Q2 2019 Earnings Call
We welcome the trains young management team, Frank <unk>, President and CEO , and David Stacy Executive Vice President and CFO . Today's conference call will include 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 yesterday. These documents are posted on the company's Investor Relations website and by means of a form 8-K filing 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 David Stacy.
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.
Factors set forth in our annual report on Form 10-K under the item one a risk factors.
Reconciliation of these measurements is provided in our earnings release and in the appendix of our Investor presentation.
A replay of the conference call and transcript will be archived on the company's Investor Relations website.
Shortly following the conference call.
The replay will be available until August nine 2020.
Now I would like to turn the call over to Frank <unk>.
Thanks, Dave and welcome to trends your second quarter 2019 financial results Conference call.
Before we begin.
Before we discuss the financial results I'd like to spend a few minutes on some of our efforts in the area of environmental health and safety, including two examples of which I'm, particularly proud.
Last week trends your release, despite sustainability and corporate social responsibility report.
This release marks the one year anniversary of our adoption of the GE are rife framework.
Public sustainability reporting.
This framework provides a more global comparability enhance transparency and better quality of information about trends you're sustainability.
On slide four you can see some highlights from our environmental footprint reductions product innovations volunteer programs and most importantly, our safety record.
Trinseos safety record is at the top decile of the chemical industry.
We're performing at a level that only a few companies can attain and one that is significantly lower than the average injury rate for manufacturers and the American Chemistry Council member companies.
Trinity only crudes, both employees and contractors and its injury count because we believe we are responsible and accountable.
For the safety of everyone at our sites.
Our most significant environmental improvements in the report is the 48% reduction in greenhouse gas emissions versus our 2011 baseline on a volume basis.
This was a cheap hopefully through employee led projects to improve energy efficiency.
Organism optimization process and equipment.
This report underscores that the tenants of responsible pure respect for and commitment to environmental health and safety and sustainability are Paramount to our organization at every level and in every decision we make.
The second example, I'd like to highlight is that Niccolo shortly.
Trinseos Global business Director Polystyrene was elected president of Styrenics circular solutions for a c., yes earlier this year.
This joint industry initiative is a driving force to take advantage of the inherent circularity of Styrenics through recently proven recycling technologies and purpose driven solutions.
Polystyrene is a polymer with unique and proven potential to achieve circularity.
As it is the most easily reverse thing into its original manner at high yield utilizing the emerging game changing recycling technologies.
The liquid state of its monomer enables easy purification and the recycled monomer is identical to the Virgin manner.
Therefore, it can be processed into styrenic polymers with identical characteristics and quality.
And they blinked production for all applications, including food contact.
Also from there it can be continuously recycled indefinitely.
In July trends you want in yours, both members the best see Us announced plans to develop the first polystyrene chemical recycling plant in Europe .
Building on technology is already established in North America between our joint venture Americas, Styrenics and their partners.
Given the urgency of reducing waste litter and the environmental impacts of plastic waste SCS has set an ambitious milestones to meet these goals and propel the circular economy forward.
SCS is engaging the entire value chain from partners in the supply chain to converters recyclers brand owners and trade associations as well as universities and research centers.
Turns you was proud to be one of the manufacturers, leading this initiative to improve the environment.
Now I'd like to walk through a few points from our second quarter results as well as provide an update on or for the full year outlook and some of our key initiatives.
In the second quarter, we experienced a continuation of the macroeconomic weakness from geopolitical stresses, causing treat uncertainty and a slowdown in investment.
Production continues to be weak in the automotive industry, particularly in Europe and China.
Margins in performance plastics were adversely impacted as polycarbonate and ABS remain challenged for slower growth and economic uncertainty in China.
Which are impacting demand for those products.
As we've discussed in prior quarters.
These impacts are creating excess supply in polycarbonate, Andy Yes in Asia, which is then being sold into Europe .
Leading to lower margins in that region as well.
In addition, we continue to see weakness in the tire market, particularly in Europe and China.
On the first quarter call. We mentioned that we have begun to see improvements in many markets in comparison to the second half of last year.
Which we were anticipating would lead to an ongoing improvement over the course of the year.
