Q1 2020 Earnings Call
Hi, opportunistic raw material sales with the latter reflecting the absence of CTO conns, the CTO constraints, which we faced in the first half of 2019 impart associated with disruptions from Hurricane Michael.
Adhesive sales volumes grew by 4.3% compared to the first quarter of 2019, reflecting solid demand and tapes and labels for packaging applications as well as good demand for construction adhesives.
Including those used in medical applications, such as gallons and face masks performance chemicals sales volume was also up 7.5% driven by higher opportunistic sales of raw materials.
Sales volume for tires was up 1.3% in the first quarter. However, given what has transpired and automotive markets and with many tire manufacturers announcing temporary plant shutdowns, we expect some weakness for our tyres business beginning in the second quarter.
As represents approximately 6% of the overall chemical revenue and therefore, the impact of the overall chemicals segment on the overall chemicals segment is not expected to be material.
Turning to slide nine.
Debt reduction remains a critical priority for create Don as mentioned the sale of Cariflex during the first.
Quarter facilitated a significant reduction in outstanding debt.
During the first quarter with paid off 290 million outstanding under the US tranche of our term loan and reduce the euro traunch by $90 million.
As a result during the quarter, we reduced consolidated debt by 368.1 million and consolidated net debt was reduced by $485 million, excluding the effects of foreign currency.
The first quarter debt reduction has significantly improved our consolidated net debt leverage ratio taking us for from 4.2 turns of leverage at yearend 2019 to 2.8 turns based upon 12 month training consolidated adjusted EBITDA as of March 31.
Excluding cariflex adjusted EBITDA for the March 31, 12 month trailing adjusted EBITDA, our consolidated net debt leverage ratio would be approximately 3.5 turns.
Great on enjoys a strong liquidity position we ended the first quarter with over 150 million of cash with borrowing base availability of approximately 200 million.
I should note that historically usage of the ABL facility has been minimal with light usage generally in the first quarter two bridge timing of cash receipts and disbursements as previously announced in April we extend the maturity of the ABL facility for two years would it now maturing in January of 2023.
Finally, while we have not changed our view with respect to the planned capex of 90 million for the full year 2020.
We remain flexible to reassess in response to market conditions as the balance of the year unfolds and with this I'll turn the call back to Kevin for his closing remarks.
Thank you are asking us as we turn to slide 10, I'll share with you our outlook and expectations for the balance of the year.
As noted we are pleased with our first quarter results and particularly the role that our broad portfolio diversification plays and buffering the impact and Singh from significant traction any particular end market.
During April we are seeing demand and most of our markets that is consistent with our expectations and as mentioned we have seen encouraging signs that activity in China is picking up.
Our carbon 19 did not have a material adverse impact on our first quarter results, we must acknowledge the spread of covert 19 throughout Europe and North America, bringing began later in the first quarter. These are important markets are great time, while it might be reasonable to assume that we will see more of an impact from business contraction and consumer pull back in these markets in the second quarter.
Because of the distinct market diversification that we have created to create onto our commitment to leading through innovation and our global supply system as the chart on the right hand side clearly indicates the majority of our sales today are directed towards markets that we believe our either resilient to macroeconomic slowdown or the global reaction to cope with 19 has resulted in increased demand.
For example, our Hesa business benefited in the first quarter from increased demand in many applications, including tapes and labels or packaging applications and construction adhesives used in medical applications.
Quite time sales into adhesive and packaging applications accounts for approximately 21% that polymer segment revenue and over one third of the chemicals segments revenue.
We are seeing good market traction for our Revolution technology, which is the new family of Rosin, Esther formulations that provide a compelling and sustainable alternative earned alternative to hydrocarbon base resins.
During the first quarter. We also saw strong demand in both food packaging and for Threed printing plates used in printing of labels and food packaging applications.
Similarly sales into medical personal care and hygiene applications accounts for approximately 11% of polymer segment revenue and we believe these key end use markets are generally not impacted by economic cycles.
Moreover, as noted in today's Cobot 19 World, we are seeing indications of increased demand in certain sectors sectors of these markets.
In terms of infrastructure sales into paving and roofing applications represents approximately 35% of the polymer segment revenue and sales into road marketing applications accounts for approximately 6% of chemical segment revenue.
Given stay at home owners around the World Road traffic is down and we believe it has an opportune time to accelerate paving projects. In addition, given the decline in crude pricing, we expect the cost of inputs such as asphalt are very attractive. We're also watching for additional economic stimulus, which Mike is specifically include new commitments to invest in infrastructure.
