Q2 2020 AdvanSix Inc Earnings Call

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Good morning, and welcome to the Advansix second quarter 2020, <unk> earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a corporate 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 proceed Star then one under Touchtone phone to withdraw your question. Please press Star then too. Please note. This event is being recorded.

I'd now like turn the conference over to Adam Crystal Director of Investor Relations. Please go ahead.

Thank you Brenda and good morning, and welcome to advance six a second quarter 2020 earnings conference call.

With me here today, our president and CEO, Aaron cane, and senior Vice President and CFO Michael Preston.

This call and webcast, including any non-GAAP reconciliations are available on our website at investors Dot Advansix dotcom.

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 identified 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 FCC.

This morning, we will review our financial results for the second quarter of 2020 and share our outlook for our key product lines in end markets. Finally, we'll leave time for your questions at the end so with that I'll turn the call over to Advansix as President and CEO Aaron Kane.

Thanks, Adam and good morning, everyone. Thank you for joining us and for your continued interest in advance.

First I'd like to start off the call I once again offering our best wishes to also have been affected by that cobot 19, pandemic I hope that everyone listening today as well as our families in co workers are healthy and saying thank.

I would also like to acknowledge our 1500 teammates that advansix.

We know 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 stays stable and sustainable operation.

During the second quarter, we continued to execute our business continuity and mitigation plan 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 faced coverings at all facilities. We're very pleased with resolve 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 impact the cobot 19.

In the face of a challenging end market environment. I'm also encouraged by the sequential improvement we saw a month to month within the second quarter in terms of both industry demand as well as our own operating rates.

For perspective are 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 our nearly approaching our normalized target rate.

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 continued to support as we navigated through week Mylan industry conditions.

Looking forward to the second half, we're ramping up preparations for the start of our third quarter plans plant turnaround, which is primarily focused around or ammonia plant.

You've 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 find 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 an available liquidity between cash on hand, and additional capacity under our 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 improvements 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 million 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're navigating.

During this unique time are 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, Aaron and good morning.

Now on slide four walls review, the second quarter financial results.

And overall I'd say, we're very proud of our performance in 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 performed 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%.

Market based pricing was unfavorable by about 3%, 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 Cobas 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 and 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 20.1 million compared to 29.1 million in the prior year period.

And lastly cash from operations.

Reached 9 million in the quarter.

That is down about 60 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 disciplined 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 dollar headwind year over year.

This reflected and approximately 12 million market based pricing decline, partially offset by a roughly $8 million benefit from lower input costs, namely natural gas and sulfur.

Trucking our key variable margin drivers, we saw continued net price over Ross 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 and nylon caprolactam at phenol as a result of global markets and the economic impact of Copel 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 on natural gas boiler investment when it cost actions and lower SGN 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 cuming impacts following the shutdown of PS represented at approximately 4 million dollar impact in the quarter as we've realigned our supply chain to ensure continuity of supply and the impact of the plan planned turnarounds was a 2 million dollar headwind year over year.

Lastly, as you'll recall, we recognize and approximately $12.6 million pre tax restructuring charge in the second quarter of 2019 associated with the closure of our possible, 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 altogether 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 caprolactam prices more closely followed.

As seen in the past downstream resin prices can tend to lag in aligning with changes in upstream capital like an over benzene spreads.

As we've had highlighted in the last quarter, we've seen the resin overcapitalized caprolactam spreads correct back to the typical two to $300 range for tongue through the second quarter and despite the year over year decline in Asia benzene, the kaprow 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 towards 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 normalized 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'll recall in the latest.

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 Preplan beginning in March through top dress applications into July.

And lastly industry realize acetone prices over refinery grade propylene costs improved in the second quarter tracking and improved supply and demand balance in the US following final affirmative anti dumping duties lower global pheno industry utilization rates and increased downstream demand.

As we stated post the anti dumping duties. Our focus has been to returns of 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 at home prices over the large biomarker through the second quarter as propylene cost decline.

As a reminder, the small medium buyer prices reflective of roughly one third of the domestic industry, where pricing is predominantly freely negotiated.

Let me turn the call back to Aaron.

Thank you Mike Im now on slide seven to discuss some industry considerations as we progress for the remainder of the year.

As a reference were 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 Mylan, we've continued to see weak demand, resulting from the challenges across its consumer oriented end markets.

