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Edited Transcript of TSE earnings conference call or presentation 7-Feb-20 3:00pm GMT

Q4 2019 Trinseo SA Earnings Call

Berwyn Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Trinseo SA earnings conference call or presentation Friday, February 7, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Myers

Trinseo S.A. - Finance Director of Corporate FP&A and IR

* 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

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Matthew Robert Lovseth Blair

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research

* Patrick Duffy Fischer

Barclays Bank PLC, Research Division - Director & Senior Chemical 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 Fourth Quarter 2019 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 management -- 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 furnished on a Form 8-K filed with the Securities and Exchange Commission. (Operator Instructions)

I will now hand the call over to Andy Myers.

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Andrew Myers, Trinseo S.A. - Finance Director of Corporate FP&A and IR [2]

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Thank you, Julianne, 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, factors set forth in our annual report on Form 10-K under Item 1A, Risk Factors.

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.

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 Fourth Quarter 2019 Financial Results Conference Call. As I look back at my first year with Trinseo, I'd like to start today's call by sharing some of my thoughts and observations. First, I'm very optimistic about the future of Trinseo for several reasons. First and most importantly, we have a great culture. I believe our cultural strength shows up in the leadership that we've demonstrated in safety and sustainability.

I'll share more on this later in the call, but it's one of the reasons that we were named as one of the 100 Most Responsible Companies in Newsweek's ranking of top U.S. public companies. Another reason for my optimism is our ability to generate positive cash flow. Even in relatively weak market conditions, like we saw in Q4, we've been able to generate significant positive cash flow, in spite of large onetime capital expenditures.

Another reason is our ability to identify and deliver on productivity initiatives. In 2019, for example, we delivered on business excellence opportunities that more than offset fixed cost inflation, and our opportunity landscape will grow in the future.

Lastly, we have some very exciting organic growth applications that performed very well in 2019 and will continue to provide faster growth and higher-margin opportunities for us in the future.

Now I'd like to discuss some of our specific achievements from 2019. First and foremost, I want to highlight what an exemplary year it was in terms of safety. We are very proud that Trinseo's overall safety rating in 2019 was one of our best ever, with an OSHA recordable rate of 0.11, which puts us at the top decile of the chemical industry. Of course, when it comes to safety, our goal is always 0 incidents. So at the end of the year, we've recognized those locations with 0 injuries, 0 spills and 0 process safety incidents for the calendar year with our Triple Zero Award. I'm happy to say that 24 of our manufacturing and R&D sites, which represents more than half of our locations, achieved Triple Zero.

In the area of sustainability, we announced in December that we are entering into a joint development agreement with 2 leading packaging companies to develop high-quality polystyrene containing recycled material that will be tested in a wide range of packaging applications. These collaborations will help demonstrate to the market that polystyrene is uniquely suited to circularity and offers the potential for closed-loop recycling.

Circular polystyrene is particularly advantaged as it diverts waste material away from landfills and can be produced with lower energy and a lower greenhouse gas footprint than traditional resins.

We're also excited to launch our PULSE eco series of recycled-containing resins for the automotive market next month. These grades of PC/ABS contain up to 50% recycled content and are specifically tailored for automotive interior applications. This series will deliver the same quality and consistency our auto customers are asking for, but at 40% lower energy consumption than virgin resins.

I'm also pleased to say that the nonautomotive grades of post-consumer waste containing resins grew substantially in 2019, with an 88% year-over-year volume growth.

Finally, CDP, or formerly the Carbon Disclosure Program (sic) [Carbon Disclosure Project], is the premier emissions reporting platform and rating provider related to climate change. They recently increased our rating from B- to B for 2019, reflecting our efforts on greenhouse gas reduction and climate change initiatives.

Our continued work in progress in corporate social responsibility was one of the reasons that Newsweek magazine named Trinseo in its inaugural top 100 of America's Most Responsible Companies. This high level of performance in safety and sustainability is what I and our executive team have come to expect from our company, and we should all look forward to further progress in these areas in the future.

One of the first things I implemented after joining the company was a business excellence process, which is a framework for optimizing business processes and driving productivity and efficiency improvements. As part of this, we established 4 Business Excellence committees, which focus on commercial, supply chain, operational and functional excellence.

The Business Excellence process is already producing positive results. For example, in 2019, Polystyrene delivered its highest EBITDA since 2013, due largely to an increased commercial focus on strategic pricing and customer segmentation.

