Celanese Corp - Series A (CE) — Q3 2020 Earnings Call Transcript

Thank you, Doug. Welcome to the Celanese Corporation third quarter 2020 earnings conference call. My name is Brandon Ayache, Senior Director of Investor Relations. With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer; and Scott Richardson, Chief Financial Officer. Celanese Corporation distributed its third quarter earnings release via Business Wire and posted prepared comments about the quarter on our Investor Relations website yesterday afternoon. As a reminder, we will discuss non-GAAP financial measures today. You can find definitions of these measures as well as reconciliations to the comparable GAAP measures on our website. Today's presentation will also 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 prepared comments. Form 8-K reports containing all these materials have also been submitted to the SEC. Because we have published our prepared comments yesterday, we'll now open the line directly for your questions. Doug please go ahead and open the line for questions.

Thank you. I would have thought that a lot of plastics inventory would have been left in the supply chain when the auto plants and other manufacturers shut down earlier in the year. So, I would have thought that Celanese would have lagged the recovery of the customers, but it seems like you've been pretty coincident. Maybe you could comment a little bit on timing issue.

Yes, thanks for the question John. I think what is clear to us as we were saying throughout 2019; we were seeing a lot of destocking in the auto chain. And so we went into 2020 with much lower inventories in our estimation than is typical in the entirety of that chain. And as we went through the first quarter auto was still running well certainly in the Western Hemisphere. And so we really have not seen any buildup during the time we were down and we've seen really steady demand consistent with or even actually a bit better than you've seen auto builds recover. So, I think what's different this time than maybe in past recessions or past downturns is just the fact that we had gone through a pretty significant period of destocking already in 2019.

And then could you provide a little more granularity in your comment about rising raw materials? And is that causing you to activate your network any differently?

Yes. The main effect in the third quarter from rising raw material costs was the increase in ethylene pricing. We experienced higher ethylene prices throughout the entire third quarter across all regions. However, this did not significantly affect our acetyl chain or our activation. The impact has not been felt in our Engineered Materials due to the long supply chain involved. Nonetheless, as mentioned in our third quarter comments, we did observe some effects in acetyls. Additionally, we noted increases in methanol and carbon monoxide at the end of the quarter. Some of those cost increases were not able to be passed on through pricing in the third quarter, but we anticipate being able to address them in the fourth quarter.

Thank you.

Thank you. Good morning.

Good morning.

Lori I think not too long ago you stopped talking about discrete project wins in EM. I'm just wondering if you could give us some sense of what you might expect as we look into 2021 versus 2020, will it be sort of a bit parity? Could it be better? Is there a chance it could be actually lower? How do you see those new project applications developing?

Yes. So, we really stopped talking a lot about project wins just recognizing that not all projects are created equal. And just because we had a lot of wins doesn't mean we were necessarily creating more value. But it is something we still try. I would tell you in the third quarter, we were well on target with the number of wins that we expected to have as well as with the margin expectations from those projects. So, as we go into 2021 I actually continue to expect to see the number of project wins going up. We've managed to build a lot in the pipeline due to some really good work by our commercial teams working virtually and using new formats for us like webinars and that sort of thing. And so we're seeing the number of projects actually continue to go up as well as the value of projects continuing to build pretty significantly. I mean maybe just a few examples of wins we've had during COVID and more recently. So, as a result of one of our webinars we recently did one on electric vehicle batteries. We had over 200 customers a lot have attended that series of webinars across the region. And as a result of all the work being done during COVID, we've also had some really good placements so not just EVs which are booming, but also we've had a big contract for LCT into one of the leading electronics manufacturers which goes into smartphones and tablets and headphones. So our commercial folks are doing a great job continuing to find those areas of growth, continuing to find those areas where our unique technologies can really be applied at meaningful margins. And we feel very good for us going into 2021 with some of the wins we've had this year and have teed up for next year.

