Trinseo - Q2 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Trinseo second quarter 2024 financial results conference call. We welcome the Trinseo Management Team, Frank Bozich, President and CEO; David Stasse, Executive Vice President and CFO; and Andy Myers, Vice President 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 Tuesday, August 6th. 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.

Andrew Myers (VP of Investor Relations)

Thank you, Abby, 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 1A 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 financial 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 call. The replay will be available until August 7, 2025. Now, I'd like to turn the call over to Frank Bozich.

Frank Bozich (CEO)

Thanks, Andy, and welcome to our second quarter 2024 earnings call. I'd like to start by discussing our Q2 results, which were in line with our expectations. The market conditions that we saw at the end of the first quarter continued through the second quarter, which resulted in our highest Adjusted EBITDA since the second quarter of 2022, despite $10 million of unfavorable net timing. This was the second straight quarter of sequentially higher profitability. We continued to see positive momentum in our Engineered Materials segments as moderating input costs, normalization of MMA market dynamics, and steady demand for our downstream applications led to the segment's highest sales volumes and Adjusted EBITDA since the second quarter of 2022. We believe this higher level of profitability is sustainable in the current challenging macroeconomic environment due to the significant restructuring and footprint actions that we've taken over the past two years.

And while free cash flow remained negative in the second quarter, we anticipate that it will turn positive in the second half. I'd like to shift gears to talk about sustainability. In July, we issued our 14th annual Sustainability and Corporate Social Responsibility Report, which shows how our company and employees helped cultivate a circular transformation in 2023. I'm very proud of the exceptional progress we made toward our 2030 sustainability goals, especially the continued progress on our polycarbonate dissolution facility, breaking ground on our PMMA depolymerization facility, and achieving critical milestones in the implementation of our decarbonization strategy. We are committed to continued investment in recycling technologies and sustainable product offerings in order to support a circular economy while reducing our carbon footprint, creating a sustainable workforce, and operating responsibly.

We had another record quarter in Q2 for sales of products containing recycled material, so our investments are already paying off, and we anticipate more growth in the future. With that in mind, I'd like to provide a brief update on two of our major ongoing recycling projects. At the end of the second quarter, we announced the opening of our PMMA depolymerization facility in Rho, Italy. The facility utilizes a novel continuous chemical recycling process that returns industrial and post-consumer acrylic waste to its constituent monomer, MMA, while emitting 1/4 the amount of CO2 as virgin MMA production, with yields that exceed industry standards. Our technology also allows us to recycle several PMMA solutions that previously could not be recycled, creating a truly circular process with advantaged economics. The result of our process is high-quality recycled MMA monomer with purity levels comparable to virgin MMA.

This enables the recycled MMA to be used in higher-end applications such as vehicle taillights and caravan windows that require exceptional optical properties. The high purity levels also allow for higher concentrations of recycled content to be used in certain acrylic solutions without sacrificing the desired properties of the end product. I'd also like to highlight some of the exciting technological advancements that we've made in our polycarbonate dissolution pilot facility. The newly developed technology at the pilot plant allows us to recycle polycarbonate waste containing high levels of residual BPA back into polycarbonate resins that contain levels of BPA that are orders of magnitude below, lower than virgin PC.

Additionally, we are able to repair current end-of-life polycarbonate waste that is degraded over time due to the exposure to natural elements such as sunlight, humidity, and temperature by restoring its molecular weight so that it can be recycled and reused even in most demanding applications. These PC waste streams until now have not been suitable for mechanical recycling due to degradation and can be sourced at advantaged costs. The technological advancements in PC dissolution, along with the beginning of our PMMA depolymerization journey, are a testament to the bright minds we have at Trinseo and our examples of how our investment in sustainable solutions continues to spawn industry-leading innovations that will help build a more sustainable future and at the same time are economically advantaged.

Before I turn the call over to David, I'd like to give a brief update on the planned sale of our Americas Styrenics joint venture. The procedural steps defined under the exit provision of the joint venture agreement have progressed. Therefore, we have agreed with our partner, Chevron Phillips Chemical, to pursue a joint sales process, which we expect to kick off this quarter and in the ordinary course should lead to a definitive agreement in the first half of 2025. Now, David will discuss our second quarter results.

