Q4 2019 Earnings Call

Greetings and welcome to the Celanese fourth quarter 2019 earnings conference call. At this time, all participants are not listen only mode. A question and answer session will fall. The introduction if anyone should require operator systems. During the conference. Please press star zero on your telephone keypad headroom under this conference is being recorded.

It is now my pleasure to introduce your host Chuck Kyrish, Vice President Treasurer, and Investor Relations. Thank you you may begin.

Thank you Donna welcome to the size Corporation fourth quarter 2019 earnings Conference call I've, Chuck Kyrish, Vice President Investor Relations with me today are Lori Reichert, Chief Executive Officer, Scott Richardson, Chief Financial Officer, and Todd Elliott Senior Vice President after till chain Celanese Corporation distributors fourth quarter earnings release.

Business wire opposed your prepared remarks about the quarter on our Investor Relations website yesterday after market close as a reminder, well discuss non-GAAP financial measures today, you can find definitions of these measures.

Reconciliations to the comparable GAAP measures also on our website. Today's presentation will include forward looking statements. Please review the cautionary language regarding forward looking statements, which can be found at the end of the press release as well that her comments documents for make airports can take all these materials have also been submitted to the FCC.

Because we published our prepared comments yesterday, well now open the line directly answer your question.

Thank you at this time, we will be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad a confirmation tone indicate your line is in the question Q you May press star to if you'd like to remove your question from the Q for participants using speaker equipment. It may be necessary to pick up your handset before pressing.

Starkey is.

The interest of time, we do after you limit yourself to one question and one follow up you may rejoin the queue. If you have additional questions. Once again that is star one to register questions at this time.

First question is coming from Vincent Andrews of Morgan Stanley. Please go ahead.

Thank you and good morning, everyone. Lori if you could just clarify on the outlook for yeah for 2020, I'm not the 10% EBIT growth. Yeah. There was a lot of commentary in your your comments about you know your differentiated volume performance from the innovation.

And I just wanted to get a sense of how much volume growth youre expecting in the year and how much of that will contribute to <unk> organic growth towards a 10% target first is the self help measures that you also discussed.

Thanks for your question Ben.

So maybe just to clarify Oh, let's say for E. For next year is we are saying, 10% EBIT growth, but there will be an offset to that because of the so offset to that because of the turnaround load next year, any and specifically the bishop palm turnaround.

So that 10% EBIT growth really comes from a couple items. One we do believe we're at the end of de stocking. So we're seeing more normal why.

The order rate. We are also sees the benefits of the project, where those from 2019 and moving into the wins for 2020, So project wins from our existing customers, but also new project wed as we called out in the script from things like electric vehicle and.

Fiveg.

Further on the Tempur said, he but well see some help from raw materials, and specifically really the raw material help that occurred in 19, but we didnt see in 19 because of the only to our supply chain inventory. So we should start to see some help from raw material as we move forward and then of course additional productivity, which is going.

He took her in a on the has occurred for example, Lebanon shutdown, which happened last year are in 29 Teen and then this year, we've already announced shutdown of our compounding facilities and Shelby.

Which will have be some helping 2020 and in addition, we have the help from some of our new capacity. That's come a lot of for example, the four lines, we started out in China and the second half of last year, which will help with our supply chain costs and being close to our customers in China.

[noise] and as a follow up if I could just ask you mentioned.

In relation to the clear Lake shutdown in the in the fourth quarter that acetic price you didn't respond to that but you also noted that you were able to that's enough to your volume decline. So I I sort of see attention between those two things and I'm. Just wondering if you know how you how you waited you know continuing to ship volume versus maybe.

Flooding the market tighten up little bit and seeing improved margins and just how you thought about that in terms of the overall profitability the segment.

Yeah, I took a look like so I mean, you know really good work by the opposite Hilti team to offset the impact of the clear Lake outage in the fourth quarter I'm, a little counter intuitively, because we had lower pricing, we didnt see as much impact from the shutdown in clear Lake you have to remember all the most of our volume.

It goes from the U.S. towards Asia, So, we actually weren't shipping as much that way so that that's actually a bit about help although it costs more to produce in China. Obviously, so when you put that altogether, what we saw as with the ship downstream to derivative moving more to them in a mall trends keep me what what volume we.

Did have in the western hemisphere, where the pricing was somewhat better we're really able to offset the impact of clear lake, but we did see it in the pricing, but there again you know the team was also are able to offset you know nearly 50% of the pricing impact on the year again due to the move to the western Hemisphere and do it.

To the moves with the Rabbit says they said into a loss trends into Bam it'd be a.

Thanks, so much.

