AdvanSix Inc.

Good day and welcome to the ADVAN6 fourth quarter 2019 earnings conference call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. I would now like to turn the conference over to Mr. Adam Crissel. Please go ahead, sir.

Thank you, Brittany. Good morning, and welcome to Advance6's fourth 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 will review our financial results for the fourth 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.

Thank you, Adam, and good morning, everyone. Thank you for joining us and for your continued interest in Advancix. As you saw in our press release, Advancix continued to navigate a difficult end market environment exiting the year. Despite the global slowdown in demand, we continue to benefit from our low-cost position and remain focused on executing against our strategic priorities. Mike will detail the results of the quarter in a moment, but I'd like to take the opportunity to highlight some of the great work that has been accomplished across the organization over the past year. As we've highlighted, 2019 saw several strategic investments that positioned the company for long-term success. First most, we continued to drive safe, stable, and sustainable operations. We achieved robust near-record output in 2019 across our Caprolactam and ammonia production units. which are key operations within our integrated asset base. Hopewell utilization was roughly 95%, a testament to the multi-year focus to drive stability, mature mechanical integrity programs, and mitigate risk. This utilization rate is up from a pre-spin 2013 to 2016 three-year average of approximately 89%. Higher, less variable utilization rates drive efficiency and build a foundation for higher returns. As you likely saw this past quarter, we announced the appointment of Wim Blindenbach as Vice President, Integrated Supply Chain. Wim comes to us following more than two decades at ExxonMobil and has a responsibility for safe, stable, and sustainable operations across our integrated manufacturing footprint, while advancing our strategic priorities with operational excellence and improving and robust safety performance. We were also recently awarded a 2020 Gold Rating for Corporate Social Responsibility from EcoVadis. an independent CSR assessment agency. The gold rating is an acknowledgment of our commitment to corporate social responsibility and the great foundation we have built as an organization to continuously improve our sustainability performance. We have also allocated capital for long-term value creation. CapEx was approximately $150 million in 2019, which was elevated to fund key investments, including our natural gas boilers, Caprolact MD bottlenecking, and our R&D lab relocation projects. These projects, as part of our longer-term, high-return project pipeline, further bolster our underlying earning potential. We expect to open our new R&D lab at our Chesterfield facility in the coming weeks, which will enable an improved configuration to drive productivity, increase connectivity with our resin manufacturing, and allow more effective collaboration with customers. In addition, we continued our return to shareholders by repurchasing approximately $62 million of shares during the year. We are continuing to stay the course through what has been a persistently challenging end market environment. We led successful anti-dumping petitions against acetone imports into the United States, which I'll further discuss later in the call, and we continue to build out long-term growth capabilities through our differentiated product portfolio. While we need to drive best possible outcomes as we perform through end market dynamics and address transient near-term factors, we are well positioned on the cost curve and remain focused on driving levers within our control for long-term value creation. With that, I'll turn it over to Mike to discuss the details of the quarter.

Okay, thanks, Erin, and good morning, everyone. I'm now on slide four, where I'll review the fourth quarter financial results. Sales for the quarter were $327 million, and that's down 16% compared to last year. Pricing overall was down by about 12%, primarily due to an 8% unfavorable impact from raw material pass-through pricing. Market-based pricing was unfavorable by approximately 4% compared to the prior year, predominantly driven by our nylon and caprolactam product lines. Volume overall was down about 4%, primarily due to unfavorable mix across our nylon and ammonium sulfate product lines and the larger planned turnaround in the quarter. EBITDA was $13 million in the quarter, down about $30 million versus the prior year. The decrease primarily reflects an approximately 25 million net unfavorable year-over-year impact of planned plant turnarounds, as well as the unfavorable impact of nylon market-based pricing and lower volume. This was partially offset by low raw material costs, including natural gas and sulfur, and an approximately $6 million charge to bad debt expense in the prior year period. Fourth quarter 2019 results also include an approximately 6 million unfavorable impact from increased raw material and logistics costs related to the PES supplier plant disruption and shutdown as previously highlighted and within expectations. Earnings per share decreased 76 cents versus the prior year to a loss of 8 cents in the quarter driven by the factors just mentioned. And lastly, cash flow from operations reached 20 million in the quarter. That's down about $26 million compared to last year, primarily due to lower net income. CapEx of $44 million was up roughly $7 million year-over-year due to the execution of high-return growth and cost-savings projects underway and an increase in maintenance CapEx associated with the timing of 2020 planned plant turnarounds. Now, let me turn the call back over to Erin.

