Q1 2020 Earnings Call
So, you know, I wanted to ask about what your trends of recovery were and asia-pacific. How did your sales go in March? And April? Is it off the region represents a large portion of your latex polystyrene and performance Plastics revenues?
Yeah, so we saw a general recovery beginning in March in asia-pacific and frankly the
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Good morning, ladies and gentlemen, and welcome to the trinseo first quarter 2020 Financial results conference call. We welcome the transient management team Frank bodek president and CEO named Executive Vice President and CFO and Andy Myers 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. It's press release along with this presentation slides at close of market yesterday. These documents are posted on the company's investor relations website and furnished on a form 8-k filed with the Securities and Exchange Commission. If anyone should require operators, it's during the call, please press star then zero on your touchtone phone. I will now hand the call over to Andy Myers Lodge.
Thank you, Jack 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 took us closure rules and cautionary note on forward-looking statements are noted on slide to during this presentation. We may make certain forward-looking statements including issuing guidance faith in our future expectations. 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 not are not limited to factor set forth in our annual report on form 10-K under item 1A risk factors off 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 or investor presentation 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 7th 2021. Now I would like to turn the call over to Frank bowditch.
Things Sandy. I'd like to welcome everyone and I hope all of you on the line are safe and healthy.
Today, I'd like to walk you through the current status of our operations and financial position what we're observing in our markets and what actions were taking to not navigate the near-term situation, but the best position for the eventual economic recovery.
As always our first priority is the safety of our employees to protect our employees during the crisis. We've taken many actions consistent with government and Industry recommendations. I'm very proud that during this. We've continued maintaining our world-class safety and performance.
As we support our employees were also assisting in the health and well-being of many of the communities surrounding our plants and offices.
One office sourced and donated thousands of children surgical masks and hundreds of children's goggles, which were used to protect orphans and children in foster care home office donated hand sanitizer to hundreds of families and cleaners throughout the city are Jean manufacturing site and China sourced and provided purchase. The materials including masks infrared thermometers and personal protective materials to Volunteers in its neighboring communities.
These are just a few of the many stories of Community Support occurring across our sites.
Many of our customers participate in industries that have been deemed essential during this pandemic. We're proud to continue to supply them with products that are intrinsic to their efforts such a polycarbonate or use and protective Shields and latex binders and polystyrene for food packaging.
We're particularly proud to serve our customers involved in the production of medical devices. Especially those used for critical patient care in respiratory therapy.
Taking specific actions to ensure the continued operation of for these customers.
Grateful to do I report to support the medical community and we want to acknowledge and thank all of the healthcare professionals and Manufacturing teams around the world for their dedication.
We have been able to meet all customer demand is all of our plants are currently able to operate and all and our supply chain has continued to function without any significant delays of business. The minimal disruption in our operation is a result of the diligent and dedicated work of our employees who have demonstrated an exemplary ability at problem solving and contingency planning.
This is an example of the vital contribution our employees provide and I want to take this opportunity to thank them for all of their effort to ensure the continued safe operation of our facility.
Turning to work business our financial priority during q1 and for the near-term has been maximizing cash generation and enhancing our already strong balance sheet.
During the first quarter we had approximately Thirty million dollars of project related spending. This was related to our systems and process transition from Dow which is largely now complete as well as our Ford plant turnarounds restructuring and Manufacturing Systems upgrades despite these expenditures $25 million dollars purchases and the q1 timing of our annual variable compensation payment. We ended the first quarter with $440 million dollars of cash and an additional $500 million dollars of liquidity through committed facilities.
in the
A quarter. We've already taken several actions to improve our liquidity position.
First as we previously disclosed we drew one hundred million dollars from our revolver early in the quarter as a precautionary measure second. We plan to reduce full year 20 Capital spending from $100 to eighty to eighty-five million dollars by deferring non-essential maintenance and productivity projects last Thursday. We're undertaking a number of cost actions including a reduction and consultant travel and discretionary spending which are expected to result in $25 of dollars of savings this year. These savings are in addition to the previously committed restructuring Savings of twenty Thirty million dollars per year announced in Lubbock 2019.
