Q2 2020 Trinseo SA Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the trend yellow second quarter 2020 financial results Conference call.
We welcome the trends young management team, Frank both Itch, President and CEO, David Stacy Executive Vice President and CEO, Andy Myers director of Investor Relations.
Today's conference will include brief remarks by the management team.
By a question and answer session.
The company distributed its press release, along with its present presentation slides I close of market yesterday.
These documents are posted on the company's Investor Relations website and furnished on form 8-K filed with Securities and Exchange Commission.
If anyone should require operator assistance during the call. Please press Star then zero on your telephone.
Please go ahead.
Thank you Amy and good morning, everyone.
This time all participants are in listen only mode. After a 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 two.
During this presentation, we may make certain forward looking statements, including issuing guidance and describing our future expectations.
We must caution you that actual results could differ materially from what has discussed described or implied in these statements.
Factors that could cause actual results to differ include but are not limited to factors set forth in our annual report on form 10-K under item one a risk factors.
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. This provided at our earnings release and in the appendix of our 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.
A replay will be available until July 30, 2021.
Now I would like to turn the call over to Frank postage.
Thanks, Andy and welcome to Trinseos second quarter earnings call.
I'd like to start by discussing our 2020 sustainability in corporate responsibility report, which we published earlier this month.
Since our founding a decade ago trinseos maintain sustainability as a core value.
After joining trinseos last year I've come to understand how deeply this is embedded within the company and how truly passionate employees are about improving our world.
Addressing and delivering sustainable products that are intrinsic to daily life.
Our reported lifts many accomplishments, which we are proud of covering a broad range of areas across the company.
These include safety for which we achieved an injury rate of only 0.11 per 200000 hours worked in 2019.
This puts us in the upper echelon of the chemical industry.
It includes environmental protection, where we've reduced our scope one greenhouse gas emissions by 37%.
Since 2011.
That covers product development, where we continue to focus on many innovations, including a greater proportion of post consumer recycled content in the products we sell.
As well as investments in polystyrene circularity.
It's because of results such as sees that Newsweek recognized us in its 2020 list of America's most responsible companies and we have achieved favorable ratings for medical by others and CDP, which was formerly the carbon disclosure project.
The anniversary as a company and would like to thank once again, our dedicated employees, who helped us achieve this moment this milestone.
We also believed our anniversary boasts an appropriate time to look 10 years ahead and embarked on an ambitious measurable and achievable long term sustainable.
Below the journey.
The roadmap for this journey as outlined in our 2030 sustainability goals, which we announced earlier this month.
This ambitious plan includes 15 long term goals under five main categories. The target climate change sustainable products supplier responsibility responsible operations and sustainable workforce.
These goals were created in part from a critical assessment of the company's capabilities as well as valuable feedback from customers and suppliers.
We remain focused not only on controlling how we are impacting our environment analysis and society, but also how we can best position our business for success in a sustainable economy.
That is what makes initiatives such as partnerships to advance the quality and use of polystyrene recycling so important.
So I want to acknowledge our employees for all their hard work.
And I look forward to next year, when we can discuss our progress against achieving these goals.
Next I want to provide a brief update on our business operations and well being of our employees as it relates to coated 19.
Im pleased to save that our business operations, including production in logistics experienced only minimal interruption by Kobin 19 during the second quarter.
And we were able to meet all demand of our customers.
We continue to prioritize safety of our employees by supporting working from home, where possible increase cleaning at our facilities and limiting travel I.
Im very proud of the leadership and agility that our employees have demonstrated throughout this pandemic.
Which resulted in the safety and health of our team as well as the uninterrupted service to our customers.
Before I discuss the second quarter results I'd like to provide you with an update on some steps, we're taking to improve our asset footprint.
Please recall that we have initiated consultation process with the economic Council and works Council of Transco Deutschland regarding the disposition of our styrene monomer assets in Poland, Germany.
And the poly Buda dying rubber assets and scope of Germany.
After a thorough analysis, we have decided to move forward with the closure of the poly Buda dining assets and Gopal, which should be completed by the end of the year.
We're still evaluating the disposition of the styrene monomer assets and hope to provide an update over the next few months.
