Celanese Corporation (CE) Q2 2018 Earnings Report, Transcript and Summary

Good morning. And welcome to the Celanese Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Surabhi Varshney. Please go ahead.

Thank you, Brandon. Welcome to the Celanese Corporation’s Second Quarter 2018 Earnings Conference Call. My name is Surabhi Varshney, Vice President, Investor Relations. With me today are Mark Rohr, Chairman and Chief Executive Officer; Scott Richardson, Chief Financial Officer; and Todd Elliott, Senior Vice President of Acetyls Chain. Yesterday afternoon Celanese Corporation distributed its second quarter 2018 earnings release via Business Wire and posted yesterday after market close. Slides and prepared remarks for the quarter were also and posted slides and remarks about the quarter in the Investor Relations section of our website. Today’s presentation includes statements about expectations for the future results and plans that are forward-looking statements. Actual results might differ materially from those project in such forward-looking statements. And additional information concerning factors that could cause actual results to materially differ can be found in the posted materials. We will also discuss non-GAAP measures and information about which, including reconciliations to their comparable GAAP measures, are posted in the Investor Relations section of our website. Form 8-K reports containing all these materials are available on the SEC’s and EDGAR system. We’ll begin with introductory remarks from Mark Rohr and then take your questions.

Thanks, Surabhi, and welcome, everyone, listening in today. Our prepared comments were published yesterday, so I will be brief and then turn the call over for your questions. We delivered strong consolidated results for the quarter with GAAP earnings of $2.52 per share and record adjusted earnings of $2.90 per share. Robust pricing across product lines resulted in net sales of $1.8 billion with adjusted EBIT margins of 26.6%. All three businesses, the Acetyl Chain, Engineered Materials and Acetate Tow, grew adjusted EBIT year-over-year. The earnings growth along with our focused effort to convert those earnings to cash generated contributed to our highest-ever free cash flow of $500 million in the quarter. We repurchased approximately 900,000 shares and distributed roughly $73 million in dividends this quarter. The remainder of the year, we expect Engineered Materials to continue delivering steady growth by extending the success of the pipeline model and executing on M&A. In Acetyl Chain, we expect market momentum to carry through the third quarter before normal seasonality in the fourth quarter and first quarter impact that business. We do not see the recent tear of disputes as having any material effect on our business. And with that, we are ready for 2018 expectations for adjusted earnings to the range of $10.50 to $10.75 per share with free cash flow generation in excess of $1 billion.

Thank you, Mark. I’d like to request all callers to please limit to one question and a follow-up. Brandon, please open the line for Q&A

Thank you. [Operator Instructions] Our first question comes from Mike Sison with KeyBanc. Please go ahead.

Hey, good morning. Nice quarter there guys.

Thanks Mike.

First question on the Acetyl Chain, you talked about a lot of outages in 2Q. Can you maybe give us a little bit more feel on the regions, where that happened? And then do you expect the utilization rate to stay at 90% for third quarter?

Yes, let me start this, and I’ll turn it over to Todd Elliott to give you more color. But we were – I think in the last call, we gave a perspective that we were in the mid-80% utilization rate. We have seen that push up to the 90% kind of range to this quarter, and we expect that to move back down towards mid-80% range as we go through the back half of this year. Todd, would you like to add color to that and maybe some color?

Yes. I mean, we continue to an overall theme of a continuing improvement in utilization rates, and this really goes back over the last couple of years. We will continue to see solid demand growth across multiple end uses. Demand growing at about 3% to 4% per year across all these different end uses. Limited supply. Frankly, limited supply since the overbill back in the 2009, 2010 and 2011 period. So we’ve seen a steady march up in operating utilization rates, and we put that in the mid-80% level in the last year and then through most of this year. And to your question, there have been multiple effects from combination of Chinese energy reform, environmental reform late last year through the first part of this year, plus a whole series of unplanned outages in multiple regions over the course of the year. So that’s pushed up instantaneous operating utilization rates up around the 90% range, certainly, in Q2. So some of that will moderate, I think as we look out, but continued good environment.

Great. And then Mark, when you think about your outlook for this year, you’re awfully close to your 2020 goals already, it seems, on an EPS basis. What’s the best way to think about, I guess, earnings progression into 2019 and to 2020 given how strong 2018 has turned out?

Yes, I think in May, we put forth a view that we would generate about $30 per share equivalent of earnings over three years, $9, $10 and $11 per share. I think we’re higher than that number now. So I would look at it kind of that way that somewhere between $30 and $33 per share some cumulative over that period of time as what I would think. How that actually flows through, Mike, on a quarter-to-quarter basis is really hard for me to quantify in that. So we’ve got off to a good start. We’re going to finish very strong, probably closer to 12 and 11 in that range and will be somewhere about think in the high between those as we enter next year. But again, it’s a bit hard to call that specifically. It’s easier to call the [indiscernible] than it is in next year.

Great, thank you.

Thank you.

