Celanese Corporation (CE) Earnings Call Transcript & Summary

Good afternoon, good morning, good evening. My name is Jeff Zekauskas and I analyze chemical companies headquartered in North America for JPMorgan. It's my pleasure today to speak with Lori Ryerkerk, who's the CEO of Celanese; and with Scott Richardson, who's the CFO. Lori became CEO in 2019 after a long career in the energy industry. And Scott became CFO early in 2018. The format today is a fireside chat. And if you in the audience have any questions, you can either use your portal to chat a question in that's tied to the conference. Or you can send me an e-mail. And what I'll try to do is I'll try to weave your questions into my own dialogue. I think what we'll do is Lori will begin with an opening statement, and then we'll proceed. Lori?

Thank you, Jeff, and good afternoon to all of you joining from Europe and elsewhere from around the globe. It's really great to be here virtually with all of you today. And Jeff, again, thanks for inviting us. You've known Celanese for a long time now, and it's really nice to be able to sit down here with a familiar face. We are thrilled to be here, both Scott and I, and participating in our third straight JPMorgan All Stars Conference. This conference has become a really core part of our strategy over the last several years to increase engagement with European investors. Prior to COVID, we've been making it to Europe twice a year or more, specifically to meet with our European investors. And we've been really pleased with everybody's interest in Celanese and what we do and in how we generate shareholder value. For obvious reasons, our outreach this year was curtailed. So we were excited to hear this conference would still go on in a virtual format. COVID-19 and the resulting demand disruption has clearly presented major challenges for our business. But one positive outcome is that it has really solidified, I think, for the market, the fact that Celanese isn't the same company it was a decade ago during the last financial downturn. As far as the portfolio, the company hasn't really changed. We still have 3 major businesses in Engineered Materials, Acetyl Chain and Acetate Tow. However, due to really purposeful actions over the years, the company is better positioned today than at any time before to continue delivering shareholder value. We're more diversified in both geography and product portfolio. Our cost structure is leaner as we have built leading scale at our lowest cost facilities, while delivering productivity year in and year out. And a number of years back, we created some unique operating models in our businesses that continue to deliver differentiated performance. And finally, our balance sheet is the strongest it's ever been and it provides us tremendous financial optionality. So let me stop there as I'm sure we'll have a chance to get into many of these points in more detail during our discussion. So thanks again, and it's really great to be with you today, Jeff.

Okay. Good. Thank you so much. The acetyls industry is changing and that Celanese is the largest company in the Acetyls Chain globally and British Petroleum is second, and the BP assets are in the process of being sold to INEOS. Do you have an opinion about why BP might have sold and why INEOS might have bought? And what the implications for the acetyls industry might be from that change?

Yes. I mean, look, it's probably a question you need to ask BP. But I would say, over time, BP has had varying interest in chemicals. I mean, a number of years ago, they were going to get out completely. Then they decided to get back in a big way, and now they've decided to get out again. Having come from big oil myself, I would just say, in some ways, the Acetyl Chain is a bit more specialized than what big oil companies typically like to do. And I think it was a good opportunity for them to monetize that investment with INEOS. As far as INEOS goes, what we've -- at any given time with the customer, we've been a supplier, we've been a competitor of INEOS. We think they're a very capable company. They'll be a good competitor in this space. But I don't really see it changing the landscape very much in terms of how the acetic acid business and the derivatives business is running around the globe.

You know there were some documents one could see, and it looked like that the asset INEOS was buying was much less profitable than your assets. So it may be that their first priority is to raise the profitability of the acetyl chemicals that they bought. From -- and so that may be their priority. Is it the case that the industry at this point needs more acetyl capacity? I know that you were thinking of building more acetic capacity in Clear Lake. You've postponed that. Can you talk about the reasons behind that decision?

Yes. So I think if you look at the industry, I mean you have acetic acid and then you have VAM. It's a mixed chunk and then you have a lot of downstream derivatives. And I think if you look at utilization around acetic acid, you would definitely say there's not a need for more capacity now. Let's tie that to the investment we were making in Clear Lake. I mean the Clear Lake investment in acetic acid expansion was basically a net 0 capacity add. It was being done for reasons of productivity. So it was adding additional capacity in the Gulf Coast, which would let us slow down or shut down capacity in Asia, which, given at the time we did the project, the dynamics of oil versus gas was much more expensive capacity. So I think in general, we don't think acetic acid market needs more capacity at this time, and you see there's not really anything being built around the globe. If you look at VAM, BP is, in fact, finishing up a VAM expansion in South Korea with their JV there. But I think even there, we don't see a lot of other work going on in VAM builds. And we have some minor debottlenecks ourselves. I think you'll see that continuing. And downstream derivatives, emulsions and other things continues to see robust demand. And so although we don't see a lot more being built there, we think there's still some opportunities there for debottlenecking and that sort of thing going forward.

