Q3 2021 Trinseo SA Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the <unk> third quarter 2021 financial results conference call.
We welcome the trends you got a management team right, but as its president and CEO, David Stacy <unk> Executive Vice President and CFO and Andy Myers Director of Investor Relations. Today's conference call will include brief remarks by the management team, although by a question and answer 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 on a 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 I will now hand, the call over to Andy Myers.
Thank you Tammy 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.
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 a of our annual report on Form 10-K or in 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 November eight 2022, now I'd like to turn the call over to Frank <unk>.
Thanks, Andy and welcome to <unk> third quarter earnings call.
This morning, we'd like to cover three topics before turning to Q&A.
First I will outline our progress in the journey to transform our portfolio.
And then I'll provide a deeper insight into our engineered materials segment, including some expectations for this business going forward.
Dave will then cover the Q3 earnings and outlook for the remainder of the year.
Okay.
As you are aware the Goldberg portfolio transformation is for <unk> to become especially materials and sustainable solutions provider with a focus on four end markets building construction consumer goods mobility and medical.
We expect that this will result in financial performance that demonstrates higher growth rates lower volatility higher margins and higher free cash flow.
An additional benefit of this journey is the transceiver will improve upon our already favorable environmental and energy profile.
We have already made significant progress on this journey and with the additions of the PMA business and <unk> Tec surfaces, along with the announced divestiture of synthetic rubber.
In late October we received the final regulatory approval for the completion of the sale of a synthetic rubber to centers.
This puts us on track to complete this transaction before the end of 2021.
At least a quarter faster than we originally anticipated.
The next step in our journey to transport Transco will be the separation of our <unk> business, which will include our feedstocks and polystyrene segments as well as our 50% stake in Americas <unk>.
It is our intention to launch a process to divest these assets in the first quarter of 2022.
By 2025, we envision <unk> being a company with EBITDA margin of at least 20% free cash flow conversion above the 80% and with a robust portfolio of sustainability focused solutions for our customers.
Not only do we expect the financial metrics and strategic options for <unk> zero to be significantly improved through the transformation of our portfolio.
But we also anticipate the additional advantage of reduced carbon and energy intensity for the remaining.
Of the remaining portfolio.
We are convinced that the carbon and energy intensity of the company are critical factors that will drive the future regulatory impact and EHS capital spending for our business over time to.
To put it another way companies with low carbon and energy intensity will be advantaged and their ability to allocate capital towards growth and shareholder value because they will be less burdened by regulations and the capital spending needed to address the inevitable energy transition.
We believe that a key performance metric for companies is profitability in relation to their C O two intensity.
Businesses that have low cotwo intensity and high profit margins can fund compliance, while growing and returning capital to their shareholders. Conversely businesses with high <unk> intensity and low profit margins will face deeper capital needs to meet future regulatory requirements.
And efficiency programs, and we will have more difficulty funding those needs.
Scope, one two and three C O two footprint reductions is a key part of trends Youre sustainability strategy.
Like the rest of the industry, we will address scope three through the careful selection of sustainability focus partners and suppliers.
As well as through recycling activities.
Slide four of our Investor deck shows how the portfolio transformation of trends, you'll reduce the scope one and two cotwo emissions of the company, while also improving the profitability.
This data represents the 2018 to 2020 average.
In fact, among the chemical companies shown on this chart <unk> would have the second lowest C O two intensity after excluding synthetic rubber.
Plus you can see that our engineered materials business has a very good position with relatively low scope, one and two cotwo intensity and relatively high EBITDA margin.
For this reason we are convinced engineered materials will continue to offer very high free cash flow and growth opportunities for <unk>.
I would also like to point out that our investor deck shows some of the other key sustainability metrics we're monitoring.
Such as water usage.
Yossi emissions and waste intensity.
Similar to carbon intensity <unk> operations at low intensity and water usage emissions and waste, which is beneficial not just for the environment, but also to my earlier point because superior environmental performance allows for more cash to be channeled toward growth and returns to <unk>.
