Celanese Corp - Series A (CE) — Q4 2019 Earnings Call Transcript

Thank you, Donna. Welcome to the Celanese Corporation Fourth Quarter 2019 Earnings Conference Call. My name is Chuck Kyrish, Vice President, Investor Relations. 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 fourth quarter earnings release via BusinessWire and posted prepared remarks about the quarter on our Investor Relations website yesterday after market close. As a reminder, we'll discuss non-GAAP financial measures today. You can find definitions of these measures as well as reconciliations to the comparable GAAP measures also 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. Because we published our prepared comments yesterday, we'll now open the line directly to your questions.

Lori, if you could just clarify on the outlook for EM for 2020, the 10% EBIT growth. There was a lot of commentary in your comments about your differentiated volume performance from the innovation. And I just wanted to get a sense of how much volume growth you are expecting in the year? And how much of that will contribute to organic growth towards the 10% target versus the self-help measures that you also discussed?

Thanks for your question, Vincent. So, maybe just to clarify, what we're saying for EM for next year is we are expecting 10% EBIT growth, but there will be an offset to that because of the turnaround load next year in EM, specifically the Bishop POM turnaround. So that 10% EBIT growth really comes from a couple of items: one, we do believe we're at the end of destocking, so we're seeing more normalized order rates; we are also seeing the benefits of project wins, both from 2019 and moving into the wins for 2020. These project wins are from our existing customers, but also new project wins, as we called out in the script from sectors like electric vehicles and 5G. Further on the 10% EBIT, we'll see some help from raw materials, specifically the raw materials help that occurred in 2019, but we didn't see in 2019 because of the length of our supply chain and inventory. So we should start to see some help from raw materials as we move forward. And then, of course, additional productivity, which has already occurred in EM. For example, the Lebanon shutdown, which happened last year, and then this year, we've already announced the shutdown of our compounding facilities in Shelby, which will provide some help in 2020. Additionally, we have the benefits from some of our new capacity that's come on. For example, the four lines we've started up in China in the second half of last year, which will help with our supply chain cost and being close to our customers in China.

And as a follow-up, if I could just ask you, you mentioned in relation to the Clear Lake shutdown in the fourth quarter that acetic prices didn't respond to that. But you also noted that you were able to not see a volume decline. I see a tension between those two things, and I'm just wondering how you weighted continuing to ship volume versus maybe letting the market tighten up a little bit and seeing improved margins? And just how you thought about that in terms of the overall profitability of the segment?

Yes, it's a whole thing. So, I mean, really good work by the acetyl team to offset the impacts of the Clear Lake outage in the fourth quarter. A little counterintuitively, because we had lower pricing, we didn't see as much impact from the shutdown in Clear Lake. You have to remember also, most of our volume goes from the U.S. towards Asia, so we actually weren't shipping as much that way. So that's actually a bit of a help, although it costs more to produce in China, obviously. So when you put that all together, we saw that, with the shift downstream to derivatives, moving more into VAM and emulsions, keeping the volume we did have in the Western Hemisphere where the pricing was somewhat better, we were really able to offset the impact of Clear Lake. But we did see it in the pricing. But there, again, the team was also able to offset nearly 50% of the pricing impact on the year, again, due to the move to the Western Hemisphere and due to the moves with derivatization into emulsions, into VAM and VAE.

Do you have a special strategy review underway, as speculated in the press? Or do you just have your normal ongoing strategy activities?

