Trinseo Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Trinseo First Quarter 2024 Financial Results Conference Call. We welcome the Chief Financial Officer and Management team, Frank Bozic, President and CEO David Stasse, 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 has been distributed its press release along with its presentation slides at close of market, Wednesday, May 8. 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

I will now hand the call over to Andy Myers.

Speaker 1

Thank you, Rob, 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 conference call. The replay will be available until May 8, 2025. Now I'd like to turn the call over to Frank Bozich.

Speaker 2

Thanks, Andy, and welcome to our Q1 2024 earnings call. Let me begin by saying how encouraged I am with how the Q1 progressed and how the Q2 has begun as profitability improved steadily over that period. The initial strength in volumes that we saw in January February continued through March resulting in our 1st year over year volume increase in 2 years and our highest volume quarter since Q3 2022. Additionally, we believe destocking in some of our value chains has ended. Market tightness resulted in significant margin expansion in Engineered Materials and Americas Styrenics as the quarter progressed, resulting in over half of our quarterly adjusted EBITDA coming in the month of March.

Speaker 2

We see this higher profitability continuing into Q2. The higher profitability that we saw in March was from several factors. We saw margin expansion in MMA as a result of supply tightness that drove March MMA prices significantly higher in Europe while costs have moderated. Weakness in epoxy, nylon and polycarbonate value chains in Asia led to reduced byproduct feedstock availability for MMA producers in that region. This dynamic along with ongoing geopolitical tensions in the Red Sea resulted in lower quantities of MMA shipped into Europe from Asia during the quarter.

Speaker 2

And we're seeing this continue into the 2nd quarter. We're also seeing demand for architectural coatings and various polymer additives beginning to pick up following a period of prolonged destocking, which is further tightening the MMA market in Europe and is supportive of continued higher margins in this segment. In North America, low acetone availability led to MMA and downstream PMMA supply tightness, resulting in higher integrated margins in the region. Additionally, Americas Styrenics had a major turnaround at its large styrene facility in January February and returned to production in March. Styrene supply tightness due to several industry outages combined with low inventory levels led to significantly higher styrene prices and margin expansion at the AmSty, and we're seeing this continue into the Q2.

Speaker 2

While we're happy to see the improved earnings profile increasing styrene and MMA prices exacerbated the typical Q1 seasonal working capital build and rising spot styrene prices negatively impacted polystyrene, ABS and latex binders margins by way of higher input costs. I'd like to shift gears for a few minutes to discuss several actions that we took during the quarter to continue advancing our transformation strategy and optimizing our business. In March, we announced the commencement of a sale process for our interest in Americas Styrenics via the initiation of an ownership exit provision in the joint venture agreement. This process provides us with a clear pathway to divest our interest in AMSDAI and we expect it to lead to a definitive agreement no later than early 2025. The proceeds will be used to pay down our highest cost debt, helping to lower our annual interest burden, which will be beneficial to future cash flows.

Speaker 2

Also in March, we announced that we engaged local works council in Germany regarding the potential closure of the remaining virgin polycarbonate production line at our Stade, Germany facility. While decisions like these are never easy, continued soft demand and price declines due to oversupply, along with significant fixed cost operating fixed operating costs in strata have strained the financial viability of the site. We do not expect these challenging conditions to abate anytime soon as capacity and additions continue in Asia continue to drive down price and make operating this chemistry in Europe more difficult. If approved, we will no longer produce virgin polycarbonate and will obtain all of our polycarbonate needs for our downstream businesses via external purchases and recycling. While difficult, this decision is in line with our continued focus on continuous network evaluation and optimization, and we expect it will increase annual profitability by $15,000,000 to $20,000,000 compared to our 2023 results.

Speaker 2

I also want to be clear that any decision to close the Virgin Polycarbonate production site in Stade will not impact our commitment to advancing our polycarbonate dissolution technology that we discussed at length in our Q3 2023 earnings call. While Stata was previously mentioned as a potential location for this technology up to commercial scale, we are now exploring numerous alternative locations that could host our recycling assets. We remain committed to the integration and application of modern recycling technologies to help customers develop more sustainable product offerings and this potential closure does not change that commitment. We continue to see excellent demand for our products that contain recycled material with a record amount sold in the Q1, which represents a 65% increase over the prior year. In addition to our focus on products containing recycled material, we continue to work on other sustainably advantaged product offerings.

