AdvanSix Inc. (ASIX) Q1 2017 Earnings Report, Transcript and Summary

Good day. And welcome to the AdvanSix First Quarter 2017 Earnings Conference Call. All participants will be 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, Ryan. Good morning. And welcome to AdvanSix’s first quarter 2017 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, using the number six in the Web address. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our business as we see it today. Those elements can change and the actual results could differ materially from those projected, and we ask that you consider them in that light. We refer you to the forward-looking statements included in our press release and earnings presentation. In addition we identify the principal risks and uncertainties that affect our performance in our SEC filings, including our Annual Report on Form 10-K. This morning, we will review our financial results for the first quarter 2017, and share with you our outlook for our key product lines and end markets. Finally, we will 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 this morning and for your interest in AdvanSix. As you saw in our press release, AdvanSix delivered a strong quarter to kick-off 2017. It was a terrific start to the year, highlighted by increased production output and sales across all of our key manufacturing sites. Mike will detail the full results in a moment, but we generated over $57 million of EBITDA in the quarter, a significant increase from the prior year, particularly when you adjust for the $15.5 million one-time benefit we recognized in the first quarter of 2016. We generated $30 million of operating cash flow and our free cash flow increased nearly $19 million from the prior year period. Sales for the quarter were $377 million with both higher pricing and volume contributing to improvement year-over-year. Our manufacturing sites have been running strong year-to-date and I’m pleased to report that our annual Frankford turnaround is already complete with the team executing safely and efficiently. In addition, we’re more than half way through our second quarter Hopewell turnaround, which is progressing as planned. There are number of exciting things happening across the Company that I’d like to briefly touch on. In April, we were among a number of honoraries recognized by CSX Corporation with their annual chemical safety excellence award. This recognition is a worry to customers who ship more than 600 carloads of hazardous materials during the year without a release to the controllable factors, and acknowledges our commitment to safe rail loading and shipping procedures. As we’ve discussed before, health safety and environmental performance remains a top priority as it correlates with operational discipline and results. We have a relentless focus on safety and continuously look for ways to reduce risks across our supply chain. Also, in April, at the European Coatings Show in Germany, we announced the launch of our EZ-Blox anti-skinning agent, an innovative and customer-tested solution now available globally to optimize the performance of alkyd-based paint. EZ-Blox is becoming more widely adopted in paints and coatings as a safe and cost effective drop and replacement to meet future environmental regulations. As we look across our product lines, the global end market landscape remains dynamics. Nylon and Intermediates pricing are currently being supported by a tightened supply and demand environment as well as higher raw material costs. While the ammonium sulfate fertilizer prices remained stable sequentially but down on a year-over-year basis. We do continue to expect challenging nitrogen fertilizer fundamentals throughout 2017. The first half and I think we provided in our last earnings call remains intact with improved plant production underscoring puts and takes across our product lines. The momentum of the first quarter will serve us well and we remain confident in our ability to drive improved performance. This quarter also demonstrates the strength and value proposition in our operational leverage. Our vertical integration and global cost advantage position gives us the confidence and flexibility to manage through uncertainty in the macro environment. Our process initiatives will help us to continue improving our operations and we remain focused on key growth oriented investments, targeting higher value products and application development. Finally, we continue to progress as a standalone company and have a sound foundation for continued margin expansion and cash flow improvement over the long-term. So with that, I’ll turn it over to Mike to discuss the details of the quarter.

