Third Quarter 2020 and Other Highlights
- Net income of $106 million and diluted EPS of $2.75
- Adjusted EBITDA* of $102 million, including a $2 million favorable impact from net timing, and Adjusted EPS* of $2.87
- COVID-19 pre-tax impact of $65 million to $70 million in the first half of the year with an expected second half pre-tax benefit of $10 million to $15 million from restocking volume and margin benefits, resulting in a full-year anticipated pre-tax impact of $55 million
- Improved market conditions and continued actions in response to COVID-19, including reduced capital spending and operating expenses, resulted in third quarter cash from operations of $52 million, Free Cash Flow* of $39 million, and quarter-ending cash and cash equivalents of $503 million
|Three Months Ended|
|$millions, except per share data||2020||2019|
|EPS (Diluted) ($)||2.75||0.56|
|Adjusted Net Income*||110||27|
|Adjusted EPS ($)*||2.87||0.67|
*For a reconciliation of EBITDA, Adjusted EBITDA, and Adjusted Net Income, all of which are non-GAAP measures, to Net Income, as well as a reconciliation of Free Cash Flow and Adjusted EPS, see Notes 2 and 3 to the financial statements included below.
Trinseo, a global materials company and manufacturer of plastics, latex binders and synthetic rubber, today reported its third quarter 2020 financial results. Net sales of $752 million in the third quarter decreased 18% versus prior year mainly due to the pass through of lower raw materials. Total Company sales volume was similar to prior year, the result of a strong recovery in demand in automotive, tires, construction, and appliance applications. Third quarter net income of $106 million was $84 million above prior year while third quarter Adjusted EBITDA of $102 million was $14 million above prior year. The increase in year-over-year profitability was due to both higher margins in most segments and cost reduction initiatives. In addition, the third quarter net income included a tax benefit of $50 million which represents a year-to-date normalization due to the improved full-year outlook for the estimated annual effective tax rate.
Cash provided by operating activities for the third quarter was $52 million and capital expenditures were $13 million, resulting in Free Cash Flow for the quarter of $39 million. In July, the Company fully repaid the outstanding $100 million revolver borrowing which was drawn in April. The cash balance at the end of the quarter was $503 million. For a reconciliation of Free Cash Flow to cash provided by operating activities, see Note 3 below.
Commenting on the Company’s third quarter performance, Frank Bozich, President and Chief Executive Officer of Trinseo, said, “During the third quarter we observed significant demand recovery in many of our end markets. In addition, tighter market conditions led to higher year-over-year margins for styrene, polystyrene, polycarbonate and ABS. I want to thank our employees for their continued dedication and there’s no doubt that our improved performance is a byproduct of both their hard work and the speed at which our management group was able to adjust.”
Third quarter Results and Commentary by Business Segment
- Latex Binders net sales of $183 million for the quarter decreased 20% versus prior year due almost entirely to the pass through of lower raw material costs. Volumes were slightly lower than prior year due to continued headwinds in graphical paper, but that was largely offset by positive volume trends in board packaging, CASE applications, and textile, as well as higher volumes from the Rheinmuenster acquisition. Adjusted EBITDA of $20 million was $1 million lower than prior year due to a negative net timing variance of $3 million, partially offset by cost reduction initiatives. Sales volume to CASE applications in the third quarter and year-to-date third quarter increased 3% in comparison to prior year.
- Synthetic Rubber net sales of $79 million for the quarter decreased 24% versus prior year due mainly to the pass through of lower raw material costs. Demand in the tire market improved versus the low levels observed during the second quarter, which were caused by COVID-19 shutdowns. Adjusted EBITDA of negative $2 million was $10 million below prior year from both lower margins, including the impact of higher spot sales in ESBR, and lower fixed cost absorption from inventory reduction initiatives.
- Performance Plastics net sales of $290 million for the quarter decreased 11% versus prior year due mainly to the pass through of lower raw material costs. Adjusted EBITDA of $51 million was $15 million higher than prior year due to cost reduction initiatives as well as expanded margins in polycarbonate and ABS from tighter market conditions and improved customer mix. Sales volume to Engineered Materials applications in the third quarter decreased approximately 3% in comparison to prior year.
- Polystyrene net sales of $167 million for the quarter were 15% below prior year. Lower pricing from the pass through of lower raw material costs negatively impacted net sales by 25%. This was partially offset by higher sales volume due to higher demand to essential applications such as packaging and appliances. Adjusted EBITDA of $21 million represents the highest Adjusted EBITDA in the segment since 2015. This result was $4 million higher than prior year due to higher volume, particularly to appliance applications, as well as expanded margins in Asia and Europe from high demand and industry utilization rates.
- Feedstocks net sales of $32 million for the quarter were 51% below prior year due to lower styrene pricing as well as lower styrene-related sales volume. Higher styrene margin and production led to Adjusted EBITDA of $11 million compared to breakeven in the prior year.
The Company previously announced that it was evaluating strategic options for its styrene monomer plant in Boehlen, Germany. As part of this effort, a new raw material agreement was negotiated that is expected to make the plant economically feasible along with the added benefit of operational flexibility. Therefore, we are no longer evaluating strategic options.
- Americas Styrenics Adjusted EBITDA of $18 million for the quarter was $7 million below prior year due mainly to lower styrene margins in North America as well as volume-related impacts from COVID-19.
Change to Business Segmentation
Starting in the fourth quarter of 2020, the Company will change its segment reporting to provide increased clarity within its Performance Plastics segment. The number of reporting segments will increase from six to seven. Five of the segments will be unchanged: Latex Binders, Synthetic Rubber, Feedstocks, Polystyrene and Americas Styrenics. Performance Plastics will be reorganized into two separate reporting segments: Engineered Materials and Base Plastics. The new Engineered Materials segment includes compounds and blends products sold into applications such as consumer electronics and medical, as well as thermoplastic elastomer products sold into a variety of applications including footwear and automotive. The new Base Plastics segment will include the results of the remaining product lines, including ABS and polycarbonate as well as compounds and blends for automotive and other applications.
This new structure is aligned with the Company’s strategy to invest its efforts and resources into product offerings serving applications that tend to be less cyclical and offer significantly higher growth and margin potential. In 2019 and thus far in 2020, Engineered Materials delivered margins that were more than two times the average of products serving all applications within the Performance Plastics segment. A summary of historical results for the new segmentation is available in the appendix of the slide presentation.
Commenting on the outlook for the remainder of 2020, Bozich said, “We have seen demand momentum continue in October and we are cautiously optimistic that this will continue through the end of the year. We expect to end the year with a strong balance sheet and liquidity position which will enable us to continue to invest in areas that will provide value to our shareholders including focusing on higher margin, more resilient applications and the exciting opportunities emerging in polystyrene circularity.”
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