Q3 2020 Trinseo SA Earnings Call
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Good morning, ladies and gentlemen, and welcome to the true, Yes third quarter Twentytwenty financial conference call with <unk>.
Call. It a trend field management team, Frank <unk>, President and CEO, David Stacey Executive Vice President and CFO and N.B. Meyers director of Investor Relations.
Today's conference call will include a brief remarks by the management team followed by a question and answer session.
The company distributed its press release, along with its presentation slides I close of market yesterday.
The commenced I 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 operator assistance during the call. Please press Star then zero on your telephone Apple nothing to call over to Myers.
Thank you Julie and good morning, everyone.
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 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 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 one day of our annual report on form 10-K for and 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.
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 November six 2021, now I'd like to turn the call over to Frank Bostitch.
Thanks, Andy and welcome to Trinseos third quarter earnings call as we noted in our Preannouncement the positive demand recovery, we observed toward the end of the second quarter gain momentum through the third quarter. This.
This led to significant sequential quarterly volume improvement in many applications in automotive third quarter volume was only down 14% versus the prior year after a decline of 65% in the second quarter.
Entires third quarter volume was flat to prior year after being down 55% in the second quarter.
Styrene margins in Europe continued to benefit from low cost benzene, which led to favorable margins versus the prior year and our feedstock segment.
Healthy demand contributed to improved year over your margins in the ABS and polycarbonate applications.
And our polystyrene segment recorded its higher highest earnings quarter since 2015, as strong demand, particularly in appliances as well as commercial excellence actions led to higher margins.
The margin expansion across many of our segments along with both short term and structural cost reductions led to an increase in year over year earnings.
I'm very proud of our employees for their speed that they adjusted to new conditions and the perseverance through the challenges we have faced over the last two quarters and I want to thank them for their hard work, which positioned us for success as demand returns.
Before I review, our outlook for the fourth quarter I'd like to highlight some announcements and developments occurring in the company, including a change in segmentation beginning in the fourth quarter.
As of October Onest, our performance plastics segment has been divided into two new reporting segments engineered materials and basic plastics.
The basic plastics segment includes ABS polycarbonate and compounds product lines.
The compounds are predominantly pcbs, serving the automotive market.
This segment also serves applications and packaging appliances and building and construction.
The engineered materials segment creates tailor made specialty compounds and is composed of two product lines rigid compounds and soft plastic compounds.
The rigid compounds are made up of compounds in PC, ABS, and Pcbs, which specialization in consumer electronics and medical applications.
The soft plastic compounds include thermoplastic elastomers, or TPS, which are used in a variety of applications, including footwear personal care and automotive.
These products and applications are a core focus for growth as they served markets that offer higher margins faster growth and less earnings volatility.
We feel this new reporting over performance plastics segment will be important and providing enhanced transparency to investors.
And is better aligned with how we now manage the business.
The appendix of the earnings presentation provides our historical results beginning in 2018 recast in this new under this new segmentation, which will be effective for the fourth quarter and the full year 2020 reporting.
During the first quarter earnings call, we announced that we had begun the consultation process with our German works council related to the possible closure of our styrene assets in Poland, Germany.
After a thorough evaluation we have made the decision to continue operating the plant.
We recently completed the negotiation of new feedstock supply agreement.
That will significantly improve the competitive limits competitiveness of this plant.
And provide for greater operational flexibility.
Next I'm pleased to share a few notes on our sustainability progress, including the advancement of polystyrene circularity.
Offering sustainable solutions and products is a critical mission for our company.
To that end, we continued to make progress towards our goal of reaching full polystyrene circularity.
In September we announced that our partnership with German packaging manufacturer Fernholz has resulted in foreign fill seal formulations with 40% recycled polystyrene.
These formulations can be used in food packaging applications in full compliance with food safety requirements and requires no capital investment by our customers since the same equipment can be used in their production.
We also recently announced a joint development agreement within the Allstate dilution Agilux and American Styrenics to share data and accelerate the realization of circular polystyrene.
Additionally, we are making progress on our joint plan within the office for European Polystyrene recycling plant in France, which remains on track to be operational in 2023.
This plan represents a significant step forward towards the ultimate goal of full polystyrene circularity.
As it will support de polymerization polystyrene back to the original styrene monomer, which can then be used in numerous applications.