Thank you. Our next question is coming from John Roberts W.P.S. Please go ahead.

Thank you do you have a special strategy review underway as we speculated in the press or do you just have your normal ongoing strategy activity.

So we've actually gone through a big strategy exercise I'm in the second half.

He died team this is really as it relates to our core businesses. So we're going to do any a signal chain you saw some of that in the mall since announcement. They came out I'm, obviously, the low tech acquisition as part of that strategy as well to strengthen and other extend our at the tail chain.

It is in engineered materials, where you saw some of our comments around a move towards Asia. Localisation for example, which is about getting closer to our customers and shortening our supply chain with our customers.

And acetate tow is about looking for next generation uses about your lasik acetate as we.

The the decline by end of the total.

Industry and being able to news like into other applications. All of those are outcome of that strategy review, which we undertook in the second half of my team. So we won't be continuing to review that with our board here in the first half of the year and anticipate an investor day sometime.

Hi, mid year, where we'll be able to share that strategy with you all in more detail, obviously that strategy and anticipate some bolt on M&A again, he saw that with you attack I will off the table that strategy is very focused on self-help organic investment organic use of cash.

To grow our own networks, and our own capability short of anything that can happen without missing.

And then secondly in engineering plastics, how much did lower raw materials help the earnings on either a sequential or year over year basis.

So really raw materials 18 to 19, we didn't see much help in in 2019, we expect to see more that help rolling to 2020 and that just reflects the long nature of the supply chain in engineered materials, where you know it has to be polymerize than it has to be.

Compounded that had seemed to the customer so that is a fairly long supply chain. So we actually expect that helped to show up more in twentytwenty.

Thank you [laughter].

Thank you. Our next question is coming from just the caucus with JP Morgan. Please go ahead.

Hi, Thanks very much.

If if you had to compare your net turnaround costs and 2020 with your net turnaround costs in 2019, who or what would be the 2020 benefit for the what's the difference.

As best as you can tell.

Yeah. So in the impact from turnarounds in 2020 is a total of about 70 to 80 million and that 50 million more than we had in 2019, so be it to hurt and Twentytwenty, a $50 million, which we will offset through it.

Additional productivity another action and about that fully baked into our plan.

So in your in your materials, you talk about an aspiration of $11 a share an earnings.

To reach $11 a share you've got to grow your EBITDA by I don't know 140 million.

Given the current business conditions, you know if if you had the size that 140 to reach her aspirations where were to come from.

Yeah. So let me, let me kind of do that walk. So if we look at that $11 that we put out there as as the challenge we put to the organization. If we start I'm just gonna do it on earnings per share because it's easier I'm sure. We start with the benign 53, we will pay an uplift for next year.

15 to its call. It 15 to 20 cents, because we won't have the clear like answer that impact so that gives us right to the 970 range. We had another 50 cents due to share buybacks and catch and other forms of cash deployment.

And so that's another 50 says that gets you to 10 20, we have put did 50 cents of net productivity. So that also offsetting 35 cents a turnaround so to put in perspective, that's about $125 million of net productivity, which we have to achieve to do that we're targeting between 200 and.

250 of gross productivity. So we can offset price increases energy variations et cetera, et cetera, but so we think that's very achievable consistent with what we've been able to do in the past those pretty sensitive gross or net productivity gets us to 10 70, and then we need about 30 cents more.

Of improvement I wasn't in demand I mean, really we lost about 30 that just in fourth quarter of this year and that was really due to be stronger than expected seasonality and engineered materials as well, it's a really dramatic price drop off that we saw in Athens Hill.

Well I'm really into some are both of those occurred in December. So if we just returned to kind of the first three quarter level of demand and pricing in our businesses. We will recover that thirtyth that so that's how we get to the 11, obviously, we're not going away for the market to get that back to watch. So we're also trying to identify.

Is there other steps or other productivity measures that we can take to author recover that 30 cents and make sure we got to 11.

Okay, great. Thank you so much.

Thank you. Our next question is coming from top court of Goldman Sachs. Please go ahead.

Thank you very much.

During the prepared remarks, you talked about operating rates in a secret I guess going in a declining 7% globally.

Last year can give us some sense regionally how that looks and then what your expectations or in 20 Twond.

Yes, so if we look at really utilization for the industry you know full year year on year 918 to 19, we saw almost a 10% drop in China utilization no globally that was.

You know just over 5% and so most of that what's coming from China and most of that in a in 18 to 19, what's coming from demand interestingly in the fourth quarter. We saw you know that similar kind of 10% drop just third quarter to fourth quarter in China and that was really due to less the outage as it wasn't.