Speaker 2

We recently introduced flame retardantpolycarbonate and PC ABS compounds that are manufactured without the use of PFAS and will primarily be used in consumer electronics applications. PFAS chemicals which have faced growing regulatory and consumer pressure to be reduced are commonly used for the flame retardant properties as well as their resistance to heat, oil, grease and water. These new products maintain those critical performance attributes and use post consumer recycled substrates, but replace PFAS with other flame retardant chemicals. Now I'd like to turn the call over to Dave to discuss our Q1 results.

Speaker 3

Thank you, Frank. Before I get into the Q1 results, I'd like to call your attention to a change in our segment reporting structure that became effective at the beginning of this year. As we previously discussed, following the closure of our polystyrene production facility in Ternusin, we no longer produce styrene and therefore no longer have a feedstocks reporting segment. As a result, we have recast the 20222023 net sales and adjusted EBITDA of the feedstock segment into the downstream segments that consume styrene, which are latex binders, plastic solutions and polystyrene. We have included segment results with and without this recast in the earnings presentation appendix.

Speaker 3

Turning back to the results. 1st quarter adjusted EBITDA of $45,000,000 was in line with our previous guidance, but included $13,000,000 of favorable net timing from rising styrene prices. The European spot styrene price increased by about 60% in the Q1 due to planned and unplanned industry outages. In this environment, we generally will have favorable net timing and a working capital build. Conversely, when styrene declines as we expect in late Q2 into Q3, we generally will have unfavorable net timing and a working capital release.

Speaker 3

Throughout this period, however, our underlying EBITDA ex timing is generally unchanged as Americas Styrenics benefits in periods of styrene tightness and our polystyrene plastic solutions and latex binders segment have a roughly equal and opposite effect as they are net buyers of styrene. Cash used in operations during the quarter was $66,000,000 which resulted in free cash flow of negative $82,000,000 This resulted in a $61 this included a $61,000,000 increase in trade working capital. Historically, the Q1 of the year includes a working capital build due to seasonal factors. However, this year's build was amplified because of the significant increase in styrene prices that I just spoke about. We expect Q1 to be the lowest free cash flow quarter of the year as our earnings improve and as our working capital normalizes from lower feedstock prices.

Speaker 3

We ended the quarter with $171,000,000 of cash and $423,000,000 of liquidity including our undrawn bank facilities. We enhanced our overall liquidity by extending the maturity of our on our accounts receivable securitization facility by 1 year to November 2025 and by including new subsidiaries in the facility that helped increase the available borrowing capacity by $36,000,000 quarter over quarter. Additionally, we are taking other actions such as proactively moderating lower margin sales to conserve working capital with only a nominal impact on earnings. Liquidity preservation is and will continue to be our top priority as we navigate this cycle downturn. Now I'll hand the call back over to Frank.

Speaker 2

Thanks, Dave. I'm happy to report that we're seeing the positive earnings momentum from the end of the first quarter continue in the Q2. Tightness in the styrene and MMA markets support a continuation of the higher margins that we experienced in the latter part of Q1. This combined with AmSty's return in the styrene operation and seasonal increases in high margin building and construction and consumer electronics sales give us confidence in a meaningful sequential profitability improvement in the 2nd quarter. As a result, we expect Q2 adjusted EBITDA of $60,000,000 to $75,000,000 including approximately $5,000,000 to $10,000,000 of negative timing.

Speaker 2

Consistent with the outlook we provided last quarter, we still expect Q1 profitability to be the low point of the year. Our base assumption is that demand remains constrained throughout 2024, but EBITDA will be stronger due to tighter markets from destock supply chains and the restructuring actions that we've taken. While our Q1 results and our Q2 outlook are certainly promising, we remain in one of the most challenging times for the chemical industry in several decades. I'm confident that the cost actions we have taken combined with our focus on prioritizing liquidity, while improving our sustainable and differentiated materials capabilities will have us well positioned to rise out of this cycle when demand returns to more normal levels. And now we're happy to take your questions.

Operator

Thank you. We will now begin the question and answer Your first question comes from the line of David Begleiter from Deutsche Bank. Your line is open.

Speaker 4

Thank you. Good morning. Frank, nice comeback or recovery in Engineered Materials. If you look to Q2 with the strength continuing, how are you thinking about EBITDA earnings potential in Engineered Materials in Q2 here?

Speaker 2

Yes. So we would expect EM Engineered Materials to be in the above $20,000,000 EBITDA in Q2. It is that that run rate in March April and we don't see the dynamic continuing or changing in any way. We've so and these are the things that we're really acutely watching from a market standpoint. We're watching what's happening in the polycarbonate epoxy and nylon value chains in Asia because as Asia those value chains being depressed really constrains the byproduct feedstock that go into MMA in that region.

