Q4 2020 Celanese Corp Earnings Call
[music].
Greetings and welcome to Celanese Q4 call and webcast at this time all participants are in a listen only mode.
And answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Brendon I ask senior director of Investor Relations. Thank you you may begin.
Thanks, Doug welcome to the Celanese Corporation fourth quarter 2020 earnings Conference call. My name is Brandon <unk> Senior director of Investor Relations.
With me today on the call are Laurie Ryan Kirk Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer.
Celanese Corporation distributed its fourth quarter earnings release via business wire and posted 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.
Form 8-K reports containing all these materials have also been submitted to the SEC.
Because we published our prepared comments yesterday, we'll now open it up for your questions.
Doug. Please go ahead and open up the line for questions.
Thank you ladies and gentlemen at this time you will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is there any question queue. You May press star two if he would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset. Please.
Let me yourself to one question and one follow up so we may get to everyone's questions. Our first question comes from the line of Jon Roberts with UBS. Please proceed with your question.
Great. Thank you and nice quarter nice outlook there.
Could you give us an update on the M&A environment for advanced materials deals.
Sure.
I think as we said Jon in.
Written comments.
We are anxious to pursue M&A, we have a good pipeline of both bolt on and transformational deals that we've been looking at I would say earlier in the year I think people were just trying to sort out how to deal with COVID-19 how to deal with the current environment how to manage their cash flows and so we really didn't see a lot of interim.
From other parties in terms of discussing M&A I would say as we move here through the fourth quarter and people start to see markets returning more to normal I feel more confident about their outlook for 2021 and therefore.
Reasonable valuation basis, we are starting to see people, having more interest in discussions around M&A. So I would say the market is opening up obviously it takes us a little while to get through these discussions but.
Definitely looking better as we go into 2021.
And then Ken Cig tow prices increase we've got kind of an unusually strong environment I mean U S. Cigarette smoking I think didn't decline from the first year on a long time and I'm guessing it's up in China.
And you had a potential transaction that you worked on a while ago and cig tow I didnt know, whether any opportunities here to revisit that.
Yeah look I think on tow we did see some drop in prices from 19% to 20 those were based on the negotiations that happened in 19 going into 'twenty.
We've been negotiating in 'twenty or 'twenty, one I'd say the prices are stable and in some cases, a little bit up so I do think there is.
As you said, we saw less decline in smoking last year than expected in some areas, even an increase in smoking I guess people had more time at home. So we really do see that prices stabilizing now for tow and maybe even on a little bit of upward movement. So that's good. So if you look at our outlook for total we're basically saying we think for the next many years that is going on.
Be pretty much flat at this kind of $2 50 to $2 60 range.
In terms of the transaction.
We didn't get to do the transaction last time because of competition concerns in the EU. There's nothing that's changed in the landscape that makes that different. So I think it's unlikely that we would be able to do a similar type transaction even today.
Our next question comes from the line of Bob <unk> with Goldman Sachs. Please proceed with your question.
Thank you very much Laurie I was intrigued by your comments about changing the production base in acetic relatively initial plans.
Thank you referenced maybe some advantageous to raw materials.
Contracts can you talk a little bit more about what that allows you to do and why.
Now feasible to keep that production.
David rates instead of pairing it back a bit.
Yeah sure.
We had originally announced the clear lake expansion from $1 3 million tons to 2 million tons.
When we did that we assumed we would either shut down or cut back capacity in Asia. So it's kind of a net capacity neutral and the project was based on was justified based on productivity. When we made the decision to delay the project for 18 months, given the low oil environment, the uncertainties around COVID-19 et cetera.
We took that as an opportunity to really go back and reexamine the basis for the project and in doing so we found another 50 million of savings in capital we could make in the project. We also had a chance to go work with some of our suppliers in Asia and were able to negotiate during that that.
Raw material environment, and very favorable contracts going forward.
Both for Singapore, and for Nanjing, which makes it both of those locations more attractive from a competitiveness standpoint.
And we also found other sources of productivity specifically around catalysts usage in clear Lake in some other areas that when we really looked at it in total we said you know what given also the strong recovery, we're seeing in acetic acid, our view to the future of that acetic acid will continue to grow at GDP, plus maybe a little bit more.
And we said it really makes more sense for us to go ahead and do the expansion at clear Lake, which by the way, we're actually going to be able to expand clear lake to be about two six.
Tons capable.
So we will do that larger expansion at clear Lake keep all the facilities available to us in running in Asia, which again, we will run them full necessarily will run them to meet what we need in the market and meet the demand that gives us the option in the future. If we do see more robust growth to run.
Them at higher rate and we still get the same level of productivity and credit on a smaller capital base.
In clear Lake So actually I think the delay turned out to be a good thing we actually had a chance to go back and reexamine. Some elements of the project and have what I think is a stronger more robust economically project now as well as additional capacity, we can use for the future.
Got it thank you and on the <unk>.
KEPCO JV turning into a manufacturing JV.
