Good morning, welcome to the Celanese first quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Surabhi Varshney. Please go ahead.
Thank you, Steven. Welcome to the Celanese Corporation first quarter 2018 earnings conference call. My name is Surabhi Varshney, vice president, Investor Relations. With me today are Mark Rohr, Chairman and Chief Executive Officer, Scott Sutton, Chief Operating Officer, and Scott Richardson, Chief Financial Officer. Celanese Corporation's first quarter 2018 earnings release was distributed via Business Wire yesterday after market close. Slides and prepared remarks for the quarter were also posted on our website, www.celanese.com, in the investor relations section. As a reminder, some of the matters discussed today included in our presentations may include forward-looking statements concerning, for example, our future objectives and plans. Please note the cautionary language contained in the posted slides. Some of the matters discussed and presented include references to non-GAAP financial measures.
Explanations of these measures and reconciliations to the comparable GAAP measures are included with the press release and on our website in the investor relations section under financial information. The earnings release and non-GAAP reconciliations have been submitted to the SEC on a Form 8-K. The slides and prepared comments have been submitted to the SEC on a separate Form 8-K. This morning, we'll begin with introductory remarks from Mark Rohr then open up for your questions. I'd like to turn the call over to Mark now.
Thanks, Surabhi, welcome everyone listening in today. I'll begin with just a few highlights before opening the call for your questions. For the quarter, net sales rose 26% year-over-year 16% sequentially to $1.85 billion. With strong pricing and volume support, we are pleased to announce GAAP earnings of $2.68 per share adjusted earnings of $2.79 per share. Engineered Materials, Acetate Tow, the Acetyl Chain, as well as our affiliates, all reported strong results, continuing a trend that's been underway for some time. Adjusted EBIT margins expanded about 300 basis points, achieving record operating EBITDA of $553 million EBITDA margins of 30%. Engineered Materials reported net sales of $665 million, supporting record segment income of $182 million, driven by projects, acquisitions, and higher sales in Asia. Volume increased 19% year-over-year, adjusted EBIT margins for Engineered Materials came in at 27%.
Affiliate earnings grew 26% year-over-year to $54 million. We saw strong growth in Asia, and we commercialized over 740 new projects this quarter. The Acetate Tow segment income in the first quarter was $78 million, declining a bit year-over-year as unique carryovers in the first quarter of 2017 did not repeat themselves. The Acetyl Chain grew 32% year-over-year and 18% sequentially to report net sales of $1 billion for the quarter and record income of $253 million. Modest but consistent demand growth and tight regional supply dynamics helped lift pricing and generate the significant growth in earnings. Margins expanded to 24%, that's 400 basis points sequentially, with strong asset and derivative pricing in all markets.
For the rest of this year, we expect Engineered Materials to build on its success with more than 3,000 project wins, with additional bolt-on acquisitions, and continued growth in Asia. Earnings in Acetate Tow should step down slightly next quarter and remain at that level through the year. Consistent demand growth and business fundamentals through the Acetyl Chain should support earnings growth through 2019 and 2020. Given the strong performance in all these businesses, we increased our expected guidance in adjusted earnings per share to the 20%-25% range over 2017. With that, I'll now turn it back to Surabhi.
Thank you, Mark. I'd like to request all callers to please limit to one question and a follow-up. Steven, please open the line to Q&A now.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Laurence Alexander with Jefferies. Please go ahead.
Good morning. I guess, first of all, on the acquisition contribution to Engineered Materials, I noticed that you didn't break it out specifically. It's just embedded in the volumes. I think it was a few quarters ago, you spoke about how you expect acquisitions to scale up over time because they give you multiple shots on goal. Can you give us a sense for how much extra capacity you have in Engineered Materials, or what kind of investment cycle you need to do to support the volume growth you're seeing?
Yeah. Scott, you want to just take a stab at that?
Yeah. Look, along with those acquisitions did come the ability to easily expand capacity without much capital. We're in the process of doing that, and we still have some available. However, at the same time, we have a number of investments going on in both compounding and at least one polymer expansion that are underway this year, and we expect more of that in the future. We're doing both items, organic expansion and extending the capacity that we acquired through acquisitions.
