Good morning, ladies and gentlemen, and welcome to the Trinseo Third Quarter 2020 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 a question-and-answer session. The company distributed its press release along with its presentation slides at close of market Wednesday, November 2.

These documents are posted on the company's Investor Relations website and furnished on a Form 8-K filed with the Securities and Exchange Commission. If anyone should require operator assistance during the call, please press star then on your telephone. I will now hand the call over to Andy Myers..

Thank you, Regina, 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 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 November 3, 2023. Now I'd like to turn the call over to Frank Bozich..

Thanks, Andy, and good morning, everyone. As we highlighted in our last quarterly call, the combination of economic uncertainty, high energy prices, and falling raw material prices triggered significant customer destocking throughout the third quarter.

In addition, record energy prices in Europe resulted in reduced demand and lower margins due to the inability to fully recover input costs. We estimate that the sequential impact of higher gas costs on margins in Q3 was about $50 million.

Asian demand remained consistent with Q2 levels, and there was no significant demand improvement as COVID restrictions continued. North American demand was steady in auto, but demand for building and construction applications and consumer discretionary items fell during the quarter as a result of rising interest rates and inflation.

Against this economic backdrop, our volumes and margins in Europe showed considerable weakness during the quarter. Additionally, elevated energy costs placed the entire industry's more energy-intensive products on the high end of the global cost curve, and as a result, created opportunities for regional arbitrage.

For more globally traded products like styrene and polycarbonate, the adverse impact on margins was significant with the oversupply leading to negative margins.

In response to these market conditions, we've announced several potential actions, which we are considering to optimize our assets and improve our cost position with the largest area of focus on the more energy-intensive products in our portfolio, namely styrene and polycarbonate.

We've begun the dialogue with the Works Council of Trinseo Deutschland regarding the potential closure of our styrene plant in Bohlen, Germany. The plant has been offline since August. First for planned maintenance and then idled in response to poor economic conditions.

The Bohlen facility contributed approximately negative $30 million to EBITDA during the 12 months ending June 2022. We have also temporarily idled our styrene production at Terneuzen in the Netherlands. The startling needs for our downstream businesses beyond our production are expected to be met via external purchases.

In polycarbonate, we're evaluating steps to optimize our production and supply chain for our downstream polycarbonate compounds. As a reminder, we consume about half of our polycarbonate production and our higher-margin downstream compounding business. But the remaining 50% is sold into the more cyclical merchant polycarbonate market.

Part of our valuation relates to potentially closing one of the production lines at our Stade plants, and we have initiated discussions with the Works Council there. This potential production line closure would lower costs and would greatly reduce our exposure to the merchant polycarbonate market.

In addition to these potential steps regarding our styrene and polycarbonate assets, we are reviewing ways to optimize our asset footprint in other segments, such as restructuring our PMMA sheet business in North America as well as reducing styrene butadiene latex capacity at our Hamina, Finland plant.

Together, all of these initiatives, if approved, would lead to an improvement in annual profitability of about $60 million under current market conditions. I'm confident that in the medium to long term, we have a very competitive asset footprint.

We are working on some very exciting energy efficiency initiatives that will both reduce our carbon intensity and decrease our utility costs. For example, heat recovery through mechanical vapor recompression. The financial benefits of these can be significant.

And we estimate the annual savings of approximately $60 million for the initial set of projects assuming a natural gas price of $100 per megawatt hour. However, like the rest of the industry, in the short term, we are faced with a combination of historically high energy costs and low demand, particularly in Europe.

Therefore, we're actively evaluating steps to improve our operating cost position and operating flexibility. And we've also enacted cost controls such as limiting discretionary spending, and reducing capital spending.

The current challenges we face as an industry reinforce the importance of continuing to transform our portfolio into a specialty solutions provider that, as a consequence, has lower carbon intensity.

We remain focused on the overarching priority of our transformation, and want to be clear that we will continue to prioritize the investments and initiatives that support this strategy. It's understandable that a significant amount of our current focus is on the headwinds we're facing from a macroenvironment.