The drop in demand third quarter to fourth quarter. It was because there are less outages in China in fourth quarter and that really put us in an oversupply situation, which again. We offer then saw reflected in pricing globally fourth quarter was a little under 10% again, mostly driven by China, a little bit driven in demand in other parts.

Oh the globe.

And I guess in the past maybe your last invest yesterday, you guys had talked about expecting some more.

Take out in the industry, some more capacity reduction I.

That was that a path then relative to your expectations and is there. Some left that you think might come out of the market.

Correct.

Yeah, you know, it's it's a great question and one frankly, you know we think about a lot I mean, obviously, if you look at the amount of supply that was in the market in the fourth quarter you'd have to say not much capacity has come out in China. However, we believe China remains committed to their environmental targets and.

So we still expect some to occur in the future, but we're just not we just didnt see that much due 2019 God. You then yeah I bought and try to late I would add that you know that utilization dropped over the course the year about 7% or you know that is to leverage point combination of some demand over the course of the year.

More availability throughout the year relative to to 18, certainly well we think the fundamentals are there. If we took to the point also on E.M. similar to asset deals. If we get a kind of normalization of demand patterns. As we go into the new year 2020, we think that that utilization rate will will come right back into that mid 80 range on a Boe basis. So.

Oh, we already saw improvement in pricing to start 2020 in the first quarter off of December levels that already started to move up I'll need to see that through over the course of Q1, given the [noise] given the conditions in front of US there one other point that I think it's important to dimension Wallace either cast remains a key product for us very.

Very significant in terms of our position, we're growing our derivatives as well and you think about our volume profile year to year, we were down about 15% on acetic acid volumes in 19 versus 18, but we didn't stop at that point, we actually talk about 6% more of our acetic acid and move that downstream today.

I am into a motion. So when you look at the volume profile of Ammon emotions. They were actually up 8% night team to 18. So we've actually intentionally moved our mix regionally western hemisphere, as well I wasn't hemisphere, a focus as well and that'll that'll allow us to ads resiliency and.

Actually creates more diversity and then the stuff, we just announced yesterday with the you'll have techs acquisition has another lab on that the Ahmet shaner, another Oh, Lincoln that chain, which will allow us to take our emotions business into now a powders.

Product line and provide more resiliency as well going forward.

Got it yeah, that's waterborne and I also want to thank you guys. The continued a way you present your earnings is very efficient and appreciate it and we're hopeful maybe your peers won't start doing the same thing. Thank you.

Thanks, Bob.

Thank you. Our next question is coming from Duffy Fisher of Barclays. Please go ahead.

Yeah. Good morning, maybe another way to hit the acetic acid in the last four or five months or have been two very large announcements for new capacity. So you had CPC C plus BP and then reliance now I know we've had a lot of announcements over the last decade that haven't come to fruition. If you were handicapping. These two.

You know kind of helping US you know with our supply model going forward, how likely are these and you know kind of in what timeframe should we expect them to come up do you think.

Yes so.

Look Debbie.

If I look at the current economics around asset deals I think it doesn't support new investment. So you know really have to consider what other motivations. These companies would have to build out to see gassing capacity and and I'll ask Todd to comment on that but I would also say from experience any new capacity being announced now it's probably a.

Three to five year period to design constructs get permits et cetera, depending on the location, but you know I'd say a three to five years before we would actually be able to see any of that capacity come online Todd Yeah, Doug I think that's right.

On the first when you mentioned, we were asked that question last quarter and continue to see that as an integration step associated with the chain to polyester. So it's in our view. It's it's just integration move ins probably multiple years down the road.

Okay and then.

A question around it'd been seen as so after the expansion there one how has it been seen a run in the interim and then to do you see any change in the ownership structure with the Ramcos investment and Sabic.

Yes, so I haven't seen a course had a big turnaround this year that hit our earnings this year by about $30 million.

But that's a normal turn around and I think operationally, we're happy with the Evan Sina operation. So far we've seen no real impact from the proposed you know the acquisition of saw back the ownership change to Saudi Aramco.

I I don't anticipate that will really change anything and we certainly haven't seen anything yet.

Great. Thank you guys.

Thank you. Our next question is coming from Mike Sison of Wells Fargo. Please go ahead.

Hey, good morning.

Right.

But when I you know if I take a look at adjusted EBIT for the assay they'll chain in the fourth quarter and even add back clear Lake <unk>.

And annualize it it's a little it's below the 750 800 million.

But you talked about prepared remarks in terms your earnings.

Level that you think is sustainable. So I guess is is that kinda the outlook for 2020 to be in that range and then if so how do we sort of improved from fourth quarter levels.

