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Celanese Corporation (NYSE:CE)

Q3 2012 Earnings Call

October 23, 2012, 10:00 am ET

Executives

Jon Puckett - VP, Investor Relations

Mark Rohr - Chairman & CEO

Steven Sterin - SVP, CFO & President, Advanced Fuel Technologies Business

Doug Madden - COO

Analysts

David Begleiter - Deutsche Bank

Rob Walker - Jefferies

Vincent Andrews - Morgan Stanley

Nils Wallin - CLSA

Kevin McCarthy - Bank of America

Frank Mitsch - Wells Fargo

Mike Ritzenthaler - Piper Jaffray

Bob Koort - Goldman Sachs

Hassan Ahmed - Alembic Global

Chris Nocella - RBC Capital Market

Jeffrey Zekauskas - JPMorgan

Duffy Fischer - Barclays

Operator

Good day ladies and gentlemen and welcome to the Celanese Corporation third quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to today’s host, Jon Puckett. Sir, you may begin.

Jon Puckett

Thank you, Shannon. Welcome to the Celanese Corporation third quarter 2012 conference call. My name is Jon Puckett, Vice President of Investor Relations. With me today are, Mark Rohr, Chairman and Chief Executive Officer; Steven Sterin, Senior Vice President and Chief Financial Officer; Doug Madden, Chief Operating Officer and Mark Oberle, Senior Vice President and Corporate Affairs.

The Celanese Corporation third quarter 2012 earnings release was distributed via Businesswire yesterday after market close. The PowerPoint slides for the call and our prepared comments for the quarter were also posted on our website, www.celanese.com in the Investor section. All of these items have been submitted to the SEC in a current report on Form 8-K.

As a reminder, some of the matters discussed today and included in our presentations may include forward-looking statements concerning for example, Celanese Corporation’s future objectives and results. Please note the cautionary language contained in our slides. Also some of the matters discussed and presented include references to non-GAAP financial measures. Explanations of these measures and reconciliations to the comparable GAAP measures are included in our slides or the press release as applicable.

This morning, Mark Rohr will provide some introductory comments and then we will field your questions. I would now like to turn the call over to Mark.

Mark Rohr

Thanks Jon and welcome everyone for joining us today. As Jon noted, we released prepared remarks last night, so I'll briefly make a few comments before we open the call to Q&A.

We reported adjusted earnings per share of $0.93 on revenue of $1.6 billion. This was a very good quarter given the challenging economic environments in Europe, slower growth in Asia and currency headwind. These results demonstrate the strength of our business, our technology platforms and accomplishments of our teams around the world.

AEM delivered sustained revenues and margins sequentially, despite weakened economic conditions in Europe. Operating EBITDA was $109 million, down $5 million or 4% from Q2 results, driven by lower equity earnings and affiliates. The base business delivered sustained margins due to higher pricings.

Consumer Specialties operating EBITDA increased sequentially and year-over-year $87 million, primarily due to higher pricing and a continued strong global demand demonstrating the value added solutions we provide to our customers.

In Industrial Specialties, our Emulsion business delivered record performance as we saw higher volume in Asia and North America. Operating EBITDA was $36 million, as soft demand for EVA applications resulted in lower revenue and earnings for the segment.

Acetyl Intermediates continue to experience trough-like conditions, which impacted both demand and pricing. Operating EBITDA was $91 million, marginally lower than the second quarter. Although the current conditions are difficult, our cost position and ability to leverage technology positions us well when global economic growth returns.

Our adjusted free cash flow was $158 million, driven by lower trade working capital compared to last year and these results help us reduce our overall net debt position by $124 million compared to Q2. These results allow us to continue to pursue our balance cash deployment strategy including increasing our dividend and repurchasing shares under our increased share repurchase authorization.

Looking forward, the macroeconomic environment remains uncertain and unfortunately we expect these continuous conditions will continue through the remainder of 2012 and into the second quarter of 2013. But we are making progress on items that are under our control like customer focused innovation, productivity and cost control. And we expect fourth quarter earnings to be modestly better than the prior years.