Sales into a rot wide variety of consumer doable products accounts for approximately 12% of polymer segment revenue in 5% of chemical segment revenue while sales in a broader industrial applications accounts were 9% of polymer segment revenue in 33% of chemicals segment revenue. These sales are well distributed geographically at this time demand is largely inline with expectations.
However, we are watching developments closely.
At the same time, we do expect automobile automotive demand will remain weak and we project that this will have an impact on our polymer sales into automotive components and sales of trend enhancement agents for tires and our chemical segment.
Weaker automotive sales and the near term reduction and road miles driven as people are not traveling or committing to work NAVAIR may adversely also impact our lubricant additive sales and sales into fuel additives.
Collectively these end markets accounted for approximately 10% of polymer segment revenue on 15% of chemical segment revenue.
We also expect a further weakening in oilfield demand and while these.
These account for less than 2% of polymer segment sales and approximately 6% of chemicals segment sales the contraction in oilfield demand has the potential to impact not only demand for tofa, but it could have an impact on pro for pricing as other manufacturers redirect product sales in response to decline in drilling activity as we saw in 2017.
While we believe our portfolio and diversified end market exposure, providing and meaningful measure of stability the progression of cold 19 across the globe and specifically the prospect for further demand contraction in Europe, and North America, and the second quarter and beyond results and significant uncertainty for the balance of the year as we noted in yesterday's press release, we do not believe it is possible to date.
And the magnitude of duration.
The progression of KOVA 19 will have on global markets for the balance of the year. Moreover, or we can make general assumptions about overall demand predicting specific customer behavior is even more challenging.
As a result that is difficult if not impossible for us to synthesize very planning scenarios into a reasonable accurate financial forecast. Therefore at this time, we're not providing specific guidance for full year 2020 adjusted EBITDA.
I want to emphasize however that we do not intend this to reflect any specific concerns or adverse market developments, we have for our business at this time.
I want to assure you that we will take appropriate steps as we navigate through the balance of the year cost reduction measures are underway with the $20 million of annual cost efficiencies. We plan to deliver this year. We believe our balance sheet is in good shape with no near term maturities and we view our liquidity position to be sound should market conditions dictate we will take appropriate additional measures related.
Two costs our capital deployment.
We believe the recent declining crude pricing should help us not only on the raw material cost side, but also in terms of energy inputs at our manufacturing locations.
And our chemical segment, we project margin pressure, resulting from the decline in gum turpentine pricing in the latter half of last year has stabilized and our polymer segment and based upon what we've seen over the last several quarters, we expect unit margins to remain stable.
We realize that an absence of specific guidance at this time continued transparency regarding market developments and demand trends is of utmost importance and we expect to provide updates when possible as we move forward.
With those comments will now be happy to open the call up for questions back to the operator.
Thank you we will now begin the question Nat testing if you would like to ask the question. Please press star followed by the number one of your Touchtone phone and record your name and company clearly when prompted your name and company is required to introduce your question to answer your question Crestar folded in number two one mode.
Please for incoming question.
Our first question from caps of loop capital markets. Your line is now open.
Hey, good morning. Thank you for all the color couple questions, one and I'm not sure if I caught it but did you say how much EBITDA the cariflex business contributed to one to the first quarter.
Yes the.
The Cariflex business contributor.
Some of the 10 million of for adjusted EBITDA for Q1 results.
Okay.
I also clarified in my remarks that.
Then we have an additional 3.4 million related to the Cariflex sale, but purely cariflex operations is $10 million right got it and then.
I get the suspension of guidance totally get it and but you also suggested that you know the in first quarter minimal disruption from Cove it.
We're one month in the second quarter does it sort of feel like overall sort of business as usual, obviously theres. Some year end markets. There is some shutdowns like for example auto in tires.
But other your businesses are performing well. So can you just characterize kind unlike the that business cadence, even if qualitatively thus far in the second quarter.
I think you summed it up very well.
Yourself, Chris It as we look at it today, just like I said in my comments.
The decision to per to not continue providing guidance was not based on anything other than prudency, given the uncertainty of where this is all going not reflective of what we see today in our business.
Yeah got it.
That's helpful and then.
So the other could last question I have just.
So.
Gum rosin prices are recovering presumably on just reduce tapping of trees.
In Asia, and so are there any signs yet that thats affecting the oversupply of the gum turpentine market.
And then in that context.
When we now know that there was elevated margins it for that tranche of the business, what's a good way of thinking about.
Should be I guess normalized EBITDA margins for the chemicals segment and when do you there.
Unfair, but like is.
In whatever the new normal might look like what might sort of normalized EBITDA margins for that segment look like thank you.