Yeah. So if you look at just fourth quarter, Mike I mean, you know two factors clear you know so clear lake $20 million and then typical seasonality in the Seattle is $20 million to $30 million. So I think if you add those back in you pretty quickly get us.

Back to that 750 to 800 million dollar foundational level that we believe we're at an asset pill.

Okay, Great and then you know I think earlier, maybe in the fourth quarter, you know given where your stock was that the thought was that the portfolio made no sense to stay together.

Where I'm a little bit far from that level. Unfortunately, now so any thoughts there and in what you think needs you need to do to get a sustainable.

Appreciation for the portfolio that you have.

Yeah, I like you know I agree we still think it makes sense to keep it together a at this point because of some of the dis synergies associated with Bloodiness I think we see the whole market down right now so it's kinda hard to say you know, where we'll end up if we see.

Some turn around a as we go yeah, we're actually quite excited and optimistic about 2020, we think we have a good path laid out in front of as we think we'll be able to continue to show the potential earnings capability and a high multiple capability of this business as we move through 2020, we're also really excited.

About our strategy for the next six years and the earnings growth potential associated with that strategy again based on things under our control which is.

Organic capex investment and productivity. So we think that's continues to be a really high return business. We think as we move into 2020 about will be more recognized by the market and you know just ask you guys to kind of watch this space.

Great. Thank you.

Thank you. My next question is coming from P.J. Juvekar part of Citi. Please go ahead.

Yes, hi, good morning.

No one up your competitors called out my long pricing that's quite weak can you talk about your nylon business.

What you're seeing there in terms of Bryce involved with them and how much of a pure Ian business is more based polyvore like my long what is this how much is sort of specialty.

Yes. Good question PJ I, if you might recall back I think it's the second quarter earnings we actually did call out softness in nylon pricing and demand back and then and and possibly we see it sooner because we don't polymerize, we you know we.

Hi, polymer and we compound nylon. So we were seeing the softness back in mid year frankly through the second half of the year, it's been where we expected it to be.

And so you know that maybe the difference between us and our competitors I would say again, if you look at our EPM business you know a third of its really highly differentiated kinda were uniquely spec Dan I started differentiated where may be worse back then with someone else, but they'll differentiated and then in the third is maybe more towards commodity.

The army two type product I think that's the best way to characterize our EPM business and we constantly work to minimize that last bucket and moved things into the more differentiated space, which specifically the nylon is what we've been doing.

[music] typically.

You may resume.

[noise], but can you hear us.

Yes, yes weekend.

Did you went down those moves or sort of good yeah. Okay.

Go ahead, Lori PJ, where did you lose that so I know.

I think you were talking about a one third unique one for different you did one third of commodity.

Right and if so what and then what I'll tell you know specifically to our nylon since that's a more recently acquired business and I think I've talked about this off a little bit in second quarter. What we found with that acquisition is so they tend to have more commoditized nylon and as we've gone through the <unk>.

Last year and a half we've been working to transition those two well using our project model to transition that is becoming more differentiated so it will be more insulated to the market demand like we see kinda two thirds of our portfolio. Yeah. PJ I think it's it's important that last bucket Lori talked about I mean as.

Isn't that we play in that standard space, because you know a lot of customers you know our buying a wide variety of UBS different polymers and grades for various applications and so having a presence in that part of the portfolio is very important to enable really that higher margin part of this segment.

Thank you can you talk about the acidic acid cost curve.

Because I think you think you start to did go to advantage of that Costco, but moving downstream or moving products around the world.

Can you just talk about your observations on the cost girl. Thank you.

So there's a couple different aspects of that P.J. I you know the first I would start with is you know the vast majority of our acetic acid is produced in clear Lake and the reason for that is the cost advantage, we have with natural gas pricing in the U.S.

So I think that's the first piece and clearly you know that was a little bit of an impact with the clear like downtime in fourth quarter, but we see that as an advantage, which continued well into the future in is the reason for our acetic acid reconfiguration project, which allows us to produce even more in the U.S. take advantage of that raw material.

As well as the economy of scale productivity in lieu of making product somewhere else and then as we've talked about before you know our ability which is unique we think in the industry. No why do we can go upstream and make choices around how we acquire Seo and methanol or make it ourselves whatever is most economic and then making choice.

He says about where to take value out of the chain, whether we knew material into them and be a E. R into motions and now another option to move into degrees first of all powder. We think that gives us a unique capability to manage a variety of economic conditions and make choices about where to take value out of the chain that.

