This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: 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.
spk03: 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.
spk09: 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.
spk00: At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that is star one to ask a question. And your first question is from the line of Frank Mitch.
spk04: Hey, good morning and nice start to the year. And congrats on closing the PMMA deal. I understand that you can't offer, you know, full year guidance for the PMMA deal. But I was wondering if you might be able to talk about where their earnings were in the first quarter, what they posted, and put that into context with where it might have been a year ago?
spk09: Thanks, Frank. And maybe let me make one comment that I didn't have in our notes. The transition this week went extremely smooth, and I want to point out that our team and the team from Arkema did a great job preparing for the separation, and all signs are that we're running extremely well from a business continuity standpoint. You know, we can't really give any guidance at this point, but I think the best thing to think about for PMMA is that last year they did $140 million in adjusted EBITDA.
spk04: Got you, got you. I mean, if I look at some of the pricing charts today relative to where they were when you announced the deal, it is looking a bit better. And I was struck by the comment in terms of the expansion into Asia. Could you talk about the timeline that you might be looking to do that? Obviously, you have the facility's The manufacturing facilities, I guess, are in the US and Europe. Is there a thought process to build over there or to acquire over there? Any call there would be helpful.
spk09: So we would expect to make an investment to put a PMMA plant and compounding line in Asia Pacific, frankly, as soon as possible. given that we've only had days to really work without any constraint with the group, all I can say is we're anxious to do this. And the upside for us here is that we can broaden our offering to those global customers that we currently don't serve in that region. So I don't have a specific timeline, and I think we can probably give more updates on that as we go forward in future quarterly earnings.
spk04: Gotcha. Congrats again. Thanks.
spk09: Thanks, Frank.
spk00: Your next question is from the line of David Begrether with Dolce Bank.
spk05: Thank you. Good morning. Frank, just on feedstocks and styrene, how are you thinking about styrene margins beyond this year in terms of supply-demand fundamentals, in terms of new supply coming on in China?
spk09: Yeah. Hey, David. So the... You know, the way we believe that styrene will normalize at a level that is sort of a cash break even for the near term after the first half of this year. And that new capacity will cause some rationalization of marginal producers, mainly the non-integrated producers in China. And that's the level that we anticipated being at for beyond the first half of this year until we start seeing more structural change in growth absorbing that capacity or industry consolidation occur. So the simple answer is after the first half, we believe it will normalize around a cash break-even basis or a zero EBITDA basis.
spk07: Got it. Let me just add, Dave, I just, hi, Dave, this is Dave Stacey. Just to add a couple of things. I think that that comment is applicable to our feedstock segment, not Amstey is obviously styrene business, you know, has a cost advantage. That's not a, we do expect to make money there. But, you know, for a European EBSM producer like us, I think what Frank says is correct. What's implied in our guidance and our, you know, for the next several years at least, we would assume you know, other than these, you know, events that happen, like these recent fly-up margins, you know. But for that, we expect, you know, limited earnings contribution in feedstocks.
spk05: Got it. And just looking forward, with PMA closed and the rubber sale on track for this year, how do you think about the rest of the portfolio, Frank, in terms of, you know, styrenics? Is it going to remain a part of Trinity longer term? And if not, what's the timeframe?
spk09: Yeah, so as we've said in our previous calls and in December when we announced this transaction, we'll continue looking at the portfolio and finding opportunities to inorganically add higher margin, less cyclical, higher growth parts of the business. And we'll look for other parts of the more cyclical part of our business to separate to finance that. I would anticipate that some of our more commodity plastics could be separated at some juncture when we find an appropriate opportunity. But we don't have any specific timeline, and it's an important part of our portfolio now from a cash contribution standpoint. So no specific timeline. And the other thing I would point out is we do have significant opportunities to improve our base plastics business with additional investment and the harmonization of our systems. So again, no immediate plans, but longer term, that's our goal.
spk05: Thank you very much.
spk00: Your next question is from the line of Angel Castillo with Morgan Stanley.
spk01: Hi, good morning. Thanks for taking my question. Just to kind of look at the other side of that, I guess, as you look at your specialty businesses, as styrene and other feedstocks normalize kind of in the back half, could you just talk about the net timing and how we should think about whether that's kind of an opportunity or a benefit in the second half and in the second quarter? And then also just, you know, as you think about kind of the pricing power that, you know, there were some headwinds here in the first quarter that because the raw material was being higher, but as we move into the second quarter and second half with styrene going lower, Do you see some benefit that, you know, as you price some of the raw materials through, margins could actually expand a little bit? If you could give more color, it would be helpful.
