AdvanSix Inc. (NYSE:ASIX) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good day and welcome to the AdvanSix first quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Adam Kressel, Vice President, Investor Relations and Treasurer. Please go ahead.

Adam Kressel: Thank you Betsy. Good morning and welcome to AdvanSix’s first 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.advansix.com. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our business as we see it today. Those elements can change and the actual results could differ materially from those projected, and we ask that you consider them in that light. We refer you to the forward-looking statements included in our press release and earnings presentation.

In addition, we identify the principle 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 of 2023 and share our outlook for our key product lines and end markets. Finally, we will leave time for your questions at the end. With that, I’ll turn the call over to AdvanSix’s President and CEO, Erin Kane.

Erin Kane: Thanks Adam, and good morning everyone. Thank you for joining us and for your continued interest in AdvanSix. As you saw in our press release, AdvanSix delivered 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, efficient and cost advantaged business model. Our results were achieved in an environment that saw nitrogen fertilizer pricing reset year-over-year amid lower energy costs and improved supply. While down from last year’s peak levels, ammonium sulfate value pricing remains robust. Headwinds in consumer durables and building construction end markets persist across portions of our nylon and chemical intermediates portfolio, while North American acetone supply and demand continues to be balanced, supporting our performance.

With confidence in the health of our balance sheet, we continued a 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 AdvanSix 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 chemical intermediates product lines, we remain confident in our demonstrated ability to execute and perform through various macroeconomic cycles. 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 strategies, we announced today our Sustain project, a multi-year investment in expanding our granular ammonium sulfate production predominantly through increased conversion by approximately 200,000 tons per year. This project wins on multiple fronts as it is further targeting no net increase in energy consumption or emissions. We believe this investment will have a 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 sulfur demand remaining robust as a key nutrient supporting crop yields, we are committed to growing in this space. I’ll note we have also applied for grant funding for Sustain from the USDA through 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 Hopewell 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 maintain a market-based, growth-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 process and consistent with historical practice, we developed robust contingency plans in the event of a work stoppage or strike.

I’d like to thank our trained salary and contingent contract workers who have demonstrated an unwavering commitment to our customers and key stakeholders to ensure 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.

Michael Preston: Thanks Erin, and good morning everyone. I’m now on Slide 4, where I’ll provide a summary of the first quarter 2023 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 through 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. Pricing was unfavorable by 10% overall.

Market-based pricing declined 6%, primarily reflecting lower ammonium sulfate pricing. Overall material pass-through pricing was lower by 4% following a net cost decrease in benzene and propylene. The acquisition of US Amines added approximately 3% to 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%. Finally, free cash flow was negative $23 million in the quarter.

Cash flow from operations of $2 million decreased roughly $48 million versus the prior year, primarily due to the unfavorable impact of changes in working capital driven largely by the timing of cumene 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 5. Here we highlight the key drivers of our first quarter adjusted EBITDA performance year-over-year. Pricing of raw materials was a $5 million 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 dynamics pressuring global pricing. Ammonium sulfate on a net price over a natural gas and sulfur basis was roughly neutral year-over-year as significantly lower pricing was largely offset by a reduction in input costs, reflecting strong commercial execution to capture our sulfur nutrient value proposition against the macro reset of nutrient values.

Lastly, chemical intermediates price over raws spread was positive year-over-year, largely reflecting acetone margin over propylene costs. Volume 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. We saw approximately $13 million in higher costs, including indirect spend inflation and plant 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 other items netted to roughly $5 million unfavorable impact, with higher SG&A costs reflecting upgrades to our enterprise resource planning systems and other functional support costs. Now let’s turn to the next slide. On the left side of Page 6, we’ve 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 timing of payments, capital expenditures, plant turnarounds, our fourth quarter pre-buy program, amongst other items. 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 our business model delivers.

We have 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 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 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.

Now let me turn the call back to Erin.

