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Celanese Corporation (NYSE:CE)

Q2 2014 Earnings Conference Call

July 18, 2014 10:00 AM ET

Executives

Jon Puckett - VP, IR

Mark Rohr - Chairman and CEO

Christopher Jensen - SVP, Finance and Interim CFO

Analysts

David Begleiter - Deutsche Bank

Robert Walker - Jefferies

John McNulty - Credit Suisse

Eric Petrie - Citigroup

Duffy Fischer - Barclays

Frank Mitsch - Wells Fargo Securities

Kevin McCarthy - Bank of America Merrill Lynch

Robert Koort - Goldman Sachs

Vincent Andrews - Morgan Stanley

Jeffrey Zekauskas - JP Morgan

Hassan Ahmed - Alembic Global

Operator

Good morning and welcome to the Celanese Second Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Jon Puckett. Please go ahead, sir.

Jon Puckett

Thanks Laura. Welcome to the Celanese Corporation second quarter 2014 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, Senior Vice President, Finance.

The Celanese Corporation second quarter 2014 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 on our web site, www.celanese.com, 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.

This morning, we will begin with introductory comments from Mark Rohr and then we will field your questions.

I'd now like to turn the call over to Mark.

Mark Rohr

Thanks John and good morning everyone. Our prepared remarks were released with the earnings, so I will keep my comments brief, then open the line for your questions.

We had a really strong quarter with adjusted EPS of $1.47, that's the highest in our history. Sales increased 7% year-over-year, 4% sequentially on pricing that was 6% higher than last year and 4% higher than last quarter. Segment income margin expanded 18.6%, that's a 260 basis point increase year-over-year and a 90 basis point sequential increase.

In Engineered Materials, we delivered record revenue and segment income with strong demand across auto, consumer and industrial applications. Consumer Specialties' segment income was impacted by a third party power outage, interrupted operations at our cellulose derivatives facility in Narrows, Virginia.

In Industrial Specialties, growth was driven by improvements in EVA polymers and the growing success of our environmentally friendly technology in emulsion polymers. Acetyl intermediates drove expanded margins through our commercial efforts in acetic acid and structural changes in VAM. Planned and unplanned VAM outages in the U.S. Gulf Coast also contributed this quarter.

Cash flow generation was also strong with $253 million of operating cash flow. We deployed $50 million to repurchase about 800,000 shares and entered the quarter with a cash balance of $1.1 billion. We had great results in the first half of the year, which gives me confidence we are going to end the year having grown adjusted earnings in the range of 15% to 17%. This performance lets us shift our focus to developing the Celanese specific initiatives that can help offset the methanol headwinds of about $100 million expected in 2015. We are working on structural actions, like rearranging some of our debt, and opportunities in productivity and tax as a start. We plan to provide you with more clarity as we go through this year, but at this stage I am reasonably confident we can find ways to offset most of the methanol headwind.

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

Jon Puckett

Thanks Mark. I'd like to just ask everybody to keep your questions to one with one follow-up, and with that I will turn it over to Laura.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions). And our first question is from David Begleiter of Deutsche Bank.

David Begleiter - Deutsche Bank

Good morning.

Mark Rohr

Good morning David.

David Begleiter - Deutsche Bank

Mark, given the strong results this year in AI, do you think you can grow earnings, EPS in 2015 versus 2014?

Mark Rohr

Yeah I think so David.

David Begleiter - Deutsche Bank

Very good. And just to think about consumer, do you get back the hit you took because of the outage? Do you get that back, in the back half of the year?

Mark Rohr

Yes we should.

David Begleiter - Deutsche Bank

And just lastly, looking at AEM second half profitability, how do you see that trending versus the first half of the year?

Mark Rohr

Well I think where we are right now, that trend is continuing. But classically, in the fourth quarter, that business falls off pretty sharply. So what I would say is that you've had really good performance in the first two quarters, I think that will continue into this quarter and I expect the fourth quarter to drop off in a more seasonal norm.

David Begleiter - Deutsche Bank

Thank you very much.

Jon Puckett

Thanks David. Laura let's move to the next question.

Operator

Okay. Our next question will come from Robert Walker of Jefferies.

Robert Walker - Jefferies

Good morning. Thank you. Besides the methanol headwind in 2015, how should we think about the benefit from outages this year in AI and in terms of how much they should repeat or not, and do you think that's another headwind?

