Trinseo Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 7, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Trinseo Second Quarter 2024 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, Vice President 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 its presentation slides at close of market Tuesday, August 6. 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

And I will now hand the call over to Andy Meyers.

Speaker 1

Thank you, Abby, 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 financial 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 transcripts will be archived on the company's Investor Relations website shortly following the call. The replay will be available until August 7, 2025. Now I'd like to turn the call over to Frank Bozich.

Speaker 2

Thanks, Andy, and welcome to our Q2 2024 earnings call. I'd like to start by discussing our Q2 results, which were in line with our expectations. The market conditions that we saw at the end of the first quarter continued through the Q2, which resulted in our highest adjusted EBITDA since the Q2 of 2022, despite $10,000,000 of unfavorable net timing. This was the 2nd straight quarter of sequentially higher profitability. We continue to see positive momentum in our Engineered Materials segment as moderating input costs, normalization of MMA market dynamics and steady demand for our downstream applications led to the segment's highest sales volumes and adjusted EBITDA since the Q2 of 2022.

Speaker 2

We believe this higher level of profitability is sustainable in the current challenging macroeconomic environment due to the significant restructuring and footprint actions that we've taken over the past 2 years. And while free cash flow remained negative in the Q2, we anticipate that it will turn positive in the second half. I'd like to shift gears to talk about sustainability. In July, we issued our 14th Annual Sustainability and Corporate Social Responsibility Report, which shows how our company and employees helped cultivate a circular transformation in 2023. I'm very proud of the exceptional progress we made toward our 2,030 sustainability goals, especially the continued progress on our polycarbonate dissolution facility, breaking ground on our PMMA depolymerization facility, and achieving critical milestones in the implementation of our decarbonization strategy.

Speaker 2

We are committed to continued investment in recycling technologies and sustainable product offerings in order to support a circular economy, while reducing our carbon footprint, creating a sustainable workforce and operating responsibly. We had another record quarter in Q2 for sales of products containing recycled material, so our investments are already paying off and we anticipate more growth in the future. With that in mind, I'd like to provide a brief update on 2 of our major ongoing recycling projects. At the end of the second quarter, we announced the opening of our PMMA depolymerization facility in Ro, Italy. The facility utilizes a novel continuous chemical recycling process that returns industrial and post consumer acrylic waste to its constituent monomer, MMA, while emitting 1 fourth the amount of CO2 as virgin MMA production with yields that exceed industry standards.

Speaker 2

Our technology also allows us to recycle several PMMA solutions that previously cannot be recycled, creating a truly circular process with advantaged economics. The results of our process is high quality recycled MMA monomer with purity levels comparable to virgin MMA. This enables the recycled MMA to be used in higher end applications such as vehicle taillights and caravan windows that require exceptional optical properties. The high purity levels also allow for higher concentrations of recycled content to be used in certain acrylic solutions without sacrificing desired properties of the end product. I'd also like to highlight some of the exciting technological advancements that we've made in our polycarbonate dissolution pilot facility.

Speaker 2

The newly developed technology at the pilot plant allows us to recycle polycarbonate waste containing high levels of residual BPA back into polycarbonate resins that contain levels of BPA that are orders of magnitude below than lower than virgin PC. Additionally, we are able to repair current end of life polycarbonate waste that is degraded over time due to the exposure to natural elements such as sunlight, humidity, and temperature by restoring its molecular weight so that it can be recycled and reused even in most demanding applications. These PC waste streams until now have not been suitable for mechanical recycling due to degradation and can be sourced at advantaged costs. The technological advancements in PC dissolution, along with the beginning of our PMMA depolymerization journey, are testament to the bright minds we have at Trinseo and our examples of how our investment in sustainable solutions continues to spawn industry leading innovations that will help build a more sustainable future and at the same time are economically advantaged. Before I turn the call over to Dave, I'd like to give a brief update on the planned sale of our Americas Styrenics joint venture.

Speaker 2

The procedural steps defined under the exit provision of the joint venture agreement have progressed. Therefore, we have agreed with our partner Chevron Phillips Chemical to pursue a joint sales process, which we expect to kick off this quarter and in the ordinary course should lead to a definitive agreement in the first half of twenty twenty five. Now Dave will discuss our 2nd quarter results.