So we've actually gone through a big strategy exercise in the second half of 2019. This relates to our core businesses. In the Acetyl Chain, you saw some of that in the emulsions announcement that came out. Obviously, the Elotex acquisition is part of that strategy as well to strengthen and further extend our Acetyl Chain. It is in Engineered Materials, where you saw some of our comments around a move towards Asia localization, for example, which is about getting closer to our customers and shortening our supply chain with our customers. In Acetate Tow, it is about looking for next-generation uses of cellulose acetate as we see the decline in the tow industry and being able to move flake into other applications. All of those are outcomes of that strategy review which we undertook in the second half of 2019. We will be continuing to review that with our Board here in the first half of the year, and anticipate an Investor Day sometime midyear, where we'll be able to share that strategy with you all in more detail. Clearly, that strategy anticipates some bolt-on M&A. Again, you saw that with Elotex. I will also tell you, though, that the strategy is very focused on self-help, organic investment, and organic use of cash to grow our own networks and capabilities short of anything that can happen with M&A.

And then secondly, in engineering plastics, how much did lower raw materials help the earnings on either a sequential or year-over-year basis?

So really, raw materials, from 2018 to 2019, we didn't see much help in 2019. We expect to see more of that help rolling into 2020. That just reflects the long nature of the supply chain in Engineered Materials, where it has to be polymerized, then it has to be compounded, then it has to be moved to the customer. It's a fairly long supply chain. So we actually expect that help to show up more in 2020.

If you had to compare your net turnaround costs in 2020 with your net turnaround costs in 2019, what would be the 2020 benefit? Or what's the difference as best as you can tell?

Yes. The impact from turnarounds in 2020 is a total of $70 million to $80 million, and that's $50 million more than we had in 2019. So it will be a hurt in 2020 of $50 million, which we will offset through additional productivity and other actions. But that's fully baked into our plan.

So in your materials, you talk about an aspiration of $11 a share in earnings. To reach $11 a share, you've got to grow your EBITDA by, I don't know, $140 million. Given the current business conditions, if you had to size that $140 million to reach your aspirations, where would it come from?

Yes. Let me explain that. We're targeting $11 in earnings per share, starting from the current $9.53. Next year, we anticipate an increase of about $0.15 to $0.20 due to the absence of the Clear Lake incident, bringing us to approximately $9.70. We expect another $0.50 from share buybacks and other cash initiatives, leading to $10.20. We are aiming for $0.50 in net productivity, which will compensate for $0.35 of turnaround costs, translating to about $125 million in net productivity required. Our goal is to achieve between $200 million and $250 million in gross productivity, offsetting price increases and energy fluctuations, which we believe is attainable based on our past performance. This brings us to $10.70. Lastly, we need an additional $0.30 improvement in demand, as we lost that amount in the fourth quarter due to unexpected seasonality in Engineered Materials and a significant price drop in acetyl. If we return to the demand and pricing levels of the first three quarters, we can recover that $0.30. This is our plan for reaching $11, and we won't rely solely on the market to help us; we're also identifying other productivity measures to recover that $0.30 and achieve our goal.

Lori, in the prepared remarks, you talked about operating rates in acetic, declining 7% globally last year. Can you give us some sense regionally how that looks? And then what your expectations are in 2020?

Yes. So if we look at utilization for the industry, full year, year-on-year, in 2018 to 2019, we saw almost a 10% drop in China utilization. Now globally, that was just over 5%, and so most of that was coming from China, with most of that decline in 2018 to 2019 coming from demand. Interestingly, in the fourth quarter, we saw that similar kind of 10% drop just from the third quarter to fourth quarter in China, and that was really due to fewer outages. It wasn't a drop in demand, third quarter to fourth quarter; it was because there were fewer outages in China in the fourth quarter. That really put us in an oversupply situation, which we then saw reflected in pricing. Globally, the fourth quarter saw a little under 10%, again mostly driven by China, with some driven by demand in other parts of the globe.

I guess, in the past, maybe to your last Investor Day, you guys had talked about expecting some more takeout in the industry, some more capacity reduction. How has that path been relative to your expectations? And is there some left that you think might come out of the market in acetic?

Yes, it's a great question, and one we think about a lot. If you look at the amount of supply that was in the market in the fourth quarter, you’d have to say not much capacity has come out in China. However, we believe China remains committed to their environmental targets. So we still expect some reduction to occur in the future, but we just didn't see that much throughout 2019. Todd, do you have any additional comments?

