Q3 2020 Celanese Corp Earnings Call
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This conference is being recorded.
Now my pleasure to introduce your host branded <unk> Senior director Investor Relations.
You may begin.
Thank you Doug welcome to the Celanese Corporation third quarter 2020 earnings Conference call.
My name is Brandon <unk> Senior director Investor Relations.
With me today on the call are Lori Wright, Kirk Chairman of the Board and Chief Executive Officer.
And Scott Richardson, Chief Financial Officer.
[music] Sony Corporation distributed its third quarter earnings release via business wire and post the prepared comments about the quarter on our Investor Relations website yesterday afternoon.
As a reminder, we will discuss non-GAAP financial measures today.
You can find definitions of these measures as well as reconciliations to the 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 found at the end of the press release as well as prepared comments.
Well <unk> reports containing all these materials have also been submitted to the.
Because we have published our prepared comments yesterday, well now open the line directly for your question Doug.
Doug. Please go ahead and open the line for questions.
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Our first question comes from the line of John Roberts with you. Yes. Please proceed with your question.
Thank you I would have thought that a lot of plastics inventory would have been left in the supply chain with the auto plants and other manufacturers shut down earlier in the year. So I would've thought the celanese would have lagged the recovery of the customers, but it seems like you've been pretty coincident, maybe you could comment a little bit on that timing issue.
Yeah. Thanks for the question John I think what is clear to US is you know we were say dropped 2019 that we would need a lot of de stocking in the auto team and so we went into the 2020 with much lower inventories in our estimation Ben its typical in the entirety of that change.
And as we went through the first quarter auto with Durrani, well certainly in the Western Hemisphere, and so we really have not seen any build up during that time, we were down and we've seen really steady demand consistent with our even actually a bit better than you've seen auto build recover. So I think what's different this time than maybe in power.
Last recession, our past downturns. It's just the fact that we had gone through a pretty significant period of de stocking already in 2099 could you provide a little more granularity on your comment about rising raw materials and is that causing you to activate your network any differently.
Yeah. So there's no impact all in third quarter from rising raw material, what's the ethylene pricing. So we really thought ethylene price eat up throughout the entirety of the third quarter really in all regions of the world I wouldn't say, it's had a real difference in terms of our uptil chain in terms of our activation.
We really haven't seen that passed through to our engineered materials. It's not it's not been an impact there really being the long supply chain and the EM, but we did see the impact as you noted from our comments in the third quarter, especially in Africa till it really we also saw some increases in methanol and C O b.
End of the quarter and some of those increases we weren't able to pass through pricing in third quarter, but would expect to be able to mitigate in fourth quarter.
Thank you.
[music]. Our next question comes from the line of Bob Crow with Goldman Sachs. Please proceed with your question.
Thank you good morning.
Thank you good luck.
Not too long ago stopped talking about discrete project wins and yeah.
I'm just wondering if you could give us some sense of what you might expect a as we look into 21 versus 20 will be.
At parity or could it be better your chances to be actually lower.
How do you see those new projects applications developed.
Yeah. So you know, we really stopped talking a lot about project wins, just recognizing that not all projects are created equal and just because we had a lot of wins doesn't mean, we're necessarily creating you know and more value, but it is something we still try I would tell you where the third quarter, we were well on target with a number of one.
That we expected to have as well as with the margin expectations from those projects. So as we go into 2021 I actually continue to expect to see the number of project wins going up we managed to build a lot in the pipeline are doing really good work by our commercial teams working virtually anything new formats for us.
Like you know webinars and that sort of thing and so we're seeing the number of projects actually continue to go up as well as the value of projects continuing to build pretty significantly I mean, maybe just a few examples of wins, we've had during cobot and more recently so as a result of one of our Webinars and we recently did one.
And on electric vehicle batteries weight of over 200 customers attend that that series of Webinars across the region.
And as a result of all the work being done during cold bed. We've also had some really good placement so not just eat which are booming, but also we've had a big contract for L.C.P. into one of the leading electronics manufacturers, which goes into smartphones and tablets and headphones. So our commercial folks are doing a great job continuing to find those area.
The growth continuing to find those areas, where our unique technology can really be applied at meaningful margins and you know we feel.
Still very good for us going into 2021 with some of the ones. We've had this year and have teed up for next year.
It could I ask you you started doing your share repurchase where the proceeds came in was that just a function of expecting.
Second in the world that he on so it was a good time to start buying and that do.
Do you have a pretty short list of way Scott can spend that money on M&A next year or is that still a lets.
Somewhat of a Murphy environment.
Yeah. So I think in terms of share repurchases, yes, we did start prior to the actual close because obviously, we could see the close with insight. So we wanted to go ahead and get in the market and start those share repurchases and spread them out over a longer period of time as a result of that clearly we're in really good financial shape, we've been quite.
