塞拉尼斯 (CE) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2007 Celanese Corporation Earnings Conference Call. My name is Tulisha and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. Mark Oberle, Vice President of Investor Relations and Public Affairs. Please proceed sir.

Thank you, and welcome to the Celanese Corporation first quarter 2007 financial results conference call. My name is Mark Oberle. On the call today are David Weidman, Chairman and Chief Executive Officer; and John Gallagher, Chief Financial Officer. The Celanese Corporation press release was distributed via Business Wire this morning and is posted on our Web site, celanese.com.

During this call, management may make forward-looking statements concerning, for example, Celanese Corporation's future objectives and results, which will be made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive markets, political and regulatory factors.

More detailed information about these factors is contained in this morning's earnings release and in the Celanese Corporation's filing with the Securities and Exchange Commission. Celanese Corporation undertakes no obligation to update publicly or revise any forward-looking statements. Celanese Corporation's first quarter 2007 earnings release references the performance measures affiliated EBITDA, net debt, adjusted earnings per share, and operating EBITDA as non-U.S. GAAP measures.

For the most directly comparable financial measures presented in accordance with U.S. GAAP and our financial statements and for a reconciliation of our non-U.S. GAAP measures to U.S. GAAP figures, please see the accompanying schedules to our earnings release, which will also be posted on our Web site. This morning, Dave Weidman will review the performance of the Company and John Gallagher will provide an overview of the business results for each segment and the financials. We'll have a question-and-answer period following the prepared remarks.

Now, I'd like to turn the call over to Dave Weidman. Dave?

Thanks, Mark, and welcome everyone to today's call. We are excited to be here and it's real pleasure to be able to highlight terrific results from the first quarter and also give you an update on significant progress we are making in our growth strategy. We had a very, very strong quarter across the Company, demonstrating the strength of our business model, the excellent franchises that make up our global portfolio, and the performance of our colleagues around the world.

Revenues were $1.6 billion, adjusted EPS was $0.91 per share, and our operating EBITDA was $349 million. John will provide more detail on the quarter in just a minute, but I would like to spend a few moments updating our progress toward the 2010 objectives outlined in our growth strategy announced in Investor Day last December.

Let's start with our focus on Asia. Asia is a key component of the growth strategies for all of our business groups. We have been extremely successful in this region in the past, and it continues to represent some of the fastest growing markets for our products. Our new investments in China remain on track. Our acetic acid plant is preparing for mid-2007 commercial startup. The Nanjing complex continues to grow and since the 1st of the year, we've announced plans to locate a new GUR ultra-high molecular weight polyethylene plant and a Celstran long-fiber thermoplastic unit at this complex. These investments represent Ticona's first wholly owned manufacturing facilities in China.

We have also continued to move forward on the business specific strategies. During the quarter, we closed the acquisition of Acetate Products Limited, and since the close, we've made tremendous progress on detailing synergies and executing the integration plans. At this time, we are confident that we will realize somewhat more than the targeted savings of between 6% and 8% of revenue.

During the quarter, we announced a strategic partnership with Accsys Technologies. Accsys has developed a very environmentally friendly technology and commercially solid process for giving renewable softwoods the physical properties of rainforest grown hardwoods. Celanese will be the exclusive supply partner for acetyl products which are consumed in the process to Accsys licensee companies. The financial benefit potential of this opportunity is very, very attractive. As world leader in acetyls, Celanese is excited and proud to be associated with this innovative venture.

And most recently, we announced a joint venture with Tianjin Shield Fine Chemical Company Limited to manufacture, to distribute and sell a co-monomer used to enhance vinyl based emulsion systems. The joint venture is finalizing construction of a plant in China, for commercial production is expected to begin by 2008. This strategic venture supports the growth goals of the Celanese acetyl chain and underscores our commitment to the Asia region.

During the quarter, we made significant progress in delivering value using our strong cash generation. In the last 60 days, we completed a refinancing transaction which accomplished lowering the cost of borrowing, improving financial flexibility, and strengthening our financial position. John will provide more specifics on this transaction, but we are excited about this very effective way of using available cash to create value for shareholders.