Yes, Bob, it's Todd Elliott. I'd add that the utilization drop over the course of the year, about 7%, was, to Lori's point, a combination of some demand over the course of the year. There was more availability throughout the year relative to 2018, certainly. But we think the fundamentals are there. If we normalize demand patterns as we go into 2020, we think that utilization rate will come back into that mid-80 range on a global basis. We already saw improvement in pricing to start 2020 in the first quarter off of December levels that started to move up. We need to see that through over the course of Q1, given the conditions in front of us. One other point that I think is important to mention. While acetic acid remains a key product for us, very significant in terms of our position, we're growing our derivatives as well. When you think about our volume profile year-over-year, we were down about 15% on acetic acid volumes in 2019 versus 2018, but we didn't stop at that point. We actually took about 6% more of our acetic acid and moved that downstream to VAM and to emulsions. When you look at the volume profile of VAM and emulsions, they were actually up 8%, from 2019 to 2018. So we've intentionally moved our mix regionally with a focus on the Western Hemisphere. The Elotex acquisition will also allow us to take our emulsions business into the powders product line and provide more resiliency going forward.

Got it. Yes, that's laudable. And I also want to thank you, guys. The continued way you present your earnings is very efficient and appreciated, and we're hopeful maybe your peers will start doing the same thing.

Maybe another way to hit the acetic acid. In the last four or five months, there have been two very large announcements for new capacity. So you had ZPCC plus BP and then Reliance. Now I know we've had a lot of announcements over the last decade that haven't come to fruition. If you were handicapping these two, how likely are they to help us with our supply model going forward, and in what time frame should we expect them to come up, do you think?

Yes. Look, Duffy, if I were to tip the current economics around acetyl, I think they don't support new investment. So we need to consider what other motivations these companies would have to build out acetic acid capacity. I'll ask Todd to comment on that. But I would also say, from experience, any new capacity being announced now is probably on a 3- to 5-year timeline to design, construct, and get permits, depending on the location. So I'd say it's 3 to 5 years before we would actually see any of that capacity come online.

Yes, Duffy, I think that's right. On the first one you mentioned, we were asked that question last quarter and continue to see it as an integration step associated with the change to polyester. So in our view, it's just an integration move, and it's probably multiple years down the road.

Yes. So Ibn Sina had a big turnaround this year, which hit our earnings by about $30 million. That's a normal turnaround. I think operationally we're happy with the Ibn Sina operation. So far, we've seen no real impact from the acquisition of SABIC or the ownership change to Saudi Aramco. I don't anticipate that will really change anything, and we certainly haven't seen anything yet.

If I take a look at adjusted EBIT for the Acetyl Chain in the fourth quarter and add back Clear Lake and annualize it, it's below the $750 million to $800 million that you talked about in your prepared remarks in terms of your sustainable earnings level. So is that kind of the outlook for 2020 to be in that range? And if so, how do we sort of improve from fourth quarter levels?

Yes. If you look at just the fourth quarter, Michael, two factors. The Clear Lake impact added $20 million, and the typical seasonality in acetyl is also $20 million to $30 million. So if you add those back in, you quickly get us back to the $750 million to $800 million foundational level that we believe we’re at in acetyl. Look, I agree. We still think it makes sense to keep the portfolio together at this point, because of some of the dis-synergies associated with splitting it. I think we see the whole market down right now, so it's hard to say where we'll end up if we see some turnaround down the track. We're actually quite excited and optimistic about 2020. We think we have a good path laid out in front of us. We believe we'll be able to continue to show the potential earnings capability and high multiple capability of this business as we move through 2020. We’re also really excited about our strategy for the next six years and the earnings growth potential associated with that strategy. Again, based on things under our control, which is organic CapEx investment and productivity. We believe this continues to be a very high return business, and as we move into 2020, that will be more recognized by the market. Just ask you to watch this space.

