Q3 2019 Earnings Call
Greetings and welcome to the Celanese Corporation third quarter 2019 earnings Conference call.
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A brief question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Chuck Kyrish, Vice President Treasurer, and Investor Relations. Thank you Sir you may begin.
Thank you Christine good morning, and walking into sounds Corporation third quarter 2019 earnings Conference call. My name is Chuck Kyrish, Vice President Investor Relations and treasure with me today, our Lori Wright career, Chief Executive Officer, Scott Richardson, Chief Financial Officer, Todd <unk> Senior Vice President as a kill chain Celanese Corporation distributors third quarter earnings release via business wire.
And posted prepared remarks about the court order Investor Relations website yesterday after market close.
As a reminder, will discuss non-GAAP financial measures today, you can find definitions of these measures as well as reconciliations to the comparable GAAP measures on their website.
Today's presentation will include forward looking statements. Please review the cautionary language regarding forward looking statements what can be found at the end of the press release as well as the prepared comments document for making airports contending. All these materials have also been submitted to the FCC. Since we published our prepared comments yesterday well now open the line directly for your question.
Thank you we will now be conducting a question answer session due to time constraints, we ask that all callers limit themselves to one question and one follow up question. If you have additional questions. You may recall, you and those questions will be a dress time permitting.
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Thank you are first question comes from a line of Vincent Andrews with Morgan Stanley . Please proceed with your question.
[noise] sorry had you had you on a mute [laughter] could you give us a bridge I'm just looking at the the guidance for 2021st is your mid points for the full year [laughter] 19 in the last one would be [laughter], 13.4% growth.
Hi, I would be about over 20. So you could just help us bridged to the low and I understand the high end would require.
Some some economic improvement, we all understand what that would be [noise].
But then thank you.
Let me start with what we said last quarter, where we Brits kinda from the 10 50 to the 12, because I'm going to use the same at the same factors. If you remember when we were going from 10 50 to 12, we kinda said it was a third markets a man business growth a third.
I'm, sorry, a third productivity and a third from our cash deployment, whether that would be M&A our share buyback. So if we look at this year, excluding the impacts of clear Lake we feel like the year would end around $10.
And so if we add productivity to that that 50 cents. If we add another if we had the cash deployment to that again that couldn't be either M&A or share buyback. That's another 50 said that gets us to the $11. So the $11 that we reflected in that outlook for 2020 is assuming basically current market conditions.
Obviously, if we get any upside going forward from an improved demand environment our price.
That can move us towards the 12.
And as a follow up when we're thinking about engineered materials into next year.
The volume has been trending lower and you talked about you know de stocking last quarter and maybe this quarter. There was a a bit of residual de stocking, but yeah. As we enter into Fourq you should we start to see volume turned positive again and what type of volume growth do you think you can expect for 2020.
Yes, it for engineered materials I mean, we are up sequentially on volumes second quarter to third quarter. We saw the volume up about 3%. So the residual de stocking that we refer to was really pretty specific to Europe , where we saw autos declined another 15% quarter on quarter.
So that that's really specific I would say consistent with what we said last quarter, we really didn't see size a de stocking in China. In fact, we saw volume growth in China I'm in the U.S. stay flattish. So we think we were at the bottom of the de stocking last quarter. So really the residual de stocking was just in euro separated.
Your material volume up second quarter to third quarter quarter by about 3% going this is a fourth quarter I don't know that we'll see volume growth, we see some seasonality typically in the fourth quarter, we see China continue to grow in advance of their you know first quarter holidays, but typically in the U.S.
In Europe , we continue to sleep slow down so I don't expect volume growth third quarter to fourth quarter, but certainly we expect volume growth based on the project wins that we've had this year as who as well as just you know normal seasonality into first quarter next year. Okay. Thank you very much.
Our next question comes for line of just the cost cuts with JP Morgan. Please proceed with your question.
Oh.
Thanks very much.
Well sure how many shares did you buyback in third quarter.
[noise] Yeah, Jeff So we bought about $275 million worth of shares and that was that roughly a price I'm a little over between 105 in $106 a share. So that's kind of where we finished and we expect to finish the year at about a billion.
Colors of repurchases for calendar year 2019.
So I assume that means that you bought no shares since September right.
No we've been steadily buying shares that that since September you know prior to that we were more opportunistically buying them, but since then we've just had a steady pattern of repurchase.
Okay, great. Thank you very much.
Our next question comes from a line of Mike Sison with Wells Fargo. Please proceed with your question.
Hey, good morning.
