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spk01: and Andy Myers, Vice President 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 Tuesday, August 6th. 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. And I will now hand the call over to Andy Myers.
spk04: Thank you, Abby, 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 financial 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 transcripts will be archived on the company's investor relations website shortly following the call. The replay will be available until August 7, 2025. Now, I'd like to turn the call over to Frank Bozich.
spk03: Thanks, Andy, and welcome to our second quarter 2024 earnings call. I'd like to start by discussing our Q2 results, which were in line with our expectations. The market conditions that we saw at the end of the first quarter continued through the second quarter, which resulted in our highest adjusted EBITDA since the second quarter of 2022, despite $10 million of unfavorable net timing. This was the second straight quarter of sequentially higher profitability. We continued to see positive momentum in our engineered material segments, as moderating input costs, normalization of MMA market dynamics, and steady demand for our downstream applications led to the segment's highest sales volumes and adjusted EBITDA since the second quarter of 2022. We believe this higher level of profitability is sustainable in the current challenging macroeconomic environment due to the significant restructuring and footprint actions that we've taken over the past two years. And while free cash flow remained negative in the second quarter, we anticipate that it will turn positive in the second half. I'd like to shift gears to talk about sustainability. In July, we issued our 14th Annual Sustainability and Corporate Social Responsibility Report, which shows how our company and employees helped cultivate a circular transformation in 2023. I'm very proud of the exceptional progress we made toward our 2030 sustainability goals, especially the continued progress on our polycarbonate dissolution facility, breaking ground on our PMMA depolymerization facility, and achieving critical milestones in the implementation of our decarbonization strategy. We are committed to continued investment in recycling technologies and sustainable product offerings in order to support a circular economy while reducing our carbon footprint, creating a sustainable workforce, and operating responsibly. We had another record quarter in Q2 for sales of products containing recycled material, so our investments are already paying off and we anticipate more growth in the future. With that in mind, I'd like to provide a brief update on two of our major ongoing recycling projects. At the end of the second quarter, we announced the opening of our PMMA depolymerization facility in Roe, Italy. The facility utilizes a novel continuous chemical recycling process that returns industrial and post-consumer acrylic waste to its constituent monomer, MMA, while emitting one-fourth the amount of CO2 as virgin MMA production with yields that exceed industry standards. Our technology also allows us to recycle several PMMA solutions that previously could not be recycled, creating a truly circular process with advantaged economics. The result of our process is high-quality recycled MMA monomer with purity levels comparable to virgin MMA. This enables the recycled MMA to be used in higher-end applications, such as vehicle taillights and caravan windows, that require exceptional optical properties. The high purity levels also allow for higher concentrations of recycled content to be used in certain acrylic solutions without sacrificing desired properties of the end product. I'd also like to highlight some of the exciting technological advancements that we've made in our polycarbonate dissolution pilot facility. The newly developed technology at the pilot plant allows us to recycle polycarbonate waste containing high levels of residual BPA back into polycarbonate resins that contain levels of BPA that are orders of magnitude lower than virgin PC. Additionally, we are able to repair current end-of-life polycarbonate waste that is degraded over time due to the exposure to natural elements such as sunlight, humidity, and temperature by restoring its molecular weight so that it can be recycled and reused even in most demanding applications. These PC waste streams until now have not been suitable for mechanical recycling due to degradation and can be sourced at advantage costs. The technological advancements in PC dissolution Along with the beginning of our PMMA depolymerization journey, our testament to the bright minds we have at Trinzio and our examples of how our investment in sustainable solutions continues to spawn industry-leading innovations that will help build a more sustainable future and at the same time are economically advantaged. Before I turn the call over to Dave, I'd like to give a brief update on the planned sale of our Americas Styrenix joint venture. The procedural steps defined under the exit provision of the joint venture agreement have progressed. Therefore, we have agreed with our partner Chevron Phillips Chemical to pursue a joint sales process, which we expect to kick off this quarter and in the ordinary course should lead to a definitive agreement in the first half of 2025. Now Dave will discuss our second quarter results.
