AdvanSix Inc. (ASIX) Q3 2018 Earnings Report, Transcript and Summary

Good morning everyone, and welcome to the AdvanSix Third 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, today’s event is being recorded. At this time, I like to turn the conference call over to Mr. Adam Kressel, Director of Investor Relations. Sir, please go ahead.

Thank you, Jamie and good morning. And welcome to AdvanSix's third quarter 2018 earnings conference call. With me here today are President and CEO, Erin Kane; and Senior Vice President and CFO, Michael Preston. This call and webcast, including any non-GAAP reconciliations, are available on our website at investors.advansix.com. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our business as we see it today. Those elements can change and the actual results could differ materially from those projected, and we ask that you consider them in that light. We refer you to the forward-looking statements included in our press release and earnings presentation. In addition, we identify the principal risks and uncertainties that affect our performance in our SEC filings, including our annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. This morning, we'll review our financial results for the 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 and for your continued interest in AdvanSix. As you saw on our press release, AdvanSix navigated through the third quarter, which was characterized by dynamic end markets, a significant planned plant turnaround at our Hopewell facility and a rising input in energy environment. While we didn’t operate to our expectations, we did generate strong cash flow and continued to advance our programs for long-term value creation. Mike will detail the full results in a moment, though, I’d like to highlight the following. Sales were up about 1% with higher raw material pass-through pricing, largely offset by lower volume. EBITDA was approximately 20 million in the quarter, which included a roughly 30 million pre-tax income impact from the third quarter 2018 planned turnaround. And our cash generation continues to improve with cash flow from operations increasing 34% in the quarter. In addition, we repurchased about 26 million of shares through later October or roughly one-third of our authorization announced in May, reflecting our maturing capital allocation strategy and confidence in continued cash flow performance. From an industry perspective, we saw the relatively stable and generally favorable industry conditions for global caprolactam in nylon and the year-over-year strengthening performance in our ammonium sulfate product line as expected in domestic fill sales, be offset by the ongoing challenging industry dynamics in acetone. Our operational excellence in safe and stable production discipline are critical to our performance. Although plant utilization rates in the quarter were lower than anticipated, we remain confident in our proactive mechanical integrity programs and reliability improvements to drive sustained output. In addition, safety performance and compliance are core to how we operate. When the process of finalizing our inaugural sustainability report and look forward to sharing that with you and our commitment and the many ongoing initiatives here at AdvanSix. In October, we hit our two-year mark as a public company. It has been an exciting time since our spin-off and we continue to build momentum across the organization. One area, we continue to be excited about in particular is the continued acceleration of our high-return growth and cost savings capital project pipeline. As we’ve previously shared, we’re executing against a multi-year $150 million to $250 million project pipeline to further enhance our advantaged integrated value chain. The first two projects initiated this year are progressing and we expect to start seeing benefits in the back half of 2019 once all assets are placed into service. In addition, we recently received approval from the Virginia DEQ for our most recent five-year growth permit aligns for our long-term strategies and supporting our investment pipeline. This permit will enable our multi-year growth strategy and help continue to advance and improve the mechanical integrity of the assets by facilitating replacement maintenance. We’ll provide more color on our current outlook for 2019 later in the call, but as we look forward, we’re encouraged by our expectation for robust plant utilization rates and successfully executing against our strategies focused on operational, commercial, and functional excellence, higher value product mix and smart disciplined capital deployment. We’ll continue to position the company for strong performance in the years to come and remain committed to delivering long-term value to our shareholders. So, with that, I’ll turn it over to Mike to discuss the details of the quarter.

