Trinseo SA Stock

Good morning, ladies and gentlemen, and welcome to Trinseo's Third Quarter 2025 Financial Results Conference Call. We welcome the Trinseo management team, Frank Bozich, President and CEO; and David Stasse, Executive Vice President and CFO; an Bregje Van Kessel, Senior Vice President and Corporate Finance and Investor Relations.

Today's conference call will include brief remarks by management team, followed by a question-and-answer session. The company distributed its press release along with its presentation slides after close of market on Thursday, November 6. These documents are posted on the company's Investor Relations website and furnished on Form 8-K filed with the Securities and Exchange Commission.

[Operator Instructions] I will now hand the call over to Bregje Van Kessel. Please go ahead.

Thank you, Calvin, and hello, 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 2.

During this presentation, we may make certain forward-looking statements, including issuing guidance and describing our future expectations. We must caution you that actual results could differ materially from what is discussed, described or implied in these statements. Factors that could cause actual results to differ include, but are not limited to, risk factors set forth in Item 1A of our annual report on Form 10-K or in our other filings made with the Securities and Exchange Commission.

The company undertakes no obligation to update or revise its forward-looking statements. Today's presentation includes certain non-GAAP financial measurements. The reconciliation of these measurements to corresponding GAAP measures is provided in our earnings release and in the appendix of our investor presentation. A replay of the conference call and transcript will be archived on the company's Investor Relations website shortly following the conference call.

The replay will be available until November 7, 202. Now I would like to turn the call over to Frank Bozich

Thanks, Bee, and welcome to our third quarter 2025 earnings call. I'd like to begin by sharing some information on trade flows in our chemistries. As we believe this is instructive for understanding how the end markets we serve have reacted to tariff uncertainties. We've included some of this information on Slide 4 of our presentation materials. In general, we saw a sharp increase in imports of Asian polymers to both the U.S. and Europe beginning in Q1.

We believe this was a reaction to the threatened tariff levels that ultimately were announced in early April and an attempt to fill supply chains in the U.S. ahead of the tariffs being implemented and the redirection of trade flows to Europe from Asia because of slowing demand in China. With respect to the U.S. on Slide 4.

You can clearly see a significant increase in imports of ABS primarily from Asian producers beginning in the first quarter to get ahead of the tariff implementation. Exports from the U.S. of both ABS and PMMA decreased versus prior year, and the decrease was most pronounced in the exports to Canada and Mexico.

This similar dynamic occurred in Europe where Asian material that is typically consumed in China was redirected to the European market, putting margin pressure on the more standard grades of ABS and PMMA. These industry trade flow dynamics continued into the third quarter, resulting in lower volumes versus prior year, but similar volumes quarter-over-quarter.

Whether these new levels of demand or transitory or structural remains to be seen. However, late in the third quarter and into the fourth quarter, we are seeing an increased run rate of sales over more formulated higher-margin products that is higher than the year-to-date average and prior year levels.

In the case of our more formulated PMMA resins, the year-over-year increase in volumes was over 10% beginning in late Q3, and this has continued into Q4. We do believe there is a drag to reshore demand even at slight premiums to the import parity price to derisk longer Asian supply chains and address potential tariff impacts in both Europe and the U.S.

Concerning our focus on sustainability, I want to highlight the fact that the European partner finalized its vehicle end-of-life directive in September. This mandates that new vehicles must contain 20% recycled plastic within 6 years, 15% of which must come from end-of-life vehicles. and this increases to 25% within 10 years.

This action formalizes the EU's drive for greater product supply chain circularity. We have remained committed to pursuing investments to scale up our technology for our circular recycled content containing platforms and expect these regulations to drive demand in the near term.

Our pilot plants for recycled polycarbonate, ABS and MMA are sold out. The volumes are still small but will become more meaningful as we ramp up. Year-to-date, our recycled content containing plastic sales grew 2% across all applications with their recycled solutions and Engineered Materials growing at 12%.

Before I hand the call over to Dave, let me comment on our press release from the sixth of October, in which we announced the discontinuation of virgin MMA production in Italy and the intention to close our polystyrene production facility in Germany. We took this difficult decision after carefully considering our options and the impact on our employees.

However, it is clear to us that these assets will not be competitive in the long term. Our Row Italy site will remain focused on PMMA resin production and will also be the site for our investments in recycled MMA. Pending works console negotiations in Germany, these projects should lead to $30 million of EBITDA improvement next year, and the cash savings will exceed restructuring costs beginning in 2026.

Now I'd like to turn the call over to Dave.

Thanks, Frank. We ended the third quarter with $30 million of adjusted EBITDA, which was impacted by $9 million of unfavorable raw material timing and negative equity affiliate earnings for Americas [ Styrenics ] due to an $8 million headwind from repair and other costs related to an unplanned outage that incurred in June.