Is that an earnings enhancement for you or is it just greater flexibility that can then lead to some earnings enhancement, how should we think about that from us.
Bottomline numbers standpoint.
Yeah.
I will let Scott comment, but I mean really it.
It's based on what we said in the past, which is we want the flexibility to move the molecules ourselves into high end market using our business model. So in the past KEPCO market at all of the molecule now we will have our 50% of the molecules that we can market and we can move into what we think will be.
Hopefully more attractive end market, so that flexibility, we believe will give us higher returns.
And then there are I think there's also some accounting changes that happened with that that Scott may want to comment on yes, and I think the other thing to add Bob is we will get synergies here I mean by now having polymer capacity in Asia.
And having 50% of that output, we're going to be able to realign our supply chain. So think about us getting synergies from this deal and kind of being like a bolt on M&A deal. So adding call. It 20 ish million dollars of earnings over a three year period of time and it didnt cost anything to get it so.
We're excited about that you will see the equity earnings line.
Which comes in on an after tax basis that will the portion that.
Kind of flips to the marketing return that we get will move above the line and we will then add revenue obviously for what we're selling there onto the P&L.
Equity earnings will come down over time, and as we stated with the announcement we expect.
That to close sometime later this year.
Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you.
Good morning, everyone.
If I could just ask on the shape of the year. It sounds like Youre expecting of <unk> normalized <unk> and <unk> and then presumably have more of a normalized seasonal for Q.
And then just one on that piece.
Why is it going to come back into <unk> I get that it's already sort of settling down a little bit but is there a case for it to stay sort of above that $170 million to $200 million range that you're expecting for the second and third quarter and then on engineered materials. If you could just help us understand how you think the shape of that is going to play out I know one other big drivers, it's going to be how fast.
Health care part comes back, but how are you thinking about and then again on the fourth quarter.
How do we lap on unusual <unk>, 'twenty and hopefully a more normalized 2021 environment.
Yes, Thanks Vincent.
So starting with acetyl.
Do expect a really robust first quarter as we guided to.
We do expect some normalization as we move into the second quarter and what could really change that I mean, if you look at what's driving kind of the fourth Q.
Let's call it really December and the <unk> pricing, we've had more robust demand all in China I would say.
For acetic acid and for Bam. So it really had been more demand led there hasn't been a number of shorter outages in China for acetic acid and Bam. If you actually look at the data it has not been significantly different than most fourth quarters. So I would say the tightness we've seen in December.
And going into January and February has really been demand driven.
Now some of those outages that we've had although there was a few more in January which has given us some volatility in acetic acid those plants are coming back online and that's why we say kind of once plants are back.
As people know have adjusted to this new level of demand I mean quite frankly, we saw what we thought was a little bit of panic bind over these three months, where people because demand was coming up and because there was a few outages responded by doing a little bit of restocking because it made them nervous.
That's going to come down as we go forward and people see security of supply at a more stable demand outlook.
Now clearly look if theres another outage, especially if there were an outage in the western hemisphere.
Could we see these conditions these kind of five to $700 per ton conditions continue on into the second quarter. I mean, we could it's just we don't have any visibility of right that right now and so we would say we expect it to kind of normalize.
To normal ranges I would expect we should have we expect $1 $70 million to $200 million.
Every quarter through the rest of the year, that's what we consider a pretty normalized level of earnings for acetyl and fully expect to be in that range for engineered materials, we guided to $120 million on.
And modest price and volume recovery, obviously, we're seeing headwinds from raws, but we've made <unk> been making price movement that we think will largely offset that movement, we've seen in raws.
I would expect a little bit of improvement on that in second and third quarter typical of what we see those being stronger demand months. We should also expect a little bit more recovery and our affiliate earnings so expect to see that roll through in second and third quarter, and then fourth quarter typically looks more like first quarter. So.
I would I would think of it that way for the year.
Okay, and maybe just a follow up on the M&A prepared remarks, I know you talked about sort of.
Having to look around at halftime in the middle of the year and seeing where the M&A environment is.
Is that a function of just sort of wanting to make a decision on how to use your cash flow for the year and not necessarily build any if youre not going to use it or do you think there's really something about the middle of the year.
Terms of specific transactions or anything in particular.
Yes, I would say that the mid year is really just about making sure. We don't sit on cash for too long. If we don't have any M&A clearly insight what we can always go borrow later to do the M&A.
At a very low leverage so that's not a problem.
And it also represents what we can we can effectively buy back shares about 4% to 500.
In the first half, we probably can't really do a lot more than that so it's also a time, where you go okay. Now we need to reevaluate if we need to go above that level that we had stated in the guidance.
Our next question comes from the line of Duffy Fischer with Barclays. Please proceed with your question.
Yes, good morning.
First one is maybe two part around JV. So on KEPCO is the idea there that that will basically sell to the partners at cost or will KEPCO actually try to make a profit.
And then could you also size the liquid crystal plant.
