AdvanSix Inc (ASIX) 2017 Q1 法說會逐字稿

Good day and welcome to the AdvanSix first-quarter 2017 earnings conference call. (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 website at investors.advan6.com, using the number 6 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 releasing 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 will 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 the 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 are more than halfway through our second-quarter Hopewell turnaround, which is progressing to plan.

There are a number of exciting things happening across the Company that I would like to briefly touch on. In April, we were among a number of honorees recognized by CSX Corporation with their annual Chemical Safety Excellence award.

This recognition is awarded to customers who ship more than 600 carloads of hazardous materials during the year without a release due to 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 resolve. We have a relentless focus on safety and continuously look for ways to reduce risk 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 alkaloid based paints. EZ-Blox is becoming more widely adopted in paints and coatings as a safe and cost-effective drop-in replacement to meet future environmental regulations.

As we look across our product lines, the global and market landscape remains dynamic. 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 remain stable sequentially but down on a year-over-year basis. We do continue to expect challenging nitrogen fertilizer fundamentals throughout 2017.

The first-half framework we provided in our last earnings call remains intact, with improved plant production underscoring put 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 a 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 in 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 will turn it over to Mike to discuss the details of the quarter.

Thanks, Erin, and good morning, everyone. I am now on slide 4, where I will cover the first-quarter financial results. As Erin indicated, it's been a really terrific start to the year. Sales came in at $377 million and that is 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 the 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 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 proactive mechanical integrity program and the reliability improvements are really making a difference and we are seeing them pay off.

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 expanded 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 and repair and 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 spinoff reflect the number of shares that were distributed as of the spin, or roughly 30.5 million shares, as no common stock was outstanding prior to the date 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 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 $117 million compared to the fourth quarter of 2016, so receivables increased in the quarter and were a drag on cash. Now it's important to point out that receivable past dues remained in the low-single digits, 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 5 to discuss our nylon product line, which includes our caprolactam resin and film products and represented approximately 50% of our sales in the quarter. As a reminder, the chart on the right-hand side of the page depicts the Asia benzene-to-caprolactam spread and caprolactam-to-resin spread 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 an 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 its key trends.

However, we do know that supply-and-demand fundamentals are becoming more regionalized. In China, where a majority of the capacity expansions in the industry have been added over the last few years, is operating towards their own self-sufficiency. Utilization rates in the region remained low for a majority of the first quarter on the back of planned outages, availability of key feedstock materials, and government-imposed environmental constraints.

With the volatility in supply-and-demand fundamentals in the country, we've recently seen significant moves in China pricing and spread. We would note that due to active anti-dumping duties, our participation in the Chinese market is limited to the re-export sales.

In the US, where we primarily sell, industry supply and demand has come more into balance, given the capacity rationalization 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 and will 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 really on the back of higher benzene prices and tighter supply and demand.

As you note, the Asia caprolactam import price raw spread or the 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 over caprolactam remained steady, tracking the underlying improvement in the key feedstock, which we expect to continue. While we continue to see these recent levels of 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 plant startups that we spoke of earlier.

Let's turn to slide 6. Moving to ammonium sulfate, which represented nearly 20% of our total sales in the quarter, we've seen this market remain challenging, despite some Q4-to-Q1 sequential pricing improvement 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 is positioned 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, with a modest decline year over year and an approximate 10% increase sequentially as well.

The supply demand environment for nitrogen fertilizers remains pressured with urea, the largest nitrogen fertilizer consumed, having an (technical difficulty) influence on all other nitrogen nutrient products. We are seeing the supply increase in urea from US capacity expansions reduce both the amount of imports required to the country, but also influencing current market pricing.

Based on the USDA planning forecast, we would expect nitrogen consumption to be lower in the US this season, with planted acres for corn and wheat, the largest of the nitrogen crops, 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 planning in the heart of the Corn Belt.

We've also continued to see cautious buying behavior through the value chain down to the growers, as US farmer income and crop futures remain challenged. As we look toward the remainder of 2017, we will need to see improvement in these underlying fundamentals to realize pricing expansion year over year.

Let's turn to slide 7 for a brief update on chemical intermediates. Our chemical intermediates business, which represented about 30% of our total sales, provides revenue diversification from the variety of coproducts we sell.

On the chart on the right-hand side of the page, we show prices for refinery grade propylene and acetone based on third-party data sourced on the IHS market. 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 it 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 phenol turnarounds at competitors and our own turnaround at Frankford, which as I mentioned earlier was completed as planned.