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

Hey guys. Good morning. I guess first off, following up on the last question, the mid-80% utilization rate up to 90%, was that delta purely because of China curtailments, either temporary or permanent? Or was there some other meaningful additives there?

No. That was a global – that’s a global spin.

And how would that parse out China specifically?

I think you should look at China been type overwhelming. You should look at China as having a sort of a steady erosion, small bits of erosion to the overall capacity utilization over the next three years and not the kind of short-term impact we have in the units being up and down like we’ve had this time.

Yeah. I mean, most of the curtailment that we’ve seen has occurred during the winter months: end of year, start of New Year. So, we saw that into 2017, start of this year, in 2018. Just the overall utilization picture in the mid-80% range is pretty healthy just to begin with. And then you overlay curtailments adjustment that we’ve been describing. And then on top of that, there have been a series of unplanned outages that really go back to last year and…

Most of those are out of China.

But even in other regions, I mean, Asia and I don’t want to name competitor names that are in the other parts of the world. And those have contributed to push up further up close to 90%. So, it’s a combination of things that keep us hovering in the mid-80-plus range. And again, that’s been a supportive environment.

Okay, terrific. Thank you. And for my second question, I guess, on tariffs. You cited the potential for incremental growth opportunities given the shift in trade flows, which correct me if I’m wrong, seen specific acetyls, but is there any risk for growth for Engineered Materials in regions such as Asia? How are you sort of thinking about tariff risks specific to EM? Thanks so much.

No. We don’t, I mean, we don’t see it as a real risk. I mean, the tariff concept is one of – it’s sort of in and out of the U.S. and the punitive tariffs in support of that. We have a very global network. And to be honest, most of the material we make in China stays in China. And we have the ability to import in the China from the most regions of the world. There are a few cases we’re moving materials from the U.S. into China and then on the EM side and on one end, it’s got a lot. And the other part of that, which have the ability to price most of that out. So, we don’t see a material effect of this. And I’ll be bold to say and I think our network is so unique and our ability to supply locally is so strong, there can be some advantage at the surface if this becomes permanent.

Yeah, perfect. Thanks so much, Mark.

Sure.

Our next question comes from Bob Koort with Goldman Sachs. Please go ahead.

Thank you very much. I’m curious, maybe, Todd; you could talk a little bit about remarks that you gave some more insight into some of the regulatory issues that are confronting companies in China. And I think the way to read is most of those are slanted towards a benefit for Celanese, but I was particularly intrigued by the comments around parks and maybe some additional closures and requests for voluntary curtailments. Can you give us a little more granularity on what you see happening over the next couple of quarters? And whether that makes you a beneficiary or perhaps you’re compromised a bit by these changes? Thanks.

Yeah. I think the chemical park policy is pretty interesting, and this one is going to affect multiple provinces. And you will, of course, be studying these as we go and trying to be engaged in Beijing and elsewhere to understand. I mean the one, the Shandong province changes is pretty fresh, Shandong in the 2017 with 199 parks. Their target is to approve only 75 parks plus 10 specialty chemical parks. So you think about what’s the 114 take-out parks as you look forward, and it’s one of the first provinces that set standards for future chemical park design in all the regulatory environment. We think that will affect our broad industry going forward. We believe it will, we think it already is affecting when you consider the change in park dynamics and then the relocations and permitting required. But this is – it’s evolving. We got to understand it and study it and assess it as we go forward. The one other note, as I think we’ve mentioned before, the winter season effects relative to energy gas versus coal and other steps on the environmental side as well. We were actually approached this summer in Nanjing by the municipal EPA. This goes back about four weeks ago, where they’ve requested not only Celanese, but multiple companies in the park to reduce operations by 50%, citing a target to reduce ozone. Again, those are their words, not ours. And not required, we ultimately did not have to do anything, but what’s pretty interesting is that outreach occurred in the middle of the summer. And then only days ago, also in Nanjing, 14 different companies in our park there in Nanjing were brought into a meeting and another request was made to reduce electricity consumption, citing summer season, peak season for electricity. So, it’s just a series of these sort of heightened steps to work that energy balance and then going forward, like the park reference, the environmental picture for China going forward. We think it’s going to have an effect ultimately and as we said during Investor Day, kind of call out maybe a couple of percent utilization change by the end of the decade.

Bob, for us, we have a phenomenal relationship, but we’re in one of the best parks is there in the Nanjing Park. We have a great, great relationship as do the other companies in that park with the park leadership. So, I think you should look at this as being a cooperative kind of process with companies like ours. And so it’s never been to our disadvantage to support and work with these folks, and I wouldn’t expect that to be the case in the future. It does, however, reflect, as Todd said, this continued erosion of the week and outline kind of businesses that are there and the continued evolution of those away from the operations.

And Mark, if I might ask on TCX, you’ve done a pretty good job of conditioning us to expect not much there. Now you’ve got some sort of transaction. Can you give us a sense of the scale of that? And does it make sense if given Todd’s fairly bullish view on acetic acid operating rates in the industry, would it make sense for any companies to convert some acetic to ethanol capacity? Thanks.