In the second quarter, we expect the release of working capital greater than one hundred million dollars from a combination of lower raw material costs and increased ability to manage our payables and a reduction in inventory from optimizing our manufacturing and supply chain networks back by our already strong balance sheet and additional liquidity lovers. I'm very confident in our ability to maintain a very strong cash position during the remainder of the year.
Before and talked about the current market conditions. I'd like to say a few words about the first quarter in terms of demand. January sales volumes were the highest since the first half of 2019 showing a rebound from the second half of last year. We saw a similar Trend in February in North America and Europe, but Asia's load following Chinese New Year from covid-19.
Well, he's you're recovered nicely in March. We started to see a decline in North America and Europe in the second half of March as government-mandated shutdowns increased and consumer concerns covid-19 grew in those regions.
And roll for the first quarter, we estimate that we experienced a pre-tax six million dollar headwind from covid-19 impacts primarily in synthetic rubber. We also had a five million dollar unfavorable impact to the contribution to even. From hamster died due to the significant turnaround. They executed during the first quarter.
Looking at the start of the second quarter the decline in demand that began in late March has accelerated in April particularly in the automotive tire and textile marketing April Automotive production was about 95% lower in both Western Europe and North America due to the large number of plant closings this steep decline in Ottawa demand impacts, both our performance Plastics and synthetic rubber seconds, and we expect second quarter sales to those applications to be down about 50% versus prior year. However, we expect Auto production will return as inventories continue to be drawn down in many regions. For example, we estimate Thursday America finished vehicle inventory at the end of April was about 25% lower than prior year.
as a reminder
Automotive make up approximately 40% of performance Plastics Revenue.
We're also seeing demand declines for latex binders and graphical paper and carpet applications in the second quarter. However, there has been strength from latex binders and bring in food packaging applications polycarbonate for use in isolation sheets and face Shields and Engineering materials used in medical device applications such as respirators wage.
We expect these Trends to continue through the second quarter.
Earlier, I mentioned the near-term cash and liquidity actions. We're taking to mitigate the risk caused by the pandemic. However, we're taking additional steps to improve the long-term position of transient and to enable our future success, especially when the economic recovery begins first, we have largely completed our multi-year project to achieve sister of independence from the Dow Chemical Company.
This will enable significant cost savings and cash flow opportunities in the future. Now that we have control over our systems and the related processes off second sustainability initiatives are part of our long-term strategy to increase demand for products while operating in a socially and environmentally responsible manner. We remain extremely focused on this during the first first quarter. We launched our new pulse Eco series recycled containing recycled content container for the automotive Market these grades a PC ABS contained up to 50% recycled content and are specifically tailored for automotive interior applications off. The whole series was targeted by Daimler as an example of the materials is looking to utilize to obtain it's to attain its 20-39 goal of a car birth.
In March, we announced the new latex binder for interior paints which offers exceptional performance balanced with reduced environmental impact. This is part of our coding adhesive sealant and elastomers our Pace applications offerings and it provides exceptional scrub resistance touch up and hiding performance with low to zero emissions of the
Our annual sustainability report will be published and available this summer. We'll have further information on our progress in this area and I look forward to sharing some more exciting updates in the future.
Lastly we continue to take actions to improve our our portfolio. We will continue to invest in applications that display higher growth and less sick locality purchased case and latex binders s-sbr and synthetic Rubber and engineered materials in performance Plastics. We are already observing some positive results from increased investor focus in these areas such as first quarter case volumes grew 11% versus the prior-year
As we moved toward the applications with higher margins and less sick with reality. We're taking steps to improve the cost position of the more commoditized parts of our portfolio to that end. We have initiated a consultation process with the Economic Council and works Council of transient regarding the disposition of our styrene monomer assets and Berlin Germany and the poly butadiene rubber assets and scope of Germany. The combined adjusted ebitda of these assets and 2019 with -18 million.
We're also keeping a close eye on Trends and Market actions that are emerging because of the pandemic.
Future Trends could include increased use increases in food packaging applications greater demand for consumer electronics at home and additional needs for plastics for isolation sheeting and medical applications.