One of your competitors called out nylon pricing as quite weak. Can you talk about your nylon business? What you're seeing there in terms of price and volume? And how much of your EM business is more base polymer like nylon versus how much is more specialty?

Yes, good question, P.J. If you recall back, I think it's the second quarter earnings, we did call out softness in nylon pricing and demand back then. We might have seen it sooner because we don't polymerize; we buy polymer and compound nylon. So we were seeing that softness back in midyear. Through the second half of the year, it has been where we expected it to be. So that may be the difference between us and our competitors. If you look at our EM business, one third of it is really highly differentiated, one third is differentiated, where maybe we're spec-ed in with someone else but still differentiated, and then the third is more towards commodity or MTO-type products. I think that's the best way to characterize our EM business. We constantly work to minimize that last bucket and move more things into the more differentiated space, which specifically the nylon is what we've been doing.

It's important that we play in that standard space because many customers are buying a wide variety of different polymers and grades for various applications. Having a presence in that part of the portfolio is crucial to enable the higher-margin aspect of the segment.

Can you talk about the acetic acid cost curve? Because I think you take good advantage of that cost curve by moving downstream or moving products around the world. Can you just talk about your observations on the cost curve?

There are a couple of different aspects to that, P.J. The first I would start with is that the vast majority of our acetic acid is produced in Clear Lake. The reason for that is the cost advantage we have with natural gas pricing in the U.S. I think that's the first piece, and clearly that was a bit of an impact with the Clear Lake downtime in the fourth quarter. But we see that as an advantage, which continues well into the future and is the reason for our acetic acid reconfiguration project, which allows us to produce even more in the U.S., taking advantage of that raw material as well as economy of scale productivity instead of making product somewhere else. As we’ve talked about before, our ability, which we think is unique in the industry, is to go off-stream and make choices around acquiring CO and methanol or making it ourselves, whatever is most economic, and making decisions about where to take value out of the chain, whether we move material into VAM and VAE or into emulsions, and now, with the option to move into redispersible powder. We believe this gives us a unique capability to manage various economic conditions and make informed choices about where to take value out of the chain. The fact that we are globally located allows us to choose where to sell any of the range of our products, whether in Asia or the Western Hemisphere, and take advantage of both. We saw it in 2018 where it made sense to move a lot of acid into China because of pricing. This year, we see the opposite, where we’ve moved significant volumes into VAM, VAE, and emulsions and into the Western Hemisphere to take advantage of better pricing.

Lori, can you just talk about, within EM, how much of the business is auto-related? And how much was that business down in Q4? And how much was it down in 2019?

Sure. About one third of our EM business is tied to auto. If you look at the auto sector, it was down about 6% globally in 2019 versus 2018, across all regions. The U.S. is a little better, but unfortunately, the two markets that we heavily play in, Germany and China, were down closer to 8%. If you look at what that impacts for us, we saw double that impact in terms of demand on materials going into auto due to destocking at many of the molders and other factors. We're talking about a double-digit impact based just on build. Fortunately, we've also been actively working to increase the volume per vehicle that we provide. Since 2015, we've seen about an 11% annual increase in the volume of materials we put into vehicles. Partly due to M&A but just 2% to 3% in the base volume, which helps offset some of the impact but still represents a significant challenge this year.

And Todd, can you just comment on where acid profitability is in China today? Maybe where it was a year ago? And what your expectations are for it to improve throughout the year?

Pricing did fall throughout 2019 versus 2018 by about 40%, which was significant. Even during the fourth quarter, we saw it dip down each month to the low point in December. That's why we intentionally pulled product out of the region and moved it elsewhere, shifting to derivatives, and re-positioning into different parts of the world and applications to offset part of that development late in the year. As we head into Q1, we've already seen pricing rise almost 10% in January, and we anticipate it will move further throughout the year. This is part of our ramp up to our $11 aspiration for the year, which is crucial for us. We need to get through the turnarounds in methanol, acetic acid, and in Nanjing, which are happening in Q1 and Q2. These turnarounds are unusual in that methanol occurs every four years, while acetic happens every three years. We believe we're well-positioned to increase pricing throughout the year once demand normalizes.

