Trinseo PLC (NYSE:TSE) Q1 2024 Earnings Call Transcript

Trinseo PLC (NYSE:TSE) Q1 2024 Earnings Call Transcript May 9, 2024

Trinseo PLC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentleman and welcome to the Trinseo First 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, Director of Investor Relations. Today’s conference call will include brief remarks by the management team, followed by a question-and-answer session. The company distributed its press release along with its presentation slides at close of market Wednesday, May 8. 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. [Operator Instructions] I will now hand the call over to Andy Myers.

Andy Myers: Thank you, Rob, 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 2. 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 measurements. The 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. The replay will be available until May 8, 2025. Now, I’d like to turn the call over to Frank Bozich.

Frank Bozich: Thanks, Andy, and welcome to our first quarter 2024 earnings call. Let me begin by saying how encouraged I am with how the first quarter progressed and how the second quarter has begun as profitability improved steadily over that period. The initial strength in volumes that we saw in January and February continued through March, resulting in our first year-over-year volume increase in two years and our highest volume quarter since Q3 2022. Additionally, we believe destocking in some of our value chains has ended. Market tightness resulted in significant margin expansion in engineering materials and America’s styrenics as the quarter progressed, resulting in over half of our quarterly adjusted EBITDA coming in the month of March.

We see this higher profitability continuing into Q2. The higher profitability that we saw in March was from several factors. We saw margin expansion in MMA as a result of supply tightness that drove March MMA prices to prices significantly higher in Europe, while costs have moderated. Weakness in epoxy, nylon, and polycarbonate value chains in Asia led to reduced byproduct feedstock availability for MMA producers in that region. This dynamic, along with ongoing geopolitical tensions in the Red Sea, resulted in lower quantities of MMA shipped into Europe from Asia during the quarter. And we’re seeing this continue into the second quarter. We’re also seeing demand for architectural coatings and various polymer additives beginning to pick up following a period of prolonged destocking, which is further tightening the MMA market in Europe, and is supportive of continued higher margins in this segment.

In North America, low acetone availability led to MMA and downstream at PMMA supply tightness, resulting in higher integrated margins in the region. Additionally, America’s Styrenics had a major turnaround at its large styrene facility in January and February and returned to production in March. Styrene supply tightness due to several industry outages combined with low inventory levels led to significantly higher styrene prices and margin expansion at the AmSty, and we’re seeing this continue into the second quarter. While, we’re happy to see the improved earnings profile, increasing styrene and MMA prices exacerbated the typical first quarter seasonal working capital build, and rising spot styrene prices negatively impacted polystyrene, ABS, and latex binders margins by way of higher input costs.

I’d like to shift gears for a few minutes to discuss several actions that we took during the quarter to continue advancing our transformation strategy and optimizing our business. In March, we announced the commencement of a sale process for our interest in America’s Styrenics via the initiation of an ownership exit provision in the joint venture agreement. This process provides us with a clear pathway to divest our interest in AmSty and we expect it to lead to a definitive agreement no later than early 2025. The proceeds will be used to pay down our highest cost debt, helping to lower our annual interest burden, which will be beneficial to future cash flows. Also in March, we announced that we engaged local works council in Germany regarding the potential closure of the remaining virgin polycarbonate production line at our Stade Germany facility.

While decisions like these are never easy, continued soft demand and price declines due to oversupply, along with significant fixed operating costs in Stata, have strained the financial viability of the site. We do not expect these challenging conditions to abate anytime soon, as capacity in additions in Asia continue to drive down price and make operating this chemistry in Europe more difficult. If approved, we will no longer produce virgin polycarbonate and will obtain all of our polycarbonate needs for our downstream businesses via external purchases and recycling. While difficult, this decision is in line with our continued focus on continuous network evaluation and optimization, and we expect it will increase annual profitability by $15 to $20 million compared toward 2023 results.

I also want to be clear that any decision to close the Virgin polycarbonate production site in Stata will not impact our commitment to advancing our polycarbonate dissolution technology that we discussed at length in our third quarter 2023 earnings call. While Stata was previously mentioned as a potential location for this technology up to commercial scale, we are now exploring numerous alternative locations that could host our recycling assets. We remain committed to the integration and application of modern recycling technologies to help customers develop more sustainable product offerings, and this potential closure does not change that commitment. We continue to see excellent demand for our products that contain recycled material, with a record amount sold in the first quarter, which represents a 65% increase over the prior year.