What are you when you think about you know leveraged to maybe better times and <unk> and and the extra dollar is that that dollar to $12. Im sorry is the extra dollar for share to 12 kinda evenly split between the asked until chain any Yemen and and what do you think needs to happen in terms of those segments to started.
Get that extra.
Bush.
Yeah, Mike I think that's right you know the I would say, it's pretty much evenly split between Alcatel and he you know we don't expect any year on year growth obviously in acetate tow.
I think you know in out the till that growth of course, we're already assuming no impact from clear lake, but that growth really probably comes from tightness in the market and improved pricing I'm into next year and he I would say it comes from a volume with you know.
Just stopping and starting to move closer to a return to normalcy in terms of market conditions in demand.
Right and then it in terms of acquisitions given that is an area that yeah could boost earnings next year any thoughts on the environment size, you know where do you think the opportunities or are focused on going forward.
Yes. So if you look at you know our use of cash.
You know first our first priority is really organic investment and if you look of course. This year. We are up against 400 million for Capex next year that goes up to 500 million and that's really investment organically and ourselves in growth projects and productivity projects.
So that's good that's kind of the first use of cash next year M&A. We continue to look at everything bolt on acquisitions to transformational look we haven't found anything yet this year, we wanted to investing quite frankly, because we have a lot of people wanting to get 18 kinda multiples when we're in a 19 price environment.
So we're we're only got to do an M&A if it makes sense than its and its the right pricing it adds value to the shareholder and we just haven't found that so you know if we look forward into next year, we're going to continue to look for opportunities clearly our main focus is on the E. M side trying to acquire additional molecules are different technologies or additional geography.
That we want to be in but but quite frankly, we don't have anything lined up at this point. We just continue to look to see what's out there and talk to various companies that we think would be attractive [noise].
Got it thank you.
[noise]. Our next question comes from Atlanta, Bob Court with Goldman Sachs. Please proceed with your question.
Thank you good morning.
Lord could you talk about maybe some specifics on the supply chain improvements you've got teed up in engineering materials, what sort of efforts are you, making or skew some granularity on on exactly what you're doing there.
Yeah. So Bob really you know as we've grown our E M volumes and particularly after we had the acquisitions over the last couple of years, and and nylon and TB and a few other product line. We really found we were straining our supply chain system, because we've added a lot of skews we've added a lot of smaller volume.
Carry all and why you know this is good for earning it has been a strain on our supply chain system as it exists today, which is largely manual our excel spreadsheet based and so really let's step back and said, okay. What do we need to do right now to make sure we continue to deliver high quality products.
To our customers on time and so we've taken efforts over the last you know six to nine months really to strengthen our existing system. So we've added some people. We've added some processes to really to really continue to do it manually but to do it more effectively and more efficiently our next spring.
Days is really and that's you know that's kept us running well and kept us in good shape as our customers, but our next phases relate to try to automate that so we're looking at more I T overlay more use of for example.
Better forecasting using statistics versus a very manual process, we have an IP system, the handle skew better attie barcoding at our site.
Where we don't have it to make this all more automated and so that effort is going on now face to we're working with a consultant to really identify the systems and the the pathway to do that and that should be completed over the next 12 to 18 months.
Gotcha and could you give us on the acetic acid side, maybe oh.
Well look around the world in terms operating rates in and I'm, particularly curious in China. I know you guys had talked in the past about maybe seeing a few more plants there might come out of the market and help tighten things.
Does that stay on these days and I guess I saw your main rival there is thinking about adding a million ton plant in China. So what's what's sort of outlook you guys see there.
So I think about if you look over the last few years I you know we've seen a few plants come out for environmental one other reasons in China, we haven't really seen any build as we have we've seen a few people you know maybe crude capacity a bit but I'd say you know volume.
Supply has been flat to maybe slightly declining in Asia and really around the world. We also saw the announcement I'm, obviously that would take you know sometime to get built and maybe I'll ask todd's comment more specifically, but but generally I'd say, we've we've seen supply b.
Fairly stable now you know an 18, there was a lot of outages in the industry, which helped tightened supply a bit this year, we've not seen as many outages.
So you know going forward again other than our expansion in quarter like now the one that's just been announced a we haven't seen any other.
Builds going on and quite frankly, the economics for most people haven't supported to build the other than the kinds of things we've been able to do with with capacity creep and you know very economical builds versus greenfield build so talk to you. When you have all have taught Elliot work you know, we're tracking with our reconfiguration project and clear like occur.
Yes, we're adding about 800000 tons their unclear like by 2022, so permits in place.
