Greetings, welcome to Celanese first quarter 2019 earnings conference call. At this time, all participants are on 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. It is now my pleasure to turn the conference over to your host, Chuck Kyrish. Thank you. You may begin.
Thanks, Rob. Welcome to the Celanese Corporation first quarter 2019 earnings conference call. My name is Chuck Kyrish, Vice President, Investor Relations and Treasurer. With me today, I have Mark Rohr, Chairman and Chief Executive Officer, Scott Richardson, Chief Financial Officer, and Todd Elliott, Senior Vice President, Acetyl Chain. Celanese Corporation distributed its first quarter 2019 earnings release via Business Wire and posted a slide presentation of prepared remarks about the quarter in the investor relations section of our website yesterday after market close. Today's presentation will include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found on slide two of the slide presentation under important information. We will also discuss non-GAAP financial measures today. You can find definitions and other important information and reconciliation to the comparable GAAP measures on our website in the investor relations section.
We published our prepared comments yesterday, we will now open the line directly for your questions. Go ahead, Rob.
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. We ask that you please limit your question to one question and one follow-up. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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. One moment please while we poll for questions. Our first question comes from John Roberts with UBS. Please proceed with your question.
Thank you. In Engineering Materials, the affiliates underperform the wholly owned operations. There's obviously some big regional differences between wholly owned and affiliates, could you remind us of some of the application and plastic mix differences between the two?
Yeah, John, this is Mark. I'll start that. Maybe Scott Richardson could add some comments. We did see our affiliates struggle a bit in the quarter. I think the real issue there is that, if I can say this, they don't have the product breadth or the global reach that we do. Some are primarily into China and selling in a limited application. We continue to work with them to see if we can help them improve that performance.
Yeah, John, to add a little bit more color. If we look at that on a year-over-year basis, almost the entire decline in the equity earnings for Engineering Materials was due to our Polyplastics affiliate, and really is, as Mark said, largely related to demand in China.
Could you remind us how much you paid for the Linde Syngas gas unit, or is that going to be in the cash flow statement when the Q comes out?
Yeah, it is. It's lumped together there, John. We haven't said exactly what that amount was. It'll be in the cash flow statement with our Next Polymers acquisition as well. It's a very low capital kind of optionality type investment that we made, which we commented on last quarter.
Okay. Thank you.
Thanks, John.
The next question comes from Michael Sison with KeyBanc Capital Markets. Please proceed with your question.
Hey, guys.
Hey, Mike.
Nice start to the year. Mark, congrats and hope you have a lot of fun things lined up going forward. I guess I wanted to ask how Lori's role will differ from yours, if any, and in terms of focusing on extracting value for the company and given your portfolio of businesses.
Sure, Mike. You know our business pretty well. The thing about Celanese is that we have a great business machine out there that brings a number of opportunities to us. The ability of that machine to bring opportunities actually has the capability to overwhelm our internal mechanisms, be they unit operations, be they logistic systems and processes, ability to innovate as fast as we need to. I spend a lot of my time on that, and I'm sure that Lori's going to spend a lot of her time working in those areas. We think in many ways it's the next frontier for Celanese to learn how to go from 20,000 FTEs to 30,000, manage that better than we do 20, is going to be a big part of what's continuing to drive us to drive value going forward.
I think that's a major area of focus for her. The second one I would say is that when you look at the opportunities before us, deploying cash continues to be the main focus of my main focus and will be hers as well. We have more and more opportunities surfacing in M&A that are bigger and structurally more complex. Lori brings a lot of capability and skills really to facilitate that and help that be a reality for Celanese, which will be a big part of unlocking shareholder value. I would say those two things are top of mind. You'll get a chance to meet her soon and ask those same questions.
Okay, great. In terms of your outlook for 2Q, you noted that it should look similar to 1Q, but it does sound like the Acetyl Chain industry operating rates could improve given outages you noted in your prepared remarks. I guess thoughts on Engineered Materials. Your outlook still looks for good organic volume growth given project wins. Just wondering what maybe headwinds that you see in 2Q that you wouldn't see a normal, say, improvement sequentially?
Yeah. Well, good. I'll start that, and I'm sure that Todd and Scott will add some comments here. One of the things that's not readily apparent is internally the things that we deal with. In 2Q, we have a number of turnarounds in front of us. Those turnarounds will cost us $25 or $30 million. Call that $0.15 to $0.20 of headwinds baked in there. We're expecting raw materials, we're probably seeing raw materials and methanol to go up, those kind of things. Net, that'll probably whack us for another $10 million. John asked a great question on affiliates, and we see that affiliate number sliding a bit further. Before we even started this quarter, we've got at least $0.25 of unusual headwinds that we didn't have the first quarter of the year.
