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Celanese Corporation (NYSE:CE)

Q4 FY07 Earnings Call

February 5, 2008, 10:00 AM ET

Executives

Mark Oberle - VP of IR and Public Affairs

David N. Weidman - Chairman and CEO

Steven Sterin - Sr. VP and CFO

Analysts

David Begleiter - Deutsche Bank

Edlain Rodriguez - Goldman Sachs

Kevin McCarthy - Banc of America Securities

Sergey Vasnetsov - Lehman Brothers

Frank Mitsch - BB&T Capital Markets

Gregg Goodnight - UBS

Charles Neivert - Morgan Stanley

Andrew O'Connor - Millennium Partners

William Matthew - Canyon Capital

Operator

Good day ladies, and gentlemen, and welcome to the Fourth Quarter 2007 Celanese Corporation Earnings Conference Call. My name is Fab and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [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 Mr. Mark Oberle, Vice President of Investor Relations and Public affairs. Please proceed.

Mark Oberle - Vice President of Investor Relations and Public Affairs

Thank you and welcome to the Celanese Corporation fourth quarter 2007 financial results conference call. My name is Mark Oberle, Vice President of Investor Relations, and Public Affairs. On the call today are David Weidman, Chairman and Chief Executive Officer; and Steven Sterin, Senior Vice President, and Chief Financial Officer. The Celanese Corporation press release was distributed via Business Wire this morning and is posted on our website at celanese.com

During 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. These statements are based on management's current expectations, and are subject to uncertainty, and changes in circumstances.

Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political, and regulatory factors. More detailed information about these factors is contained in the earnings release, and in Celanese Corporation's filings with the Securities and Exchange Commission. Celanese Corporation undertakes no obligation to update publicly, or revise any forward-looking statements.

Celanese Corporation's fourth quarter 2007 earnings release references the performance measures, operating EBITDA, affiliate EBITDA, adjusted earnings per share, net debt, and adjusted free cash flow as non-U.S. GAAP measures. For the most directly comparable financial measures presented in accordance with U.S. GAAP, and our financial statements, and for a reconciliation of our non-U.S. GAAP measures to U.S. GAAP figures, please see the company's schedules to our earnings release, which will also be posted on our website.

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

Now I would like to turn the call over to Dave Weidman. Dave.

David N. Weidman - Chairman and Chief Executive Officer

Mark, thank you and welcome everyone to today's call. It's my pleasure to provide you with highlights of our record-setting performance in 2007, and share our expectations for 2008. We concluded 2007's record year with a very strong fourth quarter. Sales in the quarter were $1.8 billion, up 23% from the same period last year. Adjusted EPS was $0.93 per share, and our operating EBITDA was $349 million, both records for the quarter. Our full year sales were $6.4 billion, adjusted EPS was $3.42 per share, and operating EBITDA was $1.325 million.

Our fourth quarter performance came in somewhat stronger than expectations, we shared during Investor Day, in December, primarily due to stronger demand, better pricing particularly in Acetyl Intermediates, and Industrial Specialties, and lower cost across the company. Though we are pleased with our 2007 performance, the future looks even better. Over the last several years, our strategy, and culture of execution has delivered increasingly improved results. Our integrated businesses are delivering, and will continue to deliver high quality earnings. This past year's stellar results were achieved in an environment pressured by volatile raw materials, and energy costs, operational disruptions throughout the industry including our own company, and sluggish economic trends in a few specific areas. But Celanese is resilient, because of the global balance, and end market diversity of our businesses, and our strong business models, we delivered great earnings growth, and strong cash generation in 2007.

However as good as last year's results were 2008 and beyond look even better. Contributions from Celanese earnings growth plan, a program, which was initially outlined during our 2006 Investor Day lifted 2007 earnings by about $90 million. In 2008, contributions to EBITDA from this program should increase an additional $120 million to $130 million.

Now let me remind you that during our December 2007 Investor Day based on increased confidence, we raised this program's full impact, and now project that it will expand our earnings power between $350 million and $400 million by 2010 versus the 2006 base year. This means in 2009, and 2010 our earnings should expand by at least another $150 million. Several have asked about selling these growth beyond 2010. Let me summarize just three important actions that we've recently taken on this front. First, last month, we announced completion of an agreement, which will double our CO supply at Nanjing. This step increases the reliability of acetic acid supply for our global customers, and supports growth beyond 2010.

Second last week, we announced an agreement with a leading Chinese technology institute, SWRI, this deal, which Celanese will acquire technology license rights and development capability that will strengthen our strategic position within the Acetyl chain and support future innovation.

And finally, as Sandy mentioned, in our December 2007 Investor Day. We've taken actions to continue growing our highly profitable Advanced Engineered Materials businesses by expanding our new European POM plant capacity by 40% using the most advanced technologies, which will also lower operating costs. We also announced plans to add a polymer compounding unit in the Nanjing Complex. These are just a few of the action, which should provide you with confidence in Celanese ability to continue our strong earnings growth performance beyond 2010.

Now as we look forward, we're excited, and energized about growing earnings in 2008. Despite increasing concerns over the U.S. economy, and emerging questions about Europe and Asia, we continue to see good demand in our businesses, as our customers tell us that they do not see significant changes in their outlooks. Areas of weakness in 2007 such as U.S housing and automotive are expected to remain sluggish into at least the first half of 2008, but based on our current views, we did not expect substantial deterioration. European growth may decelerate from a very strong 2007, but is expected to grow at historic rates.