Both for that as well as the level of expansion plan for clear Lake. So that tracks that will we think BV. The first world scale Best Technology unit that hits the market place in the near term. So we're tracking towards that day more specifically to your question today.
Hey, if you just look at utilization rates I think you were focused mainly on China of course 18, we saw utilization rates around the world push up in the 90% range both globally as well as in China, China fell down to the probably under 70% utilization rates for most of this year, we saw that nudge up towards the end of.
Q3, we would call utilization in China around 70, and then towards the end of Q3, probably around 75% to actually saw some improvement some of that was supply related due to some.
Some supply disruptions as well as improved demand prior to the Chinese national holiday, so little bit better trading conditions in China at the end of Q3 also saw pricing move up at the end of the quarter. I think the question now is that sustainable we're watching that of course as we as we're into Q4 and certainly looking for.
A better conditions into the new year really main focus on demand recovery.
Got it thanks.
Our next question comes from line of John Roberts with you B.S. Please proceed with your question.
Thank you and ask for Telus you drove down the inventories are the downstream projects to make up for the shortfall. It sounds like you plan on rebuilding those inventories why not just continue with low inventories at least into early next year, given the economic backdrop here.
You know so look we do have lower working capital. This year that is certainly helping us.
Typically we have lower demand for Bam animals in the fourth quarter for seasonality anyway. So that's quite frankly, why we felt comfortable driving down our inventory.
Well I guess, just the Choicepoint typically we see a good pick up in first quarter and there's lower raw material cost. The right now. So we still think it makes sense to take advantage that lower raw material cost and rebuild inventories to the extent, we can't in the fourth quarter and maybe John its taught again just to add on this the shift to derivatives has been in.
Intentional this year I mean, we saw opportunities to move about 5% of our acetic acid mix downstream to either vinyl acetate or go to our emotions and I think we mentioned the prepared remarks were up over 15% year over year. If you just look at our volume patterns downstream to out to those derivatives, we think that that's been a positive move that.
Allowed us to keep earnings up around under 90 million all year really since Q1, all the way through and maintaining margins above 20% on an EBIT as percentage of sales basis, so that intentional shift of derivatives. We think is.
The right call from an activation perspective this year as we saw a better opportunities in those those trading conditions.
And then as a follow up in engineered plastics, you cited both light weighting of traditional vehicles and ease as grew up both growth drivers here could you just remind us of the relative celanese content.
Typically a traditional vehicle versus a.
I don't know if there is one an average LTV so its content higher on the site.
I would say so the opportunity for content is higher on the E V side, because obviously you had the battery, which requires film which we provide a lot of there's also a lot more electrical connections in the navy vehicle than a traditional vehicle. So the opportunity for content is higher on E V.
But frankly, you know either sell very small percentage of the fleet. So we we have a we're happy with the amount of content. We currently have any veith, but you know it's still a small percentage. So I see vehicles are still highly important to us now and for the mix. Many years I'm you know the good news there there as we continue to have good penetration.
In auto we continue to increase the amount of content that we have in vehicles you might have seen the comment that we've grown more than 11% annual growth rate and the amount of kilograms per vehicle.
Now about two third of that actually comes from our M&A and that's why we did the M&A to acquire nylon and TV to have that opportunity to penetrate more in vehicles about one third from our legacy material, obviously volume as a metric. We're also very important on what is the value of raw materials were putting in vehicles. So because we want to be contributing hi.
All you hide margin.
Obviously polymers into vehicles. So we're looking at both but but again you know all of the trends lightweighting avoidance of pain because of emissions our order our durability replacement of other plastic for functionality. These are all important trends both in I see and easy.
Thank you.
Our next question comes for line of P.J. Juvekar with Citi. Please proceed with your question.
Yes, hi, good morning.
When PV no question on question on extra deals looks like you push more actually the into China and then in Western Award you've ordered more volumes tobramycin emotions.
Is that a strategy sort of going forward you had a similar strategy last quarter.
And what is what does the future of single client.
Talked about rationalization in Asia. So was the future of single blank, especially in light of the new capacity announced by BP. Thank you.
Yeah, So things PJ. So you know really our strategy an acid tells us to follow the money. So you know if you look at second quarter, we actually pulled volume out of China into the Western hemisphere, where at the gas and pricing was better we pulled it into them and other derivatives where pricing was better.
As Todd referred to earlier, we've actually seen an increase in pricing in Asia, especially here at the ended the quarter and demand for volume So actually move more volume back into China move I'm out of Europe , where we saw a real softening in the third quarter and a as we started to see softening in the Americas.