Roughly kind of what the capital spend would be there and then how accretive should that be to earnings when it starts to run.
Yes, let me take the question Duffy. So we will have some small trading profit their per cap it will be a cost plus basis.
Going forward.
And once that is finalized at closing, we'll make sure everyone's aware of what that is.
Great and on the LCP.
Looking at doing this expansion in our this build in China in phases. So if you look at the size of it the first phase.
We'll be pretty much the same as our current capacity so double our current capacity on LCP the cost of that is going to be less than $100 million.
Startup won't be until early 2024 so.
On.
Not sure financially what that looked like by then but I would say, we would expect it to be accretive fairly quickly as we already have demand insight for that time at startup.
Great.
Sure.
Could you give us a little preview on what you want to highlight at your Investor day coming up.
Sure.
I think for Investor day, we're really looking at we want to reconfirm, our plans to achieve double digit EPS year on year growth over the next three years, that's going to be based on a number of things.
First continuing to outline a more robust program of organic growth.
<unk> seen some of that already with our announcements around the <unk> expansion in the U S. The LCP build.
Putting our CLEC assets.
Project back on the table and actually at a slightly bigger expansion than we had previously.
We're going to talk a lot about innovation and in market and especially the programs that we started in electric vehicles and <unk> and medical pharma, we're already seeing good results from those really good growth and expect that to continue so we'll be talking more about those and giving some examples and then we'll be talking quite a lot.
About ESG.
Not just our commitment to ESG, but also a lot around sustainable products and the advancements we're making in sustainable products in the areas like Blue Ridge like <unk>.
Economists like bio pump so that those will be the main focus on investor day as.
As well as we will talk more about cash deployment and our outlook for cash deployment.
Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.
Yeah.
Hey, good morning, and nice a nice finish to the year there.
Can you maybe talk a little bit about some of the project momentum.
Talk about projects a lot over the last couple years from M and in particular areas you are seeing a lot of sort of requests or or growth there.
And how does that sort of look when you look at the outlook for <unk> and 'twenty one.
Yeah. Thanks for the question Mike.
Let's talk about projects, a little bit and I think this year is a good example of why we're starting to transition a little bit away from number of projects to more towards value of projects. So if you look at 2020, we actually with all the challenges of Covid and everything else ended up indeed.
The year with about 90% of the number of project wins as we had in 2019, but if you look at the value of the wins, we had in 2020 they were actually right at the same level as the value of the wins, we had in 2019 and that's really what we're focusing on on project, which is not just.
Are we generating a high number but are we generating project that have value and have extended value. So we've really been focusing on projects wind and some of those program areas I mentioned earlier, so things like future mobility around electric vehicles, and autonomous and connectivity of five <unk> and <unk>.
Other sorts of things and mobile if you look at it for example, the growth in the number of projects we've had in terms of value.
More than 65% for autonomous vehicles, and autonomous and electric vehicles and for connectivity. It's over 60%. So we're really shifting our focus to those.
I would say newer focus is things that we think are going to have long.
And we're having a very high success rate in those areas.
So if we look towards next year, clearly, we would expect that value to continue to grow it needs to grow to continue to.
To meet our expectations for EBIT growth year on year. So we continue to but again, we are focusing on value of projects wins, not just number of project wins.
Got it and then.
In terms of acquisitions.
Any.
Are you sort of maybe you could give us a framework or you're looking for.
Polymers to add to the portfolio of new technologies, maybe focusing on end markets and then.
Is there a difference on what youre looking for versus a bolt on and transformational deal.
Yes, I wouldn't say our philosophy has changed around M&A. Our philosophy is the same we are looking at projects that meet our return thresholds and also meet our strategic criteria. So those things that you just laid out so we're looking at geography, we're looking at yes, we'd love to own.
Or is that new polymers were looking at additional capabilities. So sometimes like some of the ones. We did with next and omni, adding recycled capability. We're always looking to add new capability. There. So I would say that has not changed I would say given the time, we had this year in 2020, we view.
At the cast maybe a little broader net than we've had before and looked at some other not just polymers, but other chemistries that you.
Use a similar business model to what we use in E M.
And that we think we could add value to so I'd say, we're looking broadly to make sure we're not missing any opportunities to really grow value for the shareholder.
Our next question comes from the line of Hassan Ahmad.
Alvin ex global please proceed with your question.
Laurie.
Question around segment.
Segment margins.
And obviously, the compressed sequentially to sub 20% levels and obviously under normalized.
Macro conditions historically, they were north of 30%.
Cognizant of the fact that there was some sort of turnaround expenses baked into that margin number, but I just wanted to sort of get your view on.
When do you expect to see a reversal on a return to those 30% plus EBITDA margin levels.
Yeah, well, it's not linked to the question you're exactly right I mean this year our margins were compressed in E. M. For two reasons I would say one is a pretty significant amount of turnaround expense. We had this year with both the bishop and the IP H palm turnaround. So those are two very <unk>.
Large turnarounds, which we also had quite a bit of inventory draw.
