Trinseo PLC

Good morning, ladies and gentlemen, and welcome to the Transio First Quarter 2021 Financial Results Conference Call. We welcome the Transio Management Team, Frank Bozich, President and CEO, David Stacey, 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 questions and answers sessions. 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 by 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.

Thank you, Tabetha, 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 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 May 7, 2022. Now, I would like to turn the call over to Frank Bozich.

Thanks, Andy, and welcome to Trinzio's first quarter earnings call. I want to begin with our recent news regarding the closing of the transaction to acquire Arkema's PMMA business, which we first announced last December. The newly acquired business, the results of which will be reported in our engineered materials segment, represents the first major step in the transformation of Trinzio. As we have stated, our goal is to become a higher margin, less cyclical specialty materials and sustainable solutions provider. The end uses of PMMA overlap with our current offerings in many end markets, including automotive, construction, medical, and consumer electronics. This acquisition is not only expected to generate approximately $50 million of annual synergies, but is also expected to enhance our customer intimacy in these markets. With additional investment in Asia, we will broaden the geographic scope to allow us to serve global customers in that region who are currently not served by the business. The integration of the Arkema team will largely be complete once we have migrated them to our new ERP system and eliminate the transition services agreements which is planned for mid-2022. The deployment of the new ERP system is expected to result in harmonized IT systems and business processes across regions and business units that will lay the foundation for future growth. As a reminder, we expect this alignment will result in at least an additional $25 million of cost synergies. I want to welcome the almost 900 new employees as well as numerous new customers to Trinzio, and I'm looking forward to growing our business together. Turning to our first quarter results, we started the year on a great note with very strong net income and a record quarter in adjusted EBITDA. The recovery in demand for many of our products, which began in the second half of 2020, continued into the first quarter. Our total sales volume in the first quarter was 5% higher than prior year, and 8% higher if feedstocks is excluded. We observed strong demand in most applications, including appliances, building and construction, consumer electronics, tires, board packaging, and even automotive, despite the current semiconductor and raw material shortages. We continue to grow in products that support higher margin, less cyclical applications like engineered materials and case applications, where we enjoyed their highest quarterly volume in our history in Q1. Engineered materials volume was fueled by strong demand for consumer electronics and footwear, especially for products including biomaterials, while case benefited from solid demand and construction applications as well as from our continued growth in the form of new customers and expanding our product offerings at existing customers. During the quarter, we captured higher margins versus both prior year and the prior quarter for a number of products, including ABS, polycarbonate, polystyrene, and styrene. This can be attributed to a combination of factors, including solid demand numerous commercial excellence actions, and tighter market conditions. The most prominent example of tighter market conditions was in styrene, where unexpected external events like winter storm Uri in North America and the Suez Canal blockage caused production and supply issues, which, combined with normal planned seasonal maintenance and strong demand, led to extremely high styrene margins in our feedstock segment in March. In addition, our joint venture America Styrenix was fortunate in that its styrene plant in Louisiana was able to continue running without major issues during winter storm Uri, which allowed the JV to capitalize on higher industry margins. We also benefited from higher margins in our ABS and polycarbonate products within base plastics due to high demand and industry supply outages including some from raw material shortages. These tighter market conditions resulted in higher margins in base plastics, but I will say that they did cause a headwind in our downstream segment engineered materials, where higher raw material costs, like polycarbonate, caused margin pressure for our rigid compound products. The large cost increase in raw materials also created a use of working capital during the quarter. but we were still able to generate cash from operations of $51 million, which led to a positive free cash flow of $38 million. We finished first quarter with $618 million of cash on hand, of which we used $200 million in May as part of the financing of the PMMA acquisition. With the acquisition complete, we still have a very strong balance sheet and a very positive outlook on earnings for the remainder of the year, especially for the second quarter. Before I touch on our forward outlook, I want to highlight a few updates on sustainability. First, we recently announced a collaboration with BASF with the goal of increasing styrene production from circular feedstocks. We have already achieved mass balance certification for some of our plants, And this new collaboration will help our customers reach their sustainability goals by offering them more sustainable solutions. Second, we recently committed to and were qualified for Apple's program asking manufacturers to use 100% renewable energy in Apple production. We also announced our plans to build a commercial polystyrene recycling plant into Cinderloo, Belgium, which is expected to be operational in 2023 and is expected to convert 15 kilotons per year of polystyrene waste into chemically recycled poly, chemically recycled styrene. Prior to the plant's construction, Trinzio Ineos and our newly selected technology partner, Recycling Technologies, plan to build a polystyrene recycling pilot plant in the UK in 2022. This pilot plant will look to develop recycling technologies depolymerization solution, which provided the highest yields in the conversion of polystyrene to styrene monomer and provided some of the most scalable solutions. Not only will the development of this technology reduce greenhouse gas emissions as compared to polystyrene production from traditional petroleum-based feedstock It will also position polystyrene as an integral player in sustainable plastic solutions. These initiatives strongly align with our 2030 sustainability goals, including the reduction of greenhouse gas emissions and creating a product portfolio that is at least 40% sustainably advantaged. It's satisfying to see that as we continue to make sustainability a core piece of our transformation journey, we are being increasingly recognized for our efforts. Echovatus, a global sustainability rating agency, recently issued Trendzeo a silver rating, and our score placed us in both the top 20% of all rated companies and in the top 13% of the category manufacturers of plastic products. Favorable ratings like this one, as well as our 2021 rating of AA by MSCI, are a positive byproduct of managing our company by using sustainability as a main tenant. The addition of PMMA to our portfolio is consistent with our goal of reducing our CO2 intensity, as it has a CO2 intensity that is one quarter of Trinzio's current average. I look forward to sharing more exciting updates in this area in the future. Turning to our outlook for the second quarter, we expect that overall earnings will be similar to the first quarter. We are observing demand levels sequentially in line with Q1 in many of our applications, including appliances, building and construction, tires and automotive. where the platforms we serve, such as SUVs and light trucks in North America and premium cars in Europe, are more highly prioritized by OEMs. As a consequence, they are less likely to experience lost production as a result of semiconductor and other raw material shortages. Margins in most of our segments should also be sequentially similar in the second quarter. In feedstocks, we expect another strong quarter of earnings based on high margins observed in April and May. However, we anticipate that as more supply is made available, the styrene market will find balance and the feedstock segment profitability will be closer to break even in the back half of the year. Given the strength in earnings in the first half of the year and the expectation of a strong demand environment in the second half, along with our structural business excellence initiatives. We are revising our previous full-year guidance to an adjusted net income of $303 million to $343 million and an adjusted EBITDA of $625 million to $675 million. This range assumes a full year of synthetic rubber and no contribution from the PMMA acquisition. While we are not in a position to provide guidance on PMMA at this time, I will say that we expect eight months of solid earnings contribution from the acquisition, given the positive demand we're observing in many of the applications it serves, including automotive and construction. Given our current outlook on earnings, we are confident that we will be able to reach a pro forma net leverage in the low twos by the end of 2021. This represents an approximately 18-month acceleration from our previously disclosed deleveraging plan. It's an exciting time at Transio, and we continue to transform into a specialty materials and sustainable solution provider. The PMMA acquisition has closed and we're on track to complete the process to evaluate the divestiture of our synthetic rubber business by mid-year. I'm looking forward to a strong year of earnings, integrating the PMMA business, welcoming our new employees, and implementing best practices, as well as upgrading and harmonizing our IT systems and business processes. While the PMMA acquisition is a large step forward for the company in its transformation, we will continue to look for ways to organically and inorganically grow Trinzeo that align with our strategy of higher margins and lower cyclicality with an underlying focus on sustainability. Thank you, and now you can open the line for questions.