AdvanSix Inc.

Good day, and welcome to the AdvanceX second quarter 2019 earnings conference call. Today's conference is being recorded, and 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 would now like to turn the conference over to Adam Kressel, Director of Investor Relations. Please go ahead.

Thank you, Cassie. Good morning and welcome to Advan6's second quarter 2019 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.advanc6.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. This morning, we'll review our financial results for the second quarter of 2019 and share with you our outlook for our key product lines and end markets. Finally, we'll leave time for your questions at the end. So with that, I'll turn the call over to Advancix's president and CEO, Erin Kane.

Thanks, Adam, and good morning, everyone. Thank you for your joining us and for your continued interest in Advancix. It's been a dynamic first half of 2019. As you saw in our press release, Advancix continues to benefit from our global low-cost advantage in a challenging macro environment while executing against our strategic priorities. Mike will detail the full results in a moment, but overall, the second quarter results were supported by high plant utilization rates in the face of trade and macro uncertainty, soft nylon end markets, challenging acetone industry dynamics, and a weather-delayed domestic planting season. Second quarter pre-tax income also included the previously announced $12.6 million repositioning charge associated with the closure of our Postal Pennsylvania manufacturing facility, which ceased operations in July. As we shared last quarter, we expect a cash payback in approximately one year as a result of this action and entering into a strategic alliance with Obeng Group. Our alliance continues to gain strength, positioning us for success in the nylon films industry. And lastly, we maintained our investment in high growth return and cost savings capex in the quarter while also continuing to buy back shares. We're excited to share that our new natural gas boilers are on stream and the decommissioning of our coal operation is on track, delivering immediate productivity benefits for our business. We repurchased approximately $16 million of shares in the second quarter, and in total have repurchased nearly $45 million of shares this year through July 26th. We're operating in what continues to be a more challenging end market environment overall. Despite the uncertainty, we're highly focused on continuing to execute our high return investments and driving improved operations that will support long-term underlying performance. We expect our full year 2019 capex to be approximately $150 million at the high end of our previous range. We also continue to expect the full year pre-tax income impact of planned plant turnarounds to be in the range of $35 to $40 million. We're ramping up preparations for our fourth quarter turnaround at Hopewell, which is primarily focused around our sulfuric acid plant. Overall, we continue to benefit from our focus on safe, stable, and sustainable operations. Over the past several weeks, our organization is again demonstrating its ability to successfully navigate a dynamic environment following the refinery fire at one of our Cummings suppliers in Philadelphia. Mike will spend further time on this topic later in the call, but as you've seen in our release, we've narrowed the range of the second half 2019 financial impact of this event. Our key focus is to ensure security supply at optimized economics as we realign our supply chain into 2020. There is still work to be done, and we remain confident in our long-term optionality. Lastly, as you likely saw in May, we announced that the United States government has notified us that the criminal investigation regarding air emissions at our Hopewell facility had concluded with no further action required. We are very pleased with this outcome and remain committed to a strong culture of operating compliance driven by our values of safety, accountability, integrity, and respect. So with that, I'll turn it over to Mike to discuss the details of the quarter.

Thanks, Aaron, and good morning, everyone. Now on slide four, where I'll cover the second quarter financial results. Sales for the quarter came in at $345 million. That's down 14% compared to last year. Pricing overall was unfavorable by about 9%, primarily due to a 9% unfavorable impact from raw material pass-through pricing following cost decreases in benzene and propylene. Market-based pricing was approximately flat compared to the prior year, reflecting improved performance in ammonium sulfate, offset by declines in chemical intermediates due to the lengthening of acetone supply globally. Volume overall was down about 5 percent, and that was primarily due to continued challenging acetone industry dynamics, the previously disclosed phenyl force majeure, and lower nylon volume, and that was partially offset by improved ammonium sulfate volume. EBITDA was $36 million in the quarter, down about $17 million versus the prior year. As Erin mentioned, we recognized an approximately $12.6 million pre-tax repositioning charge in the second quarter associated with the closure of our Pottsville, Pennsylvania, Films manufacturing. Approximately two-thirds of the charge is non-cash. Overall, we saw the unfavorable impact of challenging acetone industry dynamics more than offset a roughly $5 million benefit year over year, from the impact of planned plant turnarounds. In addition, this year's results included an approximately $2.3 million benefit from business interruption insurance proceeds related to the first quarter 2018 weather event offset by an approximately $2.3 million unfavorable carryover impact from the Phenoforce Majeure. The business interruption claim related to last year's weather event has now been closed with a total recorded benefit of approximately $12 million. And as everyone recalls, we recognized 2.9 million in the fourth quarter of 2018, with the balance recorded in the first half of this year. Earnings per share of 53 cents decreased by approximately 42 percent versus last year, driven by the factors just discussed, partially offset by a lower share count. Our diluted share count for the second quarter of 2019 was approximately 29.1 million shares, driven by continued share repurchases. And it's noteworthy to note that the lower share count contributed to $0.04 of EPS accretion year-over-year. And lastly, cash flow from operations reached $25 million in the quarter. That's down about $8 million compared to last year, and that's primarily due to the unfavorable impact of changes in working capital. CapEx of $32 million was up roughly $9 million year-over-year as we continue to execute against our pipeline of high return growth and cost savings capital projects. Now let me turn the call back over to Erin to discuss what we're seeing in each of our product lines.

