Q1 2023 Trinseo PLC Earnings Call
Good morning, ladies and gentlemen, and welcome to the Tringale first quarter 2023 financial results Conference call. We welcome the <unk> management team, Frank Bozich, President and CEO , David Stacy Executive Vice President and CFO , and Andy Myers Director of Investor Relations today's call.
Call will include brief remarks by the management team followed by question and answer session. The company distributed its press release, along with its presentation slides at close of market Thursday may 4th.
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'll now hand, the call over to Andy Myers.
Thank you David 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.
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. A replay will be available until May five 2024, now I'd like to turn the call over to Frank Bozich.
Thanks, Andy and welcome to our first quarter 2023 earnings call.
I'd like to start by addressing the spill at our Bristol, Pennsylvania, PMMA operations that occurred in late March.
Let me begin by saying that our organization is deeply disappointed in this event and the disruption to our neighbors and the concerns zorba stakeholders.
We are working very hard to regain everyone's confidence.
Due to an equipment failure and the accident won't release, the estimated 8100 gallons of acrylic latex emulsion occurred and some portion of this material was not contained at our facility and ultimately flowed into our local waterway.
We immediately reported the events and cooperated closely with local state and federal authorities on the response activities.
While at the same time collecting material and preventing further flow into the waterway.
This material is used in various downstream industrial consumer and medical applications, including dialysis filters and is approved by the FDA for use in medical devices.
Portly, our acrylic polymer latex Molson hasnt non hazardous Osha classification.
Within that.
There are certain precursor chemicals that are potentially present.
Our estimates of these chemicals dispersed within the 8100 gallons of material and reported to the Pennsylvania Emergency Management Agency.
Was 0.32 pounds of butyl acrylate.
162 pounds, a vessel back for late 2007 to two pounds of methyl methacrylate and 0.26 pounds of styrene.
None other water sampling conducted by authorities detected these chemicals.
Due to the onsite containment and cleanup activities as part of the initial response to the release, we believe that portion of the material never reached the waterway.
Additionally, I'd like to take this opportunity to address the record about the historical environmental performance Albert facility at the multi tenant Bristol site that includes other companies' operations are.
Our facility has a history of compliance with environmental regulations as indicated by the Epa's enforcement and compliance history online database.
That including this event our facility has had no significant violations no quarters of noncompliance and no formal enforcement actions.
As you all know we are committed to strong environmental health and safety performance and as a company we've had an overall outstanding EHS record.
I'm proud of the response of our employees and the emergency responders to handle this in a cooperative and transparent way.
Now I'd like to turn to the first quarter results.
As we entered Q1 2023 at continued low demand environment, we established three near term priorities for <unk>.
First to focus on working capital management to increase cash.
Second to recover volumes that may have been lost to low cost imports in Europe in the second half of last year and.
And lastly to continue driving organic growth programs targeting material substitution and sustainability.
I'm happy to say that our efforts around working capital management, we're very successful in Q1, as we reduced working capital by $52 million in the quarter.
Dave will elaborate on our cash management actions in more detail, but based on the actions. We're taking we are confident we will be free cash flow positive in 2023, even at these reduced demand levels.
From a market and volume standpoint, we saw a 4% increase in volume over the levels of Q4.
This volume increase reflected normal seasonal improvements rather than a broad recovery in our end markets.
Business conditions in the first quarter were broadly the same as what we experienced in the fourth quarter with continued destocking in building construction weak demand in consumer electronics.
Automotive demand.
While our total sales volume for the company was down 20% year over year volume for specialty and modified resins as well as for case applications in latex binders declined at about half that rate, which shows that these offerings to have more resiliency during periods of destocking and lower structural demand.
The volumes and margin for our technologies and enable our growth programs in general outperformed the broader portfolio and that the Q1 run rate should deliver year over year margin growth.
The volume of products containing recycled materials, which are very high demand for our by our customers grew at 1% year over year during Q1.
So far in the second quarter April volumes are consistent with Q1 structural demand remains low and the recovery in China has been softer than expected.
While we've seen an increase in orders for some high value specialties in China for May and June it's too early to tell if this represents sustainable demand.
Therefore, we have implemented a series of cash improvement initiatives, we've already seen the benefit of these through with our strong first quarter cash generation and we will continue to take action.
While the timing and trajectory of the market recovery is unknown, we are addressing what we can to optimize near to perform near term performance, while preparing for the market recovery.
I'd like to comment on the results of our engineered materials segment in Q1.
While volume and unit margins were largely as expected in almost all of our product lines. Our MMA margins were significantly lower due to ongoing ammonia forced measure of our supplier and the impacts of the natural gas hedges against declining gas prices.
