AdvanSix Inc.

Good day and welcome to the AdvanFix first quarter 2019 earnings conference call. Today's conference is being recorded. And after today's presentation, there will be an opportunity to ask questions. And to ask a question, you may press star then one on your telephone keypad. And to withdraw your questions, please press star then two. I would now like to turn the conference over to Adam Kressel, Director of Investor Relations. Please go ahead, sir.

Thank you, Riley. Good morning and welcome to Advance6's first quarter 2019 earnings conference call. With me here today are President and CEO Aaron Kane and Senior Vice President and CFO Michael Preston. This call and webcast, including any non-GAAP reconciliations, are available on our website at investors.advance6.com. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our business as we see it today. Those elements can change, and the actual results could differ materially from those projected, and we ask that you consider them in that light. We refer you to the forward-looking statements included in our press release and earnings presentation. In addition, we identify the principal risks and uncertainties that affect our performance in our SEC filings, including our annual report on Form 10-K. This morning, we'll review our financial results for the first quarter of 2019 and share with you our outlook for our key product lines and end markets. Finally, we'll leave time for your questions at the end. So with that, I'll turn the call over to AdvanSix's President and CEO, Erin King.

Thank you, Adam, and good morning, everyone. Thank you for joining us and for your continued interest in AdvanSix. It was a dynamic first quarter to kick off 2019. As you saw in our press release, AdvanSix successfully navigated through shortages and delivery delays of QME, our key raw material, while maintaining our focus on safe and stable operations. Mike will detail the full results in a moment, but overall, we captured the benefits of favorable market-based pricing despite ongoing challenges in the acetone industry. We drove higher earnings versus the prior year and generated $42 million of operating cash flow, funding high return investments in the business while we continue to share repurchases. There were two one-time considerations in the results this quarter to note, however. First, we had an approximately $8 billion unfavorable pre-tax income impact from the final force majeure event that stemmed from the shortages and delays of queuing. As a result of this reduced production in Frankfurt and Hopewell in Q1, we anticipate an additional $2 million of unfavorable impact in the second quarter of 2019 as carryover associated with the resulting lost sales. That will bring the total first half 2019 impact from the force majeure to approximately $10 million, consistent with our previously disclosed estimates. Secondly, we recorded a $6.6 million benefit in the quarter from business interruption insurance proceeds related to the first quarter 2018 weather event claim. We expect $1 to $3 million of additional insurance proceeds. However, the timing remains uncertain as we do continue to progress with the insurance carriers. We're operating in what continues to be a mixed-end market environment. Given our global cost advantage, we're driving nylon plant utilization rates above industry averages despite continued uncertainty in carpet and automotive applications. In fertilizer markets, wet weather in the U.S. has driven a late start to the planting season as well as disruptions across industry logistics. And in our chemical intermediates product line, we expect global acetone supply to further lengthen into the second quarter. Operationally, while 2019 began with a force majeure event, the organization continues to demonstrate its resilience and ability to succeed. In addition, safety, performance, and compliance are core to how we operate. We recently published our second annual sustainability report reflecting activities and performance from 2018. Among other accomplishments, we were pleased to highlight certificates of achievement, honor, and excellence across three of our sites from the American Chemistry Council. These 2018 Responsible Care Facility Safety Awards were based in part on having no lost work days to injuries or other incidents. As we look towards the remainder of 2019, we expect our full-year CapEx to be in the range of $140 to $150 million, and full-year pre-tax income impact of planned plant turnarounds to be in the range of $35 to $40 million. Reinvestment in the business remains our top priority as we execute on our high-growth and cost-savings capital project pipeline. The commissioning of our first project, which we initiated in 2018 to convert from coal-fired to natural gas-fired boilers, remains on track, and we expect to be online in the third quarter of this year. Lastly, we announced this morning a new strategic alliance with Oven Group, a leading producer of films for the flexible packaging industry, to sell BOPA, or bioactively-oriented polyamide films, in North America. In addition, we announced the closure of our Pottsville, Pennsylvania, films manufacturing by the third quarter of this year. Today's announcement reflects a thorough strategic review. This capital-efficient and highly synergistic combination best positions us for success in the nylon films industry. We are extremely thankful for the hard work and dedication of the POTSville team and are committed to ensuring a seamless transition for our employees and our nylon films customers. So overall, we continue to build momentum across the organization and are excited about the prospects for the remainder of 2019 and beyond. With our focused strategies and global cost advantage, we're confident in our ability to drive shareholder value over the long term. So with that, I'll turn it over to Mike to discuss the details of the quarter.