To cover those so those together had a pretty significant impact. The other thing. This year is with lower volume and we ran plants in second and third quarter certainly at some shut down for a period of time some run at lower rate. This is a high fixed cost business and so that fixed cost gets spread across the rest of the vol.
And that certainly had an impact on our margin I would say is as we go into 2021.
I would certainly expect to be back at that ex.
Because I always think in ebay, but at that kind of you know <unk>.
20% to 25% range of EBIT margins as we go into 2021, and we see back to normal rates.
Volume and kind of a normal level of turnaround activity.
And Hassan just one thing to add to that with the sale of the share of poly plastics that will come out of that so that is one of the things that did inflate that number up and that has been kind of running on average around $40 million or so a year, so that will be out permanently going forward and thats why.
On an EBIT basis kind of being in that 2025% is where we think we will be in 2021 very helpful and as a follow up on on.
On the acetyl chain side.
Obviously very strong margins in Q4, and Lori you touched on.
Some other drivers obviously pricing was there and you talked about some outages and sort of.
On demand rebounding again in the Lake.
I just wanted to just sort of dig deeper into the sustainability of those sort of margin levels.
It seems that there are bunch of moving parts obviously.
Coal prices have gone up quite a bit in China, obviously methanol has gone up I would expect that.
That would moderate or maybe even come down on a go forward basis.
And then obviously, there's the whole sort of notion of higher shipping costs, and maybe doors sort of coming into.
On a higher pricing levels and the like so could you just help me sort of think through the sustainability of it.
The sort of Q4 margin levels within within acetyl chain.
Sure look we think sustainable margins in acetyl.
Hundred $70 million to $200 million, we consider those kind of a foundational level of earnings and therefore, it's sustainable over a pretty wide variety of conditions and I think it's really based on the flexibility we have in the chain and the Optionality, we have in the chain earlier.
Earlier in the year, although we werent at those levels. We saw still good returns from asset sales, because we were able even with its unique asset demand being down damn being strong for emulsions being stronger being able to flex our chain to produce more of those molecules now with the CD gas is stronger we can flex back and put more back into acetic acid.
That flexibility that we have and the geographic flexibility I mean, as you say Nanjing.
Coal prices up but natural gas prices arent really up in the Gulf Coast, and we still have all that clear like capacity. So.
We just shift more to clear Lake and take advantage of low U S Gulf Coast natural gas prices.
Oil's been fairly low so that's made our Singapore capacity pretty attractive so having that geographical as well as the flexibility within the chain. We think gives us a lot of optionality across a wide range of economic conditions and that's why we feel that 170 to 200 is very sustainable and other higher level that we're seeing kind of a.
At $2 25, plus level that we're predicting for.
Q1, that's a little higher harder level to us This day and that's really based on some very high acetic acid pricing specifically in China.
But certainly that 170 to 200, we think is sustainable yes on.
On a percentage basis, the sustainability there Hassan I think we've shown over the last several years debt. This business is going to do greater than 20% EBIT.
Tight margins and that puts EBITDA and kind of the.
Mid 20 range 25 ish percent and we expect that to continue as we go forward and.
Be pretty strong in those in those areas in 2021 and beyond.
Our next question comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed with your question.
Good morning, everybody.
So Laurie you know obviously there was a lot of complexity throughout 2020 from a macro standpoint, just given the disruptions et cetera as you.
You look back at <unk>, and what Youre seeing at current.
It just sort of transitory disruptions in commodity tightness.
Driving the improvement in AC and <unk> segments, or do you see more confidence from customers as it relates to some level of global reflation sustainability and if you could just sort of touch on that dynamic across the various <unk>.
The geographic regions that would be helpful. Thanks.
Yeah, I would say, we definitely see confidence from customers and people being more certain going forward.
Look at the current resurgence of Covid is clear.
Clearly has been as bad the last few months as it was in the early days of Covid, but yes, we have not seen our customers shutting down we haven't been seeing them cutting back.
<unk> continued to see robust consumer.
Behavior around the globe and so I think thats, giving everyone confidence, we just arent seeing the impacts now from Covid I mean, if you look we're really getting back to 2019 levels of demand.
We're not hearing anything different from customers. So you know.
I think truly demand is driving the increase that we're seeing in the acetyl chain I think demand is driving the increases we're seeing in E. M. Now we have had some lumpiness and volatility in December and into the first few months of this year and acetyl I think thats been.
Based on people because they are confident about the future being worried about these what turned out to be fairly minor supply disruptions and causing some volatility in the market, but I think overall and the reason we are optimistic about 2021 and growth into 2021 is overall, we really see confidence by.
They are our customers and continued growth in the markets and that steady increase in demand.
Okay, and then in terms of the EM segments.
I meant on higher raw material costs.
On a margin lagged the last time, we had a mini inflation cycle, if you're willing the raw materials side. How are you approaching pricing for this segment. This time around I realize there is a mix impact from health care et cetera, but just your view in terms of how you're navigating the current raw material cost paradigm. Thanks again.