Thank you, Mike. I'm now on slide five to discuss our nylon product line, which includes our caprolactam, resin, and films products, and represented about 46% of their sales in the fourth quarter. As you can see from the chart on the right-hand side of the page, nylon industry spreads globally continued to decline sharply in the fourth quarter. The declines reflected weak demand environment across most major nylon end uses in what is already an oversupplied industry globally. 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 end of the year. The Asia benzene to caprolactam industry spread averaged just below $700 per ton in the fourth quarter, with December averaging closer to $500 per ton and dropping below the trough most recently seen in 2016. These levels indicate industry spreads below cash cost, and in some cases below variable costs for a portion of the global caprolactam cost curve. As we look at the nylon environment overall, we've seen decelerating growth and uncertain market sentiment continue to weigh on pricing and spreads. From an end-use application perspective, we've seen persistent weakness in North America carpet, soft auto end markets across multiple regions, and a slowdown in textile demand growth out of Asia. Carpet, which is the largest domestic nylon end-use, has been under pressure due to shifts in customer preferences, mixed construction growth, and some level of destocking, particularly into year-end. Our own robust, hope-well operating performance and slowing demand across these end-uses has resulted in a shift towards export opportunities, which we do expect to continue in the near term. We continue to actively work on upgrading our nylon resin mix into higher-value applications and adapt to changes in light of these softer end-market conditions. As an example, we increased our sales volume into engineered plastics end markets by nearly 30 percent in 2019. Now, 2020 has been off to a slow start from an industry perspective as well. On the heels of an extended Lunar New Year holiday in China and the global implications of the coronavirus, both supply and demand in the industry have been affected. Logistics across the value chain is also a consideration in the region given restrictions on transportation. We're monitoring these impacts and our current expectation is for the challenging supply and demand environment to continue in the near term. Let's turn to slide six. In ammonium sulfate, which represented about 23% of our total sales in the quarter, we successfully completed both our fall fill and fourth quarter pre-buy programs to close out 2019. Overall, nitrogen industry pricing has been subdued following a weak fall application season in the U.S., as well as lower global energy prices. Based on third-party data, we've seen more modest ammonium sulfate industry price movement as compared to recent overall nitrogen pricing. 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. Over the course of 2019, the ag environment was characterized by weather-delayed plantings and industry logistics disruptions. As we move towards the heart of the domestic planting season in 2020, we expect to see fertilizer demand and planted acres strengthen seasonally. Crop prices, most notably corn, and an expected return to more traditional planting conditions in North America continue to support an increase in fertilizer demand into the spring. We continue to monitor several factors impacting the overall global fertilizer environment, including farmer profitability, China utilization and exports, or any changes in expectations for planted acres. Specifically for ammonium sulfate, we do expect to see a continuation of increased competitive pressure in light of recent North American granular AS capacity expansion and European imports. Now, as a leader in this space, we remain focused on delivering to the value proposition of sulfur nutrition for our customers globally. We believe sulfur demand is growing at roughly 3% per year. In fact, one area that currently has us excited is soybeans. Now, soybeans are the largest or second largest crop planted by acreage in our two largest markets, the U.S. and Brazil. Historically, farmers haven't used a lot of fertilizer in general, and sulfur and nitrogen specifically, when growing beans. However, recent independent studies, grower feedback, and promising trials we've conducted with universities show indicate that farmers are likely to get a good return on investment by adding sulfur and supplemental nitrogen to their nutritional plans for soybeans, and that ammonium sulfate would be one of the best fertilizer options. We continue to conduct trials and work to educate our customers and the grower community on the potential and value of sulfur nutrition, and we'll share more on this opportunity over time. Let's turn to Size 7 for an update on chemical intermediates. Our chemical intermediates product line represented just over 30 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 over RAS continued to see pressure through year-end. Despite imports into the U.S. moderating, global acetone remained in an oversupplied position on the back of soft demand downstream. As a result, we saw pressure on spot market spreads and a continued drive for deeper discounts into the large buyer market. From an acetone demand perspective, methyl methacrylate or MMA industry conditions have remained weak overall on a global basis. However, we've seen steadily improving MMA demand following downtime and delayed restarts earlier in 2019, which over time we expect to further improve the acetone supply and demand balance. I would also 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 had issued preliminary anti-dumping duties on five countries during the third quarter of 2019. Following final duty determinations by the DOC in October, the International Trade Commission on November 14th issued final injury determination on the first two countries, Singapore and Spain, confirming duties in excess of over 100%. As for the other three countries, Belgium, South Africa, and South Korea... The DOC issued final duties on February 7th of this year, confirming the preliminary rates and significantly increasing the duty rates on South Africa and South Korea. We're now awaiting the last step in the process, which is for the ITC to make its final injury determination, and that is expected by the end of the first quarter of 2020. Assuming affirmative rulings, duties imposed would be in place for five years. In another positive sign, we saw no imports of acetone into the U.S. in January, which will continue to help improve the supply-demand balance while stabilizing industry pricing. As we look to the rest of the intermediates portfolio, phenol demand remains subdued. Globally, we've seen weakness across key end uses, such as bisphenol A into polycarbonate and epoxy resin, and, of course, nylon, as we've discussed. Across the remainder of our chemical intermediates portfolio, though, we have seen stable demand, albeit off a smaller base, with continued favorable growth trends associated with our oxymes and other derivatives. So let's turn to slide eight. At Advancix, environmental, social, and economic sustainability is essential. It is critical to our business and our relationships with key stakeholders, including customers, suppliers, employees, shareholders, and the communities in which we operate. I wanted to spend a moment to highlight some of the recent accomplishments we've seen across the organization. As I mentioned in my opening remarks, Advancix was awarded a gold rating for CSR by Ecovatus. The assessment evaluates corporate sustainability performance in the areas of environment, labor and human rights, ethics, and sustainable procurement. This is the first time that we participated in the assessment and were ranked among the top 4% of chemical industry peers. We continue to reduce our impact on the environment throughout our operations. As an example, we've seen a 42% reduction in criteria pollutant emissions since 2014. This is a result of a multi-year investment of more than $100 million, which we completed following our spinoff, to reduce our NOx emissions at our Hopewell facility. And lastly, we shared last quarter, our new natural gas boilers have been fully on stream since mid-year and are delivering immediate productivity benefits above our expectations. And we wanted to share this with you all. In total, we spent roughly $40 million in capital and expense with the current estimated IRR at approximately 34% representing a three-year payback. We anticipate an approximately $19 million annual EBITDA contribution from this project and expect a $9 million incremental year-over-year benefit in 2020. This is a terrific win-win project for sustainability as well. By converting from coal-fired steam supply to natural gas-fired boilers, this project also delivers a roughly 45 percent expected reduction in greenhouse gas emissions. So let me turn the call back to Mike.

