Celanese Corp - Series A (CE) — Q4 2020 Earnings Call Transcript

Thanks, Doug. Welcome to the Celanese Corporation's Fourth Quarter 2020 Earnings Conference Call. My name is Brandon Ayache, Senior Director of Investor Relations. With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer. Celanese Corporation distributed its fourth quarter earnings release via Business Wire and posted prepared comments about the quarter on our Investor Relations website yesterday afternoon. As a reminder, we will 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 also 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 in the prepared comments. Form 8-K reports containing all these materials have also been submitted to the SEC. Because we published our prepared comments yesterday, we'll now open it up for your questions. Doug, please go ahead and open up the lines for questions.

Great, thank you and nice quarter and nice outlook there. Could you give us an update on the M&A environment for advanced materials deals?

Sure. Yes. I think as we said, John, in the written comments we are anxious to pursue M&A. We have a good pipeline of both bolt-ons and transformational deals that we've been looking at. I would say earlier in the year, I think people were just trying to sort out how to deal with COVID, how to deal with the current environment, how to manage their cash flows. And so we really didn't see a lot of interest from other parties in terms of discussing M&A. I would say as we move through the fourth quarter, and people start to see markets returning more to normal and feel more confident about their outlook for 2021, and therefore a reasonable valuation basis, we are starting to see people having more interest in discussions around M&A. So I'd say the market is opening up. Obviously, it takes us a little while to get through these discussions. But definitely looking better as we go into 2021.

Thanks. And then, are cigarette prices increasing? We've got kind of an unusually strong environment. I mean, US cigarette smoking, I think, didn't decline for the first year in a long time. And I'm guessing it's up in China. And you had a potential transaction that you worked on a while ago in this area? I didn't know were there any opportunities here to revisit that?

Yes, look, I think on tobacco we did see some drop in prices from 2019 to 2020. Those were based on the negotiations that happened in 2019 going into 2020. As we've been negotiating in 2020 for 2021, I’d say the prices are stable, and in some cases a little bit up. So I do think there's, as you said, we saw less decline in smoking last year than expected in some areas, even an increase in smoking, I guess people had more time at home. So we really do see that prices stabilizing now for tobacco and maybe even a little bit of upward movement. So that's good. So if you look at our outlook for tobacco, we're basically saying, we think for the next many years, it's going to be pretty much flat at this kind of $250 to $260 ranges. In terms of transactions, look, we didn't get to do the transaction last time because of competition concerns in the EU; there's nothing that's changed in the landscape that makes that difference. So I think it's unlikely that we would be able to do similar types of transactions even today.

Thank you very much, Lori. I was intrigued by your comments about changing the production base in acetic relative to initial plans. And if you could reference maybe some advantages to all material contracts, can you talk a little bit more about what that allows you to do? And why it's now feasible to keep that production at stated rates instead of paring it back a bit?

Yes, we initially announced the expansion of Clear Lake from 1.3 million tons to 2 million tons, assuming we would scale back or shut down some capacity in Asia, resulting in a net neutral impact on overall capacity. The project was justified based on productivity. However, after deciding to delay the project for 18 months due to the low oil environment and uncertainties related to COVID, we took the opportunity to reassess the project's foundation. In this process, we identified an additional $50 million in capital savings. We also collaborated with our suppliers in Asia, negotiating favorable contracts during this low raw material period for both Singapore and Nanjing, enhancing their competitiveness. Moreover, we discovered additional productivity improvements, particularly in catalyst usage at Clear Lake and other areas. Given the strong recovery in acetic acid, we believe this sector will continue to grow at a rate above GDP. Therefore, it makes sense to proceed with the expansion at Clear Lake, which we are now planning to increase to approximately 2.6 million tons. We will keep all facilities in Asia operational, although they won't be run at full capacity; they will operate based on market demand. This strategy allows us to increase production if we see significant growth in the future while maintaining the same productivity level on a reduced capital base at Clear Lake. Ultimately, the delay allowed us to revisit various aspects of the project, resulting in a more economically viable project and increased capacity for future use.

Got it. Thank you. And then the KEPCO JV turning into a manufacturing JV. Is that an earnings enhancement for you? Or is it just greater flexibility that can then lead to some earnings enhancement? How should we think about that from the bottom line numbers standpoint?

Yes. I think I'll also let Scott comment, but I mean, really, it's based on what we've said in the past, which is we want the flexibility to move the molecules ourselves into high-end market using our business model. So in the past, KEPCO marketed all of the molecules, now we will have our 50% of the molecules that we can market and we can move into what we think will be hopefully more attractive end market. So that flexibility we believe will give us higher returns. And then I think there are also some accounting changes that happened with that. And Scott, you may want to comment on.

