Q3 2023 AdvanSix Inc Earnings Call
Good morning, and welcome to the advanced six third quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone. Please note. This event is being recorded I would like now to turn the conference over to Mr. Adam Crustal V. P of Investor Relations and Treasurer. Please go ahead.
Thank you Alan Good morning, and welcome to advanced <unk> third quarter 2023 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 <unk> advanced <unk> 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 third quarter 2023 and share our outlook for our key product lines and end markets. Finally, we'll leave time for your questions up yet so with that I'll turn the call over to advanced six as president and CEO Erin Kane.
Thanks, Adam and good morning, everyone. Thank you for joining us and for your continued interest in advance X.
As you saw in our press release advanced six navigated continued challenging market conditions and island installations in the third quarter well executing on larger planned multi site turnaround with for the year as expected.
These factors overshadowed resilient performance within our asset portfolio and solid results from our plant nutrient business and the seasonally slowest quarter of the year, and then made lower nitrogen nutrient values and raw material input costs.
An island environment has been pressured by unfavorable global industry supply and demand conditions for several quarters now and has approached trough industry spreads.
And the global macro environment like this are advantaged integrated business model efficiency and diversification served us well, we have a demonstrated playbook to navigate these dynamics, while maintaining our focus on smart disciplined investments and a healthy balance sheet, which we have established to weather these conditions as reflected in there.
Our ongoing repurchases and an increased dividend.
This past quarter, we had three onetime transactions as highlighted in our press release supporting our portfolio simplification and execution of our long term strategies.
First we accelerated our exit from the alliance with open a third party producer of films for the flexible packaging industry.
Under a previously negotiated terms.
This move provides both meaningful economic value and reduces business and operating model complexity, while enabling us to focus on our capabilities and resin production and south.
Second we had a noncash asset write down associated with a licensee of certain legacy ammonium sulfate technology.
Operator at their fertilizer manufacturing facility, the licensee announced its intent to close its entire facility no later than August 31 2024.
And lastly, we made the strategic decision to exit certain low margin I. It seems products, namely a O N V go underscoring our focus on profitability and sustainability, we expect a net neutral impact to 'twenty 'twenty four earnings as a result of this exit.
Through these actions, we're reducing complexity to ensure our investments and resources are aligned with supporting our customer success in areas of highest impact.
This is core to our strategic approach to focus on accelerating profitable growth.
We've begun executing to a multi year expansion and granular ammonium sulfate production through our sustained program. We also continue to progress on grant funding from the U S. D. A to the fertilizer production expansion program, which is in the midst of a public comment period to partner with farmers on innovative domestic fertilizer production.
We have a proven track record of performance through a multitude of environments. We remain focused on what is in our control, including driving superior operational and commercial performance to meet the evolving needs of our customers building capabilities to strengthen our innovation and portfolio resiliency and executing against a balanced and <unk>.
The plan is capital deployment framework.
Our organization's collective efforts are centered around driving best possible outcomes and the current set of dynamics.
We believe that the underlying improvements we have made and smart investments. We continue to make support long term sustainable performance and returns for advance X and our key stakeholders.
Now, let me turn the call over to Mike, Okay. Thanks, Aaron and good morning, everyone.
I'm now on slide four where I'll provide a summary of the third quarter of 2023 financial results.
Sales of $323 million decreased approximately 33% in the third quarter.
Pricing was unfavorable by 32% overall.
Now to break that down market based pricing was unfavorable by 24%.
This primarily reflects reduced ammonium sulfate pricing amid lower raw material input costs and a more stable global nitrogen supply environment as well as a lower in Ireland as well as lower nylon pricing due to unfavorable global supply and demand conditions.
Raw material pass through pricing was also a headwind down 8% as a result of a net cost decrease in benzene and propylene sale.
Sales volume declined approximately 1% in the quarter.
Adjusted EBITDA was approximately $7 million.
I will highlight the key year over year variances on the next slide However, I would note that the net favorable four and a half million dollars pretax income impact of the three one time transactions that Aaron mentioned earlier had been excluded from our adjusted EBITDA results as well as adjusted EPS included.
Included in the appendix of the earnings presentation, all the reconciliation of financial details associated with these transactions.
Adjusted earnings per share was a loss of 36 cents. The effective tax rate was 27% in the quarter. We now expect our full year 2023 effective tax rate to be approximately 23% and.
And finally free cash flow was negative $4 million in the quarter cashed.
