Q3 2024 Trinseo PLC Earnings Call
Speaker Change: Good morning, ladies and gentlemen. Welcome to the Trincio Third Quarter 2024 Financial Results Conference Call. We welcome the Trincio management team, Frank Bozich, President and CEO, David Stasse, Executive Vice President and CFO, and B. Van Kessel, Senior Vice President of Corporate Finance and 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 the presentation slides at close of market Wednesday November 6.
These documents are posted on the company's investor relations website and furnished on a Form 8K filled with the Securities and Exchange Commission.
Speaker Change: If anyone should require purchases during the call, please push the star then zero on your telephone. I will now hand over to Bevan Kessel.
Bevan Kessel: Thank you, Gavin, and good morning everyone. At this time, all participants are in listen-only mode. After our brief remarks, instructions will follow to participate in the question and answer session.
Bevan Kessel: Our disclosure rules and cautionary notes on forward-looking statements are noted on slide 2.
During this presentation, we may make certain forward-looking statements.
including issuing guidance and describing our future expectations.
Bevan Kessel: We must caution you that actual results could differ materially from what is discussed, described, or implied in these statements.
Bevan Kessel: Factors that could cause actual results to differ include but are not limited to risk factors set forth in item 1a of our annual report on forum 10k or in our other filings made with the Securities and Exchange Commission.
Bevan Kessel: The company undertakes no obligation to update or revise its forward-looking statements.
Today's presentation includes certain non-GAAP financial measurements.
A reconciliation of these measurements to corresponding gap measures is provided in our earnings release and in the appendix of our investor presentation.
Bevan Kessel: A replay, conference call, and transcript will be archived on the company's Vestry Relations website shortly after the conference call.
Speaker Change: The replay will be available until November 7th, 2025. Now, I would like to turn the call over to Frank Bozich.
Frank Bozich: Thanks, Bea, and welcome to our third quarter 2024 earnings call.
Frank Bozich: Before we get to our Q3 results, I would like to introduce everyone to B. Van Kessel, who will be moving back into the finance organization with responsibility for investor relations, treasury, and corporate development.
Frank Bozich: B brings a wealth of company and industry knowledge with her as she most recently served as senior vice president leading the plastic solutions polystyrene and feedstocks business segments.
Frank Bozich: Prior to that, Bea served as Senior Director of Global Business Finance, where she led the business finance organization for all of Trendsio's reporting segments.
Speaker Change: I want to thank Andy Myers for his many years of leading the Investor Relations Group and look forward to continue working with him as he takes on other responsibilities within the finance organization.
Speaker Change: Now I'd like to turn to our Q3 results. As expected, marking conditions in adjusted EBITDA were similar to the prior quarter.
Frank Bozich: MMA Supply Dynamics and Moderating European Input Costs continue to support healthier margins in our engineered materials segment.
Frank Bozich: While demand remained weak in many of our end markets, particularly building and construction and consumer durables, we saw significant year-over-year profitability improvement largely resulting from our earlier restructuring actions.
Frank Bozich: We also had our second consecutive quarter of sequential improvement in free cash flow and anticipate this trend will continue as free cash flow is expected to turn positive in Q4.
Frank Bozich: Our third quarter results were negatively impacted by unplanned outages at two of America's Steyr-Renix production facilities during the quarter, which pushed Adjusted EBITDA to the lower end of our guidance range.
Frank Bozich: While volumes in the quarter decreased 8% year over year, this was largely driven by our efforts to shed uneconomic sales in Asia and Europe to optimize plant operations and working capital, particularly in polystyrene.
Frank Bozich: However, excluding polystyrene, volumes were basically flat versus prior year, while product mix improved as volumes increased in several of our higher margin targeted growth areas.
Frank Bozich: This includes a 36% increase in compounds for consumer electronics applications in engineered materials due to higher demand and new business wins, and a 7% volume increase in case and battery applications in latex binders.
Frank Bozich: Additionally, sales of recycled content containing products increased 40% in Q3 versus prior year and 57% year-to-date.
Frank Bozich: demonstrating our continued focus on the success we are seeing in making sustainable offerings a larger part of our portfolio. In fact, sales of recycled content containing products represented 6% of the total company margin in the third quarter.
Frank Bozich: Now I'd like to discuss several of the strategic actions that we took during the quarter. As the macroeconomic landscape remains uncertain and demand weakness has persisted, we continue to take decisive action to improve our footprint and cost structure.
Frank Bozich: At the end of the third quarter, we announced additional restructuring initiatives in order to better position the business for longer-term growth and to reduce our corporate and functional costs.
to reflect the smaller footprint we currently operate.