Can you clarify why you started your share repurchase before the proceeds were received? Was it simply because you expected market conditions to improve, making it a good time to begin buying? Additionally, do you have a specific plan for how Scott can allocate that money toward M&A next year, or is the environment still somewhat unclear?

Yes. So I think in terms of share repurchases yes, we did start prior to the actual close because obviously we could see the close was in sight. So we wanted to go ahead and get in the market and start those share repurchases and spread them out over a longer period of time. As a result of that clearly we're in really good financial shape. We've been quite active looking at M&A. On the positive side, we've had most of our management team together now since June. So we've been able to use that to really reset our sights on M&A do a broader look at M&A targets. I would say we have not a short list but a pretty well-defined list of those things that we're interested in both from a bolt-on standpoint as well from a larger more transformational M&A standpoint. We do see the market starting to get better as people's stock prices are improving. The discussions can get more serious. People are I guess feeling better about getting value for their assets. So the discussions are ongoing, but as we all know this takes some time. So I think yes, it's probably well into 2021 before we'd be able to action anything.

Great, thanks very much.

Okay.

Yes, good morning. First question is just kind of around the level of business today and when we think about that going into 2021. So if the world doesn't get better from here your Q1, EBITDA was down about 15% year-over-year; this quarter was down about 17%. Does the world feel about the same as it did in Q1 and that would be flat at this level of economic activity in Q1 next year to start out? Or how would you gauge that economic level today and what we should use that to model into 2021 for you guys?

Yes. So let me just start. If we look at fourth quarter, we actually see our volumes and pricing being up in fourth quarter on kind of the base materials. But we still do expect that December seasonality. So in acetyls maybe seasonality is happening today. If we look at snow happening in some of the western and northern states in acetyls, we typically see some drop-off in demand for emulsions and VAM and powders as we see a slowdown in the construction industry due to weather. And in Engineered Materials, we typically see not so much of a volume drop but more of a margin mix effect as we see Western Hemisphere companies take time off over the holidays. That volume is usually replaced by a pickup in China and Asia, but usually at a slightly lower margin. So we still expect some seasonality in Q4, but on a growing base if you will of increased volume and pricing. As we look to 2021, look we have a lot of uncertainty right now with COVID. Our expectation is that 2021, we will continue to see growth and recovery back to 2019 level sometime in 2021, so continued recovery out of 2020. The reason we provided the guidance we did is, we don't know exactly what that looks like. And given all the uncertainties around COVID in the world today, it's kind of hard to call that. So that's why we called out our controllable actions the things that we know will add $1.25 EPS over today's earnings. So if you took your expected earnings for 2020 at $1.25 I'd say that's pretty much the floor of what we'd expect next year. Maybe to put it in perspective, if you assume Q3 demand levels would persist for all of 2021 that adds kind of another $1 on top of that for volume growth and price growth. So we are expecting a more positive 2021. But again, just uncertainties around COVID right now, what that might happen as we see it going on in Europe in the U.S. we just haven't really put out a definitive outlook for 2021.

No. That's very helpful on that dollar comment. And then could you also line out what losing Polyplastic does as we anniversary that over the next three quarters? And is there anything else discrete like Polyplastic that we should think about taking out of 2021 when we go forward?

Yes, the discrete items from Polyplastics will contribute approximately $10 million per quarter starting in the fourth quarter. This is an important factor to consider. Additionally, we have identified specific impacts in our earnings, including $0.25 from net productivity moving into next year, $0.50 from reduced turnaround expenses next year, and another $0.50 from share repurchases. Half of this amount relates to repurchases made in 2020, while the other half is for planned repurchases in 2021.

Great. Thank you, guys.

Thank you.

Thanks very much. I think year-to-date other activities in terms of EBITDA is maybe a benefit of about $46 million. And at least on an operating EBITDA basis, I think it was about $30 million in the quarter. Can you talk about what's behind those trends whether they will continue and whether your pension revaluation in the fourth quarter will be larger than it was last year?