We're quite strong in the first quarter of the year. I think on one hand it's easy to say, "Well, life will be good. You built this point." I think the first half of this year is going to be a struggle, and I think maintaining numbers in flat is a push for us. I certainly wouldn't recommend anyone go higher than that number for the quarter. I just don't see that right now materializing. If I take a stab at EM quickly, yeah, we're pushing price really hard, and we're pushing our mix really hard. The repercussions of that will not be that great as long as business starts to recover. We don't expect a full recovery in EM to start until more the second half of the year as well.
When you look at that in auto build projections, those things, we're still down the second quarter. We should start some rebound going into third quarter. Our fundamental belief is, Mike, is that we've got a bit more grind here before we get into the back half of the year where things really should be starting to improve. Todd, do you want to make some comments on AC this quarter?
Yeah. Elliot, regarding acetyl. We actually had a pretty good March as we wrapped up Q1. Almost 40% of our business occurred in March as we look at that profile. We ended on a pretty good note as we wrapped up Q1. As we get into second quarter, Mark mentioned that Celanese has turnarounds. It's pretty typical for the industry to have turnarounds during the second quarter. We've got turnaround at Bay City, Texas, already underway on VAM. Same thing in Nanjing, China on VAM. We've got a little more than a week in Frankfurt on VAM as well. That'll present a headwind we've got to navigate around. We've got a fantastic network to do that with. I think the bigger issue right now is just how China will unfold from a demand perspective as the quarter materializes.
It's a little bit of a slow start in April. There have been a series of safety checks and audits following the explosion in Xiangshui, in Jiangsu Province at the end of March. That's put, probably appropriately so, a damper on operations throughout the province. That's affected some of the downstream demand to start the quarter. We've got to see how that unfolds. We'll certainly activate our network around these things and try to deliver the quarter kind of in line with Q1.
Great. Thank you.
Thanks, Mike.
Our next question comes from Bob Koort with Goldman Sachs. Please proceed with your question.
Thanks. Mark or Todd, you guys have talked in the past about maybe some of your competitors in China being subject to some challenges, whether environmental or economic profile, et cetera. In light of the recent developments in China and maybe a little bit more discipline and enforcement, does this hasten your expectation of seeing some capacity out in China and maybe tightening operating rates even sooner and for longer?
You know what? Again, I'll start this, and Todd maybe you can talk specifically around some of the closures and stuff that come back from industrial parks. Bob, the movement in China is fundamentally one, in my personal view, is of driving inflation. If you think about that, the economy needs higher pricing to get a decent return on the overinvestments they've made for a long period of time. When I kind of work through that myself, what I see them doing is putting pressure on the 150,000 or so state-run enterprises there to continue to lift those earnings there. That means environmental restrictions that are going in, that means safety restrictions. You've seen those sort of occur episodically.
We've gone through a period of safety events, it seems like every six months or nine months, and they continue to ratchet up the impact of that, and they're directing now. We had very public about the number of closures of chemical parks that are going to occur directly with that. That will impact some of our competitors, we think. Todd, do you want to carry on with that?
Yeah. Just a specific follow-up on this situation in Jiangsu. Remember before we talked about other provinces going through steps to examine environmental policy, and that continues. In Jiangsu, we had not yet seen anything specifically around park policy. What we're hearing, have not seen anything published yet, but we're hearing that Jiangsu will reduce the number of chemical parks from 49 down to 20 starting sometime in 2024. How that ultimately is laid out and executed and started remains to be seen, and the specifics remain to be seen. That's a significant development, a key set of steps following this tragedy in Jiangsu. That's probably the most impactful in our space. We've got to watch that to think about where parks are near the Yangtze River or close to population centers. As that gets more specific in terms of details, we'll share that.
Yeah. The only thing I'd add to that, Bob, is, yes, it impacts our competitors, but it also could impact our customers too. There is kind of, I would say, a near-term demand impact on our customers as well as we see these audits and scrutiny continuing to ramp up.
Yeah. Just to follow that. The specific kind of watch out downstream, MCA, monochloroacetic acid, acetate esters, pharmaceutical intermediates, kind of a whole host of downstream applications are slow as these safety checks unfold and inventory levels are brought down. Probably the one bright spot would be terephthalic acid over to PET. That's held up pretty strong through this period. To Scott's point, that's put a damper on April, but we'll just see how that unfolds here as we get into May and June.
