Trinseo (NYSE: NYSE:TSE), a global materials solutions provider and manufacturer of plastics, latex binders, and synthetic rubber, has reported a solid financial performance in the third quarter of 2024, with notable strategic shifts aimed at improving profitability. The company's adjusted EBITDA increased to $66 million, a $25 million improvement from the previous year, and free cash flow is expected to be positive in Q4 2024. Despite facing challenges such as unplanned outages and volume declines, Trinseo is focusing on high-margin areas and restructuring initiatives to enhance future performance.
Key Takeaways
- Trinseo's adjusted EBITDA rose to $66 million in Q3, up $25 million year-over-year.
- The company expects free cash flow to be positive in Q4 2024.
- Unplanned outages at two styrenics facilities and strategic sales reductions led to an 8% volume decline.
- Sales in high-margin areas like engineered materials and recycled content products grew by 36%.
- Trinseo announced restructuring to save approximately $25 million in 2025 and $30 million by end of 2026.
- The company plans to exit virgin polycarbonate production in Germany to boost annual profitability.
- Seasonal market slowdowns expected in Q4 with adjusted EBITDA projected at $40 million to $50 million.
- Trinseo ended the quarter with $165 million in cash and $342 million in total liquidity.
Company Outlook
- Adjusted EBITDA for 2025 is projected to exceed $300 million.
- Seasonal slowdowns and lighter demand are expected in Q4.
- Customer feedback indicates a positive outlook for Q1 2025, with potential pent-up demand in building and construction.
Bearish Highlights
- The company experienced an 8% year-over-year volume decline due to strategic sales reductions and unplanned outages.
- A pronounced shutdown season in Q4 is expected to lead to an inventory drain.
- A $5 million negative timing impact is anticipated due to declining styrene prices.
Bullish Highlights
- Sales in engineered materials and recycled content products showed a 36% increase.
- Restructuring initiatives are expected to reduce costs significantly by 2025 and 2026.
- Exiting virgin polycarbonate production is projected to increase annual profitability by $15 to $20 million.
Misses
- The company reported a $30 million bridge in financial performance, with challenges in fixed cost absorption and plant operations.
Q&A Highlights
- Management is confident in navigating the macroeconomic environment and continues to focus on innovation and productivity.
- Easing interest rates could lead to a decrease in cash interest expenses, potentially saving $18 million with each 100 basis points reduction.
Trinseo's commitment to restructuring and cost-saving measures is expected to position the company for a stronger financial future. Management remains optimistic, citing the potential for demand growth in key sectors and the benefits of strategic initiatives. Despite the anticipated seasonal slowdowns, the company's focus on high-margin products and cash preservation strategies signal a proactive approach to overcoming challenges and capitalizing on market opportunities.
InvestingPro Insights
Trinseo's recent financial performance and strategic shifts align with several key metrics and insights from InvestingPro. The company's focus on improving profitability and cash flow is particularly relevant given its current financial position.
According to InvestingPro data, Trinseo's market capitalization stands at $134.71 million USD, reflecting the market's current valuation of the company. This relatively modest market cap underscores the importance of the company's strategic initiatives to enhance shareholder value.
One of the InvestingPro Tips highlights that Trinseo is "quickly burning through cash," which contextualizes the company's emphasis on achieving positive free cash flow in Q4 2024. This focus on cash management is crucial, especially considering another InvestingPro Tip that notes Trinseo "operates with a significant debt burden."
The company's efforts to improve profitability are particularly important in light of the InvestingPro Tip indicating that Trinseo "suffers from weak gross profit margins." This is further supported by the data showing a gross profit margin of 6.51% for the last twelve months as of Q3 2024. The restructuring initiatives and exit from virgin polycarbonate production in Germany are clearly aimed at addressing these margin challenges.
Despite these challenges, it's worth noting that InvestingPro data shows a strong return over the last three months, with a 92.01% price total return. This suggests that the market may be responding positively to Trinseo's strategic shifts and cost-saving measures.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights beyond those mentioned here. In fact, there are 5 more InvestingPro Tips available for Trinseo, which could provide valuable context for understanding the company's financial health and future prospects.