Asia particularly China, continues to experience high growth. Now obviously, although the global demand outlook looks relatively stable today, we will continue to monitor the economic environments of all of our served industries, and markets. However, Celanese has strong global presence, broad end market exposure, leading industry and technology positions, clearly defined growth objectives, and a culture of operational excellence, and execution. These factors give us increasing confidence that Celanese will continue to deliver earnings growth. So near term, we are more confident about our performance this year.

As you've seen in our press release, we raised our 2008 outlook for adjusted EPS, and operating EBITDA. Steven will walk you through the details of our guidance, but let me take a moment to focus on the specific dynamics for each of our businesses. First, in 2007, Acetyl Intermediates earnings clearly benefited from the strong pricing environment, and while we continued to expect pricing trends to ease, and move back towards more historic levels throughout 2008, we see the first half of the year being a bit stronger than the second half, and modestly stronger than we previously thought. Volumes for Acetyl Intermediates are expected to increase, driven by the growth of our Nanjing integrated complex.

Our downstream, Industrial Specialties businesses, which were challenged with high raw material cost in 2007 should experience margin expansion, as pricing, and their key raw materials ease throughout the year. Additionally, we expect to continue realizing the benefits of our revitalization efforts in our emulsions and PVOH businesses. Advanced Engineered Materials will continue on its path of improved earnings through growth, and innovation. 2008 earnings, however, are expected to be dampened somewhat as Ticona invests in its growth in Asia. And peak cycle cost for key raw materials such as methanol create margin pressure during the year. Expect an acceleration in earnings from this business as commodity prices decline.

Our Consumer Specialties businesses are on track to deliver additional sustained earnings growth, by continuing to capture synergies from the APL acquisition. With the combination of a focus growth strategy, a performance driven culture, and a demonstrated track record of execution, we have an exciting year ahead, as we continue to focus our efforts on actions that will significantly increase the value of Celanese.

With that I will now turn the call over to Steven.

Steven Sterin - Senior Vice President and Chief Financial Officer

Thanks Dave. Let's start by turning to page 8 in the Powerpoint presentation that's posted on our website. Net sales were approximately $1.8 billion, up 23% from last year's results on continued strong global demand for Acetyl Intermediates, positive currency impacts across the company, growth in Asia, and the additional sales from the APL business that we acquired in 2007.

Operating profits increased to $324 million from a $140 million in the fourth quarter of last year. In our U.S. GAAP operating profit results, we had approximately $93 million of income and other charges and adjustments during the fourth quarter primarily one-time gains associated with the partial business insurance recovery, the sale of our Edmonton Canada facility and resolution of commercial dispute with the vendor.

Net earnings were $214 million versus $77 million a year ago. Our adjusted earnings per share and operating EBITDA exclude the income from these one-time gains. Adjusted EPS was $0.93 a share, based upon 28% tax rate. Operating EBITDA was $349 million, up 30% from last year's results. Now let's take a look at the results of our businesses, starting with Advance Engineered Materials on page 9.

Net sales were up 13% from last year's results as the business experienced strong volume growth of 8%. We expect this business to grow at two times GDP as a result of innovation and the commercialization of new products. Higher raw material and energy costs however, continue to pressure margins for this business. Operating EBITDA was $45 million, down from last year's $58 million, driven by the lower margins as well as lower earnings relating to our equity affiliates.

Keep in mind that these businesses which include Ticona and their strategic affiliates price on the value and use of their products. And as a result do not pass increased cost on the customers at the same rate to some of our other businesses.

On page 10, net sales for Consumers Specialties were $279 million, up 25% from last year's results. These strong results were primarily driven by an additional $62 million of net sales from the APL business. Operating EBITDA was $57 million, an 8% increase from last year as higher overall pricing, continued strong demand and the incremental earnings from APL help to offset higher raw material and energy cost in the quarter Volumes were down versus 2006, as we closed the Edmonton flake facility and transferred their production volume to our China ventures. As part of our revitalization plans and our expansion in Asia. These stable, cash generating businesses tend to be economically insensitive. And we expect our performance to continue to deliver value throughout an economic cycle.

As shown on page 11, net sales for Industrial Specialties were $331 million for the quarter, a 7% increase versus last year. Higher pricing and continued strong demand and positive currency impacts contributed to the improved results. These businesses have very strong franchises in Europe and a growing position in Asia.

However, the business did have lower volumes in its emulsions and polyvinyl alcohol businesses resulting from the unplanned outage at the Clear Lake facility and the related force majeure. Operating EBITDA was $41 million, up from $25 million last year. As the business was able to generate substantial earnings growth. During a period with the raw material costs from near cyclical highs. The business continues to make great progress on the revitalization efforts. Highlighted in this quarter, by the increased presence from Industrial Specialties in China and the commercialization of the new emulsions unit in Nanjing.

Let's now turn to Acetyl Intermediates on page 12. Net sales were approximately $1.1 billion, up 30% from the fourth quarter of last year. Higher pricing and continued strong demand, favorable currency effects and acetic acid production from our new unit in Nanjing, China drove the improved results. The industry experienced continued favorable supply demand balances and additional unplanned outages drove higher acetic acid and VAM pricing across the globe. Operating EBITDA was $231 million, versus a $169 in the prior year and expanded margins, volume growth and higher dividends from our Ibn Sina cost affiliate. The Ibn Sina dividends driven impart by higher methanol prices help to offset the unfavorable impact of methanol in our Advanced Engineered Materials business, particularly in Europe and Asia.

