Earnings Call: Q2 2018

Jul 20, 2018

Good morning, and welcome to the Celanese Second Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over operation Second Quarter 2018 Earnings Conference Call. My name is Suravi Varshney, Vice President, Investor Relations. With me today are Mark Roar, Chairman and Chief Executive Officer Scott Richardson, Chief Financial Officer and Todd Elliott, Senior Vice President, Assadil James. Yesterday afternoon, Celanese Corporation distributed its second quarter 2018 earnings release via Business Wire and posted slides and remarks about the in the Investor Relations section of our website. Today's presentation includes statements about expectations for the future results, and plans that are forward looking statements. Actual results might differ materially from those projected in such forward looking statements. And additional information concerning factors that could cause actual results to materially differ can be found in the posted materials. We will also discuss non GAAP measures in information about which including reconciliations to their comparable GAAP measures are posted in the Investor Relations section of our website. Form 8 K reports containing all these materials are available on the SEC's them. We'll begin with introductory remarks from Mark Rohr and then take your questions. Thanks, Survey, and welcome everyone listening in today. I prepared comments were published yesterday, so I will be brief and then turn the call over for your questions. We delivered strong consolidated results for the quarter with GAAP earnings of $2.52 per share and record adjusted earnings of $2.90 per share. Product lines resulted in net sales of $1,800,000,000 with adjusted EBIT margins of 26.6 percent. All three businesses, the acetyl Chain Engineered Materials And Estate Cove through adjusted EBIT year over year. The earnings growth, along with a focused effort to convert those earnings to cash generated, contributed to our highest ever free cash flow of $500,000,000 in the quarter. We repurchased approximately 900,000 shares and distributed roughly $73,000,000 in dividends this quarter. For the remainder of the year, we expect Engineered Materials to continue delivering steady growth by extending the success of the pipeline model and executing on M and A. In the approval chain, we expect market momentum to carry through the third quarter before normal seasonality in the 4th quarter and 1st quarter, impact that business. We do not see the recent tariff disputes that's having any material effect on our business. And with that, we are raising for adjusted earnings to the range of $10.50 to $10.75 per share with free cash flow generation in excess of $1,000,000,000. Thank you, Mark. I'd like to request all callers to please limit to one question and a follow-up Brandon, please open the line Our first question comes from Mike Sison with KeyBanc. Please go ahead. First question on the acetyl chain, you talked about a lot of outages in 2Q. Can you maybe give us a little more feel on the regions where that happened? And then do you expect the utilization rate to stay at 90% for 3rd quarter? Yes, let me start this and I'll turn it over to Todd Elliot to let me give more color, but we were I think the last call we gave a perspective that we were in the mid-eighty percent utilization rate. We have seen that push up to the 90% call range this quarter and we expect that to move back down towards the mid-eighty percent right, as we go through the back half of this year. Tom, would you like to add color to that and maybe some comments? Yes, I mean, we continue in an overall theme of a continuing improvement in and this really goes back over the last couple of years. We continue to see solid demand growth across multiple end uses, demand growing at about 3% to 4% per year across all these different end uses. Limited supply, frankly, limited supply since the overbuild back in the 9, 10, 11 period. So we've seen a steady march up in operating utilization rates and we put that in the mid-eighty percent level. Ending last year and through most of this year. And to your question, there have been multiple effects from combination of Chinese, Energy Reform, environmental reform, late last year through the 1st part of this year plus a whole series of unplanned outages in multiple regions. Over the course of the year. So that's pushed up instantaneous operating utilization rates up around the 90% range. Certainly in Q2. So some of that will moderate. I think as we look out, but continued, good environment. Great. And then, Mark, when you think about your outlook for this year, you're awfully close to your 2020 goals already. It seems on an EPS basis. What's the best way to think about, I guess, earnings progression into 2019 into 2020 given how strong 2018 has turned out Yes, I think in May, we put forth a view that we would generate about $30 per share equivalent of earnings over 3 years, $9.10 $11 per share. I think we're higher than that number Now, so I would look at it kind of that way that somewhere between $30 $33 per share. Over that period of time is what I would think. How that actually flows through, Mike, on a quarter to quarter basis, is really hard for me to quantify that. So we've got off to a good start. We're going to finish very strong, probably closer to 12:11 in that range and we'll be somewhere, I think, in the hunt between those as we as we enter next year. But again, it's a bit hard to call that specifically. It's easier to call the full 3 years than it is next year. Great. Thank you. Thank you. Our next question comes from Ghansham Panjabi with Robert W. Baird. Please go ahead. Hey guys, good morning. I guess, first off, following up on the last question, the mid-eighty percent utilization rate up to 90%. Was that Delta purely because of China, curtailments either temporary or permanent or Was there some of their, some of their meaningful outages there? No, that was a global. That's a global spend. And how would you how would that parse out China specifically? Well, I think you should look at China, over Robin here. But you should look at China as having a, a sort of a steady erosion, small bits of erosion, to the overall capacity utilization over the next 3 years and not the kind of short term impact we have with units being