However market conditions weaken from Q1 to Q2, and styrene ABS and polycarbonate.
Which results in lower sequential margins in those products.
We had expected to see higher second quarter styrene margins due to the seasonal outage period.
However, due to general economic weakness and lower demand for styrene derivatives.
Margin declined margins declined from Q1 to Q2.
Due to an upstream supplier issue.
We had an unplanned outage at our but wouldn't Germany staggering facility in the back half from the first quarter.
Which extended through July .
Well beyond our planned second quarter outage.
The plant resumed operations last week.
The total pre tax impact of this outage on the second quarter was about $12 million.
This supply outage and the general lower margin level led to roughly breakeven adjusted EBITDA for feedstocks in the second quarter.
Versus adjusted EBITDA of $17 million in the first quarter.
On a more positive note we were encouraged by another strong quarter in polystyrene due to business excellence initiatives.
Overall, we've seen better stability in this market compared to ABS and polycarbonate.
Cash generation was very strong in the first half of the year, delivering 234 million of cash from operations and $186 million of free cash flow.
This was the result of continued operating discipline as well as a more focused inventory management approach and the impact of falling raw materials in the first quarter and the end of last year.
We continue to have the benefit of a healthy cash position, even after continued share buybacks with relatively low net leverage.
As always working capital management is a key focus area for us and is especially critical in these more challenging market conditions.
Now, let's move on to our full year 2019 outlook.
We are updating our full year 2019 guidance to a net income range of 148 million to $177 million.
And adjusted EBITDA range of 410 million to $450 million.
While weve seen some stabilization in our end markets. The positive momentum we began to see in the first quarter did not continue.
This in combination with weaker sequential dynamics in styrene ABS in polycarbonate is leading us to remove any meaningful economic improvement from our full year forecast.
Given that we are assuming no economic improvement expected second half volume and margin levels, our overall at or near what we've seen in the first half of the year.
Of course, any economic improvements there's upside to this forecast.
And as always we will remain highly focused on cash generation and cost containment.
It's important to note that we're not just sitting back and waiting for the market to improve our results during the last call like outlined some initiatives designed to improve future earnings and to better position Trinseos strategically.
First our acquisition of Dow chemicals, latex production assets and the rain Munster Germany is progressing.
We have received regulatory approval and we expect to finalize this transaction in the fourth quarter.
We expect $6 million of first year EBITDA contribution from this acquisition.
Second we continue to make progress in our evaluation of strategic alternatives for our polycarbonate plants and start to Germany.
While pricing and margin conditions in the polycarbonate merchant markets have been challenged recently.
The material is still integral to our performance plastics segment as we consume about 40% of what we produce in our higher margin compounding business.
There are a number of options that we are pursuing for the startup facility.
With the objective being to maintain a secure supply of quality feed for our downstream compounding business, while reducing our exposure to the merchant polycarbonate market.
Finally, we're proactively taking steps to reduce both reduce both fixed and variable costs as well as placing greater emphasis on business excellence programs, all with the objective of increasing profitability.
For example, we aim to at least offset inflation in our fixed cost spending.
Over the first half of the year, we've more than accomplish this as this spending has been about 2% lower than prior year on a constant currency basis.
In addition, we've been managing inventory levels more closely and inventory quantity was down 7% at the end of Q2 in comparison to the end of 2018.
These initiatives are critical to our business success and have even greater importance and the current challenging economic environment.
I'm confident that our momentum in this area will curious forward as we implement these programs to deliver shareholder value.
And with that you may open the lines for questions.
Thank you.
Just to advise everyone in order to ask a question. Please press Star then the number one on your telephone keypad again that is star then the number one on your telephone keypad.
Our first question comes from the line of David Begleiter with Deutsche Bank. Your line is open.
Thank you good morning.
Frank just on your revised EBITDA guidance for tend to 450 can you discuss the parameters about the.
Yes, some of the top and bottom end of those ranges and just really just how de risked the bottom end of that range really is thank you.
Hi, David Good morning.
I would say at this.
One we have a high degree of confidence in this range. The low end of that range contemplates that basically we operate in the second half like we did in during the first half in terms of demand.
