Barry Niziolek - Executive VP & CFO Chris Pappas - CEO, President & Director David Stasse - VP of Treasury & Corporate Finance.

David Begleiter - Deutsche Bank Dylan Campbell - Goldman Sachs Eric Petrie - Citigroup Frank Mitsch - Fermium Research Matthew Blair - Tudor, Pickering, Holt Michael Leithead - Barclays Nick Cecero - Jefferies.

Good morning, ladies and gentlemen, and welcome to the Trinseo Third Quarter 2018 Financial Results Conference Call. We welcome the Trinseo management team, Chris Pappas, President and CEO; Barry Niziolek, Executive Vice President and CFO; and David Stasse, Vice President of Treasury and Investor Relations.

Today's conference call will include brief remarks by the management team followed by a question-and-answer session. The company distributed more detailed remarks on its financial results, along with the press release and presentation slides at close of market yesterday.

These documents are posted on the company's Investor Relations website, and by means of a Form 8-K filing with the Securities and Exchange Commission. [Operator Instructions] I will now hand the call over to David Stasse..

Thank you, Chris, and good morning, everyone. [Operator Instructions] Our disclosure rules and cautionary note on forward-looking statements are noted on Slide 2. During this presentation, we may make certain forward-looking statements, including issuing guidance and describing 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, factors set forth in our Annual Report on Form 10-K under the Item 1A risk factors.

Today's presentation includes certain non-GAAP measurements. Reconciliation of these measurements 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.

A replay will be available until November 9, 2019. Now I would like to turn the call over to Chris Pappas..

Polycarbonate, ABS, and compounds and blends. Polycarbonate is a business area where Trinseo is a small player, focused on driving our compounded products growth, while shrinking our commodity market exposure. There are new capacities coming online in China over the next several years.

Polycarbonate continues to be a polymer with growth rate of about 4% per year, which will help to absorb some of the new capacity. Over the medium term, we do expect margin compression polycarbonate. The extent of this compression will depend on the timing of new capacity as well as the product quality from new entrants in China.

Short-term dynamics, like we experienced late in the third quarter and into the fourth quarter, should correct somewhat, if we see a return to a more normalized European automotive market, inventory restocking, China growth and some clarity regarding global trade dynamics.

Our strategy in polycarbonate has paid off well, and remains the same, reduce cost, focus on higher-value market segments and drive compounded products growth. ABS is a product where Trinseo is relatively large player, and we have invested for growth in our new plant in China with 75 kilotons of capacity.

Industry demand growth for ABS should exceed new capacities in the forecast horizon.

So in ABS, we see a constructive operating rate for the next couple of years, and short-term dynamics should correct, if we see a return to more normalized European automotive markets, inventory restocking, China growth and some clarity regarding global trade dynamics.

Our strategy in polycarbonate has paid off well, and remains the same, reduce cost, focus on higher-value market segments and drive compounded products growth. ABS is a product where Trinseo is relatively large player, and we have invested for growth in our new plant in China with 75 kilotons of capacity.

Industry demand growth for ABS should exceed new capacities in the forecast horizon.

So in ABS, we see a constructive operating rate for the next couple of years, and short-term dynamics should correct, if we see a return to more normalized European automotive markets, inventory restocking, China growth and some clarity regarding global trade dynamics.

Our strategy here has been to grow ABS with asset investment and to drive our high-value mass ABS for margin in select market segments. Trinseo continues to have a diverse set of consumer-oriented end markets that we serve.

While we do see a slowing of the automotive sector in Q3 and Q4, both producers and IHS are predicting an increase in total European vehicle builds in 2019 versus 2018 levels. We believe the global tire market, including high-performance tires to see destocking and a return to more normal buying patterns into the first quarter of 2019.

We see the consumer electronics, packaging and medical markets as fundamentally strong with construction-related markets under some pressure.

We believe that the market conditions that affect the Trinseo's Performance Plastics and Synthetic Rubber segments appear to be, at least to some extent, transitory, and in our view, should return to a more normalized condition as we enter 2019.

So our view for Trinseo is a relatively unchanged strategic position from earlier in 2018, although the well-documented market dynamics of the last part of Q3 and into Q4 are weighing on our current results, particularly in polycarbonate and ABS.

We must now focus even more on cost reductions and product differentiation in Synthetic Rubber and Performance Plastics.

While we face some short-term headwinds, we are expecting return to more normalized business conditions across our Synthetic Rubber and Performance Plastics segments, particularly if we see recovery in China and a resolution in the U.S.-China trade negotiations.

Our focus across the company does shift in this environment to an even more intense focus on all we can do in the short term to drive profitable growth. We are aligning our production and inventory levels with market demand, reducing fixed and variable cost through productivity and efficiency and being diligent regarding our CapEx spending.