Thanks, Erin. And I'm now on slide nine to discuss our cash flow expectations. As Aaron mentioned earlier, 2019 was a strategic investment year that will position the company for stronger performance over the long term. Moving into 2020, we have a number of tailwinds from a cash flow perspective, particularly as we progress through the year and expect stronger cash flow generation in the second half compared to the first half. Due to our realignment to spring timing for our larger planned maintenance turnarounds, we expect the more significant impact in 2020 to be in the second quarter, or roughly $25 to $30 million, in line with previous expectations. This follows our large planned turnaround of $25 million just executed in the fourth quarter of 2019. As a reminder, our large planned turnarounds are typically a year apart. In addition, we expect CapEx will remain relatively high in the first half, driven by the spring 2020 turnaround, as well as the completion of our key growth projects, but will then start ramping down as the year progresses. In total, we now expect full-year 2020 CapEx in the range of $90 to $100 million, and that's down about $50 to $60 million on a year-over-year basis. Given the challenging end-market environment, we're targeting the low end of the range and continue to be disciplined around reinvestment in the business. Approximately 14% of our 2020 CapEx will still be on high-return projects as we continue to mature our long-term pipeline of opportunities. Now, as you saw in our filing this morning, We announced an amendment to our existing credit facility due primarily to timing considerations, which will provide flexibility as we navigate through the current dynamic. As mentioned, CapEx will be heavier in the first half of the year before ramping down later in the year, which will drive negative cash flows in the first half. Another timing consideration is the impact of two large planned turnarounds within six months of each other on EBITDA. In the second and third quarter of 2020, the trailing 12-month EBITDA will have approximately double the typical impact from turnarounds. The credit amendment accommodates for these timing considerations, which will have the effect of increasing leverage ratios in the first half before reversing in the second half. So, overall, a timing consideration, and we remain confident in our cash flow generation and cash deployment opportunities. As a reminder, one other consideration for our cash flow linearity is our annual ammonium sulfate pre-buy cash advances program. This occurs in the fourth quarter typically for the spring sales in the following year. So, some timing differences between sales and cash. Now, given the puts and takes across the portfolio, we expect free cash flow to remain negative through the first half of the year. However, second half free cash flow is expected to be positive, commensurate with what we've previously demonstrated and more than offset the headwinds in the early part of the year. So, overall, we expect positive free cash flow for the full year of 2020. Now, let's turn to slide 10 to discuss our outlook for 2020 before turning to Q&A. Similar to what we presented last quarter, we've highlighted our expected trend for each of the key drivers of our performance with the red circle representing a headwind in 2020, yellow circle, neutral, and green representing a tailwind. From a product line perspective, the end market environment has remained challenging exiting 2019 and over the first two months of 2020. We continue to face unfavorable industry conditions in the nylon space. As Erin mentioned earlier, the nylon demand environment has remained weak across most major end uses, and we expect industry oversupply to continue. So while we are cautiously optimistic about our neutral view on ammonium sulfate and chemical intermediates, Given the Nylon challenges, we continue to expect total market pricing to be a headwind overall in 2020 on a year-over-year basis. Based on expected operational performance, we also anticipate improved volume overall in 2020 and remain focused on value pricing our more differentiated products based on their performance characteristics in higher value applications to help mitigate the broader macro softness. Operationally, no change to our planned turnaround schedule for 2020, which remains at a $33 million to $38 million pre-tax income impact and will be heavily weighted towards the second quarter of this year. We expect continued improvement in performance across our integrated asset base supported by our proactive maintenance and reliability programs. I highlighted our expectation for CapEx spend on the previous slide. We continue to expect full-year benefits from our new natural gas boilers at Hopewell and expect our Kappa Lactam quality and debottlenecking project to be fully online sometime in the second quarter of this year. Lastly, as we continue to expect an unfavorable impact of pre-tax income in 2020 from the PES supplier disruption and shutdown in the range of $10 to $15 million. This represents a flat to $5 million increase year-over-year. Over the medium to long term, we see QME supply and demand dynamics supportive of sufficient availability and continue to assess our long-term optionality. So overall, we'll continue monitoring developments in our end markets while driving strong operational performance, enhancing our long-term growth capabilities, and making smart and disciplined investments in the business to drive higher returns. Now with that, Adam, let's move to Q&A. Thanks, Mike. Brittany, please open the line for Q&A.

