AdvanSix Inc.

Ladies and gentlemen, good day and welcome to the AdvanSix Third Quarter 2019 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 would now like to turn the conference over to Mr. Adam Kressel, Director of Investor Relations. Please go ahead, sir.

Thank you, David. Good morning and welcome to Advance6's third 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.advance6.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 third 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 Advan6's President and CEO, Erin Kane.

Thanks, Adam, and good morning, everyone. Thank you for joining us and for your continued interest in Advan6. As you saw in our press release, Advan6 navigated a third quarter characterized by a challenging end market environment as we saw a further slowdown in demand on a global basis. Nylon industry conditions in particular remain lackluster with the sequential decline in industry spreads that began in June persisting through the third quarter. Mike will detail the full results in a moment, but overall, the third quarter results were pressured by challenging industry conditions and an unfavorable product mix. Given our global low-cost position, we continue to benefit from strong plant utilization rates at Hopal in particular, In the face of slowing nylon demand, continued acetone oversupply conditions, and mixed fertilizer industry dynamics. We have remained committed to the deployment of CapEx this year in high return growth and cost savings projects. Our new natural gas boilers are fully on stream, which coupled with low natural gas prices are delivering immediate productivity benefits for our business. And lastly, we repurchased approximately $13 million of shares in the third quarter. I'm also proud to announce that our Frankfurt facility was awarded RC 14001 certification in September. With that certification, all Advancix facilities are now third-party certified to RC 14001 and adhere to the responsible care guiding principles set forth by the American Chemistry Council. We continue to have a sharp focus on safety and advancing a sustainable enterprise. We're in the midst of completing our planning for 2020 with a conservative outlook in the near term, as macro uncertainty continues to weigh on market sentiment. Importantly, we are taking proactive measures to drive disciplined cost management, optimize working capital performance and cash flow generation, while deploying capital prudently. We remain focused on continuing to execute our strategic priorities with operational efficiency, and these will support our long-term performance. We continue to track to approximately $150 million in capital expenditures in 2019, which, as a reminder, funds three key investments this year, including our natural gas boilers, CapriLac TMZ bottlenecking, and R&D lab relocation projects. These will bolster our underlying earning potential. Looking to 2020, we expect total CapEx in the range of $90 to $110 million, or down $40 to $60 million year-over-year. Given the end market environment, we will be disciplined around reinvestment in the business while working to mature our long-term pipeline of high return opportunities. I'm happy to report that our fourth quarter 2019 plan turnaround was recently completed as expected and will have an approximately $25 million impact to pre-tax income in the fourth quarter at the low end of our previously expected range. This is a key consideration to our earnings performance in the fourth quarter and will bring the total plan turnaround impact for the full year to approximately $35 million. For the full year 2020, we expect the pre-tax income impact of planned plant turnarounds to be in the range of 33 to 38 million, which will be heavily concentrated in the second quarter of next year. Lastly, I want to provide an update on our community supply chain following a refinery fire at one of our suppliers, Philadelphia Energy Solutions, or PES, in June. In the third quarter, we saw a roughly $4 million pre-tax income impact as a result of our extended supply chain below the expected range we provided last quarter. Given the proximity of PES operations relative to our Frankfurt female plan, we inherently drive logistics and working capital benefits from that local supply relationship. As we are shifting towards a more Gulf Coast-reliant supply, our teams are actively working to optimize the impact on our business, including logistics, spot purchases, and buffer inventory levels. Given our efforts, we've narrowed the expected range of the fourth quarter 2019 financial impact to $46 million and expect the full year 2020 impact to be in the range of 10 to 15. compared to a full year 2019 impact of $8 to $10 million. Our key focus is to ensure security of supply and optimized economics as we rely on our supply chain into 2020, and we do remain confident in our long-term optionality. With that, I'll turn it over to Mike to discuss the details of the quarter.

