塞拉尼斯 (CE) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter Celanese Corporation earning conference call. My name is Peggy and I will be your operator for today. At this time all participant are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions)As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Andy Green, Vice President of Investor Relations.

Thank you and welcome to the Celanese Corporation fourth quarter 2010 financial results conference call. My name is Andy Green, Vice President of Investor Relations. On the call today are David Weidman, Chairman and Chief Executive Officer and Steven Sterin, Senior Vice President and Chief Financial Officer. Also in the room today are Doug Madden, Chief Operating Officer and Mark Oberle, Senior Vice President - Corporate Affairs.

The Celanese Corporation fourth quarter 2010 earnings release was distributed via Business Wire this morning and is posted on our website, celanese.com. The PowerPoint slides referenced during this call are also posted on our website. 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. The limitations inherent in such forward-looking statements are detailed on page six of the earning release referenced during this call. Celanese Corporation's fourth quarter 2010 earnings release references the performance measures, operating EBITDA, business operating EBITDA, or proportional affiliate EBITDA and affiliate EBITDA, adjusted earnings per share and net debt as non- US GAAP measures.

For the most directly comparable financial measures presented in accordance with US GAAP and our financial statements and for a reconciliation of our non US GAAP measures to US GAAP figures, please see the accompanying schedule to our earnings release posted on our website, celanese.com. This morning, Dave Weidman will review the performance of the company and Steven Sterin will provide the overview of the business result for each segment and the financials. We'll have a question and answer period with Dave and Steven following the prepared remarks. I would now like it turn the call over to David Weidman. Dave?

Andy, Thanks. And welcome everyone to today's call. I'm excited to share with you Celanese's terrific fourth quarter performance, briefly look back on an outstanding full year 2010 and then look forward as we outline why have increasing confidence in 2011.

Celanese delivered a very strong fourth quarter. Our net sales were $1.5 billion, up 9% year-over-year. Operating EBITDA was $262 million up 15% from last year and adjusted EPS was $0.73, up 43% over last year's results. For full year 2010, three of our four segments, Consumer Specialties, Advanced Engineered Materials and Industrial Specialties delivered record earnings. 2010 net sales for the company were $5.9 billion, up 16%. Operating EBITDA was $1.1 billion, up 31% and adjusted EPS was $3.37 per share, up 93% over 2009.

For Celanese, 2010 was a year of significant progress driven by our performance culture. Over the year, we accomplished what we set out to do and then some. Let me highlight four significant Celanese's specific achievements accomplished in 2010 that will have lasting positive impact on future performance.

First, we continue to enhance our Advanced Engineered Materials portfolio through the acquisition of two very synergistic high performance polymers businesses and by entering into an agreement to expand our important Middle Eastern strategic affiliates. These transactions bolster an already deep offering of highly specified innovative products and services and will add new cost advantage capacities to support AEM's future growth.

Second, we took the next step towards increasing earnings in the acetate business through the announced European North American Manufacturing Footprint Realignment and by embarking on the expansion of our strategic acetate ventures in China. These actions will contribute earnings growth in 2011 and beyond.

In November, we announced unique game changing ethanol production technology along with our intent to commercialize the technology in the fast-growing Asian region. This significant technology breakthrough is very exciting as it adds an entirely new growth platform to Celanese. One which will significantly contribute towards future revenue and earnings growth.

And lastly, we saw very positive reception to innovative new offerings such as VitalDose, an ethylene vinyl acetate polymer-based excipient for controlled release pharmaceutical solutions and low VOC environmentally friendly vinyl technology for paint and coatings. Innovation, whether it's new technology strengthening manufacturing cost positions, or new offerings which provide solution for today's problems will continue to be an important part of our earnings growth. These four accomplishments and many other achievements by the Celanese team including our ongoing productivity initiatives set the stage for earnings growth in 2011 and beyond. Let me take a moment to highlight an aspect of our earnings that is distinctive and significant when compared to peers and that is our strategic affiliate. Celanese's affiliates are strategically country aligned with our key businesses and remain a key component of our growth strategy. In 2010, they enjoyed very strong performance due to excellent technologies, great positions in growing region and/or advantage of raw materials positions. EBITDA affiliate proportional EBITDA increase from $205 million in 2009 to $316 million in 2010. Affiliate proportional net debt at the end of 2010 was only $96 million. Combining proportional affiliate performance with GAAP reported figures, Celanese would have 2010 revenue of $7.5 billion and EBITDA of $1.3 billion. The outlook for our affiliate in 2011 is strong. The company overall was very positive about the future.