Yes, Jeff. The biggest chunk of the year-over-year other activities is that pension income component which is in the neighborhood of between $25 million and $30 million of benefit year-over-year. So that's the largest benefit. You have seen a little bit of movement up and down in other from quarter-to-quarter this year, particularly kind of hitting the low point here in the third quarter largely driven by timing of some compensation and benefits payments. We'll see a little bit of an uptick think about Q4 being slightly higher than Q2 was as we finish out the year. And part of it is just timing of when some of the stuff has come through. So in the end, as we look forward into next year, we expect a slight uptick in underlying expenses and that will more than likely be offset by the Q4 pension adjustment. I mean, a lot is going to depend upon what happens with markets. We expect interest rates right now to hold relatively low. And if things stay where they are then we'll have a slight benefit in pension income next year, which as I said will probably be offset by some income or some expense increases.

Okay. And then in terms of your share repurchase, it sounds like you're going to execute it regardless of the Celanese price. Is that true? That is it doesn't matter whether it's at 100 or 120, you're going to spend the $500 million you've allocated this year and I guess a similar amount for next year. Is that fair?

I believe that's accurate. The $500 million we have set aside for this year is primarily intended to support the Polyplastics sale. This plan will be maintained. For the upcoming year, the $400 million to $500 million we’ve earmarked is essentially what remains from cash flow, following capital expenditures and dividend payments. Scott might provide additional insights, but we typically prefer to stay active in the market at a consistent pace, regardless of the price, and we anticipate that this approach will continue into next year.

Yes, Jeff, consistency has been the approach we've taken regarding repurchases over the year. We have occasionally been opportunistic, but we prefer to maintain a certain level in the market. This is our plan for Q4 and into next year based on the levels we outlined.

Okay. Great. Thank you so much.

Thanks, Jeff.

Thank you. On the elective surgery comments in Engineered Materials, I mean it sounds like this is a deferral not a destruction of demand and it's just a question of when folks are going to get back and do those procedures. But I just wanted to kind of understand the cadence of the destocking. I might have guessed it would happen more in 2Q versus 3Q and it obviously caused a big mix disruption. And so maybe you can just bridge that with is this just something that once there's a vaccine those people are going to get back and have their hips or their knees or what have you done? And how far in advance do your customers then need to rebuild the inventory that they're taking out now?

Yes. Great question, Vincent. What we really saw in 2Q were no elective procedures happening. And I think if you read Johnson & Johnson or anybody's release that would back that up. I mean just no elective surgery was happening in 2Q. So basically in second quarter everybody was sitting there with the inventories they had at the sudden shutdown in March of all elective surgeries across the U.S. which is the primary market this goes into. And so we have seen in third quarter that elective surgeries are starting to rehappen. But what we're also hearing from our customers is people are using that inventory they've had sitting on the shelf waiting to see how fast this all comes back before starting to reorder. Look it's not a long we carry inventory so it's not a long supply chain. They know we have it available. We are starting to see some slight uptick again in fourth quarter. So we fully expect this volume to come back across 2021 and 2022. I think it's not just the hospital being open. But again, these are generally older patients getting this. So it's also people being comfortable, either because there's a vaccine, or because they feel the virus is under control that people feel comfortable to go back to the hospital again to have these procedures.

And then, if I could just follow up on the comments about manufacturing facilities fully staffed and operating to meet improved demand. Maybe more specifically in acetyl, what rates are you operating at in each region? As I recall, there was some an asset down in Europe and maybe some lower utilizations in Asia. So, just maybe a check-in on where those are would be helpful.

Yes. So I would say for acetyls, I mean, all of our facilities are back up and running. We do have a short turnaround in Clear Lake. Actually that we're in at the moment. We had a short downtime in Singapore. So, a number of small maintenance downtimes that were planned into the numbers. But really, everything is up and running. All of our staff is back at full force. I would say, certainly for derivatives things are pretty much running at 100% to meet the demand. And in acid, we're running to meet demand as well. So we are fully staffed, fully ready to go and actually have seen for the last several months, the demand there is pretty much runs full. As we pointed out, I mean, for acetyls, we are just slightly under 2019 volumes already at this point in time.