And margins and keep in mind that in the first half we saw 7 million dollar negative impact from inventory draw downs that we were doing in the.
To optimize our working capital and we also had approximately $20 million impact from styrene outages. So.
We believe we have a high degree of confidence in the lower end of the range and that contemplates us continuing basically at the first half level.
The higher end of the range.
Contemplates that we have no operational issues in the second half that the issues, we saw in stada or in and Boland, Our don't reoccur.
And that we see some benefit from higher margins in styrene and that we get traction in our business excellence programs greater than we've already had in the first half.
Very good and Frank just looking at 2020, there is some capacity coming onstream in styrene.
What's your expectation for styrene margins.
Next year I know, it's early but any early in early insight would be helpful. Thank you.
Dave It's it's Dave I'll answer that one I think.
Obviously, it's heavily dependent on the on the demand situation, but I think the way we see it now we do see capacity coming later in 2020.
All of this new capacity is in China, and as you'd expect.
Most of it has been delayed from its originally announced date, so the data which.
This capacity is going to actually come online, it's a little bit hard to tell.
Even now as we approach it but.
I think order of magnitude we've seen.
Probably the main capacity being coming online in 2020, being a little bit higher than demand and growth rates.
I mean, a little bit high over an annualized over the annual period.
Which would put a little bit of pressure probably in styrene margins in 2020 relative to.
2009.
2019.
But having said that one of the things we've always talked about Davis.
The impact that's going to have on.
Guys at the right into the cost curve, the non integrated producers in China, which make up of that 40% of Chinese.
Production.
So the numbers I, just outlined don't contemplate any shutdowns from those producers.
Which we think may very well happen and that in fact could even be exacerbated exacerbated by the economic situation in China right now.
Thank you very much.
Our next question comes from the line of Frank Mitsch with Freemium Research. Your line is open.
Yes. Good morning, I was wondering if you could step through the pace of business through the second quarter and into July , particularly.
Any auto and the tire markets, what what have you guys been seeing.
So far this quarter.
Yes so.
Great question, Thanks, Frank the.
When we look broadly across our segments through Q2, what we saw was that it.
While it was lower than Q1 it didn't deteriorate.
By segment.
During the quarter and remained relatively steady or stable in most of the segments and we saw that.
That performance continue into July so far.
In the order book for August So, we see it steady during the quarter and continuing into Q4.
A steady steady into the first part of Q3 weeks you correct right sorry, yes, Okay, Alright, and then.
Sure you're right you're guiding full year free cash flow to tend to to 50 million I was wondering if you could talk about.
The priority uses of cash in how to share buyback.
Factor in.
Yes, Frank it's Dave I think the.
We did have a strong quarter in the first half of the year as Frank outlined 186 million of free cash flow for the first half.
So you can see obviously that that guide implies a lower second half and it also implies working capital neutral.
In other words feedstock prices kind of staying flat through the second half of the year.
In terms of.
Capital allocation I don't think a lot has changed for US I think we'll continue with the about balanced approach.
That we've been in that we've implemented for the last several quarters, we did buyback a little bit less stock as you may have noticed in our cash flow statement.
We bought back 500000 shares for $22 million in the second quarter.
Which on a dollar basis is a little bit less than what we what we embarked block.
Bat.
The prior several quarters.
And the reason for that was because we had exhausted our shareholder repurchase authorization limits. So we got that refresh to our proxy process at our annual general meeting at the end of June So we have a fresh authorization going forward.
So we should anticipate that level to pickup from the.
To pick up at the pace that it was prior to the second quarter correct.
I don't think we want to comment on how much we're going to buy the individual quarters I would just say that overall I don't think our capital allocation approach has changed from what we've outlined in the past.
You know in terms of being balanced between them.
No allocation between returned to shareholders through dividends repurchases.
And.
Reinvesting in the business.
All right. Thank you Dave.
Our next question comes from the line of Bob Koort with Goldman Sachs. Your line is open.
Good morning, This is Don Campbell on for Bob.
So when you first laid out the guidance earlier. This year include assumptions for the low end of the range, including a limited economic recovery in China continuation of weak tire markets.
No recovery in Western Europe et cetera.
