AdvanSix Inc.

Good morning and welcome to the Advanced 6 Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Adam Kressel, Director of Investor Relations. Please go ahead.

Thank you, Brandon. Good morning, and welcome to Advance6's second 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.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 as further updated in subsequent filings with the SEC. This morning, we'll review our financial results for the second quarter of 2020 and share 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 Kane.

Thanks, Adam, and good morning, everyone. Thank you for joining us and for your continued interest in AdvanSix. First, I'd like to start off the call by once again offering our best wishes 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. I would also like to acknowledge our 1,500 teammates at Advancics. We knew early on that the chemical industry and our business will be deemed essential, and our entire team has lived up to that calling. We continue to deliver for our customers by driving safe, stable, and sustainable operations. During the second quarter, we continued to execute our business continuity and mitigation plans with a focus on health and safety, including, among other actions, onsite medical personnel to actively monitor employees and contractors, thermal screening, social distancing measures, telecommuting, and upgraded personal protective equipment and face coverings at all facilities. We are very pleased with the results our practices and protocols are delivering. Mike will detail our second quarter financials in a moment where we believe our results reflect the resilience and strength of our business model, vertically integrated asset base, and global low cost advantage. Notably, we were able to improve earnings sequentially from the first quarter despite the impacts of COVID-19. In the face of a challenging end market environment, I'm also encouraged by the sequential improvement we saw month to month within the second quarter in terms of both industry demand as well as our own operating rates. For perspective, our hopeful utilization rates in April were roughly 70%, followed by nearly 85% in May and June, bringing us to roughly 80% capacity utilization for the quarter in total. Early here in the third quarter, we've seen further improvement and are nearly approaching our normalized target rates. Our diverse portfolio, including granular ammonium sulfate, sold into the heart of the domestic planting season, and acetone used for items such as hand sanitizer and acrylic screens, continue to support us as we navigated through weak nylon industry conditions. Looking forward to the second half, we are ramping up preparations for the start of our third quarter planned plant turnaround, which is primarily focused around our ammonia plant. We have taken a number of steps to ensure the health and safety of our employees and contractors, as well as our assets. From a product line perspective, while we expect a challenging nylon demand environment to continue, we've been actively working to optimize our mix across end uses, applications and geographies to position the business for success. In ammonium sulfate, following the strong domestic demand in the second quarter, we do expect typical seasonality to drive a normal sequential pricing and mix decline in the third quarter. And in chemical intermediates, we expect the favorable acetone industry supply and demand balance to continue, while also benefiting from ongoing investments in high purity applications and other differentiated products within this portfolio. We also remain confident in our financial position. As we anticipated at the end of the second quarter, we had approximately $109 million in available liquidity between cash on hand and additional capacity under a revolving credit facility. Overall, a very similar position to where we ended the first quarter, despite the challenging environment in which we're operating in. We do continue to expect positive free cash flow for the second half and full year, supported by targeted reduction of capital expenditures, anticipated working capital improvement, and receipt of cash tax benefits associated with the CARES Act. We're also taking a disciplined approach to cost management and have increased our expected cost reduction for the full year to a range of $15 to $20 million compared to 2019, in addition to the benefits associated with our natural gas boiler investment. So overall, we're driving productivity and cost savings to help mitigate the volume and price impacts of the dynamic market we are navigating. During this unique time, we're committed to driving best possible outcomes and optimizing levers in our control to create shareholder value. I continue to be inspired by the teamwork, innovation, and nimble decision-making that is happening across our organization. With that, I'll turn it over to Mike to discuss the details of the quarter.

