Good morning, ladies and gentlemen, and welcome to the Trinseo Firsts Quarter 2021 Financial Results Conference Call. We welcome the Trinseo management team, Frank Bozich, President and CEO; David Stasse, Executive Vice President and CFO; and Andy Myers, Director of Investor Relations.

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

These documents are posted on the Company's Investor Relations website and furnished by Form 8-K filed with Securities and Exchange Commission. [Operator Instructions]. I will now hand the call over to Andy Myers..

Thank you, [indiscernible] 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 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. 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 May 7, 2022. Now I'd like to turn the call over to Frank Bozich..

Thanks, Andy, and welcome to Trinseo's first quarter earnings call. I want to begin with our recent news regarding the closing of the transaction to acquire Arkema’s PMMA business, which we first announced last December.

The newly acquired business, the results of which will be reported in our engineered material segment represents the first major step in the transformation of Trinseo. As we have stated, our goal is to become a higher margin, less cyclical specialty materials and sustainable solutions provider.

The end users of PMMA overlap with our current offerings in many end markets, including automotive, construction, medical and consumer electronics. This acquisition is normally expected to generate approximately $50 million in the end of the annual synergies, but is also expected to enhance our customer intimacy in these markets.

With additional investment in Asia, we will broaden the geographic scope to allow us to serve global customers in that region, who are currently not served by the business.

The integration of the Arkema team will largely be complete once we have migrated them to our new ERP system and eliminate the transition services agreements, which is planned for mid-2022.

The deployment of the new ERP system is expected to result in harmonized IT systems and business processes across regions and business units that will lay the foundation for future growth. As a reminder, we expect this alignment will result in at least an additional $25 million of cost synergies.

I want to welcome the almost 900 new employees as well as numerous new customers to Trinseo and I'm looking forward to growing our business together. Turning to our first quarter results, we started the year on a great note with very strong net income and our record quarter and adjusted EBITDA.

The recovery and demand for many of our products, which began in the second half of 2020 continued into the first quarter. Our total sales volume in the first quarter was 5% higher than prior year and 8% higher feedstocks is excluded.

We observe strong demand and most applications including appliances, building and construction, consumer electronics, tires, board packaging and even automotive despite the current semiconductor and raw material shortages.

We continue to grow in products that support higher margin, less cyclical applications, like engineered materials and case applications, where we enjoyed their highest quarterly volume in the history -- in our history in Q1.

Engineered materials volume was fueled by strong demand for consumer electronics and footwear, especially for products including biomaterials. While case benefited from solid demand and construction applications, as well as from our continued growth in the form of new customers and expanding our product offerings at existing customers.

During the quarter, we captured higher margins versus both prior quick year and the prior quarter for a number of products, including ABS, polycarbonate, polystyrene and styrene. This can be attributed to a combination of factors including solid demand, numerous commercial excellence actions, and tighter market conditions.

Most prominent example of tighter market conditions was in styrene, where unexpected external events like winter storm Uri in North America and the Suez Canal blockage caused production and supply issues which, combined with normal planned seasonal maintenance, and strong demand lead to extremely high styrene margins in our feedstock segments in March.

In addition, our joint venture America Styrenics was fortunate in that its styrene plant in Louisiana, was able to continue running without major issues during winter storm Uri, which allowed the JV to capitalize on higher industry margins.

We also benefited from higher margins in our ABS and polycarbonate products within base plastics due to high demand in the industry supply outages, including some from raw material shortages. These tighter market conditions resulted in higher margins in base plastics.

But they will say that they did cause a headwind in our downstream segments engineered materials were higher raw material costs, like polycarbonate caused margin pressure for a rigid compound products. The large cost increase in raw materials also created the use of working capital during the quarter.

But we were still able to generate cash from operations of $51 million, which led to a positive free cash flow of $38 million. We finished first quarter with $618 million of cash on hand, of which we used $200 million in May as part of the financing of the PMMA acquisition.

With the acquisition complete, we still have a very strong balance sheet and a very positive outlook on earnings for the remainder of the year, especially for the second quarter. Before I touch on our forward outlook, I want to highlight a few updates on sustainability.

First, we recently announced a collaboration with BASF with the goal of increasing styrene production from circular feedstocks. We have already achieved mass balance certification for some of our plants. And this new collaboration will help our customers reach their sustainability goals by offering them more sustainable solutions.