Turning to the business results for the second quarter Im very pleased with the second quarter results.
In an environment of historically low demand across several of our end markets. We took aggressive action on cost and on working capital to significantly improve our position coming out of the pandemic.
We estimate that the financial impact of the pandemic on the second quarter to be just over $100 million, which includes both loss demand as well as unfavorable timing from the steep drop in raw material prices.
Therefore, the very strong free cash flow generation, we had in Q2 is something I'm very pleased with.
The automotive industry was particularly affected as we observed about 80% lower year over year demand and from North American and European customers in April and May.
However, we saw significant improvement in June and that has accelerated in July.
Recall that our automotive sales are approximately 45% each in North America in Europe, and 10% to Asia.
Tire demand followed a similar trajectory through the quarter with low points in April followed by improvement across the rest of the quarter.
And a strong follow through into July.
In addition, slowdowns and demand for graphic peg graphical paper and textile applications led to lower volumes in our latex binders segment, but this was partially offset in the segment by the resiliency in demand in our paperboard packaging and case applications on it.
Year to date basis case volumes were 3% higher than the same period in the prior year.
I also want to mention that sales to engineered materials applications within our performance plastics segment decreased only 12% on a year to date basis in comparison to 22% for the overall segment.
Within engineered materials, we provide an offering of sustainable solutions, including various products with significant post consumer recycled content.
And this relatively better performance reinforces our commitment to continue investing in these solutions.
Polystyrene saw strong volumes during the quarter.
From both increased packaging demand in Europe, as well as strong demand for appliances in Asia.
And our feedstock segment continues to benefit from expanded styrene margins caused by lower raw material prices in Europe.
European styrene costs remain more competitive.
Than in prior periods as a result of low cost Napa due to low fuel demand and reduce Pos them operating rates.
Despite the historically low levels of demand during the quarter, we generated $82 million of cash from operations, which yielded free cash flow of $58 million, including a decrease of $131 million across accounts receivables inventory and occurs.
Once payable from declining raw material prices and inventory management initiatives.
Our balance sheet continues to be a source of strength as we ended the second quarter with $582 million of cash.
And $371 million up availability under committed lines, resulting in total available liquidity of $953 million.
In addition to working capital management. We have also we're also taking steps to reduce our cost base.
Overall for the year, we expect savings of approximately $30 million from these actions.
Portion of this is temporary related to reductions and travel and other discretionary spending.
However, we expect the structural cost savings will have a 25 million dollar full year impact going forward.
Our ample liquidity position.
Coupled with our view that the market bottom for demand for many of our end markets was in April led to a decision to repay the full $100 million in July from the revolver draw that we made at the beginning of the second quarter.
We will continue to manage cash through cost control working capital initiatives and strategic capital spending.
Before I discuss the outlook for the second half the year I'd like to give you some perspective on the first half performance.
The adjusted EBITDA in the first half of the year was $48 million.
Including an estimated $65 million to $70 million of lost earnings from coded 19, mainly from the lower volume in the second quarter.
This combined with the $58 million of negative net timing from a steep decline in raw material prices created a uniquely adverse environment for earnings in the first half of the year.
Excluding these impacts you can see the first half 2020 performance was similar to last year's EBITDA run rate.
It's impossible to say how long the business will be impacted by coded 19.
What we view April as the trough and we see positive volume recovery through the quarter, which continued into July and we look forward to improve results in the third quarter.
We are seeing sequentially.
Sequential demand improvement in automotive and tire applications.
This is especially true in North America, automotive market, where sales far outpaced production in the second quarter, which resulted in lower than normal inventory levels for the region.
Especially for trucks and that Cvs.
Overall, while we expect the third quarter sales volumes to be sequentially higher we expect them to be lower than prior year, particularly to automotive tire textile and graphical paper applications.
The same applications that experienced the largest demand impacts in the second quarter.
We will continue to be highly focused on cash generation and liquidity.
Many of our larger turnarounds and special capital projects such as the dollars services transition were completed in the first half of the year.
Which will result in lower project related spending in the second half of the year.
July styrene margins in Europe continued to leverage low benzene from abundant NAFTA.