Yeah. Well, I think that we were not able to, as Celanese Corporation, convinced the Chinese government to go to synthetic ethanol as a source. And you're well aware, Bob, of the money that was invested years ago on that energy we put into that. So this asset, we shut down the asset. We've written off the asset. We have a great partner in Chengzhi that is there at the park with us. They're our provider of raw materials for the acetic acid business, and we've worked with them collaboratively on a number of deals that just haven't worked out yet. This has been one that we kind of jointly surfaced and started working on. They have an interest of really trying to promote synthetic ethanol. They're very well connected politically. And so we think that is a better approach and thus trying to do it on our own. So we have, in essence, solved the assets then we got the LOI to a lot of work we have to complete this to sell the assets to them for a nominal amount. There's no real money involved in that. And we're contributing in our TCX technology to a joint venture. And with them in that joint venture, the intent is to promote ethanol from synthetic uses. And our interest in that, of course, is to be the acetic acid provider for that. So that's really or you should think that this is just -- we put this out as not the holy grail of success for acetic acid but rather, it's one more step that we believe will further keep pressure in this market in Asia. And if we're successful with this, we think as we end this decade next, we should be seeing some acetic acid volumes, some material acetic acid volumes heading this way. Q – Unidenti1nalyst: That’s helpful. Thank you.

Our next question comes from P.J. Juvekar with Citi. Please go ahead.

Yes, hi. Good morning. So Mark, you're shutting down tow capacity in Mexico. I believe that's about 2% to 3% of global capacity, could that pattern of the market temporarily? And my second question related to that is have you looked at this new Juul product, as such new type of e-cigarette that has taken off so quickly? You think that could potentially impact cigarette demand?

Well, I'm going to answer your first question, as you to repeat it same because I missed it. PJ, you're breaking up a bit. But no, there is no material impact to, as your math noted, to global capacity utilization in terms of our – it's just the ability to rightsize our asset base with the customers we have and create productivity as a result of that. That's all you should read into that. And would you mind repeating your second question? I'm sorry.

Yes. So this is new Juul product. Juul is a new type of e-cigarette that has taken off very quickly. And cigarette companies seem to be worried about Juul. I was wondering if you had a view on that.

I'm looking around the room, and I think we're all pretty -- we're not prepared to answer that question with any kind of confidence. So no, it has not been a subject of discussion between ourselves and the customers that are out there. But we'll take a look at that.

Okay, thank you. In Engineered Materials, can you discuss your pipeline for the second half? And you mentioned that during Investor Day that if you don't do any M&A, your margins could improve from current levels. Just talk about the pipeline and where could margins go with or without M&A.

Yes. So I think, well, first half, there's going to be M&A. We're continuing to promote that. We're active in the marketplace, and we continue to bring in businesses. So we should have a view that M&A is going to materially change over the next several years in our business. That's continued pressure from that. The one I'm most interested in today is 8% margin, just to give you a reference point on that. So you're going to keep having that pressure on the raw margins. We have a good pace underway in the mid-700-ish kind of new projects this last quarter, so we should be able to press 3,000 at the end of the year, maybe a little short of that but that kind of range. One of the things that Surabhi has been doing with the team is we're rolling out sort of EM strategy 2.0 so subordinated strategy. But it's how we approach the market and particularly around how we focus our effort in new projects, and that's taken on more of a program focus. So by that, I mean, as we're looking at the areas where we -- a lot of projects we do, what we have the highest margin. We think highest ability to translate, and we're moving our resources more in that area. So I'll use medical as an example. We gave an example in the medical kind of application earlier for you guys, and we're seeing tremendous upside potential by having this machine focus a bit more. We think that's going to give us a chance as we end this year and next in spite of some pretty tough impacts of the M&A to start – there’s something to be stable in our margins and hopefully, start pushing the margins up.

All right. Thank you.

Our next question comes from Frank Mitsch with Wells Fargo Securities. Please go ahead.

Hey, good morning and very nice first half of the year. Just a follow up on that last question on M&A, you reiterated that you want to do $1 billion in buybacks between now and 2020. You did $100 million this quarter. You've got great free cash flow. How do we think about the order of magnitude buybacks versus M&A for Celanese over the next couple of years?

Well, they are -- I mean, they're kind of disconnected. As we outlined in May, a fair amount of excess free cash flow. And even with the $1 billion of buybacks, that was still there. So we don't see -- we don't think we have to slow down in either one of them and as probably going to steer you to higher levels in both as we're going through the next several years.

Mark, in keeping with the higher levels steering, obviously, you raised the guidance by about $1.50. According to our model, about one-third of that came in this quarter on the acetyl side of things. What are some of the assumptions for the back half of the year that have changed for you to lead to that higher guidance?

