Q3 2022 Trinseo PLC Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the intrinsic <unk> third quarter 2022 financial results Conference call. We welcome the <unk> management team, Frank those edge, 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 followed by a question and answer session. The company distributed its press release, along with its presentation slides at close of market Wednesday November 2nd. 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.
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 Regina 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 <unk> of our annual report on Form 10-K or in our other filings made with the Securities and Exchange Commission.
<unk> undertakes no obligation to update or revise its forward looking statements.
Today's presentation includes certain non-GAAP measurements, a reconciliation of these measurements to corresponding GAAP measures is provided in our earnings release and in the appendix of our Investor presentation.
A replay of the conference call and transcript will be archived on the company's Investor Relations website. Shortly following the conference call.
A replay will be available until November 3rd 23, now I'd like to turn the call over to Frank Bozich.
Thanks, Andy and good morning, everyone.
As we highlighted in our last quarterly call the combination of economic uncertainty high energy prices and falling raw material prices.
Falling raw material prices triggered significant customer destocking throughout the third quarter.
In addition record energy prices in Europe resulted in reduced demand and lower margins due to the inability to fully recover input cost.
We estimate that the sequential impact of higher gas costs on margins in Q3 was about $50 million.
Asian demand remained consistent with Q2 levels and there was no significant demand improvement as COVID-19 restrictions continue.
North American demand was steady in auto, but demand for building and construction applications and consumer discretionary items fell during the quarter as a result of rising interest rates and inflation.
Yes.
Against this economic backdrop, our volumes and margins in Europe showed considerable weakness during the quarter. Additionally, elevated energy costs place the entire industry has more energy intensive products on the high end of the global cost curve and as a result created opportunities for regional arbitrage.
For a more globally traded products like styrene polycarbonate, the adverse impact on margins was significant with the oversupply and leading to negative margins.
In response to these market conditions, we've announced several potential actions, which we are considering to optimize our assets and improve our cost position with the largest area of focus on the more energy intensive products in our portfolio, namely styrene and polycarbonate.
We've begun a dialogue with the works Council <unk> Deutschland rigor.
Regarding the potential closure of our styrene plants in Poland and Germany.
The plant has been offline since August 1st for planned maintenance and then idled in response to poor economic conditions.
The Poland facility contributed approximately negative 30 million.
Dollars to EBITDA.
During the 12 months ending June 2022.
We have also temporarily idled our styrene production in <unk> and then other lines.
Certainly needs for our downstream businesses beyond our production are expected to be met via external purchases.
In polycarbonate, we are evaluating steps to optimize our production.
And supply chain for our downstream polycarbonate compounds.
As a reminder, we consume about half of our polycarbonate production in our higher margin downstream compounding business, but the remaining 50% is sold into the more cyclical merchant polycarbonate market.
<unk> valuation relates to potentially closing one of the production lines that are startup plans and we have initiated discussions with the works Council there.
This potential production claim closure with lower costs.
Greatly reduce our exposure to the merchant polycarbonate market.
In addition to these potential steps regarding our styrene polycarbonate assets, we are reviewing ways to optimize our asset footprint and other segments such as restructuring our PMMA sheet business in North America as.
As well as reducing styrene butadiene latex capacity at our Harmon I spend on plans together.
Together all of these initiatives if approved would lead to an improvement in annual profitability of about $60 million under current market conditions.
I'm confident that in the medium to long term, we have a very competitive asset footprint.
We are working on some very exciting energy efficiency initiatives that will both reduce our carbon intensity and decrease our utility costs for example, heat recovery through mechanical vapor recompression.
The financial benefits of these can be significant and we estimate the annual savings of approximately $60 million for the initial set of projects, assuming a natural gas price of $100 per megawatt hour.
However, like the rest of the industry in the short term we are faced with a combination of historically high energy costs and low demand, particularly in Europe .
Therefore, we are actively evaluating steps to improve our operating cost position and operating flexibility.
And we've also enacted cost controls such as limiting discretionary spending and reducing capital spending.
The current challenges, we face as an industry have reinforced the importance of continuing to transform our portfolio into a specialty solutions provider that as a consequence has lower carbon intensity.
<unk> remained focused on over the overarching priority of our transformation and wanted to be clear that we will continue to prioritize the investments and initiatives that support this strategy.
