Q1 2022 Trinseo PLC Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the <unk> first quarter 'twenty to 'twenty two 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 brief remarks by the management team followed by a question and answer session.
Company distributed its press release, along with its presentation slides at close of market Wednesday may four at these documents are posted on the company's Investor Relations website and furnished on a form 8-K filed with the Securities and Exchange Commission.
No one should require operator assistance during the call. Please press Star then zero on your telephone I'll now hand, the call over to Andy Myers.
Thank you Sarah 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.
Bribed 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 <unk> 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 replay will be available until May five 2023.
Now I'd like to turn the call over to Frank <unk>.
Thanks, Andy and welcome to our first quarter earnings call we.
We had a very good start to the year with continued solid earnings in the first quarter.
Q1 results reflect the continued progress we have made in reshaping our portfolio as it was one of the highest quarterly adjusted earnings results.
The company in the company's history.
I'm, particularly pleased with this as we're operating in a challenging macro environment, which now includes uncertainty and volatility volatility from the conflict in eastern Europe .
Our thoughts are with the people of Ukraine, and I want to thank our employees, who have shown great generosity through their donations to benefit those who had their safety and well being compromised.
The conflict has had no direct impact on our operations as all of our plants in the region are in Western Europe with no regular direct suppliers in Ukraine, Russia, Belarus. However.
However, we have observed indirect impacts in the region, including automotive production issues as well as higher and more volatile prices of natural gas and other inputs.
We've taken proactive steps to mitigate some of these effects, including creating new mechanisms for customer pricing to more accurately pass through input costs.
These actions have helped but given the volatile volatile environment, we're still subject to significant day to day swings in prices.
I am confident that our teams will continue to find ways to securely source raw materials and keep our operations running to provide customers with their quality products in the timely manner.
While we contend with external challenges our strategic focus continues to be on the transformation of <unk> to our specialty material and sustainable solution provider.
As you know we've already taken several meaningful steps in this process, including the acquisitions of our PMA business Ers Tech surfaces, and the recycled materials business Keith one.
These new businesses.
Greatly expanded the opportunity landscape for organic growth.
By providing us with access to new markets, new products and new top line synergies due to our unique product portfolio.
To realize these growth opportunities, we're focusing on three distinct dimensions of growth, which will impact our core business by strengthening the core <unk>.
Extending the quarter and expanding the core.
Internally, we have begun to refer to these distinct efforts as our C strategy or SCE for short.
I would like to elaborate on these three growth dimensions to provide some color on them and to highlight some of the progress we've made.
First our strengthened the core efforts focus on improving our position in the markets in which we currently operate by reducing our cost position in our core chemistries driving business excellence programs and delivering on cost synergies from our recent acquisitions.
More importantly, our efforts to strengthen the core include our efforts to leverage our new capabilities.
Grow our total addressable market or Tam.
A good example of growing our total addressable market is through material replacement, such as replacing painted metal exterior trim parts with color matched PMA products.
This application creates value for our customers by reducing emissions weight and cost.
Material replacement is a significant opportunity for us because we can offer customers a quality product that not only cost less to us, but it's more environmentally friendly by virtue of eliminating process steps or alternative materials that have higher <unk> footprints.
For example, because we have both PMA and ABS in our portfolio, we're able to offer multiple end markets, a PMA laminate sheet and any color that's reinforced by ABS rather than the more conventionally used fiberglass.
This whole laminate product, which is Q1 sales volume growth of more than 20% versus prior year provides.
Customers with a solution that is both lower cost and more sustainable.
In total we believe we can expand our total addressable market and auto building and construction and consumer goods by over $3 billion.
The second area of growth focus.
<unk> on those opportunities to extend the core by moving the core business into new higher value added applications via M&A.
We will also extend the core through the implementation of our sustainability roadmap, which has three building blocks.
These efforts focus on Decarbonising, our operations developing an advantage product offering based on recycled materials and lastly, developing a sustainable feedstock business.
This involves positioning <unk>.
As a leader in waste polymer collection, and recycling and upgrading it to our innovative technologies.
Which will allow us to offer more sustainable solutions.
That was the main rationale behind the recent acquisition of the plastics waste collector and Recycler Eastland earlier this year.
We view security of supply of sustainable feedstocks is vital to our long term success and sustainability.
While <unk> has been our first major step into recycling feedstocks.
We will look to expand the sustainable business units organically and Inorganically.
In addition to strengthening and extending our position in our core markets. We look to create additional opportunities to grow further by expanding the core through the addition of complementary technologies.
