Q2 2021 Trinseo SA Earnings Call
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Good morning, ladies and gentlemen, and welcome to the chair and CEO second quarter 2021 financial results conference call. We welcomed the trains the all management team, Frank Bozich, President and CEO, Dave Stacy <unk> Executive Vice President and CFO and Andy Myers Director of Investor Relations today's.
The conference call will include brief remarks by the management team followed by a question and answer session. The company distributed its press release, along with this presentation slides at close of market yesterday. These documents are posted on the Companys and Investor Relations website and is furnished on a form 8-K filed with the securities and <unk>.
Change Commission, if and and why should require operator assistance during the call. Please press Star then zero on your telephone and I will now hand, the call over to Andy Myers.
Thank you Felicia and good morning, everyone. At this time all participants are in a listen only mode.
After our brief remarks instructions will follow to participate and the answer and question and session. Our disclosure rules and cautionary note on forward looking statements are noted on slide 2 during this presentation, we may make certain forward looking statements, including issuing guidance and describing our future expectations.
We must caution you that actual results could differ materially from what is discussed described or implied and these statements factors that could cause actual results to differ include but are not limited to risk factors set forth in item 1 day of our annual report on form 10-K, oar and our other filings.
And is 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.
The replay will be available until August 5th 2022, now I'd like to turn the call over to Frank <unk>.
Thanks, Andy and welcome to <unk> second quarter earnings call.
I'm excited to discuss another strong quarter of earnings performance as well as our improved outlook for the rest of the year.
However, I'd like to begin by thanking our employees from all of their hard work and dedication.
The transformation journey, we're on requires tremendous effort and we've already taken some big steps thanks to the dedication of our team.
All of this was amid some very difficult operating conditions, including significant supply chain challenges, where team did a tremendous job of ensuring customer supply sometimes when others couldn't.
And we've been able to deliver record quarterly profitability.
I can't stress enough, how proud I am of our team and how much I look forward to continuing our transformation together.
And I wanted to provide an update and overview on where we stand and our transformation to a specialty material and sustainable solution provider.
Given the many actions we've already taken this year.
And may we finalized the acquisition of <unk> PMMA business and I'm happy to say the business is performing well despite some industry wide headwinds such as production constraints for automotive customers and limited MMA supply.
The strong EBITDA margins that made the business and attractive target are already positively impacting our overall results.
And we look forward to and even better results from that business moving forward.
We originally anticipated $50 million of cost synergies and the business with $10 million being realized and the first year.
We are on schedule to achieve the first your cost synergies and we've identified a larger pipeline of synergy opportunities than what was originally communicated.
We are going through the process of prioritizing these opportunities across 3 dimensions magnitude.
Ease of execution and the speed to deliver and I look forward to updating you on our progress and future calls.
Fully integrating this business remains a high priority, including the migration to a new ERP system and the elimination of Tia space, which we estimate to occur in mid 2022.
As previously mentioned, the resulting ITN business process harmonization from the ERP deployment is expected to result, and at least an incremental $25 million and cost savings and the legacy <unk> business.
The acquisition of this PMMA business has enabled us to increase our product offering.
And our differentiated engineered materials segment.
Our recent announcement of the agreement to acquire ARAS Tech surfaces will allow us to broaden our product portfolio by offering continuous cast acrylic sheets into attractive end markets, including and uses for wellness leisure and architectural markets. The key.
<unk> are and hot tubs swim spas, bathtubs, countertops and recreational vehicles.
Eris Tech, which has an EBITDA margin in the mid twenties and cash flow conversions of over 80% represents a business that aligns with our strategy of seeking out markets that support higher margins higher growth and less cyclicality.
With this transaction, we identified $10 million of cost synergies, which are expected to be fully realized by the third year.
And we anticipate $50 million and value from tax basis step up.
In addition to these benefits errors tech will accelerate our growth and the Asia, where significant product applications like hot tubs and swim spas occur.
We estimate that Asian production and these applications will enjoy and the average growth rate of 13% from 2020 to 2025.