Okay. Very good. Thank you so much.

Hey. Good afternoon. Nice quarter. Lori, when you think about that dollar upside for 2021 does that assume that, the Acetyl Chain sort of the trends you're seeing now pricing at $300 and sort of the optionality focus downstream to emulsion and powders would stay in that range for that dollar?

Yes. So I was really just sorting that out as an example Mike, sorry, as the range that we would expect to see. So, third quarter kind of being our best quarter this year, if we saw that continued next year that would get you the dollar. There are many multiples of the ways to get there. I would say though, as we look to 2021, I mean, we are seeing an uptick in asset prices in China. Today, up closer to kind of the mid $300 mark up from the $300 per ton we were at in third quarter. So clearly that's an upside in acetyls. As I said, we're already getting close to 2019 volumes in acetyls. The story there is really, when do we see utilization get tight enough we start to see some price recovery, which we think we're starting to see now. Again, some seasonality expected in derivatives in December, but we would expect that that's come back in January.

Yes, Mike, I want to emphasize the importance of contribution margin. We may see prices increase as raw material costs rise. We've observed significant increases in our basic raw materials over the past two or three months. If these price levels remain consistent, we need to closely monitor the contribution margin. If the current conditions remain as Lori described for the third quarter and what we're observing in the fourth quarter, that's the dollar figure we would anticipate.

Understood. In your prepared remarks, you mentioned about $400 million to be allocated for organic growth. Could you elaborate on the specific areas where you plan to invest to foster growth in the coming years?

Yes. So we're predicting $400 million to $415 million of CapEx for next year. We're still finalizing that number, but I feel comfortable we should be well north of $400 million. It is to support organic growth as well as our run and maintain level of maintenance, which we typically have in there at around $150 million to $175 million. So, included in that number is the restart of the acetic acid expansion at Clear Lake. That happens at the end of 2021. It seems like the Bishop GUR. We've previously announced some expansion in our VAE and VAM facilities around the globe. So that number is built in there as well. So a lot of things that you've already heard about, but just really seeing them start hitting heavier capital next year.

Yes. And our teams are pushing hard on cost reduction capital as well Mike. And so, we're working to accelerate projects as we talked about earlier this year. And so embedded in that number is capital needed for some of the productivity gains that we called out in the prepared remarks.

Great. Thank you.

Good afternoon, Lori. Sorry to bore you guys, but another question about the 2021 guide. I know you guys had said that, obviously as the EPS stands right now Q3 was the strongest quarter. But as I take a look at Q4 guidance the midpoint call it slightly north of $1.50. And then I sort of think about, the one-offs seasonality as well some of the turnarounds you come up with a number recurring, which is north of $2, right? So I'm just trying to understand, or get a better sense of run rate sort of EPS as one thinks about 2021. So I mean it seems barring those one-offs, one is already north of $2 and then you have $0.25 worth of productivity another $0.50 worth of buybacks. So it seems without much improvement from Q4 levels, one could hit maybe $9 in 2021. Am I thinking about this the right way?

Yes I think that's right. If you look at where we are, we guided to in the year somewhere $7 or slightly above $7. If you add on the $1.25, that is based on controllable actions that we outlined in the comments that gets you to $8.25 plus maybe a little bit more. And then if you consider some level of recovery against, as if it were Q3 for the year, you can quickly then get yourself to $9 or a bit north of $9 next year. Again, our big caveat on that is just seeing the resurgence of COVID and not knowing what that's going to do to market in Q4 and into next year. That's why we haven't called out a specific level of recovery.

Of course, of course. Makes complete sense. And as a follow-up, you pointed out a $5 million sequential hit from Ibn Sina. Now, if I recall correctly, there tends to be a quarter's lag between what oil prices do and the impact of that being felt in your results in Ibn Sina. So is it fair to assume that Ibn Sina could be somewhat of a tailwind come Q4?

