塞拉尼斯 (CE) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Celanese Corporation earnings conference call. My name is Gina and I will be your operator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jon Puckett, Vice President of investor relations. Please go ahead.

Thank you Gina, and welcome to the Celanese Corporation third quarter 2011 financial results conference call. My name is Jon Puckett, Vice President of Investor Relations. On the call today are Dave Weidman, Chairman and Chief Executive Officer, and Steven Sterin, Senior Vice President and Chief Financial Officer. Also with us today are Doug Madden, Chief Operating Officer, and Mark Oberle, Senior Vice President, Corporate Affairs. The Celanese Corporation third quarter 2011 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. Both items were submitted to the SEC in a current report on Form 8-K.

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 provision of the Private Securities Litigation Reform Act of 1995. The limitations inherent in such forward-looking statements are detailed on page 5 of the earnings release referenced during this call. Celanese Corporation third quarter 2011 earnings release references the performance measures, operating EBITDA, business operating EBITDA, affiliated EBITDA and proportional 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 schedules to the third quarter earnings release posted on our website, celanese.com. This morning Dave Weidman will review the performance of the Company and Steven Sterin will provide an overview of the business results 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 to turn the call over to Dave Weidman. Dave?

Thanks, Jon. Welcome to today's call. I'm delighted to share our record third quarter results with you. I'll also provide more details on our increased outlook for 2011, while briefly highlighting progress on the fundamentals of our business strategy. First, let me begin with our outstanding third quarter. Celanese net sales for the third quarter were $1.8 billion, operating EBITDA was $374 million, and adjusted EPS was $1.27 per share. These results were third quarter records for Celanese, and represent very strong year-over-year improvement driven by healthy global demand for our products and successful execution on our strategic growth plan. Our strong third quarter results demonstrate the earnings power of our portfolio throughout an economic cycle, as Celanese continues to build upon our leading technology and cost position, our broad geographic end market footprint, and our innovative new products and technology.

Based on third quarter performance, we are increasing our full-year 2011 outlook for adjusted EPS to be approximately $1.30 per share higher than last year's $3.37, and our operating EBITDA to be approximately $280 million more than last year's results of $1.1 billion. Our previous outlook for adjusted EPS and operating EBITDA was approximately $1.20 higher and approximately [$275 million] (corrected by company after the call) higher than last year's results, respectively. Celanese's strategy to create shareholder value is based on 4 growth levers, geographic growth, innovation, productivity, and portfolio enhancement. Regarding geographic growth, Celanese has strong positions in the fastest growing regions of the world. In fact, based on the distribution of global GDP, Celanese business activity is modestly over weighted to the rapidly growing Asia region where we do approximately 40% of our business, and a significant part of today's Asia earnings come from either our acetate ventures or our technology advantage Acetyl business.

In order to further grow our Company, we continue to focus on innovation, innovation in application, products and processes. These efforts are leading to growth opportunities, such as our innovative TCX process technology. We note that we are on track with plans for our ethanol facilities in China and the US, which will utilized TCX technology. In addition to a culture of growth and innovation, Celanese also has a culture of productivity. This focus has enabled us to lower our fixed cost base by approximately $250 million since 2008. We target delivering annual productivity savings better than inflation that range from $40 million to $60 million. Finally, we will continue to enhance our portfolio with high-value strategic acquisition that are synergistic to our core business strategy.

Within the last several quarters we strengthened our advanced engineered materials portfolio with 2 acquisitions that are paying dividends. Many macroeconomic issues cloud the horizon today. However, as Celanese focuses on executing programs and geographic growth, innovation, productivity and portfolio enhancement, we remain confident that we will deliver top line growth of 100 to 200 basis points faster than the global GDP, while converting our incremental growth earnings at a rate of at least 30%. For shareholders, this translates into earnings increasing at 10% to 15% per year, relatively higher margins, lower earnings volatility, and return on investment capital that significantly exceeds our weighted average cost of capital. As we look forward, we remain on track to deliver our 2013 target of at least $6 of adjusted EPS and at least $1.7 billion of operating EBITDA. With that, I'll now turn the call over to Steve.

Thanks, Dave. Our business model continues to deliver excellent results, and financial performance in the quarter was strong across the portfolio. In fact, this was a record earnings performance in Q3 which followed a similar record in Q2. Our businesses continued to generate strong margins in the third quarter as global demand for innovative offerings in our AEM and Industrial Specialties businesses remains strong, as both of these businesses posted record results, and performance in our Consumer Specialties business was sustained. Our Acetyl business continued to demonstrate our unique advantaged cost and technology position in acetic acid and our ability to benefit from elevated industry utilization levels.

