Good morning and welcome to the AdvanSix Fourth Quarter 2017 Earnings conference call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Adam Kressel. Please go ahead.

Thank you, Brandon. Good morning and welcome to AdvanSix’s fourth 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 website at investors.advansix.com. Note that elements of this presentation contained 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 principle 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 fourth quarter and full year 2017 provide an update on our planned performance 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 and for your continued interest in AdvanSix. As you saw in our press release, AdvanSix delivered another strong quarter to cap off a terrific 2017 that was highlighted by higher sales volume, margin expansion and improved cash flow generation. Mike will detail the full results in a moment, but I’d like to highlight the following. Sales for the year reached $1.5 billion, with both higher volume and pricing contributing to the improvement. We generated over $200 million of EBITDA in 2017, a significant increase from the prior year, and expanded margins by 550 basis points. And lastly, our cash generation continued to improve with $48 million of free cash flow for the year, up over $18 million versus 2016. We have generated nearly $70 million of free cash flow since the spinoff. We completed our planned turnaround in the fourth quarter on time and on budget. And our safety performance continues to improve, while production output reached record highs during the year in various production areas. Our operational excellence and safe and stable production discipline continue to be critical to our performance. It is an exciting time in AdvanSix. While we’re maintaining our rigorous commitment to operational excellence, we’re also highly focused on leveraging our R&D investments and building application development capabilities to drive higher-value products. We’re still in the early days, but have achieved commercial success with our copolymer resin and engineering process applications as well as our EZ-BLOX anti-skinning agent, which optimizes the performance of alkyd paints, and is becoming more widely adopted as the safe and cost-effective drop and replacement to meet environmental regulation. We’re differentiating our distribution model across parts of our portfolio as well. Acetone is a great example of this, as our extended…

Thanks, Erin, and good morning, everyone. For those of you on the phone, I’m now on Slide 4. And there, I’ll cover the fourth quarter financial results. As Erin indicated, we closed out the year with another very strong quarter. Sales came in at $370 million, and that’s up 43% compared to last year. Volume was up 25% due to improved plant production and the impact of unplanned downtime in the fourth quarter of 2016. Pricing also contributed to the top line, increasing 18% overall, and that included a 2% favorable impact from market-based pricing and a 16% benefit from the pass-through of higher raw material costs. We saw favorable industry supply and demand conditions in our nylon, caprolactam and chemical intermediate product lines. As for raw material pass-through pricing, benzene and propylene, which are both oil derivatives and inputs to our key feedstock humin, both of those increased significantly year-over-year. EBITDA was $39 million in the quarter, an increase significantly versus the prior year, driven by higher production and sales volume and the favorable impact of market-based pricing. During the quarter, we successfully completed our planned turnaround at Hopewell, which resulted in an approximately $20 million unfavorable impact to pretax income in the quarter, as we expected. We also realized in the quarter a noncash $4 million favorable pretax income impact from a LIFO inventory reserve adjustment. In all, a very strong quarter unto itself, even when you net the unfavorable impact of the fourth quarter 2016 unplanned events of $44 million. As a result of the strong underlying operational performance, net income and EPS also increased significantly. The results this quarter included an approximately $53 million onetime net tax benefit to reflect the Tax Cuts and Jobs Act, primarily related to the remeasurement of the net deferred tax…

Great. Thanks, Mike. I’m now on Slide 7 to discuss our nylon product line, which includes our caprolactam, resin and films products, and represented nearly 50% of our sales in 2017. As a reminder, the chart on the right side of the page depicts the Asia benzene to caprolactam spreads and caprolactam to resin spreads, with the caprolactam price reflecting the Asia import contract in Taiwan and South Korea. Similar to prior presentations, we’ve also shown a global composite index, again, which encompasses benzene to caprolactam spreads across four regions, the U.S., Europe, China and the rest of Asia, and provides a weighted average view based on each region’s percentage of global caprolactam demand. We continue to see generally balanced to tighter supply conditions across North America and Europe. While in China, the government-imposed environmental constraints remain in place, particularly in the northern region, where a good portion of the capacity sits. Stricter control has resulted in lower utilization, increased costs and further plant downtime. Availability of feedstock – key feedstock materials, notably cyclohexanone, are also impacted as a result of these constraints. The environmental policy enforcement really started in earnest in December of 2016. So the 40%- plus growth rates you see for the fourth quarter truly are a result of the timing on a year-over-year basis. The Asia caprolactam to resin spread sequential decline of 17% from the third quarter is important to put in context to the second half of 2017 in total. As a reminder, that spread increased nearly 30% sequentially in the third quarter from the second quarter. So overall, spreads were in line with what would have expected in the back half of the year. On occasion, we will see timing lags on how raw material movements are shipped and supply and demand get…