Could I ask an EM question, Mark? It seemed like maybe over the last few quarters, you guys had been working hard on getting your price to offset raw materials. I suspect towards the end of last year when oil went down, maybe some of your customers not only were destocking from macro fears and trying to tighten up their inventories, but also maybe hoping they'd see some relief on price. We've had oil rally now. I'm wondering if you could give us a sense of where you see customer inventories destocking, restocking, or ability to defer purchases in light of volatility in pricing.
You called that right, Bob. There was definitely destocking going on as people wanted to have a view generally that prices are going to come down. Of course, we rallied in the right kind of way and continued to drive higher prices through that period of time. We're now in that kind of aftermath of that and waiting for fundamental demand to pick up, which it seems to be in some areas. Again, it's a bit too early to tell with that. As it relates to pricing, Bob, what we've really done is, yeah, generally, you always make sure you work hard to cover raw. Really what we've done is we went out and starting last year, just did a really hard look at where we were adding the most value and where we felt we were impacting customers in the most important way.
We wanted to make sure that our shareholders are getting the right compensation for that. We were very directed with pricing into those areas where we felt that the value is really being brought by Celanese and the uniqueness of our applications and the molecules we have. That approach is still ongoing, and we don't intend to move away from that. You've asked me in the past, do we lose volume when we do that? The answer is sure, but we're really looking at a way to drive money. Everything that we do relative to pricing and/or through elect not to participate on volume, it's a thoughtful process we go through to try to maximize the value back to our shareholders.
Perfect. Thank you.
Good. Thank you.
Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you. Good morning, and nice quarter.
Thanks, David.
Mark, would you expect EM volumes to be up year-over-year in Q2?
Oh, geez. I don't know. Scott, do you have a view on that?
Well, I think we're going to be flattish, David, right now. We're still working, as Mark just talked about. We're still working the price equation very hard. The one thing that is going to change probably slightly from Q1 into Q2 is we'll probably have a little less destocking that occurs. It takes a good six months or so. When oil fell as hard as it did, for that to kind of work its way through the value chain. While our volumes were down year-over-year kind of in the 3% range, a lot of our customers that we've talked to were kind of down more in kind of the 10%-15% range. Then we were able to offset that largely through the new project wins that we had that started to flow through in the quarter.
I would say at this point, we're kind of looking at flattish.
Yeah. The big wildcard, at least from the discussions I'm involved in daily on this, really is China. China, if you look at projections in China, there was a view that in this quarter, they'll start digging out of the hole that all that has been in China and start that recovery down mid-teen sort of number in the first quarter, down less the second quarter, and then actually being positive the back half of the year to end up down 3%-4%. That has got to start happening. If that starts happening, we're in good shape. Let's say that doesn't happen, then you might see a little volume weakness as we go through this quarter.
Got it. Mark, in yours and Scott's comments, you mentioned actively considering strategic transformational options for your businesses. Has anything changed of late, or have discussions picked up recently to drive these comments?
Well, I think when I look at the bolt-on, let's start with that for a minute. We're seeing the size of bolt-ons increase, and those are opportunities. Does that make sense? We're working a few now that would be in that $30 million to $70 million of EBITDA kind of range to $100 million. We've been doing deals that have been sub $30 million in EBITDA. That's encouraging for us. We continue to work hard to position Celanese to be able to take advantage of transformational opportunities, and that's a big personal thrust of mine. As Lori comes in and takes over the helm as CEO, I'm going to be devoting myself to that, along with Lynne Puckett, our new General Counsel.
We'll be working as hard, and we're optimistic that as this year unfolds, we get into next, maybe more opportunities come available, and we'll work hard to see if we can capture one of those at Celanese.
Thank you very much.
Thank you.
Our next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.
Hi, this is Andrew Castillo on for Vincent. Just a quick question from me on around your comments on VAM in terms of focusing on one VAM, but also the Western Hemisphere and your ability to sell more in this area. I was just curious because my understanding was that at least some of the U.S. incremental VAM would likely be exported. Just in light of your expansion and again, the comments on the Western Hemisphere, I was wondering if you're able to sell your capacity in the U.S. or were there particular factors that facilitated for you to be able to sell in the region?
Yeah. You can start that, Mark.
Yeah.
Yeah. The expansion in Clear Lake, which we brought online in December of last year. We added 150,000 tons of capacity. That's a key value step amongst several that were underway within asset deals. The work around that started way before the plant ultimately was commissioned, and that was to position our business in the most sort of attractive way as we think about contract mix around the world, key customer growth and mix around the world. Yes, we did shift some of our profile more to the Western Hemisphere following that startup. Again, intentional step, key part of our value enhancement efforts, and that'll continue into 2019 and beyond.
