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Celanese Corporation (NYSE:CE)

Q4 2011 Earnings Conference Call

January 31, 2012 10:00 AM EST

Executives

Jon Puckett – VP, IR

Dave Weidman – Chairman and CEO

Steven Sterin – SVP and CFO

Mark Oberle – SVP, Corporate Affairs

Doug Madden – COO

Analysts

David Begleiter – Deutsche Bank

Bob Koort – Goldman Sachs

Frank Mitsch – Wells Fargo Securities

John McNulty – Credit Suisse

Duffy Fischer – Barclays Capital

Kevin McCarthy – Bank of America Merrill Lynch

Andy Cash – UBS

Laurence Alexander – Jefferies

Hassan Ahmed – Alembic Global

P.J. Juvekar – Citi

Mike Ritzenthaler – Piper Jaffray

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Celanese Corporation earnings conference call.

My name is Lacy and I’ll be your coordinator for today.

At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call to Mr. Jon Puckett, Vice President of Investor Relations. Please proceed.

Jon Puckett

Thank you, Lacey, and welcome to the Celanese Corporation fourth quarter 2011 financial results conference call.

My name is Jon Puckett, Vice President, Investor Relations.

On the call today are Dave Weidman, Chairman and Chief Executive Officer; and Steven Sterin, Senior Vice President and Chief Financial Officer. Also in the room today are Doug Madden, Chief Operating Officer; and Mark Oberle, Senior Vice President, Corporate Affairs.

The Celanese Corporation fourth quarter 2011 earnings release was distributed via BusinessWire this morning and is posted on our website, celanese.com. The PowerPoint slides referenced during this call are also posted on our website. Both items were submitted to the SEC and a current report on Form 8-K. Please note, we have made one update to slide seven of the PowerPoint presentation to clarify the outlook for the Advanced Engineered Materials was for the first quarter of 2012.

This call, management may make forward-looking statements concerning, for example, Celanese Corporation's future objectives and results, which will be made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The limitations inherent in such forward-looking statements are detailed in the earnings release referenced on Page five of the earnings release referenced during this call.

Celanese Corporation's fourth quarter 2011 earnings release references the performance measures, operating EBITDA, business operating EBITDA, affiliate EBITDA and proportional affiliate EBITDA, adjusted earnings per share and net debt as non-US GAAP measures. For the most directly comparable financial measures presented in accordance with US GAAP and our financial statements and for a reconciliation of our non-US GAAP measures to US GAAP figures, please see the accompanying schedules to fourth quarter earnings release posted on our website, celanese.com.

This morning Dave Weidman will briefly review the performance of the company and Steven Sterin will provide an overview of the business results for each segment and the financials. We have a question-and-answer period following with Dave, Steven, and Doug.

I’d like to now turn the call over to Dave Weidman. Dave.

Dave Weidman

Jon, thanks, and welcome everyone to today’s call. Because we released our preliminary 2011 results two weeks ago, I’ll keep my prepared remarks brief, so that we can allow ample time for Doug and Steve to answer your questions.

2011 was a record earnings year for Celanese. Additionally, we hit several significant milestones critical to our commitment to grow earnings 10% to 15% per year. I’d like to highlight a few of these achievements.

First, we remain on track with our TCX ethanol technology commercialization plants. Not only are we meeting targets for our plants, but a few days ago, we saw a legislation introduced to the US Congress, that if passed, would open up ethanol produced using TCX technology to the $40 billion US ethanol fuels market.

Second, innovative new products and applications are making a larger contribution. For example, our emulsion products can now be found in nontraditional applications in the paper and carpet markets, as well as paints sold at the leading big-box retailer. Also, we’re excited about the pipeline of new-generation products from Ticona, Nutrinova, and our other businesses.

Third, the recently completed capacity expansions in AEM and the acetyl chain provide us with the capacity needed to support growth. This is particularly critical as we anticipate that global markets will continue to experience steady growth.

Fourth, we completed the acquisition of two product lines that will support Industrial Specialties’ strategic growth objectives. We continued a pursued approach of strategic bolt-on acquisitions.

Fifth, our results in productivity were continuous and sustainable. Across the company, hundreds of projects focused on sustainable productivity allowed us to meet or exceed our target of $40 million to $60 million of annual productivity net of inflation.

And lastly, off my announced intent to retire from Celanese in early April. The Celanese Board chose Mark Rohr to become our next Chairman and CEO. I’m confident that under Mark’s leadership, Celanese will continue to be successful in its strategic pursuit of becoming a premier chemical company.

As this will be my last earnings call, I’d like to publicly recognize the Celanese team who accepted the invitation to pursuit premier, and whose contributions I’ve had the privilege of discussing with our shareholders for almost 12 years. I’d also like to thank our investors, whose trusts and confidence in us was exceeded only by their willingness to offer their perceptive business insights and share their thought for world views.

With that, I’ll now turn the call over to Steven.

Steven Sterin

Thanks Dave. Before we get into the results and outlook for each business, let me put out some color on how we’re looking at 2012 and why we’re confident in our ability to deliver on our earnings growth goal that exceed consensus that was $4.70 per share.

With an assumed global GDP growth rate from the range of 3% to 3.5%, we have confidence that our businesses will deliver strong performance in 2012.

