Celanese Corporation (CE) Earnings Call Transcript & Summary

Greetings, and welcome to the Celanese Webcast Conference Call. [Operator Instructions] Please note, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Abe Paul. Thank you. You may begin.

Thank you, Rob. Welcome to the Celanese Corporation Conference Call to Discuss the Agreement to Sell our Equity Investment in the Polyplastics Joint Venture to Daicel Corporation. My name is Abe Paul, Vice President of Investor Relations. Joining us on the call today will be Lori Ryerkerk, Chairman and Chief Executive Officer; Tom Kelly, Senior Vice President, Engineered Materials; and Scott Richardson, our Chief Financial Officer. The Polyplastics joint venture equity investment press release was distributed via Business Wire last night and posted on our Investor Relations website, along with the slides. As a reminder, some of the matters discussed today and included in our presentation may include forward-looking statements concerning, for example, the closing of the transaction, Celanese Corporation's future objectives and results. Please note the cautionary language contained in the slides as well as our Form 8-K. Also, some of the matters discussed and presented include references to non-GAAP financial measures. Explanations of these measures, comparable GAAP measures and reconciliations to the comparable GAAP measures are included in the slides. We also filed the Form 8-K with the Securities and Exchange Commission, which includes the description of the transaction, the press release, presentation and any non-GAAP information. I'll turn it over to Lori now.

Thanks, Abe, and welcome to everyone listening in today. Please turn to the slides we posted on our website. I am very pleased to announce that we have just executed an agreement with Daicel Corporation to sell our equity investment in the Polyplastics joint venture. Our culture as Celanese has been one of action and resolve amid any economic environment to continue to drive growth and shareholder value. As part of the previously discussed business strategy refresh, which included a review of our joint venture relationship, we have decided to unlock value in historically passive investments. We have been focused on driving more robust performance at our joint ventures over the last several years, resulting in a higher level of influence over business decisions at certain key joint ventures. However, our minority ownership share in Polyplastics has limited the ability to drive the financial performance improvement that we expect in all of our investments. The monetization of this passive investment will enable Celanese to deploy cash towards higher-growth businesses within the company and share repurchases in the near term to ensure this deal is immediately accretive. As a reminder, Polyplastics, formed in Japan in 1964, is Celanese's oldest joint venture and enabled Celanese to create a presence in Asia. Over the years, Celanese has been able to build up our capabilities in Asia so that they now rival our U.S. and Europe operations with localized production sites in China and India and 3 technical innovation centers in the region. A world-class organization of local talent and leadership has been able to create long-standing relationships with customers, suppliers and officials throughout the region. The expertise and depth of the Engineered Materials team have resulted in net sales growth at a 15% CAGR over the last decade in our base business, becoming a more significant contributor to our earnings growth than all of our JVs in the region combined. The Engineered Materials business has matured and grown significantly in Asia over the last decade, allowing the company to depart from a legacy joint venture structure to one that is more contemporary in its approach to driving the Engineered Materials growth trajectory further. We have and will continue to compete with Daicel in our overlapping polymer product line, and this deal does not change the competitive business landscape. This transaction is another defining step in our evolution in Asia that will provide the opportunity for the Engineered Materials team to fully apply its unique business model and breadth of polymers to serve customer needs better. The earnings for our equity investment in Polyplastics was $44 million for Celanese in 2019. The return for this passive investment was below our expectations, clearly underperforming EM space business growth in Asia for the past decade. We have been able to unlock this investment resulting in this transaction with Daicel for $1.575 billion in cash for Celanese's 45% stake in Polyplastics, which represents a 36x multiple of Celanese's share of earnings in 2019. We anticipate the transaction to close in the second half of 2020. We expect to deploy the proceeds in a manner consistent with Celanese's disciplined capital deployment strategy, prioritizing organic growth, remaining active in this dynamic environment to pursue the right acquisitions and returning capital to our shareholders through share repurchases. In the near term, we expect to use a portion of the net cash proceeds for share repurchases to alleviate the equity earnings dilution and to pay down existing debts under our revolving credit facility. The company has the luxury of benefiting from tremendous balance sheet strength, liquidity and financial flexibility. We have no intention of letting cash sit idle on our balance sheet for any meaningful time, and we'll look to deploy capital in an accretive manner. We are committed to a multiyear value-creation strategy in Engineered Materials by continuing to enhance our product development capabilities, investing in product expansion in growing end markets such as 5G, electric vehicles and lithium-ion batteries and additional investments in Asia to meet customer demand. We have been and continue to be committed to maximizing outsized value creation for shareholders. This transaction further equips us to be in the driver's seat to actively managing all of our business relationships and positions us to take advantage of the economic recovery when it arrives. With that, I'll turn it back to Abe for Q&A.