Active looking at M&A I'm on the positive side, Yeah. We've had most of our management team together now says Gee and so we've been able to use that to really we set our sights on M&A do a broader look at M&A targets I would say, we have not a short list, but a pretty well to buy less of those.
That we're interested in both for a bolt on standpoint, as well from a larger you know more transformational M&A standpoint, we do see the market starting to get better at people stock prices are improving you know the discussions can get more serious people or I guess, the only better about getting value for their assets. So yes. It does.
Since our on going but as we all know this takes some time. So I think yes, it's probably well into 2021 before we'd be able to akshay anything.
Great. Thanks very much.
Our next question comes from the line of Duffy Fischer with Barclays. Please proceed with your question.
The same as it did in Q1 in that we'd be flat at this level of economic activity in Q1 next year.
To start out or how would you gauge that economic level today, and what we should use that to model into 2021 for you guys.
Yeah. So we you know let me just start if we looked at fourth quarter, you know, we actually see our volume and pricing being up in fourth quarter I'm kind of the base material, but we still do expect that december's seasonality. So in ASP until maybe seasonality it's happening today, if we look at no happen.
[laughter] and some of the western and Northern States you don't have to build we typically see some drop off in demand for emotions and bay and powders as we see a slow down in the construction industry due to weather and engine <unk> in engineered materials, we typically see not so much of the volume drop but.
More of a margin mix effect as we see western hemisphere companies take time off over the holidays that volumes usually replaced by a pick up in China, and Asia, but usually have slightly lower margins. So we still expect some seasonality in Q4, but on a growing base. If you will of.
Oh, the inquiry volume and pricing as we looked at 2021.
<unk>, we have a lot of uncertainty right now with co bid our expectation is that 2021, we will continue to see growth and recovery.
Back to 2019 level sometime in 2021, so continued recovery out of 2023.
The reason we provided the guidance we did as you know we don't know exactly what that looks like and given all the uncertainties around co bid in the world today, its kind of hard to call that so that's why we called out our controllable actions the things that we know well add $1.25 EBITDA over today's earnings. So if you feel like you know you expect.
Net earnings for 2020 at $1.25 I did up pretty much more of what we'd expect next year, maybe to put it in perspective, if you assume Q3 demand level would persist for all 2021, you know that adds kind of another dollar on top of that war volume growth and price.
<unk> growth. So yeah, we are expecting a more positive 2021, but again just uncertainties around co, but right now what that might happen as we see going on in Europe in the U.S., We just haven't really put out a definitive outlook for 2021.
No. That's very helpful on that that dollar comment and then could you also why now what I'm, losing poly plastic does as we anniversary that over the next three quarters and is there anything else discrete like poly plastic that we should think about picking out of 2021, when we go forward.
Yeah, you know I think the discrete things you know poly plastics call. It roughly 10 million a quarter comes out starting now in the fourth quarter, so that needs to be taken place and then I think the really discrete things are what we called out in the earnings. So a 25 cents for productivity net.
Productivity into next year 50 cents for lower turnaround expense into next year that is for certain and then another another 50 cents per share repurchases half of that being for the repurchases. We didn't 2020 offset by plastics and the other half being for share repurchases, we plan to do in 2020.
<unk>.
Great. Thank you guys. Thank you.
Our next question comes from the line of Jeff as a caucus with JP Morgan. Please proceed with your question.
Oh, thanks very much.
I think year to date other activities in terms of EBITDA.
The benefit of about 46 million.
And at least on an operating EBITDA basis, I think it was about 30 million in the quarter.
Can you talk about what's behind those trends.
Whether there whether they will continue and whether your pension revaluation in the fourth quarter will be larger than it was last year.
Yes, Jeff the biggest chunk of the year over year. Other activities is that that pension income component, a which is in the neighborhood of between 25 and $30 million benefit year over year. So that's the largest benefit you have seen a little bit of a movement.
Being down in other from quarter to quarter, this year, particularly kind of hitting the low point here in the third quarter, largely driven by timing of some compensation and benefits payments, we'll see a little bit of an uptick think about Q4 being slightly higher than Q2.
As a as we finish out the year and part of it's just timing of when some of the stuff has come through so you know in the end as we look forward into next year, we expect a slight uptick in our underlying expenses and that will more than likely be offset by the Q4.
Your pension that Josh adjustment I mean, a lot's going to depend upon what happens with markets. We expect interest rates right now to to hold relatively low and if things stay where they are then we'll have a slight benefit and pension income next year, which as I said, probably be offset by some income or some.
Rent increases.
Okay, and then in terms of your share repurchase.
Sounds like you're going to execute that regardless of the celanese price.
That's true that is it doesn't matter, whether it's at 100 or 120, you're going to spend.
The 500 million you've allocated this year and I guess, a similar amount for next year.
[music].