Which is the largest silent end use in North America remains structurally week and had been impacted by unfavorable building and construction trends in the wake of the pandemic, particularly on the commercial cyber nylon has a much stronger foothold.

We previously discussed the consumer preference of hard versus offline 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 U.S.. However, outlet does remain well below levels seen at this time last year.

Engineered plastics is comprised of three end segments consumer and industrial electric in electronics and automotive.

In each night on its preferred for its toughness chemical resistance and surface finish qualities.

Auto represents approximately 60% of nylon six demand in the sector and hear demand has remained sluggish on declines in global production. However, we have seen improvement out of Asia as Chinas economy reopens prior to the U.S. in Europe.

Non production overall has also been increasing in China sequentially on gradual demand improvement.

Textiles, which is the largest nylon and use globally with manufacturing centered mostly in China, though is heavily reliant on the overseas market and has been impacted by retail activity, which the we see as talking the opening in recovery of economies in consumer confidence.

Conversely, food packaging demand for nylon has remained robot.

So overall, we did see a sequential improvement nylon demand, which was down roughly 30% at the started the second quarter compared to prior year and exited down roughly 15% into July we're seeing demand further improved sequentially, particularly out of Asia and we are now approaching our pre cobot sale findings.

While we're pleased that volume in demand is returning there is a temporal unfavorable mix consideration as we placed product where demand exists at the same time, we're taking afford perspective by focusing on asset flexibility new products and application development and customer qualifications to position the product portfolio for sustainable performance aligned with anyway.

Is that having 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 coffee prices are typically strongest during the second quarter domestic fertilizer application and then how many seasonal pricing decline into the third quarter as a new season begins.

Meaning that we are now in a new 20, 20% 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 the geographical and product sales mix consideration.

In the third quarter, we will have higher standard grade product sales into export markets as compared to a greater granular sales domestically at the height of 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 sequential consideration.

End of $10 million to $15 million higher cogs or cost of goods solid on average in the third quarter.

Overall softer demand remains robust as a key nutrient for crop supporting yields. However, we're monetizing key indicators into the new season sale, including crop prices, which had been relatively muted potential reduction and planted acre estimates and global trade flows.

You asked the a it's also forecasting multi high year ending cornstalks 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 a softening attrition to increase crop yields.

Moving to chemical intermediates.

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 sometime now finally 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 in Europe are expected to take plan plant turnarounds in the second half a year.

In addition to tighter supply acetone demand has improved for several essential applications, including I suppose alcohol or ita used for hand, sanitizer and other disinfectants.

Supplements accolade or M&A, which among other factors has seen increased demand for acrylic screens being used as protective equipment its stores.

As well as solvent views into coatings.

Seen on demand overall remained soft in 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 QNX.

Thanks, Aaron and Im now on slide eight.

As Aaron 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 now on end markets, which have been the most challenging.

Operationally, we are continuing to support safe and stable operations, while adjusting our production output to changes in mix in demand.

Well, we're working to mitigate near term impacts of volume and fixed cost absorption as a result of code 19.

We continue to maintain utilization rates above industry output by leveraging our global cost advantage.

We now expect the pretax income impact of planned plant turnarounds to be approximately 32 million for the year as 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 drug efficiencies from the required buffer feedstock. So the maintenance work through the restart of the assets.

As we discussed previously the third quarter is expected to have the largest impact will roughly 20 million. So were 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 prebuy 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 at approximately $15 million to $20 million full year cost reduction versus the prior year and that includes indirect cost savings managing people costs and other planned 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 carriers 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 associates, social security taxes, now that Adam let some of the today.

Okay. Thanks, Mike brand and can you. Please open the line for questions.

Absolutely we will now begin the question answer session to ask a question. You May proceed Star then one on your Touchtone phone if you're using his speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to 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 few questions.

Good morning, good morning.

Good morning, Yeah.

At night I wanted to begin with so I think it was late 15 or 16, when there was meaningful global supply rests with rationalization that with caprolactam, which obviously.

Helped EBITDA results in 17.

Given the continued softness in now and end markets reasonable to you'd see that again at some point in time again, maybe just talk to you know kind of.

What you see is the same and different between.

Oh, yes, now and five years ago and.

And one of those expectations might or might not make sense at some point.

Yeah hobby, two and a great question when I think thats been on a number of People's mind, giving the us.

But aware.

Ultimate spreads have been tracking really since the back half of.

2019, as you have mentioned and what we've.