And the fact that were globally located we can choose where to sell for any of the range of our products, whether it be a asia or western hemisphere, and take advantage of those and and you know we see that we thought and 18, where it made sense to move a lot of asset into China, because the pricing. This year, we see the opposite where weve.

Move significant volumes Todd mentioned.

Into banned the animals trends and into the western hemisphere to take advantage of better pricing.

Thank you.

Thank you. Our next question is coming from David Begleiter of Deutsche Bank. Please go ahead.

Thank you good morning, Lori can you talk about within the how much the business is auto related and how much that how much was up business down in Q4, and how much was down in 2019.

Sure. So about a third of our E. M business is tied to auto and if you look at auto auto was down about 6% globally in 2019 versus 28 team its really all regions the world the U.S. as a low.

Little bit better Unfortunately to markets that we play very heavily in Germany, and China were down closer to 8%.

And then if you look at what that impact is on US I mean, that's auto builds but what we saw odds with de stocking at many of the molders and things you know in between us and the auto build we actually saw double that amount of impact in terms of demand materials going into auto. So we're really talking kind of a double digit.

Pat if we were based just on filled now Fortunately you know we've also been continuously working to get the volume per vehicle up that we have so since 2015, we've seen about 11% per year increase in the volume of materials, we put into vehicles part of that being M&A, but just.

2% to 3% in the base volumes, so that's offset some of that impact, but still clearly a significant impact this year.

Thank you end up and Todd acute.

Just come up on were asked the profitability is in China today, maybe where it was a year ago and what your expectations are for it to go over the course, yeah. Thank you.

Yeah, I think we touched on it a bad I mean pricing did fall over the course of 19 versus 18 and probably a.

Lot of about a 40% drop 19 versus 18, so significant and even during the fourth quarter. You know we saw it notched down each month to the low point.

In December and that's why we intentionally pulled product out of the region moved it elsewhere moved downstream derivatives position that into a different parts of the rural different applications, a two to offset part of that part of that.

That development late in the year going into Q1 going in this fourq first quarter, we've already seen pricing up almost 10% in January we think it's going to move over the course of the year I mean, that's part of the the ramp up to our $11.

We're going to play a big role in that we're ready to.

In a two to work hard on our network to to move pricing over the course of the year, we've got to get through these two turnarounds or three actually in total methanol is down as we speak here in Q1, and we are both acetic acid and in Nanjing and unclear like in Q2 by the way those turnarounds or unusual in that there every four years in the case of methanol.

And every three years in the case, we see the gas it so we're going to get those out of the way we've got clear Lake now back at full strength.

And so were we think we're well set up to to move price over the course of the year once we get demand back to normal levels.

So Todd on on profitability, though was were profits with where people are break even levels and not in Q4 in China I spoke a little more profitability not price.

Yeah, I can't you can't answer exactly where everybody is there I think it was a tough tough into the year for I'm certainly for those producers in the space given the the combination of where methanol ended up the MTO dynamics I think it's a tough into the year, but largely on soft demand availability and just uncertainty, but I think pedal.

Hello improve as we go forward, but our job is to maneuver within our network and positioning celanese in the best Best way too.

Take advantage of our network capabilities.

Thank you.

Thank you. Our next question is coming from Ghansham Punjabi of Baird. Please go ahead.

Hi, Good morning, this actually macri, you're sitting in for Ghansham How're you doing.

Hey, good morning, Matt.

Morning, So sticking with the China theme, just wanted to dig into what impact could corona virus have on the acetic Matt this either asset market in China, and how could this impact the global supply chain do you believe that any disruptions are related tightening would be a net positive or in that negative given the kind of demand, but also the capacity and.

I think puts and takes there.

Okay.

Yeah, you look it's a great question, we don't know how long this is going to last <unk> or what the impact is you know our first priority right now remains the health and safety as the over 800 people that we have in China. At this moment in time, we don't have any employees affected and you know our.

Operations continue as they as they were I'm going into this so at this point, we're not seeing an impact I mean, clearly yeah producers shut down. If this is extended there could be could be a drop in demand there, but there could also be a drop in supply to that impacts specific to sell any.

Yes, most of what we make in China stays in China. So we think that will be somewhat balanced for us, but quite frankly, it's just too early to call until we see how this by their develops.

That's a that's helpful. Understood and then just wanted to touch on kind of global the global growth mosaic So global growth for to decelerate from current levels versus kind of inflect higher in the back half of the year, which seems to be what where we're we're expecting.

Where does the sequential improvement or what primary levers do you have under your control that they could maybe drive earnings stability or earnings improvement, even if global growth doesn't cooperate quite as much.

Yeah. So you know just to clarify our outlook for 2020, it's really based on an economic environment.

