shift things around, I'll put it that way. I mean, there's a little that occurs probably, but...

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Jeffrey J. Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [45]

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Okay. And then, the -- you took a $27 million contract cancellation charge in ethanol. What exactly was that? And was that -- did that cash flow go out in the first quarter? Or will that go out in future quarters?

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Christopher W. Jensen, Celanese Corporation - CFO and EVP [46]

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So Jeff, this is Chris. The cash did not go out and a lot of these contracts in the Acetyl Chain on the supply side, well, I wouldn't say a lot, but there are a handful of very key supply streams where your vendor is really setting up shop there for you and making a huge investment. So if you think of the industrial gas company business model, that's what it is. So you're signing long-term contracts that allow them to recover their capital that they incurred for you -- or for us. So that number is essentially the present value of what we owe them over time. So it will be paid over time.

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Operator [47]

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Our next question is from Vincent Andrews with Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [48]

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Just, Scott, you mentioned that you were working on some unlisted projects or some things to, I guess, help the consumer acetate tow business. And I guess, were you talking about maybe some production reductions of your own, number one? And as a follow-up, you guys think the stability can take place in tow in 2018 without any production coming out from yourselves or from other industry parties?

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Scott McDougald Sutton, Celanese Corporation - COO [49]

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Yes. I mean, Vincent, I mean, what I will say is we're always working on a number of things, but specifically there's a lot of productivity work going on in the tow business and that can involve assets. It can also involve co-producer arrangements, too.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [50]

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Okay. And just as a follow-up, in AEM, the JV income was a bit stronger than we expected. Was there anything specific to this quarter? And in terms of the balance of the year, I think you're lapping turnaround in Q2, but is there anything we should think about as we model the JV income for the balance of the year?

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Scott McDougald Sutton, Celanese Corporation - COO [51]

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Yes. I mean, I don't think there's anything to really highlight. It was a stronger quarter sequentially than before. It probably won't be quite that strong in the next couple of quarters coming up, but it's not far off.

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Operator [52]

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

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Arun S. Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [53]

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So you guys have pointed to about 8% to 11% growth in 2017 on EPS. If we take a similar look at '18, we get to about $8. In the past, you've talked to $8 to $8.50. So would you need additional M&A to get to the upper end of that range? Are you still looking at that as achievable? And maybe just talk about the pipeline a little bit.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [54]

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Yes. When we rolled out -- we rolled those numbers out, they were -- the $8 to $8.50 was without M&A, but at the same token, we did not anticipate the well over $100 million drop that we've seen in value coming out of the cellulosics business. So we need M&A to cover that. So we need M&A to contribute $0.50 to $0.60, I would say, to have a shot at that. So we probably are going to do a little bit more M&A to make sure that's there.

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Arun S. Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [55]

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And then maybe just as a follow-up, talk about your cash use plans and the pipeline a little bit. Are you still looking at splitting that between M&A and buybacks?

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Christopher W. Jensen, Celanese Corporation - CFO and EVP [56]

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So we have a authorization that would allow us to do about $500 million this year and that's currently our intention is to do $500 million of share repurchases in 2017. At that point, that authorization ends. So we'll be talking more soon about changing uses of cash and what that looks like. But if we're successful on executing continued bolt-on acquisitions, it will be difficult to sustain that kind of pace of share repurchases.

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Operator [57]

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Next question is from James Sheehan with SunTrust Robinson Humphrey.

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Matthew Michael Stevenson, SunTrust Robinson Humphrey, Inc., Research Division - Associate [58]

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This is Matthew Stevenson on for Jim. Is the demand environment in China following the Chinese New Year sufficient to support the recent price movements, the favorable price developments in acetyls there? Or is it purely a result or only being supported by the tight supply due to outages there?

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Patrick D. Quarles, Celanese Corporation - EVP and President of Acetyl Chain & Integrated Supply Chain [59]

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Matthew, it's Pat. I would love to tell you that the demand is driving a big change in margin performance in China, but the reality is it's an oversupplied market today. So we're really watching kind of short-term dynamics and our ability to make choices in our chain, in our plants to kind of benefit ourselves and influence as much as we can. We've been talking about the higher coal cost environment that really started in the second half of last year and continued into the first quarter, and that put many of our competition in a position where they want to drive price. And they've been doing that, we've been doing that. And that's benefited us ultimately on margin as well. I think the dynamics that we talk about in terms of outages is primarily a Western Hemisphere dynamic. And as we've said, we've seen that developing throughout the first quarter in a very positive way and we feel good about where we're headed in the second quarter.