But I'm encouraged by the progress we're making on our transformation. Volumes of sustainable products, meaning products that contain recycled materials, grew 70% in the third quarter versus prior year, with the Q3 year-to-date increase of 65%.

Margins for these products have been some of the most resilient in our portfolio, which is evidence of how highly valued they are by our customers.

To expand our sustainable product offerings, we're creating and cultivating beneficial relationships to widen our range of sustainable products, including our recent announcement of a collaboration with Japan Steel Works to further develop recycled MMA, which will feed into circular PMMA solutions.

We are also growing in material substitution applications that help our customers achieve their sustainability and cost reduction goals, such as replacing fiber glass with the co-lamination of PMMA and ABS for mobility and wellness applications. Co-laminated product volumes have grown 20% this year through Q3.

And this is one of several material substitution offerings with significant and additional growth potential. There are additional growth opportunities through expanding our existing products into adjacent applications.

For example, our PMMA capstock technology has been adopted for PVC decking and railings as it provides high durability and weatherability, as well as the environmental benefit of lower VOC emissions by eliminating the painting for the end consumers. We recently began supplying this technology into siding applications.

And with the expansion of capstock in the siding, which has a total addressable market of approximately $200 million, we can deliver these benefits to a wider range of customers. We remain committed to developing our product portfolio as part of our transformation with organic and inorganic growth.

This will place us in an advantaged position when the market conditions inevitably improve. Our recently appointed CTO, Han Hendriks, will lead this effort to expand our technology offering into higher-value applications. Now I'll turn the call over to Dave to walk through some of the additional financial points..

Thank you, Frank. I'd like to give a little more detail on our cash generation, liquidity profile, and our near-term thoughts on capital allocation. Despite the low level of earnings in the quarter, we still generated $98 million of cash from operations and $59 million of free cash flow.

This included $166 million release of working capital, driven by the steep decline in raw material prices and inventory reduction initiatives. We expect another working capital release in the fourth quarter, which is a seasonally strong cash generating quarter for us. Our liquidity position continues to be very strong.

And we're well positioned to withstand a prolonged industry downturn if that becomes an eventuality. We ended the quarter with $243 million of cash and have access to over $500 million through undrawn committed credit facilities.

From a capital allocation perspective, we have a number of very attractive, organic growth and sustainability projects that will continue to fund through this downcycle. However, share buybacks will be deprioritized until we have better clarity into future economic conditions.

For 2023, we expect our free cash flow breakeven level of EBITDA to be about $350 million. To be clear, we're not giving guidance for 2023 at this point. But I wanted to give you this information to instill confidence in our balance sheet and liquidity position in the context of the current economic environment.

Now I'll turn the call back over to Frank to cover our fourth quarter outlook..

Thanks, Dave. Looking at Q4, we anticipate similar market conditions to Q3. Europe continues to face considerable challenges with decreased demand and high utility costs, significantly impacting near-term performance.

However, North America and Asia are generally seeing steady demand in most markets, and some improved demand in Asia for polystyrene and ABS products, hopefully signaling the end of destocking. For the full year, we expect a net loss of $126 million to $91 million, and adjusted EBITDA of $325 million to $375 million.

Further cash generation is anticipated in Q4, leading to expect a full year cash from operations of approximately $150 million, and including the estimated CapEx spend of $150 million, free cash flow of above breakeven.

At the midpoint of our full year guidance range implies fourth quarter adjusted EBITDA of $45 million, which is an $82 million improvement over Q3 due to a number of factors. First, we do not expect a reoccurrence of the $24 million of negative timing impact or the $23 million of one-time charges from the third quarter.

So those 2 factors combined should lead to almost $50 million of sequential earnings improvement. Additionally, we expect an improvement of approximately $35 million in feedstocks from improved variable margin, including the benefit of idling styrene production.

We expect further benefits in 2023 from the potential asset footprint actions we announced, which we expect will provide significant incremental improvement from our Q4 performance.