Great. Thank you. In terms of your comments on China, you mentioned the high inventory that obviously has continued to work under, at least on the acetic side. Just curious, your thoughts of how long it'll take for the industry to work out of that inventory. Also just in regards to your comments about a slow start to April, I was wondering if you could give us more color. Is that just entirely related to the plant explosion, or were there other things that you're seeing that is perhaps causing more of a slow start?
Yeah. There's lots of trade question marks, there's precepts. I think the main event followed the explosion in the Tianjiayi audit and focus on inventory control throughout the country. Really just more specifically in the province of Jiangsu. That's what we're watching now. Like I said before, we had 40% of our business in Q1 happen in March. We thought we were starting to dig out of the softness at the start of the quarter. I would point to that, point to derivatives off of acetic acid. I mentioned three before. Those are probably the ones to watch. That's linked to the inventory build we saw in the quarter.
Yeah. There's still adequate inventory. We think it's worked its way down. It's not down yet, if that was the nature of your question. There's still excess material out there, and I think that needs to be resolved. The way it will be resolved is the Chinese economy needs to pick up a bit. It will pick up whenever there's a trade agreement, in my opinion. I think, we saw the favorable trade discussion moment in March. We saw business pick up in China as a result of that. This explosion, it slows back down again. I think there's still this waiting aspect going on, personally, going on in China. Hopefully we can get that resolved in the next month or two, and I think that would be good as we end the second half of the year.
Yeah. The other piece is the turnarounds I mentioned before. In addition to ours, there are multiple industry turnarounds in Q2, so that'll play a role in the inventory dynamics as well. We count something like 17 to 36 acetic acid plants that'll be in turnaround in Q2. Many of those are in China. That'll play a role in the inventory dynamics.
Our next question comes from PJ Juvekar with Citi. Please proceed with your question.
Yes. Hi, good morning.
Morning, PJ.
Just a question on asset deals. In the last quarter, you announced rationalization of acetic capacity in Asia, then you announced expansions in the U.S. of VAM, acid, and now methanol. It seems like you're moving production back to the U.S., presumably because of the energy advantage here. Is that true, and will you be exporting some of that material back to Asia?
Yeah. Well, no. Heck, yes. That's exactly what we're doing. When you look at the economics of that, it's pretty profound for us. The assets we have in China or in Singapore are higher cost than the asset base we have in Europe. Not only is it higher cost, if you look at just the strip today for natural gas, out five, six years, when you just roll that out, you can see that variability lasting for a very long period of time. I just went through some economics the other day that shows how solar power is actually offsetting incremental gas being consumed for utilities in the state of Texas. We have this low-cost energy base here on the U.S. Gulf Coast that's pretty phenomenal.
The moves we're making really are moves to, as Todd has said, and says it much better than I can, it step us up from that base of, let's say, $800 million as kind of our trough earnings level for this business back up above a billion. About $100 million of that is locked up in the acetic acid, primarily productivity just associated with that switch from Asia to the U.S. Then you add on top of that incremental methanol, incremental VAM, those kind of things. All those contribute towards, again, without any change in the basic business, closing that gap gets you back to a billion. Then, of course, a billion and beyond goes from that. Yeah, that's what we're doing. Most of that material will end up offshore. The demand in the U.S. is not really increasing.
Great. Thank you for that. Post all these expansions in the U.S., how integrated would Acetyls be with your EM business, and how quickly can Scott separate these two businesses if you decide to take any strategic action on any of the pieces? Thank you.
Yeah. There's organizational integration that has to be separated, efficiencies associated with a single instance of SAP and those kind of things that you have to work through. There's some tax things you have to work through. I think once before we talked about the penalty associated with that of being well north of $100 million per year, call it $1 billion in negative net present value. There's been a lot of work that Mr. Richardson has led over the years, we've really dramatically dropped that down. Maybe it's $50 million today. We'll continue to work that down. I think we're getting it to a point where should an opportunity arise that would facilitate a value creation step that way, it would be certainly possible without the kind of huge negative consequences that corporations often see when that happens.
At the same time, we're seeing investment opportunities in AC. We're being very thoughtful with those. Everyone we're doing is incremental at very low costs. Certainly it's getting to that point where it could be something else. We can do something else with that if it makes sense for that organization and for our shareholders.
Yeah. Depending on the deal, PJ that we would do if we got to that point, it's probably a six-ish months process for us to get something pulled off.
Okay. That's helpful. Thank you.
Good. Thank you.
Our next question comes from Duffy Fischer with Barclays. Please proceed with your question.
Hey, guys. It's Mike Leithead on for Duffy this morning. On Acetyls, first, I was hoping maybe you could remind us what your backwards integration into methanol would be after the recently announced methanol and acetic acid expansion. Second, is it fair to assume with your methanol expansion announced, that a potential investment in a second methanol unit is off the table right now?