These costs cannot be recovered through sales of MMA into the merchant.
Our through our sales of ammonium sulfate byproduct and so the fertilizer market power.
However, our input costs have decreased significantly in the second quarter as ammonia supplier has restarted local production and we expect to see a significantly lower natural gas hedging impacting Q2.
For these reasons, we expect to see significant sequential improvement in the results.
One last comment I would like to make is related to our process to sell our <unk> assets.
We continue to have ongoing dialogue with parties interested in specific assets and regional business activities related to our <unk> business.
As we have previously stated separating these assets as part of our is part of our long term strategy and monetizing them as an important part of deleveraging the balance sheet.
Given the continued interest in specific assets as well as improvements we've made to them through our restructuring actions last year, we were restarting the sales process of our <unk> business, which will include the marketing of individual assets and regional businesses.
And now I'd like to turn the call over to Dave.
Thanks Frank.
Our first quarter adjusted EBITDA was below our expectation due to unfavorable impact of $19 million for natural gas hedges and $10 million for fixed cost under absorption.
Related to inventory reduction actions.
I'd like to spend a moment a minute on both of these topics as it's instructive for modeling for the rest of the year.
Of the $19 million loss related to natural gas hedges in the first quarter.
$7 million was from realized hedges related to gas purchased in the quarter and the other $12 million was related to mark to market on hedges that settle in future quarters.
Okay.
This was the result of a 30 euro or approximately 40% drop in the price of European natural gas in the quarter.
Moving to the second quarter. The forward curve is substantially the same now as it was at the end of the first quarter based on this we expect minimal P&L effect from the mark to market on the hedges related to future periods. However.
However, we do expect a realized loss of about $10 million on hedges related to gas purchased in Q2.
And lower amounts in Q3 and Q4.
As it relates to fixed cost absorption preserving liquidity is one of our foremost priorities in this environment.
In the first quarter, we trained $50 million of inventory by running the plants at lower operating rates and so doing generating a negative P&L impact of $10 million.
This cash flow versus P&L tradeoff was clearly the right decision for us and we will be prioritizing cash flow if and when these decisions arise during the rest of this year.
The 52 million dollar working capital release, we had in the first quarter led to our positive $24 million of free cash flow.
Which is significant for us given the relatively low profitability in the quarter and the fact that the first quarter is seasonally our lowest quarter for cash generation.
For the full year, we are increasing our cash generation guidance due to a series of actions.
Despite reducing our EBITDA guidance.
First we signed an agreement to sell our cast acrylic sheet site in Matamoros, Mexico for $19 million.
We expect that transaction to close shortly.
Second we will be substantially reducing our dividend beginning with the dividend payable in the third quarter of this year.
Third we are reducing our capex by $10 million by deferring discretionary project spend unrelated to maintenance or EHS.
And finally as I mentioned earlier, we are aggressively reducing working capital across the company and we are off to a good start on this initiative with the result in Q1.
Our strong liquidity position and improving results.
It has great confidence in our ability to weather this economic downturn, while continuing to support our strategic initiatives.
Now I'll call I'll turn the call back over to Frank who will talk about our expectations for the second quarter and the remainder of 2023.
Thanks, Dave looking.
Looking ahead to the second quarter, we expect a significant sequential profit improvement of about $40 million from lower raw material and corporate costs, lower natural gas hedge loss and higher fixed cost absorption.
These are the driving factors in our Q2 guidance of a net loss of approximately $15 million and an adjusted EBITDA of approximately $80 million.
This outlook assumes no volume growth and therefore demand improvement would represent an upside.
For the full year 2023, we are guiding to a net loss of 94 million to $61 million.
And then adjusted EBITDA of 275 million to $325 million.
This updated outlook is $100 million below our prior guidance due to $45 million of natural gas hedge losses $10 million from the first quarter fixed cost absorption.
Under from slow market recovery.
While we are expecting a gradual demand increase through the end of the year. The low end of this full year guidance range assumes no demand improvement for the rest of the year and at the high end about a 10% improvement beginning in Q3.
We see this set of 2023 forecast assumptions is independent.
From a full economic recovery or restocking cycle, both of which represent upsides.
There's no question that we continue to face very challenging business conditions, and we've reduced our 2023 outlook to reflect this amid these conditions and uncertainty around the timing of a market recovery, we've taken cash improvement actions to maintain our strong liquidity position.
Increased cash generation compared to our prior guidance with cash from operations of approximately $165 million and free cash flow of approximately $75 million.
This reflects more than $100 million of cash improvement actions that David described earlier.
Our capex guidance of $90 million includes all necessary plant maintenance as well as the funding of growth and sustainability programs.
