Good day and welcome to the AdvanSix Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. And after today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Adam Kressel, Director of Investor Relations. Please go ahead..

Thank you, Casey. Good morning and welcome to AdvanSix' second quarter 2019 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 identified the principal risks and uncertainties that affect our performance in our SEC filings including our annual report on Form 10-K.

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

Thanks, Adam, and good morning, everyone. Thank you for your joining us and for your continued interest in AdvanSix. It's been a dynamic first half of 2019. As you saw in our press release, AdvanSix continues to benefit from our global low-cost advantage in a challenging macro environment, while executing against our strategic priorities.

Mike will detail the full results in a moment. But overall the second quarter results were supported by high plant utilization rates in the face of trade and macro uncertainty, solved nylon end markets, challenging acetone industry dynamics and a weather-delayed domestic planting season.

Second quarter pretax income also included the previously announced $12.6 million repositioning charge associated with the closure of our Pottsville Pennsylvania manufacturing facility, which ceased operations in July.

As we shared last quarter, we expect a cash payback in approximately one year as a result of this action and entering into a strategic alliance with Oben Group. Our alliance continues to gain strength positioning us for success in the nylon films industry.

And lastly, we maintained our investment in high-growth return and cost savings CapEx in the quarter, while also continuing to buy back shares. We're excited to share that our new natural gas boilers are on stream and a decommissioning of our coal operation is on track, delivering immediate productivity benefits for our business.

We repurchased approximately $60 million of shares in the second quarter. And in total, have repurchased nearly $45 million of shares this year through July 26. We're operating in what continues to be a more challenging end-market environment overall.

Despite the uncertainty we're highly focused on continuing to execute our high-return investments and driving improved operations that will support long-term underlying performance. We expect our full year 2019 CapEx to be approximately $150 million at the high end of our previous range.

We also continue to expect the full year pretax income impact of planned plant turnarounds to be in the range of $35 million to $40 million. We're ramping up preparations for our fourth quarter turnaround in Hopewell, which is primarily focused around our sulfuric acid plant.

Overall, we continue to benefit from our focus on safe, stable and sustainable operations. Over the past several weeks, our organization is, again, demonstrating its ability to successfully navigate a dynamic environment following the refinery fire at one of our cumene suppliers in Philadelphia.

Mike will spend further time on this topic later on the call. But as you've seen in our release we've narrowed the range of the second half 2019 financial impact of this event. Our key focus is to ensure security of supply at optimized economics as we realign our supply chain into 2020.

There's still work to be done and we remain confident in our long-term optionality. Lastly, as you likely saw in May, we announced that the United States government have notified us that the criminal investigation regarding air emissions at our Hopewell facility had concluded with no further action required.

We are very pleased with this outcome and remain committed to a strong culture of operating compliance driven by our values of safety, accountability, integrity and respect. So, with that, I'll turn over to Mike to discuss the details of the quarter..

Thanks, Erin, and good morning, everyone. I am now on slide four where I'll cover the second quarter financial results. Sales for the quarter came in at $345 million that's down 14% compared to last year.

Pricing overall was unfavorable by about 9%, primarily due to a 9% unfavorable impact from raw material pass-through pricing, following cost decreases in benzene and propylene.

Market-based pricing was approximately flat compared to the prior year reflecting improved performance in ammonium sulfate offset by declines in chemical intermediates due to the lengthening of assets-owned supply globally.

Volume overall was down by about 5% and that was primarily due to continued challenging acetone industry dynamics, the previously disclosed phenol force majeure and lower nylon volume and that was partially offset by improved ammonium sulfate volume. EBITDA was $36 million in the quarter, down about $17 million versus the prior year.

As Erin mentioned, we recognized an approximately $12.6 million pre-tax repositioning charge in the second quarter associated with the closure of our Pottsville Pennsylvania films manufacturing. Approximately two-thirds of the charge is non-cash.

Overall, we saw the unfavorable impact of challenging acetone industry dynamics more than offset a roughly $5 million benefit year-over-year from the impact of planned plant turnarounds.

In addition, this year's results included an approximately $2.3 million benefit from business interruption insurance proceeds related to the first quarter 2018 weather events offset by an approximately $2.3 million unfavorable carryover impact from the phenol force majeure.

