Q2 2022 AdvanSix Inc Earnings Call
Good day and welcome to the advance six second quarter 2022 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 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 Crystal President of Investor Relations and Treasurer. Please go ahead.
Thank you Dave Good morning, and welcome to advanced <unk> second quarter 2022 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 Dot 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 second quarter of 2022 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 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 advantage delivered robust second quarter results capping off a strong first half of 2020 two.
Let me share a few highlights on slide three before Mike covered the details of our financials in a moment.
The second quarter results reflect the top and bottom line growth sequentially and year over year.
Strong commercial performance to meet customer demand more than offset higher inflation and the lower sales volume primarily due to unfavorable weather conditions driving a reduction of in season and fertilizer demand.
The strength and advantage of our business model and diverse product portfolio and the continued execution to our long term strategies again enabled us to both navigate the challenges of supply chain and logistics disruptions escalating raw material inputs and inflationary costs as well as to capitalize on a resilient underlying demand opportunities to deliver result, that's cool.
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A healthy $78 million of free cash flow generated in the quarter reflects the quality of our earnings and supports our continued reinvestment in the business and return of cash to shareholders.
This includes opportunistic share repurchases through July as well as our announced 16% increase to our quarterly cash dividend for the third quarter.
Our integration of U S. Amines, it's also progressing very well as expected, adding additional value to our portfolio.
We continue to make meaningful progress on our sustainability initiatives and performance, we will assume published our annual sustainability report, which highlights many of the ongoing initiatives happening around the organization integrated with our overall strategy.
I encourage you all to take a read through it.
And earlier this week, we were proud to announce that advantage was recognized as a three plus company with three or more women directors by 50 50 women on boards.
This recognition reinforces our commitment to equity diversity and inclusion at all levels.
Our diverse end market exposure and competitive cost advantage provides resiliency, particularly in the global macro environment that is evolving real time.
Looking forward, we expect continued healthy in North America demand for nylon and chemical intermediates as well as favorable underlying agriculture, and nitrogen and fertilizer industry fundamentals.
Until the 'twenty 'twenty three planting season.
In this environment, we are highly focused on executing 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 enhancing our capital deployment.
We are focused on driving best possible outcomes for our business and the current set of industry conditions and remain confident in our ability to target significant earnings growth in 2022, and build sustainable long term shareholder value with that I'll turn it over to Mike to discuss the financial details.
Hey, Thanks, Darren and good morning, everyone.
I'm now on slide four where I'll highlight the second quarter 2022 financial results.
Overall, a strong commercial execution supported significant sales earnings and cash flow growth.
Sales totaled $584 million up 33% compared to last year.
Pricing was favorable by 32% comprised primarily of 26% higher market based pricing driven by our ammonium sulfate and nylon product lines.
This was partially offset by lower pricing in chemical intermediates, driven primarily by acetone as we expected.
To a lesser extent raw material pass through pricing contributed two 6% of topline growth following a net cost increase in benzene and propylene the.
The acquisition of user means added approximately 5% of sales as well sales.
Sales volume decreased approximately 4% driven primarily by unfavorable weather driving a reduction of in season fertilizer demand and lower production output limiting supply of nylon resin and chemical intermediates compared to the prior year.
Adjusted EBITDA was $105 million, an increase of approximately 32% versus the prior year.
I'll walk through the key year over year variances on the next slide.
Adjusted earnings per share of $2.30 was up approximately 40% versus the prior year.
And finally free cash flow reached 70 million and nearly doubled from the prior year cash.
Cash flow from operations increased roughly $44 million year over year, primarily due to higher net income and the favorable impact of changes in working capital.
Capex of $18 million increase roughly $7 million year over year, reflecting the timing of maintenance, it's a maintenance spend as we expect it.
Now, let's turn to slide five.
Here, we highlight a few of the key drivers of our second quarter adjusted EBITDA performance year over year.
