塞拉尼斯 (CE) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Celanese Corporation second quarter 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 be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce our host for today, Mr. Jon Puckett. Sir, please go ahead.

Thank you, Karen. Welcome to the Celanese Corporation second quarter 2013 conference call. My name is Jon Puckett, Vice President of Investor Relations. With me today are Mark Rohr, Chairman and Chief Executive Office, and Steven Sterin, Senior Vice President and Chief Financial Officer. The Celanese Corporation's second quarter 2013 earnings release was distributed via 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 Relations 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 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 on our website, www.celanese.com, in the Investor Relations section as applicable. This morning we will begin with introductory comments from Mark Rohr and then field your questions. I'd now like to turn the call over to Mark.

Thanks, Jon, and welcome everyone. Since our prepared remarks were released last night I will keep my comments brief and then open the line for your questions. For the quarter we reported adjusted earnings of $1.12 per share, which is consistent with expectations of muted seasonality in our end markets and relatively consistent performance. Coming into the quarter we didn't anticipate favorable tailwinds from the global economy, which is why we focused on Celanese-specific initiatives to drive growth. And I believe our results demonstrate the success we are having with these initiatives.

Second quarter segment income margin expanded sequentially to 22.3% for Advanced Engineered Materials, Industrial Specialties and Consumer Specialties. We are very pleased with these results. We showcased our success in delivering value through innovation and marketing. Segment income margin in Acetyl Intermediates was lower in Q2 than Q1 due to Celanese and customer turnaround challenges, as well as raw material supply issues at one of our plants. These items alone reduced Acetyl Intermediates earnings by about $15 million in the second quarter.

We generated very healthy operating cash flow of $229 million and adjusted pre-cash flow of $154 million positioning us well to pursue our growth initiatives and our balanced capital deployment strategy. Given the economic headwinds we faced this quarter I am really proud of our team's ability to deliver the results we did the old-fashioned way, by earning it. Our growth objectives this year are being achieved by collaboration with customers and commercializing unique applications in line with their needs. We also need to deliver on remaining Celanese specific items like productivity and the ramp-up of ethanol production facility in Nanjing. We have line-of-sight and a lot of work in front of us to achieve our earnings objectives of 12% growth in 2013. And barring further deterioration in our end markets, we should be able to do so. With that I will now turn it over to Jon for Q&A.

Thanks, Mark. We have a lot of people on the line. We want to get to as many questions as possible. So, please limit yourself to one question and one follow-up. Karen, let's go ahead with Q&A.

(Operator Instructions)

David Begleiter from Deutsche Bank.

Mark, just on the $15 million impact in AI, what was the impact versus Q1 and versus -- and year-over-year? Was it up or down in terms of it's turnaround and then supply disruption costs?

It was the full $15 million or so Q1 to Q2 on the surface. I can't recall anything in Q2 last year. It's about the same. So, the team says here it's the same, David, either way.

Okay. And just on TCX, what's your expectation for TCX EBIT contribution or EPS contributions to the back half of the year?

Really not very much, David. We are starting that plant up slow. The ethanol market, like all industrial markets in China, is really sloppy today. We are just taking our time in bringing it up. We are not -- in our sort of projections for the year we are not counting really for any contributions from ethanol that's material.

So breakeven, basically.

Basically.

Thank you very much.

Thanks, David. Let's move to the next question.

Duffy Fisher from Barclays.

Good morning, fellows. Just a question on the issue with supply. Did that affect North America or Asia. And then was it more of just foregone sales or did you have to go out and purchase product then resell it at a loss to your customers?

Yes, both. We supply from others locations. We have a global system out there which can negatively impact you. And then we actually buy and resell, too.

Okay. And then what was the operating rate for Singapore in the second quarter?

Duffy, I am not going to get into that kind of clarity. We are running that facility. We have been running it all year and we try to run it in a way that maximizes profitability of our overall business.

Great. Thank you, guys.

Yes.

Thanks, Duffy. Karen, let's go to the next question.

Laurence Alexander from Jefferies.

Good morning.

Good morning.

