Q1 2020 Earnings Call
Good day and welcome to the Advansix first quarter 2020, <unk> 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 made press star one on your telephone keypad.
Withdraw your question Please press Star Q.
I'd now like turn this conference over to Adam Krejcik Director of Investor Relations. Please go ahead.
Thank you Sean So good morning, and welcome to advanced six is first quarter 2020 earnings conference call with me here today, our president and CEO earn Kane Senior Vice President and CFO Michael Preston.
This call and webcast, including any non-GAAP reconciliations are available on our website and investors Dot Advansix dotcom.
No that elements of this presentation contains forward looking statements that are based on our best view of the world and of our best 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 an earnings presentation. In addition, we identified the principal risks and uncertainties that affect our performance in our SCC filings, including our annual report on form 10-K as further update it in subsequent filings with the FCC.
This morning will review our financial results for the first quarter and share thoughts on the on the Kogan 19 pandemic and outlook for our key product lines in end markets. Finally, we'll leave time for your questions at the end.
With that I'll turn the call over to Advansix as President and CEO Aaron can.
Thanks, Adam and good morning, everyone. Thank you for joining us and for your continued interest in advancing.
First I'd like to start off the call by offering our condolences to all who have been affected by the Kobe 19 pandemic I hope it everyone listening today I'd love their families in co workers are healthy and saying safe.
We are clearly an unprecedented times I also want to send my heartfelt. Thanks, an appreciation to our 1500 teammates at Advansix.
This crisis has impacted all of our professional and personal lives in many ways. We've adapted our routines work schedules and even how we work with the challenge they'll come many opportunities and as far as our collective organization to be even more agile efficient and creative with our processes, while innovating on our strength along the way.
As we highlighted in our March 31st press release, the business of chemistry, and our specific industry was designated as essential during the response to cover 19, the most public health and safety as well as community wellbeing, we take our obligation seriously to produce materials that support the broader population, 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 organizations broader tiered accountability meeting structure to ensure we stay aligned on key priorities identified potential risks and opportunities and maintain a continuous communication feedback loops throughout the company daily communications to the organization highlight areas of focus it's all the great.
Work being done by our employees each day.
I can think it'd 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 quarter, who we are as we navigate through this environment [laughter] significant Jefferson actions have been taken to protect our employees customers suppliers shareholders and surrounding communities, including de risking our previously scheduled second quarter plan plant turnaround and shifting a majority of the work into the third quarter.
We're very pleased with resolves our packages and protocols are delivering.
But a significant challenges the world is facing from Cobot 19 pandemic, we've 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 covert 19 for my health safety and operations perspective, it's all the actions, we're taking to support our financial position.
Well also dive into what we're seeing from an industry in end market perspective.
Well, 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 affair 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 I'd be progressed through the second quarter, we're executing our business continuity plans to ensure 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 of potentially will have on the global economy.
The good thing is that advances in 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 for these dynamics.
With that I'll turn it over to Mike discussed the details of the quarter. Okay. Thanks, Aaron and good morning, everyone.
Now on slide four will review the first quarter financial results and keep him on the first quarter results were largely unaffected by coal was 19 [laughter] 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 and Uh huh.
Percent unfavorable impact from market based pricing [laughter], reflecting challenging in I'm working conditions that all nylon and kept a lifetime product lines as well as higher standard export sales mix in ammonium sulfate [laughter] 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 approved industry dynamics in chemical intermediates, particularly as the Teladoc seems EBITDA was 29 million in the quarter down about 30 million versus the prior year and I'll walk through the key variances on the next slide for the decrease primarily.
Reflects the unfavorable impact of low market based pricing.
Earnings per share of 31 cents decreased 37 cents compared to last year [laughter], you'll notice the effective tax rate of 29.9% in the quarter was higher compared to last year and expectations and that was driven by a few factors, including reduced benefits from equity investing and expected deduction loss as a result of our plans to pursue.
<unk> Federal net operating loss carry back claim allows us through the cares.
Which is expected to accrue cash taxes by approximately 8 million. This year [laughter]. Despite the tax rate in the first quarter being above expectations. We continue to expect a full year tax rate to be approximately 25% now in terms of share count first quarter came in at 20.1 million compared to 29.8 million in the prior year period.
And lastly, cash flow from operations reached 20 million a quarter.
It's down about 22 million compared to last year, primarily due to lower net income and the unfavorable impact of changes are working cap.