Our equity and cost investment performance is shown on slide 13. The chart on the left highlights the income statement impact for both the quarter and the full year. In the fourth quarter, our earnings from equity affiliates and dividends from cost investments were relatively flat as the higher dividends received from our Ibn Sina cost affiliate were offset by lower equity earnings from our Advanced Engineered Materials affiliates.

For the full year 2007, however, you can see that we have recorded a significant increase in our earnings compared to 2006. In 2007, we received higher dividends from our acetate China ventures and our Ibn Sina cost affiliate. Driven by our revitalization plans in China and strong global methanol pricing. Keep in mind, that this does not include an additional $93 million, a proportional EBITDA from these affiliates above and beyond the net earnings that we report in our income statement.

Cash flow from our affiliates is shown on the right. Dividends from affiliates were lower in the fourth quarter of 2007 versus the same period last year. Primarily due to special dividend that we received from our polyplastics equity affiliate in the fourth quarter of 2006. Looking forward to 2008, we expect another strong performance, as affiliate income will be between $175 million and $185 million. But cash flow on the same high levels as 2007.

On page 14, you will see that in 2007, we continue to generate strong cash flow. Our strong operating performance and growth in Asia were key contributors. Our performance also included approximately $90 million of additional cash taxes when compared to 2006, and a positive cash impact of the one-time gains I referred to earlier. Adjusted free cash flow for 2007 was approximately $385 million, compared with $456 million in 2006, which reflects these items, as well as increased capital expenditures, primarily related to our investments in Asia.

In 2008, we expect to generate between $500 million and $550 million, of free cash flow on continued strong earnings and lower cash taxes. Keep in mind that this guidance excludes cash outflows of approximately $50 million to $100 million, net of reimbursements, related to the relocation of Ticona site in Kelsterbach, Germany, which Dave mentioned earlier.

Let me now summarize our 2008 guidance which is down on page 15. As Dave mentioned, we have increased our guidance for adjusted EPS and operating EBITDA. We now expect adjusted EPS to be between $3.40 and $3.70 per share and operating EBITDA to be between $1.29 billion and $1.36 billion.

We continue to deliver on our strategic growth plans and our current view of the global economic environment supports further earnings growth in 2008. I have also included other financial items for your information, but these have not changed since our initial guidance in December.

With that I'd like to turn it back over to Mark to open the Q&A.

Mark Oberle - Vice President of Investor Relations and Public Affairs

Thank you Steven. If we could have some instructions, for our participants and then we can get started in our Q&A.

Question And Answer

Operator

[Operator Instructions]. And your first question comes from the line of David Begleiter from Deutsche Bank.

David Begleiter - Deutsche Bank

Thank you, good morning.

David N. Weidman - Chairman and Chief Executive Officer

Hi, Dan.

Steven Sterin - Senior Vice President and Chief Financial Officer

Good morning.

David Begleiter - Deutsche Bank

David can you describe the situation right now in China in terms of acetic acid supply, demand, pricing, weather issues? Thank you.

David N. Weidman - Chairman and Chief Executive Officer

Dave, pricing in China today is modestly lower than it was 30 days ago, 60 days ago. But we're still in the 650 a ton range plus, minus. The weather has not had a material impact on our ability to get product out to our customers or to secure raw materials. We've got open water access and we're continuing to operate and run over there. So, that's where it is. As you know, Dave from our comments, we'd expect as the year goes on the pricing trends would tend to moderate over there as move back into ranges that would be more historic, and it moved towards that in the later half of the year.

David Begleiter - Deutsche Bank

And did on that given the decline in methanol, should your profitability at least they are saying that does not increase, even as prices come down?

David N. Weidman - Chairman and Chief Executive Officer

Yes, there is going to be trends down on prices and then methanol prices are going to come down as well that's our forecast, our expectation. But remember Dave, across the company we're relatively in different volatility in methanol prices. One part of our business is benefited while the other one is disadvantaged with lower methanol prices. Certainly as we look at Ticona as I indicated, their margins are pressured by methanol and as methanol prices come down, you can expect to see an expansion there.

David Begleiter - Deutsche Bank

And just lastly on the Industrial Specialties side, is this level of income now sustainable for, in Q4 going forward?

David N. Weidman - Chairman and Chief Executive Officer

Yes, I mean we're... I would say that we're at the early stages of our revitalization in Industrial Specialties. We did see two or three really good things towards the end of the quarter. We had very nice pricing in the marketplace, our mix changed towards a more advantageous, more value-added mix. And some of the restructuring costs associated... restructuring benefits associated with reducing our manufacturing footprint came in. So, our outlook is as we've indicated before that, this is a business that can do better, we're encouraged by what we saw in the fourth quarter.

David Begleiter - Deutsche Bank

Thank you very much.

David N. Weidman - Chairman and Chief Executive Officer

Thanks David.

Steven Sterin - Senior Vice President and Chief Financial Officer

Thanks Dave.

Operator

Your next question comes from the line of Edlain Rodriguez from Goldman Sachs.

Unidentified Analyst

This is actually Joe Herrick with Gutterner Research. Couple of things for you guys, can you talk about your operational improvement initiatives and your plans revolving around and it need actually in Six Sigma and what benefits you expect to see this year?

David N. Weidman - Chairman and Chief Executive Officer

Yes, we've... our program around our profit improvement program that we announced in 2006, has a number of elements associated with it, putting new manufacturing capacity in Asia, revitalization in some businesses, gaining synergies out of some of the acquisitions and so on. That entire program will benefit earnings this year in 120, 130 range. A big part of that... the improvement that we're going to see in the Industrial Specialties business is around the revitalization and a big part of that is restructuring our manufacturing footprint, our R&D, and our SG&A.