Well, Todd, you want
I'll start, and you can add to it.
Okay.
We've talked about roughly a 50/50 balance make/buy, and that includes as well our affiliate investment in Saudi. The profile in the Americas is, of course, more heavily weighted towards make, as we think about the methanol unit in Clear Lake, PTG, our derivatives in the Americas. This will nudge us up a little bit. We started that unit back in 2015 with an original design nameplate of about 1.3 million tons. Now we're looking at 1.7 million tons once these expansions are finished. Low cost, great returns on capital. Also allows us to do some things in support of our integration there in Clear Lake. We acquired carbon monoxide, which we talked about before. We have the expansion around the corner with acetic acid, all that adds to our configurability options there in Clear Lake.
Mike, I'd probably tell you that it's a cost point. We could be full in the United States, and we're totally integrated, and it would be to our advantage at that point. There's still room to do that beyond the 1.7, beyond the increment we've pushed out with this last expansion. Yeah, we've got great partners in hand with Mitsui. We have other friends in the industry who would like to do something with us, so it's not the top thing on our list today, but it is something we continue to evaluate and look at, and we'll be willing to take that step if we can get the economics where they're willing to accept our share.
Yeah. That's the important point, is we focus on high return investments. For things like methanol, it's got to really make sense from a return perspective. When we did the plant in Clear Lake a few years ago, just as a reminder, we got 50% of the capacity for less than 50% of the capital, given some of the assets we were bringing there at the site. We continue to look for advantageous investments that are going to be really opportunistic for Celanese.
Great. That's helpful. I guess just following up on the return element, you talked about superior returns or sorry, in organic investment for Celanese. I was hoping maybe you could touch on the relative investment opportunity set between the two businesses, EM and Acetyls, either in terms of higher returns for either business or just a broader opportunity set for you guys today.
No, we've been very clear in both businesses, we really target greater than 20% returns on investments. We don't really look at either one differently from that perspective. A lot of what we're doing in Acetyls, we've talked at length about focusing on the opportunities in the Gulf Coast for incremental investments that really is justified with productivity. In Engineered Materials, a lot of these are really incremental capital. If we're putting compounding lines in for Engineered Materials, it generates a lot of value that keeps that paying back in a couple of years. That's really where we're prioritizing our investments right now. I think we said we've got nine projects or so going right now in Engineered Materials from a capital perspective. All of those are pretty small when you look at each one individually.
As a collective program, it's pretty sizable with, again, a return profile that's greater than 20%.
Yeah. I think the next generation for us, too, in EM is going to be to restructure our polymer base to better fit the consumption demands that we see in the future. Right now, we're very heavily U.S. and European based in our base polymer production. We're seeing continued opportunities in Asia. We see that growth quite dramatically, which we currently satisfy from the U.S. We think there's a whole new round of opportunities that are surfacing that'll be part of the new three-year plan that we can talk about that would make those investments out there, Todd's just talked about some of these guys. We do believe that our investment opportunities are getting greater as we grow this company, I think it's a pretty even split between the two.
Great. Thanks, guys.
Sure.
Our next question comes from Jeff Eklof with JPMorgan. Please proceed with your question.
Thanks very much. In Nanjing, over a longer period of time, do you worry that environmental constraints may either close your capacity or limit your capacity in some way, or limit the capacity of your suppliers, your customers? Do you view these environmental efforts over a longer period of time as a clear positive or a clear negative or neutral, or you can't tell for your business there?
Jeff, that's a great question. First off, we're in the Nanjing Park, and it's considered one of the top two or three parks, maybe the fourth most favorable park in the entire country. It's a very good park. It's well managed. The role that companies like Celanese play there and BASF and others, is we partner with the politicians really to support their move to become more focused on safety and environmental stewardship. We play a key role in really helping them put forth the kind of regulations and protocols we have as a corporation and the other multinationals do on that park and on organizations that work there. That relationship is really positive. Could it end inappropriately for a park like that?
I suppose it could, but what we do is pretty unique, and I have a hard time believing that any time in the near future, these moves to improve China will represent a threat to that park or a real threat to our asset base there. When you get out beyond, let's say, a park like a big industrial park, like a chemical park like Nanjing, you get to a lot of industrial parks. Industrial parks don't run that way. They have lots of mom-and-pop or smaller operations there, and those are the ones that seem to be feeling the most pressure now. I think it's really more our customers that could be impacted as time goes on in that regard. Right now, we don't have a way really to assess that, but it's something we're going to keep our eyes on.
