Celanese Corporation

Greetings and welcome to the Celanese Corporation's first quarter 2020 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Abe Paul, Vice President of Investor Relations. Please go ahead.

Thank you, Brock. Welcome to the Felonese Corporation's first quarter 2020 earnings conference call. My name is Abe Paul, Vice President of Investor Relations. With me today on the call are Lori Ryker, Chairman of the Board and Chief Executive Officer, Scott Richardson, our Chief Financial Officer. Felonies Corporation distributed its first quarter earnings release via BusinessWire and posted prepared remarks about the quarter on our investor relations website yesterday after market close. As a reminder, we will discuss non-GAAP financial measures today. You will find the 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 the prepared comments document. Form 8K reports containing all of these materials have also been submitted to the SEC. I will turn the call to Lori for opening remarks before we open the line directly for your questions.

Thank you, Abe. Thank you, Abe. Before we turn it over for questions, I would like to take a moment or two to make just a few comments. We all recognize the unprecedented challenges the world is facing right now. On behalf of Celanese, I want to extend our sympathy to all of those affected by the coronavirus pandemic and express our gratitude to those who are working tirelessly on the frontline to keep us all safe. I want to acknowledge and thank our employees across the world. Each one has been impacted in some way. and amid their varying individual circumstances, they have collectively performed exceptionally well. I particularly want to thank our manufacturing employees around the globe who have kept our plants running to make and ship products to our customers. I also want to acknowledge our employees working from home who are still supporting customers, closing deals, signing contracts, and closing our books. Our first quarter earnings per share of $2.29 reflects their efforts It was not far off from our original expectations before all this happened. The first quarter was tough, and the reality is the second quarter is shaping up to be far more challenging. Simply put, we do not yet know how far demand will ultimately drop or how long this will last. We have tried to be transparent in sharing where we have visibility. Fortunately, one of our great strengths at Celanese is a culture of resiliency and a can-do attitude. I would like to thank Mark, who recently announced his retirement as our executive chairman, for his support of me throughout the CEO transition, but also for fostering, over many years, the development of this remarkable Felonese culture. Our culture is one of action. We have a lot we are working on to counter these challenges. I outlined much of that work yesterday in the script, and we are looking forward to doing much more. In this environment, we are focused on three imperatives. First, keeping our employees safe and healthy. Two, driving resilient cash flow in 2020. And three, positioning us for growth as we move into recovery. As a result of our work over many years, we are exceptionally well positioned today to weather this environment. Celanese is leaner, more nimble, and a more diversified company today than it has been at any other time in its history. Above all, in my almost one year at Celanese, I have gained trust in our people and their ability to rise together to meet challenges. They have done it many times in our past, and I am confident they will do it again. We are collectively focused on driving long-term shareholder value and positioning ourselves for robust growth when these challenges pass. On a lighter note, like many of you, we are all doing this from our homes today. So please be a bit patient if we have lags or speak over each other or if you hear any strange noises in the background. With that, Abe, I'll turn it back over to you.

Thank you, Lori. Brock, you may now open the line directly for your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question today comes from PJ Jubicar of Citigroup. Please go ahead.

Yeah, hi, good morning.

Morning, PJ.

Hope everybody's well. You know, I have a question for you. You know, you guys were making a long-term move to add downstream capacity ram emulsions in the U.S. But with oil prices falling and natural gas prices kind of hanging in there, you know, what's your take on the U.S. advantage? And, you know, how do you think the future regional capacity for cellulose breaks down?

Thanks, PJ. Yeah, it's a question we've been looking at ourselves, but let me try to put it a bit in perspective. we think the U.S. gas, even at these low oil prices, will continue to be well-advantaged. So just to put that in perspective, if we look at the difference between, let's say, acid production between Clear Lake and Nanjing, our cost of production at Clear Lake is half of Nanjing, even at low oil prices. And Singapore is affected by low oil prices, but it just comes down slightly below the cost in Nanjing. So you still have a two-to-one advantage at Clear Lake. And that advantage rolls through VAM and VAE and everything else. So while we don't have as much advantage now in the U.S. Gulf Coast versus other producers, it is still a big advantage versus producing out of coal or producing out of a low oil environment. So our plans have not changed. We will continue on pace with our VAE and our BAM expansions. We are taking – we are slowing the acetic acid reconfiguration project, as we noted in the script. Those productivity gains and the reason for doing that project are still intact, but we will pause it for a period of time to allow us to take advantage of these low oil cost environment and what that means for our Singapore operations.

Great. And a quick question for either you or Scott. You know, Mark Rohr had talked about for some time a potential RMT transaction. Given the pandemic and Mark's upcoming retirement, would you think a probability of a large transaction is lower now? Thank you.

Yeah, PJ, let me take that. You know, look, our first priority has been and will always remain generating the most possible value for the shareholders. And we constantly look at options to do so. I think in the current environment that we're seeing, demand environment, this is difficult to do. Clearly, if you're looking at cash still, that's very difficult in this environment as everyone's valuations are down. We do, though, think there continues to be room for mergers and equals or RMTs, and we think there will be even more opportunities for these things as we move towards forward recovery.

