塞拉尼斯 (CE) 2015 Q3 法說會逐字稿

Good morning and welcome to the Celanese third-quarter 2015 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Jon Puckett. Please go ahead.

Thanks, Terry. Welcome to the Celanese Corporation third-quarter 2015 conference call. My name is Jon Puckett, Vice President of Investor Relations. With me today are Mark Rohr, Chairman and Chief Executive Officer, and Chris Jensen, SVP Finance and Chief Financial Officer.

The Celanese Corporation third-quarter 2015 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.

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 our website in the Investor Relations section under Financial Information.

The earnings release, non-GAAP reconciliations, presentation and prepared comments have been submitted to the SEC in a current report on form 8-K. We also submitted a form 8-Ka this morning to correct a clerical error on page 5 of our non-GAAP reconciliations.

This morning, we will begin with introductory comments from Mark Rohr, and then we will field your questions. I'd like to now turn the call over to Mark.

Thanks, Jon, and good morning everyone. Our prepared remarks released with our earnings, so I will keep my comments brief and then allow for your questions.

From our perspective, this quarter really demonstrates our ability to execute our strategic plans, drive what we can control and create value regardless of the external environment. We achieved a huge milestone for our Corporation in the completion of startup of the methanol unit in Clear Lake, Texas.

We started construction on this plant 21 months ago with an aggressive timeline, and our talented team completed it in record time at an impressive capital cost of less than $700 per ton. At 1.3 million tons of capacity, it is the largest, most efficient, and we believe the most economical methanol plant in the US. Truly an impressive accomplishment.

For the quarter, we generated adjusted earnings per share of $1.50. That's the second-highest third-quarter earnings performance in our history, reflecting the success we are having with our commercial models, overcoming global challenges, while also delivering on broad-based productivity initiatives across our business and functions. We generated segment income of $305 million in the quarter, and set a third-quarter margin record of 21.6%.

We continue to generate strong levels of cash, and we are tracking towards delivering record free cash flow for the year. Our confidence in our ability to generate cash prompted us to return a record amount of cash to our shareholders in the quarter by repurchasing $420 million of stock, and dividends for the quarter boosted the total cash return to $467 million. We also announced a $1 billion share repurchase authorization which we intend to execute over the next two years.

As we look to the remainder of 2015, we are confident in our ability to drive value across both quarters, continued success of our productivity initiatives and growing success in new product introductions, so we increased our outlook for earnings to a range of $5.90 to $6.10 per share for 2015. With that, I will now turn it over to Jon for Q&A.

Thanks, Mark. I'd like everybody on the phone to limit your questions to one with one follow-up. Carrie, let's go ahead and get started with the Q&A.

(Operator Instructions)

Laurence Alexander, Jefferies.

Good morning. Two quick ones. First, in your comments about the $50 million of productivity for next year, is there a tax line or is that just all cost adjustments?

Hey, Laurence. This is Mark. No. That's -- as we scope productivity, that would be a net impact. The productivity doesn't include tax in that assessment that we've done.

And I want to comment, that is just the start as -- we keep this as an evergreen process, but this time of year we start consolidating those numbers. And our first pass consolidation was $50 million, and there's more to come.

And then, secondly, as a comment about pushing 10% for -- bridge for pushing 10% growth in 2016, how much of that depends on -- what's your framework around normalized levels of demand? Or can you give us some sense of just where you see the demand levels going into next year at this point?

Well, at the broad -- let me back up a little bit on that, Laurence. I think what we're doing is we're scoping with my comments of range. We really want to share a lot of details with you guys coming up in a few weeks in New York for that plan.

Let me simply say that when a demand perspective, we do think -- I mean China has been very, very weak today, and I'm sure I will have a chance to comment more on this as we go through the call. We have a view that China is really as bad as it's going to be, and we already see signs that China seems to be recovering a bit. And we're optimistic that will see some uptick year over year in demand in China.

In the materials section broadly speaking, we are very confident in our ability to continue to grow that business through our new product introductions and efforts there. I commented on tow that we see tow as being pretty flat from a demand point of view year over year.