Okay, thanks, Erin, and good morning, everyone. Now on slide four, where I'll review the third quarter financial results. Sales were $311 million in the quarter, down 16% compared to last year. Pricing overall was unfavorable by about 14%, and that was primarily due to an 11% unfavorable impact from raw material pass-through pricing following cost decreases in both benzene and propylene. Market-based pricing was unfavorable by approximately 3% compared to the prior year. This reflects challenging end-market conditions in acetone, nylon, and caprolactam, partially offset by improved ammonium sulfate performance. The volume overall was down about 2%, primarily due to sales timing and unfavorable product mix across nylon and ammonium sulfate, driven in part by operational performance and continued challenging industry dynamics in chemical intermediates. Partially offsetting this was improved caprolactam volume due to stronger utilization rates and the larger plant turnaround in the prior year period. EBITDA was $25 million in the quarter. That's up about $5 million versus the prior year. The increase primarily reflects an approximately $25 million net favorable year-over-year impact of planned turnarounds. This was partially offset by the unfavorable impact of market-based pricing, lower volume, operational performance, and other factors, as well as the unfavorable Q mean impact, as Aaron mentioned. Earnings per share of $0.28 increased by 56% versus the prior year, driven by the factors just discussed. and a lower share count driven by continued repurchases. The lower share count contributed to two cents of EPS accretion year over year. In 2019, through the end of October, we've repurchased approximately $62 million worth of shares, and since the inception of our authorization, we've now repurchased roughly 12% of our total shares outstanding. And lastly, cash flow from operations reached $33 million in the quarter. That's down about $17 million compared to last year, primarily due to the unfavorable impact of changes in working capital. CapEx of $35 million was up roughly $16 million year-over-year due to higher planned turnaround maintenance spend, as expected, and continued execution against our pipeline of higher return growth and cost savings capital projects. Now, let's turn to slide five for a deeper dive into our earnings performance relative to last quarter. As we had previewed on our last earnings call, there were a number of known tailwinds and headwinds to our sequential performance in the third quarter relative to the second quarter of 2019. First is the pricing and mixed impact of the typical seasonality in our ammonium sulfate business. As we've highlighted in the past, ammonium sulfate prices are typically strongest domestically during the second quarter fertilizer application and then have a seasonal pricing decline into the third quarter as the new season begins. We also have a greater mix of products sold to our export markets in the third quarter. This results in higher standard grade product sales in the third quarter versus strong granular sales domestically at the height of the North America season in the second quarter. On average, we can see roughly a $50 per ton premium for granular product compared to standard product. In total, we saw the sequential seasonality consideration toward the midpoint of the $10 to $15 million range we typically see in our COGs in the third quarter. Second on the list of key sequential performance drivers is the approximately $12.6 million pre-tax repositioning charge associated with the closure of our Pottsville, Pennsylvania, films manufacturing facility that did not repeat in the third quarter. We're continuing to qualify customers. and build upon our strategic alliance with Obengroup, which we expect will position us for continued success in the nylon films industry. In addition to these factors, we also saw incremental headwinds impacting our performance in the quarter. From an industry perspective, Aaron will detail what we're seeing in each of our product lines in a moment, but in addition to AS seasonality, market pricing for other products represented an approximately $6 million headwind sequentially. The challenging dynamics in acetone have persisted, which has kept pressure on pricing and spreads. Demand has remained soft across most nylon end uses as well, with industry benzene and caprolactam spreads near their recent 2016 lows. As we previewed, there was an approximately $4 million unfavorable impact to pre-tax income in the quarter as a result of the PES supplier fire and extended QMEAN supply chain. The impact this quarter came in below the range we provided on our last earnings call, and we continue to optimize our community supply chain as we go forward. Lastly, we saw an approximately 1 million net headwinds sequentially from volume, operational performance, and other factors. Despite some unfavorable impact related to fixed cost absorption and lower yields, our capital and other unit operation utilization rates at Hopewell remain relatively high as we benefit from our global low-cost position. Importantly, we also began to see benefits from our new natural gas boilers in the third quarter. The returns for that project thus far have exceeded our expectations. Now let me turn the call back to Erin.

