AdvanSix Inc.

Good morning and welcome to the Advance 6 First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Adam Kressel, Director of Investor Relations. Please go ahead.

Thank you, Betsy. Good morning, and welcome to Advance 6's first quarter 2021 earnings conference call. With me here today are President and CEO Aaron 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.advance6.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 first quarter of 2021 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 Advancix's President and CEO, Erin Payne.

Erin Payne Thanks, Adam, and good morning, everyone. Thank you for joining us and for your continued interest in Advancix. We do hope you also remain healthy and safe. As you saw in our press release, Advancic delivered robust first quarter results to start 2021. Our collective organization contributed to generating significantly higher earnings and cash flow in the quarter, reflecting strong execution amid a tightened supply and demand environment overall. Mike will detail our financials in a moment, but as you can see on the left-hand side of slide three, we've highlighted year-over-year variances for some key metrics in the first quarter. I won't mention them all, but you can see the significant improvement in performance, particularly our ability to nearly double our EBITDA compared to last year, which, as you'll recall, was largely unaffected by COVID-19. And it generated a $57 million improvement in free cash flow year over year. Our first quarter 2021 EBITDA was the highest we've seen since the first quarter of 2017 and our second highest quarter since SPIN. Importantly, we captured pricing, achieved sales volume growth, and expanded margins while further reducing leverage levels. Across the board, it was a terrific start to 2021, and we are looking to continue building on that momentum. Early in the first quarter, we announced the acquisition of certain assets of Commonwealth Industrial Services, or CIS, which enables us to expand our offering to directly supply packaged ammonium sulfate to customers. The acquisition also diversifies and optimizes our offerings to include a spray-grade adjuvant to support crop protection, a fire retardant and insulation, as well as other specialty fertilizers and products for industrial use. I'm proud to say that the integration and synergy realization are progressing well ahead of plan, and we are excited to extend our industry-leading value chain for ammonium sulfate. As we look ahead, the outlook for our business remains favorable. In nylon, we expect robust customer demand and improved pricing as we execute our portfolio optimization and experience an improved global economic recovery. In chemical intermediates, we're targeting differentiated product growth as we expand production of oxines and nadone, as well as cultivate our storefront on those chemical marketplace while capturing continued pricing favorability in a tight acetone industry supply and demand environment. Agricultural fundamentals are also improving overall with robust planted acres and crop prices at multi-year highs, supporting an expectation for strong bulk and packaged ammonium sulfate customer demand in our plant nutrients business as we enter the heart of the North America growing season. While we are focused on mitigating continued higher raw material input costs, including freight and logistics, our investments in differentiated product growth coupled with a targeted record year of production output in 2021 are supporting higher earnings and robust cash flow. So there is a lot to be excited about. We can't always predict what the markets will do, but we're highly focused on executing what is in our control and remain confident in our ability to create value for our shareholders. We are executing against a focused strategy to deliver strong and sustainable returns over the long term as we support continued operational excellence and improving through cycle profitability. enhancing our portfolio resiliency through differentiated product growth and mix optimization, and being strong and disciplined stewards of capital. With that, I'll turn it over to Mike to discuss the details of the quarter.

