Greetings, and welcome to the Celanese Corporation Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Abe Paul, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Jesse. Welcome to the Celanese Corporation Second Quarter 2020 Earnings Conference Call. My name is Abe Paul, Vice President, Investor Relations. With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer; Scott Richardson, Chief Financial Officer. Celanese Corporation distributed its second quarter earnings release via Business Wire and posted prepared remarks about the quarter on our Investor Relations website yesterday after market close. As a reminder, we will discuss non-GAAP financial measures today. You 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 will now open the line directly for your questions. Jesse, go ahead and open the line for questions.

Thank you. At this time, we will be conducting a question-and-answer session. Thank you. Our first question comes from the line of John Roberts with UBS. Please proceed with your question.

Thank you. Nice quarter. You noted that Asia auto builds have recovered. Was your Asian Engineered Material sales up year-over-year as well? And do you think that will accelerate in Asia after the Polyplastics deal?

Yes. Thanks, John. We are seeing – we have seen the recovery in Asia. I mean, Asia was up about 2%. But I think year-over-year, we really expect Asia to be pretty flat to 2019.

Okay. And then you pivoted acetyls to emulsions and powders over VAM. Can you characterize the range of swings possible between VAM, emulsions and powders in your mix?

Yes. Maybe just to give you an idea, so we actually moved about just over 15% more into emulsions, as an example, in the quarter. We moved about 1% more into VAM. We moved more acetic acid and other derivatives back into China since that was a little bit more robust market, even though the margins were a bit lower. Generally, we characterize it as we have the ability to move anywhere from 40% to 60% of our acetic acid into downstream derivatives.

Okay. So it’s a 20% range then. Great. Thank you.

Yes.

Thank you. Our next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.

Hi. Thank you, and good morning. Just want to square a couple of the outlook comments. Starting in the Acetyl Chain, you mentioned flat 3Q versus 2Q. And you also mentioned that you don’t expect prices to improve until demand gets back to pre-COVID levels. And then later in the comments, you talked about 2021 being an opportunity for demand levels to be greater than 2019. So I wanted to make sure that comment was also meant to apply to the acetic in the Acetyl Chain? And if you think that sort of will be the trajectory?

Yes. So on the Acetyl Chain, I mean, we do expect some volume recovery—modest volume recovery in Q3. We aren’t expecting, though, a big change in pricing. As we said, there’s still a lot of available capacity in the world. So we think that puts a limit on the pricing. Look, we are seeing some improvement in methanol pricing in early Q3. We are seeing some improvement in acetic acid pricing, so maybe even slightly up margins at the beginning of Q3. But we don’t really see the fundamentals yet to really think maybe that’s sustainable for the whole quarter. You might remember in the second quarter, we also saw a bit of an uptick in margins early in the quarter, but that really flattened out as the quarter went on. So right now, we’re saying modest volume recovery, pretty flat margins and, but that volume—but we do have some smaller turnarounds in Q3 in Cangrejera, Frankfurt and Singapore, which offsets that modest volume recovery. So that’s why right now, we’re calling it essentially flat. Again, we’re seeing a little bit of margin expansion early in the quarter. But right now, we don’t know that that’s going to sustain. But clearly, if it does, that will be a help.

Yes. And I think, if you look at your question for 2021, it’s still early on the Acetyl Chain. We don’t have that long of visibility. But we do – we are anticipating, given conversations with customers that demand will be improved versus 2020 at least at the current outlook. We’ll have to see if it gets up to 2019 levels or not, we did see a fair amount of destocking in 2019 in the business. But that 2021 comment was probably a little more related to Engineered Materials.

Okay. And I did want to follow-up on the destocking and the seasonality comments that you made for Q4. I mean, obviously, recognizing Q4 in a normal year is a destocking quarter. This is obviously not a normal year when you look at sort of the volume of 2Q. And I recognize it’s very hard to predict Q4 at this point, let alone August. But are you just sort of being conservative assuming that customers will destock in Q4, because what they always do? Or is it possible this year, just because it’s been such a strange year with such a soft 2Q that we don’t actually have a down Q4 sequentially versus Q3, because customers’ demand is still coming back and customers don’t have the inventory levels to really do it? How are you thinking about that?

Yes, I would say, Vincent, we’re really assuming normal seasonality. I wouldn’t say it’s as much destocking as just slightly lower demand as demands come off in the fourth quarter for construction and other materials. So not really destocking as much as just a normal reduction in demand. Now, look, we’re keeping our options open. Maybe with the abnormal second quarter we have, we’ll see people continue to run a bit stronger in Q4. We’ve seen that in some years, but we’re not assuming that at this time, because, again, we just don’t have the visibility that far out. So we’re just assuming a normal level of demand drop-off associated with the fourth quarter.