So we haven't broken it out much more than that, we do have an ongoing program of Six Sigma that we introduced as a company in 2000, that program plus several other programs we target offsetting inflation in our numbers. We view inflation to be somewhere in the $75 million to $100 million range and over the course of the last seven or eight years, we've been successful in offsetting inflation in the numbers through real cost takeouts associated with Six Sigma and other programs.

Unidentified Analyst

What methods are you guys using in your plans to measure yourself. Are you looking at ORONA? Are you looking at OE? What's important to you guys to measure, and how are you working, measuring yourself up to your competitors?

David N. Weidman - Chairman and Chief Executive Officer

We used a number of measurements... on an income statement, we'll look at EBITDA, as a percentage of sales, and EBITDA growth to measure ourselves against our competitors, and peers. On cash utilization, we have a high level metrics that we use around TSR associated with the output. Obviously, the bulk of programs, but in deployment of cash, and deployment of capital we'll use an ROI. We do on a lot of things look at a simple payback as an example, as we look at cash going into any type of restructuring program, or any type of investment for costs take out at manufacturing. We look at simple payback of 2 to 2.5 years on that and if we'll prioritize against those type of metrics.

For growth, the ROI is after-tax adjusted is somewhere in the upper teens, lower 20% range. I'd highlight to you that Investor Day this last December, we talked about our investment in Nanjing China, and that's an investment that will generate $600 million to $800 million of revenue, and have a earnings flow in the 150 plus range, or so in it, and the total capital deployed in that activity is in the $300 million range. Certainly north of 20%, and the way we look at it. Thank you.

Unidentified Analyst

Regarding throughput, are there certain plants around the world that are more concerning to you going forward this year than others, and how do you plan to address those issues a little bit quickly [ph]?

David N. Weidman - Chairman and Chief Executive Officer

No, no, I mean, we tend to look at our manufacturing footprint on an ongoing basis, good times or bad times, and we've been forthcoming in the type of areas that we are looking at reducing manufacturing footprint and expanding. Over the last seven years, we've essentially invested significantly in Asia to follow our customers, and we move back across North America and Europe on consolidated manufacturing in those locations. We are spending capital to go after some energy programs, and we've reduced the energy consumption by about 25%, since 2000, and we have plans to reduce an additional 25% from 2007 base year out for 2010. Thank you for your questions.

Operator

Your next comes from the line of Edlain Rodriguez from Goldman Sachs.

Edlain Rodriguez - Goldman Sachs

Thank you Dave. Quick question, when you are looking at Ticona, are you essentially at the mercy of raw material volatility, or can you add... can you sort adding some wiz bang [ph] in those products in order to add value for you to raise prices?

David N. Weidman - Chairman and Chief Executive Officer

Edlain you articulated our strategy very clearly. Ticona is a very substantial investor in technology, and technology development. That technology is in three areas, one is a short term application just getting in, and getting short term applications with our customers. The second is becoming established on platforms, so we are working 2010-2011 platforms, and transportation is an example, and getting specked in as those specs come in the volume will pick up. And then longer term, we are investing in changing molecular structures, looking at different platforms that we can... molecular platforms that we can drive growth off of. So what we've done in Ticona, we'll continue to do in Ticona is to focus on bringing value to our customers, and solving solutions. We don't chase a lot of the genericized activities. The focus on growth is clearly associated with innovation in bringing these solutions to our customers.

Edlain Rodriguez - Goldman Sachs

Okay thank you. Another question on cash flow there. You've been generating very strong cash flow. You do believe that the stock is undervalued. Can you talk about the merits of a share buyback, or what can you do with that cash flow?

David N. Weidman - Chairman and Chief Executive Officer

Yes, a great question. We look at cash flow and we believe it's the shareholders, cash, and our responsibility is to find great ways to deploy that capital. It increases value to the shareholders. 2007, I think was a good example of what we do with cash. We made an acquisition with some of the cash in APL. Very accretive acquisition, post synergies, it's probably going to be ForEx multiple on the acquisition.

We also sold a business that was in our mind not part of our strategy going forward. We did a share buyback to deploy some of that cash back to the shareholders. We did a restructuring program around our balance sheet, it's been about $265 million of cash, and breakage cost in order to put ourselves in a better position with covenant light agreements, and some great financing taking us out through 2014.

So, you know included in, and we continue to invest, our capital spending is up about $50 million from prior year. As we look at investing, and growing regions of the world, such as China. So then we look at it on an ongoing basis. We like acquisitions. We like being focused on growing, and following our strategy. We have looked at share buyback in the past, and I think as we discussed with the board different options, every option is on the table.

Edlain Rodriguez - Goldman Sachs

Okay thank you.

David N. Weidman - Chairman and Chief Executive Officer

Thanks Edlain.

Operator

Your next question comes from the line of Kevin McCarthy from Banc of America Securities.

Kevin McCarthy - Banc of America Securities

Yes. Good morning.

David N. Weidman - Chairman and Chief Executive Officer

Hi Kevin.

Kevin McCarthy - Banc of America Securities

Dave if I look at Consumer Specialties your volumes have been under some pressure there for several quarters now. You referenced the shift of flake production to your Chinese ventures. Have you seen any market share shifts in that business as well and can you update us on the integration of APL, is that process close to complete now?