Speaker 2

And then we're also watching the Red Sea. So there are certain dynamics that are out of our control that are influencing the current shortness tightness in North America and Europe. But we don't see any signs right now that would change that dynamic. But the other thing I'm happy to say is that the volume improvement we're seeing in MMA is really cuts across all of the segments. MMA volumes are certainly up, but we're also seeing good volume improvement and our good order book in both the resin, our surfaces business as well as rigid compounds that go into consumer electronics as we enter Q2.

Speaker 4

Very good. And given that strong level of earnings in Q2, can you actually grow earnings from that level in the back half of the year, I. E. $20,000,000 per quarter or higher?

Speaker 2

Well, it all really depends on the underlying market demand. Right now, we don't anticipate a significant change in market demand. We're winning some new awards, but our outlook in the back half of the year really depends on how the markets develop. So difficult to say at this point. And that's why we've neglected to give full year guidance because it's just difficult to say how the markets will develop.

Speaker 4

Understood. Thank you very much.

Speaker 5

Thank you, David.

Operator

Your next question comes from the line of Matthew Blair from TPH. Your line is open.

Speaker 6

Thank you and good morning. I had a few questions on AmSty. First, are you able to quantify the impact of the turnaround in Q1? What would that $6,000,000 have looked like if you were not in turnaround? 2, what kind of interest are you seeing in marketing the AmSty JV?

Speaker 6

And then 3, could you explain a little bit more about the this ownership exit provision? What exactly would happen in early 2025? Would the other half go back to the other counterparty CPChem?

Speaker 2

So let me take the back half of that question, then I'll let Dave take the first part of it. So we've seen indications of interest from a number of strategics and financial parties in the AmSty asset when we signaled that we would be using this prescriptive JV exit provision. But we haven't begun actively marketing the asset jointly with our joint venture partner at this point. But I can say that there it's a great asset. It's recognized as one of the best styrenics assets in the world.

Speaker 2

So I'm confident we will see interest in a good process when that begins. So the JV exit provisions that are defined under the JV agreement have a number of steps. We're working through those steps. Ultimately, those steps result in a joint marketing of the asset. So it just there is certain prescriptive elements we need to complete before we get to that point and we're in the process of doing that.

Speaker 2

But again, even if those take their are fully exhausted, those preliminary steps, we're very confident that this will result in assigning of a transaction by early 2025.

Speaker 3

Matthew, related to the first part of your question, the impact to us of the outage, so they were out for substantially all of January, February for a planned outage. They have 2 styrene units and each one turns around every 3 to 4 years. So there's they often have these turnarounds in the Q1. The impact to our earnings in the Q1 of this year was probably high single digits, dollars 8,000,000 or so I'd say from the turnaround. The reason is that low is because styrene prices really didn't accelerate in margins until March.

Speaker 3

So they were up in March. As you can see, I think we had $6,000,000 of EBITDA in the quarter and all of that was in March. As we look forward to Q4, we obviously considerably better results. I mean, I think our equity income from AmSty will probably be $20,000,000 or higher in the second quarter because of the high margins that we continue to see. But related to styrene kind of a tangential point, I'll just say is in my prepared remarks earlier, I did say we do expect styrene prices.

Speaker 3

These outages are starting to end as units are coming back online as we speak that are out. And we do expect a fairly significant decline in styrene prices late in Q2 and then into Q3. The working capital benefit for us associated that will probably be a Q3 item for us and we obviously for liquidity purposes look forward to that.

Speaker 5

That's good. And then, are there any net timing assumptions

Speaker 6

in your Q2 guidance? We did see European signed contracts in May come down, although the Q2 average is still well above Q1. So if you

Speaker 5

can help us think about the expense on that timing impact in Q2, that would be great.

Speaker 3

Yes. So embedded in the guidance range that we gave Matthew that Frank mentioned on the call of $60,000,000 to $75,000,000 embedded in that, we believe net timing will be negative $5,000,000 to negative $10,000,000 in the quarter. So that's embedded in the guidance. The reason the working capital as that works its way through your balance sheet, there's a month or 2 lag really between the P and L impact and the recognition on your balance sheet of the lower working capital. So that's why I said it's probably the working capital benefit would be in Q3, but the P and L impact in Q2.

Speaker 5

Great. Thank you.

Operator

Your next question comes from the line of Hassan Ahmed from Alembic Global Advisors. Your line is open.