It's understandable that a significant amount of our current focus is on the headwinds we're facing from a macro environment.
But I'm encouraged by the progress, we're making on our transformation.
Volumes of sustainable products, meaning products that contain recycled materials grew 70% in the third quarter versus prior year.
With a Q3 year to date increase of 65%.
Margins for these products have been some of the most resilient in our portfolio, which is evidence of how highly valued they are by our customers.
To expand our sustainable product offerings, we're creating and cultivating beneficial relationships to widen our range of sustainable products, including our recent announcement of our collaboration with Japan steelworks to further develop recycled MMA, which will feed into circular PMMA solutions.
We are also growing and material substitution applications that help our customers achieve their sustainability and cost reduction goals, such as replacing fiber glass with the co lamination of PMMA and ABS for mobility and wellness applications.
Co laminated product volumes have grown 20% this year through.
Through Q3.
And this is one of several material substitution offerings with significant additional growth potential.
There are additional growth opportunities through expanding our existing products into adjacent applications.
For example, our PMMA camps that technology has been adopted adopted for PVC decking and railing as it provides high durability and weather ability as.
As well as the environmental benefit of lower Boc emissions by eliminating the painting for the end consumers.
We recently began supplying this technology in deciding applications and with the expansion of <unk> in deciding which which has a total addressable market of approximately $200 million.
We can deliver these benefits to a wider range of customers.
We remain committed to developing our product portfolio as part of our transformation with organic and inorganic growth.
This will place us in an advantaged position when the market conditions inevitably improve.
Our recently appointed CTO on Hendricks will lead this this effort to expand our technology offering into higher value applications.
Now I'll turn the call over to Dave to walk through some of the additional financial points.
Thank you Frank.
I'd like to give a little more detail on our cash generation liquidity profile and our near term thoughts on capital allocation.
Despite the low level of earnings in the quarter, we still generated $98 million of cash from operations and $59 million of free cash flow.
This included a $166 million release of working capital driven by the steep decline in raw material prices and inventory reduction initiatives. We expect another working capital release in the fourth quarter.
As a seasonally strong cash generating quarter for us.
Our liquidity position continues to be very strong and we're well positioned to withstand a prolonged industry downturn if that becomes an eventuality.
We ended the quarter with $243 million of cash and have access to over $500 million through undrawn committed credit facilities.
From a capital allocation perspective, we have a number of very attractive organic.
Growth and sustainability projects that will continue to fund through this down cycle.
However share buybacks will be de prioritize until we have better clarity into future economic conditions.
For 2023, we expect our free cash flow breakeven level of EBITDA to be about $350 million.
To be clear, we're not giving guidance for 2023 at this point, but I wanted to give you. This information to instill confidence in our balance sheet and liquidity position in the context of the current economic environment.
Now I'll turn the call back over to Frank to cover our fourth quarter outlook.
Thanks, Dave.
Looking at Q4, we anticipate similar market conditions to Q3.
Europe continues to face considerable challenges with decreased demand and high utility costs significantly impacting near term performance. However, in North America and Asia are generally seeing steady demand in most markets and some improved demand in Asia for polystyrene ABS products hopefully Sig.
<unk> the end of Destocking.
For the full year, we expect a net loss of 126 million to $91 million.
And adjusted EBITDA of 325 million to $375 million.
Further cash generation is anticipated in Q4, leading to expected full year cash from operations of approximately $150 million ending.
And including the estimated capex spend of $150 million free cash flow of about breakeven.
At the midpoint of our full year guidance range implies fourth quarter, adjusted EBITDA of $45 million.
Which is in the $82 million improvement over Q3 due to a number of factors.
First we do not expect to reoccur and so of the $24 million of the negative timing impact or the $23 million of one time charges from the third quarter.
So those two factors combined should lead to almost $50 million of sequential earnings improvement.
Additionally, we expect an improvement of approximately $35 million in feedstocks from improved variable margin, including the benefit of idling styrene production.
We expect further benefits in 2023 from the potential asset footprint actions, we announced which we expect will provide significant incremental improvement from our Q4 performance.
To sum up we have a solid financial position to operate in the current conditions and to support our transformation strategy and we will continue to be prudent with our cash management.
We are progressing well and the integration of our PMA and <unk> Tec surfaces business.