Okay. Thanks, Erin, and good morning. Now on slide four, I'll review the second quarter financial results. And overall, I'd say we're very proud of our performance and execution in one of the most challenging environments that we've ever faced. This is again a reflection of the strength of our business model that enables us to perform well in challenging end market conditions. Now turning to the financials, sales reached $233 million in the quarter. That's down about 33% compared to last year. Pricing overall was down about 14%, primarily due to the lower to lower raw material pass-through pricing, which was unfavorable by about 11 percent. Market-based pricing was unfavorable by about 3 percent, reflecting challenging end-market conditions in our caprolactam and nylon product lines and lower sales prices in ammonium sulfate. This was partially offset by improved industry dynamics in chemical intermediates, particularly acetone. We also experienced lower demand, particularly in nylon, caprolactam, and phenol, resulting in approximately 19% decrease in overall sales volume, primarily related to the global markets and also the economic impact of COVID-19. EBITDA was 31 million in the quarter. That's down about 5 million versus the prior year, but notably up compared to the first quarter of 2020. And I'll walk through the key year-over-year variances on the next slide. Earnings per share of 41 cents decreased 12 cents versus the prior year. You'll notice the effective tax rate of 16.6% in the quarter was lower compared to last year. That was driven primarily by the impact of changes in geographical sales mix on state tax and additional research tax credits. We continue to expect the full year tax rate to be approximately 25%. The second quarter share count was $28.1 million compared to $29.1 million in the prior year period. And lastly, cash from operations reached $9 million in the quarter. That's down about $16 million compared to last year, primarily due to lower net income and the unfavorable impact of changes in working capital. CapEx of $18 million was favorable by roughly $14 million year-over-year. following the completion of several high return growth and cost savings investments, as well as discipline management of our repair and maintenance spend. Now let's turn to slide five. As we shared last quarter, we thought it would be helpful to highlight a few of the key drivers of our EBITDA performance from a year-over-year perspective. Pricing of raw materials was roughly a $4 million headwind year-over-year. This reflected an approximately $12 million market-based pricing decline, partially offset by a roughly $8 million benefit from lower input costs, namely natural gas and sulfur. Tracking our key variable margin drivers, we saw continued net price-over-rose pressure across caprolactam and nylon relative to benzene inputs, reflecting challenging year-over-year industry conditions. This was partially offset by resilience in both ammonium sulfate, net of natural gas and sulfur, and acetone spread over propylene. Lower volume and other items represented roughly a $19 million headwind versus last year, primarily reflecting lower demand in nylon, caprolactam, and phenol as a result of global markets and the economic impact of COVID-19, which drove a reduction of plant utilization rates and a decrease in overall sales volume. Recognizing this year's challenges, we've been tightening our belts really across the entire business, resulting in noteworthy productivity contributions from a year-over-year perspective. Productivity and cost savings reached $11 million compared to the second quarter of 2019, and that includes ongoing benefits from our natural gas boiler investment, plant cost actions, and lower SG&A expense. In addition to benefits associated with our high-return natural gas boiler investment, We are targeting 15 to 20 million of cost reductions for the full year compared to 2019, as Aaron mentioned. The CUMIN impact following the shutdown of PES represented an approximately $4 million impact in the quarter as we've realigned our supply chain to ensure continuity of supply, and the impact of the planned plant turnarounds was a $2 million headwind year over year. Lastly, as you recall, We recognize an approximately $12.6 million pre-tax restructuring charge in the second quarter of 2019 associated with the closure of our Pottsville, Pennsylvania Films manufacturing facility. Now let's turn to the next slide. Similar to last quarter, we've included our typical pricing and spreads across our product lines all together here on slide six. Consistent with our results, global caprolactam spreads over benzene continue to decline sharply on a year-over-year basis in the second quarter. The declines reflect a continued weak demand environment across most major end uses and what has been an oversupplied industry globally. We've seen benzene costs modestly increase off the recent lows experienced late first quarter, early second quarter, which the capital lifetime prices more closely followed. As seen in the past, downstream resin prices can tend to lag in aligning with changes in upstream caprolactam over benzene spreads. As we've had highlighted in the last quarter, we've seen the resin over caprolactam spreads correct back to the typical $200 to $300 range per ton through the second quarter. And despite the year-over-year decline in age of benzene to capro spreads, which hovered around $600 per ton in the quarter, We've seen some stabilization sequentially, and we'll see easier comparisons as we move toward the end of the year. Overall, nitrogen industry pricing has also declined on a year-over-year basis, reflecting the impact of lower global energy prices. It's important to normalize pricing as urea contains 46% nitrogen, whereas ammonium sulfate contains 21% nitrogen. 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. Relative to last year's late planting because of wet weather, we saw a much earlier spring planting season in 2020 and consistent demand from pre-plant beginning in March through top dress applications into July. And lastly, industry-realized acetone prices over refinery grade propylene costs improved in the second quarter, tracking an improved supply and demand balance in the U.S. following final affirmative anti-dumping duties, lower global phenol industry utilization rates, and increased downstream demand. As we stated post the anti-dumping duties, our focus has been to return to what we believe is good, fair, and disciplined pricing in the marketplace. We've seen the continued expansion of the premium in small-medium buyer acetone prices over the large buyer market through the second quarter as propylene costs decline. 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.