Let me highlight some specific items to consider when thinking about full-year 2012 adjusted EPS. Let’s start with Acetyl Intermediates. We expect full-year 2012 operating EBITDA to be similar to 2011 results. In 2011, AI volumes were down about 4% due to turnarounds in the first half of the year, and the rapid industry destocking at the end of the year. In 2012, we expect to see volume growth and productivity that is sufficient to offset the temporary 2011 margin expansion as the demand for acetic acid and downstream derivatives continues to grow a GDP plus a 100 to 150 basis points. We have the capacity in place to rebound from the 2011 volume decline and supply this growth. And our long-term objective is to maintain a 30% to 35% share of the global production.

In Advanced Engineered Materials, we normally expect to see growth of two to three times GDP over time with high translation to the bottom-line. In 2012, we continued to expect this business to deliver strong earnings growth. However, top line growth could be at the lower end of the two to three times global GDP average as we expect to see some softness in Europe. We also expect strong contributions from our affiliates in this segment as they continue to grow similarly to our businesses. Additionally, keep in mind that in 2011, our Asian affiliates were affected by the tsunami in Japan and had a major turnaround in Q4.

In Consumer Specialties, earnings are expected to continue to be stable and sustain from 2011 levels. 2013 is when you should see their earnings growth associated with our facility optimization and our China expansion.

Industrial Specialties is coming of a record profit year and we project continued year-over-year growth from this business, driven by our innovative programs and geographic growth.

Lastly, outside of the businesses, there is some puts and takes that roughly offset each other, including favorable interests, but also higher depreciation, primarily in AEM, due to the plant expansion startup.

In terms of calendarization, in the past we have seen seasonal earning patterns of 55% in the first half and 45% in the second half, primarily due to the second quarter dividend we received from our China acetate ventures. In 2012, we expect the shape of our earnings will be more balanced between the two halves, as Acetyl Intermediates and Advanced Engineered Materials continue to improve as we move through the first half, following the destocking in Europe seemed late in Q4.

To summarize, we’re confident in the growth potential of our businesses, in our business model and in our ability to achieve our earnings growth goals for 2012.

Now, let me briefly review the fourth quarter performance and outlook for each of our businesses, beginning with Advanced Engineered Materials on page seven of the earnings slide presentation. This business delivered higher sales and earnings year-over-year in the quarter, despite a weaker European economy. Net sales were $292 million in the quarter, up $18 million from last year. Higher pricing helped to offset the modest decline in volumes, resulting from temporarily softer end-market demand primarily in Europe. Operating EBITDA was $73 million, up $5 million from last year.

Looking ahead to the first quarter, sequentially we expect to see stronger volumes due to seasonality, and the first quarter should also benefit following the Q4 turnaround of one of our Asian affiliates, which we previously communicated, cost us $10 million to $15 million in Q4. Although, we see stronger sequential volumes early in Q1, year-over-year volumes are likely to be lower due to softer demand in Europe. However, our continued progress in innovation and geographic growth should result in earnings, relatively similar to prior year in the first quarter. Additionally, on a year-over-year basis, first quarter D&A will be modestly higher, due to the opening of our new POM unit in Germany, in high single low double-digit increases.

Let’s now turn to Consumer Specialties on page eight. We saw good volume growth in this business as demand continued to be strong for our consumer-driven applications. Net sales were $306 million, a $25 million increase from last year on higher pricing and volumes. But this could not have offset significantly higher raw material and energy costs. Operating EBITDA was $73 million, compared to $80 million a year-ago.

Looking forward to 2012, first quarter volumes and earnings will be impacted by an operational interruption at one of our production sites that we experienced in January, resulting in the delay of some shipments from Q1 to Q2. We expect earnings in the first half of 2012 to be similar to the same period last year, so this is just a first quarter or second quarter timing effect in the low-to-mid $20-million range. Full-year earnings in 2012 are expected to remain stable, and we expect similar performance to 2011.

Industrial Specialties’ results are on page nine. The improved results this quarter reflects continued growth from our innovation efforts and geographic expansion. Net sales increased to $272 million, largely driven by 13% higher pricing. These results demonstrate our increased success and higher value non-traditional applications like the transition from styrene butadiene to our innovative vinyl technology in paper and carpet. Operating EBITDA was $30 million, a 11% higher from last year.

As we look ahead, we expect first quarter volumes and earnings to increase, both sequentially and year-over-year as higher demand for innovative products drive continued growth.

Let’s now turn to Acetyl Intermediates on page 10. As we discussed with you in our conference call a couple of weeks ago, the weakened European economy resulted in lower end-market demand late in the fourth quarter, which led to an acute inventory destocking in the Acetyl Intermediates industry supply chain and resulted in the temporary compression of margins. Net sales were $849 million, a $50 million increase year-over-year, largely due to higher pricing and downstream derivatives that helped recover higher raw materials. This helped to offset modestly lower volumes in the quarter, but industry utilization rates declined significantly at the end of the quarter and compress margins as companies liquidate this inventory. Operating EBITDA was $95 million, $32 million lower than last year. As we discussed previously, inventory effects resulting from the fourth quarter destocking, including FIFO and other inventory items impacted our operating EBITDA results by approximately $15 million. We do not anticipate a similar inventory effect in the first quarter of 2012.

Looking ahead, we have seen normal volume seasonality ahead of Chinese New Year. But based upon feedback from our customers, we expect volume to begin to recover in the first quarter from the lower levels experienced in Q4. It normally takes a quarter or two from margins to recover in this industry, so we would expect sequential improvement in Q1 and then in Q2, as industry demand and utilization rates move back to more normalized levels. As a result of this, earnings in Q1 are expected to be slightly lower than prior year.