Cash flow from operations of $21 million decrease roughly $38 million versus the prior year.
Now this was primarily due to lower net income and the impact of changes in working capital with less cash generated from working capital in the third quarter of 23 compared to the prior year period.
Capital expenditures of $25 million in the quarter increased $3 million versus the prior year.
Let me turn to slide five.
Here, we highlight the key drivers of our third quarter adjusted EBITDA performance year over year.
We saw an approximately $17 million favorable benefit from planned plant turnaround year over year.
As a reminder, this year's multi say turnaround was primarily centered around our sulfuric acid plant, while last year's larger turnaround was focused primarily on our ammonia operations and.
And in 2024 will rotate back to our turnaround centered around our ammonia plant.
In addition plant and SG&A costs were a $6 million tailwind in the quarter year over year, driven primarily by lower natural gas utility costs and lower functional spend.
In the current environment, we're executing levers in our control, including an increased focus on cost controls.
Pricing over raw materials was a roughly $45 million headwind and was the primary driver of the earnings declined compared to last year tracking.
Tracking our key variable margin drivers performance across our caprolactam and nylon portfolio over our key raws was a significant headwind year over year.
Chemical intermediates price over raw spread was roughly flat year over year as an increase in acetone margin over propylene costs was largely offset by performance across the remainder of our intermediates portfolio.
Lastly, ammonium sulfate on a net price over natural gas and sulfur basis was up year over year as lower pricing was more than offset by a reduction in raw material input costs.
Finally volume and sales mix were approximately 4 million unfavorable in the quarter, largely reflecting higher nylon export sales this year compared to last.
With softness seen across our key nylon end markets in North America, we continue to leverage various sales channels to meet demand, where it exists including a higher share of exports now let me turn the call back to Eric.
Thanks, Mike I'm now on slide six to discuss each of our key product lines.
Well dive into nylon solutions further in a moment, but the key takeaway here is that the declines we've been experiencing have continued global composite caprolactam over benzene spreads were down nearly 20% on a sequential basis in the third quarter and are now approaching prior trough levels.
In the fertilizer space, we saw seasonal nitrogen fertilizer pricing declines in the third quarter I would note that ammonium sulfate prices were much more stable than urea prices earlier in the year. So when urea was falling significantly we didn't see a sharp sharp of a decline in ammonium sulfate pricing and Conversely haven't seen the sharpest.
The rebound either.
Overall fertilizer demand remains stable and while global value chains continue to be more cautious in buying forward. Our order position is very much in line with historical levels and we remain confident in solid ammonium sulfate demand as we approach the 'twenty 'twenty four spring application.
Underlying agricultural fundamentals also remain favorable.
From a crop perspective, corn prices I've seen some fluctuations with changes in projections of estimated planted acres, but remain healthy relative to historical levels.
Farmer profitability expectations have also remained resilient.
And while raw material input costs have seen reductions recently costs remain relatively high in other regions steepening the industry cost curve and supporting higher overall nitrogen fertilizer prices.
So as we've navigated through a multi quarter reset here and through the third quarter seasonal dynamics in North America. The underlying fundamentals continue to support firm fertilizer demand moving forward.
Lastly, in chemical intermediates industry realized acetone prices over refinery grade propylene costs continued to improve year over year in the third quarter.
Well acetone demand has seen softness, particularly into the large buyer and applications. We see supply is generally balanced.
This has been supported by stable acetone imports into the U S and persistent lower global phenol operating rates on reduced demand into value chains, starting building construction and other industrial applications.
We also continue to monitor propylene costs.
Which declined again in the third quarter on weaker supply and demand.
Our integrated operating model continues to serve us well in the industry dynamics like these.
Now across the rest of our intermediates portfolio demand has remained soft.
For our U S amines business, which largely serves the chemical space. We've continued to face destocking headwinds as retailers and growers worked through higher inventory.
Let's turn to the next slide.
We thought it would be helpful to spend a moment and take a deeper dive on the nylon industry given the significant change we've seen over the past few months and the impact it has had on our business.
Overall, we continue to see global demand declines across most key end markets.
Leading to further margin compression in the industry.
Here in North America, the higher interest rate environment has unfavorably impacted building and construction markets as well as consumer spending impacting packaging applications like bone and meet and protective packaging.
In engineered plastics auto had any more resilient end market for us. However, the recent auto worker strike has reduced demand modestly.