Thanks, Erin, and good morning, everyone. I’m now on slide four where I will cover the first quarter financial results. As Erin indicated, it’s been really a terrific start to the year. Sales came in at $377 million and that's up 26% compared to last year. Pricing was really the big driver of the top-line, increasing 22% overall, and that included a 19% benefit from a pass through of higher raw material costs. The remaining 3% was market based pricing. Now as a reminder, prices for our end products typically track a spread over the underlying raw material costs benzene and propylene are both inputs to cumene, which is a key feedstock material for our products. With both of these inputs increasing significantly year-over-year, tracking really close to the underlying price of oil. Our sales in the first quarter also increased significantly. Now when we look at look market based pricing again that was higher compared to the prior year. We saw a tighter industry supply conditions with steady demand in our nylon caprolactam and chemical intermediates product lines. This was partially offset by a modest decline in ammonium sulfate pricing. We also had a very strong quarter operationally volume was up 4% in the quarter with high utilization rates at our manufacturing sites. Our product and mechanical integrity program and the reliability improvements are really making a difference and we are seeing them payoff. EBITDA of $57 million in the quarter increased roughly $4 million from $53 million in the prior year, primarily due to improved production and sales volume and the favorable impact of market based pricing. This was partially offset by the $15.5 million impact from the termination of a long-term supply agreement in the first quarter of 2016. Excluding this prior year one-time benefit, EBITDA increased 51% and EBITDA margin extended 260 basis points to 15.2%. Items below EBITDA were as expected, depreciation increased by about $1.5 million compared to last year, driven by a broad scope of capital investments in repair maintenance and health safety and environmental, while interest expense also increased by a similar amount. Our diluted share count for the quarter was approximately 30.9 million shares. Now keep in mind, basic and diluted EPS for all periods prior to the spin off reflect a number of shares that were distributed as of the spin or roughly 30.5 million as no common stock was outstanding prior to the dates of the spinoff. Earnings per share of $0.88 in the first quarter of 2017 declined from $0.90 per share in the prior year period, taking the prior year benefit we just discussed into consideration here. EPS would have increased significantly or in line with the EBITDA growth we saw year-over-year. Now finally free cash flow improved almost $19 million from the prior year despite higher CapEx. There were some linearity considerations in the quarter related to cash generation, following the seasonally strong fourth quarter. Sales were up about $170 million compared to the fourth quarter of 2016, so receivables increased in the quarter and were drag on cash. Now, it's important to point out that receivable pass dues remained in the low-single digit, so we really had no collection issues to speak of. Building finished goods inventories was also a focus in the quarter, following the fourth quarter turnaround and extended outages. First quarter is also typically a lower cash flow quarter due to the seasonal ammonium sulfate pre-buy program in the fourth quarter, as well as heavier disbursements tied to an elevated level of CapEx commitments in the quarter. Overall, cash flow generation is improving and we continue to manage working capital levels efficiently. We will discuss more on an upcoming slide. Let me turn the call back over to Erin to discuss what we’re seeing in terms of each of our product lines.

