Trinseo S.A. (NYSE:TSE)
Q4 2016 Earnings Conference Call
February 23, 2017 10:00 ET
Chris Pappas - President and Chief Executive Officer
Barry Niziolek - Executive Vice President and Chief Financial Officer
David Stasse - Vice President, Treasury and Corporate Finance
David Begleiter - Deutsche Bank
Frank Mitsch - Wells Fargo Securities
Robert Koort - Goldman Sachs
Matt Gingrich - Morgan Stanley
Mike Leithead - Barclays
Hassan Ahmed - Alembic Global
Eric Petrie - Citi
Good morning, ladies and gentlemen and welcome to the Trinseo Fourth Quarter and Full Year 2016 Financial Results Conference Call.
Turning to Slide 2. We welcome the Trinseo management team. Chris Pappas, President and CEO; Barry Niziolek, Executive Vice President and CFO; and David Stasse, Vice President of Treasury and Corporate Finance, who will be conducting the call. I will now hand the call over to David Stasse.
Thank you, Howard and good morning everyone. [Operator Instructions] The slide presentation for today’s call has been posted on the company’s Investor Relations website in the webcast viewer and with the financial results press release by means of a Form 8-K filing with the Securities and Exchange Commission. 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 February 23, 2018.
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 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 the Form 10-K under the Item 1A, Risk Factors. Today’s presentation includes certain non-GAAP measurements. Reconciliation of these measurements is provided on our earnings release and in the appendix of the presentation.
I will now hand the call over to Chris Pappas.
Thank you, Dave. Good morning, everyone and thank you for joining us. Please turn to Slide 3, where I would like to start by going over some key points and also the main topics that we will cover on the call. First, we are pleased by the fourth quarter and full year 2016 results. We had record performance across several metrics, including net income, adjusted EBITDA and cash generation.
Second, our business fundamentals continue to remain very strong to start 2017. We are essentially sold out in synthetic rubber and polycarbonate and we are seeing some strong sales volume results in other businesses such as Latex Binders and Performance Plastics. In addition, styrene margins are currently very favorable due to industry outages both planned and unplanned. Currently, we are in an environment of increasing raw material prices, including styrene, benzene and butadiene. As you know, these increases can result in timing impacts on our earnings, both from raw material timing and price lag. We will go into more detail on that topic later.
Third, we continue to work to increase transparency to investors. Beginning with the fourth quarter, we are reporting with our new segmentation, which provides greater visibility into the profitability and drivers of the Basic Plastics & Feedstocks division. In addition, starting in March, we will provide monthly updates on styrene margins on our Investor Relations website after the monthly settlements occur. This will provide you with more frequent data and the ability to compare actual styrene market data versus our forecast. Also, starting this quarter, we are providing the net impact of raw material timing and price lag by division. Lastly, we will end today’s call with guidance for the first quarter and full year 2017.
Now, please turn to Slide 4, where I would like to discuss our financial results for the fourth quarter. I am pleased to report that fourth quarter 2016 net income of $75 million, adjusted earnings per share of $1.68 and adjusted EBITDA of $142 million. These exceeded the guidance we gave on our third quarter call due to higher styrene margins late in the quarter as well as favorable raw material timing due to increased raw material prices net of price lag. We had $38 million of free cash flow in the fourth quarter and we have repurchased $21 million or about 350,000 shares of our stock.
Turning to Slide 5, I am happy to report that our full year net income of $318 million, adjusted earnings per share of $7.28 and adjusted EBITDA of $611 million are records for Trinseo as was our free cash flow of $280 million. We utilized this cash generation to repurchase about 9% of our outstanding stock through the course of the year. We also initiated an annualized dividend of $1.20 per share in the third quarter. In total, we returned $242 million to shareholders through stock repurchases and dividends in 2016, about 86% of our free cash flow.
Now, please turn to Slide 6 as I would like to discuss a few highlights from the year. Performance Materials had a very strong year with $341 million of adjusted EBITDA. In Latex Binders, we took several footprint actions to improve our cost and margins. Also, our investment in a new reactor to serve China’s latex market has resulted in record sales volume in Asia during the year. Synthetic Rubber had a good year as we delivered another year of record sales volume. We successfully ran trials of some new neodymium-PBR products and we commercialized our next-generation SSBR product line. In addition, we announced our latest 50-kiloton SSBR capacity expansion as well as our SSBR pilot plant. These investments are in direct response to rising customer demand for this critical technology, which is a key component in increasing energy efficiency, safety and durability in performance tires.