Okay.

Yes. Vincent, that Q4 demand in acetyls tends to be weather-related in construction, paints and coatings, and our emulsions business. So, we think that will probably come to fruition, where we may not see as much of an impact is on the Engineered Materials side. We’ll just have to wait and see. Even though we’re bringing turnarounds forward into this year, we have enough flexibility in our volumes that if we don’t see that destocking or that seasonality in EM, then we should be able to respond.

Okay, very good. I appreciate the help.

Thank you. Our next question comes from Bob Koort with Goldman Sachs. Please proceed with your question.

Thank you very much. Lori, I was wondering, you guys said back at the last big Investor Day you talked about some aggressive, but maybe not specific timeframe for some acetic and VAM expansions. Can you just give us an update in light of what’s gone on this year? How that’s changed your view, if at all?

Yes. Thanks, Bob. So, the acetic acid expansion was really around the reconfiguration. So the expansion at Clear Lake, coupled with some productivity moves in Asia. So as we said last quarter, we have delayed that project for about 18 months, really in response to the reduced demand dynamics we’ve seen for acetic acid, as well as the low oil price environment, which makes Singapore look somewhat more attractive and closer to Gulf Coast natural gas pricing. So that’s the big move in acetic acid. We’ve also announced some expansions of VAM and VAE facilities. Those continue on schedule, consistent with what we’ve said before, so we’re really talking in the 2022-plus timeframe, because we really see the demand for those products. And as it applies now with Elotex and with others, we see a very robust future for VAM and VAE and other downstream derivatives of acetic acid. So those continue on schedule. Acetic acid is delayed about 18 months.

And in EM, I’m just curious, given the pretty extreme volatility in a lot of polymer pricing. Has that provided some opportunity? Is there some threat there from intermaterial substitution? Can you just sort of talk about your development efforts with customers there in light of all this volatility? What’s that done to the whole process that you guys have in terms of the innovation and new product wins and that sort of thing?

Yes. So, I think there have been a number of opportunities that have come up in Engineered Materials. So, one opportunity we’ve seen probably more so than price volatility, I would say, is around desire to have more certainty on supply chain. And so we have seen inquiries from customers and wanting to get product within the region that they’re going to use it to derisk some of their supply chain. So that’s been a few opportunities for us. And we also just see a lot of opportunity consistent with what we’ve laid out as our strategy. So really more aggressive movement into electric vehicles. We’ve seen a lot more opportunities there, especially for some of our recycled products like ECOMID and some of our flame retardant nylon. We’ve seen more opportunities there for lightweighting. We just see electric vehicles, which obviously is also getting a lot of help here in the COVID environment from stimulus packages and things, especially in Europe and Asia. That has been a focus for us for the last 18 months now. And we see it really developing to where, for example, the accessible market for us in electric vehicles is about 30% greater for Celanese products than it is in traditional vehicles. So, we’ve seen 5G is another area, more focus on medical pharma. That has provided some opportunity. So I think, some of the strategic focuses that we’ve laid out in the last year, we’ve really seen strengthened through COVID, as well as some new ones developing around things like people wanting more materials that are resistant to the use of disinfectants and sterilization, as well as more focus on pharma compliance. So, we actually see a lot of opportunities in Engineered Materials and are pretty optimistic about the level of project wins we had despite the - in a COVID environment.

Great. Thank you.

Thank you. Our next question comes from Duffy Fischer with Barclays. Please proceed with your question.

Yes, good morning. Maybe just a follow-up on EM. When you look across your suite of all the different polymers with the weaker demand, have you seen any erosion or material erosion in pricing caused by that weaker demand?

I would say across the Board on average, no. In fact, we probably saw a little bit of margin expansion in the second quarter with lower raw materials. And we should see that raw material advantage continue, because there’s always a big of a lag in raw material advantage. And so, while in some end applications like consumer and industrial, there has certainly been an automotive. There has been a softer demand, and some of that has maybe tightened up pricing and others like electrical and medical. We’ve seen higher demand and we – and we’ve seen improved pricing. So, on average, I’d say, our margin – variable margin has been pretty consistent quarter-to-quarter. And if anything, we’re seeing just a little bit of margin expansion overall.

Okay. And then if we just move to Tow, the pandemic influence on cigarettes in your Tow business, I mean, I don’t know, but it’s a respiratory disease. I can’t imagine smoking a cigarettes is enjoyable trying to wear a mask. Have you seen any influence on demand for either cigarettes or your Tow business because of COVID?