All these actions are important steps towards sustainability goal to an offer an average of 30% recycled content to customers for polystyrene packaging in Europe by 2025.
Our joint venture Americas Styrenics is also targeting a similar goal of 25% recycled polystyrene and its product design products designed for food service and food packaging by 2000 2030.
In other areas of sustainability three of our European sites receive mass balance certification from the international sustainability in carbon certification system.
This will allow us to track the total amount of sustainable input throughout the production cycle and ensuring appropriate allocation to the finished goods.
This will apply to our polystyrene from to Sandra Lou Belgium's site.
Polycarbonate from our stock, Germany site and synthetic rubber from our scope, how Germany site.
Lastly, we reached definitive agreements with tire recycling solutions on a commercial collaboration.
And an equity investment in that company.
This agreement envisions a pool of R&D resources.
Eating in our goal of developing new value, creating solutions for manufacturing of tires.
That improves their environmental footprint and creates a sustainable outlet for end of life tires.
We continued to make progress solid progress on numerous sustainability fronts and achievements here.
Benefit not only overall the overall global environment, but also the financial performance in many of our segments as products with recycled content command a significantly higher margin.
Through October we observed similar demand pattern to what we saw in the third quarter, we have seen recovery continue in automotive tire and medical applications.
In addition to continued demand strength in applications of packaging appliances and consumer electronics.
We are cautiously optimistic that this trend will persist for the duration of the quarter.
Should we expect in our polystyrene and polycarbonate product lines to be similar to the third quarter due to the sustained higher demand.
While styrene margins in Europe are expected to decline slightly as benzene prices increase.
Our cash and liquidity position already have us.
Already a point of strength heading into the third quarter has only improved through effective cost control actions working capital management, including inventory control initiatives and higher earnings.
Nine months into the year, we have generated 128 million of cash from operations with free cash flow of $67 million.
This has added to the strength of our balance sheet as we had $503 million of cash at the end of the quarter end, even after the repayment of the $100 million revolver draw, which is now untapped.
This this puts us in an excellent position to utilize our strong balance sheet to provide value to our shareholders, including growing the business organically and inorganically and areas of lower cyclicality and higher margins.
We look forward to finishing the year with a solid financial performance in the fourth quarter, a strong position in cash and liquidity and we're.
The press Star one on your thoughts phone again does this question press star one on your telephone.
And your first question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.
Thank you good morning, Frank just on the bones site.
If you have a new agreements in place last year. When you lost money at that site, what would have been up EBITDA been under these new more beneficial arrangements.
Yes, David we Didnt have new agreements at that site last year. So this is the new agreements will be going to place effective January of next year and.
We expect that the operating loss that we incurred in 2019, if the market conditions are similar in 2021 that that we won't be making losses under those same market conditions under the benefits of the new.
New contract.
Thats very helpful and just one new.
Segmentation management, Andrew materials are you expecting to grow this business through acquisitions and if so what types of.
Targets do you see out there what multiples right now thank you.
Yes, so David maybe just a broader word on the re segmentation. We we really are excited about engineered materials. We've demonstrated very good growth in that business over the past several years and you can see it offered.
We're very focused on it.
It's this reporting is more aligned with how we operate the company now.
We think it's really important to provide some transparency to it you know because of the attractive market. So it goes into height at that offer higher growth higher margins and volatility and lower volatility.
As it relates to.
The opportunity for acquisitions, we see that there are some out there we were watching those we think in this environment.
There are attractive assets that could become available and we want to be ready if the opportunity arises.
Thank you very much.
And your next question comes from the line of Frank That's that's from NIM Research. Please go ahead.
Thank you good morning, Ana and just to know really appreciated the preannouncement last month that it obviously avoided some.
Some confusion with respect to the tax et cetera, So really allowed us to to get a better feel for the for the trend and obviously how it finished up strong and you said October was strong just curious about.
What sort of visibility do you have on your order books I know you expected that some of the strength will continue but how confident are you.
As we look out obviously November I assume that you have that pretty well set up but how do you how do your order books look into December and thereafter.
Yes, so thanks, Frank and.
So we it depends by segment, but we typically would have of our visibility one one month in advance and some of our segments, where we have long term.