The business interruption claim related to last year's weather event has now been closed with a total recorded benefit of approximately $12 million. And as everyone recalls, we recognized $2.9 million in the fourth quarter of 2018 with the balance recorded in the first half of this year.

Earnings per share of $0.53 decreased by approximately 42% versus last year, driven by the factors just discussed, partially offset by a lower share count. Our diluted share count for the second quarter of 2019 was approximately 29.1 million shares, driven by continued share repurchases.

And it's noteworthy to note that the lower share count contributed to $0.04 of EPS accretion year-over-year. And lastly, cash flow from operations reached $25 million in the quarter. That's now about $8 million compared to last year, and that's primarily due to the unfavorable impact of changes in working capital.

CapEx of $32 million was up roughly $9 million year-over-year, as we continue to execute against our pipeline of high-return growth and cost savings capital projects. Now let me turn the call back over to Erin to discuss what we're seeing in each of our product lines..

Thanks Mike. I'm now on slide 5 to discuss our nylon product line, which includes our caprolactam resin and films products and represented just about 47% of our sales in the second quarter.

As you can see from the chart on the right-hand side of the page, industry benzene to caprolactam spreads globally as well as Asia caprolactam to resin spreads were pressured in the second quarter. The declines reflected softer end-market demand environment overall.

In China and the rest of Asia, we've seen slowing growth and uncertainty around trade weigh on pricing and spreads, particularly as we exited the second quarter. From a nylon end-use application perspective, we've seen continued weakness and uncertainty in North America carpet as well as in auto end markets particularly in Europe and China.

From an input cost perspective, benzene prices declined globally on a year-over-year basis, but increased sequentially in the second quarter from the first tracking underlying oil prices.

We have however seen a divergence in input costs among regions in recent months, which is also factored into some of the interim fluctuations in regional pricing and spreads. So, overall, we're not factoring in much of recovery in the back half of the year.

With muted demand we expect industry growth year-over-year to decelerate and expect continued uncertainty around global operating rates pricing and spreads.

However, with our global low-cost advantage, we'll continue to drive high-utilization rates of our nylon assets and as always remain focused on being the most reliable domestic partner to serve our customers' requirements. Let's turn to slide 6.

In ammonium sulfate, which represented about 27% of our total sales in the quarter, we saw improved pricing and volume through the spring season despite the late start to planting here in the U.S. as a result of wet weather.

Based on third-party data, we've seen relative stability in Corn Belt ammonium sulfate industry pricing as compared to nitrogen pricing overall. As a reminder, urea is the largest nitrogen fertilizer by total consumption and tends to have an underlying influence on all other nitrogen nutrient products.

Nitrogen fertilizer pricing has continued to be dynamic over the past few quarters, with adverse weather and industry logistics disruptions playing key role. We saw the cold and wet weather in key regions resulting lower crop yield projections and reduced planted acres for corn.

Recently corn prices have moved higher, which can bode well for farmer income and potentially higher expectations for planted acres in the next domestic planting season. As we look toward the rest of 2019, we expect to see the normal seasonal pricing decline sequentially from second to third quarter.

As a reminder, this seasonality is reflected in both a geographical and product sales mix consideration. In the third quarter we will have higher standard grade product sales into export markets as compared to greater granular sales domestically at the height of the North American season in the second quarter.

We're monitoring key indicators ahead of the new season fill, including crop prices, planted acre estimates, as well as expectations for increased ammonium sulfate supply and global trade flows. And it's still early and we're remaining agile and move through the third quarter delivering on new season fill.

So overall the market environment remains dynamic and we'll continue to stay focused on positioning our ammonium sulfate product with the added value proposition of sulfur nutrition to increase yields of key crops. Let's turn to slide 7 for an update on chemical intermediates.

On chemical intermediates product line, represented roughly 26% 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 have aroused continue to be compressed and challenged overall.

And as we had anticipated, global acetone supply further lengthened in the second quarter on the back of weaker demand as a significant portion of the large buyer segment was disrupted.

This included a planned and unplanned downtime in several downstream customers, predominantly in the MMA markets and the impacts from the terminal fire at the ITC Deer Park, Texas facility in the Gulf Coast earlier this year. As a result, we've seen pressure on spot market spreads, which have also driven deeper discounts in a large buyer market.