From an earnings point of view, demand could actually be down a bit if there's more inventory correction. So I would say broadly speaking, we see a recovering economy in China, we see a stronger economy in the US and probably the same in Europe.

Thank you.

Thanks, Laurence. Let's move onto the next question.

John McNulty, Credit Suisse.

Good morning. Thanks for taking my question.

Sure.

To your comment a second ago that you -- looking to 2016, you think tow will be flat, that would imply that you continue to see some relatively serious destocking. So maybe you could give us some update as to what you're seeing right now and maybe what's a little bit different than what you were expecting earlier this year.

Yes. We will always -- we've always been pretty guarded about how long it would take to work off the destocking there.

And I guess what I would say to you, and I always caution everyone, we don't have clarity into the markets particularly in China. And we're there every day, we have teams of people there working. It's just a very complicated market.

But what we've seen is that from the data we've seen is that it would indicate that, again broadly speaking, that their objectives in reducing inventory in China were not yet fully satisfied. So that would tell me, and they haven't told me this, but that would tell me that it's going to be probably more of the same as we go through next year.

Now, outside of China, we think it's largely run its course. But inside China, we think there's still some effort going on there.

Okay. Great. And then with regard to autos, it looks like there's at least some positive trends that we are starting to pick up coming out of China, but maybe it's a little bit early.

So when you're thinking about 2016, if we have a flat auto environment, how should we be thinking about the demand pull that you will see just based on new applications on -- say in the auto industry? I know you highlighted a bunch of opportunities in some of the prepared remarks last night.

Yes. Well, the early looks at 2016, for a broad-based 2.5% increase in volume, year over year. And the good news always for us is that's in North America and it's in Germany and it's now emerging more in greater China, which is projected to be up 3% or 4% next year versus a pretty stagnant year this year.

When we look at our ability to move in that market, we have multiples of that ratio. So two or three times that ratio is what we think. So we believe that in auto, we should be able to get 6% to 9% growth off of a 2% to 3% global growth, if that helps.

And that's -- I've listed one example in the call and will go into, but for a skid plate on a vehicle, we're seeing more and more applications picking up our capability to do composites as well. We've got a lot of work going on in new models particularly in Europe that are quite exciting, so we're pretty confident we could go to multiples over the national growth rate.

Great. Thanks a lot.

Thanks, let's move onto the next question.

David Begleiter, Deutsche Bank.

Thank you. Mark, on the same plane, very strong numbers in AEM, but volumes were down actually 3% in the quarter. So what's happening there versus the, supposed to -- likely two or three times growth in the market?

Yes. We did have a little weakness and in some markets, I think some of the emerging markets were particularly slow for us. I will mention India where we've seen a little bit of a wholesale movement of second-tier products in the Indian market, and that particularly hit us hard in that regard.

We also spent time, if I can say this, moving our production assets around to make higher value products, and that's one of the ways we drove margin. So some of that volume we passed on, if I can say that, David, to moving in the smaller volumes, nonetheless higher return products.

Understood, and then on the same bent, volume growth was minus 6% in Acetyl Intermediates. Was that driven by China or China and others, any clarity there?

Yes. I think you can really say it was China. We saw China -- we've do really think hit the bottom in the third quarter, as we ended the quarter was starting to get better.

But really, just a tremendous overcapacity, almost unimaginable levels overcapacity in China now. Assets are being shut down and people are just -- there's not a lot of inherent demand at this moment in time, and so almost all of that falloff was in China.

David, I'd just add to that back on your materials question, that it's typical in the third quarter that you get some European customer plant shutdown activity. So it's not unusual to have that happen in the third quarter.

But that would have been nil last year as well, Chris, correct?

Yes. Sorry, I thought you were asking the question sequentially.

No. Year over year. Thank you.

Thanks, David. Let's move onto the next.

Vincent Andrews, Morgan Stanley.

Thanks and good morning, everyone.

Good morning, Vincent.