Thank you.

The next question is from Duffy Fisher of Barclays. Please go ahead.

Yes, good morning. I was wondering if you could just give us some help around the decremental margins. You gave some helpful quantitative numbers around what you think demand is going to do. Acetyl is down 15 to 25. But, you know, say at the 15 level versus the 25 level, is there going to be a difference in the decrementals? And kind of same thing for EM, if you would. Just walk through how should we think about the profitability relative to the sales fall.

Yeah, so let me talk a little bit about the guidance we gave for Q2. So what we indicated in the script is, you know, we do expect to see in Q2 engineer material volumes down 25% to 35% versus Q1. Now, with that, about two-thirds of that volume is still you know, relatively sticky in terms of pricing. So we would expect those margins to maintain, possibly even get a little better as raws continue to go down. At the same time, you know, about a third of it is tied to raw. So we'll see those prices go down, but margins generally stick around the same. For acetyls, we project a volume decline of 15% to 25% in Q2 from Q1. A couple things around that, you know, India lockdown, Southeast Asia lockdown, we're just not seeing the volume demand there. And margins there tend to follow, you know, methanol and other things a bit. So probably expect to see our margins going down somewhat, but we would still expect acetyl margins in the mid-teens or so. So, we do expect some margin compression in AC, expect margins to be similar in EM but down with the volume. And if you look at what that, you know, just to maybe put some numbers around it, you know, we saw a $25 to $30 million hit in Q1 just from Asia. And Asia represents 20% of our overall business, and that was really in February and March. So, Consider that we've lost $10 to $15 million per month on 20% of our business. It's not unreasonable to expect we would see a similar impact in Q2 on the other 80% of our business in the Western Hemisphere. So if you do the math on that, we do expect somewhere between $150 to $250 million impact on Q2 EBIT on the combination of volume and margin degradations. And, you know, how that, you know, as we go forward into Q3, Q4, you know, we've done a lot of scenario planning, as I'm sure every company has. You know, we think it's unlikely we're going to see a V-shaped recovery, so coming back in Q3, but we do. You know, we have done scenario planning around a U-shape or an L-shape, and broadly, you know, expect Q3 to also be down, but some recovery in Q4. But, again, we don't really know how broad this is going to be. We don't know the degree. of the downturn, nor do we know the duration and, of course, age of recovery, how fast that actually happens is a big factor.

Okay. And then could you speak to how your JVs have performed vis-a-vis, you know, how you perform particularly in EM? I know at times over the last several years, you know, someone has made the comment they felt some of those JVs were a little bit under-managed on the cost side. So maybe just kind of walk through how you think they're doing versus the markets. Okay.

Yeah, let me start, and then, you know, Scott may have some comments as well. I mean, so in general, I mean, the first quarter our JVs look good, but generally our JVs report on a quarter leg. So we would expect some downturn in the second quarter for our JVs. That may not show up so much until third quarter. You know, Ibn Sina may be slightly down more. because it has a closer tie to crude. But that number and those JV numbers are baked into that $150 to $250 million impact that we expect in Q2.

Yeah, I think Duffy, as we look at what our JVs are doing, they're very focused on cost right now as well. I mean, they're not immune to this environment, particularly, you know, our two JVs that are focused in Asia, you know, were hit with some of the softness and demand that we saw in in Q1 as well. And that will flow through a little bit into the second quarter, but hopefully we'll start to see continued demand improvement, which will help them there. But that doesn't mean that they take their foot off the gas on working the cost side of the equation as well.

Great. Thank you, guys.

Thank you. Our next question is from Bob Court of Goldman Sachs. Please go ahead.

Thank you very much. Lori, you surprised me a little bit with your commentary about how much better your cost position is clearly than in Nanjing. Can you talk about how much it's compressed, though, or maybe what the broader industry cost curve has done over the last two or three months? Has it substantially flattened or maybe characterized some of that for us?

I would say, you know, we haven't seen a big shift in coal pricing, so that's really what drives Nanjing. So we haven't really seen compression between Nanjing Clear Lake and Nanjing, the real compression is versus oil-based. So like Singapore, where everything's really priced out of bunker fuel. So that's really where we've seen the compression or, you know, not as much advantage as we used to have between U.S. natural gas-based and oil-based. So Singapore, some of the European producers, for example, they tend to be oil-based. That's where we've seen the compression. But again, what we've seen, at least in the low-oil environment so far, is just we still have kind of a two times advantage in the Gulf Coast as we do in other locations.

Got it. And then I guess China's economy is, you know, directed in a different way or managed in a different way, but it seems like that recovery is in the manufacturing sector, at least it started pretty aggressively. How would you anticipate any cues from China informing what might happen in the Western markets for you as we go through the second and the third quarter?