Okay. Thanks Erin and good morning everyone. I’m now on Slide 4. Where I’ll cover the third quarter financial results. Sales came in at 369 million that’s up roughly 1%, compared to last year. Pricing overall was favorable by about 10%, due to raw material passthrough pricing following cost increases in benzene and propylene. Market-based pricing was approximately flat, compared to the prior year. Now, we did see the pricing benefit of improved industry supply and demand dynamics in our ammonium sulphate product line as we entered the new 2018, 2019 planting season, offset by softness in chemical intermediates, due to lengthening of acetone supply globally. Volume was down about 10%, primarily due to the planned plant turnaround in the third quarter of 2018, and lower production output. EBITDA of 20 million decreased roughly 30 million versus the prior year, driven primarily by the impact of the planned plant turnaround, and lower production output. As we’ll discuss further in a moment, the impact of our planned turnaround this quarter was roughly 30 million. This compares to just about 4 million of a plant turnaround impact in the prior year period. EBITDA margin of 5.4% declined 830 basis points from last year, and that was primarily due to the factors just discussed, as well as the impact of higher raw material pass-through pricing. As a reminder, roughly 50% of our total revenue base is covered by formula and index-based pricing agreements. So, our sales will fluctuate with the price of key raw materials with our variable margin largely being protected. As we look at items below EBITDA and approximately $400,000 increase in depreciation was more than offset by roughly $700,000 decrease in interest expense with lower debt levels compared to last year. You’ll note that our effective tax rate in the quarter was lower than anticipated at 4%, reflecting adjustments associated with the filing of our 2017 federal income tax return. Given the reduced pretax income in the quarter, the tax adjustments of just over a million did have an amplified impact on the tax rate in the quarter. We do now expect that our full-year 2018 effective tax rate to be in the 23% range. In terms of bottom line performance, net income and EPS both declined by 74% versus the prior year, primarily reflecting the plant turnaround and lower plant utilization rates. Our diluted share count for the third quarter of 2018 was approximately 31 million shares, driven by continued repurchases under our current authorized plan. And lastly, we continue to see results from our focus on cash generation. Cash flow from operations reached 51 million, up 13 million. That’s an increase of 34%, compared to last year. The increase year-over-year was primarily due to the favorable impact of changes in working capital, partially offset by lower net income and a reduced benefit from deferred taxes. CapEx of 90 million was roughly flat year-over-year. We also contributed roughly 3.3 million to the defined benefit pension plan in the third quarter bringing the year-to-date total to roughly 12 million. For the fourth quarter, we don't plan to make additional pension contributions. On a year-to-date basis, free cash flow has increased by approximately 24 million as we continue to manage working capital levels efficiently and fund capital projects. Now, let’s turn to Slide 5 for a deeper dive into our earnings performance relative to the last quarter and that’s Q2. As we previewed in our last earnings call, there were some known headwinds to our sequential performance in the third quarter relative to the second quarter of 2018. First, we had the larger of our planned plant turnarounds at our Hopewell facility in the third quarter. In total, the pre-tax income impact of the turnaround was approximately 30 million, modestly higher than our expected range of 25 million to 28 million. And as a reminder, that’s inclusive of maintenance expense, fixed cost absorption, also the incremental purchases of feedstocks, which we normally manufacture ourselves, as well as lower sales. This compares to the approximately 10 million impact from plant turnarounds in the second quarter of 2018. The third quarter turnaround address multiple unit operations throughout the plants, including the Kellogg ammonia plant, our hydrox production, which feeds into our caprolactam and other oximes units and broader utilities upgrades. We also installed the last of our four NOx control systems during this period. So, lot of moving parts, but also a significant amount of work being done that continues to upgrade the mechanical integrity of our assets and position the company for higher returns through safe and stable operations. Erin will touch more on our turnaround strategies and impacts for 2019 in a moment, but overall, we continue to drive actions to improve the effectiveness of our turnaround efforts. And one proof point from this quarter is the turnaround of our ammonia plant, which by the way, has historically been one of the more complex in terms of scope and that element of the turnaround was completed three days earlier than expected, reflecting a big improvement versus historical averages as a result of utilizing setup reduction techniques. Second on the list of key sequential performance considerations from the second quarter to the third quarter is the pricing and mix impact of the typical seasonality in our ammonium sulfate business. As we talked about in the second quarter and highlighted in the past, ammonium sulfate prices are typically strongest domestically during the second quarter fertilizer application and then have a seasonal pricing decline into the third quarter as the new season begins. We also have a greater mix of products sold to our export markets in the third quarter, particularly in Latin America. This geographical sales mix carries with it a product mix consideration to as we tend to have higher standard grade product sales in the third quarter versus strong granular grade sales domestically at the height of the North America season in the second quarter. In total, we saw the sequential seasonality consideration toward the low end of the $10 million to $15 million range that we talked about on the second quarter earnings call that we typically see in COGS in the third quarter. In addition to these factors, we also saw an unfavorable impact on sales and earnings this quarter from lower production before and after the start-up of the turnaround. Now, as a reminder, Hopewell plant utilization in the second quarter of this year was in the upper 90% range. And although our plants were not directly impacted by the severe weather events in the quarter, namely Hurricane Florence, we did see a modest impact on the results, due to supply chain challenges as we move a significant amount of material up and down the East Coast through trucking, rail and also marine. Lastly, from an industry perspective, we saw continued favorable nylon industry conditions in the third quarter while acetone oversupply conditions and increasing propylene costs, pressured price of our raw spreads. 