Our earnings growth in 2011 and beyond will be paced by action we've initiate in 2010 such as acquisitions, foot print realignment and Asia capacity increases. As we demonstrated in the past, our unique portfolio of businesses significantly reduces the earnings volatility associated with price fluctuations April as such, we remain very confident in our 2011 operating EBITDA will increase by at least $150 million and that adjusted EPS will increase at least $0.60 per share or nearly 20% above 2010 levels.

Now, before I turn the call over to Steven, I would like to briefly look beyond 2011. Based on Celanese's actions and assuming only modest economic growth, we remain on track to deliver $1.6 billion to $1.8 billion of operating EBITDA by 2013. Our strategy for this focuses on four key growth leverages.

First, geographic growth. This includes actions currently underway such as capacity expansions in emulsions and Ticona that will project the benefits between 2012 and beyond.

Second is innovation. Examples here include newly commercialized product for the medical space from Ticona and polymers, are low VOC Emulsions and occasions and lower plant costs.

The third lever is productivity. We maintain a relentless company wide focus on productivity initiatives whether they're large and visible, such as the acetate manufacturing realignment, scheduled to be completed later this year, or a series of smaller efforts such as our ongoing fixed cost reduction program.

And finally, portfolio enhancement. We continue to look for growth opportunities that will provide high returns on capital and increase value for our shareholders.

In summary, our strong result and positive outlook clearly reflect the attributes of a performance-driven technology and specialty materials company. One that creates significant value for shareholders by executing strategies strive to achieve sustained earnings growth of 10% to 15% per year, higher relative margins, lower earnings volatility throughout economic cycles and returns on invested capital, which far exceeds our weighted average cost of capital. With that, I'll now turn the call over to Steven. Steve?

Thanks, Dave.

If you turn to slide seven of the earnings presentation, I'll review our fourth quarter performance and each segment outlook starting with Advanced Engineered Materials. This business experienced significant volume growth with continued strong global demand for our high performance polymers along with the successful commercialization of our new and innovative products. Net sales were $274 million up $35 million from the prior year driven by year-over-year volume growth of 10%. Pricing actions in the additional sales from our recently acquired LCP and LFT businesses also boosted sales and more than offset the negative currency events.

Operating EBITDA was $68 million in the quarter, flat year-over-year. During the quarter, the impact of the higher volumes in pricing were offset by higher raw material costs and expenses associated with a major planned turn around in North America as well as the timing of other costs. This quarter's operating EBITDA excluded the favorable PNL impact of the inventory build related to planned expansion and relocation of our Ticona European manufacturing operations. The inventory build will support our customers' needs and minimize any supply disruption during the transition which is expected to be complete by mid to late 2011. As we've previously mentioned, we're investing additional capital beyond the proceeds received to support this business' long-term growth including investment for 40% in additional capacity and ongoing lower operating costs.

Our strategic affiliates continue to make significant contributions to our performances providing a platform for growth in emerging markets and structural hedge on raw materials. Equity earnings for these affiliates totaled $30 million, a $12 million increase from last year's results.

Looking ahead to the first quarter, we would expect improved demand, expanded margins and a continued strong, value and used pricing environment for our innovative solutions. Higher raw material pricing could persist, which would be offset with expanded margins in some of our other businesses and affiliates in Celanese's unique portfolio. Typically, the first quarter is seasonally stronger than the fourth quarter and as we progress with our European expansion, we will continue to build inventory to support our customers and the product qualification process.