Yeah, so, you know, I think what we need to watch for in China, well, a couple things. So, I mean, you're right. People are up and starting to run again in China. We see some China internal demand recovering. I would say to watch out. And maybe the reason we're a little bit more pessimistic on AC at this point than others is we are starting to see inventory build in China. So people are running. but there's not a lot of exports yet from China. And so we are starting to see some buildup there. And so I think until you see more of the Western hemisphere start to recover and you see consumer confidence come back, maybe some of the stimulus packages, especially for auto that are coming on, you know, that's really going to drive the demand around the world, allow China to start exporting again. I think that's what we need to wait and see. And as of right now, we really haven't seen a resumption yet of China exports. Again, not a big impact on us directly, but a big impact on some of our customers around the globe.

The next question comes from Jeff Sakakis of J.P. Morgan. Please go ahead.

Thanks very much. Can you hear me?

Yes, I can hear you, Jack. Good morning.

Okay, good morning. With oil prices coming down, some of your competitors probably have a lower cost structure than they did before. Does that lead to a weaker supply-demand balance in ACEDEC or VAM?

You know... Let me talk again about China because I think that's generally the swing producer. We saw a lot of China production online in the fourth quarter. We've actually seen some reduction in utilization in the first quarter because of the very low pricing that we're seeing. I think people are choosing to run at lower rates, not necessarily shut down, but running at lower rates. So I think the thing is the price is just so low. So especially in China, you know, we're at maybe $300 per metric ton today. We saw that price down in the $260 range early in April. You know, it was at $300 or less in March. You know, that's just not a price where folks can run out of a coal base, and it's not a great price even out of an oil base. Sure. as compared to natural gas. So I think the advantage is there. It's less. I don't think it will impact our clear light, but it is causing some producers to slow down, which is a good thing. And we've actually seen the price start creeping up again in the last few weeks from where it was. So there seems to be some discipline in the market not to produce into a losing situation. But, again, it depends how long this goes on. But right now I would say coal is the marginal producer, which is China. And we are seeing some discipline in that market. We're seeing prices slowly come back up.

Yeah, Jeff, just to add to that, I think it's important to remember that our view of oil is that we're relatively agnostic as a corporation to high or low oil pricing. And you are going to get, you know, some compression in some areas, but you're going to get expansion in other areas. I think, as Lori just talked about, on acetic acid, you know, we don't see a lot of movement in that cost curve. On VAM, you do get some compression, but that's offset by, you know, some of the gains you get out of Singapore acetic acid. On the engineered material side of the equation, as Lori stated, about two-thirds of the pricing there is pretty sticky. So you hold pricing even as raws come down, but that's partially offset by our dividend out of Evancina. So with those puts and takes, you know, we feel like we can still generate pretty agnostic returns in any environment.

Can you talk about why you've deferred your larger capital projects, what the rationale is behind that, and how much operating income or EBITDA do you lose because of the deferral?

Yeah, so we've reduced our CapEx projection for this year by about $150 million, could be a bit more. Of that, I'd say about a third of it is associated with the delay of the Clear Lake Acetic Acid expansion. Again, the reason for doing that is because with these low oil prices, Singapore becomes not more attractive than Clear Lake, but attractive enough that we decided it was better to preserve cash in this period of time, not knowing how long and how deep this would be. We can choose to start that project up at any time once we start to see recovery, but But for right now, we've just said 18 months. We've also, for our China localization project that we were looking at, we've pushed it out a bit because obviously we have a bit of a demand slowdown for our engineer materials, and we see that taking a little while to recover. So we've pushed it out a bit, and we've also had some things change where we now are looking at minimizing costs by using some of our existing footprint preferably. So that's about another third, about $150 million. And then we have a third that's kind of everything else, and a lot of that is just project re-scoping that occurred naturally, projects that we said, you know what, to preserve cash, we can just push them out a year. So we're really just trying to be cautious because we don't know how deep and how long this can go to make sure that we are preserving cash for the organization to maintain a good free cash flow.

Thanks very much.

The next question is from Mike Sivion of Wells Fargo. Please go ahead.

Hey, good morning, everyone. Glad to hear everybody's safe and sound. Thanks, Mike. Laurie, I just wanted a little bit of clarification. I think you said for 2Q adjusted EBIT could be down 150 to 250. Was that relative to Q1 or to Q19? Relative to Q1. Q1, okay. And then when you think about adjusted EBIT margins for the acetyl chain in the mid-teens for 2Q, what is more important in getting those margins up? Is it the volume? Is it, you know, the pricing? And if pricing is going to go up, what do you think drives that? Is it more, you know, oil going up? Is it more recouping the volume? Just sort of, you know, just some color on what could get those margins, you know, better as the year unfolds.

Yeah, I think it's, you know, they're all related, but I think it is more around the pricing. I mean, look, the last time we saw below $300 per metric ton pricing for acetic acid was in 2016. So it's been a long time since we've seen this level of numbers. So I think it really is more about seeing the pricing go up. Now, that really means demand recovery for acetic acid is really dependent on China for that. I think that's where we'll see the recovery in the margins. The clear way is we have demand recovery and we get some bond recovery that helps the prices go up. Again, we're pretty agnostic to what happens to oil in this scenario. That's the beauty of our models, the beauty of having three different sources of acidic acid around the globe that we can pull on depending on, you know, what's the best source and the lowest cost source. So, you know, I don't see oil price being a big factor for us. But certainly, you know, China demand, China exports, reopening of India and Southeast Asia, these are going to be the big factors that can help drive those margins back up.