While we're taking actions for the short term rollouts are focused on strategic long term initiatives, such as our sustainability and material substitution offerings.
These programs offer us growth opportunities irrespective of the market environment.
And now we're happy to take questions.
Okay.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Just for a moment to compile the Q&A roster.
We'll take our first question from David Begleiter with Deutsche Bank. Your line is now open.
Hi, This is David one I guess first question on the <unk> business.
Can you talk about the potential timing and that guys are there any additional closure actions you can take.
That.
Option at their piece of that that's it said that he can't sell during the process.
While the timing is that.
Maybe let me step back and just give more more color.
As I said in the prepared remarks.
When we paused the process last year, we saw significantly deteriorating results beginning in Q3, and we took action to close R. R.
Poland Styrene monomer plant, which has historically been the productive of our sites and that's permanently closed.
During our entire process, we had a number of parties, mainly regional strategics and other interested parties in specific assets. They have continued to express that interest and we've had new inbounds and for that reason.
We're going to engage them formally on a process to investigate the sale I can't really comment on the more than that to say when we might see a positive outcome from this but.
Suffice it to say that we are engaging and will engage in the near term with inactive discussions with those interested parties.
Okay.
Yes.
The second part of your question about asset Rationalizations look we're always going to look at our assets and our sites to against the forward outlook in the market and relative to their competitiveness and that's part of our ongoing business activities. So.
At this point, we don't have anything that would be on the table. That's in our mind, but we always would look at those activities as part of the ongoing strategic review of our assets.
Okay, and then I guess, how should we think about the long term normalized earnings potential for the core portfolio ex <unk>.
The.
In the.
In a mid cycle EBITDA I would argue that that core portfolio should perform in the 300 $250 million to $300 million range X, excluding the <unk> assets.
Okay. Thank you.
Thank you next we'll go to Angel Castillo with Morgan Stanley . Your line is now open.
Hello, This is actually Stefan sitting in for Angel. Thanks for taking my question.
You called out absorption cost.
How much of this is baked into the midpoint of your guide going forward.
And then maybe specifically on the EM segment, how much of the absorption costs, our cloud <unk> and <unk>.
And what would you say utilization rates are in this segment and how do you see that progressing going forward.
Angel I'll take a crack at the first part of that.
So the <unk> 10 million in the first quarter $6 million of that was in the engineered materials segment and the rest was spread amongst the other segments.
I would say going forward for the rest of the year I don't expect anything of materiality in.
Ah.
To be going through the P&L in terms of under absorption.
And that's what our guidance reflects.
I think it's helpful to maybe point out a couple of other things just to kind of transition.
I'd say on the engineered materials from you that the transition from Q1 to Q2 in that business, because we do see a pretty significant increase in EBITDA.
From the first quarter to the second quarter. So as we just talked about there is plus six.
Under absorption I don't see that repeating in.
In the second quarter.
Engineered materials had $7 million of negative timing in the first quarter and that negative when we call. It negative timing is.
We're in an environment now in the first quarter and we see this continuing in the second quarter and rapidly decreasing input cost and the ZIP specifically ammonia and natural gas.
And because we're on a FIFO basis, the realization of that.
In our P&L can be somewhat lagged. So that's why I call it that $7 million, that's what that is.
That lag effect of the realization.
In our P&L.
Not going to have that in the second quarter, we see that.
We see that kind of stabilizing in the second quarter.
We also have $3 million less of hedges natural gas hedge impact in the second quarter and then the last thing is.
Just the overall benefit of decreasing input costs.
<unk>.
So if you added all that up I think we see Q4 for this segment the results in the second quarter.
25, plus million dollars higher than it was.
The result in the first quarter just engineered materials.
Great that was super helpful. Thanks for the color.
And then maybe you could just speak about.
The demand trends by region.
Yeah. So.
What I would tell you is that we.
Sure.
Globally, let me start globally by segments.
Automotive is the one market that we're seeing increases year over year or the other.
Versus the second half of last year.
And what I would tell you is that U S demand has held up relatively well.
European demand is better than.
Is improved improved slightly.
Over where it had been in the second half and then Asian demand is lower so on balance we're at a consistent level of demand from where we were in the second half.
He indicated and what we saw the 4% increase in Q1 is really reflective of more seasonal uplift than any structural change in the underlying market.
I think good reference.
Yes.
Yes, just maybe let me add I did reference in this in the prepared remarks that we have seen.
The reestablishment of orders into certain higher value specialties in China, beginning in May and June and that's.
Thats, a very positive sign again, it's difficult to say, whether that's sustainable or not but it's a good signal that these order that these companies have come back to the market.