This will be accomplished through targeted M&A of specialty businesses with attractive adjacent chemistries that broaden our offerings into applications in mobility building and construction medical and consumer goods.
The potential divestiture of the <unk> business, which continues to progress would provide us with capital that will aid in this effort.
But setting aside the potential proceeds from the sale, we are well positioned to grow thanks to our strong balance sheet and a portfolio that is very cash generative with relatively low capital intensity.
To effectively guide these SCE efforts.
We have recently added three new executive leadership positions.
Chief Sustainability Officer, Chief Commercial Officer, and Chief Technology Officer.
These positions will report to me and be part of our executive leadership team.
Francesco River, Barry was appointed as Chief Sustainability Officer last October .
Our primary responsibility is to keep us on track to achieve our 2030 sustainability goals as well as expand our product portfolio of sustainable materials, such as the recently launched Magnum bio ABS resin for automotive applications, which contains up to 80% <unk>.
Good content.
She will also take the lead in defining the investments and partnerships required to decarbonize our assets in.
In fact her team's efforts have already defined an opportunity to decrease our already market, leading scope, one and two emissions by over 70% by 2035.
Which is significantly ahead of our previously stated goal of 35% reduction.
I am also thrilled to point out that our Q1 sales volume and variable margin of recycled containing solutions grew 39% and 31% respectively over the prior year.
To give you a sense of scale for our sales of these solutions they represent about $30 million in annual variable margin.
The role of Chief Commercial Officer was recently filled by Andre <unk>, who.
Who was previously responsible for our strategy and corporate development efforts in this new role Andre will ensure that we have the right commercial processes and tools in place to better serve our customers. He.
He will also have oversight over all of our organic growth opportunities and will provide the dedicated focus to resource and drive these market expanding efforts, which focus on material replacement.
To give you some sense of scale for our existing material replacement activities. These represent about $100 million.
Annual variable margin.
The role of Chief Technology Officer, which we expect to fill soon will be responsible for creating a framework for our technology and innovation capabilities that allow us to provide solutions and products that differentiate <unk> zero and expand our total addressable market.
Before I turn the call over to Dave I'd like to comment on a recent press release concerning the request for information related to styrene monomer purchasing activity that we've received from the European Commission in 2018.
As a result of further developments on this matter we have recorded a reserve of $36 million in the first quarter.
We continue to cooperate fully and look forward to the resolution of this matter lastly, we do not expect this to impact the sales process of our <unk> business.
Now I would like to hand, the call over to Dave who will comment on our first quarter earnings.
Thank you Frank.
First quarter adjusted EBITDA of $178 million was similar to the prior year, but with an improvement in the quality of earnings at the specialty segments of our portfolio made up a larger share of our profitability.
Last year's outsized contribution from feedstocks was replaced primarily by the incremental earnings from our acquired businesses in engineered materials.
The benefit from the large favorable net timing variance in the first quarter of this year was mostly offset by about $20 million of headwinds, including lost sales from industry supply chain issues and lower margin from volatile input costs.
While we made progress in pricing to more effectively react to rapidly increasing input costs.
The high level of volatility and the lag effect of pricing still lead to some large some earnings headwinds mostly in engineered materials.
The engineered materials segment also experienced a reduced benefit from ammonium sulfate sales during the quarter.
Ammonium sulfate as a byproduct in the C. Three MMA production process that we use that we utilize in Europe .
We produce about 180 kilotons of ammonium sulfate per year and sell it into the fertilizer market in Europe .
As most of you are probably already aware nitrogen fertilizers in general have experienced a significant increase in price during the quarter because of the conflict in Ukraine.
This historic price increase push demand.
Out of the first quarter and into later quarters of 2022.
We're already seeing demand return in Q2 as commodity grain prices are stimulating increased plantings in Europe .
We had cash use of operations of $5 million during the first quarter, leading to a negative free cash flow of $30 million.
Which included a use of working capital of $103 million with.
We typically have a working capital use in the first quarter following seasonally lower December sales volume.
But this year is draw was exacerbated by a steep rise in raw material prices and an inventory build ahead of planned turnarounds in the second quarter.
We should generate higher cash in the coming quarters as we don't expect a continuation of the rapid rise in raw materials.
And as we run off inventories after mid year turnarounds.
We will continue to use the cash to grow the company and to return cash to shareholders, including via our share repurchase program, which as of the end of March still had $100 million.
Of authorization remaining after another $50 million of repurchases during the first quarter.
Now I'll turn the call back over to Frank to comment on our updated guidance and expectations.
Thanks, Dave.
