Investor Update

Jul 20, 2020

Greetings, and welcome to the Celanese webcast conference call. At this time, all participants are in a listen only mode. A question and answer session will follow 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 polyplastic joint venture to DiceLough Corporation. My name is Abe Fall, Vice President of Investor Relations. Joining us on the call today will be Lori Ryiker, Chairman and Chief Executive Officer Tom Kelly, Senior Vice President, Engineered Materials and Scott Richardson, our Chief Financial Officer. Plastics 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, Sunlands Corporation's future objectives and results, please note the cautionary language contained in the slides as well as our Form 8K. 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 Laurie now. Thanks, babe, 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 buysell Corporation to sell our equity investment in the polyplastics joint venture. Our culture at 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 and 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 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 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, one that is more contemporary in its approach to driving the Engineered Materials growth trajectory further. We have and will continue to compete with Dicel in our overlapping polymer product lines. 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 fully apply its unique business model was $44,000,000 for Celanese in 2019. The return for this passive investment was below our expectations, clearly underperforming EM's face business growth in Asia for the past decade. We have been able to unlock this investment resulting in this transaction with Ziselle for $1,575,000,000 in cash for Celanese's 45% Spake and polyplastic, which represents a 36 times multiple of Celanese's share of earnings in 2019. We anticipate 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 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 fit idle on our balance sheet for any meaningful time and will look to deploy capital in an accretive manner. We are committed to a multi year 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 sized 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 Thank you, Laurie. I'd 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 Q2 results should be deferred to our July 29th scheduled earnings call. Rob, please open the line to questions. Absolutely. As a reminder session. First question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question. Hi, this is Angel Castillo on for Vincent. Congratulations on a 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 in JVs, the Alexa, even Ciena? And how should we think about the probability of assets like that or states like that being sold? Yes, thanks, Andrew, for the question. Look, we continue to look at all of our joint ventures. As I said, that was something we specific looked at in our strategy, which is how do we further improve the performance of our joint ventures? And I would say, polyplastic was unique in that it was a very passive investment. We had limited minority rights, so we were didn't have much ability to influence the 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 full 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 a clarifying on just the organic investments and CapEx. As we think about 2021 and beyond, I believe in the past you discussed CapEx is greater than $500,000,000 potentially. As we think about the proceeds from this, does this mean that we could actually return back to that the level of CapEx or should we be viewing it differently? I think in past calls, Andrew, we've basically said, we had expected initially in 2020 pre COVID to be at about a $500,000,000 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 Ghashaan Boonja with Robert W. Baird. Please proceed with your question. Hi, good afternoon. This is actually Matt Krueger sitting in for Ghansham. I was just hoping that we could, we could dig into a few of the details surrounding the timeline and the situation in how the equity investment sale came about. I guess, why engage in the transaction now you give a little bit of history around it, 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 partner since the beginning. But we have been in, I would say, more focused discussions with Sticell over the last few years, regarding polyplastics and the performance polyplastics and way 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 ISOL. 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 does the sale preclude you from adding capacity or investing in any specific product lines, regions, markets, etcetera? No. No, in fact, the opposite, I mean, there is nothing in this agreement that keeps us or dies out from investing in any region or any product line around the world. Great, great. That's very helpful. Our next question is from Bob Koort with Goldman Sachs. Please proceed with your question. Thanks. Good morning. Maybe following on that last one, Laurie, is when you have the polyplastic JV in place, were there did inhibit you from marketing and selling products in any particular regions? Bob, thanks for the question. So, you know, we in fact competed with polyplastic polyplastics manufactured and marketed their own materials around the globe and sell in these 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, Palm and PBT, PPS. Based on your prior answer then, does that mean when you competed in those markets you did sell from your own production? So this you 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 I mean, they operated as an independent company, both from a manufacturing and from a commercial perspective. Got it. Thank you, Scott. Our next question comes from John Roberts with UBS. Please proceed with your question. Thank you. Did Celanese supply raw materials of 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 twenty twenty? It's there? 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. Please proceed with your question. First question is just how will this affect, I think it's Nantong in China, the JV between KEPCO and polyplastic 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 $800,000,000 or so seems to be stranded in today's environment unless there are some deals that you're working on you maybe just put a little bit of color around where that $800,000,000 end up going over the next year and a half or so? 