Performance Plastics had an excellent year, including record sales volume to the automotive market. In October, we announced plans for future ABS capacity in China to support both our automotive and consumer essentials market growth in Asia. Our MAGNUM ABS delivers greater product consistency, which can reduce costs for molding, compounding, extrusion and thermoforming, while offering superior aesthetics in the final product. We expect production of ABS in our Zhangjiagang, China site to begin in mid-2017.
Also in October, we announced a new long glass fiber polypropylene concentrate product family for lightweighting automotive semi-structural applications used for interior parts for lower total cost compared to steel and aluminum. This 85% glass concentration allows customers to achieve cost savings of up to 10% through significantly reduced compounding costs. We had record adjusted EBITDA in the Basic Plastics & Feedstocks division in 2016. In fact, we had record adjusted EBITDA in each of Basic Plastics, Feedstocks and Americas Styrenics as the supply demand environment in each of these segments remains tight. And finally, in January, we announced the sale of our 50% stake in Sumika Styron Polycarbonate to Sumitomo Chemical. Sumitomo is a natural owner of this Japan-based polycarbonate plant. And as an industry leader in the region, they are better positioned to manage and deliver value from this asset.
Now, please turn to Slide 7, where I would like to go into more detail around the impact that raw material volatility can have on our results. As many of you know, over the past several months, we have experienced steep increases in butadiene, benzene and styrene, primarily due to planned and unplanned outages as well as inventory corrections. We have talked in the past about how changes in these prices can impact our raw material costs flowing through cost of goods sold versus current timing. We have also mentioned that a meaningful part of our Performance Materials revenue is on a contractual basis with a price lag on the raw materials pass-through. Generally, these impacts offset each other each quarter.
For example, in some of our Performance Materials product lines, we have 60 days of inventory on hand and the raw material price pass-through to our customer is lagged by approximately 30 days. So product that we sell in the month of March would be priced based on February’s raw material price and the associated cost of goods would be based on January’s raw material price. And in an environment of rapidly increasing raw materials like we have seen in the first quarter of this year, this example would yield a positive impact from raw material timing that more than offsets the negative impact from price lag. In Performance Materials in the fourth quarter, the raw material timing impact was a favorable $15 million and the price lag impact was an unfavorable $6 million for a $9 million net favorable impact.
Now please keep in mind that these impacts can vary due to many factors, including mix and region of inventories, sales mix as well as purchase timing. Therefore, the relationship between the two impacts can vary. But on Slide 8, you can see that these impacts over the past 2 years plus our forecast for the first quarter. Now note that these impacts vary quarter-to-quarter, but overall as mentioned, they tend to offset each other over time. More importantly, notice that over this time period, the cumulative net impact is very small. While these impacts can sometimes be meaningful for a given quarter, in general, we expect them to offset over the long run. Going forward, we will continue to provide you with the net impacts by division on a quarterly basis.
Now I would like to hand the call over to Barry, who will discuss the financial details of our fourth quarter performance.
Thanks Chris and good morning everyone. Please turn to Slide 9. Fourth quarter adjusted EBITDA was $142 million. This included a $15 million benefit from favorable raw material timing in the quarter net of an unfavorable price lag. Performance Materials continued to deliver steady strong results, delivering adjusted EBITDA of $86 million, which included a favorable impact of about $9 million from raw material timing net of unfavorable price lag, essentially in line with prior guidance. Basic Plastics & Feedstocks division delivered $78 million of adjusted EBITDA in the fourth quarter, which included a favorable impact of $5 million from raw material timing. These results were better than expectations due to higher than expected styrene margins, driven by supply outages in December.