Yes, 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're using a speakerphone, please pick up your headset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from David Silver with CL King.

Yeah, hi, good morning. Morning.

Good morning, David.

Okay, so I had a few questions. I think the first one I'd like to maybe just touch on your year-end balance sheet. So in particular, the inventory level I think is at an all-time high, at least for, you know, while you've been a public company. And I guess that's kind of moving in the opposite direction of, quarterly sales trends recently. So what is it that either strategically or tactically is going on there that has led to the pretty significant inventory buildup the last couple quarters, including the fourth quarter? Thank you.

Sure. Sure, Dave. I'll take that one. As you point out, the inventory at the end of the year came in at $172 million. That is That is the highest level of the year, but that's driven by a few factors that I'll cover here. First of all, raw material inventory was also the highest level that we saw all year, and that's really driven by the timing of cu-mean deliveries. There actually became more spot purchases or spot cu-mean available for purchase here in the fourth quarter, and we took advantage of that really to add to our buffer inventories. You're familiar with the PES. shut down here and we felt that was a good opportunistic time to increase those inventory levels. So that's one factor that we saw here in the quarter. The other factor is around finished goods and WIP inventory. Those inventories were out $115 million at the end of the quarter. And we've highlighted over the past number of quarters some of the challenges around nylon. And what we saw is higher resin inventory And we've been seeing, as we've discussed, a lot of changing demand dynamics in that business. You know, we operate six different lines at Chesterfield where we make the resin, and we're adapting our operations to those changing demand conditions. And as a result, we have a bit of a different mix here in higher resin inventories. We expect those inventories will go down throughout the year and by the end of the year get to a more normalized balance or a more normalized level. The other factor on finished goods and whip inventory is ammonium sulfate inventory levels, which were a little bit higher than what we would normally expect. Some of that is really being driven by a greater mix of standard grade production relative to granular production of ammonium sulfate and the sales timing associated with that. And we expect ammonium sulfate inventories in Q1 to come down to more normalized levels And I would say overall in Q1, inventory is anticipated to come down. So that's really what's driving the inventory levels.