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 we'll continue to look at all sources of M And A, whether they be transformative or bolt on that that continues as it always has and we will be looking to deploy for organic growth for M and A or for share repurchases if neither of those are available 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 JP Morgan. Please proceed with your question. Thanks very much. What was the normalized multiple of sales or EBITDA in the transaction? 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 to kind of back into that EBITDA multiple. And it works out to be somewhere between 2030 times EBITDA. One of the important, elements of this transaction as well is that Dietel assumes all outstanding debt. Of polyplastics. Is that included in the $1,575,000,000 price? Yes, that is included in that. 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 the idea? Our next question comes from Kevin McCarthy with Vertical Research Partners. Please proceed with your question. My question relates to poly elastic 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. I mean, Polyplastics, you know, markets globally, sells globally, and does that independently from Celanese. So I don't actually have those figures. Yes. I think the only thing that Kevin is, I mean, they do have capacity, not just in Japan. And in fact, you know, you can look at publicly available plants that exist and it's probably, you know, half or slightly more than half of their capacity actually exists outside of seeing. 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 selling these, 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, polyplastic produce and marketed independently, Salanie. So that we really it really was a passive investment, which is one of the big reasons for the change is because we we're not able to apply our commercial model in any way to anything produced within polyplastic. Okay. Thank you very much. Our next question comes from Mike Sison with Wells Fargo. Please proceed with your question. Hey, good morning. Congrats on the deal. Just curious Laurie, when if you think about where you want to deploy you know, the the the the cash. Are you looking for certain polymers that maybe you don't have certain technologies? You know, any geographic areas. Maybe just, you know, as you, as you sort of recharge the M and A battery here, what do you think you want to go with the cash? Yes, thanks, Mike. Look, we're looking to 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 at been towards additional polymer capability, additional, you know, compounding capability, recycle capability, additional geography If you look at addition work we've done in AC, for example, we've in Elotex where we've gotten additional downstream chain capability. So we continue to look across all of those area for future M and A. Got it. And then just a quick follow-up on the accretion. Are you able to just start buying back the $500,000,000 today or whatever you're allowed to? Well, we'll begin buying back after the close. Our next question comes from P. J. Juvekar with Citigroup. Please proceed with your question. Yes. Hi. Good afternoon. Laurie, question on the big picture. You know, Mark Crower 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 that change in thinking? I wouldn't actually say those are related nor are they mutually exclusive. I mean, so again, we are we just continue to look for the highest, value to return to their shareholders. For the assets and the cash that we portfolio and they said, where are the underperforming portions of our portfolio? And what can we do to unlock that value? For a redeployment into higher return areas. So again, I wouldn't say they're related nor are they mutually exclusive. Okay. And then when you look at M And A pipeline, when would you say you're in the first of second innings of this M and A discussions? In Asia or would you say that they're advanced and they can close sooner so to close that gap quickly? Thank you. BJ, I'm not I'm happy. I was having a little problem with my audio. Would you mind repeating the question? Cause I'm not sure I heard it correctly. So sorry. So I think you were saying that you would replace those earnings through potentially M and A next 12 months. I'm trying to figure out where you are in that process. Are you in the first or second innings of this M and A process where you're beginning the discussions? Or are you in close to closing some of some deals here in the next 6 months? Oh, okay. Thanks, BJ. Got it. So really, we plan to replace those earnings in the short term with share repurchases. You know, obviously in 2020 still in the midst of the COVID crisis. We don't think this is a great environment for M And A, although maybe there'll be something opportunistic. But we really are looking more for M And A into 2021. Yes. And just to clarify one point from an answer, that I gave earlier. Yeah, the purchase price of 1.75 is all cash. In addition, Dicel assumes all the debt. So I just want to make sure that was clear. Our next question comes from Matthew DeJoy, Bank of America. Please proceed with your question. Hi, thanks. So as Duffy mentioned, you're not exactly cash poor So what would we consider to be a safe assumption for maybe base repurchase activity for any given year, Lori, I. E, more normal operating environment X any of these new proceeds. Yeah, I think, look, our history says we've been with the cash generation that we have and the fact that we don't have a need to pay down debt. We have tended to be kind of between $500,000,000 $1,000,000,000 of repurchases, depending on how much M and A is in front of us. And if we have a lot of M and A, then that number may be lower than that. If free cash flow is strong and there's no M and A could be higher than that. But that's typically where we've been in the last few years. Yes. Okay. And so if we look towards the end of 2021 and we still have that additional $800,000,000 in cash on the balance sheet. Sounds like you're going to buy back stock regardless next year, but this $800,000,000 balance would you be disappointed if that's still just sitting in cash by year end? Will you look to act ahead of that or is it really just kind of dependent on deal flow? Well, as I said in my opening remarks, we don't intend to sit on cash for a long period of time. We don't think that's the best use for the shareholders. And as we've also said in the past, our preference in terms of use of cash in