As shared previously Chris here is that you're right. We we saw similar trend I'm for about 18 months right. The back half to 2015 look very much like the back half. The 2019 and then we progressed throughout 2016 really yet.

You know depressed level at the time that we had equated relates in wire breakeven variable cost type type pricing on the global market and.

We're in that same environments right, we're now I'm, probably nine months or so.

What we would share is at the at least now the on the spread pets stabilized there was some uptick on actually in late June into July where perhaps you know the Chinese.

Folks have actually moved from a loss position to perhaps kind of more of a break gave it even or just sort of a very modest level above that you. So that those are signs of are watching for first would have returned though that there are disciplined approach, but there are considerations, we havent shown.

Right 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 on 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.

You know for for those that might not make it through situation, it's very hard to call and Ah, but but again I think the the point that we've made the passes that right wrong and differently. The industry does sustain the levels for much longer than what perhaps would be a.

Seem reasonable on paper so.

We'll watch it no announcements today other than we can see where I'm a number of players on sort of in the rest of Asia population, even throughout parts of Europe are running at very low level.

Got it okay that helps.

Maybe just talk a little bit more about.

Kind of some of the cost capital decisions and more specifically the cost reductions that Mike talked about the rest of the year end kind of specifically where they are targeted.

Sure, Chris I'll take that one.

As I indicated we just we've been tightening our belts across the board as you can imagine in this environment.

And through the has through the first half we executed about 12 million in cost reductions and thats from a year over year perspective, and that's just managing people costs head count and overtime discretionary spend reductions such as like Teeny outside services.

Deferring or eliminating 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 SGN and a functional costs and you can see that on the SGN a line from a year over year perspective, when you look at the financials.

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.

Well, we'll be temporal some are structural and somewhere temporal. So we think about half of the reduction might be permanent but we're going to continue to look for opportunities to 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 about 18 million was down to $80 million in the second quarter and thats down quite a bit from the first quarter of 20.

As well as the second quarter of last year, we did complete our large growth and cost savings projects you know the boilers. The like him quality project as well as the R&D relocation, so we've sort of lapsed the.

The spend for those projects and we're just going to continue to exercise discipline really across the board in the second half.

You were were prioritizing repair maintenance capex, but we'd want to make sure we do that while we ensure safe and stable operations going forward. So when you thinking about second half versus first half 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 full year perspective, and importantly will support free cash flow generation.

The second half.

But I also want to be clear that we continue to progress our healthy high return growth in 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 but little bit smaller, but again, we'll only execute those if the if the returns are there and if the IR ours meets our hurdle rates. So that's that's how we're thinking about a going forward.

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

Hi, Thanks, Chris Thanks.

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

Yeah, Hi, thank you.

So we really have a couple of questions maybe.

Maybe let's just start on ammonium sulfate. So firstly, thank you for.

Including the seasonality pricing chart, a very interesting.

I may have missed the but just a clarification so the 11% third quarter decline in.

In ammonium sulfate pricing on a sequential basis is that kind of apples to apples I mean is that the same grade ammonium sulfate or is that.

11% represent may be a blended price that reflects maybe the shift between I don't know granular.

And standard product it was that benchmark or orders has that been adjusted to reflect the realities with maybe how your sales mix trends.

And now grade mine, if we if your time at the the chart in the appendix David on that specific too granular ammonium sulfate and does and so all the same type thing grade.

Okay, and particularly just at the reference into the corn belt region.

Gotcha, and I know that theres been a new supplier who.

Started up production recently in ammonium sulfate in North America, how how would you say the effective that has been on the overall market in other words has it been kind of orderly or or maybe disorderly been how would you say that.

The new product has been distributed or marketed you know relative to expectations maybe.

Sure Yeah, you're referring to the nutrient Redwater plant that was brought online just maybe a a few points of.

Data here to clarify right today added approximately 350000 metric tons, which you know just double their their capacity to roughly 700000 metric tons.

You know at that site and a as we talked about that added roughly about 10% more granular a ask too. So the total north American you know situation now not sulfur you know we do we have continued to see growing demand right software is growing.

You know, 3% if you will always pointed out.

In the past tubing granular growth for a asked in Brazil long had been.

Looking more like 18% growth over the last several years, we talked about that on the webcast I joined with Vincent not too long and out. So we do see a good growth in a in these product lines and a and new trends are very large market participant. So you know as we expected you know that they would've use their supply lines. It would have used.