Thanks Mike. I’m now on slide five to discuss our nylon product line, which includes our caprolactam, resin, and film products, and represented approximately 50% of our total sales in the quarter. And as a reminder, the chart on the right side of the page depicts the Asia benzene to caprolactam spreads, and caprolactam to resin spreads based on third-party data sourced from Tecnon OrbiChem. The caprolactam price reflected reflects the Asia import contract, particularly for those countries in Taiwan and South Korea. As Asia is a net importing region of the world, representing about 50% of global nylon demand, its performance is a key macro indicator for the industry and why we reference as key trends. However, we do note the supply and demand fundamentals are becoming more regionalized. In China, where a majority of the capacity expansions in the industry has been added over the last two years, is operating towards their own self efficiency. Utilization rates in the region remains low for majority of the first quarter on the back of planned outages available to keep feedstock materials and government imposed environmental constraint. So with the volatility in supply and demand fundamentals in the country, we’ve recently seen significant smooth in China pricing and spreads. We would note that due to active antidumping duties, our participation in Chinese market is limited to the re-export sales. In the U.S. where we primarily sell, industry supply and demand has become more into balance given the capacity rationalization that we saw near the end of 2016. Rising raw material costs and tighter supply conditions supported increased pricing in the quarter. And then in Europe, they’ve also seen a tightened supply environment with several unplanned and planned outages that have been well carry into the second quarter. With these regional considerations, the global price increases that began in December 2016 were sustained into the first quarter of 2017, on the back of higher benzene prices and tighter supply and demand. So as you note, the Asia caprolactam import price raw spread or benzene to caprolactam spreads, tracked by the market, essentially doubled in the first quarter on a year-over-year basis and increased over 45% sequentially from the fourth quarter 2016. Pricing rose to the levels we would associate with marginal producer economics. During the same period, the Asia-based resin spread of our caprolactam remained setting, tracking the underlying improvement in the key feedstock, which we expect to continue. While we continue to see these recent levels and improved performance through the second quarter with firm near-term demand and tighter supply, we are cautious on the second half and are monitoring those additional planned start-ups that we spoke of earlier. Let’s turn to slide six. moving to ammonium sulfate, which represented nearly 20% of our total sales in the quarter. We have seen this market remain challenging despite some Q4 to Q1 sequential pricing improvements in nitrogen fertilizers. The graph on the right hand side plots urea and ammonium sulfate retail pricing on a nutrient basis. It is important to normalize pricing as urea contains 46% nitrogen, whereas ammonium sulfate contains 21%. As a reminder, our ammonium sulfate product disposition at a premium over urea due to the value proposition of sulfur nutrition on increasing yields of key crops. Based on the data from Blue Johnson we saw corn-belt granular ammonium sulfate prices in the industry decline nearly 10% year-over-year in the first quarter, though improved about 10% sequentially from the fourth quarter 2016. As for corn-belt urea, prices saw a similar trend and modest decline year-over-year and an approximately 10% increase sequentially as well. The supply demand environment for nitrogen fertilizers remained pressured with urea, the largest nitrogen fertilizer consumed, having an underlying influence on all other nitrogen nutrient products. We’re seeing the supply increase in urea from U.S. capacity expansions, reduced both the amount of imports required to the country but also influencing current market pricing. Based on the USGA planning forecast, we would expect nitrogen consumption to be lower in the U.S. this season with the planted acres for corn and wheat, the largest of the nitrogen crop, down modestly versus the prior year. Weather, particularly storms and rain hitting the major crop growing sections of the Midwest, have also contributed to a slow start to the planting in the heart of the corn-belt. We've also continue to see cautious buying behavior through the value chain down to the grower as U.S. farmer income in crop futures remain challenged. As we look towards the remainder of 2017, we'll need to see improvement in these underlying fundamentals to realize pricing expansion year-over-year. Let's turn to slide seven for a brief update on chemical intermediates. Our chemical intermediates business, which represented about 30% of our total sales, provides revenue diversifications from the variety of co-products we sale. On the chart on the right hand side of the page we’ve shown prices for refinery grade propylene and acetone based on third party data sourced from IHS Markit. Acetone as you may recall represents roughly half of our intermediate sales, and as a reminder is made through our phenol process. Acetone prices will move with their own supply demand dynamics, which we expect to come more into balance in the second half of 2017, but can also be influenced by the underlying moves in propylene prices. Input prices of propylene significantly increased in the first quarter of 2017 after dropping at the end of 2016. In addition, acetone supply in the market remains tight, given the Spring turnarounds at competitors and our own turnaround at Frankford, which is I mentioned earlier, was completed as planned. On the demand side, we continue to see strength particularly in MMA, or methyl methacrylate and solvent end uses for acetone as well as for phenolic resins on the phenol side. Our intermediate products are used as key inputs for a variety of end products, including construction materials, paints and coatings and others industrial consumer applications. Overall, we will characterize the current environment in North America as stable and we'll continue to fully utilize each unit operation of our broader supply chain to maximize value. Let's move to slide eight. As you can see from this chart and to get a sense of the underlying improvement, our planned production rates on an annualized basis have continued to increase, both for the first nine months of 2016 prior to our fourth quarter turnaround, as well as through the first quarter of 2017 compared to the average we have seen over the prior four years. As we've discussed, our manufacturing assets are highly integrated to ensuring stable production and cost operations is critical. Our operational excellence and detailed turnaround programs are at the forefront of driving that success. These initiatives are key to safe, sustainable and improved operations. Our maintenance capital investments, which we targeted on annual basis at approximately $2 million of our total estimated repricing value, help to drive more stable production and in turn allow for optimal utilization of our plans. Thus, variation on daily production rates enables upside and drives higher returns. In addition, we started our critical equipment initiatives back in 2012, which identified key assets throughout the Hopewell site that are critical to sustaining our long-term reliable supply position. We are more than three quarters of the way complete with this initiative that we believe will continue to position at AdvanSix as a leading cost advantage producer for improved operational output and financial performance. For 2017, we expect improved production rates across all three of all our manufacturing sites. At Hopewell we expect production rates to be inline or better than the utilization we’ve seen historically. The strong production rates and results in the first quarter is a great example of why our turnaround and mechanical integrity program, which have been maturing for several years now, are key components for our operational excellence. We are in the midst of completing our Spring turnaround and Hopewell, while our annual Frankford turnaround was executed on plan, as I mentioned before with zero safety reportable. Our fall turnaround in Hopewell is scheduled for the fourth quarter. For the full year 2017, we do expect an approximately $30 million to $35 million impact to pretax income from planned turnarounds across all of our manufacturing sites in total. Let me now turn the call back to Mike to wrap up before we open the call for Q&A.