Thanks, Mike. I'm now on slide six to discuss our nylon product line, which includes our Caprolactam resin and films products and represented just over 50% of our sales in the third 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 continued to decline sharply on a year-over-year basis in the third quarter. As you'll recall, we began to see a sequential step down in industry spreads really take hold in June, which were then sustained through the third quarter. The Asia benzene to caprolactam industry spread averaged roughly $775 per ton in the third quarter and dipped below $700 per ton in September, approaching the trials most recently seen in 2016. We did see an increase in the Asia Capital Lactam to resin spread on a sequential basis in the third quarter from the second, but the spread does continue to hover in and around that marginal conversion cost of monomer to polymer of approximately $250 per ton. As we look at the nylon environment overall, we've seen slowing growth and uncertain market sentiment continue to weigh on pricing and spread. From an end-use application perspective, we've seen persistent weakness in North American carpets, as well as in auto end markets, particularly in Europe and China, and a slowdown in Texel demand growth out of Asia. We've also been operating in a falling commodity input environment, with global commodities such as benzene, ammonia, and sulfur, for example, falling in recent months, and in most cases, these costs dropping more rapidly in other regions as compared to the US. We've seen the global capital action cost curve flatten on these weaker feedstocks, which has pressured industry spreads and pricing. With robust operating performance in the U.S. in a net export position, we do anticipate greater exports moving forward in the current demand environment. So while we continue to actively work on upgrading our product mix into higher value applications such as engineering plastics and adapt to changes in light of the softer end market conditions, our geographic sales mix will shift accordingly. Despite industry growth year over year continuing to decelerate, our global low cost advantage will serve us well as we focus on realigning our end market sales mix. Let's turn to slide seven. In ammonium sulfate, which represented about 20% of our total sales in the quarter, we saw our typical seasonality impact moving from the second quarter to the third, as Mike discussed. 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 on all other nitrogen nutrient products. Fertilizer industry pricing in the third quarter declined on both a year-over-year basis as well as seasonally versus the second quarter. Nitrogen fertilizer pricing overall has continued to be dynamic following the adverse weather and industry logistics disruptions seen earlier in the year. Agriculture fundamentals have remained challenging overall, and the recent USDA crop estimates published last month reaffirmed corn yield projections, which in turn have supported range-bound movement in those corn prices. As we look towards the remainder of the year and into 2020, we expect to see fertilizer demand strengthen seasonally, particularly as we move into the heart of the domestic planting season next year. We do expect to see some increased competitive pressure in light of announced ammonium sulfate capacity additions and continued European imports. We'll also continue to watch for any changes in expectations for planted acres into the next domestic planting season, while remaining focused on delivering the value proposition of sulfur nutrition for our customers globally. Let's turn to slide 8 for an update on Chemical Intermediates. Our Chemical Intermediates product line represented just under 30% 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 over RAS continued to be compressed and challenged overall through the third quarter. Despite imports into the U.S. moderating, global acetone remained in an oversupplied position on the back of weaker demand. As a result, we've seen pressure on spot market spreads and a continued drive for deeper discounts in the large buyer market. From an acetone demand perspective, methyl methacrylate, or MMA, industry conditions have remained weak overall on a global basis. As a reminder, MMA is a key consumer of acetone, particularly here in the U.S., and is using various acrylics, plastics, and coatings, which ultimately end up in applications tied to auto or housing markets. So coupled with an overall slowdown on a global basis, we've also seen delayed restarts at MMA customer plants following downtime earlier in the year, as well as further plant turnarounds that have kept demand muted. Phenol demand has also remained subdued. Globally, we've seen softness across key end uses, such as bisphenol A into polycarbonate and epoxy resin, and of course, 9-1, as we've discussed. Across the remainder of our chemical intermediates portfolio, we have seen demand remain rather resilient, albeit off a smaller base, with continued favorable growth trends associated with our oxanes and other derivatives. Lastly, I would like to take the opportunity to provide an update on the ongoing acetone anti-dumping petition. As a reminder, the U.S. Department of Commerce has issued preliminary anti-dumping duties on five countries over the past few months. Starting with the first two countries, Singapore and Spain, who did not contest the petitions, the DOC announced final determinations in mid-October confirming their initial duty rates. The International Trade Commission is expected to issue final injury determination on those two countries by mid-November. As for the other three countries, Belgium, South Africa, and South Korea, we're awaiting final dumping determinations by the DOC and final injury determination by the ITC, which is expected by the first quarter of 2020. Assuming affirmative rulings, duties imposed will be in place for five years. Now let me turn the call back over to Mike.