No, not at all. We have not seen any impact on demand or any impact actually on smoking trends. In fact, if you look at China, China through June is showing a 2% increase in demand for cigarettes. And anecdotally, even in the U.S. if you see some of the reports coming out, like Altria is reporting only a 2% decline this year versus what they thought would be a 4% decline in smoking. So I would say in some areas of the world that would appear people have more time on their hands and are using that time to smoke more, not less as kind of strange as that seems in this period. So we’re not seeing any impact in demand, if anything, a little bit of an uptick.

Great. Thanks, guys.

Thank you.

Thank you. Our next question comes from P.J. Juvekar with Citi. Please proceed with your question.

Hey, Lori, it’s Eric Petrie on for P.J.

Hi, Eric.

In the Engineered Materials, can you discuss your project pipeline you were talking about moving from 4,000 last year to 5,000 this year? So is that on track? Or has that slowed down with lower auto builds?

No, I mean, actually, our Q2 is on track for in terms of project wins with what we expected, despite the COVID challenges. And I would say, even if you look at kind of value per win, which is where we’re trying to focus this year, which is more on value, that’s actually been flat year-over-year, which we think in the COVID environment is also good that we’re getting good value out of our products. I would say, our Engineered Material folks are just doing a fantastic job being creative, finding ways to actually increase the amount of contact we have with our customers, even if it’s remotely, being able to use a remote environment to get higher level contact with our customers. And using some really creative mechanisms like webinars to really not just touch existing customers, but also do prospecting for new customers. And so, we have found, customers still want solutions. We’re still in the business of providing solutions. Our folks are really focused on that. And in addition to the ones we called out, we’ve had several great examples of project wins in this quarter. I mean, just to maybe put a little color around it, in medical-grade POM, we had a pretty big win there for an auto injector application in Europe. We signed a development agreement with an app for an application of our VitalDose EVA, which came up pretty good, upfront development fee. We have a new high voltage connector application for electric vehicles for our flame retardant nylon, which we also signed this quarter. And then we actually have quite a lot happening in the 5G space as folks are looking for better signal integrity, which is a great application for primarily LCP, but also PPS, and then for lightweighting applications, which is maybe more around LFT and other polymers. So, we’re really excited about the wins that we’re seeing in non-automotive space. But, of course, we call that we also had big wins this quarter in the automotive Tier 1 space as well.

Great. Thank you for that insight. And then turning to the Acetyl Chain, we expect some volume improvement into the third quarter, but no pricing. So is that just due to the raw materials you’re expecting to remain benign from methanol and ethylene? Or could you talk a little bit about those raw material push on pricing versus a demand pull?

Yes. The second quarter raw materials was, I would say, kind of at an all-time low, it was lower sequentially from Q1 across all areas. I mean, methanol was very low in all regions. I mean, we’re seeing 20% declines in the U.S. and Asia in terms of pricing. Ethylene was very low with 15% declines in the U.S., 25% in Europe. Natural gas was low. I mean, everything was really low in Q2. As I said to an earlier question, we are seeing maybe some slight movement upward in terms of raw material and also acetic acid pricing in Q3, but we saw that also in early Q2 and it didn’t sustain. So our assumption now for Q3 is, we may see some movements with pricing. We may see some movement with raws. They tend to move together. So we aren’t really expecting much margin compression, but we’re not expecting margin expansion either. So that’s our assumption going forward. If we see sustainable movement, there may be an opportunity for margin expansion, but we’ve not baked that into our numbers.

Okay. Thank you.

Thanks, Eric.

Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.

Hey, good morning. Nice quarter. Lori, what do you think the Acetyl Chain can get back to, once maybe a post-COVID volume number or back to maybe a pre-COVID volume, if you can get back there at some point in time? And then – and what do you think needs to happen in terms of margins and pricing and to sort of get to that run rate?

Yes. Thanks, Mike. Look, we still feel like kind of foundational level of earnings for the Acetyl Chain is in that $175 million to $200 million a quarter, so kind of that $700 million to $800 million per year. We feel pretty comfortable with that. I mean, even if you look at where we are right now in this quarter at, say, $116 million, we had an 11% volume loss due to COVID, if you remove the Elotex acquisition, which was 5%. So that’s about $40 million right there. And then we had another kind of $20 million in price margin, which I’d say was tied to those really low volumes in utilization, particularly looking at VAM. So if you look at that, we’re still in the – we still feel like we’re in that $175 million to $200 million range, kind of without the extreme impacts that we saw from COVID on volume and then resulting that resulting impact on margin. So I really think it just takes us back to getting to more normal levels of utilization. If you look at utilization this quarter, I mean, we – this is really the lowest of the trough conditions. If you look at China, China utilization was below 60%. Global utilization was only mid-60s. So I think really, to get back to that level of foundational earnings, we need to get back to the kind of 70% and higher level of utilization. And it’s really about recovering Western Hemisphere demand, because that’s really where we saw the weakness in the second quarter.