And we expect the day that dynamic to continue as long as fuel demand is low and Pos Sem rates are reduced. In addition, we expect to favorable net timing impact in the third quarter of about $10 million.
Given the increase overall demand recovers.
While it's difficult to predict the rate of economic recovery. It's important to note that we've taken actions to reduce operating expenses and we will continue to be highly focused on maximizing cash as of rate of recovery remains unknown.
We will also continued to prioritize investments and our growth areas case engineered materials.
SBR and sustainable solutions across the portfolio.
This will ensure that we are well positioned to accelerate profitability and cash generation when the recovery occurs.
Thank you and you may now open the lines for questions.
Ladies and gentlemen at this time, if he would like to ask a question. Please go ahead. Please press Star then one on your telephone keypad.
Please limit your question to one question and one follow up to allow other participants time.
Your first question comes from the line of Frank minutes with premium refunds.
Thanks, So much good morning, and happy 10th anniversary, sorry that I.
By then.
No I think those are the appropriate kits.
Thanks Frank.
I appreciate that April was the low point.
In the quarter and things have been getting sequentially better I was wondering if the.
The volume declines.
That you saw during the second quarter and I understand Threeq, you, it's going to be.
Up sequentially, but down year over year, what you saw in July as well and maybe quantify the pace.
Of recovery off of that April bottom.
Yes so.
Overall for the for the busy.
20% reduction.
Overall in April.
Proved to 17% reduction and then in June we were only 6% open.
For all volume reduction.
Versus prior year, so for coverage at 14%.
Now that Youve whitson.
On a volume basis, we have very very large volumes that go into polystyrene.
Hiring that were pretty resilient during the quarter. So if you dig.
That.
It's in automotive in.
Q2, we were 65% down versus prior year.
Your volume.
And in April and May it was actually 75% down but improved in June to 45% and we see that momentum continuing into July and the preorders we have for August.
And again, it's important to recognize that our regional mix for the automotive related sales is about 45% for both North America, and and EMEA and only 10% in Asia.
In synthetic rubber.
Which is 90% goes into tire applications.
Q2 overall, we were down.
55% and the progression was in automotive and but.
We'll be about 20% down versus prior year and again, that's proving itself out in the order pattern and again.
Continuing into.
Steady and we're seeing gradual the ones that were steady remained steady so polystyrene paperboard case applications remains steady and we're seeing gradual.
Aggressive improvements in the other submarkets like textile.
And graphical paper.
Got you. That's that's very helpful. Frank and you announced you took the decision the shutdown the scope how assets by the end of the year. What is your projected savings in 2021 with that action.
So the.
Overall savings from the entire program for bolt that was under evaluation for both Olin and should go Paul was $18 million.
Now the majority of that is related to Boland, but.
So the impact for.
For the closure the EBITDA impact from the closure in Austral, Paul will be smaller percentage of that $18 million, but again, it's going to release working capital as well as we'll have capital avoidance going forward in the future. So it's it's absolutely the right.
Decision will be positive in all fronts.
So there is no.
What we're really done as our mothballing the.
Asset so there's no closure costs of nodes severance of any signals.
With that PVR closure.
Gotcha. Thanks, Thanks, so much.
Your next.
Question for comes from the room David.
Yes, I agree that with Deutsche Bank. Your line is open.
Good morning, Copenhagen question.
If you could talk about.
How you see the net hi Nang.
The 19 related David.
Well in pop.
That you mentioned on slide.
Talk about.
And Bob Thanks, Thank you Bob that them at a margin.
Okay.
Our plan just given what you've thought about maybe volume button, a little bit better.
Share at high Catherine I'll take a shot at that for net timing that's obviously.
Entirely continued on what happens the feedstock prices.
So we had a big negative because of that had a large drop and really across the whole.
All of our relevant feedstocks in the first half what we said what Frank said in his prepared remarks, as we expected modest recovery and feedstock prices in Q3.
Which would result in a plus 10.
The third quarter.
Fourth quarter honestly, it's hard to predict that at this early stage.
Howard.
Our working assumption there what we built into our modeling for the second half of the year is really.