The answer your first question is yes, we are seeing as a result of.
The combination of the.
Of the gum turpentine steep decline in the second half of last year, coupled obviously with Covance 19, causing less t. trapping teeth.
Treat tapping to happen.
This year that we are seeing a decline in overall rosin output and that is.
Turning turning into some some incentive obviously for a price rise in rosin and we've seen evidence of that in China being happen.
With respect to your second question around margins I.
I think consistent with what we've said all along.
Specialty business like our chemical segment or polymer segment. There's no reason to believe that we won't be able to achieve high teen sustainable margins.
When when things stabilize truly.
Okay. Thank you very much.
Thank you. Our next question is from Jim Sheehan of Suntrust Robinson Humphrey. Your line is now open.
Thank you good morning.
First following up on the gum rather than pricing expectations.
You previously indicated that lower prices will be about 40 million dollar.
Headwind for the full year, what is your updated view on that getting this.
We recently.
Yes, I think that was related to the turpentine side.
And at the end of the day I mean.
The projection we had in that first quarter as a headwind versus 2019 results I think doubles.
Great. Thanks, and then a question related to your debt reduction goals are you expecting that free cash flow will be positive this year, even with what you're kind of looking at on the downside scenario and.
What letters and you pulled to preserve cash generation Terry.
Yes. This is atanas, yes, our expectation is that cash flow will remain positive and theres a number of levers that we can utilize obviously, we're very very prudent as you could see with the management of our working capital.
Obviously, we have some flexibility when it comes to the deployment of Capex them.
Capital allocation, then as Kevin indicated on the call. We have also embarked upon a cost reduction program, which will which we expect to deliver approximately $21 million run run rate cost savings.
So fiscal discipline with respect to cost working capital management, and and Capex and Capex rationalization if necessary.
Thank you.
Thank you. Our next question is from Matthijs Goralski Fcbs. Your line is now open.
Good morning, So on slide 10, you had the outlook by region just for clarification.
Timeline in fine shoot you are for the full year and then secondly, you guided to Capex. Thank you for that is this a normalized level going forward or if not how should we think about capex in future years.
I'll, let the first question I'll answer the first then turn the second our AP as that's how we see the situation today.
Again going back to the comments, we made about what's in store for us.
In into the second half of the year. It's just it's just.
With everything happening I hope you can imagine is very difficult frightening any company, let alone that create on to have.
But as we sit today, that's what we see.
With respect to Capex. If you look historically create on spent about $100 million to $110 million.
Capex.
Annually this year, where would end up ballpark, we're at 90 million, but as I said, we were watching.
I'll live events.
Unfold very closely and.
And we remain very flexible going forward I assume that $100 million if gold seems.
Reasonable to assume.
Very helpful. Thank you.
Thank you. Our next question is from Vincent Anderson of Stifel. Your line is now open.
Yes, Thank you and good morning.
So I was just curious given where gum rising prices and right now.
Yes, we have enough demand destruction in Htwo derivatives in particular, where your choice came down to pulling back on operating rates or kind of just driving excess trued wasn't exporting. It would you expect that where the current market as you would continue to run the plan set at normal rates premature almost regardless of demand.
Mr.
Yes, I think anytime you get asked this question we have a balance to consider we have both in our we don't well make a tour decision isolation without considering tilt implications and vice versa. So it's difficult for me. This suggests what would be our our our decision with respect to.
Any particular product line, depending on what happens with demand but.
As I commented in my statements from an end Hesa perspective.
You know this has been a good start to the year.
And.
Clearly attributable in many cases twod demand in certain cobot market outlets, but I would also say that you know at the end of the day.
The team is presenting our adhesive business at a much different light in the marketplace. This new technology that I mentioned the Revolution technology is just the first indication of that more to come in my opinion.
Great Nick kind of leads me into my next question Anyways.
Is it possible yet.
To put a rough number on kind of the share of your pine chemical sales that are winning this bill primarily due to the favorable environmental footprint.
Can you repeat that I'm not sure I, followed you bins.
Yes, I apologize so is it possible yet to put a number around kind of the share of your pine chemicals sales that are winning business, primarily because of their bio based footprint.
Oh, I see what we're going with that.
I think that.
Yes, we you'd be looking at where we're winning in rosin esters versus hydrocarbons and as I've commented and probably the last two calls.
I don't think that we're seeing many examples yet where ill be OEM consumers are making decision.
To use a biochemistry solution versus a hydrocarbon solution because of its environmental footprint benefit.
Those situations are not as frequent is I believe they will be with time as more and more.
