Good day, and welcome to the AdvanSix second quarter 2018 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Adam Kressel, Director of Investor Relations. Please go ahead.

Thank you, Steven. Good morning. And welcome to AdvanSix's second 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 Web site 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. This morning, we'll review our financial results for the second quarter 2018 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 joining us once again and for your continued interest in AdvanSix. As you saw on our press release, AdvanSix delivered another strong quarter, capping off a dynamic first half of 2018. Our results demonstrated the strength of our business model and our ability to perform in what has been a rising input and energy environment. We saw strong results across a number of metrics, including sales volume, income and operating cash flow. Mike will detail the full results, but I'd like to highlight the following. Sales were $400 million, an increase of 11% with higher volume and raw material pass-through pricing, contributing to the improvement year-over-year. Earnings per share was $0.91 in the quarter, up 10%, and our cash generation continued to improve with cash flow operations increasing 12%. In addition, we've initiated share purchases in June, reflecting our maturing capital allocation strategy and confidence in continued cash flow generation. Through July, we've purchased 195,000 shares for approximately $7.5 million. Our end markets remain dynamic. In this quarter, we did continue to see favorable supply and demand environment. Global caprolactam and nylon pricing is favorably supported by generally balanced to tight supply demand dynamics in North America and Europe as well, with continued supply side constraints in China. We expect the current favorable nylon industry conditions to continue as we move into the second half of the year. In ammonium phosphate, we executed on the strong domestic demand we saw in the quarter, following a late start to the planting season. The fertilizer market environment in general has improved and new season fill pricing is expected to be up about 10% year-over-year. However, we do expect the typical seasonality to driving normal sequential pricing decline in the third quarter. As to…

Okay. Thanks, Erin. And good morning, everyone. I'm now on slide four where I'll cover the second quarter financial results. Sales came in at $400 million, and that's up about 11% compared to last year. Volume was up 4%, with continued high plant utilization rates and increases across our ammonium sulfate, chemical intermediates and nylon product lines. Pricing was favorable by 7% due to raw material pass-through pricing, following cost increases in benzene and propylene, which are oil derivatives and inputs to our key feedstock cumene, as we've previously shared. Market-based pricing was approximately flat compared to the prior-year. We saw the pricing benefit of improved industry supply and demand dynamics in our nylon and ammonium sulfate product lines, offset by the unfavorable impact of elevated North America acetone imports on our chemical intermediates product line. EBITDA of $53 million decreased $1.7 million versus the prior year, driven primarily by increased manufacturing costs, including purchases of feedstocks which we normally manufacture ourselves, partially offset by the favorable impact of higher sales volume. As we will discuss further in a moment, Hopewell plant utilization rates in the quarter were very strong and we continue to benefit from our investments in proactive maintenance and reliability programs. The impact of our planned plant turnaround this quarter was in line with expectations of roughly $10 million. EBITDA margin of 13.2% declined 190 points from last year, primarily due to the impact of higher raw material pass-through pricing and increased manufacturing cost just discussed, partially offset by higher sales volume. As a reminder, roughly 50% of our total revenue base is protected by formula and index-based pricing agreements. So, our sale will fluctuate with the price of the raw materials, but our variable margin is largely protected. As you look at items below EBITDA, they…

Great. Thanks, Mike. I'm now on slide five to discuss our nylon product line, which includes our caprolactam, resin and films products, and represented over 45% of our sales in the second quarter. As you can see from the chart on the right-hand side of the page, industry spreads reflect improved conditions globally year-over-year. As we've discussed previously, there were a number of planned and unplanned plant outages in the first half of 2018, which has kept global supply snug and supported industry spreads. We continue to see generally downwards to tighter supply conditions across North America and Europe. In China, feedstock constraints, a heavy turnaround schedule, and continued government-imposed environmental constraints are driving supply-side dynamics. In addition, we are now monitoring a fresh round of inspections recently announced as part of a three-year anti-pollution plan that includes potential relocation of new and existing plants from populated areas to designated chemical industry parks. Numerous sectors beyond just our value chain has been impacted by this government focus. So, while we do continue to track potential capacity additions in the region, this seems to be balanced against continued lower utilization and other impacts associated with these environmental controls. So, despite the market being structurally long, overall, global and nylon industry spreads have held up and shown stability throughout the year. As we look toward the second half of 2018, the current favorable nylon industry conditions are expected to continue. Our downstream indicators are showing nylon end market demand is remaining healthy across the various applications we serve. And we've also seen severely constrained Nylon 66 supplies associated with feedstock and other production shortages. So, as a result of the end market growth, increased pricing and supply constraints, this can create a modest substitution opportunity for Nylon 6 in areas such as…