Thank you, Mike. I'm now on slide seven to discuss some industry considerations as we progress the remainder of the year. As a reference, we're also sharing with you a breakdown of North American industry demand as well as our own 2020 estimated sales mix to provide some context around our exposure to various end uses. Starting with nylon, we've continued to see weak demand resulting from the challenges across its consumer-oriented end markets. Carpet, which is the largest nylon end use in North America, remains structurally weak and has been impacted by unfavorable building and construction trends in the wake of the pandemic. particularly on the commercial side where nylon has a much stronger foothold. We've previously discussed the consumer preferences of hard versus soft flooring and that impact on the residential market, but we do continue to monitor the pace of recovery in both existing home sales and housing starts. On the positive side, we have seen a stabilization in industrial production for carpet and rug mills in the US. However, output does remain well below levels seen at this time last year. Engineered plastics is comprised of three end segments, consumer and industrial, electric and electronics, and automotive. In each, nylon is preferred for its toughness, chemical resistance, and surface finish qualities. Auto represents approximately 60% of nylon 6 demand in the EP sector, and here demand has remained sluggish on declines in global production. However, we have seen improvement out of Asia as China's economy reopened prior to the U.S. and Europe. Nylon production overall has also been increasing in China sequentially on gradual demand improvement. Textiles, which is the largest nylon end-use globally, with manufacturing centered mostly in China, though is heavily reliant on the overseas market and has been impacted by retail activity, which we see as tracking the opening and recovery of economies and consumer confidence. Conversely, food packaging demand for nylon has remained robust. Now, overall, we did see a sequential improvement in nylon demand, which was down roughly 30% at the start of the second quarter compared to prior year, and exited down roughly 15%. Into July, we're seeing demand further improve sequentially, particularly out of Asia, and we are now approaching our pre-COVID sales volumes. While we're pleased that volume and demand is returning, there is a temporal unfavorable mixed consideration as we place products where demand exists. At the same time, we're taking a forward perspective by focusing on asset flexibility, new product and application development, and customer qualifications to position the product portfolio for sustainable performance aligned with end uses that have a more favorable long-term outlook. Let's shift to ammonium sulfate. As we've described at this time, each of the last few years, ammonium sulfate prices are typically strongest during the second quarter domestic fertilizer application and then have a seasonal pricing decline into the third quarter as the new season begins. meaning that we are now in the new 2020 to 2021 North America fertilizer season, which runs from July through June. We've included in the appendix of our presentation this morning a slide we previously shared highlighting the seasonality in this business line, including the average industry price change for corn belt ammonium sulfate by quarter. On average, we've seen industry prices in the corn belt decline about 11% from the second to third quarter. And while there are always a range of results across the quarters depending on the environment in any given year, we've seen sequential declines into the third quarter in every year since 2010. As a reminder, this normal seasonality is reflected in both a geographical and product sales mix consideration. In the third quarter, we will have higher standard grade product sales into export markets as compared to greater granular sales domestically at the height of the North American season in the second quarter. In total, as a result of this seasonality and that ammonium sulfate sales are treated as a net back to the cost to produce Caprolactam, we typically see a sequential consideration of $10 to $15 million higher COGS, or cost of goods sold, on average in the third quarter. Overall sulfur demand remains robust as a key nutrient for crop supporting yields. However, we're monitoring key indicators into the new season fill, including crop prices, which have been relatively muted, potential reduction in planted acre estimates, and global trade flows. The USDA is also forecasting multi-high-year-ending corn stocks for the 2020-2021 crop year. Given these dynamics, we remain focused, as always, on positioning our ammonium sulfate product with the added value proposition of sulfur nutrition to increase crop yields. Moving to chemical intermediates. We expect a favorable acetone industry supply and demand balance to continue into the second half of the year. Acetone imports into the U.S. have remained low for some time now, following the affirmative anti-dumping duties. We also saw phenol plant turnaround activity in Asia in the second quarter, limiting acetone supply, and several producers in North America and Europe are expected to take planned plant turnarounds in the second half of the year. In addition to tighter supply, acetone 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 factors has seen increased demand for acrylic screens being used as protective equipment at stores, as well as solvents used into coatings. Phenol demand overall remains soft on the back of building construction trends and sluggish auto demand globally. Let me turn the call back to Mike to recap our outlook before moving to Q&A.