Capex of 34 million was down roughly 5 million year over year.
Now, let's turn to slide five Oh.
Oh, we thought it would be helpful to highlight a few of the key drivers over our EBITDA performance year over year as I mentioned earlier market based pricing represented a significant headwind roughly 37 million as a result at the continued challenging conditions in dialogue as well as lower ammonium sulfate prices year over year in part due to the unfavorable mix impact.
Excellent sales are standard grade product.
Lower input costs, namely natural gas sulfur, partially offset the overall pricing declines.
Plan plant turnarounds weren't approximately 2 million dollar impact in the quarter this year versus no impact in the first quarter of 2019.
The human impact following the shutdown of Philadelphia Energy solutions in 2019 represented only at approximately a $1 million impacting 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 acumen supply we now expect the full year.
2020 impact a pre tax income as a result of the 2019 P.S. suppliers disruption that shutdown of five to 10 million [laughter], that's about 5 million favorable versus our previous estimate and as it is approximately slabs of 5 million favorable compared to 2019.
In addition, we have submitted a business interruption insurance claim and will provide updates on that progress as appropriate.
Let's see an expense represented at approximately 3 million dollar benefit year over year, reflecting a decrease in stock based compensation and I see costs and continued disciplined cost management across the organization. [laughter] Lastly, we saw in approximately 10 million, though and that tailwind from higher volume operational performance and all the factors.
This includes productivity benefits from 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 a roughly 6.6 million of insurance proceeds related to the first quarter 2018 weather event and <unk> and the approximate.
Only 8 million dollar impact of the field force Majeure [noise].
Now, let's turn to the next slide.
As a reference a we've included our typical pricing in spreads across our product was altogether here on slide assess consistent with our result global camera lifetimes friends over benzene continue to do to declined sharply on a year over year basis in the first for the declines reflect a weak demand environment across most major.
Our end uses in what is already an oversupply the industry globally. We're also tracking the significant drop in benzene cost seen in March which the camera lifetime from prices more closely followed downstream resin spreads in the industry did show an expansion over the following Rausing caprolactam, 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 for Tom as we entered the second for.
Asia benzene the capital spreads averaged roughly $600 per ton in the quarter and that remains at levels below cash cost for more than half of the gold copper lifetime cost curve and approximates the trough levels, we saw in 2016.
Overall nitrogen industry pricing pricing has also decline 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 any finer grade propylene cost stabilized in the first quarter tracking and improved supply demand balance in the U.S. falling following final affirmative anti dumping duties and increased downstream demand. The month of March saw a significant drop or in propylene input costs.
As mentioned in small medium by arrest home prices back to a premium to the large biomarker as a reminder of the small medium buyer price is reflective of roughly one third of the domestic industry, where pricing is predominantly a freely negotiate it now let me turn the call back to era.
Thanks, Mike, Let's turn to slide seven to discuss some of the actions we've taken in the wake of the Cobot 19 pandemic.
For the last two months or so we've been executing our business continuity plans with dedicated team proactively implementing measures to mitigate cobot 19 impacts while continuing to operate all our manufacturing facilities to meet customer demand.
The health and safety of our employees remains a top priority throughout all of this.
We have protocols in place, including onsite medical personnel into actively monitor employees and contractors.
We have also adopted the way the work to mitigate risk, including implementing 100% thermal screening prophecies at all manufacturing facilities with restrictions on non essential visitors.
If establish social different saying, while limiting the number of employees and control room labs and meeting.
And we're maintaining policies and practices consistent with CDC and government guidelines, including upgraded personal protective equipment in face coverings at all manufacturing facilities.
They moved to telecommuting across all sites, where possible prohibited oh, non essential domestic and international business travel.
In addition, we proactively trained a contingent workforce to operate the plant as part of our business continuity planning.
As I highlighted earlier the previously scheduled second quarter 2020 plant plant turnaround was de risk 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 ended 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 source of liquidity for the business. In addition to our operating cash flows and matures in 2023.
As it precautionary measure in the current environment. We are currently maintaining higher cash balances of approximately $75 million.
As a reminder, the leverage ratio covenant of our facility allow for us to net debt with up to $75 million of cash.
Our previously announced amendments that 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 I know that facilities uncommitted accordion feature.
[noise] and were 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 2023 in the range of $80 million to $90 million.
I would represent a reduction of $10 million from our previously announced estimate and a decrease $60 million to $70 million versus 2019.
