Celanese Corporation (CE) Earnings Call Transcript & Summary

Greetings, and welcome to the Celanese Corporation Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Abe Paul, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Jesse. Welcome to the Celanese Corporation's Second Quarter 2020 Earnings Conference Call. My name is Abe Paul, Vice President of Investor Relations. With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer; Scott Richardson, Chief Financial Officer. Celanese Corporation distributed its second quarter earnings release via Business Wire and posted prepared remarks about the quarter on our Investor Relations website yesterday after market close. 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 use 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 of these materials have been also submitted to the SEC. Because we have published our prepared comments yesterday, we will now open the line directly for your questions. Jesse, go ahead and open the line for questions.

[Operator Instructions] Our first question comes from the line of John Roberts with UBS.

Nice quarter. You noted that Asia auto builds have recovered. Was your Asian Engineered Materials sales up year-over-year as well? And do you think that will accelerate in Asia after the Polyplastics deal?

Yes. Thanks, John. We are seeing -- we have seen the recovery in Asia. I mean Asia was up about 2%. But I think year-over-year, we really expect Asia to be pretty flat to 2019.

Okay. And then you pivoted acetyls to emulsions and powders over VAM. Can you characterize the range swing possible between VAM, emulsions and powders in your mix?

Yes. Maybe just to give you an idea, I mean, so we actually moved about just over 15% more into emulsions, as an example, in the quarter. We moved kind of 1% more into VAM. We moved more acetic acid and other derivatives back into China since that was a little bit more robust market, even though the margins were a bit lower. I mean generally, we characterize it as we have the ability to move anywhere from 40% to 60% of our acetic acid into downstream derivative.

Okay, so a 20% range then. Great.

Yes.

Our next question comes from Vincent Andrews with Morgan Stanley.

Just want to square a couple of the outlook comments, starting on the Acetyl Chain. You mentioned flat 3Q versus 2Q, and you also mentioned that you don't expect prices to improve until demand gets back to pre-COVID levels. And then later in the comments, you talked about 2021 being an opportunity for demand levels to be greater than 2019. So I wanted to make sure that comment was also meant to apply to acetic, to the Acetyl Chain and if you think that sort of will be the trajectory.

Yes. So on the Acetyl Chain, I mean, we do expect some volume recovery, modest volume recovery in Q3. We aren't expecting, though, a big change in pricing. As we said, there's still a lot of available capacity in the world, so we think that puts a limit on the pricing. Look, we are seeing some improvement in methanol pricing in early Q3. We are seeing some improvement in acetic acid pricing, so maybe even slightly up margins at the beginning of Q3. But we don't really see the fundamentals yet to really think maybe that's sustainable for the whole quarter. You might remember, in second quarter, we also saw a bit of an uptick in margins early in the quarter, but that really flattened out as the quarter went on. So right now, we're seeing modest volume recovery, pretty flat margins and that -- but that volume -- but we do have some smaller turnarounds in Q3 in Cangrejera, Frankfurt and Singapore, which kind of offsets that modest volume recovery. So that's why, right now, we're calling it essentially flat. Again, we're seeing a little bit of margin expansion early in the quarter. But right now, we don't know that that's going to sustain. But clearly, if it does, that will be a help.

Yes. And I think if you looked at -- oh, sorry, Vincent, if you looked at your question about 2021, it's still early on the Acetyl Chain. We don't have that long of visibility. But we do -- we are anticipating, given conversations with customers, that demand will be improved versus 2020. At least, that's the current outlook. We'll have to see if it gets up to 2019 levels or not. We did see a fair amount of destocking in 2019 in the business, but that 2021 comment was probably a little more related to Engineered Materials.

Okay. And I did want to follow up on the destocking and the seasonality comments that you made for 4Q. I mean, obviously, recognizing 4Q in a normal year,is a destocking quarter, this is obviously not a normal year when you look at sort of the volume of 2Q. And I recognize it's very hard to predict 4Q at this point, let alone August. But are you just sort of being conservative, assuming that customers will destock in 4Q because what they always do? Or is it possible this year, just because it's been such a strange year, with such a soft 2Q that we don't actually have a down 4Q sequentially versus 3Q because customers -- demand is still coming back and customers don't have the inventory levels to really do it? How are you thinking about that?