But there have been some positive developments however. We've begun to see imports of acetone into the U.S. moderate as we exited the second quarter.

Although inventory through the chain remains historically high, we do expect that to stabilize here in North America as we move through the second half of the year, particularly as some of the larger industry consumers come back online.

And in addition we've also reduced -- seen reduced operating rates particularly in Europe and Asia driven by slowing phenol demand. Lastly, I would like to take the opportunity to provide an update on the ongoing acetone antidumping petition. Filed a favorable vote by the U.S.

International Trade Commission on April 4th, the investigation proceeded to the U.S. Department of Commerce for preliminary antidumping duty determinations against the five remaining countries. On July 30th, the Department of Commerce announced preliminary antidumping duties for two of the five countries Singapore and Spain.

The provisional duty rates were in excess of 100%. We expect to receive notice on any remaining preliminary duty determinations by the end of the third quarter. Given this time line, we also expect the entire process to be completed over the next seven to nine months. So let me turn the call back over to Mike..

Thanks, Erin. And now on slide 8. And we wanted to spend a moment bringing everyone up to speed on the latest regarding what the Philadelphia Energy Solutions refinery fire means to our business.

As way of background and described in our press release in late June, it was a significant fire at the PES Refinery in Philadelphia on Friday June 21st that has kept their operation shut down since that date.

PES is one of multiple suppliers to AdvanSix of cumene, a feedstock material used to produce phenol as everyone knows acetone and other chemical intermediates. First, we want to be -- we're thankful for the safety of all PES employees following this event.

And certainly Erin along with the rest of the leadership team we'd like to thank our teams across the organization who have been working diligently over the past several weeks to implement our mitigation plans from this disruption.

While we're still only weeks away from the fire, we've laid out both near-term and long-term considerations on this slide based on the best available information we have today. The key takeaway here is that we're ensuring long-term security of supply in order to maintain our high utilization rates across our integrated asset base.

In the near-term we've secured additional supply of cumene and phenol from multiple suppliers to maintain production output. Given the proximity of PES' operations relative to our Frankford phenol plant, we inherently derived logistics and working capital benefits from that local supply relationship.

As we shift toward more of a Gulf Coast reliance supply, we are actively working to optimize our logistics including additional vessels and storage capacity and adding buffer -- incremental buffer inventory to mitigate risk Over the medium to long-term, we see cumene supply and demand dynamics supportive of sufficient availability.

So while there is a more acute near-term financial impact as a result of this event, we are actively working to optimize our supply chain and are confident in our long-term optionality. This includes diversifying our supplier base with both domestically and internationally and evaluating potential partnerships to further enhance our alternatives.

As you would expect, we're in the midst of assessing our optionality for a supplier across a broad base of qualified contract and spot suppliers.

We now expect the $6 million to $8 million pretax income impact in the third quarter as a result of this disruption or the lower end of our initial range as we continue to refine and optimize our position and an approximately $5 million to $7 million impact in the fourth quarter.

We do expect a onetime unfavorable impact to cash flow of $10 million to $15 million in the second half of the year as we build cumene buffer inventory. As we look forward, we're optimizing the expected base feedstock and logistics cost increases, given the lack of local supply as we realign our supply chain into 2020.

As always, we'll continue to keep you apprised of any material developments. Now let's turn to slide 9 for a recap of our expectations for the remainder of 2019. As we've discussed there continues to be puts and takes across the portfolio.

We're focused on driving high plant utilization rates while navigating through trade and macro uncertainty; soft North America carpet; in Europe and China auto end markets impacting our nylon business; and continued challenging acetone industry conditions.

As Erin mentioned earlier, we anticipate an announcement of any remaining preliminary acetone antidumping duty determinations by the end of the third quarter. As for ammonium sulfate in particular, we expect typical seasonality to drive a sequential pricing decline on higher export mix as we progress into the third quarter.

We also expect to see some level of prebuy cash advances in the fourth quarter for sales planned in 2020 as its common in that business.

Operationally, no change to our planned plant turnaround scheduled for 2019, which remains in the range of $35 million to $40 million in terms of a pretax income impact, the bulk of which will occur in the fourth quarter of this year.

As for our expectations around CapEx, we anticipate full year cash outflow of approximately $150 million or the high-end of our previous range. This includes continued execution of our high-return growth and cost savings projects.