Yes. So Ibn Sina is a quarter lag. So if you look at methanol prices they were very low levels in Q2. That's the additional $5 million sequential hit we saw this quarter from Ibn Sina. Now with methanol prices recovering, we would expect to recover that $5 million from Ibn Sina in fourth quarter.

But you won't see it flow through Hassan on the equity earnings line because it will be offset by the roughly $10 million or so that comes out from Polyplastics. So we just look at those two together down $5 million Q3 to Q4.

Absolutely. Thanks so much, guys.

Yes. Hi, good afternoon.

Hi, P.J.

A question about your BlueRidge Cellulosic plastic. I think that's biodegradable plastic for food takeout, etc. How big is that market? And how much polyethylene or PET can you replace with cellulosics? And how do you price it? Do you charge a premium over let's say PE?

Yes. Let me describe it this way. The potential market for this material could be significant. We made the marketing announcement because it's time to provide material to customers and allow them to try it out. This product is more expensive than polyethylene, which is why it hasn't had much impact on the market until now. However, we recognize that some customers are seeking sustainable biodegradable options and may be less sensitive to price. That's the reason for our announcement. We are actively working on getting material to customers. We have secured a few small purchase agreements for trial purposes, but we need additional time to better understand the price point and the demand for replacing traditional polyethylene products.

Okay. Thank you. And then secondly, as you bring more of your acetyls production in the U.S., you are more exposed to natural gas prices here. And maybe Scott you can comment about, are you concerned about rising natural gas prices because of lower associated gas production? And are you hedging any part of your natural gas purchases? Thank you.

Yes. So look we don't expect rising natural gas prices to have a really material impact on our business. It does have the potential to slightly compress margins. But this is the value of our global network. The fact that we can choose where to make the acetic acid where to sell it, we can flex our production levels, we can flex further down into derivatives, which are less raw material sensitive. So we really are not expecting any material impact from this in the fourth quarter.

Yes P.J., we do take some short-term positions from time to time but nothing that I would say is long term in nature if you will.

Okay. Thank you.

Hi. So perhaps this isn't the case in EVs, but has COVID slowed the pace of innovation at CE or at the customers at all? I would think just given restrictions around staffing and R&D labs, you may just have a slowdown in the pace and implementation of new business?

So great question, Matt. I would say, look, when we first went into COVID I mean certainly it had an impact as one I think people thought this was not a long-term thing and so things were just put on hold for a short period of time. I would say all of our customers and ourselves included have now adjusted to the new world of COVID. And if anything we see the pace of innovation pick up. Again most of our folks are back in office and facility, so we've been able to do a lot of things for our customers. We also see our customers coming back and we also see them getting more comfortable with doing more remotely. So, again, going back to my previous answer on wins we are still seeing projects win. We are seeing high-value project wins and we feel very excited about the pipeline of wins in Engineered Materials for next year and the innovation that's gone into that. It really was helpful for us that at the end of 2019, we really focused our strategy on what we considered a few emerging trends around 5G and electric vehicles and medical and pharma and sustainable solution. And that focus on that innovation and keeping that pipeline strong through COVID is really helping us now as we move into recovery and we see those areas continuing to emerge as winning sectors.

Okay. And maybe on the same light how long is it going to take you to fill out the new GUR capacity? And what EBITDA contribution of an expansion what would that look like? Because most of this is going to EV batteries too, maybe if you can provide a little bit more color there?

Yes. So, the expansion that we announced in Bishop the 15 kt expansion should be online early 2022. It is really supplying our global network for electric vehicles. And at the current rate of growth in electric vehicles about 25% a year quite frankly that will be sold out the day it starts.

Thank you. Lori just on 2021, you highlighted a number of tailwinds for next year. Are there any headwinds we should be thinking about for next year from a bridge standpoint?