And reestablished purchasing so.
We're watching that closely to see if it's structural.
And so the color and good luck in the quarter.
I would like to remind everyone. If you have a question Thats star one on your telephone Keypad next we'll go to Kevin <unk> with Jefferies. Your line is now open.
Hi, This is actually Kevin until she on for Laurence Alexander. Thank you for taking my question. So just.
Just curious Allegheny in the event of.
Recession, let's say the back half of the year.
24, I'm, just curious what sort of levers you guys could expect to pull to sort of mitigate that loss and sort of improve operating performance. Thank you.
Sure so let.
Start there is.
One we.
We see input costs going down fairly rapidly across the portfolio. So one that's a tailwind if that continues in a recessionary environment would typically also.
No.
Come with continued lower input costs, but that being said.
The destocking that we've seen again.
If you look across our portfolio, it's 20% down.
Year over year in the first quarter versus prior year.
Clearly the broader economy isn't down 20%. So there is some.
Significant destocking effect that we are still seeing throughout most of our value chains, which in a normal recessionary environment, we would actually see demand stabilize at a higher level then.
We wouldn't see a significant decrease from where we are today with the destocking still ongoing so again, it's difficult to say and unpack what the difference between destocking and the underlying market demand, but again.
Would not anticipate that we would see significant.
Further decrease in some of our value chains.
And what the Destocking levels are showing as it relates to levers.
There are always opportunities for us too.
Use regional arbitrage as well as you know.
Re flex our network to reduce our fixed cost.
And what I would tell you is that.
While we took $60 million in fixed cost out through the restructuring actions that we had last year. There were other actions that are available to us that required some capital investment for us to be able to implement.
Many of those investments will be completed by the end of Q3. So it gives us optionality in the future to run our assets and our networks slightly different.
Okay. Thank you very much.
Okay.
Next we will go to pre outright wrong with RBC. Your line is now open.
Hey, guys. Thank you so much for the call.
Can you talk a little bit when you see that volume.
Flat in your $275 million expectation on EBITDA is the flat to first quarter 2013.
Yes. It is.
I think if I heard your question correctly it was.
At the tusa at the low end of the range of $275 million of EBITDA.
As our volume assumption of flat to the first quarter of 2023 and the answer to that is yes.
So look we give <unk>.
Explicit guidance in the in our in our materials that we put out of $80 million EBITDA.
For the second quarter, so that $2 75, obviously reflects three quarters of 80, plus the 35 that we had in the first quarter. So thats a flat EBITDA environment from where we are or where we operated in the first quarter.
Got it and then on the head is that a way.
To quantify to the extent that.
Yes, good question.
Question from here, how much further losses, you would with HTC from your guidance.
Yes, it's very hard we've talked about that it's very hard to kind of quantify or to give you a rule of thumb that says if gas prices go down AG. This is the hedge loss.
Because as we go forward in time.
Hedges expire and.
The other thing I would point out is that you really can't just look at the spot price you have to look at the forward curve rate. So the entirety of the forward curve.
And how much the forward curve shifts.
That impacts the mark to market of all of our future hedges I mean, what I can tell you <unk> is that.
In the first quarter as I said, there was a 30 year or a drop in European gas prices.
And that resulted in a $19 million hedge loss in the first quarter.
And again I think it's I think it's very important to distinguish Korea that that 19 million is comprised 12 of that is mark to market on hedges.
That are four quarters other than Q1.
Okay.
And seven of it is actually cash and related to hedges that settled in Q1.
Now.
Okay.
Bill.
That ratio if you heard it I just wanted to warn that I don't think you can take that ratio and assume a 30 year of change going forward is going to be $19 million a quarter, because there will be less than that and the other thing I'd say is with gas natural gas trading at 35 years right now youre not going to have you certainly can have a 30 year on the downside.
Right.
Our belief is that we are proudly.
We're probably near the bottom I think.
European natural gas right now and we actually think there's a very credible implausible scenario that natural gas prices rise and could even spike in the upcoming winter.
Whether you look at it.
The drop in natural gas prices has.
Stimulated stimulated demand or kind of incentive industrial.
Industrial and residential demand is up considerably.
And Europe is the statistics, we look at this early in the year.
So without the floor of Russian gas, what it used to be able to LNG is not going to offset.
The Russian what used to be Russian imports.
So a cold winter coming up this winter could.
Yeah.
Could result in we think.
A very.
Very credible scenario for higher natural gas prices, and which we would be.
Obviously see a benefit from the hedge results.
And those are all the questions. We have at this time I will now.
I'd like to conclude today's conference. We thank you for your participation you may now disconnect.
Please wait.
France will begin shortly.
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