Yes, and I think the other thing to add, Bob, is we will get synergies here; I mean, by now having more polymer capacity in Asia and having 50% of that output, we're going to be able to realign our supply chain. So think about us getting synergies from this deal. And kind of being like a bolt-on M&A deal. So adding, call it $20 million of earnings over a three-year period of time and it didn't cost anything to get it. So we're excited about that. You will see the equity earnings line which comes in on an after-tax basis, the portion that kind of flips to the marketing return that we get will move above the line. We will then add revenue, obviously, for what we're selling there onto the P&L. Equity earnings will come down over time. As we stated with the announcement, we expect that to close sometime later this year.

Thank you and good morning, everyone. I would like to inquire about the forecast for the year. It appears that you're anticipating acetyl will stabilize in Q2 and Q3, leading to a more typical seasonal Q4. Could you clarify why you expect it to rebound in Q2? I understand it is already beginning to settle somewhat, but is there a possibility for it to remain within the $170 million to $200 million range you're expecting for the second and third quarters? Additionally, regarding engineered materials, could you provide insight into how you foresee that developing? I recognize that the recovery of the healthcare sector is a significant factor, but what are your thoughts on that? Lastly, for the fourth quarter, how do we compare to an atypical Q4 2020 and hopefully a more normalized 2021?

Yes, thanks, Vincent. So starting with acetyl, yes, we do expect a really robust first quarter as we guided to, and we do expect some normalization as we move into the second quarter. And what could really change that? I mean, if you look at what's driving, kind of the Q4, and let's call it really December, and the Q1 pricing we've had more robust demand, all in China, I would say, for acetic acid and for VAM. So it really has been more demand-led. There have been a number of shorter outages in China for acetic acid and VAM, if you actually look at the data. It's not been significantly different than most four quarters. So I would say the tightness we've seen in December and going into January and February has really been demand-driven. Now some of those outages that we've had, although there were a few more in January, which has given us some volatility in acetic acid, those plants are coming back online. And that's what we say kind of once plants are back, as people now have adjusted to this new level of demand, I mean, quite frankly, we saw what we thought was a little bit of panic buying over these three months where people, because demand was coming up and because there were a few outages responded by doing a little bit of restocking because it made them nervous. I think that's going to calm down as we go forward. And people see security of supply and a more stable demand outlook. Now, clearly, look if there's another outage, especially if there were an outage in the Western Hemisphere could we see these conditions, this kind of $500 to $700 per ton conditions continue on into the second quarter? I mean, we could; it's just we don't have any visibility of right that right now. And so we would say we expect it to kind of normalize to normal ranges. I would expect we should have we expect $170 million to $200 million every quarter through the rest of the year. That's what we consider a pretty normalized level of earnings for acetyl and fully expect to be in that range. For engineered materials, we got it to $120 million on some modest price and volume recovery. Obviously, we're seeing headwinds from raw, so we are making price movements that we think will largely offset that movement we've seen in raw. I would expect a little bit of improvement on that in the second and third quarter typical; what we see those being stronger demand months. We should also expect a little bit more recovery in our affiliate earnings. So expect to see that roll through in second and third quarter. And then the fourth quarter typically looks more like the first quarter. So I would think of it that way for the year.

Okay. And maybe just a follow up on the M&A in the prepared remarks. I know you talked about sort of having a look around at halftime and in the middle of the year and seeing where the M&A environment is. Is that a function of just sort of wanting to make a decision on how to use your cash flow for the year and not necessarily build any if you're not going to use it? Or do you think there's really something about the middle of the year in terms of specific transactions or anything in particular?

Yes, I would say that the mid-year is really just about making sure we don't sit on cash for too long if we don't have any M&A clearly in sight. Look, we can always go borrow later to do the M&A; we're at a very low leverage, so that's not a problem. And it also represents what we can effectively buy back shares about $400 to $500 in the first half. We probably can't really do a lot more than that. So it's also a time where you go, okay, now we need to reevaluate. We need to go above that level that we had stated in the guidance.

Yes, good morning. First one is maybe two parts around JV. So on KEPCO, is the idea there that that will basically sell to the partners at cost? Or will KEPCO actually try to make a profit? And then could you also size the liquid crystal plant roughly kind of what the capital spend would be there? And then how accretive should that be to earnings when it starts to run?

