Celanese Corp - Series A (CE) — Q3 2019 Earnings Call Transcript

Thank you, Christine. Good morning and welcome to Celanese Corporation third quarter 2019 earnings conference call. My name is Chuck Kyrish, Vice President, Investor Relations and Treasurer. With me today are Lori Ryerkerk, Chief Executive Officer; Scott Richardson, Chief Financial Officer; and Todd Elliott, Senior Vice President, Acetyl Chain. Celanese Corporation distributed its third quarter earnings release via Business Wire and posted prepared remarks about the quarter on our Investor Relations website yesterday after market close. As a reminder, we'll discuss non-GAAP financial measures today. You can find definitions of these measures, as well as reconciliations to the comparable GAAP measures on our website. Today's presentation will include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found at the end of the press release, as well as the prepared comments document. Form 8-K reports containing all these materials have also been submitted to the SEC. Since we published our prepared comments yesterday, we'll now open the line directly for your questions.

Sorry, I had you on mute. Could you explain the guidance for 2020 in relation to your midpoint for the full year of 2019? The low end indicates 13.4% growth, while the high end suggests over 20%. Please help us understand how you arrived at the low end. I recognize that achieving the high end would necessitate some economic improvement, and we all know what that entails.

Vincent, thank you. Let’s begin with what we discussed last quarter regarding the transition from $10.50 to $12, as I plan to reference the same factors. When we moved from $10.50 to $12, we attributed it to a third of market demand business growth, a third from productivity, and a third from our cash deployment, whether that involves M&A or share buybacks. Looking at this year, excluding the effects of Clear Lake, we anticipate ending the year around $10. By adding productivity, we get an increase of $0.50. Another $0.50 comes from cash deployment, so whether it’s M&A or share buybacks, that brings us to $11. The $11 reflected in our outlook for 2020 assumes current market conditions. If we experience any upside from improved demand or pricing, we could reach $12.

Okay. And as a follow-up, when we think about engineered materials into next year, the volume has been trending lower. And you talked about destocking last quarter and maybe this quarter there's a bit of residual destocking. But as we enter into 4Q, should we start to see volume turn positive again? And what type of volume growth do you think you can expect for 2020?

Yes. So for engineered materials, I mean, we are up sequentially on volume second quarter to third quarter. We saw the volume up about 3%. So the residual destocking that we referred to was really pretty specific to Europe where we saw autos decline another 15% quarter-on-quarter. So that's really specific. I would say, consistent with what we said last quarter, we really didn't see size of destocking in China. In fact, we saw volume growth in China. And the U.S. stayed flattish, so we think we were at the bottom of the destocking last quarter. So really the residual destocking was just in Europe. So for engineered materials, volume up second quarter to third quarter by about 3%. Going into the fourth quarter, I don't know that we'll see volume growth. We see some seasonality, typically in the fourth quarter. We see China continue to grow in advance of their first quarter holiday. But typically in the U.S. and Europe, we continue to see slowdown. So I don't expect volume growth third quarter to fourth quarter, but certainly we expect volume growth based on the project wins that we've had this year, as well as just normal seasonality into first quarter next year.

Okay. Thank you very much.

Thanks very much. How many shares did you buy back in the third quarter?

Yes, Jeff, we purchased approximately $275 million worth of shares, which were priced at just over $105 to $106 each. That’s how we concluded the quarter, and we anticipate completing around $1 billion in repurchases for the calendar year 2019.

So I assume that means that you bought no shares in September, is that right?

No, we've been steadily buying shares since September. You know, prior to that we were more opportunistically buying them but since then we've just had a steady pattern of repurchase.

Okay. Great. Thank you very much.

Good morning. Lori, as you consider the potential for improved conditions and the additional revenue, is the increase to $12 per share divided equally between the Acetyl Chain and EM? What do you believe needs to occur in those segments to achieve that extra growth?

Yes, Mike, I think that's correct. I would say it's fairly evenly divided between Acetyls and EM. We do not anticipate any year-on-year growth in Acetate Tow. In Acetyls, that growth, of course, assumes no impact from Clear Lake, but it likely arises from market tightness and improved pricing for next year. In EM, that growth stems from volume without destocking and a trend towards returning to normal market conditions and demand.

Right. And then in terms of acquisitions given that it is an area that could boost earnings next year any thoughts on the environment size? Where do you think the opportunities are focused on going forward?

