AdvanSix Inc.

Good day, everyone. Welcome to the AdvanceX fourth quarter 2018 earnings conference call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. I'd like to turn the conference over to Mr. Adam Kressel, Director of Investor Relations. Please go ahead, sir.

Thank you, Alan. Good morning and welcome to AdvanceX's fourth quarter 2018 earnings conference call. With me here today are President and CEO Aaron Kane and Senior Vice President and CFO Michael Preston. This call and webcast, including any non-GAAP reconciliations, are available on our website at investors.advancex.com. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our business as we see it today. Those elements can change, and the actual results could differ materially from those projected, and we ask that you consider them in that light. We refer you to the forward-looking statements included in our press release and earnings presentation. In addition, we identify the principal risks and uncertainties that affect our performance in our SEC filings, including our annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. This morning, we'll review our financial results for the fourth quarter of 2018 and share with you our outlook for our key product lines and end markets. And finally, we'll leave time for your questions at the end. So with that, I'll turn the call over to Advancix's president and CEO, Erin King.

Thank you, Adam, and good morning, everyone. Thank you for joining us this morning and for your continued interest in Advancix. As you saw in our press release, Advancix delivered a strong fourth quarter to close out a dynamic year. Mike will detail the full results in a moment, but overall, we captured the benefits of favorable market-based pricing. We drove improved plant production rates across our key manufacturing sites, And our cash generation continued to improve. Cash flow from operations increased nearly 30% in 2018, helping to fund high return investments in the business, debt pay down, and share repurchases. There were two one-time considerations in the results this quarter to note, however. We had a $6 million pre-tax income charge to bad debt expense, which was partially offset by a $2.9 million benefit from business interruption insurance advances related to the first quarter 2018 weather event claim. Taking these items into consideration, underlying EBITDA would have been roughly $3 million higher in the quarter. As we enter 2019, there continues to be great momentum across the organization. We strive to be our customers' trusted partner across all our various product lines, delivering growth and value through excellence in all we do. As you may have seen in our fourth quarter filings, we successfully renegotiated and extended our ongoing long-term arrangement with Shaw Industries. We've also increased our presence at various industry events and conferences in recent months, with members of our technical marketing team representing each of our major product lines presenting on our breadth of product offerings and capabilities. Operationally, while 2018 began with a significant weather event, which the organization successfully managed through demonstrating our resiliency and grit, our relentless focus on safe and stable operations culminated in fourth quarter plant utilization rates, reaching the highest level of any quarter since our spinoff in 2016. In addition, safety, performance, and compliance are core to how we operate. We are pleased to have published our inaugural sustainability report in November, sharing our commitment in this arena and the many ongoing initiatives at Advancix. Reinvestment in the business continues as we execute on our high return growth and cost savings capital project pipeline. The first two projects initiated in 2018 to further enhance our Advantage integrated value chain are on track. And as we commission these projects into service, we expect to start seeing benefits in the back half of 2019. Cash flow generation this year has been a consistent and positive outcome of our focused efforts. With increasing cash flow from operations, we're not only funding high return investments, but also maturing our capital allocation. You'll see in our press release, our board of directors authorized an additional $75 million share repurchase program. This authorization is in addition to the previous program announced in May of 2018. We are committed to delivering long-term value as we drive growth in the business consistent with the capital allocation priorities we have previously discussed. executing on high return reinvestment, building out our inorganic pipelining capabilities, and returning excess cash to shareholders. We'll provide more color on the remainder of 2019 later in the call. And although there are some puts and takes across the portfolio, our outlook remains largely intact from what we shared with you in November. Our priorities remain centered on continuing to drive safe, stable, and sustainable operations, enhancing our long-term growth capabilities, and making smart investments in the business to drive higher returns. We are confident in our ability to build upon our advantage validation that will continue to position the company for strong operational and financial performance for years to come. Before handling the call to Mike, I would like to take the opportunity to provide an update on the ongoing HOPAW investigation. As you'll see in our updated disclosures later today, we were recently notified that the U.S. Attorney's Office for the Eastern District of Virginia has closed its investigation with no further action required by the company. As a reminder, this investigation did have numerous state and federal agencies involved, and we do continue to cooperate fully with the remaining narrowed inquiry by the U.S. EPA and the Department of Justice Criminal Divisions. So it's certainly a positive development, and we'll continue to keep you apprised with updates as we can. With that, I'll turn it over to Mike to discuss the details of the quarter.

