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Celanese (NYSE:CE)

Q1 2013 Earnings Call

April 19, 2013 10:00 am ET

Executives

Jon Puckett - Vice President of Investor Relations

Mark C. Rohr - Chairman of the Board, Chief Executive Officer, President and Member of Environmental, Health & Safety Committee

Steven M. Sterin - Chief Financial Officer and Senior Vice President

Analysts

David L. Begleiter - Deutsche Bank AG, Research Division

Robert Walker - Jefferies & Company, Inc., Research Division

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Brian Maguire - Goldman Sachs Group Inc., Research Division

P. J. Juvekar - Citigroup Inc, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Gregg A. Goodnight - UBS Investment Bank, Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Vincent Andrews - Morgan Stanley, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Celanese Corporation First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being 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.

Jon Puckett

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 via business wire yesterday after the market closed. The slides for the call and our prepared comments for the quarter were also posted on our website, www.celanese.com, in the Investors section. All of these items have been submitted to the SEC in a current form -- 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'll field your questions. I'd now like to turn the call over to Mark.

Mark C. Rohr

Thanks, John, and welcome, everyone, to the call this morning. We released our prepared remarks last night. So I'll be brief before moving along to questions. For the quarter, we reported adjusted earnings per share of $1.14, which include the acetate dividend of $24 million or $0.12 per share. This represents the 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 a 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 free 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 to pursue growth initiatives and a balanced capital deployment strategy. We're 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 and 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, expansion of our China acetate ventures and the start-up of ethanol production in Nanjing. But we also expect to drive 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'll now turn it over to John for Q&A.

Jon Puckett

Thanks, Mark. [Operator Instructions] So Mary, I'll turn it over to you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Begleiter from Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

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

Mark C. Rohr

Well, there's a lot of things involved in that. When you look at -- and I'll kind of roll down the list here that pop in my mind, and let Steven hop in here as well. When we look at, David, the industry, in general, we're 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 can move roughly 7 kilograms to 8 kilograms of material per vehicle around the world. Globally, they were roughly 1/4 of that kind of number, and we're seeing kind of year-over-year 9% 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're actually in a lot more -- we have a lot more avenues we're selling into, and we're starting to be -- 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 a mix perspective, David, so you're seeing some of the uptick with that. That's what I would say. Steven, is that good for you?

Steven M. Sterin

Yes.

David L. Begleiter - Deutsche Bank AG, Research Division

And Mark, just lastly on China, have you seen any, in the last few weeks, any uptick in demand in acetyls in China?

Mark C. Rohr

No. China, if you want to be optimistic as I was, David, I think you could be a little pessimistic. There seems to be signs. They're 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.

Steven M. Sterin

And 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 still continue to have good success in bringing some of these high-value AEM applications that Mark mentioned into that market that really -- they're a fraction of the Rest of the World, particularly in auto on the amount of the pounds per vehicle, kg per vehicle of our AEM products. We see opportunities to continue to grow there as well. But from an overall, more difficult in Chinese economic environment.

Operator

Our next question comes from Laurence Alexander from Jefferies.

Robert Walker - Jefferies & Company, Inc., Research Division

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

Mark C. Rohr

On a year-over-year basis, that's a really awkward comp because you recall, early last year, I mean, the world is kind of coming to the end in AI so you want to go through year-over-year sequentially?

Robert Walker - Jefferies & Company, Inc., Research Division

I guess, year-over-year.

Mark C. Rohr

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

Steven M. Sterin

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

Robert Walker - Jefferies & Company, Inc., Research Division

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

Mark C. Rohr

Well, I mean, ethylene prices way down year-over-year. CO cost is way down for us year-over-year.

Steven M. Sterin

Coal's down.

Mark C. Rohr

Coal's down year-over-year.

Steven M. Sterin

Natural gas, about flat.

Operator

Our next question comes from Kevin McCarthy from Bank of America.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

This is Aleksey Yefremov for Kevin. Mark, as we approach the startup of industrial ethanol, how should we think about incremental cash margins in that business versus your acetic acid business, I guess, in current environment?

