Good morning, ladies and gentlemen, and welcome to the Trinseo Second Quarter 2021 Financial Results Conference Call. We welcome the Trinseo management team, Frank Bozich, President and CEO; Dave 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 a 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 is furnished on the Form 8-K filed with the Securities and Exchange Commission. [Operator Instructions] I will now hand the call over to Andy Myers..

Thank you, Felicia, and good morning, everyone. [Operator Instructions] After our brief remarks, instructions will follow to participate in the answer-and-question session. 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 August 5, 2022. Now I'd like to turn the call over to Frank Bozich..

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 Trinseo 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 Aristech 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, bath tubs, 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 in Aristech.

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 Trinseo 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 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 delivered record net income and adjusted EBITDA. We observed solid demand in many of our products in applications such as appliances, packaging, textile, footwear, and building and construction. In fact, our CASE products in 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 are 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 to 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've already -- 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 million to $380 million and adjusted EBITDA of $750 million to $800 million.

These estimates include eight months of PMMA business and -- but do not include synthetic rubber, which has been moved to discontinued operations or any impact from the pending Aristech acquisition.

In comparison to our prior guidance, this estimate includes approximately $80 million improvement in our legacy business -- 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 a 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 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 S/4 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 2s 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 deliver 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 3/4 of our annual adjusted EBITDA.

This includes Base Plastics, Latex Binders, and Engineered Materials 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..

[Operator Instructions] And your first question comes from the line of Frank Mitsch of Fermium Research..

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 million, 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 million for this year and then the delta between the $730 million and the $775 million 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?.

Exactly, Frank. So if you -- I'd just repeat what you said but that's exactly right. So....

Okay. All right. Fantastic. I just wanted to make sure that -- so that's a very nice step-up in the legacy business. And Frank, your -- and the guide on your free cash flow, you're at a 15% free cash flow yield relative to your market cap.

So what are we going to do with the money?.

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 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..

Is there any room in the mix for buybacks?.

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..

Frank, this is Dave. I'd like to add just one thing on -- 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..

Your next question comes from the line of Matthew Blair of TPH..

So styrene has obviously come down quite a bit in Q3, could you talk about how things are trending so far this quarter on polystyrene?.

Polystyrene is actually looking very good. In fact if I go back to 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 or 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 looks -- is very good and the applications we sell into are seeing very good demand..

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?.

Well, yes, ABS has seen very strong demand and I think one of the things that we're seeing in -- 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 smaller percentage of the ABS produced in the world..

Your next question comes from the line of Hassan Ahmed of Alembic Global..

Frank, a nice bump up in Engineered Materials EBITDA margins and obviously, I understand that 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? 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 a bump up in volume. So just want to get a sense of how to think about run rate EBITDA margins for this segment..

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, so -- at the gross margin level.

So in general, we would still see 20% going forward. And the headwinds that we saw, 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 -- that's been -- we're well on track in Q3 to recover that..

Understood. 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 talk to all the analysts, I'd love to hear your views about that..

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 EBITDA for the year.

Now obviously, we've moved that to discontinued ops, so we're not including that in our guidance anymore. So I think you're absolutely 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..

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

Frank, just on the upside to PMMA synergies, can you give a little more color as to what areas they might be coming from and the timing of those synergies?.

Yes. So the $10 million that we're on track to deliver in Q1 -- or in year one are really coming from organizational and procurement or supply chain efficiencies that we have between the businesses. As we move forward, we have some OpEx as well as the elimination of the TSAs that we got supporting the business when we carved it out of Arkema.

And then in year 3, 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 in to 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 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 we're excited about that. We're looking at what the technology solution and the capital associated with that would be, but it's not significant capital, I would tell you and would give us -- at least our preliminary view is it'll give us a very fast payback..

Very good. And just on styrene and feedstocks, you gave us a back half guidance of basically breakeven.

Is that a good run rate for next year as well, breakeven and what's your view on new demand -- sorry, new supply coming out of China over the next maybe 12 to 24 months?.

Yes. 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 breakeven level where supply conditions or supply shocks or will -- 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 breakeven level.

Now AmSty is different obviously because they have a better cost position in North America, but that's our view going forward. So we see little downside and potential upside in certain market conditions from styrene monomer..

Dave, as it relates to new supply, I mean 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..

Your next question comes from the line of Eric Petrie of Citi..

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 Bisphenol A shortage?.

The -- well, I don't have the figure. Andy is looking for the figure on the growth in PC demand. But what I would tell you is -- I want to make a couple of points about polycarbonate for us. Polycarbonate, the merchant polycarbonate business in Trinseo is very small.

And polycarbonate is mainly a feedstock that goes into our rigid blends in Engineered Materials. And 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 Stade 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 that's being -- capacity that's coming on in China is not of the same quality as the material in Germany at our Stade plant.

And so it's not relevant -- in our view, it's not relevant to compare that -- the quality of that material to what we produce because it's highly specialized. If -- so Dave has the answer on the volume growth..

Yes. So I mean, our volume -- I mean, well, there's a easy comp quite honestly compared to the second half of last -- 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. And then secondly, on Apex, it looks like EBITDA declined sequentially to $40 million, down $7 million.

Why was that given your styrene margins were higher and you had favorable timing?.

So we had interruptions at our Bohlen plant, and we were in the spot market when Bohlen was shut down for some unplanned maintenance..

And your next question comes from the line of Angel Castillo of Morgan Stanley..

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 some of the step out D&A or other kind of merger-related adjustments, how that's kind of doing it from a margin perspective, volume and price as well?.

Angel, yes, this is Dave. I'll address that. I would say on an EBITDA and a margin basis, it's doing pretty similar to a year-over-year basis.

You remember when we made the announcement, we talked about the dynamic for the PMMA 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 portion 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 that was kind of a first half headwind..

That's very helpful. And then just maybe, I guess compiled a lot of discussion around both ABS and polycarbonate just curious how you're thinking about base plastics as we go into 2022 from kind of an EBITDA perspective and kind of the cadence of earnings from 2021 to 2022..

Look, I think we would see -- we see nothing is visible to us now that would indicate any change in kind of the run rate of the -- 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 in base plastics..

And there are no further questions at this time..

Thank you..