On the cost side, we were able to deliver cost reductions equal to 150% of our total company fixed cost inflation.

In supply chain, we reduced overall inventory levels on a volume basis by 5% in 2019, which contributed to another strong year of cash generation. Over the last 2 years, we've generated $689 million of cash from operations and $457 million of free cash flow and returned $394 million to shareholders via dividends and share repurchases.

Even in the fourth quarter of 2019, with an adjusted EBITDA of $59 million, we generated positive free cash flow despite spending $34 million on our plant automation upgrades and system separation projects, both of which we view as nonrecurring. This ability to generate cash, even in a generally weak macroeconomic environment, speaks to the strength of our portfolio and the health of our balance sheet.

In the fourth quarter of 2019, we announced changes to our executive leadership team, which is now built on a global functional structure. This new structure will increase organizational effectiveness through business process optimization. This effort will accelerate in the future as we achieve systems independence from Dow in the first half of the year. The control of our systems and business processes will be a rich area of opportunity for productivity in the future.

This new structure will also enable the organization to better focus its efforts and investments on product offerings, serving 3 application areas, which we believe are less cyclical and offer higher growth and higher margins. The first is coatings, adhesives, sealants and elastomers, or CASE, within the Latex Binders segments. These applications, which we serve with our styrene butadiene and styrene acrylic technologies, are expected to grow at GDP plus rates over the next 5 years. Our sales volume into these applications increased 14% in 2019 and had margins of more than 2x the segment average.

The second group of applications, our consumer electronics, medical and thermoplastic elastomers, or TPEs, within Performance Plastics segment, which we're calling engineered materials applications. The specialty compounds we sell into these applications, which comprise approximately 17% of the Performance Plastics segment revenue, have margins of more than 2x the Performance Plastics segment average.

As I mentioned earlier, our post-consumer waste containing resins being offered into these applications are particularly exciting as they're growing rapidly and offer much higher margins than our standard grades.

The third is high-performance tires within Synthetic Rubber segment since we serve -- which we serve with SSBR produced in our Schkopau, Germany site. High-performance tire demand has grown 3x the growth rate of standard tires over the last 5 years, and we believe the electrification of vehicles and fuel efficiency standards will accelerate this trend in the future. SSBR comprise 65% of total Synthetic Rubber segment revenue in 2019, and its margins are typically 2 to 3x those of ESBR.

Now I'd like to briefly discuss the fourth quarter and describe for you the market dynamics we're currently in and how we see them impacting our full year 2020 results. Our fourth quarter results are reflective of similar business conditions to what we experienced in Q3, but with year-end destocking. Customer destocking in Polystyrene was more pronounced than usual due to rapidly falling feedstock prices. In our automotive markets, we saw customers shutting down production at the end of the year earlier than usual. This contributed to lower styrene margins as well.

Before I move on to the 2020 outlook, I'd like to take a moment to discuss the coronavirus and how we see it impacting our business in Q1. First and foremost, I'm pleased to say that our employees are safe, and we've had no infections among our workforce. In addition, our operations in Greater China have had no interruptions, and the supply of our raw materials have not been affected. However, based on input from our customers, we are anticipating lower first quarter demand from the automotive, consumer electronics, and carpet markets due to the postponed start-up of their operations following the Chinese New Year. We estimate the first quarter impact to be $5 million to $10 million. So please note this is a preliminary estimate for Q1 only and, to be sure, this is a dynamic situation that we will continue to monitor closely.

Turning into 2020. We are guiding to a net income range of $95 million to $112 million, and adjusted EBITDA of $325 million to $350 million. These ranges are based on an assumption of similar economic conditions to what we observed in the second half of 2019 and include the first quarter impact from the coronavirus that I mentioned.

So far this year, we are seeing positive signals in several segments outside of China. This includes restocking in Polystyrene and better order patterns in Synthetic Rubber. While European styrene margins declined through the second half of last year, they've been essentially flat since December, which we believe is an economic response to the margin levels that have dropped to near cash breakeven for most on-purpose styrene producers.

For example, we estimate that 13% of global styrene production has voluntarily been taken off-line in the last 2 months due to these conditions. In addition, we're already aware that one large styrene project in China has been delayed indefinitely. We believe that styrene margins have reached a fundamental threshold where further decline is not sustainable over the long run. In addition, we are seeing similar dynamics in polycarbonate with signs that prices are increasing in many applications.