Mark C. Rohr

Well, we have a pretty modest number in for this year, and for that, marginally it's -- trying to recall it. We said $0.05 to $0.10 of contribution this year in that business so I think it's pretty tight. So it's not huge in industrial ethanol, not a huge uptick from acid margins or contributions.

Steven M. Sterin

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

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

And a follow-up, if I may. In AEM, 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?

Mark C. Rohr

Well, I think it -- I mean, the quarter was -- it was a very good quarter and medical is not as write-able as some of the other businesses so that kind of rolls through. So that will be -- that's maybe down a bit. I think some of the pricing activities we undertook will be with us, and should carry through for a while there. So I think most of it can stay, maybe not all of it, most of it, Alek.

Steven M. Sterin

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.

Operator

Our next question comes from Robert Koort from Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

It's actually Brian Maguire, on for Bob today. Just at a really high level, I was hoping to -- just to 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're 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're sort of implying 5 to 10 from ethanol later in the year. So just wanted to see if we're missing anything there or if there's any other moving parts we should be aware of.

Mark C. Rohr

I think when you look at it, that's as good a job as -- it's 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, the 12% to 14% is going to based on what we deliver, Robert, and not what the market delivers. But there is a thematic day, which is the market doesn't take anything away from us. And I think it'd be a little bit foolish to assume that -- I'm sorry, Brian. I think it'll be a little bit foolish to assume that the market is not deteriorating some as we go through this year. So I think, broadly, your numbers, that range you put out there is the right kind of range. If you're asking about the only add up [ph] will be towards the low end of that range because of all the uncertainty that's out there.

Brian Maguire - Goldman Sachs Group Inc., Research Division

I think in the -- specifically, I think in the past, you've said you have maybe 4 to 6 weeks of visibility. Just wondering if there's anything you're seeing that indicates a slow down 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're seeing any destocking or anything that would cause you to...

Mark C. Rohr

No. The -- Brian, on the inventory side, I mean, these guys have done a really good job of staying low on inventory in both the U.S. and in Europe, they've 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, but what's going to be realized, there is some information that came out of Germany today relative to that. But if you look at it from a 4-week look-forward for us, we're okay. I mean, business is kind of where we thought it would to be for the second quarter, and so far, so good with them.

Operator

Our next question comes from P.J. Juvekar from Citigroup.

P. J. Juvekar - Citigroup Inc, Research Division

So Mark, you took over the company a year ago and since then, probably, this is the first good quarter you guys put out. I guess I'm just wondering if this is sustainable.

Mark C. Rohr

[indiscernible] P.J., you sound like the board right now [indiscernible].

P. J. Juvekar - Citigroup Inc, Research Division

Well, I guess, investors are wondering if these margins are sustainable in AEM or even in Consumer business where you had good margins. So I guess I have 2 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 business as of recently that sort of led to this cost cutting and margin step-up?

Mark C. Rohr

Yes. So on the first one now, 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 -- 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 5 or 6 months, putting a lot of attention in translating these opportunities to the bottom line, and you're starting to see that. So are these margins sustainable? Yes. I think in 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'll be really honest, they're not yet high enough. So we're working hard to create business models that translate sales revenue into very good and handsome bottom line margin by amount of profit.

Steven M. Sterin

Mark, I think it's 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 Voice of the Customer and because we've got the solutions. We've demonstrated that, for example, in auto. You have some customers we're in 10 or 12 different parts of the vehicle, and other auto customers only you might be in 1 or 2. So we're seeing opportunity around pricing excellence and marketing excellence to really translate these high-value applications that we already have today. It's 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 the -- 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 this strategy.

P. J. Juvekar - Citigroup Inc, Research Division

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 provide that sketch for us and where do we stand on divestiture of non-core assets, maybe like sweeteners?

Steven M. Sterin

Yes, I mean, 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, and we acknowledge we've got to deal with that. The good news is we've got some prepayable debt, a $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 pension funding so that's in pretty good shape as of now. But we do still think that based upon where our valuation has been that share repurchase makes sense, and so we're in the market. We continue to be in the market. In terms of M&A activity, Mark, you want to talk about kind of how you view that for our strategy in terms of cash?

