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Edited Transcript of TSE earnings conference call or presentation 5-Nov-19 3:00pm GMT

Q3 2019 Trinseo SA Earnings Call

Berwyn Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Trinseo SA earnings conference call or presentation Tuesday, November 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andy Myers;Finance Director, Corporate FP&A and Investor Relations

* David P. Stasse

Trinseo S.A. - Executive VP & CFO

* Frank A. Bozich

Trinseo S.A. - President, CEO & Director

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Conference Call Participants

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* Angel Octavio Castillo Malpica

Morgan Stanley, Research Division - Research Associate

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* Dylan Scott Carter Campbell

Goldman Sachs Group Inc., Research Division - Research Analyst

* Eric B Petrie

Citigroup Inc, Research Division - Senior Associate

* Frank Joseph Mitsch

Fermium Research, LLC - Senior MD

* Hassan Ijaz Ahmed

Alembic Global Advisors - Partner & Head of Research

* Michael James Leithead

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Trinseo Third Quarter 2019 Financial Results Conference Call. We welcome the Trinseo management team Frank Bozich, President and CEO; and 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 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 Andy Myers.

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Andy Myers;Finance Director, Corporate FP&A and Investor Relations, [2]

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Thank you, Amy, 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 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, 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. A 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. The replay will be available until November 4, 2020.

Now I would like to turn the call over to Frank Bozich.

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [3]

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Thanks, Andy, and welcome to Trinseo's Third Quarter 2019 Financial Results Conference Call. I'd like to start by discussing some high-priority initiatives. First, in an effort to increase organizational focus and efficiency, we announced changes to our executive leadership team at the beginning of October.

The new organizational design, which is built on a global functional structure, will enable Trinseo to increase organizational effectiveness through business process optimization. This organizational shift is aligned with our business excellence program and the pillars that support it, which will enable greater efficiency across the company. These pillars are commercial, operational, supply chain and functional excellence.

This structure will have several benefits to Trinseo. First, it will enable greater commercial focus on our faster growth applications, for example, Adhesives & Construction and Latex Binders and Consumer Electronics and Performance Plastics. We had double-digit year-over-year volume growth in each of these in the third quarter.

Second, the transition to this new structure and the resultant efficiency gains will be a major contributor to the $20 million to $30 million of annual cost savings that we have identified. In addition to lower costs, this new leadership structure will serve us well to effectively implement the many initiatives and projects that are currently underway.

For example, our project to transition administrative services such as IT, purchasing and supply chain from the Dow Chemical company is on track and is scheduled for completion in the first quarter of next year.

This important step to bring these functions fully in house, including the control of our IT capabilities and systems will enable greater control of our processes and be a critical enabler for future business process optimization. Some examples of areas where we will realize ongoing benefits are, in purchasing through our vendor consolidation and increased purchasing and leverage, in supply chain through optimization of our logistics providers and in operations through a more effective scheduling of our assets.

Another project that we previously discussed is the strategic evaluation of options for our polycarbonate facility in Stade, Germany. Our primary goal of this evaluation was to ensure that we have a reliable and cost-effective supply of high-quality polycarbonate for our higher margin compounding businesses, which consumes approximately 40% of our polycarbonate production.

We explored numerous options to achieve this goal and concluded that the best option is to remain in operation at this site and to exploit the significant structural and raw material cost savings that our team has identified. These savings will be a significant contributor to the $20 million to $30 million of savings that we have identified and will result in a more sustainable economic future for the facility. This will also better support our growing sales to the higher-margin medical and consumer electronics applications.

Now I'd like to talk about our recent participation in the K Show in Germany, the largest global fair for plastics and rubber industry, which takes place every 3 years. During the K Show, our team at Trinseo had the opportunity to address several projects that respond to our customer's demand for sustainable and recycled products that will contribute to putting an end to plastics waste.

As we mentioned on the last quarter's call, Trinseo, along with several of other materials companies, has formed Styrenics Circular Solutions or SCS. This consortium is focused on creating infinitely recyclable plastics in highly efficient and sustainable facilities. What makes this initiative exciting is that polystyrene has a unique potential for closed-loop recycling with 2 fewer steps than recycling other polymers.