Full transcript - Trinseo SA (TSE) Q3 2024:
Operator: Good morning, ladies and gentlemen, and welcome to the Trinseo Q3 2024 Financial Results Conference Call. We welcome the Trinseo management team: Frank Bozich, President and CEO; David Stasse, Executive Vice President and CFO; and B. Van Kessel, Senior Vice President of Corporate Finance and 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 the presentation slides at the close of market on Wednesday, November 6. 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 assistance during the call, please press star then zero on your telephone. I will now hand over to B. Van Kessel.
B. Van Kessel: Thank you, Gavin, and good morning, everyone. At this time, all participants are in 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 two. 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 financial measurements. 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 this conference call and transcripts will be archived on the company's Investor Relations website shortly after the conference call. The replay will be available until November 7, 2025. Now I would like to turn the call over to Frank Bozich.
Frank Bozich: Thanks, Pete. And welcome to our third quarter 2024 earnings call. Before we get to our Q3 results, I would like to introduce everyone to B. Van Kessel, who will be moving back into the finance organization with responsibility for relations, Treasury, and Corporate Development. B brings a wealth of company and industry knowledge with her as she most recently served as Senior Vice President leading the plastic solutions, polystyrene, and feedstocks business segments. Prior to that, Bea served as Senior Director of Global Business Finance, where she led the business finance organization for all of Trinseo's reporting segments. I want to thank Andy Myers for his many years of leading the investor relations group and look forward to continuing to work with him as he takes on other responsibilities. Andy and Bea will be working closely together over the coming weeks to ensure a smooth transition. Now I'd like to turn to our Q3 results. As expected, market conditions and adjusted EBITDA were similar to the prior quarter. MMA supply dynamics and moderating European input costs continue to support healthier margins in our Engineered Materials segment. While demand remained weak in many of our end markets, particularly building and construction and consumer durables, we saw significant year-over-year profitability improvement largely resulting from our earlier restructuring actions. We also had our second consecutive quarter of sequential improvement in free cash flow and anticipate this trend will continue as free cash flow is expected to turn positive in Q4. Our third quarter results were negatively impacted by unplanned outages at two of America's styrenics production facilities, which pushed adjusted EBITDA to the lower end of our guidance range. While volumes in the quarter decreased 8% year-over-year, this was largely driven by our efforts to shed uneconomic sales in Asia and Europe, to optimize plant operations and working capital, particularly in polystyrene. However, excluding polystyrene, volumes were basically flat versus the prior year. While product mix improved as volumes increased in several roll-ups where our higher margin targeted growth areas. This includes a 36% increase in compounds for consumer electronics applications in engineered materials, due to higher demand and new business wins, and a 7% volume increase in case and battery applications in latex binders. Additionally, sales of recycled content containing products increased 40% in Q3 versus the prior year and 57% year-to-date, demonstrating our continued focus and the success we are seeing in making sustainable offerings a larger part of our portfolio. In fact, sales of recycled content containing products represented 6% of the total company margin in the third quarter. Now I'd like to discuss several of the strategic actions. As the macroeconomic landscape remains uncertain and demand weaknesses persisted, we continue to take decisive action to improve our footprint and cost structure. At the end of the third quarter, we announced additional restructuring initiatives in order to better position the business for longer-term growth and to reduce our corporate and functional costs to reflect the smaller footprint we currently operate. This included combining the management of our engineered materials, plastic solutions, and polystyrene businesses, resulting in workforce reductions from the consolidation of business management roles and support functions. We believe this will result in a more streamlined organizational structure that will fuel our ability to continue growing in our core markets and our higher value offerings. These actions are expected to result in cost savings of approximately $25 million in 2025 and a full run rate savings of $30 million by the end of 2026. We also announced the decision to exit virgin polycarbonate production at Erstad, Germany, following discussions with the relevant works councils. Once operations have concluded, we will purchase all of our polycarbonate needs for our downstream differentiated products from external suppliers. As we previously stated, this is expected to increase annual profitability by $15 to $20 million in comparison to producing virgin polycarbonate. We remain committed to developing and investing in our polycarbonate dissolution technology, which will replace a portion of our external polycarbonate purchases with our own recycled polycarbonate as that technology continues to grow to commercial scale. Now Dave will discuss our third quarter results.
