Celanese Corporation (CE) Earnings Call Transcript & Summary

Good afternoon, everybody. This is Bob Koort. I head up the U.S. research team -- equity research team for the chemical space for Goldman Sachs. Joining me from my team is Anthony Walker, who helps me cover Celanese, and we're pleased to have Lori Ryerkerk, who's the Chairman and CEO; as well as Scott Richardson, who is the Executive VP and CFO. The format of the call will be for Anthony and I to grill Celanese, but hopefully, our clients will interject with their own questions. You can do that on the webcast by going into the Q&A window and submitting questions. And we will gladly put our client questions, prioritize those ahead of ours, but Anthony and I, of course, have plenty to ask if you're bashful.

Maybe we can start, Lori, if you could just give us a little tour around the world. About halfway through the quarter, what you're seeing in terms of trends and business dynamics? Maybe a little on what's happened in China as they've reopened earlier and what that may suggest for Europe and the U.S. as we go through the -- into the summer months?

Sure. Thanks, Bob. We're glad to be here and glad to have a chance to talk to you guys. So it's been an exciting second quarter following a very exciting first quarter. Of course, China has been first in all things with their COVID outbreak, with the shutdown of much of the industry, certainly with the work-from-home and stay-at-home requirements and the impact that, that's had on consumer purchases and manufacturing and everything else. And so I think the good news is, in China, as we are seeing reopening, our plants continue to run during the shutdowns of kind of the stay at home, but our plans were allowed to continue to run. They continue to run today, but our folks are now back in the offices, and we're seeing our customers start-up operations and demand starting to come back from the customers. I think what we don't know yet in China is how sustainable that demand is. I mean, in the acetyl area, for example, we've actually had reasonably good demand, and we've started to see that help pricing a little bit in China, but we also can see that at our customers, some of the inventory is starting to grow. Now some of that's intentional. They're taking advantage of raw material pricing and building inventory back when they have low raw materials, in anticipation of, I think, the rest of the economy coming back around the world. But how fast the rest of the world economies come back will really set that. We haven't seen a big uptick in exports yet from China. And I think that will be a good indication of when we see consumer pool on China as a swing producer and what that means then in terms of demand for our materials in China, both acetyls and Engineered Materials. Europe is slowly, slowly starting to come out from stay at home. Our own offices there are just starting to contemplate reopening at the end of the month. Our manufacturing facilities there, again, have continued to run as needed for demand. And we're just now really seeing auto, which is about 35% of our Engineered Material volume. Auto is starting to come back, really starting middle of April. Again, what we -- everyone is starting up, but they're starting up slowly. What we don't know is when will they get back to full production? And will there be enough consumer confidence to keep them up? So in Europe, we really have seen a very big slowdown in auto sales. So we'll have to see how that develops. In non-auto applications, the demand, at least for our products, has been relatively stable. And in acetyls, we are seeing some softness as other producers and consumers of acetyls slowing down, and we've seen building and construction slowdown in Europe. And then if you move to the Americas, auto started up again last week. We start to see more and more autos coming back online. That's a great sign. Unlike Europe, actually, auto demand were not great in the Americas. There still was some demand even during the downtime. And so that's optimistic. Hopefully, we'll see that continue, and we'll see the U.S. autos come back up more quickly. But we don't know that yet, and we are hearing from some of the auto manufacturers that there may even be some models they no longer make and they're really adjusting their plans according to what they think will sell and what will move in this kind of market. Again, in non-auto, some impact in construction and building with stay-at-home orders, people not able to work. This is a really big time for building and construction, painting and coatings, other things that go into that from our side. So we hope to see that come back up as people start lifting the stay-at-home orders and people can get back to work. We've also seen impact around the globe in terms of durable consumer goods. So think appliances. I mean, people haven't been buying while they're at home, don't yet really have a view on how that is coming back. Although we know the manufacturers are starting to come up, not really a view yet in terms of how much inventory is in that system and how much pent-up demand there may be amongst consumers. So just a bit of an overview.