Got it. And then when you think about 2021, you’ve accelerated some turnarounds, you have some cost savings. How much sort of growth do you have somewhat in your control as you head into 2021 as sort of an anchor for some profitability improvement?

Yes. So as we move into 2021, we’re really looking – if demand continues at the current trajectory, we’re really, then in 2021, nearing the levels we saw in 2019. As you noticed earlier with my optimism about our project model in EM, I mean, we are having a lot of new project wins, new opportunities that we’ve developed that we think in the EM space will let us, again, assuming the demand recovery continues, let us exceed the levels that we had in 2019 based upon the new projects that we’re seeing being developed. So again, really around the EV space. Also elective surgery, we had a bit of a – almost, I’d say, $10 million surprise this quarter from elective surgery deferral. I mean, we knew they were being pushed out, but we expected them to come back yet at the end of the second quarter. We really haven’t seen them come back. That was about a $10 million hit in the second quarter. Even in the third quarter, while we think elective surgeries come back, we aren’t expecting much of that to come back in the third quarter, because there’s some inventory that needs to be taken down at those suppliers. And so, that recovery really comes in fourth quarter and we think into 2021. So we think that will be an upside going into 2021, as well. Acetyl inventories are generally pretty low. So we think as we see demand recovery, that will pull-through to volume and margin in acetyl. And then as you said, we kind of have a $70 million to $80 million help next year from less turnaround.

Great. Thank you.

Thank you. Our next question comes from the line of Matthew DeYoe with Bank of America. Please proceed with your question.

Hi, thanks. So the last few EM deals targeted nylon compounding, but I’m assuming that opportunities have been tapped out now. So where do you see future cash deployment headed from a polymer technology standpoint?

Yes. We have targeted nylon. I mean, we put a lot of money into nylon acquisitions a few years ago. And so we’ve really been working to kind of exploit that part of our portfolio and that new capability that was the rationale behind those acquisitions. And I think, quite frankly, there’s a lot of runway left for us in nylon and especially in some of what we think are unique and good offerings we have around recycled nylon. So again, our ECOMID series, as well as our flame retardant nylon. So we actually think there’s a lot of growth left in nylon with our existing assets, if you will. So as we go forward, we’ll continue to sell that as long as our other polymers as you think about M&A going forward, our capability going forward. I mean, clearly, there are some other polymers that may be of interest to us. We continue to look for ways to further expand our capability within some of the polymers that we have, as well as expand our reach maybe to polymers that are focused on other end-use sources or other geographies that we haven’t penetrated as completely.

Okay. And then you talked about the European compounding footprint consolidation you put out in the press release. That – maybe I missed it. But did you highlight any savings or synergies from that rationalization or optimization? Should we expect anything there? Or is it kind of like a…?

Yes. Look, absolutely. I mean, it’s a bit tied to your previous question. I mean, when we did a series of acquisitions over the last few years, we assumed a certain level of synergies associated with being able to optimize footprint, further improve our compounding capability and skills, as well as the polymers that we acquired. And so it usually does take us a few years to really get our handle on the business and what’s happening and see where those opportunities are. So this announcement of the consolidation of facilities in Europe and establishing a clear compounding center of excellence at Forli, I’d say it’s just really the natural progression from those acquisitions that we made a number of years ago. And so there’s clearly productivity that comes with that, as well as we think improvement in development capability, customer support, supply chain optimization, etc. I would think of it in terms of. We typically only do projects that have greater than 20% returns. This one falls into that category and it will have a two to three-year payout.

Thank you. Our next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Thanks very much. What’s been the growth rate in medical applications in your Engineered Materials business so far this year?

And so, Jeff, I think that the medical applications have been relatively flat year-over-year with some growth in some applications, but clearly offset by the decline we’ve seen this year in elective surgeries and what that has been. Again, I don’t think that’s a long-term trend. I think, as we have in previous years, we will continue to see mid-digit growth year-on-year in medical. But I think – so I think this is just a timing impact in terms of elective surgery. But because of that change in elective surgery this year, I would say, relatively flat year-over-year.