Yes. I would say, Vincent, we're really assuming normal seasonality. I wouldn't say it's as much destocking as just slightly lower demand as demand come off in fourth quarter for construction and some materials and other things. So not really destocking as much as just normal reduction in demand. Now, look, we're keeping our options open. We're -- maybe with the abnormal second quarter we have, we'll see people continue to run a bit stronger in fourth Q. We've seen that in some years, but we're not assuming that at this time because, again, we just don't have the visibility that far out. So we're just assuming kind of a normal level of demand drop-off associated with fourth quarter.

Yes, Vincent, that Q4 demand in acetyls tends to be weather related in construction, paints and coatings and our emulsions business. So we think that will probably come to fruition. Where we may not see as much of an impact is on the Engineered Materials side. We'll just have to wait and see. Even though we're bringing turnarounds forward into this year, we have enough flexibility in our volumes that if we don't see that destocking -- or that seasonality in EM, then we should be able to respond.

Our next question comes from Bob Koort with Goldman Sachs.

Lori, I was wondering. You guys said back at the last big Investor Day talked about some aggressive but maybe not specific time frame for some acetic and VAM expansions. Can you just give us an update in light of what's gone on this year, how that's changed your view, if at all?

Yes. Thanks, Bob. So the acetic gas expansion was really around the reconfiguration to the expansion at Clear Lake, coupled with some productivity moves in Asia. So as we said last quarter, we have delayed that project for about 18 months, really, in response to the reduced demand dynamics we've seen for a acetic acid, as well as the low oil price environment, which makes Singapore look somewhat more attractive and closer to Gulf Coast's natural gas pricing. So that's the big move in acetic acid. We've also announced some expansions of VAM and VAE facilities. Those continue on schedule, consistent with what we've said before. So we're really talking in the 2022-plus time frame because we really see the demand for those products. And as it applies now with Elotex and with others, we see a very robust future for VAM and VAE and other downstream derivatives of acetic acid. So those continue on schedule. Acetic acid is delayed about 18 months.

And in EM, I'm just curious, given the pretty extreme volatility in a lot of polymer pricing, has that provided some opportunity? Is there some threat there from inter-material substitution? Can you just sort of talk about your development efforts with customers there in light of all this volatility? What's that done to the whole process that you guys have in terms of the innovation and new product wins and that sort of thing?

Yes. So I think there's been a number of opportunities that have come up in Engineered Materials. So one opportunity we've seen, probably more so than price volatility, I would say, is around desire to have more certainty on supply chain. And so we have seen inquiries from customers and wanting to get product within the region that they're going to use it to derisk some of their supply chain. So that's been a few opportunities for us. And we also just see a lot of opportunity consistent with what we've laid out as our strategy, so really more aggressive movement into electric vehicles. We've seen a lot more opportunities there, especially for some of our recycled products like ECOMID and some of our flame-retardant nylon. We've seen more opportunities there for lightweighting. We just see electric vehicles, which, obviously, is also getting a lot of help here in the COVID environment from stimulus packages and things, especially in Europe and Asia. That has been a focus for us for the last 18 months now, and we see it really developing to where, for example, the accessible market for us in electric vehicles is about 30% greater for Celanese products than it is in traditional vehicles. So we've seen -- 5G is another area, more focus on medical pharma. That's provided some opportunity. So I think some of the strategic focuses that we've laid out in the last year we've really seen strengthened through COVID as well as some new ones developing around things like people wanting more materials that are resistant to the use of disinfectants and sterilization as well as more focus on pharma compliance. So we actually see a lot of opportunities in Engineered Materials and are pretty optimistic about the level of project wins we've had despite the -- in a COVID environment.

Our next question comes from Duffy Fischer with Barclays.

Yes. Maybe just a follow-up on EM. When you look across your suite of all the different polymers, with the weaker demand, have you seen any erosion or material erosion in pricing caused by that weaker demand?