Does this estimate now that in the absence of those same things have actually gotten worse incrementally and then.
I guess as a follow up with your new guidance range. It seems like the low end of the range or assuming things stay relatively the same so what gives you comfort that.
Economic environment will continue to get worse in the second half of the year.
So there's a number of questions there and.
Compared to Q1, we did see a deterioration in performance in some of the key sectors from Q into Q2 compared to Q1.
Point out that in China.
The auto production declined 9% from Q1 to Q2.
And in Europe .
Particular, German auto exports declined 7% Q1 to Q2, so Q2 was a lower level than we saw in Q1 and also if you remember in Q1, we were seeing some uptick from Chinese stimulus and some increased volumes towards the end of the quarter and those were raised immediately and.
In Q early into Q2, so I would say, where we are in Q2 reflects a lower level than we anticipated and we started the year with and Thats reflected in our guidance.
Relative to our confidence that it won't change, but again, we have a high degree of confidence that if the markets continue at the levels. They have in our direct in Q2 were going to be solidly in our range.
Got it Thats helpful and a quick question on M. side seems like benzene prices.
I picked up quite a bit I guess in July and likely August as well.
I think you guys talked about lower margins for.
For that segment.
For that JV.
Kind of hoping you can scale that kind of margin impact Q2, Q3 for that business.
I look I would say generally.
We had you're right there has been the styrene margins go in Q2, and Q3 have dropped a little bit.
In terms of how much that is if you spread it out there and move that to amortize business and what they write might recover and.
Polystyrene polystyrene side is.
Probably a couple of million dollars.
Got it thank you.
Your next question comes from the line of Vincent Andrews with Morgan Stanley . Your line is open.
Hi, This is Andrew Castillo on for Vincent just a quick question I wanted to clarify on the free cash flow you talked about the deceleration in the second half.
I'm, just I guess trying to understand kind of that that deceleration you mentioned I think that you see feedstock prices staying flat, but and you had a pretty pretty good strong first half, but as I think about it you're generating at least $20 million EBITDA.
As I think about that free cash flow, it's pretty low compared to on any of that from an EBITDA perspective in terms of conversion and also just.
Versus prior year. So could you just bridge that for us. Please.
Well, maybe just one comment and then I'll hand, it to Dave.
If you look at the sort of reduction in free play or free cash flow generation in the second half of the year remember that in the first half we had a significant inventory reduction so by volume, we reduced inventories 7% versus the end of last year, so that liberated a significant amount of cash and frankly, we're at levels that.
Our sustainable given our current demand outlook in their business performance no.
Then doing to walk over to the full year right handed the day. The other thing Angel you have to.
Take into consideration as Capex, we do have somewhat of a backend loaded capex forecast for this year, that's really driven by.
The capital we're spending for the transmission project to move our.
Administrative services away from Dow is a project thats been going on for.
For about two years, now really and I do want to highlight so so that so the capital.
Forecast for the last guidance, we gave was 125 million.
And we've spent I think $48 million year to date. So there is a back end loaded in the.
In the Capex in the second half of the year now.
Moving forward to 2020.
We're going to see that the capital for that doubt transition project substantially go away.
So we're spending about 25 million full year.
2019 for that project, that's going to be pretty close to zero or a couple of million dollars next year.
For that particular project.
Okay. That's very helpful. Thank you and then just Bobby I was wondering if you could help us just a internationally could you talk about the inventory levels that.
Justin diverse regions for others in China, and how those are trending in the first couple of onto the quarter.
Yes, I think in general I couldn't give you precise for.
You know reduction levels or where that 7% came out.
Around the world.
What I would anticipate it was largely European base, because that's where our biggest asset bases, but we could probably follow up on that.
Yes, the only theres one inventory metric that is published on it on a weekly basis and I would comment on periodically.
And Thats styrene inventory held that.
Health at the China imports really.
And the normal level, if you look at that or you know over the cycle is about 100 eightys.
On the last couple of calls we've talked about it specifically because it's been much higher.
It's in well over 200, Eightys and in the last quarter call I think it was around 180, if I remember correctly.
So there was a there is a bit of styrene overhang from that or inventory overhang.