We're continuing to evaluate the potential impact to the carriers 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.
Let's turn to slide eight.
On the left hand side of this page, we provide a framework potential impacts by key end markets.
The chart represents an estimated percentage of our total sales ranging from low to moderate to high exposure from cold in 19 impacts.
On average, 75% to 80% of ourselves are concentrated in the modern 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 line.
Textile demand declines in Asia are also impacting nylon industry supply and demand conditions.
Although textile they're not as significant end use for advance excels directly they do represent the largest nylon and used globally and are impacted by the greater consuming U.S. and Europe markets, which are still facing significant locked down and declines in economic activity.
[noise], 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, the cobot 19 [noise].
Conversely, food packaging demand for nylon, which is preferred for its toughness in strength has been robots with inventories at grocery stores seeing rapid turnover.
Through this period Weve continue to see strong demand signals from the AG side of the business.
Have you seller 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 south.
We've seen an earlier starts to planting season, this year compared to last year, which as you recall was delayed by wet weather across regions of the U.S.
We've also seen improved acetone industry supply demand balances falling final affirmative anti dumping duties imposed in March.
Dan has improved for several central applications, including ice the purple alcohol or IPO gain used her hand sanitizer. Another disinfectants Muslim attacker later, M&A, which among other things have seen increased demand for acrylic screens uses protective equipment at stores as well as other solvents using 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 lock stuck with them. These last several weeks.
We've increased the frequency of our Pos 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 plan plant turnaround at Chesterfield.
[noise] there had been some demand pick up in Asia is economies reopened in the region and we're leveraging our core strength in global low cost position to optimize our sales next across the portfolio for this environment.
Despite some reduction in utilization April we're still running disproportionately higher which had a minimum is 10% to 15% about the industry average.
Now more than ever we are flexing, our ability to remain agile and product mix and plant utilization.
We're also driving improvement through our differentiated products with recent commercial wins for our copolymer offerings into the packaging faith.
Ongoing field trials in soybeans to continue growing underlying ammonium sulfate demand and investments in high purity applications across our intermediate portfolio to improve quality in yields.
Let's turn to slide nine.
[noise], an additional watch point for our business as results of Cobot 19, our implications to refinery utilization in the U.S.
But the vast majority the population not driving are flying there has been a contraction demand for transportation fuels.
Some refineries and the U.S. are dropping output by 30% to 50% and our managing storage constraints in the back of a significant inventory build.
We're closely monitoring any potential impact this may have on supply of our key raw materials, most notably chichimene and its inputs of benzene and propylene as well as software, which are probably stream the refinery operations.
Our teams have been hard at work to ensure security of supply. We've added two new Q means suppliers this year and diversified or 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 well in the past these oil prices as a general proxy an indicator for raw material price movements. Our business is based on benzene and propylene input, which do have their own supply and demand driven fundamentals.
For instance, in Q1 sequentially benzene rose, 8%, well refinery grade propylene fell roughly 20% all well W.G.I. 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 formulary index 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 and given the demand environment and declining customer contract volume.
We typically see formulary 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 the price of raw materials benzene and propylene.
So our sales will fluctuate with the price of key raw materials with our variable margin being largely protected.
The remaining roughly 50% over revenue was what we would consider market based pricing pricing for this part of our portfolio, including all of the ammonium product line ammonium sulfate product climb and the rest of our nine Wanna intermediates is influenced by supply and demand dynamics in the various industries, we serve and love marginal producer economics.
The underlying raw materials will also impact pricing were negotiated selling prices can lag up to 30 to 60 days with movement in those commodity inputs.
[laughter] lastly, with a sharp drop in oil prices were also monitoring the impact on industry cost curves.
As we discussed before lower energy inputs flatten the cost curves and this could result in some pricing pressure.
In particular are watching potential impacts that lower energy environment may have on the pricing into the second half the year for nitrogen fertilizer.
We believe our core strength 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 QNX tell Ya. Thanks, Aaron I'm now on slide 10 to summarize our outlook for the rest of the year [noise] Oh. We've also highlighted some key considerations that can impact our outlook as we move forward here [laughter].
Product line perspective, Aaron highlighted many of the impacts were seeing on our businesses from Cowen.
Now on 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 nonresidential construction auto production and textile growth out of Asia. So what we're navigating chosen nylon we do remain cautiously optimistic about our view on ammonium sulfate and chemical intermediates, particularly acetone [laughter] will be closely monitoring the impact.