We are very excited, pleased and delighted with this quarter's progress against our strategic -- our strategy of building a stronger and more profitable Company. Celanese is working hard to realize our goal of becoming a premier global chemical Company, positioned to substantially increase our annual earnings power over the next three or four years. I look forward to your questions, but with that, I would like to turn the call over to John Gallagher to highlight the quarter. John?

Okay, thank you, Dave. Let's start by turning to page seven in the PowerPoint presentation that is posted on our Web site. As Dave already mentioned, net sales for the first quarter were approximately $1.6 billion, a 9% increase over 2006. Operating profit was $239 million, a 41% increase. Our adjusted earnings per share was $0.91, based on a 28% tax rate. Operating EBITDA for the quarter was $349 million, a 30% increase. All of these figures exclude the results of our Oxo alcohol business, which was sold during the quarter and is accounted for in discontinued operations.

Now, let's start by looking at our business, with Chemical Products on page eight. Net sales in Chemical Products increased 6% to nearly $1.1 billion, with increased pricing of 3% and positive currency effects of 3% driving the growth. We continue to see relatively strong demand for our products in all regions of the world. While we saw some weakness in North American housing and construction markets, we saw steady demand in both Europe and Asia. This, combined with high utilization rates across the industry, drove continued high pricing for acetyl products, particularly in Asia.

Operating EBITDA was 33% to $232 million on expanded operating margins and increased dividend from our Saudi cost affiliate. During the quarter, we did benefit from our methanol production contract in Edmonton, Canada. But, with the closure of this facility in April, our third-party methanol sales will end.

Moving to page nine, with Ticona, net sales were $262 million, up 13% driven by strong volume growth of 9%, as well as positive currency impacts of 5%. We continue to see strong demand in Europe and Asia, while North American weakness in automotive was offset by strong non-automotive application growth. Operating EBITDA was $68 million, down just $1 million, as the volume growth did not quite offset operating margin pressure due to high methanol and other raw material costs, as well as higher energy and natural gas prices, primarily in Europe. Our strategic equity affiliates continued to deliver strong results in the quarter.

Now, let's turn to Acetate Products on page ten. Net sales in acetate increased 34% to $223 million, the majority of this increase or approximately $40 million of the $56 million increase was due to the inclusion of the recently acquired APL business. But, we also did see improved pricing and higher volumes for the remainder of the business during the quarter. Operating EBITDA increased 23% to $37 million, driven by increased pricing on continued strong demand and increased volumes.

From a net earnings perspective, APL didn't materially contribute to results. As Dave mentioned, we have not finalized the synergy opportunities, but we are pleased with the potential that we see based on the preliminary analysis. We have announced plans to rationalize production capacity and close the UK facility in Little Heath. And acetate is on target to reach 2008 objective of $220 million to $230 million of operating EBITDA that we communicated to you last December.

Performance Products sales were $45 million, down 8%, while operating EBITDA for the business was $20 million, $1 million less than last year. As expected, we saw relatively flat performance in this business. The volume decrease is primarily related to our exit of some historically low margin trade business in the fourth quarter of 2006, as well as fewer customer product launches this year.

Our equity and cost investments are shown on page 11. Our income statement impact on the left shows an increase to 33 million from 25 million last year driven by higher dividend from our IBN Sina cost investment. On the right, our cash flow rose from 24 million last year to 45 million this year, driven by the increase in the IBN Sina dividend as well as significantly higher cash dividend from our equity affiliates, primarily related to the timing of dividends from our Infraserv affiliates. We typically receive dividends from Infraserv once a year, and last year, we received them in the second quarter. This year, it happened to be during the first quarter. For the year, we would expect a modest increase in both cash flow and earnings from affiliates versus 2006 performance.