Okay. Thanks Erin and now on slide nine for those following on the phone here. We’d like to spend a little more time on cash flow, particularly on the quarterly and annual drivers and our priorities in terms of uses of cash. And if you look at the left hand of the slide, it shows our cash flow from operations and CapEx on a trailing 12-month basis through the first quarter of 2017. And as you can see, we’ve maintained an improving trend in cash generation, while capital investments have remained relatively steady. We have several levers to drive higher cash flow. First of all, focus on driving increased earnings. And the first quarter is really a great example of this as improved plan production rates and safe stable operations generate higher returns for our business. Given our low-cost position in the industry and value of key co-products, we are also highly focused on optimizing our product and geographic mix to drive higher profitability. Our business is also very strong as it relates to working capital performance. On average, we see about 20 turns and drive our performance on a monthly basis. Working capital performance is a reflection of our strong fundamental sales inventory and operations planning processes. And managing our own cash as a standalone company allows us flexibility to continue to drive improvements. There are also a number of linearity considerations on a quarter-to-quarter basis. We will have planned maintenance turnarounds throughout the year across our manufacturing sites as we’ve previously discussed. The timing and scope of these turnarounds will vary but the impact of the inventory builds and drawdowns will impact the timing of our cash generation. In the fourth quarter of each year, it is common to see pre-buy advances for ammonium sulfate. These will cover some domestic sales through the first half of the following year. So there were some timing differences between our sales and cash inflow. For example, in the first quarter, we saw $6 million reduction in advances as we ship orders against cash receipts received in the fourth quarter 2016. There are also some timing considerations as it relates to our capital expenditures. We typically implement a majority of our CapEx during turnarounds. However, our average payment terms can extend well beyond 30 days. Therefore, the cash outflow may span over a different quarter than the actual deployment of that committed capital. As we think about cash deployment, our focus remains on generating robust cash flow with disciplined reinvestment in the business while maintaining optionality in the early days of our Company. We will have required debt payments over the next 4.5 years. In total, we’re required to pay down roughly $90 million or one-third of our term loan over the next 4.5 years. Now, as a reminder, we do to had any requirements until the first quarter of 2018 as we paid our first mandatory payment in the fourth quarter of 2016 one year earlier than required. We also plan to make approximately $20 million of pension contributions in 2017 to satisfy funding requirements of our defined benefit plan. This will reduce required contributions in future periods to satisfy funding requirements and provide us with flexibility. We expect future contributions to be more consistent with our annual expense in roughly the $7 million to $10 million. And so far we’ve made contributions to the plan of $2.2 million in January of this year and an incremental $1.6 million in April. In addition, we plan to spend approximately 2% of our estimated six times of replacement value in the form of repair maintenance CapEx on an annual basis. With approximately $3 billion in replacement value across our asset base, that equates to approximately $55 million to $65 million of CapEx annually. Now this spend is critical and has been bench marked against others in the industry. Driving a proactive approach to mechanical integrity is a key to our operational leverage. And as a low cost leader, we can run our plants at high utilization rates. We are also nearing the end of our mandated investments in NOx control systems, which will be completed in 2018. At which point, base health safety and environmental CapEx should be in the $8 million to $10 million range. Next, we see plenty of opportunities for incremental deployment beyond debt repayment and maintenance CapEx, and we've prioritized organic growth investments in the form of high return CapEx. We set a hurdle rate of 20% plus IRR and have healthy pipeline of growth opportunities that will improve things like plant buffers, further streamline our operations, improve quality improve our mix and also just generally, our cost position. Our investments in new product and application development will target higher value end usage and enable us to produce products that meet customer needs. Examples include our EZ-Blox product, which Erin discussed earlier and our copolymer investments for packaging and engineered plastics. Over the longer term, we will consider value generating M&A to build on AdvanSix's core strengths. As a standalone Company, we now have the ability to assess potential bolt-on acquisitions that will be core and logical extensions to what we know and do today. There are opportunities across the landscape of each of our product lines where we could broaden our customer base, expand our geographic reach and enhance our technology portfolio. So overall, I would characterize our allocation strategy as a disciplined framework with the prioritization of organic growth investments driving higher returns while maintaining adequate liquidity for the business in building drypowder capacity. Now let's turn to slide 10 for a brief summary. As everyone could see, we are very pleased with the first quarter results, highlighted by improved sales, earnings and cash flow. Production output increased across all of our key manufacturing sites and made a tighten supply and demand environment, driving the strong performance. We are very excited by the opportunities ahead of us and the entire organization is highly focused on driving safe and sustainable operations while delivering strong results. Coupled with our disciplined capital allocation framework, we expect to drive continued share and value over the long-term. Now with that Adam, let's move to Q&A.

