AdvanSix Inc. (NYSE:ASIX) Q2 2023 Earnings Call Transcript

AdvanSix Inc. (NYSE:ASIX) Q2 2023 Earnings Call Transcript August 4, 2023

AdvanSix Inc. beats earnings expectations. Reported EPS is $1.16, expectations were $1.11.

Operator: Good morning and welcome to the AdvanSix Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Adam Kressel, Vice President of Investor Relations and Treasurer. Please go ahead.

Adam Kressel: Thank you, Alan. Good morning and welcome to AdvanSix’s second 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 second quarter of 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 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 and cash flow results in the second quarter amid a continued dynamic macro environment and against a record second quarter in the prior year period. The performance further illustrates the value and resilience of our diversified chemistry company. Our team executed on strong in season demand for plant nutrients, albeit in a lower nitrogen and raw material pricing environment. They navigated unfavorable nylon industry supply and demand conditions and an increased low priced imports while continuing to experience balanced North American acetone supply and demand dynamics in our chemical intermediate portfolio.

Our long-term confidence is reflected in continued share repurchases through July as well as our announced 10% increase in our quarterly cash dividend for the third quarter. We continue to make meaningful progress on our sustainability initiatives and ESG performance. We will soon publish our annual sustainability report, which highlights the terrific work happening around the organization integrated with our overall strategic priorities, including the recent launch of our 100% post-consumer recycled nylon, which I’ll speak to you later on this call. I encourage you all to take a read through it later this month. Looking ahead, our diverse end market exposure and integrated efficient and cost advantage business model provides resiliency, particularly in an evolving global macro environment.

While we anticipate seasonality impacts within our Plant Nutrients business and demand weakness in certain market segments within our Nylon Solutions and Chemical Intermediates product lines, we remain confident in our demonstrated ability to execute and perform through various macroeconomic cycles. We are highly 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 disciplined capital deployment framework. Our organization’s collective efforts are centered around driving best possible outcomes for our business in the current set of industry conditions while supporting sustainable long-term shareholder value.

Now let me turn the call over to Mike.

Michael Preston: All right, thanks, Erin and good morning everyone. I’m now on Slide 4 where I’ll provide a summary of the second quarter 2023 financial results. Overall, our results were solid considering the current environment and against a record prior year comparison. Sales of $428 million decreased approximately 27% in the quarter. Pricing was unfavorable by 25% overall. Market based pricing was unfavorable by 19%, primarily reflecting lower nutrient values, reducing ammonium sulfate pricing as well as lower nylon pricing. Raw material pass through pricing was also a headwind, down 6% following a net cost decrease in benzene and propylene. Volume declined approximately 2%, primarily driven by soft end market demand impacting portions of our nylon and chemical intermediates product lines.

This was partially offset by higher domestic ammonium sulfate volume to meet in season customer demand compared to the prior year period, which was impacted by unfavorable weather conditions. Adjusted EBITDA was $66 million and I’ll highlight the key year-over-year variances on the next slide. Adjusted earnings per share was $1.25, effective tax rate was 24.4% in the quarter, consistent with our full year expectation for an effective tax rate of approximately 24%. And finally, free cash flow was approximately $16 million in the quarter. Cash flow from operations of $35 million decreased roughly $61 million versus the prior year primarily due to lower net income and the unfavorable impact of changes in working capital, driven largely by the unwinding of ammonium sulfate pre-by cash advances this year versus prior year when there was no 2021 year end pre-buy.

Adam Gregor/Shutterstock.com

Capital expenditures of $19 million in the quarter increased $2 million versus the prior year. Let’s turn to Slide 5. Here we highlight the key drivers of our second quarter Adjusted EBITDA performance year-over-year. Pricing of raw materials was roughly a $44 million headwind. Tracking our key variable margin drivers, ammonium sulfate on a net price over natural gas and sulfur basis was down year-over-year as significantly lower pricing was only partially offset by a reduction in input costs. Performance across our caprolactam and nylon portfolio over our key raws was also negative year-over-year, reflecting unfavorable supply and demand dynamics, pressuring global pricing in a lower raw material environment. And lastly, Chemical Intermediates price over raw spread increased year-over-year, largely reflecting acetone margin over falling propylene costs.

Volume and sales mix were approximately $2 million favorable in the quarter, largely reflecting higher plant nutrient sales as previously discussed, partially offset by soft market conditions for our Nylon and Chemical Intermediate products tied to continued weak demand in building a construction and for consumer durables. We also saw an approximately $4 million favorable benefit from planned plant turnarounds year-over-year. Finally, all other items netted to a roughly $1 million unfavorable impact. Now let me turn the call back to Erin.