To ensure that we identify new developments and Trends we've increased the frequency of our executive team reviews to weekly additionally during the quarter our board of directors. God created a covid-19 response committee which meets bi-weekly to allow the board and Company management to respond quickly to covid-19 related Financial operations and health and safety issues.
Before going into Q&A. I'd like to take a few minutes to discuss the recent decline in oil prices and the resulting decline of our raw material prices and what that means for trinseo.
First four are derivative products the large portion of these have contractual prices pricing where the cost of raw materials is passed through to our customers either formulated, Leesburg.
Or through contractual pricing adjustments for those not under contracts. The pricing is typically adjusted monthly based on raw material cost to changes and market supply Dynamic a supply-demand Dynamics in these cases changes in raw material prices. Do not meaningfully impact our margins in some cases where we have differentiated products advantage and more value-based pricing. We have more of an ability to expand margins in a decreasing raw material environment, but for the most part, we generally do not experience a significant margin change as raw material prices change, except due to Temporary net raw material timing impacts.
The significant drop in oil prices and fuel demand has resulted in a dramatic and favorable change in the cost position of Napa based cracking in Europe off. This greatly reduces the cost of our raw materials such as butadiene ethylene and Benzene and could create new opportunities for us. For example lower wage in Europe could create new opportunities for the sales synthetic rubber to other regions regarding Skyrim production these lower Benzene and ethylene costs have enabled our facilities in Europe to become more cost-competitive. Therefore we have seen fewer styrene Imports into Europe and higher relative margins in comparison to the beginning of the year off.
in fact
Main margins are coming in higher than the first quarter average in this could continue based on current the current outlook for oil prices.
In addition, we're seeing lower-than-average utilization rates and implants in Europe do to lower demand for propylene oxide.
A continued low fuel demand environment will make our Network more cost competitive as demand returns.
In closing the financial Outlook beyond the second quarter is very difficult to estimate and will largely depend on the speed and scope of the economic recovery of various Geographic wage and then markets as a result. We have suspended our full-year guidance as well as additional share purchases while we remain hopeful that the second half of the year will provide full recovery and a significant increase in demand. We are preparing for various economic scenarios.
Due to the strength of our balance sheet are low Capital intensity the capabilities of our employees and the Strategic actions. We continue to take I believe we will emerge from the challenging time. Well positioned to grow the business and preserve our dividend with that Jack you may now open the phone line for questions certainly at this time. If you would like to ask a question, please press * 1 Frank Mitch with fermium research your line is open.
Good morning, and glad to hear you. You folks are our founding. Well a Frank. I appreciate the commentary with respect to lower raw materials, but it was curious. If you might get the parts out, you know what the purchasing patterns of your customers would be in in response to that. I mean typically we do see some drop off as as you know, Downstream customers anticipate lower pricing. And so, you know, you see an inventory stock now, I understand. These are unusual times. I'm wondering if you if you have any color on on how it might be impacting the the purchasing patterns of your customers off. Yeah first, let me point out that one of the impacts that you related to what you described was that we actually did see significantly lower wage in demand in q1 as people distract anticipating lower lower cost. And this now we're seeing that demand recovery in Georgia.
In Q2 and in April, very strong recovery. So that's something relates to the dynamic that you're you're describing. But in general what I would point out is that you know, I can take you through a little bit of a dynamic what we're seeing in April for demand overall. We saw demand decrease consistent with what we described to about 20% overall for the whole portfolio, but that was with increases in polystyrene applications and also bought it in some of our latex binders applications that were actually growing a versus prior year, but generally the overall percentage of decline that we've seen his been consistent with her guidance.
Gotcha, understood and it's helpful that you're seeing polystyrene come back and and I do appreciate some of the color. I want a question on a synthetic rubber. Obviously you you mentioned that you think at least in the slides that it's going to the volumes are down 50% in the second quarter, obviously so much of that is auto-related. Can you parse out the your expectations down on a month-by-month basis? Because you know, obviously we're we're we're we're hearing of all auto production sites coming back up this month and you know, so so if it's now $55 would you say that it was down greater than that in April and your expectations are for cover e or how are you looking at the pace of recovery from your auto related businesses so tired and was down 66% year-over-year in April, and we're actually seeing an improved order flow for May and so wage.