Thanks, Erin, and I’m now on Slide 11. And we’d like to spend a little more time discussing the anticipated impact of the recent tax reform legislation and what it means for AdvanSix. Given our U.S. footprint and high effective tax rate, we will be a beneficiary of the recent tax reform legislation, and we will see a favorable impact on net income and cash flow. We had a net deferred tax liability of nearly $150 million through the third quarter of 2017, and highlighted earlier that we recorded a $53 million onetime net tax benefit, primarily related to the remeasurement of that net liability out of lower corporate tax rate. Historically, our effective tax rate had been in the 38% range. In 2018, we expect our all-in effective tax rate to be approximately 25%. The reduction of the federal corporate tax rate to 21% from 35% will more than offset the elimination of certain deductions, such as the domestic manufacturing credit. To put that in perspective, the estimated 13 point reduction in our effective tax rate equates to a roughly $0.60 earnings per share benefit, and that’s based on 2017 full year results. The adoption of full expensing of CapEx for tax purposes will also have a favorable impact on our cash tax rate. We estimate that our 2018 cash tax rate will be in the 15% range. So overall, tax reform provides significant benefits to both income and cash flow, and further positions the company to generate incremental value through reinvestment in the business. Now let’s turn to Slide 12 to further discuss our cash flow. The chart on the left-hand side of the page shows our cash flow from operations and CapEx on a trailing 12-month basis through the fourth quarter of 2017. As you can see,…

All right. Thanks, Mike. Brandon, please open the line for Q&A.

[Operator Instructions] Our first question comes from Chris Moore with CJS securities. Please go ahead.

Hey, good morning guys. Thanks for taking my question.

Hey Chris.

Let me just start on a specialty chemicals in terms of, can you talk a little bit about kind of the current focus now, the investment being made there and how that might look in two to three years in terms of kind of the impact on current revenue and earnings versus looking a little bit into the future, kind of your thoughts there?

Sure. I think what we want to characterize for you, Chris, is probably talking about in a few different ways. First thing, you look on the nylon side of the business. Roughly 10% to 15% of our total nylon business today, we would characterize as more specialty differentiated, including North America packaging, wiring, cable and our Aegis barrier resin for those oxygen and CO2 barrier-type products. As we introduce MTI, we have several in the pipeline, right. And these are, as you know, focused on driving value and earnings growth above our peers in this markets. But they do take time to build out. We’ve introduced our copolymer program that doesn’t – have had early successes here in the engineering plastics environment. We look to extend that into packaging as well throughout the year in more high-viscosity grades, but recognize that the qualification processes in these types of programs can extend out six to nine months. So while our assets are – we’ve got roughly the 400 million pounds of resin capacity. Certainly, we’ll still have our significant large-volume grades, but do see that as a buildout to these capabilities and those programs that we can make a significant move against that 10% to 15% base today. On the specialty chemicals side, as we know it, right, when you look at intermediates, you’re roughly one-third of our business today. About half of that is acetone, as I’ve mentioned before, a good dozen chemistries or so in there, oxime being one. And so the EZ-BLOX product here, again, is a nice one for us that has grown year-on-year. But again, we’re building out that capability. And those product lines will be a bit more niche in their total size, but it will be the combination of those that we look to build out over time. That will drive what we hope to be and are endeavoring to be a meaningful change in that profile of that business as well.

Got it. That’s helpful. Just looking at CapEx for a second. So obviously, 2018 is going to – going up to get the $20 million to $30 million incremental investments being made. Looking out into 2019, the NOx work should be done by then, or primarily done by 2019 is that correct?