That fits, Laurence, within the $300 million-$350 million of capital that we've sort of projected for the next several years, in previous calls we've had.
Secondly, can you update on your thinking on the Chinese environmental tightening and the related shutdowns? In particular, I guess, how you're thinking about the tailwind from 2018 into 2019 and 2020. Do you see it subsiding, or what do you see as the longer-term trend for the acetyls business?
Yeah. If you think about the acetyls business, you've got to take a long-term view, and you've got to think of slow rates of change. We have a business that is growing 2% or 3% per year, maybe accelerating a little bit, so maybe 3% or 4% right now, but that kind of percentages per year. If you look back at the cycle, probably in the 2011 timeframe, we peaked out in shell capacity somewhere in there. You had this big buildup in China, as you well know, Laurence. The 2008, 2009, 2010 kind of time period where money was free, and everybody wanted to build a plant, and they wanted to convert coal, which was also free in China. It was an easy conversion to make. Since then, capacity has been relatively flat, and you've seen that creep slowly build effective capacity utilization.
Imagine a 2% or 3% decline in that capacity over the time, available capacity. We found ourselves today at the 80% kind of range, on average, a little bit above that. We saw short term, short term being the last couple of quarters, some pinch on that. Maybe it's 83, 84, 85, something like that short term capacity utilization. When we look at China, per se, and the regulations that are going on there, and the host of those in all the regions that are impacted, we believe there's going to be 5% capacity reduction as that runs its course over the next three or four years.
Okay.
That kind of timeframe. We think you've got 5% coming off the top of that at that time. At the same time, you're going to be, from the bottom, taking away another 5% or 6%. There should be about a 10% uptick net net over the next three or four years.
Great. Are you implying that you need to add capacity? Just as a clarification.
I think incremental capacity, yeah, we're adding incremental capacity now, as you know. From my point of view, as you get into sometime in the next decade, you'll see capacity addition come on. It's a long ways away. Today, I think what I'm seeing is incremental capacity is the way to go. The other thing you can do is you can look at finding ways to bring new molecules to market. That's the kind of thing you're going to see happening now. The tightness is going to be with us for a while.
Thank you.
Yeah.
Our next question comes from David Begleiter with Deutsche Bank. Please go ahead.
Thank you, Mark. In Acetyls, to Laurence's question, what's the normalized earnings rate here, absent, obviously, Q1 benefited from the outages. I think you said, did you say you expect to see operating rates increase 10% in the industry going forward? Based on that, how should we think about normalized earnings power in Acetyl over the next two, three years?
Well, we're going to be going into a lot of detail on that in a few weeks, I don't want to steal the thunder of that. We don't have a normalized earnings in our own view of that business. That earnings should grow and should continue to grow in that business for a good while. A lot of people look at this business as being cyclical, I think if you really look at it on a capacity point of view, it's only gone through one cycle in the last 18 years by my math. Demand's been pretty consistent, and it was just way overbuilt when that happened. I think we're moving back to a high capacity utilization scenario. In that timeframe in the past, you would routinely see prices of acid at $1,000 a ton.
We're nowhere close to that kind of level today. I think you're going to see it continue to grow, David, as we get out through the next two and three and four years.
Understood. Just on Acetate Tow, Mark, is there a plan B now post the JV not going through?
Yeah, I think we got plan D too. We got B, C, and D we're working. Just we said it'd be flat. We're putting forth plans, and we'll share those with you guys to keep it flat through this next planning cycle through 2020. We'll share that when we get together in a few weeks.
Thank you very much.
Our next question comes from Frank Mitsch with Wells Fargo Securities. Please go ahead.
Yes. Good morning. Just to follow up on the Acetyls and the question about normalized and so forth. Do you have any sense as to, given the fly up, oh, first off, I forgot to say, hey, congratulations on your new role, Mr. Richardson.
Thank you.
Hey, what do you think the fly-up benefit was from the very tight market conditions in Acetyls was in Q1? Obviously, this $231 million blew away any prior. Would you say $50 million, $60 million, $70 million of a short-term benefit that you realized in the quarter?
I don't know if we've looked at it that way. I'm looking at Scott.
Yeah.