Okay, thanks, Erin, and I'm now on slide eight. As Erin discussed, there continue to be puts and takes across the portfolio. We're cautiously optimistic with respect to the sequential improvement we've seen in demand overall and continue to closely monitor any signals of change, particularly in the nylon end markets, which have been the most challenging. 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 volume and fixed cost absorption as a result of COVID-19, we continue to maintain utilization rates above industry output by leveraging our global cost advantage. We now expect the pre-tax income impact of planned plant turnarounds to be approximately $32 million for the year. That's down about $3 million versus last year and down roughly $10 million versus 2018 which was the last time we executed a turnaround of our Kellogg ammonia plants. So we continue to optimize our planned turnaround schedules and drive efficiencies from the required buffer feedstock to the maintenance work through the restart of the assets. As we've discussed previously, the third quarter is expected to have the largest impact, or roughly 20 million, so a consideration in terms of our quarterly linearity as we finish out the year. From a cash perspective, we continue to expect positive free cash flow in 2020 despite negative free cash flow through the first six months of the year as we had anticipated. We have visibility to a number of tailwinds in the second half of the year relative to the first half, including a significantly lower capex run rate, working capital improvements, including anticipated overall inventory reductions, and ammonium sulfate pre-buy cash advances in the fourth quarter, and other cash tax benefits. We've highlighted our expectations for the midpoint of our previous CapEx range, or approximately 85 million in 2020, which is favorable by roughly 65 million versus last year. We also continue to drive disciplined cost management across the organization, including all discretionary spending. We're now targeting an approximately 15 to 20 million full-year cost reduction versus the prior year. and that includes indirect cost savings, managing people costs, and other plant spend and logistics benefits. That's up from our previous expectation of 10 to 15 million for the year, and it's also in addition to benefits associated with our natural gas boilers. Through the first half of 2020, we've achieved approximately 12 million of savings as a result of our actions. And lastly, as a result of the CARES Act, we anticipate approximately 12 million of cash tax savings in 2020, and an approximately $6 million cash tax benefit in 2020 from the deferral of Social Security taxes. Now with that, Adam, let's move to Q&A.

Great. Thanks, Mike. Brandon, can you please open the line for questions?

Absolutely. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Chris Moore with CJS Securities.

Please go ahead. Hey, good morning, guys. Thanks for taking a few questions. Good morning, Chris. Good morning. I'm just going to add nylon to begin with. So, you know, I think it was late 15 or sometime 16 when there was meaningful, you know, global supply rationalization with caprolactam, which obviously helped EBITDA results in 17. You know, given the continued softness in 9M markets, is it reasonable to think you'd see that again at some point in time? Maybe just talk to, you know, kind of what you see is the same and different between, you know, now and five years ago and and why those expectations might or might not make sense at some point.

Yeah, happy to. And a great question, one I think that's been on a number of people's minds, giving the sort of where ultimate spreads have been tracking really since the back half of 2019, as you have mentioned. And what we've shared previously, Chris, here is that you're right. We saw a similar trend for about 18 months. The back half of 2015 looked very much like the back half of 2019. And then we progressed through all of 2016 really at depressed levels at the time that we had equated really to more break-even variable cost type pricing on the global market. And we're in that same environment. We're now probably nine plus months or so What we would share is that at least now the spreads have stabilized. There was some uptick actually in late June into July where perhaps the Chinese folks have actually moved from a lost position to perhaps kind of more of a break even or just sort of a very modest level above that. So those are signs that we're watching for sort of returns of their disciplined approach But there are considerations. We haven't shied away from pointing out that the market is structurally long. And we do see a number of assets around the world that are running at significantly reduced capacity, perhaps several players that have multiple lines down. And those would be the ones that we would watch, just like we did back in 2016 for those that might not make it through the situation. It's very hard to call. But again, I think the point that we've made in the past is that right, wrong, and differently, the industry does sustain the levels for much longer than what perhaps would seem reasonable on paper. So we'll watch it. No announcements to date other than we can see where a number of players sort of in the rest of Asia population, even throughout parts of Europe, are running at very low levels.

Got it. That helps. Maybe you can just talk a little bit more about, you know, kind of some of the cost capital decisions and, you know, more specifically the cost reductions that Mike talked about for the rest of the year and, you know, kind of specifically where they're targeted.