Yes. When you look at the NOx program, again, that was roughly a $100 million program. We are finishing up that consent decree this year. There’s about $12 million or so to finish off that program. As we’ve talked, our base age SME CapEx does run in the $8 million to $10 million range. Although, as I mentioned, we have this first set of projects that are contributing to the additional CapEx level this year. We do have a pipeline that are continued to be evaluated, that could come forward into 2019 as well as we progress our engineering and business cases associated with other opportunities around production output, upgrading our products and to our high-return, cost-oriented projects as well.

Got you. So I mean, it certainly, even with that potential additional investment, looks like free cash flow should – in 2019, should definitely continue to improve. In terms of – Mike talked a little bit about priority. So obviously, you need to invest there. From there would be, what, paydown debt? Is there any – is there much effort on any potential acquisitions, things like that?

Yes. So we’re evaluating all of those, as you know, Chris. It’s been – the focus really has been generating the cash to begin with. It was our first full year as a stand-alone public company. We’ve done a good job with that. We continue to focus on that. And then also reinvest in the business, that’s been the focus as well. We’ve also had some obligations that we’ve had to contend with in 2017. We had $17 million of pension contributions, we’ll have between $8 million and $70 million in 2018 as well. But the focus for now is really reinvesting the business, funding these high-return CapEx projects, which will be $20 million to $30 million of incremental CapEx in 2018, as we discussed. And then we continue to evaluate other opportunities as we go forward, including value-creating M&A.

Got it. Perfect. Thank you. Last question just relates to something in terms of the outlook on the chemical intermediates. You talked about North America acetone industry, supply offset by increased acetone imports. Is this a relatively new phenomenon? Or something has been heading this direction for a while? Or maybe if you can just talk about it a little bit.

Yes. When you – the note there is it’s our understanding and confirmed by third parties that Shell is cutting back their capacity in the U.S. They have two trains, and it’s become apparent that they will be bringing down one train of phenol and acetone. So that does and has, I think, as we’ve shared, put the U.S. in a – I’d say a balanced position on phenol to slightly being a net exporter at times, but puts the U.S. in a net import position over the long haul for acetone. So that is something new that has come to light here in 2018.

Got you. Appreciate. All right. Let me jump back in line. Thanks guys.

Thank you, Chris.

Thank you.

[Operator Instructions] Our next question comes from Charles Neivert with Cowen. Please go ahead.

Good morning guys. Just one quick question is, we’ve seen propylene pricing starting to come off. Obviously, there were a lot of issues in propylene. One, because on the supply side, did you guys have any problems accessing propylene because of some of the market problems that were occurring? I know they were mostly Gulf Coast, and you guys aren’t buying there. But sometimes, they affect different regions as well. And the other is that if the markets are strong enough, either whether they’re acetone or some of the other products, are you going to be able to keep maybe some of the margin that comes from the drop in – for the non-formula prices? Do you think you’ll be able to keep some of that margin gain from a decline in propylene pricing?

Sure. So certainly, benzene and propylene influence the cumene that we purchase, right? We are purchasing cumene from a number of suppliers here in the U.S., so that has and will influence that direct material cost. So no challenges in our cumene supply chain here as a result of your question around propylene underlying conditions. When it comes to the fundamentals around price, I mean, obviously, as we’ve shared, there’s formula orientation that allows us to move price in tandem. And then where we are negotiating with supply and demand fundamentals, we can have, at times, that sort of 30 day to 60 day lag in both directions, right, I think. So in the context of rising prices, moving them up as quickly as possible, and then certainly making our decisions in how propylene influences the ultimate [ph] price and taking a look at where that supply-demand conditions are and what the markets will bear associated with those conditions. So to the note of the importers, I mean, there was a significant level of imports that came in, in December, early January of acetone, I think, that are working through, through the market. But certainly, we remain focused on our product management discipline to place our products into the value-orientated end markets and leveraging our terminals to reach that small and medium distribution markets. So I think we’re well positioned to navigate through it well.

And then second question, is there any particular area within the nylon end markets that’s moving more strongly or less strongly than the rest or off of, let’s say, the average numbers that you guys have generally sort of put out to the marketplace? Is anything doing a little bit better than expected or a little worse than expected in terms of those?