Thanks Mike. Ryan, can you please open the line for Q&A?

We will now begin the question-and-answer session [Operator Instructions]. And first question today comes from Chris Moore with CJS Securities. Please go ahead.

Can we start maybe on the pricing spreads for now, and the regionalized pricing, it sounds like that's becoming more and more the case. Is that likely to continue in the future, or is this kind of one-time paying with China kind of -- I know that’s not from an import standpoint kind of self-sufficient. But trying to understand some of the confusion with the China pricing and the Asia pricing?

I think we'd wanted to think about it Chris on that standpoint and certainly the China pricing is going to move on there -- their internal dynamics, right. But that does have, some correlation, we’ll have an influence obviously with where the incremental pounds then clear into the Asia pricing. So China again and without self efficiency and drive towards that, what we’re seeing now and I think if you can think about the cost curve as I described it to others, when we see globally, if you can envision that China costs curve coming out of the global costs curve and what you then have is a much steeper rest of world cost curves. So when you look at the Asian pricing, again, you can see that pricing can move pretty quickly on supply demand fundamentals; and in this case as we saw through the last several months and coming into Q2; is that tightened supply environment will move pricing up outside of China at a different rate and pace and perhaps what will happen internal to China. And I think the regional nature of the trade flows is changing overtime and something we’re watching pretty closely. But we are cautious overtime, because as you know, materials cancel and that we’re always have to be of U.S. to what that ultimate trade will be between regions based on again the molten capacity environments of Europe and North America and how they operate. But that will also create a window where and how far those spreads can go.

In terms of the tight supply that you saw, I know that, they were two fiber your plant outages that were we believe significant. Were there other issues that were driving the tight supply?

So the other, I think, announcement that has been public there was a fire at Kuibyshev in Russia that happened in the quarter as well, that was unplanned. And I think so you have for the combination of a number of factors that really came together at the same time.

And in terms of -- looks like the outlook for the second half of ’17 is you’re cautious on pricing. Is that just because you see more capacity coming in line and anything else behind that?

