塞拉尼斯 (CE) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Celanese Corporation first-quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

Today's conference is recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jon Puckett. Sir, you may begin.

Thanks, Mary.

Welcome to the Celanese Corporation first-quarter 2013 conference call. My name is Jon Puckett, Vice President of Investor Relations. With me today are Mark Rohr, Chairman and Chief Executive Officer; and Steven Sterin, Senior Vice President and Chief Financial Officer.

The Celanese Corporation first-quarter 2013 earnings slides -- earnings release was distributed by Business Wire yesterday after market close. The slides for the call and our prepared comments for the quarter were also posted on our website, www.celanese.com in the Investor section. All of these items have been submitted to the SEC and 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 the posted slides.

Also some of the matters discussed and presented include references to non-GAAP financial measures. Explanations of these measures and reconciliations to the comparable GAAP measures are included in the posted 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, to the call this morning. We released our prepared remarks last night, so I'll be brief before moving on to questions.

For the quarter, we reported adjusted earnings per share of $1.14, which includes the acetate dividend of $24 million, or $0.12 per share. This represents a 44% year-over-year growth, and a 54% sequential growth on revenue of about $1.6 billion. Segment income margin increased to 16.8%, which is more than 400 basis point improvement sequentially and year over year. Our margin expansion reflects good operations, favorable mix, some pricing momentum, and to be honest, a lot of focus to deliver on strategic actions.

We generated good cash flow this quarter, reporting operating cash flow of $147 million and adjusted pre-cash flow of $64 million in what is typically a tough quarter for us. We continue to invest in growth projects like ethanol, and remain well-positioned for growth initiatives and the balance capital deployment strategy.

We are all really pleased with these results and the Celanese team's ability to deliver strong performance in the face of soft demand in some of our legacy markets in some of the important economies for us. As we look forward to the remainder of 2013, we expect continued economic uncertainty. As a result, our growth is going to come from Celanese-specific initiatives like productivity, our acetate footprint rationalization, the expansion of our China acetate ventures, and the start of our ethanol production in Nanjing. But we also expect to draw growth from our efforts to support customer needs to help them be successful. Our success in working with customers is reflected in these earnings and gives us confidence we can deliver on our objective of 12% to 14% adjusted earnings growth in a very challenging year.

With that, I will now turn it over to Jon for Q&A.

Thanks, Mark. In order for us to get to as many questions as we can, we will ask you to limit to one question and one follow-up. So Mary, I will turn it over to you.

(Operator Instructions)

David Begleiter from Deutsche Bank.

Mark, just on a -- sequentially, sales rose roughly $30 million and EBIT increased by 23%. What really changed sequentially that drove this 77% operating leverage in the quarter?

Well, there's lot of things involved in that. When you look at -- and I will roll down the list here that pop in my mind and ask Steven to hop in here, as well. When you look at, David, the industry in general, we are seeing our ability to increase penetration in autos continue to grow. And the way you should think of that from an opportunity point of view is, in an ideal world we could move roughly 7 to 8 kilograms of material per vehicle around the world. Globally they were roughly 25% of that kind of number. And we are seeing year-over-year non-percent growth in that penetration.

So we continue to see that penetration growth. And to be honest, there was some vehicle uptick sequentially around the world, maybe 3% or so. So that was one vehicle. Another vehicle is, is that we are actually in a lot more -- we have a lot more avenues we are selling into. And we are starting to have more success selling into the electronics area, particularly the low-voltage electronics like cell phones, or smartphones. And those things are starting to really generate some positive traction for us. Medical was good this last quarter. And that hit us from a favorable point of view from mix perspective, David. So you are seeing some of the uptick with that.

That's what I would say. Steven, is that good for you?

Yes.

That's great. And Mark, just lastly on China, have you seen any, in last few weeks, any uptick in demand in acetyls in China?

No, China, if you want to be optimistic, is sideways, David. I think you could be a little bit pessimistic. There seems to be signs -- they are anecdotal in some ways for our business -- but there are signs that things are actually slowing in China. Our business is pretty -- has been pretty steady. Pricing was down a little bit from the fourth to the first quarter, and volume was down a little bit in that region. We made it up in some other regions, but that region was weak.

Thank you very much.

David, one thing, too, as you look at our Business in China, keep in mind that a significant portion of our earnings come out of our acetate joint ventures, which we continue to see modest growth in. And also from our expansion. And we, however, still continue to have good success in bringing some of these high-volume ADM applications that Mark mentioned into that market that really, they are a fraction of the rest of the world, particularly in auto, on the amount of pounds per vehicle, kg per vehicle, of our ADM products. We see opportunities tending to grow there as well. But from an overall more difficult Chinese economic environment.