No, I think it’s a good question. I think as you might imagine, right, given where the construct of our sales being heavily influenced here in the U.S., I mean, on the heels of sort of the hurricanes and the fires. and we have seen building construction be fairly robust here over the last quarters and even as we head into the early part of 2018.

Okay. Thanks very much.

Thank you, Charles.

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

Thanks for taking my questions. And I appreciate the segment detail that was given in the slide presentation. A question about your caprolactam business. How much of that – you just mentioned it in discussing the question, the nylon end market in the last question. What percentage of that business is U.S. versus OUS?

Clearly, when you look at the nylon sales, roughly about 78% is going to be in the U.S. when you look at where we sit today. And then out by other regions, Asia would be the largest remaining region.

Okay. And then is the U.S., is it an import market or an export market for caprolactam and nylon?

So when you look at it today, I mean, I would say we would characterize the caprolactam component probably net balanced. There are some small imports of material coming in, but there are also exports leaving as well. But when you look at – same thing happens on resin. Resin is still a net export market as well. But resin does fill in at times, and certainly – and we do export from that consideration as well. So that tends to be more tied to the types of products that people are buying, and perhaps where they have global considerations with the suppliers that they’re working with. So structurally, they’re both net exporters today, caprolactam being more balanced, but with material moving in both direction.

Okay. I didn’t know after past few years, you had some supply go out. I didn’t know if it was balanced toward U.S. and maybe perhaps become an import market on caprolactam. But right now, it’s balanced, is your view, right?

Correct. And I said, I think there are movements across North America. So if you go back to with Fibrant exiting, that took about 25% of North America capacity out in 2016. So it went from, I would say, a considerable net exporting position to being more balanced, and then throughout the year depending on movements. But I would say it’s coming in. As we mentioned, the North America market is predominantly – again, that molten market material is moving in hot liquid form. So there are movements coming in, but we would note that they would be pretty minimal.

Got it. And even worldwide, you maintain a low cost position, correct?

Correct. We do have that, and that position serves us well, right, through these dynamic times.

Got it. Okay and then the next question would be on the agricultural ANS, the ammonium sulfate. The – when will we know – you said spring planting season, we’ve shown some strength in nitrogen and urea. When will we know if the bottom is in? Because a lot of the producers are talking about they’re not seeing the exports show up at NOLA like they did last year to your commentary about the Chinese imports coming in. So when will we know that we won’t have a return to that 165 they had last, say, May and June?

Right. No, I’m following you. No problem, Chip. And I think the one thing that the markets are really waiting to see is we have to live through, as I mentioned, the full impact of all of the capacity additions coming online. So when you look at sort of what – where we sit today and affirming pricing, certainly, the Chinese is not exporting the way they were, is allowing other trade points to move around and keeping the NOLA region right now relatively quiet and firm, right? We’re still early in the season, so volumes are not very high at this point. There are some conditions related to on the urea side to – the new Indian tender. Certainly, there’s a stock pile consideration in China that is supporting perhaps more near-term fundamentals or dynamics that we’re seeing. But we have yet – relative to the capacity additions that have come on in the U.S., all of those have not been running full steam yet. And that’s really I think where the market is waiting to see what will be that true full ag season and full year impact of all of that capacity additions. So certainly, there’s the near term considerations. But until we see through all of that, I think that’s where folks are really – from our vantage point, right, that we remain sort of in that cautious view to see what really happens through the spring season, and then as – even as we enter into the fall.

Okay. I appreciate the commentary. Thank you.

Okay. Thank you.

[Operator Instructions] I’m seeing no further questions at this time. I would like to turn the conference back over to Erin Kane for any closing remarks.

Great. Thank you, and thanks for everyone’s time this morning. We’re pleased to share with you the results of another robust quarter to cap off a terrific first full year as a stand-alone company, highlighted by the improved production, earnings and cash flow. Building upon this foundational year, we’ll continue to build out our capabilities for longer-term growth and value creation, all while maintaining our safe and stable operations focused, strong working capital results and improved cash flow. There’s a lot to be excited about, and we remain confident that AdvanSix is well positioned over the long term. Thank you, again, and we’ll speak to you next quarter.

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.