In addition to our focus on products containing recycled material, we continue to work on other sustainably-advantaged product offerings. We recently introduced flame-retardant polycarbonate and PCABS compounds that are manufactured without the use of PFAS and will primarily be used in consumer electronics applications. PFAS chemicals, which have faced growing regulatory and consumer pressure to be reduced, are commonly used for their flame retardant properties, as well as their resistance to heat, oil, grease, and water. These new products maintain those critical performance attributes and use post-consumer recycled substrates, but replace PFAS with other flame retardant chemicals. Now we’d like to turn the call over to Dave to discuss our first quarter results.

David Stasse: Thank you, Frank. Before I get into the first quarter results, I’d like to call your attention to a change in our segment reporting structure that became effective at the beginning of this year. As we’ve previously discussed, following the closure of our polystyrene production facility in Trinuzan, we no longer produce styrene and therefore no longer have a feedstocks reporting segment. As a result, we have recast the 2022 and 2023 net sales and adjusted EBITDA of the feedstock segment into the downstream segments that consume styrene, which are latex binders, plastic solutions, and polystyrene. We have included segment results with and without this recast in the earnings presentation appendix. Turning back to the results, first quarter adjusted EBITDA of $45 million was in line with our previous guidance but included $13 million of favorable net timing from rising styrene prices.

European spot styrene price increased by about 60% in the first quarter due to planned and unplanned industry outages. In this environment, we generally will have favorable net timing and a working capital build. Conversely, when styrene declines, as we expect in late Q2 into Q3, we generally will have unfavorable net timing and a working capital release. Throughout this period, however, our underlying EBITDA X timing is generally unchanged as America’s Styrenics benefits and periods of styrene tightness and our polystyrene plastic solutions and latex binder segment have a roughly equal and opposite effect as they are net buyers of styrene. Cash used in operations during the quarter was $66 million, which resulted in free cash flow of negative $82 million.

This included a $61 million increase in trade working capital. Historically, the first quarter of the year includes a working capital build due to seasonal factors. However, this year’s build was amplified because of the significant increase in styrene prices that I just spoke about. We expect Q1 to be the lowest free cash flow quarter of the year as our earnings improve and as our working capital normalizes from lower feedstock prices. We ended the quarter with $171 million of cash and $423 million of liquidity, including our undrawn bank facilities. We enhanced our overall liquidity by extending the maturity on our accounts receivable securitization facility by one year to November 2025 and by including new subsidiaries in the facility that helped increase the available borrowing capacity by $36 million quarter-over-quarter.

Additionally, we are taking other actions such as proactively moderating lower margin sales to conserve working capital with only a nominal impact on earnings. Liquidity preservation is and will continue to be our top priority as we navigate this cycle downturn. Now I’ll hand the call back over to Frank.

Frank Bozich: Thanks, Dave. I am happy to report that we’re seeing the positive earnings momentum from the end of the first quarter, continue in the second quarter. Tightness in the styrene and MMA markets support a continuation of the higher margins that we experienced in the latter part of Q1. This combined with AmSty’s return on the styrene operation, and seasonal increases in high margin building and construction and consumer electronics sales give us confidence in a meaningful sequential profitability improvement in the second quarter. As a result, we expect Q2 adjusted EBITDA of $60 million to $75 million, including approximately $5 million to $10 million of negative timing. Consistent with the outlook we provided last quarter, we still expect Q1 profitability to be the low point of the year.

Our base assumption is that demand remains constrained throughout 2024, but EBITDA will be stronger due to tighter markets from destocked supply chains and the restructuring actions that we’ve taken. While our first quarter results and our second quarter outlook are certainly promising, we remain in one of the most challenging times for the chemical industry in several decades. I’m confident that the cost actions we have taken, combined with our focus on prioritizing liquidity while improving our sustainable and differentiated materials capabilities, will have us well positioned to rise out of this cycle when demand returns to more normal levels. And now, we are happy to take your questions.

Operator: Thank you. [Operator Instructions] Your first question comes from a line of David Begleiter from Deutsche Bank. Your line is open.

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Q&A Session

David Begleiter: Thank you. Good morning. Frank, nice comeback or recovery in engineering materials, you looked at Q2 with the strength continuing. How are you thinking about EBITDA earnings potential in engineering materials in Q2 here?