terms of highest value is organic growth followed by M And A and then share repurchases. So if this is a dynamic situation and we'll just continue to see where we are at any given point to make that decision. Yes. And our, our board did increase our share repurchase authorization by $500,000,000 up to now $1,500,000,000. So we have a lot of flexibility to deploy cash for repurchases if needed. Fair enough. Our next question comes from Ben Isaacson with Scotiabank. Please proceed with your question. Just trying to understand a little bit more about the rationale for the transaction. And how much of this was related to the structure of ownership and your influence versus the actual portfolio of assets maybe asked a different way. Was there a consideration that you acquire the 55% from Dicel? As I said earlier, we've been in discussion for years with buysell around different ways of structuring ensure different ways of ownership, you know, and both sides have looked at acquiring it. And the end of the day, we felt this was the most value accretive to shareholders. And as a follow-up, can you talk to see a meaningful boost to your EBIT margins all else equal? No, I mean, look, our base business EBIT margins have been improving, over the course of last several quarters as we've talked about as we've driven margin expansion as well as continue to drive synergies from the M and A deals that we had. Given the fact that we don't recognize the revenue here from this, for the overall segment, you'll remove the earnings, but there will be no revenue So at the overall segment basis, earnings will come or the percentage will come down, obviously. But from a base business perspective, we continue to improve that EBIT margin. Our next question comes from Jim Sheehan with SunTrust. Thank you. You listed 5G as a future growth opportunity. How would you quantify your current offerings for that market? Do you intend to grow that organically or through acquisitions? So we currently provide quite a bit of material into the 5 market, for not so much for internal pieces, antennas, for handsets, for transmission equipment, all of those various areas. We've been growing that organically and our current plan is to continue to grow that organically. Tom, you want to add anything to that? No, I think that's right. I think with the portfolio of products we already have, we're all set to meet the needs of the 5G industry going forward. Our next question comes from Al Cassie Framat with KeyBanc. Please proceed with your question. Thank you. Does this transaction mean that you could restart some or all of your organic growth projects? I imagine you feel more confident in your balance sheet position after this deal? I mean, with could. I would tell you the bigger than one that we deferred, which is, you know, the Clear Lake project, wasn't moved simply for cash flow has also moved because of the change we saw with the drop in oil prices, therefore, making our support facilities more attractive. So we don't have a near term plan. We still are expecting an 18 month delay in Clear Lake. We still think that makes sense for all the reasons I just described. And so that was that's really the only big one out there. I mean, if you recall at the time when we talked about the capital reductions we took, They were based on rightsizing of projects, changing of projects, clear like being the big one. We are continuing to advance major reliability projects, other growth projects and improvement projects like our supply chain improvement projects that we think have near term returns. So we probably won't see a meaningful change in our capital investment profile for 2020. Yes, Jim, I think that's a really important point. We paused the projects in Q1 because of the economic environment we're in. Not because of liquidity concerns on the balance sheet. Deployment. Should we think about, you focusing mostly on Engineered Materials on the acquisition side or asset yields could be just as big. You know, I said earlier, you know, we were looking at M And A, for Engineered Materials, but also for till. I mean, we're looking at any number of areas and we're looking for what we think will yield the highest return to shareholders. Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question. Thank you. Laurie, just on the MA pipeline, I know there's not much happening right now, but in terms of 21 pipeline visibility, is that based on you have a good line of sight to potential targets in 'twenty one or do you not at this time? I mean, we have, I would say we have good line of sight to potential targets, both transformative and bolt on M and A. Now as we all know, it can sometimes take a while to work through these and they take time. I'm just saying in the current environment, I think it's unlikely anything can happen in 2020. But we certainly have line on-site for what we think will be attractive M and A going forward. Okay. And just on Engineered Materials CapEx, the last couple of years, it's been about $105,000,000. How much of that has been in Asia versus the rest of the world? I think it's been a David, I don't have the numbers front of me, but I think it's about fifty-fifty, Asia versus the rest of the world as we've been trying to grow our capability out in Asia. Thank you. Our next question comes from Frank Mitsch with Farian Research. Please proceed with your question. Yes. Good afternoon. And let me add my congrats on the transaction. Given that polyplastics had a very large presence in Japan, one would assume that would also 5 to the Japanese auto producers. Can you talk about, in the future, you're positioning with the Japanese auto producers both in Japan and outside of Japan and what how this transaction may impact that? Frank, I'm going to ask Tom to comment. I think, you know, we historically have not had a large presence with Japanese automakers. It's a very crowded market, I would say, in Japan, so I don't necessarily see that changing. You know, but we are very well positioned in other parts of Asia as well as other parts of the world. No, I think that's right. We've had, we've got solid commercial team on the ground in Japan that works with the tears there. And then obviously we work, where the J3 were located outside it. Japan, we worked with those tiers and OEMs as well, but I think Laurie's got it. I don't think it's going to materially change our position because our position is actually pretty pretty weak. Okay. Thank you. And Scott, let me ask the