Shareholders instead of toward compliance capital.
We're encouraged that our positive sustainability story and their efforts are being recognized by ESG Raiders, including MSCI, who awarded US a 2021 rating of double a which is very strong rating and the highest in our sector.
I look forward to continuing our momentum and sustainability is a vital part of our company strategy.
I would now like to spend a few minutes, providing a deeper insight into our engineered materials segment. This segment is comprised of PMMA resins, and sheets, thermoplastic elastomers or TPS and Richard compounds that serve end use applications, primarily in the mobility builds.
And construction consumer goods and medical markets.
Based on the estimated Q4 2021 annualized figures the business is generating about $210 million of adjusted EBITDA on sales of just over $1 billion.
We're very excited about the success of this business is head growing a sustainable product offering into various end markets.
In 2021, we anticipate that the percentage of post consumer recycled containing materials sold to the consumer electronics applications would be more than 30% of the total sales volume to that market.
To achieve this the team has been able to grow these products fivefold over the past three years.
We're also very excited about our ability to increase the profitability of the business by capturing market growth as well as realizing synergies.
We have a robust pipeline of growth opportunities for the business as well as organic investments through 2025.
In addition, about two thirds of the cost synergies, we have announced related to the recent acquisitions are expected to accrue directly to engineered materials.
This will result in a business, we expect to generate over $300 million and adjusted EBITDA by 2025.
While producing a cash conversion of about 85% over the next four years.
Engineered engineered materials competitive strength.
Is it the ability to create customer capabilities across our target markets in three ways, which we describe as innovation pillars.
These pillars are process innovation.
Sustainable solutions and material substitution.
Here are some examples of the product offerings, which results in higher value value, creating customer capabilities.
Our PC emerged compounds with 30% post consumer recycled material content allows consumer electronics customers to provide a circular consumer offering.
Our enduro continuous cast PMMA laminated with ABS provides high performance durability, and UV resistance for recreational vehicle and marine markets.
Our PMMA solar Coke cap stack resin, overstay, renick or vinyl substrates and building and construction replaces more costly higher maintenance materials with a lower cost of ownership option to the end consumer.
Ultimately these and other value added capabilities that we provide to our customers allow for higher growth rates and margins because of our ability to value price them is not dependent on cost structure and commodity cycles. The segment results are expected to be much less volatile when comparison too.
Our other segments.
Also the growth rate of this business can be higher than the underlying market growth because we can replace other materials through the capabilities we offer.
Now I'd like to turn the call over to Dave who will walk you through our Q3 performance and full year outlook.
Thanks, Frank during the third quarter, we delivered solid financial performance, despite the energy and supply chain issues that by now you are all familiar with.
Demand for our products has been very strong and we've seen very good margins due to tight supply and commercial excellence initiative initiatives.
We have been implementing over the last two years.
These results were made possible by our employees, whose dedication and problem solving allowed us to mitigate the negative impact from a challenging industry environment.
Frank and I are grateful for their hard work and they continue to be one of our greatest strengths as a company.
During the third quarter, we generated cash from operations of $208 million.
Which combined with $36 million of capital spending led to free cash flow of $173 million.
The strong quarter of cash generation can be attributed to solid earnings as well as a small working capital release of about $30 million.
Looking to the fourth quarter, we expect sequentially similar earnings higher.
Higher styrene margins, a full quarter of <unk> production.
And commercial actions are expected to offset increasing headwinds.
Chip shortages, China energy rationing and higher utility costs.
It is important to note that we view these headwinds as transitory and not reflective of underlying market demand.
Which we view as robust in all segments and geographies.
We expect to end the year with record earnings with full year net income from continuing to continuing operations of $336 million to $376 million.
And we are reaffirming our prior full year, adjusted EBITDA guidance of $750 to $800 million.
