Celanese Tops Expectations - Analyst Blog

Specialty material company, Celanese Corp. (CE) earned $1.12 per share in the second quarter of 2010 beating the Zacks Consensus Estimate of $1.02. Earnings doubled from last year’s 56 cents per share.

Revenues and Margins

Quarterly revenues grew 22% year-over-year to $1.5 billion primarily driven by higher volumes across all business segments. Pricing gains in the Acetyl Intermediates and Industrial Specialties businesses further boosted growth. Operating profit jumped 75% to $156 million on lower fixed costs. Operating margins came in at 10% from last year’s 7.2%.

Segment Review

Advanced Engineered Materials: The segment benefited from the specialty engineered polymers business’ prosperity. Net sales soared 53% to $282 million on higher volumes with increasing consumer demand. Higher sales at the Future Advanced Composites Technology long-fiber reinforced thermoplastics business acquired in December 2009 also boosted revenues in the segment.

Separately, Celanese integrated its business with its affiliate Ibn Sina in Saudi Arabia, which boosted profits in the segment. Operating profit of $40 million in the second quarter of 2010 was significantly higher than the $1 million in the year-ago period. Pricing gains in the methanol and methyl tertiary-butyl ether business on improving global demand helped good results from Ibn Sina.

Consumer Specialties: Revenues and earnings in the segment were nearly static. Net sales were $291 million, slightly up from last year’s $280 million. The modest improvement in revenues was attributable to volume recoveries at the company’s acetate manufacturing facility in Narrows, Virginia that suffered production disruptions due to power outages in the previous quarter. Operating profit was $64 million versus $66 million in the prior year period. Rising raw material and energy costs offset volume gains in the segment.

Industrial Specialties: For the reported quarter, net sales in the segment were $269 million, up 23% from $219 million (excluding inorganic revenues of $48 million) in the year-ago quarter. The segment saw higher volumes across all business in North America and Europe. The company operated its Nanjing, China plant, which produces vinyl acetate/ethylene emulsion at full rates on strong demand in the Asia Pacific region. Celanese plans to ramp up production capacity in 2011. Higher revenues culminated into higher profits. Operating profit jumped to $16 million compared with $6 million in the second quarter of 2009.

Acetyl Intermediates: Net sales climbed 26% to $782 million on higher acetyl volumes with improving global demand. Selling prices also improved across all major acetyl derivative products. Celanese operated its acetic acid plants above the industry utilization rates of 80%. Operating profit almost doubled to $68 million from $39 million in the same period last year on healthy revenues and lower costs. Lower costs resulted from the shutdown of the less profitable acetic acid and vinyl acetate monomer (VAM) production operations in Pardies, France.

Liquidity

Higher revenues in the specialty materials business and sustained improvements in costs helped positive cash flows. However, higher working capital requirements led to a year-over-year decline in cash flows. Celanese generated operating cash flows of $219 million in the first half of 2010, down 27% from $299 million in the year-ago period. Total debt was $3.4 billion, against cash and cash equivalent of $1.1 billion as of June 30, 2010.

Outlook

Encouraged by an improving global economy, Celanese raised its guidance for the full year 2010. The company expects adjusted earnings of $1.40 per share higher than its previous guidance of $1.25. Operating EBITDA is expected at $260 million, up from the original guidance of $250 million.

Zacks Recommendation

Celanese is one of the world’s largest producers of acetyl products, as well as a leading global producer of high-performance engineered polymers. The company is the world leader in VAM and acetic acid production, with market shares of 30% and 28%, respectively. About two-third of the production gets consumed by the downstream units of the company. Celanese is expanding in Asia, where profit is expected to rise from 30% to more than 50% by 2010.

However, Celanese is exposed to volatile raw material (natural gas, ethylene and methanol) prices used in the production of basic chemicals in the Acetyl Intermediates segment, principally formaldehyde, acetic acid and vinyl acetate monomer. The company also faces stiff competition from larger peers, E.I. DuPont de Nemours and Co. (DD) and The Dow Chemical Co. (DOW) in the Advanced Engineered Material Segment as well as in the Industrial Specialties segment. Celanese’s balance sheet leverage is also relatively high, which limits its financial flexibility.

Currently, Celanese has a short-term (1 to 3 months) Zacks #3 Rank (Hold) rating and a long-term (6 months and higher) Neutral recommendation.
 
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