We continue to leverage various sales channels to meet demand where it exists.
It does include a higher share of exports, both caprolactam and nylon resin, which does come from a mixed consideration for our performance.
Exports represented approximately 13% of our total nylon solutions volume in the first half of this year and is anticipated to reach approximately 30% in the fourth quarter.
This is in line with progression of the cycle is ex experience previously which have historically lasted 18 to 20 months.
Amid the soft end market demand increased competitive intensity is impacting global trade flows and pricing dynamics.
We've seen China's global nylon exports reached all time highs as their slower growth economy is leading to increased exports to the rest of the world, including Europe, and North America at lower prices.
In these regions, both nylon imports and domestic supply had been competing for market share with regional price premiums experiencing downward pressure from these low priced import offerings.
As you can see from the chart on the bottom left side of the page.
The Asia industry Capra lifetime of our benzene spread are well below cycle averages and are approaching prior trough levels as seen in both the 2015, 2016, and 2019, 2020 time frame.
Average roughly $650 per ton in the third quarter nylon.
Nylon resin pricing wood tracks as a spread to caprolactam has followed suit.
Given the pressure on pricing, we are highly focused on driving productivity to improve unit profitability. We also continue to promote and sell the value proposition of our differentiated and island products, including our new post industrial and post consumer recycled offerings.
Let's turn to slide eight.
While future cycles may not be predicted by historical ones. We wanted to give some context and perspective to the industry performance for our key product lines over the last decade.
As you May recall, we first presented this view at our 2021 Investor day and the presentation of these charts is slightly different than our typical quarterly pricing charts here, we are sharing industry spreads.
Those key spreads that connect to our core variable margin equation for the business.
The Caprolactam chart represents the Asia imports, Taiwan, Caprolactam price, let's Korea benzene.
My name is sulfate chart represents corn belt ammonium sulfate price less natural gas and sulfur.
And the Acetone chart has a weighted average margin assuming the split of acetone large buyer by two thirds in the small medium buyer by one third over refinery grade propylene.
The cycles predominantly moved with supply and demand dynamics and are inherently linked to underlying marginal producer cost curve economics.
They're not there have been some structural changes in the markets over this period.
These include Caprolactam, and nylon capacity expansions in China, and U S ammonium sulfate in acetone antidumping import duties.
As you can see we have both short and long cycle considerations and all cycles do not move in sync.
So what does this mean for our business.
Despite the near term challenges, we're facing in nylon, we continue to focus our resources investments in areas of the business with the highest value and opportunity.
We're seeing that play out across our plant nutrients and chemical intermediates product lines, which don't have the same cyclicality profile as nylon.
Similar to 2019, when our markets, we're facing a downturn, we continue to make smart investments to position our business for long term sustainable performance and we're doing that again now with investments across our it platforms to support digital transformation driving further improvements in operational performance and supporting long term growth through projects like ours.
Sustained program.
Now, let me turn the call back to Mike, Okay. Thanks, Aaron and I'm now on slide nine.
We continue to execute to a set of focused priorities to drive long term shareholder returns by concentrating our resources and efforts around higher value components of our portfolio.
The simplification of our portfolio supports our customers' success in areas of highest impact.
As mentioned earlier, we made the decision to accelerate the exit of our alliance with Ogan recording a gain of $11 4 million in the third quarter.
Going forward, we will continue to supply resin to open while further developing our largest and most strategic customer relationships for growth across the product line.
We also made the strategic decision to no longer supply specific low margin ox seems products, namely a L used for crop protection and Mikko used as a legacy anti skinning agent for paints.
Revenue and profit of these products are immaterial on an enterprise wide basis, and the market outlook was challenged particularly given investments required for future environmental compliance and other regulatory pressure.
This exit will enable us to leverage our capacity release of caprolactam and maintain a focus on our higher value easy blocks product, which is a drop in replacement for Mako in alcohol it paints.
We expect a net neutral impact to 2024 earnings as a result of this exit.
Simplification enables us to focus our resources in the most profitable areas of our business.
Great example of this is in our plant nutrient business our plant nutrients portfolio is a market leader and continues to support overall company performance and results.
With sulfur demand remain robust as a key nutrient supporting crop yields we are committed to growing in this space for a multiyear sustained program.
We anticipate reaching a first milestone of 68% to 69% granular ammonium sulfate conversion level by 2020 for yearend.
Let's turn to slide 10 to wrap up before moving to Q&A.