We will remain steady on our implementation of the transition of the business services and IT activities from Dow Chemical to Trinseo, and to the continued upgrading of our plant operating capability for the state-of-the-art ABB systems, as these establish the foundation to our future effectiveness.

We see our next couple of years as ones which should continue to generate good earnings as well as good cash flow. And we will continue to allocate our cash to balance of returns to shareholders and high-value business growth.

Our new share repurchase authorization provides us the ability to maintain our track record of healthy cash returns to our shareholders. Since the beginning of 2016, we have returned approximately 75% of our free cash flow to shareholders via dividends and share repurchases, which compares favorably to our peer group.

To wrap up, we see 2019 as a year of solid earnings growth, with net income of $344 million to $368 million and adjusted EBITDA of $600 million to $630 million. We also see 2019 as a year of continued strong cash generation with cash from operations of $370 million to $420 million and free cash flow of $250 million to $300 million.

We believe the market conditions in Europe and Asia, as I described earlier, will normalize as we progress into 2019 and our businesses are very well positioned with the growth investments we've recently completed to benefit in that environment. And now, Chris, you may open the line for questions..

[Operator Instructions] Your first question comes from David Begleiter of Deutsche Bank. Your line is now open. .

Chris, just on Synthetic Rubber, given the pressures you're seeing, what's your view more -- now on more of a normalized or longer-term earnings target for this segment?.

Well, you can see from our guidance, David, that we've, obviously, shifted our view on that business, given the lower growth rate and some of the higher competitive dynamics. We've given you a number for 2018, and we've indicated that for 2019, as part of our construct for the $615 million EBITDA midpoint, we do expect some modest growth in Rubber.

We expect that there will be a return to more normalized buying, there's been a lot of destocking. But the growth rate, as I mentioned, is probably about half of what we had been experiencing in the prior couple of year periods. So our SSBR growth specifically in 2018 is going to be about 6% year-over-year.

We would expect that number to probably be similar next year. And that's about half of what we saw the market grow in the prior periods..

Understood. And just maybe just in the styrene margins.

Would you be looking at more of a normalized margin for 2019? Should you think the last 2 quarter -- 2 months of this year are a good base for thinking about normalized steady-state margins in 2019?.

I think the world of styrene, Dave, is really unchanged as we mentioned. In fact, next year, if you look at the operating rate dynamics, it should be incrementally higher than this year on average. So you can see our numbers for styrene this year, we're guiding to $135 million of EBITDA.

Now we had about $30 million of unplanned outages in that number this year, that's the estimate. And next year, we guided to about $115 million. So we would expect a slight uptick in styrene year-over-year..

Your next question comes from Robert Koort of Goldman Sachs. Your line is now open. .

This is Dylan Campbell on for Bob. Understand -- I mean, it's a tough auto market for sure. I guess, some of your competitors have referenced even in this tough auto market high single-digit growth from increased penetration of plastics and so forth.

Do you see a path? Or how can you get to higher growth rate from penetration to offset, I guess, market weakness? Could you pursue M&A, focused on more of a heavy R&D arm? Can you just help bridge the gap and kind of how you can kind of look to offset this end-market weakness in the future?.

Right. So -- first of all, the automotive market experience that we had in late Q3 and Q4 was highly influenced by the WLTP program that I mentioned earlier in Europe. That had a big influence on our position of automotive in Europe. The product lines that we have for Europe are generally ABS and compounds of ABS and polycarbonate.

And there is growth in substitutions still in those product lines, in the interior parts of cars. And there is some growth that we've been working to participate in, in more structural components.

So the product mix that we have, Dylan, has high penetration in the interior of a car and our ability to grow with our product mix on automotive is really going to be focused at penetrating exterior structural components of cars.

And to your point, for us to get on a trajectory of higher growth in automotive, we will have to find a way to expand our product mix so that we can have other offerings that allow us auto segment growth and higher growth rates. And we are working on that either through M&A, obviously, API is a small example of that, and do our internal development..

And can you help me bridge some of the free cash flow items in 2019? I mean, I think you're bringing year-over-year CapEx down to 120 million.

And then can you help me understand kind of what working capital builds you have embedded or expecting into 2019?.

Yes, there's a couple of things, this is Barry, is we have cash interest of about 50 million, cash tax of about 90 million and CapEx is about 120 million. And maybe a little bit on the CapEx where we're on it, because if you look at the CapEx, it has come down.

A major component of that is we continue to run about $50 million on maintenance and then we have IT, what we call, as Chris mentioned in his comments, the infrastructure and plant operating systems, probably call it another 45 million or so. And then the remainder will be for growth, which will be very smaller growth projects that we have.