Lower energy prices on nitrogen pricing in the second [laughter] operationally, we're continuing to supports agents stable operations, while adjusting our production output to changes in mix in demand.
So while we're working to mitigate near term impacts to absorption and volume as a result of cobot 19, we're maintaining utilization rates above industry outlook by leveraging our global cost a batch Erin highlighted the changes to our planned turnaround schedule for 2020, which is now expected to be a pre tax income impact of $30 million to $35 million.
We're down about 3 million from our prior estimate the heaviest impact is expected to be in the third quarter of this year [laughter] from a cash perspective, we've highlighted our expectations for further reduction 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 tailwinds from a cash flow perspective, particularly as we progressed through the year and continue expect stronger cash flow generation in the second half compared to the first.
This primarily reflects the significantly lower capex run rate and other working capital timing considerations.
Our annual ammonium sulfate prebuy cash advances program is another consideration for cash for reality. This occurs in the fourth quarter typically for spring sales in the following year [laughter], we're drawing disciplined cost management across the organization, including all discretionary spending.
As a result of our actions we're targeting at approximately 10 to 15 million of full year cost reduction versus the prior year, including indirect cost savings managing people costs and all the plan, it's been a logistics benefits and well continue to evaluate benefits of the care that we do anticipate approximately 8 million of cash tax savings in 2000.
20, and an approximately 6 million dollar cash tax cash benefit in 2020 from the deferral of socially social security taxes [laughter], given the puts and takes across the portfolio. We expect free cash flow to remain negative through the first half. The year. However, second have free cash flow is expected to be positive with lower capex.
And and working capital timing impacts more than offsetting the headwinds in the early part of this year.
We're continuing to leverage our stress and are committed to driving best possible outcomes, which will require us or remain agile as we navigate through the near term environment.
I don't let's move to Cuba.
Great. Thanks, Mike and I, Sean tells you can open up the line for a few and Uh huh.
Thank you very much.
Ladies and gentlemen at this time, we would like to open the floor for questions.
Mike asked a question. Please press star one on your telephone keypad now again that is star one to ask a question.
Well pause for just a moment does we wait for question Mr. Q.
[noise] and again as a reminder, that is star one to ask a question.
My first question will come from Vincent Anderson Stifel.
Yeah. Good morning, Thanks, and bladed congratulations on the assets on one.
I wanted to go through.
Kind of the commercial plan for maintaining high utilization rates and the second and potentially into third quarter. When it comes to placing a cap well yeah. When their cost physician, yeah, you'd like to move every time, you can but if we want to see something like a 30% drop in nylon demand is the physical capacity in the global capital trade.
Channel for you to move that much incremental capra.
We're down at those levels for more than a couple of months.
Oh, great Vincent Thanks for the question and I'm glad you're well in joining US here. This morning. So yeah as we mentioned we saw that April.
Certainly if that continues to be extended as he indicated we do see the opportunity right provided their demand signals around the globe to continue to run well across our integrated asset base.
So the export markets as you can imagine done certainly given given the way that hands that make I'm kind of came across the globe and if the expectation is if it reopens in that same that same constructs that a they age advancing when we saw at the end of April continuing here into early May is important.
Obviously for.
For us here and and then and then recognizing that as a markets continue to reopen that optimization right of where our mix is placed will happen in a post Ah post recovery World. So you know we we've been focused on making sure. We've got a you know the right quality the right product mix to meet or basically.
Where the demand signal is right in this environment.
So that is the plan and again a we we did see some turned down in April we proactively tuck the either the outage in Chesterfield think that helped US a you know mitigate that here in the near term and them all out we'll look to leverage like you say or competitive strengths and we do believe that you were roughly about fiber sandoz on the world's capacity and.
The strength that we have believe that again that will serve us well and be disciplined in that fashion.
Thanks, Andy you would like and somebody.
Next to I'm just quickly you mentioned that the out engine Chesterfield.
How much do depend on external contractors to turn around is there any risk to labor availability the field from a timing perspective.
You know a great question and that certainly something that played heavily into our decision to de risk. Our Q2 outage. If you recall Q2 outage was going to me a multi site outage I mean like integrated across our Frankford Hopewell as well as Chesterfield and that allows us to maintain you know right. So as you know in our previous on outage is a minute.