Great. Thank you.

The next question is from Vincent Andrews of Morgan Stanley. Please go ahead.

Thank you. Good morning and good to hear everybody's voice. Sounds like everyone's doing well. Wondering if you could just comment on what you're seeing or what you're thinking about the outlook for demand for VAM and for emulsions in the second quarter and maybe into the third quarter. Just wondering if you're going to have the same amount of flexibility going forward to shift product out of acid into those other two materials.

Yeah, you know, so we have certainly taken advantage of that flexibility, even in the first quarter. I mean, if you look in the first quarter from the fourth quarter, We sold 17% less tonnage into China as they dealt with COVID. We sold 27% more tonnage into the Western Hemisphere. We moved 8% more tonnage to BAM and emulsions. We have seen BAM and VAE hold up pretty well. We actually see some impact on that into the second quarter. We see the demand remaining strong for paints and coatings, at least so far, especially for exterior paints. Now, maybe not as much for interior paints as people, you know, aren't wanting to line up at Home Depot and wait to go in. But we are seeing the advantage of that capacity that we've been able to add. So, you know, I think in Q2, yes, we expect certainly some pricing pressure on BAM and BAE and emulsions. And we hope we'll start to see some more seasonal recovery in demand as we see economies starting to reopen, but generally stronger than a city cap since.

And then if I could just ask you on an engineer materials, you know, I appreciate and respect your comments on the ability to hold price in that two-thirds of that business because that's certainly what we've seen in the past in lower raw material environments. I'm just asking, you know, with volume expected to be down 30%, 35%, is there no mechanism for customers to come to you and ask for lower prices? Is it fully contracted or is it just, you know, not something you have to worry about?

I mean, of course, people can always ask. Again, you know, if we go back to what we see, you know, about a third of that volume is really sticky in that we're the only person specced in. So those – they tend to not be price sensitive. They don't have another option. You know, the next third maybe has a couple people specced in. We've not seen a lot of movement that way. I mean, perhaps we will. As we come up, we haven't. You know, the third that tends to be more price sensitive is more the – you know, standard-type grades, and those tend to follow raws a bit more anyway. You know, but we have seen some of the sectors continue to be very robust, right? Medical pharma, pink coatings to a certain extent, packaging from the acetyl side, food and beverage has been robust. So we expect those to continue and not to see a lot of price pressure there.

Okay. Thank you very much.

I appreciate it. The next question is from Gautam Punjabi of Baird. Please go ahead.

Thank you. Good morning, everybody.

Good morning, Gautam.

Morning.

Hey, so, Laurie, you know, just on the EM segment specific to the first quarter, you know, both volumes and margins were quite resilient, you know, considering the late quarter sort of slowed down globally. Was there any full forwarded demand from QQ? I mean, you mentioned that the team generated, you know, high single-digit volume growth in the western hemisphere. Just trying to clarify that.

No, we really didn't see any pull forward. You know, auto actually was doing quite well in January and February in the Western Hemisphere. We actually had seen auto up a few percent in both Europe and Asia, and that really helped drive some of the volumes in the first and second quarter. You know, obviously consumer goods were down in the first quarter, but generally, you know, January, February, even the first part of March were pretty good. where the Western Hemisphere was able to offset some of the decline that we saw out of Asia. And even the Asia decline during that period was fairly moderate. Now, obviously, that all changed kind of the second half of March, and that's why we're projecting the 25% to 30% down for EM in the second quarter. But it really didn't seem much volume before, yeah.

Okay, thank you. And just, you know, more broadly, I mean, you have obviously given us, you know, an assumption for each of the segments from a volume standpoint for 2Q. Can you give us a sense as to what you're embedding in terms of how June kind of plays out? I mean, clearly, you know, most of the world is on lockdown for at least, let's say, half the quarter. But how are you thinking about the back part of the quarter and kind of the exit run rate into the third quarter? Thanks so much.

Yeah, look, we're really – we just looked at the second quarter as a whole. We're really assuming we don't see much recovery even through June. And, you know, if we look at auto, for example, you know, China auto's restarted, but it's a bit slow. Europe is kind of starting this week, but a pretty low rate. You know, VW, for example, in the ID3, you know, one of their platforms that we have a lot of content in, you know, is making 50 cars a day versus what they typically make, 150 cars a day. The U.S., the autos are just now starting to announce they're going to restart. Originally, some May 4th, some May 11th, most of the big plants, not until May 18th. So we really don't see them coming up closer to full rates until, you know, late June or even early July. So that's the essential when we break in. Obviously, if they get started sooner, that's good.

Okay, we'll watch for that. Thanks so much, Lori.

Yeah.

The next question is from Matthew DeGoy of Bank of America. Please go ahead.