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Matthew Michael Stevenson, SunTrust Robinson Humphrey, Inc., Research Division - Associate [60]

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Understood. And in terms of the cadence of earnings throughout the year, when you reported your 4Q results, you were indicating, I think, it was $0.35 to $0.40 higher earnings in the second half of '17 compared to the first half of '17. Now that's been reduced. And at least compared to where numbers were, it seems like the difference came out of consumer. Can you maybe elaborate on that?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [61]

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I'm sorry. I'm actually -- can you repeat the first part of your question? I'm sorry (inaudible).

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Matthew Michael Stevenson, SunTrust Robinson Humphrey, Inc., Research Division - Associate [62]

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Sure. I believe the guidance now is for the second half of 2017 to see earnings per share of about $0.20 higher than the first half of '17, and that's less of a step up in the second half than we had previously been anticipating. And so I was wondering if you could elaborate on that. And just based on your performance versus consensus by segment, it seems like that came out of consumer, like out of the tow business. So I'm not sure if that's accurate to some extent or if you could elaborate on what is driving those dynamics?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [63]

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Yes. I think you're being a bit too mathematical with this whole process. We started the year with a view that to make our numbers, what we knew had to happen is we needed to see raw material inflation, which is occurring and we needed to capitalize on that, which we are doing. And so -- and that was back end-loaded. So we're expecting this inflation to actually grow as we go through the year. We've had roughly $40 million of what will be, we think, well over $200 million for the year. So you can see, it's more heavily back end-loaded. So we were pushing as much as $0.40 of earnings in the back half of the year. So now we got 1 quarter under our belt, we actually -- we're just not, to be honest, I'm not taking credit for that. I think we need to get to the year a little bit more and see how that inflation occurs and just to validate we can extract the kind of value from it that we think we can. And then we'll talk about how to adjust at the end of next quarter for the year, but it's no more than that. It's just a high level haircut for the back half of the year.

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Operator [64]

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The next question comes from Alex Yefremov with Instinet.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - VP [65]

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Can you quantify any (inaudible) productivity initiatives that you achieved in the first quarter?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [66]

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Yes. We have $100 million in for the year and we were roughly on pace, that might be little bit higher than that in the first quarter. And that's pretty split between the groups.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - VP [67]

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Got it. And then just turning back to acetyls, could you help us understand the total EBIT impact of the outages in the second quarter if we look sequentially versus the first quarter, including the missed opportunity and the actual cost that will not be capitalized?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [68]

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Yes, we don't really break it down that way. So I'm not trying to withhold that. I just don't have it in front of me, Alex, to break it down that way. I mean, we'll have...

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Christopher W. Jensen, Celanese Corporation - CFO and EVP [69]

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And we have some expense in the first quarter already. We're already -- we were spending money in the first quarter as we got into it. So you have the volume metrics as well as higher expense in the second quarter.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - VP [70]

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But I guess, directionally, is it going to get worse in the second quarter or stay at about the same level?

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Christopher W. Jensen, Celanese Corporation - CFO and EVP [71]

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Did you say AEM or acetyls?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [72]

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Acetyls.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - VP [73]

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Acetyls.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [74]

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Yes. It's going to stay at roughly the same level I would say going through the quarter, maybe a little better.

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Operator [75]

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The 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 [76]

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Just to triangulate a little more on the AEM earnings growth, you mentioned double-digit organic growth in AEM. Were the earnings from the legacy wholly owned AEM operations also up double-digit?