Mark Rohr

Well there is a portion of it that won't repeat, and we have kind of racked our brain to try to quantify that. I wish I could give you a perfect answer. What we saw is, we saw, maybe $20 million or so last quarter, this quarter, I don't know, maybe about the same number that is kind of between the structural changes and a bit of the trade flowing balances [culled] [ph] some inflation in pricing. So I don't know what that number exactly is, but there are some numbers that represent a bit of a headwind there. Having said that, we have had some major outages this year that won't be repeated next year, that will offset a part of it. So what my intent is Robert, as we go through the next two earnings calls, I'd be very specific about laying out exactly what's before us, and exactly how we are going to grow this company through selling methanol and grow our earnings next year.

Robert Walker - Jefferies

All right. Thanks. And then -- understand there is more detail coming at some point, but in terms of the measures you're using to offset the headwind, your tax rate is already one of the lowest in the group, and I guess I am wondering what you can do there, and in terms of the debt, does that encompass kind of flexing the balance sheet for buying it back more aggressively, or is there another lever of buybacks to help EPS growth?

Mark Rohr

Yeah, I will let Chris talk about the balance sheet and some of the thoughts he has on the capital restructure. What I will say about tax -- I don't want to get in too much detail about tax. We think we have a little bit of opportunity there that we will share with you later this year. Chris, do you want to share some information on our capital structure?

Christopher Jensen

Sure on the balance sheet, some of what we have said before -- when we are generating excess cash and this year is going to be a great year for good strong cash flow, there are different things that we can do with that, and our views haven't changed on that.

Now you can look at the balance sheet and see that we have a couple of pieces of debt that we can address, so we have a revolver, that comes due in a year or so, and we have our most expensive bond that becomes callable here in October. So those are the key items in particular we are taking a look at, and I guess what I'd tell you that we are trying to balance, as we monitor these markets and figure out specifically what we will do, is the desire to take advantage of the interest rates that are available to us right now, but also making sure that we continue to maintain the nice flexibility that we have in the nature of the debt that we have. And finally, we constantly keep our eyes on having appropriate maturities coming out into the future, in terms of the timing of debt maturities.

Robert Walker - Jefferies

Okay, thank you.

Jon Puckett

Okay, thanks Rob. Laura, let's go to the next question.

Operator

Okay. The next question is from John McNulty of Credit Suisse.

John McNulty - Credit Suisse

Yeah, good morning. Thanks for taking my question. So a question with regard to VAM, obviously things are tight now for some structural reasons with some closures and some with temporary outages. I guess, can you give us your thoughts in terms of where we are on kind of a true supply-demand or operating rate kind of level, if you kind of back out the temporary outages?

Mark Rohr

Let me give a shot at that John. So this is an industry that has been running and still runs with, on a global basis, excess capacity, and it’s a business also that -- my personal view is, is not return the cost of capital for a long period of time. So all those things kind of came together with companies like Celanese, a few of us independently shutting down, what were the least profitable assets and what was generally very poor profitable market.

The impact of that on a global capacity basis was maybe 6%, 5% or 6% capacity removed. So I don't know if that put us above 70 or not, but you are just still thinking we are probably around 70% capacity utilization. The short term outages, and these are short term outages, made on a short term basis, taking 10% of capacity off the market. So maybe that got us on a short term basis to press past 70 of capacity utilization. So there is not a shortage of VAM globally on one hand.

On the other hand, I think that this is an industry that has been plagued with tremendous, I don't know want to say, poor operating efficiency, in part because of its low levels of profitability. So I think in my own mind, we are seeing some reset of the value of VAM, and what I can't quantify exactly what that reset is, but I think it’s naturally going on around the world as this industry indirectly tries to get to a point where it starts return on capital.

John McNulty - Credit Suisse

Okay, great. And then just as a follow-up, your earnings -- they are certainly benefiting from these VAM outages and maybe some trends that we are seeing in acetic and methanol right now. At the same time, I know your goal over time has been to kind of generate strong, stable, steady earnings growth, and the steady part I guess is the part that seems a little bit in question, just given the huge tailwinds that you're seeing now, but also can become headwinds. So I guess I am wondering, are there things you can do going forward to moderate some of the volatility, both positive and negative, but moderate the volatility going forward, to really lock Celanese into a more stable kind of earnings growth trajectory?