Mark C. Rohr

Yes, P.J., the concept, what we're building on here is really putting forth very solid business models. We're testing those. We're 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 bolt-on businesses or our major businesses there. What Steve is -- 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're not working hard to make that happen. We're working hard to grow every business, and see that we have success in every business. You mentioned sweeteners, as an example and one hand you could argue Nutrinova doesn't fit in the portfolio. On the other hand, the chemistry there is pretty intriguing and we put forth a new business model there, a sweetener solution model that has potential to revolutionize in that industry, and we had our first commercial sale this last quarter. So we're going to work all the portfolio here and try to create value and eventually, we may modify the portfolio, but we're not focused on that right now.

Operator

Our next question comes from John McNulty from Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

The first question is with regard to methanol, I know you have been looking to set up a facility in the U.S. Can you give us an update as to where we are in that process?

Mark C. Rohr

John, so we have gone through all the detailed engineering work. We are out placing long -- placing orders for long lead-time equipment. We're building this plant and 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 obligations. 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'll be breaking ground this fall and be up and running by mid-2015. We're still negotiating with a partner. We're not quite in a position to announce that, but we're very -- we expect to be in a position before too long to announce the partnership arrangement for that eventually.

John P. McNulty - Crédit Suisse AG, Research Division

Great. And then as a follow-up, your SG&A line was noticeably lower than it's been for a while, and I guess I'm wondering what was driving it? Was it just -- 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?

Mark C. Rohr

John, let me ask Steven to go into details on that. One of the things Steven's 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 and so Steven, you want to comment on that?

Steven M. Sterin

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

Operator

Our next question comes from Gregg Goodnight from UBS.

Gregg A. Goodnight - UBS Investment Bank, Research Division

It was good to hear that your TCX plant has attained a 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?

Mark C. Rohr

Yes, I -- well, for us in a broad sense, we'll probably take the next 60 days or so to, really, to be very honest, checkout the unit and go through the early commissioning phases, and then we'll get into starting the commissioning and actually start running and producing some product in a modest level. We are a large ethanol producer in the Chinese market. We bring this on, and we very much wanted to make sure we bring it on and bring it on in a paced way that's good for selling these and proper for the market. You should be mindful as well, we're taking asset out of the merchant market to the [ph] addition, and we also want to be thoughtful about how we do that and how we impact our customers there. So 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'll be at kind of full operations as we get into next year.

Gregg A. Goodnight - UBS Investment Bank, Research Division

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

Mark C. Rohr

Well, that facility is part of the portfolio that 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 going on in the marketplace. That facility is operational and satisfying market needs primarily in that part of the world.

Operator

Our next question comes from Jeff Zekauskas from JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

I think, last year, your consumer specialties business contracted in volume by about 4% and this quarter, you were up 5% and 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?

Steven M. Sterin

Jeff, it's Steven. So I want to give you a little bit of clarity because you've got to keep in mind this bond in shutdown and mothballed [ph] and how we're 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's going to show up in reduced energy costs, reduced plant cost and we've expanded our Chinese joint ventures. So we're going to see some extra volume come there. Plus, our overall mix, the profitability will improve so you'll see margin improvement. But in terms of top-line volume, we'll probably be down 5% to 10% this year, but profitability and sustainability of margins significantly improved and another big step forward both in terms of pricing and costs and dividends.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

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

Steven M. Sterin

Yes, there'll be a lot more detail on this when we do our -- put our Q out later today...

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Sure, just roughly.

Steven M. Sterin

Yes, I'll give you a couple of quick highlights. So the main drivers, 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 to working capital. It's just timing, and we worked most of that off during the year, like we do it 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've 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. So if you're -- to me, if you were to normalize that out, I think the cash, overall cash performance, excluding special dividends and timing, the working capital was much better this quarter than a year ago. And I hope when we put the Q out, that will help answer those questions, but give us a call if it doesn't.

Operator

Our next question comes from Vincent Andrews from Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

My question was just answered.

Jon Puckett

Folks, we appreciate the time this morning, and I'll be around all day to take questions. Thanks.

Operator

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.

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