Could you elaborate on -- I mean, given sort of a softer environment, the degree to which you can pull forward productivity initiatives and maybe sort of buckets or the kind of markets or sales that you might be walking away from or be it a bottom slice?

Yes. Well, on the first side, the answer to your question is we are working hard to pull forward productivity initiatives, Laurence. And that's what I'm trying to say in our comments, is that we had -- we had not anticipated business to slide as much as it's done in this year. So, we have had to -- we have already started pulling those things forward.

I hesitate to give you a specific number. What I will say is that the productive things we are working on are pretty evenly spread across the businesses. It's not more in one business, necessarily, than another business. And so I don't know that you are really going to see them as any kind of one fell swoop as they go through.

And then as you look --.

Go ahead.

And then as you look at the opportunity for AEM to or Tacona to take share in the automotive markets with the new product launches, how lumpy should we expect that to be? That is are we going to see a strong year then a slow year? Is it going to be -- it is going to take a couple more years to really show up? Or, how do you see the cadence of that?

I think it is going to be very consistent. I'm going to moderate -- modify that in just a second. But is our base business that is going to be very consistent. We have -- we think our penetration is up 5% to 6% quarter-over-quarter, as a hard example or bet. At the same time you are seeing European auto builds at the lowest level in the last two decades.

So, we are able to, through this increased penetration and applications, we are able to grow in what is even a declining market in the case of Europe. Of course, we are growing positively with a positive market in the US. When you look at AEM as a total you have affiliate earnings in there. And so, as you look at the back half of this year we have major outages scheduled at Ibn Sina. We also have impact of lower MTBE pricing rolling through that.

So, there is going to be a pretty good pressure on AEM as they get towards the back half of this year. Some this next quarter and some next year. So, you'll see the quarter-to-quarter earnings move around as affiliate earnings move around in there. But I think if you'll get year-over-year-over-year should be pretty steady.

Yes. As you look at the margins of AEM, excluding affiliates, you saw a very strong performance in the first quarter. Even better in the second. And we expect those margins to continue to hold up within that range. So, the underlying businesses Mark referred to is really our direct business, everything except the affiliates. And then a little bit of volatility in affiliates this year because of turn arounds. Overall, the base margins are strong.

Thank you.

Thanks, Laurence. Karen, the next question?

Frank Mitsch from Wells Fargo Securities.

Good morning, gentlemen.

Good morning, Frank.

On the Consumer Specialties business, filter tow business, you cited the higher wood pulp costs having a negative impact on margins. What's the potential there to turn that around or is pretty much 2013 we are going to live with the lower margins in that business because of the high RAS?

From here forward through the rest of the year it should be relatively flat. Maybe a little bit lower on average. No major changes from here. Part of Q1, a little bit lower than Q2. It's just the timing of using last year's inventory versus this year's. But it should be pretty flat.

All right, thank you, Steve. And, Steve, you spent $6 million on share buyback, obviously at a slow pace. What should we be thinking about in terms of Celanese on -- and share buyback for the balance of the year?

Yes. We think we should -- especially at this price we should be buying back more shares as we move forward. Cash generation has been strong. We are over $1.1 billion, which is the lowest since the first reporting period of our IPO. So we feel really good about where we are with cash to fund the business, where the cash is. And the $6 million really is just to keep us off spending dilution. We will be more opportunistic as we move forward using cash to buyback shares.

Thank you so much.

Thanks, Frank. Let's move to the next question.

Kevin McCarthy from Bank of America Merrill Lynch.

Good morning. Mark, would you provide an update on your longer term ethanol plans in China beyond the recent brownfield start up at Nanjing? Thinking back to your technology day, you were in discussions with a state owned enterprise. I was wondering if you could let us know is that still active? And are you thinking more about being a principal versus licensing in that market at this juncture?

Yes, Kevin. Yes, it's still active. We are still working our tails off over there. I think we have had a lot of difficulty, to be honest, getting the state owned enterprises really to engage for their own reasons. And we're taking a slightly different tact now, now that we have a plant that's starting to operate and the key word on starting, we just started up. We are going to go ahead and dewater some of that material and test it.

