AdvanSix Inc. Q1 2023 Earnings Call
Good day and welcome to the advanced six first quarter 2023 earnings Conference call.
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I would now like to turn the conference over to Adam Pretzel, Vice President Investor Relations and Treasurer. Please go ahead.
Thank you Betsy and good morning, and welcome to advanced <unk> first quarter 2023 earnings Conference call.
With me here today are president and CEO , Erin Kane, and senior Vice President and CFO Michael Preston.
Call and webcast, including any non-GAAP reconciliations are available on our website at investors dot advances dot 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 as further updated in subsequent filings with the SEC.
This morning, we will review our financial results for the first quarter 2023 and share 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 advance <unk> as president and CEO Erin Kane.
Thanks, Adam and good morning, everyone.
Thank you for joining us and for your continued interest in advancing.
As you saw on our press release advantage delivered solid earnings results in the quarter amid a continued dynamic macro environment and against a record first quarter in the prior year period.
As a diversified chemistry company our performance reflects the talents of our entire team alongside the resilience of our integrated a fishing and cost advantaged business model.
Our results were achieved in an environment, that's all nitrogen fertilizer pricing reset year over year amid lower energy cost and improve supply.
While down from last year's peak levels ammonium sulfate value pricing remains robust.
Headwinds in consumer Durables and building construction end market persists across portions of our nylon and chemical intermediates portfolio, well North American acetone supply and demand continues to be balanced supporting our performance.
With confidence in the health of our balance sheet. We continue the disciplined deployment of capital in the quarter through increased capital expenditures and $18 million of cash returned to shareholders in the form of share repurchases and dividends.
We believe that advanced takes offers a compelling investment thesis over the near medium and long term.
While we anticipate the challenges of an uncertain environment and expect demand weakness in certain market segments within our nylon and come in front of me its product lines, we remain confident in our demonstrated ability to execute and perform through various macroeconomic cycle.
We have meaningfully increased the earnings power of this business and our healthy balance sheet supports performance in the current environment, while providing further optionality to deploy capital with a focus on maximizing shareholder value.
To further continued investment against our core strategy, we announced today, our sustained project a multiyear investment in expanding our granular ammonium sulfate production predominantly through increased conversion by approximately 200000 tons per year.
This project wins on multiple fronts, and there's further targeting no net increase in energy consumption or emissions.
We believe this investment will having meaningful impact in helping to nourish the world and is a win win for our customers as well as supporting our growth and sustainability initiatives.
With software demand remains robust as a key nutrients supporting crop yields we are committed to growing in this space.
I will note. We have also applied for grant funding for sustained from the USDA for the fertilizer production expansion program supporting innovative domestic fertilizer production.
Now lastly, before I have Mike discuss the financial details of the quarter I wanted to take a brief moment to address the ongoing labor negotiations with our hope all south bargaining unit and associated economic strike.
From the beginning of negotiations, we have endeavored to reach a contract through a transparent and good faith bargaining process to address the various needs brought forth by the union negotiations team.
Our proposals maintained a market based role specific wage approach designed to ensure we are providing competitive wages to our employees intended to improve attraction retention and development of our workforce in order to support long term sustainable growth.
Ahead of the bargaining processing consistent with historical practice.
We developed robust contingency plans in the event of a work stoppage or strike.
I'd like to thank our train salary and contingent contract workers, who have demonstrated an unwavering commitment to our customers and key stakeholders to ensure a safe stable and sustainable operations over the past several weeks.
All parties are back at the bargaining table. This week and we remain committed to continuing to bargain in good faith to reach a resolution to this situation.
Now, let me turn the call over to Mike.
Well, thanks, Darren and good morning, everyone.
I'm now on slide four where I'll provide a summary of the first quarter 2020 financial results.
Overall solid results in the current environment and against a record prior year comparison.
Sales of 401 million decreased approximately 16% in the first quarter.
Volume was down 9%, primarily driven by cautious buying behavior for ammonium sulfate amid continued sequential nutrient pricing declines during the quarter ahead of the start of the domestic planting season.