At the segment level, Engineered Materials adjusted EBITDA was flat versus prior year as fixed cost improvements and slightly higher volumes in PMMA resin for building and construction and automotive applications, were offset by lower volumes in medical. Medical sales, I want to remind you that we reported increased sales last year related to the closure of our Stad polycarbonate site and customers stocking up prior to the shutdown.

Latex Binders adjusted EBITDA was $9 million below prior year, mainly driven by lower volume in Europe paper and board applications as well as significant pricing pressure in Europe and Asia. Our higher-margin targeted growth platforms in case and battery binders continue to outperform the market.

Sales volume in battery binders were up 27% versus prior year for the quarter as we continue to enhance our portfolio, including new customer wins and anode binder applications. We are currently working closely with 5 of the 15 largest lithium-ion battery producers in the world.

Lastly, Polymer Solutions adjusted EBITDA was $19 million below prior year, driven by $9 million of unfavorable timing lower ABS volumes and unfavorable mix related to the closure of our polycarbonate plant. Third quarter free cash flow was negative $38 million and we ended the third quarter with $346 million of available liquidity.

The fourth quarter is typically our seasonally strongest quarter for free cash flow due to a working capital release. We expect our free cash flow in the fourth quarter to be positive $20 million and our year-end liquidity to be over $350 million. Now I'll turn the call back over to Frank.

Thanks, Dave. Looking forward, we expect fourth quarter 2025 adjusted EBITDA of roughly $30 million to $40 million. And as Dave mentioned, positive free cash flow of $20 million. This forecast assumes a continuation of the year-to-date market dynamics and a somewhat exaggerated seasonal year-end effect as well as $5 million to $10 million of negative raw material timing.

We will remain intensely focused on what's under our control, including improving our free cash flow in the short and long term through continued inventory management, restructuring activities and other actions. Additionally, we continue to believe that there are at least 5 triggers that could improve the demand environment.

First, trade certainty in any form would improve consumer confidence and provide the landscape for new investments. Second, a continuation of Federal Reserve interest rate cuts, which will lower our own interest expense and improved demand for housing and consumer durables.

Third, a resolution of the conflict in the Ukraine. Fourth is a rationalization of higher costs, less environmentally sound chemical assets in Asia and lastly, stronger support for the EU chemical industry, as outlined in the EU chemical industry action plan.

Thank you, and now we're happy to take your questions.

[Operator Instructions] Your first question comes from the line of Alex Kelsey of Wells Fargo.

I wanted to start with Slide 4 on the trade flows. I think one of the dynamics we've seen among other among a number of chemical companies is just structurally higher imports of China products into Western markets that just structurally depressed pricing and influence demand.

So I'm just curious, is it your view that this is a transitory in nature, truly just getting ahead of tariffs or are you seeing just a structural difference in how China is behaving with regard to your markets?

So yes, thanks for the question. Actually, we don't know whether it's structural or transitory, it's too early to tell as we said in the prepared comments, but I would tell you that the -- in our chemistries, the biggest I guess the more problematic dynamics. So the countries that are -- we're seeing the most increase in inflows are actually Taiwan and Korea.

And in our chemistries, we believe that those -- their domestic markets don't support the significant capacity that's been built over the years and where they used to have an outlet to supply China, that volume or that surplus capacity is now being redirected to Europe and North America.

And I would point out that at least our analysis would indicate that those are higher-cost assets in these chemistries. The other thing I would point out that's problematic from a trade flow standpoint, is the use of using imports of resin produced in China and Korea into Mexico that can be compounded relatively lightly compounded locally and then brought into the U.S. under the U.S. MCA tariff convention, tariff 3.

Now our understanding is from our trade associations and our discussions that this sort of pathway or loophole in the USMCA is goal to be closed by the administration, but it would -- that would be helpful in our value chains. And that's where Chinese products we see more of the impact of Chinese flow into Mexico.

Do you have any perspective of -- like within PMMA and ABS, maybe this is a tricky one, but how much of the market, Taiwan/Korea/China represents today versus, I don't know, 12 months ago, 24 months ago, whatever the right time frame might be?

Well, I can't precisely answer what share of the market that they represent. But what I would tell you is that the import volumes on, for example, the percentage increase in imports to, for example, from -- into Europe, from South Korea in the first half of 2025 was up 18% over prior year.

And in Q2, it went up to 26% increase over prior year. The -- and they are, by far, the biggest importer of ABS into Europe. In the case of PMMA, imports from South Korea were up marginally in the first half into Europe. But in the case of imports into the U.S. the biggest import increase in the imports sorry, the biggest imports increase in imports came from South Korea and Taiwan for ABS, where it was approximately 23% increase but then Mexican product increased 75%.

