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spk09: 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.
spk00: 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.
spk03: 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.
spk04: Hey, good morning and congrats on the record quarter. I just want to parse through the guidance for 21 a bit better. I believe your previous guidance at the midpoint was like 650. And so you're saying that 80 million is improvement in the legacy business so that on an apples to apples basis, that would get you to 730 for this year. And then the bet that the delta between the 730 and the 775 at the midpoint of your new guidance is strictly the addition of PMMA and the reduction of synthetic rubber. Is that the way that we should be thinking about this?
spk00: Exactly, Frank. So if you go out, I just repeat what you said, but that's exactly right. So okay.
spk04: All right. Fantastic. I just wanted to make sure that so that's a that's a very nice step up in the in the legacy business. And Frank, you know, you're in the guide on on your free cash flow. You're you're at a 15% free cash flow yield relative to your market cap. So what are we what are we going to do with the money?
spk00: Well, we're going to continue the transformation. I would expect that at some juncture in the near future, we'll meet with the board to reassess our dividend and to normalize that consistent with our peer group. And so, again, our first priority is to continue this journey to upgrade the portfolio, make us higher margin and less cyclical, and increase the free cash flow generation of the business. So we're going to continue doing that, and we're very positive about the results we've had so far.
spk04: Is there any room in the mix for buybacks?
spk00: That wouldn't be a top priority. A transformation would be number one, continue doing that. Servicing debt would be a second priority, and reestablishing the dividend would be another priority that I would put ahead of that. Terrific. Thanks so much.
spk06: Frank, this is David. I'd like to add just one thing just to give some confidence on the guide. We've obviously had a big working capital outflow in the first half of the year. In fact, on a year-to-date basis, our working capital outflow is about $300 million. We've already seen that reverse itself in July. Our free cash flow in the month of July is about $75 million positive as benzene and styrene have started coming down. So we do have a lot of confidence in the free cash flow guide of about $300 million for the year, which obviously incorporates getting back some of that working capital in the back half of 21.
spk04: Got you. Looking forward to the execution. Thanks so much.
spk03: Your next question comes from the line of Matthew Blair of TPH.
spk07: Hey, good morning. Thanks for taking my question here. So, styrene's obviously come down quite a bit in Q3. Could you talk about how things are trending so far this quarter on polystyrene?
spk00: polystyrene is actually looking very good. In fact, if I go back to, you know, the discussion we just had with Frank on the $80 million improvement in our outlook, 25 million of that improvement is from polystyrene. And I want to remind you that a big portion of our polystyrene business goes into higher performance, our high-impact polystyrene that goes into appliances and consumer goods. So it's a more specialized product than what you would consider more commodity, polystyrene and single-use plastics. So polystyrene, the outlook is very good. And the applications we sell into are seeing very good demand.
spk07: Sounds good. And then could you share any trends in ABS? It looks like China operates remain quite high, around 92%. What's the impact of the auto chip shortage in this business, and what are some general trends you're seeing?
spk00: Well, yeah, ABS has seen very strong demand. And I think one of the things that we're seeing is that there's been a raw material tightness feeding ABS. So one of the raw materials Acrylonitrile that feeds ABS has been short and tight all year. That's created a market environment that has been robust and value-added for us. But I would say that in general, we see very strong demand. And I remind you, our ABS is a higher quality ABS. It's a mass ABS. product that is a small percentage of the ABS produced in the world. Great. Thank you.
spk03: Our next question comes from the line of Hassan Ahmed of Alambic Global.
spk01: Morning, Frank. You know, a nice bump up in engineered materials EBITDA margins, and obviously I understand that, you know, the PMMA business is now included in the segment. Just want to get a sense of how you're thinking about sort of run rate EBITDA margins going forward. You know, I mean, you guys reported 15% this quarter, but obviously synergies need to be realized. And then obviously you guys pointed out certain raw material headwinds in the quarter, despite sort of, you know, a bump up in volume. So just want to get a sense of... how to think about run rate EBITDA margins for this segment.
spk00: So we would expect the EBITDA margins to be in the 20 above north of 20% EBITDA margin going forward. But remember, when we're doing some purchase price accounting to reflect the asset value of the acquired assets, that's stepping up depreciation in the acquired assets. you know, at the gross margin level. So, you know, in general, we would still see 20% going forward. And the headwinds that we saw, you know, that was really a timing impact with passing price increases in Q2 in the consumer product side of our rigid compounds business. And we're well on track in Q3 to recover that.
spk01: Understood. And maybe this is a question for David and the IR team, but just trying to get a sense of the full year guidance you guys have given relative to consensus estimates. My feeling basically is that while the consensus may have baked in the inclusion of PMMA, it I don't think has excluded synthetic rubber. So, I mean, since you guys talked to all the analysts, I'd I'd love to hear your views about that.
spk06: I think you're exactly right. As we're reading the flash reports that came out last night, they had the same reaction. I think almost all of the consensus numbers had synthetic rubber in there, and they had it in their kind of order of magnitude $50 million of EVA for the year. Now, obviously, we've moved that to discontinued ops, so we're not – you know, we're not including that in our guidance anymore. So I think you're actually right. I think that was something that was – look, there's a lot of moving pieces, but I think that was something that was – that might have been missed.
spk01: Perfect. Thanks so much for your help.
spk03: Your next question comes from the line of David Bellegutter of Deutsche Bank.
spk05: Good morning, Frank and Dave. Frank, just on the upside to PMA synergies, can you give a little more color as to what areas they might be coming from and the timing of those synergies?