Pricing over raw materials was a $57 million benefit as we once again drove strong commercial execution to capture higher pricing.
Tracking our key variable margin drivers performance in ammonium sulfate on a net price over natural gas and sulfur basis.
<unk> its positive trend year over year, reflecting the strong underlying AG environment as well as our ability to drive value above and beyond the sharp increase in input costs.
Caprolactam and nylon over benzene were up year over year, as well, reflecting continued tight industry supply while demand remained healthy, particularly in North America.
Lastly, chemical intermediates reflected a continued moderation in acetone over propylene spreads compared to historically high levels seen in the second quarter of 2021 as we expected.
Planned plant turnarounds were in approximately $3 million favorable, but favorable benefit year over year.
In the quarter. We also saw a roughly $23 million unfavorable impact from increased planned spend primarily driven by utilities due to higher natural gas prices and an increase in non raw material inflation, primarily on transportation costs.
Lastly, volume and other items were approximately $12 million unfavorable in the quarter.
Lower sales volume versus the prior year was partially offset by the contribution from the U S amines acquisition and a reduction in SG&A costs.
Now, let's turn to the next slide.
On the left side of page six we've once again highlighted the drivers of the second quarter 2022 free cash flow generation, which was supported by higher net income and the favorable impact of changes in working capital, partially offset by higher income taxes payable.
Working capital was a roughly $50 million source of cash in the quarter.
Counts payable represented approximately $70 million of that total partially offset by an approximately $24 million use of cash from accounts receivable, reflecting the increase in linearity of sales.
The benefit from accounts payable reflected the significant increase in the price of raw materials as well as some timing of purchases.
We do expect roughly half of this amount to reverse in the third quarter, primarily due to the timing of Cuming payments.
I would highlight that over the last 12 months, our free cash flow yield is roughly 15%, which reflects the healthy cash flow generation and quality of earnings of our business our business model delivers.
On the right side of the page we've depicted our capital deployment since 2020.
As we navigated through the Covid environment in 2020 in 2020. One we were highly focused on managing our cash and debt levels supporting a significant pay down in debt and driving our net debt to EBITDA leverage ratio of below one.
We have ramped up our deployment in 2022, including an increased run rate on organic capital investments in the business the acquisition of U S. A means for an estimated net purchase price of approximately $97 million.
And roughly $17 million of cash returned to shareholders through roughly $10 million of share repurchases and $7 million of dividends paid.
As Erin mentioned earlier, we announced a 16% increase in our quarterly dividend to <unk> 14, and a half cents per share payable on August 30th and we repurchased an additional two and a half million dollars of shares in July .
Our balance sheet is as healthy as it's ever been a positive in the current environment. We continue to execute a disciplined and balanced capital allocation strategy that we believe is a value enhancer to our core strategies and a key focus to support attractive total shareholder returns so with that 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, we've seen price raws spread modestly improve in the second quarter sequentially relative to the first quarter of 2022 led by North America and Europe .
Global cost curve has remained steep in this current energy environment with input costs continuing to rise, which has supported spreads relatively in line with marginal producer economics.
In North America, where we primarily participate we've seen pricing and spread fair better as reflected in the global composite seen on the chart here outperforming the Asia benchmarks on a year over year basis.
From an end market perspective, the north American market dynamics remain largely consistent to what we have seen in the past several quarters, including resilient demand and snug industry supply conditions.
Residential construction markets have slowed with the rise in interest rates. However recovery in commercial continues where nylon six carpet has a strong presence.
We've also seen packaging and engineering plastic resin demand remains steady.
We know this portfolio is more sensitive to consumer demand, particularly for an engineered plastics resin, while we expect regional demand on balance to remain healthy we are monitoring for signs of slowdown in areas like consumer durable goods.
Moving to ammonium sulfate strong underlying AG fundamentals alongside the elevated energy input costs drove significantly higher nutrient values in the second quarter on a year over year basis.