I think it's just a matter of, again, you can see how quickly the dynamics moved based on the current environment, both with unplanned outages but then also there are series of planned outages globally now happening throughout the Spring, including our own. So I think as we just -- as those kind of find and we move into Q3, we’re just cautious to see how that plays out, and then of course watching what could be up to potentially 100,000 tons of capacity as we talked about previously, and China still to come on as well.

[Operator Instructions] And our next question comes from [Charles Nyberg] with Cowen. Please go ahead.

On the turnarounds that you’re completing, I mean basically, you’re going through pretty much the entire Company’s facilities. What’s the frequency on the significant turnarounds that you’re doing now? I mean are there every three years, four years, what’s the norm?

They’re going to vary, as you can imagine, Charles, based on the number of factor. So we typically see on Frankford one larger outage a year, I mean if you don’t plan sometimes that can be a smaller one if that make sense. But again that’s going to be driven by infections and mechanical integrity and the work that we're doing. Hopeful we'll always have two typically at Spring in the fall. The complexity of those will ebb and flow overtime based on the work that’s being done. So again I think as you look at rotations of the various operations things we’ve talked. Hopewell really is nine plants in one. So as those varying in and operations are taken offline that changes the scales, scope and complexity. And then Chesterfield is typically much lighter outage schedule that’s along with Hopewell and we would say that they’re more clean-ups and basic turnarounds.

Couple I think just on the housekeeping sites. You mentioned two pieces of maintenance CapEx of $55 million to $65 million, and $8 million to $10 million. Is that added or the $8 million to $10 million is part of the $55 million to $65 million?

No, it's added to that, Charles.

On the pricing side for products, particularly in the nylon side, what's the typical lag between the movement of the raws and the movement of the price? I mean you have a lot of stuff I think you said was formula based. Is that pretty much immediate you get it as soon as it happens, or is there a month lag? How does that…

I can take that one. So on the formula based pricing, typically what happened pretty much right at with the same month based on how those materials move. And then on the spot negotiated pricing, we would probably say it's a one to two month lag.

And then the other thing is again just, I assume a lot of your sales are done on a contractual basis, not necessarily the prices but at least some sort of amount. But in those contracts, you guys typically have what -- how quickly you can respond to -- taking the contracts stuff out and stuff that you sell purely on a spot basis. How responsive, how much of your product is sold that way and how quickly can you move that part of your pricing? For getting the contracts, sometimes they have things that they got away to month or you got protection. But the things that are not protected, how much is in spot and how quickly can you move on that?

Yes, I think it’s -- similar view is right. So we've got about 50% of the business on a revenue basis would be on that market based pricing right, where you could influence the pricing, I would say more real-time associated with supply demand dynamics marginal improved economics and the underlying raw materials, so as we kind of look at it and based on order patterns. And again the level of our finished goods is turned pretty quickly, so is that puts you to that 30 day type framework, I would say.

And then so lastly is, what's the -- have you guys seeing an impact in Q2 with the Asian capital spreads coming down. We saw the big spike in Q1, you got the response. Are you able to slowdown your decline to the degree that your margin actually rises under the decline? Or do you think you compress a little bit from the -- or takeout some of the gain that you’ve picked up during the course of the last quarter with the big rise. I mean the dollar-to-dollar, the cost will be right but I mean that you got that extra 3% on pricing. Do you think any of that might be have to get back on the downside here?

So I think if you think about the same commentary here on the pricing lags and where the order-book is, you can imagine what the sales book and things of that nature, that's we're holding and prices will move and we’ll adjust. But we do have that 30-day maybe 60-day horizon that plays out.

The next question today comes from Robert Reitzes with Broad Arch Capital. Please go ahead.

I had a couple of questions. One is a very picky new question. I was trying to understand EBITDA for the first quarter. Was it $57 million or $42 million…

No. For the first quarter of 2017 it was $57 million. Now last year, it was $53 million in Q1 ’16, $53 million and that included a one-time $15.5 million benefit from the exit of supply agreement.