The first sizable project, our new natural gas boilers are now fully up and running which is providing immediate productivity benefits in the second half of this year. We expect our previously discussed capital-light and quality and debottlenecking projects to position us for benefits starting in the first quarter of next year.

And lastly, as I just discussed, we've indicated our expected pretax income impact in the third and fourth quarter as a result of the PES fire. In addition, we expect a onetime unfavorable impact to cash flow of $10 million to $15 million in the back half of the year as we build up our cumene buffer inventory due to a lengthening of supply chain.

Overall, we continue to assess long-term optionality for cumene supply and logistics while optimizing expected based feedstock and logistics cost increases as we realign our supply chain into 2020. Now let me turn the call back over to Erin for a brief wrap-up before moving to Q&A..

Great, Mike. Thanks. I'd like to close by highlighting our core focus areas on slide 10. While we will drive best possible outcomes and perform through end-market dynamics and transient near-term factors, we do remain focused on driving levers within our control for which we will achieve long-term value creation.

First, safe stable and sustainable operations. An essential foundation of excellence as the lowest cost producer of caprolactam globally. It's important we run in a consistent and safe way evidenced by a greater than 90% utilization rates on average through the cycle.

Our operational excellence programs and the framework for how we identify and prioritize and deploy our maintenance CapEx is critical to how we run our plant. After years of deploying this discipline, we're seeing a significant improvement in how we operate our facilities.

While there remain more to accomplish, less variability in production, quality and yield drives higher returns for the business. Second, differentiated product growth.

Although historically, this hasn't been a large driver of our business representing about 10% of our total sales, we are expecting an improved contribution from these products over the next three to five years. It's spanned across all product lines and can include high-purity applications, high-value intermediates and differentiated nylon.

On average, the gross margin of these products can be 1.5 times to 2 times our average base business margin. So clearly, an important focus for us moving forward. And finally, cash generation and deployment.

Since the spin, we generated over $400 million of operating cash flow, which has been deployed towards capital reinvestment, debt paydown and share repurchases. We are committed to delivering long-term value as we drive growth in the business consistent with the capital allocation priorities we have previously discussed.

Executing our high-return reinvestment, building out our inorganic pipeline and capabilities and returning excess cash to shareholders.

So with our focused strategies to improve underlying performance potential and our global cost advantage, we remain confident in our ability to drive shareholder value over the long-term while navigating through the year and now. So with that Adam, let's move to Q&A..

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

We'll now begin the question-and-answer session. [Operator Instructions] We'll take our first question from Charles Neivert with Cowen..

Good morning, guys. Bunch of questions let's see what we can get in.

So far has there been any help from the antidumping duties that have been levied? Have you seen any beginning of any benefit from that? Or is it still too early to tell? And do you guys expect that you'll get some? I mean assuming that it comes in it should generally raise prices over time would – is that going to be the case?.

So the duties were just announced this week. Price was fresh off the press air from that perspective. They were announced against Singapore and Spain just to reiterate.

And the notice there as a reminder Singapore and Spain did not come in and defend, right? So the duties reflected, I would say are consistent with the out – what we had put forward into ultimately the investigation. So they're reflected there.

We still have the three remaining countries we would expect to hear more on that, certainly, as we progress through the third quarter. And again, Belgium, Korea and South Africa are in that process and are defending against the petition.

So when you think about where we sit for industry pricing Charlie, we're currently seeing acetones better propylene near historical lows. Again, as you look at that chart not just on large buyer, but certainly the excess length in the market has continued to put pressure on the spot market spreads and deepening those discounts.

So we've seen large buyer spread in the prior peak at $0.14 to $0.15 per pound range, where compared to historical average in the nine range and we're well below that level today. So we can't speculate, exactly how the industry will react. But what we can share is we've seen certainly reduced imports as we've exited the quarter from that perspective.

And given the dynamics as we head into the back half the inventory still allow us to come back into a bit more of a normalized state and stabilize as we have those large consumers coming back online. And ultimately, the news percolate throughout the industry and so we still have fair amount of inventory to rework of and we'll continue to monitor.

And again that process should – completely, I would say reach resolution in about seven to nine months..