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 6 to discuss our nylon product line, which includes our caprolactam, resin and films products and represented over 45% of our sales in the third quarter. As you can see from the chart on the right-hand side of the page, industry spreads reflect similar conditions to what we saw on the first half of the year. Although we have seen occasional interim fluctuations in pricing associated with industry supply constraints, we witnessed a generally stable end market environment, but the prices moving in and around those levels that we would associate with marginal producer economics. The marginal producers located in China continue to face a dynamic supply environment. While we’re tracking potential capacity additions in the region, they're balanced against continued lower utilization as a result of feedstock constraints and the ongoing government imposed environmental controls and policy considerations. In North America, where most of our sales are, we've seen generally balanced to tighter supply and demand conditions. We're continuing to track downstream market fundamentals and are working to mitigate raw material price movements through both our formula-based and freely negotiated pricing models. As we look forward to the remainder of 2018 and the start of 2019, we expect the current stable nylon industry conditions to continue and expect the regional supply and demand conditions to support industry spreads. We'll stay focused on being the most reliable domestic supplier to meet our customers base needs, while also advancing our product pipeline to serve higher value applications. Let's turn to Slide 7. Moving to ammonium sulfate, which represented nearly 20% of our total sales in the quarter. We saw improved industry dynamics as the new 2018-2019 domestic planting season began. However, as Mike mentioned earlier, we did see the normal seasonality impact on our business sequentially from the second or third quarters based on geographical and product price and mix considerations. As we’ve shown previously, the graph on the right-hand side plots urea and ammonium sulfate industry retail pricing in the Corn Belt on a nutrient basis. It's important to normalize pricing as urea contains 46% nitrogen, whereas ammonium sulfate contains 21%. Our ammonium sulfate product is positioned with the added-value proposition of sulfur nutrition to increase yields of key crops. Based on a third-party data, we've seen more modest ammonium sulfate industry price movement as compared to recent nitrogen pricing. Urea is the largest nitrogen fertilizer by total consumption and tends to have an underlying influence on all other nitrogen nutrient products. Urea pricing again has been more dynamic both year-over-year and sequentially as we typically will see their fill season earlier. So, it's important to recall and remember that we didn't see the same type of declines early in the year in the ammonium sulfate pricing. Several factors have continued to contribute to firmer global nitrogen pricing. We've seen ongoing reductions in China urea utilization in exports, which has helped to further balance supply and demand globally. Higher energy costs have also continued to push up costs for producers in certain regions contributing to firmer pricing. For ammonium sulfate, particularly, industry pricing has been increasing and is helping to offset rising ammonia and sulfur costs. For us, sulfur is key – and key input cost in consideration and sulfur has increased roughly 60% on a year-over-year basis in the third quarter. While we've been able to achieve some increase in ammonium sulfate pricing in both domestic and export markets and are entering seasonally stronger quarters, we continue to monitor demand side fundamentals as well, like US farmer income and crop futures as they remain relatively depressed versus historical levels. However, based on industry estimates, we are expecting an increase in nitrogen acres planted for key crops like corn and wheat, which should support the current fertilizer environment. We'll continue to monitor key indicators as we exit the year, and as always, we'll stay focused on delivering on the value proposition of sulfur nutrition for our customers globally. Let's turn to Slide 8 for an update on chemical intermediates. Now, our chemical intermediates product line represented about 35% of total sales in the quarter, and as a reminder, acetone represents half of our chemical intermediates portfolio or approximately 15% of AdvanSix revenue. Overall, acetone remains in an oversupply position and elevated levels of imports into the U.S. have put continued pressure on regional pricing and spreads. As we've shown in the past, the chart on the right-hand side of the page shows refinery grade propylene costs and acetone prices based on third-party data. This quarter, in addition to showing the acetone large biomarker, which is a good proxy for nearly two-thirds of the North American industry, we've also shown the small-medium buyer price. This small-medium marker is reflective of the remainder of the industry, where pricing is predominantly freely negotiated and has historically been priced at a premium to the large buyer. As a reference, our sales of acetone are generally in-line with that industry exposure break-down. Prices for acetone will move in its own supply and demand dynamics, but can also be influenced by the underlying moves and propylene prices. Input prices of propylene continue to increase in the third quarter, rising nearly 60% on a year-over-year basis, due to tight supply conditions. Generally, acetone and