David N. Weidman - Chairman and Chief Executive Officer

Yes. We have shifted volume as part of our revitalization program that was announced at IPO three years ago. We've shut down our Edmonton, Canada manufacturing facility that used to export an awful lot of flake to China and we've increased the flake production in the Chinese joint venture to offset that. And that's why our volumes are down.

Our earnings though were up as a revitalization program goes on. We have not seen substantial shift in share. It's a relatively stable market and there is not a lot performance big movements in share out there. APL is a great add for us. We've been just absolutely delighted with the type of activities that we've been able to put into APL. We bumped volumes little bit. We've been able to balance our global supply chain and we have some good savings on not only SG&A but also distribution cost. We have a little bit more synergies in 2008 in APL, but it is more associated with the annualized impact of activities that were completed last year. We are essentially down from an activity base.

Kevin McCarthy - Banc of America Securities

Okay, great. And then shifting over to acetyl, if I look at your volume growth there of 12%, what kind of a plant loading rate is baked into that for Nanjing and perhaps you could elaborate more broadly on your acetic acid operating rate, company wide and industry wide for that matter.

David N. Weidman - Chairman and Chief Executive Officer

Yes, let's talk about fourth quarter first. Fourth quarter as you are aware was a pressured quarter in the market. Demand was very high so all of our facilities in the fourth quarter were operating in full rates. Part of that was growth in the market, part of it frankly was as a catch up as customers and value chains added back inventory levels caused by our outage and other outages in the market in the middle of the year.

As we look at the first quarter operating rates continue to be in a very good range. I would probably say that on a... they are probably between 90% to 95% operating rates now. There have been some facilities in China; some of you who follow us closely, recognize that some of the Chinese facilities on stream reliability is lower. Some of the facilities have had trouble securing natural gas and they have been out or operating at 40% or 50% rates in Asia and China. But, overall we are operating somewhere in the 95 plus minus percent range.

Kevin McCarthy - Banc of America Securities

Okay. And then a final question for Steven if I may on the special items. If I look at Edmonton at $34 million, insurance recoveries of $40 million and another $31 million from the vendors dispute resolution. It's about a $105 million can you comment on how much of that is cash and how much was received in 4Q whether or not there is any tail looking into 2008?

Steven Sterin - Senior Vice President and Chief Financial Officer

Sure, actually all that was cash except for about $7 million and related to our insurance recoveries that we have already received in January this year. So, nearly all cash in Q4 and the rest received in 2008. We made great progress on this... took a moment about the Clear Lake insurance recovery. As we talked over the last couple of quarters these tend to be long run out processes that can take six to eight quarters, and I'm very pleased with the progress we've made to-date, collecting $40 million in cash as a progress payment and there will be still claims outstanding. We're going to continue to work those and expect to see cash in the future on what they do as those progress.

Kevin McCarthy - Banc of America Securities

Thanks very much.

David N. Weidman - Chairman and Chief Executive Officer

Kevin, keep in mind that any potential recoveries on the Clear Lake insurance would not be part of our guidance. So it be additive to that. We would adjust it that like we did in the fourth quarter. So we will be very clear and transparent when we do receive those and just to reiterate it's not in any of our guidance that we have for 2008.

Kevin McCarthy - Banc of America Securities

Understood thanks.

David N. Weidman - Chairman and Chief Executive Officer

Yes.

Operator

Your next question comes from the line of Sergey Vasnetsov from Lehman Brothers.

Sergey Vasnetsov - Lehman Brothers

Good morning.

David N. Weidman - Chairman and Chief Executive Officer

Good morning.

Sergey Vasnetsov - Lehman Brothers

David you mentioned that you have several options of cash deployment on table but you also have lot of cash in the table. In rough terms maybe $1 billion in 2008 not that you need to spend it all in one year. But I just wanted you to maybe focus a bit more on how you think about relative priorities, all different options, acquisitions, dividend increase, share buyback and maybe debt repayments anything else.

David N. Weidman - Chairman and Chief Executive Officer

Yes, thanks Sergey. I think our view of cash is we wanted to put it to use in a way that as I said before we'll generate higher return to shareholders. Our focus on acquisitions tends to be strategic centered the fair way, bolt-on acquisitions similar to APL or Acetex that we did in 2006. So I would say between investing in our ongoing businesses and following our strategy and if we can plan a good acquisition those would probably receive the highest focus in our pyramid of uses of cash. The lowest on the pyramid would be debt repayment and with the type of financing that we have today and with our comfort in ongoing cash generation through the future, and the maturity that we have on the debt, the lowest priority would be debt repayment.

And then somewhere in the middle would be, dividend, share buyback, and again Sergey we do have a nice cash position today. We have a forward leaning strategy associated with acquisitions, and investment in our businesses in Asia, and the growing region of the world. And so we will continue to look at things, and have discussions with the board, as we go forward as to use of cash, excess cash beyond acquisitions.

Sergey Vasnetsov - Lehman Brothers

Okay and as a follow-up, you said the number of joint ventures and some in Asia in particular. How would you... have any chance that you might be able to buy out your partner there?

David N. Weidman - Chairman and Chief Executive Officer

It's a deep desire of ours to buy these ventures out. The ventures we have put in place, particularly the ones in Ticona were put in place 40 years ago, in some cases close to 50 years ago, when the world was entirely different. You needed a strategic partner in order to access that part of the world, and the world has changed dramatically. Customers are looking for one global experience, one solution, not a bifurcated solution. And however the agreements are structured in a way as we have said in prior discussions that, don't give us unilateral right to buy a partner out and they are great ventures, who are generating great earnings, and great cash, and the partners at this point in time seem to not be motivated to sell. If they were, we are there.