Looking ahead to the second quarter, we expect earnings to be sequentially, similar as higher styrene profitability higher margins in engineered materials and stronger volumes in latex binders are offset by more normalized margins in polystyrene ABS and polycarbonate products.
We still expect 2020 to be another Europe solid earnings and we expect full year net income of $174 million to $211 million and adjusted EBITDA of $625 million to $675 million.
This outlook assumes a continuation of the Q1 demand levels through the end of the year.
<unk> impacts from the Ukraine conflict inflationary pressure and more modest automotive production growth.
Our previous outlook reflected an easing of these conditions following the first quarter. It did not consider a military conflict in Europe or ongoing Covid lockdowns in China.
This also includes an anticipated $35 million impact in the second quarter from.
From the current styrene production outages at our <unk> site and <unk> St James site in.
In addition, we expect no meaningful net timing impact over the remainder of the year.
We expect to generate cash from operations of approximately $355 million.
And free cash flow of approximately $175 million.
Which we'll use to continue to provide value to shareholders by both growing the business and specialty and sustainable areas and providing cash returns.
Certainly there is no shortage of uncertainty in the world right now, but we are well positioned to navigate this environment with a strong balance sheet continued progress on our transformation journey and skilled teams to provide our customers with our quality products and solutions.
Now we're happy to take questions. Thank you.
As a reminder to ask a quick question knowing need to press star one on your telephone to withdraw your question press the pound key.
Again, if he would like to ask a question press Star then the number one on your telephone keypad. Please standby will be compile the Q&A roster.
Our first question comes from the line of Frank Mitsch Fermium Research. Your line is open.
Good morning, and thank you for the additional color.
I was wondering.
In your comments as well as in the in the release Youre, saying that these diabetics divestiture process.
That youre running continues to progress. So I was wondering if you might be able to provide any more color.
On perhaps the timing or the or the interest level that youre seeing there.
There has been some concerns that with the energy situation in Europe .
That might have made things a bit more problematic any color there would be very helpful.
Yes, Frank as we've said previously we expect to see this our process play out by mid year and it continues to progress as we expected. So we haven't seen any negative impacts in our process related to the energy price increases in Europe .
Fantastic very.
Very helpful.
And we saw that styrene margins.
Come in better than anticipated and I was wondering.
What's your what's your outlook is there.
Sure.
Zinc styrene margin.
While the styrene margins are significantly elevated right now because of a number of outages in the industry as well as the arbitrage window being unavailable because of logistics challenges. So.
We see that that fly up margin or.
Sure.
Higher than normal margins in styrene to continue through Q2, but then normalize in the second half of the year or two.
Basically.
Zero EBITDA contribution level.
Okay got it.
In Europe <unk> will.
Revert back to its normalized earnings levels.
Because of their advantage cost positions.
Very helpful.
Thanks, so much.
Your next question comes from the line of David Begleiter with Deutsche Bank. Your line is open.
Good morning, Frank and Dave.
Guys can you to the ridge the.
EBITDA reduction guidance I know a big chunk of that is are the aggregate and that's the news and in St. James could you bridge the remainder of that save $5 million decrease at the midpoint of the current and prior EBITDA guidance.
So maybe I'll give you.
I think the simple answer is we think that.
We think the rest of the year, we will continue at an environment similar to what we experienced in Q1.
<unk>.
With.
With the elimination of the <unk>.
Timing benefit and the fly up margin that we're currently seeing in styrene margins.
Ending.
Not recurring in the second half of the year so.
Yes, that's how we get to the full year.
To the extent that there is an improvement in the.
The conditions that we see versus Q1, there would be some upside.
Dave It's David.
Add on to it if you don't mind.
To be clear on the $75 million reduction.
You correctly highlighted that $35 million that we expect the impact of the outages to be in the quarter and that's across both Americas, <unk> and our own feedstock segment.
That is not a component of the $75 million because.
Our prior guidance didn't assume those fly up margins to begin with.
Right. So that's that.
So I think.
Ted.
So the real.
<unk> the change in guidance is entirely due.
To a change in our assumptions on the business conditions through the rest of the year.
From what we from what we gave in the first quarter.
And to break that down a little more finely I mean, theres really three components to that there's there's automotive demand.
Okay.
The cross based plastics and engineered materials.
There is lower margin than polycarbonate that we highlighted.
And the other bucket is.
Really a lot of smaller things that are really all it really attributable to the <unk>.
Same things that we've been talking about supply chain challenges.
And.
Covid related coke.
Covid related shutdown issues in China.
Those are largely the three buckets, but I just wanted to make sure you understand that the $35 million is not part of that bridge.