refinery grade propylene costs move in tandem. However, during this time, you can see that the acetone large and small-medium biomarkers have lagged the increases in the underlying raws, given the rate of increase, and the oversupply conditions we've been discussing. In 2018, we've seen acetone large buyer spread over propylene in the industry compressed roughly $0.05 to $0.06 per pound, after remaining relatively steady and robust throughout 2017. To put that in perspective, we produce and sell roughly 600 million pounds of acetone on an annual basis. So, this is clearly a headwind to our financial results. Since 2012, the average industry acetone spread over propylene has been in the $0.09 to $0.10 per pound range, commensurate with what we've seen on average in 2018. The chart as modified also illustrates the oversupply effects in the freely negotiated small-medium buyer market where even more compression of price of our raws has resulted from the current dynamics. As we move into the fourth quarter, there are also significant industry turnarounds occurring in the MMA or the methyl methacrylate space, which is the second largest end use for acetone globally. MMA is used for various acrylics and plastics that end up in housing and automotive applications to name a few. The industry turnaround here in the U.S. are expected to support continued lengthening of supply for acetone as we exit the year. So, imports remain higher than historical levels and the overall supplier length continues to pressure regional pricing as excess inventory levels persist. Given this supply position in consideration, we anticipate that further price of our raws compression can be seen in 2019. For the remainder of the chemical intermediates portfolio, phenol operating rates globally are anticipated to remain high given favorable end market demand strength. In addition, we continue to see good growth trends from our intermediate products in the portfolio associated with our oximes and other derivative. We remain focused on navigating through this dynamic industry environment to drive best possible outcomes in acetone with our regional footprint and differentiated distribution models, including our extended terminal network here in the U.S. And we're also encouraged by the growth prospects in the course of our intermediates portfolio focused on high purity and high-value niche applications, aligns a favorable macro trends. Let's turn to Slide 9. As CapEx and planned plant turnarounds are key operational considerations, we wanted to preview for everyone an early 2019 view. Regarding capital expenditures, we're tracking to approximately $110 million in 2018, including the two high-return projects we initiated that will drive future earnings and cash flow. As we've discussed in the past, these two projects will have similar carryover spend in 2019 and are focused on debottlenecking specific areas of our operations, optimizing quality and improving our mix and cost position overall. As a reminder, we'll begin to see benefits from these projects in the back half of 2019 with full-year benefits starting in 2020. For 2019, we do expect a continued acceleration of high return growth and cost savings projects incremental to what we're executing against this year. As a reminder, this project pipeline consists of projects focused on growth and cost savings, asset flexibility and improving plant buffers among other benefits. We'll also continue our base investments in safe and stable operations, as well as health, safety and environmental spend to reduce our risk profile and maintain regulatory compliance. In addition, we're excited and planning to relocate our R&D facility from its current location leased within the Colonial Heights site of Honeywell into our own Chesterfield, Virginia site. This project will add roughly $15 million of incremental CapEx in 2019, enabling an improved configuration of our labs to drive productivity, increase connectivity with our specialized resin manufacturing and more effective collaboration with customers. This will include a roughly 30% to 40% increase in lab and office space, as well as annual cost savings in rent and services. Moving our pilot plant to Chesterfield will also allow us to more quickly run customer trials and improve cycle times as we introduced new products to the market and support our strategic value stream teams. Moving to our planned plant turnarounds. We've previously discussed a significant quarterly linearity considerations they represent, and more importantly their criticality to the success of our plant up-time performance. Turnarounds are essential, particularly given our low-cost position and ability to run our plants at disproportionately higher utilization rates than our competitors throughout the industry cycle. Our turnaround excellence is key to successfully driving safe and stable operations, aimed at improving output levels to drive higher returns for the business with targeted strategies focused on improving our effectiveness. At Hopewell, and as a reminder we will engage in two turnarounds per year; one in the spring and one in the fall, and we'll also take an annual turnaround at Frankfurt. It's is important to remember that these turnarounds may not occur in the same quarter from year-to-year, and the scope complexity and timing of specific turnarounds may differ. We do however, strive to stagger our turnaround schedule across unit operations with only modest reductions in rates to maintain relatively consistent product output. In 2019, we expect the full-year impact of pre-tax income of $35 million to $40 million from our turnaround activities across all of our sites. This will be heavily weighted next year toward the fourth quarter of 2019 or roughly $25 million to $30 million, with the remaining $10 million approximately split between the second and third quarters of next year. That impact is inclusive of repair and maintenance expense, fixed cost absorption and incremental purchases of feedstocks we normally manufacture ourselves. In this rising input and labor environment, we are seeing increased cost for these turnarounds, but we have a keen focus and we'll continue to focus on various mitigating factors and buffers that will limit the impact on the business. So, let me turn the call now back over to Mike to discuss our cash flow and outlook.