Erin Kane: Thanks Mike. I’m now on Slide 7 to discuss each of our key product lines. Starting with nylon, we’ve seen global pricing pressured on the back of unfavorable supply and demand industry conditions. The Asia caprolactam over benzene spreads averaged roughly $800 per ton in the first quarter of 2023, reaching levels that we haven’t seen since 2020. The global composite price raw spreads underperformed the Asia spreads on a sequential basis from the fourth quarter as the 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, the fiber and filament space where we serve our carpet customers has seen continued slow down n demand through the chain.

Building and construction indicators on both the residential and commercial sides 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 pricing falling more significantly than the change in raw material input costs. Lastly packaging, while a more resilient end use for our business, has begun to see demand softness tied to inventory de-stocking and inflationary pressures impacting buying behavior in certain applications, like bone and meat and protective packaging. Moving to ammonium sulfate, in the lead-up the North American spring, we saw nitrogen fertilizer pricing declines in the quarter amid lower energy costs and increases in 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 applications, 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. As we have noted in the past, ammonium sulfate pricing tends to be less volatile than urea and has seen smaller price reductions through the winter. However, we have seen AS pricing pick up a bit in recent weeks as well on strong demand, and we are working to serve our key plant nutrient customers as the season progresses.

Lastly turning to chemical intermediates, industry realized acetone prices over refinery-grade propylene costs continued to improve year-over-year in the first quarter. While acetone demand downstream has seen some softness into the large buyer end applications and we’ve navigated some industry plant turnarounds, we see supply as generally balanced. This has been supported by stable acetone imports into the U.S. and persistent lower phenol global operating rates on reduced demand, again into the markets like building construction and other industrial applications we’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 in industry dynamics like these. Let’s turn to the next slide. Underpinning our success at AdvanSix 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 are developing strategies for delivering the next set of step change in our impacts. Importantly, we are completing our initial life cycle assessment to establish a cradle-to-gate footprint for our products that our customers are requesting to help meet their decarbonisation 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 in sustainable water usage, with an expected reduction at our Hopewell site of approximately 10%. Our people remain our greatest asset in 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, our [indiscernible] scholarship program, with about 60% of our current scholars joining us as summer interns.

We have also implemented a governance framework serving to ensure accountability, oversight and robust ESG reporting and performance across all indicators. As we have been progressing and maturing 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 EcoVadis, positive recognition by CDT 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 9. 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 uncertain 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 volume to increase in the second quarter, albeit in a lower nitrogen and raw material pricing environment. North American acetone supply and demand conditions remain balanced given lower phenol industry operating rates globally, while headwinds in consumer durables and building construction end markets persists across our nylon and other chemical intermediates product lines. 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 at disproportionately higher rates than the industry on average.

Our expected capex and impact of plant turnarounds remains unchanged. 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 contributions in 2022, bringing our defined benefit plan to a nearly fully funded status. Now let me turn to Slide 10 and 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 a diverse product portfolio that meets the evolving needs of multiple end markets and applications. It all starts with our essential chemistries that make innovative solutions possible.

The range of our end market exposure helps 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 its 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 drive in the critical measures that underpin achieving durable free cash flow, yield and top quartile conversion, compelling returns on capital, and attractive long term shareholder returns.

With that, Adam, let’s move to Q&A.

Adam Kressel: Great, thanks Erin. Betsy, can you please open the line for questions?

Q&A Session

Operator: We will now begin the question and answer session. [Operator instructions] The first question comes from Vincent Anderson with Stifel. Please go ahead.

Operator: The next question comes from David Silver with CL King. Please go ahead.

Operator: The next question comes from Charles Neivert with Piper Sandler. Please go ahead.

Operator: The final question today comes from Vincent Anderson with Stifel. Please go ahead.

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

Erin Kane: Perfect. Thank you all again for your time and interest this morning. Despite a dynamic set of industry conditions and a 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 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 expectations for AdvanSix’s sustainable performance. With that, we look forward to speaking with you again next quarter. Stay safe and be well.

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