Well I you know yeah, I think it's fair I think you know the 500 this year that we have or what we have remaining this year is really to remain accretive on our poly plastics sell so that well continue and I would say for next year. The four to 500, we have allocated for next year is really the balances.
Cash flow following Capex bawi dividend payment and you know like Scott may want to comment further, but we generally like to remain in the market on a fairly steady basis, regardless of the price then and we don't really see that changing as we go into next year, Yeah, Jeff consistency has been exactly how we buy.
Operated when it comes to repurchases over the year you know we have been opportunistic from time to time, but you know we like to have kind of a set level that we remain in the market and that's what we plan to do here in Q4 as well as into next year based on with those levels that we outlined.
Okay, great. Thank you so much.
Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you on the electro surgery comments and engineered materials I mean, it sounds like this is a deferral and not a destruction of demand then it's just a question of when.
Folks you're going to get back in.
And do those procedures.
But I just wanted to kind of understand the cadence of the de stocking.
Yeah, I might have guessed it would happen more to Q versus Threeq, you and obviously caused a big mix mixed disruption. So maybe you can just bridge that with you know is this just something that once there is a vaccine. Those people are are going to get back to him and have their hips or knees or what have you done and how far in advance do your customers that need to read.
Build the inventory that they're taking out now.
Yeah, Great question Vincent what we really saw in Twoq you were no electric elective procedures happening and I think if you read Johnson and Johnson or E. Bay's relieved that wouldn't back that up I mean, just no elective surgery, what's happened in Twoq. So basically in second quarter, everybody was sitting there with.
The inventory they had that the sudden shut down in March of all elective surgeries across the U.S., which is probably the primary market that goes into and so we have seen as third quarter that elective surgeries are starting to really happen.
But what we're also hearing from our customers is people are using that inventory they've had sitting on the shelf waiting to see how fast. This all comes back before starting to reorder. It look it's not a long we carry inventory. So it's not a long supply chain. They know we have available and we are starting to see some.
Like uptick again in fourth quarter. So we fully expect this volume to come back across 21, and 22 I think it's not just the hospital being open but again. These are generally older patients getting that so it's also people being comfortable either because theres a vaccine or because it's all the buyers under control that people feel comfortable to go.
Back to the hospital again they have these procedures.
And then if I could just follow up on the comments about manufacturing facility is fully staffed and operating EBIT improved demand maybe more specifically an essential what rates are you operating at you know in in each region as I recall there was some.
Asset down in Europe, and maybe some lower.
Lower utilization than in Asia. So just maybe a check in on where those are would be helpful.
Yeah, So I would say for us until I mean, all of our facilities are back up and running we do have a short turnaround at clear Lake actually that were in at the moment, we had a short downtime in Singapore. So a number of you know small maintenance downtimes that were planned into the numbers, but really everything.
Is up and running all of our staff is back at full force a I would say certainly for derivatives I think they're pretty much running at 100% to meet the demand and you know an acid were running to meet demand as well. So you know we are fully staffed fully ready to go add and actually have seen.
For the last several months, but the demand there to pretty much run fall as we pointed out I mean for US until we are just slightly under 2019 volume already at this point in time.
Okay very good thank you so much.
Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.
Hey, good afternoon nice quarter.
Lori when you think about that dollar upside for 2021 and that does that assume that the I feel change sort of the trends you're seeing now pricing of 300 and ops.
Optionality focused downstream yeah, its emotions powders, what would would stay in that range for that dollar.
Yeah. So it was really just throwing that out as example, mark <unk>, Mike sorry, as the range that we would expect to see so you know third quarter kind of beat our best quarter. This year. If we saw that continue next year you know that would get you. The dollar. There are you know any multiple ways to get there I would say, though as we look to 2020.
The one I mean, we are seeing an up tick in asset prices in China.
Today, you know up closer to kind of the mid 300, Mark up from the $300 per ton we were at in third quarter. So clearly that's an upside in Athens Hills as I said, we're already getting close 2019 volumes in acid tells the story. There is really you know when do we see utilization get tied in.
If we start to see some price recovery, which we think we're starting to see now again some seasonality expected in derivative in in December but we would expect that you know that's come back in January Yeah, Mike I think just to add I think what's really important as we think about that is really contribution margin.
And so we may see.
Pricing move up as raw materials move up so we've seen you know a lot of our fundamental raws a increase year over the last two or three months and if that were to hold these prices hold so we really look at contribution margin. So if you kind of the current conditions were to continue as Lori mentioned in third.
Quarter, and what we've seen here in the fourth quarter that that dollars the level you see.
Understood and then I think in your prepared remarks, you talked about a 400 million ourselves to be used for organic growth.
Can you maybe talk about some of the areas that you're going to you're going to invest in to do you know to drive some growth for the next couple of years.