To sum up, we have a solid financial position to operate in the current conditions and to support our transformation strategy and will continue to be prudent with our cash management. We are progressing well on the integration of our PMMA and Aristech Surfaces business.

And we are on track to realize the associated cost synergies as well as exploit the growth opportunities we now have as a result of these acquisitions. In fact, I'm happy to report that as of this morning, we have successfully transitioned to all of the PMMA sites from Arkema's ERP system to our new SAP S/4HANA ERP system.

This is a major step and it results in significant reduction in Arkema TSA services. I want to take this opportunity to thank our employees for all of their hard work on this accomplishment and everything they've done to position us for the future.

The sale of the Styrenics business remains on pause, but this is still an integral part of our transformation. Finally, we remain focused on investing in organic growth opportunities to build our product portfolio with additional sustainable and differentiated product offerings. Thank you. We're now happy to take your questions..

[Operator Instructions]. Our first question will come from the line of David Begleiter with Deutsche Bank..

Frank and Dave, just on destocking, is it continuing into Q4? And is it worse in Q4 than Q3? And you think it will be largely done by the end of the year?.

So let me back into your question. We do think it will be largely done by the end of the year. We're still seeing some level of destocking as we get into Q4. And I guess I'd give you a data point.

For example, in appliances, we -- just reading the public announcements from customers like ROFO, we've seen that their production rate is -- decrease in production is 3x the reduction in their retail sales. So there's clearly a destocking effect. We think it will be largely over by the end of the year..

Very good. And just on Terneuzen, what are the options with this site, obviously, you need some production in Europe.

But what are your options to improve the results there?.

So part of the -- so yes, thanks for the question. So part of the $60 million are a big part of it that we -- I highlighted in the script relates to energy efficiency opportunities that we have in Terneuzen.

So actually, we think Terneuzen, in the high energy cost environment with the investments that we planned, will be advantaged compared to the rest of the regional production..

Your next question will come from the line of Frank Mitsch with Fermium Research..

David, I was wondering if you could kind of break down the components of that breakeven EBITDA, the $350 million that you mentioned, i.e., what are you embedding there in terms of CapEx, et cetera?.

Yes. Frank. So to be clear, we're still going through our budget process. So I'll give you the pieces that we kind of know now. But again, we're still -- things like CapEx are still going through the budgeting process. What I can tell you about CapEx, Frank, is that it will be less than this year's $150 million.

Interest expense, I think we're budgeting $140 million to $150 million next year. Taxes, again, still a contingency based on where we end up for an EBITDA forecast.

So that's kind of -- I mean, I realize there's some pluses and minuses in there, but I think we feel pretty good about that $350 million level of -- to get free cash flow breakeven, Frank..

Understood. And I know that you probably won't offer that as your expectations of trough EBITDA. But although if you could, that would be awesome. But you did mention that -- Frank mentioned that a lot in terms of shutdowns that would save $60 million annually. And I'm wondering what the costs that are required to spend to effectuate those shutdowns..

Yes. So again, to be clear, we're working through the Works Councils, so no decision has been made there, Frank. But in the event we do take all of those actions, the cash cost to us next year would be about -- would be under $20 million, it will only be between $15 million and $20 million.

Beyond then, there could be some decommissioning -- this would be 2024 and beyond, decommissioning costs. I guess, with a net against that, what we could get for selling scrap. But I think the immediate concern is 2023, and it's less than $20 million and that's embedded in the $350 million number I gave you a couple of minutes ago, Frank..

Your next question will come from the line of Michael Leithead with Barclays..

First question, Dave, I appreciate kind of in your comments around deprioritizing share buybacks near term.

Would you expect to build cash on the balance sheet? Or is there a way to maybe buy back some of the floating rate debt you have out there today?.

Well, look, I think all I'll comment on, Mike, is the near term. In the near term, we're focused on preserving liquidity and protecting the balance sheet. And I think in the near term, certainly for the fourth quarter, that would be no buybacks of either stock or bonds. We're well aware of where the bonds are trading.