I would say across the board, on average, no. In fact, we probably saw a little bit of margin expansion in the second quarter with lower raw material. And we should see that raw material advantage continue because there's always a bit of a lag in raw material advantage. And so while in some end applications like consumer and industrial, there's certainly been -- and automotive, there's been a softer demand. And some of that has maybe tightened up pricing. And others like electrical and medical, we've seen higher demand, and we've seen improved pricing. So on average, I'd say our margin -- variable margin has been pretty consistent quarter-to-quarter. And if anything, we're seeing just a little bit of margin expansion overall.

Okay. And then if we just move to Tow, the pandemic influence on cigarettes in your Tow business. I mean, I don't know, but it's a respiratory disease. I can't imagine smoking a cigarette is enjoyable trying to wear a mask. Have you seen any influence on demand for either cigarettes or your Tow business because of COVID?

No. Not at all. We have not seen any impact on demand or any impact actually on smoking trends. In fact, if you look at China, China through June is showing a 2% increase in demand for cigarettes. And anecdotally, even in the U.S., if you see some of the reports coming out, like Altria is reporting only a 2% decline this year versus what they thought would be a 4% decline in smoking. So I would say, in some areas of the world, that would appear people have more time in their hands and are using that time to smoke more, not less, as kind of strange as that seems in this period. So we're not seeing any impact in demand, if anything, a little bit of an uptick.

Our next question comes from PJ Juvekar with Citi.

Lori, it's Eric Petrie on for PJ. In the Engineered Materials, can you discuss your project pipeline? You were talking about moving from 4,000 last year to 5,000 this year. So is that on track? Or has that slowed down with lower auto builds?

No. I mean, actually, our Q2 is on track for -- in terms of project wins with what we expected despite the COVID's challenges. And I would say, even if you look at kind of value per win, which is where we're trying to focus this year, which is more on value, that's actually been flat year-on-year, which we think in the COVID environment is also good that we're getting good value out of our product. I would say our Engineered Material folks are just doing a fantastic job being creative, finding ways to actually increase the amount of contact we have with our customers, even if it's remotely, being able to use a remote environment to get higher-level contact with our customers and using some really creative mechanisms like webinars to really not just touch existing customers but also do prospecting for new customers. And so we have found customers still want solutions. We're still in the business of providing solutions. Our folks are really focused on that. And in addition to the ones we called out, we've had several great examples of project wins in this quarter. I mean just to maybe -- just put a little color around it, in medical-grade POM, we had a pretty big win there for an auto-injector application in Europe. We signed a development agreement with an app -- for an application of our VitalDose EVA, which came up pretty good, upfront development fee. We have a new high-voltage connector application for electric vehicles for our flame-retardant nylon, which we also signed this quarter. And then we actually have quite a lot happening in the 5G space as folks are looking for better signal integrity, which is a great application for -- primarily LCT but also PPS. And then for lightweighting applications, which is maybe more around LFT and other polymers. So we're really excited about the wins that we're seeing in nonautomotive space. But of course, we called out -- we also had big wins this quarter in the automotive tier 1 space as well.

Great. And then turning to the Acetyls Chain, you expect some volume improvement into the third quarter, but no pricing. So is that just due to raw materials you're expecting to remain benign for methanol and the ethylene? Or could you talk a little bit about those raw material push on pricing versus a demand pull?

So second quarter raw materials was, I would say, kind of at an all-time low. It was lower sequentially from Q1 across all areas. I mean methanol was very low in all regions. I mean we're seeing 20% declines in the U.S. and Asia in terms of pricing. Ethylene was very low at 15% declines in the U.S., 25% in Europe. Natural gas was low. I mean everything was really low in Q2. As I said to an earlier question, we are seeing maybe some slight movement upward in terms of raw material and also acetic acid pricing in Q3. But we saw that also in early Q2, and it didn't sustain. So our assumption now for Q3 is we may see some movements with pricing. We may see some movement with raws. They tend to move together. So we aren't really expecting much margin compression, but we're not expecting margin expansion either. So that's our assumption going forward. If we see sustainable movement, there may be an opportunity for margin expansion, but we've not baked that into our numbers.

