Trinseo PLC

Good morning, ladies and gentlemen, and welcome to the Trendzeo first quarter 2020 financial results conference call. We welcome the Trendzeo 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 yesterday. These documents are posted on the company's investor relations website and furnished on a Form 8K filed with the Securities and Exchange Commission. If anyone should require operator assistance during the call, please press star then zero on your touchstone phone. I will now hand the call over to Andy Myers.

Thank you, Jack, 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 factors set forth in our annual report on Form 10-K under Item 1-A, Risk Factors. The company undertakes no obligation to update or revise its forward-looking statements. Today's presentation includes certain non-GAAP measurements. A reconciliation of these measurements to corresponding gap 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 7, 2021. Now, I would like to turn the call over to Frank Bozich.

Thanks, Andy. I'd like to welcome everyone, and I hope all of you on the line are safe and healthy. Today I'd like to walk you through the current status of our operations and financial position, what we're observing in our markets, and what actions we're taking to not only navigate the near-term situation, but also to best position Trinzeo for the eventual economic recovery. As always, our first priority is the safety of our employees. To protect our employees during the crisis, we've taken many actions consistent with government and industry recommendations. I'm very proud that during this period, we've continued maintaining our world-class safety and EHS performance. As we support our employees, we're also assisting in the health and wellbeing of many of the communities surrounding our plants and offices. Our Taiwan office sourced and donated thousands of children's surgical masks and hundreds of children's goggles, which were used to protect orphans and children in foster care. Our Hong Kong office donated hand sanitizer to hundreds of families and cleaners throughout the city. Our Zhangjigang manufacturing site in China sourced and provided protective materials, including masks, infrared thermometers and personal protective materials to volunteers in its neighboring communities. These are just a few of the many stories of community support occurring across our sites. Many of our customers participate in industries that have been deemed essential during this pandemic. We are proud to continue to supply them with products that are intrinsic to their efforts, such as polycarbonate for use in protective shields and latex binders and polystyrene for food packaging. We are particularly proud to serve our customers and many of those used for critical patient care and respiratory therapy. We've taken specific actions to ensure the continued operation for these customers. We're grateful to do our part to support the medical community and we want to acknowledge and thank all of the healthcare professionals and manufacturing teams around the world for their dedication. We have been able to meet all customer demand as all of our plants are currently able to operate. and our supply chain has continued to function without any significant delays or loss of business. The minimal disruption in our operation is a result of the diligent and dedicated work of our employees who have demonstrated an exemplary ability at problem solving and contingency planning. This is an example of the vital contribution our employees provide and I want to take this opportunity to thank them for all of their effort to ensure the continued safe operation of our facilities. Turning to our business, our financial priority during Q1 and for the near term has been maximizing cash generation and enhancing our already strong balance sheet. During the first quarter, we had approximately $30 million of project related spending. This was related to our systems and process transition from Dow, which is largely now complete, as well as our four plant turnarounds, restructuring, and manufacturing systems upgrades. Despite these expenditures, $25 million in share repurchases, and the Q1 timing of our annual variable compensation payment, we ended the first quarter with $440 million of cash. and an additional $500 million of liquidity through committed facilities. In the second quarter, we've already taken several actions to improve our liquidity position. First, as we previously disclosed, we drew $100 million from our revolver early in the quarter as a precautionary measure. Second, we plan to reduce full year 2020 capital spending from $100 million to $80 to $85 million by deferring non-essential maintenance and productivity projects. Lastly, we're undertaking a number of cost actions, including a reduction in consultant, travel, and discretionary spending, which are expected to result in $25 million of savings this year. These savings are in addition to the previously committed restructuring savings In the second quarter, we expect the release of working capital of greater than $100 million from a combination of lower raw material costs, an increased ability to manage our payables, and a reduction in inventory from optimizing our manufacturing and supply chain networks. Backed by our already strong balance sheet and additional liquidity levers, I'm very confident in our ability to maintain a very strong cash position during the remainder of the year. Before I talk about the current market conditions, I'd like to say a few words about the first quarter. In terms of demand, January sales volumes were the highest since the first half of 2019, showing a rebound from the second half of last year. We saw a similar trend in February in North America and Europe, but Asia slowed following Chinese New Year from COVID-19. While Asia recovered nicely in March, we started to see a decline in North America and Europe in the second half of March as government mandated shutdowns increased and consumer concern over COVID-19 grew in those regions. Overall for the first quarter, we estimate that we experienced a pre-tax $6 million headwind from COVID-19 impacts primarily in synthetic rubber. We also had a $5 million unfavorable impact to the contribution to EBITDA from Amstey due to the significant turnaround they executed during the first quarter. Looking at the start of the second quarter, the decline in demand that began in late March has accelerated in April, particularly in the automotive, tire, and textile markets. April automotive production was about 95% lower in both Western Europe and North America due to the large number of plant closings. This steep decline in auto and tire demand impacts both their performance plastics and synthetic rubber segments. And we expect second quarter sales to those applications to be down about 50% versus prior year. However, we