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Edited Transcript of ASIX earnings conference call or presentation 22-Feb-19 2:00pm GMT

Q4 2018 AdvanSix Inc Earnings Call

PARSIPPANY Feb 25, 2019 (Thomson StreetEvents) -- Edited Transcript of AdvanSix Inc earnings conference call or presentation Friday, February 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Kressel

AdvanSix Inc. - Director of IR

* Erin N. Kane

AdvanSix Inc. - CEO, President & Director

* Michael Preston

AdvanSix Inc. - CFO & Senior VP

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Conference Call Participants

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* Charles Nathan Neivert

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Christopher Paul Moore

CJS Securities, Inc. - Senior Research Analyst

* Kunal Banerjee

* Vincent Alwardt Anderson

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Good day, everyone. Welcome to AdvanSix Fourth Quarter 2018 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

I'd now like to turn the conference over to Mr. Adam Kressel, Director of Investor Relations. Please go ahead, sir.

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Adam Kressel, AdvanSix Inc. - Director of IR [2]

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Thank you, Alan. Good morning, and welcome to AdvanSix's Fourth Quarter 2018 Earnings Conference Call. With me here today are President and CEO, Erin 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.advansix.com.

Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our business as we see it today. Those elements can change and the actual results could differ materially from those projected. And we ask that you consider them in that light. We refer you to the forward-looking statements included in our press release and earnings presentation. In addition, we identify the principal risks and uncertainties that affect our performance in our SEC filings, including our annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. This morning, we'll review our financial results for the fourth quarter of 2018 and share with you our outlook for our key product lines and end markets. And finally, we'll leave time for your questions at the end.

So with that, I'll turn the call over to AdvanSix' President and CEO, Erin Kane.

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [3]

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Thank you, Adam, and good morning, everyone. Thank you for joining us this morning and for your continued interest in AdvanSix. As you saw in our press release, AdvanSix delivered a strong fourth quarter to close out a dynamic year. Mike will detail the full results in a moment. But overall, we captured the benefits of favorable market-based pricing. We drove improved plant production rates across our key manufacturing sites, and our cash generation continued to improve. Cash flow from operations increased nearly 30% in 2018, helping to fund high return investments in the business, debt paydown and share repurchases.

There were 2 onetime considerations in the results this quarter to note, however. We had a $6 million pretax income charge to bad debt expense, which was partially offset by a $2.9 million benefit from business interruption insurance advances related to the first quarter of 2018 weather event claim. Taking these items into consideration, underlying EBITDA would have been roughly $3 million higher in the quarter.

As we enter 2019, there continues to be great momentum across the organization. We strive to be our customer's trusted partner across all our various product lines, delivering growth and value through excellence in all we do.

As you may have seen in our fourth quarter filings, we successfully renegotiated and extended our ongoing long-term arrangement with Shaw Industries. We've also increased our presence at various industry events and conferences in recent months, with members of our technical marketing team representing each of our major product lines, presenting on our breadth of product offerings and capabilities.

Operationally, while 2018 began with a significant weather event, which the organization successfully managed through demonstrating our resiliency and grit, our relentless focus on safe and stable operations culminated in fourth quarter plant utilization rates, reaching the highest level of any quarter since our spin-off in 2016.

In addition, safety performance and compliance are core to how we operate. We are pleased to have published our inaugural sustainability report in November, sharing our commitment in this arena and the many ongoing initiatives at AdvanSix. Reinvestment in the business continues as we execute on our high-return growth and cost savings capital project pipeline. The first 2 projects initiated in 2018 to further enhance our advantage-integrated value chain are on track. And we -- as we commission these projects into service, we expect to start seeing benefits in the back half of 2019.

Cash flow generation this year has been a consistent and positive outcome of our focused efforts. With increasing cash flow from operations, we're not only funding high-return investment but also maturing our capital allocation. You'll see on our press release, our Board of Directors authorized an additional $75 million share repurchase program. This authorization is in addition to the previous program announced in May of 2018. We are committed to delivering long-term value as we drive growth in the business consistent with the capital allocation priorities we have previously discussed, executing on high-return reinvestment, building out our inorganic pipeline and capabilities and returning excess cash to shareholders.

We'll provide more color on the remainder of 2019 later in the call. And although there are some puts and takes across the portfolio, our outlook remains largely intact from what we had shared with you in November. Our priorities remain centered on continuing to drive safe, stable and sustainable operations, enhancing our long-term growth capabilities and making smart investments in the business to drive higher returns. We are confident in our ability to build upon our advantaged foundation that will continue to position the company for strong operational financial performance for years to come.