As we take an early look into 2013, we see a clear path to our long-term objective of 12% to 14% growth, but we don’t expect it will come from a robust external environment. We see overall end-market demand for our products flat early in the year before starting to strengthen in the second half. So our focus will be on Celanese specific initiatives we have been sharing with you for quite some time now. Items like the Acetate facility rationalization, the Nantong expansion, ethanol startup at our Nanjing facility and other ongoing productivity efforts. We will also increase the effectiveness and speed of our new product introductions to help us drive growth as we showcased in Houston last month.

With that let me now turn the call back over to Jon for Q&A.

Jon Puckett

Thanks Mark. Shannon let’s go and open the lines for Q&A. I would just remind everybody that we would like you to ask one question and one follow-up, so we can move through as many questions as possible. Go ahead Shannon.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from David Begleiter of Deutsche Bank. You may begin.

David Begleiter - Deutsche Bank

Hey Mark, could you comment on what you are seeing in China foresee gas and to the pricing and volumes and I know you don’t expect things to improve until early next year, but just how low will things be in Q4 and Q1 in your view?

Mark Rohr

Well David, we’ve certainly seen quarter-to-quarter sequentially we’ve price decrease a bit and we’ve seen volumes decrease a bit as well. China remains a pretty anemic marketplace. I don't think we have any expectations that it would slide further, but everyone’s a big cautious as we enter the end of the year; certainly we will dramatic steps to drop inventory and that sort of thing. But absent that, I would say we are pretty flat or slight down the trend. Doug do you have any comments on that?

Doug Madden

David, I would like to go with what Mark said, if you put this in perspective whether we talk about where we were last year sequentially last year at this time we saw high utilization in the industry and had pricing up probably $100 a ton higher than it is today. Sequentially, we seem to be very modestly down and we think that we’ve hit bottom if that’s the right term for China. So our assumptions going forward has us looking very much for this year and frankly into next year we do in the quarter here.

David Begleiter - Deutsche Bank

And Doug just on Singapore, what’s your thinking on that facility, is it structurally impaired long-term, have you down ways to lower the cost there, just what are you thinking about Singapore longer-term?

Doug Madden

Yeah, I think our view on Singapore today is the same as we’ve echoed; if you step back again and you look, just to put in perspective, because we get at this a lot, Singapore continues to be utilized and to have a role in our global footprint. The reality is that over the course for the year we’ve operated that unit probably about 35% to 40% of the time this year; whether that's for balancing our system, where there is a need for acid in the derivatives, whether that’s to cover turnarounds like in the case so we just did in Nanjing, and quite frankly to take selectively opportunities in the market place to position it.

So going forward, Singapore still has a value for us. Clearly, we continue to look at options for improving it, but next year I think you probably will see more the same in terms of operating and borrowing any stronger recovery or restoration, post the new year and whatever you believe might happen in South East Asia as well as in China.

Mark Rohr

David, little bit, from a cost position, it will feed stock disadvantage there. Raw material disadvantage there in Singapore. And we don’t see that situation dramatically changing over the short term. There are periods of time when that cost disadvantage is overcome by other things and that of course is the opportunity to offer as Doug mentioned.

Operator

Our next question is from Laurence Alexander of Jefferies. You may begin.

Rob Walker - Jefferies

Good morning, this is Rob Walker for Laurence. I guess firstly just on POM, can you give us an update on the pricing outlook for POM and whether the gains you made this year provided tailwind to next year?

Mark Rohr

Yeah, let me answer that Rob. So this year it seem particularly in this quarter, you seen some margin improvement in POM largely coming from select price increases. Some of that may actually be some mix effect as well and some favorable feed stock feedstock advantages in the raw materials. As you all know, this a value in use model, we go into the marketplace with the products that we offer, the solutions that we’re doing with the customers and we seek higher value propositions; we don’t adjust pricing up or down just based on raw material feedstock.

So, we’ll benefit as feedstock move down and sometime we see a little bit of compression. But I’d say directionally it’s the same thing for next year is we’ve got a healthy pipeline, we’ve got some enthusiasm for some of the markets that we’re working in and we’ll continue to look at selective lease spots that we can go on in and move price.

