Q1 2021 Celanese Corp Earnings Call
Hello, and welcome to the Celanese first quarter 2021 earnings conference call and webcast. At this time all participants are in a listen only mode of question and answer session will follow the formal presentation. As a reminder of this conference is being recorded.
Some of my pleasure to turn the call over to Brandon I ask senior director of Investor Relations for Adam. Please go ahead.
Thank you Kevin and welcome to the Celanese Corporation first quarter 2021 earnings Conference call. My name is Brandon I ask senior director of Investor Relations with me today on the call are Lori Riley of Kirk Chairman of the Board and Chief Executive Officer, and Scott Richardson, Chief Financial Officer.
Celanese Corporation distributed its first 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.
Form 8-K reports containing all of these materials have also been submitted to the SEC.
Because we have published our prepared comments yesterday, we'll now open the line directly for your questions. Kevin. Please go ahead and open the line.
Thank you for what I'll be conducting a question and answer session. If he likes the place into the question queue. Please press star one on your telephone keypad of confirmation tone will indicate your line is in the question queue. You May press star two if he'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up on.
Handset before pressing star one one moment, please while we poll for questions.
Our first question today is coming from Jon Roberts from UBS. Your line is not of life.
Thanks, and congratulations on the upside to the upside guidance I guess you gave back at the end of March.
Lori you source methanol in Texas during the quarter to restart your acetic acid capacity early I think methanol was really tight as well. So how did you do that.
Yeah. It's a great question, Jon I would have to say our folks were very proactive I mean, we saw the weather coming and it was predicted we anticipated we would need to shut down we anticipated that there would be tightness in the market and because we're out in the market every single day looking at what's available our folks are able to go.
Out there and kind of really sourced that material, even before we went into the freeze and like we sourced quite of few materials going into the freeze in anticipation of shut down and wanting to make sure that we could supply our customers of as best we can recognizing that we thought there would be some disruption, but I think it's just really a factor of the model.
And the fact that we're always in the market. So we don't need to activate the new team to go do anything when we see something like this come in we're already out there.
Taking advantage of what they are on the market.
Thank you as a reminder, if you'd like to ask you to please limit yourselves to one question and one follow up the return to the Q on.
The next question is coming from Bob <unk> from Goldman Sachs for why it isn't a life.
Good morning, this is actually Mike <unk> sitting in for Bob.
Laurie.
Question for you can you just speak to what happened over the past month debt.
The improved visibility for I'd say increased your confidence.
The raise our full year.
Adjusted EPS guidance again by another $1 75 midpoint to midpoint.
Yeah, you know if we go back to Investor day, Although we had the Investor day, what the 25th of Mark you know, we actually kind of locked in our guidance on our numbers you know about a week in advance of that the call. It mid March and at the time that we locked in our guidance for Investor Day, Yeah, we were really.
<unk> seen some softening of methanol prices in China, and we were anticipating even on the back of the jury and we were anticipating that you know that trend might continue now having said that we also had some uncertainty around Yuri we had some uncertainty around how.
You know what we would one of what we wouldn't what the total of those would be and in fact, you know we had some of that baked into the guidance some of which slipped into the second quarter because it came with invoicing timing it came with materials and inventory et cetera, but then what we really saw is right around the time of the Investor day, we saw prices take off again.
Good day in China.
And really you know versus where we had been in March which was around you know call. It 700 750, you know really in the last many weeks, we seen prices greatly increased an hour sometimes over $1000 and it's not just the CLEC assets, but it's also the fact that Bam and others.
During the day of pricing has also followed something which hasn't always happened in times of high pricing before and during a period, where methanol pricing is high but not as high as day. We saw in 2018. So a lot of factors coming together that have really given us very very healthy margins in the acetyl chain.
Going forward as well as you know the the continued strength and growth we see in engineered materials.
Okay, and just as a quick follow up I mean, when I look at the new for your guidance of.
12, 50 to $13 50, and kind of considering the significant strength that we've seen in the first half it doesn't seem like it takes much the fear and I mean, even.
Even if asset sales or say choppy in the second quarter earnings fall back to maybe.
Maybe that first quarter level around the $350 for the third quarter. When you would only need about $2 of our fourth quarter earnings per share to reach that guidance. So.
I guess I'm trying to better understand what have you baked into the second half in and maybe why won't earnings to be a bit more for us.
During the back half of the year.
Look I you know I think we're always we like to guide based on what we have visibility on two we don't really have any visibility into the second half at this moment in time, we expect continued growth in the E. M. After a flat second quarter. We do expect continued growth in the third and fourth quarter for E M, but in acetyl.
You know, we expect to start to see some moderation in pricing as we get towards the end of the second quarter. We expect that will continue to moderate through the third quarter and be back to more typical levels in the fourth quarter and that really was the basis for the guidance that we gave with those assumptions about what would happen in the second half.
Obviously, you know it may be different yes, we have to make assumptions around methanol pricing crude pricing everything that's happening there, but that was the basis for the guidance that we provided.
Thanks for the next question is coming from David Begleiter from Deutsche Bank. Your line is now of life.
