Celanese Corp - Series A (CE) — Q2 2018 Earnings Call Transcript

Thank you, Brandon. Welcome to the Celanese Corporation’s Second Quarter 2018 Earnings Conference Call. My name is Surabhi Varshney, Vice President, Investor Relations. With me today are Mark Rohr, Chairman and Chief Executive Officer; Scott Richardson, Chief Financial Officer; and Todd Elliott, Senior Vice President of Acetyls Chain. Yesterday afternoon, Celanese Corporation distributed its second quarter 2018 earnings release and posted slides and prepared remarks regarding the quarter in the Investor Relations section of our website. Today's presentation includes statements about expectations for future results and plans that are forward-looking statements. Actual results might differ materially from those projected in such forward-looking statements, and additional information concerning factors that could cause actual results to materially differ can be found in the posted materials. We will also discuss non-GAAP measures and their reconciliations to comparable GAAP measures, which are also available on our website. We’ll begin with introductory remarks from Mark Rohr and then take your questions.

Thanks, Surabhi, and welcome, everyone, listening in today. Our prepared comments were published yesterday, so I will be brief and then turn the call over for your questions. We delivered strong consolidated results for the quarter with GAAP earnings of $2.52 per share and record adjusted earnings of $2.90 per share. Robust pricing across product lines resulted in net sales of $1.8 billion with adjusted EBIT margins of 26.6%. All three businesses, the Acetyl Chain, Engineered Materials, and Acetate Tow, grew adjusted EBIT year-over-year. The earnings growth, along with our focused effort to convert those earnings to cash generated, contributed to our highest-ever free cash flow of $500 million in the quarter. We repurchased approximately 900,000 shares and distributed roughly $73 million in dividends this quarter. For the remainder of the year, we expect Engineered Materials to continue delivering steady growth by extending the success of the pipeline model and executing on M&A. In Acetyl Chain, we expect market momentum to carry through the third quarter before normal seasonality in the fourth quarter and first quarter impacts that business. We do not see the recent tar of disputes as having any material effect on our business. With that, we anticipate adjusted earnings in the range of $10.50 to $10.75 per share with free cash flow generation in excess of $1 billion.

Thank you, Mark. I’d like to request all callers to please limit themselves to one question and a follow-up. Brandon, please open the line for Q&A.

Hey, good morning. Nice quarter there, guys.

Thanks, Mike.

First question on the Acetyl Chain, you talked about a lot of outages in Q2. Can you maybe give us a little bit more feel on the regions where that happened? And then do you expect the utilization rate to stay at 90% for the third quarter?

Yes, let me start this, and I’ll turn it over to Todd Elliott to give you more color. In the last call, we projected we were in the mid-80% utilization rate. We have seen that push up to the 90% kind of range this quarter, and we expect it to move back down towards the mid-80% range as we go through the back half of this year. Todd, would you like to add color to that?

Yes. We are seeing an overall improvement in utilization rates, which goes back over the last couple of years. We anticipate solid demand growth across multiple end-use applications, with demand growing at about 3% to 4% per year across these different end uses. Limited supply has contributed to our higher utilization rates, largely due to the overbuild from the 2009-2011 period. We've seen a steady increase in operating utilization rates, moving from mid-80% in the last year to around 90% in Q2. However, we expect some moderation moving forward, though the environment remains positive.

Great. And then Mark, when you think about your outlook for this year, you’re awfully close to your 2020 goals already, it seems, on an EPS basis. What’s the best way to think about earnings progression into 2019 and 2020 given how strong 2018 has turned out?

Yes, I think in May, we put forth a view that we would generate about $30 per share equivalent of earnings over three years, $9, $10, and $11 per share. I think we’re higher than that number now. So I would look at it kind of that way, somewhere between $30 and $33 per share cumulative over that period of time. However, it’s hard for me to specify those numbers on a quarter-to-quarter basis. But again, we expect to finish strong, probably closer to $12 and $11 in that range.

Great, thank you.

Thank you.

Hey guys. Good morning. Following up on the last question, was the delta in utilization rates purely because of curtailments in China, or were there other meaningful factors at play?

No, that was a global phenomenon.

And how would that parse out specifically for China?

I think you should view China as experiencing a steady erosion in capacity utilization that will affect overall numbers going forward.

Yes. The curtailments we’ve seen have generally occurred during the winter months, but a combination of environmental regulations and unplanned outages in multiple regions have pushed up our utilization rates.

Okay, terrific. Thank you. For my second question, regarding tariffs. You mentioned potential growth opportunities due to shifts in trade flows. Is there any growth risk for Engineered Materials in regions such as Asia?

No, we don’t see it as a real risk. Our network is global, and the majority of material we produce in China stays in China. We have the ability to import materials from various regions around the world without significant implications.