Well, I think as we roll through this and we're getting everything's getting traction, I mentioned a few things that we've been able to overcome and address that have supported our higher guidance. One is that we – this machine continues to work very, very well and it's in the phase up, if I’m say that, pretty steep pressure on short-term on raw materials and the energy. And so we've had to push a lot of pricing, and it's a real testament to the quality of the portfolio that we've been able to do that and not really suffer tremendously in volume or anything else. So we want to do -- in some ways, we kind of wanted that environment to really demonstrate to ourselves that we really have the power that we thought we would have and that's been the pretty good story. The ability of the industry to accept and support the kind of level of pricing that Todd and company are seeing out there has also been good. I mean, we're not seeing people run through the words, we're seeing demand stay pretty good in that. We're not seeing big substitution. I'm looking at Todd when I say that. But – so even though it seems like these are big horrific moves, from our point of view, they're not that big. It's just a combination of lots of those small things that have got us to this point. And the customer acceptability was pretty good. We're driving about $40 million year-over-year of internal price being transferred to downstream businesses. And for the first time – and I think our history, we've been able to get through to all those businesses. So we've not seen a deterioration of our margin because of recalcitrance on the parts of other markets out there accepting that drive. So those things just tell me that the level of value that we generate in this business, plus or minus a little bit, is okay, is good. And that gives us the ability to step out, and we're pretty confident of higher levels as we end this year. I'm going to roll into that. I made a comment about fourth and first. We've done a lot of work in this regard and we see, typically, 3% to 7% margin fall -- I mean, not margin, but volume falloff in the fourth quarter and also the first quarter. So think low seasonality impacts of – seasonality impacts from coatings and Chinese New Year kind of thing. And last year, we didn't have that. So Frank, I believe this year, we'll have it. It's kind of my got it. It happens almost every year. And if you roll that through, that could be maybe a $50 million kind of impact for that business if you look at a little bit of volume, a little bit of price, a little bit of turnaround in here. So that's what you see kind of baked into our numbers. So a good strong third and then a step back a bit in the fourth. And as you look at next year, I think it will be the same. We'll start a little bit slower in the business, and then I think we'll be right back into some pretty powerful levels like we've been running so far this kind of year-to-date.

So is it fair to say that you continue to expect EM to be strong, but the majority of the upside in terms of the guidance raise is more tied to some of the positives that you're seeing on the acetyls business?

Yes, the EM has been a straight-line business for us and I think for our investors. We expect EM to generate the kind of numbers we thought, plus $100 million per year EBIT. And I think that's the machine we've got, and that's where we're focused on. And so I think that's going to be the real steady-eddie there that we've got. We have plenty of M&A activities there that we continue to work as well. I think the story with the chain business should really be that, hey, none of this should be a surprise to anybody, and the market receptivity to the higher valuation today has been good, which gives us confidence that that's the ability to carry on for a fair period of time.

Thank you so much.

Sure.

Our next question comes from Duffy Fischer with Barclays. Please go ahead.

A question just back on acetic acid. As you look at the returns if – for new capacity for you with lower capital cost and for competitors, what's the likelihood over the next year that we get some announcements around some new greenfield or significant brownfield expansions in acetic acid?

Yes. Duffy, we look out and we've kind of shared this with you guys. We shared a bit of it in May. We look out over the next several years, we're adding about 250,000 tons of capacity that Todd has underway between acetic acid and VAM. But to be very honest, it's going to be adequate, we think, for the market in the next couple of years with some of the efforts we have underway to unlock some molecules and things like that. So we think the market is probably kind of okay. When you look beyond that, though, that's the kind of stuff you should be looking at, we get the 20s, there could be the need for some incremental capacity. I don't think this business supports a full-on greenfield side with all the kind of subordinated -- I mean, secondary investments associated with doing that. So I'll be really surprised that was kind of announcement. I would, however, say from our point of view that with our cost to do a brownfield expansion, especially in Asia and some areas like that, combined with our ability to perhaps productivity justified that, in other words, the ability to shut are some other assets that aren't necessarily as economically advantaged as we'd like them all to be, then I think we have a pretty compelling story that we can perhaps put forth at that period of time. So Todd, you want to make any comments on this?

Yes. I mean, that configurability, I think that's what you were referring to, I do think it's an advantage. And we'll keep looking at that and assessing the options there. As Mark mentioned, we're letting 150,000 tons of new VAM capacity in Clearlake that will start up in Q4. I was just there this week. So that's on track to be ready at the end of this quarter -- or end of this year. We have 150,000 tons on top of that on VAM through technology debottlenecks, so that will be deployed across all five VAM units. We got the first technology packages installed in Bay City, Texas. We saw that this week. That's already generating yields of around 5-plus percent on top of the output there. So that will be deployed across all five VAM units. That's 300,000 tons of additional capacity already kind of baked in and planned forward to support our 3% or 5% volume growth target that we outlined in May. And then the small step on acetic acid, 140,000 tons that we mentioned also in May, bring that on by 2020. And then back to Mark's point, we just continue to look at unique ways to consider highly configurable steps that are capital efficient and kind of marched out over time that meet the customer needs.