We also continue to see soft end market demand, particularly in consumer durables and building and construction impacting portions of our nylon and chemical intermediates product lines.
<unk> was unfavorable by 10% overall.
Market based pricing declined, 6%, primarily reflecting lower ammonium sulfate pricing of raw material pass through pricing was lower by 4%. Following a net cost decrease in benzene and propylene.
The acquisition of abuse amines added approximately 3% of sales as well.
Adjusted EBITDA was $65 million I will highlight the key year over year variances on the next slide.
Adjusted earnings per share was $1 30.
The effective tax rate was 21% in the quarter down from 23, 3% in the prior year, primarily reflecting a discrete adjustment in the quarter related to the vesting of equity compensation.
I will note for the full year, we continue to expect an effective tax rate of approximately 24%.
And finally free cash flow was negative $23 million in the quarter.
Cash flow from operations of $2 million decrease roughly $48 million versus the prior year, primarily due to the unfavorable impact of changes in working capital driven largely by the time, you have to mean payments and lower net income.
Capital expenditures of $25 million in the quarter increased 4 million versus the prior year.
Now, let's turn to slide five.
Here, we highlight the key drivers of our first quarter adjusted EBITDA performance year over year.
Pricing over raw materials was a 5 million dollar headwind.
Tracking our key variable margin drivers performance across our caprolactam and nylon portfolio over our key raws was negative year over year, reflecting unfavorable supply and demand dynamics pressuring global pricing.
Ammonium sulfate.
On a net price of our natural gas and sulfur basis was rough roughly neutral year over year as significantly lower pricing was largely offset by a reduction in the input costs.
Reflecting strong commercial execution to capture all sofar nutrient value proposition against the macro reset of nutrient values.
And lastly, chemical intermediates price over raws spread was positive year over year, largely reflecting as tow margin over propylene costs.
<unk>, including the impact of lower production was approximately $15 million unfavorable in the quarter.
This largely reflects lower volume for ammonium sulfate as previously discussed and soft market conditions for our chemical intermediate products tied to continued weak demand in building and construction and for consumer durables.
So approximately $13 million in higher cost, including indirect spend inflation and planned spend primarily driven by additional maintenance expense and operational enhancements.
While our utilization rates were not as robust as the prior year period, particularly at our Frankford phenol plant, our integrated value chain and competitive cost position enables us to target running our plants at higher rates than the industry on average.
Finally, all of the items netted to roughly $5 million unfavorable impact with higher SG&A costs, reflecting upgrades to our enterprise resource planning systems.
Oh, the functional support costs.
Let's turn to the next slide.
On the left side of page six we have shown our first quarter free cash flow, which was unfavorably impacted by net working capital driven largely by the timing of raw material payments as well as some impact from the unwinding of ammonium sulfate pre buy cash advances in the quarter.
As we've shared previously there can be some lumpiness to our cash flow on a quarterly basis, driven by the timing of payments capital expenditures planned turnarounds are fourth quarter pre buy program amongst other items I.
I would highlight that over the last 12 months, our free cash flow yield is roughly 12% and our free cash flow conversion remains very strong at 92%, which reflects robust cash flow generation and quality of earnings of our business model delivers.
We've also maintained a very healthy return of cash to shareholders through share repurchases and dividends.
As we look forward into the second quarter, we do anticipate improvement in cash flow on a sequential basis compared to the first quarter of 2023.
We will however, see the bulk of the impact from the unwinding of ammonium sulfate pre buy cash advances impacting our cash flow conversion in the second quarter.
For the full year two.
2023, we continue to project capex spend to be approximately $110 million to $120 million.
This range reflects higher spend compared to 2022 to support critical infrastructure improvements other maintenance as well as additional growth and cost savings projects.
Lastly, our 12 month net debt to EBITDA leverage ratio remains well below half a turn so overall remain and we remain in a favorable position with our healthy balance sheet supporting performance in an uncertain macro environment and providing further optionality to deploy capital with a focus on maximizing shareholder value.