Yeah, perfect. Thanks so much, Mark.

Sure.

Thank you very much. Todd, can you provide a bit more insight into some of the regulatory issues in China? Are they beneficial for Celanese?

Yes. The new chemical park policy will affect multiple provinces, particularly in Shandong, where they aim to approve only 75 parks plus 10 specialty chemical parks. This is likely to impact the broader industry.

And can you provide more granularity on what you see happening in the next couple of quarters regarding potential closures or curtailments?

We've already been approached by the municipal EPA in Nanjing to reduce operations. This reflects the ongoing environmental considerations that we will need to navigate going forward.

We must emphasize that we have a strong relationship with the local leadership in the Nanjing park, and this cooperative process has been beneficial for us.

And on TCX, can you discuss the scale of the transaction and how it relates to acetic acid operating rates?

We are working with Chengzhi towards promoting synthetic ethanol, but we have had to shut down the asset and written it off. The collaboration is focused on deriving further value from this opportunity.

That’s helpful. Thank you.

Yes, hi. Good morning. So Mark, you're shutting down tow capacity in Mexico. I believe that's about 2% to 3% of global capacity; could that impact the market temporarily?

No, there is no material impact in terms of our overall capacity utilization. This is about right-sizing our asset base with our customers.

And have you looked at this new Juul product? It seems to have taken off very quickly. Do you think it might impact cigarette demand?

I’m looking around the room, and we’re not prepared to answer that question with any sort of confidence. So, no, it has not been a subject of discussion with our customers.

Okay, thank you. In Engineered Materials, can you discuss your pipeline for the second half? You mentioned during Investor Day that if no M&A happens, your margins could improve from current levels.

Yes. We’re actively promoting M&A, and we expect this to change. Currently, the EM business is seeing stable output with a strong project pipeline.

Hey, good morning and very nice first half of the year. Just a follow-up on M&A, you reiterated that you want to do $1 billion in buybacks between now and 2020.

We don’t see the need to slow down in either area. We expect both buybacks and M&A to proceed simultaneously as we generate excess cash flow.

Mark, you raised the guidance by about $1.50. According to our model, about one-third of that came from the acetyl side. What are some of the assumptions for the back half of the year that have changed to lead to that higher guidance?

The main takeaway supporting our higher guidance is our pricing power and the resilience of our customer base. We’re seeing demand stay relatively strong, even amidst some challenges.

So would you say you expect EM to be strong, but the majority of the upside from the guidance is tied to the acetyl business?

Yes, Engineered Materials has shown consistent performance. The acetyl chain business is where we see the most upside currently.

A question just back on acetic acid. As you look at the returns if – for new capacity, what's the likelihood we get announcements around some significant expansions?

We’re planning to add capacity through brownfield expansions rather than greenfield. There’s sufficient demand and current investments to support this without overwhelming the market.

So, Todd, can you characterize the type of relationships that network activations open up?

The activations facilitate both pricing strategies and supply chain management. We are engaging with customers through varied channels to optimize operations.

Got it, okay. That’s definitely helpful. On tariffs, have you seen any demand-related reactions from the trade noise, particularly in China?

No, we haven’t seen any significant impact at all in our customer base. The way our product works means we’re somewhat insulated from these trade discussions.

Mark, on Acetate Tow, can you provide an update on any strategic options you’re pursuing here?

We remain focused on making strategic moves to stabilize earnings in this segment. While we’re currently flat year-over-year, our priority is to maintain this stability.

In terms of these high prices in acetic acid, do you think substitution might occur?

We don’t see any significant signs of substitution at this stage. Prices are appropriate given our cost structure and the demand.

In the Engineered Materials segment, is there a way to think about how much of the raw material inflation comes from the acetyl segment?

Almost all of the inflation experienced in EM is due to external pressures, not from transfer pricing.

Can you discuss whether the average project sizes are getting bigger or smaller? Are customers presenting different kinds of problems?

We’re keeping our project sizes in a sweet spot that allows us to deliver sustainably without stretching resources too thin. Our focus remains on profitability.

Do you have organic volume numbers for Engineered Materials this quarter?

We don’t frequently break down volumes in that way, but approximately half our growth comes through organic channels.

Are you expecting earnings to continue at this level, or is this more of a new normal? What factors could change that trajectory?

We view the current earnings level as a healthy position for us to be in over the next several years as long as we manage external pressures effectively.

Can you provide an update on the world-scale acetic plant you mentioned during Investor Day?

It remains an active ambition. We are working to structure an expansion that doesn’t solely rely on market demand for sustained returns.

We will now conclude the call. Thank you all for your questions and for listening in this morning. We are available after the call to address any further questions you may have. Please close the call.