Great. Thanks, Mark.

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

Great. Thanks for taking my questions. So, I guess, the first one, Todd, I believed in your kind of prepared remarks last night, you spoke to a quadrupling of the network activations. I guess, assuming that’s essentially turning customers on, which I think that’s kind of roughly what it is. I guess, can you characterize the type of relationships that those open up whether they’re kind of really just, hey, look, you’ve got a great global platform and when there’s an issue because of an outage, we’ll take on spot or if these are longer-term type relationships, I guess. How should we think about like the benefit of that conversion on these network activations?

Yes. Just to recap, what these are, I mean, this is when we gather data from many, many sources around the industry, process that data and try to distill that into insights. And we have two more insights and connect that with what we believe is the leading network, acetyls network of the industry. We operate that network, look for option that emerge out of that and then activate something. So that could be a combination of things in the second quarter with 250 activations versus about 50 last year, most of those were price activations, right? That’s where most of those were. So that’s a combination of working out there in multiple geographies, multiple product lines, many, many different cases, different customers to activate different price changes in the quarter. There were several on the supply side, frankly, that within our own network and moderating, increasing, changing, shifting our own network to produce more or less depending on the region as well. The other piece there is on the supply chain side. So this is a combination of sourcing or moving product from region A, B or C to best serve our global customers and also take sort of the best network-optimized movements to support our business. So these can move around. They can be different sources or different types of activation, depending on what’s going on. But it really is supported by the broadest network that we believe is out there and really working those nodes and working those degrees of freedom to help the business generate value.

John, I think the way I would kind of characterize this, too, is that we’re students of our own business model and we’re students of the industry. And we put this in place – Todd, Steve put this in place as a method of really assessing our effectiveness and really creating opportunities in finding opportunities and acting on this opportunity. So we can measure the effectiveness of that. And it’s been a really good process for us, because what we found is that we can, as we can increase our degrees of freedom. We can enhance further our opportunities to drive profit. And so whether that’s different logistic systems in places, contractual arrangements, whatever those things might be, it just gives us a chance to continue to support this market. And we think a very positive way for our customers with a lot of degrees of optionality to give them the best product at the right time at the market-competitive price for them. And so that’s been the work we’ve done.

Got it, okay. That’s definitely helpful. And then I guess another question, I guess, I know you said in terms of the tariffs, it sounds like there’s really not a lot of exposure there. I guess, one question I had, though, with all the noise around the tariffs and with all the end markets that you indirectly end up touching. Have you seen any demand-related reactions from some of the tariff noise, that’s out there particularly in China? Is it having any impact in terms of how kind of the end customers for your products react or are consuming the products right now? Or are you too far away from kind of the end customer to actually see it at this point?

No, it’s having – I mean, it’s actually having zero impact – a company like ours, there’s no impact. On our customers, there’s no impact. And it’s not even a subject of discussion. I think if you’re Harley-Davidson and you’re selling 70,000 bikes into Europe, and its $2,500 charge per bike then you’re talking $70 million, $80 million, whatever the number is – that’s an impact. But that’s not our business model. So I think this is a political charade, to some extent. I mean, you’ve got leaders of countries kind of badmouthing one another over it one another over it. But perhaps speaking from a commercial point of view, we don’t see nor do I think many multinationals, which see huge impact of this swirling around. That’s my kind of spin on that. Again, unless you are very succinct, very focused, one product line that may – you get with no ability to produce outside the U.S. maybe I’d see that’s a little bit. So no, we don’t see it as a big deal.

Great, thanks very much.

Sure.

Our next question comes from David Begleiter with Deutsche Bank. Please go ahead.

Thank you, good morning.

Good morning, John.

Mark, on Acetate Tow, can you give us an update on any strategic options you’re pursuing here? And is that still a very high priority? Or is it may be less a priority given the performance of the rest of the businesses?

Well, I mean, I won’t give you any direct color. We continue to look for ways to make sure that business hits stable earnings, and we’ve had a good first half of this year with regard to that. We’ll be flat year-over-year, so you can do the math on that. We’ll be down a little bit in the second – the next two quarters, which is pretty typical for that business being front end-loaded. So our view is really how in the next year we keep this business flat, 2018, 2019 and 20,000. The Ocotlan shutdown was a piece of that. It gives us a chunk of that $50 million that we were going after to cushion that business, but it’s only a chunk. Our first priority is to continue to focus in and take those steps necessarily – necessary for us to self-generate that $50 million of cover that we think this business needs to make sure it’s flat as we go through these next three years. That’s the highest priority, David, where we spend most of our energy and effort. Second to that is we continue to look for ways to work with others to unlock additional synergies, and we’ve not reached a point we can talk about any of those yet. And I’ll use the secondary kind of consideration for us is not – certainly, not the end of the world if those don’t work out, but we’re hopeful we can find a way for those to work out. The last thing I’d say it strategically, is very much our strategy to make this topic de minimis. And we want to do that not by reducing earnings, but by maintaining earnings and also then growing business elsewhere. So it’s becoming a smaller and smaller portion of our free cash flow. And if you set aside the dividend from China, which in itself is pretty secure, we think for a very long period of time, you’re getting out of business that’s certainly less than $200 million of contribution and what’s going to be well over $2 billion of EBITDA this year. So we think we’re hitting all three of those in the right direction.