Thank you for that. Already some questions from our investors. One would be just the cadence as you go through the second quarter. Does it feel like April is the low watermark? Or do you think maybe it's later in the quarter?

Yes. Well, so let me talk a little bit about in -- for Engineered Materials, we had guided to saying we thought Q1 to Q2 demand deterioration, volume deterioration of 25% to 35% in the second quarter. In April, the demand we saw actually was about 35% lighter than we were seeing last February. Now we had baked in some amount of decline based on what we had seen in March when we did that. But definitely, much lighter than we saw in February. And certainly, within that range of deterioration that we expected. May order patterns are very consistent with April. So it looks like May will be similar to April, no real improvement, but no worsening either. We probably expected some worsening -- more worsening in May. And assuming this continues and given what we're seeing in terms of auto restarts and some of the lifting of stay-at-home restrictions, we would expect to see some modest improvement in June. And so with that, we're still comfortable that we're well within that range, maybe even the lower end of that range in terms of demand deterioration for Q2 for Engineered Materials. Similarly, in acetyls, as I talked about, we were projecting to see a 15% to 25% demand decline first quarter to second quarter. In April, that demand was about 20% off of March, kind of, right in line with that range. Again, pricing in China remains weak, but a little bit better than we had been seeing around the end of March and around the time of earnings. And we've seen a little bit of demand start to come up in Asia. We've seen India start to reopen, which is a good indication that Asia is on the path of recovery. But demand in the Western Hemisphere remains challenging. So again, I'd say we're within that range we gave during the quarter earnings, if anything, a little bit on the better end of the range versus the worse end of the range.

Got you. That's helpful. Lori, I think as you took over as Chairman, not too long ago, and Mark sort of exited out, there are a lot of clients asking if that has changed the strategic direction of the company. I think when Mark stepped down as CEO, he indicated he was working on trying to maximize value for Celanese. And so can you talk a little bit about what that path to maximizing value has been and will be going forward? Has there been any change? And how do you think about doing that?

Yes. I mean, in that sense, Bob, I don't think there's really -- there's no change in that strategy. The core principle for us, as a company, is to always focus on generating meaningful shareholder value and, hopefully, getting recognized by the market for that value that we generate. And part of that is really to ensure our base business continues to grow and that we identify the right opportunities for future organic growth. And we really believe focusing in on those things that we can control, which is our own organic growth and running our business exceptionally well, will really help unlock the full value of the Acetyls and Engineered Materials segments. So in the past year, we've taken a strategic review of the base business. We've done a really deep dive into end uses for our products, looking for areas we want to focus more on like 5G and electric vehicles, emerging businesses. We've looked at not just strategic sectors but also who we think the winners will be within those sectors and making sure we have good relationships and are there to help them develop solutions early on. We've also looked at how do we further utilize our -- what we think are unique business models and our capabilities to drive more growth within the sectors that we're already in and within the customers that we're already in. And then, look at strategically investing in additional capacity and capabilities to support those business models. So maybe that's a little bit the changes. We've really been focusing on how do we shore up some of the foundational aspects of our model and things like supply chain and quality to make sure that we're really prepared to deal with the next wave of growth and how do we do more of that growth organically versus just depending on M&A. And it's not that we don't think M&A is important, it's just M&A is episodic, as we see right now, you can't -- no one wants to do a cash deal right now. No one wants to do a deal at these kind of valuations because they don't think they're getting fair value for their company. And so we really have a strategy now that delivers double-digit EPS growth in a normalized environment, just based on what we can control, which is running the business well and driving organic growth. Now we also believe there's a lot of M&A opportunities out there that exist that can help us drive outsized shareholder returns and growth. Be they bolt-on M&A, which we continue to look at as well as transformational deals, it's just we don't think they're going to happen right now during the downturn, but we are preparing as we start to come out of recovery to really be able to go back and continue to pursue some of those transformative opportunities as well as bolt-on deals.

