Q2 2023 AdvanSix Inc Earnings Call
Good morning, and welcome to the advanced six second quarter 'twenty twenty-three 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 today's 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 Adam Crustal, Vice President of Investor Relations and Treasurer. Please go ahead.
Yeah.
Thank you al and good morning, and welcome to advanced <unk> 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 <unk> advanced six dotcom.
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 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 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 on our press release advantage delivered solid earnings and cash flow results in the second quarter and then it continued dynamic macro environment and against a record second quarter in the prior year period.
The performance for the further illustrates the value and resilience of our diversified chemistry company.
Our team executed on strong in season demand for plant nutrient, albeit in a lower nitrogen and raw material pricing environment.
Advocated on favorite favorable nylon industry supply and demand conditions, and an increased low priced imports.
Continuing to experience balanced north American acetone supply and demand dynamics.
In our chemical intermediates 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.
I mean, let's say don't 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 later on this call.
Encourage you all to take a read through it later this month.
Looking ahead, our diverse end market exposure and integrated a fishing and cost advantaged business model provides resiliency.
Particularly in an evolving global macro environment.
Well, we anticipate seasonality impacts within our plant nutrient business and demand weakness in certain market segments within our island 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 their 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.
Let me turn the call over to Mike Alright, Thanks, Aaron and good morning, everyone.
I'm now on slide four we'll I'll provide a summary of the second quarter 2023 financial results.
We're all 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 and that caused the 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, the effective tax.
It 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 $60 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 buy Kevin I should batches this year versus prior year.
Year, when there was no 2021, and the yearend pre buy.
Capital expenditures of $19 million in the quarter increased 2 million versus the prior year, let's.
Let's turn to slide five.
Here, we highlight the key drivers of our second quarter adjusted EBITDA performance year over year.
Pricing over raw materials was roughly a $44 million headwind.
<unk> are 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.
[noise] formats 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 and a lower raw material environment.
And lastly, chemical intermediates price over raws spread increase year over year, largely reflecting acetone margin over falling propylene costs.
Volume and sales mix for 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 and construction and for consumer durables.
We also saw an approximately $4 million favorable benefit from planned plant turnaround year over year.
Finally, all other items netted to a roughly $1 million unfavorable impact.
Let me turn the call back to Eric.
Okay.
Thanks, Mike and now on slide six to discuss each of our product lines.
Starting with Niland solutions, we think continued global pricing pressure on the back of unfavorable supply and demand the industry conditions and increasing Chinese exports.
The Asia Caprolactam over benzene spreads average 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 spread underperformed the Asia spreads once again as a slower growth Chinese economy is leading to excess supply moving to other regions and lower prices.
China exports are at an all time high and we are seeing the most acute challenges they engineered plastics space not only low price nylon, but also competitive material is coming into North America at an increasing rate.
It 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.
You have to see a volume of price recovery in the fibers filaments space, where we serve our carpet customers where in wire and cable which has exposure to residential applications.
Lastly, packaging, while a more resilient and used for a business that's seen some demand softness tied to inflationary pressures impacting buying behavior and certain applications like bone and meet and protective packaging.
Moving to chemical intermediates industry realized acetone prices ever refinery grade propylene costs continued to improve year over year in the second quarter.
Well, Tom demand downstream has seen some softness particularly into the large fire and 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 on reduced demand until a proxy RASM polycarbonate and island value chain, starting building construction and other industrial applications.
We also continue to monitor propylene costs, which ended the quarter at their lowest level since early 2021 ample supply.
Our integrated operating model continues to serve us well in the industry dynamics like these.
And lastly in plant nutrients, we saw in nitrogen fertilizer pricing declined through most of the first half of the year amid lower energy cost 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 that estimated planted acres and the ongoing drought concerns impacting potential deal.
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 and train III kill it remains well below prior year levels.
So overall, while we navigate through a multi quarter reset here as long as the third quarter seasonal dynamics in North America, which I'll discuss on the next slide.
The underlying fundamentals continue to support firm fertilizer demand moving forward into 2024.
Our plant nutrient 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 impact we typically see in our ammonium sulfate business.
Our money in Salt Lake 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 change against restocking fertilizer or three June when most application for the year's planting is completed.
The new season fill it against the third quarter and proceed 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, just 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 in the second half.
