Celanese Corp - Series A (CE) — Q1 2019 Earnings Call Transcript

Thanks, Rob. Welcome to the Celanese Corporation first quarter 2019 earnings conference call. My name is Chuck Kyrish, Vice President, Investor Relations and Treasurer. With me today are Mark Rohr, Chairman and Chief Executive Officer; Scott Richardson, Chief Financial Officer; and Todd Elliott, Senior Vice President, Acetyl Chain. Celanese Corporation distributed its first quarter 2019 earnings release via Business Wire and posted a slide presentation and prepared remarks about the quarter in the Investor Relations section of our website yesterday, after market closed. Today's presentation will include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found on Slide 2 of the slide presentation and important information. We will also discuss non-GAAP financial measures today. You can find definitions and other important information and reconciliations to the comparable GAAP measures on our website in the Investor Relations section. Form 8-K reports containing all these materials are also available on the SEC's EDGAR system and our website. Because we published our prepared comments yesterday, we will now open the line directly for your questions.

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

Yes, John. This is Mark. I'll start that, maybe I'll start, and Scott could add some comments. But we did see our affiliates struggle a bit in the quarter. I think the real issue there is that trying to say product we're at are the global reach that we do primarily in China and some limited applications. So we continue to work with them to see if we can help them improve that performance.

Yes, John, just to add a little bit more color. If we look at that on a year-over-year basis, obviously the entire decline in the equity earnings is largely due to plastics affiliates and really, as Mark said, largely related to the demand in China.

And then, can you remind us how much you paid for the Linde syngas unit or is that going to be in the cash flow statement when the queue comes out?

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

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

Sure, Mike. You know, this is pretty well, and the thing about Celanese is that we have a great business machine out there that brings a number of opportunities to us. The ability of that machine to bring opportunities actually has the capability to overwhelm our internal mechanisms, being the unit operations, the logistic systems and processes, and the ability to innovate as fast as we need to. I spend a lot of my time on that, and I'm sure that Laurie's going to spend a lot of her time working in those areas. We think in many ways it's the next frontier for Celanese to learn how to go from 20,000 FTEs to 30,000 and manage that better than we do 20, which is going to be a big part of us continuing to drive value going forward. So, I think that's a major area of focus for us. The second one I would say is that when you look at the opportunities before, deploying cash continues to be my main focus and will be hers as well, and we have more and more opportunities surfacing and becoming reality for Celanese, which would be a big part of unlocking shareholder value. So, I'd say those two things are top of mind, but you'll get a chance to meet her soon and ask the same questions.

And in terms of your outlook for Q2, you noted that it should look similar to Q1. But it does sound like the Acetyl Chain industry rates could improve. Now given your notes in your prepared remarks, thoughts on engineered materials, your outlook still looks for good organic volume growth given project wins and just wondering what maybe headwinds you see in Q2 that you wouldn't see a normal, say, improvement sequentially?

Yes. Well, good, I'll start that, and I'm sure that Todd and Scott will add some comments here. But let me – one of the things that's not readily apparent is internally the things that we deal with. So in Q2, we have a number of turnarounds in front of us. Those turnarounds will cost us $25 million or $30 million. They call it $0.15 to $0.20 of headwinds baked in there. We're expecting raw materials – probably seeing raw materials in methanol to go up. Those kind of things that net, net record for another $10 million. And John asked a great question on affiliates, and we see that affiliate number sliding a bit further. So before we even started this quarter, we've got at least $0.25 of unusual headwinds that we didn't have the first quarter of the year, quite strong in the first quarter of the year. So, I think on one hand it's easy to say, well, life will be good, you built in this point. I think the first half of this year is going to be a struggle. And I think maintaining numbers flat is a push for us. So, I certainly wouldn't recommend anyone go higher than that number for the quarter. I just don't see that right now materializing. If I take a stab at EM quickly, yes, we're pushing price really hard and we're pushing our mix really hard and the repercussions of that will not be that great as long as business starts to recover. We don't expect a full recovery in EM to start until more than the second half of the year as well. You look at the auto bill projections, those things we're still down in the second quarter. We should start some rebound going in the third quarter. So our fundamental belief, Mike, is that we've got a bit more ground here before we get into the back half of the year where things should be starting to improve. But Todd, you'll make some comments on AC this quarter.

