Q1 2020 Earnings Call
Greetings and welcome to the Celanese Corporation's first quarter Twentytwenty Conference call.
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I would now like to turn the conference over to your host Abe Paul Vice President of Investor Relations. Please go ahead.
Thank you brought welcome to that Celanese Corporation first quarter 2020, <unk> earnings Conference call. My name is a ball Vice President Investor Relations with me today on the call or where are you right <unk> chairman of the board in Chief Executive Officer, Scott Richardson, Our Chief Financial Officer.
So all these corporation distributed its first quarter earnings release via business wire imposed his prepared remarks about the quarter on our Investor Relations website yesterday after market close.
As a reminder, we will discuss non-GAAP financial measures today.
You'll find the definitions of these measures as well as reconciliations to comparable GAAP measures on our website. Today's presentation will also include forward looking statements. Please review the cautionary language regarding forward looking statements, which can be bout at the end of the press release as well as the prepared comments document.
8-K reports containing all of these materials have also been submitted to the FCC.
I will turn the call to Lori for opening remarks before we open the line directly for your questions.
Thanks, Dave.
Thank you Ed before we turn over for questions I would like to take a moment or to to make just a few comments. We all recognize the unprecedented challenges. The world is facing right now on behalf of Celanese I want to extend our sympathy to all of those affected by the Corona virus pandemic unexpressed, our gratitude to those who are work.
<unk> tirelessly on the front line to keep us all safe.
I want to acknowledge and thank our employees across the world. Each one has been impacted in some way at the mid they're very individual circumstances. They have collectively performed exceptionally well.
Particularly want to thank our manufacturing employees around the globe, who have kept our plants running to make a chip products to our customers I also want to acknowledge our employees working from home horse still supporting customers closing deals body contracts and closing or Bucks.
Our first quarter earnings per share of $2.29 reflects their effort. It was not far off from our original expectations before all this happened.
The first quarter Whats tots and the reality is the second quarter is shaping up to be far more challenging.
Simply put we do not yet know how far demand will ultimately drop or how long. This whole life. We have tried to be transparent in sharing where we have visibility.
Fortunately one of our great strings that celanese as a culture of resiliency and it can do attitude.
I would like to thank Mark who recently announced his retirement as our executive chairman for his support of me throughout the CEO transition.
But also for fostering over many years the development of this remarkable felonies culture.
Our culture as one of action we have a lot. We are working hard to counter these challenges I outlined much of that work yesterday in the script and we're looking forward to doing much more.
In this environment, we are focused on three imperatives first keeping our employees safe and healthy.
To driving resilient cash flow and Twentytwenty and three positioning us for growth as we move into recovery.
As a result of our work over many years, we are exceptionally well positioned today to whether this environment felonies as leaner more nimble and a more diversified company today than it has been at any other time in its history.
Above all in my almost one year or Celanese I have gained trust in our people and their ability to rise together to meet challenges. They have done it many times in our past and I'm confident they will do it again, we are collectively focused on driving long term shareholder value and positioning ourselves for robust growth when these challenges.
Past.
On the lighter no like many of you. We are all doing this for all our homes today. So please be a bit patient if we have legs or speak over each other or do you hear any strain choices in the background.
With that I'll turn it back over to you.
Thank you Lori Rock you May now open the line directly for your question.
Thank you.
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Our first question today comes from P.J. Juvekar of Citigroup. Please go ahead.
Yeah, Hi, good morning.
Alright, VJ hope everybody as well.
You know I've a question for you.
You know you guys were making a long term moved to a downstream capacity ramp emotions into your Wes.
But with oil prices falling in natural gas prices kind of hanging in there you know.
What's your what's your take on the U.S. advantage and you know how does how do you think the future regional capacity for Celanese breaks down.
Thanks BJ.
Yeah. It's a question we've been looking at ourselves, but let me try to put it a bit in perspective, we think the U.S. gas even at these low oil prices will continue to be well advantage. So just to put that in perspective, if we look at the difference between let's say acid production.
Between clear Lake and Nanjing, you know our cost of production at clearly it's half as Nanjing, even at a low oil prices and Singapore with is affected by low oil prices, but it just comes down slightly below the cost at managing so you still have a two to one advantage a clear lake and that is bad age.
Rolls through Bam and be a and everything else. So why we don't have as much advantage I'm now the U.S. Gulf coast versus other producers. It is still a big advantage versus produce eight out of coal are producing out of a low low oil environment.
So our plan have not changed we will continue on pace with our VA E and our Bam expansions. We are taking we are slowly the acetic acid reconfiguration project as we noted in the script.
Those productivity gains and the reason for doing that project are still intact, but we will pause it for a period of time to allow us to take advantage of these low oil cost environment and what that means for our Singapore operations.
Great and a quick question for you that you're Scott.
No market already talked about for some time in potential RMT transaction.
When the pandemic and marks a upcoming retirement would you think a probability of a large transaction is lower now thank you.