Thanks, Mike. I'm now in slide five to discuss our nylon product line, which includes our caprolactam, resin, and films products, and represented just about 47% of our sales in the second quarter. As you can see from the chart on the right-hand side of the page, industry benzene to caprolactam spreads globally, as well as Asia caprolactam to resin spreads were pressured in the second quarter. The declines reflect a softer end market demand environment overall. In China and the rest of Asia, we've seen slowing growth and uncertainty around trade weigh on pricing and spreads, particularly as we exited the second quarter. From a nylon end-use application perspective, we've seen continued weakness and uncertainty in North America carpet, as well as in auto end markets, particularly in Europe and China. From an input cost perspective, benzene prices declined globally on a year-over-year basis, but increased sequentially in the second quarter from the first, tracking underlying oil prices. We have, however, seen a divergence in input costs among regions in recent months, which has also factored into some of the interim fluctuations in regional pricing and spreads. So overall, we're not factoring in much of recovery in the back half of the year. With muted demand, we expect industry growth year-over-year to decelerate and expect continued uncertainty around global operating rates, pricing, and spreads. However, with our global low-cost advantage, we'll continue to drive high utilization rates of our nylon assets and, as always, remain focused on being the most reliable domestic partner to serve our customers' requirements. Let's turn to slide six. In ammonium sulfate, which represented about 27% of our total sales in the quarter, we saw improved pricing and volume through the spring season, despite the late start to planting here in the U.S. as a result of wet weather. Based on third-party data, we've seen relative stability in corn belt ammonium sulfate industry pricing as compared to nitrogen pricing overall. As a reminder, urea is the largest nitrogen fertilizer by total consumption and tends to have an underlying influence in all other nitrogen nutrient products. Nitrogen fertilizer pricing has continued to be dynamic over the past few quarters, with adverse weather and industry logistics disruptions playing key roles. We saw the cold and wet weather in key regions result in lower crop yield projections and reduce planted acres for corn. Recently, corn prices have moved higher, which can bode well for farmer income and potentially higher expectations for planted acres in the next domestic planting season. As we look toward the rest of 2019, we expect to see the normal seasonal pricing decline sequentially from second to third quarter. As a reminder, this seasonality is reflected in both a geographical and product sales mix consideration. In the third quarter, we will have higher standard-grade product sales into export markets, as compared to greater granular sales domestically at the height of the North American season in the second quarter. We're monitoring key indicators ahead of the new season fill, including crop prices, planted acre estimates, as well as expectations for increased ammonium sulfate supply and global trade flows. It is still early and we're remaining agile as we move through the third quarter delivering on new season fill. Overall, the market environment remains dynamic and will continue to stay focused on positioning our ammonium sulfate products with the added value proposition of sulfur nutrition to increase yields of key crops. Let's turn to slide seven for an update on chemical intermediates. On chemical intermediates, product line represented roughly 26 percent of our total sales in the quarter. The chart on the right-hand side of the page again shows refinery grade propylene costs and U.S. acetone prices based on third-party data. The industry realized acetone price overalls continued to be compressed and challenged overall. And as we had anticipated, global acetone supply further lengthened in the second quarter on the back of weaker demand, as a significant portion of the large buyer segment was disrupted. This included planned and unplanned downtime at several downstream customers, predominantly in the MMA markets, and impacts from the terminal fire at the ITC Deer Park, Texas facility in the Gulf Coast earlier this year. As a result, we've seen pressure on spot market spreads, which have also driven deeper discounts in the large buyer market. There have been some positive developments, however. We've begun to see imports of acetone into the U.S. moderate as we exited the second quarter. Although inventory through the chain remains historically high, we do expect that to stabilize here in North America as we move through the second half of the year, particularly as some of the larger industry consumers come back online. And in addition, we've also reduced seen reduced operating rates, particularly in Europe and Asia, driven by slowing phenol demand. Lastly, I would like to take the opportunity to provide an update on the ongoing acetone anti-dumping petition. Following the favorable vote by the U.S. International Trade Commission on April 4, the investigation proceeded to the U.S. Department of Commerce for preliminary anti-dumping duty determinations against the five remaining countries. On July 30, the Department of Commerce announced preliminary anti-dumping duties for two of the five countries, Singapore, and Spain. The provisional duty rates were in excess of 100%. We expect to receive notice on any remaining preliminary duty determinations by the end of the third quarter. Given this timeline, we also expect the entire process to be completed over the next seven to nine months. So let me turn the call back over to Mike.