Yes. Our primary use of cash is focused on organic investment. This year, we have allocated $400 million for capital expenditures, which will increase to $500 million next year. This investment is aimed at growth and productivity projects within the company. M&A remains on our radar; we are exploring both small acquisitions and larger transformational deals. However, we have not identified any suitable investment opportunities this year, as many sellers are expecting 2018-like valuations, while the pricing environment reflects 2019. We will only proceed with M&A if it makes sense, is priced appropriately, and adds shareholder value, but currently, we have no acquisitions lined up. Looking forward, we are actively seeking opportunities, particularly in the emerging markets sector, to acquire additional molecules, technologies, or expand into new geographies, although we are still in the exploration phase and have not finalized any deals yet.

Got it. Thank you.

Thank you. Good morning. Lori, could you talk a little bit about…

Good morning, Bob.

…maybe some specifics on the supply chain improvements you got teed up in Engineering Materials? What sort of efforts are you making there? Can you give us some granularity on exactly what you're doing there?

Yes. As we've increased our volumes in Engineering Materials, especially after our recent acquisitions in nylon, TPE, and other product lines, we've experienced pressure on our supply chain due to the significant increase in SKUs and small volume materials. Although this has positively impacted our earnings, it has strained our largely manual and spreadsheet-based supply chain system. We took a step back to assess what we need to do to ensure we continue delivering high-quality products to our customers on time. Over the past six to nine months, we've worked on strengthening our current systems by adding personnel and refining processes to maintain manual operations but with greater effectiveness and efficiency. While this has kept us operating smoothly and satisfied our customers, our next phase is focused on automation. We're exploring enhanced IT solutions, better forecasting methods that leverage statistics instead of relying heavily on manual processes, implementing systems that manage SKUs more effectively, and adding barcoding where it's currently lacking to enhance automation. This initiative is underway now, and we are collaborating with a consultant to define the systems and strategy needed to achieve this, with an estimated completion timeframe of 12 to 18 months.

Got you. And could you give us on the acetic acid side maybe a look around the world in terms of operating rates? And I'm particularly curious in China. I know you guys have talked in the past about maybe seeing a few more plants there might come out of the market and help tighten things. Where does that stand these days? And I guess, I saw your main rival there is thinking about adding one million ton plant in China. So what's sort of the outlook you guys see there?

If we look back over the past few years, we've observed a few plants shutting down in China for environmental and other reasons. However, there hasn't been much new construction. Some facilities have slightly increased crude capacity, but overall volume supply in Asia and globally has remained flat or slightly declining. There was a significant announcement regarding new developments, but those will take time to materialize. Generally, supply has been fairly stable. In 2018, the industry experienced numerous outages, which tightened supply somewhat, but this year the number of outages has decreased. Apart from our expansion at Clear Lake, which has just been announced, there haven't been many other projects in progress. Frankly, the economic conditions have not supported new builds for most companies, aside from the capacity increases and economical projects we have managed compared to Greenfield builds. Todd, would you like to add more?

Yes Bob. Hey, it's Todd Elliott. We're tracking with our reconfiguration project in Clear Lake. Of course, we're adding about 800,000 tons there in Clear Lake by 2022. So, permits in place both for that as well as the methanol expansion plan for Clear Lake. So, that tracks. That will we think be the first world-scale best technology unit that hits the marketplace in the near-term. So, we're tracking towards that date. More specifically to your question today if you just look at utilization rates I think you are focused mainly on China. Of course, 2018 we saw utilization rates around the world push up in the 90% range both globally as well as in China. China fell down to the probably under 70% utilization rates for most of this year. We saw that nudge up towards the end of Q3. We would call utilization in China around 70% and then towards the end of Q3 probably around 75%. So, we actually saw some improvement. Some of that was supply-related due to some supply disruptions as well as this improved demand prior to the Chinese national holiday. So, a little bit better trading conditions in China at the end of Q3. We also saw pricing move up at the end of the quarter. I think the question now is is that sustainable? We're watching that of course as we're into Q4 and certainly looking for better conditions into the New Year really main focus on demand recovery.

Got it. Thanks.

Thank you. In acetyls you drove down the inventories of the downstream products to make up for the shortfall. It sounds like you plan on rebuilding those inventories. Why not just continue with low inventories at least in the early next year given the economic backdrop here?

