塞拉尼斯 (CE) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Celanese first-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Chuck Kyrish. Please go ahead.

Thank you, Carey. Welcome to the Celanese Corporation first-quarter 2016 earnings conference call. My name is Chuck Kyrish, Vice President of Investor Relations. With me today are Mark Rohr, Chairman and Chief Executive Officer, and Chris Jensen, Senior Vice President and Chief Financial Officer.

The Celanese Corporation first quarter 2016 earnings release was distributed via Business Wire yesterday after market close. The slides for the call and our prepared comments for the quarter were also posted on our website, www.celanese.com, in the Investor Relations section.

As a reminder, some of the matters discussed today and included in our presentations may include forward-looking statements concerning, for example, Celanese Corporation's future objectives and results. Please note the cautionary language contained in the posted slides. Also, some of the matters discussed and presented include references to non-GAAP financial measures. Explanations of these measures and reconciliations to the comparable GAAP measures are included on our website in the Investor Relations section, under financial information.

The earnings release, non-GAAP reconciliations, presentation and prepared comments have been submitted to the SEC in a current report on Form 8-K. This morning, we'll begin with introductory comments from Mark Rohr and then we'll field your questions. I would now like to turn the call over to Mark.

Thanks, Chuck, and good morning, everyone. Our prepared remarks were released with earnings, so I'll keep my comments brief and then open the line for your questions.

Today, I'm very pleased to report first--quarter adjusted earnings of $1.83 per share, representing growth of 6% versus the prior year and setting a new performance record for Celanese. Adjusted EBIT for the quarter was our highest ever, at $358 million, growth of 2% year over year, and driven by record performance in material solutions and resilient performance across the Acetyl Chain, while facing a very difficult Chinese market.

Our adjusted EBIT margin was a record at 25.5%, expanding 140 basis points year over year, in a reflection of our broad-based productivity efforts and underlying business performance. This quarter, our businesses continued their pace of consistent cash generation, achieving $217 million of free cash flow. We deleveraged our balance sheet by $405 million in the quarter, and still ended with $716 million of cash on hand.

Looking ahead, I would like to share our earnings -- our current thoughts on a quarterly trajectory of our earnings for the remainder of the year. In the second quarter, we see headwinds of roughly $0.30 to $0.35, and that's versus the first quarter. This is primarily due to our heavy turnaround period, which will include the first turnaround of our industry materials plan in Frankfurt, as well as several [ramp] facilities around the world.

We also have an updated expectation for affiliate earnings headwinds on an annual basis. Due to further deterioration in net backs on MTBE, we now expect Ibn Sina Affiliate earnings to be lower [about] $50 million in 2016. This is $20 million worse than we expected in January, or roughly $0.10 per share over the rest of the year.

When we roll it out for the year, considering the economic backdrop in the strategies-driven place, we have line of sight to growth in adjusted earnings per share of about 8% to 10%. But as I've said earlier, to achieve the high end of that range, we will need some level of economic recovery in the second half to help us overcome a good bit of our fourth-quarter seasonality. With that, I'll turn it over to Chuck for Q&A.

Thanks, Mark. As a reminder, we would like everybody to limit your questions to one question and one follow-up. Carey, let's please go ahead and get started.

Thank you, sir.

(Operator Instructions)

Our first question comes from Laurence Alexander of Jefferies. Please go ahead.

Good morning.

Good morning, Laurence.

Two quick ones. Can you give a little bit more detail on how your thinking has evolved on consumer fibers? And also, can you give some detail on how much shares you bought in the quarter, and what you see as the cadence for the year?

Yes. I'll do the first, and I'll have Chris do the second, Laurence, if that's okay. What we've been communicating for a while on our fibers business has been really the story of destocking the world, and primarily that in China. I think all of the guys that follow us -- and you know this, Laurence -- have a view that we've gone, as an industry, from being able to sell into China roughly 120,000 to 130,000 tons down to a level that's roughly 25% of that today. So the vast majority of that shrinkage, in terms of sales into China, has in fact occurred.