Before handing the call to Mike, I would like to take the opportunity to provide an update on the ongoing Hopewell investigation. As you'll see in our updated disclosures later today, we were recently notified that the U.S. Attorney's office for the eastern district of Virginia has closed its investigation with no further action required by the company. As a reminder, this investigation did have numerous state and federal agencies involved. And we do continue to cooperate fully with the remaining narrowed inquiry by the U.S. EPA and the Department of Justice Criminal Divisions. So certainly a positive development, and we'll continue to keep you apprised with updates as we can.

With that, I'll turn it over to Mike to discuss the details of the quarter.

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Michael Preston, AdvanSix Inc. - CFO & Senior VP [4]

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Well, thanks, Erin, and good morning, everyone. Now on Slide 4 where I'll cover the fourth quarter financial results. Sales came in at $387 million, and that's up roughly 4% compared to last year. Volume was up about 4%, and that was primarily due to strong operating rates at our manufacturing sites in the quarter as well as the unfavorable impact of the planned plant turnaround in the fourth quarter of 2017.

As Erin mentioned, plant utilization rates in the fourth quarter were the highest across our sites in any quarter since the spin-off. And that is really reflecting benefits from our continued proactive maintenance and operational excellence initiatives. Pricing overall was unfavorable by about 1%, primarily due to a 4% unfavorable impact from raw material passthrough pricing, following cost decreases in cumene driven benzene and propylene. Market-based pricing was favorable by approximately 3% compared to the prior year, with improved industry supply and demand dynamics in our ammonium sulfate, nylon and caprolactam product lines. Partially offsetting this was a softness in chemical intermediates' pricing due to the lengthening of acetone supply globally as we've previously highlighted.

EBITDA was nearly $43 million in the quarter, that's up $4 million versus the prior year. And overall, we saw the benefits from improved market pricing offset by increased manufacturing costs, particularly utilities. As you can see on the right-hand side of the page, we've highlighted some of the quarterly considerations that impacted our results in both periods.

As a reminder, there were a couple of important considerations with respect to the fourth quarter results in 2017, including an approximately $20 million unfavorable impact of pretax income from a planned plant turnaround, partially offset by a noncash $4 million favorable LIFO reserve adjustment.

As Erin mentioned, this year's results included a $6 million charge to bad debt expense related to a Brazilian fertilizer customer filing for judicial reorganization.

In addition, we recorded an approximately $2.9 million benefit in the quarter from business interruption insurance advances related to the first quarter of '18, a weather event claim.

Now in terms of bottom line performance, last year was -- our results reflected an approximately $53 million or $1.71 per share onetime net tax benefit primarily related to the remeasurement of the net deferred tax liabilities at a lower corporate rate pursuant to the 2017 Tax Act. Our diluted share count for the quarter -- for the fourth quarter of 2018 was approximately 30.4 million shares, driven by continued share repurchases.

And lastly, we continue to see results from our focus on cash generation. And that's enabling us to fund our high-return capital projects. Cash flow from operations reached $46 million, up $10 million. That's an increase of 26% compared to last year. The increase year-over-year was primarily due to the favorable impact of changes in working capital and the onetime net tax benefit in the fourth quarter of 2017 driving a decline in net income and offsetting increase in deferred taxes.

CapEx of $37 million was up roughly $17 million year-over-year as we execute against our pipeline of high-return growth and cost savings capital projects.

For the full year of 2018, free cash flow of approximately $64 million increased by $16 million or 33% compared to last year. That represented strong cash conversion to net income as we continue to manage working capital levels efficiently while funding the capital projects.

Now let me turn call back to Erin to discuss what we're seeing in each of our product lines.

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [5]

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Thanks, Mike. I'm now on Slide 5 to discuss our nylon product line, which includes our caprolactam, resin and films products and represented about 48% of our sales in the fourth quarter.

As you can see from the chart on the right-hand side of the page, industry benzene to caprolactam spreads globally were relatively flat on a year-over-year basis and sequentially as well in the fourth quarter.