Yes, let me take that KEPCO question, Duffy. So we will have some small trading profit there for KEPCO; it'll be a cost plus basis. Going forward and once that's finalized at closing, we'll make sure everyone's aware of what that is.

Great, and on the liquid crystal plant, we're looking at doing this expansion in China or this build in China in phases. So if you look at the size of it, the first phase will be pretty much the same as our current capacity; so it will double our current capacity on the liquid crystal plant. The cost of that is going to be less than $100 million. Startup won't be until early 2024. So not sure financially what that looks like by then. But I would say we would expect it to be accretive fairly quickly as we already have demand in sight for that time at startup.

Correct. And then could you give us a little preview on what you want to highlight in your Investor Day coming up?

Sure. I think for Investor Day, we're really looking at we want to reconfirm our plans to achieve double-digit EPS year-on-year growth over the next three years. So it's going to be based on a number of things. First, continuing to outline a more robust program of organic growth. And you've seen some of that already with our announcements around the DUR expansion in the US, liquid crystal plant build, putting our acetic acid projects back on the table, and actually at a slightly bigger expansion than we had previously. We're going to talk a lot about innovation in end markets, and especially the programs that we started in electric vehicles, and 5G and medical pharma. We're already seeing good results from that really good growth and expect that to continue. So we'll be talking more about those and giving some examples. And then we'll be talking quite a lot about ESG. Not just our commitment to ESG, but also a lot around sustainable products and the advancements we're making in sustainable products in areas like BlueRidge, like Ecomid, like Bio-POM, so those will be the main focus on Investor Day. As well as we will talk more about cash deployment and our outlook for cash deployment.

Hey, good morning, and nice finish to the year there. Can you maybe talk a little bit about some of the project momentum; you used to talk about projects a lot over the last couple of years for engineered materials? In particular areas, you're seeing a lot of requests or growth there. And how does that sort of look when you look at the outlook for engineered materials in 2021?

Yes, thanks for the question, Mike. Yes, let's talk about projects a little bit. And I think this year is a good example of why we're starting to transition a little bit away from number of projects to more towards value of projects. So if you look at 2020, we actually, with all the challenges of COVID and everything else, ended up ending the year with about 90% of the number of project wins as we had in 2019. But if you look at the value of the wins we had in 2020, they were actually right at the same level as the value of the ones we had in 2019. And that's really what we're focusing on projects, which is not just are we generating a high number, but are we generating projects that have value and have extended value. So we've really been focusing on project wins in some of those program areas I mentioned earlier. So things like future mobility around electric vehicles, and autonomous and connectivity, so 5G and those sorts of things. If you look at it, for example, the growth in the number of projects we've had in terms of value is more than 65% for autonomous vehicles and autonomous and electric vehicles, and for connectivity, it's over 60%. So we're really shifting our focus to those. I would say newer focuses, things that we think are going to have long life, and we're having a very high success rate in those areas. So if we look towards next year clearly we would expect that value to continue to grow. It needs to grow to continue to meet our expectations for EBIT growth year-on-year. So we continue to, but again we are focusing on value of projects wins, not just the number of project wins.

Got it. In terms of acquisitions, could you provide a framework? Are you looking for new polymers to add to the portfolio, technologies, or perhaps concentrating on end markets? Is there a distinction between what you're seeking in a bolt-on deal versus a transformational deal?

Yes, I wouldn't say our philosophy has changed around M&A. Our philosophy is the same; we are looking at projects that meet our return thresholds, and also meet our strategic criteria. So those things that you just laid out. So we're looking at geography; we're looking at, yes, we'd love to always add new polymers; we're looking at additional capability. So sometimes like some of the ones we did with Next and Omni adding recycled capability. We're always looking to add new capability there. So I would say that's not changed. I would say, given the time we had this year in 2020, we've used to cast maybe a little broader net than we've had before and looked at some other not just polymers, but other chemistry that use a similar business model to what we use in engineered materials. And that we think we could add value to. So I'd say we're looking broadly to make sure we're not missing any opportunities to really grow value for the shareholder.

Good morning, Lori. Question around engineered materials segment margins. Obviously, they compressed sequentially to sub 20% levels, and obviously under normalized macro conditions historically they were north of 30%. Now, I'm obviously cognizant of the fact that there were some sort of turnaround expenses baked into that margin number, but I just wanted to sort of get your view on when you expect to see a reversal or a return to those 30% plus EBITDA margin levels.