Thank you, Lori. I would like to remind everyone to please limit their questions to one question and a follow-up and also remind the group that any questions related to Q2 results should be deferred to our July 29 scheduled earnings call. Rob, please open the line to questions.

[Operator Instructions] Our first question comes from Vincent Andrews with Morgan Stanley.

This is Angel Castillo on for Vincent. Congratulations on the deal, first of all. And just, I guess, to start out, a quick question. Just to clarify that we're kind of reading this correctly, but what does this mean, I guess, for your remaining JVs, the likes of Ibn Sina? And how should we think about the probability of assets like that or stake like that being sold?

Yes. Thanks, Angel, for the question. Look, we continue to look at all of our joint ventures. As I said, that was something we specifically looked at in our strategy, which is how do we further improve the performance of our joint ventures. And I would say Polyplastics was unique, in that it was a very passive investment. We have limited minority rights, so we didn't have much ability to influence a business decision. And I would say it also has a longer-term underperformance relative to some of our other joint ventures. So we will continue to drive our other joint ventures to improve performance. We don't have to have whole ownership to do that. There are other ways to drive performance, and we are considering other options to let us get further shareholder value from those joint ventures.

Got it. And then just to clarify on just the organic investments and CapEx. As we think about 2021 and beyond, I believe, in the past, you had discussed CapEx as greater than $500 million potentially. As we think about the proceeds from this, does this mean that we could actually return back to that type of level of CapEx? Or should we be viewing it differently?

I think in past calls, Angel, we basically said we had expected initially, in 2020 pre-COVID, to be at about a $500 million level of CapEx. We felt 2021 would be about the same level. So assuming we continue to see recovery as we move through the year and into next year, we would still expect that level of CapEx next year to be the same as we've said before.

Our next question comes from Ghansham Panjabi with Robert W. Baird.

This is actually Matt Krueger sitting in for Ghansham. I was just hoping that we could dig into a few of the details surrounding the time line and the situation in how the equity investment sale came about. I guess why engage in the transaction now? Can you give a little bit of history around how the transaction kind of came to be?

Yes, Matt, let me try to give you a little bit of color there. I mean we have obviously been in discussions with our joint venture partners since the beginning. But we have been in, I would say, more focused discussions with Daicel over the last few years regarding Polyplastics and the performance of Polyplastics and ways to improve it. Really, in about fourth quarter of last year, is when we started a more substantive discussion consistent with this announcement that we've just made, and that has come to fruition over the last 9 months in our discussions with Daicel.

Great. That's very helpful. And then just as a follow-up, can you talk a bit about some of the potential post-sale stipulations or agreements that would be relevant for Celanese? For example, does the sale preclude you from adding capacity or investing in any specific product lines, regions, markets, et cetera?

No. No. In fact, the opposite. I mean there is nothing in this agreement that keeps us or Daicel from investing in any region or any product line around the world.

Our next question is from Bob Koort with Goldman Sachs.

Maybe following on that last one, Lori, is when you had the Polyplastics JV in place, were there -- did it inhibit you from marketing and selling products in any particular region?

Well, so Bob, thanks for the question. So we, in fact, competed with Polyplastics. Polyplastics manufactured and marketed their own materials around the globe, and Celanese separately manufactured and marketed around the globe. So that commercial -- that competition situation doesn't really change at all with this agreement.

And I know they were fairly large in POM and PBT, PPS. Based on your prior answer then, does that mean when you competed in those markets, you did so from your own production, so this won't have any impact on where you produce and where you sell either?

Yes. That's correct.

Yes, Bob, I think it's important to -- I mean they operated as an independent company, both from a manufacturing and from a commercial perspective.

Our next question comes from John Roberts with UBS.

Did Celanese supply raw materials to Polyplastics? And do you supply raw materials to KEP as well?

There's very little overlap of commercial relationships, John.

Okay. And then are you willing to share with us how much did Polyplastics earnings decline in the first half of 2020, it's there, so we can pull that out of your already reported equity numbers?

No, we haven't stated that number as of yet, John. So we'll provide a little more color on that in next week's call.