Let me turn the call back to Eric.
Thanks, Mike I'm now on slide seven to discuss each of our key product lines.
Starting with nylon these 10 global pricing pressure on the back of unfavorable supply and demand industry conditions. The Asia caprolactam over benzene spreads average roughly $800 per ton in the first quarter of 'twenty 'twenty, reaching levels that we haven't seen since 2020.
The global composite price raws spread underperform the age of spreads on a sequential basis from the fourth quarter is a slower growth Chinese economy is leading to excess supply moving to other regions, namely Europe at lower prices.
From an end market perspective in North America.
Cyber and filling that space, where we serve a carpet customers I think continued slowdown in demand through the chain.
So named construction indicators on both the residential and commercial side has been lackluster.
In engineered plastics, where we serve applications such as auto consumer durables and other industrial goods.
Margin compression has persisted with resin prices falling more significantly than the change in raw material input costs.
Lastly, packaging, while a more resilient and used for our business has begun to see demand softness tied to inventory destocking and inflationary pressures impacting buying behavior in certain applications like bone and meet and protective packaging.
Moving to ammonium sulfate in the lead up to the North American spring, we saw nitrogen fertilizer pricing declines in the quarter amid lower energy cost and increased global supply availability.
However, underlying agricultural industry fundamentals, including crop prices farmer profitability expected planted acres and stock to use ratios have continued to support strong nutrient demand as we have moved into the season.
Now that we are in the thick of the spring application. We are seeing demand outpace immediate availability for a number of fertilizer offerings, which has bolstered and boosted the price for U S. Urea in particular.
So as I have noted in the past ammonium sulfate pricing tends to be less volatile than urea and.
And had seen smaller price reductions through the winter.
However, we have seen as pricing tick up a bit in recent weeks as well on strong demand and we are working to serve our key plant nutrients customers as the season progresses.
And lastly, turning to chemical intermediates industry realized acetone prices over refinery grade propylene costs continued to improve year over year in the first quarter.
Acetone demand downstream has seen some softness into the large buyer and applications.
We've navigated some industry plant turnarounds, we see supply is generally balanced.
Supported by stable acetone imports into the U S and persistent lower phenol global REIT global operating rates.
Juice demand again.
Again into the markets like building construction and other industrial applications they've mentioned.
Propylene costs have seen some movement higher particularly in March but spreads have remained steady given the supply and demand conditions I just highlighted.
Our integrated operating model continues to serve us well and industry dynamics like these let's turn to the next slide.
Underpinning our success at advance X is our commitment to sustainability and we continue to strengthen the linkage between our ESG performance and our corporate strategic priorities.
On the environmental front, we have improved operational alignment to achieve meaningful reductions with respect to our carbon footprint emissions energy usage and water stewardship.
And then developing strategies for delivering the next set of step change in our impact.
Importantly, we are completing our initial lifecycle assessment to establish the cradle to gate footprints for our products that our customers are requesting to help meet their decarbonization goals.
We've highlighted today, our granular ammonium sulfate expansion, which in addition to the other benefits I mentioned earlier.
Also represents a major step forward and sustainable water usage with an expected reduction at our Hopewell site of approximately 10%.
Our people remain our greatest asset and the foundation of the enterprise, we are executing initiatives to drive a zero incident safety mindset and progress on equity diversity and inclusion at all levels of our organization. So we can attract and retain the best talent that reflects the communities in which we operate to deliver on our promise and priorities.
By the end of this year, we will have 13 scholars sponsored under the future of stem scholars initiative or Farsi scholarship program.
With about 60% of our current scholars joining us at summer interns.
We have also implemented a governance framework, serving to ensure accountability oversight and robust ESG reporting and performance across all indicators.
As they've been progressing or maturity in this arena, we're pleased to be recognized by a number of third party organizations for our commitment to corporate social responsibility, including our second consecutive platinum rating by Epibiotic positive recognition by C. D. C D P for environmental management.