Oh. Thank you good morning, Laurie you mentioned some of ours in China that could be pushed into Q2.
Plus all of the asset base. There is is getting older as well. So how are you thinking about edge is not just maybe in Q2, but longer term of China up of planned and unplanned.
Yeah. So they were the number of outages, we were aware of in China that were planned in the first quarter of a lot of those are pushed to the second quarter based on based on the strength of the market in the first quarter.
Look some of those they may be able to push to the third quarter, we don't know, but at some point, though the outages will need to happen. We know elsewhere in the world. There are some outages that are taking place in the second quarter.
And it's just it's a big factor right now with the tightness of the market when people choose to take planned outages and of course, you know unplanned outages. There can also be of factor as we go forward, but we won't we won't know what those are but.
You know, we do know there will need to be some outages in the second quarter again, some may get pushed to the third quarter were just happy to say, we took the opportunity last year to take all of our turnarounds and necessary steps and in fact, moving the Bam turnaround in clear Lake from second quarter, taking it during the force downtime with with the winter storm.
So that we're able to run fully going forward.
Got it interest on inventories how long it will take to rebuild inventories at the customer level do you think.
You know I mean, it's that's really the basis for what we're thinking about acetyl pricing. We think it's clearly going to take into the summer so through second quarter moving into third quarter to really start inventory levels start returning to near normal levels and again that is going to depend on what outages people take is there any of them.
Planned outages and that sort of time, but I would assume it's going to take into the third quarter before we see people back at near normal levels of inventory.
Thank you.
Thanks for your next question is coming from Vincent Andrews from Morgan Stanley. Your line is now live.
Thank you Andy and good morning, everyone. Maybe just a question on the infrastructure build that's out there. That's been proposed it's obviously had some ideas about how the corporate tax rate environment is going to evolve. So I don't know if you of any thoughts around that or if you of any particular provisions about it or within it that are concerning.
Or the change in the guilty provision would impact for you or just you know maybe just any general thoughts on on what could happen to your tax rate.
Yeah, Yeah. Thanks Vincent.
I think I think as we look at it it is still too early for us to really understand exactly where things will land.
But you know we are looking at each component of the the various proposals that have been rumored right now and you know there I think.
There are ways at which I think with our global network that we will work to mitigate them you know whatever may come about night I do think you know going back even a year ago, we did call out.
Debt, we would expect to see our effective tax rate, possibly move up a few hundred basis points over the next several years and and I wouldn't come off of that right. Now I think as we look out a couple of years, regardless of what happens with <unk>.
U S tax changes I think we still believe the changes to our effective tax rate will be in that range.
Okay. That's helpful and maybe just a question in an E M.
You haven't really seen any negative impact from the chip shortage in and all of those yet, but your guidance seems to imply that you're anticipating.
There'll be some falloff in I'm, just curious you know what the what the what the trigger for that is going to be just given you haven't seen it yet.
Yeah Vincent.
It's exactly what we're assuming in the second quarter I mean, we really have not seen much impact from the chip shortage, yet again, primarily because we've been in luxury vehicles and platforms like trucks, and Suvs, which had been prioritized by the automakers are not affected as much now as the drags on we are starting to see in your <unk>.
You saw some announcements by some of the OEM. This week that they are curtailing production for a period of time because of chip.
On that did we do think that will start to affect us in the second quarter. There's also some resin shortages quite frankly are in the industry that is also impacting the automakers and you might see something of that around that especially around nylon and some other materials. So we do expect to see some impact in auto for us in second quarter, which is why.
We're calling second quarter flat on E M. But we also expect most of those issues to be resolved through the quarter and back to more normal levels by third quarter.
Okay. Thanks, very much thank you.
The next question is coming from Duffy Fischer from Barclays. Your line is that of life.
Yes, good morning.
If we think about the delta from your original guidance with the midpoint of the 975 going up $3 25 to 13.
Just back debt through your shares and you know, let's say of 40% tax rate that's about $440 million of EBITDA is that a fair way to think about it and if it is what's the delta in free cash flow because my guess is there's some more puts and takes here of working capital probably eats a little bit more cash with higher prices, but if we can work on that.
For 40, if that's the right number of increment how would that flow through the cash flow statement then.
Yeah, Duffy I think.
The the easiest way I think to look at it as originally we said we're going to do about $500 million of repurchases. This year and now we're saying we're going to do an incremental two to 300 over that I think that really is tied to that incremental cash flow that we had this year.
<unk>.
What we had originally planned on and and you highlighted where the Delta is its really on the working capital build and so it really is just the timing thing, we think that recovery of that call it $450 million of EBITDA the balance.
We won't generate in free cash flow, we would expect to collect as we get into next year. So a lot will just depend on how working capital develops at for.
For the balance of the year, but right now our projections are as we will have a working capital build and and it's driven by the fact that pricing is moving up but also the raw materials are moving up.
Fair enough.
And then maybe just one on the strategy side.
Would you anticipate any competitors announcing a major greenfield acetic acid plant this year and are of your customers pushing you.