up and down like we this time. Yes, I mean, most of the curtailment that we've seen has occurred during the winter month end of year, start of new year. So saw that end of 2017 started this year in 2018. Just the overall utilization picture in the mid-eighty percent range is pretty healthy just to begin with. And then you overlay curtailments, adjustment that we've been describing And then on top of that, there have been a series of unplanned outages that really go back to last year. Most of those are out of China. Well, but even, but even in, other regions, I mean, Asia, and I don't want to name, competitor names of other parts of the world. And those who contributed to push up further up to 90%. So it's a combination of things that keep us hovering in the mid-eighty plus range and And again, that's been a supportive environment. Okay, terrific. Thank you. And for my second question, I guess, on tariffs, you cited the potential for incremental growth opportunities given the shift in trade flows, which correct me if I'm wrong, seems specific to the seatals. But is there any risk for growth for engineered materials in regions such as Asia? How are you sort of thinking about tariff risks specific to EM? Thanks so much. No, we don't, I mean, we don't see it as a real risk. I mean, the tariff concept is one of it's sort of in and out of the and the punitive tariffs in support of that. We have a very global network. And to be honest, most of the material we make in China stays in China and We have the ability to import into China for most regions of the world. There are a few cases where moving bin ferrals from the U. S. Into China. On the EM side. And, I want him, it's not a lot in other parts of that, we should have the ability to price most of that out. So we don't see a material effect of this. And I guess I'll be so bold to say, I think our network is so unique and our ability to supply locally is so strong be some advantage at the surface if this becomes permanent. Okay, perfect. Thanks so much, Mark. Sure. Our next question comes from Bob Koort with Goldman Sachs. Please go ahead. Thank you very much. I was curious maybe Todd, you could talk a little bit about or Mark that you you gave some more insight into some of the regulatory issues that are confronting companies in China. I think the way to read it is most of those are towards a benefit for Celanese. But I was particularly intrigued by the comments around parks and maybe some additional closures and requests for voluntary curtailments. Can you give us a little more granularity on what you see happening over the next couple of quarters and whether that makes you a beneficiary or perhaps see is pretty interesting. And it's this is going to affect multiple provinces. And we look, we're studying these as we go and trying to be engaged in Beijing and elsewhere. To understand. I mean, the one the Shandong province changes is pretty fresh. Shandong ended 2017 with 199 parks. Their target is to approve only 75 parks +10 specialty chemical parks. So you think about, what is that 114 takeout park as you look forward. And it's one of the first provinces to set standards for future chemical park design and all the regulatory environment. We think that will affect our broad industry going forward. We believe it will. We think it already is affecting when you consider the change in park dynamics and then the relocations and permitting required. But this is it's evolving. We've got to understand it and study it and assess it as we go forward. One other note, as I think we've mentioned before, the winter season effects relative to energy, gas versus coal and other steps on the environmental side as well. We were actually approached this summer in Nanjing by the municipal EPA, and this goes back about 4 weeks ago. Where they've requested not only Celanese, but multiple companies in the park to reduce operations by 50% citing a target to reduce ozone. Again, those are their words, not ours. And not required. We ultimately did not have to do anything, but it's pretty interesting that that outreach occurred in the middle of the summer. And then only days ago, also in Nanjing, 14 different companies in our park there in Nanjing were brought into a meeting and another request was made to reduce electricity consumption. Siding summer season, peak season for electricity. So it's just a series of these sort of heightened step to, to work that energy balance. And then going forward, like the park reference, the, the environmental picture for China going forward, we think it's going to have an effect ultimately. And as we said during Investor Day, kind of call out maybe a couple of percent utilization change by the end of the decade. Well, for us, we have a phenomenal relationship, but when we're in one of the best parks is there, the Nanjing Park. We have a great rate relationship as do the other companies in that park with the park leadership. So I think you should look at this as being a cooperative kind of process for companies like ours. And so it's never been to our disadvantage to support and work with these folks. And I wouldn't expect that to be the case in the future. It does, however, reflect as Todd said, this continued erosion of the week and outline kind of businesses that are there and the continued evolution of those away from the away from operations. And Mark, if I might ask on TCX, you've done a pretty good job of conditioning us to expect not much there. Now you've got some sort of transaction. Can you give us a sense of the scale of that? And does it make sense if given Todd's fairly bullish view on acetic acid operating rates in the industry, would it make sense for any Steve? Thanks. Yes. Well, I think the, we were not able to sell these corporations to convince the Chinese government to go to synthetic ethanol as a source. And you're well aware, Bob, of the money that was invested years ago on that energy we put into that. So this asset, we shut down the asset, we've written off the asset. We have a great partner in Qingjour that is there at the park with us. There are provider of raw materials for the CCATs of business. And we work with them collaboratively on a number of deals that just haven't worked out yet. This has been one that we kind of jointly surfaced and started working on. They have