At the K Show, we outlined Trinseo's plan to change your product offering to be comprised of 30% recycled content to our customers for polystyrene packaging in Europe by 2025. We also outlined how through the SCS collaboration, we will build a first of its kind chemical recycling plant for polystyrene in Europe to contribute to our 2025 goal.

Our target is to make the facility capable of processing up to 50 tons per day of post-consumer polystyrene feedstock. This will make a significant contribution toward achieving the European Commission's targets for recycling rates.

Lastly, Trinseo is working to incorporate post-consumer recycled content in our products for consumer electronics and medical and therefore, keeping materials in the value chain for longer periods of time.

In addition, Trinseo was proud to be part of 2 key sustainability initiatives. The first is Circular Plastics Alliance, which has pledged to undertake in the across the plastics value chain to use 10 million tons of recycled plastic in its new products by 2025. And the second is Operation Clean Sweep, where Trinseo just renewed its pledge to drive towards 0 pellet loss as part of our commitment to keep plastic pellets out of the environment.

What was clear to me from the various discussions we had with our customers and our business partners at the K Show is that there was a great opportunity for Trinseo to solve some of our customer's sustainability challenges. Also, it is clear that Trinseo was providing needed leadership in the areas of depolymerization and chemical recycling of plastic waste.

Before I provide my third quarter comments, let me give you a brief update on the Request for Information we received from the European Commission relating to styrene monomer commercial activity in Europe. Recall that we received this request in the form of a letter from the European Commission in June of 2018.

Last week, we received a supplemental request for information that was limited to historical employment, entity, and organizational structures and certain financial, styrene purchasing, and styrene market information. We're in the process of responding to this supplemental request and we continue to fully cooperate with European Commission on this matter.

Now I want to take a few minutes to review the financials from the third quarter and what we observed across our markets. During the third quarter, we saw continuation of the macroeconomic conditions we had seen over the prior 4 quarters. This lower demand environment, in combination with a low level of styrene outages, caused styrene margins to decline in Q3 in comparison to those from the first half of the year.

In fact, this year was on track to have the lowest level of styrene outages since we began tracking them back in 2012 and we've been a disproportionate share of these outages in 2019. Therefore, we have updated our full year guidance to reflect this.

Despite these economic uncertainties, there have been some bright spots. Styrene margins in Europe have increased 3 consecutive months from the year-to-date low point in August, with November margin over raw materials increasing to its highest levels since May.

In China, the Caixin China manufacturing PMI in October was 51.7, which is the highest reading in over 2.5 years and represents the fourth straight month with an increase. Specific to the markets we serve in China, we are encouraged to see the implementation of an additional Chinese auto stimulus.

2 of the most populated cities in China decided to raise licensed plate quotas from June 19 until December 2020. This has led to a substantial increase in new license plate registrations in these cities during the third quarter and we're hopeful that government initiatives like this will stimulate sales growth in the automotive market.

Appliance production in China, which is a large market for our polystyrene and ABS, saw production growth of both refrigerators and air conditioners in the third quarter versus prior year. In the U.S. light truck sales were the highest in the third quarter of any quarter this year and were 5% above prior year. 70% of our automotive volumes in the U.S. are into this market segment.

Since I became CEO in March, I've spoken about the importance of business excellence as a key to success, and I outlined some of the anticipated benefits we expect to get in the future, but it won't stop there. These ongoing initiatives are even more vital during challenging economic times like these and we are confident in our ability to drive positive results as we move forward.

We've seen business excellence success in polystyrene as it generated strong results in the third quarter, a period that's been seasonally weaker than in prior years. We've also seen year-to-date adjusted EBITDA in polystyrene that is 75% above prior year. These results were due in large part to the business excellence initiatives put in place with an emphasis on strategic pricing and customer mix.

We've seen good year-over-year growth in several of our higher margins downstream markets, adhesives, construction, and consumer electronics. In addition, year-to-date fixed cost spending, excluding onetime items across the company, was below prior year as productivity initiatives have more than offset inflation.

While we've recognized that the rate of economic recovery is largely outside of our control, we acknowledged the responsibility we have in providing value to our shareholders. Part of that value was through projects and initiatives I mentioned earlier as well as through the continued return of cash to our shareholders.