Rob Walker - Jefferies

Just a follow-up, you had good free cash flow this quarter, can you remind us the levers that you have to pull potentially if things worsened into next year and then kind of lingers along, or what you can leverage or if you can pull to improve free cash flow next year? Thanks.

Steven Sterin

Yeah, I’d start with working capital, where we’re always continuously focused on, making sure that our inventory balances are in line with what we anticipate market demand to be. We’ve also already taken action around plant rationalization and productivity, that’s going to benefit this next year whether it’s (inaudible) shutdown or our general productivity programs built in our plants around energy cost reductions and waste reductions.

So, I feel those are the two main levers and then, beyond that, Mark mentioned in his opening comments that we’re (inaudible) kind of accelerating those things that we control in the innovation pipeline, so we do expect to continue to push hard there and try to bring our value products to the market faster.

Operator

Our next question is from Vincent Andrews of Morgan Stanley. You may begin.

Vincent Andrews - Morgan Stanley

Questions for you about 2013 and second half may be it’s related to China. If you could just sort of give us a sense of what your view of the government turnover is going to be in any potential stimulus and the impact that may be waiting for this is having on your business but before and then ultimately after. And what I am sort of wondering is that if they stimulate to consumer oriented or too much spending oriented than infrastructure. How are you thinking about this in general?

Mark Rohr

I don’t know the change in leadership structure in the Government of China. Come after November, we have the change in the company’s party or changes and then the government changes occur follow on in March of next year. Our view is talking to government officials there and business leader is that the uncertainty around government policies and policies that are going to be pushed to endorse is causing some of the economic weakness that you see and China today is certainly has had an impact on foreign direct investment, but you also need to realize that things like sovereign debt in Europe has had an impact on foreign direct investment in China.

So what we see is the new government as it positions itself in March of next year is going to be quite clear on the programs and policies that are important to it, and that in itself is going to provide opportunity for enhance growth. We do believe there will be stimulus, although I don’t think it’s going to be the kind of infrastructure stimulus that we saw several years ago. We think it’s going to be more directed at consumers and steps that can be taken to improve quality of life for the citizens of China. So we feel good about China in the second half of next year, and we think growth is going to be strong in the second half and the first half. We think growth overall in China next year will be much stronger that has been this year.

Vincent Andrews - Morgan Stanley

Is that what drives your view that 2013 improves in the back half, I mean other than and obviously [soft] occurs and that what the real driver is?

Mark Rohr

Absolutely, it’s the real driver? I think having said that, its unknown and all this as far as (inaudible) is, what the ripple effect is going to be of Europe, Europe is still sliding and at least in our equation we see it still sliding. We see automotive trending down, however there is a modest trend upward in theory this quarter in automotive. But we see a Europe trend down and US is a big question mark. So we are trying to take in on that things are going to stay about like they are through the first quarter and into the second quarter next year, and china is going to be real indicator for what should happen to our earnings and how they [got] these earnings broader next year?

Operator

Our next question is from Nils Wallin of CLSA. You may begin.

Nils Wallin - CLSA

First of, interested in the margin improvement, and especially on materials; how much of this is improving your cost structure versus bring on your POM facility?

Mark Rohr

In the quarter, I think as I try to indicate before, we’ve got prices moving up and we’ve got feed stocks moving down. Generally we’ll think of that total in terms of margin. When you ask about our new facility, our new facility gives us certainty the capability to be able to up to expanding grow with the innovation programs that we are offering. So the short answer near term is that you’ve seen in that business, I think the strength across the whole portfolio of products where we can selectively increase pricing. We've been doing that all through the year and will continue to see prices where we think that value can be improved. As feedback gets better, we expand the margins on that as well.

Nils Wallin - CLSA

Thanks and just a follow-up. You noted rather a weakness in EVA. Is that solely due to probable tax or there other markets that are also pressuring that product?

Doug Madden

So think of it largely influenced by photovoltaics and that’s a marketplace that today is substantially oversupplied. If you look between the movement here across the year, there is some timing and there is well where we would have had some of our sales and revenues. So when you look at Q2 versus Q3, you really have a stronger elevated Q2 as a result of some of that but largely photovoltaics plays role and we will continue through the first half of next year we think to have an impact on us.