You saw some of that in our volumes this quarter. We took the first big hit on that reduction, or the most material hit, in the first quarter of last year. So you see some of that year-over-year change as we go forward. So our view is that that business is as advertised. We think the destocking outside of Europe has largely run its course, and there's even some signs of some small, subtle volume increases outside of China.

When you get into China, we think it's pretty stable as we go through the rest of this year at the current level we're at. And then we expect that over time, of course, that last remaining bit will work out of the system, as well.

Net-net for the year, we've said all along that we're going to work hard to try to keep our earnings flat. We still are working to do that, and I don't have anything else to report on that front. So Chris, do you want to update us on shares?

Sure. It was a really good cash generation quarter for us, and we're in a great position now to go execute on that commitment to repurchase shares. As Mark mentioned, we have over $700 million, and more than half of that is now in the US. And that's a key to then going out to execute on the repurchases.

You'll also notice that following that revolver draw last year to do repurchases, that we paid that off in the first quarter. So that was our focus, in terms of cash flows this quarter. So we will get after it, and expect to probably do half of that $1 billion through the remainder of the year.

Thank you.

Thank you, Laurence.

Carey, let's please go to the next question.

Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Thanks. And good morning, everyone. Just a follow-up or two on the tow business. It seemed to me that the volume was probably better than you were expecting in the quarter. So I just want to see whether that's true or not? Or maybe you're going to say that it was better in the quarter, but it's going to be different over the balance of the year, so the full-year expectation is the same.

But on the 9% negative pricing, I presume we should assume that for the balance of the year, just given the contract nature of the business. And do you have any thoughts on pricing? It's obviously early to head into next year, but do you think you're seeing the tow volume has flattened out? So should that mean, or should that imply, that pricing is going to flatten out, as well?

Thanks, Vincent. So if you look at that from a point of view, I think we expected the rebound in volume, just because first quarter last year, we really took it on [shannas] everything was shut down that we had going into China. So first quarter last year was an aberration, in terms of its depth. We had a little bit of extra volume in this first quarter that probably will not repeat in the second and third quarter that just came to us, as demand has picked up outside of China.

So I think you should have a view that that swing from the low the first quarter to this quarter was -- both of those a little bit aberrations. It's going to settle out for an average volume that's a little bit lower than where we currently are, as we go through the rest of this year.

I think on price, you're absolutely right. These prices are set, really, as we end the year. So the run rate on pricing, that delta, year over year, is going to ride with us through the rest of the year. And net-net, when we roll that up, including our productivity efforts and things we're doing to try to offset some of that, we're shooting hard to be flat year over year.

If I look at pricing going forward, I think we really -- China needs to sort itself out, is what I would say to that, Vincent. China needs to have some stability to it, and not continue to slide, for us to start having a view that we could work pricing back up. So I don't know if it's going to be able to go up next year. Maybe the year after that.

Thank you.

Thank you.

Okay. Carey, let's go to the next question, please.

All right. Our next question comes from David Begleiter of Deutsche Bank. Please go ahead.

Thank you. Good morning. Mark, back in November, you discussed the M&A focus for the Company. Any progress on the M&A activity, especially in AEM?

Yes, (laughter) --yes, I wish I could share everything with you, David, but I can't. Yes, there's a lot of progress. And we're working several deals that fit in that bolt-on category hard, and I hope that in the quarters ahead we'll be able to announce those deals.

David -- as I mentioned, David, we paid off the revolver. We want that ready to go.

Very clear. And lastly, Mark, just on [aff] appeals in China, you mentioned, again, a very difficult market there. What changes that situation in the near or medium term?

It is a real pig's breakfast over there, David. It's just tremendous over-capacity and a deflationary environment that has pushed down asset margins to pretty pathetic levels. What we are seeing, though, is we're seeing people start to roll over. What I mean by that is, their state-owned enterprises in this arena are having massive layoffs. It's not a sustainable level. So my kind of view is, is that even with the over-capacity this year, we're going to see that start to drift up a bit as we get into this year.