We expect full year cash from operations between 420, and $445 million and free cash flow of $300 million to $325 million.
The anticipated strong cash generation is particularly notable given an assumed $200 million of use of working capital caused by feedstock price increases over the course of the year.
Putting together our earnings and cash guidance, we expect to finish the year with a net <unk> net leverage ratio in the low twos.
Pro forma for the acquired PMMA and Arris TEG surfaces business businesses.
Which puts us more than one year ahead of the deleveraging schedule that we laid out in December of last year, when we announced the PMA acquisition.
The takeaway is that we closed out 2021, an excellent financial position to continue funding our transformation strategy and returning capital to shareholders.
I'll now turn the call back over to Frank.
Thanks, Dave.
In closing I'd like to leave you with a few summary points center recent performance and portfolio transformation with.
With the planned separation of our <unk> assets, which we expect will begin in 2022, we will look transformed our portfolio to what should result in a much less cyclical higher margin and a higher free cash flow business.
The portfolio should also have an even more advantaged carbon and energy footprint and be better positioned to continue growing and returning value to shareholders through the anticipated energy transition in the chemical industry.
We believe <unk> represents an excellent value to investors with a robust pipeline of profit improvement opportunities free cash flow conversion of approximately 80% and the net debt in the low two times range.
Thanks, and we're happy to open the line for questions.
Thank you at this time, if you would like to ask a question. Please press the star followed by the number one on your telephone keypad to withdraw your question.
Please standby, while we compile the Q&A roster.
Your first question comes from the line of Frank Mitsch with Fermium research.
Hey, good morning.
Good morning, everyone Frank.
On the potential sale of styrene and so I just wanted to dig into that a little bit I assume you've had some conversations with the investment bankers on this and whats.
What are you hearing with respect to the M&A environment for commodities and the interest that this made this property may be able to generate from either strategics or private equity any more color on the market would be great.
Yes, Thanks Frank.
We think that will have a very good process. We think that there is really three categories of buyers who will have interest obviously there are strategics.
And vessel who are in the same value chain that we anticipate will be interested.
We also think there's regional players who will want exposure to North America and European <unk> markets.
And then lastly.
We believe that there is a good.
A number of financial sponsors who are looking for to do a roll up if you will in the aggregate assets that offer a high cash on cash return so.
We expect to have a good process a robust number of participants in those categories.
Got you got you and then just a quick question on the guide for the fourth quarter.
You call out higher styrene margins here in the fourth quarter and we just saw a very significant increase.
In Europe for the month of November I think it was up 232 euro per ton.
What's the scope here for potential upside in terms of the margins on styrene and polystyrene impacting your fourth quarter. How do you how do you think about it what's baked in.
Yes.
So yes, it's a great question and I would say look we're.
There is a mixed bag of factors that are impacting the business going forward. If you think about it energy price quarter over quarter is going to be a $30 million approximately and they're the chip shortage should.
Give us about $10 million to $15 million of headwind across the portfolio now offsetting that we're going to see the traction in the pricing actions, we've taken in engineered materials as well as soft.
Based plastics and then as you pointed out the uplift in some of the styrene margins. So.
Yes.
Those are the.
Pluses and minus the Gibson goes that are going to lead to.
How we've guided for the Q4 and full year.
Got you very helpful. Thanks.
Sure.
Your next question comes from the line of Laurence Alexander with Jefferies.
Good morning can you give us a sense of your thoughts about what the new.
<unk>.
Balance sheet should look like or how are you thinking about.
Cap allocation or future bolt on M&A or.
Willingness to do further large M&A.
Just to give a sense for what happens once the divestitures out of the way.
Yes, thanks Laurence.
Look I think our priority clearly in the near term is to get through the integration and.
Realize the synergies and execute against the growth programs that we've identified from what we've already bought.
And also complete the separation of <unk> now going forward.
Frankly, we'd see a balanced approach to looking at.