Strategic Affiliates performance are highlighted on page 11. For the full year, we reported a $192 million earnings from our Strategic Affiliates, a 14% increase over the prior year. Keep in mind, this number does not include a $150 million of equity affiliate EBITDA that is not reflected in our reported results. You can refer to table eight of our earnings release for further details on our affiliate performance in our proportional share.

On page 12, you will see our adjusted free cash flow, was $326 million in 2011, or 11% higher than last year, due to our record earnings performance this year. We delivered these results even when capital expenditures and pension contributions that were higher than last year’s levels.

On page 13, we’ve included our 2012 outlook for adjusted free cash outflows. Our forecast for capital expenditures includes our previously announced accelerated industrial ethanol projects. Pension contributions in excess of the amount expensed is expected to be in the range of a $100 million to $125 million. We expect to continue to generate strong cash flows that position us well to create value for our shareholders.

With that, I’ll now turn the call over to Mark, for some brief comments.

Mark Oberle

Thank you, Steven. I wanted to take just a minute to let everyone know that we’re currently planning our Investor Day for 2012 for the fall of this year. It will be in Houston, and focused on technology and innovations driven at Celanese, and we’ll provide more details as we get closer to that date. But I just wanted to let everyone know what we’re currently thinking.

With that, I’ll turn it over to Jon, for Q&A.

Jon Puckett

Thanks Mark. We have several people on the call this morning, so we ask that you limit your questions to one question and one follow-up. Lacy, please open it up for questions.

Question-and-Answer Session

Thank you. (Operator Instructions). And, our first question will come from the line of David Begleiter with Deutsche Bank. Please proceed.

David Begleiter – Deutsche Bank

Thank you, good morning.

Dave Weidman

Hi Dave.

David Begleiter – Deutsche Bank

David, any update in terms of Chinese demand now post the New Year and the trend on prices over the last couple of weeks and perhaps going forward.

Dave Weidman

Let me ask Doug to –

Doug Madden

Yes, Dave, a good question. Like Steven said in his comments, we’re seeing order patterns typical of normal seasonality. I’d say that everything we see right now I say is on track with our thoughts and our view you’re going to Chinese New Year as you know. And, typically, it’s a little softer until you come out of it. It leads probably about a week before the actual New Year. And by the time the units gets started up, it usually lags a little bit. This year, Chinese New Year was early, so in spite of that we’re seeing the orders and order patterns and the strengths really, really solid and in line with what our normal seasonality would be.

Dave Weidman

And, David, so I think that’s clear the case of Acetyls, which has a little bit shorter lead time, but that’s what we’re seeing. We do have some businesses, particularly our Advanced Engineered Materials, they have a bit longer lead time on their order books. And as we lookout 30 days, 45 days there we’re seeing sequential improvement across those businesses, and thus we’re encouraged by what we’re seeing in AEM and other businesses.

David Begleiter – Deutsche Bank

And Doug, just on acid pricing, China for the couple of weeks.

Doug Madden

Yes, so you’ve seen over the last couple of weeks, acid pricing starting to move up. I’m sure everybody looks at some of the published reports that are out there that has it little north of 400. I think it’s somewhere in the 420 type of range today, which is probably about $10 to $20 higher than where you saw it towards the end of the year.

David Begleiter – Deutsche Bank

And, as last, David on ethanol in China, it’s been a while since the initial May announced, what’s the potential for an announcement on Greenfield site, a partnership with one of the producers over the next – sorry, fuel markets over the next months here.

Dave Weidman

A lot of good progress has occurred. On a broad basis, you saw the announcement of the US legislation that was introduced, and this is important in the journey. I don’t think that the legislation is – we’re optimistic, but it will take a while for the legislation to get passed in the US. China, good progress going on there. And, I’ll let Steve, to talk about that.

Steven Sterin

Yes, our – as you look out to 2013, that’s in the middle of the year is when we targeted our first full-scale industrial ethanol unit to start out 200,000 tons that remains on track. We’re optimistic about the progress we’re making there in the permitting process and the engineering and construction process. So that remains on track. We’re still in negotiations with a couple of parks in China and working those options for Greenfield sites, so stay tuned on that, we’ll update you as we progress, but we’re still in negotiations.

And then you asked about fuels. We continued over the last 90 days from our last update, I’d say we’ve got a few more projects in the pipeline than we did then, the projects that we’ve mentioned continue to move forward, so the momentum is positive. We’ve said that we may not announce anything until we get to more definitive agreements just given the length of the negotiation process and the duration and the types of contracts that we’re talking about under our tolling model. But in general, we’ve got more commercial activity taking place in fuels with more projects over the last 90 days.

David Begleiter – Deutsche Bank

Thank you very much.

Steven Sterin

Thanks Dave.

Operator

And our next question will come from the line of Bob Koort with Goldman Sachs. Please proceed.

Bob Koort – Goldman Sachs

Thanks very much. And, congratulations Dave, good luck in your retirement.

Dave Weidman

Thanks Bob.

Bob Koort – Goldman Sachs

Can you give us some sense regionally what’s going on in AEM, if there has been any variations between trends in Europe to US, and what you’re seeing in Asia?

Doug Madden

Yes, Bob, this is Doug. So you kind of look around the world, as we said, this year we see still growth overall, some of that coming clearly in different regions of the world, a lot of that coming out of the innovation efforts that we’ve got going on in our own shop. But as you look at Europe, Steven said, we expect a little softness in Europe, coming out of the market, you look at things like auto builds, expected to be down probably mid single-digits year-over-year. But as you look at the US, we expect the US to be up by that or a little bit more and then across Asia as well, demand there continues to be strong for auto builds.