spk07: Yeah. Hi, Angel. This is Dave. I'll take a crack at that, and then maybe Frank can add. I'd say, you know, based on the feedstock curve that we, you know, envision and what's kind of baked in our guidance, we don't see significant timing, either positive or negative, in Q2 or, you know, Q3 and 4, frankly, is a little hard to predict, but We just don't see it right now, you know, being a significant factor either way. I guess I could, you know, maybe a follow-on to that or a related question to that would be working capital because feedstock prices are the, you know, biggest driver of our working capital. And, you know, we saw that in the first quarter with about 120 million outflow. I think, again, based on the feedstock curve as we currently envision, I think we'll make back about half of that $120 million really in the back half of this year. So I think working capital will be an inflow in the back half of that year, making back about $60 of that $120 million. The answer as it relates to feedstock prices and kind of a little bit of tailwind and the ability to pass that through the downstream businesses. I think that's an applicable conversation really more for our engineer materials segment. Your rubber largely operates with pass-throughs, as latex is the same thing. I'm not going to speak to PMMA, but our existing engineer materials business, particularly the rigid compounds portion of it, which is about two-thirds of the segment, You know, we did see a headwind in the first quarter just due to the extremely steep magnitude and timing of the polycarbonate increase, you know, that we just weren't able to get passed through fast enough in the quarter. I do think we'll be able to, as polycarbonate prices come down in the back half of the year, I do think we'll be able to make that back, you know, in that particular segment. But as I said, Angel, it's not a particularly relevant conversation in the other specialty segments.
spk01: That's very helpful. And then, you know, just in terms of capital allocation, you noted that, you know, you might end the year kind of low twos and well ahead of schedule. So that's fantastic. So just as we think about, you know, potential bolt-ons, could we see you look at, you know, potential bolt-ons within 2021 or even early 2022? or will the focus kind of be right now on rubber and maybe 2022 is more of a year that you could start to do some other cap allocation, whether it's M&A or even repurchases or anything, given the stronger balance sheet?
spk09: Yeah, I guess to be clear, our number one priority is to integrate the PMMA business and execute against the integration plan that we've got and then complete the assessment for synthetic rubber and execute against that. So we will evaluate other opportunities in 2021, but the characteristics of those would have to be that they would be not disruptive to our ability to execute under the integration plan that we have. Again, we'll look at things, but our first priority will be the integration and execution of those activities we've announced so far. Thank you.
spk00: And your next question is from the line of Hassan Ahmed with Olympic Global.
spk02: Morning, Frank and Dave. You know, just wanted to touch on, you know, obviously conscious of the fact that you can't give guidance related to PMMA, but if I heard you correct, you said that the business did $140 million in EBITDA in 2020, which I would imagine, I think, would imply that EBITDA was relatively flat year on year in 2020, despite, you know, the year being... you know, as quirky a year as it was. So first question is, did that imply flat EBITDA in PMMA year on year? And part and parcel with that question, you know, obviously the end markets at PMMA, you know, building and construction, autos, all looking quite strong this year. And then obviously it has a big China exposure. Again, a geography doing really well. So knowing that you can give forward guidance, can you at least touch on, you know, how these end markets have fared and the business has fared thus far through May?
spk09: Well, what I would say is that there's been very strong, consistent with our existing business, and we have, as I've said, we have some end market and end application overlaps. We're seeing very robust demand. in the applications that PMMA goes into. We are confident that that is sustainable, but what I would say is PMMA was also affected by the supply chain disruptions in Q1 probably more than our broader portfolio, so that the production of MMA in the Gulf Coast and the feedstocks that go into MMA production were quite disrupted and so as we're looking at the supply chain, inventories are relatively low and we would see that there's some pent up demand in addition that needs to be refilled in the supply chain after the disruptions of Q1. So I would say in general, strong demand with very low inventories is how I would characterize the PMMA market right now.
spk02: Understood. Maybe following up on that, you know, particularly as you talked about sort of lean inventory levels and the like, you know, look, as I take a look at your second half implied guidance, you know, you guys are guiding to call it slightly north of $400 million in EBITDA in the first half of the year. And looking at your full year guidance, that obviously implies that EBITDA half and half, H1 to H2, will be down, you know, call it anywhere between $125 million to $175 million. And, you know, you've also touched on how you're not really factoring in any contribution from Styrene. So I'm just trying to reconcile that half-and-half decline in light of, you know, demand continuing to remain strong, obviously turnarounds happening, backfilling of orders, and lean inventory levels, right? I mean, it suggests that maybe, you know, the second half, at least Q3-wise, may be a bit better than what's implied in this sort of half-and-half EBITDA compression that you've sort of, you know, the implied guidance suggests.
spk09: Yeah, so I guess let me give you some qualitative view on the second half and in relation to the first half. You know, while the demand we see remaining pretty strong, and the COMEX initiatives that we've implemented will remain those structural initiatives, what we anticipate is no contribution from styrene, as she pointed out, and that's about $100 million of contribution. And then also the tight supply dynamic that exists right now and existed in Q1 and into Q2 will normalize. So that supply dynamic that going away or that tightness of supply will normalize feedstock costs. And to be fair, we benefited from some of that in Q1. and we see some of that benefit more broadly happening in Q2. So when you normalize that, that's how we get to that first half, second half comparison.
spk02: Very helpful, Frank. Thank you so much.
spk00: Your next question is from the line of Eric Petrie with Citi.
spk06: Hi. Good morning, Frank. Good morning, Eric. I just wanted to go back to your announcement on circularity with PSS. How much of your products for SSBR and PS have recycled content? Is it, you know, 10, 20, 30% or is it more?
spk09: So I heard SSBR and what I would tell you is a very small percentage of our portfolio of our sales. I'm going to say negligible. today have recycled content. And the main driver for that is the fact that there's a very long qualification and approval cycle for those products. So we're excited about what we're doing there, as we were able to introduce products to the tire companies last year. And we were the first to do this. in many of those advanced SSBR applications. And again, that coincides with our investment in tire recycling solutions. So today it's small, but we have material that's out there for qualification. And over time, we would see that building rapidly. The second product that you mentioned, I heard SSBR, the second one I missed.
spk06: Yeah, so polystyrene, and just to clarify, too, not as a percentage of overall volume, but is it mixed with virgin? So you're only looking at 10% recycled content, or how does that mix work out?
spk09: Yeah, so, yeah, sorry, I misunderstood the question. So in SSBR, the content of polystyrene So the content will depend on what type of product we're offering. So if we're using a recycled content from spent tires like we would produce from TRS, it would be in the up to 15% loading level for those materials. However, if it's from chemically recycled styrene and or bio-based, butadiene or bio-based styrene, we have the ability to go up to 100% in the formulation without any change in the physical attributes because the styrene and the feedstocks have the same characteristics as virgin petrochemical-based materials. So in those products, it's a wide range depending on you know, many factors. In polystyrene, by memory, I believe that the first grades that we did sell last year that used mass balance were 40 percent chemically recycled styrene monomer as a content.
spk06: Okay, great. And then, secondly, could you talk a little bit more about ABS profitability, you know, prices? are going up globally, you know, strong appliance demand. Do you see softening comps as we kind of lap the stay at home orders? And then I think your plant in China started up in 17. Is that sold out and potentially an area that you could invest further besides potential PMMA investment in the area?
spk09: So ABS is a great example of the three characteristics that I tried to explain earlier, where we have a great franchise and a great product offering. And our team has done a fantastic job value pricing that into very specific applications, like appliances and automotive, where we see good, strong demand. So the combination of demand and COMEX and commercial excellence activities has been has been good. What I would say, though, is ABS also was really affected by tightness of raw material feedstocks. So, acrylonitrile was very tight in the beginning of the year, and so it created some exceptional earning potential if you were able to supply, and we enjoyed some of that in the first quarter.
spk07: Eric, as it relates to the second part of your question, I think you were getting at would we spend capital to increase the supply at our China plant? The answer to that is no. Our investment directed towards base plastics would not be towards expansion, but rather towards sustainability and recycled initiatives, which we will invest in. Okay, thank you.
spk00: Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that is star one. And your next question is from the line of Matthew Blair.
spk08: Hey, good morning, Frank. I'm curious if you're seeing any demand destruction or substitution in polystyrene, just given the high price environment?
spk09: I think the simple answer is right now, no, we are not. And especially, you know, I guess I'd like to remind you, we have a pretty small exposure into packaging in our polystyrene business, and a lot of our polystyrene is going into applications where HIPS, high-impact polystyrene is required, etc., so where substitution isn't viable. In packaging, we have not yet seen much traction in attempts to substitute to other products. And in fact, the awareness that is building that polystyrene is able to be recycled effectively and recycled materials becoming available has put push the pause button at a lot of the big converters or big end market users of polystyrene that would cost billions of dollars to retool to other materials. So at this point, we have not yet seen that.
spk08: Terrific. And could you provide an update on just the thin rubber divestiture process? How are you feeling about that? I mean, given the the recent uptick in profitability, is there a chance that you might hold on to that business for the long term?
spk09: So I feel very good about our process. We've had a lot of interest from parties in the market, and it's a great franchise. And frankly, I'm very proud of what that team has done. But if we think forward, our rationale for reshaping the portfolio more around case applications and engineered materials applications remains. It's not going to change. And we believe that there are other parties in the market who are better able to invest and grow synthetic rubber and our asset and invest in it than we would be able to have yet a third you know, growth platform, if you will, within the company. So, again, even though it's improving and it's doing great and we love the business and we think it's a great franchise, our priorities are in case and growing engineered materials.
spk08: Sounds good. Thanks.
spk09: Thank you.
spk00: There are no further questions. This concludes today's conference call. We thank you for your participation. You may now disconnect.
Disclaimer