Now I'll review the third quarter performance and outlook for each business, beginning with Advanced Engineered Materials on page 7 of the earnings presentation. This business delivered record Q3 performance, as global demand for our innovative performance polymers continue to remain strong, especially in the automotive sector. We continue to invest in this business with the recent startup of our new state-of-the-art POM production facility in Frankfurt, Germany. This facility will be the world's largest, and will further strengthen our global operations and advanced technical capabilities in order to meet the growing demand for our engineered polymers Net sales for this business were $332 million in the quarter, a $61 million increase from last year.

The increase was driven by higher value in use pricing across our product lines, sales from our recently acquired LCP and PCT product lines, as well as favorable currency. Additionally, volumes were up year over year as the POM volume constraints we've experienced over the past several quarters related to the facility expansion have abated. Operating EBITDA was $112 million versus $90 million last year. Earnings from Ticona Strategic Affiliates were up by $21 million, primarily driven by Ibn Sina's improved performance. As you recall, Ibn Sina provides an economic raw material hedge for our businesses, and when methanol prices are high, earnings from the venture will increase. As we look forward to Q4, we expect year over year earnings growth with normal seasonality in Q4. A planned turnaround in 1 of our strategic affiliates, will result in lower sequential equity earnings of approximately $10 million to $15 million. Even with this turnaround, we still expect to see year over year earnings growth in Q4.

Let me pause for a moment and remind you of how we typically view seasonality in our business, particularly because it has been a few years, since before the downturn, where we have seen seasonality. We generally expect to see about 55% of our earnings in the first half of the year and about 45% in the second half. When you look at the second half of the year, you would normally expect EBITDA to be a little higher in Q3 than in Q4. This year we expect to be weighted a bit more to Q3 for 2 reasons. First, a step-up on the cost curve seen in Q3 in acetic acid, which is the primary reason we raised our EPS outlook by $0.10 a share. Second, we expect a major turnaround in 1 of our AEM equity affiliates in Q4, as I've previously mentioned, which will reduce Q3 to Q4 equity earnings by about $10 million to $15 million.

Let's now turn to Consumer Specialties on page 8. This business continues to deliver stable earnings with high margins. Net sales were $298 million up $10 million from a year ago, as higher pricing offset lower volumes in the quarter. Volumes were down modestly year over year due to a temporary manufacturing outage in the is our acetate business, caused by a lightening strike. However, higher volumes in our Nutrinova business helped to offset the impact. Operating EBITDA was $78 million, a $3 million decline from last year's results, as the higher pricing offset higher raw material costs, but did not completely offset the impact of the production outage. As we look ahead, we expect higher volume sequentially, but energy costs will remain at elevated levels. The strong fundamentals and stable earnings of this business are expected to continue into Q4 and beyond.

Results for Industrial Specialties can be found on page 9. This business' innovation efforts and geographic expansion continue to drive earnings growth and margin improvement. Net sales rose to $332 million from $276 million last year, primarily driven by 15% higher pricing as well as favorable currency impact. This quarter's results benefited from the continued commercialization of innovative applications across our businesses, especially in Asia, where we focused on emulsions capacity expansion to meet the growing demand for our product offerings in this region.

The higher pricing was also a result of pricing actions taken for the recovery of higher raw material costs. Operating EBITDA increased to $43 million, approximately 20% higher than last year, as the higher pricing and improved mix offset rising raw material costs. Looking ahead, we expect volumes to be sequentially lower in the fourth quarter due to seasonality, but anticipate demand for our innovative products, like low VOC paints and our differentiated EVA performance polymers offerings in the medical space, will continue to drive year over year earnings growth.

Let's now turn Acetyl Intermediates on page 10. This business continued to benefit from higher year over year utilization rates in the industry, along with its attractive cost curve, and Celanese's leading technology position. Net sales were $975 million, $198 million higher than last year, primarily due to the significantly higher pricing, along with positive currency impacts. Volumes were higher sequentially, but slightly lower than last year due to the final impact of our turnaround in Q2 of this year. The 23% increase in pricing year over year was driven by elevated industry utilization, resulted from planned and unplanned production outages of multiple Acetyl producers, and underlying strong demand for Acetyl products. Last quarter we discussed an expected trajectory in acetic acid margins, returning to more normalized levels by the end of the year.

We actually saw margins remain relatively robust through Q3 and are now beginning to moderate to normalized levels in Q4. The recovery of rising raw material costs during the quarter also contributed to the increased pricing. Operating EBITDA increased to $168 million from last year's $110 million, as the higher pricing and positive currency impacts more than offset higher raw material cost and lower volumes. Looking ahead, we expect industry utilization rates to return to more normalized levels in the fourth quarter. With this, EBITDA margins should moderate back to the mid-teen levels that we saw in the second half of 2010 through the first quarter of 2011. However, we expect to see year over year earnings growth.