You have a relatively mild volume forecast in Acetyl Chain for the third quarter relative to the second quarter. Is that because of Celanese’s own, either restructuring activities or plant turnarounds? Or does it have to do with the rate of the growth of the acetyl industry itself? Maybe you could talk about the growth of the industry in the second quarter versus the growth of the industry in the third quarter?

Yes. So I mean, we did see some good recovery in volumes quarter one to quarter two, as we saw Asia really coming back earlier. But we saw a lot of decline, obviously, in the Western Hemisphere in quarter two. Now, as we move into quarter three, we do expect, as I said, modest volume growth in the Western Hemisphere. But we are being probably a bit conservative here in terms of what we think volume growth will be in the third quarter, just based on what we’re seeing is the trend so far.

Yes, Jeff, if you look at Q2 on a year-over-year basis, we were down somewhere in the 20% range. If you look at Q3 year-over-year, that’s probably more like 10% to 15%. So that modest increase driven by some slight recovery in the Western Hemisphere.

Great. Thank you so much.

Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Good morning. If I look at your Acetate Tow earnings in the first half of the year, your equity earnings from the JVs in China are up double digits in percentage terms, while the consolidated sales are down, looks like 22% or so. And so my question is that, that seems a lot more pronounced than the underlying demographics. Has that mix shift been more acute for Celanese for some reason? If so, why is that the case? And do you expect it to continue?

Yes. So, Kevin, I mean, I think it’s—there was a one-time event. We had a large contract which came off at the end of 2019, which actually shifted volume to our affiliate and took it out of our own earnings. And so that – you’re seeing that shift; that was something that was planned. We’ve called it out in past quarters. So it really is that shift into affiliate of volume coming from our affiliate versus coming from, if you will, Celanese production.

Yes. Kevin, if you even go back to our Investor Day in 2018, we telegraphed that this would be coming.

Understood. Thank you for that. And then second question relates to your acetyls business in Asia. In the prepared remarks last night, you referenced the expansion of some supply deals in Nanjing as well as Singapore. And so maybe a two-parter. Was there any benefit associated with that in the second quarter? And then longer-term, does that have any bearing on your flexibility to rationalize assets in Asia if and when you eventually proceed with the expansions that you had planned in the United States?

Yes. And so, look, I mean, these are contracts that have come up in a normal way for renewal. I mean, we’ve been happy renegotiating them in this environment that we’ve been able to get some additional productivity working with our supply partners. And so, we’re happy about the security of supply this gives us in both Nanjing and Singapore going forward, as well as some additional flexibility we get in these locations going forward, that to really help us better manage our Acetyl Chain. So there will be some productivity out of both of those contracts going forward. Most of that, though, will occur in future years in 2021 and beyond.

And it does not limit our flexibility, Kevin, to continue with our reconfiguration project in Clear Lake when we start that back up again.

Very good. I appreciate the color.

Thank you. Our next question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your questions.

Good morning, Lori.

Good morning.

Quick question around the Acetyl Chain and the interplay between product pricing and raw material pricing. I mean, if I remember correctly, historically you guys talked about raw material volatility actually being a favorable environment – being favorable for that business line right? And if we take a look like you rightly said, through the course of the first-half of the year, ethylene pricing came under tremendous pressure, methanol pricing came under tremendous downside pressure, and everything was kind of going down in a straight line. And now we’ve seen some buoyancy in ethylene, some buoyancy in methanol, but there are enough sort of industry folks out there that expect that buoyancy to be short-lived. So the question really is, are you expecting raw material buoyancy going forward? And would that not be a favorable environment for the AC business?

Yes. So, look, we have been at very low raw material pricing. I mean, we’ve been very low oil tends to draw low raws. And normally, when we see low oil, low raws, we actually expect some margin compression in acetyls. We’re actually – we’re very pleased in Q2, that is a really great work by our folks in the Acetyl Chain and constantly pushing the envelope around activations and movement of products into – with – throughout the terrain and throughout the geographies that we were able to maintain our variable margins and not have any compression. Usually, when we see raws going up, we would expect some margin expansion. But I think, the way you characterize it is correct. We – there is some buoyancy, but we are not convinced that that will remain. Again, we saw the same buoyancy at the beginning of Q2, but then saw raw materials go to some of the lowest that we’ve experienced in a decade. So although we’re seeing some buoyancy at the beginning of Q3, we don’t still see any fundamentals that would lead us to believe that that is sustainable for the quarter.

And that buoyancy we like, Hassan, as you mentioned, I mean, that up and down allows us to – we will flex our assets based on different raw materials and different feedstocks in different regions. And just that uniqueness of the model in acetyls that up and down that volatility, we tend to be able to make margins on.