There you know current customer base and and we see that that's exactly how the bottom end to the market as we would have expected sell.

Yeah, one of things the lots we are still in that import you know market.

As caprolactam rates have declined you know globally. That's one that will continue to watch, but obviously there as we'd indicated we had expected perhaps that Ah 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 acetone and you know the chart at the right. Most panel on slide six is very eye catching with the divergence between the small buyer market a large.

So a couple of things, but if you were drawing up a pie charts already imagine absent markets could be driven by several factors one might be the reduced imports related to anti dumping.

I I personally think reduced pheno production or feed all demand because you know also.

Dried up some supply and then on top of that there's.

The demand boost for M&A, maybe related to the pandemic, which might be little more structural going forward.

If you were to kind of allocate a 100% to those three factors or maybe you have for fourth factor I mean, what would you say the principal driver is this is a third third a third or is one of those factors more predominant in in your view since since the small buyer market started the.

Strengthen thank you.

Yeah, I know a great question is always David and it's a intriguing to maybe perhaps think about it as a team as a waiting and we can we can give that some further thought for you know later dialogue, perhaps but to give you sort of color you only you know directionally on.

On where we said you know I would answer that in the fact that Tom I think your your points and observations on the first two factors you are probably weighted more heavily than the third so the meaning that the supply side Oh.

I would say contraction right coming through the second quarter into the third its certainly lending itself to you know a tighter balance if you will on the supply demand side.

And you guys you know sort of imports have have come way down when you think about where we are sort of first half 18 or 19 versus 20. You know we saw 18000 tons brought in in the first half of 20 versus 78 in the first half of 19.

As we pointed out and you rightly noted you know phenol demands in Pheno utilization has been pulled back, particularly through Q2, you don't you think about but at the end uses on phenolic resins are being driven into building construction as well the automotive that ultimately tightens up the acetone supply.

Hi.

And then and then certainly there has been some boots dawn on IP, a and M&A, but as you know you know I kids only about.

You know the 7% of that the North American acetone demand you know if you will for.

Our appetite so hopefully that helps you at least with a you know strong sense directionally that yeah. It is a supply side here and as we noted in the I'm kind of looking forward. We do think that supply side remains remained snog, because we will have a series of back half turn around and you know the front half with sort of.

Characterize more by I turn around in in Asia on and then the second half really will be characterized by my turnarounds in North America in 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 yearend renegotiate effective date for renegotiating prices were is some of it quarterly or customer by customer how does that.

How does that shakeout, where we might see the large by your price move closer to the the small buyer price. Thank you.

Yeah, No end, a there's really two factors there to consider.

In the large by our market the the marker if you've already index that gets published in settled between buyers and sellers is a monthly settlement.

So the large fire you know price does get settled at monthly that's going to factor one factor too as you point out is that typically you know in supply contracts. There was a negotiated discount to that marker that is settled monthly and that discount is predominantly omni.

Go shaded annually and typically in the fourth quarter.

So as the market dynamics on can change that monthly settlement and you'll see that more real time, but then the discount a negotiation will happen in Q4.

How does that help you got show very good I'm going to get back in queue. Thank you.

Thanks decreases.

As a reminder, if you would like to ask questions. Please press Star then one.

Our next question comes from Vincent Anderson with Stifel. Please go ahead.

Thanks nice quarter.

So it sounds like a packaging demand as well.

And I'm guessing that was that a good test of your open partnership is there anything in particular that you wanted to highlight your films business that you were able to observe in this quarter of improving demand.

I would say yeah, Vincent that are really from a overall packaging comment that would relate to both packaging resin prices you recall, we sell 'em packaging resin as well it sounds and the packaging resin side is 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 shopping perhaps for longer stretches and Ah and the supply chain you know considerations.

We call on packaging resin be very robust now on the the Bofa film side that is they typically use as a single layer film and you know again held up a perhaps you know that does have some applications into let's say book covers even balloons and metalized other applications that that.

Track, a little bit more to your sort of consumer oriented you know purchases.

But over well overall, you know I'm good robust demand. It actually you know picked up in Q2 and a one of the things that we continue to look forward is you know the industrial packaging segment. So this would be more or sorry, <unk> industrial where restaurants are buying more in large bag first is can.

Quantities and things like that hopefully, we'll we'll come back as well as we see I'm, you know restaurants institutions and others you know open back up.

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

I know great question into end you just to re articulation of what we've been focused on you know as we've talked in the past.