Okay, great. Thanks, Erin, and good morning, everyone. I'm now on slide four where I'll cover the first quarter financial results. We once again executed very well, as Erin pointed out, with strong volume growth, pricing improvement, margin expansion, and robust cash generation. Sales totaled $376 million. That's up about 24% compared to last year. Sales volume in the quarter increased roughly 8% versus the prior year, driven by improved end market demand across our product lines. You'll recall sales volume had also increased about 8% in the fourth quarter of 2020 year over year, so a continuation of the strong trends we've seen exiting the year. Pricing was favorable by 16%, comprised of raw material pass-through pricing of 11%, following a net cost increase in benzene and propylene and market-based pricing of 5%. The improvement in market-based pricing primarily reflects continued strength in chemical intermediates, particularly acetone. EBITDA was $55 million in the quarter, virtually doubling prior year levels. I'll walk through the key year-of-year variances on the next slide. Earnings per share of 98 cents increased 67 cents per share versus the prior year, In the quarter, we saw a lower effective tax rate compared to last year, primarily driven by two items that drove up last year's rate. First was the tax impact of equity compensation vesting, and second was the federal carryback claim associated with the CARES Act. And finally, cash flow from operations was robust in the quarter, reaching $57 million. That's up about $37 million compared to last year, primarily due to higher net income and and an approximately $12 million cash tax refund as we anticipated, partially offset by the unfavorable impact of changes in working capital. CapEx of $14 million was favorable by roughly $20 million year-over-year, reflecting execution against our 2021 capital priorities and following the completion of several high return growth and cost savings investments in the prior year. Let's turn to slide five. Here we highlight a few big drivers of our first quarter EBITDA performance year over year. Pricing overall materials was roughly an $18 million tailwind year over year. Tracking our key variable margin drivers, performance in chemical intermediates reflected a continued favorable supply and demand environment for acetone over propylene spreads. Caprolactam and nylon over benzene were up year over year as we saw continued improvement in industry spreads off the trough levels we observed in 2020, supported by industry supply constraints while demand improves with economies reopening around the globe. Ammonium sulfate on a net price over natural gas and sulfur basis was down year over year, primarily reflecting the sharp increase in input costs in the quarter. You recall we benefited from low natural gas and sulfur prices for most of 2020. In the first quarter of 2021, the price of these inputs significantly spiked higher year over year, due to supply considerations and the strong agricultural environment. Sequentially moving into the second quarter of 2021, we expect ammonium sulfate on a net price over natural gas and sulfur basis to improve, reflecting strong industry fundamentals and recent price increases. Higher volume and other items were approximately 16 million favorable in the quarter. We drove increased sales volume across all our major product lines. The impact of planned turnaround to pre-tax income was only 3 million in the first quarter of 2021 versus approximately 2 million in the first quarter of 2020, representing an approximately $1 million increase year-over-year. And lastly, we had an approximately $6.6 million unfavorable non-cash LIFO inventory reserve adjustment in the quarter. This adjustment reflects the reduction in inventories from 2020 year-end resulting in the expensing of higher cost inventory layers from prior years. Now let's turn to the next slide. On the left side of page six, we've highlighted the drivers of the robust $43 million of free cash flow generation in the quarter, supported by net income, lower capex spend rates, and an approximately $12 million cash tax refund as anticipated. Working capital was roughly a $7 million use of cash in the quarter, with inventory reduction representing a $39 million favorable impact, reflecting the dynamic supply and demand environment of the first quarter and lower QME purchases offset by working capital. Accounts receivable increased with the 11% jump in sales compared to the fourth quarter of 2020, while accounts payable was also a cash headwind based on the timing of raw material payments and purchases, notably QMEs. As we've shared previously, our CapEx run rate has come down in line with our targeted priorities for the year and as we drive efficiencies in our capital process. On the right side of the page, we've once again shown our leverage ratios or net debt over trailing 12 months adjusted EBITDA going back to the end of 2018. Both net debt and adjusted EBITDA are calculated in accordance with the terms of our evolving credit facility. As expected, our leverage was further reduced in the first quarter of 2021, supported by continued robust cash generation, improved earnings, as well as debt pay down. We exited the quarter at a leverage ratio of 1.4 times, which is comfortably within our target range of 1 to 2.5 times. We continue to expect a robust cash flow outlook for 2021, supporting a further reduction in leverage towards the lower end of our target range. Now let me turn the call back to Aaron.