Operator

Thank you. Our next question is from Kevin McCarthy of Bank of America. You may begin.

Kevin McCarthy - Bank of America

Couple of big picture question for you Mark on acetic acid and maybe the shape of the global cost curve. If I look at history, your EBITDA margins today, I guess, running about half of the prior peek in ‘05 and I don't know maybe [600 to 1,000] bps below the shoulder years in ‘06 through ‘08, and so as you at cost curve today, do you think that its flattened that is to say, do you think some of the medium size Chinese competitors have become more capable or is that not the case and perhaps, we’re just seeing a weak demand environment here such that, if the environment does improve you could envision margins kind of going back up to that let’s say, mid to high-teens level. I’m curious to hear your thoughts on that?

Mark Rohr

Yeah. Well, let me kick it open and others they want to join in here. But, we believe the curve has flattened to some degree, Kevin. Some of the larger producers in China have certainly improved their position a bit and so, where it was much steeper in those periods that you’re talking about is now flatter. I think the second part of that is you can’t overestimate the sloppiness, industry sloppiness associated with running the 75% industry utilization. And appropriate at the time we tended to run at a much higher average industry utilization kind of mid 80s. And so, the ability then to influence margins or have margins influenced by disruption or an event like that was greater then than it is today and I think the combination of those two put us in a little bit different situation with [acid]. So, yeah, so it is a bit flatter.

Doug Madden

Kevin, let me just add, it’s Doug. As you kind of walk through the chronology there and you go back and you mentioned the peaks in ’06, ’07 I think structurally it’s different and I couldn’t agree more with Mark’s comments, first of all that, there has been some catch up and some compression, but, recall in ’06 or ’07 we had very high cost umbrella technology that was out there, the guys in the southeast they were operating on ethylene based technology which was the highest cost and you are talking about the difference in current technology platforms versus those of $100 to $150 a ton, those are gone, those have shrunk down, those are finished and out. So structurally, if you’re thinking about the peaks as it was in ’06 or ’07, I would say we have had a structural adjustment that would make it hard for me to see those kind of numbers to restore. Having said that and resetting to where we are today, it was just a year ago where the industry was operating at 90 plus percent and you saw pricing hit at this time last year, you saw actually in Q2 swinging into Q3 after pricing was $600 pushing 600 into Q3 its start about $100 higher than it is. I think that’s real and I think that speaks to still you saw our earnings up and it speaks to the strength of the curve.

Kevin McCarthy - Bank of America

Okay, thank you for that that’s helpful. And just a quick follow-up may be for Steve, can you comment on the likely paces of execution against the new $400 million share repurchase authorization? Thanks.

Steven Sterin

I would say that our approach is consistent with what it’s been to continue to be have a balanced use of cash. I had also mentioned that our cash generation has been strong, we are in a very nice position at the upper end of our targeted range of cash in the 930 level. We still want to try to keep between [$1.5 billion] strategic cash available to invest in the business. So I would expect as we go forward, we still maintain cash in that range, but we are in the upper end of it. We do think that buying back shares made sense given the multiple business today. We also want to pay down debt and continue to look at dividend increases and investment in the project that you heard us talk about particularly in Houston around technology and innovation and the ethanol as well. So yeah I would expect us to continue to buy back shares overtime and we are well positioned to do with our cash.

Operator

Thank you. Our next question is from Frank Mitsch of Wells Fargo. You may begin.

Frank Mitsch - Wells Fargo

One of the other things that I haven't heard a lot on this conference call season was a record and obviously you guys set a record on the emulsion side, and you talked about Ross, is being a big of that. Can you give us some more color on that, how sustainable is that and what is your expectations there?

Doug Madden

Yeah, Frank. So you saw in the quarter, Mark mentioned record earnings. We have combinations, our volumes were strong as you would expect for this time of the year, also we saw a combination here again of price movement up and advances for favorable feedstocks as well. Now recall over, we say overtime that's a business that tends to lag a quarter two in light of its feedstock, but I think what’s noteworthy for us here is the success that we’ve had in being able to grow our vinyl space with these emulations displace other technologies in being able to get the value out of that, that you would expect. So going forward we were Q4 and into next year as we have indicated the outlook for that business, I think is continued growth based upon of macroeconomic environment.