No the corporate structural change you know is.

It's a it's a need and driver for us to transform the end application portfolio, we've been talking thing quite a bit on asset flexibility yeah, you'll see that in our you know Q2 results and going forward and that's you know really allowing us to meet demand where it is that right. So.

Being able to sell mountain capital locking into the market slate capital I can as well as you know more engineering plastics oriented resin versus carpet rising so yeah, we've been focusing on it you know the asset that Chesterfield that had been predominantly in the past dedicated to carpet you know one has been fully qualified.

By now free to customers to make I'm, you know engineered plastics resin we've.

Started working on trials and a and testing perhaps on a is some new textile resins.

And just getting the flexibility out of our assets and and how we optimize that product. We all to me to meet that forward demand. When we talk about acid flexibility hopefully that gives you a little bit more color in that regard.

Yeah. Let me talk then the Q1 earnings certainly the the customer qualifications through this time period has slowed.

You know one were gotta strong sales pipeline you know a targeted list of customers that were growing west right in the compounding space and you know this is the kinda reminded that companies face again, it's not all automotive leased we've seen some resilient demand, perhaps in a electric and electronics visa.

These sort of auto and consumer and industrial.

But our 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 every articulation I think it's something we we know is.

<unk> is a 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 currently there are structural considerations that we have to be prepared to address and a enough that word that's are working toward.

That's very helpful. Thank you everybody just ask one more here I appreciate the earlier clarity Michael on the split between the temporary and structural components to the cost savings.

Right, if I could ask about the operating level savings specifically.

Has that been enough to offset ill call it negative operating leverage while the plants running at lower utilization rates are these savings bond achieved despite that and any operating leverage that comes back when the demand improvement would just be adding to it.

Yeah.

Yeah, I mean, it as as you look at the demand impact I mean, so as we discussed in the second quarter from a year over year perspective, you know a volume was down 19% right. So that that was a big number and you can see.

Yeah, but the volume the revenue decline was down 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 on the EBITDA walk we have 11 million a savings of which a portion relates to the boiler investment and then a portion relates to the you know the 15 to 20 million that we're talking about in terms of cost reduction.

So we we we don't anticipate isn't fully offset the sort of the the volume impact on the decline from 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 our utilization rates are improving particularly in nylon as we continue to drive a you know penetration in different applications and end markets there.

We're going to just continue to be very very conservative on cost and managing costs overall too to get us through this given the uncertainty but.

No, it's not quite enough to offset the impact right from a volume perspective, but we're doing whatever weekend.

Sure I appreciate that and I, if I could just maybe clarify one point that I actually was trying to make maybe better for Aaron.

How do you think about the this efficiencies that come with operating the plant at these rates less so maybe ill covering over head at the plant, but but the actual efficiency of the plant running at.

65, 70, 75% rate and sort of your targeted Yo nineties.

And now it's a it's a great question certainly you know one Oh, Yeah, I think David maybe just to take it back a high level and then come back to your point in is a morning note. This morning kind of captured I think the situation very well in a sense that.

You know, while we have seen sequential improvements you know we're working to be agile you know the outlook on macro trends remain kind of far from robot right [noise].

But we do think that you know how we're operating in a result through the second quarter, you know our reflection of our ability to focus and execute on what we can control and.

Yes, when we when we make our choices, we believe we're making prudent choices to our operating rate in the market contacts.

That we're facing you know we have to away as you point, yeah, the operating leverage in the fixed cost absorption against working capital.

Builds perhaps we have to weigh the challenges of perhaps reduce yield associated with different right.

But again, we we do that analysis, we've been much more agile I think in how we're approaching that's all my chair with others. Yeah. We've moved our sales inventory operations planning Paul to a you know to weekly where we can make it more real time decision and I think that is serving us well as you say there.

There's always trade offs you know in this in this balance.

You know 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.

Yeah, all right Thats, the only thing I would it the only thing I would add on that as I. When you look at our yields I mean as you I think really the quite where the questions coming from is as you have lower utilization rates and as you can have variability in that that could impact your yields and how that could have a negative effect on the financials and I'd say overall when you.

Look at it really hasn't impacted us a whole lot we've been able to.

The mines in different areas of our plans, we have multiple areas at Hopewell that we manage and getting those optimize 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.

Okay perfect Michael it's exactly what I was trying to get through apologies for the confusion, but appreciate all the additional context.

No apologies required thinking.