Similar to the first three quarters of 29 team. So you know not not a really increase in demand are increasing supply.

And then were lever we have in front of US. The did you know in addition to working our business model moving into derivatives and assets Hill. The project model and Yeah is productivity I mean, the one thing I have to say as the nine months I've been here as CEO I am.

Just so impressed at the embedded productivity culture that exists in Celanese I mean, it is not a once a year exercise it is not even a once a quarter exercise isn't everyday exercise for our folks to look for ways to reduce costs improve raw materials improve utilization.

And I mean this is happening every single day, I mean, clearly going into 2020, we realize we have a big uplift required and so we have taken you know additional steps to try to identify other things that can happen.

Yeah, but just maybe a few examples I mean, so we're constantly working organizational efficiency, so really revamping our supply chain and how we manage that and moving to a more digitize modern system for supply chain is the way that will get credit this year and and over the next several years.

Increasing digitization of all of our operations not just our manufacturing operations, but also the way we handle customer orders and every other aspect of our business.

Re looking at our global and regional Org structure is to make sure that they're properly sized and configure to best support our businesses going forward. We also look always at our footprint. So you saw the announcement around shutting down compound even Shelby we shut down 11 on facility. This past year, you're familiar with the old.

Got line shut down I mean, these are all things we constantly look at doing which is how do we drive cost out how do we improve efficiency how do we improve utilization. The you know just a few examples and I think this is something celanese does extremely well and I'm extremely proud to be a part of which is continuous.

Really kind of keeping the future in our own hand, rather than just being dependent on the market.

That's very helpful. Thank you.

Thank you. Our next question is coming from Laurence Alexander of Jefferies. Please go ahead.

Good morning, So I'm just related to that so two questions around sustainability.

In your prepared remarks to call out so the overall outperformance of yeah Mckee underlying market.

If conditions stay weak for <unk>.

<unk> for several years do you see the gap of outperformance being stable or do you think overtime, you would converge where you'd lose some of that access how performance.

And secondly on productivity with the stuff that you're doing this year, how should we think about the ebb and flow that is if conditions improved as the piece of productivity slow down or do you now see your line of sight to three to five years of 250 million of gross productivity because you've changed your change.

Your approach or you found different angles that weren't previously going after.

Yeah. Thanks, Laura.

Outperformance versus the market I think this is built into how we do business and I don't think that changes under varying market condition. So I get you know I talked extensively already about the strength of our ASP until chain and how that differentiates it from our competitors because we have so much optionality.

The around worth pick value out of the chain and geographic Optionality that that exists no matter if were at high acetic acid prices are low you know and I think sets us uniquely apart and engineered materials, our project business model, which we've now overlaid with more of a program focused on.

Emerging markets things like E. I'd at all you know, we think that will allow us to continue to outperform and again based on my experience I think our productivity measures Barack see you know and our consistency productivity measures far exceed that most of our competitors.

So I think under any range of economic conditions, we will be able to continue to outperform the market and outperform our competitors.

Yeah, Lawrence I think one thing that's important is that the the shape of that productivity changes over time, depending on where we are in them.

In the market and so if we get to a period of growth you know our productivity tends to shift a little more towards record revenue generation projects and de bottlenecks. For example, so those are all things that the program a productivity that we operate here you know really is always looking at the things in the Hopper and then matching with projects.

We accelerate depending on where we're at from a demand landscape perspective.

Thank you.

Thank you. Our next question is coming from Kevin Mccarthy of vertical Research partners. Please go ahead.

Yes. Good morning, I wanted to ask you about two different derivatives first in VAM I think one of your competitors declared force measure about three weeks ago. Just wondering if you could talk about your near term outlook for exam and then secondly, you announced intention to expand in via E.

155 kill a ton split between the Netherlands in China I was wondering just talk about what is driving that is fee E.

Right and if so.

Why is that the case relative to other asset fuel derivatives. Thank you.

Yes, I'm going to ask Todd to comment maybe just is that brought her so it's a we actually see both of these as great opportunities for expansion, we see demand continuing to increase and we think we have a favorable cost and technology position Inc. second quarter like in them you know we are.

Actually have just completed 150 k. kind of expansion we have another hundred 50, K. 10 over the next several years that we can do through small and low capital expansions in other locations and then as you said in D.. We recently made the announcement about the expansion there primarily in Nanjing, and Heli and lean but also.

Some other areas again, we can do these in a very low capital way, which we think makes it makes it makes it very attractive for us and into the markets, where it but let me hand, it over to tighten he can add a bit more color. Yeah. Thanks. Thank him for the question <unk>, we're well positioned in that building space you to think of self.