On the demand side, we've continued to see strength, particularly in MMA or methyl methacrylate in 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 other industrial and consumer applications. Overall, we would 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 8. As you can see from the chart, and to get a sense of the underlying improvement, our plant production rates on an annualized basis have continued to increase, both through 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 have discussed, our manufacturing assets are highly integrated, so ensuring stable production across our 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 improve operations.

Our maintenance capital investments, which we targeted on an annual basis at approximately 2% of our total estimated replacement value, help drive more stable production. And in turn, allow for optimal utilization of our plants. Less variation on daily production rate enables upside and drives higher returns.

In addition, we started our critical equipment initiative 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 AdvanSix as the leading cost-advantaged producer for improved operational output and financial performance.

For 2017, we expect improved production rates across all three of our manufacturing sites. At Hopewell, we expect production rates to be in-line or better than the utilization we have seen historically.

The strong production rates and results in the first quarter is a great example of why our turnaround and mechanical integrity programs, which have been maturing for several years now, are key components to our operational excellence. We are in the midst of completing our spring turnaround at Hopewell, while our annual Frankford turnaround was executed on plan, as I mentioned before, with zero safety recordables.

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 pre-tax 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.

Thanks, Erin, and I'm now on slide 9 for those following on the phone here. We 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, we are focused on driving increased earnings, and the first quarter is really a great example of this, as improved plant production rates and safe, stable operations generate higher returns for our business.

Given our low-cost position in the industry and value of key coproducts, 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 a $6 million reduction in advances as we ship orders against cash receipts received in the fourth quarter of 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 are 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 not have 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 range. 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 fixed-asset replacement value in the form of repair and 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 benchmarked against others in the industry. Driving a proactive approach to mechanical integrity is 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've set a hurdle rate of a 20% plus IRR and have a 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 uses 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 a 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 10 for a brief summary. As everyone could see, we are very pleased with the first-quarter results, highlighted by improve sales, earnings, and cash flow. Production output increased across all of our key manufacturing sites amid a tightened 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 shareowner 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?

(Operator Instructions) Chris Moore, CJS Securities.

Can we start maybe on the pricing spreads for nylon? 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 a one-time thing with China. I know they are not a -- from an import standpoint, they are self-sufficient, but trying to understand some of the confusion with the China pricing and the Asia pricing.

Sure. I think where we'd want you to think about it, Chris, from that standpoint. Certainly the China pricing is going to move on their internal dynamics. But that does have some correlation. It will have an influence, obviously, with where the incremental pounds then clear into the Asia pricing.

So China, again, with that self-sufficiency and drive towards that, what we are seeing now, and I think if you can think about the cost curve as I've described it to others when we see it globally, if you can kind of envision that the China cost curve coming out of the global cost curve. And what you then have is a much steeper rest-of-world cost curve.

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, that tightened supply environment will move pricing up outside of China at a different rate and pace than perhaps what will happen internal to China.

I think the regional nature of the trade flows is changing over time and something that we're watching pretty closely. But we are cautious over time because, as you know, materials can flow and there will always have to be a view as to what that ultimate spread will be between region 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.

Got you, thank you. In terms of the tight supply that you saw, I know there were two Fibrant -- your plant outages that were reasonably 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 [Kubachev] in Russia that happened in the quarter as well. That was unplanned. And I think so you have the combination of a number of factors that really came together at the same time.

Got it. In terms of -- it looks like the outlook for the second half of 2017 is you are cautious on pricing because you see more capacity coming online. Anything else beyond 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 a series of planned outages globally now happening throughout the spring, including our own.

So I think as those subside 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 800,000 tons of capacity, as we've talked about previously. And China is still to come on as well.

Got you. All right. Thanks much, guys.

(Operator Instructions) Charles Neivert, Cowen.

A couple of (multiple speakers) questions. On the turnarounds that you are completing, I mean, basically you are going through pretty much the entire Company's facilities. What's the frequency on the significant turnarounds that you are doing now? Are they every three years, four years? What's the norm?

So they are going to vary, as you can imagine, Charles, based on a number of factors. So we typically see -- on Frankford, one larger outage a year in our phenol plant. Sometimes there can be a smaller one if that makes sense. But again, that's going to be driven by inspections and mechanical integrity and the work that we're doing.