Speaker 3

Thank you, Frank. 2nd quarter adjusted EBITDA of $67,000,000 was in line with our previous guidance and included $10,000,000 of unfavorable net timing from falling styrene prices. Mix improvement led to a higher year over year adjusted EBITDA despite a 5% decline in volumes. This was driven by volume growth in all of our targeted growth areas including case and battery applications and latex binders, formulated resins for building and construction and consumer electronics applications in engineered materials and automotive compounds in plastic solutions. Substantially all the year over year volume decline was in polystyrene where we shed uneconomic volumes in Asia and Europe to optimize plant operations and working capital.

Speaker 3

Cash used in operations during the quarter was $42,000,000 which resulted in free cash flow of negative $56,000,000 We expect free cash flow to turn positive in the second half from lower styrene prices and from seasonal factors in the 4th quarter. We ended the quarter with $108,000,000 of cash $352,000,000 of total liquidity, including our 2 committed financing facilities. In July, we entered into a new accounts receivable securitization facility that extends the maturity date from 2025 to January 2028. Liquidity preservation will continue to be our top priority for the foreseeable future as we navigate this prolonged industry downturn. Now I'll turn the call back over to Frank.

Speaker 2

Thanks, Dave. Looking ahead to the Q3, we expect market conditions and adjusted EBITDA to be similar to the 2nd quarter. While decreasing styrene margins and an unplanned outage are expected to negatively impact America's styrenics, unfavorable net timing is not expected to repeat at the same magnitude as Q2. Seasonal improvements in our higher margin building and construction and Consumer Electronics applications are expected to continue through the Q3 and more normalized MMA market dynamics should continue to support improved margins in Engineered Materials. As a result, we expect Q3 adjusted EBITDA of $65,000,000 to $75,000,000 While we are not providing a specific range for the 4th quarter, we do expect Q4 profitability to be sequentially lower than Q3 due to normal year end seasonality.

Speaker 2

However, we anticipate free cash flow to increase sequentially from Q3 to Q4 as we typically have a substantial working capital release at year end. We are encouraged by the 2nd consecutive quarter of sequentially higher profitability and expect to extend this similar level of profitability in the Q3 despite persistently weak end market demand and challenging macroeconomic environment. We continue to see the benefit of the cost actions we have taken and are confident that we will emerge from this low demand cycle stronger than we were before. And now we're happy to take your questions.

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Frank Mitsch with Fermium Research LLC. Your line is open.

Speaker 4

Thank you and good morning all. I want to drill down a little bit more into the free cash flow expectations for the balance of the year, given it's been a use of close to $140,000,000 in the first half of the year. I understand that you're expecting styrene monomer prices down. You mentioned seasonal factors and working capital release by year end. Should investors expect that where can we get the free cash flow back to?

Speaker 4

I mean, are you looking for it to get to neutral? And if so, how does that play out? Again, given the fact that we're at a $140,000,000 hold as we enter the second half of the year?

Speaker 3

Yes. Good morning, Frank. Look, I think as we said, we expect it to be positive. I think Q3 will be fairly neutral, kind of flattish free cash flow. And then Q4 will be positive.

Speaker 3

For the year, clearly because of how we started the year because of high styrene prices, I think that puts us in a situation where for the full year, this year, our free cash flow will be negative. I mean looking forward to next year, we have a slide in our presentation where we show our kind of cash outflows for the year and it totals about $350,000,000 So that's the sum of CapEx, interest, restructuring, etcetera. So and that includes $45,000,000 of restructuring spend for this year. So I think the takeaway from that is at this level you need $345,000,000 of EBITDA to be cash flow neutral. So look, we're clearly not in a position today to give guidance for 2025.

Speaker 3

But if I roll this page forward to next year, I think the restructuring costs will be lower. We still have a lot of spend this year for the 2 styrene plants that we closed. Cash interest, I also expect to be lower. We have $1,800,000,000 of floating rate debt. And I think everybody's followed what's going on with rates recently.

Speaker 3

So the current trajectory of the forecasted interest rate cuts, would it lead you to think that's going to be interest rates will be several every four every 100 basis points is $18,000,000 a year of interest for us. So I mean, I think there's 4 cuts baked in the forward curve today that for this year alone. So I think those numbers will be that the interest number will clearly be lower next year. And all of that I think puts us in a position where this year's 345 or 350 of EBITDA cash flow neutral next year should be closer to 300 dollars and 300 dollars as a run rate of EBITDA is not far from where we are right now in Q2, Q3.