The machine produced that number, and if the machine wasn't in place and we didn't have flexibility, we didn't have adaptability, we were locked into long-term contracts at a cost-plus basis, I'm not sure what it would've been. It would've been a heck of a lot less than that number.
Yeah. Mark, this is Scott and Frank, I would just add to that really what's going on here is you do see the fundamentals improving, like Mark said, those fundamentals will be improving over the course of the next few years. You can imagine that even within those improving fundamentals, that you do get a little variability quarter to quarter. There's a little extra sitting in Q1 relative to where we might be in Q2, it's not a great deal.
Yeah, no, it's an interesting comment that you are expecting acetyl deals up in 2019 after setting up a very difficult comp for the first quarter. Obviously there isn't a great expectation for you that will continue to improve on the operating basis. Just if I could, free cash flow obviously was on the light side here in the first quarter. How should we think about the cadence of free cash flow to get to that over $900 million for 2018?
Yeah, Frank, this is Scott Richardson. We expect that to catch up through the year. What we saw in the first quarter was really just the timing of collections. About 40% of our Q1 sales occurred in the month of March, just from a timing standpoint, a lot of that collection pushes into April. Mark talked about the strength that we saw in Asia. We have slightly longer terms there, that plays a role as well. Scott Sutton talked about new capacity that we get for very little investment in our acquisitions. One of the things that we do is really optimize how we produce and run on those assets, which is kind of moving from what was a make to order model we had in those businesses when we acquired them, to a better balance between make to order, make to stock.
You saw inventory tick up as well. In addition, we had a little bit of increase in CapEx to support the growth in the businesses. Those are really the reasons for where the free cash flow number came in in Q1, we expect to catch that up as we move through the year.
All right. Thank you.
Thanks, Frank.
Our next question comes from P.J. Juvekar with Citi. Please go ahead.
Yes, hi, good morning.
Good morning.
I just want to go back to Acetyls one more time. I think you mentioned that, or you were hinting that this business should continue to grow into 2019, but in your prepared remarks here, you're saying that margins were 24% and you expect 20% margins for the year. That implies some give back in second half. Can you just talk about that?
Well, I think we're trying to range find these things a little bit. We had the 24% margin in the quarter, and that was up 400 basis points over the prior quarter at 20%. I think what we'd say is the normalized margin rate for us is between 24 and 20, somewhere in that for the year. I'm looking at Scott when I say that, but something like that. When you get past margin, you got volume, and so volume is a function not only of demand, but also if people are up or down and things like that. You could have a bit of a volume pull back as we go through the year and some of these units restart, P.J. That's how we kind of do the math. We're not contracted out on a volume basis, a take or pay kind of contract.
We're real time in the market, so we're trying to anticipate exactly what this market's doing with that. We also have turnarounds. We have six different turnarounds scheduled this year. We have a couple of them occurring and coming up next month, and that's probably a $30 million hit, that kind of thing. We usually don't talk about that too much, but those things happen and go through and we don't think very much about them, and I would urge you guys not to as well. In the long term, they don't really impact the numbers.
Okay. Now that the tow deal is called off, one of your competitors is dipping a toe into other products like fibers. I was wondering if you can talk a little bit about that and is there plans to shut down any capacity?
Well, we'll talk a fair amount about it at the Investor Day. What I would say is right now, no. There's some other folks that do a great job in fibers. They've been in a long time. We kind of got out of that business, so I think it's difficult for us to see running back in there. We have other applications that we're quite proud of that push us more to the polymer side and film side, and there's innovation out there. It's pretty cool, pretty interesting. We're working on the productivity things that we're planning, and we'll share more of that as time goes on. Collection of all that, we believe, plus strong performance in China and growing performance in China, we think those things wash out.
We'll be able to have three years or so of, no matter what the market does, kind of pretty stable earnings, flat earnings. There's still options for us to do other things. We'll share more of that with you. I think the important thing that you should hear from me is that as it relates to cash flow from that business, we don't see that changing over the next three years.
Okay. Thank you.
Thank you.
Our next question comes from Bob Koort with Goldman Sachs. Please go ahead.
Thank you very much. Good morning.
Morning, Bob.