Mark Rohr

If you look at -- if you take out kind of those numbers I quoted, VAM, you will see that we are growing our base level profitability in that double digit range on a year-over-year basis. And so I think the formula we have put in place to really push out and diversify our product mix, really bring intrinsic value to our customers and of course get compensated for that, combined with on the technology side, directly to marketing everyday, the products we have in our portfolio, to make sure we are extracting value. That formula is working, and that formula is working to the tune of getting this north of that 10% level that we have talked about so much, maybe in the low teens, but 10% to 12% compounded growth.

So I think that is there. As this company grows, there is going to be a natural moderation of volatility from things like a VAM outage, or an outage of cellulose acetate, if I can use those as kind of two examples. That will naturally occur, John, but right now I think to be honest, absent the little bit of aberration in VAM, you are seeing that reduced volatility in our earnings. And with that, it’s kind of the improved predictability of earnings.

John McNulty - Credit Suisse

Great. Thanks very much for the color.

Jon Puckett

Thanks John. Laura, let's move to the next.

Operator

The next question is from PJ Juvekar of Citi.

Eric Petrie - Citigroup

Good morning. This is Eric Petrie in for PJ. Mark, your second quarter EPS bid [ph] was $0.23 or 5% of 2013 earnings, but the incremental raise for full year was only 3%. So what segments going into second half are you more conservative on?

Mark Rohr

Eric, I am sorry, would you just repeat again, I kind of missed that a little bit.

Eric Petrie - Citigroup

So second quarter EPS bid [ph] was about $0.23 versus consensus of 5% of 2013 earnings, but your incremental raise for the full year was only 3%. So what segments are you more conservative on, going into the second half?

Mark Rohr

What I am trying to convey in that message, is a few things. First is, I work hard not to give you specific guidance. We tried to indicate from a directional point of view what's happening there. So the numbers that were out there in the Street had for last quarter, weren't really our numbers there, numbers that you got calculated.

Corporately, what we are saying is that, we expect the third quarter to be pretty similar to this quarter, and we expect the fourth quarter to be pretty similar to what's a normal average for us, which is a pretty darn weak quarter, and that's how we do the mental math on that. So I think year-over-year, first half to second half, if you do that math, you will see that second half is a little bit less than the first half. And it all boils down to uncertainty we have about the fourth quarter.

Eric Petrie - Citigroup

Okay. Thanks. And then you mentioned in the prepared remarks that you did some contract renegotiations in acetic acid, primarily China, how fast are you now able to pass on higher raw materials, and then what percent of overall contracts have been renegotiated on these terms?

Mark Rohr

We are pricing on some cases on a daily basis, so we are making incrementally conscious decisions about whether we sell or don't sell increments in the marketplace. So we have gotten as real time as you could get with that. In terms of the percentage contracts that have been changed, I'd say -- we are probably half on acid and probably a little bit -- I'd say maybe half.

Eric Petrie - Citigroup

On both acid and VAM?

Mark Rohr

Yeah. I am giving you -- you take that with a [bigger bout] [ph]. I don't know exactly the true numbers. But we started the process, we haven't completed the process, and we have still got good ways to go, and of course we’re working individually with customers, and we will do this year, next year, and the year after that, as these things roll off.

Eric Petrie - Citigroup

Thank you.

Mark Rohr

Thanks Eric.

Jon Puckett

Thanks Eric. Laura, let's move to the next.

Operator

Our next question will come from Duffy Fischer of Barclays.

Duffy Fischer - Barclays

Good morning guys.

Mark Rohr

Good morning Duffy.

Duffy Fischer - Barclays

Just on the EVA side of things, there was a push that started probably two years ago, because it had an ethylene backbone, had a better cost structure then, some of the other things like SB latex that were coming off of a different molecule. How has in general that push to take market share from other backbone chemical has been going for EVA?

Mark Rohr

Well it depends on where you are in the world. It has been pretty successful in Asia, Duffy. It has been maybe less successful in the U.S., kind of [indiscernible]. We have seen a lot of inflation in ethylene in the U.S., and probably less movement, north movement certainly butadiene. So I think it has been, I would say, okay in Asia, where most of the capacity has come on, and probably not very much in U.S. and Europe.

