Q1 2021 Trinseo SA Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Cherry Hill first quarter 2021 financial results conference call.
Welcome to <unk> management team, Frank Bozich, President and CEO, David Stacey Executive Vice President and CFO, and Andy Myers Director of Investor Relations.
Today's conference call will include will include brief remarks by the management team followed by questions and answers session.
The company distributed its press release, along with its presentation slides at close of market yesterday. These documents are posted on the company's Investor Relations website and furnished by form 8-K filed with the Securities and Exchange Commission.
Depending on once you acquire operate assistance during the call. Please press Star then zero on your telephone.
I will now hand, the call over to Andy Myers.
Thank you Tabitha 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 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.
Or 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.
The replay will be available until May seven 2022, now I would like to turn the call over to Frank <unk>.
Thanks, Andy and welcome to <unk> first quarter earnings call.
I want to begin with our recent news regarding the closing of the transaction to acquire <unk> PMMA business, which we first announced last December.
The newly acquired business the results of which will be reported in our engineered materials segment represents the first major step in the transformation of <unk>.
As we have stated our goal is to become a higher margin less cyclical specialty materials and sustainable solutions provider.
The end uses of PMMA overlap with our current offerings in many end markets, including automotive construction medical and consumer electronics.
This acquisition is not only expected to generate approximately $50 million.
Annual synergies, but is also expected to enhance our customer intimacy in these markets.
With additional investment in Asia, we will broaden the geographic scope to allow us to serve global customers in that region, who.
Who are currently not served by the business.
The integration of the argument team.
We will largely be complete once we have migrated them to our new ERP system and eliminate the transition services agreements, which is planned for mid 2022.
The deployment of the new ERP system is expected to result in harmonized I T systems and processes across regions and business units that will lay the foundation for future growth.
As a reminder, we expect this alignment will result in at least an additional $25 million of cost synergies.
I want to welcome the almost 900, new employees as well as numerous new customers to <unk> and.
And im looking forward to growing our business together.
Turning to our first quarter results, we started the year on a great note with very strong net income and a record quarter and adjusted EBITDA.
The recovery in demand for many of our products, which began in the second half of 2020 continued into the first quarter.
Our total sales volume in the first quarter was 5% higher than prior year.
And 8% higher if feedstocks is excluded.
We observed strong demand in most applications, including appliances building and construction consumer electronics tires or packaging and even automotive despite the current semiconductor and raw material shortages.
We continue to grow in products that support higher margin less cyclical applications like engineered materials and case applications, where we enjoyed the highest quarterly volume in the history and our history in Q1.
Engineered materials volume was fueled by strong demand for consumer electronics, and footwear, especially for products, including biomaterials.
<unk> benefited from solid demand in construction applications as well as from our continued growth in the form of new customers and expanding our product offerings at existing customers.
During the quarter, we captured higher margins versus both prior year and the prior quarter for a number of products, including ABS and polycarbonate polystyrene and styrene.
This can be attributed to a combination of factors, including solid demand numerous commercial excellence actions and tighter market conditions.
Most prominent example of tighter market conditions was in styrene were unexpected external events like winter storm Yuri in North America, and the Suez Canal blockage cause production and supply issues, which combined with normal planned seasonal maintenance and strong demand.
Led to extremely high styrene margins in our feedstocks segment in March.
In addition, our joint venture Americas <unk> was fortunate in that its styrene plant in Louisiana was able to continue running without major issues during winter storm Euro, which allowed the JV to capitalize on higher industry margins.
We also benefited from higher margins in our ABS and polycarbonate products within based plastics due to high demand and industry supply outages, including some from raw material shortages.
These tighter market conditions resulted in higher margins and based plastics, but I will say that they did cause a headwind and our downstream segments engineered materials were higher raw material costs like poly carbonate cause margin pressure for a rigid compound products.
The large cost increase in raw materials also created a use of working capital during the quarter.
But we were still able to generate cash from operations of $51 million, which led to a positive free cash flow of $38 million.
We finished first quarter with $618 million of cash on hand of which we used $200 million in may as part of the financing of the PMA acquisition.
With the acquisition complete we still have a very strong balance sheet and a very positive outlook on earnings for the remainder of the year, especially for the second quarter.
Before I touch on our forward outlook I want to highlight a few updates on sustainability.
We recently announced a collaboration with BSF with the goal of increasing styrene production circular feedstocks.
We have already achieved mass balance certification for some of our plants in this new collaboration will help our customers reach their sustainability goals by offering them more sustainable solutions.