Sergey Vasnetsov - Lehman Brothers

Thank you.

David N. Weidman - Chairman and Chief Executive Officer

Thanks Sergey.

Operator

And your next question comes from the line of Frank Mitsch from BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

Good morning gentlemen.

David N. Weidman - Chairman and Chief Executive Officer

Hi Frank.

Frank Mitsch - BB&T Capital Markets

Hey if I could just quickly follow-up on the insurance recovery, you said that you got about net 33 in the fourth quarter, and there should be some more in 2008 order of magnitude should we be looking at a similar amount that sort of order of magnitude in 2008?

Steven Sterin - Senior Vice President and Chief Financial Officer

No at this time, the only thing I'll talk about in 2008, as we receive $7 million additional cash, so in the P&L for GAAP say $40 million in the fourth quarter, 33 of cash, and another 7 of cash in the first quarter. Note the complexity of these claims its still too early to call, the impact in terms of cash, and P&L for 2008. And as Mark mentioned earlier, its not in our guidance so, as we progress through the year, we get a better sense of how this is evolving we'll update you.

David N. Weidman - Chairman and Chief Executive Officer

Frank I will underscore what we said at Investor Day in prior times as well that when we look at our performance in 2007, in spite of the outage that we have, we think that the performance of the business came in about where it would have been, if we didn't have the outage. The reason is that we had not only our plant that went out, but we also had a number of competitor's plants go out in this space, both VAM plants, as well as acid plants, and it touched... frankly all three regions of the world. And so from our customers' perspective, unfortunately it was a cascade of unfortunate situations, but the net impact for us with all these things thrown together was a year that came out about where we thought it was going to be, little bit higher on pricing, a little bit lower on volume.

Frank Mitsch - BB&T Capital Markets

But it terms of earnings, much better than your initial guidance for '07?

David N. Weidman - Chairman and Chief Executive Officer

Yes, 2007 was a good year for us. We continued to make progress in a lot of our businesses. I think from our perspective the progress that was made in growth in Ticona was ahead of where we thought it was going to be. Acetyl Intermediates had some good growth, the Nanjing facility as we highlighted came up earlier than we had anticipated. It came up around stronger than we thought it might have been. So, 2007 was a great year for us absolutely. APL acquisition and some of the synergies there came in faster.

Frank Mitsch - BB&T Capital Markets

That kind of bakes a question in mid-December when you had your Investor Day, you talked about your expectation for the fourth quarter and obviously you came in nicely higher than that. Do I have to believe you set the higher price in demand, so that would imply that December ended on kind of an up note, or a significant up note. Are those sorts of trends continuing here in the first quarter?

David N. Weidman - Chairman and Chief Executive Officer

As we appreciate you are asking a question Frank that most visibility that we have in our business is with our Ticona business. We have an order book that builds out, and we have some transparency. I'd say 45 days into the future. As we look at the Ticona order book out in to the February to March timeframe, we see growth. We see demand remaining good in all regions. We see some segments that have been sluggish, remaining sluggish, but on a year-over-year basis, we see a positive environment. I wouldn't call it robust, or be highly energized about it, but it is a growth environment globally in our businesses.

Frank Mitsch - BB&T Capital Markets

Dave, just a quick follow up in totality, you're describing it as in upbeat terms, but not quite swinging from the chandeliers, other regions of the world where you would be "swinging from the chandeliers?

David N. Weidman - Chairman and Chief Executive Officer

The Asia region, Frank, continues to be very strong. We continue to be impressed with two things, the growth in internal demand in China, and then how rapidly that growth is shifting towards latest greatest technology. Just to give you an example, transportation automotive. China today is the third largest producer of cars in the world. By 2012, it will be the largest producer of that. They tended to be basic transportation a year or two ago. Now they are putting additional creature comforts on the car safety systems, believe it or not, emission standards, fuel economy standards, GPS systems on some of the higher upgraded models. They are very rapidly moving towards a western type of vehicle. What that means for us is additional pounds of Ticona type product on an automobile. So I would say that Asia, China in particular continues to register good growth and probably somewhat ahead of what we thought it might be.

Frank Mitsch - BB&T Capital Markets

Terrific, thank you.

David N. Weidman - Chairman and Chief Executive Officer

Thanks Frank.

Operator

And your next question comes from the line of Gregg Goodnight from UBS.

Gregg Goodnight - UBS

Good morning all, hi, you mentioned the cost pressure that Ticona saw qualitatively, how much of that cost pressures due to high international methanol prices and if methanol prices subside would the cost pressure subside?

David N. Weidman - Chairman and Chief Executive Officer

It's... methanol prices as you know Greg, it just shot up and our ability to... frankly our strategy is not to pass those along customers because we sell on value and we have great margins per pound on these types of products, but order of magnitude it was about $30 million that we saw it was some pressure on the margins. And yes, you are absolutely right, it's the model that as these commodity prices decline, methanol is the biggest one but it also consumes ethylene and some other propylene derivatives. We would expect that you would have acceleration in margins.

Gregg Goodnight - UBS

Okay, question on this Southwest Research Agreement, what technologies are they into? Do they have methanol carbonylation technology? Or is it more downstream polymer? Is it even more even downstream from that application related?

David N. Weidman - Chairman and Chief Executive Officer

There is... it's a... this is all public information, but let me summarize it for you. Southwest Research Institute has technology associated with the CD gas oil production, some in downstream products, methanol carbonylation have some technology around that. So with this transaction, we were fortunate to acquire license rights exclusively for that technology plus they are very creative group and we are excited to get involved and have them work with us on expanding and extending our advantage in this change.