As we shared previously we did experience a compressed season due to weather, which led to in season demand declines for most plant nutrients across much of the U S.
Despite some heightened macro uncertainty in the near term overall underlying agricultural industry fundamentals remained favorable heading into the 'twenty 'twenty three planting season.
Supported by among other items crop prices stock to use ratios nitrogen fertilizer supply as well as continued duties on imports from China.
Key crop prices, although lower in recent weeks remained higher year over year and likely to move higher in support of positive farmer economics.
Underlying this is historically low stock to use ratios, which support the continued need for robust planted acres this upcoming season.
Overall nitrogen fertilizer supply has remained tight and raw material input cost remain historically high steepening, the industry cost curve and constraining price availability in Europe .
Are there supply constraints globally further include export limitations and restrictions in various regions.
So overall, while we navigate through a seasonal reset here in North America. The fundamentals support continued robots fertilizer demand and pricing going forward into 2023.
And lastly, turning to chemical intermediates industry realized acetone prices over refinery grade propylene costs improved sequentially in the second quarter on continued balancing of acetone supply and demand.
Pricing in the small medium buyer market, which has reflected that roughly one third of the domestic industry declined significantly on a year over year basis as expected.
As you may recall pricing reached its highest levels of 2021 at the start of the second quarter last year amid continued tight supply and demand balance in the U S with planned and unplanned downtime impacting supply across the value chain.
Despite the year over year decline pricing currently remains at healthy levels relative to history.
This comes at a time when acetone demand downstream has remained resilient imports into the U S had been minimal and refinery grade propylene costs have trended lower.
Beyond acetone, we continue to expect healthy demand to continue for a full intermediates product portfolio, which serves a diverse set of end markets and customers across building construction, although paints and coatings solvent agrochemicals electronics and pharma consumer calls among others.
Let's turn to slide eight.
Our outlook for the remainder of 2022 remains largely consistent to what we have shared previously.
We continue to target significant year over year earnings growth for the full year 2022 on top of what was an outstanding year in 2021 supported by the strength of our integrated business model and diverse end market exposure.
Despite some macro uncertainty demand is expected to remain healthy across our nylon and chemical intermediates product lines and we do expect that favorable underlying agricultural industry fundamentals to continue into 2020 three planting season.
We are also efficiently integrated in the U S amines business into our portfolio and expect the deal to deliver year one earnings accretion.
There are two items that we've discussed previously as key considerations to our expected sequential performance in the third quarter relative to the second quarter.
First our ammonium sulfate fertilizer does experienced quarterly sales seasonality, reflecting both geographical and product sales mix considerations based on the timing and length of the growing season in North and South America.
As a reminder, the North America planting season runs from July three Jim.
The new season fill typically begins in the third quarter and proceeded sequentially into the following spring, which is the peak period for fertilizer applications for key crops.
As a result of this typical pattern north American ammonium sulfate demand and pricing, particularly for our higher valued granular product are typically strongest in the first half of the year through application for the spring crops and then decline into the second half.
As we have shared in prior years historically, we've seen a sequential consideration of $10 million to $15 million higher Cogs on average in the third quarter relative to the second however in 2022 given the pricing environment and demand dynamics, we anticipate the seasonality impact to be above the higher end of the historical range.
Yeah.
A second consideration that we've shared previously is the expected impact to pretax income from planned plant turnarounds.
We continue to expect a range of $32 million to $37 million in 2022.
But the larger of our Hopewell turnaround roughly $26 million to $30 million of that total scheduled for the third quarter.
Operationally, we continue our focus on safe stable and sustainable performance, while driving less variability and utilization rates, which in turn drives improved customer experience and higher returns for the business.
For the full year 2022, we continue to expect Capex to be in the range of 95 million to 105 million with an increase to our spend run rate in the second half of this year.
As we install equipment and execute projects within our unit operations during our turnaround activities.