Yes, well, Hassan thanks for the question. You're exactly right. I mean this year our margins were compressing EM for two reasons, I would say. One is the pretty significant amount of turnaround expense we had this year with both the Bishop and the IPH POM turnaround. So those were two very large turnarounds, which we also had quite a bit of inventory drawn to cover those. So those together had a pretty significant impact. The other thing this year is with lower volumes. And we ran plants in the second and third quarter certainly at some shut down for a period of time, some run at lower rates. This is a high fixed cost business. And so that fixed cost gets spread across the rest of the volumes. And that certainly had an impact on our margins. I would say, as we go into 2021, I would certainly expect to be back at that kind of 20% to 25% range of EBIT margins, as we go into 2021. And we see back to normal rates of volume and kind of a normal level of turnaround activity.

Yes, and Hassan just one thing to add to that with the sale of share of Polyplastics that will come out of that. So that is one of the things that did inflate that number up. And that has been kind of running on average around $40 million or so a year. So that will be out permanently going forward. And that's why on an EBIT basis, kind of being in that 20%, 25% is where we think we'll be in 2021.

Very helpful. And as a follow up on the Acetyl Chain side, obviously very strong margins in Q4. And Lori you touched on some of the drivers, obviously, pricing it was there. And you talked about some outages and sort of demand rebounding again and the like. I just wanted to sort of dig deeper into the sustainability of those sorts of margin levels. It seems that there is a bunch of moving parts, obviously coal prices have gone up quite a bit in China obviously, and methanol has gone up. I would expect that would moderate or maybe even come down on a go forward basis, then obviously there's the whole sort of notion of higher shipping costs, and maybe those sort of coming into higher pricing levels and the like. So could you just help me sort of think through the sustainability of the sort of Q4 margin levels within the Acetyl Chain?

Sure, look, we think sustainable margins in Acetyl are $170 million to $200 million. We consider those kind of foundational level of earnings and therefore sustainable over a pretty wide variety of conditions. And I think that's really based on the flexibility we have in the chain and the optionality we have in the chain. I mean, earlier in the year, although we weren't at those levels we still saw good returns from acetic acid because we were able, even with acetic acid demand being down, VAM being strong, emulsions being stronger, being able to flex our chain to produce more of those molecules. Now with stronger acetic acid demand, we can flex back and put more into acetic acid. So that flexibility that we have and that geographical flexibility, I mean, as you say, Nanjing with coal prices up, but natural gas prices aren't really up in the Gulf Coast. We still have all that Clear Lake capacity. So that we just shift more to Clear Lake and take advantage of low US Gulf Coast natural gas prices. Oils have been fairly low. So that's made our Singapore capacity pretty attractive. So having that geographical as well as the flexibility within the chain, we think gives us a lot of optionality across a wide range of economic conditions and that's why we feel that $170 million to $200 million is very sustainable. Now the higher level that we're seeing kind of at $225 million plus level that we're predicting for Q1 that's a little harder level to sustain. That's really based on some very high acetic acid pricing specifically in China. But certainly not $170 million to $200 million we think is sustainable.

Yes, on a percentage basis, the sustainability there, Hassan, I think we've shown over the last several years that this business is going to do greater than 20% EBIT, tight margins, and that puts the EBITDA in kind of the mid-20 range 25-ish percent. And we expect that to continue as we go forward and are pretty strong in those areas in 2021 and beyond.

Thank you. Good morning, everybody. So, Lori, obviously, there was a lot of complexity throughout 2020 from a macro standpoint just given the disruptions, etc. As you look back at Q4 and what you're seeing currently, is it just sort of transitory disruptions and commodity tightness that is driving the improvement in Acetyl Chain and EM segments? Or do you see more confidence from customers, as it relates to some level of global reflation sustainability? And if you could just sort of touch on that dynamic across the various geographic regions? That would be helpful. Thanks.

Yes, I would say we definitely see confidence from customers and people being more certain going forward. I would look at that current resurgence of COVID; it has clearly been as bad the last few months as it was in the early days of COVID. But yes, we have not seen our customers shutting down. We haven't been seeing them cutting back. We continue to see robust consumer behavior around the globe. And so I think that's giving everyone confidence; we just aren't seeing the impact now from COVID. I mean, if you look, we're really getting back to 2019 levels of demand. And we're not hearing anything different from customers. So I think truly demand is driving the increase that we're seeing in the Acetyl Chain; I think demand is driving the increases we're seeing in EM. Now we have had some bumpiness and volatility in December and into the first few months of this year in acetyl. I think that's been based on people because they are confident about the future being worried about these, what turned out to be fairly minor supply disruptions and causing some volatility in the market. But I think overall, and the reason we are optimistic about 2021 and growth into 2021 is overall we really see confidence by our customers and continued growth in the markets and that steady increase in demand.