Now turning to Slide 10, let’s go through our segment results. Latex Binders net sales of $241 million was 7% above prior year, primarily from the pass-through of higher raw material costs. The divestiture of the Latin America business had an unfavorable sales volume impact of 4%. However, this was offset by an increase in sales volume in our remaining regions. While the divestiture of the Latin America business impacted sales volume in both Latex Binders and Performance Plastics, please recall that the profitability of the business there was roughly breakeven. Latex Binders adjusted EBITDA of $24 million was in line with guidance and was $6 million higher than prior year driven by higher sales volume to the paper and carpet markets in North America and Asia and lower fixed costs. In this segment, raw material timing and price lag generally offset each other as the days of inventory and price lag are similar. Volume for the quarter was 309 million pounds, essentially flat with last year. We had record sales volume in Asia during the quarter as we gained share in the paper, board and textile markets.
Let’s turn to Slide 11. Net sales from Synthetic Rubber of $124 million increased 20% versus prior year, driven primarily by higher SSBR and ESBR volumes as well as from the pass-through of raw material costs. Fourth quarter volumes were a record for Synthetic Rubber due to the strong demand from performance tire manufacturers. Adjusted EBITDA of $29 million was $8 million above prior year, driven by higher volumes. Adjusted EBITDA was above guidance mainly due to favorable raw material timing net of an unfavorable price lag. Our Synthetic Rubber business generally carries significantly more inventory in terms of days in comparison to the contractual price lag. Therefore in an increasing raw material environment, we would expect the positive impact of raw material timing to more than offset the negative impact from price lag.
Now turning to Slide 12, Performance Plastics net sales of $166 million was 8% below prior year, driven by lower sales volume to the consumer electronics market in Asia as well as the divestiture of the business in Latin America. Adjusted EBITDA of $32 million was $2 million above prior year and in line with guidance due to lower fixed costs. Performance Plastics generally operates with a two-month price lag. So in an increasing feedstock environment, the negative impact of price lag should be greater than the positive impact of raw material timing.
Moving to Slide 13, Basic Plastics net sales was $323 million, slightly below prior year. Adjusted EBITDA of $33 million was $4 million below prior year, driven by lower polycarbonate and polystyrene margins as well as lower Europe polystyrene sales volume. Several industry outages in the prior year had a favorable impact on volume and margin in that period. These items were partially offset by favorable raw material timing.
Turning to Slide 14, Feedstocks adjusted EBITDA in the fourth quarter was $14 million, $11 million above prior year, driven by favorable raw material timing and by better margins late in the quarter due to several unplanned outages. Americas Styrenics also benefited from these outages in the fourth quarter. There have since been a number of additional planned and unplanned outages that we will talk about more later in the call.
Now let’s turn to Slide 15 for a discussion of cash. Cash provided by operating activities for the quarter was $79 million and capital expenditures were $41 million, resulting in free cash flow for the quarter of $38 million. Our fourth quarter free cash flow was lower than expected, due mainly to collection timing as well as increasing working capital from rising raw material prices. We ended the year with $465 million of cash on our balance sheet and a net leverage ratio of 1.3x. Increasing raw material prices like we have seen over the past two months generally increase our working capital. As such, we expect a large cash outflow from working capital in the first quarter.
Now I will turn the call back over to Chris, who will discuss performance expectations for the first quarter as well as for the full year 2017.
Thanks Barry. Please turn to Slide 16 for a discussion on styrene monomer. As we have mentioned, there are a number of unexpected supply outages late in the fourth quarter, and you can see that the fourth quarter margin increased in November in Asia and in December in Europe. These increases helped our fourth quarter results in comparison to what we were expecting. Looking ahead into Q1, there are a number of industry outages planned and unplanned, which are limiting styrene supply and pushing up margins. Based on these market dynamics, we are expecting $175 per metric ton margin increase in Europe and about a $50 per metric ton margin increase in Asia in comparison to the fourth quarter.
Please note that we have a planned maintenance outage at our Terneuzen site during the first quarter, which should have an impact of about $10 million to $15 million in this environment. In addition, Americas Styrenics has an extended outage affecting about half or 500 kilotons of their styrene production capacity in North America. This capacity has been offline since the beginning of Q1 and they currently expect to bring it back up in Q2. At this point, the impact of this outage is about $15 million to Trinseo in Q1 versus Q4. Consistent with our ongoing effort to provide more transparency into our markets, starting in early March, we will post styrene margin information in the same format as this chart on our Investor Relations website. This will reflect the data from the latest settlement and prior month spot averages and will enable you to compare approximate current monthly margin over raw material data to the forecast that we provide during the earnings call.