Second, we’ve recently committed to and re-qualified for Apple's program asking manufacturers to use 100% renewable energy in the apple production. We also announced our plans to build a commercial polystyrene recycling plant in Tessenderlo, Belgium, which is expected to be operational in 2023.

And as expected to convert 15 kilotons per year of polystyrene waste into chemically recycled styrene. Prior to the plants construction Trinseo INEOS in our newly selected technology partner recycling technologies trying to build polystyrene recycling pilot plant in the U.K. in 2022.

These pilot plants will look to develop recycling technologies depolymerization solution which provided the highest yields and conversion of polystyrene to styrene monomer and provided some of the more scalable solutions.

Not only will the development of this technology reduce greenhouse gas emissions, as compared to polystyrene production from traditional petroleum based feedstock, it will also position polystyrene as an integral player in sustainable plastic solutions.

These initiatives strongly aligned with our 2030 sustainability goals including the reduction of greenhouse gas emissions and creating a product portfolio that is at least 40% sustainably advantaged.

It's satisfying to see that as we continue to make sustainability a core piece of our transformation journey, we are being increasingly recognized for our efforts. Ecovadis our global sustainability rating agency recently issued Trinseo a silver rating.

And our score placed us in both the top 20% of all rated companies in the top 13% of the category manufacturers plastic products. Favorable ratings like this one, as well as our 2021 rating of AA by MSCI are positive byproduct of managing our company by using sustainability as a main tenant.

The addition of PMMA to our portfolio is consistent with our goal of reducing our CO2 intensity as it has a CO2 intensity that is one quarter of Trinseo’s current average. I look forward to sharing more exciting updates in this area in the future.

Turning to our outlook for the second quarter, we expect that overall earnings will be similar to the first quarter.

We observing demand levels sequentially in line with Q1 in many of our applications, including appliances, building and construction, tires and automotive where the platforms we serve such as SUVs and light trucks in North America, and premium cars in Europe are more highly prioritized by OEMs.

As a consequence, they're less likely to experience loss production as a result of semiconductor and other raw material shortages. Margins and most of our segments should also be sequentially similar in the second quarter. In feedstocks, we expect another strong quarter of earnings based on high margins observed in April and May.

However, we anticipate that is more supply as made available. The styrene market will find balance in the feedstock segment profitability will be closer to breakeven in the back half of the year.

Given the strength in earnings in the first half of the year and the expectation of a strong demand environment in the second half, along with our structural business excellence initiatives. We are revising our previous full year guidance to an adjusted net income of $303 million to $343 million and an adjusted EBITDA of $625 million to $675 million.

This range assumes a full year of synthetic rubber and no contribution from the PMMA acquisition. While we are not in a position to provide guidance on PMMA at this time, I will say that we expect eight months of solid earnings contribution from the acquisition.

Given the positive demand we're observing in many of the applications it serves including automotive and construction. Given our current outlook on earnings, we are confident that we will be able to reach a pro forma net leverage in the low twos by the end of 2021.

This represents an approximately 18 months acceleration from our previously disclosed deleveraging plan. It's an exciting time at Trinseo and we continue to transform into a specialty materials and sustainable solution provider.

The PMMA acquisition has closed and we're on track to complete the process to evaluate the divestiture of our synthetic rubber business by midyear.

I'm looking forward to a strong year of earnings, integrating the PMMA business, welcoming our new employees and implementing best practices as well as upgrading and harmonising our IT systems and business processes.

While the PMMA acquisition is a large step forward for the company in its transformation, we will continue to look for ways to organically and inorganically grow Trinseo that align with our strategy of higher margins and lower cyclicality with an underlying focus on sustainability. Thank you. And now you can open the line for questions..

[Operator Instructions] And your first question is from the line of Frank Mitsch..

Hey, good morning and a nice start to the year. And that's on closing the PMMA deal. I understand that you can't offer full year guidance for the PMMA deal.

But I was wondering if you might be able to talk about where their earnings were in the first quarter what they posted and how they put that into context with where it might have been a year ago?.

So maybe just let me -- thanks, Frank. And maybe let me make one comment that I didn't have in our notes. The transition this week went extremely smooth. And I'm grateful -- I want to point out that our team and the team from Arkema did a great job preparing for the separation.

And all signs are that we're running extremely well from a business continuity standpoint. I think we can't really give any guidance at this point. But I think the best thing to think about for PMMA is that last year, they did $140 million in adjusted EBITDA..