In late August, we were authorized by our Board to repurchase up 3.3 million shares of our stock. In the third quarter, we purchased approximately 1.1 million shares, which combined with our quarterly dividend, returned $56 million to our shareholders during the quarter. Year-to-date, we've repurchased about 6% of our outstanding shares and returned almost $150 million to our shareholders through share repurchases and dividends.

Moving to the full year expectations. While we're seeing signs of market improvements so far in the fourth quarter, we're experiencing similar operating conditions to the third quarter. In addition, given the declining raw material environment, we expect an unfavorable net timing impact of about $5 million in the fourth quarter, but similar quarter-over-quarter results excluding that timing.

For the full year, we expect net income of $105 million to $112 million and adjusted EBITDA of $365 million to $375 million. This outlook assumes a minimal impact from net timing for the full year.

2019 has been a year of strong cash generation and we expect to finish the year with around $320 million of cash from operations, which we expect to result in $200 million of free cash flow.

Looking ahead to 2020, we plan on providing more detail on our fourth quarter call in February. However, regardless of the economic backdrop that develops for 2020, we are determined to improve our business results via business excellence as well as the successful execution of our growth initiatives.

Through the efforts I've highlighted on this call, I believe we will be better positioned to adapt to whatever economic environment we experience in the future. This will enable us to continue to generate cash and deliver value to our shareholders.

Now operator, please open the phone line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of David Begleiter of Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [2]

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Frank, given the recent strength in styrene margins, what are your expectations for 2020? I know there's some more capacity coming on line in China. You have seen a good rebound here in the last, as you said, 3 months in styrene.

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [3]

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Right. So we see that in 2020 there's going to be new capacity coming on in China in the first half of the year that will equal about 20,000 metric tons and an increase of 6%. That represents about 6% of global capacity. Now against that, we see demand growth growing at about 2%.

Now the one thing I would point out though. I think overall we can expect operating – the effective operating rates in 2020 to be basically the same or better than they were in 2019 and the reason I say that is 2019 was historically low in terms of the outage level that we experienced with less than 7% of the industry capacity in outage. So that was the lowest level that we've seen since 2012. And normally it's been 10% to 12% since 2015.

So there's a real potential for the effective operating rates to improve in 2020, despite the new capacity coming into the market. What it really hinges on is a return to normal operating or outage rates and what happens also to the non-integrated producers in China in the face of lower cost, bigger or effective capacity coming online. So our outlook is that growth plus the return to the normal operating rates is basically going to equal the new capacity. And then the upside for us is what happens to the non-integrated producers.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [4]

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Very good. And just lastly on rubber, Frank. The business has not performed vis-à-vis expectations. What do you think is the more normalized earnings power of this segment over the next few years?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [5]

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So we like the opportunities that we have in rubber, especially because we're targeting through our product line high-performance tires, which is where our SSBR technology goes. And I -- let me give you a little bit of a background on the performance this year and what's driving that.

And while our underlying performance in Q3 was about $12 million of EBITDA, and the $7 million that we've shown was understated because we had $5 million of bill draw impact and also $2 million of timing impact.

Now overall, year-to-date, we've actually held our SSBR margins relatively stable to prior year or flat to prior year. But in Q3, we actually saw 3% increase in our SSBR volume. So when you look at the future for our business, it's all driven by growth in high-performance tires and how we qualify our new generations of SSBR technology.

What we had a drag from is basically E-SBR, which is more of a commoditized or a standard tire rubber that is in a lower -- in depressed economic conditions standard tires, replacement tires don't grow as fast or they don't have sustainability like high-performance tires. So, again, I think in this environment, our results were driven by the decline in standard tires, but our outlook is pretty -- we like where we are given our position in high-performance tires with SSBR.

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Operator [6]

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

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [7]

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Frank, you mentioned that 2019, we're seeing a lower level of styrene monomer outages then it's typically is the case. So I was wondering if you might be able to put some metrics around that in terms of percent that out this year relative to other years and what you would anticipate would be kind of a normal level of styrene outages.