Leveling fluorine wall texturizing applications, such as that external thermal insulation systems.

Both today, and then going forward with our powders acquisitions, if you back up to the V. news that we rolled out the first wave of those are very targeted de bottleneck. So some capability enhancement them, we'll bring into helane of the Netherlands as well as a non jing those are principally in reaction to customer pull so we are fairly.

Full and so it's not a build way ahead and try to wait on demand. So these are really in response to customer needs position us for the near term and then following that the next wave will be polymerization expansion in those two sites looking out over the next several years that will dovetail nicely with the addition.

The downstream stuff, which is the powder.

Ladies first of all powder largely built on the Onvia emulsion. So it's really a looking ahead is adding that derivative capability being ready for customer demand customer hole, and then will will activate those those operations in conjunction with customer needs over the next several years.

Thank you very much.

Thank you think your next question is coming from Matthew dealing with Bank of America. Please go ahead.

Hi, I wanted to touch on yen equity earnings and.

Just based on the trajectory of methanol in Fourq, you I would think yen equity earnings by slower to start the year I'd imagine it reverts, but what are you expecting for kind of full year 2020 over 2019.

So we you know we do expect some uplift in equity earnings in 2020, I mean, the biggest piece of that of course being the absence of that had been seen a turnaround which was $30 million there.

I'm just there and we also you know we also saw some softness in demand and pricing, which affected some of our other equity earning.

Actually expect that to be much different in 2020, even with slightly lower methanol.

I think we should see kind of this year, plus the 30 and maybe a bit more.

Do you have any other thoughts and that's got no I think that's consistent the biggest differences that had been seen a turn around and you know I think you know the rest of our joint ventures are in engineered materials, and we may see some slight improvement driven by the.

The lack of de stocking as we go forward in those in those ventures now what I will say is those ventures are largely tied to Asia demand. So they may be a little more susceptible to what's going on in China right now, but we are kind of planning a slight uptick.

Okay, and then a maybe a bit of a throw back here, but oil.

Oil prices, where you're moving higher consistently through Fourq you all see Dick asset was dropping I mean was ever an opportunity to get around TCX or is that still just way out of the money and not really a consideration anymore.

Not really consideration and you know the all run up with pretty short lived so it really didn't have any impact on how we ran or any of our decisions in the quarter.

Fair enough figured I'd ask.

Thank you. My next question is coming from a room dismissive of RBC capital markets. Please go ahead.

[noise] great. Thanks, good morning.

Yes, just following up on that question I wanted to get your thoughts on the trajectory of methanol as it relates to VAM in acetic you know what what kind of decisions are you making to push a more Ah you know more of your material down into van acetic I mean, and what's your margin outlook, especially.

Given weak methanol, we we are weaker outlook for methanol. Thanks.

Yeah, you know I guess from a big picture overview I would just say you know we don't really make decisions around investment based on kind of my outlook on short term economics I mean, what we have found in this business and what I continue to believe it's true it is.

Is having more optionality and the chain over a long period of time, it gives us the opportunity to optimize and stabilize our earnings out of the asset they'll chain over the long term. So you know that's methanol is not really what's driving our decision for V. and Bam investment I think you know Todd.

Described that I thought I'm not the M&A there yeah, I mean of ethanol as a key raw material a strategic raw material. We made the investment a few years ago to produce therefore, improving the balance between maker by and that's that's how we think about it.

You know I think it's interesting when you look at our earnings profile last year 19 versus even 2017 rights we had 727.

Million of.

Of earnings.

This 2019 in in 2017 with the exact same revenue of 3.4 billion of revenue and almost identical tonnage just over 5.2 million tons.

We increased our earnings by over $150 million, just thinking about that from 575 back and 70% to 727. This last year and raised our EBIT is a person's percentage of sales from 17% to 21%. So we aim for north of 20% EBIT margins, we do that with this optionality that lorries outlined and.

That's a that's how we're going to run the business pricing for acetic acid, partly to your question. We think is more influenced by supply supply demand dynamics versus methanol.

That's helpful.

Just as a quick follow up I, just curious on the cash flow side.

Do you think working capital is gonna be or a source of funds. This year and if so you know could you size that for us just given that the raw material backdrop. Thanks.

Yeah, I, Iran to it.

I don't know that it'll be a huge source of funds you as we see business growth it tends to be fairly neutral to possibly a slight increase in working capital. We're gonna take continue to take aggressive actions.

Around our controllable items in working capital to improve that but I think it's going to be relatively flat on the big change in free cash flow year over year is going to be the increase in capex. So we expect capital to be around 500 million year over year and an expectation in our current cash flow fourq.