Thanks, Erin. And now on slide eight. And we wanted to spend a moment bringing everyone up to speed on the latest regarding what the Philadelphia Energy Solutions Refinery fire means to our business. As we have background and described in our press release in late June, there was a significant fire at the PES Refinery in Philadelphia on Friday, June 21st, that has kept their operation shut down since that date. PES is one of multiple suppliers to Advancix of Cumene. a feedstock material used to produce phenol, as everyone knows, acetone, and other chemical intermediates. First, we want to be thankful for the safety of all PES employees following this event. You know, and certainly Aaron, along with the rest of the leadership team, would like to thank our teams across the organization who have been working diligently over the past several weeks to implement our mitigation plans from this disruption. While we're still only weeks away from the fire, We've laid out both near-term and long-term considerations on the slide based on the best available information we have today. The key takeaway here is that we're ensuring long-term security of supply in order to maintain our high utilization rates across our integrated asset base. In the near term, we've secured additional supply of cumene and phenol from multiple suppliers to maintain production output. Given the proximity of PES's operations relative to our Frankfort phenol plant, we inherently derived logistics and working capital benefits from that local supply relationship. As we shift toward more of a Gulf Coast-reliant supply, we are actively working to optimize our logistics, including additional vessels and storage capacity, and adding incremental buffer inventory to mitigate risk. Over the medium to long term, we see CUMIN supply and demand dynamics supportive of sufficient availability. So while there is a more acute near-term financial impact as a result of this event, we are actively working to optimize our supply chain and are confident in our long-term optionality. This includes diversifying our supplier base with both domestically and internationally and evaluating potential partnerships to further enhance our alternatives. As you would expect, we're in the midst of assessing our optionality for supply across a broad base of qualified contract and spot suppliers. We now expect a $6 million to $8 million pre-tax income impact in the third quarter as a result of this disruption, or the lower end of our initial range as we continue to refine and optimize our position, and an approximately $5 million to $7 million impact in the fourth quarter. We do expect a one-time unfavorable impact to cash flow of $10 million to $15 million in the second half of the year as we build Q-Mean buffer inventory. As we look forward, we're optimizing the expected base feedstock and logistics cost increases given the lack of local supply, as we realign our supply chain into 2020. As always, we'll continue to keep you apprised of any material developments. Now let's turn to slide nine for a recap of our expectations for the remainder of 2019. As we've discussed, there continues to be puts and takes across the portfolio. We're focused on driving high plant utilization rates while navigating through trade and macro uncertainty, soft North America carpet in Europe, and China auto end markets impacting our nylon business, and continue challenging acetone industry conditions. As Erin mentioned earlier, we anticipate an announcement of any remaining preliminary acetone anti-dumping duty determinations by the end of the third quarter. As for ammonium sulfate in particular, we expect typical seasonality to drive a sequential pricing decline on higher export mix as we progress into the third quarter. We also expect to see some level of pre-buy cash advances in the fourth quarter for sales planned in 2020, as is common in that business. Operationally, no change to our planned turnaround schedule for 2019, which remains in the range of 35 to 40 million in terms of our pre-tax income impact, the bulk of which will occur in the fourth quarter of this year. As for our expectations around CapEx, we anticipate full-year cash outflow of approximately 150 million or the high end of our previous range. This includes continued execution of our high return growth and cost savings projects. The first sizable project, our new natural gas boilers, are now fully up and running, which is providing immediate productivity benefits in the second half of this year. We expect our previously discussed CapriLactam quality and de-bottlenecking project to position us for benefits starting in the first quarter of next year. And lastly, as I just discussed, we've indicated our expected pre-tax income impact in the third and fourth quarter as a result of the PES fire. In addition, we expect a one-time unfavorable impact to cash flow of 10 to 15 million in the back half of the year as we build up our CUMIN buffer inventory due to a lengthening supply chain. Overall, we continue to assess long-term optionality for CUMIN supply and logistics. while optimizing expected base feedstock and logistics cost increases as we realign our supply chain into 2020. Now, let me turn the call back over to Erin for a brief wrap-up before moving to Q&A.