Okay, and then in terms of the EM segment and your comment on higher raw material costs. You had a margin lagged last time; we had a mini inflation cycle, if you will, in the raw material side. How are you approaching pricing for this segment this time around? I realize there's a mix impact from healthcare, etc. But just your view in terms of how you're navigating the current raw material cost paradigm? Thanks again.

Thank you, Ghansham. Yes, we implemented a price increase in the fourth quarter. I wouldn't say we experienced significant effects on our bottom line from that. The increase was primarily to address the rising raw material costs we encountered, particularly in December, and we anticipate these costs will persist into the first quarter. We have also implemented another price increase in the first quarter, which we believe will allow us to stay ahead in this evolving raw material landscape, keeping our performance relatively stable from the fourth quarter to the first quarter. Our teams are diligent in monitoring raw material costs and strategizing price adjustments to manage these expenses effectively. However, there is typically some delay, especially in the emerging markets, between when we notice raw material increases and when they reflect in our financials and we can adjust prices. In this situation, we have low inventory, so we are seeing these effects more promptly, and we are confident that the price increases we've enacted will largely compensate for the raw material increases in the first quarter.

Yes, and we should see the benefit of Ibn Sina and the equity earnings there improving as that is a natural hedge for the engineered materials business, as a partial offset to some of the raw material inflation that we're seeing there.

Yes. Hi, good morning. Lori, you decided to keep the Asia capacity in acetyl. Can you tell us how the acetyl's profitability is today in natural gas versus oil versus coal? Maybe just give us a snapshot. So we can understand the rationale behind the decision because one would think that the coal based production would be disadvantaged today.

Yes, the US Gulf Coast clearly has an advantage, and we don't foresee any scenarios where natural gas prices would eliminate that advantage. Looking at Clear Lake, our size, our capability to produce our own methanol, and our technology position us as one of the lowest cost producers of acetic acid globally. Additionally, due to our technology and some favorable contracts we've secured, even with Singapore's current oil prices around $40 to $50, it's still competitive. Moreover, despite higher coal prices, Nanjing’s facilities rank in the top 25% to 30% of all acetic acid producers worldwide. Hence, while Singapore and Nanjing have higher production costs, they remain highly competitive.

Yes, and PJ, as we said in the prepared remarks, one of the important parts of the strategy is flexibility and the raw material agreements that we now have in place plus the CO unit acquisition we did a few years ago, and now being under our control, giving us that ability to flex up and down gives us a lot more optionality than we've ever had in the past. And so we are really excited about the ability to flex as needed based upon different raw material environments, which as we know will move all over the place over time.

I would also mention, PJ, that shipping and distribution is not an insignificant cost and is going up these days. And so maintaining that capacity in Asia to serve the Asian market is also attractive versus shipping everything necessarily from the US.

Great, thank you. And a question for Scott. First of all, congratulations on buying back stock. Not many companies were able to do that in 2020. So your timing was good. As you replace Polyplastics capacity in Asia, which is the growth market, you build liquid crystal plant, and maybe a few other appliances, what kind of total CapEx do you need over the next few years? And your M&A comment, is that M&A mostly targeted towards Asia to replace Polyplastics? Thank you.

Well, let me start and then I'll have Lori talk about views on capital going forward. I mean, look, we've been very consistent in wanting kind of a balanced capital deployment strategy and also being able to take advantage of the options that come in front of us. And so we want to be able to do M&A; we feel really good about not just the cash we have on hand, but the additional firepower that we have on the balance sheet being very clean. As earnings continue to improve, that will only give us more horsepower to do M&A going forward. And so we felt like it was the right time to bring forward our plan on the 2021 repurchases and doing the first half. We'll continue to monitor the M&A pipeline and we'll pivot as needed throughout the year. The $500 million or so that we expect in capital this year is kind of the first tranche of this wave of organic growth that we've been kind of weaving in and sprinkling in with announcements here in the last six months or so. As Lori talked about before, that's going to be an important part of our Investor Day story that we have in March.