Our next question comes from the line of Mike Sison with Wells Fargo.

Lori, what do you think the Acetyl Chain can get back to once -- maybe a post-COVID volume number or back to maybe a pre-COVID volume, if you can get back there at some point in time? And then -- and what do you think needs to happen in terms of margins and pricing and to sort of get to that run rate?

Yes. Thanks, Mike. Look, we still feel like kind of foundational level of earnings for the Acetyl Chain is in that $175 million to $200 million a quarter, so kind of that $700 million to $800 million per year. We feel pretty comfortable with that. I mean, even if you look at where we are right now in this quarter at, say, $116 million, we had an 11% volume loss due to COVID if you remove the Elotex acquisition, which was 5%. So that's about $40 million right there. And then we had another kind of $20 million in price margin, which I'd say was tied to those really low volumes and utilization, particularly looking at advanced. So if you look at that, we're still -- we still feel like we're in that $175 million to $200 million range kind of without the extreme impact that we saw from COVID on volume and then resulting -- that resulting impact on margin. So I really think it just takes back to getting to more normal levels of utilization. If you look at utilization, this quarter, I mean, we -- this is really the lowest of the trough conditions. If you look at China, China utilization was below 60%. Global utilization was only mid-60s. So I think, really, to get back to that level of foundational earnings, we need to get back to the kind of 70% and higher level of utilization. And it's really about recovering Western Hemisphere demand because that's really where we saw the weakness in second quarter.

Got it. And then when you think about '21, you've accelerated some turnarounds. You have some cost savings. How much sort of growth do you have somewhat in your control as you head into '21 as sort of an anchor for some profitability improvement?

Yes. So as we move into 2021, we're really looking -- if demand continues at the current trajectory, we're really, then in '21, nearing the levels we saw in 2019. As you noticed earlier with my optimism about our project model in EM, I mean, we are having a lot of new project wins, new opportunities that we've developed that we think, in the EM space, will let us -- again, assuming the demand recovery continues, let us exceed the levels that we had in 2019 based upon the new projects that we're seeing being developed. So again, really around the EV space. Also elective surgery, we had a bit of a -- almost, I'd say, a $10 million surprise this quarter from elective surgery deferral. I mean we knew they were being pushed out, but we expected them to come back yet at the end of second quarter. We really haven't seen them come back. That was about a $10 million hit in the second quarter. Even in the third quarter, while we think elective surgeries come back, we aren't expecting much of that to come back in the third quarter because there's some inventory that needs to be taken down at the suppliers. And so that recovery really comes in fourth quarter and we think into 2021, so we think that will be an upside going into 2021 as well. Acetyl inventories are generally pretty low. So we think as we see demand recovery, that will pull through to volume and margin in acetyl. And then as you said, we kind of have a $70 million to $80 million help next year from less turnarounds.

Our next question comes from the line of Matthew DeYoe with Bank of America.

So the last few EM deals targeted nylon compounding, but I'm assuming that opportunity is a bit tapped out now. So where do you see future cash deployment headed from a polymer technology standpoint?

Yes. Matt, so we have targeted nylon. I mean we put a lot of money into nylon acquisitions a few years ago, and so we've really been working to kind of exploit that part of our portfolio and that new capability that was the rationale behind those acquisitions. And I think, quite frankly, there's a lot of runway left for us in nylon and especially in some of what we think are unique and good offerings we have around recycled nylon, so again, our ECOMID series as well as our flame-retardant nylon. So we actually think there's a lot of growth left in nylon with our existing assets, if you will. So as we go forward, we'll continue to sell that as long -- as well as our other polymers. As you think about M&A going forward, our capability going forward, I mean, clearly, there are some other polymers that may be of interest to us. We continue to look for ways to further expand our capability within some of the polymers that we have as well as expand our reach maybe to polymers that are focused on other end-use sources or other geographies that we haven't penetrated as completely.