Anticipate that we end up at that 50% through that, you know recovery of gradual recovery and reopening of those Tire plants, but I may is is certainly significantly better than than April was and we're already seeing bookings for for June. So I bought it in general. We're seeing a good order flow to start May on a reduction from April of sixty 1%
Terrific. Thanks so much.
David begleiter with Deutsche Bank your line is open.
Hi, this is Catherine Griffin. I'm for David. Thanks for taking the question. Could you talk about how you expect decremental margins to look in cute dog, and maybe on a full year basis any color there would be helpful. Thank you.
So actually we're seeing margins prove, you know, somewhat across the portfolio as an outcome of the low feedstock price is so net of timing impacts and they can maybe comment on timing tax that we would see you know the name.
You know, we're seeing an improvement based on the the reduced feedstocks. So in and what I would also point out specifically to styrene monomer children's is that we're seeing styrene monomer margins in Q2 at the highest level since we saw in the first half of last year.
Catherine this is Dave. I think the other thing I point out in Frank mentioned is and is prepared remarks is you know, a lot of the derivatives businesses operate with password agreement. So for example, synthetic rubber substantially all of our sales eighty-five to ninety percent of the sales in that business are sold with contractual pass-throughs of feedstock prices and we make a $6 margin top of that, you know, depending on the grade latex binders in in Europe and North America works the same way. So a lot of the business by the derivatives business has you know, kind of built-in price per pound if you will margin now as a percentage of Revenue that would go up obviously in a declining environment. So I think you have to keep that in mind. The other thing is Frank did highlight with timing, you know, we've seen a substantial drop in feed stock prices that really began in the end of March and continued in the second quarter. And yep.
Think are you know as we stand here today?
Our best view of net timing impact for the corridor Q2 is -40 to -50 million dollars.
No, that's the p&l impact. Obviously, you know the counter to that is cash flow and declining environment will have a big release of working capital as we highlighted in our slides over a hundred million dollars in a second quarter.
Okay. Thank you.
Bob court with Goldman Sachs your line is open.
Good morning. This is Don Campbell on for Bob. And I appreciate the the kind of analysis he put in there on the cost curve when we think about the Am side business which was represented a pretty significant amount of your ebitda in 2019. It looks like on this cluster rightfully, it seems like the the cost advantage that you were saying and I'm not a business has has kind of gone away or lost a lot of that feedstock Advantage. I'm following up the client oil prices. How does that impact in terms of March along with your competitive positioning within that business?
So there's two factors that that play out for him one is that North American Life plans are seeing the same reduction that European implants are having as Automotive demand and propylene oxide us demand goes down. Those are scaled back and North American POS m a plant's represent about 20% of North Americans capacity for styrene monomer. So when in general we see that versus q1, we're going to see an improved contribution from going through the rest of the year because off
Little largely not that much impact from their unit margin them able to place their demand and then they've gotten through the substantial turnaround that they had a negative Headway. So we see improvement from the contribution of them stayed through the remainder of the year.
Yeah, but I just to see if I'll just add another point there. You know. One thing I think you need to consider also is the you know, the integrated nature of of Americas styrenics.
You know the extent to which their long styrene if you will in other words starving that's not used by themselves in the room polystyrene production is much less than ours timing length. If you will, you know hours during our we you know, we produce 700 Katie's of styrene in in Europe and you know, we're exposed to that styrene margin but amps dies, you know the amount that they're selling into the merchant Market is substantially smaller than that. It's probably a month or two or three hundred Katie's.
I don't think it's on that point. What do you talk a little bit about kind of what prevents Imports into the in terms of polystyrene to know the have been fairly long time. So we'd love to hear it tonight. Yes.
It's really polystyrene is a regional market and you know, we haven't seen ever significant transportation of polystyrene around the world and computers that do that are reluctant because the, you know historical price volatility. So it's it's really a regional market.
Thank you.
Vincent Andrews with Morgan Stanley your line is open.