Our next question comes from Duffy Fischer with Barclays.

First question is just how will this affect, I think it's Nantong in China, the JV between KEPCO and Polyplastics? Will that stay the same? Or does the management there change?

Duffy, thanks for your question. That stays the same. This has no impact on that.

Okay. And then the second one is just, I mean, you guys weren't cash-poor before this. Obviously, getting this cash, you'll spend some to offset dilution, but should we think about this accelerating or maybe lowering the bar for investment returns going forward? I just -- that extra $800 million or so seems to be stranded in today's environment unless there are some deals that you're working on. Could you maybe just put a little bit of color around where that $800 million may end up going over the next 1.5 years or so?

Duffy, I mean, I think you know us well enough to know we're pretty prudent stewards of our capital. And we will -- and we have been and will continue to look at all sources of M&A, whether they be transformative or bolt-on. That continues as it always has, and we will be looking to deploy for organic growth, for M&A or for share repurchases if neither of those are available to us in the short term. But we do think it provides us some great opportunities going forward.

Our next question comes from Jeff Zekauskas with JPMorgan.

What was the normalized multiple of sales or EBITDA in the transaction?

Yes, Jeff, the EBITDA for Polyplastics is not a public number, so I can't comment specifically on that. However, with -- we do show our share of equity earnings in our financials, so you can use some fairly conservative estimates around tax rate and depreciation kind of back into that EBITDA multiple. And it works out to be somewhere between 20x and 30x EBITDA. One of the important elements of this transaction as well is that Daicel assumes all outstanding debt of Polyplastics.

Is that included in the $1.575 billion price?

Yes. That is included in that price.

How much is the debt?

It is also not a public number, so I can't comment on that.

And you're going to try to make the transaction neutral to earnings per share over the next 12 months, is that the idea?

Yes. That's correct, Jeff.

Our next question comes from Kevin McCarthy with Vertical Research Partners.

My question relates to Polyplastics' sales mix. Can you comment on the proportion of sales into Japan versus non-Japan markets? And also, from a product point of view, how much is polyacetal versus other resins?

Yes. Kevin, I'm afraid I can't. I mean Polyplastics markets globally, sells globally and does that independently from Celanese. So I don't actually have those figures.

Yes. I think the only thing, Kevin, is, I mean, they do have capacity not just in Japan. And in fact, you can look at publicly available plants that exist, and it's probably half or slightly more than half of their capacity actually exists outside of Japan.

Yes. Maybe that's a good segue to my second question then. I think they've got capacity in Malaysia and as you indicate, other places as well. And so will Celanese -- or would this deal necessitate reinvestment by Celanese in Asia, where you might have been relying on Polyplastics for certain business functions presently?

No because, again, Kevin, Polyplastics produced and marketed independently of Celanese. So we really -- it really was a passive investment, which is one of the big reasons for the changes because we were not able to acquire our commercial model in any way to anything produced within Polyplastics.

Our next question comes from Mike Sison with Wells Fargo.

Congrats on the deal. Just curious, Lori, if you think about where you want to deploy the cash, are you looking for certain polymers that maybe you don't have certain technologies, any geographic areas? Maybe just as you sort of recharge the M&A battery here, where do you think you want to go with the cash?

Yes. Thanks, Mike. Look, we're looking to deploy cash where it's the highest value to shareholders. Now consistent with what we've said in the past, and if you look at some of our EM investments, that's been towards additional polymer capability, additional compounding capability, recycle capability, additional geography. If you look at additional work we've done in AC, for example, we -- in Elotex, where we've got additional downstream and chain capability, so we continue to look across all of those areas for future M&A.

Got it. And then just a quick follow-up on the accretion. Are you able to just start buying back the $500 million today or whatever you're allowed to?

Well, we'll be getting to buying back after the close.

Our next question comes from PJ Juvekar with Citigroup.

Lori, a question on the big picture. Mark Rohr was talking about -- openly talking about buying something big, maybe potentially through an RMT transaction. So how did you guys decide from going from buying something big to maybe divesting something? What led to that change in thinking?

I wouldn't actually say those are related nor are they mutually exclusive. I mean so again, we just continue to look for the highest value to return to their shareholder for the assets and the cash that we have. And so as part, again, we did our strategy work last year. We really took a look at our portfolio and said, where are the underperforming portions of our portfolio and what can we do to unlock that value for redeployment into higher-return areas? So again, I wouldn't say they're related nor are they mutually exclusive.