When looking at a year-over-year comparison to Q1, you should consider the competitive outage that took place in the first half of 2009 that benefited volumes and earnings in that period. If you look back at the full year result for AEM, which was a record for this business, you'll notice that sales were up approximately $300 million and operating EBITDA nearly doubled to $363 million.

If you look at business operating EBITDA, which excludes the earnings from all affiliates, and just include the natural hedge from Ibn Sina the translation of top line growth to bottom line earnings growth was just under 50% for 2010. This high growth, high margin business creates significant value and future growth opportunities for our shareholders.

Let's now turn to consumer specialties on page eight. These businesses continue to deliver strong performance as they experienced increased global demand, particularly for acetate products. Net sales in the quarter were $281 million, up $14 million from last year's results on higher volumes and pricing. Operating EBITDA was $80 million, up $15 million over last year, as the favorable volumes in pricing more than offset higher raw material costs. Full year operating EBITDA was $371 million, a record annual performance.

Looking forward, we expect normal seasonality in the first quarter and an ongoing robust environment with expanded margins on continued strong global demand. Keep in mind when you're looking at year-over-year comparisons, that the first quarter of 2010 was adversely impacted by the production outage at our Narrows, Virginia facility.

Turning now to Industrial Specialties on page nine. Net sales were $249 million, up $20 million from last year. Pricing was up 9% and volumes up 4% year-over-year, resulting from pricing actions and the continued positive mix impact from our innovation programs. Operating EBITDA rose to $27 million, up $8 million from last year, as these innovation efforts translated into earnings growth. Similar to AEM and Consumer Specialties, the full year EBITDA of this business was another record performance with operating EBITDA of $111 million. Looking ahead, we expect to see strong seasonal demand and continued margin expansion from our new product commercialization programs.

Let's now turn to acetyl intermediates on page 10. Net sales were $799 million in the quarter, up from $743 million a year ago. Mostly driven by higher pricing in the major acetyl product lines, especially in our downstream derivatives business including VAM. Our acetyl's business benefited from China's recent focus on energy conservation efforts which resulted in the favorable very environment and enabled us to leverage our advantage technologies. This environment, coupled with higher raw material costs, supported an improved pricing landscape.

Volumes for this segment also improved in the Americas and Europe, particularly for downstream derivatives. We continue to run our acid units at a significantly higher rate than the industry's low 80% range, as we continue to benefit from our advantage technology. Operating EBITDA was $127 million, $16 million higher than last year. Benefiting from the closure of our acetic acid and VAM operations in Pardies, France. Looking forward, we expect volume seasonality, associated with the first quarter, due to the Chinese New Year, as well as an underlying demand in pricing environment that remains robust and reflects the attractive industry structure which we have highlighted in the past.

The final results of our strategic equity and cost investments is highlighted on page 11. The left side shows the earnings impact of our affiliate performance. Full year 2010 results were $241 million, up $104 million from last year. As you can see here, our total proportional EBITDA is substantially higher than what's included in our reported numbers and is up approximately $111 million over last year. More detailed results in our affiliate performance and our proportional share can be found on table eight of our earnings release.

I won't go into detail, but we've included our 2010 outlook for cash in slides 12 and 13. As Dave mentioned earlier, we are highly confident that our unique businesses will continue to generate substantial earnings growth in 2011 and beyond.

As we look to 2011, our outlook is for operating EBITDA to be at least $150 million higher and for adjusted EPS to be at least $0.60 higher than our 2010 results. To summarize the levels that drive this earnings improvement, I would categorize this in three key areas. Each comprising roughly a third of earnings growth.

First, continued top line growth and strong earnings conversion in our AEM businesses. If you recall, this area grows at two to three times GDP because of our innovation programs and acceleration and penetration rates to these high value and used products. In addition, because of the significant value that these products bring to our customers, the translation of top line earnings growth EBITDA is very high, between 40% and 50%. We also see earnings growth from our strategic affiliates as they have similarly high operating leverage.