Great. Thanks Ghansham yeah.
Made a price increase in the fourth quarter I would say we didn't see you wouldn't have seen a lot of impact to the bottom line from that but that was really to get in front of some of these raw raw material increases we are seeing.
Certainly in the lab in December and then no see expecting them to continue into the first quarter. We've made another price increase here in the first quarter, we think that should be enough to kind of keep us in front of the raw material environment, that's developing and basically.
Keep us keep it flat if you will fourth quarter to first quarter. So we think we are out in front of it I mean, our teams do a great job keeping our eyes on raw materials and trying to figure out what's happening and making sure that we can put sufficient price increases out there to cover the cost of raw materials, but there is always a bit of a lag.
Especially in any M.
Between when when we see those raw material increases and when we see them on our books and when we can pass through prices I think in this case, we have a pretty low inventory. So we're seeing that a bit sooner.
But feel confident that the price increases that we've made will be enough to largely offset the raw material increases in the first quarter and we should see the benefit of ibn Sina and the equity earnings there in improving.
As that as a natural hedge for the engineered materials business as a as a partial offset to some of the raw material inflation that we're seeing there.
Our next question comes from the line of P. J <unk> with Citi. Please proceed with your question.
Yes, hi, good morning Laurie.
You decided to keep the Asia capacity in Africa.
Can you can you tell us how the profitability is today and natural gas versus oil or Scott.
Maybe just give us a snapshot so we can on.
Understand the rationale behind the decision because on one.
On where to think that the coal based production would be disadvantaged today.
Yeah.
You look at this I mean, clearly the U S Gulf Coast Hasnt advantage, and we don't really see any scenarios, where natural gas prices go up.
Where that wouldn't be that advantage that is clearly advantaged. If you look at clear Lake the combination of <unk>.
Our size our ability to generate our methanol.
And from our own CEO all of that I mean in our technology.
That's all on these technology clear Lake is probably definitely the lowest end of the cost curve.
Look at acetic acid producers around the world.
Because of our technology and because of some of the contracts that we've been able to negotiate if you look at Singapore, certainly kind of at the 40 to $50 oil. It is also very cost competitive and even Nanjing, even at higher coal prices I would say all of our facilities are.
In the <unk>.
Top.
25% to 30% in terms of top we mean, the best 25% or 30% of all of the acetic acid facilities in the world. So so, yes, although Singapore and Nanjing.
Our higher cost producers they.
They are still highly competitive with other players around the world.
And P. J as we said in the prepared remarks on one of the important parts of this strategy is flexibility and the raw material agreements that we now have in place plus the.
The Seo unit acquisition, we did a few years ago now being under our control, giving us that ability to flex up and down it gives us a lot more optionality than we've ever had in the past and so we are really excited about the ability to flex as needed based upon different raw materials.
Aerial environments, which as we know we'll move all over the place over time.
I would also mention P J that.
Shipping and distribution is not an insignificant cost is going up these days and so maintaining that capacity in Asia to serve the Asian market is also attractive versus shipping everything necessarily from the U S.
Great. Thank you and a question for Scott first of all congratulations on buying back stock Mark many companies were able to do that in 2020.
So your timing was good.
As you.
Place.
Volume plastics capacity in Asia, which is the growth market.
Where does CP and maybe a few other appliance what kind of total capex do you need over the next few years.
My comment is that M&A, mostly targeted towards Asia to replace plastics.
Thank you.
Well, let me let me start and then I'll have Lori talk about views on on capital going forward. I mean look we've been very consistent in one on kind of a balanced capital deployment strategy and also being able to take advantage of the options that come in front of us and so we.
We want to be able to do M&A, we feel really good about.
Not just the cash we have on hand, but the additional firepower that we have on on the balance sheet being very clean and as earnings continue to improve that will only give us more horsepower to do M&A going forward and so we felt like was the right time to bring forward our plan on the on the 2021 repurchases and do in the first.
And we'll continue to monitor the M&A pipeline and we'll pivot as needed throughout the year the.
$500 million or so that we expecting capital. This year is kind of the first tranche of this wave of organic growth debt.
Debt, we've been kind of weaving in and sprinkling in with the announcements here in the last six months or so and as Lori talked about before that's going to be an important part of our Investor Day story that we have in March.
Yes, I would say in terms of capital deployment, yes.
Specced will be at that kind of 500 level of Capex for the next few years really focused on organic growth and while a lot of it will be in Asia. So LCP as an example, we've talked about trying to build out our compounding as well as our technology capability in Asia. This is really about having the ability to respond quickly to our.
The Mers in Asia, We're also making investments in other parts of the World I mean, we've had the poorly center of excellence to better serve our European customers, we've talked about the bishop to you our expansion.
And we continue to do footprint optimization in the U S to better and also technology build out in the U S to better serve our U S and North American customers. So I would say that growth is going to be all over the world, maybe a bit more Asia focused but they really spread where we need it to best serve our customers and I would say.