Great, Mike. Thanks. I'd like to close by highlighting our core focus areas on slide 10. While we will drive best possible outcomes and perform through end market dynamics and transient near-term factors, we do remain focused on driving levers within our control from which we will achieve long-term value creation. First, safe, stable, and sustainable operations, an essential foundation of excellence as the lowest-cost producer of caprolactam globally. It's important we run in a consistent and safe way, evidenced by a greater than 90% utilization rates on average through this cycle. Our operational excellence programs and the framework for how we identify, prioritize, and deploy our maintenance CapEx is critical to how we run our plants. After years of deploying this discipline, we're seeing a significant improvement in how we operate our facilities. While there remains more to accomplish, Less variability in production, quality, and yield drives higher returns for the business. Second, differentiated product growth. Although historically this hasn't been a large driver of our business, representing about 10% of our total sales, we are expecting an improved contribution from these products over the next three to five years. They span across all product lines and can include high-purity applications, high-value intermediates, and differentiated nylon. On average, the gross margin of these products can be one and a half to two times our average base business margin. So clearly an important focus for us moving forward. And finally, cash generation and deployment. Since this span, we've generated over $400 million of operating cash flow, which has been deployed towards capital reinvestment, debt pay down, and share repurchases. 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 pipeline and capabilities, and returning excess cash to shareholders. So with our focus strategies to improve underlying performance potential and our global cost advantage, remain confident in our ability to drive shareholder value over the long term while navigating through the here and now. So with that, Adam, let's move to Q&A.

Thanks, Erin. And Cassie, please open the line for questions.

We'll now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. We'll take our first question from Charles Niebuhr with Cowan.

Morning, guys. Bunch of questions. Let's see if we can get in. So far, there have been... Any help from the anti-dumping duties that have been levied? Have you seen any beginning of any benefit from that, or is it still too early to tell? And do you guys expect that you'll get some? I mean, assuming that it comes in, it should generally raise prices over time. Is that going to be the case?

So the duties were just announced this week, right? So it's fresh off the press there from that perspective. You know, they were announced against Singapore and Spain, just to reiterate. And the notice there, as a reminder, Singapore and Spain did not come in to defend, right? So the duties reflected, I would say, are consistent with, you know, what we had put forward into, you know, ultimately the investigation. So they're reflected there. We still have the three remaining countries. We would expect to hear more on that certainly as we progress through the third quarter. And again, Belgium, Korea, and South Africa are in the process and are defending against the petition. So when you think about where we sit for industry pricing, Charlie, we're currently seeing acetone spread over propylene near historical lows. Again, as you look at that chart, not just on large buyer, but certainly the excess length in the market has continued to put pressure on the spot market spreads and deepening those discounts. So we've seen large buyer spread in the prior peak at 14 to 15 cents per pound range, where compared to historical average in the nine range, and we're well below that level today. So we can't speculate exactly how the industry will react, but what we can share is we've seen certainly reduced imports as we've exited the quarter from that perspective. And given the dynamics as we head into the back half, the inventory is to allow us to come back into a bit more of a normalized state and stabilize as we have those large consumers coming back online. And ultimately, the news percolates throughout the industry. But we still have a fair amount of inventory to rework off. And we'll continue to monitor. And again, that process should completely, I would say, reach resolution in about seven to nine months.

Okay. Secondary, you've got some costs involved, you know, in terms of that you have to now purchase, I guess, at spot or at market, cumene and phenol. And I assume that a lot of these contracts that you used to have, which were based on raw material cost increases or decreases, know that went away with the with the fire are going to get renewed with somebody else largely in next year uh that being the case can we expect that the cost of your you've outlined for the remaining part of this year will at least for the most part disappear because you'll be back in the market in the way you were prior to the fire although there might be a little bit more of a logistics cost attached to it but are we going to lose most of that