Going into the outage season into spring outage season in Q2.
Those inventory levels are now down to 86 cases, so below the normal level.
So.
Going into the fall outage season, when sometimes you know historically, we've seen some lift.
In styrene margins because of planned outages that happened in the fall.
We don't have that inventory overhang now going into that.
The fall season, which 10 was typically a September October timeframe.
That's generally the only kind of industry reported.
Inventory metric that.
That we would talk about.
Very helpful. Thank you.
Our next question comes from the line of Eric Petrie with Citi. Your line is open.
Hi, good morning.
Good morning, Eric.
We've seen other companies announced that they're focusing on downstream. So I'm wondering what do you study, Germany, 60% merchant exposure. The PC, how likely is that you could take and increase your derivative downstream compounding capacity to absorb that.
The.
Well that would not necessarily be our objective as it relates to data. So when we think about our options were.
Well, we want to secure the volumes that we would have in that downstream compounding business.
We are.
We have discrete projects that were running and developing with our customers that would be.
Market around market base growth type initiatives, but clearly we won't be able through commercial efforts in the short term to be able to absorb that.
So our efforts as it relates to start are really focused on a range of opportunities or our options ranging from restructuring the site to even possibly divesting some of those assets.
Okay.
Secondly, what is the potential to change some of your your contract terms and either performance plastics or late tax and Minimalize the pass through of lower raw material costs in a deflationary environment or asked another way how specialized would you say your product lines and those businesses are.
Oh hi.
I think one of the things that if you look at our portfolio.
We we've seen that in rubber and in latex and in sub segments of our of our performance plastics, we've had less margin erosion than weve seen a volume impact. So the margins have held up very well and in fact, we have opportunities to value price those products because they are highly specified and enable customer solutions. So I would say in sub segments, we have.
We have the ability to value based price those because they're a solution and others.
Where.
Other parts of our portfolio in polycarbonate is a great example, where.
It's really a market based price and <expletive> and the market price is based on raw material pass through.
I think Eric this is Dave just to add on to that then on the I think France, where it's a bit of a mixed bag on the on the performance plastics side on latex.
It's different regionally Asia, latex and generally a spot markets are pricing.
Without.
Without explicit pass pass through agreements.
And so prices are set on a monthly basis on that in a spot negotiation.
Generally speaking in Europe , and North America, it's more contracted business.
And those contract terms have various lengths and could be from a couple of months up to a year 18 months and you'd have to wait for an opener to to kind of renegotiate that.
Helpful. Thank you.
Our next question comes from the line of Michael needed with Barclays. Your line is open.
Thanks, Good morning, guys.
Beautiful long longer term question to start there's a number of naphtha crackers I believe being built in China right. Now do you have a sense of how many will seek to derivatized into styrene and maybe what that means for the styrene market outlook.
Yes, I wouldn't have.
I don't think we would have an outlook on that and we would sort of rely on our outlook for styrene production based on announced styrene capacity.
Yes, Mike I don't think it takes generally three years to build a styrene plant and we have a pretty good idea of.
Based on what's been announced in China of what's coming over the next three years obviously.
Beyond beyond that it's very difficult for us to predict.
And.
As I said earlier, what's what's impossible for us to predict the impact.
That these new.
Integrated styrene plants of China that operate on the lower end of the cost curve is going to have on the non integrated producers.
But you know.
Over the.
The next three years of I think we have a pretty good handle at least of what's been announced thing as you know whether its styrene polycarbonate.
Particularly in China. These things tend to me.
Come on line.
Several quarters up two years beyond after the announcement date.
But I guess just to go back to the.
The original question I wouldn't necessarily draw conclusion that.
Having more naphtha crackers come on stream and that wrapping that would ultimately would be destined to the styrene value chain. So theres a lot of different derivatives and directions that the outputs of of the naphtha Cracker can go and frankly I think.
Be difficult to.
To draw the conclusion that would be destined for styrene value chains.
Okay, and then I appreciate your conservatism inventory and managing working capital a bit tighter just given the lower earnings outlook, but if I just go back to be original.
