塞拉尼斯 (CE) 2012 Q3 法說會逐字稿

Welcome to the Celanese Corporation third quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to today's host, Jon Puckett. Sir, you may begin.

Thank you Shannon. Welcome to the Celanese Corporation third quarter 2012 conference call. My name is Jon Puckett, Vice President of Investor Relations. With me today are Mark Rohr, Chairman and Chief Executive Officer, Steven Sterin, Senior Vice President and Chief Financial Officer, Doug Madden, Chief Operating Officer, and Mark Oberle, Senior Vice President, Corporate Affairs. The Celanese Corporation third quarter 2012 earnings release was distributed by a business wire yesterday after the market closed. The PowerPoint slides for the call and our prepared comments for the quarter were also posted on our website, www.Celanese.com in the Investor section. All of these items have been submitted to the SEC in a current report on Form 8-K.

As a reminder, some of the matters discussed today and included in our presentations may include forward-looking statements concerning for example, Celanese Corporation's future objectives and results. Please note the cautionary language contained in our slides. Also, some of the matters discussed and presented include references to non-GAAP measures. Explanations of these measures and reconciliations to the comparable GAAP measures are included in our slides or the press release as applicable. This morning Mark Rohr will provide some introductory comments, and then we will field your questions. I would now like to turn the call over to Mark.

Thanks Jon. And welcome everyone for joining us today. As Jon noted, we released prepared remarks last night, so I will briefly make a few comments before we open the call to Q&A. We reported adjusted earnings per share of $0.93 on revenue of $1.6 billion. This was a very good quarter give the challenging economic environments in Europe, slower growth in Asia, and currency headwind. These results demonstrate the strength of our business, our technology platforms, and accomplishments of our teams around the world. AEM delivered sustained revenues in margins sequentially, despite weakened economic conditions in Europe. Operating EBITDA was $109 million, down $5 million, or 4% from Q2 results driven by lower equity earnings in affiliates.

The base business delivered sustained margins due to higher pricings. In Consumer Specialties, operating EBITDA increased sequentially and year-over-year, $87 million. Primarily due to higher pricing of continued strong global demand, demonstrating the value added solutions we provide to our customers. In Industrial Specialties, our Emulsion business delivered record performance, as we saw higher volume in Asia and North America. Operating EBITDA was $36 million as soft demand for EBA applications resulted in lower revenue and earnings for the segment. Acetyl Intermediates continued to experience strong flow out conditions, which impacted both demand and pricing. Operating EBITDA was $91 million, marginally lower than the second quarter.

Although the current conditions are difficult, our cost position and ability to leverage technology positions us well when global economic growth returns. Our adjusted free cash flow was $158 million, driven by lower trade working capital compared to last year, and these results help us reduce our overall net debt position by $124 million compared to Q2. These results allow us to continue to pursue our balanced cash deployment strategy, including increasing our dividend and repurchasing shares under our increased share repurchase authorization. Looking forward, the microeconomic market remains uncertain, and unfortunately we expect these conditions will continue through the remainder of 2012 and into the second quarter of 2013.

We are making progress on items that are under our control. Like customer focused innovation, productivity, and cost control. We expect fourth quarter earnings to be modestly better than prior years. As we take and early look into 2013, we see a clear path to our long-term objective of 12% to 14% growth, but we don't expect it will come from a robust external environment. We see overall end market demand for our products flat early in the year before starting to strengthen in the second half. So our focus will be on settling specific initiatives we have been sharing with you for quite some time now. Items like the Acetate facility rationalization, the Nantung expansion, the ethanol start up at our Nanjing facility, and other ongoing productivity efforts. We will also increase the effectiveness and speed of our new product introductions to help us drive growth, as we showcased in Houston last month. With that, let me now turn the call back over to Jon for Q&A.

Thanks Mark. Shannon, let's go ahead and open the lines for Q&A. I would just remind everybody that we would like you to ask one question and one follow-up so that we can move through as many questions as possible. Go ahead, Shannon.

Thank you. (Operator Instructions). Our first question comes from David Begleiter of Deutsche Bank. You may begin.

Good morning. Mark, could you comment on what you are seeing in China for acetic acid pricing and volumes, and I know you don't expect things to improve until early next year, but just how low will things be in Q4 and Q1 in your view?