Since our last update, we've seen the following: first, benzene input costs have declined globally, tracking underlying oil prices. As a reminder, a majority of our caprolactam and nylon business is on formula or index-based pricing agreements. So our sales will fluctuate with the price of key raw materials with our variable margin being largely protected. And in the parts of the business without passthrough contracts, the industry often acts quickly with only a 30- to 60-day lag relative to the movement in input costs. Looking forward, we would expect caprolactam and nylon prices to move generally with the changes in raw materials.

Second, we're monitoring signs of a more uncertain near-term auto and building and construction macro environment. In engineered plastics where auto is the primary end use, we've seen weakening industry demand, particularly, in Europe and Asia.

[Caprolactam] in the U.S., which represents 55% to 60% of nylon demand domestically, does have a tie to broader building construction growth rates, which have been impacted by cold weather in certain regions of the country as we began 2019.

However, we continue to run our nylon assets at high utilization rates given our low-cost position globally. Industry spreads have been fluctuating in and around marginal producer economics. And for the marginal producers located in China, we expect a continued dynamic supply and demand environment. We're also monitoring indicators following a seasonally low lunar new year period in the region. We'll stay focused on being the most reliable domestic supplier to serve our customers' requirements, while also advancing our product pipeline to serve higher value applications.

Let's turn to Slide 6. In ammonium sulfate, which represented just over 20% of our total sales in the quarter, we successfully completed both our fall fill and fourth quarter pre-buy programs to close out 2018.

As we've shown previously, the graphs on the right-hand side plots urea and ammonium sulfate industry retail pricing in the Corn Belt on a nutrient basis. As always, it's important to normalize pricing as urea contains 46% nitrogen, whereas ammonium sulfate contains 21%. Our ammonium sulfate product is positioned with the added value proposition of sulfur nutrition to increase yields of key crops.

Based on third-party data, we've seen more modest ammonium sulfate industry price movement as compared to recent nitrogen pricing. While urea is the largest nitrogen fertilizer by total consumption, it does have -- tend to have an underlying influence on all other nitrogen nutrient products. Urea pricing, again, has been more dynamic with sharp increases in the early part of the fourth quarter. However, nitrogen pricing was under pressure exiting the year due to seasonally slow demand following a weak fall application here in the U.S.

For ammonium sulfate, particularly, industry pricing has been increasing in recent months to help offset rising sulfur prices, which is a key input cost for us. And we've seen those input prices stabilize and begin to soften as we have started here 2019.

As we look forward to the rest of 2019, we do expect fertilizer pricing to strengthen seasonally into Spring, with the second quarter being stronger than the first, particularly given the weather-limited application window in the fall of 2018.

We're monitoring several factors impacting the overall global nitrogen environment, including in China, urea utilization and exports, the expectation increased planted acres for key crops like corn and wheat. And crop prices have also wedged up versus where they were just a quarter ago. However, global uncertainty around trade and tariffs is something we're keeping a close eye on.

So while we've been able to increase -- to achieve some increase in ammonium sulfate pricing and are coming off another successful pre-buy period, we continue to attract both supply and demand fundamentals for any shifts in sentiment. And as always, we'll stay focused on delivering on the value proposition of sulfur nutrition for our customers globally.

Let's turn to Slide 7 for an update on chemical intermediates. Our chemical intermediates product line represented over 30% of our total sales in the quarter. As a reminder, acetone represents half of our chemical intermediate's portfolio or approximately 15% of AdvanSix' revenue.

The chart on the right hand side of the page shows refinery-grade propylene costs and U.S. acetone basis -- prices based on third-party data. Overall, acetone remains in an oversupplied position.

Elevated levels of imports into the U.S. as well as aggressive trading activity have put continued pressure on regional pricing and spreads. As you've likely seen, we along with other domestic producers of acetone have filed antidumping duty petition with the International Trade Commission and the U.S. Department of Commerce.

These petitions cover imports of acetone from Belgium, Korea, Saudi Arabia, Singapore, South Africa and Spain. And we expect this investigation process to be completed over the next 12 to 14 months. Acetone prices have moved lower given supply and demand dynamics but also reflect declining refinery-grade propylene input cost. Following significant increases through most of 2018, we've more recently seen a reduction in input cost supported by rising propylene inventory levels in the U.S.

From a demand perspective, there were several industry turnarounds over the last several months, occurring in the MMA or methyl methacrylate space. As MMA is the second-largest end use for acetone globally, this reduction in demand supported a continued lengthening of supply for acetone as we enter 2019. For the remainder of the chemical intermediates portfolio, we've seen tight supply conditions for phenol, particularly, in the U.S. following competitors force majeure announcement. Demand remains relatively healthy across the broader portfolio with continued favorable growth trends associated with our oximes and other derivatives.