We are going to start working with other groups, other interested potential buyers in China and we will start working through the regulatory process ourself. It's going to be a long slug to get fuel ethanol in the Chinese market, though.

Okay. And then a second question on AEM. Your year-over-year volume growth there of 7% was quite good. I was wondering if you could provide a little bit more color as to how much of that is being driven by autos versus the other end-use markets you are serving there and what the back half of the year might look like.

Yes, it's about 50%. It's about 50% auto. In the other areas we're doing more healthcare. We're doing more in consumer electronics. We have a number of niche operations that are starting to work well for us, as well. I don't want to elaborate on too much.

But we managed to offset the weakness in European auto, in particular, and we managed to grow materially in those areas I mentioned in new markets. So, it's a very healthy portfolio. And what we're seeing is that the skill sets we bring in chemistry and applications we can apply into other markets and they are very, very well received beyond automotive. That's really what is happening for us.

Okay. Thank you very much.

Thanks, Kevin.

Thanks, Kevin. Let's move to the next question.

Robert Koort from Goldman Sachs.

Thank you, good morning.

Good morning, Bob.

Mark, when you start up your Clear Lake methanol plant what will that do to your cost structure across your acetic business?

Well, I am thinking how to answer that question. In a fundamental sense you are replacing two-thirds of the Southern contract volume. So, actually costs will go up a bit when that happens. We have opportunities to buy that other one-third at a market discount. For how much, Bob, I am not sure. So, you should have view that our costs will go up a little bit at that time.

Okay. And then as we go through the back half of the year and you start ramping your TCX plant, would you expect your acetic production in Nanjing or in Asia broadly will go down or will you still sell about the same amount in the second half?

No, it will go down as we push more into -- I mean, we have some capacity available to us. So, we can make up some of that. But largely speaking, it will go down as we move material into ethanol.

Great. Thank you.

Just one more comment on methanol, too. As we look towards our Ibn Sina deal that we announced a couple years ago, in the roughly 2016 timeframe when that unit starts up, our interest in that venture steps up from 25 to the low-to-mid 30s, which gives us effectively more cost-based methanol. So, that will be out there, as well, Bob.

Yes.

Okay. Karen, let's move to the next question.

Vincent Andrews from Morgan Stanley.

Thank you and good morning, everybody.

Good morning.

I think on the last call talking about the Nanjing startup, one of the things that was discussed was you were trying to find the right pricing or contract structure right out of the gate. So, could you just give us a little bit of an update on that?

Yes, that's one of the reasons we are taking our time with it. The markets -- the market is used to being served by a bunch of small producers that, to be very honest, that don't produce our quality. So, we are going in very slowly and trying to structure the relationships and the contracts in a way that we can maximize our net back. So, that process is underway. And we're having success with it, but I want to be very clear, we are going very slowly with it.

We are not trying to go in and jam the stuff in the market overnight. I do want to mention, Vincent, too, that so much of the industrial chemical market in China is just in turmoil now because demand has just not grown. And that certainly has shown itself in ethanol where we have seen those prices move down a bit and we are just trying to be thoughtful how we get into the market.

Okay. And just as a follow-up, you in your prepared remarks there was a reference to the liquidity issues in China, which have been in the news recently. Is there anything specific to what you're seeing or hearing from customers that's different than what we would suspect?

Well, no. I think you probably have a pretty good handle on it. But there is, generally speaking, there is a lot of concerns over liquidity as a minimum. So, you see an inventory that is just -- nobody is building any inventories. Everything is rock bottom. Everything is transaction to transaction kind of deal. People trying to push out terms to just unbelievable periods of time. So, we see that rolling through business. You shouldn't have a view that demand has dropped off precipitously because of it, but there is an element of caution that has been put into commerce there that has caused everyone to pause and to move slowly.

Okay. Thanks very much.

Thanks, Vincent.

Thanks, Vincent. Let's move to the next.

Jeff Zekauskas from JPMorgan.

Hello, good morning.

Good morning, Jeff.

I guess I was wondering why you guys maintained your earnings guidance in that normally in the fourth quarter there is seasonal weakness in AEM and Industrial Specialties, and you've got various price pressures in ethanol. So, you're not really going to have a contribution there. How do you get a fourth quarter that will more or less earn what you earned in the third or the second given these seasonal factors and the general weak economic climate?