Okay, thanks Erin. Now on slide nine to discuss our CAPEX framework. Following 109 million of cash outflow from CAPEX in 2018, We're tracking to approximately 150 million in full-year 2019, followed by a reduction in 2020 to an expected range of 90 to 110 million, or down 40 to 60 million year-over-year. As we've shared in the past, spend in 2018 and 2019 includes the two high-return projects we have initiated. The increase in 2019 and subsequent decline in 2020 is a result of several 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 plant turnarounds. 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. And lastly, we continue to be excited about the healthy pipeline of organic investment opportunities that we expect to drive ongoing benefits for years to come. However, given the current macro landscape, we will remain prudent around any discretionary deployment of capital as we further mature our high return project pipeline. Now let's turn to slide 10 to discuss our outlook for the rest of this year and 2020. As you can see on the right-hand side of the page, we've highlighted our expected trend for each of the key drivers of our performance with the red circle representing a headwind for next year, yellow circle neutral, and green representing a tailwind. 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 environment as weaker overall given the macro uncertainty and expect the current softness in end market demand to continue. We continue to look to mitigate impacts from movements in key feedstocks that remain focused on value pricing our more differentiated nylon products based on their performance characteristics in the higher value applications. In ammonium sulfate, we expect fertilizer prices and mix to increase seasonally as we're exiting the year and continue into the heart of the North America planting season. Overall, indications point to a more dynamic ammonium sulfate fertilizer environment through the rest of the 2019-2020 planting season as we're monitoring announced capacity additions, estimated planted acres, crop prices, as well as global trade flows. 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. As for chemical intermediates, we expect continued acetone price overall spread pressure for the remainder of the year on the back of slowing demand and persistent oversupply conditions. We do expect North America acetone inventory levels to stabilize over time and are awaiting final anti-dumping duty determinations, which we expect to be announced, if any, by the first quarter of 2020. Operationally, we've completed our planned turnarounds for 2019 as of the fourth quarter and remain focused on the flawless execution of our turnaround schedule into 2020, which, as Aaron highlighted, will be heavily weighted towards the second quarter of next year. We expect continued improvement in performance across our integrated asset base in 2020, supported by our proactive maintenance and reliability programs. I highlighted our expectations for CapEx spend on the previous slide. We continue to expect full-year benefits from our new natural gas boilers at Hopewell in 2020. As for the previously discussed CapElectM quality and debottle linking project, this still remains a very strategic project for us despite the current industry conditions. We are managing this project to cost and now expect to be fully online by the second quarter of next year. We've also indicated our expected pre-tax income impact in the fourth quarter of 2019 and full year 2020 as a result of our realigned QMeans supply chain. Following the approximately $4 million unfavorable pre-tax income impact in the third quarter of 2019, we expect a $4 to $6 million impact in the fourth quarter. In 2020, we expect an unfavorable impact in the range of $10 to $15 million, which represents a low to mid single digit million increase year over year. Over the medium to long term, we seek human supply and demand dynamics supportive of sufficient availability and continue to assess our long term optionality. Lastly, we expect our effective tax rate to be in the range of 24 to 25% for the full year of 2019 and approximately 25% in 2020. From a cash perspective, we expect continued efficient working capital performance next year and pension cash contributions are expected to be in the range of $5 to $10 million. Now, let me turn the call back to Erin for a brief wrap-up before moving to Q&A.

Thanks, Mike. I'd like to take the time to reiterate our core focus areas on slide 11. Similar to what we shared last quarter, our key levers to drive best possible outcomes and long-term value creation haven't changed. First, safe, stable, and sustainable operations This is core to who we are as a company. Since the start of 2017, our utilization rate at Hopewell has averaged roughly 93%, which has significantly outpaced the industry and is critical for us to leverage our low-cost capital action position globally. So while we're seeing a significant improvement in how we operate our facilities, there remains more to accomplish. Less variability in production, quality in yield drives higher returns for the business. Second, differentiated product growth. We've talked about this area of focus in three different buckets, high-carity applications, high-value intermediates, and differentiated nylon. Individually, many of these products are growing off of a small base and are still in early stages of development, but we've had successes across the portfolio. For example, our nylon wire and cable sales have increased more than 50% year-to-date, while our EasyBlox anti-skinning agent used in paints has more than doubled its sales over the same period. We're also building momentum and gaining commercial traction on additional offerings. So although the environment for the broader industries we serve has been lackluster in the near term, we're well positioned to capitalize on any macro improvement and continue to expect an improved contribution from our focus on these two key areas. Finally, cash generation and deployment. Since the spin, we've generated over $450 million of operating cash flow, which has been deployed towards capital reinvestment, debt paydown, and share repurchases. We also continue to build out our interganic pipeline and capabilities consistent with the capital allocation priorities we have previously discussed. As always, we'll remain disciplined in our approach as we look to drive long-term shareholder value. So we recognize that the current environment is challenging, but we are very focused to continue to position the company for long-term performance by executing on these strategic priorities. With that, Adam, let's move to Q&A.