Yes, and I would say in terms of capital deployment, yes. I expect we'll be at this kind of $500 million level of CapEx for the next few years really focused on organic growth and while a lot of it will be in Asia, so the liquid crystal plant is an example. We've talked about trying to build our compounding as well as our technology capability in Asia is really about having the ability to respond quickly to our customers in Asia. We're also making investments in other parts of the world. I mean, we've had the former Center of Excellence to better serve our European customers. We've talked about the Bishop GUR expansion, and we continue to do footprint optimization in the US to better it and also technology build out in the US to better serve our US and North American customers. So I would say that growth is going to be all over the world, maybe a bit more Asia focused, but it really spread where we need it to best serve our customers. And I would say in terms of what we're replacing. I would like to mention while Polyplastics was always marketed by Polyplastics; those molecules weren't really in our portfolio, if you would say. We're really excited about KEP. In fact, we now will be able to put those molecules into our portfolio as part of our Asia footprint. And now it gives us POM capacity globally, which we really didn't have before.

Thank you. Lori, is that 2.6 million tons of capacity in Clear Lake, it stays capable, is that fully online by 2023?

Yes, it will have that capability fully online by 2023. Now we need methanol and things to go with that. And we're working on that. But that capacity would be able to come up to that rate at the startup. So essentially, we will double the size of Clear Lake capacity.

Are you expecting your announcements last night on capacity to forestall some other capacity in the marketplace that you might be coming on stream?

I can't say what others will deal with the news that they have. But we certainly think this is the lowest capacity add available to the market, much, much lower than any Greenfield would be, and probably even lower than most other expansions can be. So we'll let others make their decision from there.

If I can have one more just been EM, do you think more about as you move to a more value-based approach, less volume and higher margins going forward in this segment? Is that fair?

Look, we always focus on margin. I would say we're also though focusing on volume in terms of we think that we can add more volume to our system and get high margins on them as well. So I don't think it's a trade off. But we certainly are at the point where we think we need to add additional volume in order to continue to deliver into high-value markets.

Thanks. Perhaps a little bit on that line of questioning. So you expanded your DUR plant pretty recently, and since then EV sales have picked up fairly significantly. Where are you on filling out that new capacity?

Well, so the Bishop DUR plant won't start up until really early 2022. Obviously, we would like to get it up as soon as possible because that market is growing very robustly; to put it in perspective, that business grew 25% in 2020 versus 2019. So we are anxious to get that plant up and expect to certainly fill it out within the first year or so of startup.

I got ahead of you there. And then so you'd mentioned demand is starting to pull back and you see the gas market as prices increase. Is that substitution? Or is it simply just price sensitivity and people subsiding on that panic buying you were talking about?

I'm not sure where you got that information. We are not really seeing a decline in demand for acetic acid yet. In fact, we believe we have returned to normalized demand levels. There is some supply insecurity due to minor outages in Asia, as well as a bit of panic buying as people restock, concerned that the outages might last longer. However, I would say that our current level of demand has remained relatively steady from the fourth quarter of last year into the first quarter of this year. I think we can expect this normalized level of demand to continue going forward.

Yes, good morning. On slide 11 of your supplemental materials, you're kind enough to give us volume numbers for each of your segments. And as I look at those numbers, looks like you grew Acetyl Chain volumes 19% in the fourth quarter on a year-over-year basis. And so I was wondering, yes, I know you had the Clear Lake outage. Is that a representative number? And if it is could you just talk about your operating rates these days in acetyl relative to the broader industry?

Yes, so if you look at Q4 2019 to Q4 2020, we did grow volume, as you mentioned, about 19%. There are a number of factors there. First is we did add Elotex in April of 2020, so there's some volume that comes with Elotex that gets added to those numbers. We did see, of course, demand recovery in fourth quarter of 2020, and some tightness in the market, which helps drive volumes up. I would also remind you we had a fairly significant outage at our Clear Lake plant in fourth quarter of last year. And although we had secured some volumes last year to cover that, fourth quarter last year was actually a little bit softer quarter than we typically have seen in acetic. So I would say one, it was a strong fourth quarter for acetyl in terms of demand; certainly the best we've seen this year, not surprising with COVID. But even good versus last year, as we see the market normalizing, we saw a little less seasonality. We saw some seasonality in emulsion. But we were able to ship that volume into strong demand for acetic acid and VAM especially in China. And that's really where we saw the difference in strength this year, much stronger demand in China this year, Western Hemisphere about the same.

Maybe you anticipated my follow up question. I think earlier in 2020, you talked about shifting volumes downstream into emulsions and perhaps other derivatives. Has that reversed? Or how would you characterize the outlook there for the acetyl's mix here in early 2021?

Yes, I would say that the demand for VAM is strong, and VAM pricing is also performing well right now. Emulsion demand is somewhat weaker at the moment, which can be attributed to seasonal factors due to colder weather resulting in less demand for paints and coatings. We might see a bit more activity in the first quarter regarding acetic acid, particularly with the higher pricing we’re experiencing in China. However, overall, we are noticing significant strength in the acetyl market.