Maybe segue from there to ask Scott. I think, Scott, maybe a year ago at the same conference, you had mentioned that you guys are engaging with a number of counterparties, particularly on the Engineered Materials side, about opportunities, fits. Can you talk about if there's anything that's changed beyond sort of this COVID economic issue? Is there a change in your own strategy of what you have more less appetite to do? Or receptivity from counterparties given what's going on in your own portfolio? How have things changed from where you might have been a year ago pursuing the same approach?

Well, I don't know if that -- the principles are different, Bob. And I think the opportunities might be different as we go forward. We'll just have to wait and see. But I think the principles there around -- and Lori just talked about kind of our base strategy, we believe we can grow EPS 10% per annum in a normalized environment. And that -- we think that's very solid growth. And we've seen -- I think investors have reacted positively to that over the years. But if there's an opportunity to drive outsized value, then we will definitely pursue that, but that's got to be a way that -- it's got to be a very synergistic transaction to make that Celanese, either owning that or putting our business together with someone else's business, it's got to be extremely synergistic to make any sense. And so there's not an infinite number of opportunities out there that do that. So things that either fit in the middle of the fairway, similar products, similar spaces, similar customers or either upstream or downstream, that kind of tends to be where we put the focus. So I wouldn't say it's shifted materially versus kind of where we've been before. But what we're kind of hoping is that this does kind of get the space thinking about strategies in a different way and maybe that shakes something loose down the road.

And then maybe before we get into the business segments, I guess from the outside, it seems like you've got a bit of a bimodal portfolio with the Acetyls Chain on the one hand and the Engineering Materials business on the other. How do you think about value leakage in having those pieces together? Do you lose something for the higher value, higher growth business? Do you lift up the acetic business? How do you think about whether having those assets together makes the most sense?

Yes. I mean, Bob, this is always a question. I mean what I would tell you is, there are some synergies between the 2 businesses. One, just the size of the businesses. Either one of them alone is a relatively small business. And so not having to have 2 boards and 2 sets of overheads and 2 billings and everything else, that there are synergies that come with having them together. We think that number right now is about $50 million, which is significant for a business of our size. Likewise, there are some synergies. I mean, for example, in this low oil environment, we see there is a bit of a hedge there. So the acetyl products tend to be more impacted. With the decline in raws, we tend to see also a decline in pricing for acetyl products. So the margins may maintain the same, but the absolute EBIT goes down. On the same time on Engineered Materials, for about 2/3 of those Engineered Materials, they're value-priced. So raws go down, but our prices stay the same, so we get a little bit of a margin uplift. And those things tend to offset each other. Also about anywhere for -- a good portion of our acetic acid, 40% to 60% of our acetic acid goes downstream into derivatives, and a good portion of it actually goes on into making Engineered Materials into some of the polymers that we make. And so when we had, for example, the Clear Lake issues last year, we were actually able to cut back on some of our polymerization for Engineered Materials, where we had inventories built and pull that material back into acetic acid and use it to supply our customers who otherwise we may have had to short during that time. So there are some synergies associated. Now could you run these 2 businesses separately? Absolutely. But we do think there are some real dollars associated with having them together. Look, that said, if the time comes, if we were to do M&A or something that would grow the size of one of the businesses, we may reach a different conclusion about keeping them together. But for now, quite frankly, we have the cash. We're able to fund all of the capital we want to do in both of the businesses, so neither business is being starved because of the presence of the other businesses. And we think there are enough synergies and reasons to keep them together until we have some kind of a trigger event that, again, may make us want to consider a different decision.

Lori, Scott, it's Anthony. I thought that the comment that you made around the hedging effect of pairing the acetyls business with EM is interesting. And I just wanted to ask as a follow-up, if you think about the net impact of lower raw materials on your P&L in any given year, where you see significant deflation. Is that positive or negative do you think? I would assume that you'd rather see slowly, gradually rising raw materials that has enabled you to capture more pricing. But just thinking about the net impact in a period like this, how should we think about that?