Thanks, Mike. I'm now on slide seven, where we've included pricing and spreads across our product lines. Starting with nylon, we've seen spreads further improving on the back of industry supply constraints and demand improvement with economies recovering around the globe. This quarter, we've also shown the resin spread over the upstream benzene input versus comparing to caprolactam costs, which we believe is a better indication of industry performance, particularly for integrated producers like ourselves. Although the industry remains in an oversupplied position globally, we continue to be encouraged by the recent improvement in demand and pricing. The age of capro to benzene spreads averaged above $900 per ton in the first quarter, the highest level we've seen since the second quarter of 2019, and reached nearly $1,150 per ton in March. We are monitoring rising benzene input costs, which we would expect both caprolactam and resin prices to closely follow moving forward. Overall, nitrogen industry pricing continued to move higher through the first quarter, supported by improving agricultural fundamentals, including crop prices, farmer profitability, and planted acres overall. As a reminder, urea is the largest nitrogen fertilizer by total consumption and tends to have an underlying influence on other nitrogen products. However, ammonium sulfate does have its own supply and demand dynamics, influencing the premium earned for the sulfur nutrients. So while urea pricing did move sharply higher in the quarter, other nitrogen fertilizers, including ammonium sulfate, did lag this improvement. In addition, we're tracking significantly higher raw material input costs for the industry. In particular, the Tampa sulfur marker recently doubled from last quarter, settling nearly $200 per long time in the second quarter. Now, that is by far the highest level we've seen since our spinoff in 2016. The recent increase reflects a reduction of supply from lower refinery operating rates following the winter storms in the first quarter and expectations of a strong spring ag planting season. Despite this, we expect strong ammonium sulfate performance during the season peak in the second quarter with robust demand and recent price increases. And lastly, industry-realized acetone prices over refinery-grade propylene costs continue to expand in the first quarter amid continued tight supply and demand balance in the U.S., with planned and unplanned downtime impacting industry supply. We've seen the continued expansion of the premium in the small-medium buyer acetone prices over the large buyer marker on a year-over-year basis. Now, as a reminder, the small-medium buyer price is reflective of roughly one-third of the domestic industry, where pricing is predominantly freely negotiated. This is coming at a time when propylene costs have also continued to surge higher although have backed off a bit exiting the first quarter. Let's turn to slide eight to discuss some industry considerations for 2021. Overall, we are experiencing improved end market conditions across the industries we serve, and many of the key things we discussed last quarter remain in place. We've seen steady carpet mill rates since rebounding from last year's 2Q COVID trough, as well as strong residential construction data, particularly with healthy remodeling demand. However, commercial construction continues to lag, which we expect to continue in the near term. We've also seen demand remain resilient into auto, consumer and industrial, and electric and electronics applications. A number of key ag indicators continue to trend favorably as well. Lowered expectations for ending stocks, including corn and soybeans, have translated into increased crop prices, which have remained at multi-year highs while the profitability outlook for growers continues to improve. Expectations for planted acres overall remain relatively high, coupled with nitrogen industry supply tightness coming out of the first quarter and rising input costs, all have supported increases in nitrogen pricing. With sulfur demand remaining robust as a key nutrient supporting crop yields, we continue our efforts to drive the sulfur nutrition value proposition down the value chain. Now, in acetone, it's evident that the recovery from the 2018-2019 low has been a positive story for us. expect a favorable acetone industry supply and demand balance to continue in the near term although we'll look for supply availability to increase as we progress through the year with the expected higher phenol industry utilization on the back of improving demand we're supporting growth across the portfolio through investments in high value and high purity applications as well as in our differentiated nylon products our easy blocks anti-skinning agent for paints as an example has been a great commercial traction and is expected to grow roughly 50 percent in 2021 compared to last year, in the area of targeted CapEx investment for expansion this year. Our nylon efforts remain focused on supporting asset flexibility, new product and application development, and customer qualifications to optimize our mix. We continue to see strong double-digit growth in our wire and cable offerings, while our copolymer sales are expected to double in 2021 versus last year. Let's turn to slide nine to wrap up before moving to Q&A. Our strategic priorities and value creation roadmap remain consistent as we support sustainable shareholder return over the long term. First, enhancing our day-to-day execution by strengthening our culture and core foundations of excellence. We are targeting a record year production output in 2021, supporting higher earnings and robust cash flow. We also continue to make meaningful progress on our sustainability initiatives and performance. We are strengthening an empowered, high-performing culture supported by our engaged workforce guided always by our core values of safety, integrity, accountability, and respect. We will soon publish 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 when we publish it. I'm proud to share this week we were awarded a platinum rating for corporate social responsibility by Echovatus, an independent CSR assessment agency. This follows our gold rating in 2020 and ranks us now among the top 1% of all companies assessed. Second, one of our core priorities is improving through-cycle profitability by driving superior operational and commercial performance. We're focused on driving improved earnings and cash flow through cost optimization and asset productivity, creating strong operational leverage. We have a number of efforts in place across the organization targeting improvements in rate, cost, quality, and yield, as well as efficiencies in our capital engineering and planned turnaround programs. We continue to expect the impact of planned plant turnarounds to be in the range of $25 to $30 million in 2021, which is a reduction compared to approximately $31 million in 2020 and $35 million in 2019. We're maintaining a rigorous focus on productivity and cost savings, with approximately half of the 2020 cost savings living through based on structural and permanent actions taken throughout last year. Commercially, we continue to perform well, reflecting the strength of our business model, global low-cost position, and diversity of our product portfolio amid a tightened supply and demand environment overall. In addition, we're focused on mitigating expected higher raw material input costs in 2021. Our third priority is enabling sustainable long-term growth by enhancing portfolio resiliency. We've talked more about our differentiated products, which are focused in the areas of high-purity applications, high-value intermediates, and differentiated nylon. These products represented approximately 12% of our total sales in 2020, an increase from approximately 8% of our sales in 2017. I would note that this does not include our granular ammonium sulfate product, which represents nearly 20% of our total sales last year and is viewed as a high value for the premium it earns. Although building off smaller bases, we've continued to see strong growth across these products. In the first quarter of 2021, sales of these products increased nearly 30% on a year-over-year basis. We are bolstering growth through investments in our NATO and OxyM product lines, serving these high-purity and high-value applications, while continuing to optimize our nylon offerings. Our final priority is enhancing value creation through disciplined capital stewardship. We have reduced our expected range for CapEx to $70 to $80 million in 2021. Now, that is down about $10 million from prior expectations, reflecting efficiencies in our planning and execution. This year does include spend towards high-return growth and cost-savings projects. As you may recall, we originally targeted a $150 to $200 million pipeline of projects shortly after the spin. That pipeline continues to be robust at $50 to $100 million of smaller projects from which we continue to refine, prioritize, and execute against. We expect leverage to trend near the lower end of our target range by year end and have approximately $60 million remaining under our share repurchase authorization. And as I mentioned earlier in the call, we've also had success inorganically with a recent bolt-on acquisition of CIS. And we'll continue to assess other opportunistic acquisitions that would have strong portfolio coherence with our product lines and technologies. We are leveraging all of the momentum being built as we execute against this focus strategy and continue to strengthen our ability to deliver long-term value for all of our key stakeholders. With that, Adam, let's move to Q&A.