Well, David, we have certainly seen quarter to quarter sequentially, we have seen price decrease a bit, and we have seen volumes decrease a bit as well. China remains a pretty anemic marketplace. I don't think we have any expectations that it would slide further, but everyone is a bit cautious as we enter the end of the year, over concerns that people would take dramatic steps to drop inventory, and that sort of thing. But absent that, I would say that we are pretty flat to a slight downward trend. Doug, do you have any comments on that?

No, David I would echo what Mark said. If you put this in perspective, whether we talk about where we were last year sequentially, last year at this time, as you know, we saw high utilization in the industry, had pricing up probably $100 a ton higher than it is today. Sequentially, we seem to be very modestly down, and we think that we have hit bottom, if that is the right term for China. So our assumptions going forward has us looking very much for this year and frankly into next year as we do in the quarter here.

Doug, just on Singapore, what is your thinking on that facility? Is it structurally impaired long term? Have you found ways to lower the costs there? What are you thinking about Singapore longer term?

I think our view on Singapore today is the same as we have echoed. If you step back again and you look, just to put in perspective, because we get asked this question a lot. Singapore continues to be utilized and to have a role in our global footprint. The reality is that over the course of the year we have operated that unit probably about 35% to 40% of the time this year. Whether that is for balancing our system where there is a need for acid in the derivatives, whether that is to cover turn arounds like in the case that we just did in Nanjing, and quite frankly to take selectively opportunities in the marketplace to position it. Going forward, Singapore still has value for us. Clearly we continue to look at options for improving it, but next year I think you will probably see more of the same in terms of operating unit, barring any stronger recovery or restoration post the new year, and whatever you believe might happen in southeast Asia as well as in China.

David if I can add a little bit, from a cost position, we are at a feedstock disadvantage there, raw material disadvantage to Singapore. And we don't see that situation dramatically changing over the short term there. There are periods of time when that cost disadvantage is overcome by other things. And that affords us the opportunity then to operate as Doug has mentioned.

Thank you. Our next question is from Lawrence Alexander of Jefferies.

Good morning. This is Rob Walker in for Lawrence.

Hi, Rob.

Hi. I guess firstly on POM, can you give me an outlook for POM, and whether the gains you made this year will provide a tailwind to next year?

Let me answer that, Rob. So this year you have seen particularly in this quarter you have seen some margin improvement in POM, largely coming from select pricing increases. Some of that may actually be some mix effect as well, and some favorable feedstock advantages in the raw materials. This is, as you well know, this is a value and use model. We go into the marketplace with the products that we offer, the solutions that we are doing with the customers, and we seek higher value propositions. We don't adjust pricing up or down just based on raw material feedstock. So we will benefit as feedstocks move down, and sometimes you will see a little bit of compression, but I would say directionally, and the same thing for next year is we have got a healthy pipeline. We have got some enthusiasm for some of the markets that we are working in, and we will continue to look at selectively spots that we can go on in and move price.

Thanks, and then just to follow up, you had good free cash flow this quarter. Can you remind us the levers that you have to pull potentially if things worsen into next year, and if it lingers longer, the levers you can pull to increase free cash flow next year? Thanks.

I would start with working capital. We are always continually focused on making sure that our inventory balances are in line with what we anticipate market demand to be. We have also already taken action around plant rationalization and productivity that is going to benefit us next year, whether it is the Spondon shutdown, or our general productivity programs built in our plants around energy cost reductions and waste reductions. So I would say that those are the two main levers. Then beyond that, Mark mentioned in his opening comments that we are focusing on accelerating those things that we can control in the innovation pipeline. So we would expect to continue to push hard there, and bring higher valued products to the market faster.

Thank you. Our next question is from Vincent Andrews of Morgan Stanley.

Thanks very much. Question about 2013 and the second half, and maybe it is related to China. If you could give us a sense of what your view of the government turnover is going to be, and any potential stimulus, and the impact that maybe waiting for this is having on your business, both before and then ultimately after? I guess what I am sort of wondering is about If they stimulate, if it is more consumer oriented or consumer spending oriented than infrastructure, how are you thinking about this in general?

Thanks, Vincent. They are in the middle of the fundamental change in leadership structure and the government of China. We have coming up November we have the change, the Communist party changes, and then the government changes occur follow-on in March of next year. Our view is talking to government officials there and business leaders is that the uncertainty around government policies, and policies that are going to be pushed or endorsed is causing some of the economic weakness that you see in China today, and it certainly has had an impact on foreign direct investment.