Allow them to get efficiencies when we reflected online on as the National Emergency was declared here to stay at home orders were going into place.
To conduct that outage added in Q2 would have required nearly a thousand contractors across our site. So when we looked at the health and safety of our teammates as well as the health and safety at our contractors and just availability. We felt it was very prudent to de risk and shipped out the majority of the work on so the that Chesterfield outage.
Was successfully Don I think it was great protocols, we figured out how to get the work done with six feet social distancing as well as improved on P.P. inpatient covering.
And ER that outages that were coming back out of that and ramping them plants back up and with successful from a health safety environmental perspective, as well as they're getting the the work done and inhabitation time. So we'll we'll look to Q3 and again, making those decisions to learn a lot. Obviously, if we had you know can.
Iterations on how long.
You know the pandemic last and obviously the spread in transmission, we believe will be very well prepared to execute in Q3, even though its contractors come on site yeah. Vincent the only thing OLED. There is that the contractors as well as our employees will be subject to the same screening in the same protocols that we haven't place to protect our operations. So we talked about.
Thermal screening of anyone who's visiting our saying that would include contract as well.
As well as protocols around you know onsite medical personnel to actively monitor monitor employees as well as contractor. So you feel very good about all of the actions and the Mitigations, we put in place not only to protect our operations from a you know infection do an employee but also also contractors. So we feel weren't Uh huh.
No management board.
That's great. Thanks, and then just to go quickly back to the market and you touched on.
Asia being kind of has an old for walk for near term for export opportunity and you mentioned textile weakness.
Oh.
But from an outsider perspective, like yeah, Chinese textile manufacturers had been much slower to recover some kind of the restaurants manufacturing base.
One is that your impressions to are you seeing any impact on the Asian cap and trade. As a result is that are just anything else you'd want to note there.
So it's a you know certainly being the largest a application for nylon globally and it being tied to a you know consumer confidence right and consumer demand I think Gary your observations have been consistent with what we've seen I'm in general I think a slower start.
You know across the board, but again, we still see yeah see it has a positive that there is a started out in the region. You operating rates are probably around you know, 60% or so kind of that best in China right now [noise].
But again, you know that pace here the shape of the recovery.
You know will be unique right I think to this can this consideration and again we're.
We're just going to.
Being nimble be agile I'm, you know meet demand where it exists make sure that we're a very flexible on the product mix, we need to make and [noise].
And then we'll watch here to write a you know with May and June a little bit of the opening here in you know domestic markets. You know we've seen retail stores in some states on potentially reopening and yeah. It is why do you think where it's a it's going to play out differently. I think then I'm you know previous considerations, but we've we've proven that we can navigate.
Through it with rather cycles, and you know, we're staying focused on being able to for a bit here as well.
Excellent. Thank you.
Thank you.
Thank you very much our next question will come from Chris Moore CJS Securities.
Hey, good morning, guys. Yet just you had referenced the I'm kind of Q mean sourcing it looks like the incremental cost expectation.
For fiscal <unk>, twentys little bit lower than than previously thought maybe can you talk a little bit what's behind that.
Yeah sure. So if you recall when we talked about was previously we had a range of Ah you know 10 to 15 million of an impact for 2020.
And that's compared to a 10 million dollar impact a last year. So a the initial thinking was we would see you know flat or possibly a 5 million dollar unfavorable impact if you recall in the discussions we've had inherently by expanding your supply outside the region, where P.S. was a very.
Local supplier to our plan.
You know just outside of Philly Hi, you know inherently you have a lot more logistics costs as you, perhaps a source more material down from the Gulf.
Which were well require spot vessels or other regions the world.
We've been able to really look at this and optimize the logistics span two to get more I'll say more material per vessel and vessel that we currently charter Oh from the golf, which will significantly reduce the cost and we're thinking at this point that a you know we could be.
We are flat or even 5 million favorable as as compared to last year. So I really it came down similarly, the logistics spend and we're going to continue to to optimize see if we can get it any lower as a as we go forward here.
Got it thank you.
And maybe aren't can just talk a little bit further about.
The ammonium sulfate outlook heading into the second half what.
Just some more thoughts there.
Okay, great. Thanks, I'm glad you're well as well here in joining us [laughter] today. So let me start maybe by rig reiterating Chris I'm a bit on what we're seeing right. Now is we're in the the heart of the season on because demand certainly is robust with fertilizer heading out into the field on the season is earlier and then we saw last year with corn plantings and top state.