Well, thanks, Erin, and good morning, everyone. Now on slide four, where I'll cover the fourth quarter financial results. Sales came in at $387 million. and that's up roughly 4% compared to last year. Volume was up about 4%, and that was primarily due to strong operating rates at our manufacturing sites in the quarter, as well as the unfavorable impact of the planned plant turnaround in the fourth quarter of 2017. As Aaron mentioned, plant utilization rates in the fourth quarter were the highest across our sites in any quarter since the spinoff, and that is really reflecting benefits from our continued proactive maintenance and operational excellence initiatives. Pricing overall was unfavorable by about 1%, primarily due to a 4% unfavorable impact from raw material pass-through pricing following cost decreases in cumine driven by benzene and propylene. Market-based pricing was favorable by approximately 3% compared to the prior year, with improved industry supply and demand dynamics in our ammonium sulfate, nylon, and caprolactam product lines. Partially offsetting this was softness in chemical intermediates, pricing due to the lengthening of acetone supply globally, as we've previously highlighted. EBITDA was nearly $43 million in the quarter. That's up $4 million versus the prior year. And overall, we saw the benefits from improved market pricing offset by increased manufacturing costs, particularly utilities. As you can see on the right-hand side of the page, we've highlighted some of the quarterly considerations that impacted our results in both periods. As a reminder, there were a couple of important considerations with respect to the fourth quarter results in 2017, including an approximately $20 million unfavorable impact of pre-tax income from a planned turnaround partially offset by a non-cash $4 million favorable LIFO reserve adjustment. As Aaron mentioned, this year's results included a $6 million charged bad debt expense related to a Brazilian fertilizer customer filing for judicial reorganization. In addition, we recorded an approximately $2.9 million benefit in the quarter from business interruption insurance advances related to the first quarter of 2018 weather event claim. Now, in terms of bottom line performance, last year's results reflected an approximately $53 million or $1.71 per share, one-time net tax benefit primarily related to the remeasurement of the net deferred tax liability at a lower corporate rate pursuant to the 2017 Tax Act. Our diluted share count for the fourth quarter of 2018 was approximately 30.4 million shares driven by continued share repurchases. And lastly, we continue to see results from our focus on cash generation. and that's enabling us to fund our high-return capital projects. Cash flow from operations reached $46 million, up $10 million. That's an increase of 26% compared to last year. The increase year-over-year was primarily due to the favorable impact of changes in working capital and the one-time net tax benefit in the fourth quarter of 2017 driving a decline in net income and offset setting increase in deferred taxes. CapEx of $37 million was up roughly $17 million year-over-year as we execute against our pipeline of high-return growth and cost-savings capital projects. For the full year of 2018, free cash flow of approximately $64 million increased by $16 million, or 33% compared to last year. That represented strong cash conversion to net income as we continue to manage working capital levels efficiently while funding the capital projects. Now let me turn the call back to Erin to discuss what we're seeing in each of our product lines.