Yeah, PJ, let me take that I, you know, but our first priority has been and will always remain generating the most possible value for shareholders and we constantly look at options to do so I think in the current environment that we're seeing demand environment. This is difficult to do.
Your life, you're looking at cash still that's very difficult in this environment as everyone valuations are down we do though think there continues to be room for mergers of equals our R&D team and we think there will be even more opportunities for these things as we move toward full recovery.
Thank you.
The next question is from Duffy Fisher of Barclays. Please go ahead.
Yes, good morning.
Was wondering if you could just give us some help around the decremental margins you gave.
Some helpful.
Quantitative numbers around what you think demands going to do asset yields down 15 to 25, but.
Say at the 15 level versus a 25 level is there going to be a difference in the decrementals and kind of same thing for.
If you were just just walk through how should we think about the profitability relative to the sales fall.
Yeah, Let me talk a little bit about the guidance. We gave for for Q2. So what we indicated in the script as we do expect to see in Q2 engineered material volumes down 25% to 35% versus Q1 now what's that about two.
Third of that volume is still.
Relatively sticky in terms of pricey. So we would expect those margins to maintain a possibly even get a little better as Rob continue to go down.
At the same time, you know about a third of it is tied to Ross. So we'll see those prices go down mid margins generally stick around the same for assets Hills, we projected volume decline of 15% to 25% and Q2 from Q1 couple of things around that India locked down South East Asia locked out we're just not seen the volume demand.
There.
And margins there tend to follow methanol and other things a bit so probably expect to see our margins going down somewhat but we would still looks back at the tail margin in the mid teens ourselves. So we do expect some margin compression in AC expect margins to be a similar any.
But down a it with the volume and if you. If you look at what that you know just to maybe put some numbers around it we saw a 25 to 30 million dollar hit in Q1, just from Asia and Asia represents 20% of our overall business and that was really in February March so.
So say consider that you know, we lost $10 million to $15 million per month on 20% of our business.
Its not unreasonable to expect we would see similar impact in Q2 on the other 80% of our business in the Western Hemisphere. So if you do the math on that we do expect somewhere between 150 to 250 million dollar impact on Q2, but on the combination of volume and margin decorative.
Patient.
And how that you know as we go forward into Q3 Q4, you know we've done a lot of scenario planning as I'm sure. Every company has you know we think it's unlikely we're gonna see a V shaped recovery so coming back in Q3, but we do you know we have done scenario planning rowdy U shape, our an l. shape and broadly you know.
Q3 to also be down, but some recovery in Q4, but again, we don't really know how broad this is going to be we don't know the degree of the of the downturn, nor do we know the duration and of course Asia recovery, how fast that actually happens as a big factor.
Okay, and then could you speak to how your Jvs have performed vis-a-vis.
How you performed particularly in E.
I know at times over the last several years.
So on these has made the comment they felt some of those jvs were a little bit under managed on the cost side. So maybe just kind of walk through how you think there are doing.
Versus the markets.
Yeah, Let me let me start and then got May have some some comments as well I mean, so in general I mean, it first quarter. Our JV is look good but generally our JV is report on a quarter lag.
So we would expect some downturn in the second quarter for our JV that may not show up so much until third quarter, you know ibn Sina, maybe slightly down more because it has a closer tie to crude but that that number and those JV numbers are baked into that 150 to 250.
Million dollar impact that we expected Q2.
Yes.
Yeah, I think Duffy as we look at what our JV is are doing they're very focused on cost right now as well I mean, they're not immune to this environment.
Particularly our two jvs that are focused in Asia, you were hit with some of the softness in demand that we saw in in Q1, as well and that will flow through a little bit into the second quarter, but.
Hopefully, we'll start to see continued demand improvement, which will help them there, but that doesn't mean that they take their foot off the gas on on work in the cost side of the equation as well.
Great. Thank you guys.
Thank you.
[noise]. Our next question is from Bob Court of Goldman Sachs. Please go ahead.
Thank you very much.
Were you surprised me a little bit with your commentary about how much better your cost position is clearly a them in Nanjing can you talk about how much it's compress snow or maybe what the broader industry cost curve is done over the last.
Two or three months is it seems like flatten or maybe characterize some of that.
I would say you know we haven't seen a big shifting coal pricing. So that's really what drives Nanjing. So I wouldn't I, we haven't really seen compression between clear Lake and Nanjing on the real compression is versus oil base, so like Singapore, where anything's really priced out of bunker fuel so that's really where.
We've seen the compression or you know, but not as much advantage as we used to have between U.S. natural gas break based and oil base. So Singapore some of the European producers for example, they tend to be oil pace, that's where we've seen the compression, but again, what we've seen at least in the oil low oil environment. So far is just we still.
I have got about two times advantaging in the Gulf Coast as we do in other locations.
Got it.
And then.
I guess Chinas economy is directed in a different way or managed in a different way, but it seems like that recoveries in the manufacturing sector at least it started pretty aggressively.