So that was that pathway that we were talking about. Now I want to point out though that -- remember, we make Mass ABS and these are basic -- generally basic grade or standard-grade polymers that are coming in under these conventions that are more broadly used in the less specified or formulated products.

Got it. Okay. And then on the -- around the MA comment, the formulated PMMA comment about the commentary about seeing sequential ramp into Q4 was positive. One, has just something changed in that market from a supply or demand dynamic to suggest we're at trough and rising off trough levels? And then within the EM segment, what percentage of that is [indiscernible] formulated PMA

So yes, I think it's too early to -- we don't know that the market dynamic is changing necessarily. It's too early to tell. And like I said, this is a late Q3, early Q4 dynamic that we observed, and we're watching it and trying to understand it.

We believe that there is an effort on behalf of many of the customers in North America and Europe to derisk their supply chain from a complexity standpoint and also with regard to potential tariffs or trade barriers in North America and Europe.

So I guess at this point, that's -- we're watching it. But again, it was good to see that increase over prior year.

And then the second question that I asked in terms of however you want to define it, what percentage of revenue/EBITDA/volumes in EM would you define as formulated?

Yes. I wouldn't disclose that specifically. It's a material part of our EM segment but we wouldn't share that information generally.

Okay. And then on [ AmSty. ] I have 1 question, maybe accounting related. But if the shutdown on planned maintenance was taken in Q2, I'm curious why there's an impact on Q3 EBITDA? And then more generically, can you just talk about what's being done within AmSty to sort of rightsize that business just given how underperforming it spent this year?

Alex, this is Dave. So the unplanned outage incurred at the end of the second quarter in June, but when it was related to the production of styrene. So what that forces them , which is obviously upstream to polystyrene -- so what they have to do then is go out and buy styrene, obviously, at a cost higher than what they can make it for.

And those increased -- that increased cost of goods sold in this case, goes through the P&L in the second -- in the third quarter, right? So there's both repair costs that are included in the -- so the total impact for the year for AmSty was $10 million or excuse me, the total impact to our equity income was $10 million, $2 million of it was in June and $8 million of it was in the third quarter.

And the composition of that is both the cost of repair, but also the higher cost of raw materials from the styrene that they had to buy going through the P&L.

So look, and related to the second question about what are we doing to rightsize it. I mean, look, I don't think we're doing -- I don't think anything is necessary to rightsize the business. They've got 2 styrene units that are very competitively positioned on the global cost curve for styrene. 70% of the styrene they produce they consume internally in polystyrene downstream and the other 30% goes into the merchant market.

But again, they're on the left side of the cost curve. So Look, I don't think there's anything necessary to do there from a rightsizing perspective. Clearly, styrene is long globally. I mean it's why we exited our European plants -- so styrene margins are lower, a lot lower than they used to be, but I don't think a necessary step there is going to be any capacity rationalization.

Okay. That's helpful. And then last one for me. If we like -- when we were entering 2025, and I understand things have changed, the expectation was flat volumes kind of started us a $200 million-ish plus cost saves got us to something closer to 300, if I'm remembering correctly. I know it's probably really on 2026.

But again, it feels like we're lower for longer, maybe troughing, but if you kind of take some of that same analogy, where the business is forecasted to be at the end of 2025, like all else people in up 10% in volume environment down 10%, flat, any range of outcomes for what we could think about for 2026?

So yes, maybe let me tackle the last thing first. So we've said this consistently that at 10% volume increase across the portfolio results in about $100 million of EBITDA. And so again, we're not prepared to talk about -- we don't have a view on 2026 or prepared to give any guidance for 2026.

But I think it might be helpful to go back to how we were -- as we entered the year, how we thought about it, and our expectation for significant increase was really in 2025 over 24 was driven by 5 factors: One was stable volume, number two was the disposition -- the sale of our polycarbonate assets to [ DPA, ] the also known business wins that we had as well as a more normalized earnings from AmSty as well as the cost savings initiatives that we announced last year.

What I would tell you is that we got the known business wins or the incremental business wins in our downstream markets, we delivered the cost savings and we executed on the DPEX sale, where we've had a shortfall versus our expectation was on the more normalized earnings from AmSty and then the volume development that occurred what we would attribute to really global tariff uncertainty.

So again, I think what's in our control, we've done a good job of managing, but that's sort of how this year developed and again, too premature, it's premature for us to give you guidance for next year.

There are no further questions at this time. And with that, ladies and gentlemen, concludes today's call. We thank you for participating. You may now disconnect your lines.