Yeah, so good question, Charlie. I think, first of all, let's go back to, you know, our initial views and where we are today. So initially we had anticipated for the third quarter the impact would be, you know, between 7 and 12 million. We're coming in better than that, so we continue to look to optimize that impact, you know, 6 to 8, and now in the fourth quarter, as far as we can tell, 5 to 7, so further optimization, you know, in the fourth quarter. But The important thing to note is that PES was a local supplier to us in Philadelphia, and as a result, there were some inherent logistical and working capital benefits associated with that. So getting supply from elsewhere has an impact on logistics costs, particularly as you go down in the Gulf and you need to get spot vessels to bring material up. So overall, we anticipate there will be a cost increase. But, you know, the news we're hearing out of PES and what we're seeing here, there's just a lot of uncertainty right now in terms of the future of PES as well as, you know, long-term supply. What I will say is we have a lot of options. We have optionality across, you know, many different suppliers, and we're evaluating all of those, and we'll work to optimize the impact in 2020. But, you know, inherently, there are going to be incremental logistics changes and working capital considerations as we go forward.

I guess last question for now, I'll come back after this, but in terms of ammonium sulfate, how was volume during the course of the second quarter? I know because of weather, a lot of, you know, there were areas certainly where it couldn't be laid down, you know, people couldn't get into the fields, but we've noticed from some of the fertilizer companies that they actually managed to do decent decent volumes. They weren't great, they weren't perfect, but they were actually pretty good. I mean, do these numbers maybe slightly beat the expectation that you thought given all the weather issues? Were they okay? Or are you going to have to move more to export than you would have hoped for because it just simply didn't go out in the spring?

Yeah, no, great question. And maybe I can just sort of recap our experience on the 2018-2019 season, you know, as maybe that relates to the 2017-2018 season. because certainly there were a lot of challenges that were called out, as you mentioned, on timing delays and reduction in acres. Overall, we were pleased and feel positive about a performance in the 18-19 season and the cycle over the previous year. We would say vines were more or less equivalent, so the material was moved out. Effectively, season to season, we saw roughly about a 10% pricing improvement there. I think that was positive and reflective, certainly, as the hard work of the team and ultimately how the cycle ended here late into the quarter. And as we kind of look forward, I don't know that there's necessarily a volumetric consideration as we head into the third quarter. It's going to be more of our normal seasonality experience. We talked about this this time last year as we kind of put the two growing seasons together, and we just have that – that sequential consideration to take into account.

Great. Thanks. I'll come back and let some other people in. Thanks.

Okay. Thanks, Charlie.

Our next question comes from Vincent Anderson with Stifel.

Yeah, good morning. Thank you. Can you talk about – Good morning. Good morning. Could you talk about the buying patterns in carpet right now? We keep hearing that construction growth is seeing constraints from labor shortages, even more so than spring weather and general demand. So I'm wondering if that's the line you're getting in your conversations with customers or maybe implied by how they're managing inventories this year?

And if you'll maybe allow me to hear, Vincent, maybe I can give a of a broader view on nylon and start there too to make sure that the full set of dynamics are understood. And then when you look at sort of third party, start there at reported data, the largest applications in every region I think have really come under slowing growth or demand contraction. That has an overall sort of global implication here. So textiles, while they saw significant double-digit growth in 2018 in China, is now seeing low single-digit growth here in 2019, or at least projected. Engineering plastics in Europe, which is their largest application, is also now projected to be a decline versus growth last year. And now carpet, as you mentioned, certainly here projected to be on decline. I think it does match up with some of the macro indicators that you're watching. I think there's certainly a muted residential building environment for a number of factors. In carpet, we're also seeing lower cost polyester also becoming an increasing factor in that regard. And as you noted, several folks that have reported in this space have seen kind of broader flooring segments across all of your aspects. reporting to be down 7% to 10%. I think there are a number of factors playing out in addition to not just bills or slowing and muted bills, but considerations and choices as well, just pressuring the overall demand. Again, carpet representing about 50%, 55% of North America as its largest application.

That's helpful. Thank you. Just to stay on the topic of nylon, you mentioned textile demand in Asia being down year-over-year, at least according to the Chinese national statistics for what they're worth, synthetic fiber output is up 12% year-to-date. Where is it going would be my question.

So I think the view is that it's in nylon, per se. So there's lots of different synthetic fibers across the board. Nylon is last year had quite an uptick, I think, in certainly its demand. It went into a number of things like hats and gloves. It was kind of the fiber to use. Right now, we also see quite a bit of fiber inventory build. We're seeing yarn inventory build. So I think there is consideration of, depending on where you are in the chain, what's ebbing and flowing. So it certainly feels that the you know, the upstream side here, you know, back into the intermediates and the resin and the chip is seeing the impact of that decelerated growth and perhaps inventories building through the chain.