Just on the buyback in the quarter, it looks like you used the revolver for a fair amount of it. And then for the $1 billion of buybacks you're going to do over the next two years, how should we think about -- obviously you have some US cash flow from operations, but a lot of it is offshore and a lot of your existing cash is offshore. So how should we be thinking about the way that you're going to fund those repurchases?

So, as we go through the next couple of years, we expect that our free cash flow will be better than it is today, and so most of it will be funded from that. As you pointed out, we really haven't touched the balance sheet cash, so we will have $900 million to $1 billion of cash here at the end of the year.

We will expect to use some of that cash next year to pay off that amount that we borrowed under the revolver. So you can think prospectively over a two-year period of almost all of this being funded from free cash flow. We may spend down our global cash balances a little bit as well.

And in the process of doing that, should we be expecting to see a higher tax rate as a result? Or how will that work?

No. I think -- we will talk more about 2016, but at this point, I'd say it would still be less than 20% on the tax rate, the adjusted tax rate.

Okay. Thanks very much.

Thanks, Vincent. Let's go on to the next.

Frank Mitsch, Wells Fargo Securities.

Yes. Hi. Good morning, gentlemen, and congrats on weathering the methanol contract expiration fairly well.

Thanks.

As I look at the year-over-year trends, you were down 4% year over year in Q2 on volumes, down 7% on price. A little bit of an acceleration there down 5% on volumes in Q3 year over year and down 10% on price.

So a little bit worse than the Q2 year-over-year comps, yet you posted a very nice upside surprise. I guess the simple question is, as we think back to what we thought three months ago to what we actually posted today, what went right for you guys?

Well, there was a lot of effort went into making this transition, bridging this transition. So we -- to the extent we could, we -- let's say that we had methanol available, some methanol available carried over a little bit in the first month.

We also had accumulated some acetic acid that we had built up, all of which to help us moderate, if I can say that, Frank, the hole for methanol. And so the pain wasn't quite as intense as we thought it would be as we went through that quarter. So that's one thing that went well for us I think.

The startup went very well. We had -- in our own minds we had some concerns about that of course as you are finishing the plan, and so that enabled us to have confidence we were going to be able to run very hard, very quickly with that unit, and that helped us in the planning and scheduling as well.

I go on to say our models are really working well for us, Frank. I mean, the team is out there every day looking for ways to use these global models particularly in past business.

And really we're just -- I don't know how to say this -- we're just totally tuned to the market. So we're looking at every opportunity of making conscious decisions every day, and that allows us to extract incremental money that others can't.

All right, so that -- the latter part is something obviously that's going to be ongoing. And just coming back to the use of cash, obviously you guided to about $225 million of share buyback in the second half, you did $420 million just in Q3 alone.

With this $1 billion over two years, seems like a very modest pace relative to what you just executed. Are you being conservative in that regard?

And in terms of use of cash, does M&A play a role? Are you preparing for Bishop? Can you expand a little bit more on the cash?

I don't know that we're conservative, but we're trying to be very thoughtful. And we have a lot of M&A activities underway that tend to be smaller in scope.

It's important for us to add without steering too much to add several hundred million dollars of EBIT vis-a-vis M&A that logically plugs into our business over let's say the next three years. And so we are anticipating our funding needs relative to that, we are anticipating our cash generation needs, the ongoing efforts to drive greater and greater value and put all these together, and we think $1 billion is reasonable. It's not -- it shouldn't stress us.

And so could we do a bit more? Yes. Maybe, but we want to let some things unfold before we make a commitment to do so.

Great. Looking forward to Friday the 13th.

Right.

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

Bob Koort, Goldman Sachs.

Thank you. Good morning.

Good morning.

Mark, I understand your pride in the capital cost of your methanol plant. Can you give us some help on what it might cost to make methanol in a brand-new plant at $2.50 gas and how that compares to the $0.90 market price right now for methanol?

I love you, Bob, that's a lot of data, man. (laughter) It's not as good as our contract with Southern, but it's getting pretty close.