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Scott McDougald Sutton, Celanese Corporation - COO [77]

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Yes. And so this is Scott. Look, the legacy earnings growth quarter-to-quarter is, if you take out the affiliates, right, which I'm -- we're going to the nature of your question, right, so it's not quite double-digit. But what we haven't talked about and I'll just put it out there now is that quarter-on-quarter, regardless of whether it's fourth quarter last year or first quarter last year, there's about a double-digit millions of dollars charge for inventory adjustment sitting in our first quarter of this year. And it just has to do with the fact that we ran down our inventory due to sales. So that's sitting there. So if you take that out, it's certainly double-digit earnings growth to support the double-digit volume growth.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [78]

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Yes, last year, we were building inventory for a big turnaround. And this year, with the success of sales and what we're seeing in the marketplace, we're having to pull a lot of inventory. So it was a pretty good charge in there and that masked a little bit of what Scott's talking about.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [79]

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And then, Scott, you gave us these project count numbers in terms of new projects launched and backlog. Is there a way to qualify the quality of the backlog? I'm sure there's long-cycle projects, short-cycle projects. There's higher profitability and lower profitability. Is it just homogenous enough that we can use the broad project count as a good metric?

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Scott McDougald Sutton, Celanese Corporation - COO [80]

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Well, I think the growth in the projects that are closed are a good marker. I think our pipeline, we currently -- we're working on 4,000 or 5,000 projects right now, supports growing that closure rate year in and year out.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [81]

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Okay. But you wouldn't expect much mix effect, the raw count will actually be a good metric?

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Scott McDougald Sutton, Celanese Corporation - COO [82]

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Well, I think the number of closes of projects is a good metric to judge how the business is doing.

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Operator [83]

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Next question comes from Bobby Geornas with Susquehanna.

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Bobby Geornas, Susquehanna Financial Group, LLLP, Research Division - Associate [84]

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Just a question on the raw material spike. Given the increase in raw materials in Q1 and subsequent price initiatives that you've gone after, to what extent do you see the potential for actual margin expansion in Q2 and as we progress through the year? Or are the increases that have been announced sort of merely intended to catch up with the increase in raws?

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Patrick D. Quarles, Celanese Corporation - EVP and President of Acetyl Chain & Integrated Supply Chain [85]

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Yes. So that inflation of raw input started late in the fourth quarter and we talked about that during the first quarter earnings call or the fourth quarter earnings call a few months ago, and that really continued. We've actually been successful swimming upstream faster than those increases. So we've expanded margins, really, in every product line in acetyls, really with the exception of the China VAM comment that I made earlier. And we're only, frankly, just getting started in a lot of ways because the real tightness due to these outages in Western Hemisphere began to settle into the market late March and into April. So yes, we're expecting continued margin expansion into the second quarter and feel pretty good about that where we sit today.

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Bobby Geornas, Susquehanna Financial Group, LLLP, Research Division - Associate [86]

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Okay. And just one clarification question. Earlier, you mentioned there is a $250 million sort of full year headwind from raw materials. Are you saying that about $40 million of that you would experience in Q1?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [87]

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Yes. Those are gross numbers. So I'm not giving you the net. Some of that is past due, some of that we have to really fight to cover. But yes, we had about $40 million. I think it was $38 million to $40 million of gross inflation in major raw materials and energy through the first quarter.

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Operator [88]

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Next question comes from Hassan Ahmed with Alembic Global.

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Hassan I. Ahmed, Alembic Global Advisors - Partner and Head of Research [89]

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Mark, obviously a lot of sort of conversations around the spikes in raw material prices that we've seen. Obviously, it seems that methanol, at least if I take a look at the spot market and certain new sort of contract pricing that's coming out, there seem to be signaling some methanol pricing declines. Now similarly, on the ethylene side, there's a perception in the marketplace that as turnaround season is over and as more capacity comes online, ethylene pricing may come under pressure as well. So obviously, I mean, cutting through all of this, it seems that raws may continue to be volatile at least in the near term. So my question really is, as we see more of these ups and downs in product pricing, are you seeing buyer patterns change? Meaning, are you seeing people holding leaner levels of inventory or destocking or any of those elements?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [90]

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Yes. No, you see all those things every day. I mean, it's a -- everybody tries to guess what raws are going to do and take advantage of it any way they can. What we see with raws is that if you look at year-over-year, just on a year-over-year basis, I'm pretty confident we'll be several hundred million dollars higher when we end this year than last year. How that actually rolls out quarter-to-quarter, we had a spike up in methanol, we had a major outage of the world's largest MTO plant and they dumped...

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Christopher W. Jensen, Celanese Corporation - CFO and EVP [91]

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400.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [92]

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400 tons...

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Christopher W. Jensen, Celanese Corporation - CFO and EVP [93]

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KT (inaudible) yes.