Turning to page 12, I would like to highlight a new disclosure that we have added to our press release in order to provide additional transparency to our strategic equity affiliates. On the left side are the unaudited preliminary quarterly results of our equity affiliates broken out by those that are part of Ticona's business and those that relate to our Infraserv business. As a reminder, Infraserv is an affiliate that was formed to run infrastructure services at a few of our sites. On the right side of the page, are the proportional results based on Celanese ownership of these affiliates. Let me draw your attention to the figures for affiliate EBITDA in excess of equity and net earnings of affiliates. We have highlighted this before as being a proportional EBITDA of these strategic affiliates that is not captured in our current operating EBITDA calculations. And those of you who model Celanese on an EV to EBITDA basis, we have also included net debt, so your calculations can be complete.

Now, let take a moment and summarize for you the significant improvements in shareowner value that we are able to create with our recent recapitalization transaction. In the first column on page 13, we show our actual results for 2006 where we had interest expense of 294 million and net interest of 257 million. In the middle of the page, we show our first quarter actual results. Due to the timing of the close of the refinancing and equity tender transactions in early April, our first quarter results were not impacted. However, we did see an increase in our diluted share count due to an increase in the number of options assumed for dilution using the treasury method of accounting. We have also included our estimate for the second, third and fourth quarters after the transaction.

You can see a quarterly run rate of approximately 60 million in gross interest expense, represents an improvement of $10 million to $15 million per quarter. We have updated our 2007 full year net interest guidance to approximately 205 million to 215 million. If you were to compare our new adjusted EPS guidance to our previous full year 2007 guidance given during the last earnings call, the transaction delivered an incremental $0.10 per share in net interest savings in 2007. There will an approximately $0.20 per share improvement versus 2006 actual results. The shares purchased under the equity tender offer will basically offset the increased dilution in the share count due to the options, so our weighted average shares outstanding will approximate 172 million shares.

On page 14, you will see our updated business outlook. For chemical products, we expect pricing to moderate during the remainder of 2007 to more sustainable levels, but continue to expect strong global demand for our acetyl products, particularly in Asia. As Dave mentioned, our acetic acid facility in Nanjing is expected to begin commercial production in mid-2007. However, as we have indicated previously, we do not expect any significant financial impact from the facility this year. Keep in mind, with the shutdown of the Edmonton methanol facility in the first quarter, we will no longer be producing merchant methanol. We earned about $0.15 per share in the last three quarters of 2006 that will not be in the 2007 results.

For Ticona, we expect continued volume growth of approximately two times GDP with growth in both transportation and non-transportation applications. Growth in other end uses and geographic regions is expected to offset continued softness in the North American automotive sector. With the recent decline in the global pricing of methanol, a key raw material for Ticona, we expect to see improving margins throughout the remainder of 2007. Acetate products will continue to focus on the integration of APL. The expanded capacities of our cost investments in China will continue to deliver year-over-year dividends, and we expect to receive just over $30 million in dividend during the second quarter of this year. Performance Products core business volume growth is expected to offset pricing declines consistent with our strategy.

We have increased our 2007 guidance for adjusted earnings per share to a midpoint of $3, with a range of between $2.85 and $3.15, a $0.15 per share increase from our previous guidance. This guidance assumes a 28% tax rate and cash taxes are expected to be between 170 million and 190 million. Additionally, we increased our operating EBITDA outlook to between 1,180 million to 1,250 million.

On slide 15, we will provide more detail on the key drivers behind this $0.15 per share increase. As you can see on the graph, the recent balance sheet recapitalization will reduce our 2007 net interest expense by an incremental $0.10 per share. The strong results in the first quarter and the continued strength of each of our businesses, we expect core operations to improve between $0.08 and $0.12 per share for the full year.

In the first quarter, earnings from methanol volumes, merchant methanol volumes, were greater than the amount we assumed in the initial guidance by approximately $0.04 to $0.06 per share. As we exit methanol production at the Edmonton facility in the second quarter, this benefit will only be reflected in the first quarter results.