And lastly, we expect our effective tax rate for the year to be approximately 24% and now anticipate cash pension contributions to be in the range of $15 million to $20 million compared to approximately $18 million in 2021, which will bring our defined benefit plan to nearly fully funded status.
Let's turn to slide nine to wrap up before moving to Q&A.
Yeah.
We believe that advanced six offers a compelling investment thesis and there are a number of factors supporting robust performance and attractive returns for the business and our shareholders over the short medium and long term.
First our integrated value chain and business model supported by our unique combination of assets provides inherent competitive advantages.
Our scale make versus buy economics for can't immediate location here in the U S and ultimately the technology and Chemistries, we practice provide significant value and diversify our business.
As the industry cost curve steepen globally, we are in a strong competitive position.
As a reminder, approximately 50% of our business is on Formula or index based contracts, where changes in raw materials are contractually passed through to customers with very little lag.
The second core factor is our leading product portfolio aligned to diverse end market applications.
While scaling costs underpin our position, we strive to different differentiate through our strength and execution with strong channels to market to provide security of supply best in class delivery and quality and we continue to develop capabilities to solve future customer challenges.
With digital transformation are all around us the need for chips and electronics is translating to demand generation for our high purity solvents within chemical intermediates.
The global population growth continuing to expand the world will have to produce a significantly higher amount of food annually than we do today. This will require more proscriptive use of nutrients to drive crop production as sustainably as possible to efficiently use our global arable land.
There is also need globally to address food waste and spoilage, where our position in nylon barrier packaging comes into play.
And we have substantially increased the earnings power of this business with our focus on through cycle profitability.
Our differentiated product portfolio focused on high purity applications high value intermediates and differentiated nylon is now over $200 million in annual revenue growing at GDP plus rates with margins that are twice our average base business gross margins supporting an enhanced sales mix.
Disciplined investments in our current asset base also continued to accrue long term benefits and throughput and profitability and.
And we continue to evaluate and over $50 million pipeline of high return growth and cost savings projects that focus on improving rate yield quality and cost.
Lastly, our enhanced capital allocation framework provides upside and optionality for further value creation.
Mike discussed earlier, our healthy balance sheet, and we will continue to maintain prudent leverage levels in the current environment.
We are targeting accretive M&A for bolt on opportunities, providing growth and synergies and reflecting our confidence. We've also stepped up our return of cash to shareholders with today's announcement of the dividend increase alongside opportunistic share repurchases.
So when put altogether, our strategies continue to support expectations for advance a sense long term sustainable performance with that Adam let's move to Q&A.
Thanks, Darren Dave can you. Please open the line for questions.
Yeah, we will now be good in the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys. If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time.
We'll pause momentarily to assemble our roster.
Okay.
Yeah.
The first question comes from Vincent Anderson with Stifel. Please go ahead with your question.
Yeah good morning.
Hi, good morning.
Yeah.
Is there anything to read into the higher sales growth in nylon relative to cap row again this quarter, just given they're both effectively priced off benzene.
No nothing.
Nothing to read into there Vincent I would highlight that we do continue to benefit from pass through pricing in nylon on the topline, but it's only the top line sales growth was achieved.
Again with a keen focus.
You know aligned to the regional supply demand dynamics and are you know to really capture the inflationary input costs and an increasing focus on value based pricing.
You know the camera side has probably more formulaic and the nylon has a bit more freely negotiated pricing.
Okay, that's good and actually just kind of carrying that line of thinking over the last few years, you've you've generally been able to grow through headwinds in areas like automotive.
Billy just through higher and higher adoption of the new products.
Brought to the market over that time.
We see kind of yet another round of headwinds for areas like automotive like some of your peers are pointing out.
How much confidence do you have in your current pipeline of leads to keep up that relative performance.
Yeah.
Yeah. So you know again.
The focus here for for nylon has been around mix optimization enhance portfolio resiliency.