Frank Bozich: This included combining the management of our engineered materials, plastic solutions, and polystyrene businesses, resulting in workforce reductions from the consolidation of the business management roles and support functions.
Frank Bozich: We believe this will result in a more streamlined organizational structure that will fuel our ability to continue growing in our core markets and in our higher value offerings.
Frank Bozich: These actions are expected to result in cost savings of approximately 25 million dollars in 2025 and a full run rate savings of 30 million dollars by the end of 2026.
Frank Bozich: We also announced the decision to exit virgin polycarbonate production at our Stade Germany facility following the discussions with the relevant works councils.
Frank Bozich: Once operations have concluded, we will purchase all of our polycarbonate needs for our downstream differentiated products from external suppliers.
Frank Bozich: As we previously stated, this is expected to increase annual profitability by $15-20 million in comparison to producing virgin polycarbonate.
Frank Bozich: We remain committed to developing and investing in our polycarbonate dissolution technology, which will replace a portion of our external polycarbonate purchases with our own recycled polycarbonate.
as that technology continues to grow to commercial scale.
Now Dave will discuss our third quarter results.
Dave: Thanks, Frank. Third quarter adjusted EBITDA of $66 million was $25 million higher than prior year and similar to the second quarter.
Dave: Year-over-year results improved across all business segments, except for America's Styrenics, which had unplanned outages at two facilities, leading to a $10 million negative impact on equity affiliate income during the quarter.
Dave: Cash provided by operations during the quarter was $9 million, which resulted in free cash flow of negative $3 million.
This included a $14 million decrease in trade working capital.
Dave: We expect free cash flow to turn positive and be significantly higher in the fourth quarter.
due to typical seasonal work and capital improvements.
Dave: We ended the third quarter with $165 million cash and $342 million of total liquidity, including our two committed financing facilities.
Dave: Cash preservation and liquidity management continues to be our top priority.
Now I'll turn the call back over to Frank.
Frank Bozich: Thanks Dave. Looking ahead to the fourth quarter we expect seasonally slower market demand to result in sequentially lower adjusted EBITDA.
Dave: While October volumes are in line with their average for the year, we anticipate a more pronounced year-end seasonality compared to the typical year.
Dave: However, we expect higher profitability in Q4 compared to prior year due to the benefits of our restructuring initiatives as well as the full quarter of operations at America Steadronics.
Dave: As a result, we expect Q4 adjusted EBITDA of $40 to $50 million.
Dave: We are pleased how the third quarter evolved in line with our expectations and understand that the fourth quarter will be more challenging due to the year-end seasonality and continued macroeconomic uncertainty.
Dave: However, seasonal working capital improvements should result in a stronger liquidity position at the end of the year.
despite the lower sequential profitability.
I want to thank
Dave: our employees around the world for their continued focus and dedication to Trendzio as we continue to drive productivity and innovation in our core technologies.
And now we're happy to take your questions.
Speaker Change: If you wish to ask a question, please press star followed by 1 on your telephone and wait for your name to be announced. That is star 1 if you wish to ask a question.
Speaker Change: And your first question comes to the line of Frank Mitch from Fermium Research. Your line is open.
Good morning, all, and hui morga bi, and welcome.
That's about as far as I'm going to take that.
Speaker Change: Frank, can you give us an update on the AMSI sales process? And Dave, I appreciate that $10 million negative headwind for 3Q. Is that all, the unplanned outages, is that all behind us and smooth sailing in 4Q there?
Speaker Change: Maybe I'll just answer both of those. So the answer to the second question is, yes, that's behind us. They've restarted both of those units.
Speaker Change: and we expect to see a contribution, full contribution from Amstein Q4. The status of the process is, look, we've said this before, we have a joint agreement with
Dave: CP Chem to jointly market the asset. We began our process in Q3, and we continue to expect that we would sign a transaction in the first half of next year.
Speaker Change: Terrific and then and then I guess on financing is there is there any update on the timing and process regarding the extension of the May 26 revolver and as it stands now is the plan to utilize that revolver to repay the subnotes?
Speaker Change: So, Frank, look, yeah, so we have, the stub notes is $115 million, just for clarity, $115 million due in September of next year.
Speaker Change: The plan would be either to use cash on hand or or a refinancing transaction to handle that we are Continuing to look at both and we'll announce something. We have something More concrete to say publicly about it, Frank
Thanks so much.
Speaker Change: Your next question comes from Lionel Matthew Blair from TPH. Your line is open.