Okay. Thanks, Erin. I'm now on Slide 10 where we've highlighted our cash flow generation and our priorities in terms of the use of cash. And we've shown this slide before. On the left-hand portion of the slide, you'll see it shows our cash flow from operations and CapEx on a trailing 12-month basis through the third quarter of 2018. And as you can see, we've maintained an improving trend in cash generation, while capital investments have remained relatively steady. Free cash flow has increased roughly 40% through the third quarter on a trailing 12-month basis. Robust free cash flow performance is a significant focus area for us as we've been able to not only build our dry powder capacity in the early days of the company, but also to continue to accelerate high return reinvestment projects. We're maintaining strong cash generation and have several drivers behind that performance such as improving earnings, efficient working capital performance, higher value product mix, and also the benefits of tax reform. As our cash flow generation continues to improve, our capital deployment strategies also continue to mature. We're also maintaining a capital structure that enables financial flexibility and optionality. Reinvestment in the business has consistently been our top priority. We do see ample opportunities for incremental deployment of capital beyond our base CapEx. We've prioritized organic reinvestment in the business in the form of high return growth and cost savings CapEx and have a healthy pipeline of investment opportunities. While not all of these will come to fruition, disciplined execution of the pipeline will drive further value for the company. In addition, we initiated share repurchases in June under our $75 million share repurchase authorization. Given market conditions, we have been repurchasing shares, which in total have reached roughly 2% of our shares outstanding through October. Over the long-term, we will evaluate all value-creating opportunities that build upon our core strengths and will advance and ensure discipline in our capital allocation priorities. That includes building out our inorganic pipeline and capabilities. As a stand-alone company, we now have the ability to assess potential acquisitions that would have strong portfolio coherence with our product lines, our technologies and the broader industries we serve. There are opportunities across the landscape of each of our product lines where we could broaden our customer base and enhance our technology and product offering portfolio, all while improving our free cash flow profile and improving margin stability. 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 and building dry powder capacity. Now let's turn to Slide 11. Now, before turning to Q&A, we'd like to recap our outlook for the remainder of this year, as well as 2019. As we've discussed, there are some puts and takes across the portfolio from a commercial perspective. In the nylon space, we would characterize the environment as stable overall and expect the current favorable industry conditions to continue. We are monitoring any developments related to the environmental policy driving China supply and price dynamics, particularly as we enter the peak winter heating season in that region. In North America, we expect supply and demand to generally remain in balance through 2019. We continue to look to mitigate impacts from movements in key feedstocks and remain focused on value pricing our more differentiated nylon products based on their performance characteristics in higher value applications. In ammonium sulfate, we expect fertilizer prices and mix to increase seasonally as we're exiting the year and continue into the heart of the North America planting season. Overall indications point to an improved nitrogen fertilizer environment through the rest of the 2018-2019 planting season. We also expect to see some level of pre-buy cash advances in the fourth quarter for sales planned in 2019 as is common in that business. This does result in some timing differences between sales and cash where we receive the cash in the fourth quarter for sales planned for next year. As for chemical intermediates, we expect continued acetone industry softness and price raws pressure to persist in the fourth quarter and into 2019. As Erin indicated earlier, acetone supply is expected to remain long globally. Operationally, we've completed our planned turnarounds for 2018 as of the third quarter and remain focused on the flawless execution of our turnaround schedule in 2019, which as Erin highlighted will be heavily weighted towards the fourth quarter of next year. We expect improved utilization rates in 2019 supported by our proactive maintenance and reliability programs. As we mentioned earlier, from a CapEx perspective, we're tracking to about $110 million for 2018 with the expectation of continued acceleration of high return growth and cost savings projects in 2019. We continue to be very excited about the healthy pipeline of organic investment opportunities that will drive ongoing benefits for years to come. We're in the process of finalizing our plan for next year and we look forward to sharing more with you in 2019 as these projects progress. Lastly, we expect our effective tax rate to be approximately 25% in both the fourth quarter of 2018, as well as the full-year 2019. From a cash perspective, we expect continued efficient working capital performance next year and pension cash contributions are expected to be a tailwind year-over-year as we anticipate contributions in the range of $5 million to $10 million versus $12 million this year. So overall, we'll continue monitoring developments in our markets, while driving strong operational performance and redeploying capital to create long-term shareholder value. Now, with that, Adam, let's move to Q&A.