Thank you.

Thanks, David. Mary, let's move to the next question.

Laurence Alexander from Jefferies.

This is Rob Walker on for Laurence. I just wanted to get some clarity on an AI and the price and volume declining, but your profits are rising. Is that -- was there about $30 million or so of productivity there helping year over year? And what was happening in raw materials?

On a year-over-year basis, that's a really awkward comp. Because you recall early last year, I mean, the world was kind of coming to an end in AI. So you want to go through it year over year or sequential?

Year over year.

Okay, well, volume and price were both down. I think if you look at it in a broad sense over that period that you said, the reductions in some of our cost equations, some of the variable costs, raw material input costs were way down. And that more than offset the volume and price.

Yes, if you recall in Q1 of last year, that's when we began to see the beginning of European slowdown, as well as India begin to really decelerate. And there is a bit of deceleration in China, which led to a pretty rapid de-stocking, particularly in this chain. And so there was some margin compression in Q1 last year. It probably dipped below our normal levels last year on margins. And over the last year we have worked really hard to try recover and get closer to what we think is the right level of variable margin. So raw materials are part of that.

Okay. In terms of the variable, I understand that maybe fixed cost absorption may have been better. Why would variable input costs be down year over year?

Well, ethylene price is way down year over year, CO cost is way down for us year over year.

Coal is down.

Coal is down year over year.

Natural gas.

Okay, thank you.

Okay, thanks, Rob. Mary, let's move to the next question.

Kevin McCarthy from Bank of America.

Good morning, this is Alex Yefremov for Kevin. Mark, as we approach in the start up of industrial ethanol, how should we think about incremental cash margins in that business versus your Acetic Acid business? In current environment?

We have a pretty modest number in for this year. Marginally, its -- we said $0.05 to $0.10 of contribution this year in that business. So I think it is pretty tight. So not a huge -- in industrial ethanol, not a huge uptick from acid margins or contributions.

We will see more next year as me move forward. Ramping up the unit, as we've announced, is mechanically complete. The key part now is make sure we get our commercial contracts lined up properly, and begin to produce and bring product forward. So really you are seeing most of that benefit in the back half of the year, so it is just a small part of the year. But it is incrementally positive to acetic acid.

And a follow-up if I may. In a -- the positive mix shift that we saw in the first quarter, how sustainable that is. Is it the new trend level for the remainder of the year? Or this was a particularly good quarter?

The quarter was -- it was a very good quarter. And medical is not as writable as some of the other businesses, so that kind of rolls through. So that may be down a bit. I think some of the pricing activities we undertook will be with us and should carry through for a while. I think most of it can stay. I mean, not all of it, but most of it, Alex.

Yes, we've got -- a part of this is our volume. We've got our German plant fully up and running on both lines. So we've got more flexibility to keep volumes where they are, but also improve the mix at the same time.

Thank you very much.

Thanks, Alex.

Mary, let's go to the next.

Robert Koort from Goldman Sachs.

It is actually Brian Maguire on for Bob today. Congratulations on a good quarter, guys. Just at a really high level, I was hoping to just try and bridge the EPS from the first quarter, $1.14, to your implied guidance. If I read the guidance right, it seems like you are implying about $4.56 to $4.64 for the year. And you did about $1.14 in the first quarter. So just annualizing the first quarter number, I think you get to the low end of the range, and then you are sort of implying $5 to $10 from ethanol later in the year. So just wanted to see if we were missing anything there. Or if there's any other moving parts we should be aware of.

I think when you look at it, that's as good a job as -- it is probably a better job than we actually should do to make that proclamation. What we have said all along is that our performance this year, that 12% to 14% is going to be based on what we deliver, Robert, and not what the market delivers. But there is a thematic there, which is the market doesn't take anything away from us. And I think it would be a little bit foolish to assume that -- I'm sorry, Brian -- I think it would be a little bit foolish to assume that the market is not deteriorating some as we go through this year. So I think probably your numbers that range a bit out there is the right kind of range. If you ask my view on that, I would be towards the low end of that range because of all the uncertainty that's out there.

I think in the -- specifically, in the past you've said you have maybe 4 to 6 weeks of visibility. Just wondering if there's anything you are seeing that indicates a slowdown there? Certainly you outperformed the auto market as far as build rates went in the first quarter. Just wondering if your customers maybe have too much inventory now or you are seeing any destocking or anything that would cause you to --

On an inventory side, these guys have done a really good job of staying low on inventory. Both in the US and Europe, they have done just a great job with that. So there's not a lot of slop in the system. There is more and more talk that the forecast in Europe is a bit high of what's going to be realized. There was some information came out of Germany today relative to that. But if you look at it from a four-week look-forward for us, we are okay. Business is kind of where we thought it would be for the second quarter. And so far, so good with that.