Move on him out as well. So we're really you know that is our business model, which is to have the flexibility and capability to move our molecules around between regions and between acetic acid and derivatives in order to maximize our returns and that's how we deliver you know pretty stable asset till.
Chain.
Returns.
And as far as Singapore, I mean, where you know we're still working through that obviously with the announced expansion and clear like we said, we'll take capacity out.
Of Asia, we are still looking to see how everything develops in terms of pricing in China pricing in Singapore, Obviously, IMO 2020, and the impact on pricing for for fuel oil could have an impact around that decision. So we are still preserving our options in both cases until.
We see where the economics lead us.
Thank you and a question for Scott.
Scott you due to 275 million dollar buyback.
You are on pace to about a billion dollars' worth of stock.
It looks like but that can acquisitions aren't quite there.
So.
And to give an update on the overall M&A strategy.
There are some talk about.
Right strategic splits or not improve transaction.
So can can you can you talk about that and generally sort of the ongoing consolidation and the industry. Thank you.
Yeah, Let me let me hit the buyback question first PJ and then I'll, let Lori comment briefly on M&A. So.
You know, we did $275 million in the quarter that was at an average price around $113. We did we've done $775 million for the year at an average price between 105 and $106, that's kind of where we stood and we finished the quarter. We expect to finish at a billion I said earlier.
You know.
We're going to be opportunistic with that cash flow, we are increasing capex organic investment is our priority.
For extra cash and we're taking capex up we're going to finish around 400 million. This year, we'll take that up to 500 next year, possibly even a little more than that as we have a attractive projects and that's always going to be our first choice. Then we look at bolt on M&A in this environment we.
Had not seen people really being overly willing to sell in a more depressed economic environment and so we've re purpose that cash towards buybacks and we'll continue to do that opportunistically.
Yeah, and transformational M&A I mean, I know there's been a lot in the press and many of you have written about it and you know taking certain positions I think correctly.
Many of you said you know you weren't surprised by discussion a transformational M&A and I think we've been very clear in here and Mark before me about you know we will continue to pursue whatever form of M&A is the most value added to the shareholder.
Look we regularly use advisors to help us evaluate options, it's an ongoing activity to for us that hasn't changed and quite frankly, there's really no change in our philosophy around whether or not it's attractive to split the company if at some point in time it becomes a.
Attractive to do a split because we've done other activities, we would consider doing that but it is still our opinion that to split the company as it is today I'm really wouldn't add value to the to the shareholder because of the synergies associated with the split and what we see is not much value uplift just from her.
I mean, a split short of some sort of other transformational activity.
Thank you.
Oh.
Your next question comes from lined up Duffy Fisher with Barclays. Please proceed with your question.
Yes. Good morning, just wanted to dig in a little deeper you called out a disappointing joint ventures in the EMS segment.
Can you kind of walk through Saudi in Korea, and Japan, and what are you seeing there. That's disappointing is it structural is it just macro maybe kind of to use some of that out.
Yeah. So you look I think the let me start with Saudi with our Evan Sina joint venture. We had indicated last quarter that we expected about a 10 million dollar uplift from Evan seen a this quarter versus second quarter coming out of the turnaround in Evan Sina, we actually only got about 4 million. So.
A couple of things there one is we had a little bit of residual turnaround expense that still hit the books and third quarter and the other thing is we had a GAAP tax rate adjustment.
That we booked that this.
Quarter. So we didn't get everything we wanted out I haven't seen a this quarter.
I'm.
Also I you know if we move to to the Palm joint venture as what I would say as you know as as we've really worked to move palm and as we've seen challenges in palm pricing with the downtime and autos our joint ventures had have suffered as well and maybe even more so than our own volume. So we've not seen.
The returns from though those joint ventures.
That we enjoyed for example, saying 2018, but I would say, it's generally reflective of general market conditions for the products that they make in the regions that they make a more so than anything specifically around the operations of the joint venture.
Okay, and then intro with the shutdown of the Mexican plant happening this quarter, what's the impact of that on earnings and then what should we see when we come out of that from kind of increased earnings on the back side and when will that hit will that hit squarely in Q1, or we have to wait a little bit for that to float.
Through.
Yes, the open Manuel set down at the end of this month as as we had discussed earlier you know there was about 100 to 110 million of costs that came with that shut down 10 million for personnel and another 95 million of noncash items, so really accelerated depreciation and.
Impairment, so we'll see those hit this year.