Our strategic equity and cost investment results are highlighted on page 11. On the left side of the chart, you see the earnings impact of our affiliate performance. Year-to-date we reported $226 million of earnings from our strategic affiliates. Keep in mind, this excludes over $100 million year-to-date of equity affiliate EBITDA, that is not included in our quarter results. We've included further detail on our affiliate performance and proportional shares in table 8 of our earnings release. Our adjusted free cash flow results are found on page 12. Our improved earnings performance, coupled with our strong fiscal discipline, has driven sustained cash generation throughout the year. You'll note that our capital expenditures were higher year over- year, as we've continued to invest in capacity expansions and improving the efficiency of our operations to support future earnings growth.

Our 2011 outlook for adjusted free cash outflows is on page 13. We've updated our capital expenditure forecast to acceleration of the industrial ethanol projects previously announced. Additionally during 2011, we made $128 million in pension contributions. Similar to this year, and assuming no major change in the capital markets, we anticipate funding between $130 million and $150 million annually for the next 5 to 7 years, to comply with US pension requirements. However, even with these contributions, we continue to generate strong operating cash flows that position us well to invest in higher ROI growth, productivity and innovation programs, while at the same time deleveraging and returning cash to shareholders through share repurchases and increased dividends. With that, I'll turn the call over to Jon for Q&A.

Thanks Steven, Before we start the Q&A, I ask that you to limit yourself to one question and one follow-up so we can get as many people through the queue as follows. If you have additional questions, and time permits, we will ask you to get back into the queue. Gina, I'll turn it over to you.

Thank you.

(Operator Instructions).

Your first question is from the line David Begleiter from Deutsche Bank. Please go ahead.

Good morning.

Hey, Dave.

David, could you talk about your acid price in China. What has been the trend the last few weeks and couple of months?

You bet, and I'll ask Doug to jump in a little bit here. Let me go back a little bit. During the second quarter and third quarter, we saw capacity utilization, effective capacity utilization, move to the right. We probably characterize it as saying it was in the high 80%, low 90% range. Because of that, pricing went up, margins went up. As turnarounds has been completed and unplanned outages have been restored, capacity utilization now is moving more back into the mid-80%, perhaps low 80% range and margins are coming down as a consequence of that, where we would expect them to be, Dave. Doug, do if you want to talk about that?

Yes, Dave. So you've followed the chronology that Dave laid out. Go back to the middle of the year where acid pricing was in the high $500s maybe even tipping north of $600 on a spot basis, but you've seen that coming down over the late second quarter into the third quarter. More recently, you'll see acid pricing today probably south of $500, call it somewhere around the $450, some transactional maybe at $500, but you can see the price is dropping already, which is why we believe that with industry utilization coming back to more a normalized rates you ought to think about this as more normalized mid-teens on the EBITDA level for fourth quarter.

3 key things, Dave. First, our 2013 commitment of $1.7 billion or $6 share has acetic acid margins in the range we'd expect them to be from this point forward, fourth quarter into 2012. Second, we have indicated before and it still holds true, that there haven't been any new acetic acid plants started, no new concrete put into the ground since 2008, early 2009; and third, as we look to the world going forward, we've highlighted on the 2013 number that if capacity utilization moves up on a more longer-term basis in 2013, that represents an upside to our $6 a share.

And Dave, just on Kelsterbach, when will we see the benefits of the operating leverage in that unit from ramping up and being loaded up?

Yes, so our Advanced Engineered Materials and our Ticona business is specialty-type business. So that it's unlike some of our more intermediates, where we put new capacity in and would expect to sell the plant out immediately. We work in Ticona on applications, and what the expanded capacity does is allows us to have capacity as those applications are developed, and we've got a huge pipeline of applications. Doug and I were just reviewing this morning with 1 of our colleagues that we've got some fairly large applications on the new 380, a couple of tons of our product on that. So these niche-y applications, high value in use, are what we are about. This new capacity gives us the ability to grow as those applications develop. We see it as more gradual growth. We'll get some modestly lower cost coming out of that operation as a consequence of newer technologies being applied into it, and it gives us the ability to grow for the next 3 to 5 years without the need for new additional capacity.

And I might just add, recall, Dave, that the unit is up, is fully operational. We come to full capacity utilization over time through a phase-in. So we are back in full capacity early next year, and then I think Dave's comments certainly are true as well, as we look to fill that capacity out.

Thank you.

Your next question comes from the Kevin McCarthy from Bank of America/Merrill Lynch. Please go ahead.

Yes. Good morning. Dave, I have a 2-part question on your TCX technology for ethanol. First, would you comment on the expected timing of permitting decisions at Nanjing and Zhuhai? And then, second, would you provide an update on the discussions you are having with potential partners for distribution into the fuel market, and how those are going and what the next steps there could be, and related timing? Thank you.