Great, thanks very much.

Thanks, Brian. Mary, let's move to the next.

P.J. Juvekar from Citigroup.

So Mark, you took over the Company a year ago. And since then, this is the fourth good quarter you guys put up. (multiple speakers) (laughter)

P.J., you sound like the Board right now. And that's a [Larry I'm doing].

Well, I am wondering if these margins are sustainable in AEM, or even in Consumer business where you have good margins. So I guess I have two questions. One, was there anything in the quarter like computer outages, et cetera, that benefited you? And two, have you done any strategic review of the businesses recently that led to this cost-cutting and margin step up?

In the first one, no, there wasn't anything, there were no gifts to us this quarter from someone else's sorrow. So no, everybody was running, everybody was running hard and we were just heads-up competition. We did go through an exhaustive process over the last year, P.J., really evaluating our Business and our business models, and our ability to lever those to make money. And we have been for the last five or six months putting a lot of attention in translating these opportunities to the bottom line. And you are starting to see that.

So are these margins sustainable? Yes, I think in a broad sense, they are. Maybe not quarter to quarter. You could have volatility in some of these things. But broadly speaking, they are. And I will be really honest, they are not yet high enough. So we are working hard to create business models that translate sales revenue in a very good and handsome bottom line -- margin bottom line profit.

Mark, I think it is fair to say from the strategy work we did, that one of the key areas of opportunity, we think, is doing a better job with the [voice of the] customer. Because we've got the solutions. We've demonstrated that. For example, in auto, you have some customers -- we are in 10 or 12 different parts of the vehicle, and other auto customers, you only might be in 1 or 2. So we are seeing opportunity around pricing excellence and marketing excellence to really translate these high-value applications that we already have today. It is not all new. In fact, most of it is pretty close to home, either taking new customers' existing applications or new products to our existing customers. And that's good news as you look at the portfolio that we've got, and already the rate of penetration that we've seen in the growth there. The thought going forward is we can do even more. So that was one of our key findings in the strategy.

Okay. And Steven, a question for you. You have a buyback program that you are not using currently. You also have high debt levels. So can you prioritize cash for us and where do we stand on divestiture of bond core assets, maybe like sweetener?

Yes, P.J., you're right. We've got to take care of the debt. And our intent is to pay down debt over time. We do want to get to investment grade as a result of that, not as a direct objective, but as a result. We acknowledge we've got to deal with that. The good news is we've got some pre-payable debt, the $900 million term loan that is 2016. And so we've got something out there that we can deal with, that we need to deal with, and we will. That's a critical use of cash for us. We've done a lot around the pension, pension funding. So that's in pretty good shape as of now. But we do still think that, based on where our valuation has been, that share repurchase makes sense. And so we are in the market and we continue to be in the market. In terms of M&A activity, Mark, do you want to talk about how you view that core strategy? In terms of cash?

Yes, P.J. The concept -- what we are building on here is really putting forth very solid business models. We are testing those, we are honing those business models. Part of that process is going to be to differentiate opportunities that exist for us to go out and acquire either both on businesses or major businesses there. What Steve and his team are doing is working hard to improve our -- address our capital structure in a way that we can increase our leverage and bring in some new businesses.

Could divestitures be part of that? Yes, they could. But right now we are not working hard to make that happen. We are working hard to grow every business, and can see that we have success in every business. You mentioned sweeteners as an example. And on one hand, you could argue Nutria will not fit in the portfolio. On the other hand, the chemistry there is pretty intriguing. And we put forth a new business model there and sweetener solution model that has a potential to revolutionize in that industry. And we had our first commercial sale this last quarter. So we are going to work all the portfolio here and try to create value. And eventually we may modify the portfolio. But we are not focused on that right now.

Thank you, that's helpful.

Thanks, P.J. Mary, let's move to the next.

John McNulty from Credit Suisse.

First question is with regard to methanol. I know you had been looking to set up a facility in the US. Can you give us an update as to where we are in that process?

Okay, John. So we have gone through all the detail engineering work. We are out placing orders for long lead-time equipment. We are building this plant in what's known as an attainment zone, in Houston, Texas. And that means it actually doesn't meet the natural -- the national Clean Air standard obligation. So you've got to have emissions offsets or credits. And we have now secured those credits, and we're going through the final permitting stage with the EPA. We expect to have that permit issued this fall. And they will be breaking ground this fall and be up and running by mid-2015. We are still negotiating with a partner. We are not quite in position to announce that. But we are very -- we expect be in a position before too long to announce a partnership arrangement for that venture.