And is there any hope that Southern will need to place that volume somewhere and you can help them out since you are still a little net short of methanol? (laughter)

Well, I think Southern is placed --the market still materially higher than our cost, thank goodness. But Southern has outplaced net material in the market today, and I don't think they need our help. (multiple speakers) If they want to sell some -- we have a very good relationship, and so I'm sure we will talk to them about buying some material from them.

Got it. And I want to make sure I heard you right because I thought you said China was getting a little better. Is that what you said?

Yes. That's my prediction.

And does that provide you any incentive to try and do M&A a little quicker? Because it would seem like the world feels a lot worse then maybe you should move before it feels better.

It absolutely does, yes. That's exactly right.

All right. Thank you.

Thanks Bob, let's move onto the next question.

PJ Juvekar, Citi.

Yes. Hi. Good morning.

Hey, PJ, how are you?

Mark, you talked about China hitting bottom in third quarter and then maybe the recovery in China going forward. Is that a common Company-specific Celanese based on your end markets, or are you making a generic comment that you think based on your observations in China?

Well, PJ, we're old-fashioned here, so we just get out a lot and spend time with customers. And it's hard to describe -- there's a lot of negative feeling amongst the SOEs and the manufacturing industry in general in China today on one hand. On the other hand, if you look at it from a retail point of view, if you spend time out and about, there's a lot of really positive things happening in the country.

So there's a -- what I just said practically that there is a limit to how much things can slow down. I think they've reached that limit, and so we're seeing signs that things are getting a bit better.

So my belief is whether this is immediately going to signal a ramp up in China, I wouldn't say that, but I think as we look back over this historically, the third quarter is going to be the low point and you're going to see China start to come out of the situation that they are in. I think that's what we feel and that's certainly what our customers feel.

Okay. And then, in the past, you bought a lot of stock here recently, but you haven't done any significant M&A if I look at last three, four years.

That's right.

But now you are talking about M&A. Is that some change of strategy on how you are thinking?

Well, I think, PJ, we -- I always quote my old friend Dennis Raleigh. He used to love to tell you guys, not only what he was going to do but what he wasn't going to do. And what we're not going to do is do something stupid as it comes to M&A.

And so we have looked at a lot of deals, a lot of big deals, and we simply -- and that's where we are focused. We couldn't make it work. So we've totally converted our effort now to go after much smaller deals. I use CoolPoly as the example, and we will show you guys in November some real examples of how that very small acquisition's given us a real positive traction in a lot of areas.

We're looking at much smaller deals. We have a number of nonbinding offers out today on the small deals, and it takes a number to get one.

And so, yes, you should see us be a lot more active there. We have been active, but we've been looking in an area I think that was a tough area to complete one in.

Thank you very much.

Yes. Thanks PJ. Let's move onto the next question.

Jeff Zekauskas, JPMorgan.

Hey, Jeff.

Hi. Good morning. When I look at the adhesives companies, they seem to be growing pretty slowly or contracting. And the coatings companies have also had issues with demand.

So has that affected vinyl acetate monomer demand? What's the shape of VAM demand these days, and what's pricing like?

Yes, Jeff. So the answer to your question is yes. In most of the markets I think that we're in, if you get from a pure market point of view has very little growth. And so the way we have to grow is do new and novel things, if I can say that.

Sure.

In the coating areas, some of the activities around VAE and those coatings are still very positive and we're still seeing not double-digit -- we're still seeing strong growth in those areas. That's one bright spot.

If I look at VAM from a VAM point of view, VAM is pretty long now although there are some signs it's getting a bit tighter. We've seen pricing wane a bit in that as we've come off of that, the chronic shortages of last year.

We're out actually pushing some pricing now and seem to be getting a little bit of traction on that. But I think you should look at this as being a pretty anemic marketplace right now and a marketplace that is looking for a bottom to start recovering from.

And then, for your methanol plant which is running at full rates, does full rates mean -- I don't know -- 95% capacity utilization? Do you expect that to be the norm from now until the end of the year if that is what you mean?