Erin Kane: Thanks, Mike. I’m now on Slide 6 to discuss each of our product lines. Starting with Nylon Solutions, we’ve seen continued global pricing pressure on the back of unfavorable supply and demand industry conditions and increasing Chinese exports. The Asia caprolactam over benzene spreads averaged roughly $800 per ton in the second quarter of 2023, remaining roughly flat on a sequential basis, but down significantly year-over-year. The global composite price raw spreads, underperformed the Asia of spreads once again as a slower growth Chinese economy is leading to excess supply moving to other regions at lower prices. Trying to export started at an all-time high and we’re seeing the most acute challenges through the engineered classic space.

We’re not only low priced nylon, but also competing material is coming into North America at an increasing rate. This comes at a time when demand overall has remained soft, leading to further margin compression. Across our other key end markets, building construction indicators have been mixed and we’ve yet to see a volume or price recovery in the fiber and filament space where we serve our carpet customers or in wire and cable which has exposure to residential applications. Lastly, Packaging, while a more resilient end use for our business has seen some demand softness tied to inflationary pressures impacting buying behavior and certain applications like bone and meat and protective packaging. Moving to Chemical Intermediates, industry realized acetone prices over refinery grade propylene costs continued to improve year-over-year in the second quarter.

While Acetone demand downstream has seen some softness, particularly into the large buyer end applications, we see supply is generally balanced. This has been supported by stable acetone imports into the U.S. and persistent lower phenol global operating rates or reduced demand in epoxy resin, polycarbonate and nylon value chains serving building, construction and other industrial applications. We also continue to monitor propylene costs, which ended the quarter at their lowest levels since early 2020 on ample supply. Our integrated operating model continues to serve us well in industry dynamics like these. And lastly, in plant nutrients, we saw nitrogen fertilizer pricing decline through most of the first half of the year, amid lower energy costs and increases in global supply availability.

As we have noted in the past, ammonium sulfate pricing tends to be less dynamic than urea and we had seen smaller price reductions through the winter months. As anticipated in-season customer demand picked up through the second quarter supported by favorable underlying agricultural fundamentals. From a crop perspective, corn prices have seen some volatility, with changes in projections of estimated planted acres and the ongoing drug concerns impacting potential yields. In the export market, we saw more cautious buying behavior out of places like Brazil as nitrogen prices fell and although pricing has seen some recovery entering 3Q, it remains well below prior year levels. So overall, while we navigate through a multi quarter reset here as well as the third quarter seasonal dynamics in North America which we’ll discuss on the next slide.

The underlying fundamentals continue to support firm fertilizer demand moving forward into 2024. Our plant nutrients portfolio, now with plans for further expansion of granular ammonium sulfate production is a leader in the space and continues to support overall company performance and results. Let’s turn to the next slide. We thought it would be helpful to spend a moment refreshing everyone on the seasonality impacts we typically see in our ammonium sulfate business. Our ammonium sulfate fertilizer does experience quarterly sales seasonality reflecting both geographical and product sales mix considerations based on the timing and length of the growing seasons in North and South America. The North American fertilizer season runs roughly from July when the value chain begins restocking fertilizer through June when most application for the year’s planting is completed.

The new season fill begins in the third quarter and proceeds sequentially into the following spring, which is the peak period for key crop fertilizer application. As a result of this pattern, North American ammonium sulfate’s demand and pricing, particularly for a higher valued granular product are typically strongest in the first half of the year through application for the spring crop and then declined in the second-half. To better illustrate this sequential seasonality considerations, the chart on the left hand side of the page depicts the average price change from corn belt built ammonium sulfate as published by Green Markets by quarter over the period from 2010 through current. As you can see, the trend reflects the dynamics just discussed.

On average, we’ve seen industry prices in the corn belt decline roughly 10% from the second to the third quarter. And while there are a range of results across the quarters depending on the environment in any given year, we’ve seen sequential declines into the third quarter in every year since 2010 except for 2021. The third quarter sequential declines over that period have ranged from a low single digit decline to decreases of roughly 30%. Now historically these declines correspond to a sequential consideration of $10 million to $15 million lower pretax income on average in a given third quarter relative to the second. However, in 2023, we anticipate the seasonality impact to be above the higher end of the historical range typically seen. I’d now like to turn to Slide 8 to discuss the launch of our new 100% post-consumer recycled or PCR Nylon 6.