It is going to take industry rationalization for that to change. It's going to take the new MTO plants to come online for that to change. I think both of those things are needed. With ethylene prices being what they are in China, there's a pretty good opportunity for MTO, so we're a little bit hopeful that's going to move in and start driving methanol. But I wouldn't expect there to be an overnight change in the Chinese markets.

Understood. Thank you very much.

Thanks a lot, David.

Great, thanks. Carey, let's go to the next question, please.

Our next question comes from Frank Mitsch of Wells Fargo Securities. Please go ahead.

Good morning, gentlemen. This is normally the part where I talk about what a phenomenal quarter you had, but last year, you guys upsided by $0.41, and this year only $0.34. Why the slippage?

I know, Frank, we're struggling. We're struggling.

(laughter) Really good job. Hey, look, I want to quickly follow up on the M&A question. Obviously, in November, you did talk specifically about nylon. And I believe in your prepared remarks, you also referenced doing some things in nylon technology, but it has seemed that you were doing that on your own. Can you elaborate on what's going on in your interest in nylon, and what's going on there?

Yes, we're very interested in -- obviously in autos, and nylon is a big play in autos. And the way this industry works, Frank, is, when customers have challenges, they invite in people that have portfolios or history in those markets. So we've been working hard to get at the table when nylon topics are discussed, and that's been the advice of some of our friends in the industry. So our focus has been there.

We recently introduced some of our own technology in [comp counting] that's pretty novel and unique, and so we're now selling very small quantities, but now selling nylon. A big portion of our M&A focus is in that regard, to bring in nylon. So that's the reason. We think most of the growth in the industry, from a thermoplastic point of view, will be in nylon.

All right, terrific. And then just quickly, you also mentioned in the prepared remarks some benefit from a VAM contract reset. How lucrative was that for you in the quarter, and -- or expected for the year?

There was -- it was just one-time. We're trying to signal a one-time impact. I don't want to give you the exact number there. But you need to think in terms of less than -- single-digit earnings per share impact.

Terrific.

(multiple speakers) Quarter, yes.

All right. Thank you so much.

Yes, sir.

Great, thank you. Carey, let's go to the next question, please.

All right. Our next question will come from PJ Juvekar of Citi. Please go ahead.

Yes, hi, good morning.

Good morning, PJ.

Mark, you had a big sequential jump in acetyls profitability, the intermediates business. Can you explain how much of that is -- that came from going to spot pricing and what you had talked about shifting some contracts, versus how much benefit did you get from raw materials?

There's a lot of gives and takes in that. What we saw in the fourth quarter was a real high level, as we saw the worst of the worst of the Chinese market. So there's an underlying thematic there that I just need to reflect on. You also had, within that chain, the seasonality impacts of the emulsion product lines. That also weighs it down.

So now you know the first quarter, we've had some basic improvement in China. Not a lot, PJ, but enough to where it's noticeable to us. And then we've also seen emulsions start to do better, as we get into seasonality time, especially in Europe. So you've got those big two swaps there.

When you look at raw materials, I almost feel better talking about that on an annual basis. But the big movers for us in raw materials have been ethylene. And if you look at first to fourth quarter, there was probably -- around the world, there was probably a $5 or $6 million favorable impact for us on ethylene. So pretty modest, but nonetheless, some of that was realized, some of it wasn't realized. (inaudible) But that's the kind of impact we've seen in raws.

Methanol has been more favorable. Most of our favorability has been in Asia, PJ, where it's been very hard to capture any of that. So we see most of our favorability occurring in ethylene, and I would say a little bit in nat gas, which is a few million dollars around the world.

PJ, it's Chris. I'll add a couple of things there. So there's -- you get into some timing around US methanol, if you think through the way that played out last year. So I think your question was sequential from the fourth quarter. So we were still using some methanol in the US, in the fourth quarter, that was procured in the third quarter. So that's more expensive than our ongoing produced costs of methanol in the first quarter.

Remember, also, that we have a new contract in Singapore for carbon monoxide. So you're seeing that benefit (multiple speakers) come on now, as well. We impaired that ethanol plant, as discussed before, so you get a little bit of benefit that you see in the first quarter, from depreciation going down.

