Trinseo PLC

or 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 August 5th, 2022. Now, I'd like to turn the call over to Frank Bozich.

Thanks, Andy, and welcome to Trinzio's second quarter earnings call. I'm excited to discuss another strong quarter of earnings performance as well as our improved outlook for the rest of the year. However, I'd like to begin by thanking our employees for all of their hard work and dedication. The transformation journey we're on requires tremendous effort, and we've already taken some big steps thanks to the dedication of our team. All of this was amid some very difficult operating conditions, including significant supply chain challenges, where our team did a tremendous job of ensuring customer supply, sometimes when others couldn't. And we've been able to deliver record quarterly profitability. I can't stress enough how proud I am of our team and how much I look forward to continuing our transformation together. Now, I want to provide an update and overview on where we stand on our transformation to a specially material and sustainable solution provider, given the many actions we've already taken this year. In May, we finalized the acquisition of Arkema's PMMA business. And I'm happy to say the business is performing well, despite some industry-wide headwinds, such as production constraints for automotive customers and limited MMA supply. The strong EBITDA margins that made the business an attractive target are already positively impacting our overall results. And we look forward to an even better results from that business moving forward. We originally anticipated $50 million of cost synergies in the business, with $10 million being realized in the first year. We are on schedule to achieve the first year of cost synergies, and we've identified a larger pipeline of synergy opportunities than what was originally communicated. We are going through the process of prioritizing these opportunities across three dimensions, magnitude, ease of execution, and the speed to deliver, and I look forward to updating you on our progress in future calls. Fully integrating this business remains a high priority, including the migration to our new ERP system and the elimination of TSAs, which we estimate to occur in mid-2022. As previously mentioned, the resulting IT and business process harmonization from the ERP deployment is expected to result in at least an incremental $25 million of cost savings in the legacy Trenzio business. The acquisition of this PMMA business has enabled us to increase our product offering in our differentiated engineered materials segment. Our recent announcement of the agreement to acquire Aristek Surfaces will allow us to broaden our product portfolio by offering continuous cast acrylic sheets into attractive end markets, including end uses for wellness, leisure, and architectural markets. The key applications are in hot tubs, swim spas, bathtubs, countertops, and recreational vehicles. ArisTech, which has an EBITDA margin in the mid-20s and cash flow conversions of over 80%, represents a business that aligns with our strategy of seeking out markets that support higher margins, higher growth, and less cyclicality. With this transaction, we identified $10 million of cost synergies, which are expected to be fully realized by the third year. And we anticipate $50 million in value from tax basis step-up. In addition to these benefits, ArisTech will accelerate our growth in Asia, where significant product applications like hot tubs and swim spas occur. We estimate that Asian production in these applications will enjoy an average growth rate of 13% from 2020 to 2025. We believe there are also meaningful revenue synergy upsides that are achievable through the combined positions of our engineered materials business and Aristek. We expect the deal to close by the end of this year, and the $445 million purchase price will be funded with a mix of existing credit facilities and cash on hand. I'm looking forward to adding ArisTech and its 260 employees to the Trinzio family. Ultimately, our new portfolio will result in increased exposure to markets with an improved ability to generate cash with higher, more stable margins and greater opportunities for growth. I believe we are well on our way to transforming to a specialty materials company. The other component of our transformation goal is to improve our offering in sustainable solutions. To that end, I'm proud to say that in May, we announced that our polystyrene business now supplies recycled polystyrene for food contact applications, specifically Yoplait yogurt containers that are now available in France. This kind of product supports our 2030 sustainability goal of increasing our share of sustainably advantaged products to 40%. Goals like these are used as guideposts for many of our decisions, and a list of these goals can be found in our 11th sustainability report, which was released in July. The report outlines our progress on numerous sustainability initiatives, such as our reduction of greenhouse gases by 21% since 2017. And for the first time, the report includes a SASB reporting framework in addition to GRI. Sustainability remains a foundational component of our company, and I look forward to sharing more exciting updates in the future. Moving to the second quarter performance, We deliver record net income and adjusted EBITDA. We observe solid demand in many of our products in applications such as appliances, packaging, textile, footwear, and building and construction. In fact, our case products and latex binders have grown 23% on a year-to-date basis. This solid, consistent demand over the last few quarters has combined with raw material and logistical constraints to create tight supply conditions, which has led to very strong margins in styrene, polystyrene, ABS, and polycarbonate. While we're seeing styrene margins normalizing already in the third quarter, with supply improving, We anticipate a strong operating environment in derivative products well into 2022. As I previously mentioned, I'm extremely proud of our team and we've been able to navigate external challenges to continue to provide quality products to our customers with minimal interruption. Our second quarter cash used in operations was $21 million. which combined with $20 million of capital spending led to a free cash flow of negative $41 million. This figure includes an increase in working capital of $180 million during the quarter. This significant working capital cash use was primarily caused by steep increases in raw material costs brought on by the same strong demand and supply conditions that I described earlier. For example, the cost of benzene in Europe, one of our largest raw materials, almost doubled the levels never seen in our company's history. And we observed meaningful increases in other raw materials, such as butadiene. As raw material prices normalize and decline, we expect a significant benefit to working capital and increased cash generation in the second half of the year. And we're already observing this. in our July cash results. Now looking at our earnings outlook for the year, we expect net income from continuing operations of $344 to $380 million and adjusted EBITDA of $750 million to $800 million. These estimates include eight months of PMMA business but do not include synthetic rubber, which has been moved to discontinued operations or any impact from the pending ARIS tech acquisition. In comparison to our prior guidance, this estimate includes approximately $80 million improvement in our legacy businesses, including better than expected results from the second quarter performance, plus continued strong market conditions in the second half of the year. I'd like to point out that about half of the $80 million in improved guidance is from our more specialized products offering. And as a result, we expect these to be sustainable. It also assumes no contribution from feedstocks in the second half of the year as European styrene margins normalize due to more balanced supply-demand environment. For the full year, we expect to generate cash from operations between $425 million and $475 million, and free cash flow of between $275 and $325 million. This implies capital spending of $150 million, which is an increase from our last call, mostly due to the addition of the PMMA business and the SAP S4 upgrade project. It also assumes that we'll recoup about half of the working capital cash used from the first half of the year. Putting all of this together, we expect to finish the year with a net leverage ratio in the low twos, pro forma for the PMMA business and the announced ArisTech acquisition and the synthetic rubber divestiture. In summary, we are expecting 2021 to be a year during which we've delivered record profitability while taking significant steps to continue our transformation. With these steps on a go-forward basis, we estimate that the non-commodity portion of our portfolio will contribute about three-quarters of our annual adjusted EBITDA. This includes base plastics, latex binders, and engineered material segments. We've taken these steps while providing exceptional customer services, and all with the foundation of safety, sustainability, and a strong, solid balance sheet. I'm pleased with the progress that we've already made in our transformation, and I know with the help of our dedicated and engaged employees, we will achieve much more. So with that, Felicia, you can open the line for questions.

And if you would like to ask a question, press star 1. Again, to ask a question, press star 1, please. And your first question comes from the line of Frank Mitz of Farmerium Research.