Sure, Chris. I'll take that one. You know, as I indicated, we've been tightening our belts across the board, as you can imagine, in this environment. And through the first half, we executed about $12 million in cost reductions, and that's from a year-over-year perspective. And that's just managing people costs, headcount and overtime, discretionary spend reductions, such as T&E, outside services, deferring or eliminating non-critical maintenance. So really, again, across the board, about two-thirds of the reduction is coming from operations. about another third really through SG&A and a functional cost. And you can see that, you know, on the SG&A line from a year-over-year perspective when you look at the financials. You know, I do want to be clear. The $15 to $20 million is in addition to the savings we expect from the boiler investment. So, this is over and above. However, I will say that some of the reductions will be temporal. Some are structural and some are temporal. We think about half of the reduction might be permanent, but we're going to continue to look for opportunities to drive as much of this being structural cost reduction to support our business going forward. From a CapEx perspective, you'll see the spend was down to $18 million in the second quarter, and that's down quite a bit from the first quarter of 2020 as well as the second quarter of last year. You know, we did complete our large growth and cost savings projects, you know, the boilers, the lactam quality project, as well as the R&D relocation. So we've sort of lapsed, you know, the spend for those projects. And we're just going to continue to exercise discipline really, you know, across the board in the second half. We're prioritizing repair and maintenance capex, but we want to make sure we do that while we ensure safe and stable operations, you know, going forward. When you think about second half versus first half, in the first half, CapEx was $52 million. We expect the spend in the second half to go down by $30 million. That'll get you to the $85 million from a full year perspective. And importantly, we'll support free cash flow generation in the second half. But I also want to be clear that we continue to progress our healthy high return growth and cost savings project pipeline. Some of the larger ones that we've highlighted and executed against have been completed. More of the ones going forward will probably be a little bit smaller. But again, we'll only execute those if the returns are there and if the IRRs meet our hurdle rates. So that's how we're thinking about it going forward.

Got it. I appreciate that. I'll jump back in line. Thanks, guys.

Thanks, Chris. Thanks.

Our next question comes from David Silver with CL King. Please go ahead. Yeah.

Hi.

Thank you.

So I have a couple of questions. Maybe let's just start on ammonium sulfate. So firstly, thank you for including the seasonality pricing chart. Very interesting. I may have missed this, but just a clarification, so the 11% third quarter decline in ammonium sulfate pricing on a sequential basis, is that kind of apples to apples? Is that the same grade of ammonium sulfate or is that 11% represent maybe a blended price that reflects maybe the shift between granular and standard product. So is that benchmark or has that been adjusted to reflect the realities of maybe how your sales mix trends?

Great point. If you're talking about the chart in the appendix, David, that is specific to granular ammonium sulfate. So all the same type, same grade.

Okay.

And particularly just as a reference into the Corn Belt region.

Gotcha. And I know that there's been a new supplier who's started up production recently in ammonium sulfate in North America. How would you say the effect of that has been on the overall market? In other words, has it been kind of orderly or maybe disorderly? How would you say that the new product has been distributed or marketed, you know, relative to expectations maybe.

I'm sure. Yeah, and you're referring to the nutrient red water plant that was brought online. Just maybe a few points of data here to clarify, right? So they added approximately 350,000 metric tons, which, you know, just doubled their capacity to roughly 700,000 metric tons today. at that site. As we talked about, that added roughly about 10% more granular AS to the total North American situation. Now, sulfur, we have continued to see grow in demand. Sulfur is growing 3%, if you will. We've pointed out in the past too, granular growth for AS in Brazil alone has been looking more like 18% growth over the last several years. We talked about that on a webcast that I joined with Vincent not too long ago. So we do see good growth in these product lines. And Nutrient's a very large market participant. So as we expected, that they would have used their supply lines, they would have used their current customer base, and we see that that's exactly how they've entered the market as we would have expected. One of the things we watch, we are still in that import market. As CapriLactam rates have declined globally, that's one that we'll continue to watch. But obviously there, as we had indicated, we had expected perhaps that that would ultimately flow through to the impact and what the U.S. would need or North America would need to balance the market.

Okay, great. I'd like to switch over to The chart in the rightmost panel on slide six is very eye-catching with the divergence between the small buyer market and the large buyer. A couple of things. If you were drawing up a pie chart, I imagine acetone markets could be driven by several factors. One might be the reduced imports related to anti-dumping. I personally think, you know, reduced phenol production or phenol demand has, you know, also dried up some supply. And then on top of that, there's the demand boost for MMA maybe related to the pandemic, which might be a little more structural going forward. If you were to kind of allocate 100% to those three factors, or maybe you have a fourth factor, I mean, what would you say the principal driver is? Is it a third, a third, a third, or is one of those factors more predominant in your view since the small buyer market started to strengthen? Thank you.