The other thing I will mention is a large part of that business fits within Europe. And again we’ve talked all about the headlines in Europe to the extend that we see a normal fourth quarter, we would say that we would see normal seasonality in that business, borrowing anything where we see early pullback or any kind of unexpected de-stocking going.

Steven Sterin

One of the structures of that is to what Doug said is we’ve also had success in China with commercialization of our second unit. So when you think about structural changes and to just what Doug said that provides consistent engine of growth going forward as well.

Frank Mitsch - Wells Fargo

Order of magnitude in terms of the capacity addition for that?

Doug Madden

I am sorry, one more time.

Frank Mitsch - Wells Fargo

The order of magnitude that added to your overall Emulsions capacity, roughly what percentage increase was that?

Doug Madden

We doubled the size of our Asia capacity with that last expansion and that's probably on a global footprint; I think about that as somewhere about in a 15% range on our footprint.

Frank Mitsch - Wells Fargo

Great, and then lastly, one of the things obviously you guys talked about in September was the CelFX technology and actually referred a thing or two in the marketplace since then; that gives me a bit more confidence in that technology. Can you remind me of the timing of the opportunity that you see there? Where do you think that can go to?

Doug Madden

Yeah, love to hear what you’re hearing by the way, Frank. Well, I think as we told you on our Technology Day and don’t put time limits on this, you know, we're encouraged. We're out there with all the leaders in the industry. This product is being looked at, it's being sampled, it’s being tested. Long-term with success, you can think about this maybe as much as 20% of the earnings of the business coming out, but that’s – I want to caution you that’s also success. So pick a range within there. We're still early in the process. We think it has a place in the global market, particularly in those markets today where, in Asia where they use carbon based filters as we shared with you down in technology and if you kind of carve that out and look at it, pick a number, 15%, 20% cautiously if what it might represent to the long-term success for the business. So, that’s okay?

Operator

Thank you. Our next question is from Mike Ritzenthaler of Piper Jaffray. You may begin.

Mike Ritzenthaler - Piper Jaffray

I would want to explore a little bit the inventory levels for the Specialty Products in AEM if we could. We’ve seen from other companies that have reported this season, that specialty polymers, leveraged the auto markets have produced pretty robust year-over-year growth versus what we’ve seen in Advanced Engineering Materials is flattish on the EBITDA line to maybe slightly down. So I think it would be help for a little bit more context around what’s driving that, if its inventory levels, is it customer levels or at the customer level or some thought on some other factor?

Mark Rohr

So, we talked about this business and having some visibility out there, usually about 30 days, maximum 40 days on our view. As we also talk to them and measure inventory, I’ll tell you that that’s something that we watch very closely, typically today the lead times between the time they order and the time that actually goes into production continues to be narrow.

For us, we don’t think that there is a significant amount of inventory that’s in the chain today; we’ve taken steps here to moderate our levels to be certain particularly going into the end of the year that inventories are lower.

The other thing I’ll mention here is that as we’ve brought up and commissioned our new assets in Germany, certainly as we commission we’ve run that through, we’ve got some inventory, we got inventory build for certain customers over certain period of time that we committed to as part of this transition, but we are working those down and working those off. So for the industry, don’t think that there is a huge amount out there and for us we continue to monitor and watch it closely.

Steven Sterin

Okay, I’ll share a few things on the financial side, keep in mind that that business has a nice profitability position in Europe, so we got a bit of headwind on currency when you compare it to last year since if that was your reference point. And also, even seen the joint venture, equity ability does not lag, when we saw commencing the pricing decline in the second quarter that rolled through in the third quarter. So if you look at the base business, we’ve have actually got nice margin improvement however.

Mike Ritzenthaler - Piper Jaffray

Alright that helps. And then on the Nanjing facility starting up late 2013, for some reason I was under the impression that it was, then you are targeting midyear, but may be that was for completion. If you could just kind of straighten that out for me? And then one final question on the catalysts performance, it was great to be able to see the unit at the Technology Day; now I was wondering if there is any update on the catalyst performance versus expectation?