an interest of really trying to promote synthetic ethanol. They're very well connected politically, and so we think that is a better approach than us trying to go on our own. So we have, in essence, sold the assets to them, but we've got LOI to a lot of work you have to complete this to sell the assets to them for a nominal amount. There's no real money involved in that. And we're contributing our TCX technology to a joint venture. And with them in that joint venture, the intent is to promote ethanol from synthetic uses. And our interest in that, of course, is to be the acetic acid provider for that. So that's where we are. You should think that this is just we're putting this out as as not the Holy Grail of success for seedy casting, but rather it's one more step that we believe will further keep pressure on this market. In Asia. And if we're successful with this, we think as we end this decade next, we should be seeing some acetic acid volumes, some material acetic acid volumes heading it. It's helpful. Thank you. Our next question comes from P. J. Juvekar with Citi. Please go ahead. Yes, hi. Good morning. Good morning, Vijay. So, Mark, you're shutting down tow capacity in Mexico. I believe that's about 2% to 3% of global capacity. Could that tighten up the market temporarily? And my second question related to that is have you looked at this new Juul product as it's new type of e cigarette that has taken off so quickly? You think that could potentially impact cigarette demand? Well, I'm going to answer your first question. As you repeatedly say, because I missed a PGA, you're breaking up a bit, but But no, there's no material impact to, as your math noted to global capacity utilization terms of our pulling up. It's just ability to right size our asset base with the customers we have and create productivity as a result of that. That's how you should read into that. And would you mind repeating your second question? I'm sorry. Yes. So this is new JUUL product. JUUL is a new type of e cigarette that is taken off very quickly and cigarette companies seem to be worried about JUUL. Was wondering if you had a view on that. I'm looking around the room and I think we're all pretty, we're not prepared to answer that question with any kind of knowledge. So No, it's not been a subject of discussion between ourselves and the, our customers that are out there, but we'll take a look at that. Okay. Thank you. And in Engineered Materials, can you discuss your pipeline for the second half? And you mentioned that at your Investor Day that if you don't do any M and A, your margins could improve from current levels. So just talk about the pipeline and where could margins go with or without M and A? Yes. Yes. So I think, well, first off, there's going to be M and A. We're continuing to promote that. We're active in the marketplace and we're continuing to bring in businesses. So shouldn't have a view that M And A is going to materially change over the next several years, in that business. So continue to pressure from that. The one I'm most interested in today is 8% margin, just to give you a reference point on that. So you're going to keep having that pressure on overall margins. We have a good pace underway in the mid-seven 100 ish kind of new projects this last quarter. So we should be able to press 3000 at the end of the year, maybe a little short of that, but that kind of range. One of the things that, that Sutton has been doing with with the team as we're rolling out sort of a EM strategy, 2.0, so subordinated strategy, but it's a it's how we approach the market and particularly around how we focus our effort in new projects. And that's taken on more of a program focus So by that, I mean, is we're looking at the areas where we, of all the projects we do, where we have the highest margin, we think the highest ability to translate we're moving our resources more in that area. So I'll use medical as an example. We gave an example of a medical kind of application, earlier for you guys. And we're seeing tremendous upside potential by having this machine focus a bit more. We think that's going to give the chances we end this year and next, in spite of some pretty tough impacts of the M and A to start seem to be stable in our margins and hopefully start pushing the margins up. Our next question comes from Frank Mitsch with Wells Fargo Securities. Please go ahead. Hey, good morning and very nice first half of the year. Just to follow-up on that last question on M and A, you reiterated that you want to do a 1,000,000,000 in buybacks between now 2020. You did $100,000,000 this quarter. You got great free cash flow. How do we think about the order of magnitude buybacks versus M and A for selling these over the next couple of years? Well, they are, I mean, they're kind of disconnected. As we outlined in May, a fair amount of excess free cash flow. And even with the $1,000,000,000 of buybacks that was still there. So we don't see We don't think we have to slow down in either one of them. And if I was going to steer you, I'd steer you to higher levels than both, as we're going through the next several years. Mark and keeping with the higher levels steering, obviously you raised the guidance by about $1.5, according to our model, about a third of that came in the quarter on the acetyl side of things. What are some of the assumptions for the back half of the year that have changed for you to lead to that higher guidance? Well, I think as we As we roll through this and we're getting everything's getting traction, I mentioned a few things that we've been able to overcome and and address that have supported our higher guidance. One is that we this machine continues to work very, very well. And it's in the face of if I can say that pretty steep pressure on short term on raw materials and energy. And so we've had to push a lot of pricing And so real testament to the quality of the portfolio that we've been able to do that and not really suffer tremendously in volume or anything else. So So we wanted to in some ways, we kind of wanted that environment to really demonstrate to ourselves that we really have the power that we thought we would have. And that's been that's been a pretty good story. The ability of the industry to accept and support the kind of level of pricing that Todd and company