Thanks, Mike. I'm now on slide five to discuss our nylon product line, which includes our Caprolactam, Resin, and Films products and represented about 48% of our sales in the fourth quarter. As you can see from the chart on the right-hand side of the page, industry benzene to Caprolactam spreads globally were relatively flat on a year-over-year basis and sequentially as well in the fourth quarter. Since our last update, we've seen the following – First, benzene input costs have declined globally, tracking underlying oil prices. As a reminder, a majority of our caprolactam and nylon business is on formula or index-based pricing agreements. So our sales will fluctuate with the price of key raw materials, with our variable margin being largely protected. And in the parts of the business without pass-through contracts, the industry often acts quickly with only a 30- to 60-day lag relative to the movement in input costs. Looking forward, we would expect capital item and nylon prices to move generally with the changes in raw materials. Second, we're monitoring signs of a more uncertain near-term auto and building and construction macro environment. In engineered plastics where auto is a primary end use, we've seen weakening industry demand, particularly in Europe and Asia. Carpet here in the U.S., which represents 55% to 60% of nylon demand domestically, does have a tie to broader building construction growth rates, which have been impacted by cold weather in certain regions of the country as we began 2019. However, we continue to run our nylon assets at high utilization rates given our low-cost position globally. Industry spreads have been fluctuating in and around marginal producer economics, and for the marginal producers located in China, we expect a continued dynamic supply and demand environment. We're also monitoring indicators following a seasonally low Lunar New Year period in the region. We'll stay focused on being the most reliable domestic supplier to serve our customers' requirements while also advancing our product pipeline to serve higher-value applications. Let's turn to slide six. In ammonium sulfate, which represented just over 20% of our total sales in the quarter, we successfully completed both our fall fill and fourth quarter pre-buy programs to close out 2018. As we've shown previously, the graph on the right-hand side plots urea and ammonium sulfate industry retail pricing in the corn belt on a nutrient basis. As always, it's important to normalize pricing as urea contains 46% nitrogen, whereas ammonium sulfate contains 21%. Our ammonium sulfate product is positioned with the added value proposition of sulfur nutrition to increase yields of key crops. Based on third-party data, we've seen more modest ammonium sulfate industry price movement as compared to recent nitrogen pricing. While urea is the largest nitrogen fertilizer by total consumption, it does tend to have an underlying influence on all other nitrogen nutrient products. Urea pricing, again, has been more dynamic with sharp increases in the early part of the fourth quarter, However, nitrogen pricing was under pressure exiting the year due to seasonally slow demand following a weak fall application here in the U.S. For ammonium sulfate particularly, industry pricing has been increasing in recent months to help offset rising sulfur prices, which is a key input cost for us. And we've seen those input prices stabilize and begin to soften as we have started here in 2019. As we look forward to the rest of 2019, we do expect fertilizer pricing to strengthen seasoning into spring, with the second quarter being stronger than the first, particularly given the weather-limited application window in the fall of 2018. We're monitoring several factors impacting the overall global nitrogen environment, including China, urea utilization and exports, the expectation of increased planted acres for key crops like corn and wheat, and crop prices have also edged up versus where they were just a quarter ago. However, global uncertainty around trade and tariffs is something we're keeping a close eye on. So while we've been able to achieve some increase in ammonium sulfate pricing and are coming off another successful pre-buy period, We continue to track both supply and demand fundamentals for any shifts in sentiment. And as always, we'll stay focused on delivering on the value proposition of software nutrition for our customers globally. So let's turn to slide seven for an update on Chemical Intermediates. Our Chemical Intermediates product line represented over 30% of our total sales in the quarter. As a reminder, acetone represents half of our Chemical Intermediates portfolio, or approximately 15% of Advancix revenue. The chart on the right-hand side of the page shows refinery-grade propylene costs and U.S. acetone prices based on third-party data. Overall, acetone remains in an over-supplied position. Elevated levels of imports into the U.S., as well as aggressive trading activity, have put continued pressure on regional pricing and spreads. As you've likely seen, we, along with other domestic producers of acetone, have filed anti-dumping duty petitions with the International Trade Commission and the U.S. Department of Commerce. These petitions cover imports of acetone from Belgium, Korea, Saudi Arabia, Singapore, South Africa, and Spain. And we expect this investigation process to be completed over the next 12 to 14 months. Acetone prices have moved lower given supply and demand dynamics, but also reflect declining refinery grade propylene input costs. Following significant increases through most of 2018, we've more recently seen a reduction in input costs supported by rising propylene inventory levels in the US. From a demand perspective, There were several industry turnarounds over the last several months occurring in the MMA or methyl methacrylate space. As MMA is the second largest end use for acetone globally, this reduction in demand supported a continued lengthening of supply for acetone as we enter 2019. For the remainder of the chemical intermediates portfolio, we've seen tight supply conditions for phenol, particularly in the U.S., following competitor force majeure announcements. Demand remains relatively healthy across the broader portfolio with continued favorable growth trends associated with our oxymes and other derivatives. So overall, chemical intermediates performance continues to be impacted by historically high levels of acetone imports into the U.S. and excess global inventory continuing to pressure regional pricing. Given the lengthening supply position, we anticipate that price of our raw compression will continue. Let me turn the call back over to Mike to discuss our capital investments and outlook.

