Celanese Corp - Series A (CE) — Q2 2019 Earnings Call Transcript

Thank you, Rob. Welcome to the Celanese Corporation second quarter 2019 earnings conference call. My name is Chuck Kyrish, Vice President, Investor Relations and Treasurer. With me today are Lori Ryerkerk, Chief Executive Officer; Scott Richardson, Chief Financial Officer; and Todd Elliott, Senior Vice President, Acetyl Chain. Celanese Corporation distributed its second quarter earnings release via Business Wire and posted prepared remarks about the quarter on our Investor Relations website yesterday, after the market closed. As a reminder, we will discuss non-GAAP financial measures today. You can find definitions of these measures as well as reconciliation to the comparable GAAP measures on our website. Today's presentation will include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found at the end of the press release as well as the prepared comments document. Form 8-K reports containing all these materials have also been submitted to the SEC. Since we published our prepared comments yesterday, we will now open the line directly for your questions.

Lori, just on your implied Q4 guidance, what's driving the expected improvement in engineered materials and how much improvement do you expect in that segment in Q4?

Thanks, David. If we look toward the second half through the third quarter into the fourth quarter, we do see indications that the acute de-stocking we've seen in the first and second quarter is unlikely to continue. In Acetyl, although inventories are high, it really represents only a few weeks, and we see some indications of movement there. On engineered materials, again, talking to some of our key customers, especially in automotive and other sectors, we see indications that stock levels have pulled down quite significantly in the first half, and we don't expect that to continue. We're suggesting that we expect to see demand return to more normal levels and this would not have as much seasonality in the fourth quarter since we've already seen the de-stocking occur this year. By way of evidence, if we look at our order book for July, it's about 10% higher than it was in April at this time. So that's really the basis for our outlook for the rest of the year.

And just update me on the M&A pipeline and the transformational transaction that was discussed at the last earnings call.

We continue to look at all levels of M&A, David, both small bolt-on acquisitions and more transformational activities that Mark is busy looking at. On the bolt-ons, while we have many prospects, we haven’t found any that are delivering the value we would like to complete this year. However, that activity will come through; as I said, Mark continues to work on the transformational M&A, but as we've mentioned before, that will come when it comes, and the timing is a bit uncertain.

In your engineered materials business, your equity income was down in the second quarter year-over-year. And you have some strong comparisons coming up. What's the trajectory of equity income? I know that there are timing issues related to oil prices.

If we look at equity income year-over-year, we experienced about a $27 million decline, with almost two-thirds of that, about $16 million, stemming from affiliates. Of the affiliates, $10 million was due to turnaround timing at Evancina. So, we expect that to reverse. We had some weakness in other affiliates in the second quarter and first half, particularly around our China affiliates that were more exposed to automotive. We've seen some strengthening in those in the second quarter. Thus, we expect to see an improvement as the turnaround time in Evancina reverses and demand begins to recover.

Is acetic acid pricing in China getting better sequentially, and might it make a difference to your returns in the third quarter?

Certainly, if it improves, it will positively impact our returns in the third quarter. The indications we've had in the last few weeks suggest we are starting to see some firming of pricing in acetic acid. However, whether that’s sustained remains a question. Scott, do you have any comments regarding acetic acid pricing going forward?

The demand situation in China is key. We saw demand decline by at least 10%, probably more, for acetic acid sequentially from Q1 to Q2. This is an industry-wide observation, not just Celanese. This decline has weighed on demand conditions and pricing, pulling utilization rates down in the second quarter. We're watching it closely; we've pivoted our business toward derivatives like vinyl acetate and emulsions, growing that space by 9% sequentially in volumes. This lifted the overall Acetyl business by about 2% sequentially. Demand is the critical aspect to monitor at this stage.

I was wondering if you could provide a breakdown of your CapEx. You mentioned about $0.5 billion in 2021. Can you elaborate on the buckets regarding maintenance or cost reduction activities, and the projects highlighted?

In 2019, we're approaching $400 million in CapEx. About 50% is in EHS and maintained margin projects. Approximately 25% is in cost reduction projects, which is about three times more than previous years. This reflects our focus on improving productivity through relatively minor investments leading to significant cost savings. The remaining 25% is in revenue generation activities. As we move forward towards $500 million, all the growth will be in revenue generation and/or productivity projects like methanol expansion and various de-bottlenecking activities across our regions.