And Mark, you touched this earlier, but in terms of these high prices in acid and VAM, you mentioned no demand disruption or substitution yet, but are you concerned at some point it might be some? And what level do you think that might occur?

Well, I think what I would – the way characterize this is I don’t think the price is very high. I think it’s adequate. And as I said, because if you look at it from a point of view of the average producer out there, they’re not making our margins even today. Methanol is north of 400, maybe 500 in China. Coal prices are up in yada yada yada. These guys are not raking in tons and tons of profit. And we’ve seen recently that the bad debts out there in China and the negative consequences of these enterprises, these big state-run enterprises failing is pretty horrific. We -- so the first position I think it’s probably it’s not that hard. It’s what it should be kind of level. We’ve not seen any indication and don’t believe that there’s any real going to be an impact on consumptive materials, if you look at the role that acetic acid as a derivative plays in product gains, it’s kind of de minimis. Higher oil prices, I think, directionally helps us, David, I’ll say that. So yes, if oil prices drop back to $20 a barrel or something horrific like that, then that -- then you could get some substitution to oil basis again maybe. But I think in the sweet spot we’re in now, which is low $60 to $80 coal under the pressure it’s under, the fact that from a grassroots basis, there’s not -- still not a lot of great return in this business, we think we’re kind of in a pretty sweet spot we should stay there for some period of time. And I don’t really see a lot that would knock us materially off of that.

Thank you.

Sure, thank you.

Our next question comes from John Roberts with UBS. Please go ahead.

Thank you. In the Engineered Materials segment, is there a way to think about how much of the raw material inflation is just transfer pricing from the acetyl segment? And how much is external pressure that you’re facing?

Yes, John, I would characterize this is almost all external pressure. So there’s not a lot of transfer price impact in EM from the upstream side.

Okay. And then is there a way to think about the contribution of network activations to the acetyl segment? Is there sort of a base level of fee income or a base level of margin contribution that you think that provides above which then we have just the market ups and downs on top of that?

No, John. It’s a no. Its not, I mean, a lot of these indirectly will have zero contribution for just sort of one activity. But it has -- it avoids something on one end. So we don’t break those down by dollar per nodal activity contribution.

Okay, thank you.

Sure, thank you.

Our next question comes from Laurence Alexander with Jefferies. Please go ahead.

Good morning.

Good morning, Laurence.

Two questions. One, on Engineered Materials, can you discuss whether the average project sizes are getting bigger or smaller or if there’s any particular trend in how customers are responding to your initiatives? Are they giving you different types of problems? But also just back to the question about the bridge for 2019, you often have -- or in years past, you’ve had multiple levers that you could pull the sort of try and keep roughly on, call it, a 10% kind of CAGR. In the back half of the year, you’ll be at about $10 run rate. Is that the way to think about the business? And then you may be hit the fly ups? Or do you see enough sort of internal levers to pull that acetyls profit can be flat year-over-year in 2019?

Yes, I think what I’d like to say on that is that I don’t want to not answer your question, but I’m kind of going to do that, Laurence. We’re already looking hard at next year. That’s from a seasonality point of view, it’s a little bit out of schedule. And we’ll get into next quarter and next quarter’s call, we’re going to drive that call to next year. Having said all of that, when we look at the increase in year-over-year, this modest increase in Todd’s business, I think what you’re going to see this year is, you’ve had a strong front end and a little bit weaker back end of it, which is really driven most prominently by, I think, seasonality rolling in like historically it normally does, plus the big VAM turnaround outage and things like that. It’s going to impact us in the fourth quarter. And I think you’ll see a similar kind of start. So next year is going to maybe a little bit more back end-loaded than front end-loaded, if I could say that. But when I look at it again, I’ll just simply say that I don’t think if you build it from the base up, I don’t think coal is going to change in China. I don’t think the environmental regulation is going to change in that part of the world. I don’t think methanol is going to materially change with arbitrage is available between coal, methanol and ethylene there. So I think that fundamental raw material and demand based of that business is going to stay the same. From a consumer demand, Todd lay that out, I think, with a lot of specificity in May. We’ve never seen that move around a whole lot. So whether that’s 2% or 3%, it kind of doesn’t necessarily matter a lot in the scheme of things. And so our business is going to run between 85% and 90% capacity utilization moving overtime towards 90%. So I think in the period of time where we’re getting out I think it’s a long period of time of very good business with the kind of profitability levels we use to see back in the mid-2000. So in early 2000s is what I think we’re in for. And so there should not be any reason for us not to be able to continue to grow earnings with that early over this period of time. But again, if it’s 30% going to 33%, it doesn’t necessarily mean the same as we have in 9, 10, 11. I think it could be a little bit flatter next year than that 9, 10 or 11 would projected for us in our Strategy 3.0 rollout.