Great, thank you. As a follow-up, your SG&A line was noticeably lower than it has been for a while. I'm wondering what was driving it. Was it some of the changes in the pension accounting? Or is there something else behind that, as well? And how should we think about that level going forward?

John, let me ask Steven to go into details on it. One of the things Steven has been doing is really in a broad corporate way looking at the effectiveness of all of our corporate functions, and really working to enhance that effectiveness. So Steven, do you want to comment on that?

Yes, I think what you are seeing there is the tail of a number of the productivity projects that we have already talked to you about in the past. So I won't go back to those again. But also, as Mark said, we are really looking at how do we simplify all of our internal processes and eliminate complexity? And we're finding new ways to look at that, John, that opened our eyes to ways that we can serve the customer more efficiently, give our sales people more time in the field, and also reduce costs. So it is an area that we had put focus in, in the past, but in a little different way. So we are excited about this approach and think it is really going to be a game-changer for how we operate internally and reset that cost level over time down to a lower level. So you're starting to see the benefit of that.

Great, thanks very much for the color.

Thank you.

Thanks John. Let's move on to the next question, Mary.

Gregg Goodnight from UBS.

It was good to hear that your TCX plant has attained mechanical completion. I was just wondering, in terms of the chemicals end-date, do you have an anticipated chemical end-date? And what limits the rate of the ramp-up? Is it market-limited, technology-limited, or whatever? Is there a potential upside for you if you can get chemicals in and get that thing humming?

Yes, for us in a broad sense, we will probably take the next 60 days or so to really, to be very honest, check out the unit and go through the early commissioning phases. And then we will get into starting the commissioning and actually start running and producing some product at a modest level. We are a large ethanol producer in the Chinese market, and we bring this home. And we very much want to make sure we bring it on in a paced way that is good for Celanese and proper for the market. You should be mindful as well, we are taking acid out of the merchant market to feed this unit. We also want to be thoughtful about how we do that, and how we impact our customers there. The net-net of that is we expect to be selling product as we are into the third quarter and fourth quarter. And I think we will be at full operation as of get into next year.

Okay. Second question, if I could. The Singapore plant, acetic acid plant, could you please give us an update on that plant?

That facility is part of the portfolio we have. And as we said before, we look at whether we should operate any of our facilities based on overall market conditions and what's in the marketplace. That facility is operational, and satisfying market needs primarily in that part of the world.

Okay, thank you.

Thank you, Gregg.

Mary, let's move onto the next.

Jeff Zekauskas from JPMorgan.

I think last year your Consumer Specialties business contracted in volume by about 4%. And this quarter you were up 5%. And the results were very strong. Is this a catch-up year versus last year? That is, yes, last year's volumes were unusually low relative to the industry growth rate. And so this year's volumes should be higher than the industry growth rate.

Hi Jeff, it's Steven. So want to give you a little bit of clarity because you've got to keep in mind this bond didn't shut down and mothball.

Okay.

And how we are realizing benefits from that through different ways. So we said that the net benefit of that is up $40 million to $50 million. And it is going to show up in reduced energy costs, reduced plant costs, and we've expanded our Chinese joint ventures. So we are going to see some extra volume come there. Plus, our overall mix of profitability will improve, so you will see a margin improvement. But in terms of top line volume, we will probably be down 5% to 10% this year. But profitability and sustainability of margins significantly improved. Another big step forward, both in terms of pricing and cost. And dividends.

Okay, that's very helpful. And then secondly, if you could just help me a little bit on the cash flows, in that your cash flows from operations were roughly $145 million. And your net income is, call it $140 million. And your D&A, let's call it $80 million. So that's $220 million. So how do you bridge that $220 million and net income and DNA back to the $145 million?

There will be a lot more detail on this when we do our 4Q out later today. But I'll --

Just roughly.

Yes. I will give you a couple quick highlights. The main driver is to keep in mind that the first quarter is heavy working capital quarter. So we did have north of $100 million of cash going in. The working capital is just timing. And we work most of that off during the year, like we do in other years. And our CapEx compared to last year is a bit lower, so it helps offset that. And keep in mind that in Q1 of last year we got a $72 million one-time dividend, roughly $70 million, from one of our joint ventures. So, it makes the year-over-year comps a little different. To me, if you were to normalize that out, I think the overall cash performance, excluding special dividends and timing, the working capital is much better this quarter than a year ago. And I hope that when we put the Q out, that will help answer those questions. But give us a call if it doesn't.

Okay, thank you very much.

Thanks, Jeff. And Mary, we will have this be the last question and follow-up.

Vincent Andrews from Morgan Stanley.

Thanks, but my question was just answered.

Okay. Well, folks, we appreciate the time this morning. And I will be around all day to take questions. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may all disconnect at this time.