Yeah, no, a great question as always, David. It's intriguing to maybe perhaps think about it as a weighting, and we can give that some further thought for a later dialogue perhaps. But to give you sort of color, at least directionally on where we sit, I would answer that in the fact that I think your points and observations on the first two factors are probably weighted more heavily than the third. So meaning that the supply side I would say contraction coming through the second quarter into the third is certainly lending itself to a tighter balance, if you will, on the supply-demand side. As you note, imports have come way down. When you think about where we are, first half, 19 versus 20, We saw 18,000 tons brought in in the first half of 20 versus 78 in the first half of 19. As we pointed out, and you rightfully noted, phenol demand and phenol utilization has been pulled back, particularly through Q2. When you think about the end uses on phenolic resins being driven into building construction as well as automotive, that ultimately tightens up the acetone supply And then certainly there has been some boost on IPA and MMA, but as you know, IPA is only about 7% of the North American acetone demand, if you will, for acetone. So hopefully that helps you at least with a strong sense directionally that it is a supply site here. And as we noted in the kind of looking forward, We do think that supply side remains snug because we will have a series of back half turnarounds. The front half was sort of characterized more by turnarounds in Asia, and then the second half really will be characterized by turnarounds in North America and Europe.

Okay, great. And just one more on acetone. Could you remind me when the large buyer market might reprice? In other words, is that purely an annual market, maybe with a year-end effective date for a renegotiated price, or is some of it quarterly or customer by customer? How does that shake out where we might see the large buyer price move closer to the small buyer price? Thank you.

Yeah, no, and there's really two factors there to consider. In the large buyer market, the marker, if you will, or the index that gets published and settled between the buyers and the sellers is a monthly settlement. So the large buyer price does get settled monthly. So that's sort of factor one. Factor two, as you point out, is that typically in supply contracts, there's a negotiated discount to that marker that is settled monthly. monthly, and that discount is predominantly negotiated annually and typically in the fourth quarter. So as the market dynamics can change that monthly settlement, we'll see that more real time, but then the discount negotiation will happen in Q4. Does that help?

Yep. Gotcha. Very good. I'm going to get back in queue. Thank you.

Thanks, David. Thanks, David.

As a reminder, if you would like to ask a question, please press star, then 1. Our next question comes from Vincent Anderson with Stiefel. Please go ahead.

Thanks, and next quarter. So it sounds like packaging demand did well, and I'm guessing that was a good test of your open partnership. Is there anything in particular that you wanted to highlight in your films business that you were able to observe in this quarter of improving demand?

I would say, Vincent, that really from a overall packaging comment that would relate to both packaging resin right as you recall we sell packaging resin as well as films and the packaging resin side that's going into multi-layer films you know did extremely well I think it's clear that packaged food meat and cheese packaging just with the notion of many more people eating at home you know shopping perhaps for longer stretches and the supply chain considerations, we saw packaging resin be very robust. Now, on the Bopa film side, that is typically used as a single-layer film and, again, held up, but perhaps that does have some applications into, let's say, book covers, even balloons and metalized other applications that That would track a little bit more to your consumer-oriented purchases. Overall, good robust demand. It actually picked up in Q2. One of the things that we continue to look forward is the industrial packaging segment. This would be more industrial where You know, restaurants are buying more in large bags versus canned quantities and things like that. Hopefully, we'll come back as well as we see, you know, restaurants and institutions and others, you know, open back up.

Okay, that's helpful. Thanks for that distinction there. And then, you know, you referenced the focus on optimizing nylon application and mix. Just curious if that's, you know, just a reiteration of your ongoing strategy or if there was anything in particular that you started to hone in on recently.

Great question, Vincent, and just a re-articulation of what we've been focused on. As we've talked in the past, the corporate structural change is a need and driver for us to transform the end application portfolio. We've been focusing quite a bit on asset flexibility. You'll see that in our Q2 results and going forward, and that's really allowing us to meet demand where it exists. Being able to sell molten caprolactam into the market, plate caprolactam, as well as more engineering plastics-oriented resin versus carpet resins. We've been focusing on The assets at Chesterfield that have been predominantly in the past dedicated to carpet, one has been fully qualified now through to customers to make engineered plastics resins. We've started working on trials and testing perhaps on some new textile resins. Again, just getting the flexibility out of our assets and how we optimize that product wheel to meet that forward demand. So when we talk about asset flexibility, hopefully that gives you a little bit more color in that regard. As we talked in the Q1 earnings, certainly the customer qualifications through this time period have slowed. When we've got a strong sales pipeline, a targeted list of customers that we're growing with in the compounding space, And, you know, just as a kind of reminder that compounding space, again, is not all automotive. We've seen some resilient demand, perhaps, in electric and electronics, vis-a-vis sort of auto and consumer and industrial. But our customers are just now getting back to, you know, accepting product for qualifications, you know, running their assets, you know, well there from that perspective. So just a re-articulation. I think it's something we know is... is a key strategy we have to get after just from the standpoint that, you know, while we have our temporal considerations in navigating the challenges, you know, current, there are structural considerations that we have to be prepared to address, and that's what we're working towards.