are seeing out there has also been good. I mean, we're not seeing people run for the wood we're seeing demand stay pretty good in that. We're not seeing the substitution. I'm looking at Tog might say that, but, so even though it seems like These are big, horrific moves. From our point of view, they're not that big. It's just a culmination of lots of little small things that got us to this point. And the customer acceptivity was pretty good. We're driving about $40,000,000 year over year of internal price being transferred to downstream businesses, and for the first time, and I think our history has been able to get that through to all those businesses. So we've not seen a deterioration of our margin because of, recalcitrups on the parts of other markets out there accepting that. That drives. So those things just tell me that the level of value that we're generating in this business, plus and minus a little bit is okay. It's good. That gives us ability to step out and be pretty confident of higher levels as we end this year. I want to I'm going to roll into that. I made a comment about 4th and 1st we've done a lot of work in this regard. And we see typically 3% to 7% margin fall off, I mean, not margin, but volume fall off in the 4th fourth quarter and also the first quarter. So I think low seasonality impacts of seasonality impacts from coatings, and then Chinese New Year kind of thing. And last year, we didn't have that. So Frank, I believe this year we'll have it. It's kind of my gut in. It happens almost every year. And if you roll that through, that could be maybe a $50,000,000 kind of impact for that business. If you look at a little bit of volume, a little bit of price, a little bit of turnaround in there. That's what you're seeing kind of baked in our numbers. A good strong third and then a step back a bit in the 4th. And as you look at next year, I think it'll be same. We'll start a little bit slower in the business. And then I think we'll be right back into some pretty powerful levels like we've been running so far this kind of year to date. So is it fair to say that you continue to expect EM to be strong, but the majority of the upside in terms of the guidance raise is more tied to some of the positives that you're seeing on the acetyls business? Yes, the EM has been a straight line business for us and for our investors. We expect EM to generate the kind of numbers we provided plus $100,000,000 per year EBIT, and I think that's the machine we've got. And, and that's what we're focused on. And so I think that's going to be the real steady Eddie there. That we've got. We have plenty of M and A activities there that we continue to work as well. I think the story was the chain business should really be that, Hey, none of this should be a surprise to anybody. And the market receptivity for the higher valuation today has been good, which gives us confidence that we have the ability to carry off for a fair period of time. Our next question comes from Duffy Fischer with Barclays. Please go ahead. Question just back on acetic acid. As you look at the returns, if for new capacity for you with lower capital costs and for competitors, what's the likelihood over the next year that we get some announcements around some new greenfield or significant brownfield expansions in Acetic acid? Yeah, Duffy, we look out and we've kind of shared this for you guys. We shared a bit of it in May. When we look out over the next several years, we're adding about 450,000 tons of to that Todd has underway between acetic acid and bam. To be very honest, it's going to be adequate, we think, for the market the next couple of years with some of the efforts we have underway to unlock some molecules and things like that. So we think the market is probably kind of okay. When you look beyond that though, and that's the kind of top frame you should be looking at. When you get in the 20s, there could be the need for some incremental capacity. I don't think this business supports a full on greenfield side with, all the kind of subordinated, I mean, secondary investments associated with doing that. So I would be really surprised if that was that kind of announcement. I would, I would have her say from my point of view that with our cost to do a brownfield expansion, especially in Asia and some areas like that. Combined with our ability perhaps to have productivity justify that. In other words, the ability to shutter some other assets that aren't necessarily as economically advantaged as we would like them all to be. Then I think we have a pretty compelling story that we could perhaps put forth at that period of time. So Todd, do you want to make any comments on that? Yes, I mean, that configurability, I think you're referring to, we do think it's an advantage and we'll keep looking at that and assessing the options there. As Mark mentioned, we're readying that 150,000 tons of new VAM capacity in Clear Lake that'll start up in Q4. I was just there this week, so that's on track. To, to be ready at the end of this quarter or at the end of this year. We have 150,000 tons on top of that on VAM. Through technology debottlenecks. So that'll be deployed across all 5 VAM units. We've got the first technology packages installed in Bay City, Texas. We saw that this week. That's already generating yields up around 5 plus percent on top of the the output there. So that'll be deployed across all five VAM units. So that's 300,000 tons of additional capacity already kind of baked in and plan forward to support our 3% to 5% volume growth target that we outlined in May. Then the small step on a seed of gas is 140,000 tons that we mentioned also in May. Bring that on by 2020 and then back to Mark's point, we just continue to look at unique ways to consider highly configurable steps that are capital efficient and kind of marched out over time that meet the customer needs. Our next question comes from John McNulty with BMO Capital Please go ahead. Great. Thanks for taking my questions. So I guess the first one, Todd, I believe in your kind of prepared remarks last night, you spoke to a quadrupling of the network activations. I guess, assuming that that's essentially turning customers on, which I think that's kind of roughly what it is, I guess, can you characterize the type of relationships that those