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [8]

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So this year we had less than – the industry experienced less than 7% of capacity in outage both planned and unplanned. But the unplanned rate was particularly low. And by -- typically we would have seen, for example, double-digit total industry capacity outages. And I'm looking at the numbers now, going back to 2015, they were just under 13% industry capacity in outage. In 2016, it was just under 11% of the industry capacity in outage. So on average over the past half decade it's been above 10%. So it's -- this year was an anomaly and it was the lowest year since 2012.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [9]

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I mean obviously, it's a difficult to forecast unplanned outages, but a reversion to the mean suggest some positive looking at 2020. And just to kind of follow up, you mentioned the share purchase reauthorization. You obviously ticked up the level of buybacks in the third quarter from the second quarter. What kind of level would you anticipate since you are buying back kind of on a quarter or annual basis 4Q and beyond?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [10]

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Yes. Frank, we really couldn't forecast a precise number. And let me go back to authorization that we put in place back in August. Basically with -- our share price that time was approximately $30. We were in the $30 range and so as the Board got together and we made a determination to put in place the program that we described. And we had an acquisition strategy that was basically looking at various purchasing levels at different pricing and we would do that same thing. And so I can't really predict how we would do that going forward. But we would take a balanced capital deployment approach and continue to return cash to our shareholders through that.

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Operator [11]

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

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [12]

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Frank, wanted to get a sense of where you see inventory levels right now for styrene in particular. I mean it seem to me that particularly out in Asia, inventories had gotten quite lean. Is that fair? Are you seeing sort of any tick ups, tick downs in inventory and where are they relative to normal levels?

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [13]

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It's Dave. I'll answer that. Inventory levels we see now in the mid-60s, so 65 kts in China and that compares to an historical average about 100 kts. Now what that means for us, obviously, we haven't seen, as Frank mentioned, those level of outages. That would lead to periods of increased margins as we see in the last couple of years, and I think that's indicative of the demand environment.

But -- so the low level of outages, I think, what it practically means for us is that, if there were to be -- as we get into the first quarter, particularly in the heavier outage season -- heavier planned outage season. If there are some unplanned outages on top of that I think the market is poised to see an increase in margins with this leaner level of inventories.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [14]

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And as a follow-up, on the polycarbonate business side, obviously, you guys have decided after identifying these cost-cutting opportunities to hold on to that. I mean as you guys were doing that, did you entertain a sale process? Was there any interest -- any buyer interest in that? And beyond the polycarbonate business, what are your thoughts about further portfolio management, be it shuttering assets, be it potential sale of other assets?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [15]

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So let me first address the strategic review that we went through with Stade. And I think it's important to remember that our focus for Stade is to provide the best long term economics for the polycarbonate supply to our downstream business -- compounding business that's possible and that's about 40% of the capacity of that asset.

So when we started that review, they were all – we considered all options to achieve that goal and to improve the long term economics for the site. And at the end of the day, after reviewing the options, and we had developed, I guess, opportunities to shift to other areas.

What was clear is that in the long term our best economics to support a downstream business was through the continued operation of the site, taking advantage of the significant operating and raw material savings opportunities that the team developed. So, again, all options were on the table, but this is the best option as to keep running it and to take advantage of the opportunities to improve it.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [16]

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And in terms of broader portfolio management beyond polycarbonate?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [17]

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We will always look at our assets across our portfolio and look for opportunities to improve those and/or optimize the asset -- our asset portfolio and that's going to be an ongoing effort as part of our business excellence initiative and we will continue to do that.

And when we do enter into those reviews, and most of our assets being in Europe, we will have to begin that process very transparently by communicating with our works' councils for statutory reasons. So, again, we will continue to do that and we will be transparent about it.

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Operator [18]

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Your next question comes from the line of Mike Leithead of Barclays.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [19]

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I want to first circle back on polycarbonate. I believe one of your leading European competitors in that business has taken the approach to aggressively prioritize volume over price. So I guess, can you just talk through the market dynamics you're seeing in that business and how, if at all, that factors into your calculus in competing in some of these polycarbonate application?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [20]

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Sure. So we've listened to our competitor's comments regarding the market and frankly, we agreed with their assessment of the capacity additions and the supply/demand dynamics that are occurring in the industry. And, again, when we look at -- when we think about our business, we're thinking about, how does our asset support that high volume, higher growth applications in downstream compounding.