Thank you. Good morning, everyone. Lori, you elected to expand Clear Lake and with Singapore acetic acid capacity. So your total capacity would be larger than the initial plan or shutting down Singapore? Why wouldn't the benefits of this expansion be larger than the initial $100 million benefits?

Yes, so we actually never said we were going to shut down Singapore. We always said that we would look at reducing capacity in Asia, which could have been Singapore or Nanjing or a combination of the two. Clearly with the supply contracts now we have an intention to run all three of them flexibly and as needed to meet demand. So look on Clear Lake, yes, the capacity that we've announced is larger. What we have justified the projects on and the credits that we've shared are simply the productivity. So we've assumed even if the market needs no additional capacity, what are the benefits, so we get $100 million benefit on that $350 million investment. Clearly, if there is more demand in the market, and it makes sense to run Clear Lake higher or other facilities around the world at higher rates, then there is a lot of additional upside for this project. But that was not our justification for the project. So that's just all upside for the future if we see above the projected type of growth and are able to produce into it.

Thank you for this and have you made a decision whether to integrate it into methanol directly by building or acquiring capacity or whether to purchase it in the merchant markets in the US for this expansion?

Yes. So I mean, we are still looking at methanol and what we want to do around here like methanol as you know we already have a JV there with our partner, Mitsui. So we are really looking at do we want to expand. We have the capability for a very low-cost expansion to get about another 25% capacity there. We're also looking at are there opportunities to do things with recycled streams and others. So the good news is in the US, there's a very strong commodity methanol market. So we always have the opportunity to buy methanol as well. And quite frankly, we like having the exposure to the market; we like having our own. If you look at it right now, we produce about 35% to 40% of the methanol that we need in our own system. And going forward after the expansion, certainly after the initial phases, we still have about that amount. But quite frankly, we're still in the process of deciding what we want to do in Clear Lake in terms of methanol expansion, or whether we just want to continue to rely on the market.

Yes, thanks for taking my question. Maybe this one for Scott. So when I look at the earnings that you're calling for this year, it's roughly in line with what we saw in 2019. Back then you generated about $1.1 billion of free cash flow. So it seems like the better than $700 million number that you're putting out for this year may be on the light side. Are there any major puts and takes that we should be thinking about when comparing the two? I know the CapEx is going to be up a bit, but it doesn't seem like it makes up anywhere near the difference. So I guess how should we be thinking about that?

Yes, so John, I kind of break it into three categories. The first is the CapEx, as you mentioned, call that $100 and $150 million or so increase. The next is the $100 million or so that we had with the EU settlement, which has already been paid here in the month of January. The last area is kind of what I would call a working capital rebuild a bit here. Obviously, working capital came way off during 2020. We also saw raw materials fall in line, so that was magnified. Now we see as the business really returns and things move up, there is a natural rebuild of working capital that will come with that. In addition, we're expecting a higher raw material environment. So that will then kind of add another layer on to that working capital. So those are really the three components. I would not look at things being anything fundamentally different in interoperation too just more kind of timing of some of these things coming in.

Thanks very much. How do you think your engineered materials volumes in 2021 will compare to 2019?

Yes, if we examine the volumes, our base business volumes in 2021 should be quite similar to those in 2019, and we anticipate our sales in the base business to exceed 2019 levels. The volumes may be comparable to or slightly better than in 2019, so I believe our base business will return to that level. This assumes some recovery, though not entirely in the medical sector. While medical does not contribute significantly to volume, it holds considerable earnings potential, meaning there could be additional upside if elective procedures return sooner than currently forecasted.

Good morning. It was a nice end to the year and a good dividend increase. I wanted to ask about volume in acetyl differently; it increased by 6% sequentially in acetic, VAM, and EVA. You also mentioned that you proactively sourced material before your turnaround. I’m curious if that proactive sourcing effectively replaced what you lost during the turnaround or how we should consider what you could have achieved without that turnaround. I also noticed higher volumes in the fourth quarter compared to the third quarter and would like to understand how that played out.

Yes, well, I think the higher volumes in fourth quarter versus third quarter a lot is just based upon demand recovery and producing into that demand. You're right, we lost some volume in Clear Lake, but we did buy volumes in order to provide our customers around the globe to replace that. We also always do watch the market. And if we see what we think is a tightening market and the higher demand market, we will source additional materials in order to anticipate customer needs and make sure we have sufficient volumes together. So all of those three things I think came together in the fourth quarter, and what we ended up seeing was both very high volume demand quarter, as well as a very good pricing quarter.