We believe there are also meaningful revenue synergy upsides that are achievable through the combined positions of our engineered materials business and aerostar.
We expect the deal to close by the end of this year and the $445 million purchase price will be funded with a mix of existing credit facilities and cash on hand.
And I'm looking forward to adding their risk tech and its 260 employees to the trends Youll family.
Ultimately our new portfolio will result in increased exposure to markets with an improved ability to generate cash with higher more stable margins and greater opportunities for growth.
I believe we are well on our way to transforming to a specialty materials company.
The other component of our transformation goal is to improve our offering and sustainable solutions.
To that and I am proud to say that in May we announced that our polystyrene business now supplies recycle polystyrene for food contact applications, specifically yoplait yogurt containers that are now available in France.
This kind of product supports our 2030 sustainability goal of increasing our share of sustainably advantage products to 40%.
Goals like these are used as guideposts for many of our decisions and a list of these goals can be found and our 11th sustainability report, which was released in July.
The reported outlines our progress on numerous sustainability initiatives, such as our reduction of greenhouse gases by 21% since 2017.
And for the first time. The report includes SaaS be reporting framework and addition to GRE.
Sustainability remains a foundational component of our company and I look forward to sharing more exciting updates and the future.
Moving to the second quarter performance we.
We delivered record net income and adjusted EBITDA.
We observed solid demand and many of our products and applications, such as appliances packaging textile footwear and building and construction.
In fact, our case products and latex binders and have grown 23% on a year to date basis.
This solid consistent demand over the last few quarters has combined with raw material and logistical constraints to create tight supply conditions, which has led to very strong margins and styrene and polystyrene ABS and polycarbonate.
While we're seeing styrene margins normalizing already and the third quarter with supply improving.
We anticipate a strong operating environment and derivative products well into 2022.
As I previously.
Obviously mentioned I am extremely proud of our team and we've been able to navigate external challenges to continue to provide quality products to our customers with minimal interruption.
Our second quarter cash used in operations was $21 million, which combined with $20 million of capital spending led to a free cash flow of negative $41 million.
This figure includes an increase and working capital of $180 million during the quarter.
This significant working capital cash use was primarily caused by steep increases in raw material costs brought on by the same strong demand and supply.
Conditions that I described earlier.
For example, the cost of benzene and Europe, 1 of our largest raw materials almost doubled to levels never seen and our company's history and.
And we observed meaningful increases and other raw materials such as butadiene.
As raw material prices normalize and decline, we expect a significant benefit to working capital and increased cash generation and the second half of the year and we've already.
We're already observing this and our July cash results.
Now looking at our earnings outlook for the year, we ex.
Expect net income from continuing operations of $344 million to $380 million.
And adjusted EBITDA of $750 million to $800 million.
These estimates.
Estimates include 8 months of PMMA business and.
And do not include synthetic rubber, which has been moved to discontinued operations or any impact from the pending <unk> acquisition.
And comparison to our prior guidance. This estimate includes approximately $80 million improvement and our legacy business businesses, including better than expected results from the second quarter performance plus continued strong market conditions and the second half of the year.
I'd like to point out that about half of the $80 million and improved guidance is from a more specialized products offering.
And as a result, we expect these to be sustainable.
It also assumes no contribution from feedstocks and the second half of the year as European styrene margins normalize due to more balanced supply demand environment.
For the full year, we expect to generate cash from operations between $425 million and $475 million and free cash flow of between 275 and $325 million.
This implies capital spending of $150 million, which is an increase from our last call mostly due to the addition of the PMA business and the SA.
S 4 upgrade project.
It also assumes that we'll recoup about half of the working capital cash used from the first half of the year.
Putting all of this together, we expect to finish the year with a net leverage ratio and the low twos pro forma for PM, The PMA business, and the announced <unk> acquisition and the synthetic rubber divestiture.
In summary, we are expecting 2021 to be a year during which we have delivered record profitability, while taking significant steps to continue our transformation.
With these steps on a go forward basis, we estimate that the non commodity portion of our portfolio will contribute about 3 quarters of our annual adjusted EBITDA.
