SJW Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 10 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Trinseo Third Quarter 2023 Financial Results Conference Call. We welcome the Trinseo management team, Frank Bozich, President and CEO David Stacy, Executive Vice President and CFO and Andy Meyers, Director of Investor Relations. Today's conference call will include brief remarks by the management team followed by a question and answer session. The company distributed its press release along with his presentation slides at close of market Friday, November 3rd. These documents are posted on the company's Investor Relations website and furnished on a Form 8 ks filed with the Securities and Exchange Commission.

Operator

Star then 0 on your telephone. And now I'll hand things over to Andy Myers. Please go ahead.

Speaker 1

Thank you, Bo, and good morning, everyone. At this time, all participants are in a listen only mode. After our brief remarks, Instructions will follow to participate in the question and answer session. Our disclosure rules and cautionary note on forward looking statements are noted on Slide 2. During this presentation, we may make certain forward looking statements, including issuing guidance and describing our future expectations.

Speaker 1

We must caution you that actual results could differ materially from what is discussed, described or implied in these statements. Factors that could cause actual results to differ include, but are not limited to, risk factors set forth in Item 1A of our annual report on Form 10 ks or in our other filings made with the Securities and Exchange Commission. The company undertakes no obligation to update or revise its forward looking statements. Today's presentation includes certain non GAAP measurements. A reconciliation of these measurements to corresponding GAAP measures is provided in our earnings release and in the appendix of our investor presentation.

Speaker 1

A replay of the conference call and transcript will be archived on the company's Investor Relations website shortly following the call. The replay will be available until November 6, 2024. Now I'd like to turn the call over to Frank Bozich.

Speaker 2

Thanks, Andy, and welcome to our Q3 2023 earnings call. I'd like to start with a discussion of our Q3 results. As expected, our Q3 sales volume was roughly flat to Q2 and consistent with the lower demand level we've seen over the past year. This reflects lower end customer demand, particularly in consumer durables and building and construction, continued customer destocking as well as weaker market demand in Asia, leading to higher exports to Europe. However, looking at our customers, we feel we are seeing a slowing of destocking and are hopeful this will end in the near future depending on the value chain.

Speaker 2

Despite this prolonged period of reduced demand, we've taken numerous asset footprint and other cost reduction actions to improve our profitability. Late last year, we announced the closures of our styrene plant in Bohlen, Germany and half of our polycarbonate production in Stade, Germany, along with consolidating our PMMA sheet production in North America. This year, we've seen significant profitability and free cash flow improvements from these actions. I would like to refer to the additional actions we've recently announced, which are highlighted on Slide 4 of our investor deck. First, the closure of our Chernoz in the Netherlands styrene plant.

Speaker 2

2nd, the optimization of our PMMA sheet network in Europe, including plant consolidations. And lastly, corporate cost reductions, including the elimination of certain executive positions. In aggregate, These recent actions are expected to result in approximately $75,000,000 of annual cost reductions that we expect to be realized in 2024. We believe these actions will not only increase our profitability and cash generation, but will also enable us to continue investing in transformation projects such as recycling and material substitution innovations, which offers significant growth potential even in the current market environment. While market demand has remained challenging for the entire industry, We continue to see the benefit of the shift in our portfolio to one that is more specialty and sustainability solutions oriented.

Speaker 2

In 2023, specialty and sustainable solutions comprise about 30% of our variable margin, and this is about double the level of 2020. This part of our portfolio has shown better margin resiliency in the current environment. Continued focus on growing these technologies and also taking decisive action on our more cost sensitive assets gives us additional levers to improve profit while market demand remains depressed. Looking at Q3 profitability, We reported a net loss from continuing operations of $38,000,000 and an adjusted EBITDA of $41,000,000 This result was below our expectations due mainly to the styrene related impacts during the quarter, including a short term spike and European styrene prices, while we were buying all of our styrene on the spot market during the unplanned outage at Chornuzen. However, I'm proud to say that due to our continued focus on working capital, we were able to generate positive free cash for the 3rd consecutive quarter.