Duffy Fischer - Barclays

And then, just on the sweetener business, there have been a number of articles recently about diet sodas and stuff not working -- at least not allowing folks to lose weight like we once thought. What are you seeing from an end market demand standpoint? I know you're trying to get away from say drinks and then there is bakery and stuff like that. When you look at the different buckets of demand for the sweetener business, how do you think that's playing out this year?

Mark Rohr

Well, we are seeing good receptivity to our movement into servicing more of the French producers or the emerging producers, particularly in Asia and Southeast Asia. Clearly our market -- historical market has been, as you know Duffy, has been carbonated beverages has been the big sink for [SK] [ph], particularly in U.S. and Europe. So there has been some downward pressure that we have experienced over the last couple of years. I think that trend is probably -- I won’t say it’s going to continue, but it seems to be moderating just a little bit. So really the success this business is going to require is to push in a different market, and we are having some success, well that remains to be seen if we can get kind of the growth rate we'd like to see out of these molecules.

Duffy Fischer - Barclays

Great. Thanks guys.

Mark Rohr

Thank you.

Jon Puckett

Thanks Duffy. Laura, let's move to the next?

Operator

Our next question is from Frank Mitsch of Wells Fargo.

Frank Mitsch - Wells Fargo Securities

Hey, good morning gentlemen.

Mark Rohr

Good morning Frank.

Frank Mitsch - Wells Fargo Securities

Hey it seems to me that there is issues with sweeteners and not being able to lose weight, that would probably move people to smoke more, which might actually help on the Consumer Specialty side. Just a thought.

Mark Rohr

I agree with you Frank.

Frank Mitsch - Wells Fargo Securities

Looking at AI, you did $146 million, you suffered a $10 million headwind from the plant turnaround, so call it $156 million kind of normalized, what have you. But you did mention about $20 million of an impact from the pricing issues or so. So call it a 135 base something like that for Q2 heading into Q3, yet your guidance is suggesting about $115 million for Q3 and Q4. Can you help explain why we would see that much of a delta?

Mark Rohr

Well I think -- I don't know exactly how you work into that math. I am looking at it from a total corporation point of view, and to look from a total corporate point of view, I don't know if it will end up at $146 million next quarter, that'd be too much of a prediction. But what I will say is that the fundamentals today, when I look just at the sales forecast, I look at the net back, we are running at about that rate, maybe a little bit south of that, as we go through this quarter. So I think you should expect us to be in the general range of where we were in this quarter, I mean the last quarter.

When I look at the fourth quarter though, when you work through that, we had a record fourth quarter last year, which I believe was $1.03 or something. That was an all time, never before done. People don't even want to talk about it -- kind of the number. So I am very conscious to the fact, that if you look at the motions -- in the motions area, the Engineered Materials there, you look at some of the seasonality we have seen historically and Industrial Chemicals that we could see a pretty good pull back just naturally, as we go through the end of this quarter, and go through the end of this year.

So part of what you will hear me communicate is that uncertainty relative to that last quarter. That's how we got those numbers.

Frank Mitsch - Wells Fargo Securities

All right. That's very helpful. Then you mentioned in the script, that you expect the share buybacks to moderate from here. Obviously the balance sheet is actually in a better situation. Can you talk about that use of cash?

Mark Rohr

Yeah, so we said in motion, the sort of annual objective of doing at least $150 million per year share buyback, that's what we did last year, and certainly through the first half of the year, we are a little over $100 million, is that right Chris?

Christopher Jensen

Yes.

Mark Rohr

Right now, what we are communicating, let's say, we are going to slow that just a little bit, as we go through this recapitalization kind of debate and discussion. And as we get that done, we will share with you, kind of the pace that we are on. So you should expect the second half of the year, maybe a little bit less than the first half.

When you go beyond that, we saw a good bit of cash on the balance sheet. Chris has his eyes on some of that for the recapitalization. We are very active in the M&A arena, and are looking hard to find ways so that we can supplement our portfolio in a very constructive fashion. So hopefully as we get at the end of this year, you will see some of that, and hear about some of those things.

Frank Mitsch - Wells Fargo Securities

Terrific. Thanks so much.

Mark Rohr

Thank you.

Jon Puckett

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

Operator

And our next question will come from Kevin McCarthy of Bank of America Merrill Lynch.