Yes. It's not only regarding acetyl, and we actually had a pretty good March, as we wrapped up Q1. Most of our – almost 40% of our business occurred in March, as we look at that profile. So we ended on a pretty good note as we wrapped up Q1. As we get into the second quarter, Mark mentioned that Celanese has turnarounds, but it's pretty typical for the industry to have turnarounds during the second quarter. We've got turnaround in Bay City, Texas, headwind we’ve got to navigate around. We've got a fantastic network to do that with. I think a bigger issue right now is a series of safety checks and audits following the explosion in Yancheng and Jiangsu province at the end of March, that’s put a damper on operations throughout the province. So we got to see how that unfolds, but we'll certainly activate our network around these things and try to deliver the quarter kind of in line with Q1.

Mark and Todd, you guys have talked in the past about maybe some of your competitors in China being subject to maybe a little bit more discipline and enforcement. Does this pace your expectation of seeing some capacity out in China and maybe tightening operating rates even sooner and for longer?

And again, I'll start with some thoughts about specific color on some of the closures and stuff that comes from industrial parks. Bob, the movement in China is fundamentally one, in my personal view, is driving inflation. And if you think about that, the economy needs higher pricing to get a decent return on the over-investments they’ve made for a long period of time. So, when I worked through that, what I see them doing is putting pressure on the 150,000 or so state-run enterprises. They are continuing to lift those earnings there. So that means environmental restrictions are going in. That means safety restrictions, and you've seen those occur episodically. So we’ve gone through a period of safety events every six months to nine months as they continue to ratchet the impact of that, and they're directing now. We are very public about the number of closures of chemical parks that are going to occur directly with that; they will impact some of our competitors, we think. But Todd, do you want to carry on with that?

Yes, I mean, just a specific follow up on this, the situation in Jiangsu. So remember before we talked about other provinces going through steps to examine environmental policy that continues, but in Jiangsu, we had not yet seen anything specifically around park policy. So what we're hearing – we have not seen anything published yet, but we're hearing that Jiangsu will reduce the number of chemical parks from 49 down to 20, starting sometime in 2020 forward. How that ultimately is laid out and executed remains to be seen and the specifics remain to be seen. But that's a significant development, a key set of steps following this tragedy in Jiangsu. So that's probably the most impactful in our space. We've got to watch that. So think about where parks are near the Yangtze River or close to population centers, that gets more specific in terms of details we'll share.

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

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

Can I ask an EM question? Mark, it seemed like maybe over the last few quarters you guys have been working hard on getting your price to offset raw materials and I suspect towards the end of last year, when oil went down, a number of your customers were destocking from macro fears and trying to tighten up their inventories, but also maybe hoping they'd see some relief on price oil. We've had oil rally now. I wonder if you could give us a sense of where you see customer inventories destocking, restocking or ability to defer purchases in light of volatility in pricing?

Well, you called that right, Bob. There was definitely destocking going on as people wanted to have a view generally that prices will not come down and, of course, we rallied in the right kind of way to continue to drop higher prices through that period. So, we're now in that aftermath of that and waiting for fundamental demand to pick up, which it seems to be in some areas, but again it's a bit too early to tell with that. As it relates to pricing, Bob, what we've really done is, yeah, generally you've always got to make sure you look down as we went out and starting last year did just a really hard look at where we were adding the most value and where we felt we were impacting customers in the most important way. We want to make sure that we're getting our shareholders the right compensation for that. So we were very direct with pricing in those areas where we felt that the value was really being brought by selling these and applications and the molecules we had. So that approach is still ongoing, and we don't intend to move away from that. You've asked me in the past if we lose volume we do that, the answer is sure, but we're really looking at a way to drop money. So everything that we do relative to pricing and if we elect not to participate on volume is a thoughtful process we go through to try to maximize the value back to our shareholders.

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

I don't know. Scott, do you have a view on that?