A better forward look in our orders and Thats more it's a geographic issue too where we have better.
Longer lead time orders in North America, Europe, and Asia, you have more spot orders.
But I would say in general we have over a month forward visibility and we can track.
And get a very good sense for.
What the month will be early in early in each monthly.
When the month starts.
Gotcha. Okay. Go ahead, David This is Dave out I'll add a couple of things I mean with styrene, obviously that the bulk of the economics or are known at the beginning of the quarter when the settlements happened so.
With the November settlements already happened and.
They look to be pretty healthy.
As well as October in the end of last quarter.
So it's I think to.
To answer your question I mean, I think what we see in October and the order book as far as we can as kind of more of the same as how we exited the third quarter.
Now just just to add if I could one caveat to that.
The Covance situation, obviously is changing it's something we're keeping an eye on very closely.
With respect to shutdowns in certain European countries, we've not seen any impact of that yet in our order book, but.
Clearly something that we are mindful of and have contingency plans in place if needed.
Got you got you helpful and.
Frank you mentioned, the the recycle plant in France.
Thank you have a JV with any sign and you're expecting that to start up in 2023, how do we think about the capital costs.
From Trinseos for that for that facility.
Yes, we envision that over time, it will be about a 20 million dollar investment.
The one.
The one thing that I do want to point out and.
Something I alluded to in the comments is this is really an opportunity for us to expand margins in this area.
Yeah, and maybe touching on what's happening in Europe next next year. There is a thousand dollar tax being implemented on plastics that don't contain.
Certain level of recycled content.
Now that for us as we grow our the recycled content.
Products that go into packaging that obviously.
We can we can capture a great portion of that thousand dollars a ton.
By letting our the end customers avoid having to pay that tax. So it's a great margin expansion opportunity for us and and again were we see ourselves as a leader in that sustainable solution space.
Got you. Thank you.
And your next question comes from the line of Osten Ahmed with Alembic Global. Please go ahead.
Good morning, Frank and Dave.
Good morning.
And a question around styling.
I'd love to hear your thoughts.
As you look at the net on and looking into Twentytwenty one.
On the supply side of the picture have you seen any meaningful changes in terms of.
The influx of new capacity, particularly keeping in mind some of the ups and downs, we've seen as a as a result of Goldade and talking positive with that what are you guys seeing in terms of inventory trends.
So.
Mick maybe let me start with the sort of supply demand balance and then.
We'll talk about the inventory trends second.
Earlier this year.
There was new capacity that came online in in Asia and bite off the top of my head I believe it was approximately 6% addition of global capacity.
The.
Those plants are running but at reduced operating rates and they.
That's how they started and they run at those rates now what we.
It's an interesting dynamic that we saw play out in Q3 is that.
Because of the continued low fuel demand globally European economics for styrene have improved relative to the rest of world and so it has Europe doesnt attract as many as much imports or you know it's put a stop to a lot of imports from other regions.
The second thing Thats occurred is that.
As and as we've talked about before the lower operating rates the Pos implants in Europe heads.
Made Europe, a more balanced.
Market.
And so we benefited from that and the last thing I would point out is something we've been talking about for several years now is the status of the non integrated Chinese producers. So in September are in Q3, there were actually two plants.
That represented about 450 Kmt of capacity that were shot.
And these plants.
Were shut basically for economic reasons as well as their inability to source ethylene.
So this was a dynamic that we have been anticipating to happen and these were the first two examples of these low higher cost non integrated plans not being able to either being non financially viable or not able to source ethylene in an environment, where you have very strong.
Polyethylene demand and Thats, where there is much greater margin to sell ethylene. So it's a favorable dynamic and we continue to watch it.
Hassan This is Dave I'll I'll answer your question on inventories inventories.
As reported lastly, China inventories were 120, 6K teas, which.
Which compares to the long term average about 100, so it's a little bit higher but its falling rapidly over the last month, it's fallen 30% and just last week alone fell 18%. So.
Supply is extremely tight in China.
And the reason for that is because of this the strong derivative demand.
That that you'll see in our earnings obviously and in both polystyrene ABS.
You know as well as others that produces those.
Those polymers in Asia. So I think I think we're going to continue to see.
We continue to see that inventory number drop makes.
Makes complete sense very clear and as a follow up on on raws.