David Stasse (CFO)

Thank you, Frank. Second quarter Adjusted EBITDA of $67 million was in line with our previous guidance and included $10 million of unfavorable net timing from falling Styrene prices. Mixed improvement led to a higher year-over-year Adjusted EBITDA despite a 5% decline in volumes. This was driven by volume growth in all of our targeted growth areas, including case and battery applications in Latex Binders, Formulated Resins for building and construction and consumer electronics applications in Engineered Materials, and Automotive Compounds in Plastic Solutions. Substantially all the year-over-year volume decline was in Polystyrene, where we shed uneconomic volumes in Asia and Europe to optimize plant operations and working capital. Cash used in operations during the quarter was $42 million, which resulted in free cash flow of -$56 million.

We expect free cash flow to turn positive in the second half from lower styrene prices and from seasonal factors in the fourth quarter. We ended the quarter with $108 million of cash and $352 million of total liquidity, including our two committed financing facilities. In July, we entered into a new accounts receivable securitization facility that extends the maturity date from 2025 to January 2028. Liquidity preservation will continue to be our top priority for the foreseeable future as we navigate this prolonged industry downturn. Now, I'll turn the call back over to Frank.

Frank Bozich (CEO)

Thanks, Dave. Looking ahead to the third quarter, we expect market conditions and Adjusted EBITDA to be similar to the second quarter. While decreasing Styrene margins and an unplanned outage are expected to negatively impact Americas Styrenics, unfavorable Net timing is not expected to repeat at the same magnitude as Q2. Seasonal improvements in our higher margin building and construction and consumer electronics applications are expected to continue through the third quarter, and more normalized MMA market dynamics should continue to support improved margins in Engineered Materials. As a result, we expect Q3 Adjusted EBITDA of $65 million-$75 million. While we are not providing a specific range for the fourth quarter, we do expect Q4 profitability to be sequentially lower than Q3 due to normal year-end seasonality.

However, we anticipate free cash flow to increase sequentially from Q3-Q4, as we typically have a substantial working capital release at year-end. We are encouraged by the second consecutive quarter of sequentially higher profitability and expect to extend this similar level of profitability in the third quarter, despite persistently weak end-market demand and challenging macroeconomic environment. We continue to see the benefit of the cost actions we have taken and are confident that we will emerge from this low demand cycle stronger than we were before. And now we're happy to take your questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. Your first question comes from the line of Frank Mitsch with Fermium Research. Your line is open.

Frank Mitsch (President)

Thank you and good morning, all. I want to drill down a little bit more into the free cash flow expectations for the balance of the year. Given it's been a use of close to $140 million in the first half of the year, I understand that you're expecting styrene monomer prices down. You mentioned seasonal factors and a working capital release by year-end. Should investors expect that? Where can we get the free cash flow back to? I mean, are you looking for it to get to neutral? And if so, how does that play out? Again, given the fact that we're at a $140 million hole as we enter the second half of the year.

David Stasse (CFO)

Yeah, good morning, Frank. Look, I think, as we said, we expect it to be positive. I think Q3 will be fairly neutral, kind of flattish free cash flow, and then Q4 will be positive. For the year, clearly, because of how we started the year, because of the high styrene prices, I think that puts us in a situation where for the full year this year, our free cash flow will be negative. I mean, looking forward to next year, we have a slide in our presentation where we show our kind of cash outflows for the year, and it totals about $350 million. So that's the sum of CapEx, interest, restructuring, etc. And that includes $45 million of restructuring spend for this year. So I think the takeaway from that is at this level, you'd need $345 million of EBITDA to be cash flow neutral.

So look, we're clearly not in a position today to give guidance for 2025. But if I roll this page forward to next year, I think the restructuring costs will be lower. We still have a lot of spend this year for the two styrene plants that we closed. Cash interest, I also expect to be lower. We have $1.8 billion of floating rate debt. And I think everybody's followed what's gone on with rates recently. So the current trajectory of the forecasted interest rate cuts would lead you to think that's going to be interest rates will be several? Every 100 basis points is $18 million a year of interest for us. So I mean, I think there's four cuts baked in the forward curve today for this year alone.

So I think those numbers will be the interest number will clearly be lower next year. And all of that, I think, puts us in a position where this year's $345 or $350 of EBITDA cash flow neutral next year should be closer to $300. And $300 as a run rate of EBITDA is not far from where we are right now in Q2, Q3.

Frank Mitsch (President)

That's very helpful. That's very helpful, David. If I could just stick with the restructuring spending that you mentioned, there was an expectation that 2024 would see between restructuring benefits and the NatGas hedges, etc., that we'd see a $100 million benefit in 2024 versus 2023. Can you give us a sense as to how that is trending? Is that $100 million still Trinseo's expectations for 2024?