expect auto production will return as inventories continue to be drawn down in many regions. For example, we estimate that North America finished vehicle inventory at the end of April was about 25% lower than prior year. As a reminder, sales to automotive make up approximately 40% of performance plastics revenue. We're also seeing demand declines for latex binders in graphical paper and carpet applications in the second quarter. However, there has been strength from latex binders and polystyrene in food packaging applications, polycarbonate for use in isolation sheets and face shields, and engineering materials used in medical device applications such as respirators. We expect these trends to continue through the second quarter. Earlier, I mentioned the near-term cash and liquidity actions we are taking to mitigate the risk caused by the pandemic. However, we're taking additional steps to improve the long-term position of Trisio and to enable our future success, especially when the economic recovery begins. First, we have largely completed our multi-year project to achieve systems independence from the Dow Chemical Company. This will enable significant cost savings and cash flow opportunities in the future now that we have control over our systems and the related processes. Second, sustainability initiatives are part of our long-term strategy to increase demand for products while operating in a socially and environmentally responsible manner. And we remain extremely focused on this. During the first quarter, we launched our new Pulse Eco Series recycled content containing resins for the automotive market. These grades of PC-AVS contain up to 50% recycled content and are specifically tailored for automotive interior applications. The Pulse series was targeted by Daimler as an example of the materials it is looking to utilize to obtain its to attain its 2039 goal of a carbon neutral fleet. In March, we announced the new latex binder for interior paints, which offers exceptional performance balanced with reduced environmental impact. This is part of our coatings, adhesive sealants, and elastomers or case applications offerings. And it provides exceptional scrub resistance, touch up, and hiding performance with low to zero emissions of VOCs. Our annual sustainability report will be published and available this summer. We will have further information on our progress in this area, and I look forward to sharing some more exciting updates in the future. Lastly, we continue to take actions to improve our portfolio. We will continue to invest in applications that display higher growth SSBR and synthetic rubber, and engineered materials and performance plastics. We are already observing some positive results from increased investment focus in these areas, such as first quarter case volumes grew 11% versus the prior year. As we move toward applications with higher margins and less cyclicality, We are taking steps to improve the cost position of the more commoditized parts of our portfolio. To that end, we have initiated a consultation process with the Economic Council and Works Council of Trinzio Deutschland regarding the disposition of our styrene monomer assets in Bohlen, Germany and the polybutadiene rubber assets in Schropau, Germany. The combined adjusted EBITDA of these assets in 2019 was negative $18 million. We are also keeping a close eye on trends in market actions that are emerging because of the pandemic. Future trends could include increased use, increases in food packaging applications, greater demand for consumer electronics at home, and additional needs for plastics for isolation sheeting and medical applications. To ensure that we identify new developments and trends, we've increased the frequency of our executive team reviews to weekly. Additionally, during the quarter, our board of directors created a COVID-19 response committee, which meets biweekly to allow the board and company management to respond quickly to COVID-19 related financial Operational and Health and Safety Issues. Before going into Q&A, I'd like to take a few minutes to discuss the recent decline in oil prices and the resulting decline of our raw material prices and what that means for Trunzio. First, for our derivative products, the large portion of these have contractual pricing, where the cost of raw materials is passed through to our customers either formulaically or through contractual pricing adjustments. For those not under contracts, the pricing is typically adjusted monthly based on raw material cost of changes and market supply dynamics, supply-demand dynamics. In these cases, changes in raw material prices do not meaningfully impact our margins. In some cases where we have differentiated product advantage and more value-based pricing, We have more of an ability to expand margins in a decreasing raw material environment. But for the most part, we generally do not experience a significant margin change as raw material prices change, except due to temporary net raw material timing impacts. The significant drop in oil prices and fuel demand has resulted in a dramatic and favorable change in the cost position of NAFTA-based cracking in Europe. This greatly reduces the cost of our raw materials such as butadiene, ethylene, and benzene and could create new opportunities for us. For example, lower butadiene in Europe could create new opportunities for the sales of synthetic rubber to other regions. Regarding styrene production, these lower benzene and ethylene costs have enabled our facilities in Europe to become more cost competitive. Therefore, we have seen fewer styrene imports into Europe and higher relative margins in comparison to the beginning of the year. In fact, May margins are coming in higher than the first quarter average, and this could continue based on the current outlook for oil prices. In addition, we're seeing lower than average utilization rates at POSM plants in Europe due to lower demand for propylene oxide. A continued low fuel demand environment will make our network more cost competitive as demand returns. In closing, the financial outlook beyond the second quarter is very difficult to estimate and will largely depend on the speed and scope of the economic recovery of various geographic regions and end markets. As a result, we have suspended our full year of guidance as well as additional share purchases. While we remain hopeful that the second half of the year will provide economic recovery and a significant increase in demand, we are preparing for various economic scenarios. Due to the strength of our balance sheet, our low capital intensity, the capabilities of our employees, and the strategic actions we continue to take, I believe we will emerge from this challenging time well positioned to grow the business and preserve our dividend. With that, Jack, you may now open the phone line for questions.