Okay. And then you had talked about the European compounding footprint consolidation you put out in the press release. That -- and maybe I missed it. But did you highlight any savings or synergies from that rationalization or optimization? Should we expect anything there? Or is it kind of like...

Yes. No. Look, absolutely. I mean it's a bit tied to a previous question. I mean when we did a series of acquisitions over the last few years, we assumed a certain level of synergies associated with being able to optimize footprint, further improve our compounding capability and skills as well as the polymers that we acquired. And so it usually does take us a few years to really get our handle on the business and see what's happening. You see where those opportunities are. So this announcement of the consolidation of facilities in Europe and establishing a clear compounding center of excellence at Forli, I'd say is just really the natural progression from those acquisitions that we made a number of years ago. And so there's clearly productivity that comes with that as well as we think improvement in development capability, customer support, supply chain optimization, et cetera. I would think of it in terms of -- we typically only do projects that have greater than 20% returns. This one falls into that category, and it will have a 2- to 3-year payout.

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

What's been the growth rate in medical applications in your Engineered Materials business so far this year?

So, Jeff, I think the medical applications has been relatively flat year-over-year with some growth in some applications but clearly offset by the decline we've seen this year in elective surgeries and what that has been. Again, I don't think that's a long-term trend. I think, as we have in previous years, we will continue to see mid-digit growth year-on-year in medical. But I think -- so I think this is just a timing impact in terms of elective surgery. But because of that change in elective surgery this year, I would say relatively flat year-to-year.

You have a relatively mild volume forecast in Acetyl Chain for the third quarter relative to the second quarter. Is that because of Celanese's own either restructuring activities or plant turnarounds? Or does it have to do with the rate of the growth of the acetyl industry itself? Maybe you could talk about the growth of the industry in the second quarter versus the growth of the industry in the third quarter.

Yes. So I mean we did see some good recovery in volumes, quarter 1 to quarter 2, as we saw Asia really coming back earlier. But we saw a lot of decline, obviously, in the Western hemisphere in quarter 2. Now as we move into quarter 3, we do expect, as like I've said, modest volume growth in the Western Hemisphere. But we are being probably a bit conservative here in terms of what we think volume growth will be in the third quarter, just based on what we're seeing as the trend so far.

Yes. Jeff, if you look at Q2 on a year-over-year basis, we were down somewhere in the 20% range. If you look at Q3 year-over-year, that's probably more like 10% to 15%. So that modest increase driven by some slight recovery in the Western Hemisphere.

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

If I look at your Acetate Tow earnings in the first half of the year, your equity earnings from the JVs in China are up double digits in percentage terms, while the consolidated sales are down, looks like 22% or so. And so my question is that seems a lot more pronounced than the underlying demographics. Has that mix shift been more acute for Celanese for some reason? So why is that the case? And do you expect it to continue?

Yes. So Kevin, I mean, I think it's -- there was a onetime event. We had a large contract, which came off at the end which actually shifted volume to our affiliates and took it out of our own earnings. And so that -- you're seeing that shift. That was something that was planned. We've called it out in past quarters. So it really is that shift into affiliate -- of volume coming from our affiliate versus coming from, if you will, Celanese production.

Yes. Kevin, if you can go back to our Investor Day in 2018, we telegraphed this -- that this would be coming.

Understood. And then second question relates to your acetyls business in Asia. In the prepared remarks last night, you referenced the extension of some supply deals in Nanjing as well as Singapore. And so maybe a two-parter. Was there any benefit associated with that in the second quarter? And then longer term, does that have any bearing on your flexibility to rationalize assets in Asia, if and when you eventually proceed with the expansions that you had planned in the United States?

Yes. And so look, I mean, these are contracts that have come up in a normal way for renewal. I mean we've been happy renegotiating them in this environment that we've been able to get some additional productivity, working with our supply partners. And so we're happy about the security of supply this gives us in both Nanjing and Singapore, going forward, as well as some additional flexibility we get in these locations, going forward, to really help us better manage our Acetyl Chain. So there will be some productivity out of both of those contracts going forward. Most of that, though, will occur in future years in 2021 and beyond.