Speaker 7

Good morning, Frank and Dave. I know it's early days and some positive sort of demand signs emerging. And I understand the sort of sensitivities around maybe not really sort of divulging a 2024 guidance. But I mean, look, you guys did around $154,000,000 in EBITDA in 2023, right? And from the sounds of it, the restructuring benefits certainly seem to be run rating at levels above $100,000,000 right?

Speaker 7

So I mean straight up that's north of $250,000,000 for 2024 EBITDA without even sort of factoring in some of these demand improvements that you guys are talking about and seeing. Am I sort of thinking about things the right way as it pertains to 2024?

Speaker 2

Yes. So thanks, Hassan. Look, I think what we've assumed is that year over year volume growth is going to be in the low single digit range for the remainder of the year and our volume will be similar the volume dynamic will be similar to 2023, but we are confident we'll deliver the $100,000,000 in year over year improvement that we anticipated. Will we get it exactly in the same buckets that we thought we would probably not. But I think we're confident in the $100,000,000 and we're encouraged by the start to the year, but very difficult to anticipate how the second half of the year and the market demand will develop during the second half of the year.

Speaker 2

So I would just leave it at that.

Speaker 3

Hassane, let me add a couple of things to that, if you will, please. So in Q1, we clearly had a step up in volume. Our volumes were up sequentially about 12% in the Q1 versus the Q4. And that was very broad based and in all segments. But on a year over year basis, it's up about 1%.

Speaker 3

So I'd attribute most of the Q4 to Q1 transition to seasonality. So as Frank said, I think we're very comfortable with delivering the $100,000,000 even in a low growth environment like we've assumed. We're managing the business based on the assumption that we continue to have constrained growth and low single digit year over year growth. And we're clearly not going to build any inventory for growth unless we see clear signs in the order book that that growth is there. So I just wanted to give you that color.

Speaker 3

The everything kind of we're talking about here for Q2 numbers is a continues that the demand it's not really a demand recovery we're seeing yet, it's more of a margin recovery.

Speaker 7

Very helpful. And as a follow-up, on the M and A side of things, can you talk a bit about what you guys are seeing in terms of trade patterns over there? Because I know a couple of quarters ago, we were all sort of seeing that arbitrage A out in Asia and Europe. And you guys were sort of talking about more and more Asian products sort of going into Europe. So if you could just talk a bit about whether sort of those trade patterns have normalized and that arbitrage opportunity is closed?

Speaker 8

So

Speaker 2

it's certainly reduced and the Red Sea and the crisis as well as the extended lead times from Asia into Europe have reduced the ability to ship this reactive monomer from Asia. But more importantly, the weakness in epoxy, polycarbonate and nylon demand in China really constrains phenol production, which the byproduct of phenol production is acetone, which is a key building block for MMA via the C3 route and it also affects hydrogen cyanide, HCN is the byproduct for the one of the byproducts in the nylon chain. So that availability is reduced. We also are seeing butadiene C4 production significantly reduced in Asia because of the slowness in that production. And so they're actually running at greatly reduced rates.

Speaker 2

So the combination of those two things are creating the current dynamic. Now I while things are better and we see slight improvements or signals of improvement in China broadly, those specific value chains we see is currently still challenged. And so we don't anticipate a significant change in that. If you look at Europe and North America, those markets for MMA are net short currently. You see a recovery in architectural coatings that have tightened the market up.

Speaker 2

So those factors combined have made it a much more higher margin MMA market and it's we've obviously benefited from that. So I hope that's helpful.

Speaker 7

Very much so. Thank you so much, Frank, and thanks again, Dave.

Speaker 2

Thanks, Hassan.

Operator

Your next question comes from the line of Kevin Estac from Jefferies. Your line is open.

Speaker 9

Hey, thank you for taking my questions. I guess my first question just had to do with mix. I guess curious how you characterize that as volume sort of rise, would your mix improve and would you benefit from basically higher margin product sales Or would you expect there to be a drag on mix? Just wanted to get some sense of how it would evolve in Q2 and Q3? Thank you.

Speaker 2

Sure. So yes, great question. And so while we anticipate a low single digit volume improvement year over year in 2024, we do see a much a more favorable mix. And so EM growth will be better than the broader portfolio. And so that EM resins are rigid compounds and engineered materials that go into consumer electronics as well as our surfaces business, which are our highest margin applications in the company will grow faster than low single digits.