As we look forward, we are operating in a challenging macro environment, particularly as it relates to our now our solutions business.
Global PMI has remained and contraction building and construction indicators remained subdued higher interest rates have impacted a number of consume more consumer oriented end markets and geopolitical risks have heightened uncertainty around the world.
Now more than ever the strength of our business model and our position as a diversified chemistry company will serve us well as we navigate the current set of dynamics.
We've been here before and have proven that we can successfully deliver for our key stakeholders, including customers and shareholders.
While we expect nylon industry margins to remain a prior trough levels through year end, we do expect more favorable fundamentals for plant nutrients and North American acetone to continue.
Capex for the full year 2023 is tracking to approximately $115 million, which reflects increased spend due to critical infrastructure, all their maintenance and growth and cost savings projects.
We're committed to driving best possible outcomes and the current set of industry conditions and executing levers in our control.
Including a rigorous commitment to operational excellence remaining disciplined on cost optimizing working capital and making smart investments to drive higher returns.
Now with that Adam let's move to Q&A.
Great. Thanks, Mike Alan 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 if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Vincent Anderson of Stifel. Please go ahead.
Hi, Thanks, Good morning, everyone. So on the on the open partnership or Alliance as you call. It just wanted to get into the specifics on that because it sounds like you exited the partnership that you are recording a gain and then what specifically is the plan right now for maintaining your footprint in films given.
You know that alliance was was entered into to cover the closure of our Pottsville operation.
Yeah, and it's certainly happy to add some more color here and clarity so.
What we are essentially doing here Vincent is its transitioning the sales and distribution aspects of our alliance mm two two open height. They are here then in the film packaging business here, we will maintain our supply of resin to them, but it's really that Brian is if you think about the ally.
We were producing resins they were producing the films and then we were bringing back and providing the sales and distribution in North America, It's really that that last piece that we are transitioning.
And as a result, you know this was a potential contemplated exit on in our original Alliance agreement and so we've moved forward on that transition maintaining our partnership with them on on resin supply, that's where our core capabilities, our and and still maintaining access into that into that.
The market if you think about packaging for nylon six it's about 10% of our demand or our profile of sales would would mirror.
That sort of rate and so you know again here its really just that end piece of the alliance being transitioned and fully you know over the next two years woefully transition out.
Okay, Alright that helps a lot. Thank you.
With that I would add too I mean, we're working with them on continuing to pull through P. C. I R. M. P. A R opportunities as well co branding. So it really just thinking about how the mechanics of the clients were working.
Versus a an exit from a focus on an important end market for us.
Okay, Yeah, and that that actually kind of bleeds into my next question.
That's helpful. So yeah.
I think about this down cycle in dialogue and cap row, how it might look relative to past cycles. I was I was hoping you could comment specifically on that new recycled content product with regards to whether you think that can be commercialized in a way that helps keep your mix of dialogue versus you know probably our lowest margin product being flight kaprow.
Exports, keeping that mix meaningfully higher than in past downturns.
Yeah, certainly we pull all levers we can through the downturn you know I would note hopefully you know where we're thinking about that 18 to 20 month duration sort of woman crossover. The mid cycle range were about 12 months into that time period I'm in a P C.
I R N I G E R M P. A R.
Certainly is getting a good push it has the opportunity with 10% of our total resin capacity to be available to be sold as certified in that capacity.
We are putting effort behind the launch them customers are intrigued by it but in this this realm here you know we're seeing signs that are positive for our packaging customers as well and but it is a space in general where folks are testing and understanding the value proposition through too.
Through the value chain, but it is getting a fair amount of focus as you might expect from us.
Okay, So progress, but maybe next cycle to see a full a full benefit.
I think yes, I mean, I think we we are pushing it and again, we have that 10% opportunity. We have interest from customers. It's really now moving forward to get adoption.
And you know being able to sell that value proposition all the way thrill and we can't see up to 20% premium they're not across.
All end markets, just yet, but we're moving in the right direction here.
Okay excellent.
And then just last one.
I wanted to ask about the low margin oxime, if if I'm remembering the correct collection of pipes and valves at Hopewell.
You said you were pretty footprint limited with regards to your ability to further expand your easy blocks capacity beyond your current plans. So I'm curious if this exit maybe frees up some space longer term to consider additional capacity of easy blocks.
Yeah. We are we are not capacity constrained at this time on easy blocks and so have continued runway to allow that.