Okay. Thanks, Erin. I'm now on slide nine. And as we've previously shown the chart on the left-hand side of the page shows our plant production rates on an annualized basis. Although our total utilization across the asset base in the second quarter, wasn't as robust as the near-record levels set last year, production did increase roughly 3% over our historical average. Importantly, the performance at our Hopewell site this quarter modestly improved on the upper 90% utilization that we saw in the second quarter of 2017. So, that's further proof that our maintenance and mechanical integrity programs are providing benefits both for the near-term and also over the long-term. We are mitigating risk across our operations through our asset risk matrices and reliability control plans. These programs are in place to monitor critical assets and drive improved uptime and output. Our culture of continuous improvement also plays an integral role in that success. Our detailed turnaround programs are also an important element of our operational performance. We've implemented dedicated teams assigned to continue improving the effectiveness of our plant turnaround efforts from the start of the planting process through the restart of the asset. As Erin mentioned earlier, we are concluding our 2018 plant turnaround schedule in the third quarter. We expect a $25 million to $28 million impact to pretax income in the quarter. In this particular turnaround, given the unplanned weather event from the first quarter and the shift in timing of activities throughout the year, we're seeing a higher portion of the total impact related to purchases of feedstocks that we normally produce ourselves. Most notably, that would include ammonia purchases that allow us to continue running our plants at relatively high utilization rates even during the turnaround efforts. Our leading cost advantage position supports these…

All right. Thanks, Mike. And, Stephen, if you can open the line for Q&A.

Thank you. [Operator Instructions]. And our first question comes from Charles Neivert with Cowen. Please go ahead.

In looking at nylon, you talked about the Nylon 66 situation and how tight that's gotten. Can you talk a little bit about the typical gap between Nylon 6 and Nylon 66 pricing and where it is today. Have they expanded significantly? And have you guys gotten at least the beginnings of some inquiries about customers who might be switching out or using more 6 instead of 66 in that regard, to get some picture about how things might progress over the next couple of quarters?

Great question, Charles. So, maybe to help frame it a bit to start, when you look at the total polyamide marketplace, so 66 and 6, the first part, what we want everybody just kind of understand is, PA 66 is about 60% smaller, right, than the PA 6 market. When you look across the application space, our estimates is we've kind of tried to triangulate with third-party experts here. We've adjusted about 15%, maybe upwards of 20% are in application areas where 6 could substitute for those 66 type of applications. So, that kind of frames where you can think about the focus is in. And again, it's probably in the engineering plastics arena, plus some maybe industrial yarn. When you look at where pricing has gone, we now see pricing nearly – 45% to 60% higher in the US for 66 and 6, as high as maybe 70% in Europe as it pertained to some of the local considerations. This has been a tough year for that marketplace with force majeures and constraints. So, certainly, I think folks are looking. We have had increase, I would say. We've had one customer – we typically in a compounding arena already convert one project. But as you can imagine, as you think about, having to spec these in down to OEMs, there is some time that it would take. But I think it's a fair perhaps hypothesis that folks may be actively working through the substitution, particularly just given what the long-term constraints, at least over the next several quarters.

Yeah. And then, barring – even if there is no substitution, given that the gap has opened up between the two, something that's normally much smaller, definitely always 66 at premium, is there any opportunity just to raise prices in certain – I know certain contracts might preclude it, but there are others that might allow for some price movement that might not have otherwise been available. Do you think that's something that might be coming at you guys or is already being seen at all?

Well, I think when you look at, again, just the price differential of the markets and the length that exists in Nylon 6 versus 66 in general, I think everyone is always looking at pricing. There is probably more to do with regional dynamics in the 6 side of the world. Certainly, there are raw material oriented pricing moves. We're seeing moves associated with higher logistics, costs that are in fighting [ph] moves on prices well. We'll stay focused certainly on the value-added applications to ensure that we're staying ahead there. Nylon 6 imports have increased this year into the US. So, I think when you look at threads here versus regional considerations, there's always a factor as well, as we've been discussing over time as to how the regions can actually perform.

Okay. And then, one last on a different subject. You're beginning to start to spend on the project pipeline. Based on – and $20 million to $30 million is this year and then I assume there is some flow over into next year on the projects that you're currently going to go to work on. Can you bracket at all what those might be ultimately worth to the company going forward? $20 million to $30 million is going to bring – or whatever the total number will be is going to – is from projects that might be worth how much?

Yeah. So, the way we think about these things as we evaluate moving forward and funding growth and cost savings projects, as we talked about in the past, we look at hurdle rates of sort of a 20% internal rate of return. And so, those are the kind of returns we expect to see going forward associated with those investments. Those investments will carry through. We have $20 million to $30 million this year. We'll probably have another carryover of, call it, $20 million to $30 million in 2019. As we conclude those projects in the first half of the year, you'll start seeing benefits in the second half of the year and then you'll start seeing full-year benefits as you get into 2020.

Got it. So, these are basically – these are going to take typically months to complete, obviously, not quite –

Along with our business and the type of investments and the capital-intensive nature of them, also tying them to turnarounds as well, and the engineering and a lot of these sort of upfront work we need to do, they typically take 18 months to 2 years to execute.

Got it. So, you're getting into the physical work. So, that's – you've already done the front-end of it, meaning all the paperwork. Okay.

That's correct. Yes.

Okay, thanks very much.

Okay.

No, thank you.