You'll recall various footprint activities in emulsions that you now see paying off, in terms of lower fixed costs. And then the business has just continued to do a great job on productivity, and we continue to see progress and visibility to another $100 million number in productivity this year. Back to your specific question, there's just a whole lot of those small things that really added up to quite a big sequential jump in the acetyls core.

Thank you. That's helpful. And Mark, correct me if I'm wrong, but you seem more positive on China compared to one or two quarters ago. So am I reading that right?

Yes, probably so, PJ. I think if you ask me to quantify that, buddy, it's hard to do that. But just on a qualitative basis, when we're out and about, no one can tolerate this situation. And so you're seeing people start to reach out, look for ways to get out of this chronic over-capacity situation. So my view is that as we go through the year, that some of this stuff is going to get resolved. It's unsustainable where it is, PJ, and I guess that's where my optimism really is.

Thank you.

Thank you.

Great. Carey, let's go to the next question, please.

Our next question comes from Bob Koort of Goldman Sachs. Please go ahead.

Thanks very much. Mark, I'm curious how you see the AM business, in terms of consistency going for you? You had a very nice volume number this quarter. Is that something that's sustainable? And what do you think the secular growth rate of that division is, from a volume standpoint?

I think we did have -- we had really good success this quarter. We're expecting -- and to be honest, we need to grow that rate on an annualized basis, certainly through this year, Bob. And so we're working hard to try to achieve that. We've seen some moderation in things like automobiles and stuff that, of course, we have to make sure we overcome, as we go forward. So that's how I would look at that.

We reported that we had over 300 new projects for the quarter, which puts us at a 1,200 project run rate. You recall that last year, we ended with a little bit over 1,000, and we're trying to march that up to 2,000 within a couple more years. And we think we've got a machine to do that. So we believe that machine is working pretty well, and we're seeing a good bit of the volume being realized from these kind of activities.

And Chris, I'm just curious, on the Acetyl Chain, is the impact of the ethanol write-down in the CO contract termination, is that material on a quarterly basis, until you lap those? Or no?

The ethanol depreciation's pretty small. The Singapore contract is a little bigger than that, but we're still in single digits for a quarter, sequentially.

Got it. Thanks very much.

Great. Thank you. Carey, let's go to the next question, please.

Our next question comes from Jeff Zekauskas of JPMorgan. Please go ahead.

Hi, good morning.

Good morning, Jeff.

I think your AEM margins, on an EBIT basis, were up about 700 basis points year over year. How -- on roughly flat revenues. How did you do that? And do you expect them to improve from here?

Which margin? When you say margin, what line are you looking at? Do you mean --

I'm sorry. Your EBIT. Your EBIT versus your revenues.

Okay. So your question was which period versus which period?

Forgive me. So in your first quarter, I think you earned around $89 million on $350 million in revenues, and last year, I think you earned about $61 million on $343 million.

So are you pulling out the affiliates in that math? Is that what you're doing?

Yes, I am pulling out the affiliates.

Okay. So Q1 to Q1, without affiliates. So you've got good volume growth, like we talked about.

Sure.

You do have -- year over year, you've got some benefit from lower raw materials. You have continued productivity actions, and you have some energy price benefits. So you add those things together, that's what's contributing to that margin decline.

In general, for the Company, do you feel like your raw material spreads are widening out or contracting?

I think that's a great question, Jeff. Directionally, over time, they will contract. And to be honest, I haven't dug into it really rigorously, to see how much real contraction occurred across the 5,000 SKUs we have quarter to quarter.

Sure.

But directionally, the -- as prices settle in, then that -- there will be some contraction.

Okay, great. Thank you so much.

Thanks a lot, Jeff.

Great. Carey, let's go to the next question, please.

Our next question comes from Hassan Ahmed of Alembic Global. Please go ahead.

Good morning, Mark.

Good morning, Hassan.