In the first half of this year, we'll complete the transition of IT and other administrative services from the Dow Chemical Company, a project that we started about 2 years ago. The first year cost of these services will be higher than they were last year, but this will decrease over time through productivity and efficiency efforts.

We expect to largely offset lower styrene margins and higher administrative costs with cost savings from our restructuring program and Business Excellence initiatives as well as growth in SSBR, Latex Binders to CASE applications as well as specialty compounds to engineered materials applications.

So to close, we're entering 2020 with a full year outlook, reflecting similar conditions to what we experienced in the second half of 2019, but with some added uncertainty due to the coronavirus outbreak. However, January demand was stronger than Q4 levels across all of our segments, which we view as a positive sign for improving economic conditions in our markets. We'll continue to monitor the situation in China as it develops and adjust as appropriate. As always, we're taking appropriate measures to improve our cost structure, reduce working capital and allocate resources toward resilient, faster-growing markets that are complementary to our capabilities.

Before we turn to Q&A, I'd like to share that yesterday evening, we received a letter from M&G Investment Management, our largest shareholder. They informed us they intend to file a 13D with the SEC and they intend to engage the company in discussions on various topics, but with a focus on governance. We look forward to these discussions and are always willing to consider the views of our shareholders.

Now Julianne, can you open the line for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from David Begleiter from 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, just on the styrene capacity, is off-line right now. What's embedded in your expectations vis-à-vis -- relative to your guidance as to how this capacity comes back on stream, if it does, over the course of the year?

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

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David, what we believe is, at these levels, that the industry will moderate its output to sustain the margins or to operate at a level that is economically feasible. So we don't see them trying to chase volume or trying to place that capacity, rather we see the industry moderating. And we would also say that those operations that are at the right-hand side of the industry cost curve will likely be evaluating their future, and we could see some structural changes going forward.

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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 Frank, just on the coronavirus impact. At the low or high end, what's the expected duration of these plant shutdowns post the New Year holiday? Is it through the end of the month, end of the quarter, at the higher end of the range? Or any update would be appreciated.

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

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So what we've been told right now is -- and the information that we based the outlook that we've provided is that they extended the Chinese New Year holidays for a week. So they would be back online on February 10. So that's the information that we based that forecast on. And again, it's a dynamic situation, and we'll have to see.

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Operator [6]

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Your next question comes from Frank Mitsch from Fermium Research.

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

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Terrific. And just to follow up on that. So that's -- so your expectations on coronavirus are really more volume related, assuming things come back on February 10. Now since that's happened, I mean, we've had styrene margins -- I'm sorry, styrene monomer pricing really plunge in Asia. Is any of that negativity also embedded in kind of that $5 million to $10 million numbers and expectation that you were going to see a reversal there?

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

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Yes, the current margin levels are reflected in our outlook.

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

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All right, terrific. And if I could just follow up on Slide 12. If I'm looking at your adjusted EBITDA for 2020 and then I look at some of the calls on cash, I mean, it almost implies that your free cash flow might be $50 million or lower. How are you thinking about free cash flow in 2020?

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [10]

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Frank, this is Dave. I think I'll try and take a stab at that one and Frank can add, if needed. I think the point I would point out is 2020 is somewhat of an unusual year for cash generation for us for a couple of reasons. One is it's the second of 2. 2019 and 2020 are the peak spending years for our multiyear control room refresh project that Frank talked about earlier. Spending for that, which is in CapEx, is about $30 million in 2020 and that drops to $15 million in 2021, and it drops further after that. We also have $15 million of spend as we wrap up the transition from Dow services project in 2020. That will obviously go to 0 in 2021.

The other kind of broad category I'd point out for 2020 is turnarounds. We have about $30 million of spending that we'll do, and this is not in CapEx, it shows up in the cash flow statement, obviously, but $30 million on turnaround spending in 2020, which is about 3x our average. Our average is more like $10 million a year. And the reason for that is we have a turnaround that we typically do once every 8 to 10 years at a styrene plant in Terneuzen, which is a very large project, several months long, including replacing the catalyst. So all of that is -- that's $30 million. And then also, AmSty has a large turnaround that's with a -- actually replacing reactor. And that turnaround is on once every 30 years. So we AmSty's CapEx will be considerably higher in 2020 also. So kind of all of those things contribute to somewhat of an anomaly, I would say, for cash outflows in 2020.