Speaker 2

In addition, as previously announced, we've successfully refinanced all of our 2024 term loan and over 75% of our 2025 notes. Going back to the Charnuse and styrene closure, I want to be clear that we did not take the closure of this plant lightly, but styrene profitability has been negative for the last 9 quarters. With elevated energy prices in Europe, Styrene production cost in the region is one of the highest in the world. Plus, given the recent and planned global styrene capacity additions, We believe this feedstock will remain structurally long through the end of the day. Therefore, we believe we will be able to purchase styrene at lower prices than our production costs.

Speaker 2

The positive result of our previously announced Bowling closure supports this as the correct course of action. This closure also reduces production risk, ongoing capital and turnaround costs, while lowering our energy intensity and carbon footprint. With the closure of Trinseo and styrene, we will no longer produce styrene anywhere in the world. We will therefore purchase all of our styrene needs from 3rd parties. We have always purchased all of our styrene needs in North America and Asia, as well as a significant percentage of our European requirements.

Speaker 2

So this model is not new to us. We plan to buy via diversified geographic and commercial offerings, providing us with flexibility to optimize our Starting in Q1 of 2024, we will no longer have a Feedstocks reporting segment and the actual purchase cost of styrene will flow through to the derivative segments, polystyrene, plastic solutions and latex binders. These businesses pass through styrene costs in their product prices either through market mechanisms or via price formulas. Because we will be buying all of our styrene and generally operate with pass through economics in our downstream businesses, We don't expect to see the volatility of styrene margins in our results. Before I hand the call over to Dave, I'd like to talk to you about our progress and Sustainability.

Speaker 2

This continues to be a bright spot and our sales volume for recycled content containing products was up 10% year to date from our continued focus in this very important area. On this topic, I'd like to provide more details on one of our sustainability projects that I'm particularly excited about. Earlier this year, we announced the inauguration of our polycarbonate dissolution pilot facility introduced in the Netherlands. Since that announcement, I'm happy to report that the pilot facility is operational, has been qualifying mixed waste streams and producing samples of recycled polycarbonate for our customers. Through this ongoing investment and our ability to repurpose the idle polycarbonate production line in Stade, Germany for this process.

Speaker 2

We expect to be able to achieve industrial scale production beginning in 2025 with a low capital expenditure. Now I'd like to highlight some of the unique features of our technology and the advantages it will provide in the future. Our process uses our proprietary advanced physical recycling technology that enables Polycarbonate polymer from end of life plastics such as automotive parts and consumer electronics They're difficult to recycle via traditional mechanical recycling methods. Our technology allows us to extract Polycarbonate Polymer from a mixed waste stream, meaning polycarbonate containing mixed waste mixed with other plastic, metal or glass, giving us the ability to process waste that would otherwise be unrecyclable. As a result, certain ways That could only be sent to a landfill or an incinerator in the past can be recovered and recycled using our technology.

Speaker 2

This will enable closed loop partnerships with automotive, electronics and consumer good customers that currently produce end of life plastics. These partnerships are highly attractive to our customers as they provide circular solutions. In addition to the sustainability advantages of our technology, quality of polycarbonate that we extract through the dissolution process He's on par with virgin PC and contains lower levels of residual bisphenol A. These reduced BPA levels could potentially expand the types of applications for which recycled PC is approved. Our process also emits up to 3 times less CO2 than virgin PC production, making both the process and end products more sustainable.

Speaker 2

Finally, because this technology permits the use of lower value waste in feedstock as feedstock, We anticipate at scale it will result in cost savings compared to virgin PC production. I'd like to thank our research and development team for their truly innovative work and their dedication toward creating a cleaner, more circular polycarbonate technology. This is just one of the many exciting projects that we continue to focus on in order to achieve our 2,030 sustainability and growth goals and continue to increase the mix of specialties in our portfolio. Now I'd like to turn the call over to Dave.

Speaker 3

Thank you, Frank. Our Q3 adjusted EBITDA was below our expectation due mainly to lower styrene related margin from our unplanned average at Trenuzen as well as negative net timing from decreasing raw materials. Results included unfavorable impacts of $15,000,000 related to the Ternusen styrene outage, $11,000,000 from natural gas hedge losses and $4,000,000 from net timing. Please note that the $11,000,000 impact from natural gas hedges has decreased from $19,000,000 in the quarter $12,000,000 in the 2nd quarter. We expect this impact to be about $5,000,000 in the 4th quarter and about $5,000,000 overall in 2024.