Got you. Got you. I mean, if I look at some of the pricing charts today relative to where they were when you announced the deal, it is looking a bit better. And I was struck by the comment in terms of the expansion into Asia.

Could you talk about the timeline that you might be looking to do that? Obviously, you had the facilities, the manufacturing facilities, I guess are in the U.S.

and Europe? Is there a thought process to build over there or to acquire over there any color there would be helpful?.

So we would expect to make an investment to put a PMMA plants and compounding line in Asia Pacific. It frankly, as soon as possible. We -- given that we've only had days to really work without any constraint with the group. It's -- all I can say is we're anxious to do this.

And those are -- the upside for us here is that we can broaden our offering to those global customers that we currently don't serve in that region. So I don't have a specific timeline. And I think we can probably give more updates on that as we go forward in future quarterly earnings..

Got you. Congrats again. Thanks..

Thanks, Frank..

Your next question is from the line of David Begleiter with Deutsche Bank..

Thank you. Good morning. Frank, just on feedstocks and styrene.

How are you thinking about styrene margins beyond this year in terms of supply demand fundamentals in terms of new supply coming on in China?.

Yes, hi David. So the way we believe that styrene will normalize at a level that is sort of a cash breakeven for the near-term after the first half of this year. And that new capacity will cause some rationalization of marginal producers mainly the non-integrated producers in China.

And that's the level that we anticipated being at -- for beyond the first half of this year. Until we start seeing more structural change and growth absorbing that capacity or industry consolidation occurred. So the simple answer is after the first half we insist -- we believe it will normalize around a cash breakeven basis zero EBITDA basis..

Got it..

Let me like that. Dave, I just add -- this is David Stasse just add a couple to that. I think that that comment is applicable to our feedstock segment not [indiscernible] is obviously styrene business has a cost advantage. That's not a -- we do expect to make money there.

But for a European EVSM producer like us, I think what Frank says is correct, what's implied in our guidance, and our -- for the next several years at least we would assume -- other than these events that happen like these recent fly up margins. But for that we expect limited earnings contribution in feedstocks..

Got it. And just looking forward with PMMA close and the rubber sale on track for this year.

How you think about the rest of the portfolio Frank, in terms of Styrenics is it going to be remain a [indiscernible] longer term and if not what's the timeframe?.

Yes so, as -- we've said in our previous calls and in December, when we announced this transaction, we'll continue looking at the portfolio and finding opportunities to inorganically add higher margin less cyclical, higher growth parts of the business and we'll look for other parts of the -- the more cyclical part of our business to separate to finance that.

So I wouldn't anticipate that some of our more commodity plastics could be separated at some juncture when we find an appropriate opportunity. But we don't have any specific timeline. And it's an important part of our portfolio now from a cash contribution standpoint. So no specific timeline.

And the other thing I would point out is, we do have significant opportunities to improve our base plastics business with additional investment and the harmonization of our systems. So again no immediate plans but longer term that's our goal..

Thank you very much..

Your next question is from the line of Angel Castillo with Morgan Stanley..

Hi, good morning. Thanks for taking my question.

Just a kind of look at the other side of that, I guess, as you look the -- your specialty businesses, as styrene and other feedstocks, normalized kind of in the back half, could you just talk about the net timing and how we should think about whether that's kind of an opportunity or a benefit in the second half and in the second quarter? And then also just as you think about kind of the pricing power that there were some headwinds here in the first quarter that because of raw materials being higher, but as we move into the second quarter and second half with styrene going lower, do you see some benefit that as you price, some of the raw materials through margins could actually expand a little bit if you can give more color will be helpful?.

Yes, hi, Angel. This is Dave, I'll take a crack at that. And then maybe Frank can add. I see based on the feedstock curve, that we envision and what's kind of baked in our guidance. We don't see significant timing either positive or negative in Q2 or Q3 and 4 frankly is a little hard to predict, but we just don't see it right now.

Being a significant factor either way. I guess I could -- maybe a follow on to that or related question that would be working capital because feedstock prices are the biggest driver of our working capital. And we saw that in the first quarter with about 120 million outflow.

I think based -- again, based on the feedstock curve as we currently envision, I think we'll make back about half of that 120 million in it really the back half of this year. So I think working capital will be an inflow in the back half of the year making back about 60 million of that 120 million.