Again, we have sales into fiber and filament.
You know here again, we continue to see recovering demand in the commercial and hospitality markets. You know that is a key area in which we continued to play and is it you know an important consideration as we move forward and certainly ensure that value chains have the right inventory to supply their and Pat.
<unk> got our demand has remained resilient there.
You know key barrier and durability performance characteristic so.
We see that continuing.
As you pointed out in engineered plastics. This is an area, where we're working closely with our compound and customers in the auto consumer durable and electronic sub segments.
I think we have been much more diversified in in the past and our and our focus predominantly on the independent compounds to win.
So broader reach we do have dedicated teams now dedicated technical service folks and technical marketing. So I think we are in a position to as always you know navigate through that but recognizing that we'll have to watch for.
Signs and signals here of a slowing growth and are you know certainly recognize that there are there.
Our regional.
Factors that play and while the North America region has fared favorably in.
In the recent past that we have to be cognizant of the global considerations, which is probably where you're a little bit on what you're seeing in some of the other larger compound or as they think about the global dynamics that are happening in Asia and Europe .
Okay.
Helpful.
And then turning over to fertilizers.
We saw a pretty sharp reversal in prices pretty standard seasonally probably had some help from the tough North American spring, but then if we're looking forward.
For the coming winter, it's not like things have really gotten much better from a supply side perspective, So I'm just wondering.
Willing to share anything at this stage about how you're thinking about approaching the pre buying season.
Just given where prices are today versus where they were quite recently and kind of your <unk>.
Outlook for supply demand and two it's early next year.
Yeah.
Yeah, so great.
Great question as always Vince and Harry you know, we opened our fill season.
We're getting price level is consistent with our typical methodology you know as we look at nitrogen nutrient values in our software value proposition.
Certainly as you noted.
The industry and the value chains are working through the seasonal reset you know coming off of.
You know a later spring and.
With us I would say we were focused on the underlying fundamentals into next spring season.
Again as we discussed earlier, we do think it is highly supportive of strong planted acres robust nutrient values on supply demand in energy input costs.
The likely appreciation of crop prices I would say, it's a bit early for us to assess I mean this is a market that can move than in weeks. So I think as we proceed forward, we'll certainly be prepared to share our thoughts as we.
Reported Q3 earnings later in the year.
Okay. That's that's fair if I could actually just tack on a procedural question then for that can you.
Maybe walk us through exactly how youre, how youre fill season operates as this you basically posting.
Our price and just seeing who will take it or do you accept bids and then you will decide later how much of that volume you want to commit.
Kind of maybe walk us through procedurally, how how that works.
Yeah. So it's more probably straightforward we post our open prices here again, that's out there we're in the mid to high four hundreds again consistent with our typical methodology.
And and we began building our order book and.
We effectively watch.
How that fills up we can.
And the consideration year on year right. There are a lot of factors that go into it but you know we are accepting orders.
And moving forward into a into the fall season.
Okay excellent. Thank you.
Yeah.
Our next question comes from David Silver with C. L King.
Please go ahead with your question.
Okay.
Oh, sorry hang on.
Okay go ahead David.
Alright, I am I am I coming through now, yes, yes sure.
Okay, Great I just wanted.
I wanted to mention I had to join a little bit late so I apologize.
Going to be making you repeat yourself.
So there's been a question I think about nylon related to benzene and Theres been a question about I guess.
Yeah.
Impact of I guess still very elevated natural gas situation in Europe and certain other markets.
And you know I'm wondering from your perspective Erin.
You see the.
Exceptionally high natural gas costs in Europe .
Not so much affecting fertilizer production I think that's pretty well established but what are you seeing on the nylon and caprolactam side. So in other words, you know a lot of.
At least a couple of nylon producers there have highly integrated.
Production complexes multiple products in it.
At the beginning or near the beginning as ammonia.
So Germany is obviously one market, but there are some others, but is it your opinion that.