To do something larger there obviously you had the issue of clear Lake before the freeze even and I think some customers just said that you know there's so much riding on that one plant they would like to see some diversification can you just talk about your footprint going forward on acetic acid in the if you think others for announced builds this year.
Well I can't really talk to what others will do I have no idea of what we do know there is some capacity coming out mid year here and if the gas it in China.
So certainly that will help China. You know we are of course, doubling our capacity in clear lake sort of the equivalent of adding a 1300 thousand ton.
The facility in clear Lake So another world scale of capacity facility.
You know what kind of like is is the cheapest producing acetic acid in the world I think customers are happy to have you know that kind of stability on the Gulf Coast and you know I do I expect others to announce maybe do they ultimately get built that's always the bigger question I think no one's going to build on what they see it.
For the surge in pricing it really has to be a sustainable level of pricing and I mean look you can't just go put it in acetic acid plants anywhere you'd need out of the all access to methanol or are some of some form of syngas you need to have access to C of O. Two of them you need our C. O sorry, you need to have access you know too.
<unk> yeah. So this is not something that you could easily say I'm just kind of go put of plants and where you need to be an industrial area. He needed at the access and frankly, it's what keeps keeps the cid of gas at plants from being built kind of everywhere in the world is is these other components. So you know what I would say there may be in the announcement I don't know what others will do but it's also three years to four years.
On the minimum before anybody could actually have one on line.
Great. Thank you guys.
Thank you for our next question is coming from Ghansham Panjabi from Baird. Your line is now live.
Yeah, Thanks, and good morning, everybody.
I guess first off on the velocity of pricing that you're seeing of the AC segment across your major commodities, how does that compare to the 2018 peak and then related to that the inventory levels across multiple supply chain seem to be very low based on commentary thus far on the earning season and in the part of that and so even the supply sort of gets rebates higher post the first half.
<unk> do you think it will be at a higher level for longer sort of dynamic relative to the duration of the spike that you saw on 2018.
Yeah, Let me, let me talk about that a little bit Ghansham. You know so you know we of course do you expect a record Q2 in acetyl, there's as we laid out in our in our document and I you know I think it's really based on a couple of things I mean, one is we have had a significant lift in foundational Ernie even since 'twenty.
And even since 2018, so we've added RDP without the other capacity or out of them often the bam through a low cost. The bottleneck. We've continued to refine the model and frankly, we've just gotten better and better every year about how to use the optionality available to us and how to really flex our model. We've also seen improving industry dynamics.
You know Dan acetyl is growing a couple of you know a little bit over GDP every year, we haven't seen any major capacity addition, so it's a better industry dynamic of supplier supply demand chain. If you look at 2018 2018 was very much supply driven you know inventory in demands were pretty.
The normal levels, but starting at the end of the 17, you saw a whole series of shut down in the industry, especially in the western hemisphere, which really drove a supply shortage.
And drove that price up to that seven to $800 a ton, but remember that was at the methanol around for 50 or so of crude is around $80 right that.
2021 is fundamentally different is that we went into the you know it's supposed to supply and demand.
The problem I mean, we've seen really robust demand since at least the fourth quarter of 'twenty as the world moved into recovery and again not just in acetic acid, but also in Bam and emulsions, which is a little different than 2018, which is really focused on acetic acid and our inventories were very low as we went into this year into 2021 and that was.
True globally. So it's already a really tight supply demand market and then we had her we had winter storm here.
Which you know we lost three of the for large producers in the U S. For a considerable period of time, a mean of minimum of about four weeks as everything had to get back up and running and we've done that but we still haven't seen methanol prices go way up I mean methanol still around 350 crude the 60. So you know we have a larger margin now that's partially off.
Debt by higher precious metal prices. So there is some offset there but fundamentally this is I would say is this is the deeper disconnect between supply and demand and we had an 18 and that's why we're seeing record level of pricing in China that reflects that so I think you know I do think of theirs.
For the of possibility that there's going to be longer and bigger for a period of time than 2018 was again it will just depend on how fast recovery happens around the world the demand levels stay up on what happens with methanol pricing what happens with precious metal pricing all of that will play into but I do definitely.
Thank the probability and what we've baked into our revised outlook is that this continues through Q2, and we continue to see somewhat elevated pricing it through Q3 as well.
Thank you for our next question is coming from Jeff Zekauskas from JP Morgan. Your line is now live.
Thanks, very much how long have you been handling the inflation and the ethylene prices in the United States.
Spot ethylene is maybe 64 cents a pound or are you able to.
By much much more of a contract or assistant inflationary factor that you're feeling.
Yeah, Jeff I mean, we're certainly feeling of the inflationary factor I think the the good news is we anticipated this coming back in fourth quarter of last year already and started moving prices in engineered materials to reflect this and of course that price all from the us till it gets reflected more quickly so.
Although it is an inflection of inflationary pressure, we've been able to push that through in our pricey and basically maintain the same level of variable margin.
And then for my follow up can you sort of your adjusted tax rate of 14% and you have this tremendously profitable U S operation.
How do you how do you keep your tax rates, so low why why isn't your tax rate higher.