But you also need to realize that things like sovereignty in Europe has had an impact on foreign direct investment in China. What we see is as the new government as it really positions itself in March of next year, is going to be quite clear on the programs and policies that are important to it. That in itself will provide an opportunity for enhanced growth. We do believe there will be stimulus, although I don't think it will be the kind of infrastructure stimulus that we saw several years ago. We think it will be more directed at consumerism, and steps that can be taken to improve quality of life for the citizens of China. We feel good about China in the second half of next year, and we think growth is going to be stronger in the second half than the first half, and we think growth overall in China next year will be much stronger than it has been this year.

Is that what drives your view that 2013 improves in the back half, other than obviously soft comparisons, is that what the real driver is?

Absolutely. It is the real driver, and I think having said that it is the unknown in all of this, Vincent, is what the ripple event is going to be of Europe. Europe is still sliding. At least in our equation we see it still sliding. We are seeing automotive trending down, although there is a modest trend upward in theory this quarter in automotive. But we are seeing Europe trend down, and the US is a big question mark. So we are kind of taking it on faith that things are going to stay about like they are through the first quarter into the second quarter next year, and China is going to be a real indicator for what should happen to our earnings, and other's earnings later next year.

Thank you. Our next question is from Nils Wallin of CLSA. You may begin.

Good morning, thanks for taking my question. First off, interested in the margin improvement in Advanced Engineered Materials, how much of this is improving your cost structure versus bringing on your POM facility?

Yes, thanks for the question. In the quarter I think as I tried to indicate before, we have got prices moving up and we have got feedstocks moving down. Generally we will think of that total in terms of margin. When you ask about our new facility, our new facility gives us certainly the capability to be able to expand and grow with the innovation programs that we are offering. So the short answer near term is that you have seen in that business, I think the strength across the whole portfolio of products where we can selectively increase pricing. We have been doing that all through the year, and we will continue to seek places where we think that value can be improved. As feedstock gets better, we expand the margins on that as well.

Thanks, just a follow up. You noted a weakness in EVA. Is that solely due to photovoltaics, or are there other markets that are also pressuring that product?

Think of it largely influenced by photovoltaics. That is a marketplace that today is substantially oversupplied. If you look between the movement here across the year, there is some timing in there as well, where we would have had some of our sales in revenues, so when you look at Q2 versus Q3, you really have a stronger elevated Q2 as a result of some of that, but largely photovoltaics plays a role, and it will continue through the first half of next year to have an impact on us.

Thank you. Our next question is from Kevin McCarthy of Bank of America. You may begin.

Yes, good morning. A big picture question for you, Mark, on ascetic acid and the shape of global cost curve. If I look at history your EBITDA margins today are running about half of the prior peak in 2005, and maybe 600 to 1,000 bips below the shoulder years in 2006 through 2008. As you look at the cost curve today, do you think that it has flattened? That is to say, do you think the medium-sized Chinese competitors have become more capable, or is that not the case, and perhaps we are just seeing a weak demand environment here, such that if the environment does improve you could envision margins kind of going back up to that mid to high teens level? I would be curious to hear your thoughts on that.

Yes, really let me kick it off and others may want to join in here, but we believe the curve has flattened to some degree, Kevin. Some of the larger producers in China have certainly improved their position a bit. So where it was much deeper in those periods that you are talking about, now it is flatter. I think the second part of that is you can't overestimate the industry sloppiness associated with running at a 75% industry utilization. In prior periods of time, we tended to run at a much higher average industry utilization, call it mid-80s. So the ability then to influence margins, or to have margins influenced by a disruption or an event like that was greater then than it is today. I think the combination of those two put us in a little bit different situation with acid. So, yes, it is a bit flatter.