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

[Operator Instructions] Our first question today comes from Charles Neivert from Cowen & Company. Please go ahead with your question.

Hi, Erin and Mike. This is Jeff Rossetti on for Charlie. If I could just start with a couple of questions on the quarter, with your volume down 10%, could you maybe break that out, what the impact was across your products and what were the impact was due to the planned maintenance you had? It looks like you might have given your revenue breakout. Look like you might have had an increase in the acetone, but maybe some lower volumes across the other products.

Sure. Good morning, Jeff. One of the things that maybe we can start with is, we think about the comments that Mike had shared on the pre-imposed impact considerations. I think, when you look at sort of our expectations, the outage really was characterized again by success here in the catalog ending three days early, but we did have some challenges associated with the start-up from that perspective. But if you look pre-imposed, I mean, if you think about our utilization rate certainly last year and then as we pointed out April through July and Hopewell predominantly we're running in the high 90s. We were going to be operating this quarter in the low-to-mid 90s. So, again, moderated still high utilization, vis-a-vis where you would see industry participants, but just wasn't necessarily as robust as we would have anticipated this quarter.

Yes, and maybe I would just add, in terms of revenue impact, we did see volume declines across all of the product lines given the significant turnaround. And I think, Jeff, the reference we're making to the percent of sales by product line, keep in mind, the turnaround was at Hopewell, so obviously it wasn't necessarily at our Frankfurt where a lot of our intermediates are produced.

Okay. Thanks. And just on the – I noticed you gave CapEx guidance of $40 million for 4Q, is that a run rate to you quarterly going forward or do you get some benefit from NOx control systems rolling off next year?

No, the $40 million is – typically the fourth quarter is the heaviest quarter in terms of CapEx and we've moved forward with appropriating against some of these high-return projects that we've discussed in the past. So, that is higher than the normal run rate. We're still working on our outlook for next year in terms of CapEx, but as we highlighted here, we will have the carryover of those two projects that we talked about. This year, it was a $20 million to $30 million increase versus last year in terms of CapEx. We expect another $20 million to $30 million of spend next year for those projects. In addition, we have the R&D project that Erin had highlighted here about $15 million, that will be something new for next year. We also anticipate to look at other projects to accelerate as well. In terms of the base CapEx, as we've talked about before, when we look at repair and maintenance, that is typically in the $55 million to $65 million range, and a way to think about that again is that's roughly 2% of our estimated replacement value, and that's typically what I would expect to see. On HS&E, you're right, the NOx control systems are going to be coming off and we will see a bit of a tailwind from that, as we get into 2019, but we are evaluating other projects around safety and security that could come in and somewhat offset that. So, still under evaluation, but those are I think some of the moving parts that you need to think about as it relates to CapEx for next year.

Okay. And then one more if I could just on your nylon capital outlook. Do you assume any new capacity near-term starting up in China? And what are your views like heading into the winter season on environmental regulation that was a positive last year? I just wanted to see how you feel regulations maybe implemented there going into the winter this year? Thanks.

Sure. There are certainly announced capacity additions over the next three years. However, as the market continues to evolve forward, the firm timing of those adds in some degree remains uncertain. We are probably closely monitoring the most significant of those capacity additions with Hisun, and in addition, they've recently purchased Fibrant facilities in Europe from the [CVC and DSM JV]. So, again it's – but I think more important to note is that the utilization has been fluctuating from that where we're really seeing the discipline in the supply demand characteristics. So, I mean, even as you point to the fourth quarter already, I think there’s nearly 700,000 tons of capacity offline for turnarounds in Asia and certainly more that are operating at reduced rates. As we head into the season here, certainly as we understand it, the continued focused on air-quality and as we've mentioned before, nearly a-third of the caprolactam capacities sits in provinces where typically these regulations and focus have been scrutinized, particularly when coal is being burned. And so again, I think we'll have to continue to watch. And as we stated, I think we'll continue to see fluctuations in what is a more dynamic market in China from that perspective, and that we'll just have to see how that carries over to what we focused on, which is more of the Taiwan and Korea oriented price, which is the clearing house now for nylon globally.

Thank you.