Okay. Second though you've got some thoughts involved in terms of that you have to now purchase I guess that spotter at market cumene and phenol. And I assume that a lot of these contracts that you used to have which were based on raw material cost increases or decreases that went away with the fire.

Are you going to get renewed with somebody else for the next year? That being the case, can we expect that the cost that you've outlined for the remaining part of this year will at least for the most part disappear because you'll be back in the market in the way you were prior to the fire? Although, there might be a little bit more of a logistics cost attached to it, but are we going to lose most of that?.

Yeah. So it's a good question Charlie. I think first of all, let's go back to our initial views on where we are today. So initially, we had anticipated for the third quarter the impact would be between $7 million, $12 million. We're coming in better than that.

So we continue to look to optimize all that impact 6% to 8% and now in the fourth quarter as far as we can tell 5% to 7%. So further optimization in the fourth quarter. But the important thing to note is that PES was a local supplier to us in Philadelphia.

And as a result, there was some inherent logistical and working capital benefits associated with that. So getting supply from elsewhere has an impact on logistics costs, particularly as you're going out in the Gulf, and you need to get spot vessels to bring material up. So, overall we anticipate there will be a cost increase.

But with the news, we're hearing out of PES and what we're seeing here, there's just a lot of uncertainty right now in terms of the future of PES as well as long-term supply. What I will say is we have a lot of options.

We have optionality across many different suppliers, and we're evaluating all of those, and we'll work to optimize the impact in 2020. But, inherently there are going to be incremental logistics and working capital considerations as we go forward..

Okay. I guess last question for now, I'll come back after this. But in terms of ammonium sulphate, how is volume during the course of the second quarter? I know because of weather a lot of -- there were areas certainly where it couldn't be laid down. People couldn't get into the fields.

But we've noticed from some of the fertilizer companies that they actually managed to do decent -- decent volumes. They weren't great. They weren't perfect, but they were actually pretty good.

I mean does this -- do these numbers maybe slightly beat the expectation that you thought given all the weather issues? Or whether you're okay? Or are you going to have to move more to export than you would have hoped for, because it just simply didn't go out in the spring?.

Yeah. No, great question. And maybe I can just sort of recap our experience on the 2018-2019 season as maybe that relates to the 2017-2018, because certainly there are a lot of challenges that were called out as you mentioned on timing delays and reduction in acres.

And overall, we are pleased and feel positive about our performance in 2018-2019 season in the cycle. Over the previous year, we would say volumes were more or less equivalent, right? So the material was moved out. And effectively season-to-season, we saw roughly about a 10% pricing improvement.

I think that was positive and reflected certainly as the hard work of the team and how they -- ultimately how the cycle ended here at late into the quarter. And as we kind of look forward, yes, I don't know that there's necessarily a volumetric consideration as we head into the third quarter. It's going to be more of our normal seasonality experience.

We talked about this this time last year right? As we kind of fit the two growing seasons together, and we just have that sequential consideration to take into account..

Thanks. I’ll come back and let’s some other people in. Thanks..

Okay. Thanks, Charles..

Our next question comes from Vincent Anderson with Stifel..

Yeah. Good morning. Thank you..

Good morning..

Can you talk about -- good morning -- could you talk about the buying patterns in carpet right now? We keep hearing that construction growth is seeing constraints from labor shortages even more so than spring weather and general demand.

So, I'm wondering if that's the line you're getting in your conversations with customers or maybe implied by how they're managing inventories this year..

Yeah. And if you'll, maybe allow me to -- maybe I can give a kind of a broader view on nylon, and start there to make sure that -- give you the full set of dynamics are understood.

And then, when you look at sort of third party, it's right there at reported data, the largest applications in every region, I think, had really come under slowing growth or demand contraction. That has an overall sort of global implication here.

So, textiles while they saw significant double-digit growth in 2018 in China, right, it's now seeing low single-digit growth, and now here in 2019 at least projected. Engineering plastics in Europe, which is our largest application, is also now projected to be a decline versus growth last year.

And now carpet, as you mentioned, certainly here projected to be on decline. I think it does match up with some of the macro indicators that you're watching. I think there's certainly a muted residential building environment for a number of factors. In carpet, we're also seeing lower cost polyester also becoming an increasing factor in that regard.

And as you noted several folks that have reported, in this space has seen kind of broader flooring segment across all of your aspects reporting to be down 7% to 10%.