Future M&A, but and frankly, we want to continue.
Portfolio of transformation, but as long as we trade at.
15% plus free cash flow yield, we believe that our own shares represent.
A compelling investment opportunity that will have to be part of our calculus, and how we think about capital allocation.
So that's how we would think about it at this point.
So again balance looking at.
Additional investments in sustainability and in growth opportunities, both organic and inorganic along with.
Our own shares as long as we trade, where we do before re rating upward.
And given the discussion both in the U.
So prepared remarks, but also.
In your appendix.
Slides around sort of the environmental footprint of our portfolio.
What is the kind of degree of demand pull that you see.
Seeing our signaling that youre seeing from your customers.
That's.
He's either translating into better returns or more order stability or like what's the kind of real world.
Flow through of these metrics.
Or is this.
Or are you seeing this more as a kind of regulatory or disclosure issue rather than a customer issue.
No it's great question and actually it's that.
It's a change that we've seen during the course of 'twenty. One that's marked and what's happening is the discussions that we've had prior to this year with our customers.
I would say this broad based but in particular in consumer products as well as automotive.
Has been really driven but it's been a value based discussion and.
Something a more technical discussion the two topics that have really emerged during the course of 2021 and are now really significant factors with those clients are supply security of supply and supply chain integrity as well as the sustainability of your offering because they are under.
And what we're being told is there are there are being pressured significantly to reduce the carbon footprint of their product and they're translating this into there.
Into there.
Vendor selection and material selection criteria. So it's a very important customer related factor and it's growing in importance I would argue.
Okay, great. Thank you.
Your next question comes from the line at this time Ahmed without Lindsay Alembic Global advisors.
Good morning, Dave.
Yes.
A bit of a philosophical question about.
The portfolio transformation strategy and the like.
Obviously I understand.
The transformation and the philosophy behind that I mean, you're obviously, creating a less volatile sort of earnings profile, you're improving the margin profile, while obviously enhancing.
The free cash flow conversion, obviously inherent in all of that is that you get multiple re rating right.
And I mean, if one looks at the last couple of years.
Multiple compression within the chemical space has been quiet.
And I understand the fact that everyone seems to be sort of thinking the entire sector with one broad brush.
And not delineating between call it the margin stability, so I'd to say H commodities from specialties and even the carbon footprint that you've talked about so long winded way of asking you.
You carry out this sort of portfolio transformation.
Out two years out and you are still not getting the multiples that you desire.
How would you think about things in that environment. I mean would you sort of a company is considered a sale would you just buyback the company and say look maybe theres no place in the public domain for the company. Despite all of these efforts.
Yes no.
Thanks for the question and.
I think the answer is really simple and it's twofold one.
We asked ourselves several years ago, where as a company like <unk> best able to compete and grow in the future is it in a specialty business.
Or is it in a more of a cyclical commodity business and it's very clear to us that we are much accompanied <unk> size of mid cap or small cap company is much better able to grow and return value to shareholders as a specialty company than we are.
In a global commodity market when.
When you don't have access to the cracker or advantaged feedstocks. So that's number one.
Okay as we go forward with that transformation.
One of the key outcomes is we're going to generate significant free cash flow. So the this.
This is one of the things. We're most excited about about this portfolio. So the growth opportunities that will have relative to organic and inorganic opportunities are going to be significant and then the other thing is if we're in a.
In an environment, where all that free cash flow is not our debt free cash flow yield isn't re rated up Trinity ozone shares represent a compelling investment opportunity that we will have to figure in the mix of our capital allocation, we will have to consider so again we.
Think that.
Our strategic options are vastly improved with the transformation we've made.
Going forward.
It makes a lot of Samsung <unk> makes a lot of sense and as a follow up again in light of.
My question the answer that you gave in the like again wanted to revisit the whole sort of capital allocation side effect.
In the near to medium term right.
One two or three years out.