The other thing I'd like to highlight, though, Frank, is you can see at the bridge we gave on Slide 12. One thing we didn't mention was working capital. In 2019, we had a big release of working capital. It was about $125 million, and a lot of that was just due to price declines and feedstocks through the course of the year. But we also reduced our inventories on a volume basis by 5% in 2019, and that's through our supply chain excellence process. We've got a similar target for -- in fact, even a larger target for 2020 for reducing inventories, and we've already identified $50 million to $75 million of incremental inventory reduction that we're going to be able to do in 2020. Again, it's not in these numbers.

Now I just want you to also just keep in mind, Frank, as you know, I mean, feedstock prices, changes in feedstock prices kind of overwash anything you're doing on the volume side of inventory. But if feedstock prices are flat, pretty stable through the course of the year, we would expect to have a working capital reduction in the year of $50 million to $75 million in 2020.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [11]

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If we have feedstocks flat, we're going to get a $50 million to $75 million benefit on working cap?

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [12]

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Correct.

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [13]

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That's the target.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [14]

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All right. Terrific.

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

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Maybe just to add one last point to that. Now if, clearly -- if raw material prices increase and feedstock prices increase, we would have a proportionate [reduction of our] drawn working capital, but that would come with economic improvements or business improvements that would drive that feedstock improvement. So we would see that as beneficial.

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Operator [16]

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Your next question comes from Laurence Alexander from Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [17]

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2 questions. First, can you give a feel for how you're thinking about the longer-term productivity opportunity after the full separation from Dow systems -- it's completed? And can you frame it in terms of the potential outlays you might do and the return hurdles you have for those productivity investments?

And then secondly, for the targeted growth areas, where do you see opportunities? How much can you accelerate penetration in those markets without pursuing M&A? And what would your M&A criteria be?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [18]

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Okay. So let me take the first question. When we look at the opportunity landscape for our productivity going forward, we would see it in the tens of millions of dollars range. And that would include both operational benefits that we would get in supply chain through better control of our order-to-cash and purchase-to-pay processes as well as actually functional spending reductions that would come, for example, in IT. So to capture those, we will have to spend some money and have to scope out some IT systems improvements to migrate away from the systems that we're -- we will separate with from Dow, but those would have a very quick and strong payback. So we're excited about those opportunities. And like I said, they're in the tens of millions of dollars of range.

The -- as it relates to the -- can you repeat the second question, the organic growth opportunities? How much...

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [19]

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Right. So the growth opportunities that you highlighted, because they're all each smaller parts of different segments, how do you think about the levers to accelerate the growth of those? Is M&A a component? If you did do M&A, what the criteria might be? Just trying to get a feel for where -- what this could look like in 5 years.

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

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So let me just first characterize each of those, that group of 3 application areas. They are -- we find them attractive because they offer much higher margins, greater than GDP growth rates, and they tend to be more resilient and less cyclical than other markets. And so we think we have very good traction right now on organic growth opportunities, and we're funding those through increases and reallocation of our commercial and R&D resources. And so our position -- and we're well positioned in the market. And if we expand geographically our presence commercially and with technical resources, for example, we announced that we would put a prototyping line in Hsinchu in Thailand related to engineered materials, that will help grow those organic growth opportunities.

Now again, M&A is a tactic, is a tool that you use to support that. So if the right opportunities came along, we would consider those. But again, we would have to consider those against the opportunities, the market segment, et cetera. And I couldn't tell you right now what the specific hurdle rates we would put on those would be.

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Operator [21]

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Your next question comes from Bob Koort from Goldman Sachs.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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This is Dylan Campbell on for Bob. A quick question or follow-up on the coronavirus $5 million to $10 million impact. It sounds like you guys are baking in activity levels start to return following February 10. Should that last longer? What would be the kind of sensitivity to your EBITDA, let's say, every week or so that could be extended?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [23]

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Yes. I think that's really difficult to say because it depends on which customer segments it is and what part of the geography and that it's going to. Maybe stepping back, I'd like to characterize our business in China for you a bit. We produce and we take material -- raw materials from our suppliers who are generally in the northern coastal regions of China. And these areas have not yet been affected or -- and it's unknown whether they will be affected significantly by the coronavirus. If I characterize where we ship to in our customer locations, those customers are largely in the northern and eastern coastal region of China also. So we've gotten feedback that customers are coming back to work. They're asking -- and already plants are restarting. So again, very difficult and dynamic situation other than what we know today with specific feedback from customers to give you any more specifics on that. But I would say, in general, the signals we're getting is that the customer plants are restarting. Our plant continue to plan to restart on schedule or the revised schedule they've given us.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [24]

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Got it. That's helpful.