[Operator Instructions]. And our next question comes from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning. Start on the plant turnaround. So, just want to make sure I understand the numbers, so you had talked about kind of the total impact for the year being $30 million to $35 million. It's $10 million impact from Frankfurt in Q2. Q3 is $25 million to $28 million.

That's right.

So, that $30 million to $35 million, is that expanding a little bit or is it more –

Yeah. That is correct. And if you recall, Chris, when we talked the weather impact in the first quarter and then sort of the impact to our operations there, we used that as an opportunity to pull forward some spend in the first quarter too and execute some of the plant turnaround in the first quarter. So, there's a couple of million impact there. So, when you look at those numbers, you look at sort of the full-year range, sort of about that $37 million to $40 million estimate now on a full year basis, which is well above our original guidance in terms of that range. And really, when it comes to it, it really comes down primarily to purchases of some of the feedstocks that we normally make, particularly ammonia, which are increasing not only to support the high throughput of our capital plan going forward, but also we've seen the pricing of ammonia increase as well. So, with that impact, that has sort of increased the range.

Got it. Thanks. That helps. On acetone, maybe, Erin, you just talked a little bit. Kind of the belief is that the North American imports will begin to level off. Kind of talk about the assumption behind that, why do you think that will happen.

So, certainly, that comment is going to be based on what we've seen over the last several months, right? So, maybe as we've talked about this at last call, right, we had seen imports coming in through trading activity, quite candidly, that were sort of a multiple over what the North American market needs, right? So, the North America market has moved into a net import position. So, we do need to have inflows, but there was some aggressive, I would say, moves on trying to get more material in, into what was seen as a favorable regional environment. That has leveled off over the last, I would say, three or so months, right, with normal inflows coming in as expected to what we structurally need. Coupled with this, we've got a propylene consideration as well that is influencing the variable margin that's coming from the product line as well. With propylene being tight here in the US, that's moved up cost. And we've also seen Asia propylene move down in what is more of a lengthy environment there. So, that's created some interim considerations as well relative to that. I think in any case, where there are imbalances, it takes time to flush through sort of global trade flows. And, again, I think we're seeing the signs that – at least over the last several months that we're getting to there. And now, we have this consideration of – that length also pressuring that of the – compounding what is the propylene consideration as well.

Got it. Just remind me in terms of – on the formula-based side, my understanding was roughly half of your sales kind of formula indexed pricing, about two thirds on the nylon and about half of the chemical intermediates, is that right?

It's a half to two-thirds depending on the mix. Certainly on the phenyl side, you have a benzene influence. And then, on the acetone side, you have – it's a propylene, but it's also indicated through indices, right? So, when we put up the large buyer indices, pricing may go through that, which has an implication to how propylene goes, but not necessarily a one-to-one.

Got it. All right. I appreciate it.

Thank you.

[Operator Instructions]. And our next question comes from Jed Nussdorf with Soapstone Capital. Please go ahead.

Hi, Erin. Quick question for you on the acetone business, just to follow-up there. I know with Shell idling the Deer Park facility, I guess, earlier this year, there was some thought that the market would tighten as a result. What have you seen particularly in the Gulf Coast as it relates to pricing there? And have the imports changed the mix from what you would've expected, given the idling of that facility?

So, as you maybe kind of elaborate a bit more, right, so from a net import position, if you go back through last year, prior to the shutdown, again, you look at import statistics, I would say, you were kind of in and around the range of maybe to 12 to 18 [ph] coming in to match that monthly import demand. When Deer Park shutdown the one line, inherently, that meant we needed more to come in because the US market has continued to be robust from a demand perspective. So, that would have had to increase maybe closer to, I don't know, 17-ish, maybe 20, depending on how things are moving out. So, we needed more. But when you look at what happened really late December into January, even to March, traders brought in, I would say, a multiple of that need. It would then create a situation where that had to flow through the market. Some have been re-exported, but certainly it came here in a position that has pressured price here in the first half. And so, again, I think to the notion that – structurally, this should rebalance. There's new phenyl plants that are coming onstream, that have come onstream that are lining that out. Phenyl demand, as we've said, has been extremely robust on the epoxy and polycarbonate and even global nylon side. So, it's just a matter of rebalancing where the acetone goes into to set those dynamics. But we have seen the pressure as indicated in the chart. Certainly, the large buyer settlements have not kept up, both on the propylene as a result of this length and – and, again, I think it's just a bit more time, right? It's hard to have the crystal ball to say when do we reach a point of more structural stability.

[Operator Instructions]. I'm showing no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Erin Kane for any closing remarks.

Well, great. Thanks again for everyone's time and interest this morning and for the good dialogue here in the Q&A. Again, our results this quarter, we believe, again, demonstrates the strength of our business model. We have a focused strategy that we're executing against, built on our rigorous commitment to operational excellence, continuous enhancement of our long-term growth capabilities and making smart investments in the business to drive higher returns. While there are some puts and takes across our end markets, we are focusing on executing what is in our control and driving best possible outcomes. Our vertical integration and global cost advantage position continue to give us the confidence and flexibility to drive value creation over the long-term. And we look forward to speaking to you again next quarter. Thank you.

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