Presentation.
You guys touched on plentiful availability of NAFTA.
In Europe in particular are leading to lower benzene costs.
I mean, how do you see that trend sort of playing out.
Through the course of the fourth quarter and as you look into Twentytwenty, one as well.
So at the.
The driver for that is low fuel demand or distillate demand and the shift of the refinery operations to produce more naphtha.
So we until you see a recovery of global global fuel demand in particular kerosene or jet fuel I believe and our view is that we continue to see.
A long market for NAFTA in Europe and.
Favourable X.
Economics for us relative to the rest of the world.
And so you know our current view.
Is that it at least through 2021.
And I've seen some forecast that going beyond into 2023, but before global fuel demand, especially kerosene demand recovers to 2019 levels.
Very helpful. Thanks, so much guys.
And your next question comes from the line of Eric Petrie with Citi. Please go ahead.
Hi, good morning, Frank good.
Good morning, Eric.
As you noted.
Styrene inventories have declined in China, and I think prices.
Since September are up from 800 to over $1100 per tonne. So how does that impact your margins and EPS in late tax in rubber and how much are those contracts are index based.
So is that basically had no impact on our margins.
Most of our our.
Our sales are formula based with index pricing raw materials.
Pass through pricing.
But I do think ill take the opportunity to give a.
Pointing out that in our performance plastics area.
We saw significantly better margins in Q3 really as a result of grade commercial excellence efforts and I think we did it goes to show that we have a very interesting product line and we can differentiate our products into certain applications.
And.
And we've done a great job.
In the past several quarters value pricing those.
Eric just to add onto that for as Frank mentioned.
In latex and rubber and largely in North America. The vast majority of the sales have.
Contractual pass through agreements.
However in polystyrene in Asia, we have very little actually latex is almost entirely sold on a spot basis polystyrene is is not sold with pass through agreements.
So as Frank pointed I think actually the.
The higher margin has been a function of more value based selling into the appliance.
The appliance producers in Asia.
Helpful. Thank you and from my follow up question Youve recently launched the policy go with recycled content up to 50% for auto interiors, how has that been adopted by auto Oems and how do you price that product for value.
So we will we have I would say, it's not just auto but I'd say broadly in almost every one of our end markets. There is a very strong desire in demand.
Or more.
More circular products that contain post consumer recycled material so.
We.
That product as well as the others, where we see a premium to up on price versus.
Virgin material and then many applications that not specific to the pulse echo product line, but weve, even seen multiples of the margins.
With the reset.
Recycled content so and.
The reference I made before too.
This than in packaging, the new tax that will come into place in 2021, if we offer a customer the ability to.
Avoid having to pay a thousand dollars a ton tax on up on a product we can capture a greater percentage of that value.
Thank you.
And your next question comes from the line of Matthew Blair with TPH. Please go ahead.
Hey, good morning, everyone. Frank first question on performance plastics.
It was up about 40% year over year when things like autos were were still down could you talk about some of the factors that help boost that.
Looking at the.
Appendix it looks like the base based.
Based plastics really generated most of those gains and then could you also talk about whether this level of earnings and in performance plastics is sustainable in India.
Indeed that Q4 20 and into early 2021.
So yes the driver.
For the base plastics performance is really very strong demand I would say into the appliance market is one of the particular areas, where we've seen very strong demand and Thats a result of.
Cove, it driven appliance demand around the world.
And so.
The.
So we've had very good volume demand, but really this is a margin story and its a story about.
We do have a differentiated product line.
Our even though.
There.
They are based plastics in certain applications, we offer our customers many processing advantages and weve been able we our team has really done a great job value pricing those now.
I believe.
From what we can see those conditions will continue through Q4.
We don't see any change right now in the environment that would make me believe that won't continue into 2021, but.
And again as Dave pointed out earlier it's.
It's a volatile situation with coal.
And we've seen new shutdowns in Europe et cetera, and just.
So again, it's difficult to say, whether there is a resurgence supported that could affect our earnings going forward or the order book.
Maybe.
Maybe I'll just.
Maybe I'll just add something to that Matthew just very quickly, but we did point out and I think this is this will be instructive for you guys as youre thinking about 2021.
That.
The net impact of co that on us for this year, we expect to be that $55 million.