spk06: Thank you, Frank. Second quarter adjusted EBITDA of $67 million was in line with our previous guidance and included $10 million of unfavorable net timing from falling styring prices. Mixed improvement led to a higher year-over-year adjusted EBITDA despite a 5% decline in volumes. This was driven by volume growth in all of our targeted growth areas, including case and battery applications and latex binders, formulated resins for building and construction and consumer electronics applications in engineered materials, and automotive compounds in plastic solutions. Substantially, all the year-over-year volume decline was in polystyrene, where we shed uneconomic volumes in Asia and Europe to optimize plant operations and working capital. Cash used in operations during the quarter was $42 million, which resulted in free cash flow of negative $56 million. We expect free cash flow to turn positive in the second half from lower styrene prices and from seasonal factors in the fourth quarter. We ended the quarter with $108 million of cash and $352 million of total liquidity, including our two committed financing facilities. In July, we entered into a new accounts receivable securization facility that extends the maturity date from 2025 to January 2028. Liquidity preservation will continue to be our top priority for the foreseeable future as we navigate this prolonged industry downturn. Now I'll turn the call back over to Frank.
spk03: Thanks, Dave. Looking ahead to the third quarter, we expect market conditions and adjusted EBITDA to be similar to the second quarter. While decreasing styrene margins and an unplanned outage are expected to negatively impact America's styrenics, unfavorable net timing is not expected to repeat at the same magnitude as Q2. Seasonal improvements in our higher margin building and construction and consumer electronics applications are expected to continue through the third quarter, and more normalized MMA market dynamics should continue to support improved margins in engineering materials. As a result, we expect Q3 adjusted EBITDA of $65 to $75 million. While we are not providing a specific range for the fourth quarter, we do expect Q4 profitability to be sequentially lower than Q3 due to normal year-end seasonality. However, we anticipate free cash flow to increase sequentially from Q3 to Q4, as we typically have a substantial working capital release at year-end. We are encouraged by the second consecutive quarter of sequentially higher profitability and expect to extend this similar level of profitability in the third quarter, despite persistently weak end market demand and challenging macroeconomic environment. We continue to see the benefit of the cost actions we have taken and are confident that we will emerge from this low demand cycle stronger than we were before. And now we're happy to take your questions.
spk01: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. And your first question comes from the line of Frank Mitch with Fermium Research, LLC. Your line is open.
spk05: Thank you, and good morning, all. I want to drill down a little bit more into the free cash flow expectations for the balance of the year. Given it's been a use of close to $140 million in the first half of the year, I understand that you're expecting styrene monomer prices down. You mentioned seasonal factors and a working year. capital release by year end. Should investors expect that? Where can we get the free cash flow back to? I mean, are you looking forward to get to neutral? And if so, how does that play out? You know, again, given the fact that we're at a $140 million hold as we enter the second half of the year.
spk06: Yeah, good morning, Frank. Look, I think, as we said, we expect it to be positive. I think Q3 will be fairly neutral, kind of flattish free cash flow. And then Q4 will be positive. You know, for the year, clearly because of how we started the year, because of the high starving prices, I think that puts us in a situation where for the full year, this year, our free cash flow will be negative. I mean, looking forward to next year, we have a slide in our presentation where we show all, you know, our kind of cash outflows for the year. And it totals about $350 million. You know, so that's the sum of CapEx interest restructuring, et cetera. So, you know, and that includes $45 million of restructuring spend for this year. So, you know, I think the takeaway from that is, you know, at this level, you know, you need $345 million of EBITDA to be cash flow neutral. Yeah, yeah. So we're clearly not in a position today to give guidance for 2025. But if I roll this page forward to next year, I think the restructuring costs will be lower. We still have a lot of spend this year for the two styrene plants that we closed. Cash interest, I also expect to be lower. We have a billion eight of floating rate debt. And I think, you know, everybody's followed what's gone on with rates recently. So the current trajectory of, you know, the forecasted interest rate cuts, would it lead you to think that's going to be, you know, interest rates will be several, you know? It's not... Every 100 basis points is $18 million a year of interest for us. So, you know, I mean, I think there's four cuts baked in the forward curve today for this year alone. So I think those numbers will be, you know, the interest number will clearly be lower next year. And, you know, all of that, I think, puts us in a position where, you know, this year's $345 or $350 of EBITDA, you know, cash flow neutral next year should be closer to
spk05: to 300 um and you know 300 as a run rate of ebitda you know is not far from where we are right now in q2 q3 that's very helpful uh that's very helpful david and if i could just stick with the restructuring spending that you mentioned you know there was an expectation that 24 would see between restructuring benefits and uh you know the nat gas hedges etc that we'd see a hundred million dollar benefit in 24 versus 23. Can you give us a sense of how that is trending, and is that $100 million still Trincio's expectations for 2024?