Yeah. So we're predicting a you know 400 to 450 million of Capex for next year, we're still finalizing that number but I I feel comfortable that we should be.
Well north of 400, it is to support organic growth as well as our run and maintain a level of maintenance, which we typically have in there at around 150 to 175. So included in that number is the restart of the city gas expansion at clear Lake that happens at the end of 2021 it.
Seems like the bishops you you are we previously announced some expansion in our BHP and Bam facilities around the globe. So that that number is built in there as well so a lot of things that youve already heard about but just really seen them start hitting heavier capital next year and our teams are pushing hard on cost reduction cash.
Total as well, Mike and so we're working to accelerate project as we talked about earlier this year and so embedded in that number is.
Capital needed for some of the productivity gains that we called out in the prepared remarks.
Great. Thank you.
Our next question comes from the line from a song Ahmed with Alembic Global. Please proceed with your question.
Good afternoon Gary.
Sorry, sorry to bother you guys back to another question about the Twentytwenty One guide.
I know you guys had said that obviously you know as as the P. S stands right now Q3 was the strongest quarter.
But you know as I take a look at Q4 guidance or at the midpoint call. It you know slightly north of $1.50 and then I sort of think about the one off you know a seasonality as.
As well as some of the turnarounds you come up with a number of recurring which is north of $2 right. So I'm, just trying to understand or get a better sense of run rate sort of.
Yes, as one thinks about Twentytwenty, one so I mean, it seems barring those one offs ones already north of $2. And then you have you know 25 cents worth of productivity. Another 50 cents worth of buybacks switch seems without much improvement from Q4 levels.
You know one go to hit maybe $9 in Twentytwenty, one is <unk> am I thinking about this the right way.
Yeah, I think that's right. If you look at where we are we guided to end the year somewhere $7 or slightly above $7. If you add on the 125 that is based on controllable actions that we outlined in the comments that gets you to you know a 25.
Maybe a little bit more and then if you consider some level of recovery again <unk>.
If it were Q3 for the year. You know you can quickly then get yourself to nine or a bit north of nine next year again, our bigger how do you out on that is just being the resurgence of the cobot and not knowing what that's going to do to market in Q4 and into next year. That's why we haven't called out a specific level of recovery.
Of course of course makes complete sense and as a follow up you know you pointed out is $5 million sequentially. It.
From a ibn Sina no you know if I, if I recall correctly, there tends to be a quarters lag between what oil prices do and the impact of that being felt in your results and they've been seen so is it fair to assume that you haven't seen it could be you know a a somewhat of a tailwind you know gum gum Q4.
Yes so.
I haven't seen a is a quarter lag. So if you look at methanol prices. They were at very low levels in Q2 that the additional $5 million sequential hit we saw this quarter from Encino now with methanol prices recovering we would expect to recover that $5 million from evident seen in fourth quarter.
Yes, but you won't see it flow through I found on the equity earnings line, because it will be offset by the roughly 10 million or so that come out from poly plastics. So we used to look at those two together down five Q3 to Q4.
Absolutely.
Thanks, so much for it.
Our next question comes from the line of PJ Juvekar with Citi. Please proceed with your question.
Yes, hi, good afternoon, I PJ so why.
A question about your luge Cellulosic plastics.
I didn't does biodegradable plastic for food pick out et cetera.
How big is that market and how much polyethylene or P.D. can you replace with Cellulosics.
How do you price. It you are charging a premium over let's say a pea.
Yes. So you know let me describe it this way the assessable market for this material could be huge. The reason we went ahead and made the market eat announcement. It. We're at that point now we need to get material out to customers, we need to give them the chance to try it out it is a more costly product.
And P.E., that's why this hasn't really been a factor in the market today, but we also know that there are customers out there who are looking for a sustainable bio degradable solution, who are less sensitive to the price point, but that's what we really that's why we made the announcement, we really are in the process of getting material outcome.
Merz, we've had a few small purchase agreements made for people who are going through trial, but we need more time frankly to find out what the point is on this and what the demand is really for replacement a more traditional PE products.
Okay. Thank you and then secondly, as you bring more computer oxygen production into your wife.
You are more exposed to natural gas prices here.
And maybe Scott if you can comment about is that are you concerned about rising natural gas prices because of lower associated gas production.
And are you hedging any part of your natural gas purchases. Thank you.
Yes, So you know, but we don't expect rising natural gas prices to have a really material impact on our business.
You know it does have the potential to slightly compressed margins, but you know this is the value of our global network. The fact that we can choose where to make the acetic acid were to sell it we can flex our production levels weekend, let's rather down into derivatives, which are you know less raw materials. Since then so we really are not exposed.
Seen any material impact.
From this in the fourth quarter.
He joined we do take some short term positions from time to time, but.
Nothing that I would say is it is long term in nature, if you will.
Okay. Thank you.