Yes, delighted, Kevin. Let me take the first question. I'll have Steve take the second one. We are on track on the permitting process on the Nanjing facility, and I'll just remind those on the phone that Nanjing is a retrofit of our existing acetyl complex, and we anticipate start-up of that facility to be sometime in the 2013 mid-year timeframe. Permitting is a multi-step effort in China. We are right on track going through this point in time. We continue to target and feel confident with the 2013 start-up for that facility. We also have a facility that will start up in Texas next year. That is more of a development unit to help us take our current technology and extend it beyond the capabilities that we see already. And that unit, again, is on track in the engineering, construction, permitting associated with that. Steve, do you want to talk about fuels market?

Yes. We continue to make very nice progress there in commercial discussions with a number of parties around the world. As we've mentioned before, a lot of the focus right now because of regulation in the US, is outside of the US, and we continue to gain traction in discussions, whether they be in China, Asia outside of China, or in the Middle East, and I'd say we continue to move to more substantive commercial, or project-focused, opportunities with specific customers now. So we are continuing to progress there, and the pipeline of incoming requests for interest in the technology, as well as our identification of additional customers, continues to grow. So we are encouraged by the progress. It is certainly a multi-year process, working in this industry to go from conceptualization in oil and gas to a deal, but we are making very solid progress and I'm encouraged by the response from customers.

Dave, just a follow-up. My understanding was that in addition to the pilot plant in Texas and the retrofit in Nanjing for mid-'13, you are also exploring some greenfield opportunities at both Nanjing and Zhuhai for 2014. Is that still a case, and what are the next mileposts there, regarding [ENC] and permitting?

Yes, thank you. We indicated, Kevin, that we are going to build 1 and possibly 2 facilities for industrial -- 2014, 2016 timeframe. We are in advanced stages of site selection for the first of those facilities, and we would expect to be up and operating within that timeframe, let's say a 2014 timeframe, 2015 timeframe for those greenfield facilities.

Okay, and then final 1, if I may, for Steve. I heard the cash contribution into the pension plan of $130 million to $150 million. Would you have a preliminary estimate on pension expense in terms of adjusted EPS impact?

The way we look at it, Kevin, is there could be some modest increase, but we -- as we look forward, we will cover that with productivity. Any inflation or changes in pension costs are assumed already in our 2013 outlook, and we're going to cover those through our net productivity contribution of $40 million to $60 million a year, but I would say very low double digits type of movement. So not material to us and the cash outflow should be, assuming no changes in capital markets, interest rates are really low. As interest rates move up, the whole thing can change and become a lot more favorable, not only to us but to the industry.

Understood, thanks very much.

Thanks, Kevin.

Your next question comes from the line of Duffy Fischer with Barclays Capital. Please go ahead.

Yes. Just want to follow up on Kevin's question on the fuel side of things with TCX. Where should we kind of set expectations over the next year, as far as possible deals signed. What we should we expect to hear on the fuel side of things?

So Duffy, great question. I would characterize where we are today as project specific negotiations with discrete customers, and I characterize it as customers, not just a customer. And because of confidentiality I am going to walk around things. We also are in negotiations with companies I characterize as [integrateds], as well as those who are not. Now, we have chosen to be focused on negotiating an executable agreement rather than an MLI, or MOU that we see in the industry today. So you would expect that sometime over the course of time, when we do have an announcement, it's going to be a very specific, concrete announcement with a real deal behind and a commitment on both parties' parts to go forward with the project. And again, just by nature of these things, this is going to be multiple quarters.

We are, as Steven highlighted to you, we are incredibly encouraged. It was less than a year ago that we announced our TCX technology, and the interest in the fuel side is far beyond my expectation. The level of negotiation, the level of interest in this, again, far exceeds where I thought we would be at this point. Having said that, being a fairly pragmatic guy, we haven't got a deal yet. So, we will let you know when we do have one.

Perfect. And then from their standpoint, or just anybody's standpoint analyzing the technology, when will you be able to send up the all-clear signal as far as the ability of this to scale without operational issues? Is it when Texas comes up, when the retrofit at Nanjing comes up, or do you actually need the get that first true greenfield up before you really buy in and say we know for sure it works?

Duffy, we tend to be a very cautious group, and we are at the point where we are highly confident that our technology will work. Part of that is based on the fact that a significant portion of the DNA of what we are doing is manufacturing technology where we have expertise and we have significant superior technology and advantage. We are leveraging that. In addition to that, there are breakthroughs beyond that, and those breakthroughs I'd characterize as being incredibly unique, but the application of those is within an area where we are highly confident.

As you know, we have gone to 2 independent parties on the outside and asked them to confirm our views or discourage our views. They have confirmed our views. Those have been shared with the public to the degree that we can without disclosing technology, and they've also been used as some of the justification our Board needed to go forward and commit the capital required for this first unit in China. So yes, I think we are very high confidence, and there is incredibly low chance that this technology will not work at scale.