So [overall, chemical intermediates performance continues to be impacted by [historically high levels of acetone imports into the U.S. and excess global inventory continuing to pressure regional pricing. Given the lengthening supply position, we anticipate that price of our raw's compression will continue.

Let me turn the call back over to Mike to discuss our capital investments and outlook.

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Michael Preston, AdvanSix Inc. - CFO & Senior VP [6]

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Thanks, Erin. And I'm now on Slide 8 where we've highlighted our CapEx outlook.

Following $109 million of cash outflow from CapEx in 2018, we're expecting 2019 to be in the range of $140 million to $150 million, followed by a reduction in 2020 back to levels generally in line with what we saw in 2018.

Now the increase in 2019 and subsequent decline in 2020 is a result of 2 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 leads from Honeywell into our own Chesterfield, Virginia site; the second consideration relates to approximately $20 million in spend for planned plant turnarounds. Now this increase is being driven by the scope of the 2019 turnaround as well as the timing of the 2020 turnaround scheduled for the spring requiring CapEx spend in 2019, which I'll explain in a moment.

Spend in 2018 and '19 includes the 2 high-return projects we've initiated, focused on debottlenecking specific areas of our operations, optimizing quality and improving our mix and cost position overall that will drive future earnings and cash flow. As a reminder, we'll begin to see the benefits from these projects in the back half of 2019 with the full year benefits starting in 2020.

We continue to prioritize organic investments and are executing against our multiyear $150 million to $200 million high-return project pipeline, focused on growth and cost savings, asset flexibility and improving plant buffers among other benefits.

We've set a hurdle rate of approximately 20% in terms of an internal rate of return. And we have a healthy pipeline of investment opportunities. As we've discussed on our last earnings call, the relocation of our R&D lab will enable an improved configuration of our labs to drive productivity, increase connectivity with our specialized resin manufacturing and more effective collaboration with customers. We're also continuing our base investments in safe and stable operations as well as health, safety and environmental spend to reduce our risk profile, improve security and maintain regulatory compliance.

From a maintenance CapEx perspective, we expect an additional $20 million of cash outflow in 2019 related to planned plant turnarounds. More specifically, this will manifest itself in a couple of areas: first, we typically alternate turnaround activities between our sulfuric acid plant and our Kellogg Ammonia Plant each year. Both of those units -- unit operations within Hopewell tend to be a bit more complex with larger scope plant turnarounds. And based on the equipment being replaced in our sulfuric acid plant in the fourth quarter of this year, we'll see an increase in our capital spend. Now to be clear, there is no change to our expected turnaround expense impact of $35 million to $40 million, which is what we've highlighted previously. But we will see a higher level of CapEx in 2019 related to repair and maintenance spend.

The second driver of the year-over-year increase is based on a cash outflow in 2019 related to equipment purchased for our spring 2020 plan turnaround. Based on the proximity of our turnaround schedule with activities in the fourth quarter of 2019, and then early in the second quarter of 2020, there will be a higher amount of cash outflow this year for equipment being commissioned in next year's turnaround. So based on the timing of the spend versus cash outflow, we'll see an outsized amount hit this year.

Overall, we should see a majority of the $20 million replacement CapEx impact revert back in 2020. Turnarounds are critical to the success of our operations, our plant uptime in general, and are essential, given our low-cost position and ability to run our plants at disproportionally higher utilization rates.

Now let's flip to Slide 9. Now before turning to Q&A, we'd like to recap our outlook for 2019. As we've discussed there were some puts and takes across the portfolio from a commercial perspective. In the nylon space, we recharacterized the macro demand environment as more uncertain near term given recent trends and building and construction as well as auto. However, we continue to expect solid caprolactam and nylon plant utilization rates at both Hopewell and Chesterfield as we navigate through this environment and remain focused on value pricing our more differentiated products based on their performance characteristics and higher value applications.

In ammonium sulfate, we expect fertilizer prices and mix to increase seasonally into the second quarter. Overall, we continue to expect an improved nitrogen fertilizer environment through the Spring planting season. As for chemical intermediates, the outlook there remains largely unchanged as we expect continued global acetone oversupply to pressure industry spreads. As Erin mentioned earlier, we're awaiting a preliminary investigation on antidumping duty petitions filed with the International Trade Commission and U.S. Department of Commerce. Operationally, no change to our planned plant turnaround schedule for 2019 as I mentioned. And that remains in the $35 million to $40 million range from a pretax income impact. And it will be heavily weighted towards fourth quarter of this year. We expect continued strength in utilization rates in 2019 supported by our proactive maintenance and reliability programs.