Then as you look at the part of the items you're looking for are there is some working capital and some cash flow related to that infrastructure, which pretty much accounts for that difference that brings it down to the 250 million, 300 million range..

Your next question comes from Frank Mitsch of Fermium Research. Your line is open..

Just a quick follow-up on Synthetic Rubber. You mentioned that you're going to do aggressive cost reduction anyway that you can quantify, either in the Synthetic Rubber segment or for the company, overall.

What your thoughts were there?.

One is this return to normalization that we've talked about, automotive Europe, destocking of supply chains, reconfiguring of supply chains, that starting to normalize. And some of the costs and other efforts that we're going to make. So that's the context under which I was making the comment of cost..

And just a follow-up on that 2019 guidance. Obviously, you got hit late in the quarter with some of the factors as you outlined.

I'm just curious, as you guys were looking at 2019 back 3 or 4 months ago, would your numbers have been different in terms of what you offered versus where you are today? And so -- just trying to get a sense as to, are you now looking at a slower start to the year than perhaps you were just 3, 4 months ago?.

The answer is yes. We actually gave an indication that back in August, that was higher than $615 million. And it was before we started to see the dynamics of later in the third quarter, in the fourth quarter, these transitory dynamics what we described.

So on the basis of that, we see the recovery from that, Frank, through '19, and that drives the number more into an aggregate $615 million. So we would expect some ramp-up of the recovery through these transitory events as we enter '19. In aggregate, the lower amount is from the recovery from those dynamics we experienced late Q3 into Q4..

Your next question comes from Duffy Fischer of Barclays..

It's actually Mike Leithead on for Duffy this morning. Chris, from a macro standpoint, you were pretty clear on the weakness in Europe around automotives.

I was hoping maybe you could touch on the specific end markets where you're seeing softness in China? And as we sit here in November, if this has been inflected at all?.

actual demand, supply chain destocking, uncertainty around trade and other dynamics, and customers just waiting for lower prices. Now, on lower prices, we see butadiene drop sharply.

We think we're at the end of that rope, and we would expect, as we said, that through the early part of '19, we would expect to see these transitory effects start to return to a little bit more normal dynamic..

Great. That's super helpful. And then follow-up on the ongoing transition services project that you're working through.

Can you just remind us of the CapEx and income expenses that will be booked this year and the next year?.

Let me make a high-level comment, I will then turn over to Barry. Remember what we are doing here, we're taking the remaining services that we have been buying from the Dow Chemical company, including IT services and others. And we're shifting them into Trinseo over about a 2-year period.

It's going to be a period of time where we're going to have overlapping costs associated with that, cash cost. Not so much EBITDA, because they'll add backs.

But we're going to have overlapping costs, because we're going to have duplicate capability for a while, while we bring in those services, but also train, and go through the changed management of taking on those services and processes inside the company. That dynamic is really what's happening in '19.

And the economic effects of that, Barry, are as follows..

Yes. So CapEx for -- just focused on the transition of the administrative services or what I call essentially competing the separation from Dow. CapEx is about $10 million for both '18 and '19, is our best estimate.

From an out-of-pocket expense standpoint, it's about $25 million or so this year and expected to be slightly higher next year, probably around the range of $40 million, $45 million or so.

But still early days on that, but as you look at and you go back to what Chris said, about the duplicative services and things we'll have to do as we assume full ownership, it's probably about in that $45 million range.

I think there is also when you look at our CapEx, I want to come back to you, you guys look at our -- also recall, we are upgrading our plant operating systems. And so that is another component that I mentioned.

As you look at 2019 and particularly, I mentioned, when you think of the combination of the 2 or both the separation and then upgrading our plant operating systems, we're going to have about $45 million of CapEx in our estimate for '19..

Your next question comes from Eric Petrie of Citi..

A question on Synthetic Rubber. You noted that you're targeting cost reductions.

I'm curious, is commodity grade rubber contributing to profits? Or is what we're seeing mostly from SSBR?.

I'm not sure I've heard the last part contributing to....

To profitability? Or is your commodity grade rubber breakeven or losing money?.

Yes. The answer is, it's low profitability and has dropped. That's part of the contributor to the decline in Rubber. It's both. Lower-end rubbers declining in profitability and less growth in SSBR and pressures on margin SSBR. Those are combining to create the profitability curve that you're seeing.

Now we've said next year, we expect Rubber to be slightly higher than this year in profitability, as we start to see the back end of this year in Rubber, which was highly impacted, in our view, by the destocking and other things, we expect to see that go up. Now we also have had no arbitrage this year in our Rubber business.

So last year, we had arbitrage. So all those factors are what driving us -- or driving that number..

That's helpful. Your guidance on feedstocks for 2019 is similar year-over-year, excluding unplanned outages.