About 7% ahead of our five year average and almost 15% of had 2019 and last week was from what we hear a rather a fast meet with things moving rather briskly in about a fifth or the corn crop was actually planted last week. So in the heart of it seem that robust demand, which is great for Q2.
But as is typical as we begin to approach so to the end of.
On the spring and planting and we will see and we do typically see global nitrogen fertilizer prices falling this summer with fertilizer demand likely contracting in 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 mid summer.
Oh, it's on the maybe even approach that 2017 levels right. So that's what we're going to watch for however, it right I just I remind that you and everyone that money himself. He does have its own considerations rightly continue to say, it's focused on that value a softer nutrition and also believes that the Cadillac family to cut backs, you know, which we've seen and utilization.
You know, which could turn to curtail that ammonium sulfate production as well will provide some offset right on the impact of that weaker nitrogen.
Hopefully that provide a little bit more color for you absolutely. Thank you.
Just last question for me.
You are there any potential opportunities kind on the back end.
And then make you know any any specific competitive landscapes that might shift a little bit or you know and any thoughts there.
Yeah, I know, it's I, it's a it's a great reflection hair and getting to the one we need to watch trade down when you. When you look at than Caprolactam nylon space right. It's been an industry with oversupply. We believe were operating now with more than 50% of the.
So in a cost curve for capital our Tam operating below cash cost is this isn't necessarily completely coded 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 and we sat there last time for about a you know let's call. It 15 16 to 18 months and at the end of that we did see on the rationalization of the plant here in the U.S. as well as some capacity and in Europe and I think that's the one thing we have to watch here right is does the extension of the Uh Huh.
The downturn here right on on a cycle for nylon <unk> and the additional considerations an extension that uncoated could play into that will it create another round of rationalization blessedly, yeah, no signs, yet, but I'm probably the one when you think about Ah you an opportunity that wouldn't be struck.
Sure.
Restructure the space [laughter].
Got it appreciate it thanks guys.
You bet be well.
Thank you very much our next question will come from David Silver see okay.
Yeah, Hi, good morning.
I had 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.
And I apologize there just wasn't ready to put out for me, but.
And I think you cited a due.
Decline during the month of April year over year, nylon demand and add I would like to if you wouldn't mind just repeating what that percentage decline was and then also with the 75 million dollar cash.
Elements that you mentioned that in the second quarter I missed the contracts to that was that you know boost from the 31 billion to have to get into Q1 was that due to additional draw down or was that you know from.
I guess recovery of working capital and you know other sales of products. We could just if I could just if you could just clarify those two points that would be my first.
Okay, and then I'll follow up thank you.
Yeah sure, let's let's take those an order right. So certainly on the what we saw on April the decline, we saw was 20% to 30%.
So on it that it.
Yeah, that's coming from a number of sort of application.
Certainly the automotive shutdown, a you know what would backup on the engineering plastics side and then we did have some customers for their own on health and safety sort of cold. It impacts you know had some shutdowns of their operation. So yeah, but it did comedy in that 20% to 30% impact in April.
Okay, and then the cash balance buildup yep yeah.
Sure Yeah, I'll take 'em. So as you know they we use the a the revolver as part of our credit facility as are our base source of liquidity. A you know the balances will ebb and flow and that's really kind of the benefit of having the revolver is we have the you know that flexibility and as you as you indicated we ended the quarter with 30.
1 million of cash.
As a precautionary measure we did draw down additional funds out of the revolver or holding higher cash balances again as a precautionary measure or you know as we navigate through this more challenging environment here that balance that cash balance will fluctuate it'll go up and now.
Depending on our cash flows in and how we manage that you know our view is that you know there's a whole banking industry is in a much better shape, probably capitalization perspective now than they were all if this is the 2008 in 2009 period. So really it's just strictly a precautionary you know holding.
Those cash balances a little bit higher year than we normally would ER and we'll we'll just navigate manage it as you know as we go through here as we get better visibility as we understand the impacts on demand and an operations as we go forward here, but this again strictly a portion or at this point.
Okay. Thank you I wanted to ask you about the acid fan demand outlook and in particular this this emerging or new were outlet per ads, so and and so I appreciate it.
You did highlight in your prepared remarks.
So I Gotta cracked open my industrial chemistry book here, but you know, it's an interesting alternative or incremental use.