spk00: Yeah, so the 10 million that we're on track to deliver in year one are really coming from organizational and procurement or supply chain efficiencies that we have between the businesses. As we move forward, you know, we have some OPEX as well as, you know, the elimination of the TSAs that we got supporting the business when we carved it out of Arkema. And then in year three, we'll begin to get significant savings, a significant group of savings from the harmonization of our ERP systems and the efficiency from that. I think the other thing that is really exciting to us, and this is sort of an upside to the synergies, if you will, that we hadn't fully baked into the 50 million, is how big the opportunity for chemically recycling our own PMMA scrap is. And so in the sheet operations, there's actually several percentages of production lost in scrap and you know, we can recycle that chemically just like we've demonstrated we can do with polystyrene and That represents a really nice savings and also gives us an opportunity to Put that back into our product mix and sell a circular PMMA resin so You know, we're excited about that. We're looking at what the technology solution in the capital associated with that would be, but it's not significant capital, I would tell you, and, you know, would give us a, at least our preliminary view is it'll give us a very fast payback.
spk05: Very good. And just on styrene and feedstocks, you gave us a back half guidance of basically break even. Is that a good run rate for next year as well, break even? And what's your view on new demand, sorry, new supply coming out of China in the next maybe 12 to 24 months?
spk00: Yeah, David, I think just like we've talked about in the past, our view is that over the course of time, feedstocks in Europe will normalize to a break-even level where supply conditions or supply shocks could cause things to spike up or timing could cause a quarter to be lower. But over time, we think that we'll end up at a break-even level. Now, AMSTI is different, obviously, because they have a better cost position in North America. But, you know, that's our view going forward. So, you know, we see little downside and potential upside in certain market conditions from styrene monomer.
spk06: Dave, as it relates to new supply, I think our view is pretty consistent with the last time. I would say we see mid-to-high single-digit additions both this year and next year of global supply, and then falling off considerably after that for 23 and beyond.
spk05: Very good. Thank you, guys.
spk03: Your next question comes from the line of Eric Petrie of Citi.
spk08: Hey, good morning, Frank. Good morning, Eric. How much did your volumes grow in PC and blends? And then how much do you believe the non-backward integrated PC producers in China are offline due to the Biz A shortage?
spk00: Well, I don't have the figure. Andy's looking for the figure on the growth in PC demand. But what I would tell you is, I want to make a couple points about polycarbonate for us. Polycarbonate, the merchant polycarbonate business in Trinzio is very small. Polycarbonate is mainly a feedstock that goes into our rigid blends in engineered materials. That's that product line has been growing steadily over the past several years in consumer electronics applications. And we've been cannibalizing our lower margin merchant business to support that growth. So ultimately, we will consume the Shtad volume internally in our blending. That's our goal. And we won't really have much market exposure to merchant polycarbonate. The other thing I would point out is that, The polycarbonate capacity that's coming on in China is not of the same quality as the material in Germany at our Stad plant. And so in our view, it's not relevant to compare the quality of that material to what we produce because it's highly specialized. So Dave has the answer on the volume growth.
spk06: Yeah. So, I mean, our volume grew. I mean, well, look, there's an easy comp, quite honestly, compared to the second half of last year. Excuse me, compared to the first half of last year. But our PC compounds and blends volume on a Q2 year-to-date basis is up about 30%. Helpful.
spk08: And then, secondly, on feedstocks, it looks like EBITDA declined sequentially to 40 million, down 7%. Um, why was that given Europe's diary margins were higher and you had favorable timing?
spk00: So we had, uh, interruptions that are Bolin plants and we were in the spot market when Bolin was shut down for some, uh, unplanned maintenance.
spk08: Great. Thank you.
spk03: And again, to ask a question, press star one. And your next question comes from the line of Angel Costello of Morgan Stanley.
spk02: Hi, good morning, gentlemen. Thanks for taking my question. Just on PMMA, I was wondering if you could give us a sense for how that business is doing year over year, if you kind of exclude, you know, some of the step-off DNA or other kind of merger-related adjustments, how that's kind of doing it from a margin perspective, volume, and price as well.
spk06: Angel, yeah, this is Dave. I'll address that. I would say on an EBITDA and a margin basis, it's doing pretty similar to year-over-year basis. You remember when we made the announcement, we talked about the dynamic for the PMA business in 2020, where obviously the COVID had a significant impact on our automotive volumes. But they largely replaced that with barrier protective sheet going into retail and other things. So their EBITDA in 2020 kind of order of magnitude was about $140 million. I would say that's consistent with what I would expect this year. We obviously have a prorated portfolio. portion, it reflected in our guidance, only the eight months of the year that we expect to own it, but kind of on a prorated basis, it aligns with that $140 million EBITDA number. So, look, we think that's a very good result, particularly given some of the constraints that the business has had in the first half of this year on getting MMA. MMA has been quite tight and undersupplied in North America in the first half of the year. Fortunately, we're seeing that ease as we go into the second half of the year, but yeah, that was kind of a first half headwind.
spk02: That's very helpful. Thank you. And then just maybe, I guess, compile a lot of the discussion around both ABS and polycarbonate Just curious how you're thinking about base plastics as we go into 2022, you know, from kind of an EBITDA perspective and kind of the cadence of earnings from 2021 to 2022.
spk06: Look, I think we see nothing is visible to us now that would indicate any change in kind of the second half run rate of the business. The demand pipeline continues to look very strong. We have all positive indications from our customers really across all markets. Automotive inventories, as I'm sure you know, are at the lowest they've been since the financial crisis. Our sales into automotive have declined. in the second quarter because of the production issues that the auto manufacturers have had. So I don't think we see anything standing here today that would give us any indication that 2022 would be materially different than 21 and base plastics.
spk02: Very helpful. Thank you.
spk03: And there are no further questions at this time.
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