So generally, Anthony, we're pretty agnostic to oil prices, whether it's low or high, so to say, oil versus raws. But generally, we're pretty agnostic to that. We do see some transition effects, right, as raws move faster than pricing or vice versa. But again, because we kind of have this natural hedge between Acetyls and Engineered Materials, over time, our systems adapt, and we can maintain the same level of margins. Now generally, we would prefer higher oil because prices tend to move up, and we find that's a better environment for us because we're a low-cost producer. So we get more advantage versus our competition in a high oil environment. But that said, it's not the biggest impact on us.

Yes. And Anthony, we really like volatility of raw materials. I mean, that's something we've talked a lot about. Stability, sometimes you do -- you don't see as much industry activity, typically when things are relatively flat. So we do like things moving around. And we've kind of seen us -- you've seen oil move, but methanol and ethylene have been relatively stable, particularly here in the Western Hemisphere at low levels. As you start to see some of that volatility come back down the road, that tends to be opportunities for margin expansion, really across both portfolios for us.

Interesting. And then maybe more specifically, just on Engineered Materials, we talked through, I think, a bit about the headwinds that you're experiencing in autos and the percent weighting and exposure that you have within the portfolio to autos. But can you maybe talk about what you're seeing in your -- the relative exposures to electronics, to medical, to consumer, other areas of the portfolio that have actually seen fairly significant growth, and I would suggest outgrowth relative to that market growth over the last several years. And how those individual subsegments might be performing at present?

Yes. So if you look specifically at Engineered Materials, about 1/3 of our portfolio in Engineered Materials is auto. And that actually is the smallest percentage that we've been at in our history. Typically, in the not so recent past, we were nearly half of our Engineered Materials portfolio was geared towards auto. So we have, over time, been focused on diversifying our portfolio to other high-value end users. Auto, obviously, is high-value as well. But we have grown -- it's not so much that our auto has shrunk, but we have grown faster in other end markets as well both organically and through our bolt-on acquisitions. So for example, today, we have a much more sizable business in medical and pharma, not that big by volume, but better by margins. And we also have a much more sizable business in electronics, which continues to grow as we focus on meeting the needs of 5G, where we have many of our polymers that are really good fit for 5G, both antennas and things in your handheld devices as well as transmission equipment and repeaters and that sort of thing. So our sales mix is much more diversified than it's ever been in our history. Even in auto, we typically outperform auto builds as we focus on replacement of materials, things that need to be painted, lightweighting, et cetera, replacement of other plastics from other OEM, other plastics as people want more functionality. We're really focused now on the growth of EV and hybrid, so not just GUR, ultra-high molecular weight materials, but for both -- for batteries, but also for wire for cabling, for heat disbursement. All of the other things that happen and need to happen in EVs and hybrid. There's a lot more content of plastics in EVs and hybrids than there are in conventional ICEs. And then obviously, in Asia, which has traditionally still been very metal, getting more of the Asia auto producers to transition to more polymer materials. And again, that ability to outperform build rate is not unique to autos. Because of the project pipeline that we run where we can also outperform the underlying rates in almost all of the end markets where we participate. Again, if you look at our end markets, and I'll do them on a total sell in these bases because it's easier. About 15% of our total exposure for the company is in auto, about 50% in filter media, so tobacco and few other materials we make for filters and about 15% for coatings. Then we have about 10% that goes into adhesive, 10% into industrial and 10% into consumer electronics. And then about 25% in everything else, primarily medical and pharma and food and beverage, but also a little bit of construction, textile and paper and packaging.

Lori, it's Bob again. Some investor questions. I do get this periodically, and I failed to do a good job answering it, which is, what is the secret sauce of your Engineering Materials business relative to other companies in the space that maybe have higher run and lower-valued products and applications? What is it that you do that's unique? Is it the product portfolio? Is it the customer engagement? Is it the technical development? Why have you seem to have exceeded what maybe some other companies that are selling into some of those same end markets have failed to do?