Particular product to continue to progress.
So again the these others in the portfolio.
Obviously easy box is a drop in replacement for me go It was had a challenge outlook as.
<unk>. So it was the right time and intersection of so there's market considerations and decision points to go ahead, and just pull the trigger on that exit for us.
Okay, Alright, well that's all for me. Thank you. Thanks Vincent.
The next question comes from David Silver of C. L. King. Please go ahead.
Yeah.
Yeah, Hi, thank you.
Good morning, good morning.
Yeah, a couple of I guess bigger picture questions, but.
First of all thank you for providing the additional detail and perspective on the nylon and caprolactam fundamentals I appreciate that.
If I was picking up on kind of that continued decline in that.
Caprolactam benzene spread.
I'm just looking at the thinking well first I should ask you, but relative to where you were say at the beginning of the year till now.
My assumption is the advanced <unk> advantage over the typical bench.
Benchmark producer globally has probably widened over.
Over that nine month period so.
In absolute terms the spreads have narrowed but maybe the gap between yourselves and.
Average global producer has probably widened just given your greater exposure to.
Fertilizer and probably are somewhat more favorable raw material positioning.
I'll just ask that but is that true and are we seeing any.
Reaction, yet beyond let's say the one competitor that reduced some capacity in Europe earlier. This year I mean have we reached kind of the pain point, where you know further increments are being taken offline or.
Things like our other other visible signs of.
I don't Wanna distress or pain points being reached thank you.
Yeah, maybe just to provide some some broad context right for operating rates and see if we can unpack some of the dynamics.
Certainly as you pointed out North American.
Producers are in a better position you know and certainly we maintain our leading cost position in caprolactam.
Thing about global operating rates, you've got about 84%, let's say you know estimated rate here in Americas.
Europe is struggling closer to about 40, China's operating around 70 and sort of rest of Asia.
70, 560 ish percent.
Hum.
We have for these downturns that you've.
Indicated seen sub scale capacity.
And in smaller plants that are we're on the right hand side of the cost curve. You know have certainly you know folded we've seen that with them you know the the Mexican you know operations certainly the Japanese plants have been under pressure.
And so, but if you think about sort of where the.
The World is his challenge Europe, certainly has its feeling quite a bit of that impact as well. So you know I think that you know since the startup of the areas. You say you know there has been a hub.
I a flattening you know a a bringing down of other value chain, but we also have the dynamics, where you know in these cycles in any downturn the.
The trade flows are shifting significantly we see the exports from China.
Typically lose the disciplined approach to marginal producer economics, so that puts pressure and you can see in the one chart to where you know the global composite holds out for a bit but as those impacts come into play the trade flows shift the lower priced import offerings come come into play those premium due.
Get compressed and that's happened you know throughout this year.
As a result, so hopefully that gives a little bit more context to how the dynamic is unfolding.
Yeah.
Okay. Thank you for that I appreciate it.
I'd like to maybe just shift over to the fertilizer side of things.
I I did take note of the earnings release for one of your major competitors in nitrogen fertilizer here.
And I would say that you know the tone of there.
Release was pretty upbeat all things considered.
And in particular, they talked about a very busy order book.
For this period of the year.
So I was just wondering you know if you could maybe comment on how you see the order book for your next.
Next quarter, you know post harvest and maybe early spring if that's a relevant but how is your order book developing on the ammonium sulfate side here.
Yeah. It's.
And I can reiterate that our you know our current order book is is robust it would be consistent with historical levels you know certainly.
You know, we think about where where we've been over the last couple of quarters.
You know, we're getting this reset off of very high nutrient values kind of resetting as we had said as we come through the supply chain was in a good spot post the spring see them.
We progressed or that reset into fall fill based on that the new so that a buyer.
Mental context, and so we are happy with our order position and I think have continued to set a good order rate through fall.
And we believe that as we head into spring.
I know things will continue to be robust and you know I would note as and our public postings that we have continued to take price up several times from our field level. So you know we're progressing through them you know the new season as expected.
Okay.
Okay very good and then maybe one last one a more broadly on your chemical intermediates portfolio.
Like to maybe talk about.
Not not the acetone, but maybe the balance of the products there and in particular, maybe.
The products you have.
<unk> taken control of the U S. The U S that means acquisition sorry.
But you know broadly speaking I mean, the specialty nature of a lot of products you know tend to them.