And then the second question is I understand through the businesses, on the acetone side, how would you say the outlook for that is for the next six months, I wasn’t quite sure? It sounds like its improving, and do you think that will be sequentially stronger. How would you characterize that for the next six months?

I think we would and positive income through clear enough that, we would see that market being sequentially stable on its performance as we moving forward.

So the big wild card seems to be like nylon is great now and you’re cautious on that acetone is good, ammonium sulfate is what it is and helping for turnaround. And the swing factor, you still should have good numbers but the thing between great and good is nylon. Is that fair?

I think when you, again, we go back through the three, right. Currently, nylon performing well with our operating rates in mid what is now sort of a tightened supply demand environment. And then we’ll see how that plays through post all of the global outages as we head into the back half for the year. Ammonium sulfate, just seasonally, we’re coming through the spring season. And in Q2, as we come into Q3, Q4, we really are then entering the ’17, ’18 fertilizer cycle. And I think all signs are cautious from the nitrogen in front at least through that time period. And just to reiterate, the intermediate business should really provide the strong diversification of our sales and multiple chemistries in there; acetone being the largest, but a nice business for us and one that it is performing well and stable.

Our next question comes from Brad Hathaway with Far View Capital Management. Please go ahead.

Just wanted to quickly ask a question about some of the regional dynamics that play. Is there anything in the North American supply demand environment that’s really you expect to change over the next 12 months? Is there any supply coming online, and this is caprolactam by the way? Is there any supply coming online or any major changes you expect to see in demand?

So in North America, particularly on the caprolactam nylon side, with Fibrant’s closure last year and you have two parties now in the U.S. I think with the view that there is a reinvestment economics and just the scale of capacity, we don’t -- there are no announcements for new capacity coming online in the U.S. At this point, relatively to demand, you’ve got roughly 55% of the U.S. demand is in nylon carpet, which is tied to the building construction cycle. And we see that market relatively stable right now. I mean certainly the larger growing segments there are on -- for commercial and hospitality more commercial buildings. It's certainly as we see U.S. continue to build in that arena, as well as for single family homes, particularly more high-end residential supports stat; engineering plastics continues to grow as does food packaging. So we don't think anything changing different than what we've talked about in the past.

And our next question comes from [Curtis Janssen] (ph) with [indiscernible]. Please go ahead.

Once you get the -- kind of just tell me think about the replacement cost being $3 billion. Do you look at that and in terms of your production capacity or kind of what it would take to build a Greenfield plant or what is that come from?

I mean our engineering group and we can calculate it based on the assets. So you think about it that includes our phenol assets in Pennsylvania, and includes caprolactam. But our caprolactam plant also has 600,000 ton ammonia plant, a world scale sulfuric acid and plant, a then also our Chesterfield and Hopewell assets. So when you kind look through the full chain, that's where the $3 billion comes from. And each one, but if you look at ammonia announcements, it's almost the $1 per ton, so we have 600,000 ton plants alone. So you parse it out but again as looking at if you were to build the whole stream again.

Is that 2% CapEx is that -- how does that or how do you think about that relating to your deprecation or D&A? Is that going to be north of 100% of your D&A on normalized basis or?

I think for foreseeable future, the answer is yes there. We came to 2% by looking at number of larger chemical companies and you’d imagine that every service of operation will vary. So if you have more corrosive environment that replacements and maintenance has to be higher and others maybe lower. But we canvas across all of our unit operations that's where we landed to really sustain the asset base that we have today for the long-term. And we think that's really important given our low cost position we are afforded to be able to run our assets at much higher utilization than where the global industry utilization is, and it's important for us to ensure that that sustainability is safe and stable operations.

And then just one last thing, is Fibrant still producing, or is their production completely shut down? [Multiple speakers] through the rest of this year, for example or?

No, they on their operations at the end of 2016.

Our next question comes from Chip Saye with AWH Capital. Please go ahead.

My first question is how much of your Nylon 6 capital active business is exported?

Give us a second here. I’m not keep that all off top of my head here.

It's in the low teens.