So, look we do have lower working capital this year. That is certainly helping us. Typically we have lower demand for VAM and emulsions in the fourth quarter for seasonality anyway. So, that's quite frankly why we felt comfortable driving down our inventory. Look it's just a choice point. Typically we see a good pickup in first quarter. And there's little raw material costing right now, so we still think it makes sense to take advantage of that lower raw material cost and rebuild inventories to the extent we can in the fourth quarter.

And maybe John, it's Todd again just to add on. This shift to derivatives has been intentional this year. We saw opportunities to move about 5% of our acetic acid mix downstream to either vinyl acetate or emulsion products. As mentioned in the prepared remarks, we're up over 15% year-over-year when looking at our volume patterns downstream to those derivatives. We believe that this has been a positive move, allowing us to keep earnings around $190 million throughout the year, really since Q1, while maintaining margins above 20% on an EBITDA as a percentage of sales basis. This intentional shift to derivatives has proven to be the right decision from an activation perspective this year, as we identified better opportunities in those trading conditions.

As a follow-up on engineered plastics, you mentioned the light-weighting of both traditional vehicles and electric vehicles as growth drivers. Could you clarify the typical content of Celanese in a standard traditional vehicle compared to that in an electric vehicle? Is the content higher for electric vehicles?

I would say the opportunity for content is greater in electric vehicles because they require batteries that use a lot of film, which we supply. Additionally, there are significantly more electrical connections in an EV compared to a traditional vehicle. While the content opportunity is higher for EVs, they currently represent only a small percentage of the overall fleet. We are pleased with the content we have in EVs, but it remains a small portion. Vehicles continue to be extremely important to us now and for the foreseeable future. The positive aspect is that as we maintain strong penetration in the automotive sector, we are able to increase the amount of content in vehicles. You may have noticed our growth rate of over 11% annually in kilograms per vehicle. Approximately two-thirds of this growth is attributed to our mergers and acquisitions, as we acquired nylon and TPE to expand our presence in vehicles, with about one-third coming from our legacy materials. Volume is certainly a key metric, but we also focus on the value of the materials we incorporate into vehicles, aiming to provide high-value, high-margin polymers. We are considering both aspects. Additionally, trends such as light-weighting, minimizing paints due to emissions concerns, enhancing durability, and replacing other plastics for improved functionality are significant for both internal combustion engine (ICE) vehicles and EVs.

Got it. Thank you.

Yes. Hi. Good morning.

Good morning, P.J.

A question on Acetyls. Looks like you pushed more acid into China, and then in Western world you diverted more volumes to VAM and emulsions. Is that a strategy sort of going forward? You had a similar strategy last quarter. And what is the future of the Singapore plant? You talked about rationalization in Asia. So what's the future of Singapore plant, especially in light of the new capacity announced by BP? Thank you.

Thank you, P.J. Our strategy in Acetyls is to follow the money. In the second quarter, we shifted volume from China to the Western Hemisphere where acid pricing was more favorable. We also redirected it to VAM, another derivative with better pricing. As Todd mentioned earlier, we have seen a price increase in Asia, particularly towards the end of the quarter, which led us to move more volume back into China and reduce volume from Europe due to a significant softening there in the third quarter. As we started to notice a softening in the Americas, we also adjusted volumes accordingly. Our business model is built on the flexibility to move our products between regions and between acetic acid and its derivatives to maximize returns, which allows us to maintain stable returns in the Acetyl Chain. Regarding Singapore, we are still assessing the situation. With the planned expansion in Clear Lake, we will remove some capacity from Asia. We're monitoring the pricing dynamics in China and Singapore, along with potential impacts from IMO 2020 on fuel oil pricing, which may influence our decisions. We are keeping our options open until we see how the economics evolve.

Thank you. And a question for Scott. Scott, you did a $275 million buyback. You're on pace to buy $1 billion worth of stock. It looks like the pecking acquisitions aren't quite there. So, can you give us an update on the overall M&A strategy? There is some talk about strategic splits or an R&D transaction. So, can you talk about that, and generally sort of the ongoing consolidation in the industry? Thank you.