So when Celanese conceptualizes itself over a longer period of time, it sounds like what you wish to do is really lower the cost of your operations. But you're not exactly intent on having much, much more global market share, given that your future expansion in the U.S. may be offset by shutdowns and other or curtailments in other geographies. Is that a correct way to characterize your strategy?

Yes. No, that's correct. I mean, look, everybody likes top line growth, but we want profitable top line growth. And we actually, by the strength of our model, is not necessarily in more molecules into the total market. It's about the flexibility to move our molecules between different geographies, the flexibility to move it from the very front of the chain, whether it's CO and methanol, all the way down now to redispersible powder and really respond to the market that excess and making sure we can sell the most profitable products at whatever part of the chain is profitable then. So it's a model that's really dependent on flexibility. So in that way, it's very different than a commodity market where you really try to maximize your volume and kind of hope for good market pricing. We really try to get into whichever part of the market in the chain is currently most profitable, whether it's product or geography. And that's how we really maximize our returns.

I know that INEOS had contemplated building 300 million metric ton VAM plant in whole in the U.K. Now, they're going to have to contend with more leverage from taking on BP asset. But over time, do you think the probability of that facility being built is higher now, assuming that the trend is...

I mean it's a question for them. We don't really see the need for that in the market right now. I mean Europe is an import market, but it's being well served and competitively served from other parts of the globe. There's not a huge need for additional capacity. But let's see what their economics look like, I guess. We do know, we have indications it's been delayed now for some time. But...

Sure. Well, and I can just add to that, like Lori said earlier, with the acquisition that they've just done of BP's assets, they do have a new VAM expansion starting up in Korea. So they will have some new VAM capacity available to them as they complete the acquisition.

I think when you originally contemplated expanding acetic acid in the United States, I think you said it might cost $425 million. And when we talk to other chemical companies in the United States that are planned to expand capacity, they talk about inflation in their costs. Is that something that you see? Or are those initial estimates still pretty good?

No. So I think what we've said is we anticipate that expansion to cost $400 million. We haven't seen any reason to increase that. Now we have delayed that expansion here during COVID, really in response to what's going on with global oil markets and the fact that, that's made our Asia assets more competitive. So we've seen that opportunity to kind of expand that. We spent some money already upfront on Engineering. But as we look at that project going forward, we have not seen really any inflation in what we believe it will cost to build it. And we continue to look for opportunities to bring that cost down.

So what I wanted to do is I just wanted to talk -- to touch on the industry structure in acetyl chemicals for a moment. The -- if you think about, say, the polyethylene industry, it's a 100 million-ton industry. And maybe VAM, in terms of production, is only 6 million or 7 million tons on a global basis. And you're, I don't know, 15% or 20% of that. Your market share in VAM in the United States is about 40%, and maybe there are 4 producers and in Europe, maybe there are 3, and your market share is more than 50%. Does it turn out that your market share position and the small number of producers in acetyl chemicals is one of the reasons why you like the business?

Well, I would say we like it because it's part of the chain. It is part of the optionality that we have in the entire acetyl business. And I would also say really VAM is moved globally. So it's really more relevant to look at the global market share, which is, as you said, about 20%, it's actually quite a fragmented market. There's a few large players, but there are lots of smaller players as well, especially in Asia. So it's actually quite fragmented once you get past the first few big players. And again, it's a global market. That's how we look at it. But really, our attraction to VAM is where it sits in the Acetyl Chain. So right after acetic acid and before we get into all the derivatives like emulsions and powders, it really allows us that flexibility and that optionality.

Over the past few years -- so over the past few years, there's been a flood of ethylene capacity that's come into the United States or built in the United States, the flood of polyethylene capacity. Why is it that there's no flood of acetic acid capacity or VAM capacity? What is it about VAM and acetic acid that makes it more resistant to this large expansion into low-cost raw materials in the United States?

Well, partly, I mean, it's just the full supply-demand dynamics. I mean if you look at utilization globally, it's still kind of in that 70% to 80%. So that would suggest that there's not a need for a lot of additional capacity. I also think if you look at building acetic acid clients, you don't just need to build an acetic acid plant. You need to have a source of methanol to continue to build a methanol plant and you need to have CO, so you have to build a CO plant. So the cost of entry for building a new grassroot acetic acid plant is actually quite high maybe as compared to ethylene cracker is expensive, but you basically need ethylene, ethane. So I think the cost of entry is quite high for acetic acid. The technology is a little different. But I really think it's really more just supply-demand dynamics. I mean we know there was a lot of overbuild that happened in China a number of years ago. And although the industry continues to grow, it is still not really taking up all of that spare capacity that was built out in China many years ago.