Terrific. Thank you guys.

Your next question comes from the line of John McNulty with Credit Suisse. Please go ahead.

Yes, good morning. Just a quick question. With regard to the cash available for strategic purposes, it seems like it is a decent cash hoard, and I know you have been looking for acquisition opportunities. I guess if you could give us an update as to how that pipeline is looking at this point, and if there are opportunities that actually seem any more attractive, or more strategic than your own stock at this point.

Yes. we continue to maintain a balanced approach. I mean, if you look at what we've done over the last several years it has been very well balanced between share repurchases, acquisitions, dividends. But as we look at the pipeline going forward, we are still encouraged by what we see. It is certainly a little bit less robust than it was a couple of years ago when valuations were a lot lower -- plus we have completed a number of the deals that were in our pipeline. But we are still actively working on a number of projects in bilateral discussions, and we see that as one of the possible uses of cash, but again, the type of deals we look at are similar to what you have seen us do; technology bolt-ons, or business bolt-ons, parts of existing businesses that are highly complementary to our existing technology suite. I'd say that's the principal focus of our pipeline today.

John, I will answer your question a little differently though, and say that we are in the market, as a company, with share purchase on a ongoing basis. We buy it when we can. In other words, we have internal blackout windows. We only wish that we were not in a blackout windows during the most recent time, when the stock dipped below $30, but we do view our share price as being undervalued. That is the job of a CEO, to never be satisfied, and having said that, we will continue to apply the cash in a way that creates the most return for shareholders in our judgment.

Okay great. Thanks for the color.

Thanks, John.

Your next question comes from the line of Frank Mitsch with Wells Fargo Securities. Please go ahead.

Good morning. With these record results, it looks as if your team is performing as well as the Texas Rangers these days.

Well, they still have 1 more game to go.

Yes, and it's going to be tough, but it's been an interesting Series so far. I was curious on the commentary on Ticona. You talked about the record quarter in Ticona and higher volumes. We actually heard from another company that has a significant engineering polymers business in the automotive sector that they are seeing destocking, they saw a significant destocking during the third quarter in the auto business. Did you see anything like that occur in your businesses?

Well, Frank, we have a unique position. I can't comment on what they said. I did not hear it and I don't know their business. I will underline that we do have a unique business and a unique portfolio, and our global position is fairly unique too. We are continuing to see ongoing penetration on every unit that is out there. Our position in China is expanding very, very rapidly. So, we had 5% volume growth on a year-over-year basis.

Looking forward, we see normal seasonality in the fourth quarter. We see earnings growth, and I would characterize our view of it as that we have a little view into the future in Ticona. Their order books there tend to be a little more predictive than some of our businesses out 30 days or so. Unfortunately, a fourth quarter seasonality can be softened or magnified by what is goes on in December, and we don't have any view to that now. We have taken a cautious view, however, of December, and with that we see earnings growth and we certainly see some really great demand being developed by the innovation machine that we have there.

Okay, great. So at this point you're not seeing signs of a slowdown in auto. In fact, I guess, in some parts, people are forecasting that build should actually pick up a little bit in Q4 year-over-year than 3Q due to an inventory draw down from Japan.

Yes. Doug may want to characterize this a little bit more, but we certainly see signs that people are concerned about inventory by their order patterns.

Yes. So Frank, if you step back, and I tend to not look at this in terms of quarters, but remember we entered the year, there was a lot of movement specifically for autos. Obviously the Japanese tsunami and the impact they had a significant impact. As you went through the year, many of the auto producers forecasted greater production share shifts that they would be picking up with the Japanese. Later in the year the Japanese would be back, and you would see that sometime in the latter part of the year.

The way I look at it is I kind of step back and take a bigger view of this and say, what was the auto production, what was the auto industry looking for year-over-year in their growth, and where are we today? And I would say it's basically right on track. You see a 3%, 4% growth on the full year. To your point, we expect year-on-year an increase, 4% or 5%. So in all that noise between quarters, I still see production up, and as Dave has said, a large part of what we do is not only the auto production, but it's taking, our unique polymers and our technology and putting more pounds and more value on those autos. So auto builds is 1, but what drives our growth is really through that innovation pipeline.

Frank, I mean, folks are nervous. Their order patterns, they are ordering smaller quantities, they are ordering more frequently. We will see orders pop up into the books real strong for 2 or 3 days, and then there is a pause for a day or so. If I think of past times when people were concerned about inventory they are watching their inventory, and they are only ordering what they need. They don't want to get out over their skis.

Okay, all right. Fair enough, and then just quickly looking at the Acetyl Intermediates business. You have been running ahead of normal, as you said, and you expect to get back to normal here in Q4. How would you characterize, on a percent basis, the unplanned outages in Q2 and Q3? How high did they run, and, obviously, you cannot plan for that in Q4, but I'm just curious as to what sort of percent of industry capacity was off-line on unplanned outages the last couple of quarters?