So Todd, on profitability, though, where are the breakeven levels in China in Q4? I saw a little bit more on profitability than pricing.

Yes, I can't provide an exact breakeven level for everybody in that market. It was a tough end of the year for producers in the space, due to the combination of where methanol ended up, the MTO dynamics, and the overall soft demand and uncertainty. We believe this will improve as we move ahead, but our focus is to maneuver within our network to position Celanese regarding our capability.

This is actually Matt Krueger sitting in for Ghansham. So sticking with the China theme, I just wanted to dig into what impact could the coronavirus have on the acetic acid market in China? How could this impact the global supply chain? Do you believe that any disruptions or related tightening would be a net positive or negative given the demand but also the capacity and pricing puts and takes there?

It's a great question. We don't know how long or what the impact is. Our first priority right now remains the health and safety of the over 800 people that we have in China. At this moment in time, we don't have any employees affected, and our operations continue as they were going into this. Currently, we're not seeing an impact. Clearly, if producers shut down, if this situation extends, there could be a drop in demand and a potential drop in supply as well. However, most of what we make in China stays in China, so we believe this will be somewhat balanced for us. It's just too early to call until we see how this develops. In terms of our outlook for 2020, it's based on an economic environment similar to the first three quarters of 2019. No increase in demand and no increase in supply. The real lever we have in front of us, in addition to working our business model, is productivity. The productivity culture here at Celanese is deeply embedded, and I am consistently impressed by it. This isn't a seasonal exercise but rather a daily practice for our team to find ways to reduce costs, improve materials, and utilize our assets better. As we move into 2020, we've also taken additional steps to identify other possible productivity measures. Examples include improving our supply chain management with more digitized systems, increasing digitization across all operations, and analyzing our organizational structure to ensure proper configuration and sizing to support future business needs. We also continuously assess our operational footprint. You saw the announcement around the Shelby compounding facility shutdown. We also shut down the Lebanon facility last year. We remain vigilant in looking for ways to enhance efficiency. This ongoing focus allows us to assert control over the future rather than merely responding to market changes.

So just related to that. Two questions around sustainability. In your prepared remarks, you called out the outperformance of EM against the underlying market. If conditions stay weak for several years, do you see the gap of outperformance being stable? Or do you think over time you might converge or lose some of that excess outperformance? Secondly, on productivity, with the step-up you're undertaking this year, how should we view its volatility? If conditions improve, would the pace of productivity slow down? Or can you see a clear path to $250 million of gross productivity over the next 3 to 5 years given that you've changed your approach or found different avenues previously not explored?

The outperformance versus the market is built into how we do business, and I don't think that changes under varying market conditions. On the strength of our Acetyl Chain and its differentiation from our competitors, we have ample optionality around where to take value, regardless of the acetic acid market dynamics. In Engineered Materials, our project model, which we have laid over emerging market focuses on sectors such as EVs, 5G, and medical applications, will allow us to continue to outperform. Based on my experience, our consistency in productivity measures surpasses that of most competitors, which positions us well irrespective of economic conditions. As for productivity, it's essential to acknowledge that the character of our productivity shifts according to market conditions. When we experience growth, productivity often leans towards revenue-generating projects and debottlenecking efforts. So the pace of productivity is flexible and adapts based on the current demand landscape.

I wanted to ask you about two derivatives. First, in VAM, I believe one of your competitors declared force majeure about three weeks ago. I was curious about your near-term outlook for VAM. Secondly, you announced intentions to expand in VAE with a 155-kiloton split between the Netherlands and China. Could you discuss the drives behind that? Is VAE currently tight, and if so, why relatively to other asset yield derivatives?