Speaker 3

In the second quarter, we had free cash flow of $16,000,000 including a working capital reduction of $52,000,000 which was driven by continued cash initiatives. Year to date, we have reduced working capital by over $150,000,000 and over 80% of this Production is from lower working capital days as opposed to price. We are comfortable operating at this reduced level of working capital as long as this demand environment persists. We ended the Q3 with $279,000,000 of cash and $495,000,000 of liquidity, including our undrawn bank facilities. The last item I'd like to discuss is our recent refinancing.

Speaker 3

As Slide 13 in our deck shows, We refinanced $660,000,000 of the 2.24 term loan $385,000,000 of the 200 2025 senior notes, extending these maturities to 2028. This leaves $115,000,000 of notes due in September 2025 and no other maturities until 2028. Now, I'll turn the call back over to Frank, who will talk about our expectations for the remainder of 2023.

Speaker 2

Thanks, Dave. Looking at our forecast for the rest of the year, we're guiding to a full year net loss of $509,000,000 to $499,000,000 and adjusted EBITDA of $175,000,000 to $185,000,000 This updated full year adjusted EBITDA outlook is below our prior guidance, primarily from lower styrene related margin and unfavorable net timing in Q3, as well as a more pronounced year end seasonality impact in Q4. As we continue to navigate a sustained low demand environment, we've been proactive by taking significant action to enhance profitability and cash generation, including numerous initiatives regarding asset optimization, cost reductions and liquidity improvements. The year over year benefit of these actions combined with lower losses from natural gas hedges are expected to result in over $100,000,000 of EBITDA improvement. In addition to these improvements, the 2023 adjusted EBITDA outlook includes Q3 year to date Unfavorable impacts of $22,000,000 from net timing from declining raw materials and $14,000,000 from fixed cost under absorption related to our inventory reduction actions.

Speaker 2

Therefore, we expect these tailwinds to result in significantly higher profitability in 2024. Now we're happy to take your questions.

Operator

Thank you, Mr. Bosevich. Ladies and gentlemen, at this time, if you do have any questions, simply press star 1. And if you do find your question has already been addressed, you can remove yourself from the queue by pressing star 1 again. We'll go first this morning to Frank Mitsch at Fermium Research LLC.

Speaker 4

Good morning and congrats on the refi. I want to drill a little bit more into the 2024 expectation versus 2023. You outlined $100,000,000 benefit from the cost actions that you've taken, the plant shutdowns, as well as natural gas hedges. And so far this year, you had you mentioned the $14,000,000 under absorption from running your assets lighter. Of course, you also had another 15,000,000 of unplanned outage.

Speaker 4

If I add this up, That $100,000,000 that you're expecting something like $40,000,000 less in terms of natgas hedges impact. So that implies $60,000,000 of benefit from the restructuring actions. I believe you've previously said you expected like $70,000,000 to 90,000,000 a benefit from the restructuring actions. Are we just rounding here? Can you talk a little bit more about the bridge from 2023 to 2024 from some of these various noise items.

Speaker 2

Yes, Frank, I think the best way to look at it is to look at Slide 4 of the presentation deck where we talk about the tailwinds. There's a little call out box there that shows $100,000,000 related to the asset and cost restructuring and natural gas hedges, the $22,000,000 of unfavorable net timing plus dollars 14,000,000 fixed cost under absorption. So I would say those are the tailwinds that we would go into next year with the benefit of and again, I think Q3 is representative of the Demand level that we would expect to see in this environment as we bounce along at these levels. So a normalized Q3 plus those is probably a good way to think about it in this environment.

Speaker 4

Got you, got you. We previously indicated like $70,000,000 to $90,000,000 just based on the restructuring actions from the plant shutdowns, etcetera. It looks like that $100,000,000 includes that as well as the $40,000,000 benefit from the net gas. You're not implying that that you're expecting the benefits to be less than that 70 to 90 that you've previously said.

Operator

Are you?