Morning. So if we look back at 2015 and 2016, the asset chain business generated about $600 million in annual EBITDA. Perhaps directionally you're pointing there in 2Q, but you have some outages and whatnot. So So why or why not is it possible that the company kind of returns to that EBITDA in that segment? Yeah, what else right there?

Yeah, look, we typically assume, you know, we think our asset deals business is kind of a base level of earnings in a normal environment between, you know, 180 and 200. So if you look at our earnings in first quarter, just call it 140 for easy math, You know, we had 15 million in there that we didn't have for the fairway turnaround. There was 15 to 20 million of COVID impact. And then first quarter, typically, we see 10 to 15 million of seasonality. So that gets us in that 180 to 190 range that we would expect to see from acetils. So I think, you know, what we've shown is versus even 16, 17, we have fundamentally shifted the Acetyl's base level of earnings, again, kind of up to that 180 to 190. But with COVID, with the turnaround load in the first quarter, we saw a slightly lower number in the first quarter.

Yeah, Matthew, I think it's important to remember a lot of the steps that we've taken over time in the Acetyl business to get us to that higher level of earnings. You know, reducing the fixed cost footprint and consolidating manufacturing at our large integrated facilities, continuing to lower the S&A cost structure in the business, and then further going downstream. In the past, you know, we used to sell, you know, about 60% of our acetic acid as acetic acid, and now we only sell, you know, closer to 40%. And we move that downstream into VAM emulsions and now into redispersible powders through the LSX acquisition. So, Those very purposeful steps taken over time have led to that, you know, higher level of earnings in normalized environments.

Okay. Thank you for the context. And then if price in EM was down like 5% year over year in 1Q, I would imagine it's probably going to be a little bit worse than that in 2Q. To some extent, I guess it's not surprising, given the moves we've seen in oil. But if I look back to the last time crude really collapsed in 15-16, we never saw price kind of eclipse the minus 4 number. Is this because prices have been sticking in some of the newly acquired businesses? And, you know, you talked a little bit about that margin level, and I would imagine things moved down in 2Q, but that mid-30s, is that what you'd consider normal from here?

Yeah, you know, I think there's two things there. So we did have the raw material pass-through on that kind of third of the business that is more directly tied to raws. I think that's similar to what you would have seen in 16. There was also an element, Q1-19 was really an exceptional EM quarter, and there's some timing elements there around contracts for medical and pharma, some high-margin businesses, that showed up in Q1, which is different than Q1-20. So, Q1-19, we had some big contracts that showed up in the books. Q1-20 is, I would say, more normal. So, there is that variation there. I mean, we would expect, as ROS continues to low and as we see volumes come off, you know, some further impact to margins for engineered materials and volumes, like I spoke about earlier. But I don't think the Q119 to Q120 change that you're seeing is representative because there were some uniqueness in Q119.

Fair enough. Thank you.

The next question is from John Roberts of UBS. Please go ahead.

Thank you. And congratulations, Laurie, on assuming the chairperson role.

Thank you, Tom.

The smokers seem to be more susceptible to the more severe COVID-19 symptoms. You're guiding for stable CIGTO for the rest of this year, but do you think this over the next, you know, 12, 24, 48 months will accelerate the decline in CIGTO over time?

You know, it's a good question and one we've asked ourselves, but I have to say, CIGTO has proven to be probably our most resilient sector. people who smoke tend to do it no matter what. And if anything, maybe they do it more when they're home. So, you know, just a bit anecdotally, you know, in January and February, when this was really hitting China, we actually saw toe production, cigarette production, sorry, up 4% in China and sales in China actually went up by 1%, which doesn't sound versus 2019, which doesn't sound like a lot, but in a, in a business where we expect, you know, a couple percent decline per year, that was certainly a reversal of the trend. We haven't seen similar numbers yet for Europe and for the Americas. So, you know, we have to wait and see. But as of right now, at least in our conversations with the cigarette producers and others, they are not seeing a big change in demand profile.

Okay. And then in engineering materials, you noted some challenges in getting new applications qualified with the social distancing and a lot of your customers having employees working from home. Do you think you have that solved or will have it solved over the next couple of months? Or will it be constraining in any way? Or because demand is so weak, it's just not going to be on a constraining part of the supply chain or the value added?

Yeah, I mean, look, it's a great question. And certainly with COVID, you know, we have found many new ways of working. You know, I would say our employees or even our salespeople, everyone continue to be highly productive and effective at home. Interestingly enough, in EM, while we have had some issues getting new projects qualified, we have been able to continue to progress many other projects. So a lot of our customers have lab staff working. They're doing it. In some cases, our lab group, our technology and innovation group, has actually been working with some of the customers to qualify the materials on our lab equipment. And so sometimes we've actually taken over and done some of the testing for them at our facilities. for those customers who couldn't use theirs. So our folks have been really creative to keep some stuff going. Similarly, you know, we continue to provide great customer service. I want to share with you an example we had. We actually had a customer in Germany who had a molding issue, and our technologists were able to get on the phone via iPad and basically troubleshoot the problem, you know, using iPad video with the customer. So our folks have been really creative. While we certainly have, you know, we still close the number of projects in the first quarter we expected to. We aim to do the same in the second quarter. We're just having to be really creative and really flexible in how we work and what work we do for our customers to make it happen.