Yeah, Jeff I think it's important to remember we still have a fairly sizable portion of our earnings that come through from our equity affiliates and that comes in at an after tax rate and so so it is important to keep that in mind and that is one of the factors for the tax rate remain.
<unk> low end and I do think after you know U S tax reform it has given US certainly some advantages from the U S side of our operations, but we really are you know.
Our global operation, which about a third of our sales in the U S of third in Europe, and the third in Asia, and so you know what.
That rate has been able to remain very low because of that balance now what you're seeing is we had originally guided to an effective tax rate of 13% for this year, but with the elevated earnings were seeing in some of our higher tax jurisdictions, particularly China. This year, we actually see that moving up and that's why we raised that.
Guidance to 14%.
Great. Thank you so much.
Okay.
Thank you. Our next question is coming from John Mcnulty from BMO capital markets. Your line is now of life. Okay.
For taking my question in the acetyl chain, how should we think about the risk of any demand destruction of it seems like theres a lot of other commodities that are up as well have you seen any demand destruction at this point and how should we think about that.
Yeah, we really haven't seen any demand destruction, Jon I mean, you know there is always the possibility of course by the last states could go the acrylate, but I mean, that's not that's not a cheap switched nor is that when people are going to do on the short term. So at this point in time, we're really been just trying to focus on keeping our contract customers.
Applied.
With what the absolutely need at this point in time, and we haven't seen any signs yet of of demand destruction because of the switching to other you know other commodity needs or for other reasons. In fact, we just the demand continuing to strengthen across the globe.
Got it that's the that's how.
For and then I guess the the follow up question would just be you know given the the severity and proliferation of all of the outages that we've seen have you seen a flurry of interest from customers looking to kind of partner with you in a more meaningful way maybe willing to pay higher prices for the stability of the surety of supply and like how should we think about that.
As it plays out over the potentially the next few years in terms of stabilizing stabilizing your platform even more.
Yeah, we certainly have seen I'd say across all of our businesses, we have seen customers more interested in contract arrangements versus just spot arrangements because quite frankly, we've prioritized our contract customers wish or as we've had shortages both of them in the acetyl then and in E. M. Those contours of those customers that we have contra.
<unk> with we have worked very closely to make sure we can get them.
No again, not necessarily all of the volume they wanted but the volume the absolutely needed to keep running so that they wouldn't have any any plant shutdowns of our outages for the non contract customers, we haven't been able to do that and so certainly we see the driving more people into wanting to have contract type of arrangement.
Than we've had in the past.
Thanks, very much for the color.
Thank you for the next question is coming from Hassan Ahmed from Alembic Global Your line is all of us.
Good morning Laurie.
Lori just wanted to sort of revisit the back half guidance, specifically on the acetyl chain side of things.
You know.
Obviously conscious of the fact that you guys just have visibility of call it through June.
You know just didn't hearing some of the remarks that you made.
You know turnarounds of certain turnarounds being pushed into Q3 call. It then.
And then the impact of jewelry, you know obviously, the fact that in.
Inventories are fairly lean even pre the winter storm and they go on to even guide and it'll take us through call. It Q3 just to normalize.
Inventory levels, and then you know theres the whole back filling of order side of things and the like so so long story short I mean.
Is there a fairly high probability the this moderation in the supply demand fundamentals and pricing that you were looking for within a few chain.
Good actually surprise to the upside.
Keeping all of the sort of moving parts in mind.
But there's always that possibility I mean again, we've put out guidance based on where we.
Kind of for our assumptions about what we think is going to happen, especially through the third quarter. I think it's the is the real question here. Obviously, you know what there's new capacity coming on in the third quarter in China. So we've baked that into the acetyl that should help stabilize the supply demand situation. There, but you know if we had if we saw.
The extended turnaround if we saw you know unplanned outages I mean, clearly that could extend this period of higher pricing for longer and you know could result in an upside.
Yeah, It's always it's always the possibility for sure. But this is you know this is our best outlook and you have to remember we still do expect seasonality in fourth quarter. I mean seasonality is pretty typical even thought last year, especially in acetyl is you see the construction market generally ramp down of bad because of weather and other constraints in the fourth quarter.
So you should still be baking in some seasonality in the fourth quarter on back to a more typical level.
Understood understood very helpful and as a follow up on the longer term side of things.
You know obviously, we've been hearing about the bite and sort of the greenhouse emission reduction plans you know as much as 50% by 2030, you know how do you feel the do you guys have set up.
To execute on call. It in line with that and how are you guys thinking about sort of the capex associated with that you know in the run up to sort of call. It 20 to 30.
Yeah, I you know I.
Unfortunately, there's not really enough details out about the plan to know what that really means in terms of how it's measured can you get credit for materials that you make that help for example for light weighting and things that helped to reduce other people's greenhouse gas emissions I mean, let's be honest on the one hand, it's the real opportunity for us because many of the products that we make will be.
Needed by others to meet that kind of a commitment even in the construction industry. If you think about asset sales and how much of that goes into weather proofing and installation and things like that which would also be necessary. It could be a huge opportunity for us as far as reducing our greenhouse gas emissions of our own facilities that really has to do with it.
You know.