Kevin, let me just add, it is Doug, as you walk through the chronology there, and you go back and mention the peaks in 2006, 2007. I think structurally it is different, and I couldn't agree more with Mark's comments, first of all that there has been catch up and some compression, but recall in 2006 or 2007, we had very high cost umbrella technology that was out there. The guys in the Southeast that were operating on ethylene based technology, which was the highest cost, and you are talking about the difference in current technology platforms versus those of $100 to $150 a ton. Those are gone. Those are shift down, those are finished and out. Structurally if you are thinking about the peaks as it was in 2006 or 2007, I would say that we have had a structural adjustment that would make it hard for me to see those kind of numbers restored. Having said that, and resetting to where we are today, it was just a year ago where the industry was operating at 90%-plus, and you saw pricing at this time last year, you saw actually in Q2 swinging into Q3, acid pricing was $600, pushing $600 and then in Q3 you saw it about $100 higher than it is. That is real, and I think that speaks to still you saw ours remains up, and it speaks to the strength of the curve.

Thank you for that. That is helpful. And just a quick follow-up maybe for Steve. Can you could comment on the likely pace of execution against the new $400 million share repurchase authorization? Thanks.

I would say that our approach is consistent with what it has been and will continue to have a balanced use of cash. I also mentioned that our cash generation has been strong this year, and we are in a very nice position at the upper end of our targeted range of cash in the 930 level. We said we wanted to keep it between $500 million and $1 billion of strategic cash available to invest in the business. So I would expect as we go forward, that we will still maintain cash in that range, we are in the upper end of it. We do think that buying back shares makes sense, given the multiple of business today. We also want to pay down debt, and continue to look at dividend increases, and invest in the projects that you heard us talk about, particularly in Houston around technology and innovation in ethanol as well. So yes, I would expect us to continue to buy back shares over time, and we are positioned to do that with our cash.

Thank you. Our next question is from Frank Mitsch of Wells Fargo.

Good morning gentlemen, one thing I haven't heard a lot on this conference call season was records, and obviously you guys set a record on the emulsion side, and you talked about raws being a big part of that. Can you give us more color on that, how sustainable is that, and what are your expectations there?

Yes, Frank, so you saw in the quarter Mark mentioned record earnings. Our volumes were strong as you would expect for this time of the year. Also we saw a combination here again of price movement up, and advancing favorable feedstocks as well. Now recall we say over time, that is a business that tends to lag a quarter or two in light of its feedstocks, but I think what is noteworthy for us here is the success that we have had in being able to grow our vinyl space with these emulsions, displace other technologies, and being able to get the value out of that that you would expect.

So going forward, We are Q4 and into next year, as we indicated the outlook for that business is continued growth based upon macroeconomic environment. The other thing I will mention, is a large part of that business sits within Europe. Again we have talked all about the headlines in Europe, to the extent that we see a normal fourth quarter, we would say that we would see normal seasonality in that business, barring anything where we see early pull back or any kind of unexpected destocking going.

One other structural to add to that, to what Doug said, we have also had success in China with our commercialization of our second unit. So when you think about structural changes, in addition to what Doug said, that will provide a consistent engine of growth going forward as well.

Order of magnitude in terms of the capacity addition for that?

I am sorry, Frank, one more time?

The order of magnitude that added to your overall emulsions capacity? Your roughly what percentage of increase, what is that?

We doubled the size of our Asia capacity with that last expansion, and that is probably on a global footprint think about that as somewhere about a 15% range on our footprint.

Great, great, lastly, one of the things that you obviously talked about in September, was the CelFX technology, and actually I have heard a thing or two in the marketplace since then, that gives me a bit more confidence in that technology. Can you remind me of the timing of the opportunity that you see there, where do you think that can go to?

Yes, I would love to hear what you are hearing, by the way Frank, that would be great. I think as we told you at our Technology Day, and don't put time limits on this, we are encouraged. We are out there with all the leaders in the industry. This product is being looked at, it is being sampled, it is being tested. Long term with success you can think about this maybe as much as maybe 20% of the earnings of the business coming out, but I want to caution you, that is ultra success. So pick a range within there. We are still early in the process. We think it has a place in the global market, particularly in those markets today where in Asia, where they use carbon based filters as we shared with you down in technology. And when you carve that out and look at it, pick a number, 15%, 20% cautiously of what it might represent to the long-term success of the business. Does that help you?

Thank you. Our next question is from Mike Ritzenthaler of Piper Jaffray. You may begin.

Good morning.

Good morning, Mike.

I want to explore a little bit the inventory levels for the Specialty Products and the AM if we could. We have seen from other companies that have reported this season that Specialty Polymers levered to the auto markets have produced pretty robust year-over-year growth, versus what we have seen in Advanced Engineering Material, which is flattish on the EBITDA line to maybe slightly down. I think it would be helpful for a little bit more context around what is driving that, if it is inventory levels at the customer level, or some other factor?