Kevin McCarthy - Bank of America Merrill Lynch

Yes. Good morning gentlemen. Couple of questions on methanol. First, would you update us on your latest thoughts on the possible expansion at Bishop, Texas? And then second, with regard to your headwind linked to the procurement contract expiration, curious as to why you have not adjusted that downward? It seems like methanol prices have declined quite dramatically over the last six months. Are you being conservative there, or are there perhaps other offsets I am not aware of?

Mark Rohr

Yeah Kevin. So regarding Bishop, that permitting process is underway, and I am looking at Gjon Nivica, our General Counsel there. Have any of the permits actually been filed, do you have -- its very close to the filing aspect of the permit. So Kevin, we are continuing to work that, we are negotiating with a number of folks that will try to get to a shortlist here in the fall, and we will keep reporting on that project, on how that project is developing.

Regarding the methanol headwinds, we did arrange calculations there, and I think we used $4 to $5 a MMBTU per natural gas, and methanol was $500 to $600 a ton. So yeah you could argue, maybe we are down a little bit on methanol in that, but that was a range of $75 million to $125 million to $130 million.

So where we are today, Kevin, its impossible to be any better than say about 100. Of course, which day you start up is worth, I don't know, $750,000 or whatever a day. But it’s a big number per day, may be $500,000 a day. So there is the big numbers there based on the schedule as well, and we are just doing our best to try to be frank about the volatility that -- not volatility, but the ambiguity we have about the exact number.

Our plan is to go find $100 million to offset that and we are working like crazy to do it.

Kevin McCarthy - Bank of America Merrill Lynch

Understood. That's really helpful. And then second question Mark, I think you made a comment that M&A in your case is quite active. Obviously you have seen tremendous activity across the chemicals industry in terms of lots of companies pursuing large divestitures, spin-offs, large acquisitions. I'd be interested to hear your thoughts on that in general, as it relates to the industry, but in particular for Celanese, what sort of opportunities might you see for your own portfolio?

Mark Rohr

Yes. I mean, there has been a lot of activity. That activity has all been, from what I can tell, pretty thoughtful. In other words, it has all been focused on driving greater shareholder value. So we have met with a number of those firms. I will say that Kevin, they really talked through their thought process relative to how they think about opportunities for all those different scenarios that you mentioned.

So at Celanese, we are all about driving and trying to create shareholder value, and for us, the portfolio connectivity now is a source of tremendous value for us, and value for our shareholders. And so, we are continuing to work it in that fashion.

So going forward, from an M&A point of view, we are looking for ways that we extend the reach of our -- either our technology based kind of businesses, or our customer solutions kind of businesses. We are very interested in the materials space and expanding out in that, everything from biopolymers and cellulosics through to composites, particularly in aerospace and automotive, that's areas that are really emerging areas for us and are really attractive. I think some of the derivatives around [indiscernible] chemistry are also pretty much of interest to us, and we are working hard in that area as well.

Well nothing specific to report to you today, but I can say, I got my best team on it, and they are working like crazy with the commercial leaders, to find really good opportunities for our shareholders.

Kevin McCarthy - Bank of America Merrill Lynch

Fantastic. I appreciate the thoughts.

Jon Puckett

Thanks Kevin. Laura, let's move to the next.

Operator

Next we have Robert Koort of Goldman Sachs.

Robert Koort - Goldman Sachs

Thanks. Mark I was wondering if you could talk on AI, give us some sense of how much your profit improvement there was a reflection of the tighter industry, and how much of it was rejiggering of this contract?

Mark Rohr

Well Bob, I think -- I will throw out the $20 million number this quarter, and I am not trying to be flipping with that. It’s the hard calculus to do specifically in there, and only history will give you the exact number, but that's what we think. This quarter was probably the direct result of the tightening of the industry.

Robert Koort - Goldman Sachs

And the issues in your flake contract, can you talk about the basis or the context of that contract, and then when that might go away, or the path that it goes away?

Mark Rohr

Yeah. We have a legacy contract on flake, and it’s a long term agreement, about a decade agreement, and we are in the last several years, providing flakes agreement. I am looking at it. Jon, [indiscernible] 17 maybe? 17 is the last year of that Jon, and it has formula step-in, so we actually took a slight stepdown in price this quarter versus last quarter, but that's kind of -- I think its going to generally run its course, and will be at this kind of level going forward, for the next couple of years.

Robert Koort - Goldman Sachs

And last one if I might --?

Mark Rohr

[Indiscernible].