So, with that backdrop on styrene, let’s move to Slide 17 to discuss our guidance for the first quarter. The fundamentals for Performance Materials in the first quarter look very good. We expect adjusted EBITDA of about $95 million, inclusive of about $5 million to $10 million of favorable timing impacts. For Latex Binders, we expect adjusted EBITDA in the $30 million range with little timing impacts. This reflects price increases as well as fixed cost actions we have recently taken. We expect Synthetic Rubber adjusted EBITDA of $40 million to $50 million, inclusive of a $10 million to $15 million favorable timing impact. We continue to operate at full utilization, and demand from the performance tire market for our products remains very strong. In Performance Plastics, we expect EBITDA of about $25 million. This is slightly lower then recent trend because of an anticipated $5 million negative net timing impact.
Now, moving to Basic Plastics & Feedstocks division, we believe the first quarter adjusted EBITDA will be approximately $105 million, including approximately $35 million of favorable raw material timing and approximately $15 million sequential decline in equity earnings from AmSty due to their extended turnaround as well as a $10 million to $15 million impact from the Terneuzen planned turnaround. In total for Trinseo, we expect to generate between $170 million and $180 million of adjusted EBITDA in the first quarter. This includes a favorable impact of about $80 million from raw material timing partially offset by about a $40 million unfavorable effect from price lag as well as the impacts outlined earlier from Americas Styrenics and Terneuzen styrene turnarounds. We expect adjusted EPS in the first quarter to be between $2.19 and $2.37 per share. Our first quarter free cash flow is expected to be negative as increasing raw material prices are driving up working capital, and this is the seasonal build time for inventory. During the first quarter, we expect prices of our major raw materials to increase by about 40% and a significant portion of our revenue is a function of raw material pass-through.
Turning to Slide 18, we are affirming our full year 2017 guidance of $580 million of adjusted EBITDA. I would like to make a few important points related to this guidance. As we have discussed, raw material price swings can have a significant impact on our reported results. You can see the history in the appendix on Page 22 of our slide deck. While it’s difficult for us to make predictions or quantify associated timing impacts to EBITDA for the remainder of the year, our guidance of $580 million of EBITDA assumes essentially no timing impacts. However, our view is that benzene will moderate in Q2 as outages end and more supply comes back online. In addition, we believe butadiene will remain firm through Q2, but we also expect it to moderate in the back half of the year. This would result in continued strong fundamental margins and earnings, while reversing the use of cash into working capital in Q1 to a source of cash in the back half of the year. The business fundamentals of all of our segments are in very good shape to begin the year and our thesis of generally rising operating rates leading to higher margins in Basic Plastics & Feedstocks continues to play out as is our growth strategy in Performance Materials.
Finally, there are a number of styrene outages and we think this will last into the second quarter. However, it is still early 2017 for us to make a call on the level of outages we will have throughout the year. Incremental unplanned outages of significance beyond what we are currently aware of could present upside to our guidance in our Feedstocks segment and the equity income we realized from Americas Styrenics.
Before I turn the call over to questions, I would like to say how proud I am of the Trinseo team for a record year in 2016. It was a result of the lot of hard work from a lot of people. And while we have taken time to look back and recognize our accomplishments, we have not stopped looking forward towards accomplishing the growth and other achievements that we discussed at our Investor Day. We remained focused on what lies ahead.
And now, Howard, you may open the line for questions.
[Operator Instructions] Our first question or comment comes from the line of David Begleiter from Deutsche Bank. Your line is open.
Thank you. Good morning. Chris, just given the very strong Q1 guidance, why didn’t you raise the full year EBITDA guidance?
