Before the open this morning, TSE reported that it expects 4Q18 results to be far below the low end of its prior guidance range. More specifically, it now expects Q4 profitability to be within a net loss of ($3.0) mln and net income of $1.0 mln, with Adj. EBITDA of $63-$67 mln. In its Q3 earnings report on November 8, it had guided for net income of $55-$63 mln and Adjusted EBITDA of $110-$120 mln, so, this is a rather drastic cut to its outlook.
In today's press release, the company stated that rapidly declining feedstock prices, macroeconomic pressures in China, and continued weakness in the automotive and tire markets were primary culprits. Those headwinds might sound quite familiar to you, because over the past several days there have been a couple other materials companies citing similar concerns, resulting in their own downside guidance.
Namely, on January 15, Sherwin-Williams (SHW) lowered its Q4 guidance as its Consumer Brands and Performance Groups experienced weaker-than-expected demand. Those segments happen to include industrial coatings for the automotive industry. Soon thereafter, coatings and pigment company Ferro (FOE) followed suit, cutting its Q4 outlook, also pointing to softness in the automotive markets.
Overview of TSE
TSE is a materials company that manufacturers and markets synthetic rubber (13% of FY17 revenue), latex binders (25%), performance plastics (18%), and styrene monomer feedstock (10%). The sythetic rubber segment mainly produces rubber that is used in high-performance tires, as well as conveyor belts, hoses, seals, and gaskets. This segment has significant exposure to European tire markets (Europe 60% of FY17 revs overall) where tire makers rely heavily on rubber suppliers for supply, as opposed to North America where tire manufacturers produce most of their own rubber.
In its latex binder segment, it provides styrene-butadiene latex that is used as a binder for mineral pigments, allowing high coating speeds, improved smoothness, high gloss level, water resistance, etc. The end markets here include magazines, advertising, as well as the carpet and artificial turf industries.
The Performance Plastics business includes compounds and blends that are primarily used in the automotive industry, helping OEMs improve their products, such as by reducing the weight of vehicles.
Its Feedstocks segment consists of its production and procurement of styrene monomer outside of North America. In fact, TSE is responsible for supplying about 15% of styrene monomer capacity out of Europe. Styrene monomer is a key raw material for the production of polystyrene, expandable polystyrene, SAN resins, SA latex, SB latex, ABS resins, unsaturated polyethylene resins, and styrene-butadiene rubber.
Recurring Themes Causing Weakness
With nearly a quarter of total sales being generated in Asia Pacific, it's no surprise that the economic slowdown in China is causing some pain for TSE. Tariffs and trade tensions have had an acute effect on the automotive industry in China as sales sank 14% last November -- the largest decline of 2018. Not only that, but, sales have declined for four months in a row for the first time since the Asian Financial crisis of 1998-1999.
The auto industry represents 14% of total revenue, matching its largest end market along with Building Construction. Tires and rubber goods are not far behind, at 13%, further amplifying its exposure to the automotive market.
It isn't just China that has felt the pinch in this industry. The European Automobile Manufacturers Association (ACEA) recently reported that sales in the EU declined by 8% in November and that registration fell for the third consecutive month. Germany was a major laggard as sales dropped by nearly 10%, followed by France with a 4.7% decline. As we noted above, Europe is by far TSE's largest geographic market at 60% of sales.
The most potent driver to its slashed guidance, however, is the rapid deterioration in its feedstock segment, resulting in a negative $28 mln impact on Q4 results. Customers have been de-stocking inventory and delaying orders of feedstock as macroeconomic concerns in China have mounted. This has resulted in falling feedstock prices.
A key takeaway here is that styrene is used in many different industries and products, implying that it isn't just the auto industry that is struggling. For instance, it is used in food and beverage packaging, textiles, paper, insulation, appliances, and electronics. In other words, the steep decline in feedstock prices could indicate a more broad-based softening of economic conditions -- particularly in China and Europe.
Other Material & Chemical Stocks to Keep an Eye on
Given that it competes in many different markets, TSE has a multitude of competitors. There are some notable publicly traded companies in that list that are likely facing these same pressures. Those would include OMNOVA Solutions (OMN), LyondellBasell (LYB), Repsol (REPYY), Sinopec (SHI), Total (TOT), and DowDuPont (DWDP).
None of these companies have issued fiscal Q4 results yet, with OMN confirmed to report earnings on January 31 and LYB on February 1.