Thanks, Erin. And David, you can go ahead and open the line for questions.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster. Our first question will be Chris Moore with CJS Securities. Hey, good morning, guys.

Good morning. Good morning. Maybe just with the So the PES fire, the 10 to 15 million impact on 2020, can you break that down a little bit further? And I'm trying to understand from Mike's comments, is that likely going to be a permanent impact in the quest structure or still to be determined?

Yeah.

Yeah, Chris, I'll take that. Yes, as we discussed in the past, the benefit of having PES as a cumulative supplier was that they were very close to our Frankfurt facility, and we inherently had logistical and also working capital benefits as a result. So now, as we source humine from other sources, that extends our supply chain, and with that comes quite a bit of logistics cost associated with that. So when you look at the $10 to $15 million impact next year, a good chunk of that, a good large percentage of that is actually logistics for chartering vessels, having them go down to the Gulf, pick up additional material, and come up. In terms of whether or not that's a permanent impact going forward, certainly as long as PES is down and we don't have local supply, there is going to be that consideration going forward. What I'll say is, you know, we continue to optimize, you know, the cost, where we get the cumin from, how we manage our logistics, how we manage, you know, manage buffer supplies of cumin to mitigate that to the best extent we can. In fact, you saw that the actual results in the third quarter were below, you know, what we had guided, and we continue to, you know, to improve on the impact, but we are going to be faithful

in terms of logistics that we go for.

Gotcha.

With respect to, I guess you talked at the end, you know, kind of the higher value nylon products, it seems like, you know, that's becoming more and more critical given the current environment. Roughly from a 2020 perspective, you know, what percentage of revenue do you see there and, you know, what's the ceiling?

So, Chris, I can reiterate a few things here for you. As we look across the entire portfolio, you know, again, we want to reiterate that the opportunity to grow differentiated products exists in three buckets. High-carity applications, which is going to be kind of geared inside of our intermediates portfolio. You know, year-to-date, we've seen growth of 4% in those product lines, and high-value intermediates as well. I've already noted the EasyBlox anti-skinning agent who has doubled their sales year to date. Those two have opportunity for us to continue to work into 2020 and beyond for those. And then, of course, as you mentioned, differentiated nylon. In general, we recognize we have to continue to upgrade our mix, as you point out. We're doing very well in the wire and cable with those sales doubled as well. And when you... Look at the number of opportunities. Again, it's difficult. We recognize that we put this on a percent of sales basis, but as the raw materials environment change, we're seeing more top-line movement and still seeing underlying performance being driven out of our pipeline. We're going to continue to be focused across all product lines, really with the opportunity These products that have 1.5 to 2x the gross margin versus our company average. And that will be a continued focus into 2020 and beyond. And as we get into 2020, we recognize we have to provide some transparency here for you. You know, another data point I can provide in translating our mix is we've grown volumes into the engineering plastics, you know, compounding space by 5% as well. And then we realign our, you know, our portfolio to where we want to go. So we do anticipate that it will be a contributor to incremental earnings next year.

Last question for me, Erin. I think you had mentioned ammonium sulfate, their new capacity coming up.

Sure. As we've mentioned in the past, Chris, we are watching and actually Nutrient's new capacity is online in Western Canada. They converted an old phosphate line to an on-purpose ammonium sulfate line, adding roughly 350,000 metric tons, which kind of doubles their current capacity to a total of about 700,000 tons. So it's about 10% additional granular AS into North America. To put that in perspective, we have imports into the region of about 512,000 metric tons through August, which is up year over year. So I think when we talk about the potential supply-demand dynamics playing into this next season, it is that new capacity coming in, as well as how that realigns through that North American balance. So that's the key one we're working on.

Thank you. Our next question comes from Charles Nievert with Callen.