And Jeff, and these plants as you quoted earlier, these are expensive plants and historical margins in this space at times has been thinner. And so I do think when you look at that, the hurdle to invest is fairly significant because of the high capital cost relative to the amount of volume that you end up getting in what is a fairly finite demand set.

One of the areas where there has been some expansion over the past few years has been China. And then there was a period of time where there seemed to be environmental constraints that led to the shuttering of some capacity or the curtailment of production. Is that something that's still going on today? Or has the world changed and China is more willing to expand?

So I -- look, I think China is still committed to improving their environmental footprint. I think that will include the shuttering of some older plants. I would say right now, China is focused on other things, as is the rest of the world, with coming out of COVID and trying to get their economy back on track. But I think we'll continue to see that trend in China that less environmentally friendly technologies will be shut down in favor of others. I mean we actually see that a bit today, even in VAM, where we have a green VAM available to the market and we have existing producers coming to us to buy green VAM in order to shut down their less environmentally friendly technology. So I think that's going to continue. I think it may look like it's been a bit paused here in the last year because of all the other issues China and the rest of the world have been dealing with. But I don't see any reason to think in longer term that trend won't continue.

One of the themes of -- that's emerged from listening to Celanese over a longer period of time is you talk about the strength in your export capability and your ability to find profitable markets as business conditions change. Can you give us an idea of how you do it? Or why you're such a good profitable exporter relative to your competitors? What is it that you can do that they can't do?

Well, the big difference is our footprint. I mean if you look at most of our competitors, they either exist in just 1 or 2 portions of the chain. So maybe they have methanol and acetic acid or maybe they have acetic acid and VAM or they only have VAM and derivatives or just derivatives, whereas we have everything from CO all the way to redispersible powder. So that is very different than our competitors in that we have built a network that allows us great optionality where to take profit in the chain. We also exist in all 3 geographies. Most of our competitors are concentrated in 1 geography or maybe 1 and a little bit in another. So again, we have 3 acetic acid plants; one is based on natural gas, one is based on oil and one is based on coal. And so that's 3 very different economics. So we're able to flex production depending on raw material pricing. So our optionality, I would say, is far greater than anybody else in our space or anything one of those spaces because nobody is across all of those spaces. And that's -- and we run it that way. We make decisions every day about how much to run, where to run, where to export, where to import. We make those decisions on a daily basis. And I would say that's also different, going back to your question about BP. I mean in my own experience, in larger companies, they tend to say, "Hey, we're going to maximize production, we should run the facility full." We don't do that. We decide what is the market and where do we want to run and how do we want to run. So I'd say, we run our business much more like a trader would run their business, which is day-to-day decision-making versus I have a monthly plan, going to meet that plan. Ours is a much more flexible model. And I think that's really what differentiates us if you look at the margins that we achieved even in a down cycle, I think it's really what differentiates us from our competition.

Yes. Jeff and I think one thing I'd add to that is, think about every day, we're on -- from a commercial perspective, we're following the sun. Our team in Asia wakes up and while they're focused on their local markets, they're always doing that with an eye to what's going on and what the decisions that they're making there and what impact that's going to have on the fact that these products move around globally. And so that competitive intelligence in that landscape of always having the local market in mind and then communicating that, handing that off to the European team when they wake up and then handing that off to the U.S. team. It is a constant 24-hour operation that's occurring and really daily. And those decisions are being made daily, and that team tries to stay very, very tight as they work together. And it's a very mature commercial organization that is very synergistic in how it operates globally.

Okay. So in the second quarter in your Acetyls Chain, volumes were down maybe mid-teens year-over-year, but that was a quarter of quarantine and recession. How does the third quarter look in terms of VAM volumes and acetic acid volumes year-over-year and sequentially? Is the world very different for you? Or is it similar?

Well, definitely, we've -- the world has improved in third quarter versus second quarter. And I think even in the second quarter, we called that out. We anticipated a pretty strong improvement from second quarter to third quarter. We're still down, roughly 5%, maybe a bit more quarter on -- year-on-year. So that's definitely a big improvement, though, over second quarter. So third quarter, we're about, let's call it, 5% down year-on-year. And we see improvement in auto. We've seen -- although that's a small market for us for AC, we've seen improvement also in construction, continues to be very strong. So that's good. I would say the thing, though, that may be a little bit different than what we called out in second quarter is when we had Hurricane Laura, although our facilities all recovered well, we did shut down in Clear Lake. And as we were shut down in Clear Lake, we made the decision to go ahead and advance a catalyst change we had for our VAM unit scheduled for next year. We moved it into this year. We've been seeing some catalyst deactivation prior to the turnaround. So since we had the unit down and we knew what the outlook was for VAM, we said, let's go ahead and take that turnaround -- take that catalyst change now. So that catalyst change, so we've had better volumes, is what I'm saying. And of course, we've seen a bit of an uptick in raw material pricing. But that -- so the better volumes offset a little bit by the lag in raw materials and about another $0.05 to $0.10, let's say, by the decision to move our catalyst change forward.