Yes. If you go back to the end of the first quarter, really second quarter, we were probably running in the high 70s, low 80s, and then what we said last quarter as saw it move up into the low 90s. And as we progressed through the quarter and some of that capacity's come back online, we have kind of moved now down into the low to mid-80's, is where we are today, and we expect that to be relatively consistent, maybe moving towards 80% by the end of the year, as people come back online.

But as a percent of third quarter capacity, you think, what, 4% or 5% was offline due to unplanned outages?

Yes, I would say. It got better as the quarter went on, but on average I would say, Doug, probably 4% to 6%?

Yes, I think that's a good range, 4% to 6%.

All right, thank you.

Thanks, Frank.

Your next question comes from the line of PJ Juvekar with Citi. Please go ahead.

Good morning, Dave.

Hello, PJ.

Given your extensive asset base and experience in China, have you seen any slowdown in different end market, given talks about hard versus and soft landing there?

Yes, only anecdotally. PJ, I mean, when you talk about acetic acid or where we are in China with our acetate ventures, they are not highly GDP growth sensitive. China continues to grow, but we can't feel the difference between a 7% and a 9%, as an example. Now, there is some anecdotal stuff that is coming in that is a little bit different from what we have heard the general consensus in the market, and we are trying to figure it out. But starting back in a year ago, maybe a little less than a year ago, we had some of our smaller customers finding difficulty getting credit. There was a credit tightness that was initiated back then. Did not affect our business because we had a broad enough base that we were able to get to market in a different way.

That persisted until about 4 weeks ago, 3 or 4 weeks ago, and then these guys came back with more credit. So based on that, if you could take that and come to any conclusions, you would say that China -- the people who run the Chinese economy, and is state-controlled capitalist economy, the best run in the world, they sensed that there is something out there and they are pumping more liquidity into the system and it's having an effect. We haven't seen anything, PJ. I mean, the economy there continues to move forward. We track and monitor tons of data on a sequential and year-over-year basis, and there's nothing there that causes us any substantial heartburn.

And a specific question on Industrial Specialties. In competing technologies like acrylic prices are beginning to come down in Asia. Have you seen in October any sort of pricing pressure on the acetyl to downstream chains?

Yes. PJ. I think consistent with what we had said before. As the acetyls comes more into balance and you start to see the effects of lower utilization, you probably get a little bit of that impact through the whole chain. Frankly, we have been looking more at just underlying demand, and I think as Dave said, seeing whether or not there is any real impact, and we don't see it. So you get the impact of some raw materials and other things that impact it, but nothing measurable.

Yes, PJ we haven't seen anything that affects margins, and as we look at people switching from acrylic to vinyl systems, there is still a view out there that on the margin, vinyl systems are going to get more value relative to where they were 2, 3 years ago, and we still have high interest in people switching out of systems into ours.

Recall we started up a new emulsions-based facility there, and PJ, we are very pleased with the loading on that facility and our ability to take those low VOC vinyl systems into that country and find really great application and great growth for us.

Right, and just lastly, just a long-term questions on TCX. I think, Dave, you talked about taking TCX technology out of China into other parts of Asia.

Yes.

Do we need to prove the technology in China before we take into other parts of Asia?

It is a good question. The people that Steven is talking with are confident in the technology and are moving forward in a very accelerated way with discussions and negotiations. So I would say, based on what our customers are telling us, there is no pause, there's limited questions on technology and whether the technology will work.

Thank you.

Thanks PJ.

Your next question comes from the line of Bob Koort with. Goldman Sachs. Please go ahead.

Thanks gentlemen, Good morning.

Hey, Bob.

Dave, and maybe for Steven, I wanted to ask some more on the TCX process. It would seem like, given the Ministry of Ag over in China has talked about trying to move away from corn-based ethanol. Do you think it's feasible that you could actually see them reduce corn into fuel ethanol and embrace your technology as an alternative? And then as a follow-up, whether in China or somewhere else, if we come in some Monday morning and read a press release about State Oil Company X doing a deal with you, what would that deal look like from an asset investment offtake, those sort of dynamics? What would be the most likely way that you would reach an agreement?

Bob, we see the same sentiment in China, whether it's in the 12th 5-year plan that talks specifically about land use, or in public commentary in China. There is significant concern about food issues. And although the Chinese will decide what they do with that existing capacity, the mandate that China has looked for on ethanol is much, much larger than the corn ethanol production that is there today. So they have the option to do what they want with food, and our technology gives them that flexibility. So, yes, we see the trends, both in terms of continued pressure on commodity prices, whether it is food or oil, and a plentiful and available feedstock in terms of coal and natural gas in those regions that is set up very well for the technology, and that is why we have so much interest from customers over there.