Got it. Thanks. And just a last one on the topic of the trade cases. To the extent you can comment on it, you know, South Korea's cost accounting for acetone seemed to be a sticking point between the two parties involved, and they claim to be in compliance with Korean GAAP accounting standards. Do you have an impression as to whether that will carry any weight with the Commerce Department, or if the department generally seeks to evaluate these cases on the basis of economic fair value versus whatever is technically allowed from an accounting standpoint?

It's a great question and a highly technical one there, Vincent, from that perspective. What I can share is that these cases are complex to that point. There is quite a bit of analysis that goes into it. There are WTO-oriented regulations on how duties are ultimately constructed vis-a-vis where you know, cost and sales are in their home countries versus, you know, what happens here to there. So, you know, it's hard to say. You know, I think it is part of the back and forth on the additional set of questionnaires. And, you know, they have, you know, in this case, part of the case here is that acetone is separated from phenol. You have fundamentally different incoming raw material considerations. And that is kind of at the heart of the, I think, the objection on where cost is being shifted between one output material to the other. And, you know, we see them as separate markets, you know, separate drivers. And so, again, we'll continue to drive there. And just to the point of, you know, Singapore and Spain, you know, those were high determinations. They were consistent with, you know, how the calculations and the allegations were in. And that ultimately, you know, I think that was what was reflected in the preliminary number. And so I think a reasonable indication that they feel material injury to the industry is occurring, right? And, you know, kind of a positive step in the process to restore fair competition. So in Korea, only one right now is using that particular cost accounting process. And that's, you know, part of the work that will be done here. you know, over the next couple of weeks and months by the Commerce Department.

Thanks. And actually, if I can sneak in one more on the trade case. Just procedurally, if South Africa is unable to comply with its August 5th deadline for, you know, its additional cost data, do you know, would that be treated as it dropping its defense, like Singapore and Spain chose not to defend, or would it be able to continue to battle on, you know, other grounds?

Again, a highly technical question there, Vincent. I don't know that I have the answer for you other than the process is run pretty firm by dates and expectations, and so it would be our expectation consistent with the process that's been laid out by the Department of Commerce and the expectation that you comply.

Thank you. Got it. Thank you.

Our next question comes from Chris Moore with CJS Securities.

Hey, good morning, guys. Good morning. Good morning. On CapEx, so I know $150 million is kind of the expected level in fiscal year 19, and just trying to get a sense of a normalized level moving forward. Can you maybe just remind us of kind of the one-time expenditures this year and, you know, what might be a more normal level?

Yeah, so... Good question. And what we're seeing this year, Chris, is about an incremental 20 million of CapEx associated with the timing of the planned plant turnaround. So, we have our large sulfuric acid plant turnaround in the fourth quarter of this year. And next year, we have a turnaround in the spring. So, because of the proximity of those two turnarounds being that close, you know, we'll have some capex spend this year for the turnaround next year. Okay, so that by itself. And the scope of the equipment we're purchasing as well this year for the sulfuric acid plant turnaround is also a consideration in that $20 million, but the bigger impact really is the, you know, the proximity of the turnaround. So that's $20. The other project that we're executing this year is the R&D relocation from the Colonial Heights facility, which is a shared facility with Honeywell to Chesterfield. That by itself is in the $15 million range. That will be more or less done this year, so there won't be much of an impact next year. So factoring those two things in, what we anticipate in 2020, that our CapEx will be closer to 2018 levels. And in 2018, we were right around that $110 million level. So that's what we anticipate as of today.

Got it. Helpful. And just staying on the CAPEX, so it sounds like the, on the CAPEX project, the switch over to the natural gas fire boilers in Hopewell is online now, and the bottlenecking will begin in Q1 of 2020. Can you just, is there any way to quantify a little bit further in terms of the benefits that you're looking from each of these on a relative basis and any specifics you can give.

Yeah, sure. Yeah, so what we've talked about in the past, Chris, and the returns we anticipate with these projects will be consistent, is as we evaluate the business cases for these different CapEx projects, we look at a 20% internal rate of return. as a threshold, and these projects and the returns associated with them, we anticipate, will be consistent with that.

Got it. Last question, just on the Oban Group. I mean, you had talked about new product development opportunities there. Anything you can share at this point in time?

So right now, we're highly focused on ramping up the alliance. As I shared, we shut down successfully and uneventfully here the platform facility in July. So now we're transitioning the supply chain, aligning that through qualifications with our customers. And as we get through this, the stabilization period ramping up on the new supply chain, which is going extremely well, and we continue to be excited about the prospects going forward. We'll then turn to what the opportunities are to continue to grow and think about those, I would say, expansions to the alliance as well as the R&D-oriented type efforts. So more to come on that.