How would you anticipate any cues from China, informing what might happen in the western markets for you as we go through the second and third quarter.
Yeah. So you know I think what we need to watch for in China, well, a couple of things. So I mean, you're right people are up and starting to run again in China, we see some China internal demand recovery.
I would say to watch out at one and maybe the reason were a little bit more pessimistic on AC at this point than than others is we are starting to see inventory build in China. So.
So people are running but there's not a lot of exports yet from China and so we are starting to see some build up.
They are and so I think until you see more of the western hemisphere start to recover and you see consumer confidence come back maybe some of the stimulus packages, especially for auto.
That are coming on.
That's really going to drive the demand around the world allow China to start exporting again, I think that's what we need to wait and see and as of right. Now we really haven't seen a resumption yet of China exports.
Again, not a no big impact on us directly by the big impact on some of our customers around the globe.
The next question comes from Jeff Secaucus of JP Morgan. Please go ahead.
Thanks, very much can you hear me.
Yes, I can reach its funny, okay. Good morning.
With oil prices coming down some of your competitors probably have lower.
[noise] cost structure than they did before does that lead to a week or supply demand balance and strategic or them.
Oh, you know a let me talk about again about China, because I think you know that generally to swing producer.
We we saw a lot of China production online in the fourth quarter, we've actually seen some reduction in utilization in the first quarter because at the very low pricing that we're seeing I think people are choosing to run at lower rates not nesler's shut down but running at lower rates. So I think.
The the thing is the price is just so low so, especially in China. You know, we're at maybe $300 per metric for metric ton today, we saw that price down in that 260 range early in April you know it it was at 300 or less.
March up you know, that's just not a price where folks can run out of a coal base.
And it's not a great price even out of an oil base sure [noise].
As compared to natural gas. So I think the advantages there is less I don't think will impact our clear lake, but it is it is causing some producers to slow down which is a good thing and we've actually seen the price start creeping up again in the last few weeks from where it was so there seems to be some discipline in the market not to produce into a into.
Losing situation.
You know, but again it depends how long this goes on but right now I would say coal is the marginal producers, which is China and we are seeing some discipline in that market, we're seeing prices slowly come back up.
Yes, Jeff I had just to add to that I think it's important to remember that our view of of oil is that were relatively agnostic as a corporation to high or low oil pricing and you are going to get some compression in some areas, but you're going to get expansion in other areas I think as Lori just talked about on acetic acid you know we don't feel.
Lot of movement in that cost curve on VAM, you do get some compression, but that's offset by some of the gains you get I'm out of Singapore acetic acid on the engineered materials side of the equation as already stated about two thirds of the pricing there's pretty sticky. So you hold pricing, even as Ross come down, but that's partially offset by our dividend out.
I haven't seen so with those puts and takes you know we feel like we can still generate pretty agnostic returns in any environment.
Can you talk about why youve deferred fewer larger capital projects, what what's the rationale is behind that and how much operating income or EBITDA, you lose because of the deferral.
Yes, so we we.
Reduced our capex projection for this year by about 150 million could be a bit more of that I'd say about a third of it is associated with the delay of the clear Lake acetic acid expansion again, the reason for doing that is because with these low oil prices Singapore becomes.
Much more not more attractive and clear lake, but attractive enough that we decided it was better to preserve cash in this period of time, not knowing how long and how deep. This would be we can choose to started that project up at any time once we start to see recovery or for right. Now. We've just said 18 months. We've also for <unk>.
China Localisation projects that we were looking at we've pushed it out a bit because obviously, we have a bit of a demand slowed down for engineered material and we see that taking a little while to recover so we've pushed it out a bit and we've also had some things change where we now they're looking at minimizing costs by using some of our existing footprint.
Preferably so that's about another third about 150 million and then we have a third that's kinda everything else and a lot of that is just project risk scoping that occurred naturally.
Projects that we said you know what to preserve cash we can just push them out a year.
So we're really just trying to be cautious because we don't know how deep and how long. This can go to make sure that we're preserving cash for the organization to maintain a good free cash flow.
Thanks very much.
The next question is from Mike since the Dawn of Wells Fargo. Please go ahead.
Hey, good morning, everyone glad to hear everybody safe havens. Thanks, Mike Lawrie I, just want a little bit a clarification I think you said for to Q adjusted EBIT could be down 150 to 50 was that relative to Q1 or two Q 19.
Relative to Q1.
The Q1, Okay and then when you think about adjusted EBIT margins for the estill chain in the mid teens for to Q.
Well what is the what is more important in getting those margins up as it is it the volume is it.
You know the pricing and then if pricing is going to go up what do you think drives that is it more oil gone up is it more recouping the volume just sort of.
Just some color on what what could get those margins.
Better as the year unfolds.
Yeah, I think at some it you know, they're all related but I think it is more around the pricing I mean, but the last time, we saw below 300 dollar per metric ton pricing for its unique acid wasn't 2016, so set a long time since we've seen this level of numbers.