Yeah, Jeff, when we started planning for that site 15 years ago, we really tried to build it both from our own constructions, but also our upstream gasification suppliers construction with an eye towards the future. If China had an environmental regulation very similar to what we see in the Western Hemisphere, that's what we built for. It's not to say that, to Mark's point, that you couldn't see some crackdowns possibly in the future, but we really did build that plant with an eye for the future.
Okay, great. In Engineered Materials, was there a few percentage points of volume growth from acquisitions in the quarter year-over-year? I don't know, 4%, 3% benefit?
There was a little bit from NEX that rolled in this quarter versus last quarter. Year-over-year, Scott.
It was pretty small, Jeff. It's more like 1%-2% is probably in there. As I talked about earlier, year-over-year, when you look at it on a straight volume basis, it was 3%. What we're hearing from our customers and their demand is down considerably more than that. If you pull that acquisition, roll that through there as more kind of base basis, probably 4%-5% down. We feel pretty good about that given the environment that we were in, that we were able to offset that with new projects.
Okay, great. Thank you so much.
Sure.
Our next question comes from Ghansham Panjabi with Robert W. Baird. Please proceed with your question.
Thank you. Hi, everyone. Good morning.
Good morning.
Good morning. I guess first off, in going back to the first quarter results, sort of relative to your initial guidance at the time of the 4Q earnings report, what truly surprised you the upside in the first quarter? Related to that, Mark, in your prepared comments, you mentioned confidence and an improvement in China and just broader underlying demand. Is that embedded in your reiteration of guidance for 2019? I'm just trying to clarify.
Yeah. What I would say is that we guided it pretty flat, and we were starting the year very slowly. We were focused solely on what we could bring to the table. What I was pleased about is that we brought a lot to the table through incremental productivity, through incremental sales, through a mix shift that occurred in our portfolio and sort of working into that. You add on top of that a stronger March than we really kind of anticipated. That kind of lifted us up a bit over that initial kind of view we had. Now it's entering this quarter, and I've just outlined, I think you heard, there's probably $0.25 of headwinds today that we didn't have last quarter that are real. We're starting out not at 260. We're starting out more like 230-ish.
It's that kind of spot, and we've got to build back into that. What my optimism for the year was centered upon is that I really do believe that China is going to improve as we get into this year and end this year. I do believe it almost seems like the machine is trying to get started, only for something to knock it off course. We know the Chinese people well, we know that region well, and the customers well. There's a desire for them to do better. My belief is, as you get into the back half of this year, that we'll see that machine come alive and start to have more of a foundation, which is not only good for us, but it's good for our affiliates and things like that.
Great. Thank you. For my second question, going back to the EM segment, volumes down 3% in the first quarter. Obviously, comparisons are much more difficult given years of outsized growth and the choppiness in the macro. The trend line is nonetheless weaker over the past few quarters. I guess, going back to the 4,000 projects guidance for this year, what sort of visibility do you have towards that number, that gives you confidence in being able to hit that? Thanks so much.
Well, I think there remains this overall press to differentiate. Customers very much want to do new things and serve markets in a better way. What you actually see is you see that trend increasing. The flip side of that is that the numbers tend to start weighing down and be a little bit smaller in size because the people are less confident in that. We feel very good about the 4,000. We feel very good about that contribution. That is not a function of us thinking that the business itself is going to get better, the market's going to get better. It's just the need for customers to differentiate themselves versus their competition.
Thank you, Mark.
Sure.
Our next question comes from Laurence Alexander with Jefferies. Please proceed with your question.
Hi, this is Nicholas Cecero. I'm for Laurence. For Engineered Materials, you mentioned that the projects used in battery separators is expected to double again in 2019. I was just wondering if we should expect the current cadence of growth to continue over the next three to five years, maybe if you can just size the potential market opportunity here.
Scott, do you want a shot?
Yeah. We do see that trend continuing. That growth trajectory is extremely strong in that end use. It's probably one of the really good bright spots for us in China. We are in the process of finalizing the expansion of our GUR ultra-high molecular weight polyethylene unit there in Nanjing, which will help satisfy that demand in the near term. We're already looking at what is the next wave of investments, because we don't see that growth trajectory changing given the focus around electric vehicles in China and these batteries playing a critical role in that growth.
Great. Thank you very much.
Thank you.
Our next question comes from John McNulty with BMO Capital Markets. Please proceed with your question.
Good morning. Thanks for taking my question. In the prepared remarks, you pointed to seven project expansions in the EM segment. Can you help us to think about the earnings power tied to them and the cadence at which they may come in over the next couple of years?