Thank you. The next question is from John McNulty of BMO Capital Markets. Please go ahead.

Yeah, good morning. Thanks for taking my question. With regard to the acetic acid markets in China specifically, have you seen any permanent closures? And I guess how long would we have to see this recessionary environment drag on before we might actually start to see some of maybe the more marginal capacity just get permanently shut down? What are your thoughts on that?

So I would say to date we have not seen any permanent closures. And part of the reason for that is I think, you know, a lot of the – Acidic acid capacity in China is tied to downstream uses of the same company. So they're part of a value chain for other companies, not necessarily the MVAE, but maybe going into plastic bottles or this sort of thing. So what we've seen, though, is we have seen people slowing down capacity, so only matching their capacity to what they internally consume. I think, you know, it will take a bit longer at these kind of prices before we see people permanently shut down, but we have definitely seen people take, you know, run at lower rates, which has helped. You know, we were really low in terms of China utilization in the first quarter. Those numbers are still low, just below 70%, but slowly coming back up as people cut back on run rates to more match their downstream, internal downstream consumption. So, you know, I don't know how long it's going to be, but I think it will be longer before we see any permanent shutdown of spare capacity in China.

Got it.

Yeah, and, John, we're focused on what we can do to control things. So we're controlling our own operating rates. We're focused on productivity, as Lori talked about. We're focused on what we can do from near-term cost reduction action. So those items that we have control over ourselves is really where our focus needs to be. so that as we see the changes in demand pivot in the coming months, we're well positioned to take advantage of that.

Great. Thanks for the call on that. And then just, I guess, with regard to the engineered materials platform, I guess the magnitude of the sales drop seems a little bit on the higher end, I guess, than what we were thinking, especially considering you do serve some pretty defensive markets as well, like on the healthcare side. So, I guess, can you Can you give us, in terms of how you're thinking about the buckets of your cyclical portion of that business and the maybe defensive side, what you're thinking in terms of the volumes for those?

Yeah, I mean, you know, on the kind of resilience side, I mean, obviously I talk about tow, that's 15% of our revenue, and then, you know, we have medical pharma, food beverage, even 5G packaging, you know, that's kind of another 10 to 15% of our revenue. But some of our big Users like for the entire company, auto is about 15%. You know, until people start up, although they're sticky businesses and they will come back and order from us, they're just not taking volume. So that's really what's built into that, as well as consumer electronics. And, you know, people are just not buying big, durable consumer goods right now. They're worried about jobs. They can't get out, you know, all these kinds of things. So, you know, I would say it's not so much that we see people shifting away from our engineering materials. It's just they're not running, so they're not ordering. If, you know, if you look at even in Q1, you know, we saw, you know, we lost about $10 million in volume in orders just in March due to cancellations, about 50% in Asia and 50% in other places. And in Q2, you know, automotive, the big decline dropped. I mean, April – was 50% lower in terms of automotive demand for us than it was in 2019. And in the Americans, that was 80% lower. So these are sticky businesses, but if they're not running, they're not ordering. Now, in non-auto, we're nearly flat for 2019. So, again, it's just that balance of those highly resilient, those that have kept running and had high demand, and those that haven't been as resilient, like auto, where we've just seen the demand basically go to zero for a period of time.

Got it. Thanks for the call. Be safe.

Thank you.

The next question is from Kevin McCarthy of Vertical Research Partners. Please go ahead.

Yes, good morning. With regard to your CapEx program, I think you indicated you're deferring capacity expansions or methanol and acetyls by about 18 months. Do you still plan to reduce capacity in Asia? And if so, would the acetyl capacity reduction there be concurrent with the new timeline?

Yeah. So, our plan all along has been it was really we justified the project on productivity. So, our plan would be to reduce capacity in Asia. in that same timeframe, so in that mid-2023 timeframe. Again, it could be a shutdown of a facility or it could just simply be a reduction in facility. And that's a decision we'll make sometime later once we see kind of how raw material dynamics and demand even out over the next few years.

Okay. And then on page nine of your prepared remarks released last night, I just had a clarifying question maybe. You're talking about the free cash flow improvement there of $300 to $400 million, and I think it's equated to a 40% decline in adjusted EBIT for Acetyl Chain and EM. I guess my clarification is, is that 40% in fact your forecast, or are you just sizing the magnitude of the free cash flow improvement there?

Yeah, Kevin, we're just sizing it for Q2 through Q4. That's really what that point was about.

Very good. And if I may, I'll just sneak in another one for you, Scott. There's a reference to, I think, a tax relief provision that's expected to benefit you by $40 to $50 million. Can you just talk a little bit about that and when you would expect that cash in the door? Sure.