We have announced a new compensation program consistent with our goal to ensure the retention of our key executives that contribute to Celanese's success. The incremental cost to this program is between $0.08 and $0.12 per share. This program was not included in our initial guidance for 2007. Taking into consideration all of these factors, we arrive at our new guidance range of between $2.85 and $3.15 per share for 2007.

With that, I would like to turn the call back over to Mark to open the call up for Q&A.

Thanks, John. Now, I would like to open it up for Q&A. I do ask that we have limited to one question and a follow-up. If there is additional time and additional interest, we will come back around and get any further follow-up questions.

Thank you. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Kevin McCarthy with Banc of America Securities. Please proceed.

Yes, good morning gentlemen.

Hello, Kevin.

Hi, Kevin.

Given the results of the Dutch auction, could you comment on your anticipated use of the very large 1.1 billion cash balance that you have right now?

Sure. Now, remember the transactions, refinancing transactions where we paid down debt, we incurred some breakage costs, and then the results of the tender closed in April. And together with some of the other activities, we used about $500 million. So, I think it was about $600 million of cash. And we have said -- there is nothing to announce at this time. We are going to continue to evaluate all of our alternatives, including looking at bolt-on acquisitions, continuing to de-lever the balance sheet, continue to invest in the business for the long-term, and then again, we will continue to discuss and look at options that will allow us to effectively return cash to the shareowners.

Is there any reason you wouldn't at least authorize a program to give yourselves that flexibility subject to share price fluctuations?

That's under consideration.

Okay. And moving to acetyls, if I may, could you comment on how the quarter progressed in terms of North American demand and what you saw in March and April versus last year?

Yes. In North America, Kevin, the demand was flattish to modestly up from last year. As it developed through the quarter for acid and vinyl acetate, there really was not a significant change in momentum, January to February, February to March. And so far, we see it flattish again to last year. I think underneath this what we are seeing globally is a very, very strong Europe. Europe is probably performing a lot stronger than we expected it to. Asia is doing very well, demand there continues to be very robust and very strong, and North America right now is the weakest region, and in our view, the world doesn't change an awful lot over the next six months.

Okay. And finally, if I may, on the Ticona side, volume up [9] there, I know your businesses is roughly half exposed to autos in that segment. Could you comment on what volumes look like in your auto end use markets versus the non-auto applications where you are expanding the opportunities at?

Let me break it down a little more than that, Kevin, if this is helpful. Well, North America and Europe is split roughly 50-50 on a volume standpoint. Our European auto demand continues to be very robust. In North America, we are actually up in demand year-over-year across Ticona. That's driven by electrical and electronic applications. The automotive applications look consistent with what we saw last year. I would caution you that, within Ticona, our exposure to the Big Three is muted somewhat because of the exposure that we have to the J3. From pounds per automobile standpoint, our largest exposure is with Toyota in North America, we have more pounds on the average Toyota than we do on any other average platform. And so, I would say it's as flattish, flattish to up, but the exposure is a little bit different than perhaps other folks out there.

Okay, thank you very much.

Thanks, Kevin.

And our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

Good morning.

Hello, David.

Hi, Dave.

David, could you just remind us again of your -- within acetyls, your North American construction exposure?

Yes, it's very modest. For acetyls, North America is about a third, maybe a little more than a third of our total business. And then across the board, our overall exposure to construction is somewhere in a high single digit, low double digit range, 8% to 10% thing. So, we don't have an awful lot of exposure overall to North America construction. It's very broad and very global, any inputs or any changes in any particular segment or space, we see that is muted significantly because of the breadth of the business line, breadth of offerings we have, breadth of markets we go into and the geographic footprint.

Thank you. And just on Ticona, can profits or margins return to prior levels in Q2, specifically profits, given the recent methanol cost?

Yes, I think methanol prices are moving down. Ticona does have some good demand growth and good volume growth, so that methanol should help us. But, I would caution that there were some energy impact and there are some raw material prices that were burdening us in the first quarter that probably will come down over the next several quarters. So, we don't think, they are fairly sticky for the second and third quarter.

And David, last thing, just on your new Nanjing plant, how do you expect to load it over the next 6 to 12 months?