So I think it really is more about seeing the pricing go up now that really mean demand recovery for for acetic acid and really dependent on China for that.
I think that's where we'll see see the recovery in the margins, but clearly as we have demand recovery, we get bogged recovery that helps the prices go up again, we're pretty agnostic to what happens to oil in this scenario. We that's the beauty of our models BD of having three different sources of acetic acid around the globe that we can pull on depending on you know what's the.
What's the best source and lowest cost source I'm, So I don't see oil price being a big factor for us, but certainly you know China demand, China exports reopening of India Southeast Asia. These are going to be the big factors that can help drive those margins backup.
Great. Thank you.
The next question is from Vincent Andrews of Morgan Stanley. Please go ahead.
Thank you good morning, and good to hear of British voice sounds like everyone's doing well I'm wondering if you could just comment on what you're seeing or what you're thinking about the outlook for demand for VAM and for motions in the second quarter and maybe into the third quarter. Just wondering if you're going to have the same amount of flexibility.
Going forward to two ships product out of assets to those other two materials.
Yes.
Yeah, you know so so we've certainly taken advantage of that flexibility even in the first quarter. I mean, if you look in the first quarter from the fourth quarter I'm. You know, we sold at 17% left tonnage into China as they dealt with coal bed. We moved that we felt we sold 27% more tonnage into the western Hemisphere moved.
8% more tonnage to ban and emulsion, we have seen Bam and be a hold up pretty well, we actually see you know some impact on that into the second quarter. We see the demand remained strong for for paints and coatings only so far especially for exterior paint now maybe not as much for interior paids as people.
Not wanting to line up at home depot and wait to go in.
And but we are seeing the advantage of of that capacity that we've been able to add so I think in Q2, yes, we expect certainly some pricing pressure on Bam and be a eat and emulsions.
And we hope will start to see some more seasonal recovery in demand as we see economy, starting to reopen but generally stronger than acidic acid.
And then if I could just ask you on an engineered materials I.
I appreciate respect your comments on the ability to hold pricing that two thirds of that business be that's certainly what we've seen in the past.
And lower raw material environment I'm, just asking you know with volume expected to be down 30, 35% as there is there no mechanism for customers to come to you and ask for lower prices purely because of fully contracted or is it just you know not something you have to worry about.
I mean of course people can always ask again you know if we go back to what you know about a third of that volume is really sticky and that word the only person specked in so those they tend to not be price sensitive they don't have another option.
The next third maybe has a couple of people expected.
We've not seen a lot of movement that way I mean, perhaps we will as we come up we have it you know the third that tends to be more price sensitive as it is more the.
Standard type grades and those tend to follow raws a bit more anyway.
You know, but we have seen some of the sectors continue to be very robust Wright medical pharma.
Paint and coatings to a certain extent.
Packaging from the assets hillside food and beverage has been robust.
So we expect those tickets continue and not to see a lot of price pressure there.
Okay. Thank you very much appreciate it.
[noise]. The next question is from gone Trump Punjabi of Baird. Please go ahead.
Thank you good morning, everybody.
Good morning, I am wondering okay. So Laura you know just on the M. segment specific to the first quarter, both volumes and margins were quite resilient.
Considering the linked quarter sort of flow down globally, what was there any pull forward of demand from Twoq. You. I mean, you mentioned that the team generated high single digit volume growth in the Western Hemisphere, just trying to clarify.
No we really didn't see any pull forward you know a auto actually was doing quite well in January and February in the in the Western Hemisphere, We actually had seen auto up a few percent in both Europe and Asia and that really helped drive some of the volumes in the first and second quarter.
Obviously consumer goods were down in the first quarter, but but generally do you know January February even the first part of March were pretty good where the western hemisphere was able to offset some of the decline that we saw out of Asia and even the Asia decline during that period was fairly moderate now obviously that all change kind of the second half of March and.
That's why we're projecting the 25% to 30% down for EM in the second corner.
Okay, and I was really nothing much volume for yeah.
Okay. Thank you and just more broadly I mean, you have obviously given if you know in assumption for each of the segments will volume standpoint for Twoq you.
Got it can you give us a sense as to what you're embedding in terms of how June kind of plays out I mean, clearly you know most of the world has been locked down for at least let's say half the quarter, but but how are you thinking about the back part of the quarter and kind of the exit run rate into into the third quarter. Thanks. So much.
Yeah look we're really we just look at the second quarter as a whole were really assuming we don't see much recovery even through jail and you know if we look at auto for example, you know China autos restarted, but it's a bit slow.
Europe is kind of starting this week, but a pretty low rates you know BW for example in the I'd three you know one of their platforms that we have a lot of content. In you know is making 50 cars today versus what they typically make 150 cars a day. The U.S. The autos are just now starting to announce are going to restart originally.
Some may 4th on May 11, most of the big plants not till may 18th. So we really don't see them coming up closer to full rates until you know late June or even early July.
So that's the things when we break it obviously, if they get started sooner basket.