open up, whether they're kind of really just, Hey, look, you've got a great global platform and when there's an shoe because of an outage, we'll take down spot or if these are longer term type relationships. I guess, how should we think about like the benefit of that conversion on these network activations ones? Yes, just to recap what these are. I mean, this is when we gather data from many, many sources 3, process that data and try to distill that into insights. And we have 2 or more insights and connect that with what we believe is the leading network at the field's network in the industry. We operate that network look for options that emerge out of that and then activate something. So that could be a combination of things. In the second quarter with 50 activations versus about 50 last year. Most of those were price activation, right? That's where most of those were. So that's a combination of of working out there in multiple geographies, multiple product lines, many, many different cases, different customers to activate different price. Changes in the quarter. There were several on the supply side frankly our own network and moderating, increasing, changing, shifting our own network to produce more or less depending on the region. As well. The other piece there is on the supply chain side. So this is a combination of sourcing or moving product from region A, B or C to best serve our global customers and also take sort of the best network optimized, movements to support our business. So these can move around. They can be different sources different types of activations depending on what's going on. But it really is supported by the broadest network we believe is out there and really working those nodes and working those degrees of freedom to help the business generate value with John, I think the way I would kind of characterize this too is that we're students of our own business model. And we're students of the industry and we put this in place Todd's team put this in place as a method of really assessing our effectiveness in really creating opportunities and finding opportunities and acting on opportunities. So we can measure the effectiveness of that. And it's been a really good process for us because what we found is that we can as we can increase our degrees of freedom, we can enhance further our opportunities to drop profit And so whether that's different logistics systems in place is contractual arrangements, whatever those things might be, it just gives us a chance to continue to support this market. And we think a very positive way for our customers with a lot of degrees of optionality to give them the best product at the right time. At the market competitive price for them. And so that's been the work we've done there. Got it. Okay. No, that's definitely helpful. And then I guess another question, just I know you said in terms of the tariffs, it sounds like there's really not a lot of exposure there. I guess one question I had though, with all the noise around the tariffs and with all the end markets that you indirectly end up touching, have you seen any demand related reaction from some of the tariff noise that's out there, particularly in China. Is it having any impact in terms of how kind of the end customers for your products, react or consuming the products right now? Or are you too far away from kind of the end customer to actually see it at this point? No, it's having, I mean, it actually is having zero impact on companies like ours. There's no impact on our customers, there's no impact. And it's not even a subject of discussion. You know, I think if you're Harley Davidson and you're selling 70,000 bikes into Europe and it's a $2500 charge per bike, then you talk in $70,000,000 to $80,000,000, whatever the number is, then that's an impact. But that's not our business model. So I think this is a political charade to some extent. I mean, you've got leaders of countries kind of badmouth and we're another over it. Practically speaking from a commercial point of view, we don't see nor do I think many multinationals would see a huge impact of this. Swirling around. It's my kind of spend on that. And again, unless you are very succinct, very focused, one product line that may get with no ability to produce outside the U. S. Might get beat up a little bit. So, no, we don't see it as a big deal. Great. Thanks very much. Our next question comes from David Begleiter with Deutsche Bank. Please go ahead. Good morning, David. On an acetate tow, can you give us an update on any strategic options you're pursuing here? And is that still a very high priority or is it maybe less a priority given the performance of the rest of the businesses? Well, I mean, I won't give you any direct color. I think we continue to look for ways to make sure that business has stable earnings. And we've had a good first half of this year. With regard to that, we'll be flat year over year, so you can do the math that will be down a little bit in the second, the next two quarters, which is pretty typical for that business to be able to front end loaded. So our view is really how we make sure we keep this business flat. 18, 19, 20. The Olga launch shutdown was a piece of that. It gives us a chunk of that $50,000,000 that we were going after. To cushion that business, but it's only a chunk. Our first priority is to continue to focus in and take those steps necessarily necessary for us to self generate that 50,000,000 cover that we think this business needs to make sure it's flat as we go through these next 3 years. That's the highest priority, David, where we spend most of our energy and effort. Second to that is we continue to look for ways to, to work with others to unlock additional, synergies and we've not reached a point, we can talk about any of those yet. And, and that is a secondary kind of consideration for us. It's not certainly not the end of the world if those don't work out, but we're hopeful we can find a way from one of those 2 work out. The last thing I'd say is strategically is very much our strategy to make this topic de minimis. And we want to do that not by reducing earnings in it, but by maintaining earnings and also then growing business elsewhere. So it's becoming a smaller, smaller portion of our free cash flow. And if you set aside the dividend from