Let me address the buyback question first, P.J., and then I’ll let Lori provide broader insights on M&A. We executed $275 million in buybacks this quarter, averaging around $113 per share. For the year, we’ve completed $775 million in buybacks at an average price of $105 to $106. By the end of the quarter, we’re aiming to reach $1 billion. We'll be strategic with our cash flow. We're planning to increase capital expenditures, as organic investment is our main focus for any extra cash. We expect to finish this year at around $400 million in CapEx and anticipate raising that to about $500 million next year, possibly more if we find attractive projects. This remains our top priority before considering bolt-on M&A. In the current economic climate, we haven’t observed a strong willingness among sellers to engage, so we’ve redirected that cash toward buybacks and will continue to do so as opportunities arise.

Yeah. And a transformational M&A, I mean I know there's been a lot in the press and many of you have written about it and taken certain positions. I think correctly many of you said you weren't surprised by discussion of transformational M&A. And I think we've been very clear here, and Mark before me about we will continue to pursue whatever form of M&A is the most value added to the shareholder. Look, we regularly use advisers to help us evaluate options. It's an ongoing activity for us. That hasn't changed. And quite frankly, there's really no change in our philosophy around whether or not it's attractive to split the company. If, at some point in time it becomes attractive to do a split, because we've done other activities, we would consider doing that. But it is still our opinion that to split the company as it is today, really wouldn't add value to the shareholder because of the dissynergies associated with the split, and what we see as not much value uplift just from having a split short of some sort of other transformational activity.

Thank you.

Yes. Good morning. Just want to dig in a little deeper. You called out disappointing joint ventures in the EM segment. Can you kind of walk through Saudi and Korea and Japan? And what are you seeing there that's disappointing? Is it structural? Is it just macro? Maybe kind of tease some of that out?

Yes. Let me begin with our Ibn Sina joint venture in Saudi Arabia. Last quarter, we had projected an uplift of approximately $10 million from Ibn Sina this quarter compared to the second quarter following the turnaround. However, we only realized about $4 million. There are a couple of factors contributing to this. Firstly, we incurred some remaining turnaround expenses in the third quarter. Additionally, we recorded a GAAP tax rate adjustment this quarter. Therefore, we did not achieve our full expectations from Ibn Sina this quarter. Moving on to the POM joint ventures, we've been working hard to progress them, but we've encountered challenges with POM pricing due to the downturn in the automotive sector. As a result, our joint ventures have faced difficulties, potentially more so than our own volumes. We've not seen the returns from these ventures that we experienced in 2018. This situation generally reflects the overall market conditions for the products they produce and the regions they serve, rather than any specific issues with the operations of the joint ventures.

Okay. And then in tow with the shutdown of the Mexican plant happening this quarter, what's the impact of that on earnings? And then what should we see when we come out of that from kind of increased earnings on the backside? And when will that hit? Will that hit squarely in Q1? Or will we have to wait a little bit for that to flow through?

Yes. So Ocotlán will shut down at the end of this month as we had discussed earlier. There was about $100 million to $110 million of costs that came with that shutdown, $10 million for personnel and another $95 million of non-cash items. So, really accelerated depreciation and impairment, so we'll see those hit this year. That shutdown and the savings that come with it going forward make up a significant portion of the $50 million of productivity we needed to see to maintain flat earnings in Acetate Tow going forward. So what I would say is, given that and the market dynamics, I would expect Acetate Tow going forward, so next year to look very similar to what it did this year because these savings are already baked into that.

Great. Thank you.

Hey guys. Good morning. I guess first off back to the 2020 guidance, Lori. How would you have us think about quarterly phasing as we think about 2020? And related to that, how are we thinking about volumes at the low end of guidance? How would that shake out by the two core segments EM and AC?

Yes, we haven't really analyzed the quarterly volumes specifically, but I would expect them to follow our historical patterns for quarterly earnings. I don't anticipate any significant changes. We usually observe some seasonality in the fourth quarter and a dip in the first quarter for China. I tend to refer to past trends for how the quarters typically unfold. This year, I don't expect much variation. Of course, we will see the full-year effects of our expansion projects, which will contribute to volume increases in the Acetyl Chain. Additionally, we should begin to notice volume and productivity impacts from our new projects in Emerging Markets, specifically the new compounding lines in Nanjing and Suzhou. Typically, we see mid to high single-digit increases in Emerging Markets, while acetate tends to grow at a couple of percent lower than that. I don't foresee any major differences next year. Much of what we have factored into the 2020 outlook reflects similar market conditions to this year, the absence of Clear Lake, and aspects within our control related to productivity and cash deployment.