Thanks, David. David, we gave our guidance for the year as you recall at Investor Day in November. We were one of the only companies then to give guidance at that time. And as we thought about what we wanted to accomplish on this call with all of the new items we have been discussing, including added transparency, incremental data that’s going to help analysts and investors understand styrene movements from month to month, new segmentation information, we really felt that affirming our guidance was the right thing to do at this time. Importantly, we have another call, as you know, on May 3. It’s only 65 or so days away. And as we start to see the planned and unplanned outages of the styrene market unfold over that period of time, we will be in a much better position to update our guidance, Dave. We are off to a great start. We are extremely proud of that. We obviously think the first quarter is going to be quite good. We think that the second quarter should have some favorable dynamics as we look at the styrene market. But generally, we are not going to predict on an incremental quarterly basis styrene upside from unplanned outages. We just don’t think that’s a highly productive thing to do, but we are going to provide much more transparency with monthly data, so that you, David, and others can get a very good sense of those numbers from month to month.
Very good. And Chris, just on the use of cash in 2017, can you discuss the level of buybacks you are looking at this year?
I will turn that over to Barry. He will give you a comprehensive sense of our cash story for the year.
Yes, David. As we said at Investor Day, we are going to balance growth initiatives with returning capital to shareholders. So, I think as you recognized, our CapEx has increased to $175 million from $125 million in 2016, which includes funding the 50 KT expansion in SSBR, the ABS expansion in China. Two-thirds of that – of our CapEx, as you are aware, is directed at Performance Materials to fund the growth initiatives to get the additional $100 million in EBITDA that we have targeted in 2019. And then additionally, we are looking at bolt-ons and additional ventures as we go through this year. That said, we are continuing to look at return of cash to shareholders, including increasing our dividend as we go through the course of the year, but it’s going to be a balance between investment and returning CapEx to – capital to shareholders.
And just some buybacks in ‘17?
Well, that would be a portion of that returning of cash to shareholders, David, in the balanced approach. So, we obviously were active in the prior year and we will continue to report our activity appropriately quarter by quarter. But I think Barry said it well, we are looking at what we said at Investors’ Day a balanced use of cash, including returning cash to shareholders.
Very good. Thank you very much.
Thank you. Our next question or comment comes from the line of Frank Mitsch from Wells Fargo Securities. Your line is open.
Hey, good morning gentlemen and congrats on a record year. Chris, let me follow-up on the guidance question. So you are saying that no timing impact is embedded in that $580 million number, so given that you expect $40 million in Q1, assuming that stays flat, that number would be $620 million, I am guessing for the full year, but I guess, the other broader question on the guidance, yes you gave that $580 million number in November, early November I believe. And since that time, how would you describe the business outlook better, flat or worse and I understand that the styrene margins are materially better, but AmSty is taking a longer than expected turn, how would you broadly assess the business conditions today versus what they were or what the expectation was back in November?
Better across the board, it’s a great question. I love the way you framed it, better across the board. Of course, we have been sold out in rubber, that continues. Good performance tire markets, that continues. Our latex binder business, I would describe as better. Price increases are taking hold. Cost reductions are taking hold. Performance Plastics continues to be strong, better. And ABS has been – was good at that time Frank, probably incrementally better. Polycarbonate, I mentioned earlier, we are sold out. So I think it’s pretty clear across the board, we would generally say better.
That is better, awesome. And just on the delayed restart for AmSty, obviously they postponed it once and now it’s sometime in Q2, A, I guess how is the confidence level on it being restarted during the second quarter and B, just in general on plant reliability since we seem to be going through a state of industry outages, how would you describe your view of Trinseo’s plant reliability?
We have – well, first of all, on the accuracy or confidence, Frank, that’s the best information we have from them. We are pretty aware of their plan, of course and we think it makes a lot of sense. So we have pretty good confidence in that outlook. We have really four styrene plants, if you will, in Trinseo and I include AmSty in that. They have the two trains on one side and we have of course our assets in Europe, the two different sites. I would consider us better than the industry. But having said that, we obviously have within our system, at AmSty, we have an extended outage that is kind of a surprise to us and I think a surprise to them. So we consider ourselves a pretty darn good operator. We have put a fair amount of capital into our own styrene plants. They have been attentive to theirs, but when you have plants that are old as these plants are, even under those conditions, you can have surprises. We are having one now. There are several as you point out in the industry, but I stand by my view, which is we have put in more capital and more attention to our styrene facilities over the last half a dozen years generally than the industry. And that should bode well for us going forward for these kinds of events.