And it's actually a plus 15 in the second half of the year and that plus 15 is largely in polystyrene that base plastics business.
Where we have seen.
Some orders that were booked.
Booked in Q.
Some demand that was pushed out of the second quarter in the third quarter.
And maybe a little bit of margin lift from tightness in the market. So.
I think you should think about that as you.
To answer your question about 2021.
Okay.
Sounds good and then Dave do you have any rough Q4 estimate on items like working capital net timing and tax.
As it relates to cash I think we'd see working capital is pretty flat in the quarter.
We would usually see we've often seen in the past a.
The working capital inflow in December.
As volumes kind of fall off and.
I'm not sure we're going to I think I'm not sure we're going to see that this year given the into the demand environment that we're in so I think I think I'd call working capital as pretty much flat right now.
Cash tax in the fourth quarter, probably about $5 million.
I think the other is a slide in the deck that gives the other kind of year to date updates on capex cash interest and things like that.
His back at the year to date numbers.
Great. Thank you.
Yes, I would like to ask a question press star one on your telephone.
And your next question comes from the line of NGL Castillo with Morgan Stanley. Please go ahead.
Good morning, gentlemen, thank you for the question I just wanted to touch base again on your comments on 2021 and the impact of Covidien in 2020, So that 55 million that you noted and as we think about kind of run rate in the earnings potential of the business right. Now if we just kind of take the quarter would imply something.
400 million EBITDA or for.
For the business.
On an annual basis, but if you kind of just.
Take that 55 million and added to.
I guess, a full year EBITDA for 2020 to be closer to 300 million. So maybe if you could just kind of conceptualize everything processing in Latin like how do you see the normalized earnings power of the business kind of on that not necessarily sequentially, one, but as things normalize you volumes improve.
With margins being as high as they are how you think about that going forward.
Yes, I think.
If you look at the second half as Dave pointed out.
We would have anticipated that there was approximately a $15 million.
Positive lift from Covidien related factors. The other thing that we pointed out is there were some cost benefits that are non recurring in the second half of the year related to subsidies that we got related to the incentive programs in Europe.
And then also cost related to actions that we took that in a recovery environment would not recur. So we wouldnt hang on to those even though we do have some structural cost savings that we got so.
Right I think if you factor those things in the second half would be.
Representative of what we would hope a normalized.
Forward view of the business would be EPS.
Absent those those factors those would be the gives and goes now.
As we pointed out Theres full head of we're seeing a resurgence of shutdowns in Europe, and we're cautiously optimistic that we'll work through it we won't see another.
Impact like we saw in Q2, but I guess, maybe just the last comment on this and.
Is no matter what the environment is we feel very very confident in our portfolio and our ability to manage through it because.
We saw very very negative Q2.
Economic in an order environment, we actually were.
The positive EBITDA in those and in that period, and we generated significant free cash flow. So.
Again, I am I know, we can manage through whatever market environment, we see because of the portfolio and the actions we are able to take quickly and so.
So we'll see what happens, but that would be how we think about next year.
That's very helpful. Thank you and then on your engineered materials. Thank you for providing that information.
In terms of as I look at the performance of that business. There was a pretty big pickup in EBITDA in 2019.
Whereas it looks like volumes and sales on maybe a little bit flatter year over year.
How do you see kind of that does the go forward.
Annual growth of that business kind of.
Look between one and beyond and if you could give us more color estimate electrode that uplift in margins into 2019, and whether we can expect that to continue.
So I think theres really two drivers for the growth, it's us winning new business platforms in medical and consumer electronics and winning it with.
Recycled material or more sustainable solutions that we're able to price at more advantageous margins, so even though the.
Volume.
Was relatively flat your year over year, the awards and the business, we're winning with that with more sustainable solutions offer an opportunity for us to value price those and I think thats reflected in the performance as it relates to growth rate.
I think those end markets.
And end markets themselves are growing it much better than GDP rates, but what we would see is that this is.
Our ability to win platforms through customer qualification and various.
Submissions.
Where we're developing a specific customer solution can be much greater than that so we really like this business.
We we've done pretty well in it and.
We're excited to continue to invest in it.
Very helpful. Thank you.
And there are no further questions for today. This concludes today's conference call. Thank you all for joining US you may now disconnect.
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