Well, I'd love to, John. I don't have it done in front of me. You should think of all these as being small and being incremental, all adding millions, not tens of millions of dollars, to that process, all baked into that. We have to build this thing $100 million per year, which we've been doing in that scenario. I think these are small incremental step changes that make us going from the $690 up in the $770 or so this year, whatever that number turns out to be, $760, and then up from that into the $850, $860 next year. It's all part of that.
Yeah, it's really what allows us to satisfy the demand growth that we have from the project win that we've been talking about in great detail over the last several years. To Mark's point, these are five-ish million dollar type projects, each one of them, plus/minus. We're not talking a huge capital for each one.
Got it. Thanks for the color on that. Then, I guess, with regard to M&A, you indicated, I guess again in the prepared remarks, that the pipeline was strong for both businesses. Aside from the syngas unit that you just acquired, I don't really recall a whole lot happening in the acetyl chain. I guess, how should we be thinking about the opportunities for M&A there and what types of either assets or ventures you might be considering or looking at?
Well, we think in that arena, there's partnership opportunities that are available to us, at least in theory, on paper. We have come very close to acquiring businesses that would be derivative-like businesses that would fit our emulsions business well and the portfolio of products we sell there well. There's upstream opportunities there that could involve M&A. You need to think of us trying to extend that chain laterally and also back integrating that chain.
Got it. Thanks very much for the color.
Thanks, John.
Our next question comes from Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Yes, good morning.
Good morning.
Mark, would you comment on the size of your investment to expand methanol at Clear Lake by 25%, as well as the timing of that project?
The timing is several years. I think two and a half years, because you have to do the next turnaround. We haven't talked about the dollar amount, but it's well less than $100 million.
Okay.
Yeah. Kevin, think of the timing similar to the startup timing with the expanded acetic acid unit. There's configuration benefits with both of those units starting up about the same time. There's some recapture.
On the CO2 side of the site, some hydrogen benefit of the site. There's all kinds of integration benefits associated with it. To Mark's point, capital is the minimum and would be funded through the venture itself.
Great. I wanted to clarify a comment you made earlier regarding potential cost to separate your businesses at $50 million-$100 million. How did you reduce that cost? As a clarification, is it operational cost or is it inclusive of potential tax effects as well?
It's sort of all the above. We look at all of the implications of everything from the credit arrangements we have and changing of those arrangements out there, the cost of the SAP systems. Now you reconfigure those systems, there's positive, negative relative to that. People that have joint jobs and how we deal with men and women like that and ways to take care of them. Every aspect of that we've looked at, and we felt pretty good that the 100, and it was actually a number higher when we first started looking at that. We saw ways that we can invest money and improve our ongoing operating efficiency to get that number lower. Our path has been on through productivity to pull that down, and we think contemporary number today is closer to 50 for that ongoing impact.
Scott and others are working to even get that lower over time. That's how we did it. There's no magic here. There wasn't one thing. There's hundreds of small things that we just had to go after.
Thank you very much.
Sure. Thank you.
Our next question comes from Frank Mitsch with Fermium Research. Please proceed with your question.
Hey, good morning, nice to talk with you, gentlemen. On the acetate tow side of the house, the expectation when you offered guidance for the first quarter was that it would be equivalent to the third quarter of last year, which was around $65 million. You came in at $72 million. I noticed in the slides you talked a little bit about affiliate dividends perhaps being a little bit larger. You also mentioned that that business, you believe, has returned to a stabilized earnings profile. Can you provide a little more color on what went right there and what should our expectations be for that business?
We did quarter-to-quarter. A couple of things came in a bit higher than we thought. Price eased up a little bit. There was just some sort of return to the normalized pricing. It's pretty flat year-over-year, but it was improvement quarter-to-quarter. We had some energy favorability with a few million dollars in there. Spending was down as part of our productivity initiatives came in. Those things all added up to some pretty good money. On top of that, equity earnings came in a bit higher. That was the pop-up that you saw there. It'll settle back down in that mid-60 kind of range.
We think run out the year, we have continued to look at ways to add productivity, do more productivity in that arena. We'll think we'll need to keep these earnings flat next year. I don't know if that's enough color for you, but I think the business is performing the way we thought it would. We expect to be flat as we end this year-over-year.
Terrific. Thank you. Just a clarification. Mark, obviously, you indicated that you thought China was going to improve. Just curious, is a trade deal necessary for you guys to hit that 1050 number or not?