Very clear. And as a follow-up, again, sticking to the Acetyl Chain, recently, we obviously saw a large incumbent exit that business, and I guess, a new entrant will eventually be coming in. And one of the reasons cited for the exit was that the company talked about how they had kind of underinvested in that business over the years and they wanted to focus on their core business. How are you guys thinking about the evolution of the market with, I guess, that large incumbent leaving, new entrants coming in and some of the statements coming out as reasons behind that exit?

Yes. Look, INEOS is an experienced player in the business. We don’t see any meaningful change in terms of the industry dynamics or competitiveness of the industry within INEOS replacing BP. So we don’t see any change. Look, I think, there’s a lot of reasons that transaction took place. I think, INEOS will be a good steward of the business. And while they have an interest in expansion, I also don’t believe that these margins, anybody is going to be interested in investing in these businesses at this level of margin.

Very helpful. Thanks so much, Lori.

Thank you. Our next question comes from Ghansham Panjabi with Baird. Please proceed with your question.

Hi, good morning, everyone.

Good morning, Ghansham.

Yes. So, Lori, I just wanted to follow-up on some of your recent comments. Just kind of stepping back over the last three years in particular, the Acetyl Chain has been very opportunistic in kind of flexing its global network and optimizing margins along the chain of molecules. I guess, the question is, are opportunities going to be as plentiful in a diminished sort of global demand growth scenario, where there’s considerable excess capacity, as you pointed out?

Yes. Look, we – as we’ve said before, I mean, we really think our acetyl model is unique. It’s unique in the breadth of the portfolio in terms of going all the way from methanol, in a way now to redispersible powders. And it’s unique in the fact that we have three very distinct routes from raw materials to end-use products that move in different geographies, and that gives us a lot of optionality that others in the industry just can’t replicate. And so we think that opportunity continues through every scenario going forward. Look, acetyls will tend to grow at the rate of GDP. We tended to maybe even outpace that a little bit, given the optionality, given our focus on end-use customers and some of the derivatives in the Acetyl Chain. So I don’t see that changing going forward. We think acetyl continues to be a high-margin business, maybe considered a commodity product, but we do not operate it in a commodity way.

Okay. That’s helpful. And then just kind of thinking through the past few months, I mean, obviously, the pandemic has impacted each of the major regions differently. Just looking through the lens of Celanese, are the western regions recovering in line with maybe what you experienced in China? Or is it still too early to tell?

I think it’s a little too early to tell. I mean, China has had a fast recovery within China. I would say, what has not fully recovered yet in China is exports from China. And you may recall last quarter, we called out one of the things we’re looking for on recovery is when do China exports get back to previous levels? Because that’s a good indication of Western Hemisphere recovery. So starting to see some exports again, but clearly not up to full level. I think the U.S., we’re seeing – we saw pretty good signs of recovery, especially in auto. How sustainable that is? I think we’ll have to see what happens with COVID. And do we see the economy continue to open up? Do we see it start to contract again? I mean, that’s our concern going forward. I think Europe has been a little more sluggish initially, but seems to be coming out of COVID a bit stronger. So maybe we see that continuing. So I think it is very mixed by region, both at the pace and also both about the certainty in the future. And I think we continue to watch the same things. We’re looking for signs of Western Hemisphere recovery, a lot of which can be measured by what our exports doing in China.

Got it. Thanks so much.

Thanks, Ghansham.

Thank you. The next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you. Good morning. Just in Engineered Materials, why were volume down in June? And how are they trending year-over-year in July?

Yes. So I would say, June volumes were up – actually up from May and July is up from June and August is trending pretty consistently with July. At this point, we don’t really have any visibility at this point on September. But steady monthly good progression from May through July.

Yes. And David, for the quarter in Q3, we’re kind of looking at 10% to 15% down year-over-year, if that’s helpful. And it’s a little different. Typically, August, we would see volumes come down versus July. We’re not seeing that dip in the order book, just given the differences that we’re seeing this year.

That’s helpful. Thank you. And just Lori, you mentioned Ibn Sina having the big earnings decline in Q2 due to the low oil prices. They’ve come back a little bit. So how do you think about Ibn Sina earnings in the back-half of the year a little bit higher oil price?

Yes. So we – look, we did see Ibn Sina come down in the second quarter due to low oil prices. Again, Ibn Sina has the quarter delay. So that’s low oil prices in Q1. Obviously, those low oil prices continued in Q2, which we will now see show up in our Q3 earnings. And then Q4—who knows? Hopefully a bit back up as we start to see oil going up again.