In terms of what we're replacing I would like to mention a while.
Poly plastics we.
There's always marketed by poly plastics, so those molecules werent really in our portfolio.
I would say.
We're really excited about Caf and the fact that we now will be able to put those molecules into our portfolio as part of our Asia footprint and now it gets as pom capacity globally, which we really didn't have before.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Laurie.
Is that $2 6 million tons of capacity in clear Lake.
Are you capable is that fully on line 2023.
Yes, it will have that capability fully in 2023.
Now, we need methanol and things to go with that and we're working on that but but that capacity would be able to come up to that rate assets at the startup.
So essentially we will double the size of clear Lake capacity.
Are you expecting your announcements last night on capacity to forestall some other capacity in the marketplace that you might be coming on stream.
I can't say, what other people do with the news that they have but we certainly think this is the lowest capacity add available to the market much much lower than any greenfield would be.
And probably even lower than most other expansion can be so we'll let others make their decision from there.
If I can ask one more just any.
Should we think more about as you move towards more of a value based approach.
Less volume at higher margins going forward in this segment is that fair.
Look we always focus on margin I would say, we're also though focusing on volume in terms of we think that we can add more volume to our system and get high margins on them as well. So I don't think it's a trade off but we certainly are at the point, where we think we need to add additional volume in order to.
To continue to deliver into high value market.
Our next question comes from the line of Matthew Deyoe with Bank of America. Please proceed with your question.
Thanks.
Perhaps a little bit on that line of questioning. So you expanded your G. U R plant pretty recently and since then EV sales have picked up fairly significantly where are you on filling out that new capacity.
Well so the Bishop D. You are planned well won't start up until.
Really early 2022, obviously, we would like to get it up as soon as possible because that market is growing very robustly.
Put it in perspective that business grew 25% in 2020 versus 2019.
So we are anxious to get that plant up and expect to certainly fill it out within the first year or so of startup.
Okay got ahead of you there.
And then.
So you had mentioned demand is starting to pull back and the acetic acid market as prices increase.
Substitution or is it simply just.
No.
Price sensitivity.
People subsiding on that panic buying you were talking about.
Oh.
So Matthew I'm, not sure where you got that we're not really seeing demand pull back yet.
Jake assets, we actually think we're kind of back at normalized levels of demand.
There is a little bit of supply in security is there was some minor outages in Asia, and a little bit of panic buying people restocking worrying that those but I think because they thought maybe those outages will be longer but I would say the level of demand. We're at now is holding fairly steady from fourth quarter last year into first quarter.
This year.
And I think it's really a normalized level of demand that we should expect to see going forward.
Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes, good morning on.
On slide 11 of your supplemental materials, you're kind enough to give us volume numbers for each of your segments and as I look at those numbers. It looks like you grew acetyl chain volumes, 19% in the fourth quarter on a year over year basis.
And so I was wondering.
I know you had the clear Lake outage is that on.
A representative number and if it is could you just talk about your operating rates these days and asset tools relative to the broader industry.
Yes. So if you look at Q4 19 to Q4 'twenty, we did grow volume as you mentioned about 19% Theres number of factors. There first is we did add <unk> attack.
In April of 2020. So there is some volume that comes with <unk> that gets added to those numbers. We did see of course demand recovery in fourth quarter of 'twenty.
And some tightness in the market, which helped drive volumes up I would also remind you we had a fairly significant outage at our clear Lake plant in fourth quarter of last year and although we had secured some volume last year to cover that fourth quarter last year was actually a little bit softer.
Order than we typically have seen in acetyl. So I would say one it was a strong fourth quarter for asset sales in terms of demand certainly the best we've seen this year not surprising with COVID-19, but even good versus last year as we see the market normalizes, we saw a little less seasonality, we saw some seasonality in our motion.
But we're able to shift that volume into strong demand for acid and Bam, especially in China, and that's really where we saw the difference in strength. This year much stronger demand in China. This year Western hemisphere about the thing.
Maybe you anticipated my follow up question I think earlier in 2020, you talked about shifting volumes.
Volumes downstream into emotions and perhaps other derivatives.
Has that reversed or how would you characterize the.
Outlook there for the assets fuels mix here in early 'twenty one.
Yes.
On them demand Bam pricing is also very strong right now on Molson does a little softer right now, which is but that's really a seasonal impact as it's called or less demand for paints and coatings.
So probably a little bit more on the first quarter into acetic acid, especially the higher fee asset pricing, we're seeing in China, but I would tell you across the entirety of the chain right now we're seeing a lot of strength in acetyl.
Our next question comes from the line of Alex <unk> from off with Keybanc. Please proceed with your question.
Thank you good morning, everyone.
Laurie.
You've elected to expand clearly you can see Singapore acetic acid capacity.
So your total capacity would be larger than the initial appointment or shutting down Singapore why wouldn't the benefit of this expansion be larger than the initial 100 million benefit.