Hi, good morning. This is Jeff Roselli. I'm for Charles. I just wanted to see if you could touch on the supply size in Capro and Nylon. Have you seen anything recently come online in China? And maybe your thoughts on heading into 2020 if you see any new capacity there?

Sure. I mean, there continues to be, I would say, the focus on continuing expansion. If we look at sort of total capacity, you know, from 17, 18 into 19, you know, we've seen about another 500,000 tons or so, you know, come on 18 into 19, which was on top of about 800,000 tons of capacity, you know, added in 18. One of the things that we are noticing is that while there are several announced capacity additions over the next several years, increasingly I would say the firm timing of those ads is becoming uncertain. So there is at least a view now that given the fluctuations in supply demand, when you look at China, you have automotive in decline. On the textile side, they've gone from double-digit growth in 2018 to low single-digit growth in 2019, which is a large consumer of nylon in the region. So again, I think we're watching, but we would anticipate that those additional announcements of a couple hundred thousand tons, give or take, will continue to be uncertain and likely push out.

Okay, thanks. And maybe just could you maybe quantify what kind of benefits you're seeing from the new natural gas boilers and the cap road deep bottlenecking versus in 3Q versus what you might expect in 2020? Yeah.

Yeah, so when we talked about the high growth and the cost savings projects, growth and cost savings projects, we had the two, the boilers, as you mentioned, and the and the capital debottle-making projects. When you add those two up, you know, as we talked about in the past, that's roughly, you know, 55 to 60 million of CapEx, and an internal rate of return of 20% is what we anticipate, you know, an aggregate there. As we talked about, the boiler started up in the third quarter, and we started to see benefits. You know, what I'll say is, you know, we're looking at low to, you know, mid-single-digit million kind of benefits from that, and the You know, the benefits are exceeding our expectations overall. You know, the boilers are operating as we anticipated, and we are getting the returns. And we expect to get sort of full-year returns next year. So we'll get about a half – if you look year-over-year in 2020, you know, we'll get another half a year of benefit compared to 2019. When you look at the Caprolactam debottlenecking project, that one, as you can imagine, and by the way, what we've talked about in the past was that would unleash about 2% of additional production, additional capacity of Caprolactam. In the context of more challenging end market conditions, we've been managing the pace of that one now to be more of a cost-driven project And therefore, we don't anticipate to start achieving benefits of that project until the second quarter of next year. So we'll have a bit of a ramp in the second quarter and then start to get sort of full run rate benefits in the second half.

Okay. Thanks very much.

Thank you. Our next question comes from David Silver with CLK.

I apologize. Your timing is exquisite. There's just a fire alarm here. I was wondering, I was going to ask you a question about maybe your thoughts about capital allocation or balance sheet here. During 2019, I mean, we've seen the debt levels on your I guess strategically, I'm sure there's kind of a potential acquisition funnel or some ideas you have that maybe would utilize or strengthen your vertical integration, maybe diversify your end markets and could integrate your thoughts about strategic you know, capital deployment going forward and versus balance sheet debt? In other words, are you maintaining enough dry powder or financial flexibility to, you know, take advantage of an opportunity, you know?

Yeah, got to do it. I'll try it. Yeah, I'll try to answer that. You were breaking up a little bit on our end here, but I'll try to answer that. First and foremost, what I'll say is the first priority, David, as we talked about, is the reinvestment in the business, particularly the capital expenditures. And this year, 2019, we anticipate to spend about $150 million of CapEx. And as we've talked about as well is really the step up and spend on these, you know, organic high return growth and cost savings projects of which we're starting to get the benefits from those now. And, you know, again, we have a whole pipeline behind that of growth and cost savings projects of $150 to $200 million with, you know, with nice returns that we anticipate, 20% internal rate of returns that we're going to continue to build the business cases on and do engineering on going forward. So that is the That is the first priority for us. In terms of M&A, we are active in terms of looking at targets, building a pipeline, and all the reasons for that you mentioned in terms of improving our margins, cash flow stability in the business, vertical integration. Those are all things we're interested in, that we've been maturing in terms of building that pipeline over time. That is a strategic priority for us, but the first initial focus for us is the organic reinvestment through CapEx. That is the focus area. Okay.