Mark, when you guys contemplate strategy 3.0 for the EM business, do you anticipate you can continue to achieve those high single organic volume growth rates? What more do you need in that toolkit, either from a product or geographic
standpoint, can you talk about the staffing needs as you continue to grow that business so aggressively?
Well, I'll make just a brief comment and then let Scott kind of dig into that, if you would mind, Scott. If you look at that business and success that the team has had there, we've grown earnings, I believe, I might say in $70 million, $80 million to $90 million year-over-year for the last three years. You should think in terms this year of us being north of 100-plus in that growth, that's kind of the embedded rate that we have built in our model. We see that kind of continuing, if I can say that. This is a strong growth and strong contribution business out there. We believe that the project model is, the S-curve is nowhere near curved out, we have plans to overlay curves on top of that with things like translation.
We feel really strongly that that model is going to continue to generate that high single digits kind of growth that's out there. That's kind of a year-over-year basis, not necessarily quarter-to-quarter kind of thing. Scott, you want to talk about-
Yeah
thought process about where that business is going from a point of view of products and markets.
Yeah
any of that stuff?
Yeah, sure. Bob, Scott here. Look, that business really is set up to not only extend earnings but grow earnings further. To your question, what do we really need to be able to do that? Well, as you know, we have a pretty novel model there that matches up the robust market opportunity that we have, really with the broadest solution set in the industry. You'll see us do things like expand that solution set. Some of that'll be organic, but it could be inorganic as well. There are a few polymers that we're not experts in today that we can do that. We also have opportunity in other geographies where we may not have a giant presence today, That's a prime target for bolt-on acquisitions.
Look, the key to making this work is we have a great team running this business and operating in this business. That novel model is our intellectual property. That great team focuses on working on that model every day, improving processes that we can be globally connected and solve solutions around the world for customers. That's what we'll continue to do.
Do you have any metrics, Scott, you can share around headcount or product development, R&D? Obviously, if you're growing that fast, I assume it's got to be a burden on your internal staffing and growth there. Can you talk about how you achieve that?
Well, yeah. I wouldn't say it's a burden, of course. I would think more of it as a challenge. The number one metric we have is well known, number of projects that we get wins on. We'll get 3,000 purchase orders for new projects this year. What will go up is our commercialization rate. We brought that from a lower level up to almost 45% today. We are adding some resources, Bob, we also continue to get more efficient as well.
Thanks very much.
Yeah. I'll make a comment on that and build on what Scott said. The focus in on efficiency is what's made that model, it's been an element we've needed in that model to make it work with the organization that we have. Absent that improvement in efficiency, we'd start to top out that S-curve, we've not done that yet. What we're focused on now is other dimensions. Everything, I think, is the classic S-curve. The development phase, the growth phase, and the maturation phase. As we move up that curve in this machine, as it gets better and better, that machine, it's important that we find ways to translate more of these products, because translation is a whole other dimension of efficacy of this model. We'll talk about that in two weeks, how we approach that, how we lever success in one area to another area.
To be very honest, we're just scratching the surface on that. If I can say this, that's going to make our growth here happen without proportionate addition of resources, because we just get better and better at what we do, and it becomes easier for us to grow.
Got it. I look forward to hearing about it.
Yeah. Thank you.
Our next question comes from Ghansham Panjabi with Robert W. Baird. Please go ahead.
Hey, guys. Good morning. Mark, I was hoping you could kind of back up a bit and touch on the overall sort of macro. You call out China as a driver for both Engineered Materials and Acetyls. What about the other regions? How would you sort of characterize global growth as we sit today?
Well, from a very high level for us, the entire world is doing well. We have strong business in the Americas and improving footprints across the Americas. We have very strong performance in Europe and great innovation in Europe, great connectivity with all the major OEMs and more innovative OEMs in Europe that really drives a lot of growth not only in Europe and around the world. In Japan, we're seeing stronger performance, and we're seeing more connectivity with the Japanese OEMs inside Japan with our team, and that translates into business outside of Japan as well. You get into China. China just continues to improve, and it's classic material upgrade. A lot of work with autos there, a lot of work with consumer goods there, and it's all to make them better for their local market. We see every place doing pretty well.