We talked about this business, and having some visibility out there, usually about 30 maximum 40 days on our view. We also talk to them and measure inventory. I will tell you that is something that we watch very closely, typically today the lead times between the time they order and the time it actually goes into production continues to be narrow. For us, we don't think that there is a significant amount of inventory that is in the chain today. We have taken steps here to moderate our levels to be certain, particularly going into the end of the year, that inventories are lower. The other thing I will mention here is that as we have brought up and commissioned our new asset in Germany, certainly as we commission, we have run that through, we have got some inventory. We have got inventory built for certain customers over a certain period of time that we have committed to as part of this transition, but we are working those down and working those off. So for the industry, I don't think there is a huge amount out there, and for us, we continue to monitor and watch it closely.

A few things on the financial side, keep in mind that that business has a nice profitability position in Europe. We have got a bit of headwind on currency when compared to last year, since that was your reference point. Also our [Ibn Sina] the joint venture equity delayed is on a lag, and we saw some MTB pricing decline in the second quarter that rolled through in the third quarter. So if you look at the base business, you have actually got a nice margin improvement.

Alright, that helps. And then on the Nanjing facility starting up late 2013, for some reason I was under the impression that you were targeting mid-year, but maybe that was for completion, if you could straighten that out for me? And then one final question on the catalyst performance, it was great to be able to see the unit at the Technology Day, and I wondering if there was any update on the catalyst performance versus expectation?

The unit will be mechanically complete sometime around mid-year. So it will be the end, or probably early third quarter when that happens. So it will take us a little while to get it up and running, so we are calling it late in the year. I expect by the fourth quarter we will have it running, that kind of time frame. Catalyst is performing as anticipated. We are really excited about performance, and we are getting ready to in a matter of weeks actually shut the unit down and modify it for Gen 2 operations, which includes a higher efficiency, lower cost catalyst as well. We are very excited about the performance of that unit, looking forward to demonstrating Gen 2, and moving on with future installations.

Thank you. Our next question is from Bob Koort of Goldman Sachs. You may begin.

Good morning.

Good morning, Bob.

Maybe I will start be being a little obsequious, but I really appreciate you putting out the numbers, the script and everything the night before. It gives us a great chance to study it and then ask more insightful and more time for questions. Thanks to Jon and the team for that. Maybe now I can ask some tough questions.

Yes, yes.

When you guys take down Nanjing to connect up this ethanol unit, do you expect that Singapore will be at full production to offset whatever production decline that you might have?

The real key for us in Singapore will be if I can say that, will really be the economics of that unit, can we run it and make any money. That depends a lot on the feedstock cost position on that unit as well. I don't know if we can forecast what is going to happen there.

Mark, if I heard you correctly you said there were periods when your technology advantage cannot offset the raw material disadvantage. Can you help me to quantify or qualify, that raw material delta, how from the outside would we track that?

Well, I don't know how much of that I actually want to share, but in terms of dollars per ton, Bob, we share with you guys pretty specifically the range of margins that were available through our technology upgrade. It happens if someone can back in a grade, and get a real sweetheart deal from a feedstock point of view that could trump the margin that we have. I don't know if it has ever really happened in the full sense, but it can take the edge off of our margin.

The only thing I could point you to generally is, I think if you were to generally look at margins today, I think it would be reasonable to assume that some of these lower-end margins today, that the other guys still remain modestly above cash cost. There is some difference in there between our technology and those swings in raw materials. But if you think about it being marginally even with those raw materials both at cash cost.

Bob, we don't crack ethylene, but if you look at it, it is almost like a feedstock from an ethylene cracker point of view. Feedstock can be an advantage or a disadvantage, some producers can have economics that roll through because of their advantaged situation.

And speaking of cracking ethylene, is it conceivable your new methanol unit could be structured as an MLP for a much lower cost of capital?

Our new methanol unit can be structured as a methanol olefins, is that what you are saying? No, no, I don't think so. You are talking about Houston?

It seems that all sorts of crazy things are going into MLPs these days. Once upon a time Borden Chemical I guess was an MLP that had a methanol plant. The last question if I might, you have given the bridges before about what 2013 might look like, and you have been pretty consistent that you could get $0.50 of self help for your $0.50, and then whatever the macro brings you. Are you still comfortable with that kind of range?