What is the right way of thinking about buybacks and I know that probably is a moving target but.
How do you sort of.
Bookend.
That moving target with regards to buybacks.
Yes.
I think it's exactly what I said before as long as we are.
We look at external opportunities and organic investments.
We will have to weigh that against the opportunity to buy our own shares and when we do that calculus, if on a synergy adjusted basis and strategically.
Our own shares represent a compelling opportunity we will have to consider that so.
Yeah.
I can't give you a definitive answer other than you know.
We think <unk> represents.
Really compelling investment opportunity not only for the market, but for ourselves with the free cash flow we'll be generating.
Very helpful. Thanks, so much thank.
Thank you.
Your next question comes from the line of David Begleiter with Deutsche Bank.
Hi, good morning Frankenberger.
Thanks.
Polystyrene is it does have some performance attribute similar to engineered.
Engineered materials.
David.
The.
I think the simple answer is we did evaluate a number of options and what we would retain and and frankly, we see that.
That activity Europe, polystyrene fits with the styrene monomers and gives them the opportunity to divest at some critical mass.
And then I would say that the market overlap with the rest of the portfolio.
<unk>.
It is less.
<unk> less market traction and market synergies than the portfolio that we're building building in engineered materials based plastics and then also with latex so.
At the end of the day, we looked at various options and we came out in favor of it had to be included.
The other thing I would point out is we would expect that the recycled.
Polystyrene should be included also in our in what would be divested.
With polystyrene because at the end of the day.
The biggest source of feed for that recycling.
<unk> is going to be.
Single use plastics or pet plastic packaging.
That contains polystyrene so we see those as being included in that scope.
Understood.
Just on the M&A question there are at least two.
Large assets to sell right now and this engineered materials space.
Given the scarcity of these assets.
You may not match up perfectly with what you're trying to accomplish.
But given the scarcity of assets on the premium versus the tenure for growth versus share buybacks might be a little more aggressive perhaps right now given again the uniqueness of these assets for sale.
Okay.
Yes, David.
Like I said before.
We've done a lot. This year, we have a lot to do with the separation of <unk>.
Of the <unk> assets as well as completing the integration of that what we've already acquired and thats going to be our near term priority.
Got it thank you very much.
Thank you.
Your next question comes from the line of Duffy Fischer with Barclays.
Yes, good morning.
Just on the upcoming separation styrene polystyrene I guess first question is how clean is that going to be for you guys plant site wise.
Intercompany supply wise stranded cost that type of stuff.
Yes.
Duffy Hi, it's David well I think there has to be I mean, the Americas <unk> piece, obviously is quite clean thats the joint.
Yes.
Separate separate company, it's a joint venture.
Now.
Now within <unk>.
We'll be a carve out we will have.
I would expect our downstream businesses to have supply agreements.
With the carve out businesses as it relates to styrene.
And <unk>.
Some of the sites that all of the sites are are kind of.
Co located with other with other businesses.
With other trends your businesses. So there is a fair amount of separation work to do we've already started that I think thats. The good news Thats why we are kicking off a process in the first quarter, we started working on the.
Not only carve out financials, but also the <unk>.
Carving out of the.
The operation the supply agreements and all those sorts of things. So so it is a fair amount of work that does have some lead time, but I think it's a manageable process that allow us to kick things off in the first quarter.
Okay.
And then roughly how many employees would you expect to go with that carve out and then do you have an early view of how much stranded costs will be left that youll have to work down over time.
Yes, we're working through those.
In terms of the specific ftes or the employees.
Can't give you a number right now.
And also the stranded costs.
That's something we will have we're working on.
To understand what that would be.
Okay, Alright, thank you guys.
Okay.
Your next question comes from the line of Eric Petrie with Citi.
Hey, good morning, Frank.
Good morning, Eric.
On the PMA upfront investment in Asia, how much would a plant cost in the is margins in line with that 25% target that you put out for 2025.
So.