That shutdown and the savings that come with it going forward make up a significant portion of the 50 million of productivity, we needed to see to maintain flat earnings and acetate tow going forward. So what I would say is given that and the market dynamics I would expect acetate tow going forward so mix.
Year to look very similar to it did this year because these savings are already baked in to that.
Great. Thank you.
Our next question comes from the line of Ghansham Punjabi with Baird. Please proceed with your question.
Hey, guys good morning.
I guess first off back to the 2020 guidance Laurie how would you have is think about quarterly phasing as we think about 2020.
Related to that you know how are you thinking about volumes at the low end up guidance, how would that shake out by the by the to of course segment the AC.
[noise].
Yeah, So look I you know.
I wouldn't we haven't really looked at it by quarter. So I would assume quarterly volumes tend to follow what if it had been our historical patterns for quarterly earnings I wouldn't think that's much different we see some fourth quarter seasonality you know, we usually see some down in the first quarter for China, I mean, I would just looked at.
The pass really for how the quarters tend to break out we don't see that being very different this year I mean, obviously, we start to us we see the full year impact if somebody expansion projects. We've done so that has some volume uptick and.
The acetyl chain, but we should also start seeing some volume impacts as well some productivity impacts from some of the new projects. We've done an m. So the new compounding lines that we've just completed in Nanjing and few Joe.
So you know I would you know typically we see increases in E of kind of mid to high single digits.
Acetate, a little bit lower than that couple a couple of percent I wouldn't say that a lot different next year a lot of what were seen in terms of.
What's baked into the 2020 outlook is just you know similar market to this year, the absence of clear lake and relate productivity and cast deployments. So the things within our control.
Okay and then in terms of the you know de stocking comments, you made specific to the and Europe do you see that sort of phasing through as winter Fourq you or do you think still think that there's going to be some residual destocking us with the specific to autos for fourth quarter and yeah. Thanks, so much.
No I you like I really think you know if we look at fourth quarter. What we're seeing is pretty typical seasonality, we see I mean, China you know as an example, if we look at our order books in October versus July China's up about 2% that pretty typical that we see China come up in the fourth quarter.
We have good demand in advance of Chinese new year's a in the first quarter I'm on the other had you know in year. The U.S. in Europe were flat to slightly down across the sectors, which again is also fairly typical from a seasonal basis. So you know I don't really see a lot more de stocking.
In occurring like we said we thought it really in Europe as a result of the really severe decline in auto in the last quarter.
But we really every other signal is that we're really we've really seen the destocking occur in all the other sectors and so we don't expect destocking to occur in fourth quarter, but yet we will see some lower volumes outside of China associated with just seasonality both in asset sale that him.
Understood. Thanks, so much Laurie.
Thanks.
Our next question comes from line of Laurence Alexander with Jefferies. Please proceed with your question.
Good morning could you flush out sort of little bit more detail, what you're thinking about the longer term optionality for acetate tow.
Or or what we had to what degree the degrees of freedom. There are more limited than you thought initially.
And secondly can you update your thinking about opportunities to pull forwards productivity in working capital efficiency gains in 2020 2021.
Yeah. So look I mean acetate tow I think you know we feel confident going into 2020 of our ability to maintain relatively flat earnings.
We do see pressure on volumes as we've seen quite frankly at slowing down a little bit, especially in China, where in fact, China.
Recently, we've actually seen growth and in cigarette demand. So yeah, we do expect continuing volume and price declines in acetate tow, but with the ocotlan closer with other productivity, we still see and expect that to be able to maintain flat I'm certainly through 2020 .
Yeah, and then on productivity in working capital Laurence I think you know a lot of the investments that we're making as we increase organic investment.
A lot of those are tied to revenue generation, but it's also tied to productivity and working capital. So for example, we've talked about the need to invest more in engineered materials in Asia that improves our supply chain. It also lowers our overall inventory level. So a lot of this is very consistent with the investments that we're making we've we've aggressively.
And working working capital now for a while you've seen that reflected an improvement of free cash flow productivity is.
We've seen an uptick in productivity. This year, we expect that cost reduction productivity to continue into 2020 odd because we're really focused on what we can control what are the controllable actions that are unique to celanese.
They're going to drive the earnings growth from 19 to 20, because as we said earlier, we're just not expecting fundamental improvements in our end markets.
Thank you.
Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Good morning, you've indicated about a 500 million dollar capital expenditure budget for 2020.
I guess two parts could you talk through how much of that is growth versus cost reduction projects and maintenance.
And then more broadly yeah, that's about double what the company was spending from 2014 through 17.
Should we think of 500 as a new normal level for the company or would you expect that level to come back down in the out years as you complete your expansions in Texas for example.