And we are on track to realize the associated cost synergies as well as exploit the growth opportunities. We now have as a result of these acquisitions.
In fact, I'm happy to report that as of this morning, we have successfully transitioned to all of the PMA sites from <unk> ERP system to a new SAP <unk> Hana ERP system. This is a major step and it results in significant reduction in Arkoma TSA services.
To take this opportunity to thank our employees for all of their hard work on this accomplishment and everything they've done to position us for the future.
The sale of the <unk> business remains on pause, but this is still an integral part of our transformation.
Finally, we remain focused on investing in organic growth opportunities to build our product portfolio with additional sustainable and differentiated product offerings.
We're now happy to take your questions.
At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of David Begleiter with Deutsche Bank. Please go ahead.
Thank you and good morning, Frank and Dave just on Destocking is it continuing into Q4 and is it worse in Q4 than Q3.
Anything there would be largely done by the end of the year.
So let me back into your question, we do think it will be largely done by the end of the year, we're still seeing some level of destocking.
As we get into Q4.
And I guess I can give you a data point.
For example in appliances.
Reading the public announcements from customers like rural pool.
We've seen that their production rate is 3% decrease in production is three times the reduction in their retail sales. So there is clearly a destocking effect effect, we think it'll be largely over by the end of the year.
Very good and just on to news and what the options with this site.
Obviously, you need some production in Europe , but what are your options to improve the results there.
So part of the six so.
Yes. Thanks for the question so part of the $60 million are a big part of it that we highlighted in the script relates to energy efficiency opportunities that we have ensure nuzzo. So.
Actually we think for news and <unk>.
The high energy cost environment with the investments that we've planned will be.
Advantaged.
Compared to the rest of the regional production.
Very good thank you very much.
Thank you.
Our next question will come from the line of Frank Mitsch with Suriname and research. Please go ahead.
Hi, good morning.
Good morning.
David I was wondering if.
If you could kind of break down the components of that breakeven EBITDA in the $350 million that you mentioned I E. What are you embedding there in terms of Capex et cetera.
Yeah, Hi, Frank.
So.
To be clear, we're still going through our budget process and I'll give you the pieces that.
We kind of know now, but again, we're still things like Capex are still going through the budgeting process, but I can tell you about capex Frank is that it will be less than this year is $150 million.
Interest expense.
I think we're budgeting $140 million to $150 million next year taxes.
Taxes again still a contingency based on where we end up.
Where we ended up for an EBITDA forecast so.
It's kind of.
I mean, I realize there are some pluses and minuses in there, but I think we feel pretty good about that $3 50 level of free.
Free cash flow breakeven Trey.
Understood and I know that you probably won't offer that as your expectations have trough EBITDA.
But.
Although if you could that would be awesome, but you did mentioned that.
Frank mentioned a lot in terms of shutdowns that would save $60 million annually and I'm wondering what the costs that are required to spend to effectuate those shutdowns.
Yes, so so again to be clear, we're working through the fourth cancelled so no decision's been made there Frank but.
In the event, we do take all of those.
Actions the cash cost to us next year would be that would be under 20, it'll be between 15 and $20 million.
Beyond then there could be some decommissioning.
This would be 2024 and beyond decommissioning costs.
I guess, we have been net against that what we could get for selling scrap, but I think the.
The immediate concern is 2023 units, it's less than $20 million.
And that's embedded in the $3 50 number I gave you a couple of minutes ago, Alright, alright terrific. Thank you so much.
Your next question will come from the line of Michael <unk> with Barclays. Please go ahead.
Great. Thanks, Good morning, guys.
First question, Dave I appreciate kind of in your comments around prioritizing share buybacks near term.
Would you expect to build cash on the balance sheet or is there a way to maybe buyback some of the floating rate debt you have out there today.
Yes.
Well look I.
Alright.
I'll comment Don Mike is the near term in the near term we're focused on preserving liquidity.
And protecting the balance sheet and I think in the near term certainly and certainly for the fourth quarter that would be no buybacks of either stock or bonds.
We are well aware of where the bonds are trading a lot of we've gotten a lot of inbounds on that question, but.
In the immediate term im just going to speak for Q4, we'll have to see.
What happens is we start the new year, but Q4 that we know.
Purchases of either.