Thanks, Aaron. And I'm now on slide eight where we've highlighted our CapEx outlook. Following $109 million of cash outflow from CapEx in 2018, we're expecting 2019 to be in the range of $140 to $150 million, followed by a reduction in 2020 back to levels generally in line with what we saw in 2018. Now, the increase in 2019 and subsequent decline in 2020 is the result of two factors. The first relates to the previously announced 15 million of incremental capex associated with the relocation of our R&D facility from its current location leased from Honeywell into our own Chesterfield, Virginia site. The second consideration relates to approximately 20 million in spend for planned turnarounds. Now this increase is being driven by the scope of the 2019 turnaround as well as the timing of the 2020 turnaround scheduled for the spring requiring CapEx spend in 2019, which I'll explain in a moment. Spend in 2018 and 19 includes the two high-return projects we've initiated, focused on de-bottlenecking specific areas of our operations, optimizing quality, and improving our mix and cost position overall that will drive future earnings and cash flow. As a reminder, we'll begin to see the benefits from these projects in the back half of 2019, with the full year benefits starting in 2020. We continue to prioritize organic investments and are executing against our multi-year $150 to $200 million high return project pipeline, focused on growth and cost savings, asset flexibility, and improving plant buffers, among other benefits. We've set a hurdle rate of approximately 20% in terms of an internal rate of return, and we have a healthy pipeline of investment opportunities. As we've discussed on our last earnings call, the relocation of our R&D lab will enable an improved configuration of our labs to drive productivity, increase connectivity with our specialized resin manufacturing, and more effective collaboration with customers. We're also continuing our base investments in safe and stable operations as well as health, safety, and environmental spend to reduce our risk profile, improve security, and maintain regulatory compliance. From a maintenance CapEx perspective, we expect an additional $20 million of cash outflow in 2019 related to planned plant turnarounds. More specifically, this will manifest itself in a couple of areas. First, we typically alternate turnaround activities between our sulfuric acid plant and our Kellogg ammonia plant each year. Both of those unit operations within Hopewell tend to be a bit more complex with larger scope planned turnarounds. And based on the equipment being replaced in our sulfuric acid plant in the fourth quarter of this year, we'll see an increase in our capital spend. Now, to be clear, there's no change to our expected turnaround expense impact of $35 to $40 million, which is what we've highlighted previously, but we will see a higher level of capex in 2019 related to repair and maintenance spend. The second driver of the year-over-year increase is based on the cash outflow in 2019 related to equipment purchased for our spring 2020 planned turnaround. Based on the proximity of our turnaround schedule with activities in the fourth quarter of 2019 and then early in the second quarter of 2020, there will be a higher amount of cash outflow this year for equipment being commissioned in next year's turnaround. So based on the timing of the spend versus cash outflow, we'll see an outsized amount hit this year. Overall, we should see a majority of the $20 million replacement CapEx impact revert back in 2020. Turnarounds are critical to the success of our operations, our plant uptime in general, and are essential given our low-cost position and ability to run our plants at disproportionately higher utilization rates. Now, let's flip to slide nine. Now, before turning to Q&A, we'd like to recap our outlook for 2019. As we've discussed, there are some puts and takes across the portfolio from a commercial perspective. In the nylon space, we would characterize the macro demand environment as more uncertain near-term, given recent trends in building and construction, as well as auto. However, we continue to expect solid capital lifetime and nylon plant utilization rates at both Hopewell and Chesterfield as we navigate through this environment and remain focused on value pricing our more differentiated products based on their performance characteristics and higher value applications. In ammonium sulfate, we expect fertilizer prices and mix to increase seasonally into the second quarter. Overall, we continue to expect an improved nitrogen fertilizer environment through the spring planting season. As for chemical intermediates, the outlook there remains largely unchanged, as we expect continued global acetone oversupply to pressure industry spreads. As Aaron mentioned earlier, we're awaiting a preliminary investigation on anti-dumping duty petitions filed with the International Trade Commission and U.S. Department of Commerce. Operationally, no change to our planned turnaround schedule for 2019, as I mentioned, and that remains in the $35 to $40 million range from a free tax income impact, and it will be heavily weighted towards the fourth quarter of this year. We expect continued strength in utilization rates in 2019, supported by our proactive maintenance and reliability programs. As we mentioned earlier from a CapEx perspective, We're expecting $140 to $150 million for the full year, including the execution of high-return growth and cost savings projects and an increase in maintenance spending due to the scope and timing of plan-to-plan turnarounds, as we discussed. And we continue to expect our effective tax rate to be approximately 25 percent in 2019, with our cash tax rate at roughly 15 percent, reflecting full expensing of CapEx from a tax perspective. Lastly, as we think about the quarterly linearity for our earnings throughout 2019, we do anticipate underlying results excluding the planned turnaround impacts to be stronger in the second half of the year compared to the first half. That includes initial benefits from our high return capital investments towards the back half of the year and continued improvements in underlying operational performance. Within the first half, we expect our ammonium sulfate results to be seasonally stronger in the second quarter compared to the first, given the timing of domestic fertilizer application. So, overall, we'll continue to monitor developments in our markets while driving strong operational performance and reapplying capital to create long-term shareholder value. Now, with that, Adam, let's move to Q&A. Thanks, Mike. And, Alan, you can open the line for questions.