Hi, good morning. The one I just following up on on the question on the cost curve. Just thought about your European capacity. And how much of that is contract versus spot or perhaps Thursday. So on the ministry perspective and then following up on that just given the improved economics for or european capacity any any rethinking of the bulb and whether that uh should be shut down or whether you could take advantage of the improved economics. So, you know, there's a couple of questions. They're the the first point I would make is that we're a net buyer of styrene monomer in Europe. So, you know, we consume almost every generally when we do sell in the merch Market, it's it's a short-term basis or very opportunistic is the first point as it relates to to Bolen.
The you know our decision to engage The Works console in the consultation process was really more driven by the reliability of that asset due to the inconsistency of some of the Upstream supplies that we've gotten over the years and as an example of the past two years memory their plant has operated at only about sixty 66% asset utilization. So it's less Bolen is less about the Palm Beach. Cost of relative beeps. Cost then it is a reliability and a conversion cost issue. So we're Our intention is to continue through that consultation process. And once that decision we get advice from The Works Council we can make a decision
And then just to follow up on that I guess in terms of potential costs. If you were to close the plant down anyway to kind of provide some color their organs size that as to what the actual cause, I believe he already took an impairment charge, but just actual cash flows that would result from at
Yeah, as I as I stated in the script, you know between that asset and the you know, the public views down and rubber plant those had an impact on ebitda 2019 of 18 million dollars that give you a magnet to Angel. Yeah, I think it's it's a little bit early for us to comment on that. We're still going through the consultation process with the works Council obviously and that will heavily influence. It's what I want to I don't want to jump the gun there, but the other thing I would say things important for four people on the call is related to where liquidity wage, you know, regardless of outcome. We don't see any cash flows of of materiality going out the door related to that project in in 2020.
Very helpful. Thank you.
Asana met with Olympic Global your line is open morning, Frank and Dave.
I got you know a question on the near and medium-term supply-demand side of things and styrene, you know obviously demand is is highly unpredictable right now so completely cognizant of that but on the supply side, you know with some of the changes in sort of Rose we've seen, you know cost curve moves and they're like, but on the other side, you know, a lot of companies sort of cutting their capex particularly the growth capex, you know, curtailing projects delaying projects. I mean, you know, what's your latest and greatest view of you know, where we are near-term wise in styrene sort of utilization.
Station rates, you know Supply demand fundamentals sort of a normalisation in the global GDP picture.
Yes, so we think Global utilization has decreased in this environment to the low 80% range, but there's some dynamics that are playing themselves that are leading to improved margins particularly in Europe. And I mentioned the first one is is demand into the auto applications. So show me plants in Europe or 40% of that supply and then the second factor is this lower, you know, the lower feedstock place and that has waged created a barrier to import into Europe. So we see you at least for the near term that Europe is going to be somewhat advantaged in margins expect but I think the the thing that we're watching intensely is fuel demand and what that means relative to Europe cost.
Structure for the critical feedstocks that go into styrene relative to the rest of the world. And if as long as we have both fuel demand off normally with Europe already being long before the crisis where they were exporting 33% of their gas production and NASA going into gasoline off and then the other Factor big factor being aviation fuel as those demands are low the only outlet for that NAFTA that's coming out of European refineries is into petrochemicals and that will create a very very low cost environment particularly in in Europe off the other region. So we see Dynamics in Europe being helped by that low fuel demand more so than even low oil price the other thing that dog
You know in the last piece to answer your question about there are delays now in a you know, delays being announced in project that we're plan for Europe or Asia. So we see that those funding, you know, the industry fundamentals will not be as negative as we had previously thought before the crisis on destroyed very helpful Frank and as a follow-up, I know it's a much smaller party or overall business office, but you know on the
One of your one of your sort of one of the European companies, you know larger ones. That's that's you know, a significant player within within the pod bay business, you know reported ebitda margins Rising by over three hundred basis points sequentially in q1. So again, you know, I understand Q2 is is kind of a sort of odd quarter, you know with the lock down in the like but my question is that what we saw, you know, in terms of the results of this company in q1, is that a start of a wage a trend are you seeing some sort of a recovery recovery barring obviously, you know, this this this sort of demand, you know, tempted demand environment, you know, if we get through it is this is this the start of the new trend and if it is, I mean, I know you had shelved your plans about potentially selling your body Garden, Atlanta, Georgia.
Does that change anything over there?
So the simple answer is no we