Launched at the global platform in June this new portfolio of products built on our introduction of post-industrial recycled or PIR resins and films in 2021. Our effort here is to meet growing demand for environmentally friendly products by incorporating materials built on recycled monomers reclaimed from waste streams. Our approach uses an industry accepted mass balance approach that is third party certified annually. With more than 10% of our total resin capacity available to be sold with a PCR or PIR certification, this is another terrific opportunity for us to boost differentiated product growth, while providing our customers a cost effective path to sustainability. We’re targeting customers across a wide range of applications, driving our value proposition across food and medical packaging that requires FDA compliance, automotive carpeting, thermoformed and shrink packaging for meat and cheese and bag and box packaging.

The new PIR, PCR Nylon 6 materials offer the same excellent properties as conventional nylon products. They are drop-in replacements with no costly re-qualifications or cost to consumers and provide a solution to help companies meet their sustainability goals. We’re in the process of finalizing a life cycle assessment comparing your conventional Nylon 6 with our recycled offerings. We expect that it will show us significant carbon footprint reduction, positioning this product to further contribute to our customers decarbonization goals. Now to put this in perspective in a packaging application, nylon’s inherently larger footprint relative to polyethylene becomes an advantage when optimizing the overall packages carbon footprint. As an illustrative example, if you assume use of these products in a typical multilayered film application the recycled nylon 6 could potentially deliver an approximately 30% reduction in overall carbon footprint when compared to plastic [indiscernible] published numbers.

Now let’s turn to Slide 9 to wrap up before moving to Q&A. 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 agriculture and fertilizer industry fundamentals to continue. However, typical seasonality will be a key consideration to our expected sequential performance in the third quarter relative to the second. 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 persist across our nylon and other chemical intermediates product lines.

This is expected to continue having implications for both price and volume. Operationally, we are highly focused on the execution of our upcoming third quarter planned plant turnaround, which supports our ability to safely operate at higher utilization rates relative to our industry. We continue to expect the pre-tax income impact of planned plant turnarounds to be $25 million to $30 million in the third quarter of 2023 totaling $20 million to $33 million for the full year. So overall, we are executing to a set of focused priorities, all of which are aligned to driving the critical measures that underpin compelling returns on capital and attractive long-term total shareholder returns. With that Adam, let’s move to Q&A.

Adam Kressel: Great. Thanks Erin. Alan, can you open the line for questions?

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Q&A Session

Operator: We will now begin the question and answer session. [Operator Instructions] Our first question comes from Vincent Anderson of Stifel. Please go ahead.

Vincent Anderson: Yes. Good morning and nice job on the quarter.

Michael Preston: Good morning.

Vincent Anderson: Good morning. So purely hypothetically, how would a trade case against Nylon 6 from China compare to acetone or ammonium sulfate just given trade data doesn’t disaggregate Nylon 6 from other nylon products? Is that something that’s based on your prior experiences would be feasible?

Erin Kane: Yes, certainly. Thanks for the question, Vincent. We want to keep all of our options open here and certainly ensuring fair trade practices is important to us as we continue to monitor the industry dynamics here. Our assessment is underway and as you pointed out, we’ve been in this position in the past in both our ammonium sulfate and [indiscernible] businesses and trade cases like these around the world. And we’ll leverage our prior experience to participate in fair trade right if determined that that’s the most appropriate action.

Vincent Anderson: Okay, all right. And then can you just quickly remind us what types of agricultural products U.S. means going to and how did it perform this quarter given we’ve seen some pretty severe destocking and crop protection kind of everywhere else in the chemicals world?

Erin Kane: Yes, no and our experience here would be the same. As a reminder, we go into the herbicides down the glyphosate chain with our MEPA product offerings and certainly on the AG chemical side their work and we did see more destocking that occurred based on the import levels that happened late last year. And so we have seen that on impact and certainly demand through what would have otherwise been a strong season like t we saw in dry fertilizer as — basically down the chain and retailers and growers work through the higher inventory. But again, I think the underlying fundamentals generally it might support an opportunity set here as we come through into the next season.

Vincent Anderson: Great. And if I could just ask a couple quick ones on the recycled content. So, if I remember correctly, your PIR nylon is tied with your own kind of internal manufacturing process waste for lack of a better term, but what is the feedstock for the post-consumer recycled nylon?

Erin Kane: Yes. If you think about the opportunity set that we have with our customers and their value chain, we can take opportunity sets of monomers and back from them, they’re in their streams as well. And so it’s an expansion if you think about that envelope, opportunity set to be able to bring it back into our chain.

Vincent Anderson: Okay, okay that makes sense. And then does Ogun [ph] already have food packaging products developed and ready to market with PCR nylon or is that your next step?

Erin Kane: Certainly as we work with them in concert and create that opportunity set, so in Boba [ph] that’s going to be in certain types of applications. Those are typically more mono oriented type packaging. The multi-film would work through our partners and in some of the other converters.

Vincent Anderson: Got you. Okay, all right. Thank you very much.