Trinseo PLC

We welcome the Trinzio management team, Frank Bozich, President and CEO, David Stasse, Executive Vice President and CEO, and Andy Myers, Director of Investor Relations. Today's conference 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 and furnished on a form 8K filed with 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 Mr. Andy Myers. Please go ahead.

Thank you, Amy, 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 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 July 30, 2021. Now, I would like to turn the call over to Frank Bozich.

Thanks, Andy, and welcome to Trinzio's second quarter earnings call. I'd like to start by discussing our 2020 Sustainability and Corporate Responsibility Report, which we published earlier this month. Since our founding a decade ago, Trinzeo has maintained sustainability as a core value. After joining Trinzeo last year, I've come to understand how deeply this is embedded within the company and how truly passionate our employees are about improving our world, addressing complex material challenges, and delivering sustainable products that are intrinsic to daily life. Our report lists many accomplishments which we are proud of. covering a broad range of areas across the company. These include safety, for which we achieved an injury rate of only 0.11 per 200,000 hours worked in 2019. This puts us in the upper echelon of the chemical industry. It includes environmental protection, where we've reduced our scope one greenhouse gas emissions by 37% since 2011. It covers product development where we continue to focus on many innovations including a greater proportion of post-consumer recycled content in the products we sell as well as investments in polystyrene circularity. It's because of results such as these that Newsweek recognized us in its 2020 list of America's most responsible companies and we have achieved favorable ratings from Echovatus and CDP, which was formerly the Carbon Disclosure Project. In June, we celebrated our 10th anniversary as a company and would like to thank once again our dedicated employees who helped us achieve this momentous milestone. We also believed our anniversary was an appropriate time to look 10 years ahead and embark on an ambitious, measurable, and achievable long-term sustainability journey. The roadmap for this journey is outlined in our 2030 Sustainability Goals, which we announced earlier this month. This ambitious plan includes 15 long-term goals under five main categories that target climate change, sustainable products, supplier responsibility, responsible operations, and sustainable workforce. These goals were created in part from a critical assessment of the company's capabilities, as well as valuable feedback from customers and suppliers. We remain focused not only on controlling how we are impacting our environment and society, but also how we can best position our business for success in a sustainable economy. That is what makes initiatives such as partnerships to advance the quality and use of polystyrene recycling so important. So I want to acknowledge our employees for all their hard work, and I look forward to next year when we can discuss our progress against achieving these goals. Next, I want to provide a brief update on our business operations and the well-being of our employees as it relates to COVID-19. I'm pleased to say that our business operations, including production and logistics, experienced only minimal interruption by COVID-19 during the second quarter. and we were able to meet all demand of our customers. We continue to prioritize safety of our employees by supporting working from home where possible, increased cleaning at our facilities and limiting travel. I am very proud of the leadership and agility that our employees have demonstrated throughout this pandemic, which resulted in the safety and health of our team as well as the uninterrupted service to our customers. Before I discuss the second quarter results, I'd like to provide you with an update on some steps we are taking to improve our asset footprint. Please recall that 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 Schkopau, Germany. After a thorough analysis, we have decided to move forward with the closure of the Polybutadiene assets in Schopau, which should be completed by the end of the year. We are still evaluating the disposition of the styrene monomer assets and hope to provide an update over the next few months. Turning to the business results for the second quarter, I'm very pleased with the second quarter results. In an environment of historically low demand across several of our end markets, we took aggressive action on cost and on working capital to significantly improve our position coming out of the pandemic. We estimate that the financial impact of the pandemic on the second quarter to be just over $100 million, which includes both lost demand as well as unfavorable timing from the steep drop in raw material prices. Therefore, the very strong free cash flow generation we had in Q2 is something I'm very pleased with. The automotive industry was particularly affected as we observed about 80% lower year-over-year demand from North American and European customers in April and May. However, we saw significant improvement in June and that has accelerated in July. Recall that our automotive sales are approximately 45% to each North American