To better illustrate the sequential seasonality considerations. The chart on the left hand side of the page depicts the average price change corn belt ammonium sulfate as published by Green markets by quarter over the period from 20 <unk> to parent.
As you can see the trend reflects the dynamics just discussed.
On average we've seen industry prices in the farm belt decline roughly 10% from the second to the third quarter.
And while there are a range of resorts across the quarters, depending on the environment in any given year, we've seen sequential declines into the third quarter and 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 eight to discuss the launch of our new 100% post consumer recycled or P. C. R nylon six.
Yeah.
Lots of that global pouch farm in June this new portfolio of products built on our introduction of postindustrial recycled or P. A R. A residence in films and 2021.
Our effort here is to meet the growing demand for environmentally friendly products by incorporating material built on recycled monomers reclaims from waste streams.
Our approach is an industry accepted mass balance approach that is third party certified annually.
With more than 10% of our total around the capacity available to be solid with a P. C. R. P. I E. Our certification. This is another terrific opportunity for us to boost different differentiated product growth.
While providing our customers a cost effective path to sustainability.
We're targeting customers across a wide range of applications.
Our value proposition across food and medical packaging that requires FDA compliance automotive carpeting thermal farmed and shrink packaging for meat and cheese and bag in box packaging.
The new P. A R. M. P C. Our nylon six materials offer the same excellent properties as conventional nylon products.
Drop in replacements with no constantly be qualifications or cost to consumers.
And provide a solution to help companies meet their sustainability goals.
We're in the process of finalizing a lifecycle assessment, comparing our conventional and island sex with our recycled offerings.
We expect that it will show a significant carbon footprint reduction because this thing this product to further contribute to our customers' decarbonization goals.
And to put this in perspective, and a packaging application nylons 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 multi layer film application.
The recycled nylon six could potentially deliver approximately 30% reduction in overall carbon footprint when compared to classic Europe's published numbers.
Now, let's turn to slide nine 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 reason billions 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 all of our 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 feed all industry operating.
Operating rates globally, well 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 pretax income impact of planned plant turnarounds to be $25 million to $30 million in the third quarter of 2023.
Totaling $28 million to $33 million for the full year.
So overall, we are executing towards that I focus priorities all of which are aligned to driving the critical measures that underpin compelling return on capital and attractive long term total shareholder returns.
With that Adam let's move to Q&A.
Great. Thanks, Erin Alan can you open the line for questions we.
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.
Yeah.
Yeah.
Our first question comes from Vincent Anderson of Stifel.
Please go ahead.
Yeah, good morning, and nice job on the quarter.
So.
Good morning, so purely hypothetically.
How would a trade case against nylon six from China compare to acetone or ammonium sulfate just given trade data doesn't disaggregate nylon six mother nylon products is that something that based on your prior experiences would be feasible.
Yeah, certainly thanks for the question Vincent we want to keep all of our options open here and certainly ensuring fair trade practices of it is important to us as we continue to monitor the industry dynamics here. Our assessment is underway and are you as you pointed out we've been in this position in the past.
In both our ammonium sulfate and asked him businesses and trade cases like these around the world and will leverage our prior experience.
Petition for fair trade right if determined that that's the most appropriate action.
Okay Alright.
And then could you just quickly remind us what types of agricultural products. The U S. It means going to and how did it perform this quarter given we've seen some pretty severe destocking in crop protection kind of everywhere else in the chemicals world.
Yeah, no and I our experience here it would be the same as a reminder, we go into the herbicides down the glyphosate chain, you know with our <unk> product offerings and you know.
Certainly on the AG chemical side their work and we did see more destocking that occurred based on the import levels that happened you know late last year and so we have seen that on impact and certainly demand through what would've otherwise been.
Strong season, like we saw in dry fertilizer them as you know basically down the chain and retailers and growers I've worked at that higher inventory, but again I think the underlying fundamentals generally trade support a and opportunity set here as we come through into the next season.
Great and if I could just ask a couple of quick ones on the recycled content. So if I remember correctly. Your P. I R and I wanted to start with your own kind of internal manufacturing process waste for lack of a better term, but what what is the feedstock for the for the post consumer recycled nylon.