And it's about how do we best serve that and best position ourselves to grow in that area going forward. And our merchant sales, I would say in this area, provide an overall positive earnings contribution, but they're not the primary goal for us and why we operate that site that give us critical mass and economies of scale for our downstream -- for the internal supply. So we see we have a sustainable position, but relatively small, minor merchant position. And our focus is to operate that site with the best economics possible.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [21]

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And then just to follow up on synthetic rubber. Obviously, volumes have been hit by the weaker auto demand. But maybe could you parse apart the mix effect you're seeing in SSBR demand versus E-SBR demand? And how unit margins for this business have trended over this choppy demand environment?

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [22]

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Again, it's Dave. I can address that. I think Frank outlined it pretty well. I mean if you look at the composition of our manufacturing capacity in synthetic rubber, it's roughly evenly split between E-SBR and SSBR. E-SBR being the more commoditized, which goes into standard tires. And a lot of that, frankly, ends up in Asia in the standard tire market and SSBR, which is targeted towards the high-performance tire market.

Our volumes, as Frank mentioned, they're up about 3% on the SSBR side where we're focused on growing and developing that market, but they're down double digits on the E-SBR side. So on a percentage of year-over-year basis our volumes in E-SBR are down double digit. And, frankly, there's been a big margin hit on that side of the business.

Also, there is -- if you look on a global basis, there is excess capacity in E-SBR, so that's subject to margin fluctuation and weak demand environments. Where conversely on SSBR, as you know, we have a largely contracted business with the large tire producers and we've held margins for several years pretty consistently on SSBR.

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Operator [23]

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

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [24]

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Question on your cost savings target of $20 million to $30 million, how do you see the run rate going forward? Do you see all that being captured next year? And how would you split it by business segment?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [25]

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That's a great question. On the last piece, it's too early for us to apportion that to a business unit. I guess what -- maybe let me give you a context on the -- on that number. First, I would tell you we have a much bigger pipeline of opportunities than the $20 million to $30 million. And the sources of these are efficiency gains from the transition to a global functional organization, which is more streamlines us. And then there's operating improvements that we normally have at the site and opportunities there and then also raw material savings.

So right now we're in the process of resourcing these various initiatives and then developing the sequencing. But I would tell you the vast majority of that will be -- will hit our P&L in 2020. But the exact timing and phasing of it, we won't know for a couple more months until we resource that and fully implement the program. But, again, it's much bigger than that number going forward in the future.

And I guess, one add-on I would give it to you is that this – the program that we have to become systems independent from Dow Chemical is a really important enabler for future process efficiency for us in the future. And that'll be a big sort of opportunities as we look at how we redesign our business processes in supply chain and our manufacturing operations, et cetera. So, I'm confident that we will have a continued pipeline of opportunity bigger than this. But 2020, the majority of that we should see realize hitting the P&L.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [26]

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As for follow-up, you mentioned European styrene margins improving. Could you give us comments on the Asian market? I think prices have declined to roughly $850 down from a $1,000 in September, so any comments there? And how much volume you might be buying based on those economics of purchasing, would be helpful.

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [27]

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It's Dave. I think you're right. We have seen a decline in styrene margins in Asia, but our exposure there is much smaller. So I'll give you the numbers just to refresh everybody, so -- to level set. We have about 700 kts of manufacturing capacity for styrene in Europe. Now we've produced a little bit less than that this year obviously because we've had a couple of outages.

But, generally speaking, our exposure to styrene margin in Europe is 700 Kts. We're purchasing about a 100 kts in Asia. We've got a relatively small -- and we're -- we've got a relatively small exposure there and we're purchasing that on cost economics in Asia. And then we've got 500 Kts of exposure through our 50% ownership interest in Americas Styrenics. So in total, it's about 1,300 kts of exposure to styrene margin with Asia being by far the smallest.

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Operator [28]

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Your next question comes from the line of Vincent Andrews of Morgan Stanley.

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Angel Octavio Castillo Malpica, Morgan Stanley, Research Division - Research Associate [29]

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This is Angel Castillo on for Vincent. Just a quick question on your 4Q expectations. You noted a similar market, I guess as 3Q. I'm just curious as to why you wouldn't, I guess, include a little bit more of seasonality and maybe what are the factors that make you feel comfortable with that.