I think when you reported your second quarter earnings, you thought that your EBIT sequentially in your Acetyls Chain would be roughly flat? Is it now better than that? Or is it coming in pretty much as you thought?

I'd say it's closer to what we thought, maybe because of this catalyst change, even slightly down. But again, it's the offset of, yes, we've seen better volumes. But we have the catalyst change and raw materials have been going up. And there's always a couple of months lag. So we'll see the benefit of those raw materials, but we'll see that benefit really probably in fourth quarter.

Different companies are reporting sort of a different tempo of demand in that they'll be selling products where -- in different geographic areas, and it seems that there's plenty of capacity, there's no real tightness. And yet in other geographies or in other applications, what they'll find is that they're entirely sold out, and it's difficult to get material to their customers. Can you talk about the Acetyls Chain and various pockets of tightness or looseness? If there is a difference in the different geographies or end markets?

I think definitely there's a difference in geographies. But what I would say is that the Acetyl Chain really runs on a global basis. So we are able to move products around the globe as needed. So we haven't really -- I'm trying to think, we haven't really seen any instances where we've had trouble supplying our customers out. We plan for it. We try to keep an outlook in advance as with the VAM downtime we've had now for the catalyst change. We make sure that we secured enough product so that we would continue to be able to supply our contract customers during this time. So yes, I mean there is always region-to-regional variability, but I would say that the beauty of a global model is we're able to at least make sure our contract customers that we can meet their demands during this time.

Can you talk about the flavor of demand growth in China versus Europe versus the United States, in the Acetyl Chain in the third quarter?

So I think in all regions, it's really been led by construction. So the demand for paints and coatings and bonding agents and all of that sort of thing definitely has been leading demand growth. I would say China is really back to pre-COVID levels across all the sectors. The U.S. has come back strongly, but still kind of 90% to 95%. And Europe has been a little bit slower, but also coming back. Auto, although we don't sell a lot of Acetyl Chain materials into auto, it's a pretty small number for us. It's come back more strongly. So that's helped. And then I would say like packaging, which is the other big area. Packaging remained pretty strong during second quarter or as everybody was home, they were ordering a lot from Amazon. So packaging has stayed pretty strong through second quarter and continued strong into the third quarter. And industrial, I would say, is the sector where you really see China's back, industrial still coming back in the U.S. and Europe.

So I think in the United States in VAM, in October, Celanese has a turnaround, Dow has a turnaround, Lyondell has a turnaround. Maybe it's 2/3 of domestic VAM. Should the market tighten up in the late third and fourth quarter in VAM?

Yes. So we do not have a VAM turnaround in the fourth quarter. We have acetic acid turnaround in the fourth quarter in Clear Lake. So we -- like I said, we have taken a VAM outage here at the end of the third quarter in order to change our catalyst, but our units will be back on and ready to go before the end of the month. So I don't think there will be a lot of tightness in the market. Again, our turnaround is in acetic acid. We have the ability to move those molecules around. So...

In Europe, in this quarter, have you been operating your Frankfurt facility at lower rates of utilization in VAM? Has that tightened up the European market at all?

Yes. So we did, with lower demand, we were experiencing in Europe and recognizing that Europe is one of our more -- our higher cost locations for producing VAM. We took the opportunity of a lower demand environment across the globe to controllably shut down our Frankfurt facility, but it is coming up again in preparation for fourth quarter. And also to cover some of the VAM outage we had in Clear Lake. So it is coming back up. But we just simply did that to take it as we constantly do, to take advantage of our lowest cost facilities during periods of low demand.

Everybody looks at different Bloomberg prices. And sometimes they're good and sometimes they're not so good. But if you look at some of the Bloomberg VAM prices, they seem to have jumped in China recently. Is that a good indication of the way the market is evolving? Or is that not so representative?

Certainly, it's representative for China. I mean, look, globally, we do see VAM prices moving up. Again, for all the reasons we talked about, a lot of strength in construction and paints and coatings, I think the question there is, as we move into the fourth quarter, a lot of construction is very weather dependent. So we're still waiting to see in the fourth quarter how much seasonality we see based on weather. So can't call the weather, but we'll watch and see as we get more into fourth quarter. But I think certainly, a lot of pent-up demand for commercial construction and things during COVID, and we're seeing that impact on VAM pricing globally now.