Yes. Thanks, Yeah. So it is about double let me let me characterize it for you. So if we if I look at historically, where we spend we spend roughly 200 million a year for E. H S and what I call maintain margin projects so reliability.
Realizing of equipment things, we need to do just keep the current assets running and running consists are consistent with good safety standards and you know a meat and environmental compliance. So that's 200 million a year.
We spend another 200 million a year at hit like this year 200 million year in productivity and revenue generation projects. So things like the clear like expansion things like improving energy efficiency of boilers things that give us you know a high quality greater than.
20% return as we go up to 500 million all of that growth is really in productivity and rep jet. So it's the clear like expansion projects.
If we so you know I would just say 200 is kind of our base level run and maintain capital and then everything you see above 200 is really towards productivity and revenue generation.
Just put on that perspective, the our return on our total portfolio, including kind of those non return based projects is greater than 20%. So we still have great opportunity to invest in ourself and value added projects that will be a great return for the shareholder if I go past 2020, so 2025.
Billion. If we go into 20 123, we actually may see levels above 500 million as we look at our church.
Chinese localization projects building additional am capacity in China, other productivity and Rev. Gen products around the globe, but I would say kind of post that period of growth that we've outlined we would return to the proximately less the less than 400 million level of ongoing capital.
Great that's very helpful and secondly, if I may.
I wanted to ask you to just talk through the outages.
In a little bit more detail I saw on your management remarks last night that you had brought Singapore down for maintenance I think just prior to the incident at clear Lake.
Did you have other outages and.
What's your what's your latest thinking on when the C O unit.
Might restart a clear lake.
Yeah. So let me address Singapore first so Singapore was a planned turnaround the timing for the Singapore turn around in the duration of the Singapore. It turn around is tied to our C. O producers turned around and Singapore. So we only have one source of C O in Singapore, and they had to take that unit on turnaround on a planned basis and.
Not really accounts for the duration of the outage in Singapore, So I would put that into the kind of normal operational bucket of event.
Clearly clear Lake was an unplanned downtime we've been working through the impacts that outage as of today. You know methanol is back at full rates acid is restarted and and really partial rate and well be at partial rates until we get the C. O plan up VAM will be.
Before the end of the weak and we continue on our COO repairs, which will put us back at full rates you know sometime within within the fourth quarter.
Fantastic. Thank you.
Mm.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you good morning.
Lori Lord going back to BP is a million ton JV announcement, what do you think there we're seeing in China that you're not as you might rationalize some of your capacity in that region.
The outside the comment, but you know as we've we've looked at that I don't know that they're seeing anything we're not what we do know is they have the demand for that much acetic acid in their own derivatives system and apparently as we have done with methanol. Another they have decided that being more integrated along their value chain.
We'll give them greater value. So we wouldn't actually expect any of that acetic acid to show up in the market, we expect that to be consumed in their own derivatives and based on our view of a top may have more color on that yeah. David's Todd were just.
Studying the news and trying to understand a better I mean this was at least as far as we can tell in MW announcement at this point. So it's early days in the project. It will take some time to work through the details I'm sure.
All the work that would follow in terms of engineering, ultimately timeline or project as a said before we're pleased that we're on track with our expansion and clear Lake by 2022. So we think will be first.
With capability I think lorries right I think this is largely an integration move.
Upstream PX down through PA, and ultimately polyester to.
Service, the Chinese localized demand for polyester in the region. So we think it's largely in and integrated.
Announcement, it will have little effect on the merchant market.
Got it and just lastly on acetate tow any potential for a price increase given perhaps higher supply demand post closing closing in Mexico facility.
Yes, so we do believe in time as as we rationalize others rationalizing the industry that there will be potential for for price increase I mean quite frankly, what we see is for more transactional short term contracts, we have been able to push through price increases.
For some of our longer term contracts you know we've seen price decline. So you know it's about imbalance at the moment, but we certainly project going forward, while the continued to be tension around price, we actually think the price environment will be fairly stable and at some point in the future some opportunity push price up.
Thank you.
Our next question comes the line of a room just want upon with RBC capital markets. Please proceed with your question.
Great. Thanks, good morning.
Just wanted to go back to a the portfolio questions I'm in the past I guess you had you had noted that the dis synergies and kind of come down to around 50 million a year from your prior estimate of 100.
Have you continued to make progress on bringing those down and if so how would you characterize that now swing.