Yes. And just to take your first question, Laurence, about our project size, I think we’ve been pretty clear. Our sweet spot is in the few hundred thousand dollar range in terms of projects, and we’re not seeing that materially changing. The power of our model is being really disciplined in the types of projects that we work on. And if things get too small, the potential value of us putting efforts there becomes de minimis. On the flip side of that, larger projects tend to be a bigger lift to be successful. And so, we're very focused on improving our win rate and so we’re keeping our project size kind of in the area where we've proven successful is critically important for us.

Thanks.

Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Thank you very much. Two questions; first, just quickly do you have organic volume number for engineering materials this quarter?

No, we don't. And in broadly speaking, we think that half of our volume growth is organic and half of it is through M&A in that process. And we don't parse that – there is no part of that equation if we're going to – Vince if we’re going to parse out, I'll have to give you how much material we lose in terms of leakage, volumetric leakage that occurs in this business, which is not linear. But if you think of a little thumb of 50:50 is as good as when you get with it.

Okay, very good. And then just in the acetic chain, I'm just trying to understand sort of the bridge sequentially because I see sales were down, but obviously the profit was up, so that implies some type of cost benefits. So it was just a question of lower ethylene contract prices being a little bit stickier? Or what sort of is the dynamic that allowed that to play out?

I think we're checking that a little bit. You're talking about the first quarter to second quarter or second quarter to end of the year? What…

Sorry, first quarter to second quarter, your sales are down in 2Q versus 1Q, but your profits are up. So I'm just trying to understand what happened on the cost line?

Yeah, I would focus on the price side as being really the major contributor to our earnings performance in the second quarter. I mean that's – really the story is the combination of utilization rates, pricing, margin increase, loss are relatively flat frankly and have been – most of the year. We had some turnaround activity in there in Q2 that wasn't in Q1 that may be part of that’s driving that.

Okay, alright, so nothing in particular. Thanks very much.

Thank you.

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

Great, thanks a lot, just wanted to clarify on acetyls here. You've entered kind of your level of earnings power in the business, and it sounds like you do see kind of a positive supply-demand balance for the next several years. So, I guess, are you actually expecting earnings to kind of continue at this level in trajectory? And what would be kind of one or two swing factors or two or three swing factors that would prevent that from happening? Thanks.

Well, these are big volume businesses, probably around the world, so it can’t move day to day in that process. What we said in May is that we think this was a 20% margin business and [indiscernible] things and that's still what we kind of believe. We believe we're in the three-year period. We're going to be averaging that 20 maybe discussion above that through that period of time. But certainly, you can go through a short-term swing if raw material prices will be spiked up or will sales fall off. You could find yourself move around a little bit, but we think yes, we think we reset that margin from mid-teens level to a 20% level. And we don't see a reason why that 20% level, and that's our margin, not industry margin. We don't see why that level shouldn't be – shouldn’t exist throughout this three-year period. And we believe we can set the stage for that to continue beyond that period through a series of smart investments and cooperative support agreements we can put in place. So we're pretty comfortable that this business is going to stay pretty tight for a fairly long period of time.

Great and on the – the earnings trajectory over the next several years, so if you expect this to kind of remain in a similar level, would you be in a position to use capital deployment whether it’s in the form of buybacks or M&A to kind of keep you on that trajectory of 10% or 12% earnings growth? And on that note, I mean, you highlighted some potential debt capacity at your Investor Day, if you further thought about that and deploying…

I'll make a few comments and I'll let Scott Richardson as well to step in here. But yes, when you look at it, we don't have any pulse rate in terms of anxiety about whether we can predict earnings, so that you have to agree like I think all you guys would like us do. We're just focused on generating earnings and we'll happily trade-off what we need to do on the process of period to period to make that sort of happen on a gross basis. What I will look at this as a view that we think this business is – we said a bit sooner than we anticipated, probably advancing it by nine months or so, what we kind of anticipated in our three-year plan. So we think that if you look at out there in 2020, we'll be closer to 12 than 11 in that number. So we think this profit is going to, for the most part, stay with us through that period of time, but it could ebb and flow a little bit as we go through that period. I don't know if I'm fully answering your question. But I think for us we feel like whether it's $30 cumulative over that three-year period, or $33 cumulative, it's kind of flipping about it’s kind of been different to us. We think there is going to be a period of very, very good and strong, solid earnings, and we'll do our best to project for you just how that's going to flow as we get further along.

Yes, I would just add, I mean, it's critically important for us to be disciplined stewards of how we utilize that cash flow. And we have a prioritization of uses of cash that we really stick to and organic growth in our business has been first and looking at attractive investment, second. And then being very consistent, being consistent increaser of the dividend and then of buying back shares. And depending on the timing some of that cash flow and where the M&A pipeline is there may be times at which we fluctuate on the levels that we deploy in each of those areas. But that's really kind of how we look at it strategically.