Speaker 3

No, Frank, this is Dave. No, the savings from the restructuring actions, you're right, 70 The $90,000,000 is the original range we gave and the amount is $75,000,000 So what we expect today to get out of that is $75,000,000 So the $100,000,000 that Frank was referring to was in the slide, so is the sum of that $75,000,000 plus the natural gas savings. Okay. It looks

Speaker 2

like it looks like it's grounding. Frank, we're getting some Partial benefit from some of these actions this year. Right.

Speaker 3

Right.

Speaker 5

Okay. All right.

Speaker 4

So the year over

Speaker 2

year So you can't just Yes. There is a portion of it that we're getting. For example, the corporate restructuring actions, those were in effect late in Q3. And so a portion of those we're going to get we've already gotten. So we'll only get the year over year benefits of tailwind next year and That's what we've highlighted in that tail that call out box.

Speaker 4

All right. Very helpful. And then lastly, you mentioned that you're seeing a slowing of destocking. And I was wondering if you might be able to provide some color in terms of the end markets where you might be seeing that, whether that be Building and construction, especially paper, packaging, whatever, any color there on where you're seeing the slowing?

Speaker 2

In the consumer electronics, we're seeing slowing. We're seeing some slowing In the case applications in latex binders as well as in the Well, automotive has been very steady. So that supply chain has been pretty resilient. I'd say with the And also we've seen a slowing in the white goods or consumer goods areas related to appliances where we still see some destocking. It Probably the most pronounced destocking that's still ongoing is in kitchen and bath type applications for our various technologies, terrific building and construction.

Speaker 4

Got you. Got you. All right. Thank you so much.

Speaker 2

Thanks, Frank.

Operator

Thank you. We'll go next now to David Begleiter at Deutsche Bank.

Speaker 6

Thank you. Good morning. Friends, do you have an update on the styrenics sale?

Speaker 2

So David, we no real update. We continue to field questions from parties that are interested, but nothing is imminent.

Speaker 6

Understood. And Dave, just on working capital, when volumes do come back to more normalized levels, how much rebuild do you think you'll need in working capital?

Speaker 3

Well, Dave, as I said in the prepared remarks, over 80% of the reduction this year is from days, so days of working capital that we've taken out. And we've taken that out through and we believe Substantially, all that is structural. We've taken out those days of working capital because of the systems and processes that we've implemented, specifically around S and OP and in our new ERP system. So I think, look, Price out of that is probably 15% or less. I think when prices Do rise, that will likely be indicative of a recovering environment.

Speaker 3

So we probably see higher EBITDA in that as well. But The vast majority of it, the remainder is days of inventory and days of other working capital that we think we've structurally taken out, and don't think we need to add back. Thank you.

Operator

Thank you. We'll go next now to Matthew Blair at TPH.

Speaker 5

Hey, good morning, Frank and Dave. I was hoping you could help us out a little bit on the EBITDA bridge from Q3 to Q4. I think midpoint EBITDA guidance only as Q4 moving up maybe about $5,000,000 quarter over quarter. It seems like you would have some pretty considerable tailwinds from rolling off the feedstocks impact in Q3, dollars 19,000,000 as well as it sounds like The net gas headwind is effectively going to be about a $6,000,000 tailwind. So is that the right way to think about it?

Speaker 5

And I guess the delta would be the Increased seasonality as well as the benzene hit on the styrene margins?

Speaker 2

Yes. I think that's a good way to think about it. We'll have some benefit as we outlined from styrene and from the actions we've taken, those will be Somewhat muted in the results because of the we expect extended customer shutdowns during the year end.

Speaker 3

And Matthew, just one other point. Look, Frank mentioned in his prepared remarks, but I think it's important that everybody Our earnings you mentioned benzene, right? And benzene the higher elevated benzene putting some pressure on styrene margins. And that is in fact happening. Now in the Q3 or excuse me, the Q4, we're seeing that in AmSty.

Speaker 3

AmSty is going to have a lower performance in Q4 due to styrene margins. But because we're no longer a styrene producer, higher benzene and Styrene margins do not impact our results like they used to. So I know that's going to take some getting used to But styrene margins really only affect us now in AmSty, not in our own results.