China, which in itself is pretty secure, and we think for a very long period of time, you're getting in and out to a business that's certainly less than $200,000,000 of contribution and what's going to be well over $2,000,000,000 of EBITDA this year. So we think we're heading all three of those in the right direction. And Mark, you touched this earlier, but in terms of these high prices in asset and VAM, you mentioned no demand disruption or substitution yet. But are you concerned at some point might see some and know what level do you think that might occur? Well, think what I would the way I characterize this is I don't think the price is very high. I think it's adequate. And I say it because if you look at it from a point of view of the average producer out there, they're not making our margins even today. Methanol is north of 400, maybe 500 in China coal prices are up and yadayadayada, these guys are not raking in tons and tons of profit. And we've seen recently that bad debts out there in China and the negative consequences of these enterprises, these big state owned enterprises failing is pretty terrific. We so the 1st position Outtech is pricing's not that high. It's what it should be, kind of level. We've not seen any indication and don't believe that there's any real, going to be any real impact consumptive materials. If you look at the role that acetic acid as a derivative plays and the end product game, it's kind of de minimis. Higher oil prices, I think directionally helps that, David, though, I'll say that. So, yeah, if oil prices drop back to $20 a barrel or something horrific like that, then that then you could get some substitution to oil bases again, maybe. But I think in the sweet spot we're in now, which is oil 60 to 80 coal under the pressure it's under the fact that from a grassroots basis, there's not still not a lot of great return in this business. We think we're kind of in a pretty sweet spot. We should stay there for some period of time. And I don't really see a lot that would knock us materially off of that. Thank you. Sure. Thank you. Our next question comes from John Roberts with UBS. Please go ahead. Thank you. In the Engineered Materials segment, is there a way to think about how much of the raw material inflation from the acetyl segment and how much is external pressure that you're facing? Yes, John. I would characterize it as almost all, external pressure. So there's not a lot of transfer price impact in the EM from the upstream side. Okay. And then And then, is there a way to think about the contribution of network activations to the SFTL segment? Is there sort of a base level of fee income or a base level of margin contribution that you think that provides above which then we have the just the market ups and downs on top of that? No, John. It's, no, it's not I mean, a lot of these indirectly will have 0 contribution for just for that one activity, but it has it avoids some than one end. So no, we don't break those down by dollar per nodal activity contribution. Sure. Thank you, Matt. Our next question comes from Lawrence Alexander with Jefferies. Please go ahead. Good morning. 2 questions. One on Engineered Materials, can you discuss whether the average project sizes are getting bigger or smaller, if there's any particular trend in how customers are responding to your initiatives? Are they giving you different types of problems? But also just to brought back to the question about the the bridge for 2019, you often have or in the years past, you've had multiple levers that you could fall. To sort of try and keep roughly on, call it, a 10% kind of CAGR in the back half of the year, you'll be at about a $10 run rate. Is that the way to Sateel's profits can be flat year over year in 2019? Yes, I think what I'd like to say on that is that, I mean, I don't want to not answer question, but I'm kind of going to do that, Lawrence. We're already looking hard at next year. A seasonality point, you have a little bit ahead of schedule. And when we get into next quarter and next quarter's call, we're going to devote a lot of that call to next year. Having said all that, when we look at the increase in year over year, this modest increase in Todd's business, I think what you're going to see this year is you have you've had you're going to have a strong front end and a little bit weaker back end. Of it, which is really driven most prominently by, by, I think, seasonality rolling in like it historically normally does plus the big band turnaround outage and things like that. Going to impact us in the fourth quarter. And I think you'll see a similar kind of start. So next year is going to be maybe a little bit more backend loaded than front end loaded. If I could say that, But when I look at it, again, I I've just simply said that I don't think, I don't think build it from the base up, I don't think coal is going to change in China. I don't think the environmental regulation is going to change in that part of the world. I don't think methanol is going to materially change where the arbitrage is available between, coal methanol and ethylene there. So I think that fundamental raw material and demand base of that business is going to stay the same. We as from a consumer demand, Todd laid that out. I think with a lot of specificity in May, we've never seen that move around a whole lot So whether that's 2% or 3%. It kind of doesn't necessarily matter a lot in this scheme of things. And so our business was going to run at capacity. And moving over time towards 90. So I think we're in a period of time where we're going to have, I think it's a long period of time, a very good business kind of profitability levels we used to see back in the mid 2000s. So in early 2000s is what I think we're in for. And so there should not be any reason for us not be able to continue to grow earnings as early over this period of time. But again, if it's $30,000,000 going to $33,000,000,000, it doesn't necessarily mean the same as we had with 9.11, I think it could be a little bit flatter next year than not. Than that non 10 or 11 would have projected for us in our strategy 3.0 rollout. Yes. And just to take your first question, Lawrence, about project size, I think we've been pretty clear. Our sweet spot is in the few $100,000 range in terms of projects. And we're not