Mark Rohr

So, the unit is going to be mechanically complete sometime around mid-year, so if everything before the end of probably in the early third quarter when that happens, so this configures well with getting up and running so we telling late in the year; I expect the fourth quarter will have it running that kind of timeframe.

Catalyst is performing as anticipated. We are really excited about performance and we are getting ready to in a matter of weeks actually ship unit down and modify for Gen-2 operations which includes a higher efficiency, lower cost catalyst as well. So we’re very excited about the performance of that unit and looking forward to demonstrate Gen-2 and moving on with future installations.

Operator

Thank you. Our next question is from Bob Koort of Goldman Sachs. You may begin.

Bob Koort - Goldman Sachs

May be I’ll start by being a little obsequious, but I really appreciate you guys putting out the numbers, the script and everything that gives us a great change to study and then ask more insightful and more time for questions, so thanks to John and the team for that. May be now I can ask some tough questions? When you guys take down Nanjing to connect up this ethanol unit, do you expect that Singapore would be at full production to offset whatever production decline you might have?

Mark Rohr

The real key for us on Singapore is going to be, if I can say that it’s really going to be the economics of that unit, can we run it and make any money and that depends a lot on the feedstock cost position of that unit as well. So I don't know if we can forecast what's going to happen there.

Bob Koort - Goldman Sachs

And Mark I think if I heard you correctly, you said there are periods when your technology advantage cannot offset the raw material disadvantage. So could you just help me quantify or qualify what that raw material delta, how from the outside can we track that?

Mark Rohr

Well, I don't know how much of that I want to actually share, but we got in terms of dollars per ton, Bob, we share with you guys pretty specifically the sort of range of margins that were available to our technology upgrades. So it happens if someone can back integrate and get a really sweetheart deal from a feedstock point of view, they could trump that margin we have; unless it doesn’t really happen in full sense, but it can take the edge off our margin.

Steven Sterin

But, Bob, the only other thing I just kind of point to you generally is, I think if you were to look at margins today it would be reasonable to assume as some of these lower end margins today that the other guys still remains modestly above cash costs.

There is some difference there in between our technology and those swings in raw materials, but think about it being marginally in with those raw materials, those cash costs.

Mark Rohr

In very simple sense, we don’t crack ethylene, but if you look at, it's almost like a feedstock methylene crack the point of view. You know, feedstock can be advantage or disadvantage and so some producers can have economics that roll through because of their advantage situations.

Bob Koort - Goldman Sachs

And speaking of cracking ethylene, is it conceivable your new methanol unit, could be structured as an MLP for a much lower cost of capital?

Mark Rohr

On our new methanol, structurally that’s a methanol (inaudible) you’re saying. No, I don't think so. You think about it in Houston.

Steven Sterin

Seems like all sorts of crazy things are going in MLP these days. So you know, once upon a time, [Borden] Chemical was an MLP that had a methanol plant.

Bob Koort - Goldman Sachs

But last question if I might, you’ve given the bridges before about what 13 might look like and you've been pretty consistent that if you get a $0.50 of self help, $0.40 or $0.50 and then whatever the macro brings you, are you still comfortable with that kind of range?

Mark Rohr

Yeah, I mean that’s what we were saying with the 12% to 14%. Is that we’re kind of ignore what else going on in the world and we're going to work hard to make sure we can what we can deliver, and that’s going to give us 12% to 14% or so of growth. We’re not taking credit for the outside market or things that, we’re really calling market pretty flat year-over-year.

Operator

Our next question is from Hassan Ahmed of Alembic Global. You may begin.

Hassan Ahmed - Alembic Global

If I could just carry on with this guidance conversation, the comments you were making earlier. So, if I were to keep Q4 ’12 numbers flat with Q4 ’11 numbers that would imply, call it around 370 or so in terms of EPS. And then, you talked about being able to sort of internally be it from Nantong or Nanjing ethanol and the like, and the Spondon closure generate another $0.50 or so. So, that gets me to 4.20. So obviously fair to assume that you’re not really factoring in any recovery in terms of (inaudible) margins?