No, not really David. For us, the headwind could be the potential impact on the economy due to a resurgence of COVID, which is why we haven't made any specific projections regarding volume and price growth. However, we intentionally advanced a lot of our plans into 2020, including facility changes and inventory adjustments, to capitalize on the low-demand environment. Therefore, we don't anticipate any significant headwinds as we move into next year.

And just on EV, Lori where are your sales today for EV-related content? And where can they be do you think in three to five years?

David, I don’t have a precise figure, but I can say GUR has applications beyond electric vehicles. Electric vehicles are definitely the fastest growing of those applications. We anticipate the electric vehicle market, where we are a significant player in lithium-ion battery separators, to expand at approximately 25% annually over the next five years.

Yes, it's a tough question David because there's a lot of applications where we have content on a vehicle that it doesn't matter if it's an ICE vehicle or if it's an EV vehicle. So, sometimes it's hard for us to partial that out. If we look at EV-specific applications, it's very low single-digits of the percentage of EM's revenue today.

Thank you very much.

Yes, thank you. Hi, good afternoon everybody.

Hi Ghansham.

Hey Lori would you be able to give us a sense as to what the volume exit run rates for the Engineered Materials segment was as you cycled into the fourth quarter? What are you sort of baking in for the fourth quarter specifically? And also I realize this is real time but what are you hearing from customers given the incremental lockdowns in Europe at this point?

Overall, we expect approximately 10% growth for the company. I don’t have a specific breakdown between Engineered Materials and Advanced Composites at the moment. However, we anticipate about 10% growth before accounting for seasonality effects on volume and price as we move from the third quarter to the fourth quarter. Based on feedback from customers and our order book, we see that Engineered Materials in October is showing some modest improvement compared to the average of Q3, and November is consistent with that trend. We don’t have a clear view for December yet, but it continues to show similar levels of modest volume growth. We may experience some margin impact in December. So far, we have not observed any signs of demand destruction linked to the second wave of COVID in either Europe or the U.S.

Thank you. Good afternoon and congratulations Brandon on your new role. I'd like to follow up on the acetic acid situation in China. I recently saw some information indicating that operating rates are exceeding 90%, which seems quite high and hasn't been seen in a year. Are we prepared to say that China has fully recovered and is in the process of restocking? How should we interpret operating rates above 90% in China?

Yes. I'd have to see the data Frank to be fair. There's a lot of different numbers reported. We are not seeing that kind of return in terms of utilization based on the numbers that we look at.

Dividend is strong Frank, I mean there's no doubt it has improved in China. I don't know if we're ready to call it that it's back if you will. But certainly, demand was strong at the end of the third quarter. And so far the order books, as we see things into November, do suggest that the end of the year in China in acetyls should be pretty good.

Got you. Thank you. And Scott, I think Celanese had been talking about a 2020 free cash flow target, most recently of $800 million plus. Following this very strong third quarter, you're about $30 million to $40 million short. How do we think about 2020 free cash flow for the company? And I guess, a lot of the discussion has been on 2021 and you're going to see higher earnings from productivity turnarounds, recovery but you're also going to see higher CapEx. Can you talk about what your expectations are on the free cash flow side?

Yes. The $800 million to $900 million target for this year remains a solid estimate. We believe we will stay within that range, even considering the tax payments related to the completed transaction. Looking ahead to next year, much will depend on demand. However, we anticipate that working capital inventory levels will be at the required rate as we conclude this year, so we don't expect a significant increase in working capital next year. We feel confident about cash flow, which supports our plans for share repurchases of $400 million to $500 million for next year, expected to be funded by free cash flow.

Hi. So perhaps this isn't the case in EVs, but has COVID slowed the pace of innovation at CE or at the customers at all? I would think just given restrictions around staffing and R&D labs, you may just have a slowdown in the pace and implementation of new business?

So great question, Matt. I would say, look, when we first went into COVID I mean certainly it had an impact as one I think people thought this was not a long-term thing and so things were just put on hold for a short period of time. I would say all of our customers and ourselves included have now adjusted to the new world of COVID. And if anything we see the pace of innovation pick up.