You think about the electronics market, last year, we saw little bit softer demand. We would expect with the GDP growth and with some of the programs that we’ve got in the commercialization, we start to see some growth there. So I’d say Europe flat-to-modestly down, US up for AEM, and Asia up as we continue to invest in the business there for growth.

Dave Weidman

So, Bob, I think if you translate that, we’d normally expect two to three times GDP growth in this business. You’ll probably be a little more towards the lower end, because of Europe. But when it comes to our control bars, our innovation efforts, and as Doug said the other regions, we’re seeing nice healthy demand. So still AEM will be a strong contributor to the growth 2011 to 2012.

Bob Koort – Goldman Sachs

If I could ask you on AI, you’ve had over the years capacity additions, you’ve had some productivity gains, what would you gauge your normalized earnings power in that business to be on an operating EBITDA basis?

Dave Weidman

Yes, we’ve talked a little bit about that in the past. If you go back to – if you look at the end of 2010 and the first part of 2011 before the downturn, we’re running in a 125 to 135 range. I think from where we are today that’s normal – what I’d say is normal. So we’d be probably modestly below that in the first quarter moving back towards that in the second quarter. And certainly we think we’re going to grow through that in the normalized range as we move later in the year. Just keep in mind, this business grows the GDP plus a 100 to 150. And so when you take out the softness of Europe and you begin to recover and get normal global GDP growth on top of that your new normal back half of the year should be a little bit north of that. And so, net-net, think of AI as being flat this year, but a little soft in the first half just as we come out of the European softness.

Bob Koort – Goldman Sachs

Great, thanks very much.

Operator

And our next question will come from the line of Frank Mitsch with Wells Fargo Securities. Please proceed.

Frank Mitsch – Wells Fargo Securities

Good morning, gentlemen. And, Dave, congratulations on a great career at Celanese, and best wishes for your future plans.

Dave Weidman

Thanks Frank.

Frank Mitsch – Wells Fargo Securities

Yes, sticking with AI, can you talk about the expectations for industry operating rates, where do you believe they were in the fourth quarter and what’s your sense as we progress through 2012, how the industry operating rates will be trending?

Steven Sterin

Yes, Frank. If you look at fourth quarter, we would take those rates probably in the – on average mid-70 range higher at the beginning of the quarter. As we’ve indicated, it came off fairly quickly. That means that some folks cutback substantially as they went into it. Some recorded the high-end of the curve, probably down in the 50% to 60% range. As you know, we were on our units, and we continue to run our units. But I’d say that as we now look at – we turn the page on the calendar year and look at the quarter and frankly the year, we’d probably have those in the low-80 type range for utilization.

Frank Mitsch – Wells Fargo Securities

So low 80 is where your expectation is for all of 2012?

Steven Sterin

Yes. And as industry and its demand kind of comes back with this global GDP, you’d kind of climb through there, but I think it’s low-to-mid 80 range.

Frank Mitsch – Wells Fargo Securities

And then your expectation is obviously that you guys would be in the mid 90s plus?

Steven Sterin

Well, again with the GDP growth, as the industry we run our rates full as you all know. So I think that’s a reasonable assessment.

Frank Mitsch – Wells Fargo Securities

Okay, great. And then if I could just ask a question on the Consumer Specialties, you talked about this operational interruption that it will impact you in the mid – low-to-mid $20 million during the first quarter. Can you give a little more clarity on that? Has that started? When you anticipate that being finished and where specifically is that facility?

Steven Sterin

Yes. Frank it’s done and it’s finished. It really is just the timing of some sales. The disruption was really tied to some third-party services. It’s – we’ve addressed that the units are – they’re operating. So really it’s just the timing of sales. Net-net to the year, no change, no blood, just the timing from Q1 to Q2.

Frank Mitsch – Wells Fargo Securities

All right, terrific. Thank you so much.

Operator

And our next question will come from the line of John McNulty with Credit Suisse. Please proceed.

John McNulty – Credit Suisse

Yes, good morning. And, again, Dave congratulations.

Dave Weidman

Thanks John.

John McNulty – Credit Suisse

Just a quick question. With regard to uses for cash, I know you’ve been looking for bolt-on acquisitions; I guess, you had a couple in the fourth quarter. Can you give us an update as to how w should be thinking about the pipeline and your uses of cash toward that pipeline in 2012?

Steven Sterin

Yes. We mentioned a couple in the fourth quarter. One of them actually closed in the first quarter of this year, the DuPont acquisition – I’m sorry Ashland acquisition that we completed in the AEM business, so we’ve got rolling in the first quarter. Those were the type of acquisitions that we call them center of the fairways looking at technologies, product lines, parts of businesses as we’ve talked in the past, so not a meaningful change in our strategy.

In terms of M&A, we’re still holding to a very strict financial discipline around four to six [inaudible] synergy multiple. Other uses of cash is really unchanged. Continuing to fund the pension plan as we’ve mentioned and then balance beyond that between – probably the next large use of cash is debt repayment over time, continue to reinvest in the business and in the projects that we’ve talked about like industrial ethanol, and then also share repurchases, and we’ve moved our dividend up over the last couple of years. So you can expect directionally similar types of the capital structure actions.

John McNulty – Credit Suisse

Okay, great. And just one last one follow-up. On the FIFO benefit that you got with pricing starting to move higher, should we be thinking about – or excuse me, the FIFO hit that you took, should we think about a potential FIFO benefit in the first quarter or is that something where the prices just haven’t moved enough to really move the needle?