So sub-20%?

Yes…

Well, the other project we don’t have at top of mine…

And so of that, and where is it exported if sub-20% is exported. Where does that end up where the end market?

Yes, it’s mostly -- it’ll mostly be in Asia. So I would about 10% of the total nylon business, including caprolactam, is export to Asia. The rest is primarily in North America.

So are there any more supply, any more capacity coming off in Nylon 6 and caprolactam in the U.S., you think the next couple of years?

This we don’t foresee and our new announcement, certainly, on the caprolactam side is the environment is much more balanced at this point with the current suppliers and producers.

The reason I was asking I was reading a industry report that said maybe by 2018, 2019, U.S. maybe actually an import market, because you mentioned the increased demand for -- while you’ve got the carpet business and you also have the plastics business, food packaging, et cetera. And with the closing of the Fibrant plant and BASF like in their capacity reductions. Is that what you see?

So right now, we see North America does import resin today, and also exports. Right now, it's in a net export position on the Nylon 6 resin. And certainly, as we progress now putting in Nylon 6 resin capacity is different than investing in caprolactam asset. But we’ll continue to watch. It will also be highly predicated on what the end applications needs, which we’re very much focused on as well as those change overtime.

And your focus there would, I guess, be the higher end -- higher value food processing through packaging, et cetera versus I guess carpet end market?

Again, we’re looking at all the applications in which we can serve in the end customer needs, the co-polymer investments that we’ve made, and I talked about, certainly help us reach into the changing needs, and for food packaging and as well as for engineering plastics. Carpet is still a very important application here in the U.S. in one which we have very differentiated product in. So it’ll always be important for us as well. But I’m looking to supplement that overtime with building out the portfolio to reach faster growing and higher end applications, yes.

And let me switch gears here to the ammonium sulfate. How much of that business is export business?

On ammonium sulfate, again that business really is North American and South American business. So when you look at -- we put the growing in between North America and South America. So if you add up our South American sales, maybe close to 30% will be exported…

And that 30% is mostly to Brazil?

Brazil and then to other Latin America, right; Peru, the Dom Rep are going to be good application areas for us as well.

And our last question today comes from Kunal Banerjee with Brigade Capital Management. Please go ahead.

Just wondering, I think in Europe, both the resin and capro pricing continues to rise, at least through April and May even as benzene and propylene have sold off there. So clearly spread has continued to expand there. Is there a parallel, I don't have the data for the U.S. But I'm just wondering if U.S. is trending similarly. And given the lag in your realizations, would you expect to see some of that benefit actually carryover into Q3 as well?

I think we would come back and reiterate our cautious horizon post Q2. I mean, yes, certainly dynamics in Europe it is a different market many look at the makeup of suppliers and consumers from that perspective. And given I think what I would say is with the unwinding of Fibrant happening in Q4, we’ve had the stability here in the U.S. playing out as well. And tying for the markets to react, whereas in Europe, there’s a number of dynamics going on and continue to go on through the current foreseeable future.

And then just on the capacity that's coming in capro in Asia. Are there any net or are there any shutdowns going up against the 800 KT that you're talking about; because, obviously, there has been rationalization and other commodity chains in China because of environmental considerations. So I was just wondering if there are any shuts that would net against the 800 KT of new supply.

And none that we have seen at this point, so what we would say is those sites are hard to stop and start. We do see folks taking longer maintenance shutdowns and things of that nature. But today there isn't any clear announced shut-downs or rationalization yet that has been definitively put up against those extensions.

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. Well, we had a terrific first quarter to kick off the year. We're well positioned for improved operational and financial performance in 2017, while continuing our focus on safe operational outputs driving higher value product mix and strong working capital results. Our leading cost position will serve us well for the dynamics of our end markets, and our plants are running planned rates. And we're continuing our product development work, as well as building out capabilities for longer term growth and value creation, all while ensuing end-to-end business efficiency. There is a lot to be excited about and we look forward to sharing more with you as the year progresses. Thank you for your time this morning.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.