Okay, thank you for that. And just one more quick one, or one more on the balance sheet. But in current liabilities, there's a deferred income item, I guess, $19 million. And I see it includes customer advances. So I just want to clarify that in your prepared remarks, you touched on the pre-buying for spring fertilizers. Is that what that third quarter to fourth quarter bump is related to?

Yes. And as you point out, the balance at the end of the year was $19.7 million. That is predominantly related to our ammonium sulfate pre-buy program, as we typically see in the fourth quarter. And what you'll see during the year is that balance declines in the first half of the year as we sell the ammonium sulfate through the season and those advances come down and typically get to a low point right around the June and July timeframe before building back up in the fourth quarter. From a modeling perspective, you know, it is an important consideration as you think about the linearity of cash flow during the year. and we expect the same factors to come into play as we look at free cash flow and cash flow generation in 2020.

Sure, that makes sense, but thanks for clarifying. I'm now going to ask kind of the China coronavirus and other kind of issues question, which I think for your company is a little bit more multi-layered than for some of the other companies I follow, but The nylon business, both on the supply and demand side, has been driven by Chinese factors, auto production and new capacity for the past several years, and now there's kind of a certain amount of uncertainty injected in, I guess, in both of those areas. I know it's early days, but at this point, how does your company – prepare or you know what's your thinking about your ability or what are you seeing in the market extra opportunistic exports bleeding out or you know what's your market intelligence tell you that the Chinese nylon industry is how they're reacting here and you know I guess I'm wondering about how this what challenges it might face present you to maintain that high Hopewell utilization rate that you cited earlier and the various benefits that maintaining the high utilization provides. Thank you.

We can certainly take that in a few different steps here, David. And maybe to calibrate us all just from the stance of what kind of plays in all of our end markets, Because as you point out, sales into China really only represents about 1% of our total sales and closer to about 3% of our, you know, caprolactam and nylon sales. It's small from a standpoint of our direct participation, but obviously, as you point out, you know, more significant from sort of how China impacts, you know, the broader consideration of these industries. And that's because when you look at China, they represent 50% of the total nylon supply and demand. On a phenylacetone perspective, there are 20% of the phenylacetone supply and 25% of global demand. And then on ammonium sulfate, there are nearly 40% of the total AS supply, but only 13% of AS demand globally. So as you say, it's early days, but we could see both second and third order consequences or impacts here potentially playing forward. I mean, from our intelligence, we're certainly... We're certainly seeing that, you know, prolonged demand weakness has played forth. I believe the last week's utilization rates from our intelligence puts China utilization about 54%, right? So certainly that's, you know, lower than where they have been driving. We're also hearing about the potential mismatch between production and consumption, right? As the transportation logistics and various points of these, you know, sort of multi-step integrated chains you know, play out, that that is causing, you know, challenges. You know, again, that has to play forward a little bit. But we're really watching now, as you say, for the impact on trade flows, you know, between China to the rest of the world and in between other regions that could create either challenge or opportunity, you know, for demand and pricing. And, you know, from our standpoint relative to, you know, our positioning and you know, the reach that we have. You know, for us, we continue to stay focused on, you know, ensuring that our reach allows us to place product into the most opportunistic and best, you know, geographies and application mix that's available to us. So that remains our focus, you know, both here in the U.S. as well as, you know, into the export markets. And then, again, looking to where there could be disintermediation that provides opportunity as well.

Okay, thank you for that. I know it's the very early days, and, you know, it's kind of a multilayered kind of situation at this point. I'm going to get back in queue. Thank you.