Guidance for this year looks like Capex is held fairly constant. This year. So can you maybe just talk about the composition of what your capital spending is this year and if you've looked at or re run the numbers on some of that just given the market deterioration.
Sure our our total Capex budget is $125 million.
And if you look at how that builds up in maintenance capital is about $45 million.
And then you have two strategic projects that are approximately $55 million of spending and thats divided between our AB conversion.
In our plants, that's our distributed control systems at the plant and then also the spend $25 million for our.
Project to become systems independent from Dow Chemical services.
So what's left is growth in productivity capital of about $25 million now each of those and I would say, it's heavily weighted toward productivity.
And those have good paybacks.
So given the current outlook and the heavy.
The heavy.
Emphasis on maintenance as well as strategic spending that we have in this year, it's unlikely that we're going to.
We're much from that capital spending budget, but as Dave pointed out as we go forward and those strategic initiatives.
Our rolling off and coming to completion, we would see a significant portion of that.
Being.
Freed up to four free cash flow and we would have decision to make whether we have strategic initiatives for productivity initiatives to to absorb that but I would anticipate a lower capital spending level going forward. After this year.
Okay. Thank you.
Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open.
Hi, This is Nick Sarah on for Laurence.
So I think in the past it was mentioned that styrene margins need to being somewhere in the range of $500 per ton on a consistent basis for the economics of the new Greenfield to work.
And I believe the current margin environment underneath those levels. So is there a chance that some of the new capacity you mentioned gets completely shell.
Well.
Theres you have two different kinds of styrene capacity that comes into the market. One you have the.
The PEO SM plans or possum plants that are being built and that's really the driver is demand for.
Propylene oxide and we would anticipate.
That you know the at that propylene oxide demand will drive that and which is really consumer spending and population growth. So we would anticipate that the two that are announced and under construction would begin and they'll come on stream.
The non integrated plans in this environment.
It would seem to us very likely that they would not be putting in new non integrated styrene monomer plants. Given this current outlook and the current margin levels.
Thank you very much.
As a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Our next question comes from the line of Hassan Ahmed with Alembic Global Your line is open.
One question Dave.
Morning.
You know in your sort of initial remarks, you spent a fair bit of time old is he talking about the whole.
Sort of questions are surrounding recycling and you know the noise, we hear nowadays about you know various states counties countries and the like coming out with.
You know polystyrene bands.
I mean as you guys run your own sort of internal supply demand balances you know near to medium term, how should we think about the sort of demand growth impact all of these moving parts you know more recycling up knowing some of these bands kicking into place and the like.
I mean, what sort of impact do you feel it would have on longer term demand growth.
Well clearly demand destruction.
Regulated.
De selection of plastics is could happen, but we believe that the characteristics of polystyrene offers some real positive options for the market and then consumers to take advantage of and those are proven.
You know we were already seeing a very good traction from our JV and.
Americas, Styrenics and the JV that they.
To recycle polystyrene and we're getting very positive feedback.
From our downstream customers that in if we could offer recycled solution. It would not only stabilize demand, but it could even increase the selection of those materials over other non recycled materials. So I think it's still early it's difficult to tell but I think there's some inherent advantages and why we're excited about polystyrene and its potential for recycling that offer a solution to the industry.
Understood understood now going back to the Capex side of things.
Early in response to one of your earlier questions you talked about how you know there are a couple of projects that you guys are involved in and maintenance Capex is around 45 million and obviously the guidance for this year is around 125 million.
So, let's let's you know they could draconian view and let's assume that you know there is some sort of a recessionary period, we we'd get into I mean, how you know there are some companies that have announced some steep capex cuts. So that's sort of a draconian environment I mean, how low could that capex number would be I mean, do we fall down to maintenance levels, maybe even you know for a short duration below maintenance levels I mean, I'm, just trying to get a sense off.
You know what free cash flow generation would look like in.
Sort of recessionary environment.
Sure So maybe let me.
Make a couple of comments on that.
Yes, Dave too.
To to add on to that.
The thing to remember is there is $55 million of strategic spending that we have to do that makes us stronger and more sustainable going forward.
This 125 million so that will come off.
In the future what I would tell you is that.
Through our business excellence programs, we will identify.