We've gotten a lot of inbounds on that question. But in the immediate term, I'm just going to speak for Q4. We'll have to see what happens as we start the new year, but Q4 there be no repurchases of either..

Fair enough. And then second, maybe a bigger picture question. On the 2 big acquisitions, Aristech and the Arkema business, you've had both of these for, give or take a year or so now.

Can you maybe just help provide us, obviously, the macro is a bit different, but just mile markers about where profitability and synergy is, just kind of how the integration has gone relative to maybe versus when you first picked up these businesses..

Yes. So let me take a crack at that, and we'll have Dave supplement, if I miss any points. But what we said is, we would estimate that the cost -- aggregate cost synergies between the 2 is approximately $60 million that we would accrue by the end of the third year post acquisition. I would say we're on track or ahead of schedule to realize those.

There's additional growth synergies that, frankly, we're -- we've seen a lot more growth opportunity than we anticipated into mobility, and building, and construction, and sanitary markets than we had anticipated.

Clearly, the volumes are down significantly in this environment in building a construction and mobility, and the Asian markets are lower than we expected. But I would say our expectation is that these businesses, in normalized terms, will generate a $50 million EBITDA contribution to the business.

And I don't see any reason when things return largely to normal and we've realized the synergies that they won't do that..

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

I was hoping you could give us a little bit more color on 2023 and particularly, as you think about some of the, I guess, the range that you've laid out for the fourth quarter, it then goes from $20 million to kind of $70 million.

And if we were to kind of annualize that, it would suggest a range that is still kind of below the $350 million breakeven cash cost level that you've kind of noted.

So just, as we think about the puts intakes for next year, can you maybe help quantify some of the incremental factors, at least that you have -- that you're kind of looking at beyond the $60 million of savings that would then -- that we would have to think about kind of incremental to the fourth quarter levels? Maybe how much destocking would be incremental or positive? And then how much normalization you anticipate? If you could just help us kind of bridge that, that would be helpful..

Yes. So let me give you -- I'm not going to be able to pinpoint exactly the numbers that I would anticipate incrementally, because as Dave said, we're working through the budget. But let me qualitatively give you that there's really 3 big moving parts that will put 2023 above the Q4 run rate. Number one is the normal seasonality of our business.

So Q4 is normally -- has a much lower season, is one of the lowest quarters of the year for us from a normal seasonality standpoint. The second thing is there is a continuation of destocking, which we anticipate will be done by the end of the year. It's a challenge to say how much -- to quantify how much destocking there is, but it is significant.

And that, we believe, will largely be over. And then the other thing is the productivity initiatives that -- the full year benefit that we'll see from those as we continue -- we drive those to completion. So I think those 3 buckets move us substantially above the Q4 run rate. The other….

Very helpful.

Say again?.

Sorry, one sort of point I do want to make a point of is, that we are seeing in Asia significantly better volumes in both polystyrene and ABS in Q4. And so that's giving us a signal that in -- things are going to return much to -- largely much to a better situation in 2023..

Got it. That's very helpful. And actually a good segue to my next question, I guess, around fourth quarter.

Could you maybe specify a little bit more what kind of trends you saw in terms of order patterns in September, October, and November and what that kind of cadence was? And then as we think about the $20 million to $70 million range, what do you need to see, it sounds like -- for instance, Frank you just noted with ABS, what do you need to see to get to the higher end of that $70 million versus maybe what's embedded in the $20 million type outcome?.

Angel, it's Dave. I'll address that. I think, look, what we're seeing in terms of order patterns is a continuation of the same in Europe. No -- clearly no restocking. I mean kind of bouncing off the bottom, I guess, I would describe it at the very low levels of demand in Europe that we saw really starting in early in the third quarter.

North America has largely, at least in our portfolio, been flat in -- for this the duration. We have not yet seen any destocking of significance in North America. That continues in the fourth quarter. And then as Frank mentioned, the Asia is higher.

Our Asia, polystyrene and ABS demand is higher in the fourth quarter, so it's a signal to us that the destocking is over. Feedstocks prices have clearly come down considerably. So that's how we'd see it. So all of that kind of gets us to the midpoint of the range.