Speaker 2

Maybe just add one more. Sorry, go ahead. Please go ahead, Frank. No, the other thing I just do want to point out is that The styrene contracts that we've negotiated begin in January of next year. We've secured the needs we have for the remainder of the year, largely through spot purchases on the market.

Speaker 2

So the timing for The contracts to kick in is January of next year.

Speaker 5

Got it. And then will feedstocks be will that still be around for Q4? Will that be a 0? Or will there still be some Residual like negative EBITDA flowing through for feedstocks in Q4?

Speaker 3

It will be there in Q4, Matthew. We will still have a styrene reporting segment. It's not going to reflect the Production of styrene and internal sales toward internal businesses, it will just reflect purchases of styrene that we make and internal transfers of that. Yes. So I wouldn't I don't expect it to be a negative because of that, I don't expect it to be a negative number in the Q4.

Speaker 5

Got it. And then last question is, I I believe the cash flow statement reflected $15,000,000 or $16,000,000 in the Q3 from proceeds from the sale of business and other assets. What can you remind us what that was for?

Speaker 3

That was for it was kind of small immaterial sales of assets. It wasn't a business. It's kind of miscellaneous assets that it's not even worth the time on the call.

Speaker 5

Okay, sounds good. Thank you.

Operator

Thank you. We go next now to Michael Lighthead at Barclays.

Speaker 7

Great. Thanks. Good morning, guys. First, Frank, can you just speak to the intensity of lower cost Asian imports across your portfolio? Is it getting better or worse relative to maybe earlier this year?

Speaker 2

Yes, I would say it's getting better. And that's because the cost differential between European production and Asian cost has decreased, but there's still a pronounced pressure due to the lack of capacity For the lack of the free capacity and underutilization of assets in Asia. So there's still pressure from imports And there still is a dislocation in cost between Europe and Asia. I would say it's most pronounced in plastic solutions and in EM. And due to the nature of Our latex bond business being a water based product, it's least pronounced or most non existent there.

Speaker 7

Great. That's super helpful. And then Dave, after the recent refinancing, can you help us with what your current run rate Annual cash interest is?

Speaker 3

Yes. It's $235,000,000 a year, Mike.

Speaker 7

Great. Thank you.

Operator

Thank you. We'll go next now to Hassan Ahmed at Enlivant Global Advisors.

Speaker 8

Good morning, Frank and Dave. Guys, wanted to revisit some of the moving parts associated with The initial 2024 sort of guidance or bridge analysis you guys have given. Frank, you mentioned a good way to think about sort of Run rate quarterly EBITDA is Q3 2023 levels, right? So I annualize that and I come up with, call it 100 and $64,000,000 in EBITDA. Then you talked about the sort of tailwinds from asset and cost restructuring, which is another 75,000,000 The sort of non presence of the unfavorable timing impacts in 2023, which is another $22,000,000 and fixed costs under absorption, which is another $14,000,000 So you sum it up and you come to at least dollars 274,000,000 to $275,000,000 in 2024 EBITDA.

Speaker 8

Am I right in assuming, 1st of all, that that It's the correct way of thinking about it. And of course, that does not factor in any sort of demand improvements and it doesn't factor in potentially the benefit from the new styrene contract. Am I thinking about this the right way?

Speaker 2

I guess, let me play back to you how I would think about it or I've been thinking about it and I think You know how we discussed it earlier when Frank asked the question. So if we take $41,000,000 for Q3 and add back the $4,000,000 timing plus the negative impact from the styrene outage of $15,000,000 that gets us to about a $60,000,000 run performance underlying performance in Q3. And from that, we have an additional tailwind of $100,000,000 related to restructuring and natural gas hedges. So that's how I would think about it. Again, this we're not guiding yet.

Speaker 2

We'll guide in February, but sitting here today, that's how I would think about next year.

Speaker 8

Fair enough. Fair enough. And just again trying to sort of understand the demand side of things with this I said, destock that we've seen, back, back, I believe it was Q4 of 'twenty two during the earnings call, you talked about how historically Destockings lasted 2 quarters and the restock post those 2 sort of quarters of destocking historically had been quite impressive. Now here we are several quarters later with the destocking continuing. So I mean, should we expect after this level of destocking As and when it happens, an equally impressive restocking?