So I was just curious how much did you financially benefit from outages this year and did you see that...?.

About $30 million this year. And I mentioned earlier that -- we see the operating rates a little -- marginally higher next year. So you might see a little bit of a lift in feedstocks. But we've said similar. In that business given the tonnage, it's a small change in variable margin. Obviously, across the tons could make a difference.

But similar to '18, less than $30 million is probably a good construct to think about for next year..

Your next question comes from Matthew Blair of Tudor, Pickering, Holt. Your line is now open. .

Chris, how quickly do you plan to execute the new $2 million share repurchase authorization? And could you just talk about the -- I guess, the relative attractiveness of buying back your own stock now versus external M&A?.

So second question first. We would barely think that share buybacks at this level have an attractiveness to them. Our track record on returning cash to shareholders via share repurchases and dividends, in our view, has been strong. It's shown on a three-year -- two-year history plus the Q3 LTM on Slide 13 in our deck. So we have a good record there.

We've returned 75% of our free cash flow over 3 years to shareholders. We don't comment, of course, on rate and pace. That's up to management and the board's discretion. But I think our track record speaks for itself. Barry, our year-to-date numbers and so on are very strong..

Yes. We have previously talked about rate of about $100 million is what we've targeted over the course of the year. And if you look at our year-to-date share repurchases through the third quarter, it's $96 million..

Got it. Okay. And then Chris, I think you mentioned -- there was a comment about how you were hoping for resolution to the trade war.

Could you just talk about how that's directly and indirectly impacting you today? And what kind of mitigating actions you might be able to take over the next 12 months or so?.

Sure. Well I described in ABS and polycarbonate, those are the two areas where we see that as -- it's not just a trade war. So it's hard to pin this on the trade war per se. There are a lot of things going on in the world as we all know. But one of them is, in this environment, the demand in China has been uncertain.

We talked about it at the end of -- in our third quarter call. And lower feedstocks were driving down demand, people are waiting, lot of destocking.

So I believe some of what we saw at the end of the third quarter into Q4, in ABS and polycarbonate, just from restocking and people purchasing now at the bottom of the feedstock cost curve, if you will, I believe that already will show some help to '19.

What would also be helpful is if we could get some clarity on the general trade dynamics, because that would instill some more confidence, I think, into the overall buying patterns in China and elsewhere and that would boost fundamental demand. Now China is putting stimulus in as we all know to try and combat this. We'll see how effective that is.

In terms of actions, we've already started to slow our plans, manage our inventory and lower our CapEx and go after cost. Those are mitigating actions that we've been putting in place in order to do everything we can in this environment.

All of those actions are what underpinned our guidance of 615 million midpoint next year, including some gradual return to normalcy through the year. That's the fundamental in that guidance that we gave you..

And then one last quick one.

With the low water levels on the Rhine, are you expecting any impact to your operations I guess, in Q4 here?.

No, minimal. We don't have direct activities there. We have, we call it, knock-on effects of small amounts, supply of materials, things of that nature. But we really don't have any direct activity on the Rhine. So we're not directly affected in the short term on that. It is an issue for the industry, but no expected direct impact of substance on us..

Your final question comes from Laurence Alexander of Jefferies. Your line is open..

This is Nick Cecero on for Laurence.

Just may be revisiting the trade flow situation in ABS and polycarbonate, are you seeing any further capacity shuts down in Europe, maybe to try and take some supply to the market?.

So in ABS, Nick, just to reiterate the dynamic. China is an importer of ABS, largely from Asia, particularly Korea. As these dynamics in China unfolded late third quarter, fourth quarter, they did not send product to China, they sent it to Europe. That created margin pressures both in China, low demand there, and in Europe.

That's not a normal trade flow. That trade flow, we believe, will revert when the restocking and other dynamics occur in China. In ABS, there has been significant 20%, as our best estimate, idling, of capacities in ABS in response to this, mostly in Asia, in fact, completely in Asia, as far as we know.

So there's been a lot of ABS capacity idling in response to this short-term dynamic of the last four months of this year. In polycarbonate, the dynamic's a little different. The two major producers of polycarbonate in Europe, remember, we're 12% of the market, rest of the producers are about 87%, 88%. They are exporters to China of polycarbonate.

And in an environment, like what we described in China, rather than export, they keep product in Europe and that has pressured margins there. We would expect that to normalize also over the recovery of these transitory effects that we've talked about. In polycarbonate, we have slowed down our asset.

We believe others may have done the same, but we don't have as clear data on that, Nick, as we do in ABS, where we have a good view, and we believe about 20% of the capacity of ABS has been idle..

That was our final question for today. Thank you for your participation. This concludes today's conference call. You may now disconnect..