That's very helpful. Thank you. If I could just ask one more here. I appreciate the earlier clarity, Michael, on the split between the temporary and the structural components of the cost savings. But if I could ask about the operating level savings specifically, you know, has that been enough to offset, you know, call it negative operating leverage while the plant's running at lower utilization rates? Or, you know, have these savings been achieved despite that and any operating leverage that comes back with a demand improvement would just be adding to it?

Yeah. Yeah, I mean, as you look at the demand impact, I mean, Well, as we discussed in the second quarter, from a year-over-year perspective, you know, volume was down 19%, right? So that, you know, that was a big number. And you can see, yeah, for the volume, the revenue decline was down 19%. And the impact from an EBITDA perspective was 19 million. So it's a little bit challenging over that short-term time period to fully offset that. You'll see in the EBITDA walk, we have 11 million in savings. of which a portion relates to the boiler investment and then a portion relates to the 15 to 20 million that we're talking about in terms of cost reduction. We don't anticipate it to fully offset the volume impact and the decline from a year-over-year perspective, but as Aaron mentioned, we're starting to see better demand sequentially come through here as we get into the third quarter. And that's, you know, our utilization rates are improving, you know, particularly in nylon as we continue to drive, you know, penetration in different applications and end markets there. And we're going to just continue to be very conservative on cost and managing costs overall to get us through this, given the uncertainty. But, you know, not quite enough to offset the impact, right, from a volume perspective, but we're doing whatever we can.

Sure. I appreciate that. And if I could just maybe clarify one point that I actually was trying to make, maybe better for Aaron. You know, how do you think about the dis-efficiencies that come with operating the plant at these rates? Less so maybe, you know, covering overhead at the plant, but the actual efficiency of the plant running at, you know, a 65, 70, 75% rate instead of your targeted, you know, 90s.

It's a great question. Certainly, one, I think David, maybe just to take it back a high level and then come back to your point, in his morning note this morning captured the situation very well in the sense that while we have seen sequential improvements, we're working to be agile, the outlook on macro trends remains far from robust. But we do think that how we're operating and our results through the second quarter are a reflection of our ability to focus and execute on what we can control. Yes, when we make our choices, we believe we're making prudent choices to our operating rates in the market context. that we're facing. We have to weigh, as you point, the operating leverage and the fixed cost absorption against working capital builds, perhaps. We have to weigh the challenges of perhaps reduced yields associated with different rates. But again, we do that analysis. We've been much more agile, I think, in how we're approaching this. I've shared with others, we've moved our sales inventory operations planning pulse to weekly where we can make more real-time decisions. And I think that is serving us well. As you say, there's always trade-offs in this balance. We want to utilize and leverage our competitive advantage, but also recognize that we have to drive the best outcome across all measures right here for the right shareholder value.

All right, thank you. The only thing I would add on that is that when you look at our yields, I think really where the question is coming from is as you have lower utilization rates and as you can have variability in that, that could impact your yields and how and that could have a negative effect on the financials. And I'd say overall, when you look at it, it really hasn't impacted us a whole lot. We've been able to optimize the different areas of our plants. We have multiple areas at Hopewell that we manage, and getting those optimized, and we've been able to more or less mitigate those impacts, and in some cases even improve on what we had planned to really optimize how we're running in this environment.

Perfect, Michael. That's exactly what I was trying to get to. Apologies for the confusion, but I appreciate all the additional context.

No apologies required. Thank you.

Our final question is a follow-up from David Silver with CL King. Please go ahead.