Well, Jeff, you're right. The fourth quarter has been historically a weak quarter for Celanese. We have made structural changes to the business that aren't in prior numbers like the Spondon shutdown, like the acetate dividend normalization. We have taken steps to reduce [BU] other spend. When you add those things with incremental sales of Qorus, a little bit stronger auto build sales, we can work up to that number. But you're right in saying there is some risk with that. What I'm trying to convey to investors is that we're aware of that and we are working our tail off to try to offset those and generate that number. But there is risk.

Okay. Thanks very much.

Thank you, Jeff.

Thanks, Jeff. Let's move to the next.

Thank you. Chris Nocella from RBC Capital Markets.

Thanks, guys, and congrats on the start for the Nanjing ethanol plant. Just a quick question. Do you have a sense of what the cost curve for industrial ethanol is in China?

No, I don't. (laughter) No. I'm sorry, I don't. As we look at that we felt pretty confident that there is -- given our low cost asset position that there is good margin in that business. What is going on right now, to be very honest, is China is long on ethanol. Prices are pretty weak and so we're just being slow with it.

Okay. And then just taking a quick look for 2014, this year in 2013 you had some Company-specific things that helped earnings growth like the acetate, maybe asset shutdowns and stuff like that. Are there any Company-specific measures that you would like to highlight for 2014?

There are, but I would rather start highlighting those next quarter, if I can. We are working on a lot of things. I think you're wise, Chris, in outlining it generally speaking that there is not going to be a lot of strong inherent chemical demand growth in the world. So, you have got to go out and make your own way. We have a number of things to work and we will be happy to share those in the quarters ahead.

Okay, great. Thank you.

Thanks, Chris. Karen, let's move to the next question.

Hassan Ahmed from Alembic Global.

Just wanted some clarification around the supply issue you talked about, raw material supply issue you talked about within AI. Was this at one of your facilities or was it also a third party, one of your suppliers for, call it methanol, experiencing some curtailments or the like? The only reason I ask this is because we have been hearing a fair bit about natural gas curtailments in Trinidad and associated lower operating rates from ethanol.

Yes. I don't want to color just exactly who it was, but it was one of our raw materials provided by third-party providers. We have not had problems getting methanol.

Got it. But it's again just reading some of the journals and the like, it seems that these gas curtailments are going to get more severe. For some reason September seems to be mentioned again and again. So, are you expecting any sort of reductions in supply?

No, no, no. We're talking to those guys routinely and it's not -- we're certainly not expecting that or anticipating it.

Fair enough. Now, a follow-up on the methanol side of things. Obviously, your plants in the works as far as methanol goes. You've talked about roughly $615 a ton replacement value and there has been a couple of new -- well, I shouldn't say new, some brownfield plants that have been announced and the range is anywhere between $400 to $600 a ton in terms of replacement value. Yet it seems that some of the newer greenfield facilities would be anywhere between $800 to $1,000 a ton. So, are you still comfortable with the capital outlay guidance that you have given?

We are very comfortable with the capital outlays we have given on that. We have made substantial progress in bidding out a lot of large equipment purchases and well on our way to get that thing up and running in 24 months. Some of the ones that you have seen that have been lower -- or ones that are integrated in refineries, exist in refineries. So, that helps their capital economics because you have got existing gasification, hydrogen, that type of thing.

You are right, the greenfields have been a lot higher. One of the reasons ours is lower and closer to a brownfield is we used to operate a methanol unit in Clear Lake and we are able to take advantage of some infrastructure that was ready in place.

Very good. Thanks so much.

Thank you.

Thanks, Hassan. Karen, let's go to the next one.

Andy Cash from SunTrust.

Hello, good morning. Just a couple of quick ones here. On acetic acid, could you give us some direction? Was the second quarter margins less than the first quarter margins and how are they trending into the third quarter?