Okay, just a second question. Last quarter, you pointed towards the Legacy Consumer Specialties segment being flat on an EPS basis for 2018. Do you still think that'll be the case in the context of the resegmentation of Food? Can you sort of update us on the EPS contributions from each of the segments, given your big guidance raise for the year? Thanks.
Yeah. I'll start that with a big hell yeah. We look at it as Acetate Tow, is what we call it, and we're good stewards of that business, and we've been saying we'll be flat for a couple of years, and we've been flat for a couple of years, and we'll be flat this year. We're able to manage that business in a way that we continue earnings in spite of the fact that there is this gradual decline underway. I do want to mention that business is a lot calmer today since we've kind of run through that capacity drop that occurred when the Chinese quit importing so much material. That's almost fully run its course. Now you see more of a normalized situation.
Yeah, we're going to be flat this year, and I think we can be that way for the next three years, which is the basis of our plan. You said the EBIT by segment?
Mm-hmm. Yep.
I'll take a stab at this. Scott, weigh in a little bit. I've already just told you we're flat. You got that in Acetate Tow, it's flat.
That's a pretty easy one to do. Flat for us is plus or minus $10 million, something like that. We're not that good, but flat is what we'd say that to be. If you look at the EM business, we've already told you 100+. That's kind of that business, and you get into 200+ in the Acetyl Chain business, and that's kind of how the math's going to work out for us this year.
Thank you so much.
Sure.
Our next question comes from Mike Sison with KeyBanc. Please go ahead.
Hey, guys. Nice quarter.
Thanks, Mike.
Mark, when you think about Engineered Materials, you've doubled the business since the last downturn, and you think about the pace of acquisitions potential, what do you see as the potential to grow this business over the next three to five years?
I'm going to let Scott answer that. Scott, you want to weigh on that?
Yeah. Hi, Mike. Scott Sutton. I think in terms of more acquisitions, there's a broad slate of candidates out there, and we have a very big pipeline, and we are talking to one to 200 over the course of 12 months that we put through a funnel process. You've seen us come up with and be able to match objectives. We said we'd do nylon, and we've done nylon. Now we're looking even at other growth technology initiatives that we have. For example, medical energy storage, these things. We'll be trying to find acquisitions that match up to those needs. At the end of the day, there's a lot of opportunity out there, Mike. It's about finding the best opportunity, and of course, we're going to pay the right value for these. We target around a multiple of 10. There's really not a cap on Engineered Materials.
You got to remember, we're call it 1% of global Engineered Materials business out there. There's plenty of opportunity, right? It's just a matter of us progressing on those.
If the 70, 80, 90, 100+, if you look at 100, if you just look at the additive factor of that is the base model we have in place today. We still have opportunity to make that work the way it's worked. We don't see that changing, Mike. What we've not talked about is increased optionality that we're getting as we go into business. The business is getting a bit tighter. With a lot of these Engineered Materials, the capacity's not long in them. It's getting to be quite short. We've got incremental expansions underway. We'll be adding more volume as we go through these next several years, producing more volume, which is a good thing. It's needed by the market. Very cost effective for us to do that.
We've still not talked about a bigger deal, and there's a two of those out there that we continue to play with. I think this business, if you lay a straight edge on what's happened in the last several years, that's how I'd plan it out.
Right. Okay. Great. In terms of your outlook for 2018 in Engineered Materials, I think I might have missed, but your first quarter organic growth was, I don't know what that was, but for the full year, it should be what? High single digits to maybe double digits for organic growth?
Yeah. Mike, if you think from a volume standpoint for the full year organically, it should be in the high single digits. If you think about what happened in first quarter, just think about it from a revenue standpoint. The acquisitions added almost half of that revenue growth, and the rest of that revenue growth was organic.
Great. Thank you.
Our next question comes from Duffy Fischer with Barclays. Please go ahead.
Yes, good morning.
Good morning, Duffy.
Question just on Ibn Sina, started up early this year. Can you flesh out how that's going to roll through this year? How long it'll take for that plant to kind of fill out? How much was just the step up in ownership versus, again, you increased operating rates throughout this year, and then does that anniversary kind of all the way through the first half of next year then?