Speaker 4

That's very helpful. That's very helpful, David. And if I could just stick with the restructuring spending that you mentioned, there was an expectation that 2024 would see between restructuring benefits and the natgas hedges, etcetera, that we'd see $100,000,000 benefit in 2024 versus 2023. Can you give us a sense as to how that is trending? And is that $100,000,000 still Trinseo's expectations for 2024?

Speaker 3

It is. Yes. The $100,000,000 is absolutely in the numbers for this year. We are very confident that we will fully recognize those cost savings again, which is just some of both the natural gas hedges going away plus the benefits of no longer running 2 styrene plants. So we're very confident that we'll realize that $400,000,000 this year.

Speaker 5

Thank you so much.

Operator

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

Speaker 6

Thank you and good morning, Frank. I thought in your Engineered Materials segment, the commentary on the PMMA volume improvement was pretty encouraging. Can you talk about which end markets are maybe looking a little better for you, which end markets are still a little softer?

Speaker 2

Yes. So, thanks for the question. The I would say automotive has been steady and we saw building and construction applications where we're offering a sort of a unique solution into many building and construction applications to be look, for example, cap stock, those to be actually very strong and steady demand. And so I would say in end markets, it's been steady in PMMA. The thing that has the growth in volume is really Europe recovering, volumes in Europe, it's sort of geographical where European volumes have come back this year much stronger than they were last year.

Speaker 6

Sounds good. And then on the guidance, I guess I was a little surprised the Q3 number does not include, I guess, any sort of big assumptions on that timing. I think contract prices for styrene in the U. S. And Europe are down in the Q3 versus Q2.

Speaker 6

So is there an offsetting factor to those lower styrene prices once again this quarter?

Speaker 2

Well, the in Q3, you have AmSty will be we expect AmSty to be have some headwinds compared to Q2 due to lower styrene prices as well as the unplanned outage they have at one of their plants. And then as usual, you have in some of our end markets a weaker August because of the vacation period in Europe. So that's how you look at Q3.

Speaker 3

I think, Matt, this is Dave. I can add something. Just related to timing specifically, you're right. We did see a big drop in prices at the end of Q2 into Q3, which you would infer from that we'd have negative timing. But we've seen an increase.

Speaker 3

There was an increase in contract prices in the month of August. There's a couple of outages probably short term in duration that I think will probably largely offset that timing. Just one other point that you referenced North America styrene prices. That doesn't have an input that doesn't influence of any significance or net timing. It's really by far it's European prices is the largest and then Asian prices would be the 2nd.

Speaker 3

So as I said earlier, sitting here today, Matt, I don't anticipate timing of any significance in the quarter.

Speaker 6

Great. Thanks for the color.

Operator

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

Speaker 4

Good morning, Frank and Dave.

Speaker 5

You guys talked about how within the MMA business conditions are normalizing. Certainly, on the surface, it seems certain other businesses seem to be quite far away from more normalized levels. So if you wouldn't mind, just could you revisit what your assumption of the normal earnings power of the company is? I mean, you guys obviously did around on an annualized basis $270,000,000 in EBITDA in Q2. And obviously, the EM business popped nicely EBITDA margin wise close to 11%.

Speaker 5

So if you wouldn't mind reminding us where we stand with sort of the state of affairs the way they are in terms of the normal earnings power of the company?

Speaker 2

Yes. I mean, Hassan, it's really difficult to almost impossible to say what to predict what normal looks like right now. So I think we can expect to see improvements going forward from the actions we've taken and we continue to have additional opportunities that we'll pursue. But to predict what a normal market looks like in many of our end segments against the backdrop of all the geopolitical uncertainty and market uncertainty, I think is really difficult. Understood.

Speaker 2

Understood.

Speaker 5

And on a separate note, during the Q1 call, you guys talked about how in China, weakness in the polycarbonate market within epoxies and within nylon, that was impacting phenol and in turn acetone production, which obviously there on forward was limiting MMA production. So where do we stand with regards to that now?

Speaker 2

We see the MMA market is tight in basically all regions. And the factors that we highlighted in the Q1 call still exists. And I would say the other thing that you need to remember is MMA the MMA market almost it varies by region, but it also a significant portion of MMA, almost half of it goes into polymer additives as well as architectural coatings. And you can see that in the architectural coatings market that has come volumes have improved and are coming back. So that's created a tightening effect at the same time the feedstocks availability in Asia are limited.

Speaker 2

So it's a tight market and I don't see absent something dramatic changing, we don't see the current conditions for MMA changing.