Yeah do you think about the opportunity set that we have with our customers and in their value chain. We can take an opportunity sets at the monomers and you know back from them. They are in their streams as well and so it's an expansion if you think about that envelope.
Fortunately set to be able to bring it back into our into our chain.
Okay.
Okay that makes sense and then does open already have food packaging products developed and ready to market with PCR nylon or was that your next step.
But certainly as we work with them and in concert in to create that opportunity set so in the ballpark.
That's gonna be in certain types of applications. Those are typically more mono oriented type packaging. The multi film would works through our partners I mean, some of the other converters.
Gotcha, Okay, alright, thank you very much.
Thanks Vincent.
Our next question comes from David Silver from C. L. King go ahead.
Okay.
Yeah.
Okay great.
Arnie.
Good morning.
Yeah I have a few.
Admittedly scattershot questions here.
First question.
We'd have to do with your balance sheet and in particular inventories.
So you know your second quarter, ending inventory balances sharply higher than a year ago and I am I'm guessing the units difference is greater than the dollar difference just given the.
The shifts in product pricing.
So certainly some of that is.
Some of that is related to your upcoming turnarounds or which may be underway now but could.
Could you just maybe talk about your comfort level with the inventories as of June 30, and then in particular.
Did the buildup of inventory have a meaningful impact on your reported results in the second quarter in other words did it.
Improved your unit margins.
If you produce more than your shipping thank you.
No I mean good question. So when you look at the inventory number as you pointed out.
We ended the quarter with $226 million of inventory and that was pretty flat relative to the first quarter are Dave about a million dollar.
Increase in up about $10 million since the end of the year. So you know again from a sequential basis not much of a change, but as you point out are.
Definitely a change from a year over year perspective, and when you break that down.
At roughly a $70 million increase in inventory from a year over year perspective.
Raws were up in that $15 million range and we do have a lot of time with respect to Q mean in and based on the rotations and when we receive those so that I can.
Certainly fluctuated from quarter to quarter, but the balance is really in the finished goods and work in process.
And as you point out as we head into the turnaround the plant turnaround here in the third quarter, we clearly like to head into those with a higher inventory balances. So we don't disrupt sales and ensure continuity of sales to our customer base and so that's critically important to us.
And as we roll through the turnaround in the third quarter here and through the second half as we come out of that we would expect there to be a reduction in inventory and that is what we're planning for.
Here in the second half and then as we've sort of pointed out we have been faced with some soft demand conditions for Niall.
Nylon and certain intermediate products tied to building and construction as well as consumer durables. That's also been a consideration and we continue to sort of optimize to navigate.
As we are you know as we.
We progress here in the second half, but we are expecting a reduction in inventory as we head through the turnaround in the second half of the year.
Okay.
Okay, great. Thank you for that and I would like to ask you about your Capex plans for this year. So no change in your targeted full year level, but I guess, you're you know if you were just to divide that by four.
First half of the year, you're kind of trailing.
The pace at which your full year Capex spend.
Pete would play out.
Can you just maybe talk about how you get from here to there in other words with the turnaround and everything and a number of.
Diverse initiatives included in that.
Somewhat larger spend this year.
You know, maybe just talk us through the back half of the year and how that spending might progress. Thank you.
Yeah, No. Good question and the first half just to put some numbers around it.
Our capex spending in the first half was roughly $44 million and we're still guiding to a 110 to 120 amount for the full year, which means that the second half spend has to ramp up you know quite a bit about two thirds of the annual spend that roughly is in the second half and as you know as we execute the turnaround.
A lot of the capital equipment that we've been planning for will be installed in our Capex will increase.
As a result, and so we do expect a ramp up here in the third quarter and then another ramp up.
In the fourth.
And we talked about some of the projects that we're focused on this year, which is resulting in the increased and elevated spend and some of those critical infrastructure projects that we've talked about.
Particularly the.
Some of the the dock, we have at our Frankfurt facility, which were performing some upgrades to.
And some other projects as well so.
That is driving the spend for the year and what we expect here in the second half.
Okay. Thank you for that.
One one question to go back maybe to the nylon chain and the market dynamics right now and in particular, China.
You know there is a you know a lot of consensus on the fact that China is exporting a lot of nylon that they can't place domestically.
Nylon and its precursor but.
I was just wondering.