This includes based plastics latex binders.
And engineered materials segments.
We've taken these steps, while providing exceptional customer services and all.
And with the foundation of safety sustainability, and a strong battle and solid balance sheet.
I am pleased with the progress that we've already made and our transformation and I know with the help of our dedicated and engaged employees, we will achieve much more.
So with that Felicia you can open the line for questions.
And if you would like to ask a question press Star 1 again to ask a question press Star 1 please.
And your first question comes from the line of Frank Mitsch Fermium research.
Hey, guys good morning.
A record quarter.
I just wanted to parse through the guidance for 'twenty, 1 a bit better I believe your previous guidance at the midpoint was like 650.
And so youre, saying that $80 million.
And improvement in the legacy business, so that on an apples to apples basis that would get you to 730.
For this year and then the delta between the 730% and 775 at the midpoint of your new guidance is strictly. The addition of PMA and the reduction of synthetic rubber is that the way that we should be thinking about this exactly Frank so if you.
I would just repeat what you said, but that's exactly right. So okay.
Alright, Fantastic I just wanted to make sure that day. So that's a very nice step up and the and the legacy business and.
And Frank.
And the guide on.
And your free cash flow youre at a 15% free cash flow yield relative.
And relative to your market cap.
What are we what are we going to do with the money.
Well, we're going to continue.
We're going to continue the transformation I would expect that at some juncture in the near future, we'll meet with the board to reassess our dividend and to normalize that consistent with our peer group.
And so again, our first priority is to continue this journey to upgrade the portfolio and make us higher margin and less cyclical and increase the free cash flow generation of the business. So we're going to continue.
And doing that and.
We're we're very positive about the results we've had so far.
Is there any room and the.
And the mix for buybacks.
That wouldn't be a top priority at transformation would be number 1 continue doing that.
Servicing that would be our second priority and reestablishing the dividend would be another priority that I would put ahead of that.
Terrific. Thanks, so much.
Frank and Frank This is Dave I'd like to add just 1 thing on and just to give some confidence on the guide. We've obviously had a big working capital outflow and the first half of the year in fact on a year to date basis.
Our working capital outflow is about $300 million.
We've already seen that reverse itself in July our free cash flow.
In the month of July is about $75 million.
Positive and.
And as benzene styrene and I've started coming down and so we do have a lot of confidence and.
And the free cash flow guide of about 300 million for the year.
Which obviously incorporates getting back some of that working capital and the back half of 'twenty 1.
Got you and looking forward to the execution. Thanks, so much.
Your next question comes from the line of Matthew Blair of TP H.
Hey, good morning, Thanks for taking my question here. So styrene has obviously come down quite a bit and Q3 could you talk about how things are trending so far this quarter on polystyrene.
Polystyrene is actually looking very good in fact, if I go back to.
Hum.
The discussion, we just had with Frank on the $80 million improvement and our outlook.
$25 million of that improvement is from polystyrene and I want to remind you that a big portion of our polystyrene business goes into higher performance or high impact polystyrene that goes into appliances.
And consumer goods. So it's a more specialized product than what you would consider more commodity polystyrene and single use plastics, so polystyrene and the outlook looks is very good and.
And the applications, we sell into we're seeing very good demand.
It sounds good and then could you just hear any trends and ABS and looks like China operates.
It remains quite high around 92%.
Whats the impact of the auto chip shortage and this business and what are some general trends Youre seeing.
Well.
ABS has seen very strong demand.
Okay and.
And.
And I think 1 of the things that we're seeing in.
That is that there has been a raw material tightness feeding ABS. So 1 of the raw materials accrual of nitrile that beads ABS has been short and tight all year.
That's.
Created a market environment that.
As you know.
And robust and value added for us, but I would say that in general.
We see very strong demand and I remind you of our ABS is is a higher quality ABS of mass the ABS product that is a smaller percentage of the ABS produced and the world.
Great. Thank you.
Your next question comes from the line of Hassan Ahmed of Alembic Global.
Good morning, Frank.
And nice bump up in engineered materials, EBITDA margins, and obviously I understand that.