Our next question comes from the line of Matthew Geo with Bank of America Merrill Lynch. Please proceed with your question.
Hi, so perhaps.
Perhaps this isn't the case in east, but has cobot slow the pace of innovation at CE or the customers at all I would think just given restrictions around staffing and R&D labs, you may just have a slowdown in the pace and implementation of new business.
So great question, Matt I, you know I would say what when we first went into co bid I mean, certainly it had an impact as well and I think people thought this was not a long term thing and so things were just put on hold for a short period of time I.
I would say all of our customers and ourselves included have now adjusted to the new World of co bid and if anything we've seen the pace of innovation pick up again most of our folks are back in office in facility. So we've been able to do a lot of things for customers. We also see our customers coming back and we also see them getting more comfortable with doing more.
Or remotely so you know again going back to my previous answer it on on wins, we are still seeing projects when were seeing high value project wins, and we feel Derrick.
Very excited about the pipeline of.
When in engineered materials for next year and the innovation that's gone into that you know it really was helpful for us that would be in the 19, we really focus our strategy on what we considered a few emerging trend around by GE, and electric vehicles, and medical and pharma and favorable solution and that.
Focus on that innovation and keeping that pipeline strong people bed is really helping us now as we move into the recovery and we see those areas continuing to emerge as winning sectors.
Okay, and maybe on the same light how long is it going to take you to fill out the new.
Our capacity and what EBITDA contribution and expansion what would that look like.
I mean, most of this is going to be batteries to maybe if you can provide a little more color there.
Yeah, so that the expansion that we announced in Bishop the 15 K T expansion should be online early 2022, it is really supply and our global network for electric vehicles, and if the current rate of growth in electric vehicle, but 25% a year you know quite free.
Thank Lee that will be sold out the day it starts.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Lori just on 21, you highlight a number of Tailwinds for next year.
Once we shouldn't be thinking about for next year from a bridge standpoint.
No not really David I mean for US. The headwind is you know does something happens to the economy because of a reemergence cobot and that's why we haven't called out any specific you know projections for us in terms of volume and price growth, but no. You know we intentionally pulled a lot boarded 2020 this year.
In terms of the facility changes inventory draws all those things to take advantage of the low demand environment.
So we really don't see any major headwinds going into next year.
And just on a easy Lori where are your sales today for even UBI related content and work can they be do you think in three to five years.
Hi, David I'm I'm I don't think I have an exact number I mean I would say you know do you are you had other applications be by E. V is certainly the fastest growing of those application and we expect electric vehicle the market for electric vehicles of which we are.
Our pretty significant player in the lithium ion battery separators to grow at about 25% per year for the next five years, Yeah. It's a tough question, David because there's a lot of applications, where we have content on a vehicle that it doesn't matter if it's and it's a nice vehicle orbitz any vehicle so some.
The times, it's it's hard for us to parcel that out if we look at E.V. specific applications, it's very low single digits.
The percentage of the EMS revenue today.
Thank you very much.
Our next question comes from the line of Ghansham Punjabi with Robert W. Baird. Please proceed with your question.
Thank you hi, good afternoon everybody.
Hi, guys.
Hi, Laurie what would you be able to give us a sense as to what the exit run rates for the engineered materials segment was you cycle into the fourth quarter, what do you sort of baking in for the fourth quarter specifically.
Also I realize this is real time, but what are you hearing from customers given the incremental.
Downs in Europe.
You know over all four of 'em, we expect probably 10% growth that though for the company I'm not sure I really haven't specified between he and AC, though we expect about 10% growth before the impact of seasonality or.
You know volume and price I'm going from third quarter to fourth quarter and I would say what we're hearing from our customers. I mean, just if you look at our order book, that's probably the easiest way to talk about that if you look at EM. You know October is showing some modest improvement over Q3, the average of Q3 november's pretty consistent.
With that.
December is you know we don't have as much view on that yet, but it's still showing that same kind of level of modest volume growth, but again, we get some margin impact in December and so far I would say, we have not really seen Indian any indications of demand destruction associated with this second.
Wave of co bed, either in Europe or in the U.S.
Great. Thank you so much and then in terms of productivity I mean, you're calling out call. It 25 cents in EPS.
21 versus 20.
None of that 35 million at the midpoint of temporary cost savings reversal.
This year I.
I think your productivity numbers 200, plus is the 21.
Rob how do you ever your base is a function of just lower Capex. This year and then as you ramp that up you know that trend line improves materially in 2022 or is there something else when I consider.
Well I think you have to work I mean look 2020 was an exceptional year with exceptional a headwind. So yeah. We went into this year I'm planning to get about 150 million of gross productivity, we bumped that up to challenge the organization to 200, which we will get that this year.
I was I had another $30 million to $40 million of one time costs. So if you look at next year. In comparison, we are currently targeting for at least 100 million of productivity on a gross basis, that's actually pretty typical to the level. We've achieved over the last few years. If you just don't look at 2020, so we put that target out there.