Great. And last one is just you discussed the possibility of methanol investment. Maybe you can just discuss that further. And also your possibility of potentially separating the businesses, is there still a large dis-synergy component that you will be concerned about? Or are you working to minimize that? Thanks.

Yes I think the real key for us in all of our investments – for all of our businesses, is can we make sure that we're not withholding cash for any business in that process. And I'm happy to say we've never done that certainly since I've been here at Celanese. As we look forward, there could be more organic growth opportunities surfacing in the chain business that it could well serve it to be a separate entity versus a combined entity. That's not an eminent issue for us or topic. But we see this business is having lots of opportunity to in theory seek investments either directly or with partnership shoot ups to grow at scope around the world and better position itself to keep his earnings growth underway without regard for a subtle change in asset price in China. So I think you should expect us in the month and quarters ahead to talk more about organic growth and organic growth opportunities in that process. I think likewise we're seeing – continuing to see – you know it's been a few months since we closed the deal, we’re continuing to see plenty of opportunities in EM. And those organic investments are also very important for us and very important for our investors to keep that business growing at the pace it's been on. So what I'll just tell you here is that our intention to fund both of those things and make sure we fund them. We think we can do that today we've been able to do that very well. It’s been a combined entity at some point. If we couldn't do that as a combined entity, we would be separate entity. So we’ll make sure we maximize shareholder value.

Yes, thanks.

So that is the methanol, just a direct comment on methanol. Methanol continues to have an attractive play for us. I think the concept of methanol, though I would patriate more as we get to looking it additions to acetic acid. When they're appropriate down the road methanol could be a piece of that either independently with us doing it, with somebody else doing it or as a partnership.

Thanks.

Sure.

Brendon we’ll take one last question and then wrap up the call.

Thank you. Our last question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Good morning. Thank you for squeezing me in. Mark, dating back to your Investor Day, I think, you said at that time in early May that you're exploring multiple options for a new world-scale ascetic plant. Realize it's only been 2.5 months, but can you provide an update there? Is that still an active ambition on your part?

Yes, I think what will be of interest to us is doing it in a way that I'm not dependent on new volume growth to satisfy. We would like – we always like to do things in a way that the productivity contribution made by this investment is sufficient to carry the investment. So Todd is working hard to find ways and options to create scenarios where we can expand in a way that from a market point of view is incremental, from an internal point of view that's great in our return is not solely dependent on what the gross market is doing. So yes, it's still of keen interest to us, Kevin. And we're working hard. So as soon as we get to a point where we have more detail to share, we'll do that.

And finally, the risk of beating a dead horse, I want to come back to acetyls and kind of the cyclical move that we’re – anyway the move we've seen there, how would you characterize that business relative to your view of normalized earnings power? Normally, when earnings double, let's say EBITDA, in your case has doubled broadly over the last two to three years. And you've got a nine handle in the first half on the operating rate. Things start to feel pretty full. On the other hand, you described price is adequate and you've pointed to some interesting and unusual environmental restrictions in China that really could have some legs. And so I guess, I'm trying to parse out is the current level more of a new normal in your view or above normal? How would you characterize that?

Well, I certainly think that the period that we went through, the 2012 to 2016 period is abnormal. It was abnormal as it reflected the sustain investment in China, in particular, and all these assets and just the crumbling of capacity utilization. And the way we do with any business, it gets pretty – it just gets goofy. And so we have a lot of volatility in earnings and those things. I would say through that period of time though, Kevin, we were able to predict, I think pretty accurately, where we are. So we see these changes as not being unusual. I know that may seem flippant to you guys, but we predicted this would happen, we've talked a lot about it in every – back in 2015, we talked about it. What we missed I think was probably six or seven months. And that's what we missed and – or eight months. But it wasn't – we didn't miss it. So I think in a period where this business is healthy, that's how I describe it. I don't think it's overpriced or it's overamped. It's healthy. And I’d say it because I think if you look at the largest market in the world in China. It's still a marginal business for them. I mean, it's not – I mean, it's certainly profitable at today's rate, but it's not crazy profitable. It's probably not even in the Chinese market today given the costs associated with it and the environmental concern is even attractive economically for them to reinvest. So we think that's a healthy place and a natural place for us to be. And so yes, I do expect this to change as we communicated them in May. And I do think this was a – for us, a 20% margin kind of business. And I think in the Asian’s markets, its low teens to mid-teens. I mean, I think that's what you've got, 500 or 600 basis points – 700 basis points we have between their world and our world. So I think yes, I think we're going to be here plus or minus a little bit for some period of time.

That’s very helpful. Thank you.

Sure.

We will now conclude the call. Thank you all for your questions and for listening in this morning. We are available after the call to address any further questions you may have. Please close the call.

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