Very good. Thank you very much.

Thank you. The next question comes from the line of Frank Mitsch with Fermium Research. Please proceed with your question.

Thank you so much. I appreciate some of the commentary with respect to the second quarter and the third quarter. I was wondering if I could get a little more granular in terms of the monthly progression that you saw through the second quarter and how has July actually been coming in, in terms of your volumes?

Yes. So I mean, for both EM and for acetyls, I would say, we – the same trend is true. I mean, we definitely saw July being stronger than June and we’re seeing August coming in pretty consistent with July, both in terms of volume and margin.

And the fact that August is coming in consistent with July would be more positive than you’ve seen in prior years. Is that correct?

Yes. No, that’s correct, because usually, we see the impact, especially in Europe of extended vacation periods. And we are anecdotally hearing some workplaces in Europe are not shutting down in August, like they typically do, because they’ve already been down for so long. And so we think that’s pulling through in a bit more strength in August than we typically see.

Very helpful. And you suggested that the industry operating rates in the second quarter for acetic acid were in the mid-60s and VAM were in the mid-70s during the second quarter. Where are those numbers now?

They aren’t significantly moved from Q2 in terms of overall global operating rates.

Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Good morning. Thanks for taking my question. Just curious, you talked previously about the opportunity for about $0.50 from productivity/supply chain investments, as well as $0.50 from buybacks. Could you just update us on the possibility of realizing that over the next year-and-a-half or so?

Yes. So I – I’m completely confident in our ability to achieve the $0.50 from productivity. Year-to-date, we’re at $135 million of productivity that – so two-thirds of the way already to the $200 million target that was associated with that 50% – that $0.50. So feel very confident we’ll get that $200 million. Just to put it in perspective where that comes from, about a third of that productivity comes from optimization of our footprint and other manufacturing optimizations; about a third comes from raw material and logistic productivity and then about a third from revenue optimization, SG&A and kind of everything else. So given that it’s a very balanced way we get productivity. I feel completely comfortable we’ll achieve at least that $200 million target. And you might recall, we also have another $30 million to $40 million of one-time cost savings in 2020 that we expect to get this year, which will be even a bit more help. So, things like travel reduction and additional manufacturing savings associated with slowdowns, the shutdowns and corporate functions, etc. So, I feel very comfortable at $0.50. I mean, the $0.50 share buybacks, clearly, our balance sheet is in a good position right now. And so we feel like that’s certainly achievable. But let me hand it to Scott.

Yes. So Arun, we did a little over $100 million in the first part of the year, which will get us some of that. We announced $500 million as part of the Polyplastics deal, which will make that an accretive transaction. So we’ll get a little bit more from that. And then you’ve got the balance of the $800 million from that deal that will be deployed, either through M&A or additional repurchases into next year. So between all of that, we should exceed that $0.50 that we had originally called out as we get into the middle part of next year.

Great, thanks. And maybe you could just get your perspective on acetic and VAM pricing as you go through the rest of this year and maybe even to next year. I mean, is it fair to assume that there’s going to be limited opportunity there, just given low operating rates and maybe methanol remaining relatively low as well? Are you looking at kind of overall pricing opportunities in the AC Chain? Thanks.

Yes. So, I think if we look at the entirety of the AC Chain, I think, pricing will tend to move with raws. I think, we won’t see a lot of margin compression, but I’m not sure given the low capacity utilization will also see a lot of opportunity for margin expansion. And so while we may see pricing go up, I don’t – as raws – if raws go up, I don’t think we’ll see a lot of additional margin there. I think there’s probably a little more opportunity in VAM and downstream of acetic acid, as those tend to have slightly higher utilizations already. And especially now as we move – remain in a strong construction season through Q3, there may continue to be some opportunities there on pricing. But again, as we move into Q4, that tends to fall off a bit.

Okay, great. Thanks.

Yep.

Thank you. Our next question comes from William Blair with Tudor, Pickering Holt. Please proceed with your questions.

Hey, Lori, it’s Matthew Blair with TPH. I was wondering how you’re thinking about free cash flow targets for 2020? At one point, you’re aiming for about $900 million, then COVID hit, but you’re still at $418 million year-to-date. You’ve also outlined the extra $400 million of tailwinds from things like productivity and lower CapEx. So do you think something like I don’t know $1.0 billion to $1.2 billion of free cash flow in 2020 is a good range?