David Stasse: Thanks, Frank. Third quarter adjusted EBITDA of $66 million was $25 million higher than the prior year and similar to the second quarter. Year-over-year results improved across all business segments except for Americas Styrenics, which had unplanned outages at two facilities leading to a $10 million negative impact on equity affiliate income during the quarter. Cash provided by operations during the quarter was $9 million, which resulted in free cash flow of negative $3 million. This included a $14 million decrease in trade working capital. We expect free cash flow to turn positive and be significantly higher in the fourth quarter due to typical seasonal working capital improvements. We ended the third quarter with $165 million cash and $342 million of total liquidity, including our two committed financing facilities. Cash preservation and liquidity management continue to be our top priority. Now I'll turn the call back over to Frank.
Frank Bozich: Thanks, Dave. Looking ahead to the fourth quarter, we expect seasonally slower markets. While October volumes are in line with their average for the year, we anticipate higher profitability in Q4 compared to the prior year due to the benefits of our restructuring initiatives as well as the full quarter of operations at Americas Styrenics. As a result, we expect Q4 adjusted EBITDA of $40 million to $50 million. We are pleased with how the third quarter evolved in line with our expectations and understand that the fourth quarter will be more challenging due to year-end seasonality and continued macroeconomic uncertainty. However, seasonal working capital improvements should result in a stronger liquidity position at the end of the year despite the lower sequential profitability. I want to thank our employees around the world for their continued focus and dedication to Trinseo as we continue to drive productivity and innovation in our core technologies. And now we're happy to take your questions.
Operator: If you wish to ask a question, please press star then one on your telephone keypad. Your first question comes from the line of Frank Mitsch from Fermium Research. Your line is open.
Frank Mitsch: Good morning all. And Huiyawaga be in Belkom. That's about as far as I'm gonna take it. Frank, can you give us an update on the AmSty sales process and, David, appreciate that $10 million negative headwind for Q3. Is that all behind us and smooth sailing in Q4 there?
Frank Bozich: So maybe I'll just answer both of those. The simple answer to the second question is, yes, that's behind us. They've restarted both of those units, and we expect to see a full contribution from AmSty in Q4. The status of the process is, look, we've said this before. We have a joint agreement with CP Chem to jointly market the asset. We began our process in Q3 and we continue to expect that we would sign a transaction in the first half of next year.
Frank Mitsch: Terrific. And then on financing, is there any update on the timing and process regarding the extension of the May 2026 revolver? And as it stands now, is the plan to utilize that revolver to repay the stub notes?
David Stasse: So, Frank, look. Yeah. So we've the stub notes is $115 million just for clarity. $115 million due in September of next year. The plan would be either to use cash on hand or a refinancing transaction to handle that. We are continuing to look at both, and we'll announce something when we have something more concrete to say publicly about it, Frank.
Operator: Thanks so much. Your next question comes from the line of Matthew Blair from TPH. Your line is open.
Matthew Blair: Thank you, and good morning. Just regarding the Q4 guide, so you know, it seems like there'll be some tailwinds from AmSty getting back up, you know, call it approximately $10 million. And then you mentioned the seasonality that you're expecting in the more differentiated parts of the business. But could you provide just a little bit more explanation and color around that? I mean, I guess that would imply some pretty severe drop-offs in plastic solutions and engineered materials, potentially latex binders as well. So is this just seasonality? Is this just being conservative? Are there any other factors like raw materials or net timing that you're also anticipating would be headwinds in the fourth quarter?
David Stasse: So, look, yeah, I'll help you with the bridge on that. So at the midpoint of our guide, $45 million, we're down call it 20% quarter over quarter. And you're right, plus $10 million of AmSty. So what we're bridging is $30 million. About half of that bridge is explained by fixed cost absorption, you know, related to running the plants. Like Frank said, we do expect a more pronounced shutdown season this year at a lot of our customers, and we'll operate similarly. So we will have, you know, it's really significant inventory drain in the fourth quarter, whereas we had to build up in the third quarter building up preparing for the shutdown. So about half of that $30 million bridge is explained by that. Yeah. Just fixed cost absorption. And the rest is volume and margin, you know, really across all of the businesses. You know, we do expect demand to be lighter just due to, you know, seasonality. I think that's been a consistent theme during this earnings season. So, you know, we will see that as well. I do think, Matthew, we do we would expect negative timing in the quarter. You know, standing here today, I don't know, $5 million or so. Just due to styrene prices going down.