Mark Rohr

Yeah. I’m not going to argue your math, that’s roughly the way it works. But, what we’re saying is that, when we look at individual businesses and we factor in recovery and a lots of recovery, we can see some businesses sliding, that haven’t slid yet. So, we’re not comfortable that Europe is at the bottom and is starting to rebound.

Europe still appears to be slide a bit. So, yeah, we have some positive uptick and as appeals in other areas, we think it happened equally, we think some other business may slide a bit. So the net of all that is pretty flat. So we’re just, it’s all compressed to our present day without more clarity. I think as we get into the year we can provide clarity on that, but for now it’s the things we control.

Hassan Ahmed - Alembic Global

Off late it seems that at least on the Chinese spot pricing side of things, [CTech] seems to be sort of moving upwards, what are you seeing out there and what’s really causing that. Is it just rationalization of facilities or is there anything on the demand side that you’re seeing?

Steven Sterin

Yeah. I think while you see very modest movements, we would consider to be relatively flat. $10 to $15 up there one point may be reverses itself. Generally market conditions today keep it relatively flat.

Operator

Our next question is from Chris Nocella of RBC Capital Market. You may begin.

Chris Nocella - RBC Capital Market

Just a follow-up on AAM; can you give us a sense of the current loading or may be operating rate of the new plant in Frankfurt and may be the margin potential of that segment as volumes improve and you sell out the facility a little bit?

Steven Sterin

If you think about where that facility is today, I would say think of it today as we ramp it up probably in the 60% to 70% range today, and frankly what it runs at really will depend on what the world looks like as we turn into 2013.

Remember too that we added an additional 40,000 tons of capacity on top of what we had; so we shouldn’t be alarmed by what its run rates are. That was intended to give us the kind of growth over the next several years.

Mark Rohr

The one other area put us to look at broader Asia has been our Polyplastics joint venture. We’ve got a new facility going into Malaysia that will serve the broader Asia region. So that will also contribute to our capacity in the facility to grow in that market.

Chris Nocella - RBC Capital Market

Okay. And just on the analyst day you mentioned that you are with negotiations with the major Chinese they don’t respond here to some prices currently. Is there any way to get a sense of the timing of when we could see some additional steps? Do you think it’s sometime this year or may be potentially early next year?

Steven Sterin

Question is about China and the Indonesia announcement?

Chris Nocella - RBC Capital Market

That Chinese stayed on enterprise.

Steven Sterin

We are in a dialog with multiple customers in China. I would say at this point, given where we are in discussions and negotiations, it probably wouldn’t give us to set a fixed timeline. But I would say is that the discussions are progressing well. That there is interest, we continue to identify additional value that ethanol can bring in the market place, and we are making forward progress. And the number of folks that we are talking to is increasing.

So I would say, in general, we are heading in the positive direction. China is a big complex market and this is a new application, the [perfect] application for China. So I wouldn’t tie down the specific timing at this point. We will keep you updated on our general progression and discussions.

Operator

Our next question is from Jeffrey Zekauskas of JPMorgan. You may begin.

Jeffrey Zekauskas - JPMorgan

In the 1.3 million metric ton methanol plan you planned to build, is it possible that you might go at alone without a partner? And secondly, in which and in which year do you expect to bring that plant on.

Mark Rohr

I think could we do without partner, yes. I will prefer not having that how much cash [start up] in it. So we are going to try to bring a partner on. We are looking at completion in mid-2015.

Jeffrey Zekauskas - JPMorgan

Secondly in your commentary you said that the acetate facility rationalization Spondon might reduce fourth quarter volumes in [acetate]. I was wondering, why that would be the case because presumably you would built inventory at Spondon as you close that and then secondly, in the course of your commentary you said that there were various businesses that could slide, that haven't slid yet. Which were those businesses?

Doug Madden

So, Jeff let me take the acetate question. You know, your logic is right. So we're transitioning now with the shutdown of Spondon. We've been overtime building some inventories to support it. Part of this transition has us bringing that down, has us debottlenecking our other facility at (inaudible) which we shared with you. The ability for us to transition overtime and the plan includes continuing to build inventory as we go forward.