Was wondering internally what do you think that that incremental route or you and market for acetone could amount to maybe you know when the shorter term where demand just spiking, but also you know whether you think that room from a fundamental perspective.
It is gonna be the state that's sustainable source of <unk>.
Incremental demand longer term.
Yeah, no great Great question and since you offer that you opened up your chemistry, Buck I'll try to add to build off of that right. So perhaps not chemistry. Buck you may have seen that there are two rounds on to make I used the proper alcohol and certainly I'm here in the U.S. as well as globally both route.
You know I think are employed one directly from propylene on the second from acetone and I would say over a long stretches I'm David Wright, the they trade off of which route wins you know it really depends on where acetone sits over 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 up so we were a servicing to large producers here in the U.S., who use that acetone route.
And.
So I think certainly for it for the foreseeable future praised the demand strength here. It is important you know in the interim is certainly creating.
Further tightness in addition to what we're seeing on the nothing that's accolade side for for clear plastic sheeting for protective barriers.
But I would imagine I can't call. It that you know we've seen this overstretch isn't a recycled they're always its I cant made from acetone, but at some point when the markets are restored in the Pan dining passes I would anticipate.
Sometime in the future that you know the normal trade off between the propylene route and the acetone route will fall back into normal balance.
Okay.
Alright. Thank you for that and then this is a question for Mike I think that has to do with.
Inventory levels and you know within the context stuck with current try to oil price outlook. So.
No I noted that sequentially your Rob inventory levels, you know declining to certain amount, but from fourth quarter from your rents at March 31, but I'm kind of scratching my head and I'm just kind of wondering you know oil oil wherever it is today I mean, it's much lower than than it was you know even just a few months ago.
So and that to me kind of always makes me scratch my head and wonder about the potential for inventory losses.
You know product it's produced.
Petrochemical inputs that you know based on a certain oil price to know what a different level.
Could you maybe talk about that overall you know what.
Both risk or you know effect do you think the 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, right.
Yeah sure.
You did notice say I believe maybe on the last earnings call. You also asked about the inventory and we did see a reduction in the first quarter.
Really was driven by two two areas. When you look at the sort of the with and finished goods inventory that that really drove a reduction then or that was down roughly about no 8 million in aggregate we.
We had acetone animal ammonium sulfate really the two primary drivers of the inventory reduction.
And the men's much of that standard product inventory that.
We had at the end of the here we did so.
In the first quarter as well froman, though from an oil price perspective, it sounded like you're referencing.
Sort of an accounting consideration around a lower cost tomorrow.
And you know we evaluate that we'll evaluate that you know every single a quarter or you know as we set our standard cost and when you look at the inventory levels in the values of the inventory or they are based on our standard cost and the amount of volumes, we have an inventory and that's the value that does go into the inventory.
We will evaluate a you know 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 you know the terms of.
The actual product cost relative to the other sales prices if the sales prices fall below protocols, we need to consider how that will in fact inventory values.
What I would say you know again economically that as an accounting consideration economically when you look at it still the considerations around the fact that 50% of our business is passed through you know we pass through those raw materials as they go down we also increase.
You know prices as raw materials go up and our variable margin is largely a protected that you know economic consideration is still in place and in terms of.
The accounting considerations on a pro lower costs and market as far as we can tell right now the risk is relatively relatively low.
Okay. Thanks, I just have one final question this would be for air and it's kind of your follow up on your answer.
To the post pandemic question that you handled earlier in the Q1 day, but you know you did focus on the potential for reduced supply.
I was going to ask your maybe she thinks it have you thought about it was there any potential demand opportunity. So in other words I mean, we'll see how things play out, but I I've read the other people predicting it I try to believe that there will be no to a certain extent reordering of.
Global supply chains.
Most pandemic and my sense is that you know a wide variety of industrial products that are currently manufacturer you know in China lets say might.
The read 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 what company or a product chain that currently might be manufacture.
Several steps you know in you know, China, where that region that you know pose pandemic might be strategically relocated back into domestic markets, including you know a north America. Thank you.
Oh no.
So as a great thesis, David I think one that we're all collectively watching for in certainly it you know whether it's certain durable goods that you know where supply chains have been impacted to certainly we're seeing that on a more humanitarian basis relative to p. and [noise].
Medications and things of that I would say today, we haven't received any indication that just yet I think there has been you know quite amount of work I think for for people in Alaska.