Thank you, sir. If you'd like to ask a question, please signal at this time by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star 1 if you'd like to ask a question. We'll first go to Chris Moore with CJS Securities.

Hey, good morning, guys. Thanks for taking some questions. Good morning, Chris. Good morning. Start with just on the... the nylon, you talked about the macro uncertainty relating to, you know, in markets like auto and building construction. Is that something that you're starting to feel now or more of a reference to, you know, kind of certain macro indicators that you're tracking?

Great question, Chris. And I would articulate and maybe clarify it would be the latter. We're certainly seeing, I would say, signs relative to macro trends. You know, a few data points that we've been watching, certainly China auto sales, As you looked at 2018 over 2017, fell 3%. It's certainly been highlighted that's the first decline in 20 years, followed by the China Association of Automobile Manufacturing releasing basically a forecast for 2019 with no growth, right, on weak market sentiments. In Europe, we've, you know, seen certainly Ford have challenges. And from that perspective, and here in the U.S., we're seeing dealer inventories, you know, as they've risen. with the projected sales to fall below 17 million vehicles, and that's kind of for the first time since 2014. So those are just more, I think, mileposts out there that are general sentiment that we have to watch for, you know, relative to potential for destocking, you know, through the value chain.

Got it.

That's helpful. And then in housing construction, I think it's the same, right? We've had some challenges relative to weather. You know, certainly we see a deceleration potentially in housing starts. And then the non-residential construction spending has been revised down as well with growth slowing. So it's just a watch out for us, you know, certainly as, you know, we enter into 2019, which is, I think, I would anticipate, you know, should be commensurate with what others are saying just relative to the macro view.

Yeah, and Chris, what I'll say is, you know, given our cost position, though, we're going to expect to continue to run at high utilization rates at our sites. And there's just a question of... how we place the, you know, the product, where, what region, what application, and we'll continue to drive, you know, the best outcome there for the business.

Got it. Thank you. Maybe on the acetone side, I know Q4, you know, talked about that kind of 4% unfavorable impact on the raw material to pass through. So I'm just trying to understand, you know, kind of looking forward the balance between, you know, kind of the input costs and and the acetone. I know there's a 30- to 60-day lag you had talked about. Is acetone pricing as weak? Is it still declining? And is it, you know, that, you know, kind of 4% unfavorable impact, is that something that will likely continue to see, or will it normalize, you know, as we head into 2019? Just kind of understanding, you know, if acetone is going to be leading the way.

Yeah, I mean, overall, Chris, I'd say our outlook really hasn't – changed on that front. What we saw in the fourth quarter is continued oversupply of acetone globally, high inventories as well as some of the downstream demand for acetone in terms of the M&A plants being offline. So we're continuing to see discounting off of some of the industry benchmarks. And, therefore, we expect, you know, the oversupply to continue and margins continuing being challenged going forward. So really not a whole lot of change there. Got it. Okay.

And last one from me. And the 4% is overall in total, right? So that would be inclusive of really the benzene and the propylene, all of the raw material pass-through associated with the formula, which, again, is about 50% of our sales, but more heavily weighted to nylon and intermediates for about two-thirds of the sales there would have that impact.

Got it. And just in terms of kind of your sulfate, ammonium sulfate view, I know that we're heading into kind of seasonally stronger pricing. Has your overall view of the industry changed much over the last three to six months?