Great. Thanks, Erin. Betsy, can you please open the line for Q&A?

We will now begin the question and answer session. To ask a question, you will press star then 1 on your touchtone phone. If you are 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 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from David Silver with CL King. Please go ahead.

Okay, thank you. Good morning.

Good morning, Dave.

Yeah, hey. So I have a number of questions here, but maybe if we could just drill down on the LIFO layers kind of issue that cropped up this quarter. Maybe if you could just provide a little background on the genesis or the origination of those LIFO layers, that would be great. And then more to the point, would you anticipate further adjustments in coming quarters? In other words, will you touch on even more of those older LIFO layers going forward? Thanks.

It's a good question, Dave. Yeah, so we are on LIFO accounting, and we did have to make an adjustment of $6.6 million in the quarter as we communicated as a result of a reduction in inventories from 2020, and you saw the reduction in the quarter. And simply what that means is you need to go back to prior year layers and evaluate the cost of those layers. And some of those layers were at roughly a 20% higher cost than our current standard cost. And as a result, you have to absorb that into the P&L as you reduce the inventory levels. Now, going forward, we don't anticipate inventory through the year by the year end to change a whole lot from where we are today. So we don't anticipate another adjustment going forward, but we'll obviously continue to monitor our inventory as we go forward here.

Thank you for that. I next had a question, I guess, on the sales trend this quarter in ammonium sulfate. You know, when I do the math, you know, the percentage of sales that's allocated to them and, you know, your total revenues, I mean, it seems like it was a very modest increase year over year in ammonium sulfate revenue, and actually it was a decline from the fourth quarter. So I know there's, you know, certainly price and volume and a whole bunch of arms and legs there, but I think I confess thinking about how the market has improved both demand and price-wise, I confess I'm a little curious why the year-over-year increase was so modest, relatively speaking, in a market that seems to be quite robust right now. Thank you.

And certainly we have, as we communicated here, David, good expectations for the peak of the season here in Q2. If you think about sort of how you progress throughout the year, you know, the ag cycle runs sort of July to June in North America. You know, in the fall there is, you know, prep, that fall fill, right, for some fall application in North America, but then leading to basically, you know, building inventory levels for, you know, for the spring. Plus the second half also has, you know, the contribution of us selling export into South America as we sort of bridge the two growing seasons as we're producing non-monium sulfate year-round. So, you know, it's always difficult to sort know exactly how that will play out. You know, I think that we are staging material and selling material into the heart of the season. And again, on a full July to June ag season, this will be a stronger season annually versus what we saw last year. So there could be some time and consideration, some mix. And Mike, I don't know if you want to add into it, but I wouldn't reflect it more on you know, a view that we're not going to see the benefits of the strong season coming through in our numbers here in Q2.