The 100 million I'm quite sure about cheese that its a little it looks a little lower when you look on the EPA because you have to offset that with the onetime cost savings. We had this year things like not running our production our facility this fall and not having travel and those sorts of expenses. So we fully expect those costs will come back in 2021.
As we see ourselves running closer to fall and so that that discount that EPS number a little bit but actually the hundred million grows we have it pretty consistent with what we achieved most years and of course, we'll push for more about hundreds what we've baked in right now yeah I got them, we didnt have the the tow plant shutdown that occurred at the.
End of 2019, which was kind of a a big item as we started 2020. That's in this year's number and we don't have a an item that large as we go into 2021.
Okay perfect. Thank you so much.
Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes. Good afternoon, now that you've closed the poly plastics transaction, what's your estimate of the after tax proceeds.
We'll be the first part and then secondly of the proceeds I think you mentioned you intend to use a 400 million to repurchase shares just in the fourth quarter and I was wondering as a practical matter if you determine whether to do that by a SAR or open market repurchases.
Yeah. So so for poly plastics, we expect the after tax proceeds to be something greater than $1.3 billion. A we are repurchasing associated with that 500 million to assure there but the deal is accretive we did do a portion of that in third quarter and will do.
The remainder and fourth quarter.
Got you may want to answer your question.
Yeah, we are our strategy Kevin on repurchases has been to do open market and that's our plan here in the fourth quarter as well as for the four to 500 million that we outlined for next year as well.
Okay, Great and then Scott.
As a brief follow up for you I just had a housekeeping question on free cash flow in the third quarter like you mentioned in the materials yesterday that it was 351 million so.
Apparently a strong number there of that amount you said used 184 to return to shareholders can you speak to what the balance of the free cash flow was used for it it looked like that that's just just declined a little bit.
Yeah, we did end up we built a little bit of cash Kevin just mainly for uses a geographic mix of where we need cash so our cash on hand increased by roughly about 100 million from Q2 to Q3.
Okay I'll circle back thank you very much.
Our next question comes from the line of a run Viswanathan with RBC capital markets. Please proceed with your question.
Thanks for taking my question.
I guess I was just kind of curious if I could ask this a different way maybe if you could help us understand your own volume levels, you know from an exit run rate standpoint and in Q3.
In both EM and AC.
You know on a percentage basis.
Are you running maybe about 80 or 85% of of normal in certain markets or how did you kind of characterize your exit run rates on on volume at each segment.
So I would characterize it you know as the killed. It we are just 1% below our 2019 level. So I would characterize it as we are running pretty full everywhere again, you know maybe we don't run every acetic acid plant bull everyday that's not how we run it but our strategy.
But we you know our downstream derivatives everything is running full I mean engineer materials, we are within 10% of where we were in this quarter and 2019, which is a pretty full quarter. So with the exception of things that are down for turnaround are starting to go down for turnaround you know like the IPO.
Hi, Tom I would say all of our facilities are running fall.
Okay. Thanks, and then.
Do you have any updates on.
Optimization plan and in a C. And then also potentially adding capacity and yeah I'm in China. Thanks.
Thanks.
Yeah. So as we said last quarter I'm for it we've talked about the.
Did you get that expansion in clear Lake and optimization of our network to do that we have delayed that expansion in 18 months I'm just in light of what lower oil prices and other things that make it attractive to continue to produce and other parts of the world. So.
So that continues so no no announced plans of what we're going to do with the rest of our capacity and then in E. 'em. We are continuing with a localization prospect in China again, a little bit of a change from where we were say.
Half a year ago and that originally we were lucky that developing another site in China in order to continue to expand both our preliminary station as well as our compounding and technology capabilities there.
Due to some changes in Nanjing, which is where we have other facilities, we actually had more land and and facilities available to us and so we have actually we designed that project. If you well take advantage of the efficiency of being able to expand on our existing location. So those those plans are continuing.
We'll see more about that coming up but those plans are continuing on a pace consistent with how we see the demand continuing to grow in China and Asia region.
Thanks.
Our next question comes from the line of our alerts.
He free month with Keybanc capital markets. Please proceed with your question.
Yes. Thank you good afternoon, everyone.
We recently announced a price increase in engineered materials for up to 10% could you tell us what's what's your expected realizations maybe over the next couple of quarters.
So could you discuss what led to this announcement.
I'm, sorry, let's say I didn't hear the last part of question.
Just could you discuss what led to this announcement.
Lucy tightness in any product lines or something but.
Yeah.
Thanks.
Yes, we just did announce a price increase I mean as with all these things they take a little while to work through so if you think about it with increasing raw materials, so, especially ethylene, but also increasing raw lead iris he gets it and all the building blocks chemicals that go in polymers.