Thanks, Erin, and good morning, everyone. Now on slide four where I'll cover the first quarter financial results. Sales came in at $315 million, and that's down 12% compared to last year. Pricing overall was unfavorable by about 9%, primarily due to a 12% unfavorable impact from raw material pass-through pricing following costing decreases in benzene and also propylene. Market-based pricing was favorable, actually, by approximately 3% compared to the prior year, reflecting improved performance in our nylon, ammonium sulfate, and caprolactam product lines. Partially offsetting this was a decline in chemical intermediates pricing due to the lengthening of acetone supply globally. Volume overall was down about 3%, primarily due to the unfavorable impact of the phenol force majeure and continued challenging acetone industry dynamics, partially offset by improved nylon production. EBITDA was $42 million in the quarter. That's up about $11 million versus the prior year. And as a reminder, the significant weather event last year resulted in an approximately $30 million unfavorable impact to pre-tax income in the first quarter of 2018. And as Aaron mentioned, this year's results included an $8 million unfavorable impact related to the funeral force majeure that was announced in March including the impact of fixed cost absorption, lost sales, and incremental logistics costs. In addition, we recorded a $6.6 million favorable benefit in the quarter from business interruption insurance proceeds related to the first quarter of 2018 weather event claim. Overall, we saw favorable market-based pricing offset by lower-than-expected operational performance and the unfavorable impact of challenging acetone industry dynamics. Earnings per share of 68 cents nearly doubled versus the prior year, driven by the factors just highlighted, as well as lower interest expense and a lower share count. Our diluted share count for the first quarter of 2019 was approximately 29.8 million shares. That's a decline versus last year, driven by continued share repurchases. Share repurchases contributed to 4 cents of EPS accretion year over year. Partially offsetting this was an increase in our effective tax rate year-over-year, which came in close to our expectations, right around 25.3% in the quarter, as well as higher depreciation and amortization expense. And lastly, cash flow from operations reached $42 million in the quarter. That's down a modest $2 million compared to last year. CapEx of $40 million was up roughly $9 million year-over-year as we continued to execute against our pipeline of high return growth and cost savings capital projects. Now let me turn the call back over to Erin to discuss what we're seeing in each of our product lines.

Thanks, Mike. I'm now on slide five to discuss our nylon product line, which includes our Caprolactam resin and films products and represented just over 50% of our sales in the first quarter. As you can see from the chart on the right-hand side of the page, industry benzene to Caprolactam spreads globally have continued to fluctuate on both a year-over-year and sequential basis in the first quarter. Although we've seen occasional interim moves in pricing associated with industry supply constraints, macro demand uncertainty and fluctuations in input costs, we continue to see spreads maintaining levels generally associated with marginal producer economics. From an input cost perspective, benzene prices declined in the first quarter, tracking underlying oil prices. However, we've seen an uptick in input costs as we've moved into the second quarter. From a demand perspective, we continue to monitor signs of uncertainty in auto and carpet end markets, both of which are primary end uses for nylon, particularly in North America. In engineered plastic, which is used primarily in automotive applications, we've continued to see slowing industry demand globally. In carpet, which has a tie to broader building and construction growth here in the U.S., we've seen softening demand as we progress through the first quarter. As we've been seeing inventory destocking through the value chain, we expect continued softness into the second quarter as we watch for signs of improvement in these applications. We're also monitoring supply and demand fundamentals for the marginal producers located in China. where we expect a continued dynamic environment. The environment on safety inspections that we've been discussing over the past two years continue to progress, particularly in response to the more recent tragic pesticides chemical plant explosion in China that occurred in March. There have been continued fluctuations in plant utilization rates in the region, impacting producers across the nylon chain, including for key feedstock materials. Despite the macro uncertainty, we continue to run our nylon assets at high utilization rates, given our low-cost position globally. and we'll stay focused on being the most reliable domestic supplier to serve our customers' requirements, while also advancing our product pipeline to serve higher-value applications. So let's turn to slide six. As I mentioned earlier, we're excited to have announced a strategic alliance with Obeng Group to sell Bopa films in North America. This alliance combines our commercial excellence, customer relationships, technical expertise, industry-leading resins, and channels to North America with Obeng Group's new state-of-the-art manufacturing facility. which will position us for improved performance in nylon films. We also announced today the closure of our Pottsville, Pennsylvania films plant as part of our broader strategic efforts associated with the films product line. As a reminder, we currently have manufacturing assets which were built in the 1980s in a leased facility in Pottsville, Pennsylvania, where we upgraded a portion of our nylon six resin to films. In 2018, our nylon film sales were approximately $34 million. Although this product line represents only 2% of total advanced sales, nylon films serve end uses with attractive long-term growth rates, reflecting macro trends such as the shift from rigid to flexible packaging. We continue to like this space and remain committed to the films industry. However, our assets are prior generation technology and approaching end of life. Faced with this reinvestment decision for new films lines, which can cost upwards of $30 or more million of investment, We determined a strategic alliance with an asset-light approach was the best option for us and our customers. Our sales, marketing, and R&D teams will continue to ensure we support our customers through these quality products and service. And we're excited to combine our expertise with Owens to create a powerful way to go to market and create new products to meet industry needs. Subject to the finalization of certain estimates, we expect to take a pre-tax repositioning charge associated with a closure in the range of $10 million to $12 million in the second quarter of 2019. The expected charge consists of approximately $6 million associated with a non-cash impairment of plant and business-related assets. Future cash expenses associated with the charge are anticipated to be approximately $2 million for employee separation benefits and $3 million of other exit and removal costs. The closure is expected to be completed during the third quarter of 2019, and we expect a cash payback in approximately one year. It is now very important for me to recognize and thank our employees again for their hard work, dedication, and service to the Pottsville plant and to our customers over the years. We are truly committed to ensuring a thoughtful and seamless transition for everyone. Let's flip to slide seven. In ammonium sulfate, which represented just over 20% of our total sales in the quarter, as we shared earlier, we have seen wet weather in the U.S. drive a later start to the planting season. As we've shown previously, the graph on the right-hand side plots urea and ammonium sulfate industry retail pricing in the corn belt on a nutrient basis. That is because it's important to normalize pricing as urea contains 46% nitrogen, whereas ammonium sulfate contains 21%. Our ammonium sulfate product is positioned with the added value proposition of sulfur nutrition to increase yields of key crops. Based on third-party data, we've seen relatively stable movement in corn belt ammonium sulfate industry pricing as compared to nitrogen pricing overall. As a reminder, urea is the largest nitrogen fertilizer by total consumption and tends to have an underlying influence on all other nitrogen nutrient products. Nitrogen fertilizer pricing has been dynamic over the last two quarters, following a weak fall application season in the U.S. One phenomenon we've seen play out in the early part of 2019, again, is the late start to the season, particularly with cold and wet weather in key regions. The industry has also faced significant logistics disruptions, particularly due to high water levels and flooding along the Key Mississippi River. These delays have impacted the timing of fertilizer application. However, we continue to believe we're well positioned to execute on spring demand and will remain agile as we move through the second quarter and the balance of the spring season. As we look towards the rest of 2019, we do expect the nitrogen fertilizer environment to strengthen seasonally into spring, with the second quarter being stronger than the first. We continue to monitor several factors impacting the overall global nitrogen environment, including China urea utilization and exports, and the expectation of increased planted acres for key crops like corn and wheat. The ag market environment remains dynamic and will continue to stay focused on sustaining our ammonium sulfate value proposition on sulfur nutrition. Let's turn to slide eight for an update on Chemical Intermediates. Our Chemical Intermediates product line represented just under 30% of our total sales in the quarter. As a reminder, acetone represents half of our chemical intermediates portfolio, or approximately 15% of the Demantic's revenue. The chart on the right-hand side of the page again shows refinery-grade propylene costs and U.S. acetone prices based on third-party data. Overall, acetone remains in an oversupplied position. Historically, high levels of imports into the U.S., excess global inventory, as well as aggressive trader activity have put continued pressure on regional pricing and spreads in recent quarters. From an input perspective, acetone prices also moved lower in the first quarter, reflecting a decline in propylene costs. Moving into the second quarter, we anticipate now our realized acetone price overall to continue to be compressed at or below what we've seen in the last six months. And that's due to the fact that the already challenged environment we've been discussing is now compounded with softer demand in the MMA, or methyl methacrylate space, following both planned and unplanned downtime at several producers, as well as extended demand disruptions as a result of the recent terminal fire at the ITC Deer Park, Texas facility in the Gulf Coast. These issues have further complicated logistics getting in and out of the already backlogged Houston ship channel and impacted customers throughout the region into the second quarter. With an already oversupplied condition and a significant portion of the large buyer segment disrupted, acetone supply is expected to further lengthen in the near term. I would also like to take the opportunity to provide an update on the ongoing acetone anti-dumping petition. As you've likely seen, on April 4th, the U.S. International Trade Commission voted to proceed to the U.S. Department of Commerce for investigation. The commission determined there is reasonable indication of material injury to the industry as a result of imports from Belgium, Korea, Singapore, South Africa, and Spain. The investigation of acetone from Saudi Arabia was dropped, but I note that represented less than 5% of the total imported volume. We expect the investigation process to be completed over the next 10 to 12 months. Let me turn the call back now over to Mike to discuss our cash flow and outlook.

Okay, thanks, Erin. I'm now on slide nine where we've highlighted our cash flow and capital deployment framework. As we've previously shown, the chart on the left-hand side of the page shows our cash flow from operations and CapEx on a trailing 12-month basis through the first quarter of 2019. And as everyone's aware, robust cash flow performance has been and will continue to be a significant area of focus for us And as you'll see, operating cash flow has increased 15% on a trailing 12-month basis. Aligned with our strategic priorities, we're driving improved earnings, higher value product mix, and efficient working capital performance. We've maintained an improving long-term trend, helping to fund high return investments in the business, debt pay down, and share repurchases. We are committed to delivering long-term value as we drive growth in the business, consistent with the capital allocation priorities we've previously discussed, executing on high return reinvestment, building out our inorganic pipeline and capabilities, and returning excess cash to shareholders. We continue to see ample opportunities for incremental deployment of capital beyond our base CapEx, further enhancing our integrated value chain. While not all of these projects will come to fruition, Discipline, execution of the pipeline will drive further value for the company. Now, we've talked more extensively about the two larger capital investments initiated last year. We've also triggered other smaller high-return projects. For example, we've invested to expand current production capabilities for our EasyBlox anti-skinning agent used in paints that meet emerging regulatory requirements, particularly in Europe. We've also continued to replenish our pipeline of higher return growth and cost savings projects. Most notably, we're evaluating investments such as ways to improve our cumulophenol yield, increase our ammonium sulfate granular conversion, as well as improving our approach to buffer inventory for cyclohexanone, which will increase net production output and improve our ability to grow higher value intermediate sales. In addition, we've continued our share buyback with approximately $30 million of shares repurchased in 2019 through April 26th. We now have $82 million remaining under authorization. And lastly, we'll continue to evaluate opportunities across the landscape of each of our product lines where we could broaden our customer base and enhance our technology and product offering portfolio, all while improving our free cash flow profile and improving margin stability. Now let's turn to slide 10. Before turning to Q&A, we'd like to recap our outlook for 2019. Our full year outlook remains generally intact from what we shared with you last quarter. From a commercial perspective, that continues to be puts and takes across the portfolio. We're focused on driving strong nylon plant utilization rates while navigating through a continued uncertain macro demand environment. For ammonium sulfate, we expect nitrogen fertilizer prices and mix to increase seasonally through the spring planting season. And as Aaron mentioned earlier, we're monitoring continued oversupply conditions for acetone globally with the expectation of further lengthening in the second quarter. Operationally, really no change to our planned turnaround schedule for 2019, which remains in the range of $35 to $40 million from a pre-tax income impact, the bulk of which will occur in the fourth quarter of this year. In addition, we're pleased to report that our second quarter turnaround was completed on time and on budget. and no change to our prior expectations around capex spend for the year. We continue to expect productivity benefits to begin in the third quarter once our new natural gas fire boilers come online at Hopewell. As Aaron mentioned earlier, we also anticipate an additional $2 million of unfavorable impact in the second quarter from the final force majeure. And that brings the total first half 2019 impact to approximately $10 million from a pre-tax income perspective, and that's consistent with our previously disclosed estimates. Lastly, as we think about the quarterly linearity of our earnings throughout 2019, we anticipate underlying results or excluding the planned turnaround impacts to be stronger in the second half of the year than the first half. That includes initial benefits from our high return capital investments and continued improvements in underlying operational performance. As Aaron discussed, we're keeping a close eye near term on demand trends in nylon and acetone into the second quarter while maintaining our focus on what what's in our control to drive the best possible outcomes, including making smart investments and maturing our capabilities to capitalize on our core advantage and growth opportunities that will drive long-term shareholder value.

Now, with that, Adam, let's move to Q&A. Great. Thanks, Mike. And, Riley, if you can, please open the line for questions.

And we will now begin our question and answer session. And to ask a question, you may press star then 1 on your touchtone song. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll take our first question from Vincent Anderson with people. Please go ahead.

Yeah, good morning. Thanks. So I wanted to start on the open partnership. Just briefly talk about the economic structure of the agreement, whether it's cost plus on the resident or shared economics. And then how would those economics change for any jointly developed new products?

So I appreciate that question, Vincent. Obviously, you know, a lot of that we're holding as confidential associated with how the structure has been set up. I think I would reiterate that we feel that the capital efficient and sort of synergistic combination is well-structured to meet the needs of our customers and long-term needs of the industry. Again, we will be using our Aegis resins produced at Chesterfield to produce the films at Oban, and they will be sold under our brand names as well as Capron Films back into the U.S. They were focused heavily, as you can imagine right now, focused on our employees' transition and the customer transitions into the new value chain, and then ultimately with a new set of capabilities both on our R&D side as well as their capabilities with the new state-of-the-art facility we'll then approach what longer-term new product growth could look like. So more to come there.

Great, thanks. And just a quick follow-up on that. I saw that Obin also produces Nylon 6 compounds for automotive applications. Is that something that you're talking to them about in terms of areas for further new product development?

The areas of the alliance and the collaboration to date are around packaging films. So as soon as we're through our transition on the value chain for BOLPA, we will have the ability to discuss BOPT and BOPET films with them as representing them in the U.S. So, again, starting with films, and we'll go from there.

Great. And if I could ask one more just on fertilizers real quick. Do you have an estimate for the impact of AMSOL and 1Q19 from weather? And how is the 2Q, you know, the second quarter started in terms of making up those volumes?

Yeah. So, Vincent, we don't have a specific estimate on Ansel. You know, I will say when as you compare the one thing that Aaron talked about, as you compare the first quarter, you know, from a year-over-year perspective, what we did see is a slow start to the season overall. Obviously, we had some wet weather, flooding, some issues related to logistics overall, so the planning season has been late, and that has impacted some of our domestic volume here of ammonium sulfate in Q1. We do anticipate that to pick up and improve, assuming improved weather conditions as we get into the second quarter, which is consistent with the season, but we did see a slow start in the first quarter. Okay, thank you.

And again, that is star one to ask a question, and we'll take our next question from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys. Yeah, maybe we can start just on the non-line end markets. I know you were cautious after Q4 in terms of some of the end markets there, and call that out again. Just directionally, would you say that the the concern or caution at the end of Q1 was, you know, heightened versus Q4 or, you know, kind of, you know, in line with what we were talking about a few months ago?

Sure, Chris. Let me elaborate a little bit more, and you're correct, right? Last quarter we did discuss that we were closely monitoring the key indicators in auto and carpet with the potential to watch for destocking through the value chains. And over the last few months, I would say certainly the global signposts continue to point towards weaker demand in engineering plastics and fibers. The U.S. continues to see sort of, you know, weaker light vehicle sales in the first quarter. China car sales are also reported to be kind of the only shrinking consumer product group. And other contributors in Europe, like Brexit and the regulations from the EU Commission on CO2, continue to have ripple on effect internationally. And, you know, so while we are further back in the engineering plastic value chain, certainly we have seen from our customers and talks of, you know, potential for further softening on resin demand. And then on carpet, U.S. flooring sales across the board appear to have started the year weaker with certainly a muted seasonal uptick as we would have expected kind of entering spring. We talked last quarter around the cold and wet weather, certainly impacting building construction growth rates in certain regions of the country. And housing starts were down approximately 9% for the quarter year-over-year as well. And we talked last quarter as well about the put in place non-resi construction spending that was already revised down. We saw it revised down again, further moderating growth rates and spending across the sectors. So I think it's, you know, the signposts are continuing, and certainly following what was a softer quarter, a rebalancing of inventory through the chain does appear to be underway. And I'll just close, you know, and kind of reiterate for you, you know, that ultimately in this environment, we'll continue to focus, as I mentioned earlier, right on our robust, safe, and stable operations while remaining nimble and agile to perform given the global cost advantage. So we'll always focus on driving the best possible outcomes, as Mike indicated, and we'll place the product in the best regions available and applications.

Got it. Very helpful. Acetone, obviously, you know, supply looks like it's going to be strong again going into Q2. It seems like things started to really weaken the second half of 2018. If you were to compare second half of 19 versus, you know, kind of second half of 18 where you sit today, any sense as to whether there could be favorability there or still too early to say on that?

Honestly, Chris, I was going to say it's a bit too early, right? We're focused on navigating through 2Q, and as we indicated, 2Q is expected to be at or below sort of that second half of 2018. Okay. And just to put it a little bit more in context, you know, net imports year to date, you know, are still about 30% more than what is required to balance the market. We saw significant imports come in in April. April imports in 2019 were actually greater than what they were in the same month of last year. And, you know, coupled with the fact that beginning in March and sort of carrying forward now into Q2, 30% of the market demand has been offline or disrupted. as I mentioned, associated with whether it was a planned turnaround, an unplanned turnaround, and then the disruption in the Gulf with the fires. So a lot to navigate through here, and certainly we were committed to making sure that we're communicating when we see signs of anything different.

Yeah, Chris, we really saw the compression on the spreads really starting to accelerate in the fourth quarter of last year. So even from a third-quarter perspective, year-over-year, you still had reasonable acetone spreads in the third quarter last year. So really, you know, the year-over-year comps get a little bit easier as they get into the fourth quarter of this year. But as Aaron mentioned, I think, you know, it's a little bit difficult to predict at this point. We'll continue to monitor it very closely.

Got it. I appreciate it, guys. Let me jump in line.

Very good. Thanks, Chris.

And again, that is star one to ask a question, and we'll take our next question from Steve with Cowan. Please go ahead.

Good morning, guys. Just a couple of quick ones. One, are you guys still having any delivery issues for fertilizer into the corn belt or into the areas you typically deliver in? I mean, either disruptions from rail or anything else that's, you know, obviously to go with the slow season if you've got logistic disruptions. It's another issue to deal with. But have those been resolved, or are you guys still dealing with them?

No, for us, we believe we're in pretty good shape at this point with warehouse inventory and certainly shipments that are leaving the site at current. You know, rail has been – most of ours is rail and truck in pretty good shape. I think the broader logistics, you know, considerations, you know, there are areas of the Mississippi River, I think, further north that still have locks and dams sort of shut down. for movement. And, you know, so there could be just considerations on some inter-corn belt, certain regions that could get tight from an overall nitrogen perspective. But we believe we're in good shape for how we're currently positioned.

Do you expect any benefit from other issues? I mean, if they can't get upriver, it would be gone barge. Does it present some opportunity potentially for sulfate in the region, or is it not very likely?

I think it's just a consideration for overall. You may see, you know, urea move up, right? I think it's just right now nitrogen pricing for nitrogen prices are rather mixed. You may have seen as well while urea has been moving up and pretty dynamic in trading, you know, other sources like ammonia and UAN are flat to down. So I think it's going to be a mixed consideration depending on, you know, where the application is and what the current supply states are. But I think I wouldn't at this point sort of assume that it creates, you know, a large uptick.

Okay. The other thing is nylon 6-6 has been having continuing issues with raw materials. Pricing has been high relative to 6-6. We've been seeing, you know, talking with some people where there has been some substitution where six has been taken out some market share from six-six because they want the better supply situation. Is that something that you guys have been affected by or, you know, seen any improvement in or is it something you see going forward that could help things going forward either by lifting pricing a little bit to close the gap or through demand or some combination of the two? No.

Yeah, I would reiterate for you, you know, ultimately, yes. I think from the standpoint of, you know, opportunity for the broader SIX market to see, you know, a demand substitution from SIX-SIX, you know, there are opportunities, and certainly we're aware of compounders working on applications from that perspective. You know, for us engineering plastics, you know, we're primarily focused on independent compounders, given the large integration in the chain with other companies significant players. We have seen 6-6 pricing come off, and we've also heard indications that supply is improving, I think, really on that softening of demand of end markets. So I think it's an area to continue to watch. I would say in these spaces, particularly in auto and OEMs, the substitution, the transition, the qualification time is also rather lengthy as well. So, you know, again, it's one we've been watching, but I don't know that it's anything that has been, you know, creating a large spike one way or the other, but rather a consideration for longer-term, I would say, positioning between the two materials. And while I will say, you know, globally, nylon sticks, right, still has plenty of capacity. So, you know, I think the spreads are more driven by the tightness in 6-6 versus what 6 can command.

Got it. All right. Thanks very much.

Sure. And as a quick reminder, to ask a question, please press star 1 on your telephone keypad. And to remove your questions, please press star 2. And we'll take our next question from Vincent Anderson with people. Please go ahead.

Yeah, thanks for entertaining a couple more here. I was wondering if you had any insight into whether one of your major competitors recently proposed a Nylon 6 price increase in the U.S., and I was wondering if you knew whether or not that had been accepted by the market.

So, certainly, we are aware of not just the North American. There has been another market player as well, you know, announcing price predominantly out of Europe, and You know, certainly you won't speculate on the rationale. What I can share or will share is that while, you know, we see market demand sentiment, you know, soft, benzene has significantly moved up in late Q1, you know, into April and May. And you have a situation where the ARB across the regions has gone from, you know, effectively being closed for nearly six months to significantly opening up, with Europe seeing the largest increase in input costs. So I think we're monitoring it, but it's – I would say, you know, given where the pricing has held in the movement of benzene, basically dropping in Q1 and just coming right back into Q2 would be a consideration here.

Great. And the perfect segue, you know, in times like these where, you know, the benzene to propylene spread can become exceptionally wide, have you given any thought to opportunistically hedging your propylene exposure? Sure.

Yeah, no, propylene is one that we wouldn't, you know, typically look to hedge. Remember, we also buy cumine, and, you know, when we look at our formula-based contracts with our suppliers, you know, our cost of cumine will fluctuate, obviously, with changes of benzene and propylene, and then a good majority of that, you know, as we talked about, 50% of our revenue is on formula-based contracts. We also, you know, pass that right through, so... There really isn't – I mean, we have, from a contractual perspective, we have natural hedges, you know, in place, and therefore no big reason to, you know, to pursue hedging.

Great. Thank you.

There you go.

And with no further questions, this concludes our question and answer session. I would now like to turn the conference back over to Aaron Kane for any closing remarks. Very good.

Thank you all again for your time and interest this morning. Our results this quarter again demonstrated our ability to navigate a dynamic environment and highlighted the resiliency of our organization. We continue to maintain our focus on operational, commercial, and functional excellence strategies, higher value product mix, and smart discipline capital deployment. I'm excited for what we can accomplish for all of our key stakeholders in 2019 and beyond. And with that, we'll look forward to speaking again with you next quarter. Thanks and have a great day.

The conference has now concluded. Thank you for attending today's presentation.