Yes, Dave, the only thing I'll add is, you know, last year we did have high export standard sales due to some sales timing. We had some shifts of those sales. They can be a little bit lumpy from the fourth quarter of the prior year to the first quarter of last year, and we didn't sort of see that repeat of the timing this year. So as a result, you know, it of that timing, you know, that impacted the year-over-year variance. So it's more of a sales timing consideration, really.

Okay, very good with that. I have a question here on your income tax accrual rate. So, you know, it was right around what I expected in the first quarter, 25%. But My assumption is that your pre-tax earnings should be significantly higher this year than last year. And sometimes in cases like that, the income tax accrual rate, I've found, tends to creep up. In other words, there might be a handful of discrete tax benefits that have a certain percentage effect when earnings are at normal levels or slightly below normal. But when earnings ramp up, those discrete benefits kind of fade in importance. And as a result, the accrual rate that we should be applying to your pre-tax income kind of can be higher than originally anticipated. You know, as your company starts to swing into a higher level of earnings and pre-tax earnings, I mean, how should we think about the full year accrual rate for income tax purposes?

No, it's a good question, Dave. You know, I think still 25% is a good target to assume going forward, and we are anticipating higher earnings, as we've talked about, this year relative to last year. The one thing that we've done a nice job with, as you've seen in the past, is driving credits and doing a lot of planning to mitigate any of the creep we could see from an effective tax rate. And so we continue to push the envelope there. But I still think a 25% sort of target and planning number from an ETR perspective is good. What I'll say, too, is with the sort of bonus depreciation on capital expenditures, we're still going to see cash tax benefits from that, you know, as well. Our cash tax rate will probably be right around the 10% to 15% range. That excludes the cash tax refund we got, by the way, in the first quarter. That's more normalized for the year, excluding that. So we continue to see those benefits as well.

Okay, and then maybe one more question, and then I'll get back in queue. But this would be for Aaron, and it's a capital deployment question. And with your cash flow generation kind of picking up here, and I think with a pretty bright outlook for a couple of quarters, I mean, you're going to have incremental, I guess, flexibility, in my opinion. And I'm just wondering if you could say there was a little bit of share creep this quarter, for instance, but how does the priority for buybacks or the inclination to deploy cash for share repurchases kind of shift here as maybe your flexibility grows? Thanks.

Thanks for that, David. and certainly consistent with our communications in the past, we are committed to delivering strong and sustainable shareholder returns over the long term and obviously enhancing our value creation through capital allocation is a lever for us and a core strategy. As we drive growth in the business, our allocation priorities you know, have been aligned with one, right? As we've already started to demonstrate, getting our debt leverage levels into our target range, certainly as we have come through, you know, 2020 and navigating the pandemic, you know, executing on high return investments in the business. And again, we still have opportunity sets that we continue to refine and prioritize and execute against. And these are strong waterline projects for us, right? We're targeting those 20 plus returns type levels. We believe as well that the opportunities we demonstrated with CIS, which for an acquisition is tracking to achieve those levels that we would set for ourselves for capital projects, which is a great opportunity. We'll continue to build out those inorganic pipelines and capabilities. As you note, we recognize that returning excess cash to shareholders is in that mix for us as well. You know, as we progress through the year and, you know, we will continue to assess that. We still have our authorization in place. And, you know, we'll continue to think about what our long-term strategy should be here as well.

Okay. Thank you for that. So I'm going to get back in queue, but I do have a couple more questions for later. Thank you. Great. Thanks, Dave.

As a reminder, if you have a question, please press star that one to be joined to the queue. Our next question comes from Vincent Anderson with Seafull. Please go ahead.

Yeah, good morning. Great job to start the year off. Thank you, Vincent.

Good morning.

So let's just start, get it out of the way. You know, what... What specifically did you have to deal with in the first quarter from a logistics perspective, particularly with import and queue mean and export and cap row? And then how are you positioned into 2Q, both from a cost standpoint and a working capital standpoint?