No, I think, you know, our sentiment is that we're still anticipating a strong, strong spring. I mean, certainly in general, right now in the last couple of months, you tend to be in a lull between seasons at this time and, you know, with not much demand. So, you know, there's been a fair amount of nitrogen that wasn't applied in the fall. You know, so inventories are collectively kind of full through the distribution chain and all are sort of waiting for the start of spring. But certainly with the lack of the fall application, we do expect solid demand once the season begins. Sulfur is a growing nutrient as well, so there's positive demand from that perspective. And acres should be up as well, both for corn and wheat. Corn should be in that 92 to 93 million type acres, which is up over the last season of around 89. So again, all signs continue to point to a stronger spring as we had anticipated.

Appreciate it.

Thanks, guys.

Next, we'll go to Charles Niebert with Cowan.

Morning, guys. A couple of things. When I'm looking at the CapEx number, sort of that 19-20 combined, I mean, realizing that because it's just a timing thing, you get one or the other, but is the Is the work being done in 20, if it were sort of all contained in 20 years, would that be a larger than normal year? I mean, is this sort of like a, quote, big turnaround, or is this something that's sort of the normal turnaround and it's simply a timing issue? Or is this something that's sort of more major and a more extensive type of turnaround that's a little bit more costly?

No, no, yeah. It's just more of a timing issue related to the fact that the proximity of the turnaround is, in 2020 is early in the spring, and it's very close to the fourth quarter turnaround this year, resulting more of the CapEx outflow occurring for the 2020 turnaround in 2019. And that's why there's no, you know, significant change in the scope of that turnaround. It's more of a timing issue.

Okay. I mean, is there a time when we should look any time, whether it was, you know, especially going forward, is there... a really, you know, a larger scale turnaround in the future that we should sort of be aware of might come. It might be 21. I mean, it doesn't matter what year. I'm just trying to figure that there's sort of the normal scope of turnaround. And then, you know, typically... there are bigger ones for certain types of units that come less frequently. Is there anything in that going forward?

Really, yeah, I think the way you want to think about, yeah, the larger scale turnarounds are really at our Hopewell site, and they relate to either the ammonia plant or the sulfuric acid plant. And we typically rotate those every other year, right? So those are the ones that would be associated with the larger impacts you'll see on a, on a quarterly basis, but those are unchanged. I mean, those have been, you know, large-scope turnarounds in the past, and we don't expect any change in that going forward.

And as we spoke about last quarter, I mean, we have a tremendous amount of focus, as you can imagine, on turnaround excellence, both on, you know, de-risking them, focusing on using techniques to drive down, you know, wrench times, as well as mitigating the raw material purchases that we had during those times where we would otherwise have made our own raw materials. So, again, I think the view here is just a matter of the timing, but going forward we continue to have this as a key focus of the organization, recognizing that they are annual events that are critical to the sustainability of the business.

Got it. On ammonium sulfate, As you go into the sales going forward for the next few months, they're now largely U.S. sales, whereas sales toward the tail end of the year and such are moved to Latin America. Are these better? If the pricing was the same, is this generally considered going to be a better net back period for the U.S., meaning same price but better margin or similar margin?

We're getting the price issue. Yeah, no, no. With you, for sure. You know, certainly second quarter will be better than first quarter. But when you think about we spoke last time, I think the last quarter, you know, certainly on the seasonality associated with the mix of being domestic versus export. You know, volume does, as you point, tend to be rather flat across the board. But certainly in Q2, we have higher granular oriented sales domestically here, which is, you know, at a premium, you know, to your point, from a net back perspective. whereas the back half of the sales tend to be, you know, export and standard.

Got it. Last question. You mentioned something about, again, the investigation around the EPA. Can you go through that again for me, please? I mean, what's been taken off the board, what's still to come, or what still has to be dealt with? Obviously, it was a big step to sort of say no and more action, but I just need to know sort of what's out there still and what's finished.

Yep. No, understood. And Certainly, from the start of the investigation, there were a number of federal and state agencies involved relative to the underlying investigation. What has occurred here recently was that we were notified by the U.S. Attorney's Office for the Eastern District of Virginia that they have concluded their portion of the investigation with no further action required by us. So that is a positive development. However, we do have ongoing dialogue and cooperation on a narrowed inquiry with the EPA and the DOJ criminal divisions. So, again, you know, over the last several months, narrowing of scope, narrowing of view, and certainly the exit by the U.S. Attorney's Office.

Got it. Okay. So one down, two more to go, I guess, is one way to look at it. All right. I think that's it for me this morning. Thank you.