Okay. Regarding the comments about destocking in emerging markets and Europe, do you anticipate this continuing as we enter the fourth quarter? Or do you believe there will still be some leftover destocking, particularly in the automotive sector for the fourth quarter in emerging markets? Thank you.

No. I genuinely believe that when we analyze the fourth quarter, what we're observing aligns with the typical seasonality we expect. For instance, looking at our order books, China increased about 2% from July to October. This pattern usually occurs in the fourth quarter, as we see robust demand leading up to the Chinese New Year in the first quarter. Conversely, the U.S. and Europe are experiencing flat to slightly decreased demand across various sectors, which is also a typical seasonal trend. Therefore, I do not anticipate significant destocking happening. We did observe it primarily in Europe due to a substantial downturn in the auto sector last quarter. However, all other indications suggest that destocking has already taken place in the other sectors. Consequently, we don't expect destocking to happen in the fourth quarter. Nonetheless, we will likely see lower volume outside of China, which is tied to seasonal factors in both Acetyls and EM.

Yeah, understood. Thanks so much, Lori.

Thanks.

Good morning. Can you provide more details on your long-term plans for Acetate Tow? What limitations are there that you weren't expecting initially? Additionally, can you share your thoughts on the potential to advance productivity and improve working capital efficiency in 2020 and 2021?

Yeah. So look, I mean Acetate Tow, I think, we feel confident going into 2020 of our ability to maintain relatively flat earnings. We do see pressure on volumes, as we've seen quite frankly that slowing down a little bit especially in China, where in fact China recently we've actually seen growth in cigarette demand. So, we do expect continuing volume and price declines in Acetate Tow. But with the Ocotlán, exposure, with other productivity we still see and expect that to be able to maintain flat, certainly through 2020.

Yes, regarding productivity and working capital, many of our investments, as we increase our organic investments, are linked to revenue generation as well as productivity and working capital. For instance, we have discussed the need to invest more in Engineered Materials in Asia, which enhances our supply chain and reduces our overall inventory levels. Thus, our investments are aligned with these objectives. We have been actively managing capital for a while now, which you can see reflected in the improvement of our free cash flow. This year, we have observed an increase in productivity, and we expect this trend of cost reduction and enhanced productivity to continue into 2020. We are focusing on controllable actions unique to Celanese that will drive earnings growth from 2019 to 2020, especially since we do not anticipate significant fundamental improvements in our end markets.

Okay. Thank you.

Good morning. You've indicated about a $500 million capital expenditure budget for 2020. I guess two parts, can you talk through how much of that is growth versus cost-reduction projects and maintenance? And then more broadly, that's about double what the company was spending from 2014, through 2017. Should we think of $500 million as a new normal level for the company? Or would you expect that level to come back down in the out-years as you complete your expansions in Texas for example?

Thanks, Kevin. Historically, we've spent around $200 million annually on environmental health and safety as well as maintenance projects to ensure our current assets operate efficiently and adhere to safety and environmental standards. Additionally, we allocate another $200 million each year to productivity and revenue-generating projects, such as the Clear Lake expansion and improving energy efficiency in our boilers, which yield returns greater than 20%. As we aim for $500 million, the growth primarily stems from these productivity and revenue generation initiatives. Our baseline capital expenditure is about $200 million for maintenance, with amounts exceeding that dedicated to growth. Overall, our return on our portfolio, including non-return-based projects, exceeds 20%, indicating strong potential for value-adding investments for our shareholders. Looking ahead, in 2021 to 2023, we might see expenditure levels surpassing $500 million due to our Chinese localization initiatives and expanded capacity efforts globally. However, following this growth phase, we expect to revert to capital spending levels below $400 million.

Great, that's very helpful. And secondly, if I may, I want to ask you to just talk through the outages in a little bit more detail. I saw in your management remarks last night that you had brought Singapore down for maintenance, I think just prior to the incident at Clear Lake. Did you have other outages? And what's your latest thinking on when the CO unit might restart at Clear Lake?

Yeah. So let me address Singapore first. So, Singapore was a planned turnaround. The timing for the Singapore turnaround and the duration of the Singapore turnaround is tied to our CO producer's turnaround in Singapore. So, we only have one source of CO in Singapore, and they had to take that unit on turnaround on a planned basis. And that really accounts for the duration of the outage in Singapore. So, I would put that into the kind of normal operational bucket of events. Clearly, Clear Lake was an unplanned downtime. We've been working through the impacts of that outage. As of today, methanol is back at full rates, acid has restarted and really at partial rate – and we'll be a partial rate until we get the CO plan up, VAM we'll be up before the end of the week. And we continue on our CO repairs, which will put us back at full rates sometime within the fourth quarter.