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [30]

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Yes. So if I understand the question, we basically are seeing very similar operating rates and business environments in Q4 so far as what we've seen in Q3. The performance, net of timing, should be basically the same. Now, we are seeing optimism and upturns in the various markets that we're serving and in our downstream markets. But it will take time, we believe for that to flow through the supply chain to us. And so we'll have a better read on that as we get into later Q4 and early Q1. Does that answer the question?

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Angel Octavio Castillo Malpica, Morgan Stanley, Research Division - Research Associate [31]

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It does. Thank you. And then just kind of following up on that, I guess, and in your comments in raw materials. Just curious benzene moved out quite a bit throughout the year. I know that there's a lag effect and obviously, you have the net timing impact in the fourth quarter. As we head into 1Q and 2Q, just thoughts on kind of the raw material impact and what should we expect as we head into 2020 from that?

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [32]

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Yes, it's Dave. I mean, I think it's a little too early for us to -- obviously, the -- what happens to benzene will be largely influenced by what happens to crude in Q1 and Q2, and as well as outages. So I think it's a little too early for us to pass judgment on where feedstock prices will be in Q1 and Q2.

One thing I do want to just point out to you though, Angel. You're right, there were a couple of cracker outages in Europe that affected benzene -- or caused benzene prices to rise probably August-September timeframe. So that -- and as we mentioned earlier, August was the trough styrene margin month for us in the year and it was largely caused by that impact in Europe. And that -- those outages have ended, which is largely contributed to the increase in styrene margins we've seen in the several months since then. So that was really the primary driver of the benzene price movement over the last 3 or 4 months.

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Operator [33]

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And your last question in queue today comes from the line of Bob Koort of Goldman Sachs.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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This is Dylan Campbell on for Bob. I noticed that polystyrene actually had pretty encouraging results growing EBITDA year-over-year in the third quarter. When we look at 2020, it gave a pretty interesting bridge and in terms of capacity and demand growth for styrene. I'm just curious how much of that styrene is going into polystyrene versus I guess other styrene derivatives?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [35]

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I'm going to get you a precise answer, but…

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [36]

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Yes. It's a little hard to parse it out that way, Dylan, because as you know, we manufacture styrene and we also purchase styrene. So -- I mean, it's somewhat fungible and in terms of which of that -- which of the manufactured versus purchased styrene goes into polystyrene versus latex or rubbers, is very hard for us to parse out.

What I would say and I think -- what I would say, which I think is important just for understanding the economics of our polystyrene business and how we account for -- how we account for polystyrene segment. We transfer styrene internally from our feedstocks business regardless of whether it's bought or sold. It's transferred internally at market. Okay?

So what we report as EBITDA in our polystyrene business -- and the same holds for latex and rubber and the other businesses. What we report as EBITDA in that business is the polystyrene margin over the market cost of styrene that effectively our polystyrene business is buying styrene at. So I want to make sure you understand that.

The -- and to get your specific question about, you're right, the results of -- the results of polystyrene had been -- the first 3 quarters a year we've been running at a $15 million or $16 million adjusted EBITDA run rate versus about a $12 million quarterly run rate for the past several years and the reason for that is commercial excellence activities. We've done a very good job on parsing out the market and segmentation and pricing activities in that market.

And -- but I would say going into 2020, Dylan is that, there were 2 fairly large polystyrene plants that have been shut down or that will be shut down in Europe over the next 2 or 3 months. One of them is being converted to produce ABS and the other is being shut down. And those combined are about 7% of European capacity. So that should -- we think that will provide us with some tailwind for 2020. And, again, polystyrene is largely a regional product. It doesn't ship globally. So that 7% reduction in Europe should be helpful going into next year.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [37]

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And then I noticed in the free cash flow build, you assume kind of minimal sources in uses of working capital. I think generally, or I guess, the last 2 years or so in the fourth quarter you've got a pretty decent source of working capital in the fourth quarter. What's kind of driving the difference in 2019?

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [38]

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Yes. I think we based that probably -- you're right, Dylan. We typically have seen -- we have seen a release as sales decline in December and we have release of working -- of receivables really there for us. I would say -- I guess, I would attribute to just the forecasting conservatism, Dylan. That's really all I would say about that.

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Operator [39]

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And ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.