This is a great question. Please understand that I'm talking, this is a feeling, just having got back from there recently. The team has spent a lot of time over there. If you look at the data coming out of China, what you see is, you see starts and stops of things. It's like momentum starts to build. Something knocks it off course. Momentum starts to build. Something knocks it off course. I see it as an economy. It's not sliding down. It's already taken that step down. It is trying to recover. There's not a good reason for it to be down. If you go there, you see this. It's a thriving economy still today, a $14 trillion economy that's going to grow 6%. That's probably twice the economic contribution globally to the world than is the U.S.
To me, getting that incremental $800 billion or so coming from incremental growth of the Chinese economy is going to be critical not only for China, but it's also critical for the world. I do believe that for the world to get better, China needs to recover. I do think to jumpstart the economy in China, the trade deal needs to happen.
Very helpful. Thanks, Mark.
Sure.
Our next question comes from James Sheehan with SunTrust Robinson. Please proceed with your question.
Thanks. Regarding larger scale M&A in EM, is that all in the engineered plastics area, or would you consider other kinds of businesses? Then on acetate tow, you once considered a joint venture there. What's your strategy for enhancing shareholder value from that business?
Yeah. When you look at the bigger deals we're looking at, they tend to be more EM oriented. That's because of the balance equation. If you look at AC, we have more control on the growth destiny of AC. In other words, we need fewer partners. We already have a machine that we can elect to work with people or just do our own investments in. They tend to be more EM oriented. That's what I would say there. Yeah, in regards to AC, we continue to look at ways to try to involve others in that. We think that's the right thing to happen over a longer period of time.
Having said that business is directionally starting to improve. We do believe if we can get through the next year or two with flat economics, we'll see a period of time without whether we do a deal or not with somebody else, we'll start to get back on course and improve naturally.
Yeah. James, as we look at deals in Engineered Materials, we really are focused on deals in the engineered thermoplastics space. Other materials or similar materials to what we have today.
Terrific. How should we think about the earnings lift from the 15,000 ton expansion in Nanjing?
Yeah. It's a few cents on a full year basis, James. It's kind of embedded in the projections that we gave as part of our three-year plan last year.
Thank you.
Thank you.
Our next question comes from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
All right. Thanks. Good morning. Just real quickly on the synergies that you cited there, the $15 million, would you like to see that, I guess, go to break even before you proceed forward with any kind of action in the JV transaction or separation? Thanks.
Arun, you were talking about the acetate tow business or the AC business?
The AC business.
Okay, yeah. You guys don't like me very much for this comment, I think you don't make money by just blowing something up. You make money only if you catalyze a unique growth profile. Right now, we have that underway for AC. We're not holding back money for AC. I think until we started holding back money from a growth point of view, the shareholders are getting the full value for that within the portfolio. We would see it as part of some catalytic event, I do believe, or if there was a need for a lot more money we're going to put in place, then you could rationalize it's the right thing to do to bring in a partner or do something else to try and unlock that shareholder value.
Thanks.
Sure.
Our next question is from Aleksey Yefremov with Nomura. Please proceed with your question.
Hey, this is Matthew Skarupski on for Aleksey this morning. Just following up with Kevin's question. In the past, you mentioned that CapEx in out years of 2020 plus is going to be around $400 million. Is that still a good number to think about now that you have these expansion projects going on?
No, it's drifting up, and I don't know. I'm looking at Scott. I don't think we've rolled out a number there, but we'll update that shortly, I think. Clearly, the CDCast expansion's in there, and that wasn't included originally with those in the $400. It'll be up a bit.
Understood. Thank you. Then within Engineered Materials, was destocking limited to autos or were there other end markets?
Primarily auto.
Yeah. Auto and electronics were.
That was auto.
The two biggest where we saw it. We really didn't see much impact in our medical business. Consumer goods has actually held up pretty well also. It's really mainly cell phones, other electronics and automotive.
Understood. Thank you.
Thank you. Bob, the next will be our last question.
Our last questioner is from Matthew Blair with Tudor, Pickering, Holt. Please proceed with your question.
Hey, thanks for squeezing me in, guys. Just one for me. You mentioned a pretty heavy turnaround schedule in Q2. It also seemed like you had some downtime in Q1. Does this mean that your turnaround schedule for the back half of 2019 is pretty light, and can you provide any numbers around that?
Yeah, AC is pretty light. I think we have EM outage planned in the third or fourth quarter as well. Yeah, like most companies, we tend to do more in the second quarter, it's pretty normal for us, that $30 million, $40 million kind of hit in the quarter.
Thank you.
Sure.
Ladies and gentlemen, at this time, we've reached the end of the question and answer session. I would now like to turn the call back to Chuck Kyrish for closing comments.
We thank you for your questions and for listening in today, certainly. We're available after the call to address any further that you have, that'll wrap us up. Bob, you can close us out.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.