Yes, I think we're going to be flattish, David, right now. I mean, we're still working as Mark just talked about. We're still working the price equation very hard. The one thing that's going to change probably slightly from Q1 to Q2 is we'll quite have a little less destocking that occurs. I mean, it takes a good six months or so. When oil fell as hard as it did for that to kind of work its way through the value chain. And while our volumes were down year-over-year, and in the 3% range, a lot of our customers that we've talked to were kind down more in the 10% to 15% range. And we were able to offset that largely through the new project wins that we had and started to flow through in the quarter. So, I would say at this point we're kind of looking at flattish.

Okay.

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

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

Well, I think we have, when I look at the bolt-on deals, for a minute, we're seeing the size of bolt-ons increase and those are opportunities that make sense. So we're working a few now that would be in that $30 million to $70 million of EBITDA kind of range to $100 million where we've been doing deals that have been sub-30 in EBITDA. So that's encouraging for us. We continue to work hard to position Celanese to be able to take advantage of transformational opportunities and that's a big personal thrust of mine. So as Lori comes in and takes over the CEO, I'm going to be devoting myself to that along with Lynne Puckett under General Counsel. So we'll be working as hard, and we're optimistic that this year unfolds, more opportunities come available and we'll work hard to see if we can capture one of those elements.

This is Angel Castillo on for Vincent. Just a quick question for me on your comments on VAM, focusing on one VAM with also the Western Hemisphere and your ability to sell some in this area. I was just curious because my understanding was that at least in the U.S. incremental down would likely be exported. So just in light of your expansion and again the comments on the Western Hemisphere, I was wondering, are you able to sell your capacity in the U.S. or are there particular factors that facilitate for you to be able to sell in the region?

Yes, let me start that, Mark. Yes, the expansion in Clear Lake, which we brought online in December of last year. So we added 150,000 tons of capacity, that's a key value step amongst several that were underway with asset yield. The work around that started way before the plant ultimately was commissioned, and that was to position our business in the most attractive way as we think about contract mix around the world, good customer growth and mix around the world. So, yes, we did shift some of our profile a little more to the Western Hemisphere following that startup, so again intentional stuff keeping our value enhancement efforts and that continue into 2019 and beyond.

And then in terms of your comments on China, you mentioned the high inventory obviously continue to work on the acetic side. Just curious your thoughts take for the industry to work out of that inventory. And then also just in regards to your comment about slow start to April, I know, if you could give us more color on that, just entirely related to the plant explosion or were there other things that you're seeing that are perhaps causing more of a slow start?

Yes, I mean, there are lots of trade questions around those processes. But I think the main event following the explosion and the subsequent audit and focus on inventory control throughout the country, really just more specifically in the province of Jiangsu. So that's what we're watching. As I said before, we had 40% of our business in Q1 happened in March; we thought we were starting to dig out of the softness at the start of the quarter. So I would point to that, point the derivatives acetic acid. I mentioned three before, those are probably the ones to watch and that linked to the inventory build that we saw in the quarter.

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

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

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

Yes, we know that; that’s definitely true, that’s exactly what we're doing. When you look at the economics of that, it's pretty profound for us. The assets we have in China or in Singapore higher costs than the asset base we have in Europe and not only is that higher costs, if you look at, it's just the strip today for nat gas of five years or six years, we just roll that out. You can see that variability lasting for a very, very long period of time. I just meant the economics of the day – this shows how solar power is actually offsetting the incremental gas being consumed for utilities in the state of Texas. I mean, so we have this low-cost energy base here on the U.S. Gulf Coast that is pretty phenomenal. And the moves we're making really are moves to achieve efficiencies that will boost our earnings from what we believe is going to be around $800 million to above $1 billion, which will generate around $100 million over that locked up in the acetic acid front; primarily, it's productivity just associated with that switch from Asia to the U.S. And then you add on top of that incremental methanol, incremental VAM, those kinds of things. All those contribute toward again without any change in the basic business, closing that gap gets you back to $1 billion and, of course, $1 billion beyond goes from that. So, yes, that's what we're doing. So most of that material will end up offshore. The demand in the U.S. is not really increasing.