From a go-forward basis, I would include about $150 million of MOB-type CapEx, with the rest aligning with what Lori stated in terms of cost reduction and revenue generation. The entire CapEx, inclusive of MOB, is generating returns greater than 20%.

On the engineered materials side, growth appeared explosive 4, 6, 8 quarters ago, but that seems to be slowing. Additionally, you are facing raw material pressures while being selective about your pricing. Can you talk about the pricing side and its correlation to raw material?

Regarding engineered materials, we have seen a decline in auto demand and electronics demand. Notably, competitors have been driving prices down, impacting our volumes. However, we haven't followed that trend to the same extent. Particularly in automotive, we have observed pricing pressures which are influenced by M&A activities over the past two or three years. The volumes that came in from acquisitions were not as differentiated as our base portfolio, and thus haven't been as resilient in a challenging economic backdrop. We expect this to improve over time as we further develop the acquired volumes consistent with our business model.

Could you discuss your capacity in acetyls in Asia and the reports of you taking down your utilization rates?

In acetic acid in China, we observe a demand decline of over 10% in the second quarter, bringing capacity utilizations around 70%. Compared to last year, which was in the mid-80s. Utilization is significantly down, and we have seen other producers in China take units down completely in response to the low pricing. Todd, do you have more insight on our operations?

We assess Acetyl’s network daily to maximize value across all products. In Q2, our activations increased by 30% sequentially. We had turnarounds which impacted our overall production levels. Going into Q3, we should see ramp-ups from planned turnarounds, and we expect to pivot accordingly based on demand.

On the EM side, there seem to be some inventory movements in healthcare a few months ago. Can you clarify how this volume can swing?

That characterization holds true. Although the healthcare sector is strong, it's smaller in volume but with high margins. Small swings can have a big impact on earnings. We did see some volume building in the first quarter, which can vary based on customer behaviors and external factors like Brexit. The volume between the first and second quarter showed a notable difference, primarily from the medical sector being lumpy.

In terms of the Acetyl Chain, as you think about the second half of the year, where do you think you will need to pivot?

We're quite pleased with our position in the Acetyl chain. Seven consecutive quarters above 20% is a testament to the strength of this model. Our performance in the second quarter showcases this strength. We need to continue maximizing the activation model, and if pricing improves, it would boost our results even more.

Can you update us about the expansions with Methanex and how they're proceeding?

Our plan is to expand that unit to 1.7 million tons, operational by 2022. We're pleased with the current output of the unit. We did receive the requisite permit from Texas to proceed.

In engineered materials, we saw a 3% drop in the automotive segment overall. EU demand declined significantly, but the US remained stable. Key demand indicators show significant declines in volumes from tier 2 and tier 3 suppliers. For us, actual volume was down about 4%.

As the center of gravity shifts for Acetyl towards the US while EM focuses on China, will this lead to less integration between the two units?

I don’t foresee less integration going forward. Raw materials will be available in China. We just might see less of our own material being put into EM in China, but we will still grow EM business in the US. Thus, I expect integration to remain intact.

Can you break down the increase in profitability you mentioned regarding the Acetyl Chain? Is it due to pricing or volume?

I don’t have the exact breakdown, but it involves a combination of factors. Pricing realization is certainly part of it, but the strength of our integrated model and understanding how to extract value has played a vital role. We work hard for these results, and I’m confident in our ability to sustain these gains.

The combination of our increased capacity due to methanol and expansion has led to more valuable outcomes. Having more integration provides operational flexibility. This is a repeatable model and we’re focused on adding more value steps going forward.

We shouldn't ignore productivity either. We deliver around $100 million a year in productivity improvements. Committing to this consistently has made us more competitive and has lowered our overall cost base.

Your share buybacks have been robust this quarter; are you still targeting a 7% reduction for the year?

Yes, we will be opportunistic with buybacks. We're expecting around the same range of buybacks as in 2018.

Could you talk about how June performed relative to the second quarter for both Acetyl Chain and engineered materials? I get the impression that June was strong for EM but perhaps weak in Acetyl Chain?

For EM, the last month of the quarter is typically strong due to business patterns. June had a good performance, even seeing an increase in automotive sales in China. It’s unusual and driven by discounting, but it was a notable month for us. For Acetyl Chain, it was balanced overall, with no significant performance variance.

The operational activities remained steady overall but we always remain flexible in our approach.

Thanks, Rob. Certainly, we would like to thank everyone for listening in today and the good questions. We’re available after the call for any further inquiries.