The answer as it relates to feedstock prices and kind of little bit tailwind and the ability to pass that through the downstream businesses. Like I think that's an applicable conversation really more for the engineer -- our engineer material segment. The rubber largely operates with passthroughs as you know, Latex is the same thing.

Our existing and [indiscernible] speak to PMMA that our existing engineering materials business, particularly the rigid compounds portion of it, which is about two-thirds of the segment.

We did see a headwind in the first quarter just due to the extremely steep magnitude and timing of the polycarbonate increase that we just weren't able to get passed through fast enough in the quarter.

I do think we'll be able to -- as polycarbonate prices come down in the back half of the year, I do think we'll be able to make that back in that particular segment, but as I said Angel, it's not a particularly relevant conversation the other specialty segments..

That's very helpful. And then just in terms of capital allocation you noted that you might end the year kind of low twos and well ahead of schedule. So that's fantastic.

So just as we think about potential bolt-ons, could we see you look at potential bolt-ons within 2021 or even early 2022 or will that focus kind of be right now on rubber and maybe 2022 is more of a year that you could start to do some other capital allocation whether it's M&A or even repurchases or anything given the stronger balance sheet?.

Yes, I guess, the -- to be clearer, our number one priority is to integrate the PMMA business and execute against the integration plan that we've got. And then complete the assessment for synthetic rubber and execute against that. So we will evaluate other opportunities in 2021.

But the characteristics of those would have to be that they would be not disruptive to our ability to execute under the integration plan that we have. So again, we'll look at things but our first priority it will be the integration and content execution of those activities we've announced so far..

Thank you..

And your next question is from the line of Hassan Ahmed with Alembic Global..

Good morning Frank and Dave. Just wanted to touch on obviously conscious of the fact that you can give guidance related to PMMA.

But if I heard you correct, you said that the business did $140 million in EBITDA in 2020, which I would imagine, I think would imply that EBITDA was relatively flat year-on-year in 2020 despite the year being as quirky a year as it was.

So first question is, did that imply flat EBITDA PMMA year-on-year? And part and parcel with that question, obviously, the end markets at PMMA building and construction, autos, all looking quite strong this year. And then obviously, it has a big China exposure, again the geography doing really well.

So knowing that you can’t give forward guidance, can you at least touch on how these end markets have fared and the business has fared thus far to me?.

What I would say is that there's been very strong -- consistent with our existing business. And we have -- as I've said, we have some end market and then the application overlaps, we're seeing very robust demand in the applications that PMMA goes into. We're confident that that is sustainable.

And but what I would say is PMMA was also affected by the supply chain disruptions in Q1 probably more than our broader portfolio, so that the production of MMA and the Gulf Coast and the feedstocks that go into MMA production were quite disrupted. And so, as we're looking at the supply chain inventories are relatively low.

And we even see that there's some pent-up demand, in addition that needs to be refilled in the supply chain after the disruptions in Q1. So I would say, in general, strong demand with very low inventories as how I would characterize the PMMA market right now..

Understood.

And maybe following up on that particularly as you talked about sort of lean inventory levels and alike, look as I take a look at your second half implied guidance, you guys are guiding to call it slightly north of 400 million in EBITDA in the first half of the year and looking at your full year guidance that obviously implies that EBITDA half and half, H1 to H2 will be down correlate anywhere between $125 million to $175 million.

And you've also touched on how you're not really factoring in any contribution from styrene. So I'm just trying to reconcile that half and half decline in light of demand continuing to remain strong. Obviously turnarounds happening, backfilling of orders and lean inventory levels, right.

I mean, it's suggested maybe, the second half at least Q3 wise, maybe a bit better than what's implied in this sort of half and half EBITDA compression that you sort of -- the implied guidance suggests..

Yes, so -- I guess let me give you some qualitative view on the second half. And in relation to the first half. While the demand we see remaining pretty strong. And the COMEX initiatives that we've implemented will remain those structural initiatives.

What we anticipate is no contribution from styrene as it was pointed out and that's about $100 million of contribution. And then also the tight supply dynamic that exists right now and existed in Q1 and into Q2 will normalize. So that that supply dynamic that going away or that tightness of supply will normalize feedstock costs.

And to be fair, we've benefited from some of that in Q1. And we see some of that benefit, more broadly happening in Q2. So when you normalize that, that's how we get to that second -- first half second half comparison..

Very helpful. Frank. Thank you so much..

Your next question is from the line of Eric Petrie with Citi..

Hi, good morning, Frank..

Good morning, Eric..