Fair enough and then second maybe bigger picture question.
On the two big acquisitions <unk> Tec in the Arkoma business, you've had both of these for give or take a year or so now can you maybe just help provide us obviously the macros.
Bit different but just mile markers about where profitability stand synergies just kind of how the integration has gone relative to maybe versus when you first picked up these businesses.
Yes, So let me.
Let me take a crack at that and we'll have Dave.
Supplement if I'm missing the point, but what we what we said is we would estimate that the cost aggregate cost synergies between the two is approximately $60 million that we would accrue by the end of Q of the third year post acquisition I would say.
We're on track or ahead of schedule to realize those.
There is additional growth synergies that frankly.
We've seen a lot more growth opportunities than we anticipated into mobility and building and construction and sanitary markets than we had anticipated.
Clearly the volumes are down significantly in this environment and building and construction and mobility and the Asian markets are lower than we expected.
I would say our expectation is that these businesses in normalized terms will generate a $50 million.
EBITDA contribution to the business and I don't see any reason that when things return largely to normal and we've realized the synergies that they won't do that.
Great. Thank you.
Your next question comes from the line of Angel Castillo with Morgan Stanley . Please go ahead.
Hi, Thanks for taking my question I was hoping you could give us a little bit more color on 2023, and particularly as you think about that.
Some of the I guess the range that you've laid out for the fourth quarter.
Yes.
$20 million to $70 million and if we were to kind of annualize that it would suggest a range that is still kind of below that 350 million breakeven cash cost.
Level that you've kind of.
So just as we think about.
There are puts and takes for next year can you maybe help quantify some of the incremental factors.
At least that you have.
Kind of looking at beyond the $60 million of savings that would then yes, we would have to think about kind of incremental to the fourth quarter levels, maybe how much destocking would be incremental I apologize and then how much normalization or anticipate.
If you could just help us kind of bridge that that'd be helpful.
Yes so.
Let me give you I'm not going to be able to pinpoint exactly the numbers that I would anticipate incrementally because as Dave said, we're working through the budget, but let me qualitatively give you that there's really three big moving parts that will.
2023 above the Q4 run rate.
Number one is the normal seasonality of our business. So Q4 is normally.
Much lower season is one of the lowest quarters of the year for us from a normal seasonality standpoint. The second thing is there is a continuation of Destocking, which we anticipate will be done by the end of the year.
It's a challenge to say how much.
Sure.
Quantify how much destocking there is but it is significant.
And that we believe will largely be over and then the other thing is the productivity initiatives that.
The full year benefit that we'll see from those as we continue we drive dose.
The completion so.
I think those three buckets move us.
Substantially.
Actually above the Q4 run rate.
The other.
Okay sorry.
Sorry, once we get the point I do want to make.
A point out there is.
We are seeing in Asia significantly better volumes in both polystyrene and ABS in Q4, and so that's giving US a signal that things are going to return much.
Largely.
Two a better situation in.
2023.
Got it that's very helpful and actually.
My next question I guess around fourth quarter could you maybe specify a little bit more what kind of trends you saw in terms of order patterns in September October and November and what that kind of cadence wise and then as we think about that 20% to $70 million range.
Do you need to see a terrific pricing cycle noted with avs.
Need to see to get to the higher end of that $70 million versus maybe like an embedded into 'twenty.
Okay.
Angel, It's Dave I'll address that I think.
Look what we're seeing in terms of order patterns as a continuation of the same in Europe .
No clearly no restocking I mean.
Kind of.
Bouncing off the bottom I guess I would describe is at the very low levels of demand in Europe that we saw it really starting in early in the third quarter North America.
Has <unk>.
Largely at least in our portfolio been been flat.
For.
The duration, we haven't we have not yet seen any destocking of significance in North America that continues in the fourth quarter and then as Frank mentioned Asia is high our Asia.
Polystyrene ABS.
Demand is higher in the fourth quarter. So that's a signal to us that the destocking is over.
Feedstock prices have clearly come down considerably so that's how we would see it.
So all of that kind of gets it gets us to the midpoint of the range I think what would.
So what would get us into a higher range I mean clearly some.
To better demand than what I just outlined.
Our feedstocks assets are idled. So I don't think I think that number is.
Yes, somewhat derisked given the guidance.