Okay, we'll watch where that thanks, so much yeah mhm.
The next question is from Matthew to going of Bank of America. Please go ahead.
Good morning.
So if we look back in 2015, and 2016, yes, chill chain business generated about $600 million, an annual EBITDA or perhaps directionally, you're pointing there into Q, but you have some outages and whatnot. So.
Ah why or why not is it possible the come to kind of returns are that EBITDA in that segment.
Yeah, well start there yeah look we we typically assume you know we think our asset yields business, it's kind of a base level of earnings in a normal environment between you know 180 200. So if you look at our earnings in first quarter just call. It 140 for either.
Math, you know we had about 15 million in there for this week that we didnt have for that fairway turn around there was 15 to 20 million of Cobot impact and then first quarter typically we see 10 to 15 million of seasonality. So that gets us in that 180 190 range that that we would.
Expected to see from asset tilt. So I think you know what we've shown is versus even 16 17, we have fundamentally shifted the asset sales base level Bernie's again kind of up to that 180 to 190, but with co bed with the turnaround log first quarter, we saw a slightly lower number in the first quarter.
Yeah, Matthew I think it's important to remember a lot of the steps that we've taken over time in the us steel business to <unk> to get us to that higher level of earnings you know, reducing the fixed cost footprint and consolidating manufacturing.
At our large integrated facilities are continuing to lower the SNA cost structure in the business and then further going downstream in the past you know we used to so you know about 60% of our acetic acid as acetic acid and now we only so closer to 40% and we.
We move that downstream into a van damme emotions and now a into Redispersible powders studio attacks acquisition. So those are very purposeful steps taken over time have led to that higher level of earnings in normalized environments.
Okay.
Thank you for the context, and then its price in EM was down like 5% year over year in one Q.
I would imagine, it's probably going to be a little bit worse than that in twoq.
To some extent I guess, it's not surprising given the moves we've seen in oil, but if I look back to last time crude really collapsed in 15 16, we never Sop price kind of eclipse the minus four number.
Just because prices in the sticky in some of the newly acquired businesses.
And you talked a little bit about that margin level and I would imagine things moved down into Q, but that mid thirtys. She said.
What you would consider normal from here.
Yeah, you know I think there's there's two things there. So we did have the raw material pass through on that kind of third of the business that that is more directly tied to raws I think that's similar to what you would've seen in and 16. There was also an element Q1 19 was really an exceptional.
E.M. quarter, and there's some timing elements there around.
Contracts for medical and pharmacy, some high margin businesses that showed up in Q1, which is different than Q.
120, which it so Q1 19, we had some big contracts that showed up in the books. She went 20, its I would say more normal. So there. So there is that variation there I mean, we would expect as Ross continues to below and as we see volumes come off.
Further impact to margins for engineered materials and volumes like I spoke about earlier, but I don't think that Q1 19 to Q1 20 change that you're seeing is representative because there were some uniqueness in Q1 19.
Fair enough. Thank you.
The next question is from John Roberts of you'd be yes. Please go ahead.
Thank you and congratulations Bari I'm, assuming the year to your personal role.
Thank you Chuck.
The smokers seem to be more susceptible to the more severe cobiz 19 symptoms you're guiding for stable seek tow for the rest of this year, but do you think this over the next 12 24 48 months will accelerate the decline in Santo overtime.
It's a good question and one we've asked ourselves, but but I have to say tow has proven to be probably our most resilient sector.
People, who smoke tend to do it no matter, what if anything maybe they do it more when their homes. So you know just a bit anecdotally you know in January and February when this was really hitting China, we actually saw tow production cigarette production, sorry up 4% in China and sells in China actually went up by one for.
Percent, which doesn't that versus 2019, which doesn't sound like a lot but in a in a business where we expect you know a couple percent decline per year that was certainly a reversal of the trend we haven't seen similar numbers yet for Europe and for the Americas. So we you know we have to wait and see but as of right now at least in our conversations with the cigarette producers and others.
They are not seen a big change in demand profile.
Okay, and then in engineered materials, you noted some challenges and getting new applications qualified with the social distancing and what are your customers having employees working from home do you think you have that solves or will have it solved over the next couple of months or will it be constraining at any in any way or because demand is so weak, it's just not going to be on it.
Constraining part of the supply chain or the value added.
Yeah, I mean look it's a it's a great question, there and certainly with co bed. You know we have filed many new ways of working you know I would say our employees are even ourselves people everyone continue be highly productive and effective at home.
Interestingly enough in E. While we have had some issues getting new projects qualified we have been able to continue to progress. Many other projects. So a lot of our customers have lab staff working they're doing it in some cases, our lab group, our our technology and innovation group has actually been working with some of it.
<unk> customers to qualify the materials on our lab equipment, and so sometimes where we've actually taken over and done some of the testing for them at our facilities for those customers who couldn't use there. So our folks have been really creative to keep some stuff going on similarly, you know we continue to provide great customer service.
I will share with you. In example, we had we actually had a customer in Germany, who out of molding issue.