Yeah. Duffy, this is Scott again. We did start up that Pampa plant expansion there last year. We've been withdrawing volume from that at a pretty good clip so far that supported our growth. It's not running at capacity, and it'll take through this year probably to get to that level. The earnings have stepped up a little bit, and they'll sort of stay at that stepped-up level through the rest of the year. Most of that coming from the increased economic ownership that we have there. It's not going to be a dramatic step up. There's even turnaround scheduled within that joint venture as well, but you'll see it similar to where it is in first quarter.
Great. Thanks. If you could just comment on the slide nine, you talked a little bit about free cash flow from that slide, but can you talk about just cash flow from ops, the big step down each of the last two years from that base of high $200s and what's eaten away at that cash flow?
Yeah. Duffy, it's really just timing for us. We see again, being greater than $900 million for the year, just what we saw from the strength of the business, particularly in the second half of the quarter. We're collecting that now in April, and we see that continuing as we move through the year. We should catch up as we move through the second quarter and into the third quarter and be back on that trajectory of being in excess of those kind of how we track quarterly, going forward through the balance of the year.
Great. Thank you, guys.
Thanks, Duffy.
Our next question comes from John Roberts with UBS. Please go ahead.
Thank you. Can you hear me?
We can, John.
Was the benefit from trading activity in Acetyls above normal in the quarter? Eastman didn't come back until the start of the quarter, I would imagine opportunities for trading were still high at the start of the quarter.
I don't know what your question is. What do you mean trading?
Well, I think you said last year you traded at least the equivalent of a world scale plant.
Oh, yeah
it was above average last year.
Yeah. I think our activity early in the year, early this year, was a lot more pricing oriented and our volume, we did trade some, we did move some third-party volume in that period of time. As we get into this quarter, still some pricing and some volume that's going on.
Okay. Then in Acetate Tow, you mentioned there may still be opportunities to extract further value. The Blackstone deal had operational synergies, but I think it also gave you a path to potentially deconsolidate down the road. Do you think you could still find a path to deconsolidate without some sort of merger deal?
It's a bit harder. I think, with EU, which is a real disappointment. I'll be very honest, if you look at it from an economist perspective, there's no reason for that deal not to occur. The European Union has some funny views on this concept called overlap, and they just didn't want to approve anything unless there was no overlap, which means basically you couldn't do the deal. I think we see a path where we could do a deal in theory and have it pass the European Union, but I think practically it's more difficult.
Okay. Thank you.
Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.
Thanks, good morning. I understand the first quarter free cash flow dynamics, but I just want to make sure I'm clear on, you've raised guidance, but the full year free cash flow, if I'm correct, you're still calling for the same above $900 million. Is that just a continuation of the issue that as you have higher prices in AC, you obviously have higher working capital from an inventory and receivables perspective, and you just have to get into a rolling period where that stays the same, and then you get the release of cash flow?
Yeah, that's the best way to look at it. There's really nothing fundamental going on that's of issue. We talked a little bit about the rise in inventory from the M&A integration activities. That's going to continue. We expect, obviously, to collect that. Again, there's nothing fundamental. Terms are a little bit longer given the dynamics we're seeing right now, because we have more sales in Asia, and we saw pricing move up in Asia, particularly through the quarter. Given the outlook that we stated for the balance of the year, I think that's how we see it flowing through. We don't really see a fundamental issue in cash flow.
Yeah. On an annualized basis, that's right. I think the short term as well, we'll spend a bit more on capital ratably right now than we had been the last few quarters. That was a little bit of a draw in the first quarter as well, Vincent.
Thank you. Just as a follow-up, I can't help noticing that oil's $75 again. Where would TCX become and where would you get that going again? Is it much higher than current levels, or how are you thinking about that, if you're thinking about it at all?
Yeah, we're not really thinking about it at all. I'm looking at the team, unless they're thinking about it and not telling me about it.
Yeah.
They look guilty over there, Vincent. I'm not sure.
Yeah.
Go ahead, Scott.
Yeah, it's interesting. Certainly, ethanol demand for fuel in China is up. There's still the questions over organic versus synthetic to get over.