Yeah, this is mostly just timing, Kevin, and it's a lot of the stimulus packages that have been passed around the world. Actually, the lesser of that number is the U.S. We have a pretty substantial impact from German payroll tax deferrals. So it's really just deferment to 2021 or 2022 on payroll taxes.

Perfect. Thank you so much.

The next question is from Alex Yevremov of KeyBank. Please go ahead.

Thank you. Good morning, everyone. Laurie, just to clarify, the EBIT decline sequential you mentioned, 150 to 250 million range, was that for the company overall or for EM segment only?

No, that's for the company overall.

Understood. Thank you. And turning to acetyls, just based on benchmark margins, we're estimating that they were quite healthy in March and April if we look at acetic acid versus methanol or BAM versus ethylene and acetic acid. Is that, in fact, true when you look at your business? And if so, are you expecting this level of margins that we saw in March and April to persist in the latter parts of second quarter?

You know, Scott may want to provide some detail as well. But, you know, again, if we look at – you know, we actually saw prices drop very low at the end of March and in early April. And, you know, at those kind of prices, you know, margins in Nanjing where you have methanol coming out of coal are not that good. You know, Clear Lake out of gas, still a margin, but significantly compressed from the margins that we've had in the past. So, you know, I think – we continue to see that challenge with acetyl margins going forward, even in a low methanol environment, again, because price tends to fall a little bit.

Yeah, I think we did see a lot of compression in the first quarter, as Lori stated, Alexi. And, you know, in the last week, we've seen a slight bit of expansion, but we saw these periods and pockets at various points in the first quarter as well. So it's Until we see, I think, more robust exports moving out of China and demand improving in other parts of the world, I don't think you're going to see a big change in that dynamic.

If I just may clarify, you do expect your acetyls margins to decline sequentially, right?

I think we expect to see things relatively flat right now, Lexi, at least as we're baking in, given that demand landscape that we talked about. I think it's important. We're more or less on the floor here for methanol in China, given where the coal producer's cost structure is and given where methanol prices are at. We may see things move a little bit in the upstream feedstock landscape, but material movements up or down, given the inventory levels and given the cost structure, we just don't see things moving a lot.

Understood. Thank you very much.

The next question is from Frank Mitch of Ferium Research. Please go ahead.

Thank you so much, and good morning. As I parse through the various forecasts and understanding this is an inexact science, and where you think the coronavirus impact is. I mean, obviously a very significant impact here in 2Q. But as I look at the numbers, is it fair to say that as things stand today, you think the impact from coronavirus, if we were to say parse up 100% for the balance of the year, it would be like 50% impact in Q2, I don't know, 30% Q3, and 20% Q4. How are you currently thinking about the pace of the impact for the balance of the year?

Yeah, look, we've done a lot of scenario planning. And again, we don't expect a B-shaped recovery, so we do expect some continued impact. We've, you know, we've looked at a U-shaped recovery, which will start to see some recovery in December. We've looked at L-shaped, which has it going down into 2021. I think the answer is You know, we don't know. Even with things opening up, we have yet to see, you know, a couple things. When does the Western Hemisphere automakers return to full production? You know, when will we see enough relaxing of social distancing in the U.S. and Europe for people to go back to painting? And, you know, and as well as allow for construction to go back to seasonally normalized levels. And then, as I said earlier, you know, when do we see that improvement in China export? Because we're not seeing that yet. So even though China's running, we're not seeing enough demand. outside of China to really resume the pace of China exports. So I think there's still a lot unknown, a lot related to consumer confidence. Stimulus packages can help. We're waiting to see how that goes. You know, but I don't think we can really predict accurately at this point what we will see in third and fourth quarter.

Got you. But, you know, I was looking at that comment, you know, from Scott about the acetyls and EMs. being off 40% for the balance of the year. And so it just seemed to me that it was a bit more front-end loaded in terms of the impact for the second quarter. And perhaps, you know, in terms of a year-over-year negative impact, it would be lessened for the balance of the year. But at this point, you think it's maybe a little bit too premature to offer that?

Yeah, that 40% was really illustrative of what that magnitude of cash flow reduction would equate to. So that's how I'd read that.

Terrific. Thank you so much.

The next question is from Matthew Blair of Tudor Pickering and Holt. Please go ahead.

Hey, good morning. Glad to hear everyone is safe. I wanted to touch on that 5% volume gain in acetyls, which I think occurred despite some turnarounds. Would you say that was just normal, you know, quarter-to-quarter volatility, or do you have a strategy to try to take share in this weak market and offset some of the price declines?

Yeah, so we had the volume gain from fourth quarter. Remember in fourth quarter we had the issue at our Clearlight plant, and it was down, and so – we had more volume available in Clear Lake, obviously, in Q1 than we did in Q4. So that volume uptick really reflects the additional production in Clear Lake offset slightly by the COVID impact in Asia.

Sounds good. And then any sense on the timing of the $150 to $250 million working capital benefit that you expect? Would that Could that be mostly in Q2 or kind of spread throughout the year?

Thanks. Scott, do you want to answer that?