Got it. All right. I appreciate it, guys.

Our next question comes from Bill DeZellum with Peten Capital.

Thank you. A group of questions. If I may come back to the acetone duties, would you talk about the relative size of Singapore and Spain, their imports relative to the remaining countries, and your view of the degree to which your calculations would indicate the remaining countries duties should be similar, higher or lower, to what Singapore and Spain were given?

Sure. So the remaining three countries represent roughly 79% of the imports, so we still have quite a bit of ways to go here. Maybe just to reiterate on the Singapore and Spain duties did exceed 100%. And again, they would be in line with what was alleged in the petition, you know, through the calculations. And as expected, since, you know, the suppliers in those countries did not respond, inherently the Department used the inferences made against them and, you know, took and resulted in high provisional duties. And again, these are provisional. There's still a final determination, you know, ultimately to come. So while we can't necessarily speculate, again, on what will happen because, again, as we were dialoguing with Vincent just a little bit earlier, those duty determinations are specific to country, specific to producer, and ultimately to how their dialogue and their defense goes here. So we would expect, based on the timing of the case, that we'll learn more by the end of the third quarter on the remaining three. It's, again, just to maybe reiterate that, you know, while there's no assurance of a particular outcome against those, the others, the other two represent, you know, I would say the higher duty range as a result of their non-defense. And, you know, ultimately, the fact that they did find a determination, we think it's reasonable indication that the department feels that there is material injury at this time to the industry. And at least this is a positive sign. in the process we were taking really to restore fair competition.

And then relative to the boiler, when did it actually start up?

Right around mid-year. And we're, you know, so far so good. They're running as we expect. And again, we'll start getting benefits in the third quarter. There's a little bit of cost associated with the decommissioning of our coal assets this quarter, so we may not get the full run rate benefit, but there will be benefits in the third quarter, and we anticipate those to accrue over time.

Okay, so the decommissioning of the coal will impact this quarter by what dollar amount?

Not an exact dollar amount, but there'll still be a net benefit in the quarter, but you won't see, again, the full benefit in the third quarter until we complete the decommissioning of the coal operations, and then we're fully clean in the fourth quarter and going forward.

And when you said mid-year, is that to assume it's approximately July 1, June 30, is somewhere in there? Yeah, sure. Okay, great, thank you. And then Q4 will be the steady-state run rate.

That's correct.

Let's shift to PES if we could. My impression is that that plant is shutting down, but Aaron, you made reference to the fact that there were some conflicting reports. It was a little bit more fluid than what I had perceived it to be. Would you talk through what you understand to be the case there?

Sure, happy to. And there are a number of moving parts here, and I think hence Mike's comments earlier. When you look at the public statements early on, certainly there was indication that they were shutting down. Then their CEO said, indicated that they were shutting down with the intent for a resale and a startup. Most recently, as last week, I believe, recent timing, they have filed for bankruptcy. It is for restructure, not liquidation. And within that petition, there are statements indicating the view to restart and consider sale exploration. So, you know, again, I think our base case here is that they do not start back up, right? We have a business to run and we are putting our mitigation plans in place. But to the point that Mike made, certainly East Coast Supply does lend itself to, you know, economic and working capital benefits. So we continue to watch it closely, you know, working in dialogue, but we wouldn't have anything more than what is in the public domain today. And so that's Those are the data points we have.

Thank you, Erin. Let's, for the sake of this next question, assume that PES does not come back online and never again is a supplier of yours, which I understand there could be some upside to that argument, but let's assume that for the sake of now. The fourth quarter impact that you have highlighted in the release today is $5 million to $7 million. Would you see that to be your normal ongoing increase in cost by not having that facility? Or as you move into Q1, Q2, and the remainder of 2020, would you see those costs coming down even further?

Yeah, it's a good question. What I'll say is the number one priority for us is ensuring that we have security of supply and we're confident We're in a position to get supply to sustain our high utilization at our plant, so that's really number one. And number two, we're looking to optimize that going forward here into 2020. You've seen an improvement in the impact from the third quarter to the fourth quarter. There's a lot of options we have, a lot of options we're evaluating. But I will say into 2020, as we think about alternative supply outside the region, there will be incremental logistics costs associated with that, and that's what we'll have to contend with going forward. However, we're going to do our best to mitigate that impact and put ourselves in the best position while also ensuring we have security supplies. So that's really the goal. As we learn more, we'll have updates here for the investment community. At our next earnings call, we'll provide everyone with a further update as we'll have better visibility at that point.