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

Yes, the businesses are not – there's organizational integration that has to be separated and there are efficiencies associated with a single instance of SAP and those kinds of things that you have to work through with some tax considerations. I think once before we talked about the penalty associated with that being well north of $100 million per year; call it $1 billion of negative net present value. There’s been a lot of work that Mr. Richardson has led over the years and we've really dramatically dropped that down. Maybe it's $50 million for that. We'll continue to work that down. But I think we'll get it to a point where, should an opportunity arise that would facilitate a value creation step that way, it would be certainly possible without that kind of huge negative consequences that corporations often see when that happens. At the same time, we're seeing investment opportunities in the space, and we're being very thoughtful with those. Every one we're doing is incremental at a very low cost. But certainly, it's getting to that point where we could do something else if that makes sense for that organization and for our shareholders.

Thank you.

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

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

Yes, I'll do one. I'll start and you can add to that. We've talked about roughly a 50:50 balance make/buy, and that includes as well our affiliate investment in Saudi. But the profile in the Americas is, of course, more heavily weighted toward make as we think about the methanol unit, our derivatives in the Americas. But this will nudge us up a little bit. We started that unit back in '15 with an original design nameplate of about 1.3 million tons, now we're looking at 1.7 million tons once these expansions are finished. So low cost, great returns on capital, also allows us to do some things in support of our integration here in Clear Lake. The acquired carbon monoxide, which we talked about before. We have the expansion around the corner with acetic acid. So all that adds to our configurability options there in Clear Lake.

And, Mike, as I would say with the cross point, we could be full in the United States and we’re totally integrated and it would be to our advantage at that point. There’s still room to do that beyond the 1.7 million tons, down the increment that we've pushed out with this last expansion. So, yeah, we've got great partners in hand with Mitsui. We have other friends in the industry we'd like to do something with. So we're certainly not – it's not the top thing on our list today, but it's something we continue to evaluate and look at, and we’d be willing to take that step with the unit economics where it really makes sense to our shareholders.

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

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

No, we've been very clear in both businesses. We really target greater than 20% returns on investments, and we don't really look at either one definitely from that perspective. A lot of what we're doing in asset yields, we've talked at length about focusing on the opportunities in the Gulf Coast for incremental investment that really justifies with productivity. And then in Engineered Materials, a lot of these are really incremental capital. So we're putting compounding lines in for Engineered Materials. It generates a lot of value that is paying back in a couple of years. So, that's really where we're prioritizing our investments right now. I think we've said we got kind of nine projects or so going right now in Engineered Materials from a capital perspective; all of those are pretty small when you look at each one individually, but as a collective program, it's pretty sizable, with, again, a return profile that's better than 20%.

Yes. I think the next generation for us too in EM is going to be to restructure our power base to better fit the consumption demands that we see in the future. So, right now, we're very heavily U.S. and European based in our base polymer production, and we're seeing continued opportunities in Asia. We see that growth quite dramatically, which we currently satisfy from the U.S. So we think there's a whole new round of opportunities that are surfacing and will be part of the new three-year plan to think that we talked about. We'll make those investments out there, and Todd has just talked about some of these. So we do believe that our investment opportunities are getting greater as we grow this company, and I think it's pretty evenly split between the two.

In Jiangsu, over a longer period of time, do you worry that environmental constraints may either close your capacity or limit your capacity in some way or limit the capacity of your suppliers, your customers? Do you view these environmental efforts over a longer period of time as a clear positive or a clear negative or neutral, you can tell for your business there?

Well, Jeff, that's a great question, yes. So when we first off, we're in the Nanjing Park and it's considered one of the top two or three parks, maybe the fourth most favorable park in the entire country. So it's a very good park, it's well-managed. The role that companies like Celanese play there and BASF and others as we partner with the politicians really to support their move to become more focused on safety, environmental stewardship. So we play a key role and really helping them put forth the kind of regulations and protocols we have as a corporation and the other multinationals do on that park and on organizations that work there. So that relationship is really positive. Could it end appropriately for a park like that? I suppose it could. But what we do is pretty unique, and I have a hard time believing that anytime in the near future it represents moves to improve China really represent a threat to that park or a real threat to our asset base there. When you get out beyond, let's say, a park like a big industrial park like Nanjing, you get to a lot of industrial parks. Industrial parks don't run that way. They have lots of mom and pop or smaller operations there, and those are the ones that seem to be feeling the most pressure now. So I think it's really more customers that could be impacted as time goes on, in every going. And right now we don't have a way to assess that, but it's something we're going to keep our eyes on.