Speaker Change: Thank you and good morning. Just regarding the Q4 guide, so
Speaker Change: You know, it seems like there'll be some tailwinds from Amstey getting back up. You know, call it approximately 10 million. And then you mentioned the seasonality that you're expecting in the more differentiated parts of the business. But could you provide just a little bit more
Speaker Change: explanation and color around that. I mean, I guess that would imply some pretty severe drop-offs in plastic solutions and
Speaker Change: engineer materials, potentially latex binders as well. So is this just seasonality? Is this just being conservative? Are there any other factors like raw materials or net timing that you're also anticipating would be headwinds in the fourth quarter?
Speaker Change: So, yeah, I'll help you with the bridge on that. So at the midpoint of our guide, $45 million, we're down, let's call it 20, quarter over quarter. And you're right, plus 10 of Amstey. So what we're bridging is $30 million. About half of that bridge is explained by fixed-cost absorption related to running the plants.
Like Frank said, we do expect a
Speaker Change: demand to be lighter just due to seasonality. I think that's been a consistent theme during this earnings season.
Speaker Change: So, you know, we will see that as well. I do think, Matthew, we would expect negative timing in the quarter, you know, standing here today, I don't know, five million dollars or so, just due to styrene prices going down, but that should help with the bridge.
Speaker Change: That does help. Thank you. And then thinking about some of the moving parts on the 2025 free cash flow outlook, your 2024 guidance includes a $45 million restructuring cost. Do you have a sense of what restructuring would look like in 2025? And aside from just EBITDA, are there any other discrete moving parts we should be thinking about with 2025 free cash flow?
Speaker Change: Yes, so Matthew, I'd refer you to slide 11 in our charts where we list out all the pieces for our free cash flow for 2024, and you're right, our cash, we expect to spend $45 million this year on restructuring.
Speaker Change: I expect that to be a similar number next year. Obviously, the spend related to the shutdown of the styrene plants is, you know, is tailing off, but we do have...
Speaker Change: but all the other pieces on this bridge I would expect to be materially the same in 25 versus 26 so CAPEX
Speaker Change: you know, cash taxes, turnaround, etc. And if you add all those up...
Speaker Change: It's $340 million, right? So the cash outflows, if you will, for this year is $340 million. So we would need $340 million of EBITDA to be cash flow break-even. Now...
Speaker Change: You know the one line item that I think is worth mentioning is cash interest. We have 200 million dollars this year you know clearly we're in a
Speaker Change: So every 100 basis points reduction, you know reduces our cash interest by 18 million dollars So I would expect the 200 million of cash interest to be lower next year depending on the on the pace of Fed cuts
Speaker Change: I think, you know, to sum all that up, to sum all that up, Matthew, I mean, that puts our, you know, I think our cash flow break even drops to more like a low 300s type number for 2025.
Speaker Change: Sorry about that. Can you give some sense on what your customers are saying about once we get through the kind of year-end seasonal adjustments?
Speaker Change: How much pent-up demand they're seeing for the first half of next year? Any innovation cycles that would be pulling product forward? Can you give a sense for kind of how we should think about the demand side for the bridge for next year?
Yeah, Lawrence, the...
Thank you. Bye.
You know what I have to say?
Speaker Change: been at customers as recently as Monday, you know, what I'm hearing is that
You know, they see
Speaker Change: The Q4 is sort of a declining raw material environment and so there, I think in general, most of our customers are not building in inventory, awaiting, you know, waiting for Q1. I think there was also some uncertainty about the regulatory environment and the election results more broadly even across the world.
Speaker Change: The tone I'm hearing from most of our customers is that they expect Q1 to be stronger and that they expect to see modest improvement in their...
Speaker Change: in their outlooks. And again, for us, as you know, building and construction is a big part of our portfolio.
Speaker Change: You know, their anticipation is that easing interest rates will stimulate pent-up demand in building and construction. So I would say modestly positive for Q1 is the outlook.
Thank you.
Thank you.
You know, maybe let me build on that, just...
Speaker Change: a bit because I think not only, you know, if I think about next year while we're not giving guidance at the current time,
Speaker Change: You know, we anticipate that there are three factors that will...
Speaker Change: you know, give us support for next year as we head into 2025.
Those are the restructuring initiatives.
known business wins that we
Speaker Change: have today that we've achieved during 2024 and will achieve in 2025 that will fully accrue, plus the full year benefits from AMSTI. So those collectively you know, are the things that are factoring into an improvement for next year.
Speaker Change: And, you know, we would expect that certainly the adjusted EBITDA for next year would have a three in front of it, you know, be a $300 million plus.
Speaker Change: There are no further questions, so I'd like to thank the Trinidad management team and you all for joining. That does conclude our conference for today, thank you for participating and I'll disconnect.
Daniel Rizzo, Roger Spitz, David Stasse, David Stasse, David Stasse, David Stasse [inaudible]