Okay, thank you. Our next question comes from Vincent Anderson with Stifle.

Yeah, thanks. Good morning, everyone. So I wanted to ask maybe a little bit of a longer one on your R&D initiatives, particularly in nylon. So I'll try to be clear, three parts. First, when you look at how you're positioned to compete in composites, I was curious how broad your portfolio is today in terms of fiber sizing and the number of base resins that you're able to optimize for. And then the second is just you introduced the Nylon 6 product last year with some 6-6 characteristics, tough environment to launch into. So any update on progress there and any success you've had getting that specced in with OEMs? And the last one is just simply, you know, any strategic priorities you want to share for the OBIN partnership in 2020, and if we can expect any measurable margin improvement from, you know, the combination of the Pottsville shutdown and any new film sales.

Sure, we can be happy to talk about that a bit here. So maybe I can start around really our focus into engineering plastics and where we sit in the value chain to sort of set some context, right? So Our focus is ensuring that our customers, who really the target here is the independent compounder, then serving OEMs, whether it be in automotive, consumer products, industrial electronics, so that they're armed with the best resins to meet their solution needs. For where we sit in the in that chain, obviously when you come to the number of things that, you know, those compounders need to solve solutions is, as you say, a variety of resins, both from, you know, base homopolymers to, you know, homopolymers with master batch blends perhaps, and then obviously we have our copolymer capabilities that we have invested in and continue to bring forward. So I would share that we made great inroads this past year. As I noted in my remarks, you know, 30% volume growth into this space. I'd say that certainly the focus is we need to get those high volume products into the space first so that we're there as a partner. And then we have a number of programs that lead us into those more bespoke, tailored solutions underway. And so we've seen opportunity and growth in our wire and cable sales as an example. And our copolymers are out for you know, for testing and solution providing. But those are the ones where, again, they're going to be smaller volume, you know, more tailored solutions. You know, we're excited about the projects that are in the queue, but those are coming with time. And as you say, 2019 wasn't a fabulous year relative to sort of the demand pool, if you will, for projects. But an area that we continue to stay focused on, you know, tours of our sites and driving those collaborations, you know, again, this is long-term and we feel confident that we're moving in the right direction. So if I touch on Oban, again, the Oban alliance here was really a win-win for us relative to the ability to continue to have great quality films and use current best-in-class manufacturing technology to serve our customer base. We remain, you know, committed to that transition and that's moving along. And really this year, you know, key things that we're looking at is being able to now look at just not our base films but using the capabilities around, you know, metalized films as well as other characteristics and opportunities that they have. You know, working with them on their other film opportunities that they have. They also are a Bopet and BOPP supplier. So more to come there, but I would say we are well underway and making good strides relative to really our transition plan and alliance focus.

Great. Thank you. And you provided some really helpful remarks on acetone, but 2019 was a bit nuts in North America specifically. So I was hoping you could just give us the lay of the land today in North America, including any numbers you could possibly put around MMA demand and capacity on a year-over-year basis. And then on that note, you know, the market appears to be moving towards more balanced state. So what's your impression of the basis for these aggressive large buyer bids that you've referenced?

So the base of the report, yeah, no, that's great. And a lot of it's contextual to where and when, you know, sort of annual contracts get negotiated. And, you know, they're typically, you know, done at the end of the year prior to, you know, to the start. You know, at that time, we still had a fair amount of inventory in the system. And so, again, when you have, you know, these dislocations in supply-demand length, you know, it can lead to, you know, aggressive and sort of frenetic competitor behavior. We do see the large buyer, you know, volumes moving back. We do have, you know, and see their demand profiles picking back up relative to where we were last year. You know, really our focus here, you know, post the petition, now that we have some duties in place but also, you know, a right sizing to the supply and demand balance, Our main focus here, Vincent, is really to seek to lead in returning to really what we believe is good, fair, disciplined pricing in the marketplace, and that's our current focus.

Great, thanks. And just a quick one on the trade case, if you're able or willing to share, is it the opinion of your counsel that the ITC's favorable decision in the Spain and Singapore duties, but specifically the damages, reads very favorably for finding damages in the remaining trade cases?

Great question. I think we would share that we would expect the same rationale and approach that applied with the first two countries to carry through and read through to the final three.