And our technologist, we're able to and we're able to get on the phone via I pad and basically troubleshoot. The problem you know using I pad video with the customer so our folks have been really creative while we certainly have you know we still close the number of projects in the first quarter, we expected to we aim to do the same in the second quarter.
We're just having to be really creative and really flexible and how we work and what work we do for our customers to make it happen.
Thank you.
The next question is from John Mcnulty of BMO capital markets. Please go ahead. Your good morning, Thanks for taking my question.
With regard to the acetic acid markets in China, specifically have you seen any permanent closures and I guess, how long would we have to see this recessionary environment drag on before we might actually start to see some some of maybe the more marginal capacity just get permanently shut down what are your thoughts on that.
So I would say to date, we have not seen any permanent closures and part of the reason for that is I think you know a lot of the.
Acidic acid capacity in China is tied to downstream uses at the same companies. So they're part of a value chain for other companies not necessary BAF D E, but maybe you.
You know maybe going into plastic bottles or you know this sort of thing. So what we've seen though is we have seen people's slowing down capacity, so only matching their capacity to what they internally consumed.
I think you know it will take a bit longer at these kind of prices before we'd see people permanently shut down but we have definitely seen people take you know go run at lower rates, which has helped you know we were.
Really low in terms of China utilization in the first quarter. Those numbers are still low just below 70%, but but slowly coming back up as people cut back on runway rates to more matched their downstream internal downstream consumption.
So I don't know how long, it's going to be but I think it will be longer before we'd see any permanent shutdown a spare capacity in China.
Got it fair and John John We're focused on what we can do to control things were controlling our own operating rates were focused on productivity as Lori talked about we're focused on what we can do from near term cost reduction actions. So those items that we have control over ourselves is where they where our focus needs.
To be so that as we see the changes in demand pivot in the coming months, you were well positioned to take advantage of that.
Great. Thanks for the color on that and then just I guess with regard to be engineered materials platform I guess the magnitude of the sales dropped seems a little bit on the higher end I guess than what we were thinking, especially considering you do serve some pretty defensive markets as well like on the on the health care side. So I guess can you can you give us in terms of how you're thinking about.
The buckets of your cyclical portion of that business and the and the maybe defensive side, what you're thinking in terms of the volumes for those.
Yeah, I mean, you know any on the Rekynda resilient side, I mean, obviously talking about toll that 15% of our revenue and then you know we have medical pharma food beverage even fiveg packaging you know that's kind of another 10% to 15% of our revenue, but some of our big users like.
For the entire company auto is about 15% you know until people start up although there are sticky businesses and they will come back in order from us they're just not taking volume. So that's really what's built into that as well as consumer electronics and people are just not by big durable consumer goods right now they're worried about jobs they can't.
Get out how all these kinds of thing. So you know I would say, it's not so much that we see people shifting away from our engineered material. It's just there not running so they're not ordering.
If you know if you look at even in Q1, you know we saw.
We lost about $10 million volume and orders just in March due to cancellations about 50% nation, 50% in other places and in Q2, you know automotive the big decline drop I mean April.
Was 50% lower in terms of automotive demand from up for us that it was in 29 tea and then the Americans that was 80% lower so it's these are sticky businesses, but they're not runny, they're not ordering now in non auto were nearly flat with 2019. So again, it's just that balance.
Those highly resilient those that have kept running it had high demand and those that haven't been as resilient like auto where we've just seen that demand basically go to zero for a period of time.
Got it thanks for the call it be safe.
Thank you.
The next question is from Kevin Mccarthy of vertical Research partners. Please go ahead.
Yes, good morning.
With regard to your.
Capex program I think you indicated you are deferring capacity expansions.
For methanol and asset yields by about 18 months.
Do you still plan to reduce capacity in Asia, and if so would the assets fuel capacity reduction there be concurrent with the new timeline.
Yeah. So our plan all along has been it was really we justified the product on that project on productivity. So our plan would be to reduce capacity in Asia.
In that same timeframe. So in that 22 mid 2023 timeframe again, it could be a shutdown of the facility Arca just simply be a reduction in facility and that's a decision will make sometime later once we see kind of how raw material dynamics and demand even out over the next few years.
Okay, and then on a huge none of your prepared remarks released last night.
Instead of a clarifying question, maybe you're talking about the free cash flow improvement there are three hundreds of 400 million.
It could see equated to a 40% decline in adjusted EBIT for acid till chain and EM.
I guess my clarification is that 40% in fact your forecast or are you just sizing the the magnitude of the free cash flow improve there.
Yes, Kevin we're just sizing it for Q2 Q through Q4, that's that's really what that point was about.
Very very good and if I may want to sneak in another one for you Scott our there's a reference to I think a tax relief provision that's expected to benefit you by $40 million to $50 million can you just talk a little bit about that and when you would expect that cash in the door.