This unusual.
Natural gas situation in Europe is going to.
Reduce the global supply of nylon or 10, the producers kind of all through their global networks to offset it.
Pluses and minuses, but how do you see.
The supply for nylon and caprolactam responding to.
The current <unk>.
Situation in natural gas, maybe any other raw materials.
Sure and.
And thank you for that question, David and as you know certainly.
Natural gas energy right across the board has steep ends you know all the cost curves Europe is the marginal producer for caprolactam.
At this time and are certainly you know couple of as you know with the energy supply considerations have impacted their operating rates.
And I was there on also beginning to 10 points trade flows globally.
Caprolactam operating rates in the U S by comparison around 90%, whereas they said probably closer to 16 in Europe and about 65% to 70% in Asia.
You know when we think about that regional structures in nylon in the U S is primarily balanced.
Europe is structurally long we would note that the current cost structure is much higher than potentially landed imports from Asia.
So I think we are at a point of watching for where.
Typical of trade flow positions could shift.
On how the demand signal evolves and and certainly with the global networks and the global.
Overcapacity that fits naturally in caprolactam and and.
And nylon that are.
You know I think as the dynamic plays out in Europe volumes could flow in different directions to compensate.
Okay, great and if I could follow up I think on a comp the comment was made about the 50 million dollar kind of discretionary.
The list of projects.
You could tackle I was wondering if you might be willing to share a little bit of color on on where those opportunities might lie I mean as I recall you had a coming.
Shortly after you became public do launch the $150 million program that was I guess focused.
On your legacy facilities I'm I'm guessing some of the.
Next wave of discretionary spend might might focus on your required assets or maybe some targeted areas and new product development, So and any color you might share would be helpful. Thank you.
Sure and I think you're thinking about it right.
Certainly as we have shared.
We talked about a number of large projects out of the gate to out of our original pipeline. So the decided that now tend to be smaller in nature.
At our core facilities they are focused on things.
Things like energy cost yield we continue to refine our outlook on our roadmap for expanded granular ammonium sulfate conversion. We continue to refine projects that will allow expansion of the sales growth over time in products like our cyclohexanone.
You know solvents and high purity solvents, there and as you say we've been hard at work on a pipeline of opportunities for the U S. It means acquisition and certainly part of our ability to target that a doubling of our EBITDA.
EBITDA in the next three to five years will require some projects as well again these will be smaller in nature.
You know they won't be sort of the $20 million to $30 million as they sit today and continue to work themselves through the engineering process and.
So I think it's again, a nice way for us to drive growth, but also just sort of core base underlying earnings.
Okay, Great last question would be about capital deployment so.
I personally was very pleased to see the increase in the dividend.
I tend to believe that it will reduce the volatility of your stock over time.
Probably probably eat those words tomorrow or the next day, but overtime.
Shareholders will.
Reward you for that.
But I wanted to pick up maybe on the comment about quote unquote opportunistic share prices.
And you know your stocks really moved within a wide range over time and I'm. Just wondering if you could maybe just if you have some rules of thumb or some guidepost that you might offer on what.
Considers.
Opportunistic and in the context of a share repurchase thank you.
Yes.
David we're going to.
As you point out deploy an opportunistic approach obviously there are other considerations around when we can do the share repurchases the amounts.
Subject to.
Certain reviews and information we have so.
That is a consideration for sure but you've seen what we've done we've certainly disclose the amounts and the share prices that we repurchase out and I.
I think from there could that could help give you sort of a guidepost on how do we think about things going forward and again, we're just going to continue to be opportunistic there are times, where.
Our share price does move around due to various different factors and certainly we like to have that opportunity.
To be opportunistic, we certainly have 50 million roughly of remaining authorization left to deploy and to use and that will be our approach in yoga and youll continue to see that going forward here.
Alright, Thank you very much I appreciate it.