Maybe if we step back, we do recognize that we left you all off at our last earnings call in the midst of winter storm and supply chain disruptions and I'm not sure if that's exactly, you know, maybe to give some context there and then how we see the supply chain sort of stabilizing here, you know, through the quarter and into next, into Q2. And I think certainly the results show that we performed, you know, well in a difficult period for the industry. And, you know, that we didn't have any direct physical damage to our facilities. And as you know, it was really, you know, how did we manage the disruption to the raw materials side? And there were confluence of factors, right, to the industries in which we participate, you know, plant rates being offline, availability of raw materials. You know, it led to the transitory sort of tightness in demand, which really the industry is still working through. And we were one of the few producers that remained running consistently during that time that certainly supported performance in the quarter. We did take the largest utilization reduction in Frankfurt and Chesterfield, while our Hopewell rates remained relatively strong and consistent with 1Q 2020 performance and nearly in line with fourth quarter as we looked to move things around and protect that value chain. As you note, we did draw down inventories. Mike noted that, a significant reduction in the core that played into the ultimate LIFO consideration. you know, as we worked hard to meet our customer demands and customer needs and to support the industry going forward. So, you know, the U.S. demand continues to recover. It has been strong. I think our presence here helps. So, you know, the Q-Mean supply chain is stabilizing back out, you know, through Q2. That's our expectation. You know, I think there still is supply-side tightness. You know, when you think about the height of it, you know, 70% of the phenylacetone supply was off in the U.S. You know, a significant amount of cyclohexane and, you know, even others in the capro and nylon chain were impacted. So, you know, I think the logistics in the U.S. and the supply side is sorting itself out. When it comes to export, you know, we have to watch that. We do see container ships rolling, you know, availability of containers. We're trying to get ahead on pre-bookings where we need to. But that is something that certainly, you know, we'll continue to monitor. And I think we talked about this mix shift as well. I think as we continue to see that mix shift back into the U.S., that alleviates a little bit of our – you know, I'd say our exposure on the export levels that perhaps were evident in our 2020 numbers versus what will transpire in 2021.

Yeah, and Vincent, the only other thing I would add is that, if you recall, we started the year in a very good position from an inventory perspective. You know, the raw material inventory overall was up $25 million last year and was up $9 million in the fourth quarter, and we knew certain suppliers were going to take planned turnarounds in the first quarter. So that put us in a very good position to weather through some uncertainty in the first quarter as a result of Yuri.

Okay, perfect. I appreciate that. And then just thinking about kind of the capital markets outside of the U.S., I just wanted to get a check from your point of view. When we looked at China in the first quarter and kind of just Eastern Asia in general. They had a pretty wild start to the year in terms of gas prices and sulfur over there as well. Do you feel like any of that had contributed to spreads internationally in the first quarter, or was it too short-lived? And what we're seeing right now is just really a good old-fashioned recovery.

Yeah, and they certainly – I mean, I think, Q1, there were supply-side disruptions in a number of places around – The government certainly had them here. Europe at some point lost nearly 25 or plus percent of its capital action capacity with some force majeures. You had your typical sort of, I think, ramp-ups in China and dislocations potentially of raw material availability too. We've seen some stabilization in Asia as we've come into April on pricing, on spreads that we're watching. I think there was a quick start to textile demand that has perhaps plateaued a bit here, too. So we'll be watching that into the second quarter. But I think the greatest, I think, opportunity set here certainly that we've seen as of late is, again, that the demand side has stayed in an improvement trend with recovery. you know, whether it's housing construction, automotive had, you know, posted strong numbers in every region. And as we work sort of through some of these disruptions, you know, I think that will play out as we head forward too.

And then I wanted to spend a little bit of time on capital allocation. I know David brought it up, but maybe looking out a little bit further as you become more confident that we're, you know, that we're facing a more sustained recovery. First off, on the share buyback front, is there a percent of shares outstanding where you think it would make more sense to start curbing repurchases and start thinking about a modest dividend?