Yes that we will have a payment to the European Commission.

Right. Thanks.

Oh. Thank your next question is coming from Frank Mitsch Affirming Lam research. Please go ahead.

Thank you Yeah, Scott just a follow up on that can you can you want to talk a little bit more about the 89 million dollar you reserve for the a European Commission investigation, where does that stand where where might that had to.

Yeah look right now Frank I can't provide a lot of comments I mean based on everything we know today from the commission. We don't expect <unk> book any further reserve and like I said, it's in our cash flow forecast for 2020.

Okay, and then Lori any a in a transcript a you highlighted.

As it did the GM strike had a bigger than a bigger than expected impact in the fourth quarter.

Than anticipated and and you outlined some reasons for that in terms of the supply chain from the tier two suppliers et cetera. I'm curious is this something that was if it didn't happen in fourth quarter to something that.

Could be a first quarter event do you expect this too.

To rebound and impact your first quarter, perhaps second quarter.

No. We really don't I, you know I would say, we hadn't really expected much impact at all from GM, because our assumption was once the strike with over they start back up and you know kind of take that volume they stay down a bit longer I'm as in many of the auto builders by the way I'm a bit longer through the holidays and so we saw.

More of an impact, but we do not expect us to continue into the first and second quarter alright. Thank you.

Thank you. Our next question is coming from Jim Sheehan of Suntrust Robinson Humphrey. Please go ahead.

Lori are a transformative M&A options now completely off the table because of the potential dis synergies it sounds like in the past that you're you said that the synergies we're not a barrier to considering that so if that's off the table now why is that the case.

Yeah, I mean, it's so maybe I should clarify dis synergies are not a barrier to consider it is just a hurdle that has to become come over so the deal has to be good enough to be able to carry those dis synergies. So you know as I said before we continuously look at M&A, both bolt on like the low Tech deal, which we just closed as well as transform.

And if M&A, if and when it happens a if it's a good deal we'll do it but you know we're trying to position our strategy so that M&A as an option for us not a necessity.

Yeah, Jim I mean, we've been very consistent on this over time I mean, we are focused on creating shareholder value and so we look at ways in which to do that and that's both bolt on as well as transformative and those deals and those are the things. We look out there are really never off the table.

Thank you and on nylon and pricing a the prices.

Peaked in the first quarter at 19. So do you think that supply demand has balanced out here and that the first quarter 2020 that these headwinds.

Well be behind us or do you see more downside risk and that in the nine line dynamics into the second quarter.

I think look I think our current view on on nylon is it seems to be more balance. We think we're through much of the de stocking there's still some inventory out there, but generally we would see it more balance going to sit here.

Thank you.

Donna let's make the next question or last one place.

Certainly our next question is coming from Matthew Blair of Tudor Pickering Holt. Please go ahead.

Great. Thank you I had two questions on just cash flows here. So you provided free cash flow guidance and 900 million could you just talked about the split you're thinking about for 2020 between buybacks and M&A and then second question. Your your debt levels moved up a little bit 29 to you're still within your leverage targets, but how should we.

Think about debt in 2020 would you look to repay any or perhaps take out smart. Thanks.

Yeah I think.

Thanks for the question Matthew I mean look at the end of the day, we are always very consistent and how are we looking at cash deployment. Our first choice of cash deployment is going to be organic investment back into the company and given the projects they're extremely attractive from a return standpoint.

Today as Lauren talked about earlier that Capex is moving up over the next several years and so we're going to be around 500 million of capex because those.

It's just the projects are extremely attractive and historically our return profile on that was right around 20% that's always going to be our first choice. Then we look at M&A and making sure we're very disciplined and looking at M&A, we're not overpaying and that we're acquiring companies that have high degrees of center.

But those are gonna be episodic and so when we don't have M&A right in front of US we're going to deploy that cash for share repurchases. So last year, we did a billion dollars of repurchases.

This year given the fact, we've already announced one M&A deal you know I would see that number probably coming down a little bit we're targeting at least 500 million. This year regarding debt DAP moved up a little bit as we pulled on the revolver. The early part of the year for us is always.

Hi, I cash outflows. So Q1 is always a high ASP high cash outflow quarter for us.

So you see that revolver.

Stay pulled on a little bit higher in the early part of the year and then come down throughout the year over time as we have consistently done it.

Very clear thank you.

Thank you at this time I'd like to turn the floor back over to Chuck for closing comments.

Thank you so we'd like to thank everybody for listening in today as usual were available after the call for any further questions you might have done I feel pretty close out the call at this time.

Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and have a wonderful day.

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