We announced the price increase to try to get out in front of that to make sure. We didn't have margin compression. So that that's what goes behind the announcement. It takes us as you know it does take some weeks or months to work through the price increase depending on contract depending on a you know everything else, but we do expect to see those price.
Increases flow through as we move into the fourth quarter.
Thank you Lori and also on engineered materials your volumes were down 7% year over year and you said in prepared remarks that automotive volumes were down 3% to 4% year over year. It also seems like appliances electronics are doing well.
There's the minus 10% primarily.
Well I suppose this seems a bit tight relative to the weight of medical Oh volumes.
Yeah, So I would characterize it you know our volumes were down.
A little less than 10% year on year. If you look at all of our in market from an industry basis that was that is still down 10% to 15%.
So we're doing a little bit better I would say than the end market auto were down just 3% again auto itself was down.
Closer to three that little bit higher than that closer to 4%. We were helped there by the fact that we think we're aligned on good platforms like trucks and actually be in the U.S. and Germany, which has proven to be more robust as as well as E. B industrial is actually up a little bit year on year, which has been a help or a selective.
Phonics pretty flat, but we are seeing appliances, I'm down year on year closer to that 10% and medical as we said is down about 15% currently year on year. So just really two sectors I would say that have the biggest impact applies a medical but remember autos a third so even 3% down on auto a you know the fair.
The big impact for us.
No Sir.
Good.
Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Hi, Thanks, two quick ones first on the.
What is the culture around the growth platforms of growth priorities, sorry should we expect to re shuffled every three to five years, so that fiveg might be replaced by a new growth theme or is it a organic evolution sort of bottoms up driven by just the project mix.
And secondly on asset yields.
Should we expect a zero carbon a CD cap city.
Acidic acid production project.
In the next five years to be announced within the next five years and if so would it have to be a greenfield or could you retrofits of existing facilities.
Yeah, Great question I would say on.
All right, let me ask a last December I've already forgotten. Your first question because I got to thinking about the last one.
So perhaps until what I think in the next five years I would not expect a zero carbon technology I think it's difficult to do I mean, there are always ways to get to zero carbon through repurchase of credits et cetera, I'm not sure yet that's what our customers demand that said we constantly.
And we are looking at ways to reduce the carbon footprint of our existing facilities, whether it be through energy efficiency project. The purchase the solar energy for our projects like we've just done a big contract in clear Lake the use of bio based methanol, which have a greener footprint. So we're constantly looking at ways to reduce.
Our carbon footprint I would just say you know at this point in time were not on track for a zero carbon plant.
Again, unless we see a big change in demand from our customers.
And on your first question Laurence about the engineered materials growth programs. I mean this is our model. We work. This we're constantly working with our customers and evolving those.
Those focus areas and where we have our resources on innovation.
To be able to adapt to the changing landscape. So yes today, it's things like Fiveg electric vehicles, a sustainable and recycled polymers as we go over the next and really it's something we're evaluating really every year is where should our focus be and continuing to adapt so yes.
Three four or five years from now we will be talking probably about some different things.
I would just add to that though I think you know this is a little different than we did we did say several years ago with with all bottoms up we've added the overlay of the game because what we found is by waiting for the customers to come to us we weren't necessarily getting to the right customer early enough in the development.
Process to be their supplier of choice. So it has to be both going forward. It has to be bottoms up as well as looking at the landscape in the future and say what are the emerging themes and how do we make sure. We're there from the beginning not wait for someone to come to us.
Great. Thank you.
Our next question comes from the line of buyback no doubt, yes, with BMO capital markets. Please proceed with your question.
Hi, Good afternoon. This is my last call it John.
So in public attitudes.
We've been a bit surprised to see acetic acid and then pricing be as soft as it was in China and yet the industry itself seems to be running at.
No downtime so I'm just surprised at the high operating rates, Yes, we have now and then how should we think about the supply side of the equation as we think about next year.
Yeah, but as you may remember 'em, we called this out in our earnings call in second quarter, which was that we did expect modest volume recovery, which we saw a bit better than expected, but we actually expected fairly flat pricing and the reason was we said we didn't see the fundamental.
Within the industry to support more pricing and I think in fact, that's what we thought so we did see an increase in demand in China, you know almost a 10% Q on Q increase in demand, but we also saw outages fall by a third. So then more supply came on to basically meet that demand and as a result.
Lace in China was pretty flat right at that 70% level and that's why we Didnt think we see pricing increase and in fact, while we didnt see the pricing increase now as we move towards the end of the third quarter and into the fourth quarter. We are seeing raw material prices come up that's starting to push prices up.
Generally that result in slightly better margin.
What I would say you know to really see a good strong price recovery work and margin recovery, we're just going to need to see that utilization, especially in China continue to improve.
Got it and then.