Yeah. This is mostly just timing, Kevin and it's a lot of the stimulus packages that have been passed around the world actually to the lesser of that number is the U.S., we have a pretty substantial impact from a German payroll tax deferrals. So it's really just deferment.
To 2021 or 2022 on payroll taxes.
Perfect. Thank you so much.
The next question is from Alex you ever come off of Keybanc. Please go ahead.
Thank you good morning, everyone. Lori just to clarify the EBIT declined sequentially. You mentioned 260 to 250 million range was that for that for the company overall or for EM segment only.
No that's for that company overall.
Understood. Thank you and turning to ask materials, just based on benchmark margins, where we're estimating that there were quite healthy.
In March and April if we look at acetic acid versus methanol or VAM versus ethylene and then acidic acid is that in fact true when you look at your business.
And if so are you expecting these this level of margins.
That we saw in March and April two two persist.
In the latter parts of second quarter.
You know Scott may want to provide some detail as well, but you know again, if we look at you know we actually saw prices dropped very low at the end of margin in early April and you know at those kinda prices you know margins in Nanjing, where you have nothing all come.
Now to coal or not that good you know clear lake out a gas still a margin, but significantly compressed from the margins that we've had in the past. So I you know I think.
We continue to see that challenge with at the tail margins going forward.
Even in a low methanol environment again, because pricing to follow a bit.
Yeah, I think we did see a lot of compression in the first quarter is already stated Aleksey and you know in last week, we see slight bit of expansion, but we saw these periods in pockets at various points in the first quarter as well so until we see I think more robust exports moving out of China and demand.
Improving in other parts of the World I don't think you're going to see a big change in that dynamic.
If I just make clarify you do you expect your ass deals margins to decline sequentially.
No I think where you see yeah, I think we expect to see things relatively flat right now actually at least that's where a bit baking in given that that demand landscape that we talked about and you know I think it's important were more or less on the floor here for methanol in China given way.
For the coal producers cost structure is and given where methanol prices are at so we may see things move a little bit in the upstream feedstock landscape, but material movements up or down given the inventory levels and given the cost structure. We just don't don't see things moving a lot.
Understood. Thank you very much.
The next question is from Frank Mitsch up for Rim Research. Please go ahead.
Thanks, so much and good morning.
I'm, sorry, I was I parse through the various forecasts at understanding this is in an exact science.
And you know where you think you know the krona virus impact is I mean, obviously very very significant impact here in into Q.
But as I look at the numbers is it fair to say that you know as as things stand today, you think the impact from Corona virus, if we were to say.
Parse up 100% for the balance of the year it would be like 50% impact in Q2, I don't know, 30% Q3, and 20% Q4 hundred how how are you currently thinking about the.
The the pace of the impact for the balance of the year.
Yeah, I look we've done a lot of scenario planning and again, we don't expect to be shape recovery. So we do expect some continued impact. We you know we've looked at u. shaped recovery, which will start to see some recovery in December we looked at El shape, which has a going out into 2021 I think the answer is.
You know, we don't know even with things opening up we have yet to see you know.
A couple things when does the western Hemisphere automakers returned to full production when will we see enough relaxing the social dismissing in the U.S. in Europe for people to go back to painting.
And I, you know and as well as allow for construction to go back to seasonally normalized levels and then as I said earlier when do we see that improvement in China export because that we're not seeing that yet. So you know China is running we're not seeing enough demand.
Outside of China to really resume the pace of China export. So I think theres still a lot unknown a lot related consumer confidence stimulus packages can help we're waiting to see how that that goes.
But I don't think we can really predict accurately at this point, what we what we will see in third and fourth quarter.
Got you but.
Looking at that comment you know from from Scott about the.
As of Hills and EM.
Being off 40% of for the balance of the year and so it just seemed to me that they were it was a bit more front end loaded in terms of the impact for the second quarter and perhaps you know in terms of a year over year negative impact it would be lessened for the balance of the year, but but at this point you think it maybe a little bit too premature to.
To to offer that.
Yeah, Yeah, Alright, that's to say that 40% was really illustrated of of what that magnitude of cash flow reduction would equate to so thats hybrid up.
Terrific. Thanks, so much.
The next question is from Matthew Blair of Tudor Pickering Holt. Please go ahead.
Hey, good morning, glad to hear everyone incentive wanted to touch on that 5% volume gain in the fuels, which I think occurred. Despite some some turnarounds would you say that was just normal quarter to quarter volatility or.
Or do you have a strategy to try to take share in this week market in north and some of the price declines.
Yeah. So we had we had the volume gain from fourth quarter remember in fourth quarter, we had the issue at our clear like plan and it was down and so we had more volume available in clear Lake obviously in Q1, and we Didnt Q4, so that volume uptick really reflects the.
The additional production in clear Lake offset slightly by the cobot impact in Asia.
Sounds good and then any sense on it I mean, the 150 to 250 million working capital benefit that you expect that that'd be mostly in Q2 or kind of spread throughout the year. Thanks.
That you want to answer that.