Manifest themselves most clearly in kind of softer economic environments in other words, it's easy to maintain probably easier to maintain prices and margins when fundamentals are reasonably balanced to tight.
Given the softer industrial environment for a prolonged period right now.
How would you say the overall demand.
And I would just say margin resilience of you know.
Your broader chemical intermediates portfolio.
You know is right right now I mean, how how sturdy or how our resilient would you say they are.
The broader chemical intermediates portfolio, including a U S. M means has been thank you.
Sure and if we think about the way they.
The areas of of intermediate certainly into higher value applications.
Higher value and products.
We think of things like NATO going into electronics and specialty solvents and as you mentioned, we think of you know the U S means the portfolio like you like you also called out in certainly you know I would say there. The dynamic is just as you would say the pricing and the margins are resilient and do hold out because the value proposition of.
The chemistries.
Such is that what we are seeing is more of a demand decline impact here.
And so you know we think about the AG chemical space for you as a means I'm telling me before we went to that chain.
<unk> are down about 30% from the five year average.
Average cycle, so that does have an impact.
And it's mostly the destocking associated with last year's season that continues to to play forward.
Then.
You know a product like NATO and is that just more general.
Just sort of consumer and demand considerations and and cycles. There. So you know I think you're right here, where our overall results you see a large pricing and not so much of our volume consideration on our.
Large scale product lines. These more specialty lines. The pricing holds the margin holds and we're seeing more of that demand impact.
Okay.
Okay, great. Thank you I'm going to get back in the queue.
Thanks, Steve.
Our final question comes from Charles <unk> of Piper Sandler. Please go ahead.
Good morning, guys.
One quick question on when I look at the split of earnings among the different segments that you guys report.
Alright it.
It sounds clearly like the biggest impact has come in that the nylon caprolactam and the other two are generally held up so if we're looking at round numbers to be.
The turnaround so we're looking about round numbers $35 million of EBITDA ex turnaround.
What would this how do you look at the split now versus the way. The split was maybe in a in a substantially better time, meaning if I've got 35 round numbers have divided equally among the four major segments. You report round numbers, its eight or nine per <unk>.
Whereas how does it look now and how does that look into more.
Not for lack of a better time normal situation, I mean, where the where the profitability is coming from.
Yeah. So I would I think it's you know the themes are pretty consistent right.
And we sure Charlie on the call here the year over year bridge and the.
The consideration around price raws for nylon being the largest year over year headwind from a consideration perspective, whereas when you look at price raws for both ammonium sulfate in chemical intermediates ammonium sulfate net of natural gas and sulfur actually being positive year over year.
Air and then intermediate as being relatively flat. So it's really a nylon story, so relative to I would say a normal a more normalized you know performance nylons you know mixing this because of the headwinds would be a bit lower right relative to.
To the other.
Product lines and I would say you know acetone has been performing well margins are being probably a greater mix of the total and ammonium sulfate. Despite the reset that we've seen here from first half into the second half and and you know a bigger seasonal impact.
On a relative basis are still performing well and providing.
Good returns and good income performance for the for the business.
And then when I look at ammonium sulfate now.
Going forward into next year, those are largely going to be U S. Based sales as opposed to Latam, which is sort of the off season sales. So we've now sort of shifted over to predominantly U S.
Yeah, and therefore, a more granular in the mix Yeah, I mean, certainly when you think about the first half sales right. It does have you know that geographical consideration of more sales and into North America.
That's the primary season, and as you say the granular piece, which as you know.
An important view as they continue to grow our granular conversion from you know 65% upwards to another you know three to five per cent targets here for the year.
Got it now.
In terms of the sales there's a premium you know granule over the over standard grade and you're just beginning to sell I guess, a little bit more granular into the non U S markets is that getting the same sort of premium that you would typically I mean, the price points itself may be lower but the premium over over standard grade is that still in in there even though.
The sales that are non U S.
Correct me that's important for us to I'm thinking about most of our incremental sales for the expanded granular conversion programs is we're targeting growth and in the U S.
Suffer nutrients continue to grow here. So again that that is primarily to help the U S pharma to help drive productivity.
So we anticipate that the primary market will be here.
And then two more quick things yup.
Can you give me some indication about you talked about operating rates globally.
Are you guys in line with the U S. Operating rate are you a little bit better there and this isn't like the capital area, a little bit better than the operating rates in the U S a little bit worse.
Where do you guys stand.