And I would also highlight, that there is a lot of ethanol, corn-based ethanol, that goes into industrial today -- industrial ethanol. And we have assumed that stays there, it doesn't grow and we pick up the growth in the market. If your scenario develops, that gives us industrial opportunity beyond projected.

Your second question about how to think about what would a Celanese model look like in the fuel space? Similar to what we said at Investor Day, that hasn't changed. We are not entering the fuel space, we are bringing technology into the fuel space, and we have described it as an industrial gas-plus model, but let me put more color and texture on that. It is bringing the technology, our operational know-how and capability, and Celanese investing that for our customers, and our customers taking the offtake of the ethanol, taking the marketing for that as well as providing the raw materials. So think of it as a total conversion model, where Celanese invests in our technology, which we have said a 400,000 ton plant somewhere around $300 million, but we can go up to 1.1 million tons for somewhat less than double that investment. So you can think about that as an investment base, and that is what we focus our capital on, and then in terms of a return profile, we would be looking at getting paid for the technology, the operational capability, and a return on capital. So very similar to the gas model.

And Steven, you had mentioned that the US market hasn't been a focus for you, given the, I guess, political and subsidy dynamics around it. But now we have congressmen talking about changing the fuel loading levels, depending on [corn stalks] to use, and there's obviously a sentiment against some of that subsidy. So is there some small light at the end of the tunnel that maybe you can get into the US market someday, or is that just a pure option value they don't really ascribe a high success probability to?

I certainly think there is potential options in the US. The same dynamics that you talked about for China exist here. There are concerns about high food prices and agricultural prices, and as you said there is talk in DC, but I think there is still a lot of work that has to happen in DC for that to occur.

Okay.

It's fair to say that there is people on both sides of the aisle that are very concerned about energy security. There are people on both sides of the aisle who are unpersuaded by what is going on on corn ethanol in our country. So this is getting an awful lot of attention there. Having said that, moving something through Washington frustrates a business guy like me and Steve. So obviously we are putting energy into it, and I am not the right guy to ask to handicap the likelihood of success.

Thanks, Bob.

Your next question comes from the line of Paul Leming from Ticonderoga Securities. Please go ahead.

Good morning, and thank you for taking my question. Just wanted to drill down a little bit into the results at the wholly-owned part of Advanced Engineered Materials, really the Ticona operations. The 2-part question I have is if you look at EBITDA margin for the operations, and I am stripping out the equity income, margins have really been down 2 quarters in a row now, and just wondering if you could talk a little bit about how much of that is raw material costs? How much of that is operational or yield issues? Do you see that flattening out in here, or is this an issue you are going to be fighting through for the next couple of quarters? Then somewhat related to that, depreciation for Advanced Engineered Materials is up 30% or 40% over the last couple of quarters. I presume that is 90% Kelsterbach. Have we got depreciation in that segment kind of up to the new run rate now, or are we still going to see another jump in the fourth quarter?

Let me have Steve confirm the depreciation question. I will answer the margin question. Ticona is a specialty business model. We sell value-in-use, rather than cost above materials, but when we go to somebody, a medical device manufacturer, and work with them to put a product into -- a drug delivery system as an example, or go to Airbus and Boeing and put materials on their new planes, we do it on a value-in-use. We price on a value-in-use. That price tends not to change unless the value we deliver changes dramatically, and then we will reach out and move price. We do have raw material movement under that, but we have hedged that, not through a financial hedge but through a strategic hedge with the -- even seeing a joint venture, which is shown in the documents that we released. And so over the last couple of quarters we've seen raw material prices move up. Margins within Ticona will be squeezed, but the hedge has delivered more profit, and as raw materials went down, you would see the opposite occurring.

And to the second question, D&A, you're correct, it's Kelsterbach. It's the new plant start up, and would not expand to see any major changes to the run rates that you are seeing now going forward.

Is that helpful, Paul?

Both of them were very helpful. Thanks very much.

Thank you.

Your next question comes from the line of Rick Goodnight with UBS. Please go ahead.

Actually it is Gregg Goodnight, but that will do.

How are you, Gregg?

Doing well, doing well. Would you please comment on any companion syngas projects in China for your TCX technology? If I recall, one is not necessary to coincide with your 2013 Nanjing start-up, but perhaps as you expand it, you will need the extra capacity. So can you comment and bring us up to date, please?

Sure. What we have said on the 2013 project is that there is limited utility, raw material, and footprint availability at Nanjing. Consequently, we need to take existing raw material feeds within that acetyl complex and apply those where it is the highest value, highest profit, highest profit material that can be manufactured in that complex. So that is what we have said. That is what we said publicly. If we go to greenfield, obviously there is utilities, syngas, and other items that are negotiated as part of the complex, but specifically for Nanjing, that is kind of where we are at there. Steven?