Yes, so I think most there can be a chunk of added that is Q2 as we see you know the more acute demand impact that Lori talked about happening in the current environment and we will gain working capital here. So we will see that we do expect with really actions that we're taking and this is not a new thing for us we've been heavily working.
Working capital actions around accounts receivable accounts payable the last several years and this environment really gives us that opportunity to push hard on the inventory side of the equation also so there's some sort of spent sustainable actions that we're taking in addition to just kind of the drop from a sales coming off so.
It will gain a lot of working capital in the second quarter, but we do.
Expect some of those actions to yield benefits in the back half also.
Thank you.
The next question is from David Begleiter of Deutsche Bank. Please go ahead.
Thank you.
Lora Scott on the as Appeals base earnings 80 to 190, I know you said, you're agnostic to oil price changes.
Why isn't it wasn't there some variability at a $25 oil price versus.
Don't oil price for the base level of earnings and that's in that segment.
Yeah, So David I think what we say as a company were fairly agnostic I mean, you will see a little bit of an impact in AC which is by you know why why lightbridge, including seasonality gets you to the lower into that 180 to 200, you know clearly you will see some impact in AC but.
That said, we see some a little bit of offset any where our prices don't typically for about two thirds of our value the prices don't track down with raws and so we get a little bit of expand margin expansion in EM that offsets the compression of margins, we see an AC.
Understood interest.
In India Anderson, the affiliates, what's happened with or even seen I give her a low a MTB margins. These days.
Got you an answer that.
Yeah, So David I'm, our dividend, Arizona, one quarter lag. So what came through in Q1 is what we saw from Q4 and then likewise, you're stepping through into Q2. So we're going to see most of that impact in the second half of the year that we're seeing.
To be follows oil so pricing is coming down and we will get some compression there on the flip side in the E.M. segment, you'll get upside from where we get margin expansion, where we have pretty sticky pricing as we talked about earlier.
Thank you.
Next question is Laurence Alexander of Jefferies. Please go ahead.
Good morning, do you see any opportunity to or do you have any interest in acquiring.
Okay downstream assets feels assets for the mature that worked further optimize or give you more degrees of freedom.
And secondly, can you remind us where you are on.
Innovation cycle in assets the old <unk>.
Before we see.
And today, it's a good information and Opex and Capex projects.
Yeah, you brought up a little but let me answer the first one so I mean clearly you know we just completed the acquisition of Ila tax that is adding down to the backend of our asset till chain with Redispersible powders, we're really excited to close that deal despite having to do a remote.
Lee I mean, it is a fast growing market.
And we think it's a great additions. So we do continue I think it's just an example, we do continue to be very interested and continuing to expand our asset tail chain, where it makes sense.
To deliver greater shareholder value, which we think you know eagle attacks fit that you know in terms of innovation I mean, we continue to be very flexible with our assets Hill chain. We we like the model that we have which gives us a lot of optionality and gives us a lot of ability to pivot I gave examples earlier of the amount of tonnage.
We can move geographically as well as tonnage downstream our teams continue to innovate constantly around Bam animals funds and offering new products to our customers I'm. So I think we're doing doing very well there.
Thank you.
The next question just from Jim Sheehan of Suntrust. Please go ahead.
Good morning, Thanks for taking my question.
Well, we looked at a natural gas prices in Asia, and specifically, China, they're they're moving lower into the region actually of coal prices I'm wondering how you think that's impacting competitive dynamics in China, how sustainable might that be and does that really affect the asked until changed at all.
Yeah, I care I don't really know much about natural gas into Asia. These days, so I can't say, how sustainable that will be what I will tell you it CD asset equipment.
In China is built around on coal to methanol base. It would take an amount of investment in order to convert that to natural gas the methanol base.
So I don't see that happening quickly I think you would have to have a very sustained period of competitive and low natural gas prices as well as.
Some a surety of continued supply before you saw people willing to make that investment away from coal to natural gas.
Yeah, Jim natural gas is earmarked for personal consumption, there's very little chemical production based upon natural gas and we just haven't seen a policy shift in that direction.
Okay and on social distance thing you know you talked about you know the impacts that might have on new project development I'm wondering about maybe you could comment on how it's affecting your your integration of acquisitions like Oh attack.
Yeah, well you know social distancing on besides the fact that we have about 2000 people working from home. These days you know we still have another five roughly 6000 people working in our plans and so we have learned how to operate with social dismissed the using personal protective equipment as needed.
You know I think that's gone very well and we've been very fortunate we've had.
No cases of of Cobot 19 transmitted at work and so I you know I think we can learn to operate in this way I think it's been good I think you know people. Other we see the same thing in other industries and socially people are learning to work this way, but we just need to get consumer confidence back.
Thank you.
[noise] Brock.
That concludes our time for questions today, I would like to turn the call back over to aid Paul for closing remarks.
Thank you Brian.
Thank you for your questions Im listening in today as usual we are available after the call further questions you might have rough feel free to close up the call. This time.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation. Thank.
Thank you.
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