Perfect. Thank you so much, Chris.
Thank you. Our next question or comment comes from the line of Robert Koort from Goldman Sachs. Your line is open.
Thanks very much. Chris, I was just curious and I recall at the time of the IPO, I think the major selling point to Trinseo was the quality of the rubber business and the value of that business, obviously since your IPO, the stock’s done wonderfully, but it seems like a lot of that fuel has been on the commodity side, how do you think about monetizing or getting fair value for that rubber business?
Well, I broaden that out, I think Bob, a little bit. In fact we had really two things at the time of the IPO. One was that we felt Performance Materials, we had a little different nomenclature then, but in any case, Performance Materials businesses were going to be steady and growing and relatively higher margins and relatively more stable. But we also had a thesis then that the Basic Plastics & Feedstock businesses would benefit from rising operating rates limited capacity rising operating rates. And that you are right, has in fact happened and has been a large part of the fuel for the stock. On the other hand, we announced at Investor Day, in detail at Investor Day $100 million EBITDA growth plan for Performance Materials in aggregate, taking it from $335 million, which was the year end estimate at that time year end ‘16 to $435 million of EBITDA in 2019. So we believe we can grow Performance Materials. We outlined in detail how we are going to do that, including growing our rubber business, including growing ABS in China, including growing Performance Plastics, including the steps we are taking at Latex Binders to remove costs and raise price. And all of that, we think is beginning to show on that side of the business. On evaluation/monetization question Bob, we are not looking to do anything different than what we have been doing, which is deliver results, grow our EBITDA on Performance Materials, continue to show sustainable and growing EBITDA in Basic Plastics and be smart, thoughtful and patient in terms of the use of our cash. So we have no plans to do any monetization. Our multiple has moved up as you know. We still think it has the ways to go, but it has made significant progress in the last year or so because frankly, we have been delivering results. And I think the market understands that Basic Plastics & Feedstocks is experiencing sustainable rising margins and we are delivering in Performance Materials. And I think Bob, if we continue to do that we should be rewarded in the market.
Would you consider acquisition [Technical Difficulty] from that side of the business as a means to getting more attention and more credit for it or…?
We said we would, Bob. We said we would look at it at this point, bolt-on acquisitions there. We haven’t gone so far as to say we would look at anything of major scale. I guess that’s always a possibility, but it’s certainly not something that we have an immediate attention to. But yes, we would like to grow that business for the reasons you mentioned, to increase its scale relative to the scale of the other side of the equation. I should point out, in our new segmentation, you can now calculate rather precisely the amount of EBITDA that this company generates from say, styrene monomer, which is really I think the piece of the Basic Plastics that’s the most volatile. That number in 2016 is about 22%. So I think your point is if we could raise the EBITDA of the company generally and lower the percentage of the influence of styrene that should be a valuable thing in terms of the multiple of the company. If that’s your thesis, we would share that thesis and we would be trying to do that. I am not sure if that’s precisely where you are going Bob, but I think it is.
No, I think that’s right and we appreciate the added disclosure. It certainly makes our lives easier and it probably makes your story better as well. So I appreciate it.
Okay. Thanks Bob.
Thank you. Our next question or comment comes from the line of Vincent Andrews from Morgan Stanley. Your line is open.
Thanks. This is Matt Gingrich on for Vincent. To clarify the possible upside of the guidance that unplanned styrene outages may present, are you currently embedding no unplanned outages or normalized level of outages. And secondly, is it possible to quantify the extent to which unplanned outages have weighed on utilization rates historically and more recently?