Again, if you have a question. Please press Star then one our next question comes from Charles Neighbor. Please go ahead with your question.
Good morning, good morning, guys.
Quick question.
Is there any opportunity to move some of fertilizer products.
To to Europe , instead of South America, I mean, given europes exceptionally high Cogs and probably shutting down a lot of the base products.
Based off of ammonia and natural gas or at least cutting back production significantly does that open any opportunities for Europe , and if Europe , where our market would it take the granular or the more standard product the more standard product.
Yeah, it's certainly something to watch trolley occurring.
Europe does and has historically exported.
A portion of its ammonium sulfate both into North America, as well as into the South American market.
You know certainly as.
Operating rates have drawn back we've seen that.
Yeah, perhaps tighten up a bit.
But we continue to look at the opportunity.
Is predominantly more of a I would say granular oriented market.
Given the investments that Fibernet and others have made over time to create.
Create that higher value for them, but certainly something that we will continue.
We continue to explore.
Particularly as we look at.
The Chinese growth of sales of caprolactam into places like Brazil right.
Where are you now perhaps are not even covering nutrient values is a consideration but.
Yeah, probably limited imports historically, but as you say dynamics could could change rates that we'll stay nimble and agile and are looking at it right.
And then sort of associated with that has your have you seen any issues in Europe again since cap broadly sort of if you walk. It back you know so that had some natural gas facing two it has that affected their ability to produce at all and therefore again, given maybe potential opportunities going forward or is it just basically lifted global pricing because their cost structure is now.
So high and that that ultimately might be.
Yes, certainly with they've declined in their utilization rate.
We see from the trade statistics, certainly that they've pulled out of.
Export markets.
And in a pretty significant way in certain certain places. So I think the question is will it tilt.
Any.
Any further but you know certainly with Asia supply being in the middle of the cost curve.
That.
That gets back to a little bit of the commentary earlier where are they.
They those pounds can get into a.
Into into Europe , you know below the are they manufactured cost so as the global dynamic for for demand plays out in the next couple of months you know, we're gonna have to watch to see what that does is it lifts certainly global prices, but you know as we've talked in the past that that global clearing price really get Sutton.
Asia and that's one that we have to to watch closely as we proceed going forward.
Okay.
In the last few weeks, maybe even less there has been a really significant drop in the price of sulfur.
Clearly you know that's sort of part of the.
The system you guys have to deal and is that going to give you any benefit and to what degree and it or is there basically an automatic pass along it for that price dropped because I think it was pretty significant.
Yes, we have seen a significant.
The reduction in the pricing of software now keep in mind sulfur when you look at it sequentially from the second quarter to the first it was up 70% so.
We're just.
Going backwards from what has been a significant inflationary environment you know in the second quarter year over year. So far is up like 150%. So.
Big numbers here.
From what we've seen here the price appears to have peaked here in the second quarter and it is coming down.
Sharply in the third.
Some of that is as a fertilizer demand coming down a bit here as well as.
The demand from China, reducing as well.
And it's right now it's dynamic I would say.
Certainly the production of sulfur and the supply of sulfur has been pretty steady while we're starting to see the demand here tail off a bit.
And we'll watch it I mean, it is sulfur is a key consideration with respect to our <unk>.
Raw materials right around that sort of eight 9% of our total direct material, but it is also incorporate as part of some of our formula contracts as well so that would be an offset but it.
It's moving quite rapidly and will continue to monitor monitor it very closely.
Okay and on a completely different area you guys talked about nylon packaging and I know, it's a sort of a nice business for you guys, but given some of the movement in recycling and you know those programs and in some cases can be like Dow and others have talked about trying to be more consistent with these multi layer package.
And things like that so that our package is easily recyclable is that going to present any issues for nylon. If it's sort of part of a larger packaging system or is it just typically done on its own not in layers and therefore recycling is not really other people's recycling issues and changes in packaging is not going to be an issue for you guys.