Yeah. China can't meet their ethanol mandate. I think they're struggling with it, so that could surface some things there, but we're not actively pushing it.
Okay. Thanks very much, guys.
Thank you.
Our next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.
Great. Thanks. Good morning.
Morning.
Just to follow up on the guidance here, the 20%-25% EPS growth, is there a way to kind of characterize maybe how much is persistent, is Celanese's upside, or maybe the acquisition contribution or EM doing better than expected? I guess I'm just curious as to the mechanism as to this kind of coming back down. Was lower ethylene maybe a positive for your EM margins in Q1?
I think it's just a rule of thumb. You can't be too specific with your numbers when you're looking at big numbers like this. For us, broadly speaking, we've outlined that we're going to have a very strong year in materials. They're off to a good start, and we expect that to continue as we go through the year. That's that $100 million-plus kind of quantity. We've towed flat year-over-year, plus or minus $10 million or $15 million, something like it was flat. You get into the chain business, and the chain business had $100 million to $140 million kind of first quarter. I think we're $200 million-plus for the year. You're going to see that moderate a bit, but it doesn't mean our line business is not really strong.
That's subtle movements in pricing and incremental volumes and things like that will moderate. We got a bunch of turnarounds to do on those. Each one of those posters in the offer are $10 million to $15 million, and we have about six of those. That'll all be plugged into that scenario that rolls out as we go through the year. You should expect a stronger first half than the second half, but you should also expect that the next year is stronger than this year.
Yeah. Mark, I would just add to that, look, the business strategies are working and materialize, and there are good, concrete fundamentals underneath all three businesses, and that's why we're confident in saying that this will continue. The Acetyls team continues to implement their model, and so does the Engineered Materials team. You see that moving forward.
Okay. Thanks. That's helpful. On the acquisition pipeline, you mentioned compounding earlier. Are there any other particular substrates or capabilities you're looking for? Do you still have the plan to use the other half, maybe for buybacks, or maybe you can just reiterate your plans for cash there?
Yeah, on the buyback question, we haven't really made a decision on that. We'll share more in the weeks ahead with our plans on share buybacks. That's in part because we see lots of M&A activity theoretically in front of us, so we need to sort through that just a little bit. I'd really not say which molecules we're going after and things like that in the M&A. What I will say, just to echo what Scott has pointed to, is that we tend to look at initiatives, and that can be a polymer-based initiative, which (fell into heat) and fell into nylon. That was this big initiative we've been on, and we've gone from being a small player in there, I think, to perhaps the largest independent compounder of nylon. If not, we're pretty close.
That move we've made, and we now have moves like that underway in medical and energy storage and things like that. We'll see how those unfold as time goes on.
Okay, thanks.
Thank you.
Our next question comes from Jim Sheehan with SunTrust. Please go ahead.
Thanks. I'd like to clarify on Acetyl Intermediates. In your discussion of trading activity, was there a one-time trading gain or loss in the numbers for this quarter?
No, the answer to that is no. What I will say is that we have this globally connected model that we go out and activate the network, and we measure how we're doing and how we're growing by how we activate that network, and we continue to increase those number of activations. There's no specific kind of one-off trading gain or something like that. I just want to be clear about that.
Thanks. In Engineered Materials, you talked about how you see margins progressing over the next few quarters. When you're adding in acquisitions, you've talked about those being dilutive. Do you expect to completely offset that dilution and to actually expand margins? Also with the resegmentation, how should we think about the margin runway in that business?
Well, look, as long as we're running bolt-ons, you can expect that margin to be around 19%-20% without the equity income from the joint ventures. We get a little bit of dilution, but we're recovering from dilution from previous bolt-ons we did. If we weren't doing bolt-ons, you'd see that come up a little bit. As far as the resegmentation, where we put the food ingredients into the Engineered Materials business because the project pipeline runs in a similar fashion, you got to think in terms of maybe that's 5% of the overall Engineered Materials business, so it's really not impactful.
How dilutive is that business to the segment?
It's not dilutive. Similar.
Thank you.
Thank you.
Our next question comes from Hassan Ahmed with Alembic Global. Please go ahead.
Morning, Mark.
Morning.