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [25]

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Dylan, I'd just add one other thing. The $5 million to $10 million estimate that we talked about, what that assumes is a phased return. In other words, not -- they don't return on February 10 at 100% demand, it's more of a phased approach.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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Got it. That's helpful. Then on free cash flow, it's kind of less than $50 million, notwithstanding that the working capital benefits for 2020 seems to undershoot last year's dividend payment. Could you talk a little bit about kind of what your capital deployment priorities are in 2020, considering lower free cash flow? And I guess talk a little bit about your ability to repurchase shares and whether you can do that at a similar pace in 2019.

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [27]

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Well, maybe I'll talk about our capital expenditure priorities first. The -- in -- given that we have significant onetime spending related to the DCS conversions and also our systems migration, that's a top priority. And so what we've -- and we've also made a priority, end-of-life in EHS (sic) [EH&S] capital, as always. And so where we've moderated our view is on growth capital and what projects that we would fund from a growth capital standpoint and also on productivity capital. And so we've prioritized those productivity capital-related projects that offer very quick returns. So that's how we would set the priority and that's how we get to the $100 million.

As it relates to our program going forward and returning value to shareholders, we're going to continue to take a balanced approach and use the tools as dividends and share repurchase to do that.

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Operator [28]

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Your next question comes from Hassan Ahmed from Alembic Global.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [29]

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Frank, that chart that you guys sort of shared with us about curtailments in styrene sort of production, very helpful. My question is about some of the new supply that's coming online in the near term, particularly in China, some of the sort of greenfield styrene supply that's coming online. What are you guys hearing about that? Should we expect some delays over there, keeping in mind, the way the economics are? And then for the out years, I mean, are you sort of hearing anything in terms of maybe even some of the out-year projects being canceled?

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

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So I'll answer the last question first. And so we have heard that one project is scheduled for 2024, and Shandong has been put on hold indefinitely. We would see that the newer projects are the projects that were already scheduled to come on stream in 2020 and 2021, that they will. And again, those are generally world-scale plants that have very favorable economics or much more favorable economics than certainly the Chinese nonintegrated producers. And I guess I'd refer back to our Slide 11, where you look at the industry cost curve. If you look at the right side of the industry cost curve, there's -- and we brought this up before. There is a significant portion of the industry in China with those nonintegrated producers that, in this environment, will be significantly disadvantaged. And again, I think -- we believe even the integrated producers in the middle of the cost curve will be evaluating their long-term viability and that given at these economics. So without increased demand at these levels, we would anticipate structural changes as it relates to the industry with capacity being rationalized. That would be the logical thing to expect.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [31]

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Understood. Very helpful. And as a follow-up, it just seems still many moving parts, still a bit vague, the sort of recently announced Chinese sort of plastic ban. But as sort of you look at that and as it pertains to Trinseo, I mean, what impact would you guys expect? And again, very cognizant of the fact that not too many details are available. But I mean how are you guys thinking about that?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [32]

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So in general, we see that as having a minor impact on our business. And we look at our Asian polystyrene -- Asians' polystyrene volume, only 10% to 15% of that goes into packaging applications, but only -- even a fraction of that go into the targeted single-use areas that the Chinese regulation is targeting, which is plastic bags, straws, hotel single-use items. So again, if you think about what our product mix and our end-use mix is, it's largely appliance, applications, refrigerators, white goods, et cetera. So we see that as having minimal impact on where we serve our markets. I guess maybe just stepping back and making a more general statement about it, there -- our belief is that even in the affected applications, it will take time for technically viable substitutes to emerge that would reduce the demand on those applications. And I've heard estimates of several years before technically viable substitutes emerge that would be widespread in the industry. So again, we see very little impact in our end uses and where it is impactful, it would take time.

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Operator [33]

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Your next question comes from Vincent Andrews from Morgan Stanley.