Are they in your opinion or are there other nylon chain products that they are.
Also you're seeing the same type of <unk>.
Opportunistic export behavior, perhaps out of China, and then I'm thinking of ammonium sulfate, firstly, but anything else that you think is kind of filtering into the markets that we need to keep an eye on thank you.
Yeah sure I can provide some context in our in the chain.
As you point out in my remarks.
China export volumes globally, and now sort of equate to.
Three times the size of a Chesterfield capacity right. So the equivalent of three of our nylon plants are now being export in globally from from China.
And certainly I would just say that is in a slower growth environment for them.
Certainly pressuring opportunity sets.
Into Europe .
But then also it means now into North America.
And as I share it predominantly coming in in the engineered plastics space and then that is also carrying downstream to where.
You know classic engineered compounds are made of nylon six are also coming again, you know pressuring and competing with our customers.
You know, we extend that to them.
So the sort of the the broader chain, obviously, you know global flake caprolactam.
Is being export it as well and then the the resort and the millennium sulfate, which we have seen them for for a number of years now.
And you know Chinese production and exports effectively as they have expanded.
Their capacity inland four four for caprolactam that has brought ammonium sulfate ammonium sulfate has been flat in domestic consumption. There. So so effectively with evergreen edition.
They have added that ammonium sulfate is being exported.
Export a globally.
And that has reached.
Nearly 13.
So a million tons, if you think about it so it's a significant against.
Consideration and in the global marketplace and that is predominantly I mean, they are heading into a into Brazil southeast Asia and so that's just a little bit of context.
And in that regard right. So.
I can certainly expand if there's anything more of a follow on but that that is what we're saying.
Yeah on the value chain and I.
As the.
You answered earlier, I mean, there tends to be a bit of a crazy quilt of.
Trade restrictions and whatnot that go both ways, which kind of complicated.
Complicates the analysis, but no. Thank you for that.
Erin Big picture question here, So I'll preface my remarks by saying I'm not a professional economist, but I've been a you know.
Careful observer for a long time.
And I would just again stipulate.
This is kind of a two faced or schizophrenic economy. The industrial economy that we're in that I haven't really I have a tough time finding a comparison you know just with the puts and takes.
As I look around but in your opinion is the United States now in an industrial recession.
In other words are the negatives broad enough that they're outweighing.
The positives that are out there.
And if so how does that change how you operate maybe tactically you know over the next few quarters.
Sure well I mean as you pointed out the there is data that underpins the backdrop of the macro environment that we are operating in we are in the business of <unk>.
You know produced I'm, saying, Oh, great Chemistries in our central Chemistries that are used on the value chain for consumer goods.
Good then essential products right that are.
Impact millions around the world, but the reality is you know you've got S&P global manufacturing PMI that is contracted for 11 months in a row.
Have you asked manufacturing PMI as of July that is contracted for nine straight months in a row.
The evidence of Destocking.
And a reduction of global operating rates are I think is you know.
Certainly strong indication of the dynamic that you are suggesting and as I point out we've been here before and you know this is a business that we have.
We continue to focus on them.
The core first principles and in an environment like this you know our cost advantage business model and efficiency comes into play and we are fortunate that we are able to run disproportionately higher utilization rates accordingly.
Supports our through cycle profitability and we continue as you as you know it took them to focus on the areas of opportunity to expand the underlying earnings of this business through smart capital investments and you know there are bolt ons on a on M&A and are actively.
Actually our our cost focus as well will need to come into play and if this is to continue to be extended.
Extended but certainly this is not something that's just happening you know this is a dynamic that has been progressing now for and some aspects of our business for the better part of the year.
Yes.
Okay, Great I really appreciate your thoughts on that thank you sure.
Yes.
Yeah.
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, despite a dynamic set of industry conditions and our record comparison in the prior year.
We're proud that we delivered solid earnings and cash flow results in the second quarter of 2023.
Our results once again demonstrated the strength of our business model and our position as a diversified chemistry company.
While there are puts and takes across our end markets and broader macro uncertainty. We are focused on executing what is in our control, including a rigorous commitment to operational excellence continuous enhancement of our long term growth capabilities, and making smart and disciplined capital deployment decisions to drive higher returns with that we look forward to speaking with you again next quarter.
Stay safe and be well.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.
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