Well, Dave, we have said that this is the year that's the start-up of the plant. We are very excited about the plant and the construction has gone very well. There is a lot of optimism in the year over there about it. But, we have taken the view that these type of plants are never easy to start up. You have CO issues, you have normal start-up issues within your facility, and so our guidance includes a view that the impact is going to be fairly modest that we will start up sometime mid-year and have commercial sales in that period of time. And then, there will be a normal ramp up through the third and fourth quarter, and I would expect that by the end of the year the plant's going to be running fairly well. It is one of our lowest cost facilities, not the lowest cost facility in the world. And through our system, we are going to balance the off-take and be able to take the products that are the lowest cost to those markets to bring the highest returns, and I would expect China would be running fairly healthy at this point next year.

Thank you very much.

Thanks, Dave.

Thanks, Dave.

And our next question comes from the line of Sergey Vasnetsov with Lehman Brothers. Please proceed.

Good morning.

Good morning.

With the orders being flat in the Chemical Products area, what allowed you to achieve [3%] price increase?

Yes, the biggest area for us is in Asia for acetyl products. The demand in Asia has been very, very robust in acetyl products, acetic acid and vinyl acetate. Just to give you some idea, we think of a normalized price in China somewhere in the $500 to $550 a ton range for acetic acid. We think that's a healthy price because of the high cost producers over there that kind of tends to be the type of pricing that we think is good and healthy for the business. In this last quarter, pricing was north of $600 and $650 a ton range, and it was driven all by supply-demand balance across the industry.

Okay. David, what's the acetyls operating rate in the first quarter and what is it so far in the second quarter?

[It's all sold out]. I mean, we are running every unit as hard as we can.

Okay. And lastly, as far as the BP facility nearby you in Nanjing so far is barely starting up its construction process, what's your current on that?

Well, there is three data points out there that I would point to. Number one is that they did have a groundbreaking in this last quarter. Number two, they did publicly announce that the unit would start up in 2009. I think it was the second half of 2009. But, the confusing thing to ask is that there was an announcement that the gas pipeline that would supply their CO facility wouldn't be finished until 2010. So, there is a little confusion in our minds as to what's going on there, but that's what's publicly in the market.

Okay, thank you.

Thank you.

And our next question comes from the line of Greg Goodnight with UBS. Please proceed.

Good morning all.

Hello, Greg.

Hi, Greg.

The Acetate Products Limited, you mentioned that there would be 5% to 6% of revenue of synergies, net synergies?

Yes.

And that that would be gradually accomplished this year and next, what is the incremental EBITDA for that? I understand sales are, what, 200 million to 250 million, but what is the base load incremental EBITDA for that acquisition?

Greg, we said that the facility, as we bought it before synergies, had a high single-digit, low double-digit EBITDA. So, if you take that and combine that with the synergies, we fully expect to move that business' performance to be more aligned, more similar to the business performance of Acetate Products overall.

Okay. And am I right on the revenue estimate of 200 million to 250 million?

Yes, I think we probably said 220 million, 230 million.

And those synergies, Greg, will be -- there are significant plant restructurings and realignment of production will probably not take effect [more] but start in the fourth quarter, early next year.

And you mentioned a plant shutdown?

That's right.

Okay. Second question, in your table one, down at the bottom where you say operating EBITDA, I notice other activities this quarter was negative 8 million versus typically a run rate of negative 25 million to 30 million. I was wondering if this is the (inaudible) activities which I assume associated with corporate type expenses. This quarter reflect reallocation of the operating divisions or some sort of one-time charges, or how do you explain that 8 million?