The $0.30 to $0.35 EPS headwind relative to Q1 guidance that you gave, I know you talked about an element of that being turnaround and an element of that being the captured opportunity in Q1 in acetyls. Am I understanding it correctly, that the acetyls contribution to that $0.30 to $0.35 headwind was in the single digits?

The acetyl contribution? No, the -- yes, the incremental volume? Yes, that's right.

Okay. Fair enough.

The majority of that is the turnarounds, and we've never taken an outage at the new POM facility. And from a statutory point of view, we have to basically go into every vessel and do a bunch of testing, from a German statutory point of view. So that is a huge outage and a huge cost to us there, and then we have a series of [BAM] outages. So the lion's share of that $0.30 let's [call it] those two outages that occurred.

Understood, understood. Now, on the tow side of things, as I understand it, there was some new regulations, as far as cigarette packs go in India, commencing April 1. And my understanding is that cigarette manufacturers in India have halted production right now.

How should we be thinking about that, as it pertains to be it volumes or pricing or the like? I mean, completely understand that you guys are far more China-exposed, but these things potentially could have ripple effects.

What we've -- I think if you're asking about long-term consumptive effects, we don't anticipate that there's any real difference in that ongoing decline curve that is expected. On a short-term basis, there was a little bit of volume you could probably attribute to production, under the old labeling rules versus the new labeling rules, that occurred in the first part of the year, but it wasn't material.

Got it. And you don't expect it to be material through the course of Q2, as well?

No, it's going to run its course now. So if you're talking about, from a point of view of impacting sales, no, we've seen no indication from the cigarette manufacturers that they expect sales to be impacted because of it.

Got it. Perfect. Thanks so much, Mark.

Thank you.

Great. Carey, let's go to the next question, please.

Our next question comes from Jim Sheehan of SunTrust Robinson Humphrey. Please go ahead.

Good morning. On the $100 million in productivity gain that you expect for the year, how much did you achieve in the first quarter?

More than one-quarter of it.

Great. And could you also elaborate on other activities? Why was that lower than expected?

We try not to spend money unless we have to, (laughter) so that should be good news. Look, that -- there is such a -- I'm going to go back to Mark's words and tell you that it's a pig's breakfast. There's just a lot of different things that fit in that other category.

That number is probably low, relative to what we would expect the rest of the year. And if you go look last year, the same thing happened. And then Q2, Q3 and Q4 were more $20 million range, so I think it's going to be at least that the rest of the year. There's just a long list of puts and takes there.

Yes.

There was some currency benefit in the first quarter.

Thank you.

Our productivity, we -- you should think -- in the past, we had some big productivity numbers. And what's nice about our machine is that we've evolved into dealing with much smaller numbers, and do that quite well. So we have literally hundreds of programs in place to drive and make sure we achieve that $100 million year over year. And those things aren't -- they are not totally rateable. Some occur early. Some occur later in the system.

Thank you so much.

Thanks, Jim.

Great. Thanks. Carey, let's go to the next question, please.

Our next question comes from Aleksey Yefremov of Nomura. Please go ahead.

Good morning, everyone.

Good morning.

In AEM, did you build any inventory ahead of turnaround of Frankfurt? And if so, did it impact your cost basis in Q1?

When we talk about the costs of turnarounds and those headwinds in the second quarter, that includes both the direct costs of the turnaround, as well as the inventory draw impact, because we'll be drawing inventories during that period.

Okay. Thank you. And back to acetate tow, do you expect to take market share in Intel this year? And a related question, do you think your price declines in the filter tow this year are consistent with what your major competitors, what will show in their results, as well?

Hassan, I don't think there's any material market shift going on. Part of our efforts -- some customers may sell more cigarettes than other customers, so you may get an -- how do I say that? The cigarette manufacturers may change market share, which could impact us if we're supplying and somebody's not doing quite as well in the marketplace.

But in terms of our efforts, no, we don't see any real shift in market share. Consistent? Yes. I think -- yes, I think we're all in the same kind of boat. So my gut is they will be in the same kind of range, yes.

Great. Thanks a lot.

Thank you.

Great. Carey, let's move to the next question.