Recovery, you know lower for an aspiring uses of alternative energy like our solar contract at clear Lake as well as the recovery of met the Vin.
Venting of C O two which in the like we're doing in clear Lake you know, maybe theres options for recycled back into our operations. So you know I don't know, we don't know yet is it possible to reduce our own footprint by that amount again, we need to see the details of the plan, but I would say in general it's probably more of an opportunity for us and of threat at this point in time.
Very helpful. Thank you so much.
Thank you. Our next question is coming from Frank Mitsch from for me in research. Your line is non life.
Yes. Good morning, let me just follow up on that second half outlook question.
Of the pace of buybacks is set to slow down in the second half is that more of a function of debt.
That lack of visibility in the second half and is that is that something that you may revisit when we.
Depending on how the results come in.
Yeah look I think what we were trying to indicate is we'll have done kind of half of $500 million of buybacks in the first half as we see our financial outlook improving for the full year, we basically show that additional cash available to us as buybacks to make sure that the shareholders will benefit.
From the you know kind of the additional earnings this year, if we have higher earnings I would anticipate we'll put those into buyback, but it still doesn't change our desire to do significant M&A. This year of next year and remember we still have of billions, even after the buyback for they'll have $1 billion on the valeant the balance sheet in order to put towards.
You know meaningful M&A. So I think it really was more of an indication. If you will in our belief that we want to make sure that the shareholders benefit from this increased earnings outlook, we're seeing from this year and so we reflected that as buybacks Scott.
Got you got you very helpful and I was struck by the I was struck by the commentary in the prepared remarks regarding having to air lift materials because of the the block in the Suez, which begs. The question you know you broke down.
The impact of the winter storm and what have you in terms of I guess $40 million of repairs in 35 of our higher raw costs, etcetera, but what about logistics and.
Because obviously you know you you have to spend more on logistics, how what sort of headwind you faced on logistics in the first quarter on what's your expectation.
Here on the second our second quarter.
Yeah, I don't I don't have an exact number on that Frank you know what I would say is we you know this.
Well this was the very unusual situation with Yuri I would also say, we work very fluidly and flexibly to always supply our customers. So these are all things. We've tried in one form or another we probably did more of that in a short period of time now, but I mean, they're just they're baked into our cost of supply. So I don't have a really good sense of.
You know is it is it $10 million $20 million I don't know what we spent in addition, during yuri but definitely more than typical but but we always work very hard to supply our customers.
Yeah, Frank and I would just add I think we were in a pretty tight situation, even going into Yuri and and so this has made it even tighter. So our teams are really working on getting creative.
Not just for the second quarter, but we think this could continue into the second half logistics are going to be tight probably for the balance of the year. So it's something we're just trying to stay ahead of.
Thank you so much.
Thank goodness. The question is coming from P. J do you have a car from Citi. Your line is the alive.
Yes, hi, good morning.
Good morning, you know lot of you talked about the big Green project of making methanol from recycled C O two at clear Lake.
What is the C O two coming from and what is the all in cost of methanol from recycled. So you would do versus let's say based on natural gas.
So the methanol or sorry, the C O two of them P.
P J, it's coming from our facilities and our partner facilities in clear Lake. So there have been streamed the off of operating facilities that are high cotwo and fairly pure.
So that that's what makes it very affordable for us at clear Lake as we can take those those stream further compress them for other purify them and add them directly to our synthesis gas at fairway, where it is converted into methanol. So what makes it really attractive for US is we have spare synthesis of capacity currently at fairway.
We have a source of hydrogen available to us to ramp that unit up from the hydrogen grid industrial grid in that area and we have.
On the availability of high purity C O two streams of available to us so with that basically the cost of producing methanol from recycled.
<unk> is is really comparable to our normal cost of producing methanol from natural gas.
Okay, and then you know there were a couple of questions on the bite on plan.
Exxonmobil recently announced a massive Ccs project in Texas or on the Gulf Coast on backup the Byron plan is there something you could do there to participate as the supplier of C O two or as an off taker of C. O two there.
Yeah, it's not something we've looked at yet P. J I mean, the this project is the several years down the road yet quite frankly and the real question is you know what is the what is the purity of the C. O two streams why how much yet the cost to clean it up I mean, I like the idea of recycling C. O two more than just sticking on the ground to be fair.
But you know you have to look at the economics of it and how that would but its clearly something were looking at at our facilities or other facilities around the world, which is are there other opportunities to do this to use this technology on a cost effective way.
Great. Thank you.
Thank you. Our next question is coming from Mike Sison from Wells Fargo. Your line is non life.
Hey, good morning, really nice start for the year.
What do you think about the acetyl chain.
And I know, it's a little bit early but you know you guys talked about 900 million two of them 1 billion in adjusted EBIT for 'twenty three.
I I guess investors should think about that for 22 of the reset back to let's say 900 or so.
Is that the right way to look at it and and if so what do you have it.
The growth in E M, and and maybe cost savings other areas to potentially offset the year over year Delta in 'twenty two versus 21.
Yeah look 'twenty one to 'twenty two is gonna be a difficult comparison, assuming we kind of go to normalized earnings because we have had that surge up in acetyl I mean.