Fantastic. Thank you.

Thank you. Good morning.

Good morning.

Lori, going back to BP's one million ton JV announcement, what do think they're seeing in China that you're not as you rationalize some of your capacity in that region?

So I'll ask Todd to comment, but as we've looked at that I don't know that they're seeing anything we're not. What we do know is they have the demand for that much acetic acid in their own derivatives system. And apparently, as we have done with methanol and others they have decided that being more integrated along their value chain will give them greater value. So, we wouldn't actually expect any of that acetic acid just show up on the market. We expect that to be consumed in their own derivatives, again based on our view. But Todd may have more color on that.

Yeah, Dave, it's Todd. We're just studying the news and trying to understand it better. And this is at least as far as we can tell an MOU announcement at this point. So it's early days in the project. It will take some time to work through the details, I'm sure and all the work that we follow in terms of engineering ultimately timeline of projects. As I said before, we're pleased that we're on track with our expansion in Clear Lake by 2022. So, we'll – we think we'll be first with this capability. I think Lori is right. I think this is largely an integration move upstream PX down through PTA and ultimately a polyester to service of the Chinese localized demand for polyester in the region. So, we think it's largely an integrated announcement. It will have little effect on a merchant market.

Got it. And just lastly on Acetate Tow, any potential for a price increase given perhaps higher supply/demand post the closing of your Mexico facility?

We believe that over time, as the industry rationalizes, there may be opportunities for price increases. Specifically, in terms of short-term contracts, we've managed to implement price increases for some of our longer-term contracts despite experiencing price declines. Currently, it's balanced, but we anticipate continued price pressures ahead. However, we expect the price environment to remain relatively stable, with potential opportunities to raise prices in the future.

Thank you.

Great. Thanks. Good morning. I just wanted to go back to the portfolio questions. In the past I guess you had noted that the dissynergies have kind of come down to around $50 million a year from your prior estimate of $100 million. Have you continued to make progress on bringing those down? And if so how would you characterize that now at this point?

Yeah. So, look we continue to always look at how we can do this, but there is a certain amount of dissynergies which is always going to exist if you're splitting into two companies. You have to have stand up two management teams. You have to have two back offices. I mean, there is always going to be a certain amount of dissynergies associated with that. So, maybe let me ask Scott, if he has any more specific comments.

Yeah. I mean, you're right. With that trajectory of statements that we've made in the past $100 million down to $50 million we continue to work it, work on the tax side of things leakage et cetera. So we have brought it down below $50 million, but I would say it's closer to $50 million than it is to zero.

Great. Thanks. And just kind of understanding, when you think about China what's it going to take for – what are some of the markers you're looking for to see that there is an improvement in primary demand or at least the stabilization? Would it be inventory levels or anything else that we should be watching? Thanks.

Yeah. Look, I think as much as anything we look at price volatility. I mean, we're anxious to get whether past this national holiday to see, if demand returns prior to Chinese New Years. Obviously, the same factors affecting the rest of the globe concerns about tariffs concerns about global recession. These also impact China. But we're just looking for the signs of sustainable – kind of sustainable demand lift to occur. I mean, again we saw an increase in Asia in the third quarter in volumes and price. It seems, it's not greatly improving at the moment, but it's also not greatly declining. So we see that as somewhat favorable. But we need some sustainability in the response which is probably what we haven't seen yet. Todd, anything you want to add?

In acetyls, we monitor order books daily and weekly. Supply and demand trends, along with utilization rates, are essential as they influence pricing and raw materials such as methanol and olefins. Regarding inventory levels, I believe the situation is similar across the entire company, especially with finished goods inventory on the customer side. These fundamental indicators are what we continually track and observe.

Thanks.

Hey, good morning. The prepared comments mentioned Nanjing was running at lower rates due to a request from local authorities. Was this around air quality? And would you expect it to persist in the fourth quarter and 2020 as well?

Yes, you're correct, Matthew. The entire industry received a request from the Chinese government to lower rates for air quality reasons ahead of the national holiday. When we later inquired about lifting that request, they agreed, likely due to our longstanding relationship and their understanding of our business needs. For the most part, this restriction has been lifted across the industry in the fourth quarter. I anticipate that similar requests may arise again in China, possibly before the Chinese New Year, which has been a recurring pattern. However, currently, it is not affecting our fourth-quarter results.