Matthew Blair: But that should help with the bridge.
David Stasse: That does help. Thank you. And then thinking about the moving parts on the 2025 free cash flow outlook, your 2024 guidance includes a $45 million restructuring cost. Do you have a sense of what restructuring would look like in 2025 and, you know, aside from just EBITDA, are there any other discrete moving parts we should be thinking about with 2025 free cash flow?
David Stasse: Yeah. So Matthew, I'd refer you to slide eleven in our charts where we list out all the pieces for our free cash flow for 2024. And you're right. Our cash ex we expect to spend $45 million this year on restructuring. I expect that to be a similar number next year. Obviously, the spend related to the shutdown of the Styrene plants is, you know, is tailing off, but we do have, you know, we have the shutdown from the stop facility as well as corporate actions that we've took that will kick in. So I expect restructuring to be similar in 2025 and then drop off materially in 2026. But all of the other pieces on this bridge, I would expect to be materially the same in 2025 versus 2026. So capex, you know, cash taxes, turnaround, etcetera. And if you add all those up, it's $340 million. Right? So the cash outflows, if you will, for this year is $340 million. So we would need $340 million of EBITDA to be cash flow breakeven. Now, you know, the one line item that I think is worth mentioning is cash interest. We have $200 million this year. You know, clearly, we're in an easing cycle now. We'll see later this afternoon what happens with the Fed. But as I said, you know, I call last call, I think we have $1.8 billion of floating rate debt. So every hundred basis points reduction, you know, reduces our cash interest by $18 million. So I would expect the $200 million of cash interest to be lower next year depending on the pace of Fed cuts.
Frank Bozich: Chris, I think, you know, to sum all that, sum all that up, Matthew, I mean, that puts our, you know, I think our cash flow breakeven drops to more like a low $300 million type number for 2025.
Operator: Got it. Thanks. Your final question comes from the line of Laurence Alexander from Jefferies LLC. Your line is open. Laurence Alexander, your line is open.
Laurence Alexander: Sorry about that. Can you give some sense on what your customers are saying about once we get through the kind of year-end seasonal adjustments, so how much pent-up demand they're seeing for the first half of next year? Any innovation cycles that would be pulling products for? Can you just give a sense for kind of how we should think about the demand side for the bridge for next year?
Frank Bozich: Yeah, Lawrence. I, you know, I guess, I've been at customers as recently as Monday (NASDAQ:MNDY), you know, what I'm hearing is that, you know, they see the Q4 as sort of a declining raw material environment. And so there I think in general, most of our customers are not building in inventory, awaiting, you know, waiting for Q1. I think there was also some uncertainty about the regular the world. And so, you know, that tone I'm hearing from most of our customers is that they expect Q1 to be stronger, and that they expect to see modest improvement in their outlooks, and they and, again, for us, as you know, building and construction. You know, their anticipation is that easing interest rates will stimulate pent-up demand in building and construction. So I would say modestly positive for Q1 is the outlook.
David Stasse: Yep. You know, maybe let me build on that just a bit because I think not only are, you know, if I think about next year, what we're not giving guidance at the current time, you know, we anticipate that there are three factors that will, you know, give us support for next year as we head into 2025. Those are the restructuring initiatives, known business wins that we have today that we've achieved during 2024 and will achieve in 2025 that'll fully accrue, plus the full year benefits from AmSty. So those collectively, you know, are the things that are factoring in some improvement for next year. And, you know, we would expect that certainly the adjusted EBITDA for next year would have a three in front of it. It'll be a $300 million plus.
Operator: There are no further questions. So I would like to thank the Trinseo management team and you all for joining. That does conclude our conference for today. Thank you for participating. You may now disconnect.
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