Let’s start with the last part of that first. We have given numbers, particularly in 2015, where we indicated what we believe to be the amount of our EBITDA that was influenced by unplanned outages in styrene. That number for 2015 was $50 million. In 2016, you now have our results and you also have results by segment, including feedstocks. And our view would be that very little of our results in 2016 were driven by that dynamic. Going forward, the planned outages for the spring of this year are rather healthy. It’s a strong turnaround season around the world in the spring of this year. And so we would expect that to have an influence on the spring of this year March, April, May. Unplanned outages, of course we have no way of forecasting. But obviously, there are unplanned outages of magnitude at the moment in the styrene market. There have been since the end of December and they are continuing, it looks like into the second quarter. So at the right time, when we start to see how all those numbers work out, we will be able to and as I said, you will have monthly data. So you will be able to see how those numbers are flowing through our styrene margins and you can make your own judgment on whether they were highly influenced or not influenced by planned or unplanned outages. But look guys, we have said for several years, in a rising operating rate, which we have in styrene because of limited supply and some growth in demand and the age of the assets, the pressure that it puts on the system for the potential for unplanned outages is higher. And more importantly, if those occur because you are starting from a generally higher operating rate, the effect on margin can be higher. And that has been our thesis frankly, for 2.5 years or more and it has played out. So you are asking us to predict with precision the numbers and we are just not going to do that because it’s just very hard to do and I think that should be obvious. We have 1.5 million tons of styrene. Just do the math $30 – $45 million a year.
Great. And just to follow-up, I was hoping for additional color on the drivers and potential resolution of the recent butadiene inflation and what the risk is to synthetic rubber demand if prices continue to rise to offset the inflation?
Butadiene, obviously, has come roaring back from the sleep if you will, of a couple 3 years, that’s driven we think, not by structural, but by some unplanned outages in butadiene in Asia and otherwise we expect those to continue into the second quarter. Through the second quarter, our forecast is what I mentioned, relatively high butadiene through the second quarter. We would expect it to moderate in the back half of the year. It has had no impact on our ability to continue to be sold out in rubber nor do we expect it to, nor has it had any impact on our latex business, which is doing very well, because we have contractual pass-through of prices of cost of butadiene and importantly in rubber because we have very, very good products for high performance tires. A benefit of higher butadiene for us in our rubber business is we get some arbitrage value out of rubber we sell from Europe to Asia. Now you recall, we don’t have a lot of volume there because we have contracted most of our rubber business. But to the extent that we can sell product from Europe to Asia in rubber in the first quarter, for example, we would have arbitrage value from that delta in butadiene and that’s a dynamic that is occurring, I might add at the moment, but in small volume.
Great. Thank you.
Thank you. Our next question or comment comes from the line of Duffy Fischer from Barclays. Your line is open.
Hey guys. This is actually Mike Leithead on for Duffy. I guess tying in with David’s question earlier, can you just talk a bit about your free cash flow expectations for 2017, if we can get some sort of walk from EBITDA and kind of what you guys are seeing the full year headwind from working capital to be?
It’s Barry. Based on – we had mentioned that the Q1, we expected a working capital outflow, but we expect that to moderate as we go through the course of the year. You have our EBITDA guidance of $580 million and then had mentioned our CapEx is $175 million. We are expecting interest payments of approximately $75 million and taxes of about $90 million is where we are to go ahead and come up with a cash flow estimate for the year.
Okay. And you guys talked, I guess at your Investor Day a few months back and earlier in your response to another question around one of your growth goals being targeted M&A, I was wondering if you guys could update us on kind of what you are seeing in the M&A markets you hope to participate in either I guess, in terms of activity or multiples right now?
High prices, patient, thoughtful process on our end. How is that for an update, multiples are high, prices are high. There is a lot of high expectations out there. We are not in a rush. We have no burning desire to go do anything dramatic. If the right opportunities were to come along, we have to assess them and think about them, but the fact is the price – generally the prices of the market are pretty high. It makes it a little bit difficult to think large acquisitions or things like that.
Thank you. Our next question or comment comes from the line of Hassan Ahmed from Alembic Global. Your line is open.
Good morning Chris.
Chris, just wanted to revisit, you obviously talked a fair bit about the sort of affected utilization rate side of things obviously being buoyed by sort of variety of planned outages, a question around sort of what you are seeing in terms of utilization rates in China, in particular, in the past you have talked about subscale facilities in China, those facilities running at relatively depressed operating rates and a lot many times, the operating rates of Chinese styrene facilities being dictated by refineries, right, so obviously, kind of an interesting dynamic these days where refining margins aren’t that great, styrene margins have picked up, you have a variety of outages, so just wanted to sort of get your thoughts about what you are seeing in terms of these Chinese operating rates at these subscale facilities with all of these dynamics in mind?