Frank Bozich: Yes. So we would expect engineering materials to be in the above $20 million EBITDA on Q2. It is at that run rate in March and April, and we don’t see the dynamic continuing or changing in any way. So, and these are the things that we’re really acutely watching from a market standpoint. We’re watching what’s happening in the polycarbonate epoxy market and nylon value chains in Asia because those value chains being depressed really constrains the byproduct feedstock that go into MMA in that region. And then we’re also watching the Red Sea. So there are certain dynamics that are out of our control that are influencing the current short-knit tightness in North America and Europe. But we don’t see any signs right now that would change that dynamic.

But the other thing I’m happy to say is that the volume improvement we’re seeing in MMA really cuts across all of the segments. MMA volumes are certainly up, but we’re also seeing good volume improvement. And our good order book in both the resin, our surfaces business, as well as rigid compounds that go into consumer electronics as we enter Q2.

David Begleiter: Very good. And given that strong level of earnings in Q2, can you actually grow earnings from that level in the back half the year, i.e., $20 million per quarter or higher?

Frank Bozich: Well, it all really depends on the underlying market demand. Right now, we don’t anticipate a significant change in market demand. We are winning some new awards, but our outlook in the back half of the year really depends on how the markets develop. So difficult to say at this point. And that’s why, we’ve neglected to give full year guidance because it’s just difficult to say how the markets will develop.

David Begleiter: Understood. Thank you very much.

Frank Bozich: Thank you, David.

Operator: Your next question is coming from the line of Matthew Blair from TPH. Your line is open.

Matthew Blair: Thank you, and good morning. I had a few questions on AmSty. First, are you able to quantify the impact of the turnaround in Q1? What would that 6 million have looked like if you were not in turnaround? Two, what kind of interest are you seeing in marketing the AmSty JV? And then three, could you explain a little bit more about this ownership exit provision? What exactly would happen in early 2025? Would the other half go back to the other counterparty [indiscernible]?

Frank Bozich: So let me take the back half of that question, then I’ll let Dave take the first part of it. So we’ve seen indications of interest from a number of strategics and financial parties in the AmSty asset, when we signaled that we would be using this prescriptive JV exit provision. But we haven’t begun actively marketing the asset jointly with our joint venture partner at this point. But I can say that it’s a great asset. It’s recognized as one of the best Styrenics assets in the world. So I’m confident we will see interest in a good process when that begins. So the JV exit provisions that are defined under the JV agreement have a number of steps. We’re working through those steps. Ultimately, those steps result in a joint marketing of the asset.

So it just there’s certain prescriptive elements we need to complete before we get to that point, and we’re in the process of doing that. But again, even if those take their – are fully exhausted, those preliminary steps, we’re very confident that this will result in a signing of a transaction by early 2025.

David Stasse: Matthew, related to the first part of your question. The impact to us of AmSty they were out for substantially all of January and February for a planned outage. They have two Styrene units, and each one turns around every 3 to 4 years. So they often have these turnarounds in the first quarter. The impact to our earnings in the first quarter of this year was probably high single digits, $8 million or so, I’d say, from the turnaround. The reason it’s that low is because, styrene prices really didn’t accelerate in margins until March. So they were up in March. As you can see, I think we had $6 million of EBITDA in the quarter, and all of that was in March. As we look forward to Q4, we obviously considerably better results, I think our equity income from AmSty will probably be $20 million or higher in the second quarter because of the high margins that we continue to see.

But related to styrene, kind of a tangential point I’ll just say is in my prepared remarks earlier, I did say we do expect styrene prices these outages are starting to end as units are coming back online as we speak that are out. And we do expect a fairly significant decline in styrene prices late in Q2 and into Q3, the working capital benefit for us associated with that will probably be a Q3 item for us. And we obviously for liquidity purposes, look forward to that.

Matthew Blair: That was good. And then, are there any net timing functions in your Q2 guidance? We did see European styrene contracts in May come down, although the Q2 average is still well above Q1. So, if you could help us think about the potential net timing impact in Q2, that’d be great.

David Stasse: Yes. So, embedded in the guidance range that we gave Matthew that Frank mentioned on the call of $60 million to $75 million, embedded in that, we believe net timing will be negative 5 to negative 10 in the quarter. So, that’s embedded in the guidance The reason – the working capital, as that works its way through your balance sheet there’s a month or 2 lag, really, between the P&L impact and the recognition in your balance sheet of the lower working capital. So that’s why I said it’s probably the working capital benefit would be in Q3, but the P&L impact in Q2.