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Angel Octavio Castillo Malpica, Morgan Stanley, Research Division - Research Associate [34]

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This is Angel Castillo from Morgan Stanley. Just had a quick question, Frank. Just around the cost curve, you discussed the high end producers or the, I guess, high cost producers. Just curious as to how trade impacts the entire dynamic of who goes off-line in terms of where prices are at today? If China is a net importer, how does that kind of play, I guess, become a factor into all this dynamic?

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

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Well, I think everybody will be -- in a reduced demand environment, the industry will be looking at their landed costs or the landed revenue as they supply. And in general, we think they'll factor in those economics. And that's why the world-class plants that are being launched in China will be viable over the long term. And why we believe that the nonintegrateds in China will be particularly disadvantaged.

And I guess I'm going to add one other point that is interesting about the Chinese nonintegrated producers, they're sourcing ethylene and benzene from the market to operate. And in an uncertain environment, let's say, a prolonged or a declining fuel demand environment or a petrochemical demand environment in China, the availability and the cost of benzene and ethylene would likely go up and be less available. So we would see this could be a very, very challenging environment for those nonintegrated producers where availability of ethylene, because of low output, could curtail what they could bring to the market. So we're watching that very closely.

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Angel Octavio Castillo Malpica, Morgan Stanley, Research Division - Research Associate [36]

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That's very helpful. And then you noted some restocking in Polystyrene as well as just some better order patterns in Synthetic Rubber. I was wondering if you could give us a little bit more color on those dynamics that you're seeing in the first quarter and perhaps a little bit more color around the regions as well.

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [37]

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Yes. So as it relates to polystyrene destocking, what we saw was a more pronounced destocking in Q4 than normal year-end destocking simply because of the sharp drop in the feedstock prices. And the consumer is anticipating lower polystyrene prices coming out of that in the future. Now I want to remind you, in Europe, in 2020, 7% of European's -- Europe's polystyrene capacity is actually going to be rationalized. These are the announcements from Total and Ineos last year. So in anticipation of that, we took a value-over-volume approach in Q4, and we opted to hold up -- hold margins rather than try and place a lot of volume. And so as that demand drop occurred, anticipating there would be less supply early in 2020 and better fundamentals for us, so I'm happy to say that what we're seeing so far in Q1 is strong restocking with some good -- at good margins. So the tactic that we deployed there in our PS business was -- is paying off so far is what we see.

Sorry, so that was Polystyrene. You asked about -- was it tire?

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Angel Octavio Castillo Malpica, Morgan Stanley, Research Division - Research Associate [38]

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The Synthetic Rubbers as well. You mentioned order patterns.

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [39]

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Yes. So Synthetic Rubber, actually demand for SSBR has been very strong in Q1 -- or in January. It was very strong over Q4 run rate. So we're optimistic that the continued growth in performance tire and the replacement tire market in North America and Europe will continue to drive that.

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [40]

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Angel, this is Dave. I would just add. I mean, just generally speaking, if you look across the whole portfolio, I think it's safe to say what we see early in the quarter and January has better order patterns, higher demand than we saw on a Q4 run rate basis across all of our businesses, notwithstanding the coronavirus in China. So I think that generally holds true across the whole portfolio. But again, it's very early, obviously.

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Operator [41]

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Your next question comes from Eric Petrie from Citi.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [42]

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So China is adding ethylene capacity, roughly 3 crackers are starting in 2020. And by 2023, there's roughly 10 crackers with at least 1 million tons capacity. So how does that impact the ethylene availability and the cost economics of these nonintegrated styrene plants?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [43]

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So again, those crackers and that ethylene is destined for basically polyethylene. And the economics of a nonintegrated producer who's not attached to one of those crackers is particularly disadvantaged because you're going to -- you have to ship and deliver a compressed gas to those sites. So inherently, they're disadvantaged versus an integrated producer. But what -- I guess the point I was trying to make is that if we see lower demand or lower outputs for fuels and petrochemicals in China early this year or in the first half of this year, the end -- the destination for that ethylene will not be prioritized to nonintegrated polystyrene producers. It'll be prioritized to those polyethylene applications. So they could see a very challenging environment with availability of ethylene. And that's a situation that we've seen in the past during periods of slowdown in petrochemical demand. I don't know if that helps.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [44]