Look, we’ve previously – before COVID, we were looking at a range of $800 million to $900 million of free cash flow. As we went into COVID, we’ve obviously clearly been fixated on free cash flow and making sure we take steps to try to preserve free cash flow. We did identify that $400 million that you referenced have additional steps we can take on free cash flow. But again, we’ve also had a pretty large EBIT decline associated with COVID volumes and margins. So we still think we’re – that given our strong first-half performance that we will be north of the $800 million mark on free cash flow that we had laid out earlier.

That’s helpful. Thanks. And then the release noted that turnaround costs in 2021 would be meaningfully lower. Can you share any numbers around that? And in particular, any details by segment?

Yes. So on turnaround, we will be meaningfully lower in 2021. If you look at where we are earlier this year, again, pre-COVID, we thought turnarounds were in this $70 million to $80 million for 2020. We’ve now pulled in the Frankfurt POM, which is $20 million to $30 million. This year, our outlook—total outlook for turnarounds will be in the $90 million to $110 million range. In 2021, that goes back to $20 million to $30 million. And I would – that $20 million to $30 million is pretty evenly split between EM and AC.

Thank you.

Thank you. Our next question comes from John McNulty with BMO Capital Markets. Please proceed with your question.

Hi, good morning, Lori. This is Bhavesh Lodaya for John.

Hi.

So first, on your commentary for the third quarter. So it looks like, obviously, sequentially, EM is expected to see strong growth, and then the rest of the segments will be more balanced with their own pluses and minuses. So if we add the $60 million of EBIT or so to the EM and keep the rest unchanged from sequential 2Q levels, we are looking at, call it, $260 million of EBIT for the next quarter. So the question is, is as straightforward as that? Or obviously, any macro surprises could impact that? But are there any other moving pieces, which can cause this target to move materially?

Yes. So we are really suggesting for Q3, the recovery will be in EM. We expect to recover about 50% of the decline we saw Q1 to Q2, we expect to recover going back into Q3. We also get some help from not having a batch of turnaround in Q3, but that’s offset by some further decline in Ibn Sina. And again, in AC and Tow, we expect them to be relatively flat with Q2 performance.

Got it. And then if we move to the 2021 comment, so you mentioned that you expect demand growth for 2021 to be beyond 2019 levels. Is the implication that you could see higher earnings as well in 2021 versus 2019 levels? Or does pricing and other headwinds remain kind of like the bigger unknowns?

Yes. So I think for – we expect for AC demand levels probably similar to 2019. For EM, we would expect, assuming the demand trajectory continues level similar to 2019 with maybe some upside due to the project wins that we are having this year and fairly robust sectors like EV, like 5G, like medical, that we think may give us some upside next year versus 2019.

Yes, Bhavesh, I think the timing of when we see the full recovery will be—will kind of determine exactly where the overall annual earnings end up. If we finish this year and start next year at demand levels similar to 2019 at the beginning of the year, then, yes, I think that that’s a decent assumption. However, if we see things still kind of ramping back to those levels as we begin the year, you may not get to that level until somewhere in the middle part of the year. So there’s just a level of visibility we have still to where we’ll see that recovery and when we’ll see it get back to those levels is still a little bit uncertain.

Got it. Got it. Thanks, Lori and Scott.

Hey, Jesse, we’ll go ahead and make the next question the last one for the call.

Thank you. Our final question comes from the line of Jim Sheehan with SunTrust. Please proceed with your question.

Good morning. Thank you. Can you comment on acetic acid inventory levels in China? And also, the reports of high water levels on the Yangtze River impacting shipments from Nanjing. Are you seeing any shipment delays because of this?

Yes. So, inventory levels, generally, globally are reasonably low for acetic acid. I mean, there has been some build in other products made from acetic acid in China associated with the lack of exports. So we have yet to see how that plays out. I will say on the Yangtze, we have not seen any impact at all to our operations associated with high water levels or otherwise. We’ve not had any supply chain problems.

Thanks. And can you comment on political proposals to raise the U.S. corporate tax rate to 28%? How much impact might that have on your effective tax rate?

Scott?

Yes. Jim, we’re still working through those. And I think, it’s really too early to say. Obviously, we have a pretty global network. And so you won’t see it straight flow through to all of our earnings. So we will – we’ll continue to look at that, and a lot would depend upon where demand levels are broadly from a global perspective.

Thank you.

Thank you. We have reached the end of our question-and-answer session. So I’ll turn the floor back over to Mr. Paul for any additional closing comments.

All right. Thank you, Jesse. We thank you for your questions and listening in today. As usual, we’re available after the call for any further questions you might have. Jesse, feel free to close out the call at this time.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. Once again, we thank you for your participation, and you may disconnect your lines at this time.