Yeah. So look we continue to always look at how we can do this but there's a certain amount of dis synergies, which is always going to exist. If your splitting into two companies you have to have stand up to management team you have to have to back offices. I mean, there is always going to be a certain amount of dyssynergy associated with that so maybe let me ask Scott if he hasn't.
The more specific comment yeah I mean.
You're right that trajectory of of statements that we've made in the past hundred down to 50, we continue to work at work on the tax side of things leakage et cetera. So we have brought it down below 50, but I would say, it's closer to 50 than it is to zero.
Great, Thanks, and just kind of understanding.
When you think about China or what's it going to take for you know what are some of the markers you're looking forward to see that there is a an improvement in primary demand or at least the stabilization you know it would it be inventory levels or.
Anything else that we should be.
Watching thanks.
Yeah I you know look I think you know as much as anything we look at price volatility I mean, we're anxious to get further pass this national holiday to see if demand returns.
Prior to Chinese new year's obviously, the same factors affecting the rest of the globe concerned about tariff concerns about global recession.
He's also impact China, but we were just looking for other signs of of sustainable kind of sustainable demand lift to occur I mean again, we saw an increase in Asia in third quarter in volumes and price.
It seems you know, it's it's not greatly improving at the moment, but it's also not greatly declining. So we'll see that is somewhat favorable, but we need some sustainability and the response, which is probably what we haven't seen yet.
Pat anything you want have not done I think that's right an asset deals. We just like Larry said, we look at order books on a on a daily weekly basis.
Supply demand utilization trends are critical as it affects the pricing environment raw materials of course will be a methanol to olefins MTO rates.
Your point on inventory levels I'm sure. That's the same across the whole to the company both.
Finished goods inventories are customer side, particularly I mean, so so all those classical markers as fundamentals are we track and watch.
All the time.
Thanks.
Our next question comes from kind of Matthew Blair with Tudor Pickering. Please proceed with your question.
Hey, good morning, the prepared comments mentioned in June was running at lower rates due to a request from local authorities was this around air quality and would you expect it to persist into the fourth quarter in 2020 as well.
Yes, I know you're exactly right Matthew so well, we had and went all of industry had was a request by the Chinese government to reduce rates for air quality purposes in advance of the national holiday.
Since then they you know when we went back and asked to have that lifted they were willing to do so I think reflecting on our long relationship with them and and their understanding of our business need. Since then I think thats, mostly been less lifted where most of industry in the fourth quarter. So look I expect is going to continue from time to time in China.
I would expect you know maybe it will happen again right before the Chinese new year's that tends to be a pattern.
So I think it will happen again right now, we're not seeing that being an impact on fourth quarter.
And the good news is we were able to ramp rates back up as needed. Following a clear Lake incident. So we we worked with the team there and certainly with the local.
Governmental were.
Allowed to run a full rates as we expected and that was that was helpful to cover the from a network perspective, a loss of the clearly capacity.
The only other thing to watch maybe late in the years the winter season heating season than we typically.
Depending on the.
The energy profile and sources for energy production as well as industrial activity there can be curtailment activity towards the kind of late November December timeframe, depending on various condition. So we'll watch that.
Sounds good Thanks, and then you're young project wins last year rose about 47% you're on your own similar pace. This year, but EM volumes are down about 5%. This year could you just help me reconcile those two numbers mean I guess that implies your your base business has seen some pretty.
Significant volume declines is there anything changing in terms of the the size of the profitability of the average project.
Yeah. So look I would say the size as the size of the average project. If you talk about volume is is less than it was and it reflects the fact that we're doing more project them more different types of projects I think it's also important to realize that look some you know these projects come in three buckets I mean, you have.
Some that are very long term return projects. So for example in the medical field and some of the auto you know some of these are projects that continue to pay out four.
Five plus years, and then you probably have another bucket that you know maybe you get one year from from that or maybe two years and then you have a number of them that are actually very transactional. So it a project that moves volume, but at the onetime move so not all of these projects are things that payout for five years and so what do you see is why we can.
And have up to 15% growth from M. projects in any years' time frame it could very well be that only 5% or something of those continue and then of course you have attrition normally from other projects rolling off as well as just other attrition. So you know I mean project wins as an important metric for us because just as how good.
We generating materials, but you know they are smaller this year because of the economic conditions and we are seeing kind of more attrition in the base with slower GDP and slower demand around the world. So that all comes into play, but we still think it's important because this is what's allowing us to show the sequential quarter on quarter grow.
With that we've shown on the last quarter, it's continuing to deliver these projects and as we referenced in our in our notes you know we had we had a lot of great projects. When this quarter now not all that volume doesn't show up this quarter. It shows that many of those were long term with the medical project wins, we had some auto project wins.