As we mentioned earlier from a CapEx perspective, we're expecting a $140 million to $150 million for the full year, including the execution of high-return growth and cost savings projects and an increase in maintenance spending due to the scope and timing of planned plant turnarounds as we discussed. And we continue to expect our effective tax rate to be approximately 25% in 2019 with our cash tax rate of roughly 15% reflecting full expensing of CapEx from a tax perspective.

Lastly, we -- as we think about the quarterly linearity for our earnings throughout 2019, we do anticipate underlying results, excluding the planned turnaround impacts to be stronger in the second half of the year compared to the first half. That includes initial benefits from our high-return capital investments towards the back half of the year and continued improvements in underlying operational performance.

Within the first half, we expect our ammonium sulfate results to be seasonally stronger in the second quarter compared to the first given the timing of domestic fertilizer application. So overall, we'll continue to monitor developments in our markets while driving strong operational performance and redeploying capital to create long-term shareholder value.

Now with that, Adam, let's move to Q&A.

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Adam Kressel, AdvanSix Inc. - Director of IR [7]

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Thanks, Mike. And Alan, you can open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll first go to Chris Moore with CJS securities.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [2]

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To start with just on the nylon. You talked about the macro uncertainty relating to end markets like auto and building construction. Is that something that you're starting to feel now? Or more of a reference to kind of certain macro indicators that you're tracking?

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [3]

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Great question, Chris. And I would articulate and maybe clarify, it would be the latter. Right? We're certainly seeing, I would say, signs relative to the macro trends. A few data points that we've been watching. In certainly China auto sales, as you looked at 2018 over 2017, fell 3%. It's certainly, been highlighted, that's the first decline in 20 years. Followed by the China Association of Automobile Manufacturing releasing basically a forecast for 2019 with no growth, right, on weak market sentiment. In Europe, we have seen certainly Ford have challenges. And from that perspective, in here in the U.S., we're seeing dealer inventories have -- they've risen, with the projected sales to fall below 17 million vehicles, and that's kind of for the first time since 2014. So those are just more mileposts out there that are general sentiment that we have watch for relative to potential for destocking through the value chain. And then in housing construction, I think it's the same. We've had some challenges relative to weather. Certainly, we see a deceleration potentially in housing starts. And then the nonresidential construction spending has been revised down as well with growth slowing. So it's just a watchout for us certainly as we enter into 2019, which is -- I would anticipate should be commensurate with what others are saying just relative to the macro [deal].

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Michael Preston, AdvanSix Inc. - CFO & Senior VP [4]

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

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [5]

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Got it. Maybe on the acetone side. I know in the Q4, you talked about the kind of 4% unfavorable impact on the raw material passthrough. So just trying to understand kind of looking for the balance between kind of the input costs and the acetone. I know there's a 30- to 60-day lag you had talked about. Is acetone pricing as weak? Is it still declining? And is it -- that kind of 4% unfavorable impact, is that something that we'll likely continue to see? Or will it normalize as we head into '19? Just kind of understanding that acetone is going to be leading the way?

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Michael Preston, AdvanSix Inc. - CFO & Senior VP [6]

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

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [7]

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Got it, okay. And last one for me. Just on the...

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [8]

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And the 4% -- maybe just to clarify, the 4% is overall in total, right? So that will be inclusive of really the benzene and the propylene, all the raw material passthrough. If you associate with the formula, which, again, is about 50% of our sales that heavily -- more heavily weighted to nylon and intermediates for about 2/3 of the sales, they would have that impact.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [9]

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Got it. And just in terms of kind of your sulfate -- ammonium sulfate view. I know that we're heading into kind of seasonally stronger pricing. Has your overall view of the industry changed much over the last 3 to 6 months?