Yes, I know ahead. Certainly, it was a very good pricing quarter. And obviously your results reflected that. Typically, a lot of purchasing agents will try and get ahead of price increases, etc. And so do you have any good feel as to what amount of that demand was restock? Or how do you think about that just in general inventory levels at your customers as they stand when 4Q went today?

Yes, look, we think there was a little bit of restock happening in Asia, not really the Western Hemisphere really we thought in China to be specific. So we think there was a little bit of restock a bit. Again, the ability to restock is not very big in Acetyl Chain. These are for the most part liquid products and they go into tanks, and people have limited amount of tanks. So you're talking about the difference between people holding 30 days of inventory versus 20. So it was a small amount that went into restock. I don't think it will be meaningful as we go forward in terms of affecting overall demand for our products.

Thank you for taking my question. Congratulations on the progress in 2020. I apologize if I missed this earlier, but are you estimating around $250 million to $275 million for Q1? I believe you mentioned that Q2 and Q3 should perform better and that Q4 will be similar to Q1. Your EPS guidance for the entire year is set at $9.50 to $10. Are you suggesting that the EPS for Q2 and Q3 will be lower than Q1? Could you clarify this for us?

Yes, I believe the key factor here is acetyl. For the first quarter, we project it will be at or above $225 million. Looking ahead, I expect acetyl to settle in a more normalized range of $170 million to $200 million. Additionally, EM is likely to see a slight increase in the second and third quarters, but we do anticipate a decrease in acetyl. This is how we arrive at the EPS guidance of $9.50 to $10.

Okay, great. And then just as a follow up on the capital allocation side, you obviously have relatively low leverage; you've got a lot of opportunities in front of you both organic and inorganic. And you already laid out your priorities on buybacks. So I'm just curious if there are any other potential asset sales that you're evaluating or divestments that would maybe give you a little bit more firepower on the buyback side? And maybe we can just discuss that. Thanks.

Look, I would just say we constantly reevaluate our portfolio. There I would also tell you, though, there's nothing meaningfully out there from gaining more firepower. I mean, we have quite a lot at the moment. We don't think that's going to be a factor in what we pursue in terms of M&A.

Hey, good morning. Thanks for fitting me in here. Lori, are you able to share Acetyl Chain utilization rates by region?

I'm sorry. I wasn't quite clear. Utilization rates for acetic acid are acetyl.

Yes. For your acetyl business by region.

I'm not sure I have it exactly by region. I can talk a little bit about China and maybe globally. So if we look at the fourth quarter, for example, both China and global acetic acid utilization was up about 5% from the previous quarter. And again, that was based on higher demand not because of higher outages. If you look at what that translates to, that really was kind of low 80s in China. And remember, there's a lot of capacity in China that doesn't get actually run to a city gas that's fits on the books. In the global, we saw actually the globe utilization crossing over kind of even into that low 90% range a couple of different times during the quarter. As we deal into the first quarter, we're seeing kind of the same level of utilizations both in China and in the globe.

Yes, Matthew the global number is really important number. I mean these are global markets product can move all over. And so that is really what drives things really in the short and long term is what's happening with global utilization.

But I think it's probably fair to say that anything that's based on US Gulf Coast natural gas is running at 100% if they're mechanically capable of doing so.

Thank you. Good morning, guys. Just one quick one on the EPS guidance. When you're looking at the numbers, like what do you see upside or downside to those numbers? Like is it a pricing thing? Or is it volume? And how much of that depends on a faster or slower rollout of the vaccine?

Look, I think for Q1 and for the full year, obviously the upside comes if we continue to see strong demand in acetic acid, even above say where we are today. Or if we were to see significant supply outages in acetic acid, that would certainly be an upside to both the quarter and to the year. I think the obvious biggest challenge on the downside is what you laid out in terms of COVID, do the markets lose confidence? Do we see automakers, for example, shut down again for two months? That would be the biggest downside. The vaccine rolling out helps, I think in that area of confidence and also making sure we have enough employees who are well to run plants around the globe. As I said earlier, it is a downside. We're not baking that in because quite frankly, we're not seeing that behavior from our customers. What we're seeing if people have demand, people want to run; people are back at normal buying patterns. So unless we see a significant change from where we've been today on COVID; we think that's a manageable downside risk.

Thank you. I want to thank everybody for listening in today. As usual, we are around after the call. If you have any further questions, Doug, please go ahead and close out the call.