We view both VAM and VAE as excellent expansion opportunities, predicting continued demand growth alongside favorable cost and technology positioning. In Clear Lake, we've recently completed a 150-kiloton expansion for VAM, with another 150-kiloton expansion slated for the next few years through small, low-capital expenditures in various locations. Likewise, the recent announcements concerning VAE expansions, primarily in Nanjing and Geleen, also reflect our strategy. We can conduct these expansions with minimal capital investment, making them very attractive for our market positioning. Now I’ll pass it to Todd for additional commentary.

We're strategically positioned in the building space, addressing applications in self-leveling, flooring, and wall texturizing. The initial wave of VAE expansions primarily consists of targeted debottlenecks focusing on immediate customer pull. We're at capacity, so we’ve opted for expansions that directly respond to customer needs rather than preemptively building inventory. Subsequent expansions will involve further polymerization enhancements at our Nanjing and Geleen sites over the next few years. This will align well with the addition of our downstream capabilities in the recently acquired redispersible powder segment, aiming to effectively respond to customer demand now and into the future.

Yes, just following up on that question. Regarding methanol, can you share your thoughts on its trajectory as it relates to VAM and acetic? What decisions are you making to prioritize material for VAM versus acetic? And what does your margin outlook look like, especially considering a weaker methanol forecast?

From a big-picture view, I would say that our investment decisions aren't influenced solely by the short-term economics, such as methanol. Historical data has shown that possessing greater optionality enables us to optimize and stabilize our earnings over the long run. Therefore, methanol isn't directly driving our decisions regarding investments in VAE and VAM. I think Todd has elaborated on this very well.

Yes, methanol is certainly a strategic raw material. Our past investments in production have made a positive improvement to our balance between produce and procure. Notably, when I compare our earnings profile from last year to those in 2017, we increased earnings significantly without elevating revenue. Our aim is to maintain EBIT margins above 20%, capitalizing on our experiences and strategies as we've discussed. Acetic acid pricing is primarily influenced by supply-demand conditions rather than solely by methanol pricing. Yes, Arun, I don't foresee working capital being a substantial funding source. As business growth tends to result in a fairly neutral stance on working capital, any increases will be slight. However, we'll continue taking proactive measures to manage working capital efficiently. It’s worth noting that the primary variance in free cash flow year-over-year will come from capital expenditures. Our expectations put CapEx around $500 million year-over-year, with an anticipated payment to the European Commission as well.

Yes, Scott, just a follow-up on that. Can you elaborate on the $89 million you reserved for the European Commission investigation? Where does that stand? Where might that hit?

Yes, Frank. Currently, I can't provide extensive comments. We don't expect to book any further reserves based on all the information we have known to date, and this is included in our cash flow forecast for 2020.

Lori, are transformative M&A options now completely off the table because of potential dis-synergies? It sounds like in the past that you said that dis-synergies were not a barrier to considering that. So if that's off the table now, why is that the case?

Dis-synergies do not eliminate the consideration of M&A; rather, they act as a component of evaluation. The attractiveness of a deal must outweigh the potential dis-synergies. We continuously assess both bolt-on opportunities like Elotex and transformative M&A options. We'll proceed with any good deals that present themselves and ensure our strategy maintains M&A as an option rather than a necessity.

And on nylon pricing. The prices peaked in the first quarter of 2019. Do you think that supply-demand has balanced out here? And do you expect these headwinds to be behind us by the first quarter of 2020, or do you see more downside risk in the nylon dynamics into the second quarter?

Our current view on nylon indicates a more balanced position. We believe we've passed through the worst of destocking, although some inventory still exists. Overall, we should see more market balance as we proceed into the upcoming year.

Thank you. So we'd like to thank everybody for listening in today. As usual, we're available after the call for any further questions you might have. Donna, feel free to close out the call at this time.