Speaker 5

Very helpful. Thank you so much.

Operator

And your next question comes from the line of Laurence Alexander with Jefferies. Your line is open.

Speaker 7

Good morning. This is Dan on for Laurence. With the new PMMA facility in Italy that's now ramping up, do you have a timeline of when that is going to be positively contributing to EBITDA? And kind of what the I know at mid cycle what it could potentially mean to you guys in terms of EBITDA and earnings?

Speaker 2

Yes. We don't have that a forecast for that right now because as a practical matter, this is a demonstration facility for a much bigger investment that we'll have to do in the future and that's front end load engineering analysis at the current time. So I can't really give you an expectation for what the EBITDA contribution or exact timing for when it will occur. But, I can say that we see that as favorable to virgin production from a cost standpoint and with similar quality. So it's a very exciting opportunity for us.

Speaker 2

Okay.

Speaker 7

And then you mentioned, I think you highlighted the battery market as being one that's doing fairly well. I was wondering if your outlook for that market has been altered at all just given a lot of headlines we're reading with electric vehicles or just battery demand in general?

Speaker 3

Yes. So,

Speaker 2

our growth in battery continues into this year and it's significant growth. Now what's driving our growth is the technological advancement. And our technology or our solution goes into binding the anode in an energy battery like NCM, nickel, cobalt, manganese cathode battery that goes into EVs. And our technology allows the producer to have a higher energy density in the battery. So here we're and we have a small percentage of the market, but as our technology is qualified at other producers, we anticipate to see growth no matter even in sort of a flat EV market because we're going to penetrate because of the innovation and the technical advantage of our solution.

Speaker 7

Thank you very much.

Operator

And your final question comes from the line of Michael Leithead with Barclays. Your line is open.

Speaker 3

Great. Thank you. Good morning, guys. First, I just had 2 on cash interest. One, it looks like you decided to pick $15,000,000 of cash interest in your updated forecast for this year.

Speaker 3

I guess, Dave, can you just help us understand the change of thinking there versus last quarter, sort of how you arrived at that $15,000,000 number versus, say a higher or lower amount? And then 2 related to that, what is the incremental cost for you guys on that $15,000,000 interest by deferring it? Sure. Okay. So just for the benefit of that, right.

Speaker 3

So what Mike is referring to is that we do have the pick option, pay in kind option on the term loan that we put in place in September of last year. That term loan carries interest of SOFR plus 8.5 and we have the ability to pick or pay in kind 4.25% of that coupon. So today's SOFR is about 5.25 percent plus the 8.5 percent spread, that's about a 13.75 percent coupon right now. We have the ability to pick or not pay interest and instead capitalize 4.25 percentage points of that, which is about a third of the coupon. And there's a 1% penalty for doing that.

Speaker 3

So it was about for the coupon that was payable in July, we elected that pick option. Again, it's capped at what I just described, Mike. And it was about $11,000,000 the amount of interest that was picked if you will or capitalized. I think the 15 that you're referring to is probably the change in interest from the last time we saw this. The other thing that influence us that number is the forward curve, right?

Speaker 3

So we're in obviously in an environment today where it looks like there's going to be more cuts versus less this year. So to get to your the other question about why did we decide to do that? I mean, as I said in my prepared remarks, Mike, I mean, preserving liquidity in this environment is our absolute top priority. And I mean what's changed from a year ago when we issued this debt is that we're a year farther into this downturn and there's been no recovery, no demand recovery to speak of. So we just think it's prudent to take all possible actions to preserve liquidity.

Speaker 3

We'll obviously revisit the election to pick or pay in cash in the future as we reach future coupon dates. Great. That's helpful. And then for Frank, just with the joint AmSty sale now, you guys have obviously surveyed the market before. By now going with, say, the whole asset for sale going with CPChem for AmSty.

Speaker 3

How do you think that changes the attractiveness of the sale? And maybe how does that kind of influence your confidence about now getting this deal done given kind of your experience here before?

Speaker 6

Yes. I mean,

Speaker 2

we got very clear signals from the participants in our previous process that there was overhang on their interest because to enter into a joint venture. So their strong preference was to own 100% of AmSty. And because it's a great asset, it's performed very consistently. And I think people want to buy control, not into a JV. And so that experience and those market signals we got in the previous process make it clear to us that any the concerns related to this that we were expressed by some of the participants will be minimized.

Speaker 6

Great. Thank you.

Operator

And ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now

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