Trinseo PLC

Good morning, ladies and gentlemen, and welcome to the Trinzio second quarter 2023 financial results conference call. We welcome the Trinzio management team, Frank Bovich, President and CEO, David Stacey, Executive Vice President and CFO, and Annie Myers, Director of Investor Relations. Today's conference call 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 Thursday, August 3rd. These documents are posted on the company's investor relations website and furnished on a form 8K 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 Mr. Andy Myers. Please go ahead, Andy.

Thank you, Bo, 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. 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 call. The replay will be available until August 4, 2024. Now, I'd like to turn the call over to Frank Bozich.

Thanks, Andy, and welcome to our second quarter 2023 earnings call. Before I comment on our second quarter results and what we're seeing in the market, I'd like to start by giving a brief update on our sustainability journey. In July, we issued our annual Sustainability and Corporate Social Responsibility Report, which details how we continue to implement our sustainability initiatives and shape the future of the company. We made fantastic progress last year toward our 2030 sustainability goals with waste and energy improvements at our facilities around the world, the acquisition of Heathland to supply our businesses with a reliable source of recycled feedstock, and the development of decarbonization strategy. Our employees have set the stage for continued sustainable progress, and the advancements made to date are a testament to their dedication. I want to extend a heartfelt thanks to those who played a role in our efforts as they've set us on the path to success. Now we'd like to turn to the second quarter results. As expected, our Q2 sales volume was similar to both Q1 and the average over the last three quarters, as volume was stabilized at about 20% below mid-cycle levels. We continue to see lower demand across many applications, particularly in building and construction, consumer durables, as end consumer demand remains soft and as customers continue to destock. In Q2, the total sales volume for the company was down 17% from prior year. However, volumes for products containing recycled materials, products for case applications, and our technologies that enable our growth programs outperform the broader portfolio while experiencing improved unit margins. This relative performance shows that these offerings have more resiliency during periods of destocking and lower structural demand. Despite overall demand temporarily stabilizing at this low level, we were able to deliver our third consecutive quarter of sequentially higher adjusted EBITDA. while generating positive free cash flow. In the first quarter, we announced more than $100 million of cash improvement initiatives, and we're well on our way to achieving that. In the second quarter, we continued to make progress on these initiatives, and this resulted in $43 million of free cash flow. Based on our progress to date, we have increased our outlook on free cash flow in 2023, despite lower profitability. So far in the third quarter, we continue to see demand at similar levels to the first half of the year. While the timing trajectory of the market recovery is unknown, we are addressing what we can to optimize near-term performance while preparing for the market recovery. Late last year, we announced several asset restructuring initiatives, and we've seen the expected benefit of those in the first half of the year. As we continue to assess the structural challenges facing our value chains, since the natural gas supply from Russia was disrupted, we're taking additional actions to optimize our business. We recently began Works Council discussions regarding the potential closure of our styrene facility in Chernoos in the Netherlands. If closed, we will no longer produce styrene, and we will purchase all of our styrene needs from third parties. We have always purchased all of our styrene needs in North America and Asia, as well as a significant percentage of our European requirements. This model is not new to us, and at times we have, in fact, sourced all of our styrene needs for Europe from the market. With the elevated energy costs in Europe, styrene production in the region is some of the highest cost in the world, plus Given recent and planned global styrene capacity additions, we believe this feedstock will remain structurally long through the end of the decade. Therefore, we believe we will be able to purchase styrene at a lower price than our production cost. This action would also reduce production risk, ongoing capex, and turnaround cost, as well as lower our carbon footprint. I would like to point out, however, that styrene production will remain an important profit contributor to our joint venture, America's Styrenics, as they enjoy world-class economics for energy and raw materials. We already source styrene from Amstey in North America, and we anticipate Amstey supplying a greater share of our future needs. We are also evaluating our PMMA cast and extruded sheet network in Europe. including the possibility of consolidating operations. And finally, we are taking measures to lower operating costs, including headcount and other reductions. This includes our recent executive leadership changes to create a more streamlined organizational structure. In aggregate, we anticipate these actions will improve annual EBITDA by approximately $70 to $90 million in 2024. Before I hand the call over to Dave, I'd like to follow up on a topic that came up on our Q1 earnings call regarding mid-cycle EBITDA. During the call, we indicated that following the sale of our Styrenix businesses, our mid-cycle EBITDA would be about $350 million. This amount is lower than our previous estimate, and I'd like to discuss some of the drivers for that. The primary drivers are higher energy costs from the war in Ukraine and reduced growth rates for chemical demand in China. The change in energy and feedstock costs relative to the rest of the world has reduced the competitiveness of many segments of the chemical industry in Europe, including some of our own. Coupled with lower demand in China, this has resulted in lower margin expectations for Europe for many globally traded products. Let me remind you that over half of our revenue is generated in Europe. Within engineered materials, we've seen significant margin degradation in our MMA production as a result of higher natural gas and ammonia costs, which could not be offset through ammonium sulfate sales. We believe this could be permanent as the price of ammonium sulfate in Europe is currently being capped at the landed cost of Chinese production. I'd like to go a bit deeper on engineered materials. Slide six of our earnings presentation divides the products we offer into three categories, ranging from less differentiated to more specialized. On the far left in the less differentiated category is MMA, which is where we believe we have permanently lost profitability given our current configuration and the changing regional economics of key inputs. We purchase MMA in North America at cost via capacity rights agreement, and this is one of the lowest variable cost assets in the world. However, we produce our own MMA in Europe, and with the elevated energy and ammonia cost, our MMA plant has become less competitive compared to Asian and North American plants, and therefore we are structurally disadvantaged. Assuming energy costs in Europe remain among the highest in the world, we believe our MMA-related profitability, which is currently negative in Europe, may not return to historic mid-cycle profitability levels. However, we have made investments in our European assets over the past 12 months to flex our network to take advantage of regional cost differences We have also identified specific investments that we can make to reduce the energy and carbon intensity of our assets to make them more competitive. The middle section of the slide includes the cast and extruded PMMA sheets. These products are more specialized and therefore margins are more dependent on end applications and the service levels required by our end customers. While we saw a negative impact from imports coming into Europe from Asia when energy and input cost differences were highest, we are watching to see if the elevated energy costs will have a permanent impact on trade flows. While currently both volumes and margins are below mid-cycle conditions, we believe profitability of these products will return to near historic levels. In addition, our potential consolidation of operations will make our network more competitive going forward. The far right section contains the most specialized products within the EM. Rigid compounds, mainly for consumer electronics applications, PMMA resins, continuous PMMA sheets, and TPEs. These products are highly formulated, solution-based, differentiated offerings that are value priced. While demand is currently below normal levels, Margins have been very resilient, and we believe overall profitability of these products will also return to historical levels. In addition, these are technologies where we have significant growth opportunities that are enabled by new innovations, recycling, and through substitution for higher-cost materials. These growth opportunities create future upside to our historical performance of these technologies. In summary, higher energy costs and overcapacity in China have had a major impact on European chemical industry. The ultimate impacts are not yet known, but we've already seen this greatly influence the region, including a reduction in our MMA and polycarbonate profitability. Please understand that while we've already taken some actions to address this, we will continue to look at ways to optimize our business given this new operating environment. Please also understand that this does not change our strategy of focusing on higher value, formulated and sustainable products. If anything, it accelerates our need to do this. Ultimately, the actions we've announced, our ability to flex our network, the growth investments we're making will allow us to increase our mid-cycle earnings potential in the near term. Now I'd like to turn the call over to Dave.