So, I think there are a number of factors playing out in addition to sort of not just builds or slowing in muted builds, but considerations and choices as well, just sort of pressuring the overall demand. And again, carpet representing about 50%, 55% of the North America as its largest application..

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

So I think the view is that it's -- in nylon per se so there's lots of different synthetic fibers across the board. Nylon last year had quite an uptick, I think in certainly it's demand. It went into a number of things like hats and gloves. It was kind of the fiber to use. Right now we also see quite a bit of fiber inventory build.

We're seeing yarn inventory build. So I think there is consideration of depending on where you are in the chain, what's ebbing and flowing. So it certainly feels that the upstream side here back into the intermediates and the resin and the chip is seeing the impact of that decelerated growth and perhaps inventory build through the chain..

Got it. Thanks. And just a last one on the topic of the trade cases to the extent you can comment on it. South Korea's cost accounting for acetone seem to be a sticking point between the two parties involved and they claim to be in compliance with Korean GAAP accounting standards.

Do you have an impression as to whether that will carry any weight with the commerce department? Or if the department generally seeks to evaluate these cases on the basis of economic fair value versus whatever is technically allowed from an accounting standpoint?.

It's a great question and a highly technical one there, depends from what perspective. What I can share is that in these cases are complex to that point. There is quite a bit of analysis that goes into it.

They are WTO oriented regulations on how duties are ultimately constructed vis-à-vis their cost and sales are in their home countries versus what happens here to there. So it's hard to say. I think it is part of the back and forth on the additional set of questionnaires.

And we -- they have -- in this case part of the case here is that acetone is separated from phenol. You have fundamentally different incoming raw material considerations. And that is kind of at the heart of the -- I think the objection on where cost is being shifted between one output material to the other.

And we see them as separate markets, separate drivers. And so again, we'll continue to drive there. And just at the point of Singapore and Spain, those were high determinations. They were consistent with how the calculations and the allegations were in. And that ultimately, I think that was what was reflected in the preliminary number.

And so I think a reasonable indication that they feel material injury to the industry is occurring, right? And kind of a positive step in the process to restore a fair competition.

So in Korea only one right now is using that particular cost accounting process and that's part of the work that will be done here over the next couple of weeks and months by the commerce department..

Thanks. And actually if I can sneak in one more on the trade case.

Just procedurally if South Africa is unable to comply with its August 5 deadline for its additional cost data do you know -- would that be treated as it dropping its defense like Singapore and Spain chose not to defend? Or would it be able to continue to battle on other grounds?.

Again, a highly technical question there Vincent. I know that I have the answer for you other than the process is run pretty firm by dates and expectations. And so it would be -- our expectation consistent with the process that's been laid out by the Department of Commerce and the expectation that you comply..

Thank you..

Yeah..

Thank you..

Our next question comes from Chris Moore with CJS Securities..

Hey, good morning guys. Maybe just….

Good morning..

Good morning. On CapEx. So I know $150 million is kind of the expected level in fiscal year 2019. And just trying to get a sense of a normalized level moving forward.

Can you maybe just remind us of kind of the one-time expenditures this year? And what sort might be a more normal level?.

Yeah. So, good question. And what we're seeing this year Chris is, about an incremental $20 million of CapEx associated with the timing of the planned plant turnaround. So we have our large sulfuric acid plant turnaround, in the fourth quarter of this year. And next year will have a turnaround in the spring.

So because of the proximity of those two turnarounds being that close, we'll have some CapEx spend for this year for the turnaround next year. Okay? So that did it that by itself. ….

Okay..

And the scope of the equipment we're purchasing as well this year for the sulfuric acid plant, turnaround is also a consideration in that $20 million, but the bigger impact really is the proximity of the turnaround. So that's $20 million.

The other project that we're executing this year is the R&D relocation, from the Colonial Heights facility which is a shared facility with Honeywell to Chesterfield. That by itself is in the $15 million range. That will be more or less done this year, so there won't be much of an impact next year.

So factoring those two things in, what we anticipate in 2020 that our CapEx will be closer to 2018 levels. In 2018, we were right around that $110 million level. So that's what we anticipate as of today..

Got it, it's helpful. And just staying on the CapEx so it sounds like the -- on the CapEx -- the switch over to natural gas for boilers and Hopewell is online now. And the de-bottlenecking will begin in Q1 of 2020.