The second area of growth comes from our ongoing productivity efforts. These would be most strongly reflected in our Consumer Specialties and Acetyl Intermediates businesses. Celanese relentlessly pursues permanent cost reductions to not only offset inflation, but to fund growth in our business and deliver bottom line earnings improvements.

And finally, the impact of geographic growth and innovation in Industrial Specialties and Acetyl Intermediates. Both of these businesses have substantial growth opportunities in Asia. In Industrial Specialties we plan to start up our second low VOC emulsions unit in mid-2011 and our acetyl business is well poised for growth in Asia, particularly in the downstream derivatives.

These three areas combined, provide the fuel for our expectations for nearly 20% EPS growth for 2011. With that, I'll now turn the call over to Andy for Q&A.

Thanks, Steven. Before we start the Q&A, as a reminder, we ask that you limit yourself to one question and one follow-up so we can get as many people through the queue as possible.

Peggy, I'll turn it over to you.

(Operator Instructions)

Our first question comes from the line of Robert Koort with Goldman Sachs. Please proceed.

Thank you, Good morning. Couple quick ones.

One, can you talk a little bit about your syngas contract with Wison for your ethanol plant?Is that a fixed price contract or is there a fixed margin in there or --How does that give you some security around feedstock costs?

The position that we have with Wison is very similar to other syngas contracts that are out there. Essentially, it's a utility cost and any advantage that there is in purchases of coal [defeative] would pass us.

Okay and then secondly, Dave, can you talk a little bit about how Celanese benefits from the ethane issues in North America creating a little more competitive environment with your contracts, your raw material contracts there. Is that getting passed to you as well or passed by you?

Yeah, good question. I would characterize the relationships that we have on ethylene as being global in nature.

We have some contract and some relationships that span both Europe and North America. What's occurring is that there's a tightness in the marketplace on T3 and I think the chemistry that we're in -- there's advantages in T2 versus T3. That's probably the most significant thing we're seeing. We're seeing increased opportunities in the [emulsion] space because of that and those are advantages that drive not only the bottom line, but also the top line as well.

Dave, do you think you're in the second, fifth, seventh inning of those conversions as your customers look to use ethane based instead of propylene based?

I'll start the answer and let Doug talk a little bit about it, but from our prospective this is viewed now as being persistent and longer term. People are talking about a super cycle and the effects of that. I don't think that conversations a year ago was happening and certainly our customers weren't expecting it a year ago. Doug?

Yeah, Bob, I'll just add to that. We clearly see as Dave and Steven have articulated through our innovation programs, where our technologies and our chemistries are widely being accepted in the market and I will add that globally, whether we talk about North America, Europe or in Asia.

So combination of innovation, combination of adding performance, combination of advantage in a C2 versus C3 chemistries we're seeing it across our businesses.

We're early.

Thank you very much.

Our next question comes from the line of P.J. Juvekar with Citi, please provide.

Yes, hi, good morning, Dave. You mentioned electricity costs in China impacting high cost of acetic acid layers. Can you expand upon that? How much of that capacity shutdown? And what are your operating rates today in China?

P.J., most of the impact on energy constraints was in VAM. So we had a very good demand quarter for VAM, particularly in Asia where the energy constraints were -- that boosted our performance in the quarter. As we look forward to operating rates, currently they back off modestly in the VAM space but I'd remind you that in the acetyl space we continue to run our plants full. The margins remain very healthy there. We're at a very good point on the cost curve and as we look at the performance of that business it's performing really, really well.

As you look forward, you've got the big Sokol plan coming online. Can you give us some intelligence on that regarding the startup and what you expect the impact of that will be?

P.J. , we don't see, frankly, any more on that than is out in the press and there's a wide range of dates and speculation on when Sokol will start up. I will remind you that Sokol facility and some other facilities that are contemplated to be started up this year really sit at a very high point on the cost curve. They're essentially right at their -- the production economics are very similar to what they would be and you wouldn't able to cover variable costs. We just barely cover variable costs today. So, for our business, whether they're in or they're out, we don't frankly see an awful lot of impact in 2011, 2012 or

So no big impact. Thank you.