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

And in Engineered Materials, is there a few percentage points of volume growth from acquisitions in the quarter year-over-year? I'm not sure, maybe 4% or 3%?

There was a little bit - there was a little bit from Next that rolled in this quarter versus last quarter year-over-year.

Again it was pretty small. Jeff, I mean it’s probably more like 1% to 2% in there. As I mentioned earlier, on a year-over-year basis, it was 3% when looking at straight volume. However, what we're hearing from our customers is that their demand is down significantly more than that. If you factor in that acquisition, the base is likely down around 4% to 5%. We feel pretty good about that, considering the environment we were in, that we were able to offset that with new projects.

I guess first, going back to the first quarter results relative to your initial guidance at the time of the Q4 Earnings Report. Well, what truly surprised you the upside in the first quarter? And then related to that, Mark, in your prepared comments you mentioned confidence in an improvement in China and just broader underlying demand. Is that embedded in your reiteration of guidance for 2019, I'm just trying to clarify.

Yes, I would say that we provided very flat guidance at the start of the year since we began slowly, focusing on what we could contribute. I was pleased with the progress we made in terms of increased productivity, higher sales, and shifts in our portfolio mix, along with a stronger performance in March than we had expected, which boosted our outlook somewhat from our earlier perspective. As we enter this quarter, I've pointed out that we are facing approximately $0.25 in headwinds that weren't present last quarter, meaning we're starting out closer to 230 rather than 260. We need to work our way back up from this position. My optimism for the year is based on my belief that China's situation will improve as the year progresses. It feels like the momentum is building but is being interrupted. We have a good understanding of the Chinese market and our customers there, and there's a strong desire for improvement. I believe that as we enter the latter half of the year, we'll see more positive developments, establishing a stronger foundation that will benefit not only us but also our affiliates.

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

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

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

Scott, do you want to try?

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

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

Well, I'd love to, John. I don't have that in front of me, so you should think of all these as being small and being incremental, all adding millions not tens of millions of dollars to that process, all baked into that push we have to grow this thing $100 million per year, which we've been doing in that scenario. So I think these are small incremental step changes that make us go from $690 up to $770 or so this year. We’ll see what that number turns out to be; $760, and then up from that into $850, $860 next year. So part of that.

Yes. And it's really what allows it to satisfy the demand growth that we have from the project wins that we've been talking about in great detail in the last several years. And so, I mean my point is either by this million-dollar type project each one of them plus or minus. So we're not talking about huge capital for each one.

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

Well, we think in that area there are partnership opportunities there that are available to us at least in theory on paper. We have come very close to acquiring businesses that would be derivative-like businesses that would fit our emulsions business well in the portfolio of products we sell there well. There are upstream opportunities that could involve M&A. So anything I was trying to extend that chain laterally and also a back integrating that chain.

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

The timing, that’s several years. I think two and two and a half years because you've got to do the next turnaround. We haven't talked about the dollar amount, but it's well less than $100 million.

Yes. So, Kevin, think of the timing similar to the startup timing with the expanded acetic acid. So there are integration benefits associated with both units starting up about the same time, there's some recapture on the CO2 side and hydrogen benefits at the side. So there are all kinds of integration benefits associated with this, and a market point capital is de minimus and would be funded through the venture itself.

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

It's sort of all the above. I mean we look at all of the implications of everything from the credit arrangements we have in changing those arrangements out there, the cost of the SAP systems, now you reconfigure those systems both positive and negative relative to that; people that have joint jobs and how we deal with men and women like that and ways to take care of them. So every aspect of that we've looked at and we've got pretty good that the number today is closer to $50 million for that ongoing impact. Scott and others are working to even get that lower over time. So that's how we did it. It’s not, there's no magic, there’s one thing, there's hundreds of small things that we just had to go after.