Robert Koort - Goldman Sachs

Sorry. Could you give us your assessment of the long term supply/demand trends in the filter tow business and sort of what you're seeing on the ground?

Mark Rohr

Yeah. I'd be happy to. So that's a business that has been in decline in the developed world for a number of years. It has been growing primarily in Asia, primarily in China there to the tune of 3% to 4% per year. As the new regime took over and imposed a number of restrictions on the use of government credit cards, we saw actually a shift in that, and this year we think will be about flat in China. So the net effect of that probably has pushed the industry down, and these are my numbers, which take from what they're worth, my numbers would be 1% to 1.5% volume down right now, kind of globally.

Now the backstop on that, the background on that, you recall we shut down, spun, and we took a fair amount of volume out ourselves last year. I was actually surprised how the industry seemed to be building volume around that time. The industry was running the very high 90% capacity utilization, maybe mid-90 kind of numbers and I think, but I can't tell you how much Bob, that inventory was built with all the end customers that -- through last year. We certainly saw that with some of our customers.

As confidence has returned, the industry can handle the rates, some of that is backing out. So we are seeing some reduction of sales to customers, well we know -- our customer's demand has not changed, if that makes sense. We are seeing some moderation of that inventory, but I think that's kind of running this course through this year.

That's a very long way to understand, we think we are kind of flat this year, and we think we will be kind of flat next year, as we see what really unfolds in China.

Robert Koort - Goldman Sachs

Okay. Thanks for the help.

Mark Rohr

Great. Thanks.

Jon Puckett

Thanks Bob. Laura, let's move to the next question.

Operator

Okay. Next we have Vincent Andrews of Morgan Stanley.

Vincent Andrews - Morgan Stanley

Thanks. Mark, could you touch on -- there was a big announcement in the U.S. cigarette industry this week with consolidation between Reynolds, Lorillard and I guess, Imperial Tobacco playing a role. What are your thoughts on that? I can imagine some situations where that could be very good for you, I could imagine some takes to it as well. Can you remind us which of those are your customers and just how you are thinking about that in general?

Mark Rohr

I'd really not say which one exactly our customers are, but we sell to a lot of folks, and so you shouldn't be surprised if we don't sell to some of those folks. Its not at all surprising to me. This is an industry that where you've had -- it’s a very distributed industry, primarily put in place to serve the fibers industry guys, long time ago. So you have got a lot of small facilities around the world, supporting tobacco industry and tobacco industry itself has got a lot of small facilities around the world supporting a number of brands. So there is going to be a natural consolidation that it goes through, as we go forward. I think that's a real healthy thing. That's my personal view on it.

So it didn't surprise us. I expect you will see more, and I expect, just like you saw us take down an inefficient plant, you will see those kind of things going on and this industry kind of keeps itself in balance through the next couple of decades.

Vincent Andrews - Morgan Stanley

Okay. And just on the -- I know you don't impart Nutrinova anymore, but on the sweetener business, how core is that still? We saw last week I think, the wild flavors business was sold at a pretty attractive multiple, relative to where you guys trade. So how are you thinking about that, from a -- from that perspective?

Mark Rohr

It’s a really interesting business. What we do in -- if I think about it from a customer facing technology point of view, we combine chemistry and applications to -- in a pretty unique way for the industry, and what's nice about that business is, we actually do that on a organic chemistry perspective. We are actually designing flavors and designing taste. I like that model, I like that concept, take chemistry and really modify it in a unique way and create a very unique application for the end market. So that kind of model is an integral part of Celanese.

Having said that, we have strong ambitions for that business, and we are putting a lot of energy and effort into driving it. If it got to a point where someone else could drive that better, we'd certainly consider that. Right now, we think we are the right company to promote that technology and that brand, and I think inherently, its good for Celanese too, having that portfolio.

Vincent Andrews - Morgan Stanley

Okay. Very helpful. Thanks very much.

Mark Rohr

Thanks Vince.

Jon Puckett

Thanks Vincent. Laura, let's move to the next question.

Operator

So next we have Jeffrey Zekauskas of JP Morgan.

Jeffrey Zekauskas - JP Morgan

Hi, good morning.

Mark Rohr

Good morning Jeff.

Jeffrey Zekauskas - JP Morgan

In the equity income and other category, you have other activities and in the quarter you reported $36 million, I think it was $10 million in the year ago quarter, and often its sort of five or six. What is that number, why is it so big?