Speaker 2

And our lowest growth area actually we're seeing negative growth in polystyrene, which would be our one of the lower margin application. So we will enjoy a favorable mix during the course of the year if based on the current assumptions that we have. The other thing I did want to point out that in Q1, as Dave said, we had a 12% sequential improvement in volume compared to Q4, but also we did see a lot of volume growth, 15% volume growth in Asia Pacific, but all of that was concentrated in paper and board for Latex in Asia, which we don't see that as that was really driven by some unique industry events that we don't see continuing. So those are the things that we're balancing, but yes, favorable mix through the full year with EM applications growing better than the rest of the portfolio.

Speaker 9

Okay, got it. Thank you. And apologies if this question has been asked, but my service has been a little spotty on this call. I'm just wondering, I guess, where you're still seeing destocking and guessing which value chain specifically? Thank you.

Speaker 2

Yes. The only place where we're seeing some where we would see some signs of destocking is in downstream building and construction related to polystyrene, EPS, XPS applications. So those are the only areas where we currently believe in Q1 or and that's specific to Europe and North America.

Speaker 9

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Ed Brucker from Barclays. Your line is open.

Speaker 10

Hey, thanks for the call this morning. My question is my first question is on just demand. You mentioned that you're still not near normal levels. I guess how far below normal levels are you still you could do broadly or by business? And for example, like Engineered Materials business, you said at $20,000,000 if you run rate that, is that kind of normal demand now or is there upside if we get a demand to return?

Speaker 2

Yes. So in the earnings presentation, there's a pretty good breakdown of the trade volumes by segment. And what I would tell you is, we're about 20% below the historical run rate volumes for the whole portfolio, as it exists today compared to sort of normal demand over the previous cycle, even the previous decade. And so what and what I would tell you too is with the current mix in the portfolio that for every 10% improvement that's approximately a $25,000,000 per quarter EBITDA impact. So, or $100,000,000 per year for every 10% recovery.

Speaker 2

So, if we get halfway back to normal volumes, we would expect that to deliver an additional $25,000,000 a quarter in EBITDA in aggregate.

Speaker 10

Got it. That's helpful. Thank you. My second question, the $150,000,000 stub of the 2025

Operator

over the next or

Speaker 3

I guess before it goes current?

Speaker 10

Over the next or I guess before it goes current?

Speaker 3

The reason behind leaving it was really covenant. It was covenant for covenant reasons we left that. We did a transaction in September of last year as you're aware and the sizing of that transaction was constrained by covenants. So look, we clearly had the cash and liquidity to address that. I'm kind of less concerned about it.

Speaker 3

I don't view it going current as a necessarily as a constraining factor as to when we need to address that. I mean it also happens to be our lowest cost of debt right now. So look our plans are to either pay it off or refinance it in a transaction. We do have a number of divested sale processes underway. I mean that could bring in incremental proceeds.

Speaker 3

I think as Frank mentioned in his prepared remarks the AMP sized sale I mean the net proceeds from that already would be earmarked to the most recently issued debt, but other asset sales could be used for others. So again, I think we were comfortable with our liquidity and our ability to handle that maturity, but don't feel compelled to do that before it goes current.

Speaker 10

Got it. And just one last one. I noticed the 8 ks for the retention bonus that you put out at the end of February. What was the reasoning behind those retention bonuses?

Speaker 2

So, we had several members of the team that did exceptional work navigating through the deepest part of the cycle. And at the same time, we wanted to create a strong incentive and recognition retention for those efforts and that's what it reflects.

Operator

Your next question comes from the line of Roger Spitz from Bank of America. Your line is open.

Speaker 8

America. Regarding AMSight, just to see if I understood correctly, you're saying the preliminary steps you're having to take before you start marking this will likely result in both you and CP Chemical working together to sell all of AmSty. Did I hear that correctly or did I misinterpret that?

Speaker 2

No, these steps are prescriptive in their precursory to a joint marketing effort, but it will certainly result in a joint marketing of the asset. Okay. It's just we have to go through these prescriptive steps.

Speaker 8

Got it. But the thinking is, AmSty will be sold, both parties will sell their 50% stakes in AmSty, someone is going to be buying all of AmSty, is that correct?

Speaker 2

Yes. I'm sorry, can you repeat the question? I missed it.

Speaker 8

You are going to be marking all of AmSty. Somebody, a potential buyer will be looking to buy all of AmSty, not just your 50%.

Speaker 2

That is correct.

Speaker 8

Okay. That's it. Thank you very much.

Operator

And we have now concluded our question and answer session. This concludes today's conference call. We thank you for your participation. You You may now

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Trinseo Q1 2024
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