Let me take you through that. First of all, in the first quarter, you are going to see productivity year-over-year. So, I would think about other activities last year was in around the $115 million range and this year, we think it's going to be around the $70 million range. And so, I would just talk full year for a second now, so that's about 25 million in productivity that the AGM meetings, with the squeeze out behind us that the -- having dual accounting centers in Bedminster, New Jersey behind us. So, you really are going to see the productivity coming out of those corporate other activity. Also remember, Greg, AT Plastics is in that number. We do see some improvement or at least we will be forecasting in the number I have provided some improvement in AT Plastics, and then as a miscellaneous of FX and some other things. So, I think in the full year, around 70. I think the first quarter is unusually low based on that run rate. We got some of the productivity, but there was a number of timing of our corporate expense incurrence, principally because of tightening other things that we were just involved. Our resources were all focused on divestiture and the carve-out, and I think those caused -- I would project those caused increase in Q2 through Q4.

Okay, great. That was very helpful. Thank you.

And our next question comes from the line of Frank Mitsch with BB&T Capital Markets. Please proceed.

Hi, good morning all.

Hi, Frank.

David, you talked about the strength in Asia and Europe offsetting some of the softness in North America. Can you quantify, as a percent of total, what the first quarter, what -- I don't know, sales or volumes on a topline basis were in the various geographies, and then perhaps talk a little bit about the profit coming from each region?

Yes, let me touch on (inaudible) I can, Frank. We've said historically that coming out of Asia, about 25% of our revenue comes out of Asia, and then Europe and North America are roughly similar. So, I think in terms of 35%. I would say, in the first quarter, that was skewed a little bit more towards a strong Asia, or excuse me, the strong Europe, strong Eastern Asia and then North America was a little bit weaker than that. But, it wasn't a material difference between that. We've also said that the profit underneath that comes about one-third, one-third, one-third between the three regions of the world. That's how 2006 tracked. And Asia was probably a little bit stronger this last quarter. We frankly haven't broken it out by region to look at it, but I am guessing that Asia is going to be little bit stronger this quarter than it was. That's one of the advantages of Celanese's global footprint and the breadth of business lines that we participate in, and we shift profit around from region to region or product line to product line depending on how markets move and how profitability is.

But, Frank, let me give you one more point that may be a little bit helpful, when we think of the $0.91, there's three factors in that that I think ought to be taken to consideration. One is the point that John answered for Greg, that there was timing on some of our spending SG&A. Think about that as about $0.05 advantage from where we think it probably would be. Also, we had this methanol production up in Edmonton, that was on a contract, and that's shut down now. Above what we thought it was going to be, there was about a $0.05 of contribution there beyond what we thought it was going to be. And then underlying business performance was stronger and we see it continue to be stronger throughout the rest of the year, and that was, if you will, roughly $0.05 that we saw versus what we thought it was going to be here 90 or 120 days ago. Is that helpful?

That's very helpful. A nickel here, a nickel there, before you know, you are talking about real money. And just to follow up, because I thought that perhaps Asia was starting to break out a little bit in terms of being a greater percentage of your profits. And you commented on the very strong pricing in the first quarter, how do you see that playing out for your acetyls business? Do you -- would you expect to see continued strength through the second quarter and beyond?

We take a, let me call it a cautious view of what's going on in pricing. We think the high prices that were there in the first quarter were caused by some unexpected plant turnarounds and new plant starting up, and it was just a very healthy pricing environment. But, I'd say, over the last three years or four years, more normalized pricing range of somewhere in the 500 to 550 a ton range, and our view going forward is that pricing at some point in 2006 returns to that level -- 2007, excuse me, returns to that level, and we think that's more of, I'll call it, long-term strategically healthy than these higher prices out there.

And of course, you are expecting me to say, at one point in '07, you expect it to return to those levels?

No, I mean, that's really something that's a function of the marketplace out there and it's hard for us to make the call on it. I think though that, as we look at our earnings profile, historically we've been heavy first half Company in earnings. 55% to 60% of our earnings in the first half and the balance of that in the second half, I would say this year we are probably going to be closer to 60% in the first half and the balance of it in the second half of the year.

Terrific. Thank you very much, Dave.

Okay, thanks, Frank.

And now our next question comes from Mike Judd with Greenwich Consultants. Please proceed.

Good morning.

Hello.