So we're.
In the process of doing some preliminary engineering and site selection work.
We have seen an estimate of preliminary estimates that would put.
A greenfield investment at somewhere around $40 million.
Now if we are able to.
Put the investment on our site.
Where we have some infrastructure it could affect that.
That's order of magnitude, what we're thinking and yes.
For us the investment in Asia Pacific for the scale that we're thinking and let me remind you its focus will be on formulated PMMA resin.
That goes into more of the specialty applications that serves our global customers, So think global Oems and being able to supply them in all regions with the same.
Specification materials, we think that we will achieve that that margin.
Helpful. And then secondly, just on the engineered materials business from the Recyclability eight point of view of that 30% sales volume.
Most of that in PMMA or could you take that.
Step back for us in terms of how you see that going forward in terms of the buckets between PMMA rigid compounds and <unk> TP.
Yes so.
The 30% that I referenced is specific mainly to PC ABS compounds that goes into.
Consumer electronics, and Thats, where our group has had some traction over the last several years building that offering.
Now I would expect that we would see.
Similar growth traction on the circular.
PMMA offering as we do.
We have more time under our belt as the owner of the asset going.
Going forward and we're seeing a similar interest from the customer base.
In those end markets too.
Thank you.
Again to ask an audio question. Please press star one on your telephone keypad.
Our next question comes from the line of Angel Castillo with Morgan Stanley.
Hi, Thanks for taking my question and good morning, just wanted to get a little bit more color on the engineered materials business.
Give us a little bit more color as to what I guess, what pressure to that in the third quarter and the implied guidance for the fourth quarter.
Based on the kind of $210 million EBITDA that you gave could you kind of bridge similar to what you gave in terms of the puts and takes for the full company what kind of the puts and takes that get you from kind of a third quarter EBITDA to that implied kind of low 50 million.
EBITDA for the fourth quarter.
Yeah, Hey, good morning Angel. This is Dave I can address that I think probably for starters given the automotive exposure that we do have in the PMA business.
I would expect the third quarter to always be the lowest level of EBITDA and Thats just due to automotive production seasonality. So not only for this year, but going forward I would always expect that seasonally speaking now auto demand was incrementally lower.
What we would expect just due to seasonality.
Due to the supply challenges that I think everybody is aware of it the Oems.
Now compounding this in the third quarter, we had an extremely rapid pace of feedstock increases specifically MMA increases in the third quarter.
And our price increases just weren't able to keep up with that so transitioning to Q4.
Youre right, we do expect EBITDA to be about $20 million higher for engineered materials.
And that's really attributable to three things. The first is pricing actions that we've taken that have gone into place.
On October one.
The second is we have higher we're seeing higher MMA margins on the merchant volume that we do have an.
Our MMA production in Europe.
And then the third thing is we do have an incremental two months results.
Of Arris Tech that.
That will be so we are reporting a full quarter of Arris Tech results in the fourth fourth quarter, whereas we only had one quarter in Q3 or one month excuse me in the third quarter.
Okay got it that's helpful. And then in terms of the Capex that was reduced for the year.
What was the driver for that and how should we think about it for 2022 and beyond it sounds like some of that maybe.
<unk> planned in Asia might be part of that but how should we think about timing of that.
Yes, I think.
With most of the Capex.
So we lowered our capex from 150 to 120, I would say, 20% to $25 million of that is purely going to be rollover. So.
Our other vendors are having supply chain issues as well so getting things that we've ordered is taking longer.
Really across the board. So I would expect that that spend is still occur, but it will just roll over into next year into 2022.
Angel the other thing I think I mentioned this in the last call. It 2022 will be.
The peak year of spending as it relates to our SAP implementation. So.
Clearly.
We do see 'twenty, two as being a higher year for capital.
In 2021.
There are no further questions at this time. This concludes today's conference call. We thank you for your participation you may now disconnect your lines.
Thank you.
[music].