Mark Rohr

Chris, you want to take Jeff through that?

Christopher Jensen

Yeah Jeff; that other activity segment has got a lot of stuff in it, but think of it generally being the functional activities of the company. In addition to that, another big slug is the non-service cost, elements of our pension programs globally go through there. So that movement you're seeing quarter-to-quarter and year-to-year, I think I mentioned in the comments that we are pre-released. Some of that is just the timing of when our compensation changes come through. Some of it is money we are spending on initiatives that benefit the whole company and that's why they show up in that other area.

Jeffrey Zekauskas - JP Morgan

I didn't mean the other activities in the operating profit line, I meant the other activities in the equity earnings line?

Mark Rohr

That's primarily related to our interest -- Chris, do you want to cover that one?

Christopher Jensen

Yes. There are several, and one of them is particularly large. Investments in these [indiscernible] companies over in Germany who manage side operations, side infrastructure for multi-plant chemical sites, and we have partial ownership in some of those operations. So if you're looking at the increase that you see there, quarter-on-quarter, mostly relates to a debt restructuring that happened, cleared down at a subsidiary level, underneath one of those investments. It was a situation where they had the opportunity to favorably restructure their debt. There was a big gain that came through. Its about $48 million for the company and most of it shows up in that other line that you're seeing.

Jeffrey Zekauskas - JP Morgan

Maybe I can follow-up. So my second question is, I guess a question for Mark, when you look at the European economy and the Chinese economy, do you now see them on a much firmer footing or do you have a different view? How do you see your demand from those two regions in particular going forward?

Mark Rohr

Yeah Jeff, if we just look at that, the first half this year, every economy in the world is better for every business we have year-over-year with the exception of Brazil, where we are seeing some slowdown, some systemic slowdowns that are impacting the automobile industry there, and most of our business there is auto related.

In Europe, Europe has certainly learned to manage their debt crisis, or seems to be managing their debt crisis in a way that there is more certainty throughout the EU in their future. Of course, we are big players in the Engineered Materials space there and the Auto space, and that has been classically pretty good, although we are seeing some trends down year-over-year in Automotives there, that will probably impact us a bit in the second half. But if you look at coatings, if you look at C1 [ph] chemistry derivatives. Generally speaking, Europe is doing fine, and some signs of life and regions of Europe that have been pretty stagnant. So we are pretty pleased with Europe.

India is better. Part of that is just pure optimism over Modi, but I think it is sort of the nature being down for so long, things have started picking up again, they seem to have more confidence to make investments there, that certainly had not been in place.

Southeast Asia seems to be doing well. We are particularly pleased with our progress in Indonesia as an example, and feel pretty good about the election change that's occurred there and then what that means for that economy.

In China, yeah, China is getting better Jeff. I think there is tremendous support for the Chinese government by the citizens of that country. There is a strong view that the Premier has the mandate to address the economic and social challenges of the country, and they have given him lots of latitude to do that. His moves against corruption there have been really positive and well received. So we feel good about China and one of the things I will say, maybe this is wishful thinking, is that the move on a part of a Chinese government to address some of the poor legacy investment decisions they have made, tighten up liquidity a bit, I think is trading [indiscernible] where businesses are making more rational decisions now than they used to make. At least it seems that way to me. We are not seeing a lot of crazy investments in our space. Investments that were guaranteed to have no return. That just doesn't seem to be happening right now.

So industries are getting a bit tighter, and pricing is -- has more of a flavor, so it should return on capital to it today than it used to have.

So we feel pretty good about the world, notwithstanding some of the craziness that's going on in some parts of it right now.

Jeffrey Zekauskas - JP Morgan

Okay. Thank you very much.

Jon Puckett

Thanks Jeff. And Laura, let's move to the next question, and we will have that be the last set of questions.

Operator

Okay then. Our final question will come from Hassan Ahmed from Alembic Global.

Hassan Ahmed - Alembic Global

Thanks so much. Mark, just wanted to revisit AI. More specifically your guidance for the second half of the year. For $165 million in EBITDA going down to what you referred to as a more normal quarterly run-rate of $110 million to $120 million. So I just wanted to get a sense of sort of what really is embedded in that guidance with regards to, how much of that decline is coming from, call it, moderating acetyl pricing, or how much of that is from, let's say, higher methanol prices?