Quick question on in terms of how the season. So so what both in terms of the acid These businesses.
Is being sold to the debt if it Tim snake emerging than others, and how should we think about maintaining that dynamic going forward because it certainly seems that that's moving out some of the volatility in the business.
Yeah, absolutely and that's definitely part of our strategy, which is to control as much of the chain as as we can so that we always have the choice.
Not just geographically where to produce and where to sell but also where in the chain to produce and sell so if you look at our flexibility we move anywhere from 40% to 60% of our acetic acid into downstream derivatives, and we flex that depending on a you know on what's more attractive.
And constantly we try to you know we're continuing to build more back some more b E. We bought you attack, we continue to do things to give us more flexibility that chain and more ability to move things around.
I mean, and you know a good example, I think of that is if you look this year you know the <unk> this quarter, sorry third quarter the amount of acid, we sold into China was actually 20%.
Then what we sold in 2019 at the same time because of these kind of $300 per tonne that wasn't attractive we move that volume into derivatives in China, which had better margin and also into other regions of the world and you can see that really as well and the total if you look at kind of the share.
As still earning that came from some of the very end of the chain emulsions and Redispersible last year that was around 15%. This year that's around 25%. So I think that just shows the plant is an example, the flexibility that we have in the model to really new.
Where are the better margins are whether be geographically or you know asset versus derivative.
Hey, Thanks for your time.
Our next question comes from the line of Frank Mitsch with a freemium research. Please proceed with your question.
Oh, Thank you good afternoon, and congrats Brendan on your new role.
I, if I could just follow up on that acetic acid question, China I, just saw something in Isis that showed operating rates, reaching levels not seen any year over 90%.
Seems rather high so I guess I.
Yes are we ready to declare that you know China is fully back and where we are restocking or how does how do we think about operating rates over 90% in China.
Yeah, I'd have to see the data trying to be fair. There is a lot of different numbers reported we are not seeing that kind of return in terms of utilization based.
Based on the numbers that we look at demand is strong Frank I mean, there's there's no doubt it is improved in China I don't know if we're ready to call. It that it back if you will but you know certainly demand was was strong at the end of the third quarter and so far the order books.
As we see things into November.
Due to suggest that the end of the year in China in asset deals should be pretty good.
Got you, Thank you and and Scott I think Sony's had been talking about a 2020 free cash flow target. Most recently of 800 million plus.
Following this very strong third quarter, you're about 30 or $40 million sure. How do we think about 2020 free.
Free cash flow for the company and I guess, you know a lot of discussion has been on 21 and you're going to see.
Higher earnings from productivity turnarounds recovery, but you're also going to see higher Capex can you can you talk about what your expectations are in a free cash flow side.
Yes.
The eight to 900 million for this year is still a good number we think we'll be in that range, even with some some tax payments that will be made relative to.
The transaction that we completed so that's still a good range for this year and then as we look forward into next year.
So a lot will depend honestly Frank.
As to where demand is but we think that working capital inventory levels will be kind of at the run rate, where we need them. As we end. This year should we shouldn't have a big working capital pick up that occurs next year and so it should be pretty robust and we feel comfortable.
With where cash flow is going to be to call out that those repurchases of four to 500 million for next year and we expect those to come from free cash flow.
Great. Thank.
Thank you so much.
Doug will make the next question our last question.
Our last question comes from the line of Matthew Blair with Tudor Pickering, Holt and company. Please proceed with your question.
Hey, good morning, Laurie I was just hoping you could circle back to the electric vehicle space I mean, it really sounds like your opportunity is in the battery side.
Do you have any other opportunities we should be thinking about him and also there is the growth of east does that help your existing.
Plastics business into the auto sector.
Yeah I know, there's we you know we talk about lithium ion battery separators, because we are such a major player in that component and clearly that the easy one to see but frankly he be in themselves are a great opportunity for the polymer space. I mean, so you think about the literally miles of electrical cable lane.
All of which need conductors.
That's a great opportunity for US you think about how quiet. He these are and the fact that no people don't want to hear all the squeaks and things that used to be covered up by the sound of the motor So great application for things like palm that have really good topology, and and you know can minimize the amount of wearing between components that lead to that.
Squeak, you know that the electric vehicle has significantly more assessable polymer space. If you will for us than a conventional vehicle just in terms of because it needs to be light in order to have range and all those things I just spoke about so we actually have a lot of placements in electric vehicles for any range of components from.
Interior.
The other thing about the electrical system, and and more and more I'm under the hood there as well.
So it is a big space for US we see continue to see it as a big opportunity and one as I said, we've really been focused on since the end of 2019.
Okay.
Great. Thanks.
There's no further questions I would like to hand, the call back to management for closing remarks.
Thank you we'd like to thank everybody for listening in today as usual are available after the call for any further questions you might have Doug. Please go ahead and close out the call at this time.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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