I mean, look, first of all, you're aware of what we've done so far from a share repurchase perspective. We've repurchased over $100 million in more than 10% of the company. So, you know, we've done a lot. We still have $60 million remaining on the authorization. And we've navigated through more challenging times last year from a leverage perspective and gotten the leverage down, you know, quite significantly here, down to the bottom of the range. And we expect that favorable trend, you know, to continue going forward. So we don't necessarily target, you know, specific shares outstanding. I would say As leverage continues to improve, it just gives us more opportunity, more flexibility to create value for shareholders, and that could be either through share repurchases, other ways to deploy capital. Certainly you bring up dividends. That's something we haven't done yet, but that is something we would continue to evaluate. But also M&A. I mean, as we get further down in terms of leverage and improve our cash flow generation, You know, we have a very active pipeline. We have opportunities identified in every single one of our product lines. We did our first one this year. There are opportunities out there. We continue to vet, and we'll look to deploy capital there as well. So, you know, it's really across the board. And, again, getting the leverage levels down gives us the opportunity to evaluate those, you know, even more robustly going forward.

I kind of headed off a couple of my follow-ups to that, but I'm going to ask in many ways. So when you think about the debt levels, they're obviously improving drastically. Do you think about maybe, now that the asset base that you have is in such a strong position operationally, do you think about maybe targeting a lower gross debt level overall to position yourself a little bit better to be opportunistic in a future downturn? Or are you just very comfortable with where we are right now?

You know, again, we've communicated the range. I mean, certainly we're comfortable. We can operate within that range. We have plenty and ample liquidity within our credit facility that we're very, very comfortable with. And so as we look at opportunities going forward, we'll Again, way leverage, the outlook for cash flow generation, which we've proven we can execute well at, and compare that to and consider that as we evaluate all those opportunities for additional value creation. I wouldn't say there's a specific gross debt level we would target. We would look at it in terms of more of a range of leverage ratio, but again, very focused on creating value here.

And then so to drill into M&A, assuming that we can maintain an improving and maybe even getting back to an ideal macro backdrop, would you expect to prioritize really more incremental downstream add-ons like we've seen so far? Or are you starting to feel more comfortable thinking about expanding the asset base and product mix a bit more significantly?

As we think about, and we've talked before, Vincent, I think when you have one way, you know, and historically we have represented the company in a linear fashion, right, as one value chain, as we've been continuing to, you know, refine that, that we really are much more diverse than just that representation, that in fact we have, you know, streams of technologies and chemistries a wider variety of application sets and markets that we are exposed to. And really thinking about the business more diversified into plant nutrients and software nutrition is an area of continued growth. And as we share an area of interest, we've got a growing intermediate platform that has continued to perform well. It is getting investment this year as we think about those higher value application sets, you know, into, you know, coding, the electronic space, whether it's pharma, even ag, you know, intermediate. It's a nice franchise that continues to, you know, receive growth investments. And in areas we think about, you know, chemistry is either to, you know, forward integrate in and around or expand, you know, across the target application sets. And then obviously in nylon, we continue to focus organically at the time, right, as we think about that portfolio, you know, optimization, you know, amid sort of the end market application space. So continue to, you know, see us, you know, in our disclosures, how to represent ourselves into these three sort of main segments and, you know, from that standpoint and, you know, while not reportable, but really how we are operating and driving discrete strategies around them and where those targeted growth areas could be. So, that's been our focus.

That makes perfect sense. I appreciate it. And then, so I'll just, I'll finish up with a couple more focused M&A questions, then kind of tying into exactly what the strategy sounds like. So, first, you know, when I think about the nitrogen balance in Brazil, you know, they're restarting some urea capacity, and then, you know, as CAPRA utilization rates kind of tech hire with demand overseas, you know, maybe a little bit more incremental AMSOIL competition there specifically. Are there any acquisition opportunities like the one that you just did here in the U.S. that could help firm up your footprint in that country?

Yeah, I mean, so when you think about Brazil, I mean, just in general, the framework here, there are very few sort of independent, you know, players in the space that where we sit today, right? Brazil is is a large import of its raw material ag considerations. And, you know, again, I will leave my remarks where we said before that we continue to, you know, explore all these avenues, right? We're looking for portfolio coherence, how we continue to, we can increase our margins, we can, you know, dampen cyclicality, right? There are traits that we're looking to address, both with our organic and our inorganic investments in the business. And again, we can go on a number of avenues accordingly with that.

And last one, this one comes from a place of maybe a little bit more ignorance on the acetone side, but just given how tight it has become in the U.S., I know you've always felt really good about the mix and quality of the different grades that you offer, but is there a potential that any of your end users may be struggling in this price environment and could prove present an opportunity to go downstream there?