The PMA business is now included in the segment.
Just wanted to get a sense of how youre thinking about sort of run rate EBITDA margins going forward. I mean, you guys reported 15% this quarter.
And obviously synergies needs to be realized.
And then obviously you guys pointed out.
And raw material headwinds in the quarter despite sort of.
Bump up and volume so I just wanted to get a sense of.
And how do you think about the run rate EBITDA margins for this segment.
And so.
We would expect the EBITDA margins too.
B and in the 2000 and above north of 20% EBITDA margin going forward, but remember when we're doing some purchase price accounting to reflect the.
Asset value of the acquired assets Thats stepping up depreciation and the acquired assets. So.
Okay.
At the gross margin level so.
In general, we would still see 20% going forward and the headwinds that we saw.
That was really a timing impact with passing price increases in Q2 in the consumer products side of our rigid compounds business and we're.
And that's been well on track and Q3 to recover that.
Understood understood and maybe this is a question for David and the IR team.
And I'm, just trying to get a sense of.
The full year guidance you guys have given.
Relative to consensus estimates my feeling basically is that while the consensus NAV baked and the inclusion of the MMA.
And I don't think has excluded synthetic rubber.
I mean since you guys spoke to all the analysts.
Love to hear your views about that.
And I think I think youre exactly right.
And as I read and that the flash reports that came out last night. They had the same reaction.
I think almost all of the consensus numbers had synthetic rubber and there.
And they had it and theyre kind of order of magnitude $50 million of EBITDA for the year now, obviously and we've moved it to discontinued ops. So we're not.
We're not including that and our guidance anymore. So I think youre actually right I think that was something that was and.
Look there's a lot of moving pieces, but I think that was something that was that might've been missed.
Perfect. Thanks, so much.
Your next question comes from the line of David Begleiter of Deutsche Bank.
Good morning, Frank and Dave.
Thanks, David.
And the upside to PMA PMA synergies can you give a little more color as to what areas and maybe it might be coming from and the timing of those synergies.
Yes, so the.
The $10 million that we're on track to deliver in Q1 are in year, 1 are really coming from organizational and procurement or supply chain efficiencies that we have between the businesses.
As we move forward.
We have some opex as well as.
The elimination of the TSA.
We got supporting the business when we carved it out of our come up.
And then and year 3 we'll begin to get significant savings.
<unk>.
Group of savings from the harmonization of our ERP systems and the efficiency from that.
I think the.
The other thing that is really exciting to us and this is sort of and upside to the synergies. If you will that we hadn't fully baked into the.
To the $50 million is how big the opportunity for <unk>.
Chemically recycling our own PMMA scrap is.
And so in the sheet operations, there's actually several percentages of production lost and scrap and.
We can recycle that chemically just like we've demonstrated we can do with polystyrene and that represents a really nice savings and also gives us an opportunity to.
Put that back into our product mix and sell a circular PMMA resin. So.
We're excited about that we're looking at what the technology solution and the capital associated with that would be but it's not significant capital I would tell you and would give us or at least our preliminary view is it will give us a very fast payback.
Very good and just on <unk>.
Sirena and feedstocks and gave us the back half guidance are basically breakeven.
Is that a good run rate for next year, as well breakeven and and what's your view on new demand and new supply coming out of China over the next maybe 12 months to 24 months.
Yes, David I think just like we've talked about from the past our view is that over and over the course of time.
Feedstocks, and Europe will normalize to a breakeven level.
Supply conditions or force, our supply shocks or will could cause things to spike up or.
Timing could cause a quarter to be lower but over time, we think that will end up.
And at a breakeven level now <unk> is different obviously, because they have a better cost position and North America, but that's our view going forward. So we.
We see little downside and potential upside and certain market conditions from styrene monomer.
David as it relates to new supply and I think our I think our view is.
Consistent with the last time I would say we see.
Mid to high single digit additions, both this year and next year, our global supply.
And then falling off considerably after that for 'twenty 3 and beyond.
Very good thank you guys.
Your next question comes from the line of Eric Petrie of Citi.