[Operator Instructions] We do have an additional question. This comes from Chris Moore from CJS. Please go ahead with your question.

Hi. Good morning, guys. Maybe we could start with acetone. So, sounds like the market dynamics continue to be challenging. I wasn't sure if you were saying that the – it's going to be a while before the spreads improve or there is a likelihood that they could further tighten?

Great, Chris. Good morning. I'm glad you joined us. Maybe we can expand a bit here. I mean, overall supply length continues to certainly pressure the regional pricing. As we've been talking about, as these excess inventory levels persist, there's not a whole lot of, I would say, transparent market data to characterize, though we are seeing the impacts here certainly in the large buyer and the small-medium buyer that we introduced here this quarter to provide more transparency there. I mean, the key consideration for the fourth quarter, as we noted the methyl methacrylate consumption, that is 40% of America's demand for acetone and 70% of the US capacity is offline right now. So, when you look at what was already a challenging situation and then you have this consideration on top of it. The view here is that is a fourth quarter consideration, but then we're going to exit the year still in a position with continued focus on length here, but then also early, I would say intelligence has indicated that a significant import vessel has arrived in late-October, which is going to add to that continued consideration. So, I know we've been talking about this now for some time and the reality is, it looks like it's going to persist. And you can see that drop in the spread that has really sort of taken hold now here in the fourth quarter.

Got it. So, I mean that kind of small buyer versus the large, can you walk through that a little bit further in terms of, kind of what drives the differences between the two, do they – from your perspective, does either side tend to hold more inventory or just kind of understanding the dynamics a little bit better?

Yes, happy to explain. Let's start with the large buyer, that's the one that we've been showing for some period of time. And so, the large buyer marker is reflective of roughly two-thirds of the demand for acetone here domestically. I'm assuming your large bulk consuming applications like the methyl methacrylate, like Bisphenol A, which would head forward into your polycarbonate and epoxy type applications, as well as maybe tied to some larger derivative consumers as well. And again, we've been showing that as a view – many of those consumers and their corresponding suppliers typically work under contract. And so that is a – if the marker is settled, we do not participate in that marker settlement, I think we've talked about that in the past; others do. But it tends to be tied into contractual considerations from that perspective. Now, the small-medium buyer marker will be more reflective of the distribution markets, smaller paints and coatings and solvents type applications, that your kind of around on smaller applications, even farmer-oriented or some of your considerations like that, smaller truck and I would say rail type consumers versus large vessel consumers or barge consumers. And typically, this space is a freely negotiated dynamic between producers and consumers, which means that pricing can be negotiated on a monthly basis and oftentimes it can actually be negotiated on a truck and rail basis, because of the types of volumes that are being consumed and purchased. And typically, that market has been operating at a premium. There is – you've got the cost to serve from that perspective. And what has really happened is because of their freely negotiated nature, the less contractual nature of those end applications, that has been what you've seen is sort of an exacerbated response where the imports have come in, the oversupply is targeting those areas and is really compressed and disconnected what has been a historical norm on how the market has operated.

Got you. So, I mean, again, it is anyone’s guess, is it likelihood of that, because of that exacerbation on the small side that there is more volatility there, it could rebound either way more quickly?

I think that, again, because that's the part that's going to move pretty quickly with the actual supply demand dynamics.

And your split historically is two-thirds to larger and one-third to the small-medium?

Yes, I would say characteristic just like another applications, our end market profiles would sort of mirror what the industry looks like.

Got it. And that's likely to stay at those levels, there's no reason to think that's going to change significantly?

Correct.

Okay. Got it. In terms of the turnaround, so we are talking about $35 million to $40 million this year, little bit less than 2019, a little bit above 2017, is the $35 million to $40 million kind of the new normal moving forward, you think?

Yes. I mean, that's – obviously, when we look at planning our turnarounds each year, we do a bottoms-up, a review of what needs to get done, the resources that are needed, the incremental raw materials we need to purchase that we would normally make, all of those come into an evaluation of the cost and come to the range. Historically, you're right, it's been $30 million to $35 million, and that's what we've said in the past. Next year, we are seeing at a $35 million to $40 million, a contributor to that though is with rising energy costs and just commodities overall. The cost to purchase the raw materials that we normally would make have gone up, and that is definitely a contributing factor to that. I don't know if I would say that's a new norm of a range, but that is what we're seeing for 2019 and that's what I would plan for.