Yeah. So, I think most, there can be a chunk of that that is Q2 as we see, you know, the more acute demand impact that Laurie talked about happening in the current environment, and we will gain working capital here. So, we will see that. We do expect with, you know, really actions that we're taking, and this is not a new thing for us. We've been heavily working. working capital actions around accounts receivable, accounts payable the last several years. And this environment really gives us that opportunity to push hard on the inventory side of the equation also. So there's some sustainable actions that we're taking in addition to just kind of the drop from sales coming off. So we'll gain a lot of working capital in the second quarter, but we do expect some of those actions to yield benefits in the back half also.

Thank you.

The next question is from David Begleiter of Deutsche Bank. Please go ahead.

Thank you. Lauren Scott, on the asset heels base earnings 180 to 190, I know you said you're agnostic to oil price changes, but why isn't there some variability at a $25 oil price versus a $50 oil price for the base level of earnings in that segment?

Yeah. So, David, I think what we say as a company, we're fairly agnostic. I mean, you will see a little bit of an impact in AC, which is probably, you know, why my bridge, including seasonality, gets you to the lower end of that 180 to 200. You know, clearly, you will see some impact in AC. But That said, we see a little bit of an offset in EM where our prices don't typically, for about two-thirds of our volume, the prices don't track down with RAS. And so we get a little bit of margin expansion in EM that offsets the compression of margins we see in AC.

Understood. And just in EM, just in the affiliates, what's happening with Ibn Sina given the low MTBE margins these days?

Scott, do you want to answer that? Yeah.

So, David, our dividend there is on a one-quarter lag. So what came through in Q1 is what we saw from Q4, and then likewise here stepping through into Q2. So we're going to see most of that impact in the second half of the year that we're seeing. You know, MTBE follows oil, so pricing is coming down, and we will get some compression there. On the flip side, in the EM segment, you'll get upside from where we get margin expansion, where we have pretty sticky pricing, as we talked about earlier. Thank you.

The next question is Lawrence Alexander of Jefferies. Please go ahead.

Good morning. Do you see any opportunities to – or do you have any interest in acquiring – up to the downstream asset deals, assets, and then phone image your network to further optimize or give you more degrees of freedom. And secondly, can you remind us where you are on the innovation cycle in asset deals? I mean, roughly how many years before we see a significant innovation in OPEX and CAPEX on new projects?

Yeah, you broke up a little, but let me answer the first one. So, I mean, clearly, you know, we just completed the acquisition of Elitex. That is adding down to the back end of our Acetyl chain with redispersible powders. We're really excited to close that deal despite having to do it remotely. It is a fast-growing market area. And, you know, we think it's a great addition. So we do continue. I think it's just an example. We do continue to be very interested in continuing to expand our asset sale chain where it makes sense to deliver greater shareholder value, which we think, you know, Elotech fits that standard. You know, in terms of innovation, I mean, we continue to be very flexible with our acetyl chain. We like the model that we have, which gives us a lot of optionality and gives us a lot of ability to pivot. I gave the examples earlier of the amount of tonnage we can move geographically as well as tonnage downstream. Our teams continue to innovate constantly around BAM and emulsions and offering new products to our customers. So I think we're doing very well there.

The next question is from Jim Sheehan of SunTrust. Please go ahead.

Good morning. Thanks for taking my question. When we look at natural gas prices in Asia, and specifically China, they're moving lower into the region nationally of coal prices. I'm wondering how you think that's impacting competitive dynamics in China. How sustainable might that be, and does that really affect the acetyl chain at all?

Yeah, I don't really know much about natural gas in Asia these days, so I can't say how sustainable that will be. What I will tell you is acetic acid equipment in China is built around coal to methanol base. It would take an amount of investment in order to convert that to natural gas to methanol base. So I don't see that happening quickly. I think you would have to have a very sustained period of competitive and low natural gas prices as well as some assurity of continued supply before you saw people willing to make that investment away from coal to natural gas.

Yeah, Jim, natural gas is earmarked for personal consumption. There's very little chemical production based upon natural gas, and we just haven't seen a policy shift in that direction.

Okay, and on social distancing, you know, you talked about, you know, the impact that might have on new project development. I'm wondering about, maybe you could comment on how it's affecting your integration of acquisitions like LRTAC.

Yeah, well, you know, social distancing, besides the fact that we have about 2,000 people working from home these days, you know, we still have another, you know, roughly 6,000 people working in our plants. And so, We have learned how to operate with social distancing, using personal protective equipment as needed. You know, I think that's gone very well, and we've been very fortunate. We've had, you know, no cases of COVID-19 transmitted at work. And so, you know, I think we can learn to operate in this way. I think it's been good. I think, you know, people, we see the same thing in other industries and socially, people are learning to work this way, but we just need to get consumer confidence back.

Thank you.

That concludes our time for questions today. I would like to turn the call back over to Abe Paul for closing remarks.

Thank you, Brock. We thank you for your questions and listening in today. As usual, we are available after the call for further questions you might have. Brock, feel free to close out the call at this time.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Thank you.