Okay. Hi. This is kind of a question about maybe next steps, and I heard Aaron loud and clear. The current environment is far from robust, but a couple of things. I mean, first, Aaron, you've been managing these assets either independently or as part of your parent company for a very long time, and I assume you know these assets like the back of your hand. And then it's also been my experience with carve-outs or spin-offs of kind of seasoned industrial assets that there's often been some underinvestment and there tends to be some, I don't know, quote-unquote low-hanging fruit that the parent wasn't willing to invest in, but the newly independent company finds it in their interest. So you're coming towards the end of your growth and efficiency program, which I think captured a lot of those attractive incremental opportunities. But things have changed since you've been spun out. And I'm wondering if you had to make the next incremental kind of discretionary investment You know, is there more kind of low-hanging fruit, or are there more kind of attractive incremental investment opportunities? You know, should the environment become a little bit more normalized? Could you even further strengthen your low-cost position in nylon? You know, one thing I thought of, I guess, to mitigate the issues with cumin supply is you know, does it make sense to have, you know, some logistics or some additional storage capability for that product? I mean, that's just one example. But, you know, based on your long history with these assets, what, you know, in your opinion, what remains to be done that can be done, you know, high return, quick payback type of opportunities? Thank you.

So we can talk us through a handful of things here, perhaps just of what's yet still in store. One, perhaps just to clarify on the growth and cost savings pipeline, when we had introduced the larger projects coming into last year, it indicated that we had a pipeline of ideas ranging from an investment level of $150 to $200 million that we felt had strong potential to meet our internal water line for for those returns. As you noted, we did execute a number of the larger ones. Amy said that those projects range in scope and scale and could be rather lumpy. I think the first point is we're not done with that pipeline. That pipeline continues to be reshaped. It continues to be sort of really thought through by our value stream teams and looking at opportunities. So you will continue to see, and actually our spend this year continues to include some smaller projects associated with yield, energy, things of that nature that will continue to, I could say, make a way at the opportunities on the cost side and productivity side. We also have a few on the growth side, smaller in size. We've talked about our oxines portfolio. That is something that we will be looking to trigger here later in the year into next year. That, again, is a product line that continues to show good growth. We've got the drop-in replacement for MECO with 2PO. So you'll continue to see opportunity in those regards. You can look for us to clarify, I think, how that pipeline shapes up in the coming quarters. We're working through that in our strategy sessions and focus for next year. But don't count that sort of lever out. One of the things that we've also talked about in the past that we continue to work on is the question you noted on ammonium sulfate. you know, granular growth is something that we see, you know, globally, right? So how will we look to address growing in, you know, granular ammonium sulfate, right? It's still on the list and things we need to address from that standpoint. Because of that value optimization we get over standards and just from the growth potential in the marketplace. And as we noted, we're investing in the soybean research. Those field trials continue to go well, so that continues to be an area. As we've noted previously, that is still a forward perspective. So that's kind of the first. As you noted, and I think we've talked around how do you release opportunity associated with buffer stocks or potentially sort of your interactions between the plants. we work to run a lean and efficient supply chain, but as all these unit operations kind of play out, unlocking potential through storage, I think you had commented, well, I hadn't thought about that one, is one of continual optimization, right? And we did note that post the PES situation and realigning our supply chain that we would need to make an investment again to make sure that We had that security supply on cumene underway. And in the forward view, we really are taking an opportunity to, as we pointed out, you can think about this business, right, in a linear fashion, right? We make phenol and acetone, then we make caprolactam, ammonium sulfate, then we make nylon-6. And I shared, if you kind of turn that inside out and draw sort of the the business slightly different, right? We have ammonia-based chemistries, we have sulfur-based chemistries, we have phenol-based chemistries that allow us really to push on the innovation side within the company. And as you noted, those are muscles that have to be built. We've got the operational excellence. We continue to, I think, bolster that. But we recognize that innovation is to drive growth is that's why we've invested in the application development, you know, reframing our R&D team, but recognizing that was going to give us mid- to long-term growth as we built those muscles. So hopefully there's, you know, a little bit more of an umbrella there for you to think about, you know, the avenues, right, that we're facing and driving for the medium to long term.

Very comprehensive. Thank you. Appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to Erin Kane for any closing remarks.

Thanks, Brandon, and thank you all again for your time and interest this morning. In such a dynamic time, our results this quarter again demonstrated the strength of our business model. We have a great foundation to build on in the face of these near-term challenges, and I know that each member of our organization is focused on executing what is in our control and delivering for our customers. Our competitive position gives us the confidence and flexibility to drive value creation for all of our key stakeholders over the long term. So with that, we'll look forward to speaking with you again next quarter. Do stay safe and be well.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.