So it is certainly a long term trend that we have to watch and and dive deeply game with our customers Charlie just given the macro considerations when nylon can be used by itself right. It also is used in multilayer packages as well.
One of the reasons behind our launch of our postindustrial recycled 100% PCR resin was to help our customers in this space.
Meet some of their targets as well.
But again, it's as we dive into our innovation for Circularity innovation in this area.
Again nylon is further up relative to the amounts used compared to a number of the other core large.
<unk> and films, but you know.
Something that.
We'll have to.
Certainly watch over the long term.
Okay. Thanks, very much I'll pass on.
Our last question comes from Vincent Anderson with Stifel. Please go ahead with your question.
Yes. Thanks, I just wanted to ask a couple quick ones on costs. So.
I guess just first are you seeing any meaningful increase in Q I mean, adders, just given where octane prices have gone or is this market is still pretty stable aside from the benzene and propylene pass through components.
Yes, so the majority of our acumen is under contracts and typically there either one year or multi year.
Agreements and at the Adders are determined at the time of the contract.
Finalization and so we're highly contracted coming into this year.
However, when you look at it from a spot perspective, certainly given the.
The tightness, we've seen over overall in the marketplace.
<unk> on a spot basis have have gone up.
But again, we're primarily active really with our contracted suppliers and that's where we get a majority of our acumen. So we don't necessarily.
Feel that that spot movement, and obviously as we go forward here we're continue to.
Interact with our suppliers with respect to contracting and work through the EDA is going forward as we.
As we approach those renewals.
Okay, perfect and then.
You don't want to break out the utility versus gas dollar increase in that earnings bridge.
So maybe if you could just talk about the structure of your utilities contracts or those kind of annually negotiated or are you just kind of paying some kind of a large customer right.
And maybe a reliability premium can you just talk about what.
Yes, sure the pricing is.
Of the utilities is really mostly driven by a natural gas. There is also electricity rates in there as well.
As you can imagine Vince and our plants are pretty energy intensive.
And subject to moves in what you saw really in the second quarter. When you look sequentially, what natural gas prices did they were up.
Roughly 50% from Q1 to Q2.
And so that that does get reflected in our purchase cost with respect to natural gas for utilities and flows through our planned spend.
And so that is a variable component and what we've done is we've worked.
Very hard to make sure that you know across our product lines, we have that in front of us and we're doing everything we can to.
For the sort of non formula customers and the spot business.
Push as hard as we can to make sure we recover those utility costs, which is what we're doing in addition to any other non material inflation. We also saw inflation on transportation cost as well in the quarter, which we are working here to to actively recover through the commercial actions we've seen so so that's.
How we're managing the inflation and where we're doing a good job getting through it and being able to get those cost.
Covered here through again, the commercial actions we're taking.
Okay, great Yeah. So it sounds like just think of it as that.
Gas and not worry too much about the shoreline.
Okay.
And then last last one I promise.
We don't talk too often about phenol.
But you have some merchant tons and those spreads to benzene. It looked like they have exploded recently I'm. Just wondering if you could give us a little bit of insight there.
Yeah. The most of our phenol again, we're a much smaller player given the fact that you know nearly 80% of our phenol is produced four for downstream.
Sumption into a into Hopewell.
For for both caprolactam, nylon and and higher value of derivatives.
You know our contracts here in the customers we serve are on formula contracts.
So certainly I think on a spot oriented basis.
Which perhaps some of the larger players would be participating in that.
That could be the case, but we think about ourselves as being predominantly contracted and those contracts considerations would have been set in the fall of last year.
Okay. All right helpful. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Erin Kane CEO for any closing remarks.
Thank you all again for your time and interest. This morning, we delivered robust results in the first half of 2022 and are hopeful you share our excitement about the opportunities that lie ahead, 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 total shareholder returns.
Certainly an exciting time in advanced <unk> for all of our key stakeholders.
With that we'll 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.