46 weeks really to keep their employees healthy and safe and also to quickly adjust to 'em rapidly changing demand signals domestically as well I would say that we remain.
Focus our conversations with customers are I'm, you know daily in touch points, you know when we think about the portfolio transformation sort of opportunity for us and nylon in a.
I would say a steady carpet decline, which we've talked about right and that need to continue to grow in packaging in engineering plastics I will say those conversations not work continues right and we you anything to sit out, but I want a year over year quarter over quarter basis in ourselves into the EPA space is up.
You know, 70% and a into an industrial application spaces. You know 20 to 30. So again, we're very focused on building those relationships getting products into.
Into trials and custom applications are recognizing that that had been slowed right a lot of that that work for those new products and those applications will calm, but I think again building out you know the connections it's important for US here on so that we are seen as that trusted reliable supplier, who can you know brings.
To their the the products that are needed I'm sure that pieces play out sell yeah. We're doing it just one from the standpoint strategically we need to but it hopefully positioning us well to be there initiatives decisions the name.
Okay I know, it's pretty very early days. So thank you know your comments on the appreciate it.
Of course, all right they healthy.
Thank you very much on last question will come found that Charles Neocart.
Thanks, Good morning, everyone, let everyone as well one quick question I've been you know in terms of the ammonium sulfate. Obviously, we've got the summer law, but you guys typically sell a lot into South America, and though we I is obviously change 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.
This year, because it could be potentially a very strong market given that they're farmers are doing well.
It looks like there's going to be some acreage Benson things like that so you know have you gotten any early indications yet.
On that front.
Yeah, I'd say, it's I'm, probably a little early magazine focus here I'm moving you know certainly the granular out to a out to the fields hearing in Q2 and as you rightly Notifi 'em, we do typically like to that that Q3 sort of export consideration.
Yeah, I think that you know we have seen I'm certainly HM you know what would be an enormous hey, I would say right now of you know inquiries for bookings into South America, and not just Brazil, but Peru.
You know through.
Through Latin America in Central America. So I think as we proceed over the next couple of weeks and mindful, we'll get a better sense of where that sets and not only one of the things that like you say watching on the on the total sort of plantings in what crops I think you're going any key right as we think about Ah getting into that second sees.
And then certainly into the fall but.
Good observation I appreciate that trial.
Well awful in terms of the the assets on side of things you guys feel like you're being help at all but the fact that is pheno a little bit on the weakest side, which means you're getting some people who are watching that some pheno production and therefore, adding to.
The tightness wars Snugness that you might be seeing as it sounds obviously the demand is better but you also maybe seeing quite hit is that something that you guys are facing or anyone else you can see in the industry is facing again. It just help the has its own thought.
Yeah. There there are certainly a number of factors right that are playing into a sort of the acetone dynamics and certainly the ability to and restoration really where we were after for that.
Pricing recovery post Ah the anti dumping determination. So certainly on the supply side. If you look Q1 year over year only about 7000 tons of imports came in compared to 50000 tons. This time last year. So that certainly has moderated post.
The anti dumping as you know certainly pheno operating rates globally, and Ah you know BP a into polycarbonate and proxy rather than for on construction certainly are weakening no from that perspective, so again, your but phenol demand down utilization comes down acetone supply comes down then coupled with.
You know what has continued to be fairly.
No robust.
Acetonide demand you've got the M&A market I'm here in the U.S., we believe sort of operating at 80 plus percent again that Ah, yes pull through into piano nave or clean cheating on continues to be doing well architectural coatings seems to be a the held up that's far too I think with.
You know certainly people many opinion their houses or you know their homes and D. I lie, but architectural is held up over sort of industrial and and automotive coatings.
But you know all of these are playing out I think to create that the plans supply demand dynamic that is enabling really where Ah. We wanted to see the mark to get to which was that that restoration of a price and fair value to the end application. So.
Comedy from all those things as you point out.
Great. That's that's left for me thanks very much.
Very good. Thank you [laughter]. Thank you very much I would now like to turn this conference back over to Aaron Kane for concluding remarks.
Oh, great that with a terrific our I'm staying with everyone and as we approach here I just wanted to thank everyone again for their time and interest. This morning on 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 an 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 angles 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 look forward to speaking with you again next quarter. Please stay safe and please be well. Thank you.
[laughter]. Thank you very much ladies and gentlemen. This now concludes today's conference you may disconnect your phone lines and had a great rest a week. Thank you [noise].
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