We really consider our acetyl foundational level still 800 now moving towards 900 over the next two years. So I think that's the right way to think about that you know based on the capacity adds and the other thing that we've had we expect we'll continue to see continued productivity I would assume that's in there at about <unk>.
Five cents EPS kind of year on year. So we will continue to see that the offset yeah. It is going to continue to grow kind of at that 10% CAGR of our higher every year. So that that will also be in there to offset and of course I think the other thing where the <unk>.
And of course on certain but the other thing is that will be important for us over the next two years is is the M&A and having M&A. Two also complement that growth strategy organic growth strategy that we have for our businesses.
Got it and then just just on the second half for for E. M. Seven.
7% volume growth in first quarter, obviously, <unk> is gonna be abnormally strong volume growth, but what what sort of under the underpinning the outlook for the second half for E. M or are you going to be at that kind of 10 of 11 double digit growth and if you are what's going to drive that.
Yeah.
Really saying for E. M is the second quarter, we think will be flat to first quarter, because we are expecting some softening in auto based on the ship towards chip shortage in the resin shortage, but we are seeing recovery of medical and not just the implant of we think the implants will continue to need of the through the end of the year to.
Really get back the full rate, but in other areas of medical we are making really good progress. So for example.
For our diabetes applications in medical we're seeing really significant growth in in those areas going forward. So and just to give you. The example, so our diabetes applications were up 50% from first quarter of last year. The first quarter of this year. So you know that.
Growth in other elements of medical other elements of <unk> in electronics and industrial applications. Those will continue to grow and support that kind of a 10% CAGR of year on year growth going forward.
Great. Thank you.
Thank you for the next question is coming from the Macerich deal from Bank of America of your line is now live.
Yes.
Thanks.
The Eaton guide on the EM is pretty impressive.
The.
It seems to indicate the $5 $50 million number you gave just like two weeks ago for.
For the full year is already pretty stale. So did something change in the EM was that just conservatism is there something perhaps about the back half of it we're not necessarily picking up on I'm, just kind of going off normal seasonality in your <unk> guide and the exit rate for stuff like that.
No I think look we've seen continued good recovery I mean at the time of Investor Day, I mean, we did have concerns about automotive, although we haven't seen the impact of that time I think we will see those concerns you know develop and in Q2 now we do we do see an end of that inside as well. So we do see Q3 strengthening.
In Q4, but you know as we get further into the year as we get better visibility as we have visibility now into the into the June time frame, we really see that continued growth and despite the resurgence of COVID-19, which is kind of the other concern we called out we really haven't seen that impacting our demand numbers in any part of the world.
Just like with very serious issues around the globe with COVID-19. So I think we are getting more confident in that in that.
550 number and above going forward until very very confident in that in that growth rate I just called out.
Okay and.
The 400 million EBIT numbers, it's a pretty big number.
The kind of implies to me that you are pulling product out of band and selling it into the acid is that.
Is it true I mean, I think in the past you talked about pushing more and more downstream in the west 50 to 50% to 55% of your assets then moved down to Bam did you move backwards on that and have you been more opportunistic and just selling into assets and subsequently have that tightened the bam as a result.
You know so not really I mean, the interesting thing about this this surge in pricing for asset sales, which is different than 2018 as we've seen the price hold not not just for asset which is what happened in 2018 and in fact in 2018, we did move a lot of stuff back the asset and sold it as assets of the market. What's different here is we are seeing that price.
We'll through in them and emulsions as well because of the really strong end markets for those products. So I don't have the exact numbers in front of me, but I would say was not made that shift back the asset in the same way I think we because we have seen pull through and the pricing into the downstream derivatives as well.
Okay.
Thank you. Our next question is coming from Kevin Mccarthy from vertical research partners. Your line is that life.
Yes, good morning, Laurie just to follow up on acetic acid.
You're on your prepared remarks last night, it's evident that you plan to run your whole network very hard the one.
One exception to that was acetic at clear Lake, where you said you're at 80% due to limited availability of certain third party raw materials can you expand on that what is constrained right now upstream of assets.
On timing wise when would you.
Expect to be able to run full out of clear Lake.
Yeah, So, but you know of.
Number of our third party suppliers of raw materials had issues during the free some of them of had to take turnarounds in order to properly repair their equipment, we were down around 70% went out but 80% as they slowly bring facilities back online we really expect by the end of the second quarter to be fully out of this may.
Even a little bit before.
And back to a 100%.
Okay, and then I had a follow up for Scott on free cash flow you indicated in the prepared remarks. Your goal for this year is 900 million or better.
<unk> sorted through our model last night I was I was frankly coming up with a larger number and so I was wondering if you might refresh us a bit on on Capex and exactly how much working capital. We are penciling in at this point and also whether or not you have any call.
Call It extraordinary items beyond the 100 million settlement with the European Commission.
Yeah, Kevin I think the simple answer on the extraordinary items is nothing more than the 100 million that was already baked in our Capex is we're planning on a number between $500 million and 550 for the.
The year end and a lot of the of that will just depend upon.
When expenses come in from a timing standpoint.