I think what would get us in the higher range, I mean, clearly, some better demand than what I just outlined. Our feedstocks assets are idled. So I don't think -- I think that number is somewhat delist in the guidance. I think -- Angel, I want to go back to maybe a question.

I think it's probably a good point in the call to go back to a question that Frank raised earlier about the trough level of EBITDA. I'm sure it's on people's mind. I think we would see -- and this is disconnected from my comments earlier on cash. I mean this is just a fact.

I mean, in the current environment, where demand is, where natural gas is, I think we see trough EBITDA for the company of $350 million to $400 million.

And again, for the reasons that Frank just pointed out in your earlier question is, Angel, I mean, that's a higher number than obviously run rate in the third and fourth quarters for the reasons that Frank gave..

Your next question will come from the line of Hassan Ahmed with Alembic Global Advisors..

Question was very helpful in your slides that you broke out volumes by regions. And I was quite intrigued by the sort of steep volume declines in Asia, I guess, not surprising with the COVID lockdowns and the like, and relatively flat year-on-year volumes in North America. Now I mean I'm not looking for quantitative guidance.

But just qualitatively, obviously, the Asian lockdowns are not going to last forever, right? And you're already talking about seeing some sort of volume green shoots out in Asia.

Now the flip side of that is that you guys pointed out that there was no destocking as yet in North America and people are already talking about sort of weakening housing market and the like.

So as you look at this volume, so these volume crosscurrents into 2023, what are broadly your expectations there?.

We would see that 2023, at this point, is largely consistent with what we're seeing in the second half of this year. And there's some decline in the North American market to annualize the growing weakness in building construction announced.

So I guess that's how we go into our planning cycle looking at next year is sort of a continuation of the underlying demand ex destocking in Europe and Asia, and some weakening in North America driven by building and construction and housing..

And just as a follow-up, I know you've obviously announced a variety of sort of restructuring sort of assets and the like. I mean the EM segment margins at 3% this quarter, I mean, I was a bit surprised by that because I would have imagined the business would have been a little more resilient.

So now with the restructurings that you guys are doing -- I mean how -- if -- obviously, we're destocking behind us mostly, how should we think about if current sort of market conditions continued through 2023 with destocking behind us and the like, where would you sort of tag these EM segment margins to be in an otherwise sort of relatively recessionary environment in '23?.

Yes. I would put the margins for that business in the low teen level for next year..

Our next question will come from [indiscernible]..

I just want to add one thing, if you don't mind. I think the margins you're quoting there -- there was an element of the onetime charges that were in Engineered Materials as well, Hassan, so I think those numbers are somewhat deflated by that..

Our next question will come from the line of Eric Petrie with Citi..

What's your view on auto build into 2023 compared to this year and the impact on Engineered Materials as well as Base Plastics?.

So into 2023, we would see auto -- so I think our underlying assumption -- well, actually, I'd have to come back to with -- I don't know exactly what number we've landed on for auto builds. Yes, we'd have to come back to you on that number. Obviously, we've got a very precise assumption as it relates to Dave, you....

Yes. I think, Eric, looking at it just standing here today, our assumption is the auto outlook is up low single digits in 2023 versus '22, and that's what we're kind of building our plant based on that assumption..

Okay.

And then secondly, just on styrene, how long can you keep those assets idled? Are you planning to do that through winter and restarting in second quarter? And then on your energy efficiency project, how fast can you come into the FID and implementation of that?.

Yes. So the -- so with styrene, the assets, as long as we can see significant availability on the spot market to meet our downstream needs at a cost that's advantaged versus production, we would continue to leave the idles asset or the assets idle.

So I would say, though, that we're seeing the conditions improved significantly from where they were in Q3. So again, it's -- it all depends on the availability on the spot market to get advantaged pricing we would continue to remain idle.

And then the - the timing to deliver the energy efficiency programs, some of those will be in effect by the end of 2023 and others would take place or we begin to see the benefit in early 2024..

Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect..