AdvanSix Inc.

Good day and welcome to the AdvanceX First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star 1 on your telephone keypad. To withdraw your question, please press star 2. I would now like to turn this conference over to Adam Kressel, Director of Investor Relations. Please go ahead.

Thank you, Chantelle. Good morning and welcome to AdvanceX's first quarter 2020 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.advancex.com. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and 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, as further updated in subsequent filings with the SEC. This morning, we'll review our financial results for the first quarter and share our thoughts on the COVID-19 pandemic and 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 Advancix's President and CEO, Erin Kane.

Thanks, Adam, and good morning, everyone. Thank you for joining us and for your continued interest in Advancix. First, I'd like to start off the call by offering our condolences to all who have been affected by the COVID-19 pandemic. I hope that everyone listening today, as well as their families and coworkers, are healthy and staying safe. We are clearly in unprecedented times, and I also want to send my heartfelt thanks and appreciation to our 1,500 teammates at Advancix. This crisis has impacted all of our professional and personal lives in many ways. We have adapted our routines, work schedules, and even how we work. With the challenge, though, comes many opportunities. It has forced our collective organizations to be even more agile, efficient, and creative with our processes while innovating on our strengths along the way. As we highlighted in our March 31st press release, the business of chemistry in our specific industry was designated as essential during the response to COVID-19 for both public health and safety, as well as community well-being. We take our obligations seriously to produce materials that support the broader populations while maintaining a relentless focus on health and safety. At the onset of the crisis, my leadership team began to meet daily as part of our organization's broader tiered accountability meeting structure to ensure we stay aligned on key priorities, identify potential risks and opportunities, and maintain a continuous communications feedback loop throughout the company. Daily communications to the organization highlight areas of focus, as well as the great work being done by our employees each day. I continue to be inspired by the teamwork, collaboration, and nimble decision-making that is happening across the board. Above all, health and safety remains our top priority and core to who we are as we navigate through this environment. Significant efforts and actions have been taken to protect our employees, customers, suppliers, shareholders, and surrounding communities, including de-risking our previously scheduled second quarter planned plant turnaround and shifting a majority of the work into the third quarter. We are very pleased with the results our practices and protocols are delivering. With the significant challenges the world is facing from COVID-19 pandemic, we have restructured our call today to focus on the key information we believe is most important to our shareholders. Mike will briefly review our first quarter results, and then we'll spend most of the call highlighting our response to COVID-19 from a health, safety, and operations perspective, as well as actions we're taking to support our financial position. We'll also dive into what we're seeing from an industry and end market perspective. While we do expect nylon demand weakness to continue particularly in carbon-engineered plastics applications tied to consumer demand, we do see resilience across various other product lines, including our acetone for hand sanitizer and acrylic screens, nylon for food packaging, and granular ammonium sulfate into the heart of the domestic planting season. Our integrated asset base, global low-cost position, and diverse co-product portfolio served us well in the first quarter. And as we progress through the second quarter, we're executing our business continuity plans to ensure we remain a trusted partner for reliable supply to our customers. There is considerable uncertainty regarding the duration of this crisis, the pace of recovery, and the impact it potentially will have on the global economy. The good thing is that advances is starting from a strong foundation. The assets we have, our business model, global cost advantage, and resilience across the organization give us a great base to build upon as we navigate through these dynamics. With that, I'll turn it over to Mike to discuss the details of the quarter.

Okay, thanks, Erin, and good morning, everyone. Now on slide four, I'll review the first quarter financial results. And keep in mind the first quarter results were largely unaffected by COVID-19. Sales in the quarter were $303 million. That's down about 4% compared to last year. Pricing overall was down about 10%, primarily due to an 11.5% unfavorable impact from market-based pricing, reflecting challenging in-market conditions in our nylon and CapriLite 10 product lines, as well as higher standard export sales mix in ammonium sulfate. Raw material pass-through pricing was favorable by about 1%. Volume overall was up about 7%, primarily due to higher standard ammonium sulfate export sales and improved industry dynamics in chemical intermediates, particularly acetone and oxymes. EBITDA was $29 million in the quarter, down about $13 million versus the prior year. And I'll walk through the key variances on the next slide, but the decrease primarily reflects the unfair rule impact of low market-based pricing. Earnings per share are 31 cents, decreased 37 cents compared to last year. You'll notice the effective tax rate of 29.9% in the quarter was higher compared to last year in expectations. And that was driven by a few factors, including reduced benefits from equity vesting and expected deduction loss as a result of our plan to pursue a federal net operating loss carryback claim allowed through the CARES Act, which is expected to improve cash taxes by approximately $8 million this year. Despite the tax rate in the first quarter being above expectations, we continue to expect the full-year tax rate to be approximately 25%. Now, in terms of share count, first quarter came in at $28.1 million compared to $29.8 million in the prior year period. And lastly, cash flow from operations reached $20 million in the quarter. That's down about $22 million compared to last year, primarily due to lower net income and the unfavorable impact of changes in working capital. CapEx of $34 million was down roughly $5 million year over year. Now, let's turn to slide five. We thought it would be helpful to highlight a few of the key drivers of our EBITDA performance year-over-year. As I mentioned earlier, market-based pricing represented a significant headwind, roughly $37 million, as a result of the continued challenging conditions in nylon, as well as lower ammonium sulfate prices year-over-year, in part due to the unfavorable mixed impact of higher export sales of standard-grade products. Lower input costs, namely natural gas and sulfur, partially offset the overall pricing decline. Planned plant turnarounds were an approximately $2 million impact in the quarter this year versus no impact in the first quarter of 2019. The cumming impact following the shutdown of Philadelphia Energy Solutions in 2019 represented only an approximate $1 million impact in the quarter. That's well below the runway we had seen in the second half of last year. We are further optimizing our supply chain as we've aligned our CUNY supply. We now expect a full year 2020 impact of pre-tax income as a result of the 2019 PES supplier disruption and shutdown of $5 to $10 million. Now, that's about $5 million favorable versus our previous estimate, and is approximately flat to $5 million favorable compared to 2019. In addition, we have submitted a business interruption insurance claim, and we'll provide updates on that progress as appropriate. SG&A expense represented an approximately $3 million benefit year-over-year, reflecting a decrease in stock-based compensation and IT costs, and continued disciplined cost management across the organization. Lastly, we saw an approximately $10 million net tailwind from higher volume, operational performance, and other factors. This includes productivity benefits from our natural gas boilers at Hopewell, which have continued to exceed our return expectations. As you recall, in the first quarter of 2019, we had two one-time considerations which largely offset each other, roughly $6.6 million of insurance proceeds related to the first quarter of 2018 weather event and the approximately $8 million impact of the funeral course majority. Now let's turn to the next slide. As a reference, we've included our typical pricing and spreads across our product lines all together here on slide 6. Consistent with our results, global cavern lectin spreads over benzene continued to decline sharply on a year-over-year basis in the first quarter. The declines reflect a weak demand environment across most major end uses in what is already an oversupplied industry globally. We're also tracking the significant drop in benzene costs seen in March, which the CapriLactam prices more closely followed. The downstream resin spread in the industry did show an expansion over the falling ROAs in CapriLactam, however. Transaction volume in the industry at these levels was very low, and we've already begun to see a crack back to roughly the $200 to $300 range per ton as we enter the second quarter. Asia benzene and capro spreads averaged roughly $600 per tonne and a quarter, and that remains at levels below cash costs for more than half of the global caprolactam cost curve and approximates the trough levels we saw in 2016. Overall, nitrogen industry pricing has also declined on a year-over-year basis, tracking lower global energy prices. Based on third-party data, we've seen more modest ammonium sulfate industry price movement as compared to recent urea pricing, which, as you recall, is the largest nitrogen fertilizer by total consumption. And lastly, industry realized acetone prices over refinery-grade propylene costs stabilized in the first quarter tracking an improved supply and demand balance in the U.S. following final affirmative anti-dumping duties and increased downstream demand. The month of March saw a significant drop in propylene input costs and expansion in small, medium, and buyer acetone prices back to a premium to the large buyer market. As a reminder, the small-medium buyer price is reflective of roughly one-third of the domestic industry, where pricing is predominantly freely negotiated. Now let me turn the call back to Erin.

Thanks, Mike. Let's turn to slide seven to discuss some of the actions we've taken in the wake of the COVID-19 pandemic. For the last two months or so, we've been executing our business continuity plans with dedicated teams, proactively implementing measures to mitigate COVID-19 impacts. while continuing to operate all our manufacturing facilities to meet customer demand. The health and safety of our employees remains top priority throughout all of this. We have protocols in place, including on-site medical personnel to actively monitor employees and contractors. We have also adapted the way we work to mitigate risk, including implementing 100% thermal screening processes at all manufacturing facilities with restrictions on non-essential visitors. We've established social distancing while limiting the number of employees in control rooms, labs, and meetings. And we're maintaining policies and practices consistent with CDC and government guidelines, including upgraded personal protective equipment and face coverings at all manufacturing facilities. We moved to telecommuting across all sites where possible, prohibited all nonessential domestic and international business travel, In addition, we've proactively trained a contingent workforce to operate the plants as part of our business continuity planning. As I highlighted earlier, the previously scheduled second quarter 2020 plan plant turnaround was de-risked with the majority of the work shifted to the third quarter in order to limit the number of contractors on site and ensure operational continuity in the current environment. We also remain confident in our financial position. At the end of the first quarter, we had approximately $31 million of cash on hand with approximately $87 million of additional capacity available under our revolving credit facility. Our $425 million revolving credit facility provides a base worth of liquidity for the business in addition to our operating cash flows and matures in 2023. As a precautionary measure in the current environment, we are currently maintaining higher cash balances of approximately $75 million. As a reminder, the leverage ratio covenants of our facility allow for us to net debt with up to $75 million of cash. Our previously announced amendment to the facility executed in the first quarter also provides us with leverage ratio covenant flexibility in 2020. In addition, we're actively assessing potential incremental borrowing capacity under the facility's uncommitted accordion feature. And we're also driving a disciplined approach to cost management, including all discretionary spending, and are planning a further reduction of capital expenditures. We now expect CapEx for the full year 2020 to be in the range of $80 to $90 million, which represents a reduction of $10 million from our previously announced estimate and a decrease of $60 to $70 million versus 2019. We're continuing to evaluate the potential impact of the CARES Act and other government stimulus programs to optimize cash flow, including provisions for taxes, employment-related costs, deferral pension funding obligations, and options for liquidity, which Mike will elaborate on in a moment. So let's turn to slide eight. On the left-hand side of this page, we provided a framework of potential impacts by key end market. The chart represents an estimated percentage of our total sales, ranging from low to moderate to high exposure, from COVID-19 impacts. On average, 75% to 80% of our sales are concentrated in the moderate exposure, but I must say visibility remains mixed across many end markets. Our highest demand risk in the near term is linked to more consumer-oriented end markets. Global auto production shutdowns and demand weakness in consumer durables are expected to impact our nylon and chemical intermediate product lines. Textile demand declines in Asia are also impacting nylon industry supply and demand conditions. Although textiles are not a significant end use for advancing sales directly, they do represent the largest nylon end use globally and are impacted by the greater consuming U.S. and Europe markets, which are still facing significant lockdowns and declines in economic activity. We're also keeping a close eye on building construction trends as well as carpet demand, which are expected to remain weak as a result of COVID-19. Conversely, food packaging demand for nylon, which is preferred for its toughness and strength, has been robust, with inventories at grocery stores seeing rapid turnover. Through this period, we've continued to see strong demand signals from the ag side of the business, as we sell our ammonium sulfate fertilizer into the heart of the spring planting season. The second quarter is historically our strongest quarter domestically for higher-value granular ammonium sulfate sales. We've seen an earlier start to the planting season this year compared to last year, which, as you'll recall, was delayed by wet weather across regions of the U.S. We've also seen improved acetone industry supply-demand balances following final affirmative anti-dumping duties imposed in March. Demand has improved for several essential applications, including isopropyl alcohol, or IPA, used for hand sanitizer and other disinfectants, methyl methacrylate, or MMA, which, among other things, has seen increased demand for acrylic screens uses protective equipment at stores, as well as other solvents used in coatings. Visibility across the portfolio is only a few weeks out, which in many cases is not too different than how our orders typically come in. Our customer base is very steady with long-tenured top customer relationships, and we've been in even greater luck stuck with them these last several weeks. We've increased the frequency of our pulse checks and decision points through our sales inventory and operations planning teams to respond quickly to demand signals. We've seen a roughly 20% to 30% reduction in nylon industry demand in April, which we addressed proactively by proceeding with our planned plant turnaround at Chesterfield. There has been some demand pickup in Asia as economies reopened in the region, and we're leveraging our core strengths and global low-cost positions to optimize our sales mix across the portfolio for this environment. Despite some reduction in utilization in April, we're still running disproportionately higher, which at a minimum is 10% to 15% above the industry average. Now more than ever, we are flexing our ability to remain agile on product mix and plant utilization. We're also driving improvement through our differentiated products with recent commercial wins for our co-polliner offerings into the packaging space, ongoing field trials in soybeans to continue growing underlying ammonium sulfate demands, and investments in high-purity applications across our intermediate portfolio to improve quality and yield. So let's turn to slide nine. An additional watch point for our business as a result of COVID-19 are implications to refinery utilization in the U.S. With the vast majority of the population not driving or flying, there has been a contraction in demand for transportation fuels. Some refineries in the U.S. are dropping output by 30% to 50% and are managing storage constraints on the back of a significant inventory build. We are closely monitoring any potential impact this may have on supply of our key raw materials, both notably cumine and its inputs of benzene and propylene, as well as sulfur, which are product streams of refinery operations. Our teams have been hard at work to ensure security of supply. We've added two new cumine suppliers this year and diversified our sulfur supply as we continue to maintain optionality through our supply chain. We've also seen a significant drop in oil prices in recent weeks. While in the past we've used oil prices as a general proxy and indicator for raw material price movements, our business is based on benzene and propylene inputs, which do have their own supply and demand-driven fundamentals. For instance, in Q1 sequentially, benzene rose 8%, while refinery-grade propylene fell roughly 20%, all while WTI crude moved down on average approximately $10 quarter-to-quarter. We thought it would be helpful to briefly review our pricing mechanisms in this context. We primarily mitigate raw material input price risk through formula index-based price agreements, which span roughly 50% of our total revenue base. We anticipate a modestly higher exposure to spot sales in the near term, given the demand environment and declining customer contract volume. We typically see formula index-based price agreements in place in our nylon business, in particular Caprolactam in some of our resin sales, and across parts of our chemical intermediates business. Our selling prices in these instances are indexed to the price of raw materials, benzene or propylene. So our sales will fluctuate with the price of key raw materials, with our variable margin being largely protected. The remaining roughly 50% of our revenue is what we would consider market-based pricing. Pricing for this part of our portfolio, including all of the ammonium product line, ammonium sulfate product line, and the rest of our nylon and intermediate, is influenced by supply and demand dynamics in the various industries we serve, as well as marginal producer economics. The underlying raw materials will also impact pricing where negotiated selling prices can lag up to 30 to 60 days with movement in those commodity inputs. Lastly, with a sharp drop in oil prices, we're also monitoring the impact on industry cost curves. As we've discussed before, lower energy inputs flatten the cost curve, and this can result in some pricing pressure. In particular, we're watching potential impacts that lower energy environment may have on the pricing into the second half of the year for nitrogen fertilizer. We believe our core strengths will continue to serve us well, and resilience in our operating model enables us to perform in any energy environment. Let me turn the call back to Mike to wrap up before we move into Q&A.

Okay. Thanks, Erin. I'm now on slide 10 to summarize our outlook for the rest of the year. We've also highlighted some key considerations that can impact our outlook as we move forward here. From a product line perspective, Erin highlighted many of the impacts we're seeing on our businesses from COVID-19. Nylon demand weakness and reduced global industry operating rates are expected to continue. We'll also be closely watching for any demand signals around both residential and non-residential construction, auto production, and textile growth out of Asia. So while we're navigating challenges in nylon, we do remain cautiously optimistic about our view on ammonium sulfate and chemical intermediates, particularly acetone. We will be closely monitoring the impact of lower energy prices on nitrogen pricing in the second half. Now, operationally, we're continuing to support safe and stable operations while adjusting our production output to changes in mix and demand. So while we're working to mitigate near-term impacts to absorption and volume as a result of COVID-19, we are maintaining utilization rates above industry output by leveraging our global cost advantage. Karen highlighted the changes to our plan turnaround schedule for 2020, which is now expected to be a pre-tax income impact of $30 to $35 million, or down about $3 million from our prior estimate. The heaviest impact is expected to be in the third quarter of this year. From a cash perspective, we've highlighted our expectations for a further reduction of capex spend in 2020 as we continue to assess opportunities to maximize free cash flow in light of current and anticipated economic conditions. We have a number of ailments from a cash flow perspective, particularly as we progress through the year and continue to expect stronger cash flow generation in the second half compared to the first half. This primarily reflects the significantly lower CapEx run rate and other working capital timing considerations. Our annual ammonium sulfate pre-buy cash advances program is another consideration for cash flow linearity. This occurs in the fourth quarter, typically for spring sales in the following year. We're driving disciplined cost management across the organization, including all discretionary spending. As a result of our actions, we're targeting an approximately $10 to $15 million full-year cost reduction versus the prior year, including indirect cost savings, managing people, costs, and other plant spend and logistics benefits. While we continue to evaluate benefits of the CARES Act, we do anticipate approximately $8 million of cash tax savings in 2020 and an approximately $6 million cash benefit in 2020 from the deferral of Social Security taxes. Given the puts and takes across the portfolio, we expect free cash flow to remain negative through the first half of the year. However, second half free cash flow is expected to be positive. with lower capex spend and working capital timing impacts more than offsetting the headwinds in the early part of this year. We're continuing to leverage our strengths and are committed to driving best possible outcomes, which will require us to remain agile as we navigate through the near-term environment. Now, with that, Adam, let's move to Q&A.

Great. Thanks, Mike. And Chantal, if you can open up the line for Q&A.

Thank you very much. Ladies and gentlemen, at this time, we would like to open the floor for questions. If you would like to ask a question, please press star 1 on your telephone keypad now. Again, that is star 1 to ask a question. We'll pause for just a moment as we wait for questions to queue. And again, as a reminder, that is star 1 to ask a question. Our first question will come from Vincent Anderson, Stiefel.

Yeah, good morning, thanks, and belated congratulations on the acetone win. I wanted to go through kind of the commercial plan for maintaining high utilization rates in the second and, you know, potentially into the third quarter when it comes to placing Capro. You know, with your cost position, you know, you'd like to move every time you can, but if we were to see something like a 30% drop in nylon demand, is there physical capacity in the global Capro trade channels for you to move that much incremental Capro if, you know, we're down at those levels for, you know, more than a couple months?

Great, Vincent. Thanks for the question, and glad you're well and joining us here this morning. So, as we mentioned, we saw that in April. Certainly, as that continues to be extended, as we indicated, we do see the opportunity, right, provided there are demand signals around the globe to continue to run well across our region. you know, integrated asset base. So the export markets, as you can imagine, certainly given the way the pandemic kind of came across the globe and if the expectation is if it reopens in that same construct, that the Asia's advanced signal we saw at the end of April continuing here into early May is important, obviously, for us here. And And then recognizing that as markets continue to reopen, that optimization, right, of where our mix is placed will happen in a post-recovery world. So, you know, we've been focused on making sure we've got, you know, the right quality, the right product mix to meet basically where the demand signal is, right, in this environment. So that is the plan. And, again, we did see some turndown in April. We proactively took the outage in Chesterfield. I think that helped us, you know, mitigate that here in the near term. And then we'll look to leverage, like you say, our competitive strengths. And we do believe that we're roughly about 5% of the world's capacity, and with the strength that we have, believe that, again, that will serve us well and be disciplined in that fashion.

Thanks. And you led right into my next two. Just quickly, you know, you mentioned the outage and Chesterfield. You know, how much do you depend on external contractors for your turnarounds? And is there any risk to labor availability this year from a timing perspective?

You know, it's a great question, and certainly something that played heavily into our decision to de-risk our Q2 outage. If you recall, Q2 outage was going to be a multi-site outage. It was integrated across our Frankfurt, Hopewell, as well as Chesterfield. You know, that allows us to maintain, you know, rates, as you know, in our previous outages, and it allows us to get efficiencies. When we reflected on, as the national emergency was declared here, stay-at-home orders were going into place, to conduct that outage as is in Q2 would have required nearly 1,000 contractors across our site. So when we looked at the health and safety of our teammates as well as the health and safety of our contractors and just availability, we felt it was very prudent to de-risk and shift out the majority of the work. So the Chesterfield outage was successfully done. I think it was great protocols. We figured out how to get the work done with six feet, social distancing, as well as improved PPE and facial covering. And that outage is, we're coming back out of that and ramping the plants back up and was successful from a health, safety, environmental perspective, as well as getting the work done in an adaptation time. So we'll We'll look to Q3, and again, making those decisions to learn a lot. Obviously, if we have considerations on how long you know, the pandemic lasts and obviously the spread and transmission, we believe we'll be very well prepared to execute in Q3, even as contractors come on site.

Yeah, and Vincent, the only thing I'll add there is that contractors as well as our employees will be subject to the same screening and the same protocols that we have in place to protect our operations. So we talked about, you know, thermal screening of anyone who's visiting our site, and that would include contractors as well. as well as protocols around on-site medical personnel to actively monitor employees as well as contractors. So we feel very good about all of the actions and the mitigations we've put in place, not only to protect our operations from infection through an employee, but also contractors. So we feel we're in a very good position to manage that going forward.

That's great. Thanks. And then just to go quickly back to the market, Aaron, you touched on, you know, Asia being kind of pivotal to watch for in the near term for export opportunity. And you mentioned textile weakness earlier in your comments. But, you know, from an outsider perspective, it looks like, you know, Chinese textile manufacturers have been much slower to recover than kind of the rest of its manufacturing base. One, is that your impression? And two, are you seeing any impact on the Asian capro trade as a result of that or just anything else you'd want to note there?

No, it's certainly been the largest application for nylon globally. And being tied to consumer confidence and consumer demand, I think you're – your observations have been consistent with what we've seen. In general, I think a slower start, you know, across the board. But, again, we still see a – you know, I see it as a positive that there is a startup in the region. You know, operating rates are probably around, you know, 60 percent or so, kind of at best in China right now. But, again, you know, the pace here, the shape of the recovery – you know, we'll be unique, right, I think, to this consideration. And, again, we're just going to be nimble, be agile, you know, meet demand where it exists, make sure that we're very flexible in the product mix we need to make. And then we'll watch here, too, right, you know, with May and June, a little bit of the opening here in, you know, the domestic markets. You know, we've seen retail stores in some states potentially reopening and, Yeah, it's one of these things where it's going to play out differently, I think, than, you know, previous considerations. But we've proven that we can navigate through other cycles, and, you know, we're staying focused on being able to prove it here as well.

Excellent. Thank you.

Thank you. Thank you very much. Our next question will come from Chris Moore, CGS Securities.

Good morning, guys. Yeah, just you had referenced the kind of community sourcing. It looks like the incremental cost expectation for fiscal of 20 is a little bit lower than previously thought. Maybe can you talk a little bit what's behind that?

Sure. Sure. So if you recall, when we had talked about this previously, we had a range of $10 to $15 million of an impact for 2020, and that's compared to a $10 million impact last year. So the initial thinking was we would see... you know flat or possibly a five million dollar unfavorable impact if you recall in the discussions we've had inherently by uh expanding your supply outside the region where pes was a very local supplier to our plant um you know just outside of philly uh you know inherently you have a lot more logistics costs as you perhaps source more material down from the gulf which would require spot vessels or other regions of the world We've been able to really look at this and optimize the logistics spend to get more, I'll say, more material per vessel and vessel that we currently charter up from the Gulf, which will significantly reduce the cost, and we're thinking at this point that we could be flat or even $5 million payable as compared to last year. So it really came down to the logistics spend, and we're going to continue to optimize to see if we can get it any lower as we go forward here.

Got it. Thank you. And maybe, Aaron, can you just talk a little bit further about – the ammonium sulfate outlook heading into the second half. Just some more thoughts there.

Great. Thanks. I'm glad you're well as well here and joining us. So let me start maybe by reiterating, Chris, a bit on what we're seeing right now as we're in the heart of the season, because demand certainly is robust with fertilizer heading out to the field. The season is earlier than we saw last year with corn plantings in top states, about 7% ahead of our five-year average, and we're almost 15% ahead of 2019, and last week was From what we hear, a rather fast week with things moving rather briskly, and about a fifth of the corn crop was actually planted last week. So in the heart of it, seeing that robust demand, which is great for Q2. But as is typical, as we begin to approach sort of the end of spring and planting, we will see and we do typically see global nitrogen fertilizer prices falling. This summer, with fertilizer demand likely contracting and energy prices flattening those cost curves, as I mentioned, We anticipate and have seen projections that nitrogen prices could likely fall below the last two years' midsummer lows and maybe even approach those 2017 levels, right? So that's what we're going to watch for. However, right, I'll just remind you and everyone that ammonium sulfate does have its own considerations, right? And we continue to stay focused on that value of sulfur nutrition and also believe that the capylaxam-related cutbacks, you know, which we've seen in utilization which could curtail that ammonium sulfate production as well, will provide some offset on the impact of that weaker nitrogen. So hopefully that provides a little bit more color for you.

Absolutely. Thank you. And just last question for me. Are there any potential opportunities kind of on the back end of the pandemic? Any specific competitive landscapes that might shift a little bit or any thoughts there?

You know, it's a great reflection here. And I think the one we need to watch, right, is when you look at the Capri-Lactam nylon space, right, it's been an industry with oversupply. We believe we're operating now with more than 50% of the sort of cost curve for Capri-Lactam operating below cash costs. This isn't necessarily completely COVID-related here, but we came into it already in that position, right? And so we're testing the trough levels that we saw back in 2016. And we sat there last time for about, you know, let's call it 15, 16 to 18 months. And at the end of that, we did see the rationalization of a plant here in the U.S. as well as some capacity in And I think that's the one thing we have to watch here, right, is does the extension of the downturn here, right, on the cycle for nylon and the additional considerations and extension that COVID could play into that, will it create another round of rationalization? But that's simply, you know, no signs yet, but probably the one when you think about, you know, an opportunity that would restructure the space.

God, I appreciate it. Thanks, guys.

You bet. Be well. Thank you very much. Our next question will come from David Silver, CLK.

Yeah, hi. Good morning. I have a number of questions. I think maybe if you don't mind, I just would like to get a couple of points clarified from your prepared remarks. So, and I apologize, I just wasn't writing fast enough on these. But, Aaron, I think you cited a decline during the month of April year over year in nylon demand. And I would like to, if you wouldn't mind just repeating what that percentage decline was. And then also with the $75 million cash balance that you mentioned earlier, in the second quarter. I missed the context of that. Was that, you know, boost from the $31 million at the end of Q1, was that due to additional drawdown, or was that, you know, from, I guess, recovery of working capital and, you know, other sales of products? If you could just clarify those two points, that would be my first thing, and then I'll follow up. Thank you.

Yeah, sure. Let's take those in order, right? So certainly on the – what we saw in April, the decline we saw was 20 to 30 percent.

Okay.

And that is – yeah, that's coming from a number of sort of applications – Certainly, the automotive shutdown, you know, would back up on the engineering plastic side. And then we did have some customers for their own health and safety sort of COVID impacts, you know, had some shutdowns of their operations. So, you know, but it did culminate in that 20% to 30% impact in April.

Okay. And then the cash balance buildup? Yep. Sure.

Sure, yeah. I think... So as you know, we use the revolver as part of our credit facility as our base source of liquidity. You know, the balances will ebb and flow, and that's really kind of the benefit of having the revolver is we have that flexibility. And as you indicate, we ended the quarter with $31 million of cash. As a precautionary measure, we did draw down additional funds out of the revolver, bar holding, higher cash balances. Again, as a precautionary measure, you know, as we navigate through this more challenging environment here, that balance, that cash balance will fluctuate. It'll go up and down depending on our cash flows and and how we manage that. You know, our view is that, you know, the whole banking industry is in a much better shape from a capitalization perspective now than they were in 2008 and 2009. So really it's just strictly precautionary, you know, holding those cash balances a little bit higher here than we normally would. And we'll just navigate and manage it as, you know, as we go through here, as we get better visibility, as we understand the impacts on demand and operations as we go forward here. But it is, again, strictly precautionary at this point.

Okay, thank you. I wanted to ask you about the acetone demand outlook and, in particular, this emerging or newer outlet for acetone into IPA that you did highlight in your prepared remarks. So I had to crack open my industrial chemistry book here, but, you know, it's an interesting alternative or incremental use I was wondering internally, what do you think that that incremental route or end market for acetone could amount to maybe, you know, in the shorter term where demand is spiking, but also, you know, whether you think that route from a fundamental perspective is going to be a sustainable source of incremental demand longer term?

And a great question. And since you offered that you opened up your chemistry book, I'll try to build off of that, right? So perhaps in that chemistry book, you may have seen that there are two routes to make isopropyl alcohol. And certainly here in the U.S., as well as globally, both routes, you know, I think are employed. One directly from propylene, the second from acetone. And I would say over long stretches, David, right, the The tradeoff of which route wins, you know, it really depends on where acetone sits over propylene. But certainly in a time like we're seeing now and the demand, I think anybody who can make it is certainly making it. So we are servicing two large producers here in the U.S. who use that acetone route. And, you know, so I think certainly for the foreseeable future, right, the demand strength here is important. You know, in the interim, it's certainly creating further tightness in addition to what we're seeing on the methylmethacrylate side for clear plastic sheeting, for protective barriers. But I would imagine, I can't call it that, you know, we've seen this over stretches and over cycles, There always is some ITA made from acetone, but at some point when the markets are restored and the pandemic passes, I would anticipate sometime in the future that, you know, the normal tradeoff between the propylene route and the acetone route will fall back into normal balance.

Okay. All right. Thank you for that. And then this is a question for Mike, I think, and it has to do with, inventory levels and, you know, within the context of the current kind of oil price outlook. So, you know, I noted that sequentially your inventory levels, you know, declined a certain amount, but from year end to March 31. But I'm kind of scratching my head and I'm just kind of wondering, you know, oil, wherever it is today, I mean, it's much lower than it was, you know, even just a few months ago. And that, to me, kind of always makes me scratch my head and wonder about the potential for inventory losses or, you know, product that's produced from petrochemical inputs, you know, based on a certain oil price and now we're at a different level. Could you maybe talk about that overall? You know, what type of risk or, you know, effects do you think that decline in oil price might have on, you know, on your ability to pass through the full, you know, production costs that are represented in your inventory at March 31. Thanks.

Yeah, sure. You did notice, I believe maybe on the last earnings call, you also asked about inventory, and we did see a reduction in the first quarter. Really, it was driven by two areas. When you look at sort of the width and finished goods inventory, that really drove a reduction, and that was down roughly about – eight million in aggregate. We had acetone and ammonium sulfate really the two primary drivers of the inventory reduction and much of that standard product inventory that we had at the end of the year, we did sell in the first quarter as well. From an oil price perspective, it sounded like you were referencing sort of an accounting consideration around lower cost of market. And, you know, we evaluate that. We'll evaluate that, you know, every single quarter. You know, as we set our standard cost, and when you look at the inventory level and the values of the inventory, they are based on our standard cost and the amount of volumes we have in inventory, and that's the value that does go into the inventory. We will evaluate that every quarter in terms of those values relative to the market pricing. When you look at the finished goods, and we'll make adjustments as appropriate. If you do see oil prices decline and go below in terms of the actual product cost relative to the The sales prices, if the sales prices fall below the product cost, we need to consider how that will impact inventory values. But I would say, you know, again, economically, that is an accounting consideration. Economically, when you look at it, you know, still the considerations around the fact that 50% of our business is pass-through. You know, we pass through those raw materials as they go down. We also increase sales. you know, prices as raw materials go up and our bearable margin is largely protected, that, you know, economic consideration is still in place. And in terms of the accounting considerations from a lower cost of market, as far as we can tell right now, the risk is relatively low.

Okay, thanks. I just have one final question. This would be for Aaron, and it's kind of a follow-up on your answer to to the post-pandemic question that you handled earlier in the Q&A. But, you know, you did focus on the potential for reduced supply. I was going to ask you maybe to think, have you thought about, or is there any, you know, potential demand opportunity? So, in other words, I mean, we'll see how things play out, but I've read other people predicting, and I kind of believe that There will be, to a certain extent, a reordering of global supply chains post-pandemic. And my sense is that a wide variety of industrial products that are currently manufactured in China, let's say, might be redirected back into the domestic markets, including North America. And I'm just wondering, you know, from your perspective, have you had any high-level conversations? I know it's very early days, but have there been any high-level, you know, contacts or inquiries just regarding, you know, a company or a product chain that currently might be manufactured several steps, you know, in China or that region that, you know, post-pandemic might be strategically relocated back into domestic markets, including, you know, North America. Thank you.

So it's a great thesis, David. I think one that we're all collectively watching for, and certainly it's, you know, whether it's certain durable goods that, you know, where supply chains have been impacted, certainly we're seeing that on a more humanitarian basis relative to PPE and medications and things of that. I would say to date, we haven't received any indication of that just yet. I think there has been, you know, quite amount of work, I think, for people in the last, you know, four to six weeks really to keep their employees healthy and safe and also to, you know, quickly adjust to rapidly changing demand signals domestically as well. I would say that we remain focused. Our conversations with customers are, you know, daily and touch points. You know, when we think about the portfolio transformation sort of opportunity for us in nylon in a, I would say, a steady carpet decline, which we have talked about, right, and that need to continue to grow in packaging and engineering plastics, I will say that those conversations and that work continues, right? And we, you know, I think just about sort of on a year-over-year, quarter-over-quarter basis, you know, our sales into the EP space is up, you know, 70%. And into an industrial application space is... you know, 20 to 30. So, again, we're very focused on building those relationships, getting products into trials and customer applications, but recognizing that that has been slowed, right? A lot of that work for those new products and those applications will come, but I think, again, building out, you know, the connections is important for us here so that we are seen as that trusted, reliable supplier who can, you know, bring to bear the products that are needed and should that thesis play out. So, you know, we're doing it just one from the standpoint strategically we need to, but hopefully it's positioning us well to be there, you know, should those decisions be made.

Okay. I know it's pretty very early days, so thank you for your comments on that. Appreciate it.

Of course. All right.

Stay healthy.

Thank you very much. Our last question will come from Charles Niegert.

Thanks. Good morning, everyone. I'm glad everyone's well. One quick question. I've been, you know, in terms of the ammonium sulfate, obviously we've got the summer lull, but you guys typically sell a lot into South America, and OEI has obviously changed its value relative to the dollar, and my understanding is Brazilian farmers are doing rather well. Have you gotten anything early, early sort of inquiries or ideas about what South America might look like uh this year because it could be potentially a very strong market given that their farmers are doing well it looks like there's going to be some acreage expense and things like that so you know have you gotten any early indications yet on that front yeah you know i'd say it's um probably a little earlier because we focus here on the moving um

you know, certainly the granular out to the fields here in Q2. And as you rightly noticed, we do typically switch to that Q3 sort of export consideration. I think that, you know, we have seen certainly, you know, what would be our normal pace, I would say, right now of, you know, inquiries for bookings into South America, again, not just Brazil, but Peru, you know, through, you through Latin America and Central America. So I think as we proceed over the next couple of weeks and months, we'll get a better sense of where that sits. And obviously one of the things that, like you say, watching on the total sort of plantings and what crops I think are going to be key, right, as we think about getting into that second season and certainly into the fall. But good observations. I appreciate that, Charles.

Great. Well, also, in terms of the the ethics on side of things, you guys feel like you're being helped at all by the fact that is phenol a little bit on the weakest side, which means you're getting some people who are ratcheting back some phenol production and therefore adding to the tightness or snugness that you might be seeing in acetone. So obviously the demand is better, but you also may be seeing the supply hit. Is that something that you guys are facing or anyone else that you can see in the industry is facing? Again, it just helps the acetone side.

Yeah, there's certainly a number of factors, right, that are playing into sort of the acetone dynamics and certainly the ability and restoration really where we were after for that product. that pricing recovery post the anti-dumping determination. So certainly on the supply side, if you look Q1 year over year, only about 7,000 tons of imports came in compared to 50,000 tons this time last year. So that certainly has moderated post the anti-dumping. As you note, certainly phenol operating rates globally, you know, BPA into polycarbonate and epoxy resins, for auto construction certainly are weakening, you know, from that perspective. So, again, the phenol demand is down, utilization comes down, acetone supply comes down. Then coupled with, you know, what has continued to be fairly, you know, robust, you know, acetone demand, you've got the MMA market here in the U.S., we believe, sort of operating at 80, you know, plus percent. Again, that's... you know, pulled through into PMMA for clear sheeting continues to be doing well. Architectural coatings seems to have been held up thus far, too. I think with, you know, certainly people may be painting their houses or, you know, their homes in DIY, but architectural has held up over sort of industrial and automotive coatings. But, you know, all of these are playing out, I think, to create that supply-demand dynamic that – is enabling really where we wanted to see the market get to, which was that restoration of price and fair value to the end application. So it's kind of a combination of all those things that you point out.

Great. All right. That's it for me. Thanks very much.

Very good.

Thank you.

Thank you very much. I would now like to turn this conference back over to Aaron Cain for concluding remarks.

Well, great. That was a terrific hour spent with everyone. And as we approach here, I just wanted to thank everyone again for their time and interest this morning. It is a unique time, but we remain focused on driving best possible outcomes and optimizing the levers in our control to create value. I'm very proud of the way our entire team has come together to keep our business moving forward during this dynamic and unprecedented time. And lastly, I'd love to call out that, as you saw in our press release this morning, we recently published our third annual sustainability report. which can be found on our website and highlights many of the ongoing initiatives happening around the organization. And I really encourage all of you to take a read through it. So with that, we'll look forward to speaking with you again next quarter. Stay safe and please be well. Thank you.

Thank you very much. Ladies and gentlemen, this now concludes today's conference. You may disconnect your phone lines and have a great rest of the week. Thank you.