Right. Hard to be precise as you can imagine with all of the complexities of where the assets are in China and the various forms of feedstock and so on, but our best guess would probably be in the mid-70s, Hassan. There is a little bit of product interestingly, starting to flow styrene from China to the Americas, which is unusual trade flow, frankly. But there is a little bit of that going on. And I think that’s of course driven by the tremendous turnaround and unplanned outage issues going on in the U.S. right now. So there is a bit of a shift in trade flow, minor I would add, which might indicate that they are moving monomer through the system a little bit better Hassan, at the moment, but mid-70s I think is the way we would characterize.
Got it. Now, a bit more sort of macro on the demand side of things, I mean as I take a look at sort of company wide end market sort of revenue exposure, you know what I mean, for you guys, it’s quite diversified, right, you talked a bit about market share gains within the paper and sort of carpet end markets, particularly in Asia, I mean I would imagine you are not really seeing spectacular demand growth in autos, so could you just help me sort of think through what A, you are seeing in terms of numerically speaking, demand growth above trend, below trend, at trend and some of the puts and takes associated with the different end markets?
Okay. Well, first of all, I mentioned earlier to Frank’s comment, compared to early November, we would generally be more constructive overall. Certainly, the European economies look a little bit better. The U.S. has potential to be better. We will have to see, a lot of noise about changes, tax reform and other things. Asia looks about the same, maybe incrementally better. If you break that down getting underneath, looking at our businesses, in rubber, the performance tire business is good. We are just sold out. If we have that new capacity up right now, we could grow rapidly. In polycarbonate, we are sold out. We have one plant. We are sold out. In latex, demand has been pretty good as mentioned. And because we have closed assets and cut costs, our margins are going up. We have been able to raise price. Performance Plastics, where we have I would say the most ability Hassan, to react to market volume, we see pretty strong volumes across automotive and electronics and medical and consumer laptops, electronics, things like that. So I think we are constructive is really where we are right now on that across the board. I kind of wish we had more capacity. We were pretty much sold out in ABS, that’s why we are adding in China. So particular to Trinseo, we have some sold out positions that of course we are improving; rubber, ABS, Performance Plastics. And that’s part of why we believe we can grow Performance Materials by $100 million of EBITDA between 2016 and 2019, taking advantage of the markets with new assets and growth.
Prefect. Thank you so much, Chris.
Thank you. Our next question or comment comes from the line of P.J. Juvekar from Citi. Your line is open. Mr. Juvekar you may need to un-mute your phone.
Sorry about that. It’s Eric Petrie on for P.J. Hi Chris.
Could you give us an update on the timing of your Performance Materials growth initiatives and the cadence of the EBITDA realization over the next 3 years?
At Investor Day Eric, we indicated that year-over-year 2017 in Performance Materials would look very similar to 2016 and we gave some specific reasons for that. As we start to transition into the new rubber capacity, we are going to have to slowdown and take out some rubber capacity. As we start to get ready for our ABS capacity, we have to make some investments to be ready to start the plant itself. So that was kind of the thesis we laid out at that time and so then you are left with 2 years, right, ‘18 and ‘19 on that basis. And I think the best split we could give you is something like $35 million to $40 million in 2018 and the balance would come in 2019. Now we are off to a really good start in Performance Materials this year as you guys pointed out. We gave you guidance for the first quarter of about $95 million minus some favorable timing effects. So maybe we will do a little bit better than that. Let’s wait and see how the year develops. I am talking about that [indiscernible] growth rate Eric, that I talked, that we mentioned.
And secondly, into first quarter, are you seeing any of your styrenics customers delay orders in hopes that prices for styrene monomer go down?
Yes. They – absolutely, so you can imagine with the rise in styrene, the derivative markets are trying their best to wait until things change, and that’s of course an obvious activity that occurs in these market dynamics. They have limitations on that. They have orders. They have certain inventory levels. But clearly, they take down their inventories. They wait and they are hoping for lower styrene, which will lead theoretically to lower polystyrene prices for them. So the answer is yes, we are seeing that.
Thank you. I show no additional audio questions at this time. I would like to turn the conference back over to management for any closing remarks.
All set, Howard and everybody, thanks for joining us. Take care. Bye-bye.
Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.
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