No very helpful. Dave. Thank you for that and just on ammonium sulfate can you quantify the shift of earnings from Q1 to the back half of the year and what's normalized earnings in that in that line of business for you guys.
Well the way we account for that David.
It's a it is a byproduct of producing MMA. So the way we account for it.
We don't book revenue and margin that you would see it's it's booked as a credit to the manufacturing cost.
So.
Yes.
It lowers cost of goods sold I guess, you would say.
I, probably wouldn't consider that Dave to be a profit.
Obviously as profitable.
But.
The way, we think about it is as a natural hedge against it's a natural hedge that exists in that business against a portion of our natural gas.
Purchases and the reason I say that is what drives the price the price of ammonium sulfate is the price of ammonia what drives the price of ammonia its natural gas.
So the sales of that byproduct.
The sales the dollar amount of those sales is really driven by the price of natural gas.
And like I said.
The the income if you will that we recognize from the sales.
Really serve as a natural offset of part of our.
Natural gas purchases.
Does that makes sense.
It does and I appreciate that.
That detail. Thank you.
Your next question comes from the line of Hassan Ahmed with Alembic Global Advisors. Your line is open.
Thanks, Dave.
A question around Ian segment margins.
They jumped up nicely sequentially from nine 4% to 11, 9%.
The question is that.
Obviously 2022 is certainly not a normal year with all of the cross currency, we're seeing vehicle logistical be it.
So auto end market demand and the like.
Twofold question one is.
Would these margins through the course of 2022, and where do you see them going in a more normalized environment.
So the.
So thanks for the question and let.
Let me first point out that as steep as Dave mentioned, we did have some headwinds in Q1.
That we highlighted in the earnings release and in fact, we said approximately $20 million of nonrecurring headwinds in the first quarter I would say slightly less than half of that accrues to.
So you could expect that in Q1, we would have had low $40 million.
Adjusted EBITDA contribution from E minus those nonrecurring items it puts us into the mid teen range now.
Historically, when we guided to.
Sure.
Gave us some feedback on where we envision <unk> being in the low $20 million.
Over $50 million quarterly EBITDA contribution that contemplates a normalization of auto builds.
Two a levels that we were anticipating.
Historically, but it also.
Which contemplates that.
The supply chain issues and the extreme freight inflation coming out of China normalizes, because those two factors.
Depressing, let's say demand for EM materials. So I think in the near term, we expect that those one time issues to go away and in the medium term as we continue growing the.
These growth programs as well as we see markets in China and in automotive normalizing, we would get into the low fifty's.
Very helpful. Thanks, and as a follow up.
In the press release, you guys put out.
There was a line, stating that the synergy pipeline is greater than anticipated.
I'd love some sort of further color around that.
So the.
On the cost synergies.
We're clearly on track to deliver the year, one savings of $10 million were clear.
Clearly above that.
The full synergies between east.
Eric <unk> surfaces as well as the PMA acquisition.
We're in total cost savings synergies were $60 million is what we stated over the three year period.
The first three years, we are well on track to achieve those and we see greater.
A bigger pipeline than than that $60 million in aggregate were significantly higher is on the growth side and as I've mentioned in the.
Market expansion opportunities that we have that we previously didn't have.
We can expand our total addressable market by over $3 billion and.
So.
Okay.
It's a very significant expansion opportunity and.
As I said in the script it was though.
Those markets are.
Material replacement activities today that are ongoing.
Represent $100 million in.
Annual variable margin. So they are they are there.
There are ongoing there are significant already and they're growing much faster than the.
The market.
Because of the value proposition that we offer so that's the color I would give you.
Very helpful. Frank Thank you so much.
Sure.
Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open.
Good morning, a question about sort of your customer activity I mean to what extent.
Given the range of end markets your exposure to what extent are.
<unk> customer value chains, not living hand to mouth that is selling everything they produce.
Are you seeing any signs of customers be able to get some slack and build inventory.
I would say gen.
Generally the answer is no.
We arent really seeing inventories being built.
In any of the major markets that we participate in.
And can you give us a feel for kind of the level of incentives.
And the kind of capital intensity of expanding capacity in your downstream businesses given how strong demand is in the size of the opportunity.
And then the new product replacement areas.
Yes, so in the in the product replacement technologies.
It's a mixed bag and I would say, there's probably five distinct opportunities that we have.
Many of these we have the ability to grow.
Organically with very little capital investments, so single digit to low double digit million capital investments to affect that.
The growth in those areas.
So they are not capital intensive and we have the ability to grow them.
Significantly.
Okay. Thank you one I guess the one thing as we pointed this out previously we will make an expansion of our <unk>.