Mark, question on the AC side of things. Look, you in your earlier remarks, talked about volume growth being quite robust in Q1, sort of not being as strong over the next couple of quarters. Just trying to get a sense of what sort of volume growth we should expect, because it seems that you guys generated 5% year-over-year volume growth in Q1, which kind of seems relatively normal. I'm just trying to understand on the volume front, what we should expect from the remainder of the year.
Yeah, I think we believe that 3%-5%, as you look out over the next several years, should be a pretty average growth for us. I'm looking at Scott.
Okay
I think that's right. Quarter to quarter, that can be up and down, but that's where I think we are. If you look back over your shoulder, it's been more like 1%-2%.
It doesn't take much to make a real difference. We have a number of these three incremental expansions we're doing. We can secure that volume, and we can also build into that volume in ways we get a very high return. We're seeing that volume picture for us, and we'll share more about that in a few days. A big part of our continued growth in earnings in this business.
Understood. The methanol side of things seems to continue to be quite strong. Price is high, supply-demand seems to be relatively tight. Any further thoughts about a potential second facility in the U.S.?
Well, we continue to look at it. I think it doesn't hit the priority level of these other things we're doing right now. It remains a very viable project. We'll just keep you guys posted on our thoughts with that.
Perfect. Thank you so much.
Thank you.
Our next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead. Mr. McCarthy, your line is open.
Sorry, I had you on mute. This is Matt on for Kevin. Just looking at the proposed Chinese import tariffs on plasticized cellulose acetate. I know you have four tow facilities under JV with CNTC locally in China. I don't, I guess, expect it to pertain to you specifically on a company basis. What do you anticipate will be the fallout on an industry level, if there is any?
Hey, Matt, this is Scott Sutton. What I would say is you're right. Most of those joint ventures are back integrated into acetate flake. We supply a little bit in there, but we actually supply it from outside the U.S. from another facility, we're not impacted. Other acetate flake does flow into China there could be some impact yet to be seen. I would say on that, though, too, Matt, is that the volumes are pretty low now for everybody. I wouldn't get too worked up over that.
Yeah. It's going to come down. As a follow-up, I guess, you buy a fair amount of ethylene for your VAM and polyethylene production. I think we kind of estimate you somewhere around like 1.25 billion pounds-1.5 billion pounds a year. Ethylene prices are at historic lows. Was that a tailwind for the quarter?
No
Do you anticipate this to be larger for 2Q? Are you a spot buyer or a contract buyer?
No, if you look at it around the world, you're right. We buy a lot of ethylene in Asia, we buy a lot in Europe, and we buy in the U.S. as well. U.S. has a lot of pass-through ties to raw materials, most of that's covered in pass-through. We don't see a lot of impact of ethylene, especially spot ethylene in the U.S., doesn't really have much impact on us.
Okay. Thank you.
Thank you.
Our next question comes from Aleksey Yefremov with Nomura Instinet. Please go ahead.
Good morning, everyone. Thank you. Coming back to Engineered Materials, where do you stand in your efforts to raise prices? I think you were pursuing that earlier this year. Are you continuing to raise in the second quarter? And also, where do you stand in realizing the full benefit of the recent acquisitions that you made? What's the level of accretion incrementally in terms of EPS or margin that we can see later in 2018 or in 2019?
Yeah. This is Scott, Alexsey. In terms of pricing, we're having some success raising price. You can see that sequentially prices has come up and we've just announced another round and are in the process of implementing those prices. And we expect to be successful with most of those increases. Second part of your question was what topic? Remind me again.
Sorry, yeah. Recent acquisitions in-
Yeah. Sorry
Engineered Materials. Are you fully realizing the benefit of integration or is there some incremental benefit?
Yeah. There's incremental benefit left. Maybe we're a third of the way through with integrating those three acquisitions. I won't give specific numbers, but remember we went back and said that, look, one or two of those added $0.10 a share in the first year, and another one maybe added $0.05 a share. Everything's progressing to plan. At the end of the day, those will double, triple those values over the course of the first three years. That's the way to think about it.
Thank you.
Okay.
Steven, we will now conclude the call. Thank you for your questions and for listening in this morning. We are available after the call to address any further questions you may have. Steven, please close the call.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.