Speaker 2

We I don't know what to expect going forward to be honest with you, because I think that the chemical industry In general, as at an inflection point that in my 4 years I've not seen before, with over capacities in Asia, Geopolitical effects, dislocations and costs. So it's hard for me to say what to expect going forward. Based on history, I would based on our prior experience, if history would repeat itself, we would say yes. But I'm not Again, sitting here today, it's difficult to predict when and how that will happen or what it will look like.

Speaker 8

Fair enough. Very helpful, Frank. Thank you so much.

Operator

Thank you. We go next now to Laurence Alexander at Jefferies.

Speaker 9

Good morning. Could you unpack the comments around extended shutdowns? Is that just in kind of the appliance industry or are you also seeing that in automotive? And are you thinking about it in terms of shutdown starting earlier than normal or are you also concerned about them spilling over into January more than usual?

Speaker 2

No, we think that the customers will be Managing working capital by reducing stocks through the year end. And so their shutdowns will start earlier. And I would say this is across probably across the value chains. And again, if there's an exception, it's probably automotive.

Speaker 9

And secondly, just in terms of kind of the comp effects, If you take kind of the way your customers talked about their sense of underlying demand, Is there at least a high confidence level of confidence that volumes are positive comparisons in Q2 year over year? Or our customers more nervous on the visibility. I just want to make sure

Speaker 2

I understand what the so I just want to make sure I understand positive volume compared to to

Speaker 9

When we think about the year over year cadence on volumes, should you be back in Positive territory by Q2 of next year based on what your customers are saying or are they indicating too much uncertainty on demand trends? Just trying to think about flat things in the stock cycle.

Speaker 2

Yes. So I would say in general, we would see low single digit demand improvement It's the signal we're getting across the portfolio. So some improvement, but not, As Hassan asked, a recovery. So low single digit demand improvement and it varies by Specific segment when that will kick in. That's how I would think about it and how we're thinking about it right now.

Speaker 9

And then just lastly on the recycled polycarbonates, you made a comment if I heard properly that will actually be cheaper than virgin polycarbonate. Do you have a sense is there a Kind of structural gap, like a rule of thumb as to just how much of an advantage you should have? And Do your customers expect you to sort of split that with them so that they get cheaper product or are they telling you that they would be willing to pay a premium like we see in other plastics And then you just get a healthier margin?

Speaker 2

Well, we would I would say in general, we enjoy a premium in the recycled product based on The significant demand in many of our value chains for that product, for helping our customers achieve their recycling and circularity goals. So I would expect to get a healthy return on these technologies as we market those back to our customers. From a cost standpoint, it will all depend on what feed we begin with. And I think what we're trying to explain and what's unique about our technology is we can take a mix stream that would contain colors, other types of materials like metal, glass or other plastics and we can extract the polycarbonate polymer from that and get to an almost purified virgin quality polycarbonate. So depending on The cost to get secure that feedstock, which In mixed waste, these are largely very inexpensive or previously been landfilled.

Speaker 2

We would expect to get a lower Be able to produce at scale a lower cost than virgin. I don't know if that helps. It's difficult to quantify because it all depends on what partnership we have with our end customer. And let me give you an example. So we could take headlamps that are Waste scrap by our customer might be end of life or could be low quality or off grade from their production and we can recycle it and return that material to them.

Speaker 2

So same thing, we think about an interior door panel from a car company. We actually have taken byproduct or scrap door panels from our existing customers and recycled it and made delivered back to them the polycarbonate that we've recycled and they've made virgin door panels and they meet their quality requirements. So it's a we've done the same thing in consumer electronics. So we've yet to See the full potential of it, but we're very excited about it and early indications are that we have a significant demand from our customer base And they're excited about partnering with us.

Operator

Thank you. And ladies and gentlemen, that will conclude our question and answer session this morning. And it will bring us to the end of this morning's conference call. Again, we'd like to thank you all so much for joining the Trinseo Q3 2023 financial results conference call and wish you all a great day. Goodbye.

Remove Ads
Powered by Quartr
Earnings Conference Call
SJW Group Q3 2023
00:00 / 00:00
Remove Ads