David Stasse (CFO)

It is. Yeah. The $100 million is absolutely in the numbers for this year. I'm very confident that we will fully recognize those cost savings, again, which is the sum of both the natural gas hedges going away plus the benefits of no longer running the two styrene plants. We're very confident that we'll realize that full $100 million this year.

Frank Mitsch (President)

Thank you so much.

Operator (participant)

Your next question comes from the line of Matthew Blair with TPH. Your line is open.

Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)

Thank you. Good morning, Frank. I saw in your Engineered Materials segment, the commentary on the PMMA volume improvement was pretty encouraging. Can you talk about which end markets are maybe looking a little better for you, which end markets are still a little softer?

Frank Bozich (CEO)

Yeah. Thanks for the question. I would say automotive has been steady. We saw building and construction applications where we're offering sort of a unique solution into many building and construction applications to be, for example, capstock, those to be actually very strong and steady demand. I would say in end markets, it's been steady in PMMA. The thing that has the growth in volume is really Europe recovering volumes in Europe. It's sort of geographical where European volumes have come back this year much stronger than they were last year.

Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)

Sounds good. And then on the guidance, I guess I was a little surprised the Q3 number does not include, I guess, any sort of big assumptions on net timing. I think contract prices for styrene in the U.S. and Europe are down in the third quarter versus the second quarter. So is there an offsetting factor to those lower styrene prices once again this quarter?

Frank Bozich (CEO)

Well, in Q3, we expect AmSty to have some headwinds compared to Q2 due to lower styrene prices, as well as the unplanned outage they have at one of their plants. And then, as usual, you have in some of our end markets a weaker August because of the vacation period in Europe. So that's how we're looking at Q3.

David Stasse (CFO)

I think, Matt, this is Dave. I can add something just related to timing specifically. You're right. We did see a big drop in prices at the end of Q2 into Q3, which you would infer from that we'd have negative timing. But we've seen an increase. There was an increase in contract prices in the month of August. There's a couple of outages, probably short-term in duration, that I think will probably largely offset that timing. Just one other point, you referenced North America styrene prices. That doesn't have influence of any significance or net timing. It's really, by far, it's European prices is the largest, and then Asian prices would be the second. So as I said earlier, Matt, I don't anticipate timing of any significance in the quarter.

Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)

Great. Thanks for the color.

Operator (participant)

Your next question comes from the line of Hassan Ahmed with Alembic Global Advisors. Your line is open.

Hassan Ahmed (Senior Equity Analyst)

Morning, Frank and Dave.

Frank Bozich (CEO)

Morning, Hassan.

Hassan Ahmed (Senior Equity Analyst)

You guys talked about how within the MMA business, conditions are normalizing. Certainly, on the surface, it seems certain other businesses seem to be quite far away from more normalized levels. So if you wouldn't mind, just could you revisit what your assumption of the normal earnings power of the company is? I mean, you guys obviously did around, on an annualized basis, $270 million in EBITDA in Q2. And obviously, the EM business popped nicely, EBITDA margin-wise, close to 11%. So if you wouldn't mind reminding us where we stand with sort of the state of affairs the way they are in terms of the normal earnings power of the company?

Frank Bozich (CEO)

Yeah. I mean, Hassan, it's really difficult to almost impossible to predict what normal looks like right now. So I think we can expect to see improvements going forward from the actions we've taken. And we continue to have additional opportunities that we'll pursue. But to predict what a normal market looks like in many of our end segments against the backdrop of all the geopolitical uncertainty and market uncertainty, I think, is really difficult.

Hassan Ahmed (Senior Equity Analyst)

Understood. Understood. And on a separate note, during the Q1 call, you guys talked about how in China, weakness in the polycarbonate market within epoxies and within nylon, that was impacting phenol and, in turn, acetone production, which obviously, their on-forward was limiting MMA production. So where do we stand with regards to that now?

Frank Bozich (CEO)

We see the MMA market is tight in basically all regions. The factors that we highlighted in the Q1 call still exist. I would say the other thing that you need to remember is MMA, the MMA market almost varies by region, but it also a significant portion of MMA, almost half of it goes into polymer additives as well as architectural coatings. You can see that in the architectural coatings market, that has come volumes have improved and are coming back. That's created a tightening effect at the same time, the feedstocks availability in Asia are limited. It's a tight market, and I don't see absent something dramatic changing, we don't see the current conditions for MMA changing.