And public company board of the year by the National Association of corporate Directors, New Jersey chapter among other recognitions and awards.
Let's turn to slide nine.
Now our outlook for 2023 remains largely consistent to what we have shared previously.
We continue to expect performance this year to demonstrate the resilience of our business model and our ability to navigate through the challenges of an answer.
Certain environment.
We expect favorable underlying agricultural and fertilizer industry fundamentals to support a robust planting and application season.
As such we anticipate improvement in ammonium sulfate domestic sales by them to increase in the second quarter.
In the lower nitrogen and raw material pricing environment.
North American acetone supply and demand conditions remained balanced given lower feed all industry operating rates globally, well headwinds in consumer durables and building construction end markets persist across our nylon another chemical intermediates product lines. This.
This is expected to continue having implications for both volume and price.
Operationally, we remain focused on safe stable and sustainable performance and continue to target running our plants, a disproportionately higher rates than the industry on average.
Our expected.
Capex for the impact of planned plant turnarounds remains unchanged.
And lastly, we continue to expect our effective tax rate for the year to be approximately 24% and anticipate cash pension contributions to be approximately zero to $5 million.
Following our $20 million.
$20 million contribution in 2020, two bringing our defined benefit plan to a nearly fully funded status.
So let me turn to slide 10 to wrap up before moving to Q&A.
As a diversified chemistry company, we take pride in our long legacy of success and our strong track record of serving as a trusted partner for our customers with.
With a diverse product portfolio that meets the evolving needs of multiple end markets and applications at.
It all starts with our central Chemistries that make innovation innovative solutions possible.
The range of our end market exposure helped insulate the company from significant variability in any one product line as demonstrated by our results in several environments.
Supplementing our exposure to diverse end use applications, we have enhanced our sales mix through our differentiated product portfolio and continue to make smart and disciplined investments in our assets to sustain and improve throughput and profitability.
With this focus on through cycle profitability and upside from our deployment of capital. We continue to focus on increasing the earnings power of this business.
We are executing to a set of focused priorities all of which are aligned to driving the critical measures that underpin achieving durable free cash flow yield and top quartile conversion compelling returns on capital and attractive long term shareholder return.
With that Adam let's move to Q&A.
Great. Thanks, Erin Betsy can you. Please open the line for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
The first question comes from Vincent Anderson with Stifel. Please go ahead.
Hey, good morning, and a nice nice job sure.
So.
Yeah.
Hey, guys.
So I want to start with the granulation project and just kind of what the.
It sounds like it might be a little bit of a slower rollout and I just wanted to know if there's anything we should be thinking about.
So hope well footprint.
Maybe some downtime to squeeze any of that equipment in there.
Yeah.
It was certainly and I'm happy to expand a bit more and you know this is an exciting day for US as you know this is an important area for us and we've had a you know.
Opportunities to look at a variety of ways to think about our conversion.
This program allows us to aggregate a number of projects.
And think about this expansion project over.
The next few years and so you know as you pointed out it's not a one big one Big project one Big Bang. So we will be seeing benefits you know move forward with increased production capability next year and sort of full completion of the set of aggregate projects probably in the 2026.
'twenty 'twenty seven timeframe.
You know again program probe projects are in different stages, we continue to work through the engineering of them and they have different kind of shapes and sizes, but we thought it was important to them to pull them together I mean, they're multiyear investment and you know as we progress we'll continue to give you all some you know further transparency to that.
Now did you say you know we have to align the engineering two turnarounds, but not everything will will require a significant turnaround. If you will based on how we're thinking about it.
Gotcha, Okay Super helpful and then.
Then kind of sticking with the money and sulfate. The U S is stabilizing a bit but Brazil prices are still just a calamity.
Seeing Chinese urea exports pick up a little bit.
It off a low base I guess.
Tying that into the overall Chinese kaprow industry is there do you have a current view of the maybe the total system profitability for the Chinese players just given this rapidly disappearing co product revenue of theirs that they've been dumping into Brazil.