Can you just -- is there any way to quantify a little bit further in terms of, the benefits that you're looking from each of these on a relative basis? And any specifics you can give?.

Yeah. Sure. Yeah. So, what we've talked about in the past, Chris. And the returns we anticipate with these projects. And we'll be consistent is, as we evaluate the business cases for these different CapEx projects, we look at a 20% internal rate of return, as a threshold.

And these projects and the returns associated with them, we anticipate will be consistent with that..

Got it and last question just on the Oben Group, I mean you had talked about new product development opportunities there.

Anything you can share at this point in time?.

So right now we're highly focused on ramping up, the alliances. As I shared, we shut down that successfully and uneventfully here at the, Pottsville facility in July. So now we're transitioning the supply chain, aligning that through qualifications with our customers.

And as we get through this, the stabilization period ramping up, on the new supply chain which is going extremely well and we continue to be excited about, the prospects going forward. We'll then turn to what the opportunities are to continue to grow. And think about those.

I would say expansions to the alliance as well as the, is there R&D-oriented type efforts, so, more to come on that..

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

Sure..

Your next question comes from Bill Dezellem with Tieton Capital..

Thank you.

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

Sure. So, the remaining three countries represent roughly 79% of the import. So, we still have quite a bit of ways to go here. Maybe just to reiterate on -- the Singapore and Spain duties did exceed 100%. And as again they were -- they would be in line with what was alleged in the petition, through the calculations.

And as expected, since the suppliers in those countries did not respond, inherently the department used the inferences made against them. And took -- and resulted in high provisional duties. And again these are provisional. There's still a final determination ultimately to come.

So while we can't necessarily speculate again on what will happen because again as we were dialoguing with Vincent just a little bit earlier those duty determinations are specific to country, specific to producer and ultimately to how their dialogue and their defense goes here.

So we would expect based on the timing of the case that we'll learn more by the end of the third quarter on the remaining three. And again, just to maybe reiterate that while there's no assurance of a particular outcome against those the other two represent I would say the higher duty range as a result of their non-defense.

And ultimately, the fact that they did find a determination we think its reasonable indication that the department feels that they're in material injury at this time to the industry. And at least this is a positive sign in the step process we were taking really to restore fair competition..

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

Yes, right around midyear. And we're -- so far so good. They're running as we expect. And again we'll start getting benefits in the third quarter.

There's a little bit of costs associated with the decommissioning of our coal assets this quarter so we may not get the full run rate benefit but there will be benefits in the third quarter and we anticipate those to accrue over time..

Okay.

So the decommissioning of the coal will impact this quarter by what dollar amount?.

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

And when you said mid-year is that to assume it's approximately July 1 June 30 or somewhere in there that the....

Yes sure..

Okay. Great.

And then Q4 will be the steady-state run rate?.

That's correct..

Let's shift to PES if we could. My impression is that that plant is shutting down. But Erin you made reference to the fact that there were some conflicting reports. It was a little bit more fluid than what I had perceived it to be.

Would you talk through what you understand to be the case there?.

Sure, happy to. And when you -- there are a number of moving parts here. And I think hence Mike's comments earlier when you look at the public statements early on certainly there was indication that they were shutting down then their CEO indicated that they were shutting down with the intent for a retail and a start-up.

Most recently as last week I believe recent timing they have filed for bankruptcy. It is for restructure not liquidation. And within that petition there are statements indicating the view to restart and consider sale exploration.

So again I think our base case here is that they do not start back up right? We have a business to run and we are putting our mitigation plans in place. But to the point that Mike made certainly East Coast supply does lend itself to economic and working capital benefits. So we continue to watch it closely working in dialogue.

But we wouldn't have anything more than what is in the public domain today. And so that -- those are the data points we have..

Thank you, Erin. Let's -- for the sake of this next question assume that that PES does not come back online and never again as a supplier of yours which I understand could be -- there some upside to that argument. Let's assume that for the sake of now. The fourth quarter impact that you have highlighted in the release today is $5 million to $7 million.

Would you see that to be your normal ongoing increase in cost by not having that facility? Or as you move into Q1 two and the remainder of 2020 would you see those costs coming down even further?.