Yes, so we actually never said, we were going to shut down in Singapore, We always said that we would look at reducing capacity in Asia, which could have been Singapore, our nanjing or a combination of the two.
Clearly with the supply contracts now we have an intention to run all three of them flexibly and as needed to meet demand.
Unclear like yes, the capacity that we've announced is larger we have justified the projects on and the credits that we shared are simply the productivity. So we've assumed even if the market need no additional capacity what what are the benefits. So we get a $100 million benefit on that $350 million investment.
Clearly if there is more demand in the market and it makes sense to run clear like higher or other facilities around the world at higher rate than there is a lot of additional upside for this project, but that.
That was not our justification for the project. So that's just all upside for the future. If we if we see above GDP type growth and are able to produce into it.
Thank you for this.
Have you made a decision whether to integrate into methanol directly by building on <unk>.
Wiring capacity or whether to purchases on the merchant market from the U S from this expression.
Yeah. So I mean, we are still looking at methanol and what we want to do around sort of like methanol as you know we already have a JV there.
With our partner Mitsui.
So we are really looking at do we want to expand we have the capability for a very low cost expansion to get about another 25% capacity there we're on.
Also looking at are there opportunities to do things with recycled streams than others. So the good news is in the U S is very strong.
Commodity methanol market. So we always have the opportunity to buy methanol as well and quite frankly, we like having the exposure to the market, we like having our own if you look at it right now we produce about 35% to 40% of the methanol that we need in our own system.
And going forward after the expansion.
After the initial phases, we still have about that amount.
Frankly, we are still in the process of deciding what we want to do in clear Lake in terms of methanol expansion or whether we just want to continue on the market.
Our next question comes from the line of John Mcnulty with BMO capital markets. Please proceed with your question.
Yes, Thanks for taking my question, maybe this one for.
Scott So when I look at the earnings that you are calling for for this year, it's roughly in line with what we saw in 2019.
Back then you generated about $1 $1 billion of free cash flow. So it seems like the better than 700 million number that youre putting out for this year, maybe on the life side are there any major puts and takes that we should be thinking about when when kind of comparing the two I know the capex is going to be up a bit but it doesn't seem like it makes up anywhere near the difference. So I guess, how should we be think.
About that yeah.
So Jon I'll kind of break it into three categories.
First is the Capex as you mentioned, all that 100 $150 million or so increase.
Next is the 100 or so million that we had with the EU settlement, which has already been paid here in the month of January and the last area is kind of what I would call working capital rebuild a bit here, obviously working capital came way off.
<unk> 2020, we also saw raw materials fall a lot. So that that was magnified now we see us as business really returns and things move up there is a natural rebuild on working capital that will that will come with that in addition, we are expecting higher raw material environment. So that will then kind of add.
On another layer onto that working capital. So those are really the three components I would not look at things being anything fundamentally different in <unk>.
In our operations it just more kind of timing of some of these things coming on.
Got it thanks very much for the color.
Our next question comes from the line of Jeff Zekauskas with J P. Morgan. Please proceed with your question.
Thanks very much.
How do you think your engineered materials volumes in 2021 will compare to 2019.
Yeah, I think if we look at the volume. So if you look at our base business volumes our volumes in 'twenty, one I think will be very comparable to 2019.
And maybe even certainly our sales on our base business, we think will be a 2019, but the volumes will be comparable to maybe slightly better. So I think our base businesses.
Is kind of back to that 2019 level and again that assumes some level of recovery, but not all and medical so medical is not a huge volume but it.
It is a huge ernie so there is some additional upside.
We would see earlier return of elective procedures.
We currently have in the forecast.
What do you think the EBIT penalty was from medical in 2020.
In 2020.
It was tens of millions.
So it was it was significant when you look at it on the.
Base earnings.
Our next question comes from the line of Frank Mitsch with Romanian Research. Please proceed with your question.
Good morning, nice end to the year, a nice dividend hike I wanted to ask that volume question on asset sales a little bit differently. It was up sequentially 6%.
<unk> in EMEA and you also mentioned that you're proactively source material prior to your turnaround. So I was just curious.
Proactive sourcing was that kind of a.
Was that a very neat match.
In terms of.
What you lost from your turnaround or.
How should we think about what you might have been able to do if you didn't have that turnaround and it was just curious to see higher volumes in <unk> relative to <unk>. So I was just trying to understand that a little bit better how that worked out.
Yeah, well I think the higher volumes in fourth quarter versus third quarter. A lot is just based upon demand recovery and producing into that demand.
You're right we lost some volume in clear Lake, but we did buy volumes in order to provide our customers around the globe to replace that.
We also always do watch the market and if we see what we think is a tightening market and a higher demand market. We will source additional materials in order to anticipate customer needs and make sure. We have sufficient volumes together. So all of those three things I think came together in the fourth quarter and what we ended.
<unk> seen was both very high volume demand quarter as well as a very good pricing quarter.
Yes.
One is a very good pricing quarter on obviously your results reflected that.