Hopewell will always have two: typically a spring and a fall. And the complexity of those will ebb and flow over time based on the work that's being done. Again, I think as you look at rotations of the various unit operations, things we've talked, Hopewell really is kind of nine plants in one. So as those varying unit operations are taken off-line, that changes the scale of scope and complexity.

And then Chesterfield is typically a much lighter outage schedule that is aligned with Hopewell and we would say that they are more cleanouts and basic turnaround.

Okay. Couple other things on the housekeeping side. You mentioned 2 pieces of maintenance CapEx: the $55 million to $65 million and the $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.

Okay. 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? 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 work?

I can take that one. 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.

Okay. And then the other thing is -- again, this is sort of -- I assume a lot of your sales are done on a contractual basis -- not necessarily the price is set, but at least some sort of an amount. But in those contracts you guys typically have, how quickly you can respond to -- taking the contract 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? Forgetting the contract -- sometimes they have things that they got to wait a month or you've got protection. But the things that are not protected, how much is in spot and how quickly can you move on that?

I think it's similar views, right? So you've got about 50% of the business on a revenue basis would be on that market-based pricing, where you could influence the pricing, I would say, more real-time associated with supply-demand dynamics, marginal producer economics, and the underlying raw materials.

So if you look at it and based on order patterns and, again, the level of our finished goods has turned pretty quickly. So that would push it to that sort of 30-day type framework, I would say.

Okay. So lastly, is what's the -- have you guys seen an impact in Q2 with the Asian capro spreads coming down? We saw the big spike in Q1. You got the response.

Are you able to slow down your decline to the degree that your margin actually rises under the decline? Or do you think you can compress a little bit or take out some of the gain that you picked up during the course of the last quarter with the big rise? The costs will be right, but you got that extra 3% on pricing. Do you think any of that might -- have to give back on the downside here?

Yes, so I think if you think about the same commentary here on the pricing lags and where the order book is, you could imagine the sales book and things of that nature that we are holding on. Prices will move and we will adjust, but we do have that 30- to maybe 60-day horizon that plays out.

Okay, great. Thanks very much.

Robert Reitzes, Broad Arch Capital.

Good quarters. I've got a couple questions, one is a very picky question. I was trying to understand EBITDA for the first quarter. Was it 57 or 42 with the one-time --

No, for the first quarter of 2017, it was $57 million. Last year, it was $53 million; in Q1 2016, $53 million. And that included a one-time $15.5 million benefit from the exit of a supply agreement.

Okay. And the second question is I understand two of 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 it's improving, and do you think that will be sequentially stronger? How would you characterize that for the next six months to a year?

That's a great question. I think we would, and I apologize if it didn't come through clear enough, that we would see that market being sequentially stable on its performance as we move forward.

Okay. So the big wild card seems to be nylon is great now and you are cautious on that; acetone is good. Ammonium sulfate is what it is and hoping for an ag 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, if we kind of go back through the three, certainly nylon performing well with our operating rates in mid what is now a tightened supply-demand environment and we'll see how that plays through post all of the global outages as we head into the back half of the year.

Ammonium sulfate, just seasonally. We're coming through the spring season in Q2. As we come into Q3, Q4, we really are then entering the 2017/2018 fertilizer cycle. And I think all signs are cautious on the nitrogen front, at least through that time period.

And just to reiterate: the intermediates business should really provide a strong diversification of our sales. Multiple chemistries in there, acetone being the largest. But a nice business for us and one that is performing well and stable.

Thanks for your help. Appreciate it.

Brad Hathaway, Far View.

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

In North America, particularly on the caprolactam and nylon side, with Fibrant's closure last year, you have really the two parties now in the US. I think with the views of the reinvestment economics and just the scale of capacity, there are no announcements for new capacity coming online in the US at this point.

Relative to demand, you've got roughly 55% of the US demand is in nylon carpet, which is tied to the building construction cycle. We see that market relatively stable right now. Certainly, the larger growing segments there are in carpet/tile commercial and hospitality, more commercial buildings.

But certainly as we see US continue to build in that arena as well as for single-family homes, particularly more high-end residential supports that. Engineering plastics continues to grow, as does food packaging. So we don't see anything changing different than what we've talked about in the past.

Great, thank you.

Curtis Jensen, Robotti.

[What did you just said], but just kind of help me think about the replacement costs being $3 billion. Do you look at that in terms of your production capacity or what it would take to build a greenfield plant? Or where does that come from?