Hassan Ahmed (Senior Equity Analyst)

Very helpful, Frank. Thank you so much.

Operator (participant)

Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open.

Speaker 8

Good morning. This is Dan for Laurence. With the new PMMA facility in Italy that's now ramping up, do you have a timeline of when that's going to be positively contributing to EBITDA and kind of what the, I don't know, at mid-cycle, what it could potentially mean to you guys in terms of EBITDA and earnings?

Frank Bozich (CEO)

Yeah. We don't have a forecast for that right now because, as a practical matter, this is a demonstration facility for a much bigger investment that we'll have to do in the future. And that's in front-end load engineering analysis at the current time. So I can't really give you an expectation for what the EBITDA contribution or exact timing for when it will occur. But I can say that we see that as favorable to virgin production from a cost standpoint, so, and with similar quality. So it's a very exciting opportunity for us.

Speaker 8

Okay. And then you mentioned, I think you highlighted the battery market as being one that's doing fairly well. I was wondering if your outlook for that market has been altered at all, just given a lot of the headlines we're reading with electric vehicles or just battery demand in general?

Frank Bozich (CEO)

Yeah. So our growth in battery continues into this year, and it's significant growth. Now, what's driving our growth is the technological advancement. And our technology or our solution goes into binding the anode in an energy battery like a NCM, nickel-cobalt-manganese cathode battery that goes into EVs. And our technology allows the producer to have a higher energy density in the battery. And we have a small percentage of the market. But as our technology is qualified at other producers, we anticipate to see growth no matter even in sort of a flat EV market because we're going to penetrate because of the innovation and the technical advantage of our solution.

Speaker 8

Thank you very much.

Operator (participant)

Your final question comes from the line of Michael Leithead with Barclays. Your line is open.

Michael Leithead (Director of Equity Research)

Great. Thank you. Good morning, guys. First, I just had two on cash interest. One, it looks like you decided to pick $15 million of cash interest in your updated forecast for this year. I guess, Dave, can you just help us understand the change of thinking there versus last quarter, sort of how you arrived at that $15 million number versus, say, a higher or lower amount? And then two, related to that, what is the incremental cost for you guys on that $15 million interest by deferring it?

David Stasse (CFO)

Sure. Okay. So just for the benefit of everyone, so what Mike is referring to is we do have the pay-in-kind option on the term loan that we put in place in September of last year. That term loan carries interest of SOFR plus 8.5. And we have the ability to pay-in-kind 4.25% of that coupon. So today's SOFR is about 5.25 plus the 8.5 spread. That's about a 13.75 coupon right now. We have the ability to pay-in-kind or not pay interest and instead capitalize 4.25 percentage points of that, which is about a third of the coupon. And there's a 1% penalty for doing that. So it was about for the coupon that was payable in July, we elected that pay-in-kind option. Again, it's capped at what I just described, Mike.

It was about $11 million, the amount of PIK, the amount of interest that was PIKed, if you will, or capitalized. I think the 15 that you're referring to is probably the change in interest from the last time we saw this. The other thing that influences that number is the forward curve, right? So we're obviously in an environment today where it looks like there's going to be more cuts versus less this year. So to get to your other question about, well, why did we decide to do that? I mean, as I said in my prepared remarks, Mike, I mean, preserving liquidity in this environment is our absolute top priority. And I mean, what's changed from a year ago when we issued this debt is that we're a year farther into this downturn, and there's been no recovery, no demand recovery to speak of.

We just think it's prudent to take all possible actions to preserve liquidity. We'll obviously revisit the election to pick or pay in cash in the future as we reach future coupon dates.

Michael Leithead (Director of Equity Research)

Great. That's helpful. And then for Frank, just with the joint AmSty sale now, you guys have obviously surveyed the market before. But now going with, say, the whole asset for sale, going with CP Chem for AmSty. How do you think that changes the attractiveness of the sale? And maybe how does that kind of influence your confidence about now getting this deal done, given kind of your experience here before?

Frank Bozich (CEO)

Yeah. I mean, we got very clear signals from the participants in our previous process that there was an overhang on their interest because to enter into a joint venture. So their strong preference was to own 100% of AmSty because it's a great asset. It's performed very consistently. And I think people want to buy control, not into a JV. And so that experience and those market signals we got in the previous process make it clear to us that the concerns related to this that were expressed by some of the participants will be minimized.

Michael Leithead (Director of Equity Research)

Great. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.