<unk> a lot of purchasing agents will try and get ahead of price increases et cetera, and so do you have on do you have any good feel as to what what.
The amount of that demand was restock or or how do you think about that just in general inventory levels at your at your customers as they stand with <unk> today.
Yeah look we think there was a little bit of restock happening in Asia, not really the western hemisphere really we thought it in China to be specific. So we think there was a little bit of restock a bit again, the ability to restock is not very big in the acetyl chain. These are for the most part liquid products then they go into tanks then.
People will have a limited amount of tank. So youre talking about the difference between people holding 30 days of inventory versus 'twenty. So it was a it was a.
A small amount that went into restock I don't think it will be meaningful as we go forward in terms of.
Affecting overall demand for our product.
Our next question comes from the line of around on this one nation with RBC capital markets. Please proceed with your question.
Great. Thanks for taking my question congratulations on the progress on 'twenty.
I guess.
I apologize if I missed this earlier, but.
You're guiding to around.
250 to 275 or so for Q1 and.
I think you have some comments as it relates to that Q2, and Q3 would be better.
In Q4, it looks like Q1.
So your EPS guidance for the full year is $9 50 to $10.
So are you calling for a Q2 Q3 level of EPS that's below Q1.
Maybe you can just help us square that out.
Yeah, I think look I think the real swing factor here is really acetyl.
Acetyl.
For for Q1, we're saying, it's going to be at or above $225 million.
If we look going forward as I said, I think acetyl will be more on that $1 70 to 200 range, which is the more normalized range.
Again E on will probably be slightly up in the second and third quarter, but we do expect that drop in acetyl. So that's how we get to the 950 to $10.
Okay, Great and then just as a follow up on the capital allocation side.
You, obviously have relatively low average you've got a lot of opportunities in front of you both organic and inorganic.
And you already laid out your priorities on on buybacks. So I'm just curious.
Are there any other potential asset sales that you're evaluating or divestments.
That would maybe give you a little bit more firepower on the buyback side.
And maybe you can just discuss that.
Well I would just say we constantly reevaluate our portfolio.
I would also tell you, though there is nothing meaningfully out there.
<unk> from <unk>.
Gaining more firepower I mean, we have quite a lot at the moment.
We don't think that's going to be a factor in what we pursue in terms of M&A.
Our next question comes from the line of Matthew Blair with Tudor Pickering, Holt and company. Please proceed with your question.
Hey, good morning, Thanks for fitting me in here Laurie are you able to share the acetyl chain utilization rates by region.
I'm, sorry, I wasn't quite clear on the utilization rates for acetic acid or <unk>.
Yes for your acetyl business by region.
I'm not sure I have it exactly by region I can talk a little bit about China, and maybe maybe globally. So if we look at the fourth quarter for example.
Both China and global equity.
Unique asset utilization was up about 5% from the previous quarter and again that was based on higher demand.
Not because of higher outages.
And if you look on what that translates to that really what's kind of low <unk> in China and remember there's a lot of capacity in China that doesn't get actually run two at the GAAP as it sits on the books.
And then the global we saw actually the globe utilization crossing over kind of even into that low 90% range. A couple of different times during the quarter as we go into the first quarter, we're seeing kind of the same the same level of utilization both in China and in the globe, Yes Matthew.
The global numbers, who really important number I mean these are global markets.
Donna can move all over and so that is really what drives things.
Really in the short and long term is what's happening with global utilization.
But I think it's probably fair to say that anything that based on U S. Gulf Coast natural gas is running at 100% if theyre mechanically capable of doing so.
Very helpful I'll leave it there thank you.
Doug will make the next question our last one please.
Our last question comes from the line of Edlin Rodriguez with Jefferies. Please proceed with your question.
Thank you good morning, guys.
Just one quick one on the EPS guidance.
When you're looking at the numbers like what do you see upside or downside to those numbers.
At a price anything or is it volume and how much of that depends on a faster or slower.
Rollout of the vaccine.
Look I think for Q1 and for the full year, obviously the upside comes if we continue to see strong.
Demand in acetic acid, even above say, where we are today or if we were to see significant supply outages in acetic acid that would certainly be an upside.
To both the quarter and the year I think the obvious biggest challenge on the downside is what you'd laid out in terms of Covid is.
Due to the market's lose confidence do we see.
Automakers for example shut down again for two months.
That would be the biggest downside.
The vaccine rolling out help I think in that area of confidence then and also making sure. We have enough employees, who are wells that run plants around the globe.
On the.
As I said earlier it is a downside we're not baking that in because quite frankly, we're not seeing that behavior from our customers. What we're seeing is people have demand people want to run people are back at normal buying pattern. So unless we see a significant change from where we've been today on COVID-19.
That that's a manageable downside risk.
Okay. Thank you very much.
I'd like to hand, it back to Brendan for closing remarks.
Thank you and I want to thank everybody for listening in today as usual we're around after the call. If you have any further questions.
Doug. Please go ahead and close out the call.
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.