Gregg Goodnight - UBS

I see. Historically have they had... or have they given our sole methanol carbonylation licensing?

David N. Weidman - Chairman and Chief Executive Officer

Yes, there is the few plants in Asia that are operating and others that had been licensed, they tend to be smallest plants but yes, there was a plants that they had licensed.

Gregg Goodnight - UBS

Good. Just a clarification for my purposes. You mentioned the free cash flow of $500 million to $550 million expected in '08. And then you also mentioned the cost to back cash of... I thought I heard $50 million to $100 million this year, is that reimbursable in this year or is any of that in the 5 to 550?

David N. Weidman - Chairman and Chief Executive Officer

Gregg, let me give you a little context on then will Steve will answer this specific question. When we established the settlement with Fraport to move our facility and sell our facility, we essentially brokered an arrangement that was cost neutral. Now what does that mean? Well it means not only capital spending, but also any cost associated with prequalification with customers, anything associated with any labor that needs to be done and it was a fixed amount. The agreement, we've also indicated provides incentives to be totally spent in Germany, or disincentives if it's not totally spent and not spent in Germany. And then Steve do you want to walk through kind of how the cash comes in.

Steven Sterin - Senior Vice President and Chief Financial Officer

Yes, as we talked about last year, we expect to receive €670 million in reimbursement. But that's going to be over an extended period of time between now and 2011. And we are beginning the preconstruction process, and our capital expenditures will begin to occur overtime and because of the lumpiness of the reimbursement versus our spending, we wanted to provide transparency to the airport relocation. So you'll see in all of our reports beginning this year and going forward will highlight the net impact separately from our normal capital expenditures or the relocation. But I did mention in 2008, 50 million to 100 million is in debt over the reimbursement and we will receive about €200 million euros in reimbursement 2008.

David N. Weidman - Chairman and Chief Executive Officer

And Gregg, just to put a bow on it and underscore what I said in the opening remarks, that facility will be 40% larger than our existing facility to support the growth in Europe, and it will employ the latest greatest technology not 30, 40 year old technology, and yield lower operating cost.

Gregg Goodnight - UBS

Okay, when you said €40 million to €50 million net, that's net positive or net negative of reimbursements?

Steven Sterin - Senior Vice President and Chief Financial Officer

Negative this year. It will be the outflow $50 million to $100 million.

Gregg Goodnight - UBS

Okay and that is not in your free cash flow of 500 to 550?

Steven Sterin - Senior Vice President and Chief Financial Officer

That's right.

Gregg Goodnight - UBS

Okay, thanks.

Steven Sterin - Senior Vice President and Chief Financial Officer

Thanks Gregg.

Operator

Your next question comes from the line of Charles Neivert from Morgan Stanley.

Charles Neivert - Morgan Stanley

Good morning guys.

David N. Weidman - Chairman and Chief Executive Officer

Good morning.

Steven Sterin - Senior Vice President and Chief Financial Officer

Good morning.

Charles Neivert - Morgan Stanley

Got a couple of quick questions. The progress on the China facility, is that sort of in line with what you guys have been talking about? Is it moving a little long or little bit quicker and given how quickly the acetic acid came up. Are you expecting sort of maybe something close to similar performance in terms of bringing up these facilities at this point, having learnt from the first pass through?

David N. Weidman - Chairman and Chief Executive Officer

We're right on track, I'd say that some units are modestly ahead of other units may lag a month or two. But as we stand here today we have an operational acetic acid unit. We have an operational emulsion unit and our long fiber units, Celstran unit became operational this month. We have three other units that are currently under construction, we anticipate startup through this year and into next year that's a GUR unit and an hydride unit and also a VAM unit. And then we announced in the fourth quarter that we are going to put in place a 7th unit which is a compounding unit and that should be operational in 2009.

The learnings from acetic acid startup I think are several fold. First, we were frankly delighted with the quality of construction at the location. Second, we were diluted with the employees and the skills and capabilities that they brought to the job. And third we are delighted with the raw material supplier. The CO vendor was... in our mind one of the question marks that we had going into among others. But that question mark was eliminated and that's what gave us confidence to go forward and commit to a doubling of the CO supply in the 2009, 2010 timeframe.

Charles Neivert - Morgan Stanley

And one other... you talked about obviously the Chinese car production coming up rather rapidly and moving more toward convenience as you see typically in the U.S. and Europe are more typically here. How is your capture rate on putting Ticona products in those cars and versus what you got in some of the others here? I mean not in tonnage, but just sort of X tons... X pounds are available, how much are you guys taking?

David N. Weidman - Chairman and Chief Executive Officer

Yes, I'll take it into two main areas. There are a lot of western transplants, either European or North American transplants that are taking their production over there and manufacturing there, some for local consumption but as much as anything to capture the labor arbitrage and move it to the other parts of the world or finished products to other parts of the world. In that area it is essentially 100% capture rate either ourselves or through the affiliated companies, we are capturing essentially a 100% of that.

With the innovation by Chinese manufacturers, I say our capture rate is pretty high, and I am sorry Charles I don't have the details on that. But I will tell you that we are seeing at an incredible dynamic where the Asian manufacturers want the latest and greatest technology and they are willing to pay for it. And so, when we bring in our learning's over the last 20, 30, 40 years in Ticona in a particular application such as the fuel injector system in automotive or a safety device in transportation. There is very rapid acceptance, there is very rapid prototyping and putting on to a new vehicle or a new appliance. And they pay for the innovation that we bring to it. We are not chasing the low end business over there, its high end.