Yes, ultimately, it's in our engineering group and we can calculate it based on the asset. So you think about it, that includes our phenyl asset in Pennsylvania and it includes caprolactam. But our caprolactam plant also has a 600,000-ton ammonia plant, a world-scale sulfuric acid and oleum plant. And then also our Chesterfield and Pottsville asset.

So when you kind of look through the full chain, that's where the $3 billion come from. Each one, but if you look at ammonia announcements, it's almost $1 per ton. So we have a 600,000-ton plant alone. So when you parse it out, but again, it's looking at if you were to build the whole stream again.

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

Right, I think for the foreseeable future, the answer is yes there. We came to 2% by looking at a number of larger chemical companies. And you can imagine that every service of operation will vary. Say, if you have more corrosive environments, that replacement and maintenance has to be higher, and others may be lower.

But when you kind of canvass across all of our unit operations, that's where we've 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 global industry utilization is. And it's important for us to ensure that sustainability and safe and stable operation.

And then one last thing. Is Fibrant still producing or is their production completely shut down? Are they producing through the rest of this year, for example?

No, they [unloaned] their operations at the end of 2016.

Okay. All right, great. And congratulations on the CSX award.

Appreciate it. We're really pleased with it. Thank you.

Thank you.

Chip Saye, AWH Capital.

Thanks for taking my questions. My first question is how much of your nylon caprolactam business is exported?

Give us a second here. I'm not keeping that all off the top of my head here.

It's in the low teens.

Okay. So sub-20%?

Yes.

[We'll get there]. I apologize we don't have it top of mind.

Okay. And so of that, where is it exported? If sub-20% is exported, where does that end up? What are the end markets?

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

Okay. So are there any more supply -- any more capacity coming off in the nylon caprolactam in the US you think in the next couple years?

Coming off? No, this we don't foresee and there are no announcements. Certainly on the caprolactam side, the environment is much more balanced at this point with the current suppliers and producers.

Okay. The reason I was asking -- I was reading an industry report that said maybe by 2018, 2019, the US may be actually an import market because you mentioned the increased demand for -- well, you've got the carpet business and then you also have the plastics business, food packaging, etc. And with the closing of the Fibrant plant and BASF making their capacity reductions, is that what you see?

Right now, we see North America does import resin today. It also exports. Right now, it is in net export position on the nylon 6 resin. And certainly as they progress now -- putting in nylon 6 resin capacity is different than investing in a caprolactam asset. But we will continue to watch. And it will also be highly predicated on what the end application needs are, which we are very much focused on as well as those change over time.

And your focus there would I guess be the higher end -- higher-value food processing, food packaging, etc., versus I guess carpet end markets?

Again, we are looking at all the applications in which we can serve in the end customer needs, the copolymer investments that we've made. And I've talked about certainly help us reach into the changing needs for food packaging and as well as for engineering plastics.

Carpet is still a very important application here in the US and one which we have a very differentiated product in. So it will always be important for us as well. But looking to supplement that over time with building out the portfolio to reach faster-growing and higher-end applications, yes.

Okay. 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 split the growing seasons between North America and South America. So if you add up our South American sales, maybe close to 30% would be exported.

And that's 30% mostly to Brazil?

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

Okay. Thanks for taking the questions and good quarter.

Kunal Banerjee, Brigade Capital Management.

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 the spread has continued to expand.

Is there a parallel -- I don't have the data for the US, but I'm just wondering if the US is trending similarly. And given the lag in your realizations, would you expect to see some of that benefit actually carry over into Q3 as well?

Again, 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 when you look at the makeup of the suppliers and consumers from that perspective.

And given I think the -- what I would say is with the unwinding of Fibrant happening in Q4, we've had the stability here in the US playing out as well and time 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.

Okay. And then just on the capacity that's coming on in capro in Asia, are there any [mats] or are there any shutdowns going up against the 800 kt that you're talking about? Because obviously there's been rationalization and other commodity change in China because of environmental considerations. So I was just wondering if there were any shots that would net against the 800 kt of new supply.

Good question, and none that we have seen at this point. What we would say is that 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 sort of clear announced shutdowns or rationalization yet that have been definitively put up against those expansions.

Okay, thank you.

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

Great, thank you. Well, we had a terrific first quarter to kick off the year. We are well positioned for improved operational and financial performance in 2017 while continuing our focus on safe operational output, driving higher-value product mix, and strong working capital results.

Our leading cost position will serve us well through the dynamics of our end markets and our plants are running at planned rates. We are continuing our product development work as well as building out capabilities for longer-term growth and value creation, all while ensuring 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.