We were able to increase rates again following the Clear Lake incident. We collaborated with the team and the local government, allowing us to operate at full rates as anticipated. This was beneficial in compensating for the loss of capacity at Clear Lake from a network standpoint. The only potential concern later in the year is the winter heating season. Typically, depending on the energy profile, energy production sources, and industrial activity, there may be curtailment activity around late November and December based on various conditions. We will keep an eye on that.

Sounds good. Thanks. And then your EM project wins last year rose about 47%. You're on a similar pace this year, but EM volumes are down about 5% this year. Could you just help me reconcile those two numbers? I mean I guess that implies your base business has seen some pretty significant volume declines. Is there anything changing in terms of the size of the profitability of the average project?

Yes. I would say the average project size in terms of volume is smaller than it used to be. This is because we are taking on more projects and a wider variety of projects. It's also important to understand that these projects can be divided into different categories. Some are long-term projects, especially in sectors like healthcare and automotive, which yield returns over five years or more. Then there are others that might generate returns for just one or two years, along with a number of projects that are purely transactional, moving volume for only a one-time event. Therefore, not all projects provide returns over five years. While we can achieve up to 15% growth from emerging market projects in a year, it’s possible that only 5% of those may have continued returns. There is also typically some attrition from other projects ending and general attrition. Winning projects is vital for us as it demonstrates our capability to generate materials, but this year, they are smaller due to economic conditions, and we are seeing increased attrition in our base, linked to lower GDP and reduced global demand. Nevertheless, we believe this is important, as it helps explain the consistent quarter-on-quarter growth we've experienced recently. We've had numerous project wins this quarter, though not all of that volume will materialize immediately. Many of those wins are long-term, particularly in the medical sector, as well as some in automotive and 5G, which will yield results over the next two to five years rather than next quarter.

Very helpful. Thank you.

Good morning, thank you. How should we think about plant turnaround costs in 2020 versus 2019?

Yes, that’s a great question. For 2020, we anticipate a turnaround cost increase of about $50 million. We have several large turnarounds scheduled, including our joint venture methanol plant in Clear Lake and some of our POM units. These significant units only undergo turnarounds every three to four years, so we will have a considerable workload next year. However, this is already factored into our projections. The productivity improvements we are implementing will help mitigate these costs, and that has been included in the outlook for 2020 that I shared with you.

Thanks. And regarding the General Motors labor union strike, how are you thinking about automotive shutdowns and whether the impact this year will be normal or above normal?

Yeah. So for the GM specifically that's not a big customer of ours. So, we didn't have a lot of exposure to GM, so we haven't seen much impact from that. Clearly there are other autos that would have had a bigger impact. I don't know that we've seen that as a major impact going forward for us. I mean, we tend to be spread across quite a lot. Obviously we have a lot of auto in Europe that maybe a bigger exposure. China as we said auto actually have picked up recently. Now, I expect some consolidation of auto in China, but again I think we're well positioned for that.

Christine, we’ll make the next question, our last question.

Thanks for squeezing me in. Can you just walk a little bit through the buckets on the productivity gains of $0.50 then? Because if I recall from Duffy's question, you had mentioned part of that savings is going to go to the savings from the closure in Mexico and then you just mentioned part of that will go to offsetting the maintenance expense next year, which is already looking to maybe be offset by the $45 million in losses you're taking this year on Clear Lake. So where those $0.50 bucketing out? And then does that mean the net gains from productivity are less than $0.50?

The net gain is $0.50. This figure is influenced by turnarounds and requires a significantly higher level of productivity. The net gain includes factors like turnarounds and productivity improvements. It originates from various sources, including Ocotlán, Lebanon, and other shutdowns alongside a reduction in footprint management, all of which contribute to productivity. We also focus on energy and cost savings; for example, we optimize boiler configurations to reduce energy consumption, which impacts productivity. Additionally, we've renegotiated raw material contracts to manage costs effectively, which also contributes to productivity. These are among the key areas, along with regular optimization and maintenance spending, and the optimization of our workforce. We've made significant changes to improve our organization’s productivity, which you've noted in the severance costs. These are all elements included in our productivity initiatives. Scott, do you have any further insights on this?

No, I think that is it.