The only that just a modest recovery and feedstock prices.
So I would say plus 10 in Q3 Q4 really too early to say.
In terms of decremental margin or incremental margins in this case.
Catherine I think I think the best way to answer that is.
And this is a disclosure we have in our 10-K.
Our raw materials are about 70% of our revenue so wrong. So.
I think if you looked at that now assuming fixed cost is fully absorbed.
Yes variable margin if you will that's across the portfolio.
So I mean, you know from falling as for a while it obviously certain businesses have higher margins than others.
You can kind of deviate from that 30 for 30% average.
By business and I think we gave you the assumptions or Frank just outlined that volume assumptions for the back half of the year I think the critical ones our automotive entire.
Which we expect.
To improve to and 20% year.
Year over year.
Volume decrease in that third quarter. So I think that kind of gives you all the math that that you can work through.
To figure out the.
The.
Margin impacts.
Thank you very much.
Your next question today line of Laurence Alexander from Jefferies. Please.
Please proceed with your question.
Hi, This is Adam view this on for Laurence Alexander today.
Through it sounds like end market demand bottomed out in April.
Wondering however are there any end markets that stand out as having lost that positive momentum carried out there.
As the simple answer is no.
But I would say that.
What we did the.
You saw it.
Very significant are.
Irene.
Really.
Efficacy.
That I think Theres, an increased focus on that in during this.
Second quarter and because of the cobot crisis. So we saw an improvement in demand applications for polystyrene.
And most importantly, we think that that.
Especially for.
To realize that have higher recycled content.
Yes, so again the Simplant this or is there wasn't a significant part of our portfolios that bucked the trend of improvement during the quarter.
Okay. Thanks, that's up that's very helpful and then.
My last question, just you said that auto volumes I think I expect to be down 20% in Q3.
In performance plastics.
I'm trying to create a bridge to Q. We just wondering if you can help me think about what percent auto is of total sales per day.
Year over year are.
Yeah.
Yes year over year or that was a 20% we anticipate a 20% reduction over prior year third quarter into this year and in performance plastics automotive related applications is 40% of this segment volume.
Okay. Thank you very much.
Your next question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.
Wanting thinking Dave.
On.
With regard to well.
Quick question on the styling side, if I'd like to me at Dupont.
One is in terms of sort of the near term supply side of things you know what do you guys seeing are you seeing the base of supply additions that we were expecting correlate late last year early this year, it's sort of continuing.
You know as forecasted or are you seeing certain sort of push outs.
And then sort of the second part is what do you guys seeing in dozens or styling inventories, particularly in China.
So.
Yes, Doug of maybe I'll take the first question then I'll give more of a qualitative answer and Dave can take the second and give you some data on the specific projects that we see being delayed.
But.
The projects that were anticipated to be brought on stream in 2020, we see did comment come on stream and it was.
Projects coming in the 2020 to 2023 timeframe that have been delayed.
Sapacitabine additions for.
Anticipated them.
As it relates to the inventory now.
I would like to make one of the dream it dramatically reduce.
Just operating rates.
And.
You know and this is what we've talked about in previous.
Yes calls that the producers now are managing the supply demand balance to keep adding net cash neutral position.
So thats why we anticipate in this lower demand environment they'll continue to operate as it relates to the inventories that.
Inventories in China, right now are about 200, K teas, and they've been at that level that you know really really since the first quarter when code and really start to impact Asia.
That compares to a long term average of about 100 cases.
With that where we see in China.
Very helpful very helpful.
As a follow up on the body carbonate side of things.
Busy we saw some resilience in the marginal the door locking in all in in the breadth Tunius you guys talked about.
Maybe a tapering off of type margins. So what are you guys seem a little bit there what did you see in Q2, what should we expect in Q3, and then where do you guys stand with regards to the thought process around the state of that business.
So.
Yes, we did see of progression of an improvement in Q2 of margins that go into polycarbonate and the biggest driver was reduced cost of benzene.
Okay feedstock prices and you know and we saw resilient demand because of polycarbonate application into sheeting applications that would go into self isolation cheating or barrier sheeting.
Now we are as benzene prices are moving up.