No. No big impact.Thank you.

Our next question comes from the line of Brian Mitsch with BB&T Capital Markets. Please proceed.

Not quite Brian, but that's okay. Good morning, gentlemen.

We know who are you, Frank.

Yeah, I'll be honest with you, I wish I was in Dallas this week, but oh well.

Hey, wanted to follow-up on Ticona, you mentioned the plant turn around and was wondering about the impact there and you mentioned there was higher spending due to various timing issues. I guess that begs the question it might be lower going forward. Can you comment on those two items and then also you obviously are expecting a solid 2011 in Ticona. What sort of growth rate in auto builds are you expecting globally for 2011 there?

Yeah, Ticona had a terrific year and as Steven highlighted,the conversion through the year was really, really strong. We had some lumpiness in the quarter and Steve can talk to characterize what they were and some view of the future.

As we said previously in our remarks, we did have a major turn around at one of our plants. As well as timing in other spending, but really across the year you saw that real strong translation really at the top end of what we would expect in that business. So strong performance and we expect to see some more performance going forward. Those were non recurring costs that we saw in the fourth quarter.

As we look forward, you asked about automotive demand, we don't have more knowledge or insight into that than what you read out in the press. What you're hearing is about a 10% growth rate in builds in North America. Europe relatively flat. Asia, probably particularly in China, 10% to 15%. That's pretty consistent what we're hearing from our customers. That being said, in this model it really doesn't matter where the builds take place. Our penetration rates continue to increase and we'll benefit from it regardless of who makes the vehicles where they're made.

On the raw materials side, we could see persistence of raw material costs, clearly where oil is and derivatives. I think as we look across our business, you could see puts and takes across the businesses and across the regions, but we've set up a number of structural and natural hedges across our businesses that really mute the impact the volatility of raw materials on the company in total. So, not overly concerned with raw materials.

Steve, I thought I heard you say as you were talking about some of the drivers for 2011 that incremental margins in that business in the AEM business is running 40% or so? On EBITDA?

What we would normally expect in this business is you get two to three times GDP on the top-line growth and then you'll see about a 40% to 50% translation to earnings and that -- really that range is driven by the raw materials, but as we said earlier, we see offsets to the raw materials in other businesses. You saw it in the fourth quarter where you've got a strong pricing environment in AI for example, but think about that as the top-line translation to bottom line as a range.

Perfect, thank you.

Thanks, Frank.

Our next question comes from the line of Edlain Rodriquez with Gleacher & Company. Please proceed.

Good morning. Just going back to the Ticona business. What was the impact of the turn-around. Like can you quantify that? And also because those products are not sold -- the Ticona products, they're not sold on a cost basis. So what do you do to offset like the higher costs. Is it going to be like volume or is it going to be benefit from Ibn Sina and so forth?How do you close that gap?

Edlain, I'll have Steve comment on the impact of the cost, but you're absolutely right, Ticona's business largely is sold on a value and use. You probably saw yesterday we came out with price increases. There is some of our volume - a small amount, 10% to 15%, 20% perhaps that is not sold on value and use and we have opportunities to escalate prices as the market escalates prices or as raw materials come through, for a variety of reasons and so we've chosen to take advantage of the opportunity that's in the market today to raise prices, but that's only on a small part of the business.

You're absolutely right. In the Ticona business, the offset for us on most raw materials is the natural hedge that we have in our Ibn Sina joint venture. You tend to see over several quarters Ibn Sina's profit going up as methanol goes up to offset the producers on methanol inside of our AEM business. There's some lagging mechanisms and reporting sequencing that doesn't mean it hits exactly in the quarter, but certainly over a two to four quarter period of time you see those offsets kick in to deliver the bottom line operating results. Steven, you want to characterize?

Yes, if you look at the fourth quarter the turn around as well as at lumpiness in spending, think about it being in the high single digit/low double digit millions range.