margin question a little bit differently. If I take a look at Selineese's base EM business, the EBITDA margin. And I take a look at polyplastics overall business EBITDA margins. Is it fair to assume that polyplastic EBITDA margins would be below Celanese spaceem EBITDA margins? Yeah, I think you can pull that out from, the financial statements that are public within, DISO statements, right? Got you. Thanks so much. Our next question comes from Hassan Ahmed with Alembic Global. Please proceed with your question. And, you know, you obviously said that you guys have been in conversations with polyplastics, since Q4 of last year. And that was, you know, post a strategic review of the portfolio. You know, could you just tell us if there are a, other divestiture candidates that have been identified, you know, how you're thinking about the metrics when you consider those divestitures, And, you know, part and parcel with this, you know, how should we think about you guys maybe even potentially doing the opposite? I a entirely consolidating the joint venture? I mean, are there any plans, you know, as you've done this strategic review? So as we went through our strategic reviews last year, Hassan, I mean, we looked at all options around our joint ventures. And again, they're all structured differently and we have different levels of, oversight and control, if you will, on our various joint venture I mean, in some, we produce end market for the joint ventures and some, we get a share of the joint venture, or we market a portion. So you know, everyone was different. I would say, polyplastics is the one that was most passive, the one we had least control over, and therefore, we felt a better candidate for divestiture. But we look at all options around our joint venture as well as our other operations. And again, the criteria is just always on focus on what is the best way to get shareholder value for that investment. So in this case, you know, to maybe talk about it very simply, we felt even taking the money and repurchasing would give us a better return than what we were getting out of the venture itself. But obviously, that's very different by venture and, and whether you're looking at adding or subtracting, that's really the criteria we always use, which is what produces the best shareholder value. Understood. Understood. And as a follow-up, I mean, over the years, there have been multiple conversations with investors about maybe the full value of these joint ventures not being appreciated as far as valuation goes and the like. Again, I'm just trying to sort of think 10, 15, 20 years out. Is the goal basically simplifying the structure of selling these as a company so that, you know, I guess for lack of a better way of putting it, the financials maybe are not that complex, per se, just because of the presence of these joint ventures and certain things can be disclosed, certain things can't as obviously we were even discussing about certain tech metrics not being publicly available for certain JVs. No, I don't think that's really been a consideration. I mean, it's really been focused on value and you know, whether we felt a asset was performing appropriately or not. And so in this case, where we thought felt like the asset was underperforming, it became a candidate for divestiture. But I, there's not really, I don't really have a strategy that says I want to simplify the folio to make it easier for folks to understand. I'd be really happy if you all just want to take the 36 exo and apply it across the portfolio. Very helpful, Laurie. Thank you so much. Our next question comes from Arun Viswanathan with RBC Capital Markets. Please proceed with your question. Hey, thanks for taking my question and congrats on the transaction. Guess, first off, I just wanted to get back to that last point. So, obviously a very healthy multiple in the 20 to 30 times EBITDA range. And, looking across your portfolio of 5 other JVs there in EM. Obviously, sometimes that gets missed in, in valuing the company, frankly, because of, you know, it's sitting in equity income. So I guess, is there any sense of urgency to unlock little bit more value here, especially given your comment earlier that this was one of the more underperforming ones, potentially you could realize even greater value for the remaining stakes. And I guess I'm just curious, would that be actually more advantageous given the structure And again, your earlier comments on inability maybe to realize full value with the others. Thanks. Yeah. Irene, I mean, this is not a topic we haven't touched on before. I mean, we we did have said that there there has been concern around not getting full value given that they come in and are reported on an after tax basis. And And that is well, not necessarily a consideration for doing a deal. You know, it is something where finding ways to continue to get the value lifted, so that investors see the benefits of these ventures has been important. We've been able to do that in some of our other ventures. And we've been very open about how we have restructured them. We obviously changed The have been seen a joint venture a few years ago. We built a pond plant there to change our percentage of what we get from that. So this is not a new phenomenon for us. We have not, to date, found a way to do that at polyplastic until now. And this just comes in the form of monetization of the venture. But just given the attractiveness of it, we felt like it just made a lot more sense. We're going to continue to look at ways to do that, with our other ventures. And, you know, we, we always have and have always had very active discussions with our partners about doing that because our interests is aligned around that. Okay, thanks. And then, and then just again, just as a follow-up here though, was there anything particular to this transaction that allowed for a greater lift up in that purchase price from the partner? Or, was it just that, that appears to be fair value on both sides. No. No. There was nothing like that in the deal. I mean, you know, I guess you'd really have to talk to Thicell, but this, this was the negotiated value. We have reached the end of the question and answer session this time I'd like to turn the call back over to questions and listening in today. As usual, we are available after the call for any further questions you might have. Rob, feel free to close this call out at this time. Thank you. This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.