Yes, Andy, I will give you a high level overview. Utilization rates were about the same Q1 to Q2, in the [mid $70 million]. We are on a pretty flat and long part of the cost curve, as we have shown before. We don't expect nor have we been seeing very much movement in margins. On the whole China, if anything, moved up a little bit. You saw some price movement there. But rest of world relatively flat and that's what we would expect.

Okay. Thanks. And just a question on slide 11, Industrial Specialties. On the quarter you did $18 million EBIT, which is about 50% lower than a year ago. I was just curious, on that slide 11 you have got a sideways movement. Is that sideways movement compared to last year's $86 million, which would imply that you are going to have to average about [$26 million] for the remaining third and fourth quarter this year. I am just curious if that's possible?

Yes. So, what's behind that is we saw strong [acetate] demand and strong -- which particularly in Asia and strong Asian demand at the end of 2011 and into the first half of 2012. That dropped off substantially as the PV market got really long in inventory. So, our EVA system was down. However, on the other hand, our emulsions business actually a record quarter, this quarter. So, we're doing really good there with our expansion in VAE in Asia and hitting out there as well as some of the remodeling that's taken place with existing home sales.

We tend to have a better participation in existing home sales than we do in new home starts because we tend to go through the resellers versus contractors. So, emulsions is doing well and it should carry us over.

I think, Andy, there is some -- it's going to have to have a good fourth quarter, though, to your point, emulsions, to carry the [VAE].

Okay, thanks very much.

Thank you, Andy.

Thanks, Andy. Let's take the next question, Karen.

Mike Ritzenthaler from Piper Jaffray.

Just to follow up on Andy's question there, is it going to take something bold like the 10- gigawatt initiative per year in China to return the Industrial Specialties to prior profitability or are there other Celanese-specific drivers that could do that?

So, I think about it first by business. Emulsions there is continued opportunity in China and in Asia to grow our low-VOC paint coating and adhesive binder systems. And that's a very encouraging market. We have had experience there. We have already built two reactors and ramped those up pretty quickly. And that has really been in a one small part of China, in and around Nanjing. We see other opportunities in China for that. We see growth coming from that. (multiple speakers) EVA we haven't made a call yet, but the market is so long in photovoltaic and there is challenges in that market.

There is price initiatives going on between Europe and China with just import duties. So, we are not counting on that any time soon. So, really trying to drive into other markets. There are specialty markets for EVA, like medical, controlled release applications, where we can make headwinds and offset some of those photovoltaic -- it's not going to come from PV any time soon, in our opinion.

Okay. That makes sense. And we had the opportunity to taste the Qorus products at IFT this past week and we were pretty impressed with it. I was just curious about how long it takes to commercialize a new sweetener like that given your previous experience and the level of competition in sweeteners. Is there any sort of profit impact that you could provide to put Qorus in context within the larger company, including the cannibalization effects with the current products?

Mark, were you at the cocktail hour?

No. Just at the trade show.

I was just checking. Apparently, that was a big hit.

Yes.

Yes, Mike, it takes longer than you'd like to think to do this. I think we have 50 projects we're working now. We have a host of trials. We have some commercialization started and the response is really good. But it takes a while. So, I don't know quite how to say it other than that. Depending on how we range it, it can be anything from making -- these are all good contributions but $5 million to $10 million to a much, much larger number.

So, what we're trying to do is to really measure the effectiveness of our rollout techniques with each customer and get feedback on that to try to do a better job projecting. If you will be a little bit patient with us, we will start to forecast what that means as we end this year and we start looking at next year.

Yes, that makes sense.

He also talks about cannibalization, we are working real hard not to the do that. In particular, these products go into sugar replacement, these applications, either complete sugar replacement or partial. So, we see this as a new market space for our product.

All right, great. Thanks, guys.

Thank you.

Thanks, Mike. Let's move to the next one, Karen.

John Roberts from UBS.

Good morning, guys.

Good morning, John.

Sequential comparisons are usually for companies that don't have seasonal issues in their businesses. Last quarter I thought it was maybe you were making the switch because of the JVs, changing in terms of how you are recognizing that, but it sounds like it's deeper than that. It sounds like you think that with the auto seasonality or coating seasonality that you can actually smooth this out?

That's the plan, boss.