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [10]

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

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Operator [11]

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Next, we'll go to Charles Neivert with Cowen.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [12]

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

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Michael Preston, AdvanSix Inc. - CFO & Senior VP [13]

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

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [14]

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

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Michael Preston, AdvanSix Inc. - CFO & Senior VP [15]

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

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [16]

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

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [17]

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

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [18]

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Yes, no. With you, for sure. Certainly, second quarter will be better than first quarter. But when you think about -- we spoke last time, think of last quarter, certainly on the seasonality associated with the mix of being domestic versus exports. Volume does, as you point, tend to be rather flat across the board. But certainly in Q2, we have higher granular-oriented sales domestically here, which is at a premium from -- to your point and from a netback perspective. Whereas the back half of the sales tend to be export in standard.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [19]

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Got it. Lastly, you mentioned something about of getting the investigation on the EPA. Can you go through that again for me, please? I mean, what's been taken off the board? What's still to come? Or what's still has to be dealt with? Obviously, it was a big step to sort of say, no, in more action. But I just need to sort of what's out there still? And what's finished?

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [20]

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

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Operator [21]

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And next, we'll go to Vincent Anderson with Stifel.

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Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [22]

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

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Michael Preston, AdvanSix Inc. - CFO & Senior VP [23]

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Yes, so just to reiterate a couple of points here. As you may already be aware, 50% of our business is on formula-based contracts. But when you take out ammonium sulfate, which is all spot business, a disproportionate amount of nylon, caprolactam and intermediates is on formula passthrough. It's about 2/3. And many of that -- many of the passthrough elements of those contracts are pretty real-time. And that leaves about a 1/3 of nylon and intermediates to be subject to more of the spot movements and lags, which we may see. What I will say is when you look on the chemical intermediates side, as we've discussed earlier, the acetone oversupply is continuing. And that's resulting in some discounting relative to some of those markers. And some of that being driven by also soft demand from MMA plants, which were offline in the fourth quarter. So we don't expect there to be much of a benefit there going forward due to that. And we expect the price for our spreads to be challenged on a continuous basis. The other portion of that I will point out is, when you look at -- for the portion that is spot business in the nylon business set, is exported, there was a bit of a squeeze in terms of resin spreads going forward as well globally. So that did further pressure margins there as well. So we don't expect there to be a significant uptick or benefit relative to price [rose] as we go into the first quarter.

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Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [24]

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

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Michael Preston, AdvanSix Inc. - CFO & Senior VP [25]

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Yes. So when you look at the growth and cost savings projects, the 2 projects that we had talked about. The large ones at Hopewell in total were in the sort of $50 million to $60 million range. Half of the spend in 2018, half in 2019. And the new project that we had discussed is the R&D lab of $15 million, which will be incremental in 2019. So that's kind of the new one. And then we continue to evaluate accelerating other opportunities in the pipeline that we talked about. The $150 million to $200 million pipeline that we've identified of some really interesting and nice return projects that we'll continue to evaluate going forward.

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Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [26]

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Okay, so that a 2020 preliminary estimate could move up if you accelerate some of those other growth projects?

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Michael Preston, AdvanSix Inc. - CFO & Senior VP [27]

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Yes, we have some scoping, engineering work, business case development to further vet some of those projects. But for now, as we said, we expect 2020 to revert back to 2018 in aggregate, pending further evaluation on those growth projects.

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Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [28]

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

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [29]

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

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Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [30]

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

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [31]

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

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Operator [32]

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(Operator Instructions) We've got next question from Bill Dezellem from Tieton Capital.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [33]

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

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [34]

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

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [35]

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All right. And then apologies for this next basic question, but would you please discuss the steps between now and the preliminary ruling relative to the antidumping suit? And what then happens with that preliminary ruling if there is a finding that there was some form of dumping taking place?

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [36]

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

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [37]

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After you, please.

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [38]

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

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Kunal Banerjee, [39]

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

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [40]

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

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [41]

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And I think earlier, I cut you off at something else that you were going to add that was going to be helpful in understanding this process.

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [42]

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Oh, no. just from a standpoint that each one takes on their unique -- relative to -- each case is different. And certainly, that I was just going to comment that while there is no assurance of particular outcome in this case, we do feel that it was important and a positive first step in the process for us and the others who joined in the petition to restore fair competition. Right? Ultimately, it reflects our commitment to the acetone industry.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [43]

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

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [44]

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No. It's only been about 24, 48 hours. And certainly, everyone's just understanding the process, the next steps -- from that perspective. But appreciate the question.

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Operator [45]

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It looks like we have no further questions at this time. So I'd like to turn the call back over to Ms. Erin Kane for any additional or closing remarks.

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Erin N. Kane, AdvanSix Inc. - CEO, President & Director [46]

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

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Operator [47]

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