Yeah. When you think about the the price points that we mentioned and I'm operating now at around $800 a ton spread you know we would you know put this back into the line at more of a variable I'm sort of breakeven or.
Firstly, they fully disciplined total cash cost.
<unk> you know it certainly influencing the pricing in Europe , which now sits on top of it you know European.
Cash costs. So you know it is we're seeing a bit of that behavior. I think just with the length that theyre experiencing operating rates in China are probably approximated about 70% to 75% you know Europe's still depressed at around 50 odd so right.
As you know all of these things are.
Come into play with where they you know effectively you know price into the market. So watching the recovery you know certainly in China and their growth is is important here.
Okay. Yeah. That's that's a that's a helpful data point I think typically they they tend to revert back to around 60, 65%. So I guess, we'll see how that goes.
In terms of nylon demand have you seen enough demand decline, yet, whether just destocking and carpet or industrial to to have to begin shipping more cap broke proportionately or are you still able to place all of your nylon today.
Yeah. So in the environment in our view here is again with our caprolactam cost position right targeting again, those dips her personal rates, which you know we continue to seek and target to achieve them in in nylon, where we have seen the softness.
We're using that opportunity now to I would say, we replenish and rebuild them. Good inventory levels. I think you had asked the question a quarter ago. How you know how we might think about that you know over the course of the last couple of years right. We covered out of her industry Force matures you know we had some of our.
One operational views, though as were running well, we're reestablishing healthy levels of inventory. So we feel good about our position and then we have started to export some caprolactam or the market provides those opportunities using our cost position allows us to do that but.
Keep our assets full get ourselves in good shape and then you now see.
It does.
The opportunities that we always have done during these time frames.
Alright excellent.
I want to sneak one one last one in here and then ill give.
Someone else, it's hard but.
One of the big compound has pointed out the the bead program are in the.
Infrastructure, Bill, which is stalling out something like $40 billion over the next few years to expand high speed Internet coverage. So.
Two questions on that our first does your wire and cable business include fiber optic cable lines and then assuming yes. If we were to see significant increase in demand from that product.
That market over the next four to five years is there anything we need to start thinking about from an incremental capacity perspective or can you shift as much of your nylon production to wire and cable.
Necessary.
Yeah, No great question and certainly all of these.
He's infrastructure programs and grants are yeah are of interest to our customers for ourselves.
But at current we do not play into the applications into fiber optics are most of our wire and cable is more feeder line you know for buildings, but you know noted, but right now I think that's and probably not a direct opportunity set for an island.
Okay. Thank you.
The next question comes from David Silver with CL King. Please go ahead.
Yes.
Yeah.
Yeah, Hi, good morning.
Oh good morning.
Yeah.
So I have a scatter of quest.
<unk> here.
I think I'd like to start with the Hopewell self issue if you don't mind.
And you know you've been very clear about your stance, including in the.
Press release today, but I was wondering if you could provide a little bit of.
Historical background, you know Aaron in particular since you're long Association with these assets, but just just a couple of things, but firstly what is the longer term.
Our history with bargaining with Hopewell South in other words is this the first strike in a long time or short time.
Is the hope will self bargaining unit of recent creation and then secondly, more to the point you know when I read your releases I see the bargaining unit is comprised of I don't know, maybe a half a dozen different.
Units are separate.
Unions.
And I'm, just wondering if that complicates getting to a solution in other words, if some things.
The acceptable to the electrical workers at the food and commercial workers, but not.
Two the journeymen pipe Fitters that does that prevent a solution or are these different groups committed to.
Voting together and agreeing with her agreeing with what the majority.
Yeah.
Going along with what the majority agrees with it so in other words, just maybe a little bit.
Background on this and how we can assess maybe the duration and potential longer term impact is.
Uh huh.
The labor situation continues thank you.
Yeah.
Sure. So let me I'm sure you know, it's a little bit of context here as you you've asked for and relative to where we set so I would characterize our relationships with our unions across the entire enterprise is good we have a long history of.