spk06: It is, yeah. The $100 million is absolutely in the numbers for this year. I'm very confident that we will fully recognize those cost savings again, which is the sum of both the natural gas hedges going away plus the plus the benefits of no longer running the two styrene plants. We're very confident that we'll realize that full hundred million this year. Thank you so much.
spk01: And your next question comes from the line of Matthew Blair with TPH. Your line is open.
spk08: Thank you, and good morning, Frank. I thought in your engineering materials segment, the commentary on the PMMA volume improvement was pretty encouraging. Can you talk about which end markets are maybe looking a little better for you, which end markets are still a little softer?
spk03: Yeah, so thanks for the question. I would say automotive has been steady, and we saw building and construction applications where know we're offering a sort of a unique uh solution into many building and construction applications to be look for example cap stock um those to be actually very strong and steady demand um and so i would say in in markets it's been steady in pmma The thing that has the growth in volume is really Europe recovering volumes in Europe. It's sort of geographical, where European volumes have come back this year much stronger than they were last year.
spk08: Sounds good. And then on the guidance, I guess I was a little surprised the Q3 number does not include I guess any sort of big assumptions on that timing? I think contract prices for styrene in the U.S. and Europe are down in the third quarter versus second quarter. So is there an offsetting factor to those lower styrene prices once again this quarter?
spk03: Well, in Q3, you know, you have AMSTI will be you know, we expect Amstey to be, have some headwinds compared to Q2 due to lower styrene prices, as well as the unplanned outage they have at one of their plants. And then as usual, you have, um, in some of our end markets a week or August because of the vacation period in Europe. So that's, you know, how you look at Q, you know, that's how we're looking at Q3.
spk06: I think, um, Matt, this is Dave. I can add something just related to timing specifically. You're right. We did see a big drop in prices at the end of Q2 and the Q3, which, you know, you would infer from that we'd have negative timing. But we've seen an increase. There was an increase in contract prices in the month of August. There's a couple of outages, probably short-term and duration, that I think will probably largely offset that timing. Just one other point that you referenced, North America styrene prices. That doesn't have an impact. That doesn't influence of any significance or net timing. It's really, by far, it's European prices is the largest, and then Asian prices would be the second. So, you know, as I said earlier, sitting here today, Matt, I don't anticipate timing of any significance in a quarter.
spk07: Great. Thanks for the color.
spk01: And your next question comes from the line of Hassan Ahmed with Olympic Global Advisors. Your line is open.
spk02: Morning, Frank and Dave. You know, you guys talked about how Within the MMA business, conditions are normalizing. Certainly, on the surface, it seems certain other businesses seem to be quite far away from more normalized levels. If you wouldn't mind, could you revisit what your assumption of the normal earnings power of the company is? You guys obviously did around, on an annualized basis, $270 million in EBITDA in Q2. And, you know, obviously the EM business popped nicely EBITDA margin-wise, you know, close to 11%. So, you know, if you wouldn't mind reminding us where we stand, you know, with sort of the state of affairs the way they are in terms of the normal earnings power of the company.
spk03: Yeah, I mean, Hasan, it's really difficult to, almost impossible to say what, to predict what normal looks like right now. You know, so I think we can expect to see improvements going forward from the actions we've taken. And, you know, we continue to have additional opportunities that we'll pursue. But, you know, to predict what a normal market looks like in many of our end segments, you know, against the backdrop of all the geopolitical uncertainty and market uncertainty, I think is really difficult.
spk02: Understood, understood. And on a separate note, you know, during the Q1 call, you guys talked about how, you know, in China, you know, weakness in the polycarbonate market within epoxies and within nylon, you know, that was impacting phenol and in turn acetone production, which obviously, you know, their own forward was limiting MMA production. So where do we stand with regards to that now?
spk03: We see the MMA market as tight in basically all regions. And the factors that we highlighted in the Q1 call still exist. And I would say the other thing that, you know, you need to remember is the MMA market almost – buried by region but it also a significant portion of mma almost half of it goes into polymer additives as well as architectural coatings and you can see that in the architectural coatings markets that has come you know volumes have improved and are coming back so that's created a tightening effect at the same time the feedstocks availability in asia are limited so you know um It's a tight market, and I don't see, you know, absent something dramatic changing, we don't see the current conditions for MMA changing. Very helpful, Frank. Thank you so much.