seeing that materially changing. The power of our model is being really disciplined in the types of projects that we work on. And if things get too small, the potential value of us putting efforts there, becomes de minimis. On the flip side of that, larger projects tend to be a bigger lift to be successful. And so we were very focused on improving our win rate. And so keeping our project size kind of in the area where we've proven successful is critically important for us. Our next question comes from Vincent Andrews with Morgan Stanley. Two questions. First, just quickly, do you have an organic volume number for engineering materials this quarter? No, we don't, in broadly, broadly speaking, we think that half of our volume growth is organic and half of it is through M and A. That process. And we don't parcel out there's another part of that equation. If we're going to eventually, if we're going to parcel out, I have to give you, which is how much material we lose in terms of leakage, biometric leakage that occurs in this business, which is not linear. But if you think of a rule of thumb of fiftyfifty, it's as good as we can get with it. Okay. Very good. And then just in in the acetic chain, I'm just trying to understand sort of the bridge sequentially because I see sales were down, but obviously seg the profit was up. So that, that applies some type of cost benefit. So, was it just a question of lower ethylene contract prices being a little bit stickier or what sort of was the dynamic that allowed that to play out? I think we're shaking our heads a little bit. You're talking about the first quarter to 2nd quarter or 2nd quarter to end of the year. What's Sorry, 1st quarter to 2nd quarter, your sales are down in 2Q versus 1Q, but your profits are up. So I'm just trying to understand what happened on the cost line? Yes, I would focus on the price side as really being the major contributor to our earnings per in the second quarter. I mean, that's really the story is the combination of utilization rates, pricing margin, increased raws or relatively flat frankly and have been most of the year. We had some turnaround activity in there in Q2. It was in Q1 that maybe part of that's driving that. Okay, all right. So nothing in particular. Thanks very much. Yes, thank you. Our next question comes from Karun Viswanathan with RBC Capital Markets. Please go ahead. Great. Thanks a lot. Just wanted to clarify on acetals here. You've entered kind of a newer level of earnings power in the business. And it sounds like, you do see kind of a positive supply demand balance. For the next several years. So I guess, you know, are you are you actually expecting earnings to kind of continue at this level? Factory and and what would be kind of a 1 or 2 swing factors or 2 or 3 swing factors that would prevent that from happening? Well, these are big volume businesses probably move around the world. So it can move day to day in that process. What we said in May is that we think this was 20% margin business and, through the thick antenna things. And that's still what we kind of believe. We believe we're in this 3 year period, we're going to be averaging that 20, maybe discovery above that, through that period of time. But certainly, you can go through a short term swing if raw materials prices really spiked up or coating sales really fell off. You can find yourself move around a little bit, but we think, yes, we think we've reset that margin from a mid teens level to a 20% level. And we don't see a reason why 20% level, and that's our margin, not industry market. We don't see why that level shouldn't be, shouldn't exist throughout this 3 year period. We believe we can set the stage for that to continue beyond that period through a series of smart investments and cooperative support agreements we can put in place. So we're pretty, pretty comfortable that this business is going to stay pretty tight for a fairly long period of time. Great. Excuse me. And on on, the the earnings projector over the next several years. So if you expect this to kind of remain in a similar level, Would you be in a position to use capital deployment, whether it's in the form of buybacks or M and A to kind of keep you on that trajectory of 10 or 12 percent earnings growth. And and on that note, I mean, you you highlighted some some potential debt capacity at your investor day. If you further thought about that, deploying that kind of cash? I'll make a few comments and I'll let Scott Richardson as well to step in here. But yeah, when you look at it, we don't have any pulse rate in terms of anxiety about whether, you know, we can predict earnings to the nth degree. Like, I think all you guys like us do. We're just focused on generating earnings and we'll happily trade off or do what we need to do in the process of period to period to make that that sort of happen on a gross basis. What I would look at this as a view that we think this business is as we said a bit sooner than we anticipated probably advanced it by 9 months or so. What we kind of anticipated in our 3 year plan. So we think that if you look at out there in 2020, we'll be closer to 12 than 11. In that number. And so we think this profit is going to for the most part stay with us through that period of time, but it could ebb and flow a little bit as we go through that. That period. So I don't know if I'm really answering your question, but I think for us, we feel like whether it's $30 cumulative over that 3 year period or 33 cumulative in kind of, I don't mean flippant about it. It's kind of been different to us. We think we're going to be a period of very, very good and strong solid earnings that we'll do our best to project for you just how that's going to flow as we get further along. Yes. And I would just add, I mean, it's critically important for us to be disciplined stewards of how we utilize that cash flow. And we have a prioritization of uses of cash that we really stick to and organic growth in our businesses being 1st and looking at attractive investment second and then being very consistent being a consistent increase through the dividend and then, of buying back shares. And depending on the timing, some of that cash flow, and where the M and A pipeline is. There may be times at which we fluctuate on the levels that we deploy in each