Excellent. Thanks so much.

Our next question comes from Chris Moore with CJS Securities.

Good morning, guys. Good morning. Talk a little bit further about, you had referenced on Q3 the kind of shifting geographic sales and talked about it a little more today. Maybe provide some specifics there and is this, you know, I know it's a response to near-term conditions, but is it kind of a longer-term trend as well?

So what you're going to see and really where, you know, as, again, the robust performance comes out of Hopewell, you know, certainly in the current dynamic in the U.S., that, you know, you should think about that last pound that's coming off really is going to have to be an export pound, right? That's just where we sit today. And so that, you know, as we proceed certainly in the near term and over the last quarter, you know, we've seen that influence out. So when we talk about mix and sort of impacts, you know, that is, you know, a pound that's going into the spot market. You know, now as a leading global cost advantage player, that's still a good pound for us. But we just wanted to be transparent and clear that that is something that, you know, is happening and would continue to happen for now. As we continue to shift the portfolio, and again, as we talked about moving and offsetting the declines in carpet into engineering plastics and packaging, those are growth applications. And so we do believe over time, as we continue to progress in that nature, that we'll continue to get that mix shift in the direction that we want for the long term.

Got it. That's helpful. That's all I had. Thanks. Thank you.

Our next question comes from Bill DeZellum with Titan Capital.

Thank you. I have a couple of questions. First of all, would you please repeat the duties, the February 7th determination on acetone?

Sorry, give me one second. Belgium has, you know, for INEOS, has a final duty determination of 28%, as do all others exporting from that country. In South Africa, SASAL has moved to 415, roughly, percent, with all others moving to around 315%. And then in Korea, we have a move against two players. Kumho came in just shy of 48%. LGC came in just around 25 with all others at 33.

Great, thank you. And then you made reference to the soybean market for ammonium sulfate. And very early you said, I guess two questions. First of all, how many acres are you anticipating being planted this year? Is that going to influence the business at all or is it still truly in trial phase? And then secondarily, how many acres of soybeans are planted in the United States relative to corn?

Okay. So we can – give me one second here. So when we talk about soybeans, really our large focus here Bill has been on the U.S. and Brazil. So, maybe I can kind of just frame, you know, how we're thinking about that. So, if you think about, you know, 164 million acres kind of combined for those two regions, you know, and sort of a modest adoption, and again, still early days, but if, you know, we applied at sort of a 20% adoption rate, that could yield, right, to mid to high single-digit percent increases in AS demand opportunities. So, well north of a million tons, which is significant growth opportunity just in two regions. So hopefully that puts a little bit of color commentary around that opportunity. And then for AAS relative to corn or just corn in general, I believe the February WASDE still is maintaining in and around 81.5 acres for corn, and their yield targets around 168 bushels, kind of have remained same for the last couple of months.

And then for soy, you're looking at roughly 75 million acres planted here in the U.S. approximately. So it's a little bit below corn.

But still very close to a similar number.

Yeah, in general, I mean, those two tend to be the... the two largest crops planted here.

And is there any indication at this point with the early research that the penetration of ammonium sulfate into soybeans would or should be any more or less than corn?

So obviously all application rates, when you look at ag, are soil dependent, so they become regionally dependent as well as tied to what the planning is. But hopefully just what I shared, again, early days, just kind of framing what could be a modest adoption. There's got to be a strong grower education program here. All the things that, as a leader in this space, This is what we've been doing for quite some time, we believe, differentiated compared to our other AS competitors here, and committing to the research, driving opportunities for global demand growth. So we're excited, and I think we'll be able to share more as time unfolds here.

And then the first part of the question was acres that you would expect this year, and if you think it has an impact at all. or whether, because I think you answered the question for long-term.

Yeah, so I think, you know, again, near-term, we're out talking with folks today, but again, in any adoption cycle, you know, I think it becomes, you know, several fertilizer seasons before you have the approach there. So, you know, I think that's where we sit.

And was your question on corn acres planted specifically in the outlook for 2020? Was that your question?

No, I'm sorry. It really was soybeans and whether there'd be any material impact this year, whether it was still too early.

Gotcha.

Okay. Thank you. And then my last question is the boiler project. Were you originally planning for that 30-plus percent IRR and were simply being conservative, not knowing, frankly, the unknowns? or were there some things that developed that led the IRR to actually be greater than what you anticipated?