Steven Sterin

So think about that as a cost that impacted us in the fourth quarter. It was included in our numbers, so we really just called it out to bring your attention to it. And the key issue is, it’s not something that will reverse, but it’s something that won’t recur. So if you – we provided that so you can get a sense of what the fourth quarter would have looked like absent that amount. So yes you’re right, as you move into the first quarter, you shouldn’t see those types of charges again.

John McNulty – Credit Suisse

Okay, great. Thanks for the color.

Operator

And our next question will come from the line of Duffy Fischer with Barclays Capital. Please proceed.

Duffy Fischer – Barclays Capital

Yes, good morning. I wonder if you could just give a little more color – you had given some EPS guidance for this year, how much of that will happen or that year-over-year change at the EBITDA level versus below the EBITDA level? And then if you could, you’ve also given a 2013 number of greater than $6, can you walk through the big bucket as you look out to ’13? Where you think that growth will come from, whether it’s new plants coming on line, some acquisitions, just price-volume? Thanks.

Steven Sterin

Yes, great question. So this year, you’ll see a little bit more EBITDA growth in EPS, because we do have some additional depreciation. We also have some favorable interest. Taxes should be in the similar range. So I’d say it’s fairly balanced, maybe a little bit more in EBITDA, because of the depreciation, not being in that line. And as you move to 2013, as we’ve said, to achieve our objectives of north of $6 a share, a lot of that is Celanese controllable activities.

I’d say the first category is being positioned for growth to move our innovations pipeline forward, whether it’s the expansion of our POM facility in Germany, our emulsions expansions in Asia, our expansions in our EVA business, and our industrial ethanol facility in China, those are levers that will provide us growth as we move forward. So think about growth driven by – some from GDP, but principally through our innovation efforts, and we’ve got capacity in place to grow.

The second area is – I failed to mention, sorry, one other growth area, which is the expansion of our Chinese joint ventures that will begin to see the benefit up in 2013 in our acetate business. And the second area, in our Consumer Specialties business, we’ll – should see this benefit from the shutdown of the Spondon facility, which is about $30 million to $40 million in 2013. So that remains on track and is a contributor to our earnings growth between ’12 and ’13.

So if I were to step back and just kind of summarize it kind of business-by-business, I’d say in the Acetyl Intermediates business, you can think about GDP plus a 100 to 150 basis points of growth, we’re positioned for it; the cost curve remains intact; and we also at our Investor Day last year talked about some nice productivity coming out of that business that will even strengthen ourselves on the cost curve.

In our AEM business, two to three times GDP with high conversion, we said we’ll be at the lower end of that, we expect to be more in the normal range next year as Europe begins to recover.

Consumer Specialties; as I mentioned, Spondon shutdown and the acetate expansion will drive the growth there. We have got some exciting innovation in our Nutrinova business as well. So you should see earnings growth in that business. We continue to – we have announced some price increases in that business.

And we think about our Industrials – Industrial Specialties business, actually we’re doing – our innovation programs were ahead of schedule. We thought we’d be around $200 million plus in 2013, we did a $150 million in 2011. So Industrial Specialties is becoming a bigger and more important part of the this strategy and demonstrating our true innovation programs.

And then I would say the other key element is the industrial ethanol startup that’s planned for the middle 2013 in China. Keep in mind that that’s actually a retrofit into our existing facilities. So we’ll be taking raw materials out of the acetyl product chain and moving them into the industrial ethanol business. So you’ll see some earnings growth come from that as well.

One more quick note, we’ve mentioned this before, but there are some upsides to the 2013 that are not included in our numbers, and that would be a recovering in housing in the US or Europe, but most likely the US, as well as recovery in automotives in the West. And so we’re excited about 2013. And we’re also generating significant cash flows. So you got to take that into account as you look at EPS growth that we’ll have and a very strong cash generation over the next two years.

Duffy Fischer – Barclays Capital

Great, thanks. And then just one on the ethanol. With the change, it seems like structural in the US on gas prices, how do you think about the value of ethanol geographically. So if you put in three buckets, China, US, and all other, how would you think about the value of your ethanol business?

Steven Sterin

Yes, that’s a great question. Industrial – I’ll break into industrial and fuel. And industrial will be the low-cost producer. Think of it similar to our advantage into acetyl. So we show a leading cost position to our customers from the industrial market. That’s why we think we can capture a significant portion of the growth in China.

In the fuels market, in the Eastern – well I’ll say broadly Eastern Hemisphere, so Asia, China specifically where you don’t have variable land, you don’t have biomass, you don’t have alternatives, you’re really competing against low prices which have shown a resiliency to stay high versus our low-cost coal-to-liquid or gas-to-liquid technology. So we think the value proposition is very strong in Asia and Middle East.

In the Americas, in Brazil and the US, they’re the largest markets, so it’s a tremendous opportunity, but you have a lot of capacity there today. We still think will be competitive certainly versus some of these new low-energy density technologies, whether it’s waste or biomass. And so we feel that we will also be the low-cost producer in this region of the world as well.

Duffy Fischer – Barclays Capital

Great, thank you.

Operator

And our next question will come from the line of Kevin McCarthy with Bank of America Merrill Lynch. Please proceed.