Yes. So I think, Bob, it's really -- it starts with technology. We are at our heart, a technology company. We still develop products, develop new techniques. We have people who specialize in color. I mean, so it starts with technology. It's our people who are really adept at how do we use those technologies and provide specific solutions to specific problems that our customers have. And ultimately, it's the breadth of our portfolio. There's not anyone else out there. We have about 20 polymers that we can offer. If someone comes to us with the problem, we have many different combinations of materials that we can offer as solutions to meet their specific needs versus if you just have a few polymers in your portfolio, then you have to use those to do everything. So customers don't come to us because we're the cheapest. They come to us because we can add the highest value product that best meets their need and maybe helps with other things like not having to paint or speeding up production lines or other characteristics. So really, the secret sauce is really around the technology, the knowledge our folks have about the application of that technology, and then just the sheer breadth of our portfolio.

Yes. And I'd also just add, I think, the cost structure plays a role here, Bob. I mean, it's -- and I think this is an area where we tried to leverage what we've learned over many, many years in acetyls around having to run a very lean manufacturing operation and constantly looking for ways at which to drive cost productivity, whether it's energy reduction projects or rev-gen projects and get more capacity out of our assets, that lever on fixed costs is really important. And we've leveraged some of that capability over to Engineered Materials. And so because it is a high fixed cost business. And so finding ways at which to get more from your existing base, whether that's the SG&A line or the plant manufacturing line plays a big role and the ability to scale that business.

And I mean, I envision you have these technical development and sales -- technical sales folks that are just terrific about finding these opportunities in the work-from-home environment. Is that significantly stunting that opportunity? Or are we going to create a gap that has to be filled as people slowly go back to work? Or have you found, you're able to create continuity even in a remote setting? And also curious, does that change your work processes in the future? Is there something that you revisit?

Yes, it's a great question. So in the first quarter, we actually closed as many projects as we had planned within our target to close for the first quarter. We're on track for that in the second quarter. Certainly, it's been more challenging as not only are some of our folks not being able to work in the office and do some of the test runs and things, but some of -- our customers are also not in the office. Now the good news is because we're global, because we have capability around the globe, in the first quarter when Asia maybe couldn't have their folks in the development labs, we were able to move some of that work to other parts of the world. In the second quarter, we've been able to move some of that back to Asia plus some of the stuff from Europe and the U.S. back to there. And our labs have continued to run in some capability. In some cases, we've been able to do testing for our customers that they had planned to do but can't, so we're doing the testing. So we are still keeping our project pipeline moving. Our sales force and our technical support folks are making calls every day to customers. We have solved some interesting problems with molders and other things. They've had a problem, we couldn't send people in. We've done it using iPads and over Skype and doing it more remotely. I think the exciting thing is we've been able to pretty effectively solve problems for people. On a remote basis, we've been able to use our global model to keep work going. And I think it shows us there's probably more potential for productivity and cost savings and actually better connectivity with our customers going forward, as we've gotten more comfortable and as our customers have gotten more comfortable doing this in a remote environment.

And Lori, it's Anthony again. Similar to Bob's question on EM and drilling down into the secret sauce, as we talk to clients and we're explaining the acetyls business, we certainly also get questions on understanding the cost advantages between the various regions, your ability through your integrated system to flex kind of upstream versus downstream. So maybe just help us better understand how you think about the competitive advantage of the way that your acetic acid business is set up that enables you to have a differentiated position in the marketplace?