Our next question comes from Arun Viswanathan of RBC Capital Markets. Please go ahead.

Thanks. Good morning.

Good morning.

I just wanted to ask a similar question, I guess. You guys had very impressive volume performance year on year. Some of that was due to the easy comps. But on the pricing side, do you expect these kinds of moves down on price as we go through the year? And especially in the downturn businesses and AEM or consumer specialties?

I think -- yes, it's a great question. It's a function, really, of what raw materials are going to do and overall demand in the marketplace. We are hopeful that as we go through the year, demand will start to pick up in some of our business, which will support pricing initiatives a bit better than what you have -- than we've seen in the last several months or several quarters. So I think what I would say is, I expect our pricing to be relatively consistent with what it is now, and trending up as we go through the year.

Okay. And then just on the uses of cash, you did pay down some debt in the quarter. Has that run its course? And what are your focuses and priorities, if you could bucket them on M&A versus buybacks?

On the buybacks, we plan to do $1 billion in 2016 and 2017, so we'll probably try to do half of that this year. Acquisitions, it depends on the size of the acquisition. If they are small, we might pay cash for them. If they are larger, there will be leverage involved.

Great, thanks.

Thank you.

Thank you. Let's move on to the next question, Carey.

Our next question comes from John Roberts of UBS. Please go ahead. John, your line is open, if you would like to ask a question. Perhaps your line is on mute?

Okay. Should we move on and come back?

All right. Our next question, and the last in our queue for today, comes from Nils Wallin of CLSA. Please go ahead.

Good morning, and thanks for taking my question.

Sure.

Was curious about the varying levels of GDP forecast you have behind your expectation for the rest of the year, in order to hit the 10% earnings growth? What type of economic growth do you see as needed, in order to get the top end?

I wish I was that good, man.

Don't we all.

We distill GDP down into what our customer demand forecast is. So we look at it as customer demand as opposed to national or international demand. So I don't know that we really have a strong view on GDP. What's clear is that GDP growth globally is moderating, and so our philosophy is we've got to go out and earn this business, on the material side, through substitution, which is a big part of our play. So we try to grow our market share by not in a similar way, but from taking someone else's product, a polypropylene product, and selling our product in its place is an example.

So a lot of the growth in AEM that we're working on is these new projects we have and new introductions. And we think that as we go through the year, that will continue to build for us.

In acetyls, we are expecting that the -- and this isn't so much GDP-driven as it is just misery index. We think the misery index in China in manufacturing is so high, it cannot last. And we do expect to see some improvement, as we go through the year, in that regard. And I don't know that it's really going to be reflected in any kind of big uptick in Chinese GDP.

Understood. And just to follow up, your SG&A numbers were down pretty significantly, year over year and sequentially. Is all of that productivity? Or were there other -- some other unique -- I don't want to call them nonrecurring, but other unique events that allowed you to do so well in the SG&A line? And how sustainable is that?

Let me ask you which period specifically you're talking about? You mean Q1 --

Both sequentially (multiple speakers) -- Q1 versus --

Yes, if you're looking sequentially, that Q4 SG&A number has [potential] mark to market in it, so it's --

Excluding that, of course.

So you've done that math? Okay. What we're expecting in SG&A is the continuation of downward trend from our productivity initiatives. You can get currency impacts in there. You don't for the periods that you're talking about, but part of the decline from 2014 to 2015 would have been currency-related.

Understood. So you expect that level to pretty much sustain itself in Q1?

Yes, in absolute dollars, yes, and we expect them to trend down. But on a big year-over-year comp basis, a lot of our SG&A-related productivity came in in the middle part of last year and [try that] towards the end. So you got a little bit bigger comp, probably first and second quarter this year versus last year, than you will in the trailing quarters.

Got it. Thanks very much.

Thank you.

Great, thanks, Nils. We appreciate everyone's time this morning, and we'll be around for questions later today. Carey, at this point, I'll turn the call back over to you.

Thank you, sir. The conference has now concluded. Thank you all for attending today's presentation. You may disconnect your lines at this time. Have a great day.