Kevin McCarthy – Bank of America Merrill Lynch

Yes, good morning. Dave, is it becoming more difficult in your judgment to obtain Greenfield capacity expansion permits in China? Some of your peers across the industry have expressed that concern albeit in another product lines where Celanese doesn’t not compete as someone is very close to the market there, I’d be interested to hear your perspectives and whether or not it alters in anyway expected timelines for your Greenfield ethanol plants in China.

Dave Weidman

Kevin, let me answer the last question first. The timelines aren’t altered, but it is different, it’s permitting environment today than it was seven years ago when we through permitting or the Nanjing complex, the Nanjing facility. China has matured an awful lot in their permitting process. The things they asked for are more contemporary with what we would see in Houston or what we would see in Germany, the western world. For Celanese, though, we brought that seven years ago, it wasn’t required, but we brought it anyway. In the world we’re in today, we’re bringing it, the reviews are very similar, the dialogs are very similar, it’s different today than it was seven years ago, but it’s not different from what you would see in another environment.

Really companies to bring advanced technologies and technologies that are efficient users of energy and raw materials, and which we feel both our acetyl technologies as well as our new industrial ethanol and fuel ethanol technologies meet those standards.

Kevin McCarthy – Bank of America Merrill Lynch

So it is fair to say then that your confidence level remains quite high that you’ll be permitted at either Nanjing or Zhuhai for Greenfield?

Dave Weidman

Yes.

Kevin McCarthy – Bank of America Merrill Lynch

Okay, great. And then a follow-up if I may for Steve. On slide 13, on your cash flow table there, you have a category called reserve/other indicated at a $190 million to $200 million. It looks to be a much larger number than you indicated last quarter for 2011, maybe up a $100 million, $110 million. I was wondering if you could elaborate on what is in that bucket and what is driving the increase, please.

Steven Sterin

Yes, the main driver there is that we pushed this – but if you recall we pushed the shutdown on Spondon out the year, so you’re seeing most of the cash outflow related to the shutdown of that facility taking place in this full calendar year and sort of being spread out over a couple of years. So we’ve lied on it in actuals into 2011. So really just the timing issue.

Kevin McCarthy – Bank of America Merrill Lynch

Timing issue, and you would expect that then to drop back down in ’13. Is that fair?

Steven Sterin

Yes, that’s higher than our normal run rate, which I’d say is more probably in that – as you said, $110 million to $120 million level.

Kevin McCarthy – Bank of America Merrill Lynch

Perfect. Thank you very much.

Operator

And our next question will come from the line of Andy Cash with UBS. Please proceed.

Andy Cash – UBS

Hi, good morning. You guys have talked about Celanese growth relative to GDP a number of times, so I’m just looking at that. Now, if you go back to 2006, global GDP has increased for the past five years and your overall growth has declined for the five, and then if you look cumulatively your volume would be down about 5% or 6% and GDP would be up about 14%. So I’m just curious, if you look at this volume decline, was it market share loss, was it markets declining, was it intentionally passing on some business, so if you could kind of capture what the overall reason from a high level would be?

Steven Sterin

Yes. I think if you look over the timeframe, one of the things – and we can – it’s all public and perhaps we can help you with you this is, there has been some divestitures that we’ve done that didn’t get Trespaphan [ph] treatment, so that’s affecting the – when you look at our volume lines.

So – but if you look across the Advanced Engineered Materials business, you can certainly see the growth there. That business was somewhere in – back in that timeframe around $700 million. We’re about $1.2 billion this year.

Acetyl Intermediates, we’ve continued to run full. And we say, over time, we’re going to grow with the market. So in Industrial Specialties, you could see the top line growth there. So I think you’re probably seeing some of the noise from some of the divestitures. So we can help you with that.

Andy Cash – UBS

Right. My understanding, when you report your volume that was on an ongoing basis, so I beg your pardon if I was not including that divestiture.

Steven Sterin

No. Some of the divestitures didn’t get that Trespaphan treatment where you’d normally strip it out.

Mark Oberle

Andy, this is Mark. There is one other structural thing you have to take into consideration particularly in our acetate business where we have shifted production from what we would count as revenue in the US or Europe, and have shifted that to match the market growth in China. So you see the offset significantly higher dividends coming into our acetate business, but you’re going to see less on a revenue basis, and that’s just part of our ongoing strategy for that business line.

Andy Cash – UBS

Okay. And one other question on the TCX. Given the CO2 issues surrounding, their use of petroleum and feedstocks, why do you guys have confidence that there is a chance from getting this through Congress?

Dave Weidman

Yes. As we look at – so when you look at the CO2 option footprint of various hydrocarbon based technologies, we think that we’re better than nearly all other options for the use of natural gas in the United States. So on a relative basis, it’s a very low CO2 option for the use of gas. The same holds true in China. If you look at competing technologies using coal, either coal-to-liquids or coal-to-energy, we’ve got an advantage footprint versus those other technologies as well. We think bio has a role too. We’ve always thought that that’s an important part of having a all of the above approach to solving our energy issues. So that’s how we view it.

Andy Cash – UBS

Okay, thank you.

Operator

And our next question will come from the line of Laurence Alexander with Jefferies. Please proceed.

Laurence Alexander – Jefferies

Good morning.

Dave Weidman

Good morning, Laurence.

Laurence Alexander – Jefferies

I guess two questions around visibility, and I guess I was wondering to what extent you can quantify some items. For AEM, it looks as if even after backing out the one-time adjustment, you’re looking for profits to double – roughly double sequentially. I was wondering if you could flush that out. And then as you think about the bridge into 2013, you listed about six different factors, can you just walk through which ones you think are – under your control, so – because my math looks it looks as if you’re about $70 million to a $100 million of year-over-year tailwind that’s directly under your control and not contingent on market factors. Is that roughly fair?