Yes. Look, I think our Acetyl Chain business is significantly different than anybody else's out there. So again, you mentioned acetic acid specifically, but it is for us, all about the chain. If you start with acetic acid, we have what we believe is the world's most competitive technology to produce acetic acid. And we also believe our Clear Lake facility, because of the size, because of the natural gas advantage, is probably the lowest cost producer of acetic acid in the world. So this is a huge advantage for us. But the real secret sauce, if you will, what differentiates us the most from people start -- again, it starts with technology, not just acetic acid, but VAM, VAE, but really is the length of our chain and the global diversity of our chain. So if you look, we start with raw materials, and we go all the way from making CO and methanol, all the way now to redispersible powders. So we have many value points in the chain. We have the ability to flex anywhere from 40% to 60% of our acetic acid downstream into derivatives. And we're able to -- so we're able to manage that as well as globally manage it to go basically where the best returns are. So if you look at '18, which was like unbelievable pricing and demand for acetic acid in China, we moved as many molecules as we could into acetic acid, and we move them to China. We had Nanjing for. We had Singapore, but we also were able to move molecules competitively even from the Gulf Coast. And we maximized the amount of acetic acid in China. Roll forward to 2019, not such great pricing in China and Asia, not as much demand for acetic acid, but good demand for VAM and emulsions in the Western Hemisphere and acetic acid. So we moved a lot of volume now back to the Western Hemisphere. We moved a lot more downstream. During this time, we also brought in new capacity for VAM and for emulsions. And we continue to bring on more capacity there. We had an advantaged methanol pricing even in '18 and '19 after the start-up of our projects there. So we are able to completely flex and decide where in the world and where in the chain we can get the most value for our products. And basically, that way, stabilize the level of earnings. We feel we've, probably versus a few years ago, have increased the kind of stable base level of acetyl earnings several hundred million dollars from where we were just a few years ago.

I think that's incredibly helpful. And then maybe piggybacking on that question and related to that last sentence there. One of the noticeable differences, I think, between this recessionary environment in 2008, 2009, is the amount of capacity that's coming online through the Acetyls Chain. Can you maybe just talk to your expectations, and I think you alluded to it, for margin stability relative to prior downturns in 2020 and into 2021?

Yes. And Scott may want to give some historical perspective as well since he was around. But if you look at '08, '09, a lot of capacity had come on in China. There was a lot of overcapacity. And we went from a period of being kind of at maximum margins, if you will, to holding a lot of capacity on economic downturn at the same time, and we went from a very big peak to a very big trough overnight. I think, in this downturn, one, we haven't had -- really had any new capacity being built in acetic acid since the mid-2000s. And so we're not seeing as much overcapacity. We also were already -- we also -- 2019 wasn't a great year for acetic acid demand and for acetic acid pricing. And so we're coming off what was kind of poor year into this trough. We're just not seeing as big of an impact. Again, we are seeing some impact in terms of volumes, but not as big of an impact in terms of margin because we're not coming off a peak. And again, we're down -- '19 and early part of this year, we're down kind of more into the 70% utilization in China. As an industry, maybe sometimes even sub-70s at some of the worst points in the first quarter. But when we -- in 2018, when we were doing really well, we were just really above 80. So there's just -- it doesn't take a lot of demand recovery to push us back to where we start seeing more attractive pricing and -- but still not pricing that would incentivize a lot of new capacity to start being built.

Yes. Anthony, I feel really good about where we are right now just from a fundamental base business. As we enter this recession, we're selling about 60% of our acetic acid actually downstream. And we're leveraging that -- we actually used to sell about 60%, 70% of our acetic acid to the third-party market when we entered the previous recession. And so just a diversity of business, we've also shut down a number of facilities, which -- yet have increased capacity broadly across that Acetyl Chain. So that gives us a much greater lever on the fixed cost in this business. And so as we enter this, we're entering a very different period as well from a capacity landscape, as Lori talked about. What was going on back in 2008 was this kind of the industrialization of China, and you had coal gasification. People needed to turn that gas into something. They turned it into methanol. They needed a home for the methanol. Acetic acid was a logical choice because you were making the CO as well in that gasification process. And we just don't see that same push to coal gasification. In fact, you see things going the other way with the focus on pollution. So it's not that we won't see acetic acid additional capacity come up. I just -- it probably won't be the same mass build and overbuild that we saw back then. We -- it really has taken us a decade to kind of work our way through, so we do expect to see much better balanced supply demand situation as we go forward.

Well, guys, unfortunately, that ends the time we have. So Lori and Scott, thanks so much for joining us. Stay safe, and appreciate your time.

Thanks very much, Bob. Thank you, Anthony.

Thank you, Bob. Thanks, Anthony.

Bye.