Okay, thank you.Another quick follow-up on -- in terms of cash flow. You have strong cash flow and so forth. You talked about acquisitions like what are you seeing out there and where do you see better opportunities?

Yes, Edlain, I'll start at a high level. We've got cash positions that will allow us cash to use in high return activities. Those could be M&A. Those could be some restructuring activities. They could be growth opportunities for us but as we step back and look at the M&A pipeline it's certainly not as large as it was 18 months ago, but it still is a good pipeline and our guys are very busy.

I will remind you that we're absolutely delighted with the two or three deals we closed this year. We wish they were larger, but they are meaningful. We saw more there when we got into them than we thought was there and we were delighted going into it. I characterize it as a good acquisition pipeline, not as robust as it was 18 months ago.

Okay, thank you.

Our next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch, please proceed.

Yes, good morning. How are you?

Dave, could you comment on the European market for acetyls. We hear that it's very tight, we're also cognizant you have closed Pardies and you have some more formulaic contacts over there. Is it the a meaningful source of upside to you relative to the volatility in Asia and if so, maybe you could elaborate or quantify that.

Yeah, the European market is strong. Pricing and margins in Europe are good. They're strong. So, right now it is positive. I characterize our AI business globally as being very healthy and very good. Capacity utilization is at a very good point. And acid, our downstream businesses, are having healthier margins and good demand coming off of them. We're very confident at delivering the projected revenue and profit associated with this business without a big fly up in margins on acetic acid, so I characterize as being very healthy and very good.

And shifting gears to Advanced Engineered Materials, if I look at the first quarter of 2011 versus the fourth quarter of 2010, I will imagine you have a tail wind from Ibn Sina earnings, given the increase in methanol that occurred in Asia and the one-quarter lag.

How much of a sequential boost could that be to you in the segment?

I'll let Steve characterize it, but you're right in the element. First quarter is volume strong in the space. We also have benefits associated with Ibn Sina.

I would remind you that on a year-over-year basis we had an unusually strong first quarter last year due to a competitor's outage and we took full advantage of that. We won't expect that to recur, but it should be a good quarter for us versus fourth quarter. Steven?

When you -- if you look maybe year-over-year Q1 which is probably a easier way to think about that business because of the seasonality. You'll see we've got a little bit of headwind because last year on a comp basis we had the outages.

You have a little bit higher raw material based out there, but as we said you should expect higher earnings from Ibn Sina to mostly offset that. I think those will be the two biggest factors when you think about the business on a year-over-year basis.

Thank you very much.

Thanks, Kevin.

Our next question comes from the line of David Begleiter with Deutsche Bank, please proceed.

Good morning.

David, with your acid operating rates getting high again. Can you discuss your thinking on future capacity additions in acetic acid, whether to expand Nanjing, expand Texas or perhaps a Brownfield or Greenfield site somewhere in Asia?

Yes, Dave, thank you.

Our strategy is to basically hold our share and grow with the market. That means we would be looking every year at capacity increases of somewhere between 100,000 and 150,000 tons. It may come in a little bit of a lumpy fashion.

The last increase we had was in our plant in China about 18 months ago and we have the ability to put capacity in with our technology in Clear Lake or in Nanjing or in Singapore. So we'll continue to look at investment opportunities. From our perspective, its doubtful that we'd be very public with modestly bottlenecks in our plant that is consistent with our strategy and we're only get very visible on what we're doing with capacity if we had a new Brownfield or Greenfield plant.

And acetate tow, what were you selling price increases on your annual contracts for 2011?

You know, a lot of that is confidential but we came out of it very happy with what we were able to achieve and we should, as Steven said, see earnings increases in that space in 2011.

And Dave, last thing. In Industrial Specialities, what is your margin expectation year-over-year in 2011?

In Industrial Specialities -- we have some innovation projects that are helping give us higher margin expectations there and somewhat higher translation. So again, we would see earnings growth on a year-over-year basis in that space. Steven, do you want to add to that?