A lot of we have some fiveg project wins, a lot of those will show up over the next you know two to five years not necessarily next quarter.
Very helpful. Thank you.
Mhm.
Our next question comes from line of Jim Sheehan with Suntrust Robinson Humphrey. Please proceed with your question.
Good morning. Thank you how should we think about plant turnaround costs than 2020 versus 2019.
Yeah, Great question. So turnarounds in 2020, we actually see expect to be up about 50 million.
Overall, we have a number of big turnarounds next year, including our joint venture methanol plant in clear Lake some of our Palm unit. So these are big units that only come up for turnaround every three to four year. So we do have a significant turnaround workload next year.
But you know that's baked into our numbers the additional productivity that we're delivering will help offset that and that's already anticipated in the 2020 outlook that I gave you.
Thanks, and regarding the general motors or labor unions strike you know how are you thinking about automotive shutdowns and whether the impact. This this year it will be normal or above normal.
Yeah, you know so for the G M.
Specifically, that's not a big customer of ours, we didn't have a lot of exposure to G.M.. So we haven't seen much impact from that I'm. You know clearly there are other autos that would have had a bit bigger impact.
I don't know that we've seen that as a as a major impact going forward for us I mean, we tend to be spread across quite a lot. Obviously, we have a lot auto in Europe that maybe a bigger exposure.
China as we said auto actually has picked up recently.
No I expect some consolidation of auto in China, but again, I think we're well positioned for that.
Thank you.
Christine will make the next question or last question.
Thank you. Our final question comes from a line of Matthew Dale with Bank of America Merrill Lynch. Please proceed with your question.
Thanks for squeezing me in can you just walk a little bit through the buckets on the productivity gains at 50 cents, then because if I recall from Duffy's question. You had mentioned part of that savings is going to go to.
The savings from the closure in Mexico, and then you just mentioned part of that will go to offsetting the maintenance expense next year, which is already looking to maybe be offset by the.
$45 million and losses, you take this year I'm clear Lake so.
Where those 50 cents bucketing out and then does that mean, the net gains from productivity or less than 50.
Yeah, So well no no I say well didn't know the net Gabe. This is net gain its 50 cents. So this actually because of turnarounds and everything else. Obviously it requires a much higher level of productivity than that so this is net what we get a plus turnaround cost productivity et cetera. So so you know where does it come from.
So I get line as well as Lebanon as well as other shutdown that we've had and footprint management and reduction that goes into the productivity bucket. There's a there's a bucket in there which is we've worked very hard on energy and cost savings in energy like said boiler configurations things to help.
Lower energy usage that goes into productivity Theres also a raw material contracts and things we've done to buy forward, our do things with rise to manage our raw material cost versus the spot market that those for example, going to productivity. So I'd say you know those are the major buckets.
You know as well, it's just normal optimization of maintenance spend optimization of personnel, we've done a lot, which you've seen show up in terms of Rightsizing, our organization and reorganizing for the most productive organization you've seen some of the severance costs associated with that so those are all buckets within productivity.
Got it.
Okay, No I think that.
Okay and then so my last one I guess price was down about.
[laughter] <unk> percent sequentially and year over year in E. M. I think you'd mentioned PLM palm as being one part of weakness, but what are the other primary markets responsible for the softness as this.
Competition or deflation and raws and then on the latter comment where are you seeing the primary savings NTM as your spread to raws has improved.
Yeah, you know a good bit of it I would say is mix I mean in general we've been able to hold our price in a declining raw material market. So that that has helped us but there you know in a few of our materials. We've seen some mix impact you know for example last medical.
More or you know more lives or less lids more general do you I mean, so there's a few areas where that's happened, but I'd say, it's kind of more the mix. This year because in general we've been able to hold pricing. Despite a decline in raw materials across each of them.
And then I guess it was organic volume growth any M. What would you say or I guess, what the better question is how much did acquisitions contribute T M volume growth on the quarter.
[noise] said about 2% or something.
No. So volume volume growth on M. was up about 3% I would say most all of that is organic I. You know there wasn't a notable difference in terms of a acquisition growth.
Just thinking you're now you're all the acquisitions for the acquisitions, which happened a while ago. So.
Yeah, I was just thinking year over year, but I kind of square that thank you.
Yeah.
Oh, Mister car wash I'd now like to turn the floor back over to you for closing comments. They interesting yeah, we'd like to thank everybody for listening in today and thank you to those who participated as usual around after the call for other questions, Chris and you can close the call after that.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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