Second we recently committed to and we're qualified for apples program asking manufacturers to use 100% renewable energy and the Apple production.
We also announced our plans to build a commercial polystyrene recycling plant into central New Belgium, which is expected to be operational in 2023.
And is expected to convert 15 kilo tons per year of polystyrene waste into chemically recycled polyester chemically recycled styrene.
Prior to the plant construction.
<unk> <unk> and our newly selected technology partner recycling technologies plan to build polystyrene recycling highlights clients in the UK in 2022.
This pilot plant will look to develop recycling technologies deep polymerization solution.
Which provided the highest yields in the conversion of polystyrene styrene monomer and provided some of the most scalable solutions.
Not only will the development of this technology reduce greenhouse gas emissions as compared to polystyrene production from traditional petroleum based feedstock.
It will also position polystyrene as an integral player in sustainable plastic solutions.
These initiatives strongly aligned with our 2030 sustainability goals, including the reduction of greenhouse gas emissions and creating a product portfolio that is at least 40% sustainably advantaged.
It's satisfying to see that as we continue to make sustainability a core piece of our transformation journey, we are being increasingly recognized for our efforts.
<unk>, a global sustainability rating agency recently issued <unk> silver rating.
And our score placed us in both the top 20% of all rated companies.
And at the top 13% of the category manufacturers plastic products.
Favorable ratings like this one as well as our 2021 rating of double a by MSCI.
Our positive byproduct of managing our company by using sustainability as the main tenant.
The addition of PMA to our portfolio is consistent with our goal of reducing our cotwo intensity as it has a cotwo intensity that is one quarter of <unk> current average.
I look forward to sharing more exciting updates in this area in the future.
Turning to our outlook for the second quarter, we expect that overall earnings will be similar to the first quarter.
Serving demand levels sequentially in line with Q1, and many of our applications, including appliances building and construction.
Tires on automotive.
Where the platforms, we serve such as Suvs and light trucks in North America and premium cars in Europe are more highly prioritized by Oems as.
As a consequence, they are less likely to experience loss production as a result of semiconductor and other raw material shortages.
Margins in most of our segments should also be sequentially similar in the second quarter.
In feedstocks, we expect another strong quarter of earnings based on high margins observed in April and May. However, we anticipate that as more supply is made available the styrene market will find balance and the feedstocks segment profitability will be closer to breakeven in the back half of the year.
Given the strength and earnings in the first half of the year.
And the expectation of a strong demand environment in the second half along with our structural business excellence initiatives.
We are revising our previous full year guidance to an adjusted net income of 303 million to $343 million.
And then adjusted EBITDA of 625 million to $675 million.
This range assumes a full year of synthetic rubber and no contribution from the PMA acquisition.
While we are not in a position to provide guidance on PMMA. At this time I will say that we expect eight months of solid earnings contribution from the acquisition given the positive demand we're observing in many of the applications it serves including automotive and construction.
Given our current outlook on earnings we are confident that we will be able to reach a pro forma net leverage in the low twos by the end of 2021.
This represents an approximately 18 month acceleration from our previously disclosed deleveraging plan.
Yes.
It's an exciting time at <unk>, and we continue to transform into a specialty materials and sustainable solution provider.
PMMA acquisition has closed and we are on track to complete the process to evaluate the divestiture of our synthetic rubber business by mid year.
I'm looking forward to a strong year of earnings integrating the PMA business welcoming our new employees and implementing best practices as well as upgrading and harmonizing, our it systems and business processes.
While the PMA acquisition has a large step forward for the company and its transformation. We will continue to look for ways to organically and inorganically grow trends that align with our strategy of higher margins and lower cyclicality with an underlying focus on sustainability.
Thank you and now you can open the line for questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
That is still wanted to ask a question.
And your first question is from the line of Frank Mitsch Mitch.
Hey, good morning, and nice start to the year.
Congrats on closing the PMA deal I understand that you can't offer full year guidance for the PMA deal, but I was wondering if you might be able to talk about where their earnings were in the first quarter.
What they posted and.
Put that into context, with where it might've been a year ago.
So maybe just let me.
Thanks Frank.
Maybe let me make one comment that I didn't have an on and our notes.
On the transition this week went extremely smoothly.
Great.
Point out that our team and the team from <unk> did a great job preparing for the separation and all signs are that we are running extremely well from a business continuity standpoint.
I think.
We can't really give any guidance at this point, but I think the best thing to think about for PMMA is that last year, they did a $140 million and adjusted EBITDA.
Got you got you I mean, if I look at some of the pricing charts.