That is what we are saying with the 12% to 14% is that we are going to, we are kind of ignoring what is going on in the world, and we are going to work hard to make sure that we can deliver what we can deliver. That will give us the 12% to 14% or so growth. We are not taking credit for the outside market, or things that we are really calling the market pretty flat year-over-year really.

Thank you. Our next question from Hassan Ahmed of Alembic Global. You may begin.

If I can carry on with this guidance conversation, the comments that you were making earlier. If I were to keep the Q4 2012 numbers flat with Q4 2011 numbers, that would imply call it around $3.70 or so in terms of EPS. Then you talked about internally, be it from Nantung, or Nanjing ethanol, and the like, and then the Spondon closure, generate another $0.50 or so. That gets me to $4.20. So obviously fair to assume that you are not really factoring in any recovery in terms of acetic margins?

Those are, I am not going to argue with your math. That is roughly the way it works. What we are saying is that when we look at individual businesses, and we factor in recovery and lack of recovery, we can see some businesses sliding that haven't slid yet. We are not comfortable that Europe is at the bottom and starting to rebound. Europe still appears to be sliding a bit. We have some positive uptick in acetiles and other areas that we think could happen equally, we think some other businesses may slide a bit. So the net of all of that we think is pretty flat. It is awkward for us to talk about that today without more clarity. I think as we get into the year we can provide clarity on that, but for now it is the things we control.

Fair enough. Of late it seems that at least on the Chinese spot pricing side of things, acetic it seems to be sort of moving upwards. What are you seeing out there? What is really causing that? Is it just rationalization of facilities, or is there anything on the demand side that you are seeing?

I think that while you see very modest movements, we would consider it to be relatively flat. $10 to $15 up one point maybe reverses itself. Generally market conditions today keep it relatively flat.

Thank you. Our next question is from Chris Nocella of RBC Capital Markets. You may begin.

Just to follow up on AEM. Can you give us a sense of the current loading, or maybe operating rate at the new plant in Frankfurt, and maybe the margin potential of that segment as volumes improve and you fill out the facility a little bit?

Yes, if you think about where that facility is today, I would think of it today as we ramp it up, probably in the 60% to 70% range today, and frankly what it runs at really will depend on what the world looks like as we turn in to 2013. Remember too, that we added an additional 40,000 tons of capacity on top of what we had. So we shouldn't be alarmed by what its run rates are. That was intended to give us the kind of growth over the next several years.

One other area of growth in broader Asia is in our polyplastics joint venture, we have got a new facility going into Malaysia that will serve the broader Asia region. So that will also contribute to our capacity and ability to grow in that market.

On the Analyst Day, you mentioned that you are in negotiations with a major Chinese state-owned refiner that is in process currently. Is there any way to get a sense of the timing of when we could see some additional steps? Do you think it is sometime this year or maybe potentially early next year?

The question about China or Indonesia announcement?

With the Chinese state-owned enterprise.

We are in dialogue with multiple customers in China. I would say at this point, given where we are in discussions and negotiations, it probably wouldn't behoove us to set a fixed time on that, but what I would say is that the discussions are progressing well, that there is interest. We continue to identify additional value that ethanol can bring in the marketplace, and we are making forward progress. The number of folks that we are talking to has increased. So I would say in general we are heading in a positive direction. China is a big, complex market, and this is a new product application for China, so I wouldn't tie down a specific timing at this point. We will keep you updated on our general progression and discussions.

Thank you. Our next question is from Jeff Zekauskas of JPMorgan. You may begin.

Good morning.

Good morning Jeff.

In the 1.3 million metric ton methanol plant you plan to build, is it possible that you might go it alone without a partner? And secondly, in which quarter and in which year do you expect to bring that plant on?

Jeff, I think we could do it without a partner, yes. I would prefer not have that much cash tied up in it. We are going try to bring a partner in. We are looking at completion by mid-2015.

In 2015, okay. And then secondly, in your commentary you said that the acetate facility rationalization at Spondon might reduce fourth quarter volumes in acetate tow. I was wondering why would that be the case? Because presumably you would build inventory at Spondon as you closed it. Then secondly in the course of your commentary, you said that there were various businesses that could slide that haven't slid yet. Which are those businesses?