I think.
Angel I want to go back to maybe a question I think there is probably a good point in the call to go back to a question that Frank raised earlier about the trough level of EBITDA I'm sure it's on People's minds.
I think we would see and this is this is disconnected from my comments earlier on cash I mean this is just the fact that in the current environment.
Where demand is where natural gas is I think we see trough EBITDA for the company of $350 million to $400 million.
And again for the reasons that Frank just pointed out in your earlier question as Angel I mean, thats, a higher number than obviously, you've run rating the third and fourth quarters.
For the reasons that frankly.
Very helpful. Thank you.
Your next question will come from the line of Hassan Ahmed with Alembic Global Advisors. Please go ahead.
Good morning, David.
Question. It was very helpful. In your slide that you broke out.
Volumes by up by regions.
And I was quite intrigued by the steep volume declines.
In Asia, I guess, not surprising with the Covid lockdowns and the like and relatively flat year on year volumes in North America, now I mean, I'm not looking for quantitative guidance, but just qualitatively.
Obviously, the Asian Lockdowns are not going to last forever, right and you're already talking about seeing some sort of volume green shoots out in Asia now the flip side of that is that you got.
As pointed out that there was no destocking as yet in North America and people are already talking about sort of.
Weakening housing market and the like so as you look at this volume. So these these volume crosscurrents.
For 2023.
What broadview your expectations here.
Okay.
Yes.
We would see that 2023 at this point is largely consistent with what we saw.
The second dispute.
Some decline in the North American market to annualize the growing weakness in building construction.
So I guess, that's how we'd go into our planning cycle looking at next year is sort of a continuation of the underlying demand.
Destocking in Europe and Asia.
And some weakening in North America, driven by building and construction and housing.
Understood understood and just as a follow up I know you will.
Obviously announced a variety of sort of.
Restructuring efforts in the light.
I mean, the EM segment margins at 3% this quarter.
I mean, I was a bit surprised by that because I would imagine the business would have been a little more resilient. So now with the restructurings that you guys are doing.
Uh huh.
Yeah.
I mean, how.
Obviously with Destocking behind us mostly.
How should we think about if current sort of market conditions continued through 2023 were destocking behind us and the like.
Would you sort of peg DS and segment margins to be in an otherwise sort of relatively recessionary environment in 2003.
Yes.
The margins for that business in the low teen level for next year.
Very helpful. Thanks, so much.
Our next question will come from.
I just wanted to add one thing if you don't mind.
I think the margins you are quoting there.
There was an element of the onetime charges that were in engineered materials as well Hassan So I think that is.
Those numbers are somewhat deflated by that.
Our next question will come from the line of Eric Petrie with Citi.
Okay.
Hey, good morning, Frank.
Good morning, Eric.
What's your view on auto builds into 2023 compared to this Sharon the impact on engineered materials as well as based plastics.
So.
Into 2023, we would see auto so I think our underlying assumption.
Actually I'd have to come back to with I don't know exactly what the number we blamed it on for auto builds.
Yes, we would have to come back to you on that number and obviously, we've got a very.
<unk> assumption as it relates to <unk>.
Yes, I think I think.
I think Eric looking at it.
Standing here today, our assumption is.
It is the auto outlook is up low single digits in 2023 versus 2000.
Versus 2002.
And that's what we're that's what.
We're building our plan based on that assumption.
Okay.
And then secondly, just on styrene, how long can you keep those assets idled are you planning to do that through winter.
And restarting in second quarter, and then on your energy efficiency project, how fast can you comes in <unk> and the implementation of that.
Yes so.
So with styrene.
The assets as long as we can see significant availability on the spot market to meet our downstream needs.
At a cost.
Advantaged versus production, we would continue to leave the idled SaaS at arc.
Assets idle.
<unk>.
So I would say, though that we're seeing the conditions.
Improved significantly from where they were in Q3 so.
Again.
It all depends on the availability on the spot market to get advantaged.
Pricing, we would continue to remain idle and then.
The timing to deliver the energy efficiency programs at some of those will be.
Be in effect by the end of 2023, and others would take place or we begin to see the benefit in early 2024.
Thank you.
Ladies and gentlemen that will conclude today's call. Thank you all for joining you may now disconnect.
Please wait.
France will begin shortly.
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