On a relative to where they were when you announced the deal. It is looking at is looking a bit better than I was struck by the comment in terms of the expansion into Asia could you talk about the timeline that you might be looking to do that obviously you had the facilities the Manny.
Factoring facilities I guess on the U S and Europe is there a thought process too.
To build over there or to acquire over there any any color there would be helpful.
So we would expect to make an investment to put a PMA.
Plants and compounding line in Asia Pacific.
Frankly as soon as possible.
Given that we've only hit days to really work without any constraint with the group.
All I can say is we're anxious to do this and there is a.
The upside for US here is that we can broaden our offering to those global customers that we currently don't serve in that region. So.
I don't have a specific timeline and I think we can probably give more updates on that as we go forward in future quarterly earnings.
Got you and congrats again thanks.
Thanks Frank.
Your next question is on the line of David Begleiter with Deutsche Bank.
Thank you and good morning.
Frank just on feedstocks on styrene, how are you thinking on how you're thinking about styrene margins beyond this year in terms of supply demand fundamentals in terms of new supply coming on in China.
Yes, Hey, David so the.
You know the way we.
We believe that styrene will normalize at.
At a level that is sort of a cash breakeven for the near term after the first half of this year.
And that on.
New capacity will cause some rationalization of marginal producers, mainly the non integrated producers in China and Thats the level that we anticipated being at.
For beyond the first half of this year.
Until we start seeing more structural change in growth absorbing that capacity or industry consolidation occur. So the simple answer is after the first half we anticipate.
Believe it will normalize around a cash breakeven basis or a zero EBITDA basis.
Got it let me take that.
Dave I just.
Hi, Dave This is Dave Stacy just add a couple of them I think that that comment is applicable to our feedstock segment not <unk> is obviously styrene business.
It has a cost advantage that's not it.
We do expect to make money there but.
For our European E BSM producer like guidance I think.
I think what Frank said is correct, what's implied in our guidance.
For the next several years at least we would assume.
Yes.
Other than these.
Since that happened late these recent fly up margins.
But for that we expect.
Limited earnings contribution in feedstocks.
Got it and just looking forward with PMA clothes in the rubber sales on track for this year.
How do you think about the rest of the portfolio Frank in terms of dynamics.
Is it going to be we made it part of your longer term and if not what's the timeframe.
Okay.
Yes so.
We've said on our previous calls and in December when we announced this transaction. We will continue looking at the portfolio on finding opportunities to inorganically add higher margin less cyclical higher growth parts of the business and we'll look for other parts of the.
The more cyclical part of our business to separate.
To finance that.
I would anticipate that some of our more commodity plastics could be separated at some juncture when we find an appropriate opportunity, but we don't have any specific time line and it's an important.
Part of our portfolio now from a cash contribution standpoint, so no specific timeline and the other thing I would point out is we do have significant opportunities to improve.
Our based plastics business with additional investment in the harmonization of our systems. So.
Again nothing new.
No immediate plans, but longer term that's our goal.
Thank you very much.
Your next question is on the line of Angel Castillo with Morgan Stanley.
Hi, Good morning, Thanks for taking my question just to kind of look at the other side of that I guess as you look at your specialty businesses.
Staying on other feedstocks normalized kind of on the back half could you just talk about the net timing and how we should think about.
Whether that's a kind of an opportunity on a benefit in the second half and in the second quarter and then also just as you think about kind of the pricing power that there was some headwind on the first quarter that because of raw materials being higher but as we move into that.
Quarter on second half with Diane going lower do you see some benefit.
As you price some of the raw materials through margins could actually expand a little day picking up on color would be helpful.
Yeah, Hi, Andrew This is Dave I'll take a crack at that and then maybe Frank can add.
I think based on the feedstock curve that we have.
Envision and what's kind of baked in our guidance.
We don't see significant timing either positive or negative.
In Q2, or Q3 and for frankly is a little hard to predict.
We just don't see it right now.
Being a significant factor either way.
I guess I could maybe a follow on to that related question that would be working capital because feedstock prices are the biggest driver of our working capital.
And we saw that in the first quarter with about $120 million outflow.
I think based again based on the feedstock curve as we currently envision I think will make back about half of that $120 million.
And it really on the back half of this year. So I think working capital will be an inflow in the back half of that year, making back about 60 of that $120 million.
On the answer as it relates to.
Feedstock prices and kind of will it be a tailwind in the ability to.
Pass that through to the downstream businesses.
I think thats, an applicable conversation really more for the engineered our engineered materials segment rubber largely operates with pass throughs as latex is the same thing.