Renewals and extensions and a rep vacations, you know across the board and <unk> South in particular, the last strike was a 1987.
So to your point it has been on 36 years.
Since we have seen.
Sin.
And arrived at a situation like this.
As you know on the Hopewell South bargaining unit is comprised of four separate unions.
Yeah, when we think about this contract are.
Our goal right, we've been looking to achieve more unity her by providing an equitable contract with wages that are competitive now.
Not just for a segment of the gang in population.
And so to your point right. There there is the current state of affairs and that's what we're trying to achieve them and you know within the current state of affairs, we have to move them again, we want to ensure that.
You know all roles and have the ability to be paid to market competitive position.
While we is that need to maintain those groups that are already well positioned in the market.
So that does present.
A different approach to what is necessary for the long term vision of this company to attract retain and provide progression for for our workforce. So you know as you know Impella you Peel back there is.
There is a level level of difference right and in the approach here to accomplish those goals so I'll pause there.
Yeah.
Okay, Great and then just a follow up I mean, just a couple of things, but you've assembled a contingent workforce and I just wanted to clarify but in your.
In your assessment that contingent workforce can maintain safe and efficient.
Operations of the Hopewell South indefinitely is that is that your.
Is that your road okay.
Yeah. So we can I can provide some more color there to radar, our salaried and contingent workforces comprised of advanced ex employees as well as our partner our contractors as well as contingent workers that we bring in and train I can share it was down on Monday.
Hey.
Myself and I can assure certainly based on what I saw on the time spent and this is a collective team that is committed to serving our customers at this time.
I would sure they ran the plant extremely well in April .
And we have a collaborative engaged empowered learning environment that.
And that is is committed to our success and and driving really great progress here for it for ourselves and for our customers.
Okay, very good I'd like to switch over to.
The fertilizer business.
So.
You know I was listening to the comments from another nitrogen fertilizer supplier on their conference call and one issue the cropped up.
Hmm.
Ooh bid upon there one issue that came up was kind of Ah.
I, an expansion or a widening of the coastal inland spreads in other words, it's getting much more costly to move product up the river and then too.
So just from New Orleans up the rivers to the desired mid corn belt desk.
Destinations.
And I would say that you know your particular positioning right on the eastern corn belt gives you a kind of a nice <unk>.
Vantage here at a very nice time of year for something like that to happen.
And you did mention in your remarks that after a long slide.
Long a period of lower prices.
Most recently you said ammonium sulfate has picked up so I'm just wondering if that logistical bottleneck.
You know plays to your advantage have you been able to you know.
Do you see that in your particular regions have you been able to exploit that and what does that mean for maybe demand for your incremental demand for your product through the balance of the spring planting season. Thank you.
Sure.
Well, maybe I'll just react all of that you didn't get and you can have more volatility perhaps in our dynamic.
Dynamicism right to pricing in Korea, then you can see and in ammonium sulfate nuomi.
Let me think about the comments I think that those comments. We're certainly you know logistics costs have moved up but I think the logistics constraints and what's happening on the river is also creating a.
Supply shortages as we talked about to an immediate supply that allows pricing to move in different spots regionally you know as the season has progressed it.
The Midwest is pretty large you know for US we think about the upper Midwest 10 dollar I would say typically.
We see about a $45 spread.
A S in those regions, but.
But you know as you know, we and we've shared in the past we prudently rail from from Virginia, you know out into out into the corn belt.
You know we've been working to position.
Our our products into the region.
So it was certainly adds were in the thick of it and planting is underway. We have been able to you know see a bit of an uptick in and capture some price, but that's probably a little bit more color as to how we see that situation.
Okay, great. Thank you for that.
Next question I did want to ask you about your.
Testament to date of the U S. I mean acquisition so.
I think it's a little over a year just about a year since that.
<unk> business was acquired.
And you know.
I guess I was just hoping you could discuss a few things I guess number one how you feel the integration has gone and also you know maybe I remember.
Believe Mike was talking about a lot of kind of.