Charles Neivert - Morgan Stanley

And just as a follow on, I mean if you look at let's say, a U.S. or a European company, how... versus sort as to China, I mean how quickly did they bring prototype to market versus here, they talk about, you want to redesign a particular car its X number of years. How quickly can they bring in new parts and things like that into the cars and incorporate some of your products?

David N. Weidman - Chairman and Chief Executive Officer

It's markedly faster in China than it is here. Again we saw one example, recently that took... I think three years of prototyping and development in... I think this is a European... within the European context and it was done in nine months in China.

Charles Neivert - Morgan Stanley

Okay. That's it. Thank you very much.

Steven Sterin - Senior Vice President and Chief Financial Officer

Thanks Charles.

David N. Weidman - Chairman and Chief Executive Officer

Thanks Charles.

Operator

Your next question is from the line of Andrew O'Connor from Millennium Partners.

David N. Weidman - Chairman and Chief Executive Officer

Hi Andrew.

Andrew O'Connor - Millennium Partners

Hi David, Steve, Mark congratulations on the quarter.

David N. Weidman - Chairman and Chief Executive Officer

Thanks Andrew.

Andrew O'Connor - Millennium Partners

Related to the industry production outages in Acetyl Intermediates, how long do you guys expect current outages to linger? Thanks so much.

David N. Weidman - Chairman and Chief Executive Officer

Yes the overall view that we have has changed in the last six months. We had assumed that there was an on-stream reliability for the industry in the 90% to 92% range. We found though that the new facilities coming in China bring the overall industry average down to 87%, 88% on-stream reliability. The Chinese facilities and the raw materials suppliers that tie into them have not been able to have as much success in keeping their plants running as western manufacturers have, certainly as we have. And as a consequence of that it's tough to predict exactly what units are going to come up and when they are going to come up or down. But we do expect supply demand through 2009 and 2010... excuse me through 2010 to be very robust and stay in the 90 plus percent range. It could happen in any given year.

Andrew O'Connor - Millennium Partners

Got it, Thank you Dave, again great quarter.

David N. Weidman - Chairman and Chief Executive Officer

Thank you Andrew.

Mark Oberle - Vice President of Investor Relations and Public Affairs

We have time for one last question.

Operator

Your last question is from the line of William Matthew from Canyon Capital.

William Matthew - Canyon Capital

Hey guys kind of following-up on that previous question, you... the current spot prices for acetic acid are in Asia. I think you mentioned 650 per ton?

Steven Sterin - Senior Vice President and Chief Financial Officer

Yes, it's in that range.

William Matthew - Canyon Capital

Okay. What is your guidance based on a per ton basis. What kind of per ton number are you factoring in?

David N. Weidman - Chairman and Chief Executive Officer

We judge that, though we judged at our... well let me back into it. The pricing in China now is set by some supply demand, but more than anything, that the marginal cost of the high cost producers. And that's the ethanol, and the ethylene guys, principally the ethanol guys. And so based on the reports we see out there, we believe the pricing for these high cost guys are going to trend down. Ethanol prices are going to trend down, and so through the year we have our prices trending down associated with that. And I would also say that into your pricing, we have it somewhere $550 and $600 a ton.

William Matthew - Canyon Capital

Okay so $550 to $600, I guess it's just hard for me to reconcile, a trending down in prices, but your operating rates are remaining the same. So, if you are saying that your operating rates remain tight for 2010, I just... conceptually it's hard for me to understand why prices would trend down and that means that your forward guidance is too conservative?

Steven Sterin - Senior Vice President and Chief Financial Officer

Are you accusing me of being cautious?

David N. Weidman - Chairman and Chief Executive Officer

Bill, here's the logic in it. As you know in the acetyl acetic acid in particular, there is a very, very steep cost curve, and the pricing is established by the marginal cost of the high cost producers. In many cases, we judge that the market is either like that today, or moving into that situation over the next few weeks. And the marginal cost of the high cost producers according to published reports are going to be trending down into the second half of the year and so those prices trend down, they are ones who set the marginal price and we think that prices will trend down as well.

William Matthew - Canyon Capital

Okay and then the amount of affiliate earnings that are not captured in net income or the unconsolidated EBITDA, what is that for '07?

Steven Sterin - Senior Vice President and Chief Financial Officer

For '07, it was $93 million for the full year.

William Matthew - Canyon Capital

93.

Steven Sterin - Senior Vice President and Chief Financial Officer

If you want some detail, and if you look at our earnings release on table 8, you can see by quarter and by year at the bottom of the table, it was $93 million and there's only about $100 million of net debt associated with these affiliates on a proportional basis.

William Matthew - Canyon Capital

Okay. And so if we wanted to get a rough estimate for the evaluation of that using some kind of current EBITDA multiple say six times that number of times, an EBITDA multiple is kind of what's not captured in your share price?

Steven Sterin - Senior Vice President and Chief Financial Officer

Mathematically, you are correct but I think you would look at higher multiple, because most of the earnings in these businesses are in Ticona, which have higher growth rate. So we would expect to see a multiple on 8, branch for these new businesses.

William Matthew - Canyon Capital

Got it great, okay.

Mark Oberle - Vice President of Investor Relations and Public Affairs

Thanks Bill. Thank you everyone.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, have a wonderful day.

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Source: Celanese Corp. Q4 2007 Earnings Call Transcript
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