Our existing.
On a macro to speed the PMA that our existing engineered materials business, particularly.
Particularly the rigid compounds portion of it which is about two thirds of the segment.
We did see a headwind in the first quarter, just due to the extremely steep magnitude and timing of the polycarbonate increase.
That we just weren't able to get pass through fast enough in the quarter.
I do think we'll be able to add polycarbon on prices come down.
In the back half of the year I do think we'll be able to make that back.
In that particular segment, but that as I said angel its not a particularly relevant conversation on the other specialty segments.
That's very helpful and then just in.
Terms of capital allocation you noted that you.
You might end the year kind of low teens and well ahead of schedule. So.
That's fantastic.
As we think about potential bolt ons could.
Could we see you look at potential bolt ons within 2021, or even early 2022 or will they focused right now on rubber and maybe 'twenty two is more of a year that.
You could start to do some other capital allocation, whether it's M&A or even repurchases or anything given our strong balance sheet.
Yes, I guess.
To be clear our number one priority is to.
Is to integrate the PMA business and.
Execute against the integration plan that we've got.
And then.
<unk>.
<unk> assessment for synthetic rubber and execute against that.
So.
We will evaluate other opportunities in 2021, but the characteristics of those would have to be that they would be not disruptive to our ability to execute under the integration plan that we have so.
Again, we will look at things, but our first priority will be the integration and execution of those day.
Activities, we've announced so far.
Thank you.
And your next question is from the line of Hassan Ahmed with Alembic Global Global.
Good morning, Frank and Dave.
Yes.
Just wanted to touch on.
Obviously conscious of the fact that you can't give guidance related to M&A.
If I heard you correct.
You said that the business did $140 million on EBITDA in 2020, which.
I would imagine I think would imply that EBITDA was relatively flat year on year in 2020 despite.
Being.
Ask brookie a year as it was so so first question is.
Did that imply flat EBITDA.
PM in the MMA a year on year.
And Barton, partially with that question.
Obviously, the end markets at PMA bidding and construction autos or looking quite strong this year and then obviously it has a big China exposure.
On a geography doing really well so knowing that you can't give forward guidance can you at least touch on how these end markets have fed and the business has fared thus far.
What I would say is that there has been very strong consistent with our existing business and we have as I've said, we have some end market and end application overlaps were seeing very robust demand in the applications that PMA goes into.
We're confident that that is sustainable and.
But what I would say is PMMA was also affected by the.
On the supply chain.
<unk> in Q1, probably more than our broader portfolio. So that the production of MMA in the Gulf Coast and the feedstocks that go into MMA production were just.
We're quite disrupted and so.
As we're looking at the supply chain.
Inventories are relatively low and we would see that there is some pent up demand. In addition that needs to be rebuilt in the supply chain. After the disruption of Q1, So I would say in general strong demand with very low inventories is how I would characterize the PMA market right now I understood.
And maybe following up on that particularly as you talked about sort of lean inventory levels and the like.
Look as I take a look at your second half implied guidance.
As a guiding to call it slightly north of $400 million in EBITDA in the first half day yeah.
And looking at your full year guidance that obviously implies that EBITDA half on half H, one to H due will be down call. It anywhere between 125 million to $175 million.
And you also touched on how you are not really factoring in any contribution from styrene. So I'm just trying to reconcile back half on half decline in light of the.
Demand continuing to remain strong obviously turnaround happening.
Back filling of orders and lean inventory levels right.
It suggests that maybe.
Sure.
On the second half at least Q3 wise, maybe a bit better than whats implied in this sort of half on half of ebay.
EBITDA compression that you've.
Sort of.
The implied guidance suggests.
Yes so.
I guess, let me.
Quality gives you some qualitative.
View on the second half.
And in relation to the first half.
While the demand we see remaining pretty strong.
And the comex initiatives that we've implemented will remain those structural initiatives. What we anticipate is no contribution from styrene issues pointed out that's about $100 million of.
<unk> contribution and then also the tight supply dynamic that exists right now and.
<unk> existed in Q1 and into Q2 will normalize so that that supply dynamic that.
Going away or that tightness of supply will normalize feedstock costs.
And to be fair, we benefited from some of that in Q1.
And we see some of that benefit more broadly happening in Q2. So when you normalize that that's how we get to that second half first half second half comparison.
Very helpful. Frank Thank you so much.
Your next question is from the line of Eric Petrie with Citi.
Hi, good morning, Frank.
Good morning, Eric.