Yes, and we have also said that, to do that, that integration will result in a de-rating of other acetyl products, whether it is acetic acid or downstream derivatives, because you are limited on syngas. And so as we look forward, 2 things to keep in mind. So you've got that, but we also have a stated strategy of continuing to supply our customers growth in the market, which is about 150,000 plus tons per year. So when you take into account the de-rating and the continued growth in Asia, and we want you to keep in mind we have multiple options. Syngas is an important part of it, but as we think about going forward, there is some de-bottleneck opportunities, but there is also greenfield opportunities for acetic acid to make up for that, and also provide for growth. So the decision will be made purely on economics, but we have the flexibility and that optionality that we will continue to evaluate.

Okay. A question for you on your TCX. You guys have stated that shale gas, in a way, can be considered a renewable. My question is, have you considered the possibility of hooking your TCX technology up to a low-cost bio-based syngas generation facility in the US? Perhaps you can get ethanol qualified as a renewable, and you would be in perhaps a new set of economics, a new paradigm for renewables in the US. Is that something you have even considered?

Yes. We continue to look for all options to get Into the US market, both within the existing legislative framework, as well as in adjusted alternative frameworks, and we continue to look at alternative technologies that may give us the opportunity to do that.

Okay. So it is something you would consider, it is just early stage, I would assume?

Yes, if the economics make sense, absolutely.

Okay. Last question if I could. Spot prices of methanol in China have recently been high. Could you discuss your leverage to these prices? And what is your expectations for methanol prices in China going forward?

Yes, just very simply, in China we buy at market minus, and we are positioning in that market. The market over there, most of our competitors, from our belief, buy on similar economics. So as methanol prices move up in China, market prices move up, because of the cost curve and the marginal producer needs to recover as variable economics. So as methanol goes up or down, you are going to see movements of acid pricing that are a function of that methanol going up and down.

Presumably, the higher prices are baked into your guidance for fourth quarter.

The margins are. It is simply a margin recovery game. Prices in China, as you follow it, Greg, real closely, you know that those China prices are really spot.

Yes.

They move on a day-to-day basis, every 2 or 3 days. So it is pretty dramatic. If you see a move in methanol, you will see a move in acid price pretty quickly. That is because the marginal producers are out there moving those prices and leading to capture his cash costs.

Okay. Well, thank you for that help.

Thank you Greg.

Your next question comes from the line of Nils Wallin with CLSA. Please go ahead.

Good morning.

Good morning.

There are a number of projects in sort of the mid-part of this decade in China, methanol to olefins. So I was curious to know how you feel about those projects. Obviously, they will take in more coal; they will demand more methanol. How that makes you feel about your cost position, raw material cost position, on the acetic acid side in that business, and whether there is an opportunity to shift more of your capacity back to North America with the shale gas advantage, certainly at Clear Lake

Yes, great question. Let me try to answer it. I will give you the short answer. We do not see it having a material impact on our competitiveness with the technology, but we continue to look for opportunities where natural gas is plentiful and inexpensive, and a little texture on that. When we look at spotting a facility and look at the economics of the facility, we assume global coal prices. We don't assume that you need to have something that is spotted right at [mine mouth] in order to be competitive. Our economics, the efficiency of our technology, the amount of coal needed for a ton of ethanol, is substantially less than it is for a coal to olefin project. As a consequence to that, we look at market, global economic markets, for coal, and basically that is what we are assuming in our projections.

Okay, got it. Now, if you lose some acetic acid capacity in Nanjing because of your TCX expansion, and assuming you tend to want to keep your global share of acetic acid the same, does that mean you may expand other units around the world into your AO2 Plus?

Yes, exactly right. I will reinforce what Steve said a little bit earlier. For acetyls, our goal is to maintain our market share as the world grows. Acetic acid is the foundation of that. As the market grows, we will increase our capacity. It may not be in lockstep, but our goal over time is to hold our share. We do have some incremental de-bottlenecks taking our acetyl technology and putting it into existing facilities, whether that's Nanjing, Clear Lake or our Singapore facility. And we do have the option of taking our technology and building a new facility in order to accomplish the same strategic goal in acetyl.

So we would not be public with our incremental de-bottlenecks, generally speaking. It is just a consequence of executing our strategy. But because of the size of the brownfields or greenfields, those generally we would have some discussion and some announcement on. At some point we shouldn't be surprised if we announced a new acetic acid plant that was economically attractive, relative to de-bottleneck or any other option that we had, and we would be public with that announcement, but our target, strategic target, is to maintain our share in this growing market.

Got it. Thanks for taking my question.

That concludes the Q & A session. I would now like to turn the call back to Jon Puckett, Vice President of Investor Relations, for closing remarks.

I would like to thank everybody for their time today. I know it is a busy day, and thank you for your interest in Celanese. If you have follow-up questions, please don't hesitate to reach out to me. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.