It's running at 100% capacity, which is what you would expect. Methanol plants are a little bit -- I mean that they're pretty -- chemically they're pretty simple operations.

So you tend to run them at a -- they don't hunt, if I can say that -- Jeff. So you will lock it at 100% and let it run.

And we will take it down a few weeks a year is the way you should look at that. And so we're -- we pop the unit up and down a few times since we first put feet in it just getting things worked out, but generally speaking we're running it at 100% rates. And I would expect us to continue to run at that level from now on.

Okay. Great. Thank you so much.

Thanks a lot.

Let's move onto the next question.

Hassan Ahmed, Alembic Global.

Good morning, Mark.

Good morning.

Just wanted to revisit the pricing side of things within AI. Obviously there were a couple of pricing hike announcements through the course of Q3. Yet sequentially Q2 to Q3 pricing was down around 3%. Right?

So what I'm trying to get a handle on is that obviously spot pricing, be it on the acetic side or the VAM side came down through the course of the quarter as did methanol pricing as well. And you obviously talked about supply/demand fundamentals being quite slack as well.

So the question, really, is how in such an environment does one achieve any pricing hikes? That's question number one.

And associated with that question, number two, is that, if you do achieve those price hikes, some of the price hikes that you try to implement in Q3, is there a lag effect? Will we see those hikes coming through in Q4?

Yes, it's a really complicated market, so you need to think of almost truly a spot market. And so you're always out there looking for the ability to sell cargoes and Internet deals a little bit favorable from a margin point of view of where you were the prior day. So price hikes are signals to the marketplace where we're going out.

And more important than the price hike is the margin that you're trying to drive. So it's a function of not only the price but also the raw material input at the time. So we've been out trying to create momentum around driving higher margins in this business.

It is been a very hard, as you said, and I'd be misrepresented to say we've seen a big margin increase. In fact, margins have been flat to pretty steady the last couple of quarters, certainly the last quarter. So I don't know quite how to answer your question other than to say the market needs to get a bit tighter before you can really start driving margins.

Sure.

And that's -- there are several outages out now, scheduled outages in China where plants are going down for several months to -- just to do repairs but also to sit down for a bit because the market's long. We're getting ready to go down a bit for some turnaround activity and particularly in China. So I think those are, again, signaling the bottom of this trough piece, and you will start to see margins go up and you will see us announce pricing as part of that activity.

Fair enough, and maybe this is something that you'd want to address on the analyst day, but one of the things that you've talked about in your qualitative guidance was that obviously some headwinds, currency being one of them. Offsetting those headwinds via productivity and one of the things that you talked about was capacity rationalization as well.

So just wanted to get a sense of as we look into 2016, if you could talk broadly about what areas that rationalization you may do in. And associated with that, how much of a cash drain could that potentially be in 2016?

Yes. So we will, if you will let me punt that a bit for a few weeks, we will take a better shot at that in November. What I will say is that we are -- we have several activities underway. We're talking to employees now about outages.

And from a scope of things, they're not -- on one hand they are not huge. On the other hand, it does let us consolidate, get efficiency and drive value. So you should think of that in terms of $20 million, $30 million thing, not $100 million opportunity.

Got it. Thank you so much.

Thanks. Let's move onto the next question.

Jim Sheehan, SunTrust Robinson Humphrey.

Hi Mark. Really good job in AEM, of holding price when raw materials were falling.

Just wondering if you could give us your perception of how customers view that relationship. You clearly got some pricing power here, and do you see that as pretty sustainable going forward?

Well, customers don't like it, Jim. I mean, it's -- you've got to make sure that you're bringing them a lot of value in that process.

I think to answer question, yes, I think so. We're working really hard to go in and very rapidly solve problems. The undercarriage example I gave you.

The amount of -- what we can do well is we can talk to a customer in Japan and a triangulate with all of their tier suppliers around the world, introducing a new product line, to go into a bunch of different vehicles. And we do that better than anybody else. And that allows us to have an edge in the pricing that you talked about.