Thanks for that. If I could switch over to the slide you have on acetone. You know, I know that the lines, you know, charting the benchmark pricing are, you know, are just that. They're kind of benchmark pricing. But, you know, if I kind of eyeball it, if I look at a 40% year-over-year decline in acetone pricing, I mean, that's kind of on the border of 25 cents a pound or, you know, more than $1,000 a short ton price. I'm sorry, I'm getting my math mixed up, but 25 cents a pound. And, you know, first of all, I'm just wondering, is that the type of year-over-year difference that you're seeing on your acetone realizations? And then I'm just wondering if you could maybe remind us what your breakdown of sales might be between the small-medium buyer market and the large buyer market. Thank you.

Sure, Dave. Let me take a stab at that for you. First of all, from the breakdown perspective, our sales would be in line with really the market share of large buyer versus small-medium buyer, which would be two-thirds weighted to the large buyer, a third weighted to the small-medium you know, give or take. And when you think about, you know, certainly how the line charts look vis-a-vis, you know, the propylene, so when you look at sort of where we've been, cycle averages, you know, the long-term average on that spread is probably closer to, you know, a nine-cent-ish spread on, between propylene and propylene. and the acetone sales, and certainly we are seeing now spreads that have been quite compressed to that long-term average. And part of that is when you have length in the market, the small-medium buyer market tends to be more of a freely negotiated orientation. It also has historically been priced at a premium, or at least you earn margins because you're in LTL, truckloads, more customer service into those oriented types of markets. That was the first space that had seen quite a bit of compression, as you can see from the line charts. You know, now they've kind of almost collapsed on top of one another. So that is the area of the market that, you know, we look to have improved, you know, return performance, given that we should see premiums there. And then certainly the large buyer market will improve, but that also needs to improve along with the health of the MMA market as well.

Okay. Okay, and I'm assuming that, and correct me if I'm wrong, but as the anti-dumping investigation and determinations and rulings flow through and take effect in the market, I mean, would I be correct in assuming that that's going to be principally affecting the large buyer market?

Again, we would anticipate that on a true affirmative determination, we see a few things having to play out. First, the acetone inventory needs to work through the system, and we need to have healthy M&A demand to do that. We look to those key end consumers for their plant stabilities and their end markets to to improve. And then with that, you know, certainly given the reduction in the imports, you know, return to more fair and disciplined, you know, orientation of those imports that inherently you would see, you know, could see, you know, the return on spreads rising in both the small, medium buyer market as well as the large buyer.

Yeah, yeah. One will lead, I guess. Okay. And just to reiterate, in your prepared remarks, you said that despite the initial determinations regarding anti-dumping duties, the tone of the market to this point has really shown no improvement. And is that Sometimes we say month to month, but would you say that September, October is similar to July and August, or would you say the average of 3Q over 2Q is what has not improved?

I would say there's been modest sentiment, but again, I think the supply-demand length has been – really the broader umbrella story here than what can happen in a short-term, you know, indication. And again, those affirmative duties, you know, if final, will be in place for five years. And that is, again, the long-term view that we've been taking here with the petition.

Okay. So, all right. It's going to play out over a period of time. All right. Thank you very much. Appreciate it.

Thank you, David. Thank you. Ladies and gentlemen, again, if you have a question, please press star, then 1. Our next question comes from Vincent Anderson with Stifle.

Yeah, thanks, and nice job on the turnaround this quarter. I wanted to start with the ammonium sulfate and just clarify. Have you seen actual signs already of the impact from the new North American capacity from your distributors and retailers, or is it too early?

It really is too early here, Vincent, right? The plan's just now online, and as you know, following other companies, Q3 is really the start of the next season. It's been rather, I would say, quiet to date, but something that we definitely need to watch as we get into the height of the season.

Okay. Thank you. And then I was hoping you could go into a little bit more detail on what the kind of the near-term commercialization plan is for increasing your nylon utilization rates into this kind of demand environment. Is it all going to be through value-add or are you planning to go back after market share?