Inherent in that number of something towards the higher end of that range and then the balance is a working capital build as I stated earlier now you know I think it was south of you called out you know incremental $450 million or so of EBITDA versus our original guide at the beginning of the year and that's in the in the right ballpark and we do expect to collect that is cash.
It's just likely a portion of that is going to slip into 'twenty.
'twenty 'twenty, two because of that working capital build.
I see thank you so much.
Thank you. Our next question is coming from Alex number of from Keybanc. Your line is that of life.
Thank you. Good morning, everyone you had a quite healthy sequential improvement in engineered materials could you try to walk through the sequential bridge in the earnings and understand the benefit of all the buckets, such as volume leverage positive mix and match.
Is there an uplift in less differentiated polymers were supply demand may have been tighter.
Yeah.
So let me try to take that let's see if I understand your question correctly. So if you look at kind of fourth quarter to the first quarter. Yes. We did have a significant uplift in earnings I mean, almost doubled doubled our earnings and our engineered materials. So we had about a 6% increase in volume, which I would just say it's continued growth in demand really across the.
All sectors really any of you we thought the automotive.
Returning to kind of pre COVID-19 levels, joining the U S and Asia that had gotten there in the fourth quarter. We thought industrial continue to go up and we did see continued recovery in our medical again, not just the implants, but other areas of medical now that because of the programs that we put in place are really starting to show up so that was about a 6% increase and then we had about.
6% increase in price and I would say you know about half of that were proactive pricing measures that we took last year to get in front of the raw materials and then about half of that was really product mix. So again more medical of more higher end premium palm application I'm really pushing the molecules that we did have into our more.
More premium product and then we also had a bit of of help from we didn't have of palm turnaround because we took that in the fourth quarter of last year and I P. H that was kind of another $30 million uplift.
They're not having the problem and then the palm turnaround in this quarter and then we had another about $10 million uplift from affiliate I'm really kind of across the board in affiliate. So I mean those are the big factors that really you know accounted for the pretty dramatic uplift that we saw in E M.
Thank you Lori and a quick follow up you mentioned disruptions from nylon and PBT supplies. How long do you think this could last.
Yeah I you know I think we do think they're going to continue through the second quarter and.
To resolve themselves as we move into the third quarter.
Got it thank you.
Thank you for the next question is coming from Arun Viswanathan.
From RBC capital markets. Your line is non life.
Alright, Thanks for taking my question.
I guess I'll just start on the longer term outlook for asset yields you guys of.
You know announcements of capacity additions of couple of years ago. There was some rationalization in Bam in Europe.
How do you see supply and demand I guess in the acetyl chain of.
The next couple of years do you expect a further additions as well from the industry.
Or would there be opportunities for consolidation.
And I guess, maybe if you could also address you know you've noted some strength in the end markets do you believe those are structural or you know just a little bit more near term cyclical developments.
Yeah.
Yeah.
The longer term I mean, I I believe there have been structural improvement in terms of demand for acetyl chain products again lots of it goes into construction and infrastructure, but painting coating packaging I don't I think the the.
Move towards the people, having everything shipped to their home in boxes is not going to change anytime soon so you know I.
A lot of those sectors are seen.
Last the increases in demand, even paints and coatings I mean, why that maybe it can be a bit more cyclical again, I think what's happening with infrastructure bills and desire to reduce energy usage, you see a lot more going into insulation and exterior coatings and things to further weather proof of existing buildings as well as better better materials in.
New building. So I think we are seeing a structural improvement in demand for acetyl products I do expect we'll see some capacity come on line I mean, probably other than what we've announced not a lot in the near term of again because of these things take a little while to build them, but you know if you go out.
For years, what I expect to see some additional capacity add yes.
So assuming that continues.
That said you know I also expect that especially in China, you know new environmental regulations. The other safety regulation may lead to some consolidation of capacity in China and certain parts of the world.
You know I think you know look I don't think this pricing level is going to continue forever and I've talked about that already but I do think we should continue to see fairly healthy margins going forward in acetyl.
Based on those changes.
Okay. Thanks for that and just as a follow up then.
You know you provided kind of of 13 or 14 dollar our outlook for a couple of years.
From now, but you've also mentioned that you know you do have some some plans for M&A this year.
So maybe you can just elaborate on what you're seeing on the M&A front and you know if that does kind of now factor in a little bit more concretely into your longer term outlook and maybe push you up into the the 15 level or so how would you think about that.
Yeah, I mean, I think we laid it out in Investor day, I mean, what we laid out in the Investor day did not assume any M&A just assumed everything with share repurchases because that was easiest way to model. It in but I mean look we're very active right now in looking at M&A as we have been I think the M&A market is opening up we see you know more parties interested.
And discussing M&A, we see more things you know being surface. So.
Look I'd say, where we're hopeful we're not baking anything in yet in terms of M&A, but we're certainly hopeful that over the next 18 to 24 months, we will be able to do some form of meaningful M&A.
Okay. Thanks.
Thank you. Your next question is coming from Matthew Blair from Tudor Pickering Holt. Your line is not a lot.