You know awareness starts to drive that purchasing behavior. Our view is of course very clear we are not looking at this any way other than all else being equal in terms of performance in terms of quality in terms of cost. We think is sustainable solution wins, it's the right thing for the world. It's the right thing obviously.
For the environmental footprint than the sustainable business model that create on espouses, but we think customers are every bit is.
As supportive of that model is where.
That's that's very helpful.
In mind I, just want to ask one more on turning to CST.
Just curious if your CTO contracts or are your CST contracts are very similar to your CTO contracts or directly way.
And then on the demand side.
How much are you spending into cleaning products.
And how it's kind of the volume shaped up for demand for the cleaning product applications and CST versus the rest of the portfolio.
You can imagine the CST contract conditions is highly sensitive and.
I think I'm, just going to leave it at that.
But you know.
Like everything that we do and create on whether its polymeric chemicals, there's an energy component that comes into play and obviously todays energy world is a much different picture.
With respect to your second question.
Im sorry, you have to remind me again, what that was.
Yes.
Yes, I got reminded by so cleaning is up I think it's a small portion I think we called it out as being perhaps a 1% of that overall chemical segment sales on that's on slide 10 for you.
And it shows up and probably a couple of different places one in our and our.
Flavors and fragrance demand as well as probably also in our.
Fatty acid business generally speaking as it goes into.
In those cases as it goes into.
Surfactant demand.
Okay very helpful. Thank you.
Thank you. Our next question is from John Roberts.
Your line is now.
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Yes. Thank you.
Realize Kevin that you don't want to talk about feedstock contracts, but is there any conceptual way you can help us think about how you're chemical feedstocks will respond to the WT on movement.
Well.
I think it's pretty much what you'd expect John that to the extent there is energy components. Obviously, you know with some delay or lag. If you will in the contract design, we'll see that flow into obviously, our raw material costs.
And we think about a monthly average obviously the daily Volatilities incredible right now.
Yes, it's not a daily pricing I can assure you that.
In some cases as monthly in some cases its quarterly.
Okay, and then the bottom end to the barrel coming out a refinery is not worth as much either can can you run the refinery in a different mode. That's there to.
Either shift the mix significantly given I guess, you always want to make higher value products, but there are no in this environment what it does anything else you can do.
All we can do there is think about the the components in CTO feedstock, where we have a choice and where we run it in which region.
But at the end of the day, the chemical make up the constituent component makeup of the CTO is predetermine. So no we don't have the ability to.
It would be nice what you described but we don't have the ability to to promote one fraction versus another.
Yes. Thank you.
Thank you speakers there are no questions in queue. At this time again as a reminder for other participant if you would like to ask your question. Please press star followed the number one in your phone and record your name and company fill you in prompted to cancel your request press star folded in a breakout.
We have another question from Matt can Hello, and thank you Sir your line is open.
[noise], sorry, hi, guys. Thanks for the presentation I'd say two quick questions.
So DRTV those guys are familiar with that was recently sold.
Was wondering if you guys had to look at that business.
Or sold to trade and if you did or not what you thought it was the multiple there and then I am just rather than each cotton as well so just the M.
Why just given the fall in oil.
The hydrocarbon stuff looks a lot more attractive now relative to what you guys too. Thanks.
So im not going to comment too much on he or she certainly we are familiar with the DRG transaction. We are familiar that it was in the market being sold by its sponsor owner prior previously and of course very familiar with who acquired the business I.
I don't think Theres officially a number out there so I'm not going to speculate on the multiple reference you had.
But we do here it was a it was a healthy one.
Now with respect to.
The second part of your your question.
Hi.
I guess, let me.
Let me try to.
Answer it in the context of our overall business.
Well with crude oil in decline obviously hydrocarbons.
In general are going to have a lower cost base as well, but I would remind you that when it comes to the types of businesses, we compete against hydrocarbons.
Thats coming from our CTO pool, and our CTO pool, obviously has just like the pre your previous question was asked a connection to that energy energy input cost as well. So I don't know that there's any distinct difference between their energy cost with new cost structure than ours.
Everything weve dealt within the past several years with respect to the the competitiveness of hydrocarbons versus our rosin offering is much much more driven by supply demand than it was driven by underlying energy cost advantage.
Got it okay. Thank you.
Thank you speakers there I know question. Thank you sign.
Okay, well, thank you caf, we'd like to take this opportunity to thank all of our participants this morning for their interest and for their thoughtful questions.
I will note Theres a replay of this call will be available later today and you may access the replay by dialing 888566.
Zero for one eight that concludes our prepared remarks. Thank you.
This concludes the Creative Corporation first quarter 2020 earnings Conference call you may now disconnect.
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