We see that that will put us some squeezed on the margins, but are still be better in Q3 than it was in prior year.
But it won't be at Q2 levels as benzene prices rise.
As it relates to the.
Sale of that business, we're not actively looking at we announced last year, our project to evaluate those strategic positioning of the site.
And.
After evaluating our options, we restructured and renegotiated certain contracts that put us in a sustainable position.
We believed with that business with the sites and that asset and so we're not pursuing actively any process to sell that business just to be clear.
Very helpful from that thank you.
Your next question comes from the line with Mike with macro will conclude with your question.
Great. Thanks, guys good morning.
First question on latex it looks like the volume comp you're guiding do in third quarter down more than it wasn't second quarter. So so can you talk about what's driving that.
Yes, Hi, Mike I can talk about that I think there's some seasonality in there.
And.
And.
I guess in terms of.
In terms of where there's a question earlier about end markets certain end markets recovering faster than others, I I would point out.
To that are slower tumor slow to recover our.
Clearly coated paper a continuation of the secular dynamically seen there and also textile the carpet market.
Which for US is largely in the us that that's been slow slower relatively slower to recover I would say.
Got it that's there and then a question on the cash bridge as we look into next year I think the slide you provided with the breakdown by line item is helpful. In terms of free cash flow assumptions. If we think about next year end, who knows where the macro ends up but the dow transition items and related.
Spends as well as some of the turnaround restructuring costs, you just give us a sense of how much that will come down as we head into next year.
Yeah, Yeah, well, Mike and it's a good question. We brought this up earlier this year, we talked about the full year.
Cash cash assumptions and and as we said we did have some significant project.
Restructuring and turnaround cash outlays in the first half of the year.
Largely going to go away in the second half of this year and we outlined on slide 14, if we look in fact, our our cash outlays for those items in the second half of the year.
We'll be $25 million to $30 million lower than they were in the first half of the year and moving into 2021, though to be lower still.
The Dow transmission project as Frank mentioned in his prepared remarks is over.
We'll have some residual.
Going to small cash outflows in the back half of this year as that.
Just a clean that up so we don't expect any expense our cash related to that.
In 2021 turnaround spend was about $30 million. This year again heavy in the first half of this first half of the year next year, we expect that to the about 15 for the full year.
So thats going to go down.
The last item one of the other projects that we have is upgrading the control room software across all of our plan that's a multiyear project.
The spend for that next year will probably be between 15 and $20 million.
So I don't think we're at a point yet Mike were little early to give capex guidance for the year, but I think.
Two of the big projects.
Yes that that which of the Dow transmission projects in that control room.
Upgrade which for the full year 2020 work, let's call it $35 million.
Next year will be a total of about about $15 million I think.
The last point on that topic I'd, just like to make this to reiterate something we said I think last quarter.
Is the EBITDA cash breakeven as the company.
You know at what we think is a kind of a sustainable level of.
No interest taxes and Capex for the company.
Our EBITDA cash breakeven level for the company's about $160 million.
Or if you want to include the dividend its $220 million.
So I think thats an important.
Factors to.
Deepen for context for some of these cash items.
Great. Thank you so much.
Okay.
Your next question comes from the line Eric Keytruda with Citi. Please proceed with your question.
Hey, good morning, Frank.
Right.
I wanted to ask a bigger picture question on.
Recycled content for your engineered materials applications, and polystyrene and approximately 30% of your spend by 2025 will be aimed at circular economy solutions. So how are you seeing the trajectory.
What percentage of sales and profit.
Reviewed in your your performance going forward.
Yes, so thanks for asking the question.
What I would let me start by talking about.
The value increased value that.
Shins worse, what we're seeing from that area at a minimum we're seeing a two X margin multiple on sustainable solutions.
Versus typical petrochemical products and it goes up depending on the application now.
Again, I can't really get specific into each of the markets, but I would say from a from a profitability standpoint at this point in time, we see tremendous demand that not or probably even improved through the crisis.
And and base.
And basically.
Sort of an unlimited demand against.
Limited supply capability and I would.
Put out there I think as it relates to our Chemistries. We believe we're in a leadership position.
So.