Opportunities for investment in our sights to take cost out and become more efficient and we'll prioritize those and put appropriate hurdle rates on that but as a practical matter maintenance spending is.
Add for the size of our asset base at $45 million as appropriate and frankly, we will not sacrifice safety or the stability of our assets for short term.
The.
To reduce the capex spending in the short term. So the area that probably is subject to flexibility is the growth in productivity capital, which this year is 25 million now again, we'll we'll be.
Very focused on identifying good projects in the future that deliver very.
Fast returns and have appropriate hurdle rates, but thats the level of flexibility yet I believe we have after we get through the strategic initiatives.
Hey, Ed.
Hi, aside it's Dave I mean in terms of the other numbers I mean interest is pretty much fixed.
That $40 million a year.
Cash taxes.
I think you can use that.
In a recessionary environment, probably a high twentys tax rate on.
Whatever EBITDA you're using.
But again back to capital.
We're going to spend as Frank said $55 million. This year on these two projects combined.
That number next year should be more like 30 or 35.
And the maintenance again I don't think we would cut we will continue to spend for maintenance so that would be in the probably $40 million to $45 million run rate.
And then what's on top of that from growth and productivity would be.
Clearly decision there the.
We have made in the context of the economic environment.
Yeah, just just one other last point that that strategic spend goes to 7 million in 2021, so it's almost entirely gone by 2021.
Understood very helpful guys. Thanks, so much.
Your next question comes from the line of Matthew Blair with Tudor Pickering Holt Your line is open.
Good morning, Brent can Dave.
Morning.
I was hoping you could provide a little bit more commentary on the rubber market I think your rubber volumes were down roughly 11% quarter over quarter, 18% year over year.
Is it fair to say that that you're losing share in this market and can you talk about any trends in OEM versus replacement that you're seeing.
So what we're seeing is that OEM tires broadly our demand for OEM tires are down because they are consistent with the decrease in the auto builds replacement tire or hit with the branded companies you know the global branded tire producers has been relatively flat. It's the commodity tire markets that have been hurt more significantly or than non performance tire markets and thats, where our yes, we are.
Technology would typically go.
SSP, our volume has been relatively stable and held up because it's destined more for performance tires.
So.
Thats sort of the high level color I would say that we would see performance tires and that utilize SSP our technology.
Growing and being growing much faster than the broader tire market in the future and Thats why we think that's a very important place for us to continue to invest and broaden our offering related to performance tires, but that's sort of the broad backdrop that I would give you.
Great that's really helpful.
And then Dave.
Your comments are pretty interesting regarding the upcoming battle between.
The integrated and non integrated.
Styrene producers in China.
I was hoping you could just talk about the overall.
Global cost curve and in how does trinseos.
European and American styrene.
Capacity, how does that fair on the cost curve versus these integrated China producers.
Sure. So on on the far left that left side of the cost curve you've got.
Middle East and North American Styrene Americas, Styrenics, clearly would be in that.
And then you've got a step up.
We actually showed a chart on this back couple of back on Investor Day in 2016.
So after North America, and the Middle East.
You've got to step up where I put the European producers need.
Yes, they're generally.
Pretty close I don't think there's a lot of separation amongst the European styrene producers.
And I will put those on a par with the Chinese large integrated sites.
And then at the far right several hundred dollars a ton higher you've got these smaller non integrated independent producers in China.
That.
In normal economic unhealthy economic environments.
Operate at.
60% operating rates for two reasons one is because.
They only operate obviously when its economic when its economic and second because they have been hard time getting ethylene.
And benzene feedstocks, but really ethylene so they literally these guys are trucking in ethylene.
In an environment like where we are today.
In a more difficult economic environment in China.
Ethylene is plentiful and cheap. So these are these producers are running.
But I think I think you're right what it sets up for.
Other than China styrene market in the coming years and the question that we'll we'll have to wait and see how it plays out is.
After all of this.
China capacity comes online in the next couple of years, what happens to that 40% of.
Chinese.
Production Thats.
Comes out of these.
Non integrated producers.
Great. Thank you.
There are no further questions at this time. This does conclude conclude today's conference call. Thank you for your participation you may now disconnect.