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [94]

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KT in the market to press the market. You're kind of working through that today. So I think you're going to see that kind of volatile movement, but the broad trend is that we're seeing higher and higher inflation. And I think, broadly speaking, there's a limit to what you can do long term to deal with that. I mean, long term, it's got to be processed through the value chain. Short term, you may be -- you may hold back a decision to buy or you may build some inventory or do things like that.

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Hassan I. Ahmed, Alembic Global Advisors - Partner and Head of Research [95]

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Fair enough. Now, on a different topic, you guys talked about through the course of the pace of the year, if I heard this correctly, essentially taking the entire $500 million of share buyback authorization, sort of spending cash on that. So my question basically is that as I take a look at the 52 weeks sort of trading range of your shares, they've been in the low 60s, they've been in the low 90s, so -- and obviously, today, they're closer to the high end of it rather than the low end. So does that change the sort of thought process or calculus around buybacks? I mean, meaning, do you still feel that you would be able to sort of do the full $500 million? Or does that decelerate a bit?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [96]

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That doesn't change the calculus. I mean, we -- the earnings have been growing in the corporation. Without the equity value, it's been growing in the corporation. We expect to continue to grow earnings. We expect to be $8 to $8.50 at the end of next year. So you can -- if you want to do the math on that, you can forecast in what you think the share price is going to be next year, but we're expecting that -- we're expecting earnings to grow and we're expecting share price to grow. So we'll look at it from an intrinsic value and we think that the shares today are priced in a way that they're still quite attractive. So we are on pace to do that $500 million this year.

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Operator [97]

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The next question comes from David Wang, Morningstar.

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David Wang, Morningstar Inc., Research Division - Analyst, Basic Materials [98]

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I just wanted to follow-up a little bit more on the margins for AEM segment. I know we talked about this a little bit already, but I wanted to get some more clarity around if we saw any margin compression in that legacy business or was that mostly due to SO. F.TER.? I'm just trying to get a sense of that 3% kind of looks like year-on-year pricing decline. Do we see that in which segment of the AEM business?

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Scott McDougald Sutton, Celanese Corporation - COO [99]

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Yes. So I mean -- this is Scott. Look, I mean, it's really 2 principal drivers. One is that SO. F.TER. is now integrated into our business, so that brought some lower margins in. And the other key driver of that is what I talked about before, right, it's this double-digit millions inventory charge in the first quarter that wasn't there in other quarters as well. So those 2 things principally dropped the margin down.

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Operator [100]

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Our last 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 [101]

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Mark, just going back to your comments on inflation, just to clarify the $200-plus million in gross inflation, in your 8% to 11% earnings guidance, are you assuming that you fully offset that gross inflation number for 2017?

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [102]

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Yes.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [103]

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Good. Okay, great. And then, also in terms of the...

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Mark C. Rohr, Celanese Corporation - Chairman, CEO and President [104]

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It's the only way I can answer that. But yes, hell yes, we expect to offset it. Yes.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [105]

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That's what I wanted to hear. And then, just going back to the VAM pricing environment in China, can you just give us a sense as to the difference in production cost during the first quarter? And has there been any improvement into 2Q thus far?

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Patrick D. Quarles, Celanese Corporation - EVP and President of Acetyl Chain & Integrated Supply Chain [106]

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Yes. So the dynamic in VAM in China really changed towards the end of the year, beginning of this year when essentially the relative competitiveness of the carbide VAM producers and the ethylene VAM producers switched and changed both our behavior as well as theirs. So it was towards the end of the quarter really just that light switch flipped on us. So as a result, I mean we really minimized rates early in the first quarter back to way the influence in the market with production in the market if needed and the carbide guys kind of fill that space. That dynamic still exists today. I mean ethylene remains very strong. It's pushing over $1,200 a ton again. So we'll need to monitor ethylene to kind of judge what we need to be doing inside China. That capacity is still competitive on an export basis to fill in some supply commitments that we've made so we do move it a little bit out of China to ensure we keep our customers supplied.

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Surabhi Varshney, [107]

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We will wrap up the call now. Thank you, everyone, for your questions and for listening in this morning. We will be around if you have any further questions. Anita, I'll turn the call over to you now.

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Operator [108]

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This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.