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

Okay, Hi, so.

This is kind of a question about maybe next step Tonight, you know I heard the Aaron loud and clear the current environment as far from robust but.

A couple of things I mean, first you know air and I'm, you've you've been managing these assets either no independently or as part of.

Your parent company for very long time, and I assume you know these assets like the back of your hand.

And then it's also been my experience was carve outs or spin off but.

Oh of kinda seasoned industrial assets, but the there's often been some under investment and there tends to be some I don't know quote unquote low hanging fruit that you know the parent wasn't willing to invest in but the newly independent company.

Finds it in their interest so to your coming towards the end of your growth and efficiency program.

Which I think captured you know a lot of those attractive incremental opportunities.

But you know things have changed since youve been spot now and I'm wondering if you had to make the next incremental kinda discretionary investment.

You know is there more kind of low hanging fruit or is there more are there more kind of attractive incremental.

Investment opportunities should the environment become a little bit more normalized could you even.

Further strengthen your your low cost position, then nylon one thing I'd thought of I guess to mitigate the issues with Acumedia supply.

What does it make sense to have you know some logistics for 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 what you know in your opinion what remains to be done that can be done you know high return quick payback type of opportunity.

Thank you.

[noise] door weekend, or we can talk us through I, a handful of things here, perhaps as sort of whats yet still in store or you know one perhaps just to clarify on the growth in cost savings pipeline. When we had introduced the the larger projects coming into last.

Here you indicated that we had a pipeline of ideas you know ranging.

From an investment level of $150 million to $200 million. You know that we felt were had strong potential to meet our internal waterline form for that was returned as you noted we did execute a number of the larger ones and he said you know that those projects range and scope and scale and Ah could.

It could be rather lumpy so.

I think the first thing is we're not done without pipeline that pipeline continues to be reshaped it continues to be.

In sort of really a thought through by our value stream teams and are looking at opportunities. So we you will continue to see and actually our spend this year continue to two include the smaller projects you know associated with yield energy things of that nature that we'll continue to take the same.

You know Nick away at the opportunities on a on the cost side and productivity side. We also have a few on on the growth side smaller in size and we've talked about our oximeter portfolio that is something that we will be I'm looking to trigger here. You know later in the year into next year on you know that again is.

Hey, I'm pipeline that continues to show good growth we've got the drop in replacement for me go with two P.L. and a the so you'll continue to see opportunity in those regards and yeah. You can look for us to clarify I think how that pipeline shapes up in the coming quarters right. We're working through that are our strategy sessions and a you know focus.

For next year.

But don't count that sort of lever out right. One of the things that we've also talk about half of it continued to work on it I think Oh, Yeah. The question you noted on ammonium sulfate I'm you know granular growth is something that we see you know globally right. So how do we look to address rolling 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 dive optimization, we get over standard and just from that the growth potential in the marketplace and a as we know that we're investing in its only been research. The field trials continue to to go well. So that continues to be an area. As we've noted previously that is you know still afford perspective.

So kind of though that the first as you noted and I think we've talked price around you know how do you release opportunity associated with you know buffer socks and or potentially so does your interactions between the plan.

You, we work to run a lean and efficient supply chain, but as all these unit operations Kinda play out you know unlocking potential through with restore it I think you're kinda did well I had thought about that one you as one of continual optimization right.

And we didn't know that post the P.S., you know situation and realigning our supply chain that we would need to make an investment again to to make sure that.

We had that security of supply on Q mean underway.

And Ah you in any the forward view, we really are taking an opportunity to.

As we pointed out you can think about this business right in the linear fashion right, we make phenol, an appetite and let me make capital I commend ammonium sulfate that may make nylon sick and I shared with you kind of turned that inside out and draw all sort of the the business slightly different right. We have ammonia based chemistries, we have to offer based chemistries you have seen all based kind.

Mysteries now that allow us really two to push on the innovation side within the company and as you noted those are muscles and have to be built we we've got the operational excellence. We continue to I think bolster that but we recognize that a innovation.

To drive growth is Ah that's why we've investigate invested in the application development you know re framing our R&D team, but recognizing that was going to give us mid to long term girls that we built those muscle cell.

Hopefully, there's a 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 a in driving for for the medium to long term.

[noise] very comprehensive thank you appreciate it.

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

Thanks, Brandon and thank you all again for your time in 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 some 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 has now concluded. Thank you for attending today's presentation you may now disconnect.

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