In return for that, we get to sell quality products in a quality applications at a higher price than others. So -- you should expect us to continue to do that.

And just on your 2015 earnings outlook, and it looks like the magnitude of the beat that you had in the third quarter is roughly the same as the increase in your guidance. Yet with China, possibly seeing an uptick, I'm just wondering -- are you being a little bit cautious on how you view the fourth quarter, and why wouldn't you be more optimistic given your views on China?

Well, I -- Jim, it's just early, it's early in the process. I will also say that we see other signs out there of people wanting to -- we've have had recently some announcements from folks that tell us that there's stuff scheduled for December they were going to go ahead and shove to January.

So people are going to be taking steps to clean up this year, if I can say that, and it's hard for us to factor those things in. But those things can easily be a $20 million hit or something if you get a number of companies, a number of businesses that want to reduce inventory and things like that. So we expect this to be a tough quarter even though we are starting to talk about China being a bit better.

Thank you.

Thanks a lot, Jim.

Let's move onto the next question.

John Roberts, UBS.

Thank you. How far out into the future is the methanol JV buying gas?

Well, John, I have forgotten. Not that long. I mean, we have part of the gas locked up for most of next year, but not all of it. So I'd be happy to share more detail, I just don't have it with me right now.

Okay.

What we tend to do is we tend to -- we don't tend to go 100% on anything. So we will -- we locked into some pretty good positions, and for a portion of our gas and will continue to treat it that way.

Okay. And if you collapsed the two business units within the Acetyl Chain, collapsed Acetyl intermediates and Industrial Specialties from a reporting, is there a layer of cost that could be taken out? Is that something that's worth looking at?

Well, if you look at it, part of the productivity is that we are really running these cores with a lot of shared resources now in there, and we're making sure that in support of those cores, we're aligned from a functional point of view and a more efficient fashion. So everybody in this company wears at least two baseball hats, some wear three or four. So to answer question, yes, we can do more there, we continue to do so more there and some of the productivity we talked about is a reflection of that.

Will you probably continue to report the two business units?

Yes. I mean -- you mean the subordinated units within the Acetyl Chain?

Yes. I just don't know if there's another layer to take out there if you brought it together as one.

At some point, we will fully collapse them.

Okay. Thank you.

We promise we report it for a while, and we're talking about how we should move forward in the future.

Great. Thank you.

Thanks.

And let's move onto the next question. Let's have this be the last series of questions.

Nils Wallin, CLSA.

Yes. A good morning. Thanks for taking my question.

Good morning.

Just had a question on your SG&A line. You've done a tremendous job of lowering that year on year, and certainly you're focused on more productivity. But curious to know how much of that has been the benefits of currency and so going forward, how much of the cost that you've taken out there is sustainable.

Well, some of it is currency from our European operations. But Chris, do you have a sense of that?

Yes. I'm trying to -- what periods are you looking at?

Just year to date.

Yes. We get -- if it's year to date versus year to date last year, there's some amount of currency benefit, but it's not massive. I mean, think of that being $10 million to $20 million for the year.

Got it.

Looking at SG&A.

Yes. I mean the -- yes. It's not huge.

And then, obviously the methanol plant coming off -- you've finished the build up there, and so you freed up cash and certainly talked about returning that to shareholders. But I'm curious as to how much of that might be siphoned off towards innovation. And certainly that's going to be something you're talking about at investor day, but how are you thinking about things like your vitality index and new product introductions as a percent of total sales?

Well, we put a lot of energy in that, and we think we're fully funding that today. Now, what I will say is that we are starting to adopt some -- from a vitality point of view, some longer-term investments in areas that seem to really make sense to us that could at some point require us to up that spending from the level we are at currently. At the investor show, we will share a lot of detail about our new product launches and how we do the math around those and how we expect to continue to grow that and how that correlates to sales revenue that we expect from new products that we introduce.

Great. Looking forward to it.

Great. Thanks.

Carrie, I will turn it back over to you. We appreciate everybody's time this morning, and we will be around for questions later today.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.