Hey, good morning, Frank.
Good morning, Eric.
How much did your volumes grow and PC and blends and then how much do you believe and non backward integrated PC producers in China, and our offline due to the bad day shortage.
The.
Well.
I don't have the figure.
And he's looking for the figure on the growth and PC demand, but what I would what I would tell you is.
And may want to make a couple of points about polycarbonate for us.
Carbonate and the.
And the merchant polycarbonate business in <unk> as is.
Is very small and <unk>.
Polycarbonate is mainly a feedstock that goes into our into our rigid blends in engineered materials and.
And.
And that's that product line has been growing steadily over the past several years and consumer electronics.
Electronics applications.
And we've been cannibalizing, our lower margin merchant business too.
To support that growth. So ultimately we will consume the.
Volume internally and our blending thats, our goal and we won't really have much market exposure to merchant polycarbonate and.
The other thing I would point out is that the polycarbonate thats being capacity, that's coming on and China is net of the same quality as the material in Germany at our <unk> plant and so it's not relevant and our view, it's not relevant to compare that with the quality of that Ms.
Cereal to what we produce because it's highly specialized if.
So Dave has the answer from the.
The volume growth.
Yes, so I mean, our volume growth.
Well it is a.
Z comp quite honestly compared to the second half Flash Scott excuse me compared to the first half of last year, but our PC compounds and blends volume I Q2 year to date basis is up about 30%.
Helpful. And then secondly, feedstocks it looks like EBITDA declined sequentially to $40 million down 7%.
Why was that given that Europe styrene margins are higher and you had favorable timing.
So we had interruptions that are boland plants, and we were in the spot market went bowling was shut down for some unplanned maintenance.
Great. Thank you.
And again to ask a question press star 1.
And your next question comes from the line of Haynesville Costello of Morgan Stanley.
Hey, good morning, gentlemen, thanks for taking my questions just on PMMA I was wondering if you could give us a sense for how that business from drilling year over year. If you kind of exclude some of the step out DNA or other kind of merger related.
Adjustments, how thats kind of do 1 and from a margin perspective volume.
Price as well.
Angel, Yes. This is that this is Dave I'll address that.
I would say on an EBITDA and a margin basis, it's doing pretty similar to year over year basis.
Remember when we made the announcement.
We talked about the <unk>.
Dynamic for the PMA business and in 2020, where obviously the Covid had a significant impact and our automotive volumes.
But they largely replace that with barrier protective sheet.
Going into retail and other things so.
Their EBITDA in 2.
2020 kind of order of magnitude was about $140 million.
I would say that's consistent with what I would expect this year.
Obviously, you have a pro rated.
Portion.
And reflected in our guidance only.
Only <unk>.
<unk> 8 months of the year that we expect to own it.
But kind of on a pro rated basis and aligns with that.
$140 million.
EBITDA numbers so.
So look we think thats a very good result.
Particularly given some of the constraints that the business has had in the first half of this year on getting MMA MMA has been.
And quite tight and under supplied and North America and the first half of the year. Fortunately, we're seeing that ease as we go into the second half of the year, but.
Yes that was that was a kind of a first half headwind.
That's very helpful. Thank you and then just maybe.
Yes.
And what are the discussion around both ABS and polycarbonate and just curious how youre thinking about based plastics as we go into 2020.2.
From kind of an EBITDA perspective, and kind of the cadence of earnings from 2021 and 2022.
Look I think.
I think we would see we see nothing is visible to us and that they would indicate any change.
In kind of the run rate of the second half run rate of the business.
The demand pipeline.
<unk> continues to look very strong.
We have all positive indications from our customers really across all markets.
In automotive automotive inventories as I'm sure you know are at the lowest they've been since the financial crisis era.
Our sales into automotive have declined in the second quarter.
Because of the production.
<unk>.
Issues of the auto manufacturers have had so I don't think I don't think we see anything standing here today that would give us that would give us.
And the indication that 2022 would be materially different and 21 and based plastics.
Very helpful. Thank you.
And there are no further questions at this time.
Thank you.
Okay.
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