spk01: And your next question comes from the line of Lawrence Alexander with Jefferies. Your line is open.
spk00: Good morning. This is Dan for Lawrence. With the new PMMA facility in Italy that's now ramping up, do you have a timeline of when that's going to be positively contributing to EBITDA and kind of what the, I don't know, mid-cycle, what it could potentially mean to you guys in terms of EBITDA and earnings?
spk03: Yeah, we don't have a forecast for that right now because, you know, as a practical matter, this is a demonstration facility for a much bigger investment that we'll have to do in the future, and that's in... front-end load engineering analysis at the current time, so I can't really give you an expectation for what the EBITDA contribution or exact timing for when it will occur, but I can say that we see that as favorable to Virgin production from a cost standpoint and with similar quality. So it's a very exciting opportunity for us.
spk00: Okay, and then you mentioned, I think you highlighted the battery market as being one that's doing fairly well. I was wondering if your outlook for that market has been altered at all, just given, I know a lot of the headlines we're reading with electric vehicles or just battery demand in general.
spk03: Yeah, so our growth in battery continues into this year, and it's significant growth. Now, what's driving our growth is the technological advancement, and our our technology or our solution goes into binding the anode in, you know, an energy battery like a NCM, you know, nickel cobalt manganese cathode battery that goes into EVs. And our technology allows the producer to have a higher energy density in the battery. So, and we have, you know, a small percentage of the market. But as our technology is qualified at other producers, we anticipate to see growth no matter, you know, even in, you know, sort of a flat EV market because we're going to penetrate because of the innovation and the technical advantage of our solution.
spk00: Thank you very much.
spk01: And your final question comes from the line of Michael Lighthead with Barclays. Your line is open.
spk09: Great. Thank you. Good morning, guys. First, I just had two on cash interest. One, it looks like you decided to pick $15 million of cash interest in your updated forecast for this year. I guess, Dave, can you just help us understand the change of thinking there versus last quarter, sort of how you arrived at that $15 million number versus, say, a higher or lower amount? And then... related to that, what is the incremental cost for you guys on that $15 million interest by deferring it?
spk06: Sure. Okay. So just for the benefit of everybody, so what Mike is referring to is we do have the pick option, paying kind option on the term loan that we put in place in September of last year. That term loan carries interest of SOFR plus $8.5 million. and we have the we have the ability to pick or pay in kind um uh four and a quarter percent of that coupon so today's sofa is about five and a quarter plus the eight and a half spread that's about a 13.75 coupon right now we have the ability to pick or you know not pay interest and instead capitalize four and a quarter percentage points of that which is about a third of the coupon um And there's a 1% penalty for doing that. So it was about, for the coupon that was payable in July, we elected that pick option. Again, it's capped at what I just described, Mike. And it was about $11 million, the amount of interest that was picked, if you will, or capitalized. I think the 15 that you're referring to is probably the change in interest from the last time we saw this. The other thing that influences that number is the forward curve, right? So we're in obviously in an environment today where it looks like there's going to be more cuts versus less this year. So to get to your the other question about well, why did we decide to do that? I mean, as I said in my in my prepared remarks, Mike, I mean, preserving liquidity in this environment is is you know our absolute top priority and um you know i mean what's changed from a year ago when we issued this debt is that we're you know we're a year farther into this downturn and there's been no recovery no demand recovery to speak of um so you know we just think it's prudent to take all possible actions to preserve liquidity um um you know we'll obviously revisit the election to pick or pay in cash in the future as we reach future coupon dates.
spk09: Great. That's helpful. And then for Frank, just with the joint Amstey sale now, you guys have obviously surveyed the market before. By now going with, say, the whole asset for sale, going with CP Chem for Amstey, how do you think that changes the attractiveness of the sale and maybe How does that kind of influence your confidence about now getting this deal done, given kind of your experience here before?
spk03: Yeah, I mean, we got very clear signals from the participants in our previous process that there was, you know, an overhang on their interest because, you know, to enter into a joint venture. So they're strong preference was to own 100% of Amstey because it's a great asset. It's performed very consistently. And, you know, I think people want to buy control, not into a JV. And so that, you know, that experience and those market signals we got in the previous process make it clear to us that, you know, any, the concerns related to this that we were expressed by some of the participants will be minimized.
spk07: Great. Thank you.
spk01: And ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now disconnect.
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