Dave Weidman

Yes, I’ll start with the first part of the question and walk you from Q4 to Q1, and Doug can explain you why that business grows at two to three times GDP. So keep in mind that in the fourth quarter, it’s the slowest quarter of the year, because of seasonality, customer shutdowns and just the seasonality at the end markets.

The first quarter tends to be one of the stronger quarters Q1 and Q2, so you’d certainly have more volume coming through, and you can see that historically as you look across that business. And also in the fourth quarter we had about $10 million to $15 million of charges coming through in our equity affiliates, because they had a major turnaround. And so you will see – you won’t see those charges again as you’ll move from Q4 to Q1. And our affiliates have a lot of similar customers and applications, and so you should see the growth rate that we talked about in our business show also in the affiliates. So we feel good about that type of Q4 to Q1 a walk that used to – Doug you want to cover the second question?

Doug Madden

Laurence, so with our AEM business, we’ve got leading positions in the industries that we serve. And if you take a look at the business model that we’ve got, we are set to drive through our innovation programs, being able to put, for instance, more parts, more weight, more value on bigger goals, to be able to bring innovation to the world of electronics which frankly has got some fairly growth rates. So as you kind of take a look at across the portfolio with our engineering and with some of the solutions that we bring to these small high-value parts, we’re able to grow substantially greater than GDP.

Remember also that we’ve been – we’re investing heavily in Asia, and the growth rates in Asia are certainly elevated. And I’m not speaking out just China specifically, but as you look across the globe, we’ve got great presence in each of the regions, and certainly in the highest growth regions, we’ve got a great portfolio of products that goes broadly across large application areas and all of those are in high growth areas, and we’ve got a business model that allows us to build close relationships with engineers in the value and use model that drives the two or three times GDP growth.

Dave Weidman

So at a high level if you were to walk from 2012 to 2013, think about this two to three times GDP as Doug said, we have some visibility, because we’ve got a pipeline, we’re working on model years that go out to that period of time. So you’ve got the market – the penetration in the applications. And so if you think about a business that’s generating 1.3 plus top line, you should think about 3 to 3.5 GDP, you get pretty strong top line growth. The translation is also very high.

These are high variable margin businesses, product lines, because they bring a lot of value to the customer, and they are replacing more expensive components where they enhance the cost position of our customer. So you get somewhere between 30% to 40% – 45% translation to the bottom line.

And then you also – so that right there, you could do the math on it, it gets you in the $40 million to $50 million a year of growth, and then you see another $10 million or $15 million coming through your affiliates because of the same types of drivers. They’ve also got advanced technologies and a POM, and there we’ve got an expansion taking place in one of those business – in one of those affiliates in Malaysia to serve the fast-growing Asia market. So we feel really good about the continued growth in this business.

Laurence Alexander – Jefferies

Thank you.

Operator

And our next question will come from the line of Hassan Ahmed with Alembic Global. Please proceed.

Hassan Ahmed – Alembic Global

Good morning, Dave.

Dave Weidman

Good morning.

Hassan Ahmed – Alembic Global

Question around the cash flows, particularly in 2011. As I look at the operating cash number, it’s around $638 million, and off that it seems around $285 million is coming from the affiliates. So if we net away the affiliates, it seems that the core business is generating around $350 million or generated around $350 million in 2011, which essentially is in line with the CapEx for that given year. So the question really is that going forward, how should we think about the non sort of affiliate business cash generation ability in excess of the CapEx needs?

Steven Sterin

Hi, this is Steven. I think you highlighted a couple of key points. So I think – I’ll make two points about the affiliates. One is, as we’ve talked before, we don’t get a full recognition of their earnings in our EBITDA, and table eight of our press release shows you that we have a $150 million of earnings not included. So I think that’s an important point as you look at the overall affiliates impacting the value of the company. The second key point is that these affiliates pay cash, they’re not just – P&L benefits they’re actually generating cash.

And then I would differentiate the affiliates into two categories, because our – even seen an affiliate – it’s going to be a platform for POM growth long-term as we’re going to build a facility there. But think of it today – it’s got a – a lot of it is hedged to raw materials. So it really is an offset to what’s happening in the business. So I would consider that more part of kind of normal operating cash flows coming [Technical Difficulty].

And then when you look at Celanese cash position today – when you look at 2012, keep in mind what I mentioned earlier, you’ve got higher reserve spending, because of our Spondon shutdown, but that’s got a very high cash payback. And then the other key as we are funding our pension plan, so to the extent you consider that a form of deleveraging, that’s in the $150 million range. So that’s the key part of operating capital.

So I think when you look at those components that helps to provide a little bit more granularity into what’s driving cash flows. But to me as I’ll look at it, we’re able to fund the continued expansion of really the portfolio globally as we’ve talked today about the projects that are out there fund the pension plan have a natural hedge in our even senior venture have a nice global position that complements our AEM business with our [inaudible] affiliates and still generate significant capital beyond that as we paid down $300 million in debt over the last 18 months.

Hassan Ahmed – Alembic Global

Very good. Thanks so much.

Dave Weidman

Thanks Hassan.

Operator

And our next question will come from the line of P.J. Juvekar with Citi. Please proceed.

P.J. Juvekar – Citi

Yes. Hi, good morning. You’ve mentioned a shift from SB latex to acetyls in paper and carpet markets, is that driven by cheaper pricing or performance, and how big is this opportunity for you, can you just sort of go into that?