Jeff, let me take the acetate question, and your logic is right. We are transitioning now with the shutdown of Spondon. We have been over time building some inventory to support it. Part of this transition has us bringing that down, has us de-bottlenecking our other facility at Lenocken, which we shared with you. The ability for us to transition over time in the plan includes continuing to build inventory as we go forward. So you would see a hit in the fourth quarter. Have we rebuilt all of the inventory to replace Spondon, the answer is no, we have not. That has been part of a conscious plan. I think as we move through the latter part of this year, and frankly into next year, as we balance that system, as we get those lines running, and continue to build inventory support you will see some modest decline over time. We would expect that, though, as we move into later part of next year, that we will start to see that more normalized.

The other thing that I would add here is we also have a major turnaround coming into a facility that is under plan for early 2014. So you are balancing several things in your inventories to bring Spondon down, as well as you think ahead for that as well. That is why you transition all of the way through the quarter. Having said that, it will not have an impact on the profitability of the business, and we will continue to see some improvement in that business across that time.

Jeff, let me try the second one there. My worries are specifically Euro-centric. We just went through a process where we saw Germany initially announcing that there will be some positive auto builds quarter to quarter, only to have that reversed with announcements of extraordinary shutdowns. Europe is currently forecasting volumes down 5% or so in the auto sector, and you have already got France and Spain in record low volume production, and you have got Germany coming off of, the set number is going to get worse. And yet to see a resolution to the sovereign debt crisis. We are concerned that that will ripple into other markets and activities there. That is the real basis when you say that other businesses could slide.

Just to piggyback on Mark's comments, you can apply the same logic to where our industrial specialty business is, has significant exposure into Europe, and we are just uncertain with what happens there. Also we mentioned earlier, things like photovoltaic that in our EVA business, that is going to take us the first half of next year to work through as well, and we anticipate softness there where we saw quite a bit of strength in that market in the first half of this year. There are a lot of puts and takes to the cautious tone that you are hearing here.

The last thing I will say is that Germany just announced further reduction of GDP forecasts 2% down to 1%. That process has not run its full course, and we will work to manage that in a way that is good for Celanese and our shareholders. But it leaves me a little concerned that we will see some takeaway from base business as we enter next year.

Thank you. Our last question is from Duffy Fitchers of Barclays. You may begin.

Good morning.

Good morning.

Wanted to go to the Nanjing retrofit with TCX, and with the oversupply of acetic acid in China today, what is the potential for additional retrofits at Nanjing going to ethanol? And then both with what could be an additional retrofit and the original one, what is the variability to swing that between ethanol and ascetic acid as you get to some equilibrium point, and would want to have some flexibility down the road?

Well, there is the possibility to do additional ethanol at Nanjing. It is certainly something as we look to implement Phase two that we are going to consider in that. We will always design that from the Nanjing point of view where you have got some feedstock flexibility. The more you move into fuel however the less feedstock flexibility you have by definition, because you will be satisfying the third party in their demand for ethanol as part of the fuel circuit. But in the industrial market we have the capability to put it into ethanol or put it into SVAM or acid, we could go a number of ways. So building out that unit to give us more flexibility is something that we are looking at.

Okay, and then we have talked a lot about acid, but within AI can you talk about the downstream derivatives? You talked about the flattening curve at the acid level. What has happening in the competition in the downstream derivatives, particularly in China over the last year or two?

Yes, it is probably the same kind of response we have given before. In the downstream derivatives it tends to be more of a demand issue than anything else. I don't know that I would call out by any means a competitive issue. And a lot of what that downstream derivative again is tied to things that happen globally. A lot of it is consumed in Europe, in the downstream esters, the acetile esters businesses specifically.

You typically have seen margins hold up a little bit better there, but it is volume and demand. India has had an impact, a substantial amount of that particularly in Asia that is consumed and used in India. I think you know the story there as well, that this year you have seen very modest growth relative to what India has been. We would look for some recovery and strengthening there in the downstreams to contribute as well. Duffy, I just leave it as we see it less as a competitive issue, and just a real demand issue.

Thank you. Now I would like to turn the call back over to Jon Puckett for closing remarks.

Thank you Shannon. We appreciate everybody's time today, and I will be around for questions throughout the day and the rest of the week.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.