Yes. I think you'll see healthier margins in the low to mid teens in that business on average across the year which is a couple hundred basis points better than we've seen in the last couple of years.

We do have some new capacity in China that's coming in the second half of the year that will boost it. In fact, in 2011 we've got capacity coming in in several of our businesses that supports growth. We have it in emulsions, we have it in acetate, so we 're well positioned to capture growth in the market.

Thank you very much.

Our next question comes from the line of John McNulty with Credit Suisse, please proceed.

Good morning. Just a quick question on the Chinese energy conservation measures. If these end up being structural and there is some speculation that this may continue for a while. Should you be able to sustain the acetyl margins that you're at now? And how does that make you think about your overall cost curve as well and where you are in the steepness of it overall?

Most of the benefit on what happened in China in the fourth quarter, was a volume impact and that volume obviously translated into margins.

Is it sustainable over an extended -- and it was with the derivatives, the acid derivatives, vinyl acetate. So, if there is a shift and it becomes sustainable and secular, you would have the volume, you have an increased capacity utilization within the VAM space. You would have some increased capacity utilization within acetic acid which probably would move you up to that next point in the cost curve somewhat sooner.

So, yes, I would say that's probably an upside that you look at. As we give forward looks because you know we tend to do it on the basis of what we can control. We make modest assumptions around economic growth. We make modest assumptions around shifts like this, but if something like that were to occur, John, it could be an upside.

A quick question on the industrial side. Are you seeing an ability to get through price to offset raw materials here or really is the margin improvement going to come almost exclusively just from the self help you were talking about in some of the new products you're developing ?

No, we are able to get prices through. Remember, this is a business that generally we will see if there are raw materials escalating or de-escalating, there's a lag. A quarter to two quarter lag in when we recover margins in the business. That's both up and down.

We benefit from raw materials drop and hold that for a quarter or two and they go up and we're able to recover them, a quarter or two after the event. Overall, I would say with the way our portfolio is structured with the natural hedges we've have in place, that specific event in that business tends to get mitigated throughout the rest of the company through puts and takes.

Great, thanks for the color.

Thanks, John.

Our next question comes from the line of Andy Cash with UBS.

Good morning. Just a clarification and just one question about your outlook. When you announced your advanced technology -- fuel technology for ethanol, you indicated that you're planning on spending about $300 million. The White House in their Press Release says they're planning on spending around $650 million. So I'm just curious, is the $650 million over a number of years or $300 million kind of the starting point?

I'm going to let Mark answer that question. He's not only in charge of communications in Investor Relations but he's got a red line into the White House.

I'm not sure about that, but Andy on the announcement that came out as part of the White House briefing was a view of a longer-term total spend. That's going to include not only our capital, which you're correct in saying we've characterized as being about $300 million for the first 400,000 ton industrial ethanol plant, but that's also going to include capital assumptions for Wison, who we've signed an MOU with as our syngas our supplier for certain feed stocks going in there as well as some of the capital that would be associated with our work here in Texas. So it's a much more encompassing number than just the $300 million for the 400,000 tons of capacity.

So the $300 million would be a combination of your equity and debt, for example?

Yes.

Okay, good. So and the question I had about your outlook. Just if you look at the year-over-year change in gross profit adding back the D&A I calculate that was up 5% and your EBITDA was up 15%. I'm just curious when you look at 2011 you're talking about a 13% year-over-year improvement in EBITDA across the whole year.

Would you expect the gross profit change to sort of lag that number and you make up for the difference with the JVs or do you think the gross profit number will be sort of an equal contributor to the overall improvement in 2011?

The gross profit will be -- we'll have a little bit more depreciation next year as we start up our new facility in Germany and we also, as part of our debt refinancing, we do have one year where interest costs will be up about $20 million versus 2010, but as we've said, we've got forward starting swaps and won't see a decrease in interest costs by about $30 million starting in 2012. You've got those couple of other elements that effect it, otherwise your view is correct.

So the JVs will be disproportional benefit, that's in your expectations?