Mark Rohr

Hassan, there is nothing wrong with your question boss, I am probably not smart enough to answer it. What I will tell you directionally, is that we think we are roughly the same or trending down just a little bit and in AI, second quarter to third quarter and we think it would be a deeper trend down in the fourth quarter, as some of these great companies out there that have not been able to run their plants or get them back in operation. And when we do that math and kind of roll it all up, and we get our earnings in the second half to be a little bit less than our earnings in the first half, and that kind of gives us the forecast that we have out there.

Hassan Ahmed - Alembic Global

But I mean, more specifically on just the raw side of things, are you expecting sort of any headwinds from raws? Will it be a tailwind?

Mark Rohr

No. I am not expecting any headwinds in raws, nor am I expecting any headwinds in raws, nor am I expecting any favorability either. I think within that norm, we go out there and we try to make sure we cover, if we have headwinds and if we have -- we always try to make money, so if we get an extra penny that comes through from raw materials, that's great, we try to put it in our back pocket. But no, I wouldn't -- I think -- there is nothing wrong again with your question, but I think our ability to be real specific with that is just a bit of a challenge. So I will give you an example in the -- if you look at it from a second quarter to the third quarter -- for our corporation as a whole, we think we are going to be -- maybe a little bit favorable in the third quarter versus the second quarter in raws. That's may be -- but at the same time, if I look at that in the second half versus the first half, maybe we are going to be impacted maybe to the tune of $20 million, as we see some real changes in some of the fundamental materials in different spots in the world.

So that's the kind of volatility we see moving through these numbers, all of which we try to just manage on a day-to-day basis.

Christopher Jensen

Hassan, let me add one thing there too. When you asked your question, I think I heard you say 165 of EBITDA versus 110 or 120? When you said 110 to 120, he was talking about EBIT, 165 was our EBITDA.

Hassan Ahmed - Alembic Global

Understood.

Christopher Jensen

There is 120 there.

Hassan Ahmed - Alembic Global

Understood, fair enough. Now just with the guidance for 2015, that sort of earnings hit guidance from the contract expiration. Just wanted to get a sense of, what does that bake in, in terms of operations at the new facility? Does that bake in sort of normal operations collate in Q4, because you were quite specific in saying the plant should be sort of ready by September and operational in October. So does that factor in, sort of a full fourth quarter of normal operations?

Mark Rohr

That's exactly right. So what we have said when we worked our schedule out, that we will be fully exposed for one quarter to commercial methanol prices of next year, and then every one quarter next year, and this will be the fourth. We will have operational -- our facility, that will cover two thirds of that domestic methanol, and the other third will be exposed. That's how we do the math in there. Of course, I can't guarantee you that day-to-day but that's our best guesstimate on that date. So each day that moves around, let's call it $0.5 million, that's the kind of volatility in there. The other one you have got is nat gas, and actually methanol costs in U.S., those are the three factors that go in that math.

Hassan Ahmed - Alembic Global

Understood. And a final one if I may; obviously we saw West Lake announce an MLP, favorable reaction to that. Within the methanol domain, you have an MLP in OCIT, good multiple there. Now as you're starting up this methanol facility and considering potentially another methanol facility. Any thoughts regarding sort of fighting for an MLP for those?

Mark Rohr

Yeah, Chris you want to -- I mean, we have certainly looked at -- not for the first and the second, but the first is done without the second.

Christopher Jensen

Hassan, I wanted to step back and say first of all, the timing, if we did something like that, would be quite ways out [ph] I mean, these things have to be fully operational, making money before you can go try to sell shares in an MLP. I just want to make sure everybody is worried that this would be your [indiscernible] (44:09). It is something we have looked at. We are sharpening our pencils on that. One of the things we want you to know, that we think about is, the fact that enter into that space as a trade between getting paid now and yeah, we understand the concept of the multiples that happen in these deals, versus having appropriate pricing on our methanol that we need going forward, and that's what we look at.

Hassan Ahmed - Alembic Global

Understood. Thank you so much guys.

Mark Rohr

Thanks a lot. Appreciate your questions.

Jon Puckett

So with that, that's the last question. So we will wrap up here. Folks, I will be around to take calls later, as well as Mark and Chris. So just let us know what's on your minds. Thanks for your time this morning.

Operator

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

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Source: Celanese's (CE) CEO Mark Rohr on Q2 2014 Results - Earnings Call Transcript

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