Yeah on caprolactam rates, we continue to progressed, you know at or slightly above depending on you.
You know, how we are running but that's always been our you know our opportunities that Charles as you know that.
We have that opportunity set given the global cost position you know it can fluctuate like I said with a planned turnarounds and you know other considerations.
But that's always our target and we're holding in there.
Got it and last question is on the nylon side with all the exports coming out of China that you're seeing are they sort of direct competition for the nylon versions that you produce or are they tend to be at the commodity end, but they're dragging places down across the board and obviously taken some volume I mean, how are they competing clearly I don't think they can do.
The same sort of level of.
Higher end grades that typical north American producers get so how how is it how do you see their product in the marketplace is it like I said, just commodity grade, that's a price drag or they're taking on volume from others or what's going on there.
You know, we do see the exports from China and broader Asia right as a trade flows have shifted here I would say that their offerings are primarily looking to compete strongly in engineered plastics right. So these are.
Based compounding rather than you know offerings and so yeah. If you think about just what the trade flows just with where they're willing to offer.
You know again, and losing a bit of a discipline to the marginal producer you know cost dynamic in a you know in a stronger market that just kind of pause.
Pricing down across the board creates that pressure too to regional premiums and that's mostly you know the dynamic that we have on packaging and fiber and filament. We do have an edge in quality and that helps a bit but certainly just overall pressure on the pricing side just exist with this dynamic.
Okay. Thanks very much.
Thanks, Rob Thank you.
Once again, we have David silver from C. L. King. Please go ahead.
Okay. Thank you just just one last one and this would be a I guess I'm just kind of taking a temperature on.
M&A opportunities. So you know in this release you talked a lot a lot a fair amount about portfolio simplification and the current you know a weaker environment and my sense is that you know many other companies are trying to do some of the same things.
And you know in that environment, I mean may be a business that.
It doesn't fit in a larger organization my might be a very tight fit with what you're.
Youre doing and especially intermediates or other areas.
You've maintained a pretty healthy balance sheet as well during this period too.
How do you view the opportunity set for may be a you know an opportunity to bolt on some.
<unk> products or product lines that that might help.
Are you in terms of bread or geographic positioning or or maybe you know production assets.
How are you think are you going to be maybe continuing to fine tune your own portfolio or.
Is there the opportunity to maybe you know see see what what might be available.
And certainly and you know I I might start.
Start with contextually right in our capital allocation approach and priorities remain.
You know consistent right, we're committed to leveraging and using the disciplined approach to allocation to deliver strong and sustainable T. S are over the long term so.
As noted in our action certainly we wanted to make sure that you know first we are making smart decisions on our portfolio and their their opportunities.
And now to continue to to reflect and refresh them. You know those views you know our base Capex is important.
That run and maintain H S any capital to sustain the business you know our growth and cost savings Capex investing in ourselves is always a great place and you can see that in our commitment to the sustain program in plant nutrients. You know overall given its profile will continue to be an area, where we look to you know accelerated.
What about growth opportunities.
I had a return of cash to shareholders as you say accretive M&A has always been part of our framework.
And you know certainly it is an area, where we continue to evaluate opportunities. You know this is an interesting time.
<unk> to that but I think certainly we are not the only company right who reflects on their long term view, what's what's right and the fit of the portfolio and where the opportunity set. So you know we have a framework. We continue to look at opportunities again for value chain integration, where we can drive profitable growth and molecule and product upgrades.
Again brought or expansions with bolt ons things that will leverage our core strengths and expertise.
To strengthen our core geographic positions and so you know these are things, but certainly making sure things are free cash flow accretive.
And fitting our financial profile of the future is as important as well. So we continue to look, but certainly you know navigating and pulling through and investing in ourselves its core through through this down cycle on ensuring that as.
You know we come out of it.
Now that we have continued to build a stronger business that will perform with higher through cycle profitability and.
And a larger base to grow from.
Yeah.
Thanks, very much I appreciate the perspective that thanks, Steve.
This concludes our question and answer session I would like now to turn the conference back over to Erin Kane for any closing remarks.
Thank you all again for your time and interest. This morning, while there are puts and takes across our end markets and broader macro uncertainty we are focusing on executing what is in our control. We have a demonstrated playbook and track record as well as a healthy balance sheet to navigate these dynamics and will continue to position our business for long term sustainable performance with.
We look forward to speaking with you again next quarter and stay safe and be well.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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