All right. Thank you. And next we'll go to Vincent Anderson. Hello.

Hi, Vincent. Good morning.

Hi. Good morning. Thanks. So I just want to get a feel for the cadence heading into next year. With the decline in raw materials that we've seen over the last few months and the lag effect on the pass-through portion of your business, If you hold everything else equal, which is tough to do, should we expect margins to improve sequentially into the first half of next year on your spread products?

Yeah, so just to reiterate a couple of points here, as you may already be aware, 50% of our business is on formula-based contracts. But when you take out ammonium sulfate, which is all spot business, a disproportionate amount of nylon, caprolactam, and intermediates is, on formula pass-throughs, about two-thirds. And many of that, you know, many of the pass-through elements of those contracts are pretty real-time, and that leaves about a third of nylon and intermediates to be subject to more of the, you know, spot movements and lags, which we may see. What I will say is when you look on the chemical intermediate side, as we discussed earlier, the acetone oversupply is continuing, and that's resulting in some discounting relative to some of those markers, and some of that being driven by also soft demand from MMA plants, which are offline in the fourth quarter. So we don't expect there to be much of a benefit there going forward due to that, and we expect the price for all spreads to be challenged on a continuous basis. The other portion that I will point out is when you look at for the portion that is spot business in the nylon business that is exported, there is a bit of a squeeze in terms of resin spreads going forward as well globally. So that did further pressure margins there as well. So we don't expect there to be a significant uptick or benefit relative to price rolls as we go into the first quarter.

All right. That's very helpful. Thank you. And I might have missed this in your earlier comments, but the 2019 growth and efficiency CapEx, is that all related to your prior announced projects? Or if there are new projects, could you provide some additional detail on those?

Yeah, so when you look at the growth and cost savings projects, the two projects that we had talked about, the large ones at Hopewell in total were in the sort of $50 million to $60 million range, you know, half of the spend in 2018, half in 2019. And the new project that we had discussed is the R&D lab of $15 million, which is will be incremental in 2019. So that's kind of the new one. And then we continue to evaluate accelerating other opportunities in the pipeline that we talked about, the $150 to $200 million pipeline that we've identified of some really interesting and nice return projects that we'll continue to evaluate going forward.

Okay, so that 2020 preliminary estimate,

could move up if you accelerate some of those other growth projects yeah we yeah we have some scoping engineering work business case development to to further vet uh some of those projects but uh for now as we said we you know we expect in 2020 to revert back to 2018 in aggregate you know pending further evaluation of those growth projects okay excellent

And then one more. So we've seen Chinese caprolactam prices come down with benzene, but I haven't personally seen much in the way of relief on cyclohexane availability. Is that also your view? And if cyclo is still tight, would the better interpretation of this decline in capro prices really be that it's a headwind to Chinese profitability because they're pricing off of benzene but can't get the cyclohexane?

Yeah, I mean, certainly raw material feedstocks, whether it's cyclohexane, cyclohexanone, even in some case, you know, phenol pricing went up drastically as well through 2018, all of which would be, you know, impacting availability to the Chinese producers as our feedplates have, you know, grown with the latest, you know, investments. So while we have seen the compression, you know, I think what's happening is, Certainly that marginal producer economic view, it still holds. I think it's moving around a bit. It could be plus minus $50 to $100. But the availability certainly of feedstocks has constrained production in addition to the environmental constraints that we saw through the last several quarters as well. So I think it's one that we'll have to continue to watch. There's a small number of plants, you know, slated to come back on. So, again, I think we still view that region of the world to be very dynamic, you know, relative to their ability to perform and be profitable.

Great. Thanks. Actually, if I can sneak one more in. Could you remind us the status of your nylon copolymer and when you hope to be in the market with that?

Yeah. So, certainly, both products have been launched. And just as a reminder, we have a – a high-viscosity packaging copolymer that really is being launched to drive value for profitability at film extruders and thermoformers and driving puncture resistance and clarity for end users. And we have had our first sales in the fourth quarter of that product, so we continue to drive the customer qualifications and growth. So that was a real positive for us as we ended the year. And then, likewise, we have the engineering plastics version, which, again, as we've talked about, has the value of improved surface finish, lower warpage, and higher impact for reinforced parts. And, again, you know, that product came, you know, into the market mid-year. But, again, it's out being, you know, tested, again, typically in that space because we're looking at automotive and other types of parts have longer qualification periods. But both are out there now commercially, and it's really now around how do we – promote, market, and ramp those up.