Yeah, so the spend overall, when we talk about the $40 million in capex, which includes most of that, sorry, the $40 million in spend, most of that being capex, there's a little bit of expense in there. That came in line with our expectations, which has an impact, obviously, on the returns and the benefits of Really, it comes down to the performance of the boilers, which are coming in in line or better than what we had anticipated, which we now have some run time with them after them being up and starting up in the third quarter of last year, as well as a lower natural gas environment. We've seen natural gas prices decline, and that has provided more of a benefit than what we had anticipated. I think it's tough to predict exactly where you know, the future of natural gas prices are going to go. Some of it's weather dependent, supply-demand dependent overall, but as you saw, natural gas prices have been down, have been low, and some of that being driven by, you know, the warm weather conditions we've seen here. So when you kind of reset those expectations going forward, that does improve the returns on the project.

Thank you both.

Very good. Thank you. Thank you. And we will take our last question from David Silver with CL King.

Okay. Hi. Just a couple of follow-ups. So first would be on your CapEx programs. And I believe in Michael's comments, he talked about a major project or two being completed in the first half of 2020. And I was just wondering if you could remind me which projects are due to be completed and put into service in the first half of 2020. Is that the CAP or LACTAM expansion and upgrade or something else?

Yeah, so when we first really started talking about these growth and cost savings projects and the pipeline, associated with that, the $150 to $200 million of multi-year pipeline that we have and opportunities that we have. Really, the two big projects that we started discussing are the boiler project, which we talked about, started up in the third quarter of last year, and we're seeing really good benefits from that one. And the other one is the Capital Lactam de-bottlenecking project, which is set to be completed here and start coming online here in the second quarter. You know, the one thing I'll say about that project, you know, obviously more caprolactam production goes into the nylon space. Nylon, as we've talked about, has been a bit more challenging from a supply-demand perspective, and we've seen, you know, the adder and the margins compress a little bit here. But for us, we're still very excited about that project. Over the long term, we anticipate it will expand our caprolactam capacity by 2%. as well as improve our yields at our downstream Chesterfield resin plant, which will provide benefits there as well. So that project is, again, anticipated to come online here in the second quarter.

Okay, great. And just last one. You know, when I look at your – when I look at slide 10 and I look at your, you know, red light, green light, yellow light layouts, I mean, everything kind of seems to align with your comments, with perhaps the exception of the chemical intermediates and, you know, you assigned that a yellow light. And, you know, I'm just wondering, but my impression was your acetone business was pretty depressed last year, such that yourselves and other producers, you know, pursued anti-dumping relief. and now that relief seems to be coming into play. And, you know, I don't want to read into it too much, but the graphs, I think, on page seven kind of point to maybe a stabilization in acetone pricing even while underlying propylene costs, you know, continue to decline. So I'm just wondering why yellow and not, green when you compare full year 2020 to full year 2019, which, again, I thought was fairly depressed from a longer-term perspective. Thank you.

No, sure. And I appreciate the question and the challenge here. And as we look at the year, and certainly Mike pointed out, you know, of the of the stoplights on that page and the neutral ratings on AS and chemical intermediates. I think those are the two that we remain cautiously optimistic about as we move forward here into 2020. Obviously, on the acetone, we have a number of great mileposts that are moving in our direction, and we now need to go do the work to lead pricing back to that fair and disciplined that we believe that the market should bear. And that's the work that's underway. You know, the duties themselves don't snap back, you know, the market to previous states. So work to be done there. But, again, we're feeling good and we're focused on it. But, again, I think it's a good call and, you know, certainly one where, you know, we're going to watch. And while we were really – you know, we struggle to call the length of the oversupply, right? I think if we go back to where we started – But again, good mileposts that we're seeing, and we do have some cautious optimism here on that being able to improve throughout the year.

All right. Thank you very much for that.

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

Great. Thank you all again for your time and interest this morning. As we continue to navigate end market dynamics, we remain focused on successfully executing against our strategic priorities and positioning the company for long-term success. While planning conservatively in the near term, 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 through 2020 and over the long term. We'll look forward to speaking with you again next corner. Have a great day.

Thank you, everyone. This concludes today's teleconference. You may now disconnect.