And maybe one other point I would add in just relative to the cost side. I mean, as we've talked, contractors are incredibly important on the execution of these turnarounds and it's not uncommon for us to double really our census during these times. And labor costs are escalating, and as I've talked to others – my peers, I think, most see labor cost 3%-ish up next year. So that's also a consideration here. This is a practical reality and how these turnarounds get executed.

Got it. Last question, are there any milestones timelines related to the EPA discussions?

No, it's continuing to be top of mind and certainly a consideration. I would characterize as our conversations are ongoing, fully cooperative on answering the government's inquiries and we continue to progress it. And as we've shared, certainly at the earliest time that we have the ability to share more, but it is an active investigation and we will endeavor to bring back news as quickly as we can when we are available to do so.

Got it. I appreciate it, guys.

Thanks, Chris.

Thanks, Chris.

[Operator Instructions] Our next question comes from Chip Saye from AWH Capital. Please go ahead with your question.

Good morning and thanks for taking my questions.

Of course, Chip. Good morning.

Good morning.

Good morning. The acetone business for you is roughly 15% of total revenues, is that what I heard you say?

That's right.

Okay. And of that two-thirds would be large buyer and one-third would be small buyer, typically?

Yes, that's roughly correct, yes.

Okay. So, the MMA plants are going down. When do those come back on?

I believe most of these outages are sort of one month in duration.

Okay. And those buyers, they would probably be buying from the large buyer market?

Correct. When you think about, handful of them actually contribute to the marker settlement with other suppliers that they purchase from as well. I should also note that there is one turnaround here domestically, where acetone is being taken offline, anyhow it does have a short outage this quarter as well. But even when you balance those, length will be created in the quarter.

Okay. So, where I was trying to figure that out is that the plants come back on by early – they're back on in Q1, then the large buyer market, the demand is back. Is that fair to say?

Yes. I mean, certainly these are planned turnarounds just like we take our turnarounds, they are taking theirs, unfortunately just happened to be coinciding and off at the same time.

Okay. And then the – but supply concerns will still exist in 2019, is that right?

I think when we're trying to characterize for everyone here that there is a global oversupply situation that's been created through 2018. And while, ultimately, I think earlier we had thought that we will be on our way to start reducing off that access those inventory levels persist. North America is a higher value-added region and so the import levels that continue to come in are higher than historical levels, and again this persistence of challenge we see continuing into 2019.

Okay. Thanks for the detail on that. On the phenol market, that still seems to be in good shape there, right? You use most of the phenol you produce, but then the part that you're selling, that's a strong market.

Correct. Yes, so about 80% of our phenol is going to be integrated down into our caprolactam and derivative production, and again, through those end markets we continue to see healthy and robust demand. I think, globally, phenol demand is again healthy into the epoxy resin and polycarbonate end uses, as well as we've had some new nylon-oriented production plants come online that are phenol consuming like ours. I think, folks have looked at our technology, or our routes and have invested in those. So again, we see that continuing. As well as, we've talked a little bit about oximes. We sell other niche type intermediates that come off of our production chain and again those have continued to show a very nice demand rates here, certainly as we've come through 2018 as we head into 2019.

Okay. And lastly, you mentioned phenol and the caprolactam, that again, around 80% of that business your sales in North America, correct?

Yes. When you look at our nylon base, certainly since the market restructuring in late-2016 with caprolactam plants down, our sales are going to be predominantly, I would say, Americas-based.

Yes. So, year-to-date our total sales are in the 85% range in the U.S. When you add in North America, we're in the 90%-plus range, just to confirm.

Okay. And then that – and lastly that market for 2018 and 2019 is looking balanced, right and favorable?

Yes. I think certainly with the market structure, we're balanced to snug and I think that has been a keen focus for us to make sure that we are the most reliable supplier to our customer base and continuing to focus on the needs and growth opportunities with our new product lines as well.

Alright. Thanks for taking my questions.

Thanks, Chip.

Thanks, Chip. Have a good one.

[Operator Instructions] And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference call back over to Erin Kane for any closing remarks.

Thanks, Jamie. And thank you all again for your time and interest this morning. We have a focused strategy that we're executing against, built in our rigorous commitment to operational excellence, continuous enhancement of research and development capabilities and an emphasis on longer term growth-oriented investments. While there continue to be some puts and takes across our end-markets, we are focusing on executing what is in our control. We're confident in our ability to continue building upon our advantage foundation that will position the company for strong operational and financial performance for years to come. We look forward to speaking with you again next quarter. Have a great day.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.