And then maybe a more detailed question. You cited specifically, North American auto in the engineering plastics business where you had the penetration, are there any model lines of cars or specific applications across a series of model lines that kind of stand out there that we can pay attention to?

Yes. Yes.

General statement, you tend to see us more in sophisticated vehicles. So, more likely vehicles where they are trying to drive higher MPG. We're in the US, GMC and Ford do a lot in that area. In Europe, the leaders in the space has been for a long time and continues to be Volkswagen. We work closely with folks like that. But you are really seeing it across the board. The German producers and the European producers tend to be ahead in terms of how much pounds per vehicle. But North America is a growth opportunity, of course, particularly in GMC.

Yes. If you look at GMC's new light, light truck, I think it's K2XX platform, is completely redesigned, brand new platform that rolls out in the 2014 model. That is an example of the model that we're heavily involved in.

And you're shipping into that now and that goes in effect in the quarter? Because you singled out in the quarter North American auto penetration.

Yes, it's starting to ramp up.

Okay. Thank you.

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

Nils Wallin from CLSA.

Good morning and thanks for taking my question. I was just wondering if you would provide us with an update as to the timing of the EPA and TCEQ approvals for your methanol plant and then how such timing may affect the goal of bringing on that plant online on time in 2015.

Yes, we are in the final phase of approval. We are going through public comment periods and there is three permits that are involved, that involves EPA, state agencies and the Corps of Engineers. All of them are proceeding very well. We certainly think by the end of September we will have those permits wrapped up and that's the timeline we are on. They could probably slip a little bit and it wouldn't be a problem. If they slip more than a month or two, it would start to impact the schedule. But right now we are meeting with these folks daily and everything is on track.

Great. And just a housekeeping question. What was the year-on-year change in volumes for Consumer Specialties given the Spondon shutdown.

In terms of total volumes for the Consumer Specialties space, there is two things I want to point out. You have got to remember last year in the first quarter we had an outage at one of our facilities that pushed a tremendous amount of volume into the second quarter. I probably want to talk about this on a first half versus first half basis. Consumer Specialty volumes in the first half were [$101 KT] and they are [$97] in the first half of the year. So, minimal impact. But you are seeing not much higher dividend come through from our joint venture.

Got it. Thanks very much.

Karen, let's move to the next question and we will have this be the last question.

Thank you. Our final question comes from the line of PJ Juvekar from Citi.

Hi. Good morning, Mark.

How are you, man?

Mark, you talked about a long slog with the SOEs in China to get them on ethanol. Do you think that China goes more with methanol in the gasoline, especially with states having M5 and M10 mandates? Any thoughts on that?

Well, I think methanol is used in gasoline today. It's used at the Provincial level and tends to be in the provinces that have a lot of coal and a lot of methanol produced as an outlet. It is not endorsed by the state and it's not endorsed by the large refining and blending industry because of the hazards associated with it. So, we don't see methanol increasing in China. In fact, it even seems to be decreasing a little bit right now. So, no, I don't think that's the issue. I think the issue really gets down to what the preferred oxygenate is.

Without getting into much detail, some prefer other oxygenates and want to continue to promote those. It's a complicated arena for us to deal in. What we're encouraged by, though, is that the social pressure being put on the government to clean up the air quality is getting very intense. So, those men and women that feel that social pressure are sort of demanding that the fuel standards within China be upgraded to international standards and that's going to be good for oxygenates like ethanol. It's going to be good for other businesses and folks that take out sulfur and things like that.

Yes. Yes. The environmental point is a good one. And then on just ethanol this Nanjing startup. You had talked about $0.05 or $0.10 contribution per quarter from that. Did I hear that maybe it's pushed out more into 2014 than 2013?

Yes, I think we said $0.05 to $0.10 for that business this year. And that's when we -- last year when we started this year, (technical difficulties) what we had looked at. The contribution this year is going to be de minimis from that business. Ethanol market's really sloppy there and we are just taking our time with it. It's really too early to forecast what the number will be for next year.

Okay. Thank you.

Thanks a lot, PJ.

Thanks, PJ, and thanks, everybody, for your time this morning. We'll be around for calls later today.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.