I think it's helpful the exhibit, which has the Ticona affiliates information on it, thank you for including that. I guess my question is, if the market continues to not really pay attention to this source of EBITDA for your Company, would you consider basically acquiring the other pieces in order to bring it all on balance sheet?

Mike, we've been public in saying it, we'll continue to be public in saying that but we would love to buy out the joint venture partners. They are -- we are the strategic partner, we are the strategic marketing partner, the strategic technology partner, the strategic operating partner within the joint venture. These were established 50 years ago or so and were put in place at a different point in time with different needs in the organization, and we feel frankly that we are the right people to own these ventures. Having said that, there is limited provisions that allow us to force a sale, so they have to be willing partner on the other side, and we are a willing buyer. And that's about all I can say.

Thanks for the help.

And our next question comes from the line of [William Mathews with Canyon Capital]. Please proceed.

Hi, guys, most of my questions have been answered, but the -- again just to review the weakness in the Ticona margins, could you just go over that again?

Yes, Ticona is a business that -- the business model in Ticona is to sell and price their product based on value and use, value and application. So, if you have an incredibly high value and use, we price it on that, we work closely with the engineers, and we try to stay out of the purchasing agent's office. We also -- and the margins here are great. Think of variable margins in the 70%, 80% range, they are very high. Consequently, when we raw material escalation or de-escalation, we try to avoid that conversation because of the way that we sell the product, we would expect that as raw material -- commodity raw material prices move up, there is going to be some compression. As they move down, we are going to be able to hold all of that.

Got it. Great, thank you.

You are welcome.

And our next question comes from the line of Bob Goldberg with Scopus Asset Management. Please proceed.

Good morning.

Hi, Bob.

Just wanted to follow up on the question about acetic acid prices, I noticed that -- I believe it was yesterday that you announced a global price increase for acetic acid of $50 a ton?

That's right.

I just want to understand the rationale there, and with methanol prices coming down and your start-up coming pretty soon or in the process of starting, what is the thought there and what is the market dynamic that you see?

The main market dynamic now is a very tight market and supply-demand balance, and so, we are out in the market and pricing the product to supply-demand curve [but then] some type of cost curve is out there, and that period also existed in about two years ago. About six or seven quarters ago, we had a couple of quarters where the supply-demand curve really would set the pricing and prices moved up. We are in that happy position right now. Our expectation though longer term is this is going to normalize somewhere in the 500 to 550 range.

I understand. Well, I guess I was wondering what your guidance assumes, is the guidance assumed in that range for the second half of the year, or does it assume a much higher --?

Without getting into specifics on pricing and pricing assumption, what we've said is that it's going to be a lot stronger first half than it will be in the second half, and there's a number of factors included in that, that balance historic performance levels, demand levels historically, as well as assumptions on pricing.

So, clearly, if the market would stay in tight for the balance of the year, it would be I guess you would view it as upside for what you have laid out today?

Yes, if there's pricing -- if supply-demand balance remained strong, that's an upside.

Great. Thank you very much.

Okay. Thanks, Bob.

And our final question comes from the line of [Cheryl Zanwinkel with Independent United Capital]. Please proceed.

Yes, it's [Cheryl Zanwinkel]. Yes, the question is just on Edmonton, could you just tell us in EBITDA terms what the total benefit from Edmonton in the first quarter of '07 was?

Cheryl, I don't believe we can that -- unfortunately, we are in a position where we have some non-disclosures with --

With specific tolling arrangements.

With specific tolling arrangements with the customers.

We are prohibited from disclosing the specifics.

So, based on what was incorporated in our thoughts for the year in guidance, it was about a nickel better performance than what we had thought when we put our original guidance numbers together.

Okay, thank you.

Okay. Thanks, Cheryl.

And there appears to be no additional questions at this time. I would now like to turn the call back over to Mark Oberle for any final remarks.

Thank you and thanks everyone again for joining us on today's call. As always, if you have any follow-up questions, feel free to give me or anyone on my team a call. We look forward to talking to you soon. Thanks.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.