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

Yes, really quarter-to-quarter, we had a couple of things come in a bit higher than we thought. Price peaked up a little bit. There was just some sort of return to a normalized pricing, so it's pretty flat year-over-year, but there is improvement quarter-to-quarter. We had some energy favorability with a few million bucks in there. Spending was down as part of our productivity initiatives came in at those things; all added up to some pretty good money, and then on top of that equity earnings came in a bit higher; that was a pop up that you saw there. I mean, it will settle back down in that mid-60s kind of range, and we think running out the year, we have to continue to look at ways to add productivity, do more productivity in this area, and we'll think we'll need you to keep these earnings flat next year, but I don't know if that's enough color for you. I think the business is top performing the way we thought it would, and we expect it to be flat as we end this year year-over-year.

And just a clarification, Mark. Obviously, you indicated that you thought China was going to improve, and just curious is a trade deal necessary for you guys to hit that target?

Well, it's a great question, and I want you to please understand that I'm talking and this is a feeling; I just came back from there recently on the team since the last time over there. But if you look at the data that comes out of China, what you see is starts and stops of things. It's like momentum starts to build and something knocks it off course; momentum starts to build and something knocks it off course, so actually as an economy it's not sliding down. It's already taken that step down. It is trying to recover, and there is not a good reason for it to be down. I mean, if you go there, you see this – I mean, it's a thriving economy still today, a $14 trillion economy; it's going to grow 6%. That's probably twice the economic contribution globally to the world than the U.S. So to me getting that incremental $800 billion or so coming from incremental growth as the Chinese economy is critical, not only for China but it's also critical for the world. So I do believe that for the world to get better, China needs to recover. And I do think to jumpstart the economy in China the trade deal needs to happen.

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

So yes, when you look at the bigger deals we're looking at, they tend to be more EM-oriented, and that's a bit of a balance equation. If you look at AC, we have more control on that growth. And we thought we needed fewer partners; we have already have a machine and we can all investments and so they tend to be more EM-oriented. That's what I would say there. Yes, as regards to AC, we continue to look ways to involve others in that; we think that's the right thing to happen over a long period of time. Having said that, that business is directionally starting to improve, and we do believe that we can get through the next year or two with flat economics. We'll see a period of time without that whether we do a deal or not with somebody else and soon start to get back on course and improve naturally.

Yes. And Jim, as we look at deals in Engineered Materials, they have been really are focused on deals in the engineering thermoplastic space. So other materials are similar materials to what we have today.

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

The timing, that's several years. I think two and two and a half years because you've got to do the next turnaround. We haven't talked about the dollar amount but it's well less than $100 million.

Yes. So, Kevin, think of the timing similar to the startup timing with the expanded acetic acid. So there's option - there's configuration benefits with both of those units starting up about the same time, there's some recapture on the CO2 side and hydrogen benefit at the side. So there's all kinds of integration benefits associated with this and a market point capital of the minimus and would be funded through the venture itself.

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

It's sort of all the above. I mean we look at all of the implications of everything from the credit arrangements we have in changing of those arrangements out there, the cost of the SAP systems, now you reconfigure those systems both positive and negative relative to that, people that have joint jobs and we how we deal with men and women like that and ways to take care of them. So every aspect of that we've looked at and we've got pretty good that the 100 and it's actually a number of higher than we first started looking at that, we saw ways that we can invest money and improve our ongoing operating efficiency to get that number lower. So our path has been on new productivity to pull that down and we think contemporary number today is closer to 50 for that ongoing impact. And Scott and others are working to even get that lower over time. So that's how we did it. It's not, there's no magic, - there was one thing, there's hundreds of small things that we just had to go after.

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

Yes, really quarter-to-quarter, we had a couple of things came in a bit higher than we thought, you know price peaked up a little bit. There was just some sort of return to a normalized pricing so it's pretty flat year-over-year, but it is improvement quarter-to-quarter, we have some energy favorability with few million bucks in there, spending was down as part of our productivity initiatives came in at those things all added up to some pretty good money and then on top of that equity earnings came in a bit higher, that was a pop up that you saw there. I mean, it was settle back down in that mid 60s kind of range and we think run out the year, we have to continue look at ways to add productivity, do more productivity on arena and we'll think we'll need you to keep these earnings flat next year but I don't know if that's enough color for you, but I think the business is top performing the way we thought it would and we expect it to be flat as we end this year, year-over-year.

We thank you for your questions and for listening in today. We're available after the call to address any further inquiries that you have. And that wraps this up. Rob, you can close this out.