So. The way I would think about the JVs is think about Ibn Sina. We talked about having a natural hedge against raw materials and then you will see some growth coming from our Ticona joint ventures. We publicly said think about those as growing around $10 million a year in an environment where you've got 3% global GDP. So that's part of the first bucket that I described on the 2011 outlook. That would be the way I think about the joint ventures. In consumer specialties there could be some modest growth as we've seen over the last several years coming out of the acetate joint ventures, but the most substantial growth you'll see in that joint venture will come out in the 2012-2013 time frame following our expansions.

Okay, because when I was looking at the gross profit I was adding back the D&A and so the 5% year-over-year that will sort of continue at a lower level than the overall EBITDA improvement. That sounds right?

I think so. I think Mark can probably help clarify the split between gross profit and EPS.

Okay.

Thanks, Andy.

Thank you.

Our next question comes from the line of Charles Neivert with Dahlman Rose.

Just one quick question on China and the auto build. We always talk or you always talk about China being relatively low penetration in terms of the poundage per automobile. How fast is that moving forward and where is it today? Where would you expect it in two years, five years at this point in terms of pounds per vehicle of your products?

You're absolutely right. I think China will show a modest volume growth rate year-over-year this next year, as least that's what the projections are, but the important thing for us is the penetration. The last time we discussed this, we said that penetration in China is roughly 15% to 20% of the penetration that there is in the US. They are rapidly catching up. There is a shorter test and approval time in China than there is in Europe or the US. So that trend is continuing.

I honestly -- from our perspective we're looking at being positioned to support very rapid penetration in that space and the pessimist in me says until China has an export car and begins to put an export platform in place, not only export but for local consumption they'll reach a point that's below where Japan, Europe and US is and stop there. All I'm saying is it's a very dynamic picture, Charlie, and I don't have a firm view on it but we're trying to plan ourselves in the event that it's a very rapid growth.

Okay, and just one other. Could you guys go quickly through in each segment the speed with which price hikes go through. Obviously you have some that are more commodity oriented and might more move in line with cost and others that have greater lags and leads. Could you sort of step through the major segments and talk about the difference in timing of those movements.

You bet. In consumer specialties, these tend to be annual contracts that are negotiated. Price gets set towards the end of the fourth quarter every year for the next year. In our Advanced Engineered Materials business the large proportion of volume there is value and use selling. You may have 10% to 20% of the volume that has any chance of getting raw materials passed through on a short-term basis. And that's why we have the natural hedge in place there with Ibn Sina to protect the value and use the margin on the value and use it on a hedge basis.

As I shared with you the Industrial Specialty businesses tend to be a quarter, may be a two quarter lag. You get part of the recovery the first quarter and you tend to get the full recovery at least in the second quarter and then in our AI business there it's daily, if not weekly. If you see raw material prices, primarily methanol, go up in China, you will immediately see a response with prices going up for acetic acid. That's because those marginal competitors are right on the variable cost curve and they're in a position where they have to raise prices in order to keep themselves afloat. I think generally that's the characterization. There's some regional differences, but generally speaking that's -- by segment, that's what it looks like.

Obviously, especially important given the volatility we're seeing in some of these cost structures this year and pretty much across all of your product lines between wood pulp and ethylene, propylene, et cetera.

Steven highlighted in his comments, because of the natural hedges that we have built into our portfolio and the different dynamics there are in the marketplace, some of the cost positions we have, the purchase cost positions, some of the contractual positions we've have on selling. Overall as a company we tend to be relatively indifferent, very well buffered to raw material fluctuation -- I don't lose a minute of sleep over raw material escalation / de-escalation. These things tend to naturally click in and you may shift where profit comes. You may shift from a Europe or an Asia into the Americas or you may shift from one segment to another segment, but overall volatility doesn't trouble our model.

Great, thanks very much.

Thank you.

And we have no further questions at this time. I would like to hand the call back to Mr. Andy Green.

Okay, thank you, Peggy and thanks everyone again for joining us on today's call.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.