I just wanted to go back to your announcement on circularity with PSS, how much of your products for <unk> PFS has recycled content.
10, 20, 30% or is it more.
So.
So I heard SSP are.
And what I would tell you is a very small percentage of our portfolio.
Our sales are net I'm going to say negligible today have.
Recycled content and park and the main driver for that is the fact that there is a very long.
Qualification and approval cycle for those products.
Where we're excited about what we're doing there is we were able to introduce products.
Two the tire companies last year, and we were the first to do this and many of those advanced SBR.
Applications and again Thats coincides with our investment in tire recycling solutions.
Today, it's small, but we have material debt.
Out there for qualification and over time, we would see that building rapidly. The second product that you mentioned I heard the SSP or the second one I missed.
So polystyrene and just to clarify to not as a percentage of overall volume, but is it mix with Virgin.
We're only looking at 10% recycled content or how does that next workout.
Yes, so yeah, sorry, I misunderstood the question.
No.
SSP or the content of.
So the content will depend on what type of product we're offering so if we're using a recycled content from.
Spent tires like we would produce from Trs it would be in the 5% to fit up to 15% loading level for those materials.
If its policies.
From chemically recycled styrene and or bio based butadiene or bio based styrene.
We have the ability to go up to 100%.
In the formulation without any change in the physical attributes because.
Styrene and the feedstocks have the same characteristics as Virgin petrochemical based materials. So it's in those products.
It's a wide range.
Depending on the.
Many factors in polystyrene.
By memory I believe that the first grades that we did sell last year that used mass balance were 40%.
Chemically recycled styrene monomer is a content.
Yes.
Okay, Great and then secondly could you talk a little bit more about ABS profitability not prices are going up globally.
Strong appliance demand do you see softening tops as we kind of lap the stay at home orders and then I think your plants in China started up in 17 is that sold out and potentially an area that you could invest further besides potential P&L.
<unk>.
In the area.
So ABS as a great <unk>.
Example of three characteristics.
I tried to explain earlier, where we have a great franchise on a great product offering and our team has done a fantastic job value pricing that into very specific applications.
Like appliances, where we have very.
And automotive, where we see good strong demand.
The combination of demand and comex have been.
Commercial excellence activities has been has been good.
What I would say, though is ABS.
Also was really affected by tightness of raw material feedstocks, so acrylic nitrile.
Was was very tight in the beginning of the year and so it created some exceptional earning potential if you were able to supply and we enjoyed some of that in the first in the first quarter.
Eric I'll add as it relates to the second part of your question I think you were getting at would we would we spend capital to increase the supply at our China plant.
The answer to that.
Yes.
The answer to that Eric is no I don't think.
Our investment directed towards based plastics would not be towards expansion, but rather towards.
Sustainability and recycled initiatives.
Which we will invest in.
Okay. Thank you.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
That is star one.
And your next question is from the line of Matthew Blair.
Hey, good morning, Frank.
If youre seeing any demand destruction or substitution in polystyrene, just given that the high price environment.
I think the simple answer is right now no we're not.
And the.
Especially.
I guess I guess I.
I'd like to remind you we have a pretty small exposure in the packaging.
In our polystyrene business and a lot of our polystyrene is going into.
Applications were hips high impact polystyrene is required et cetera.
So we're substitution isn't viable.
In packaging.
We have not yet seen much traction in attempts to substitute other products and in fact are.
The awareness that is building the polystyrene is able to be recycled effectively and recycled materials coming being becoming available.
Put pushed the pause button that a lot of the big converters or big and end market users polystyrene that would cost billions of dollars to retool.
Other materials. So at this point, we have not yet seen that.
Terrific.
Could you provide an update on just the thin rubber divestiture process.
How are you feeling about that I mean, given the.
The recent uptick in profitability is there a chance that you might hold on to that business for the long term.
So I feel very good about our process. We've had a lot of a lot of interest from parties in the market and it's a great franchise, and we and frankly I'm very proud of what that team has done but if we think forward R. R.
Our rationale for reshaping the portfolio more around case applications in engineered materials applications.
Remains thats not going to change.
And we believe that.
There are other parties in the market, who are better able to invest and grow synthetic rubber and our assets and invest in it then we would be able to have yet a third.
Growth platform, if you will within the company. So again, even though it's improving and it's doing great and we love the business and we think it's a great franchise, our priorities, our encase and growing engineered materials.
So on.
Good thanks.
Thank you.
There are no further questions.
This concludes today's conference call. We thank you for your participation you may now disconnect.
Okay.
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