So you would see a hit in the fourth quarter. We rebuilt all the inventory to replace Spondon and the answer is no. We've not. And that’s been part of our conscious plan. So I think as we kind of move through the latter part of this year and frankly into next year, as we balance that system as we get those lines running and continue to build inventory support, you’ll see some modest decline overtime. We would expect that though as we move into later part of next year that we will start to see that more normalize.

The other thing I’ll add to you, we will add here is we also have a major turnaround coming into a facility that is under plan for early 2014. So you are balancing several things in your inventories to bring Spondon down as well as to think ahead for that as well and that’s why you transitioned all the way through the quarter. Having said that, it will not have an impact on the profitability of the business and we’ll continue to see some improvement in that business across that time.

Mark Rohr

Jeff, let me try the second one there, my worries are specifically Euro centric. We just went through a process where we saw Germany initially announcing that there will be some post bills quarter-to-quarter, the only way to have that reversed with announcements of extraordinary shutdowns. Europe is currently forecasting volumes down 5% or so in the auto sector and you already got Perham and Spain just record low volume productions and you got Germany coming off, where the numbers is going to get worse and now you have seen a resolution to the sovereign debt crisis so, we’re concerned that will ripple into other markets and activities there and that’s real basis when you are saying those businesses. Doug you want to add something?

Doug Madden

Well, I would only add, I mean just to take you back on Mark’s comments, you can apply the same logic to where our Industrial Specialty businesses has significant exposure into Europe and we’re just uncertain to what happens there. Also, we’ve mentioned earlier things like photovoltaic’s that in our EVA business, that’s going to take us to first half of next year to work through as well and we anticipate softness there where we saw quite a bit of strength in that market in the first half of this year. So there is lot of puts and takes I think to the cautious tone that you’re hearing here.

Mark Rohr

And last thing I’ll say is Germany just announced a further reduction of GDP forecast of 50% down to 1%. So that process is not running its full course and we are going to work to manage that in a way that’s good facility its in our shareholders but at least we’ll be able to concern that we will see some takeaway from those businesses going into next year.

Operator

Thank you. Our last question is from Duffy Fischer of Barclays. You may begin.

Duffy Fischer - Barclays

When you go through the Nanjing retrofit with TCX and with the oversupply of the acetic acid in China today what’s the potential for additional retrofits at Nanjing going to ethanol and then both with what could be an additional retrofit and the original one what’s the variability to swing that between ethanol and acetic acid as you get to some equilibrium point and would want to have some flexibility down the road.

Doug Madden

Well, there is a possibility to do additional ethanol at Nanjing. It is certainly something as we looked to implement in Phase II that we are going to consider and that we will always design that we have Nanjing point of view where you got some feedstock flexibility. The more you move into fuel however the feedstock flexibility you have by definition because you will be satisfying the third-party and their demand for ethanol for the fuel circuit. But in the industrial market, we have or we put it into ethanol or put it into (inaudible) and we can acid. We can go in number of ways. So building out that unit to give us more flexibility something we are looking.

Duffy Fischer - Barclays

Okay. And then we have talked a lot about acid but within AI can you talk about the downstream derivatives you talked about the flattening curve at the acid level what’s happened with the competition in the downstream derivatives particularly in China over the last year or two?

Doug Madden

Yeah, it’s probably the same kind of response, we have given before. In the downstream derivatives it tends to be more of a demand issue than anything else. I don't know that I call out by any means a competitive issue and a lot of what that downstream derivative again it’s tied to things that happened globally. A lot of it is consumed in Europe and the downstream esters, the [acetate] esters businesses specifically. You typically have seen margins hold up a little bit better there but its volume and demand. India has an impact of substantial amount of that particularly in Asia that's consumed and used in India, and I think you know the story there as well, but this year you have seen a very modest growth relative to what India has been and we would look for some recovery and strengthening there in the downstreams too to contribute as well. So, I just leave it as we see it less as a competitive issue and just a real demand issue.

Operator

Thank you. And now I would like to turn the call back over to Jon Puckett’s for closing remarks.

Jon Puckett

Thanks Shannon. We appreciate everybody’s time today, and I will be around for questions throughout the day and the rest for week.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.

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