Hey, Mark Congrats on the strong results from Q1 I was hoping you could just simply range for your top three of end markets right now on him in terms of just overall demand strength.
Yeah, So probably electronics is would be the number one in terms of demand strength.
I would say.
Medical is probably number two in terms of the.
Not our largest market, but in terms of the strength of the growth that we're seeing for medical and pharma is number two and then auto despite what we expect in second quarter is probably the number three in terms of continued growth in the future.
Okay.
Great. Thank you and then we're seeing the huge spot volume in the studio cast the presence in China.
The extra I understand your comments from from before or are you, saying that.
The those high prices are a result of.
Current outages or the hey, we have high prices now and be on the look out for.
For the future.
Future outages that were deferred from Q1.
Well I think the high prices. We're seeing now is started with the the high demand we saw coming out of the fourth quarter and the tightness of the market. The that's aggravated by winter storm. Yuri. So you know normally for example of Europe is an important market normally everybody ships from the U S, which is the lowest.
Cost of location to Europe to meet the the demand there for the gas it but more importantly, bam them often.
If you look at the Hurricane Yuri with nothing coming out of the U S. Everything started coming out of China.
In other parts of Asia, So that really kept it that's really what's been driving I think the higher pricing in China and Asia isn't the demand there as well as exporting now into Europe going forward, because we know now all of the plants are running again in the U S. They're all coming back up to full capacity going forward I think it will stick.
The tight but I think it could be tightened further depending on the timing of now the China turnarounds that need to occur as well as any unplanned outages that could happen anywhere around the globe.
Great. Thank you.
Thank you for the next question is coming from Laurence Alexander from Jefferies. Your line is now live.
Good morning, so in the E M.
Do you have a sense for how the range of new projects on the duration of projects is affected by a inflationary or more volatile raw material environment.
Yeah, we haven't seen the raw material environment really impacting the rate of new projects I mean in fact, we've been you know we've talked to we talked about this a little bit of Investor day, but you know our project model continues to be extremely productive, especially with the focus on the growth programs that we added 18 months or so ago. So if you look.
Can I.
Just say.
Q1, 'twenty versus Q1, 'twenty, one we've actually increased the number of projects by 13%. So the number of projects won by 13% and if you look at the value of those projects that's more than a 20% growth year on year in terms of the value of the projects. Once I would say you know the project model.
Very healthy it is giving excellent resolved we are getting a lot of value and I mean, it is the thing that is supporting the greater than 10% CAGR growth. We're looking at over the next few years.
Thank you.
Kevin Let's make the next question the last one please.
Certainly our final question today is coming from J D. Pandya from on field investment Research. Your line is now live.
Oh, Thank you and thanks, a lot for the comments yesterday it was very helpful.
First question is really on Bob and the your you know ultra high molecular weight.
Going into battery separate is kind of just tell us how much of Paul is in a I C E versus the E V and then what sort of growth do you expect in your.
Ultra line.
Polyethylene.
S EV penetration sort of goes up and the wet end capacity in separate is comes through but that's my first question on the second question really is around acetic acid.
What is really the car on sort of payback for.
Any.
Current player or a new player that wants to enter this market considering all the things that you've described of the market.
At which point to fundamentally better demand supply balance than it was maybe in the previous cycles. Thanks a lot.
Yeah, Let me see if I can get that so in terms of the palm I think if you look at palm the difference between common and I see and then and then the EV is not much difference at all it's really other component that add I mean, the difference between polymer content, it's very large between IC and <unk> spent for Palmer specifically.
Pretty flat between the two now if you look at them at G. U R. I mean, do you or we've seen really significant growth over the last few years really supporting the.
The expansions that we're putting in place. So if you look at say libs, great. So the lithium ion battery separator growth from 19 to 20 that was up 25% and then if you look at between 2020, one it's going to even be above 25% growth year on year. So huge demand for the also high molecular weight material for.
The lithium ion battery separators.
We are able to expand into that capacity at very low capital cost. So we're continuing to do so and that's why we announced the Bishop D var plant, which will start up.
Here next year, and then at EUR plant to follow in Europe that will start up in 2020 for.
And then in terms of acetic acid in the I mean gosh, that's a really hard question I mean, if youre expanding acetic acid and Bam, which is what we have been doing you know I would say you get pretty you can get and you have good capital efficiency you can get really good pay out you know, let's say kind of nominally three year kind of pay out I think if you're talking about greenfield.
Our brand new build you know I again, everybody's economics are different but I'm going to say, you're probably talking closer to a 10 year pay out even at pretty good you know maybe seven years of your really really capitally efficient, but you know again and as the infrastructure. It takes to build on the CD gas that you have to hydrogen you have to have the methanol you have to have the oh.
You know unless you're in an industrial area of this gets really really expensive and just the transport the stuff moves around in the stainless banks I mean, it's the transport. It is an expensive proposition for a new player to get into acetic acid and Bam.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Brandon on for any further of closing comments.
Thanks, Kevin we'd like to thank everyone for listening in today and as always we're available after the call for any further questions you might have Kevin. Please go ahead and close up the call at this time.
Thank you of that does conclude today's teleconference and webcast. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.