Just wanted to go back to your announcement and circularity with CSS, how much of your products for SSBR and PS have recycled content? Is it 10%, 20%, 30% or is it more?.

So I heard SSBR and what I would tell you is a very small percentage of our portfolio of our sales, net --I'm going to say negligible. Today we have recycled content. And part -- and the main driver for that is the fact that there's a very long qualification and approval cycle for those products.

So we're excited about what we're doing there is we were able to introduce products to the tire companies last year and we were the first to do this. And many of those advanced SSBR applications. And again that coincides with our investment in tire recycling solutions. So today, it's small, but we have material that's out there for qualification.

And over time, we would see that building rapidly. The second product that you mentioned, I heard SSBR the second one I missed..

Yes, so polystyrene and just to clarify to not as a percentage of overall volume, but is it mixed with virgin? So you're only looking at 10% recycled content or how does that mixed workout?.

Okay. Yes, so -- yes, sorry, I misunderstood the question. So in SSBR, the content of -- so the content will depend on what type of product we're offering. So if we're using a recycled content from spent tires like we would produce from TRS, it would be in the 5% to 15% -- up to 15% loading level for those materials.

However, if it's from chemically recycled styrene and or biobased, butadiene or biobased styrene, we have the ability to go up to 100% in the formulation without any change in the physical attributes because the styrene that -- and the feedstocks have the same characteristics as so as virgin petrochemical base materials.

So in those products it’s a wide range depending on many factors. In polystyrene by memory, I believe that the first grades that we did sell last year that used mass balance were 40%. chemically recycled styrene monomer as a content..

Okay, great.

And then secondly, could you talk a little bit more about ABS profitability? Now, if prices are going up globally strong appliance demand, do you see softening comps as we kind of left the stay-at-home orders and then I think your plants in China started up in ‘17 is that sold out and potentially in an area that you can invest further besides potential PMMA investment in the area?.

So ABS is a great example of the three characteristics that, I tried to explain earlier where we have a great franchise and a great product offering and our team has done a fantastic job value pricing that into very specific applications like appliances, where we have very -- and automotive where we see good strong demand.

So the combination of demand and COMEX have been an commercial excellence activities has been has been good. What I would say though, is ABS also was really affected by tightness of raw material feedstock. So [accrued nitrile] was very tight in the beginning of the year.

And so it created some exceptional earning potential if you were able to supply and we enjoyed some of that in the first quarter..

Eric I will -- as it relates to the second part of your question, I think you were getting at would we spend capital to increase the supply or trying to plan? I think the answer to that is -- yes, the answer to that Eric is no, I don't think we've -- our investment directed towards base plastics would not be towards expansion, but rather towards sustainability and recycled initiatives, which we will invest in..

Okay. Thank you..

[Operator Instructions] And your next question is from the line of Matthew Blair..

Hey, good morning, Frank.

Curious if you're seeing any demand destruction or substitution in polystyrene just given the high price environment?.

I think the simple answer is right now no, we are not. And the – especially -- I guess -- I'd like to remind you, we have a pretty small exposure in the packaging in our polystyrene business and a lot of our polystyrene is going into applications where hips, high impact polystyrene is required, et cetera. So we're substitution isn't viable.

In packaging, we have not yet seen much traction in attempts to substitute the other products.

And in fact, our -- the awareness that is building that polystyrene is able to be recycled effectively and recycled materials coming being becoming available is -- put -- push the pause button that a lot of the big converters or big end market users polystyrene that would cost billions of dollars to retool to other materials.

So at this point, we have not yet seen that..

Terrific. And could you provide an update on just the Syn Rubber divestiture process? Yes.

how are you feeling about that? I mean, given the recent uptick and profitability is there chances that you might hold on to that business for the long-term?.

So I feel very good about our process. We've had a lot of interest from parties in the market and it's a great franchise and we -- and frankly, I'm very proud of what that team has done.

But if we think forward our rationale for reshaping the portfolio more around case applications and engineered materials applications remains, it’s not going to change.

And we believe that there are other parties in the market who are better able to invest and grow synthetic rubber and our asset in investing in we would be able to have yet a third growth platform, if you will within the company.

So again, even though it's improving, and it's doing great and we love the business and we think it's a great franchise, our priorities are in case and growing engineering materials..

Sounds good. Thanks..

Thank you..

There are no further questions. This concludes today's conference call. We thank you for your participation. You may now disconnect..