Seeing and each of the markets I would say the the key markets that are.
More robust or wherever we see sort of an insatiable demand for these types of solutions are the consumer electronics side.
We also see that in.
And one of the I want to.
During the second on this in.
You'll note probably that the European Union has put forward a plan to tax Virgin plastics at a rate of $800.
Slurs per ton beginning next year.
So we've actually booked our first orders now for a post consumer waste recycle containing polystyrene that will go into specific applications in that market and theres, a very very strong response from our customers now we see that bye.
The value, we can create by helping our customers in the market avoid that 800 dollar a ton tax penalty is tremendous so thats, where this in the investments we've made in a step polystyrene circularity and the joint venture that we have in north.
America or what Americas Styrenics is doing with Agilux is so important so I'm sorry for the longest answer but I hope you can tell we're excited about it we think we're in a leadership position in many of our markets are showing that this is the place to investor dollars.
Helpful Color secondly, how much did your SBR an.
That's a PR sales volumes decline into Q and then how do you see underlying auto OEM versus replacement tire demand for second half than what's your rough split for exposure combo.
Yes, so I'm going to give you the overall number and I I'll repeat this from the earlier question overall in Q2.
We had a decline of 55% in volume over prior year.
For synthetic rubber now remember that.
SSB, our is about 70% of the.
Of our mix versus yes, our of our mix versus SBR.
We anticipate that that will improved to 20% reduction going into Q3, I can't idle maybe on as it it wasn't materially different Eric between he has.
Andrew.
It's replacement tire.
Okay well.
It's you know.
And we sell rubber to the tire manufacturers and we know what tires will.
Qualified on but too.
To that to know how that flows downstream is hard for us to assess so fully generally given people is the.
With the industry standard is 75% replacement 25 OEM.
But but again, it's very difficult to really nowhere.
Specifically, our rubber ends up and then what we do know I think this is important maybe for the year in the Argentine your question is geographically what is our exposure.
Yes.
And for US it's about 45% each.
North America.
Excuse me, 60% Europe, 20% North America, 20% Asia.
I think thats him.
Important to understand when you're looking at.
Kind of.
Regional trends in tire sales.
Great. Thank you for the call.
Your next question comes from the line Angel Castillo with Morgan Stanley.
Please proceed with your question.
Hi, good morning, and thank you for taking the question.
Just to.
Clarifying question on your commentary on Fourq, you recognize that it's a little barely at the time, there's limited visibility but I.
We think about the comment Pat just typical seasonality in the fourth quarter and translating that into into EBITDA should we be viewing it sequentially.
Flattish to slightly down EBITDA for the fourth quarter or.
Not really what kind of their costs.
Yes.
Well.
Again at this juncture, we see that Q4 is similar.
Yes in terms of Euro VI.
Progression.
Right and then in terms of Ams die how should we think about that in second half.
Okay.
I don't think I wouldn't draw that big distinction between and stay Threeq versus Fourq you.
As the anything.
I would say from Q2 to three to clearly we're going to see an improvement.
We talked in the last call about that.
And size explosion of Latin America, polystyrene market, which is about 30% of their polystyrene volume.
And given the.
Relatively severe impact there were having in Latin America, how weird.
You know how that was affecting their Q2 numbers.
At the Latin American markets have improved.
The appliance manufacturer manufacturers in Mexico.
So they're polystyrene volumes.
Our improving.
Q3 to Q4, I didn't see standing there right now with big.
A big difference.
Got it and if I noticed and adequate when just in terms of M&A as you noted.
Whether it's the lower Capex are now coming here as you think about bolt on opportunities within case or assets PR.
OEM.
What are you seeing turn devaluation opportunities.
In this market versus perhaps next year and how you're thinking about that.
Really our focus right now is on.
On preserving the balance sheet getting through the crisis, we're certain that there are going to be.
Oh participants in the market that.
Our forced to sell assets to support their balance sheet. Unlike us and so if those opportunities arise, we'll evaluate them as that case comes but.
You know we at this point you know our entire focus is to.
Get through the crisis preserve the balance sheet and.
See what opportunities come out of it.
Thank you we hit.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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