Great.

Thank you. All right. And once again, everyone, that is star one. If you'd like to ask a question, please make sure your mute function is turned off to allow your signal to reach our equipment. Take our next question from Bill DeZellum with Titan Capital.

Thank you. I have a couple of different questions. First of all, Just for clarification on some of your earlier comments, did you reference building an inorganic pipeline and capabilities, meaning an acquisition pipeline and capabilities?

Yes. As we have talked about in previous quarters, certainly as we continue to mature our capital allocation priorities and our long-term growth vectors for the business, we do believe that We have a foundation of which we can build upon inside this organization, and that, you know, certainly as we've talked about, we are prioritizing organic investments through the form of high-return growth and cost savings projects. But as we look to really assess the potential for long-term growth, there are opportunities across the landscape of each of our product lines where we believe over – longer range, we can broaden our customer base, enhance our technology and product offering portfolios, and look to, you know, ultimately as well, you know, improve our financial profile and free cash flow and margin stability. So, again, that's consistent, we believe, with our comments previously and something that is, you know, in the works.

Great. Thank you, Erin. And then the policies for this next basic question. But would you please discuss the steps between now and the preliminary ruling relative to the anti-dumping suit and what then happens with that preliminary ruling if there is a finding that there was some form of dumping taking place?

Just give me one second so we can actually pull up the timeline. Because as we said, the investigation process will be completed over the next 12 to 14 months. You know, right now we're at the phase where it was filled this week. The next step really is for that case to be accepted, which then once accepted will be, you know, a series of, you know, actions and steps associated with, you know, you know, questionnaires and responses, as well as, you know, hearings and briefs, you know, that work their way through the ITC. And, you know, ultimately, from a timing perspective, you know, the earliest you could see a preliminary determination would be late summer in the late July timeframe. It could be extended up to September. And then that is a preliminary determination of which then, you know, ultimately – You know, because there is a view here of whether there is material injury, you know, to the industry. And then, ultimately, this could conclude in, you know, roughly a year from now. So, again, everything is a little different there. Sorry.

After you, please.

No, no, please. I'm sorry. Let's start with the timeline. Is that helpful or I can reiterate?

So one of the perceptions that we have had with these type of cases is that once the preliminary ruling is made, if it is concluded that some form of dumping did take place, let's just pick a number, if it was a 20% discount, that that number begins to be collected at that time. And so it's almost, even though the investigation is not complete, the industry begins to behave as though it was complete, and then when the findings are finalized, those collections then are adjusted. Is that how you perceive this taking place, or am I not remembering this process correctly?

No, you are correct, right? Relative to the process, once a preliminary determination is made, or should a preliminary determination be made, in which case the timing on this case would be, you know, into the fall, somewhere between the end of July and mid-September, those preliminary duties do become active. And then it gets carried forward, you know, ultimately to a final determination several months later.

Thank you. And I think earlier I cut you off. Is there something else you were going to add that was going to be helpful in understanding this process?

No, just from the standpoint that each one takes on, you know, they're unique, you know, relative to, you know, each case is different, and certainly, you know, I was just going to comment that, you know, while there's no assurance of, you know, a particular outcome in this case, we do feel that it was important and a positive first step in a process for us and the others who joined in the petition to restore fair competition, right, and also reflects our commitment to the acetone industry, so.

And then finally, I recognize it's very early for this question, but have you seen any change in behavior in the marketplace as a result of this?

You know, it's only been about 24, 48 hours, and, you know, certainly everyone's just understanding, you know, the process, the next steps, and from that perspective. But I appreciate the question.

Thank you, Eric. Thank you.

All right, and it looks like we have no further questions at this time, so I'd like to turn the call back over to Ms. Erin Kane for any additional or closing remarks.

Very good. Thanks, Alan. And thank you all again for your time and interest this morning. We remain focused on successfully executing against our strategies concentrated on operational, commercial, and functional excellence, higher value product mix, and smart discipline capital deployment. We are excited by the opportunities ahead of us, and we remain confident in our ability to drive value creation for our shareholders over the long term. We'll look forward to speaking with you all again next quarter. Have a great day.

And that does conclude today's conference. We thank everyone again for their participation.