Yes. It's a good question. What I'll say is the number one priority for us is ensuring that we have security of supply and we're confident we're in a position to get supply to sustain our high utilization at our plants. So that's really number one. And number two, we're looking to optimize that going forward here into 2020.

You've seen an improvement in the impact from the third quarter to the fourth quarter. There's a lot of options we have, a lot of options we're evaluating.

But I will say into 2020 as we think about alternative supply outside the region, there will be incremental logistics costs associated with that and that's what we'll have to contend with going forward. However we're going to do our best to mitigate that impact and put ourselves in the best position while also ensuring we have security of supply.

So that's really the goal. And as we learn more we'll have updates here for the investment community. In our next earnings call we'll provide everyone with a further update as we'll have better visibility at that point..

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

That's right..

That's great. Thank you, folks.

It's a little bit early. Thank you..

We’ll take a follow-up from Charles Neivert with Cowen..

Yes, Couple of things. On the boilers you've talked about the gains that they're going to bring.

Is that strictly from the fact that they're going to be lower cost to run on the coal in terms of environmental and the cost of actual operation? Or does it bring on some level of greater efficiency to the process that might in effect increase throughput or more reliability? Or what else is -- what's coming from the boiler? What they're driving?.

Well it's really efficiency. Yes Charlie it's really efficiency and lower cost. I mean the cost to run the coal operation; the cost of coal itself is inherently high. You could see the prices of natural gas out there. And the boilers are new technology as well. So very efficient.

So it's s-- strictly -- it's not going to impact throughput per se it's really going to impact cost and efficiency..

Okay.

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

Yes. So we do -- we look at a variety of ways to purchase a natural gas. In some cases, we'll have longer-term agreements on purchases of natural gas. In other cases, we -- our costs will fluctuate with NYMEX.

What we look to do ultimately is to procure natural gas at the lowest possible cost we can to whatever strategy we deploy going forward to make sure we're running the plant on a consistent basis.

From a hedging perspective, we evaluate hedges like anything else depending on where the price in NYMEX is going and what the outlook is and evaluating supply and demand. We'll evaluate that on a case-by-case basis. And there are times where we may hedge here and there, but it's more opportunistic at this point..

And then last question same on the gas again just your -- clearly a delivered price to the plant is going to be a little bit different than NYMEX or whatever hub you're working off of.

I mean, about round numbers, what's the premium over a NYMEX number that you typically have seen? So if NYMEX now is trading around 2.15%, I mean you guys tend to be $0.50 because of delivery $0.75. I mean what's the range we're --.

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

Okay. And last question.

Has there been any mix shift benefit on nylon? As carpets eased off, I mean, have other things taken on some of the volume in that bigger higher-margin businesses?.

Yes. So what we can share in, as you would -- might expect, Charlie, right, our sales-type efforts are going to be focused in and around the engineering plastics and packaging space. And there are growth areas here in North America and globally. And those are providing and enabling the offsets and growth opportunities as you would expect. So --.

Okay. Thanks very much..

Thank you..

Thanks, Charlie..

We'll take our next question from Bill Dezellem from Tieton Capital..

Hello. Thank you. Actually just wanted to follow-up on last question relative to natural gas and the boiler.

What was the NYMEX price that you were assuming in your calculation to determine whether this was a good project or not?.

As we evaluate the project in making those investments, right, we develop a model that has a number of scenarios around it, with different -- so I wouldn't say that would lock in a specific price.

We look at different scenarios and through that determine that, in a number of scenarios relative to our coal operation, this is a project that adds value that provides a return to us. So I wouldn't necessarily disclose the specific -- a specific price.

But all in all we feel very good that this project is going to provide a return, consistent with what we've said previously around that 20% internal rate of return. And so far, we're seeing the benefits from it..

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

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

Thank you..

Thank you. .

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

Great. Thank you all again for your time, interest and great questions this morning. Our results this quarter, again, demonstrated the strength of our business model. And while there are puts and takes across our end markets and broader macro uncertainty, we are focused on executing what is in our control.

We continue to maintain our focus on operational, commercial and functional excellent strategies, higher-value product mix and smart disciplined capital deployment. I'm excited for what we can accomplish for all of our key stakeholders over the remainder of 2019 and beyond. We look forward to speaking with you again next quarter..

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