PMMA business into Asia and.
That capital is in the mid double digit million.
Capital.
<unk> now.
I do want to spend a second.
On the opportunities that I highlighted to reduce the carbon footprint of our.
Of our business because we see <unk>.
Not only does it improve our environmental footprint, but it creates an opex savings and reduces our energy dependence and there are the $70 million in.
Our 70% reduction in scope, one and two emissions that I referenced in the script is associated with approximately $100 million of capital investment over the rest of this decade.
Okay perfect that's helpful. Thanks.
Ken if he would like to ask a question press Star then the number one on your telephone keypad.
Our next question comes from the line of Andrew <unk> with Morgan Stanley . Your line is open.
Hi, Thanks for taking my question just a quick one on the.
Normalization around margins for ABS polystyrene and polycarbonate. One I was wondering if you could give us a little bit more color as to what youre seeing a cost I know that auto is a big market.
And then maybe ABS RPC, but across other end markets. What are you seeing and specifically as we think about the second half and the margin normalization of it.
Product.
Where do they go in the second half and where do they go kind of as we think about 2023 and in a more kind of steady state environment.
Okay.
Well, let me I'll give you some background.
So as you know PC in ABS, the biggest consuming regions of.
In the World is China with some of the Rolling Lockdowns.
The demand in Asia has been reduced and at the same time, we've seen double low double digit capacity expansion to the global supply our current PC and ABS in Asia.
So that's put some margin pressure or made these the supply demand balance.
It's gotten a bit long in.
And we anticipate that staying through the remainder of the year and Thats whats.
Whats driving the normalization of the margins that we anticipate.
Got it that's very helpful and I guess as you think about that.
I think the guidance right now implies something like a 150 million.
<unk> types.
EBITDA in the back half kind of exit rate.
So roughly $600 million on an annualized basis is that the level you would kind of anticipate as we move forward or it sounds like it's fairly diverse so as autos and other.
And markets recover you would anticipate.
Further I guess improvement in that.
As we think about other products normalizing that gave me SPC would you anticipate some kind of offset and therefore that should be $5 million is roughly kind of a good level as we think beyond 2022 or is that how.
How would you think about it.
Yes.
The answer is yes. This is Dave the answer is yes, there is an offset and the offset is.
Is going to be improvement in engineered materials for the reasons that we just talked about so.
To be clear and just to add onto what Frank said I mean, I think that the direct question was is there still some over earning that exist in based plastics.
In polystyrene.
In Q1, I mean, clearly we highlighted that Q4 was.
Some over earning.
And that over earning there probably was some over earning that existed in the first quarter also so you are right.
We do expect the normal kind of a normalization of margins in.
And both polystyrene and base plastics as we go to the back half of the year to put a number on that on a quarterly basis I would say the two of those combined.
Probably over earned by 20% to $25 million in the first quarter. So that's what that's the magnitude I would say of the normalization.
So yes, you are right also what the guidance implies as.
Order of magnitude of $150 million of 600 a quarter.
In the back half of the year, moving what will offset that decline I mean, thats clearly improvement in engineered materials and.
And the other thing is.
<unk>.
The realization of synergies.
Frankly, I am talking about the cost synergies here.
As Frank said, we're well ahead of our.
What we said was the target for the first quarter and looking at for the first year.
And looking ahead to the second year. So I think those two things combined are what are what offsets the.
The decline Angel.
Very helpful. Thank you.
Your next question comes from the line of Matthew Blair from Tudor, Pickering, Holt and company. Your line is open.
Yes. Good morning, everyone. So I think back in December you announced the 200 million buyback program over the next 18 months Q1 buybacks quite strong over over $50 million, how should we think about the cadence of buybacks.
In Q2.
Beyond and is there potential for you too.
Re up this program finish it early and re up at higher levels.
Yes, Hi, Matthew it's Dave again, Yeah look is there a potential I mean, absolutely.
As I said, we have another $100 million left under the authorization.
We see a lot of value in buying back our stock at these levels I would expect Q2 to be a similar number to Q1.
And you know.
As.
When the program exhaust ourselves, we'll talk to our board.
In light of our balance sheet position and whatever what other cash needs we have in <unk>.
I have a discussion about putting in place a new authorization, but.
You know.
So I don't want I can't really comment beyond that other than to say that we clearly see a lot of value.
And buying back stock at our current multiple high cash flow yield in <unk>.
Q2 expect a similar number to Q1 and Q4.
I'll leave it there thank you.
There are no question at this time. This concludes today's conference call. Thank you for participating you may now disconnect.
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