of those areas. But that's really kind of how we look at it strategically. Great. And last one is just, you discussed the possibility of a of a methanol investment. Maybe you can just, discuss that further and and and also, you know, your your possibility of potentially separating the businesses? Is there still a large dissynergy component that you'd be concerned about? Or are you working to minimize that? Thanks. Yes. I think the real key for us in all of our investments for all of our businesses is can we make sure that we're not withholding for any business in that process. And I'm happy to say we've never done that, certainly since I've been here at Celanese. We look forward, there could be more organic growth opportunities surfacing in the chain business that it could well serve it to be a separate entity versus a combined entity. That's not an imminent issue for us or topic, but we see this business as having, a lots of opportunity to to in theory seek investments either directly or with partnerships to grow, grow its scope around the world and better position itself to keep earnings growth underway without regard for a subtle change in asset price in China. So I think you should expect us the months and quarters that had to talk more about organic growth and organic growth opportunities in that, in that process. I think likewise, we're seeing continuing to see You know, it's been a few months since we closed the deal, where it's continuing to see plenty of opportunities in E. M. And those are organic investments. Also very important for us and very important for our investors to keep that business growing at the pace it's been on. So what I'll just tell you here is it's our intention to fund both of those things and make sure we fund them. We think we can do that today. We've been able to do that very well. It's been a combined entity at some point. Do that, it's combining that we would be separate entities to make sure we maximize shareholder value. Yeah. So that's I think it's in methanol, just a direct comment on methanol. Methanol continues to have an attractive play for us. I think the concept of Methanol though, I would posture it more as as we get to looking at the to a city cafe when they're appropriate down the road. I'm not saying it could be a piece of that either independently with us doing it with somebody else doing it or as a partnership. Thanks. Sure. Brandon, we'll take one last question and then wrap up the call. Our last question comes from Kevin McCarthy with Vertical Research Partners. Day. I think you said at that time in early May that you were exploring multiple options for a new world scale acetic plant realized it's only been two and a half months, but can you provide an update there? Is that still an active ambition on your part? Yes, it is. I think what would be of interest to us is doing it in a way that I'm not dependent on new volume growth to satisfy. And we're we would like we always like to do these things in a way that the productivity contribution made by this investment is sufficient to carry the investment. So Todd is working hard to find ways and options to create scenarios where we can expand in a way that from a market point of view, it's incremental from an internal point a very high return and it's not totally dependent on what the gross market is doing. So yes, it's still a keen interest to us, Kevin, and and we're working hard. So since we get to point, we have more details to share, we'll do that. And finally, at the risk of beating a dead horse, want to come back to acetyls and, kind of the cyclical move or anyway, the move we've seen there. How would you care characterize that business relative to, your view of normalized earnings power normally when earnings double, let's say EBITDA in your case has doubled broadly over the last 2 to 3 years, you've got a 9 handle in the first half on the operating rate. Things started to feel pretty full. On the other hand, you've described prices adequate and you've point to some interesting and unusual environmental restrictions in China that really could have some legs. And so I guess I'm trying to parse out is the current level more of a new normal, in in your view or, above normal? And how would you characterize that? Well, I certainly think that the period that we went through the 12 to 16 period is is abnormal. It was abnormal as it reflected the subsea investment, in, in China. Particular in all these assets and just the crumbling of capacity utilization. And whenever you do that to any business, it gets pretty it just gets goofy. And so we had a lot of volatility in earnings and those things. I would say through that period of time though, Kevin, we were able to predict I think pretty actively where we are. So we see these changes as not being unusual. I know that may seem flipping to you guys, but We predicted this would happen. We've talked to we talked a lot about it. And every back in 2015, we talked about it. What we missed, I think, was probably 6 or 7 months. And that's what we missed in, or 8 months, but it wasn't we didn't miss it. So I think we're in a period where this business is healthy. That's how I would describe it. I don't think it's overpriced or it's over amped. It's healthy. And I say it because I think if you look at the largest in the world in China, it's still a marginal business for them. I mean, it's not, I mean, it's certainly profitable at today's rates, it's not crazy profitable. It's probably not even in the Chinese market today given the costs associated with it and the environmental concerns, even attractive economically for them to reinvest. So we think that's a healthy place and a natural place for it to be so, yeah, I do expect, I do expect this to change as we communicated in May. And I do think this is a 20 for us, a 20 margin kind of business. And I think for the in the Asian markets, it's, it's low teens to mid teens. I mean, I think that's what you've got. 5 or 600 basis points, 700 basis points gap between, between their world and our world. So I think, yes, I think we're going to be here plus or minus a little bit for some period of time. We'll now conclude the call. Thank you all for your questions and for listening in this morning. We are available at the call. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.