So maybe I could help reframe, you know, really our sentiment when we talk about, you know, high utilization, right? Our core focus as we've talked is really around stable and sustainable operations. And when we run more stably and more reliably, we are inherently getting more rate out of our facilities. And that is really our focus. Versus if you will say, and I, you know, not to interpret the comment that we're moving a dial, right, from that perspective. Certainly the debottlenecking projects will give us inherently more capacity, but much of our performance really is just coming from the long-term, I would say, latent opportunity that has existed inside our asset base that as we continue to be proactive and drive our mechanical integrity and maintenance excellence programs, we're getting the benefits and returns of those investments. So again, from a targeting perspective, it is around continuing on our core strategies with the strong belief, and quite candidly, the demonstration over the last several quarters that the methodologies and the strategy works to get more out of the plants. Now with that, we need to make sure that we're working hard, as you've pointed out, on the mix of those pounds. So in the actual nylon polymerization facility, Clearly, we're working to realign our mix as carpet has continued to come under pressure to move our mix, to allow us to reach into the compounding space, to support independent compounders and others with high-quality, good products to compound and meet engineering plastics needs, to focus on higher-value, high-viscosity products for packaging. as well as, you know, doing new things like copolymerization, various types of termination that allows us to get at those application bases. So that's really the focus there, and hopefully that provides a little bit more context to the notion of, you know, the targeted utilization rates.

That's helpful. Thank you. And actually going back to the operations, you know, during the turnaround this quarter, were there any – specific changes to the exercise or investments made that really helped that performance and give you added confidence in your turnaround costs, you know, kind of remaining lower and more predictable going forward?

Sure. You know, one of the things that we do and have continued over the last several years in this, and we've talked about this probably several quarters ago, is a focus on what we call our global turnaround strategies. So we've been focusing on looking at how do we integrate our schedules, looking at wrench time, alignment, how do we take waste out of the daily work to increase the wrench time. We've seen great success last year in our keloazomonia turnaround. We applied the same techniques and got the same benefit here out of our sulfuric acid plant turnaround. A lot of integration, a lot more coordination, using new techniques, you know, that are maybe perhaps lean in nature, right, to get waste out of the timeline and get your wrench time up. A lot of key focus on startup as well. I think we've had learnings that we can do really well and execute on the wrench time, but we also need to flawlessly execute on our startup. That has been a keen focus. And as we head into Next year, we're adding a new layer and looking at how we can also mitigate our raw material purchases. That has been a key cost for us, particularly when we take down the sulfuric acid plant or the Kellogg ammonia plant. But obviously, if we can start to leverage our own materials and think about how to be creative and mitigate that cost, that will be new for 2020 as well.

Thanks. And just two more quick ones, if I can sneak them in. Just going into 2020, would it be possible for you to quantify the year-over-year savings if we were to hold sulfur prices where they are today, given how much they've fallen through the year?

Yeah, we'll have to get back to you on that. But as you saw, the sulfur has come down. If you look at some of the recent industry pricing, we're sort of in the $50 per ton level. That, I would say, is pretty low relative to what we had seen in the prior year. So the question is whether or not that is a stable price and will be sustained as we go forward. into next year. But if that is the case, you know, that'll certainly be a, you know, a bit of a tailwind for us next year.

Great. Thanks. And last one, just looking a little bit more long-term, you know, you've talked about derivative products as a as a focus in M&A, potential M&A I should say. Have your thoughts on those targets maybe shifted away from the key mean value chain given the feedstock uncertainty there?

So I think you point out an interesting view. I think our strategies, as Mike had alluded to before, remain You know, the same in the interest to how do we continue to look at opportunities, think about the value chains along our product lines, you know, as new opportunities. But certainly, hopefully it's coming through, ensuring that we have the right long-term optionality sorted for our QME strategy comes to the front of the list, if you will, particularly if we're going to go down that value chain. So I think it's a good observation and one that we're working on.

All right, thanks so much. Thank you. We have no further questions, so I'll turn it back to Ms. Erin Kane for closing remarks.

Great. Thank you all again for your time and interest this morning. As we continue to navigate through challenge and market conditions, we are focused on executing what is in our control. While planning conservatively, we remain focused on positioning the company for long-term success. We're confident in our ability to build upon our advantage foundation and are excited for what we can accomplish for all of our key stakeholders as we head into 2020. Thanks again. We look forward to speaking with you again next quarter.

Thank you. Ladies and gentlemen, that concludes the Advance 6 third quarter 2019 earnings conference call. You may disconnect your phone line. Thanks. Thank you for joining us this morning.