I'm going to make sure I heard what you just said there correctly, that as you move into 2020, you are looking to find ways to reduce that cost further, but at this point you don't have a dollar amount to discuss.

That's right. That's great. It's a little bit early. Thank you.

Take a follow-up from Charles Niebert with Cowan.

Guys, a couple things. On the boilers, you've talked about the gains that they're going to bring. Is that strictly from the fact that they're going to be lower cost to run than the coal in terms of environmental and the cost of actual operation? Or does it bring on some level of greater efficiency to the process that might, you know, in effect increase throughput or more reliability or, you know, what else is coming from the boiler? What's it driving?

No, it's really efficiency. Yeah, Charlie, it's really efficiency and lower cost. I mean, the cost to run the coal operation, the cost of coal itself is inherently high. You know, you could see the prices of natural gas out there. And, you know, the boilers are new technology as well, so very efficient. So it's strictly, it's not going to impact throughput per se. It's really going to impact, you know, impact cost and efficiency. Okay.

And sort of on the same note, how are you guys set up on natural gas for those things? Is it, I mean, volume I'm assuming is contracted, but how is pricing set? Is it hedged? Is it where you just buy spot? How do you deal with that?

Yeah, so we look at a variety of ways to purchase a natural gas. In some cases, we'll have longer-term agreements on purchases of natural gas. In other cases, our costs will fluctuate with NYMEX. What we look to do ultimately is to procure natural gas at the lowest possible cost we can. through whatever strategy we deploy going forward to make sure we're running the plant on a consistent basis. From a hedging perspective, we evaluate hedges like anything else, depending on where the price on IMEX is going and what the outlook is in evaluating supply and demand. We'll evaluate that on a case-by-case basis, and there are times where we may hedge here and there, but it's more opportunistic at this point.

And then the last question, same on the gas again. Clearly, a delivered price to the plant is going to be a little bit different than NYMEX or whatever hub you're working off of. I mean, about round numbers, what's the premium over a NYMEX number that you typically have seen? So if NYMEX now is trading around $215,000, I mean, you guys tend to be 50 cents because of delivery, 75. I mean, what's the range?

I would say, you know, Charlie, yeah, it's a good question. We don't go to that level of disclosure. What I'll say, it'll fluctuate around NYMEX, and we look to optimize it, you know, going forward and get the best source of supply for the lowest cost, you know, going forward. And we have, you know, dedicated people focused on that.

Okay, last question. Has there been any benefit on nylon? You know, has carpets eased off? I mean, have other things taken on some of the volume, and have they been in the higher margin businesses?

Yeah, so what we can share, and as you might expect, shall I write it ourselves, type of efforts are going to be focused in and around the engineering plastics and packaging space, you know, in their growth areas here in North America and globally. And those are providing and enabling the offsets and growth opportunities, as you would expect.

Okay. Thanks very much.

Thank you.

Thanks, Charlie.

We'll take our next question from Bill DeZelt from Teton Capital.

Thank you. I actually just wanted to follow up on the last question relative to natural gas and the boiler. What was the NYMEX price that you were assuming in your – calculation to determine whether this was a good project or not?

You know, as we evaluate the project and making those investments, right, we develop a model that has a number of scenarios around it with different, so I wouldn't say that would lock in a specific price. We look at different scenarios and through that determine that in a number of scenarios relative to our call operation, this is a project that adds value, that provides a return to us. So, you know, I wouldn't necessarily disclose a specific price, but all in all, we feel very good that this project is going to provide a return consistent with what we've said previously around that 20% internal rate of return, and so far we're seeing the benefits from it.

And presumably given that natural gas prices are at, one of the lowest levels that they've been for years, that your return and benefit would be greater than what you originally anticipated?

I mean, as you indicate, natural gas prices are low, and that's not necessarily a bad thing per se from a cost perspective. You know, it's hard to predict where they're going to go going forward, but again, over the long term, we feel very comfortable that we'll get the return on that project that we intend. Thank you. Thank you.

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

Great. Thank you all again for your time, interest, and great questions this morning. Our results this quarter again demonstrated the strength of our business model. And while there are puts and takes across our end markets and broader macro uncertainty, we are focused on executing what is in our control. We continue to maintain our focus on operational, commercial, and functional excellence strategies, higher value product mix, and smart, disciplined capital deployment. I'm excited for what we can accomplish for all of our key stakeholders over the remainder of 2019 and beyond. We'll look forward to speaking with you again next quarter.

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