Attractive incremental opportunities on the site and things like that so just kind of your one year anniversary assessment of USA I mean has it met your goals, thus far and.
In that let's say in that capital budget that you outlined here, what if anything pertains to.
The two locations that you acquired with USA.
Thanks.
Thanks for the question and you know.
I will say, we are very pleased with the U S. It means acquisition.
Overall, the integration has gone very very well they've been operationally and functionally integrated with the company. We also recently upgraded their enterprise.
Enterprise resource planning system to the latest generation of S E T.
We feel very good about that yeah and in terms of those attractive incremental opportunities for growth. We continue to explore those some requiring some incremental investment at the site to be able to produce certain products that will be new in those.
Opportunities are coming to fruition, they do take some time and some commercial development as well as investment, but we are pleased with those opportunities and how they are coming to fruition and we are still very optimistic in terms of the outlook for the business.
Okay.
That's great. Thank you very much.
Thanks, David.
Your next question comes from Charles <unk> with Piper Sandler. Please go ahead.
Good morning, everyone.
Couple of quick questions.
Just a couple of quick questions one on ammonium sulfate youre going to be moving a lot more granular overtime, how much of your total salt they will be able to become granular when you're finished with these projects out in 'twenty six 'twenty seven as you were talking about.
Yeah, but when you think about house under the math works right. So it's an additional 200000 times, but that would approximate to a roughly 75% overall conversion.
Okay. So when it's all said and done you conceivably under the right circumstances are you going to sell 75% granular with 25% what standard I guess they call it.
Oh great.
It could be standards valuable you know that's the opportunity that we also pull into our packaging business. There's mid grade you know so there there are other cuts that will come off of that.
So 75% granular the ones I'm focused on at this point, Okay, and then in terms of the choice to make the expansion I assume it's based on demand coming from your existing client customer base plus some other cost. Some operations you may be able to take on I mean, it's not just to do with the habit it's more.
Yes, we know we can we can sell it. So we are willing to spend the money to get the upgraded product.
It's sort of you sort of following our project is following demand as opposed to the other way around.
Correct well when you think about you know North American software demand growth right. It has continue to grow and will continue to grow based on its value proposition. So yes. This is very much a a business case oriented approach.
You know in aggregate you know we are we are reaching and the investment levels that we've been consistently you know sharing and so these are no good good projects and <unk>.
It's time for us to move relative to supporting our customer base right.
And then when you as you get to the full level of granular is there going to be a change in the mix of sales in terms of low <unk>.
Regions I mean, basically the reason you had some of that what the mix you had in part was because the south American market.
It wasn't really buying as much granular I know that that is picking up but do you anticipate that tonnage is starting to shift around to be more U S. Based and therefore, you'll have inventory and trying again sell more into the U S on the.
On the seasonal basis that it runs or you're still going to continue to sell pretty split up between U S and South America, mostly South America.
There's just more granular to South America.
Yeah, no. It is to support the North American market. So you know over time, we would anticipate that that makes the ship that geographical mix.
Okay, and then in terms of the the project obviously part of what you said the energy savings and things of that nature. I mean are you walking through other parts of your businesses irrespective.
Which which it is and looking for places to cut costs along the along energy lines is this something that sort of is all I mean, you did that with coal going to the gas boilers that kind of stuff or are there more projects potentially that could take down energy consumption over time.
Yeah, when you think about our lifecycle assessments and where a product type I thought brands I mean, all of that is tied to how we think about wherever you want to focus you know going forward and so there's emissions energy that inform our options that.
We're we're wrapping that up as I indicated that will allow us to do a complete set of analysis to really think about where and how we support our customers relative to their de carbonization goals and then obviously you know energy gives us a win win both on our cost and sustainability side.
But there are you know relative to that footprint.
You know, we've got to figure out where it isn't that roadmap, but certainly relative to our ongoing operational excellence.
<unk>.
These are areas that we continue to look at but I would say probably in this case because its conversion theres no really net increase in consumption of raw materials.