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Okay. And broader picture. Germany industrial production today fell 3.5% month-over-month. What are you seeing in terms of broader Europe? And then any comments on China demand?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [45]

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I would just go back to the comments that Dave made about how we're seeing the start of the year. In general, in the applications that we're serving and some of our grow applications, we see that we're starting the year with good fundamentals. And tire industry, there's probably pent-up demand, we would believe, on replacement tire from last year. So we're seeing some strong demand in that area and then recovery on the Polystyrene side, et cetera. And then there's fundamentals for us in automotive that are somewhat different from the broader automotive market because it's driven by lightweighting and fuel economy drivers that necessitate the use of plastics and interior applications where we serve. So again, I -- we feel generally pretty good about what we're seeing so far in this year in the demand side for automotive, despite the macro automotive market.

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Operator [46]

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Your next question comes from Matthew Blair from Tudor, Pickering, Holt.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [47]

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Frank, I was intrigued by some of the comments in the release just regarding the improving trends you're seeing in the consumer electronics market in Asia. Could you provide any more details here?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [48]

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Yes. So actually, that's exciting and we really like that. We're -- we had a position historically in consumer electronics with their compounds. And what -- but it was narrow, I would say, with or concentrated with a few large clients. And we've invested in the past several years to broaden our commercial activities and technical activities to other consumer electronics suppliers. And so we're getting good traction by broadening who we're going after. So our big clients, if you will, are becoming a smaller percentage of our overall demand. So that's what's driving the results that we're seeing. And then the other thing I would tell you that the desire for post-consumer waste recycled content in your product is really exciting for us because the demand is very, very strong, especially in consumer electronics. So those customers are particularly interested in sustainability. And so that's driving very strong demand. And we were quick, if you will, to -- we were early on the front edge of offering high-recycled content resins. And so we're seeing the benefit of that.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [49]

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Sounds good. And then just thinking about the turnaround schedule for the year. So you have AmSty sounds like a $10 million impact in Q1. On the Terneuzen turnaround, what quarter would that roll through? And I guess would that be about a $20 million EBITDA impact?

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David P. Stasse, Trinseo S.A. - Executive VP & CFO [50]

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Matthew, it's Dave. It's -- that turnaround is starting in February, and it will last into May, I believe. So it's several months. And it's already -- the impact of that is already baked into our guidance number.

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Operator [51]

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Your next question comes from Duffy Fischer from Barclays.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [52]

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Just wanted to ask a question about the reduction in the economy of plastics and the push from that. And just how you think the polystyrene molecule will end up doing, let's say, versus polypropylene, polyethylene? My guess is at the end of this road, we'll find out that there were meaningful differences in how much you can decontent. But do you have any preliminary views on how polystyrene will fare versus the other 2 major molecules?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [53]

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Yes. It's a great question. And I would tell you, we believe the fundamentals for polystyrene demand to be sustained or polystyrene, because of its inherent chemical circularity, to be sustained are very strong relative to the other plastics of now. And this isn't testing any negative aspersions of the other plastics. They're always purpose-appropriate for their applications. But polystyrene is unique in the fact that it can be chemically recycled at very favorable economics back to a virgin monomer. And that's what we've demonstrated through our joint venture at Americas Styrenics. And we think that as that gains traction and the demand for -- by the end consumer for circular materials continues to drive, we see that being widespread and then collection networks being set up that would feed recycling plants that would bring us recycle polystyrene that we could turn back into virgin monomer. So I really like the fundamentals of polystyrene for those reasons. And it's simply, on its chemical -- it's a chemical engineering basis for my bias there. But I -- the other thing I think that's really important for everybody to understand is that the end consumers really want this. And so there's very high demand, very high interest and a very high level of engagement with our customer base to bring a solution and they're talking significantly higher prices they're willing to spend or materials that have recycled content or could be even be 100% recycled. So my bottom line, very optimistic and positive about the future of polystyrene because of those reasons.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [54]

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Great. And then just to clarify, your comment that January volumes were stronger than Q4, to level set that, what would that look like year-over-year?

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Frank A. Bozich, Trinseo S.A. - President, CEO & Director [55]

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Yes, it'd be difficult to say. It's hard to extrapolate that because there's always some seasonality that factors into that, but it's materially stronger demand in January than the Q4 run rate, but it would be -- I couldn't extrapolate that to the full year.

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Operator [56]

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We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.