Doug Madden

P.J., you’ve clearly seen a shift on the SB versus the vinyls, but I wouldn’t want to understate the performance features that our vinyl’s technology bring us as well without taking you through to the whole thing is, it’s largely on performance, there is a significant shift underway on the pricing. So when you look at the value and use of pricing model that we bring to those two end users, it’s been significant increase in the portfolio.

As Steven has said, it’s a big market; styrene butadiene itself is a huge market. We see this as structural, we see this as long-term, we’ve moved forward in advance of our innovation targets there. And I can tell you that with the agreements in the commercialization plants that we put in place in ’11 and ’12, it’s a sizeable part of going forward what we think of is that business.

P.J. Juvekar – Citi

And then second question on your ethanol plant in China, I think it’s COFCO that has also announced a new ethanol plant from [inaudible] in China for 2013. Do you have any intelligence on that and do you think they have viable technologies to compete with you?

Dave Weidman

Yes, COFCO has been public about their intent. There is a number of others – I mean there is a lot of technology taking place – a technology development in early stages taking place. We – when we did our Investor Day, we were already aware of that, and so COFCO’s bold moves they’ve been out, talking about this technology and working on it for quite a while.

We still think that we’ve got the lowest costs and most scalable which is very important in the fuels industry technology, on a order of magnitude five to 10 times larger than anybody has announced even an entitlement size of scale. So we’re not surprised by it, we’re aware of it, and we realize this is a big playing field the fuels industry, and there is a lot of players trying to figure out ways into the space through different routes. But we think that our route, because of leverages, our advantage in Acetyl Intermediates and what we have done there over the last 35 years positions us as the leader in the ethanol industry going forward.

Doug Madden

And, P.J., the only I’ll add to that, I think that’s – that announcement is dated, but I think it’s a – I think it’s a demonstration unit. I think it’s a small demonstration unit it’s certainly not a commercial unit.

P.J. Juvekar – Citi

So on a commercial scale, you’re saying that your plants are five to 10 times larger than the competition, is that what you said?

Dave Weidman

Yes. If you look at – if you look at what people have said that they can do, nobody has demonstrated yet, but if you just take it on the face value, we offer a scaled advantage at lower capital and [inaudible] technology, which typically I wouldn’t point out, because at the end of the day it’s ROI. But we’ve got that advantage. And then when you look at the fuels industry, because of the size of refineries are million tons facilities match up really well for the fuels industry.

P.J. Juvekar – Citi

Thank you.

Operator

And our next question will come from the line of Mike Ritzenthaler with Piper Jaffray. Please proceed.

Mike Ritzenthaler – Piper Jaffray

Good morning, guys. My question is on the CapEx for TCX. On slide 13, you have highlighted the $350 million to $400 million in 2012. Can you give us a sense for the portion that’s allocated to the project that’s starting up in 2013 and maybe just kind of frame our expectations around the staging of that project, is it a 12-month sort of construction timeline? And then, I guess, a follow-up on that would be a Greenfield plant versus the retrofitting, sort of what the synergies you see in the retrofit that you won't have on the Greenfield in terms of CapEx and timing?

Dave Weidman

Yes, we haven’t commented specifically on what the CapEx is for this retrofit unit, because it is – but let me – I’ll give you a basis to go also. We’ve said that our investment in Greenfield is $300 million for a 4,000-ton unit off a Greenfield, and less than a double that for a million unit. So you could imagine that would be less than $300 million. And typically these are 24 to 36-month type of projects on the Greenfield, so it’s a little bit shorter timeframe when it’s a retrofit.

Mike Ritzenthaler – Piper Jaffray

Okay, thanks.

Operator

And our next question will come from the line of Neil Qualen [ph] with CLSA. Please proceed.

Neil Qualen – CLSA

Good morning, and thanks for taking my question. The question on the fuel or the challenges of fuel ethanol in China, there has been some discussion about China improving standards for M15, and about seven different provinces already have some sort of methanol blending in the gasoline stream. So curious what you see is the challenge for fuel ethanol to compete with methanol if these standards are finally approved and what – or what do you see in terms of the ability to prove out that strategy over methanol?

Dave Weidman

Yes. This is public, so you can go back and look at it. But Sinopec has talked about – so there is really two clear leaders that makeup the majority of the Chinese gasoline distribution market, Petrochina and Sinopec. And Sinopec has been public in stating that they’re not going to put methanol into their gasoline, because there is risk of toxicity, it’s a highly toxic additive. There are provinces that or that have methanol units that are underutilized. Methanol can be put in gasoline on a molecular basis per ton it is cheaper, but it’s a higher rebate for pressure and other challenges associated with it. And as we look at China as a whole, we view that as on the outside, but one of the solutions in some of the provinces could be methanol, but we think based on comments by the government, comments by the leaders in the industry that ethanol has a [inaudible] on it.

Neil Qualen – CLSA

Thanks very much.

Operator

Thank you. And, ladies and gentlemen, this concludes our question-and-answer portion of today’s call. I will now turn the call back over to Mr. Jon Puckett, Vice President of Investor Relations for closing remarks.

Jon Puckett

Thank you, Lacey. We’ll be around for questions later. We appreciate your interest in Celanese and the time you’ve spent with us today, and I’ll be around all day, and the rest of the week to take questions. Thanks.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day, everyone.

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Source: Celanese's CEO Discusses Q4 2011 Results - Earnings Call Transcript

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