Energy and then obviously working hard to get the sustainability benefits associated with water.
Last question, but if I'm looking for a signal or orange indicator of maybe some improvement in a variety of different ways and is it would.
With one of those signals might be the pullback of Chinese exports to internal use you start being China being less participating less for instance, in the European market, which would be a signal that their own demand is picking up.
That something we should be looking at or what other signals might be looking at to sort of indicator or.
Coming improvements racking in the nylon and <unk> sulfate business.
Yeah, I think but I think it's a very good one that you point out you know right now with where their capacity utilization is.
And and then certainly there their exports I mean, you can kind of look at both what they're exporting directly but then we would also kind of look at imports in the U S. And you know in nylon is it's not necessarily in parts of caprolactam resin, but really the importance of the compounded.
Themselves as well so yeah, I think that trade flow dynamic them is probably the first place that we would look relative to a year.
Seeing an opportunity for that those green shoots to start arriving.
Okay, well that's it for me for today. Thanks.
Okay. Thanks, Charlie.
Our final question today comes from Vincent Anderson with Stifel. Please go ahead.
Yeah. Thanks, I just had a couple of more Super quick ones have you seen any of the destocking headwinds from the paint customers in your ox seems business or is that organic growth offset most of that pressure.
Yeah, we certainly in the European paints and coatings has seen that pressure.
Vincent certainly and in Q4, and you know where.
We're just now starting to see maybe a little bit of life coming back into that space and then even in North America in paints and coatings. They haven't yet seen a significant seasonal uptick that we would see so it feels like a little bit.
There's still to watch here still to come.
Okay excellent and then.
You addressed most of my Amy's question or David touched on most of these but maybe just to be more direct.
Because I don't trust my own math, but it looks like that business was actually up organically in the quarter or is that is that correct.
Yeah, So when we look at it.
Vincent from a from a year over year perspective, we actually executed the closed the transaction rather late in Q1 last year.
So year over year, most of that impact will just be sort of the the acquisition in Q1 to Q1.
On apples to apples basis.
So that's what we see now will have it obviously fully integrated in this year and our comparisons will be fully organic as we you know as we move ahead.
Okay.
On a pro forma basis would it have been up.
And <unk>.
Yeah. It was.
We can come back on that one you know relative to the dynamics remember their main market place is our main end markets here for US is in a great. So it's all the same dynamics.
So I don't have that top of mind for you, but it would have seen the same considerations of a slower start you know relative into other you know the the herbicide space with with rebounding coming here in Q2 so.
Okay, Okay, Adam can follow up but yeah yeah.
Yeah no worries.
And then last one maybe a little left field for Michael here to keep him on his toes. So.
The Granulation project, you mentioned potential USDA funding, which is interesting, but also just kind of looking at you know its energy neutral saving a lot of water. It's technically a co product rather than on purpose chemical fertilizer and most of your debt structure right now is as you know.
Floating revolver line you know is there any thought here about green debt financing as part of maybe a broader review of your optimal capital structure and fixed versus floating debt.
Yeah.
Leads that is an option out there and some companies have taken advantage of that with respect to.
Sustainability investments at each of the sites and I will say that as we evaluate these opportunities both for sustainability related investments as well as growth in expansion projects. We do look at all options and you know for US as we looked at the opportunity with respect to U S. D a potential.
Funding and a grant.
As well as the health of our balance sheet, we feel very comfortable with with how we're funding this project.
Alright, great.
It's all for me.
This concludes our question and answer session I would like to turn the conference back over to Erin Kane for any closing remarks.
Terrific. Thank you all again for your time and interest this morning.
Quite a dynamic set of industry conditions in our record comparison in the prior year, we delivered solid earnings results in the first quarter of 2023.
A diverse product portfolio and global low cost position and continue to serve us well as we navigate the current environment. We feel very good about the strategies, we've implemented which continue to support expectation for advance it says sustainable performance.
With that we look forward to speaking with you again next quarter stay safe and be well.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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