Europe and 10% to Asia. Tire demand followed a similar trajectory through the quarter with the low point in April followed by improvement across the rest of the quarter and a strong follow-through into July. In addition, slowdowns in demand for graphical paper and textile applications led to lower volumes in our latex binder segment, but this was partially offset in the segment by the resiliency and demand in our paperboard packaging and case applications. On a year-to-date basis, case volumes were 3% higher than the same period in the prior year. I also want to mention that sales to engineered materials applications within our performance plastics segment decreased only 12% on a year-to-date basis in comparison to 22% for the overall segment. Within Engineered Materials, we provide an offering of sustainable solutions, including various products with significant post-consumer recycled content, and this relatively better performance reinforces our commitment to continue investing in these solutions. Polystyrene saw strong volumes during the quarter, from both increased packaging demand in Europe as well as strong demand for appliances in Asia. And our feedstock segment continues to benefit from expanded styrene margins caused by lower raw material prices in Europe. European styrene costs remain more competitive than in prior periods as a result of low-cost naphtha due to low fuel demand and reduced POSM operating rates. Despite the historically low levels of demand during the quarter, we generated $82 million of cash from operations, which yielded free cash flow of $58 million, including a decrease of $131 million across accounts receivable, inventory, and accounts payable from declining raw material prices and inventory management initiatives. Our balance sheet continues to be a source of strength as we ended the second quarter with $582 million of cash and $371 million of availability under committed lines, resulting in total available liquidity of $953 million. In addition to working capital management, we are also taking steps to reduce our cost base. Overall, for the year, we expect savings of approximately $30 million from these actions. A portion of this is temporary, related to reductions in travel and other discretionary spending. However, we expect the structural cost savings will have a $25 million full-year impact going forward. Our ample liquidity position coupled with our view that the market bottom for demand for many of our end markets was in April led to a decision to repay the full $100 million in July from the revolver draw that we made at the beginning of the second quarter. We will continue to manage cash through cost control, working capital initiatives, and strategic capital spending. Before I discuss the outlook for the second half of the year, I'd like to give you some perspective on the first half performance. The adjusted EBITDA in the first half of the year was $48 million, including an estimated $65 to $70 million of lost earnings from COVID-19, mainly from the lower volume in the second quarter. This, combined with the $58 million of negative net timing from a steep decline in raw material prices, created a uniquely adverse environment for earnings in the first half of the year. Excluding these impacts, you can see that the first half 2020 performance was similar to last year's EBITDA run rate. It's impossible to say how long the business will be impacted by COVID-19. but we view April as the trough and we see positive volume recovery through the quarter which continued into July and we look forward to improved results in the third quarter. We are seeing sequential demand improvement in automotive and tire applications. This is especially true in North America automotive market where sales far outpaced production in the second quarter. which resulted in lower than normal inventory levels for the region, especially for trucks and SUVs. Overall, while we expect the third quarter sales volumes to be sequentially higher, we expect them to be lower than prior year, particularly to automotive, tire, textile and graphical paper applications. The same applications that experienced the largest demand impacts in the second quarter. We will continue to be highly focused on cash generation and liquidity. Many of our larger turnarounds and special capital projects, such as the Dow Services transition, were completed in the first half of the year, which will result in lower project-related spending in the second half of the year. July styrene margins in Europe continue to leverage low benzene from abundant naphtha, and we expect that dynamic to continue as long as fuel demand is low and POSM rates are reduced. In addition, we expect a favorable net timing impact in the third quarter of about $10 million, given increasing raw material prices as overall demand recovers. While it's difficult to predict the rate of economic recovery, it's important to note that we've taken actions to reduce operating expenses and we will continue to be highly focused on maximizing cash as the rate of recovery remains unknown. We will also continue to prioritize investments in our growth areas, case, engineered materials, SSBR and sustainable solutions across the portfolio. This will ensure that we are well positioned to accelerate profitability in cash generation when the recovery occurs. Thank you, and you may now open the lines for questions.