The end markets in which the acetone goes into are all very robust. I think it's evident by the demand. You've got large BPA consumers. You've got folks who are making methyl methacrylate, all of which are benefiting from end consumer demands here. You've got strength in paints and coatings, and you can look down that value chain of how those end customers are doing. So, you know, I think right now certainly there are, you know, pressures here on pricing. I think, again, as we noted, we would expect supply availability to ease throughout the year. You know, certainly there are about 12 KT of imports that have arrived this month, and we do need imports, too. to help balance out the marketplace. But I would say the strength of that value chain right now is rather robust, just given the end market demands and considerations.

All right. Excellent. Thanks.

Our last question comes from David Silver with CL King. Please go ahead.

Okay, thanks a lot. I think I have kind of a question about the turnaround activity for your company, kind of a two-part question. But could we get an update? I believe in the second quarter you're scheduled for one of your major pieces of equipment, sulfuric acid, to undergo its annual turnaround. First of all, I'm just wondering if you could kind of update us on the progress there. And then secondly, I mean kind of somewhat related, but should I assume that there won't be any interruption or any reduction in your planned shipment capability during the second quarter? In other words, I see the inventory levels coming in. to the second quarter and there's a certain amount of production you'll be able to do before you have to take equipment offline. Based on your product availability and also the timing and execution of the turnarounds, can you just give us an update on how that aspect of your overall operations is progressing through what I consider the peak spring selling season for some of your products? Thanks.

Yeah, no, I'm happy to, David. And just, you know, maybe just on a positive, right, if we think about, you know, the full year impact rate of turnarounds, you know, continuing to expect $25 to $30 million, if you look at that on a comparable consideration for, you know, likely the same type of turnaround we took would be in 2019 at $35. So I think, you know, we continue to focus in on our execution and, delivery of our turnarounds and creating value here. Now, as you may recall, we take two outages in the year at Hopewell, typically one in the spring and one in the fall. One is smaller in the spring. And in this case, our turnaround for the sap plant or sulfuric acid plant will be in the fourth quarter. So if you think about that consideration. In the second quarter, we are taking more of our lighter turnaround in Hopewell. We also have the remainder of our Frankfurt turnaround to complete. We did pull as much as we could forward in Q1 as we were navigating the impacts of winter storm, but we still have some work that has to be completed in the second quarter. That's what the second quarter represents. In these times, we also leverage, you know, the ability of the plants are still running, right, albeit at reduced rates, but those were taken into consideration certainly as we think about how we meet our customer demands and continue to navigate through. So we've planned very well for these. I think that's shown in the targeted expectations for impact, and we continue to, you know, to drive forward, you know, not just in we're executing right now in the second quarter, and then obviously in strong position for good execution as well on the sap plant. So again, I think from a full-year perspective, and even in the height of Q2, we think we're still very well positioned. We've moved material into the value chain, into warehouses for the peak of the ammonium sulfate season, as you asked about that particularly. So again, I think we've pulled all the levers in preparation and I expect that we will navigate through this well as we had intended.

Okay, thanks. I had one question, I guess, about the engineering resins part of your nylon business. I was listening to a conference call from an engineering resins producer with big interests supplying the auto industry. And during their conference call a few days ago, they cited shortages of nylon and one other product, PBT, and that that was disrupting the supply of engineering resins to their customers. Now, I know there's several types of nylon that might be used in engineering resins, and they're a mix. It's not just nylon typically. But from your perspective, I mean, is that an isolated incident? Is that something you're seeing in that part of your business? In other words, maybe just, you know, some color, if you can share it, on, you know, how that aspect of the nylon market might be supply-demand-wise relative to the broader market. Thank you.

Yeah, sure. And then in auto, you have two... I would say amongst others, right? You have a significant demand for nylon six, six, um, you know, as well as the nylon six, um, you know, nylon six, six has had, um, you know, once again, some significant, um, supply shortages, um, you know, happening, uh, you know, right now with it, certainly there were implications of the storm here for several players. Um, but there also is a rather significant force majeure, um, you know, happening in Europe right now as it pertains to some key raw materials into that value chain with a number of players, you know, out announcing sort of indefinite force majeure. So that has, you know, certainly crimped the supply side in a key, you know, nylon resin for that space. I think what we saw here in North America, again, a bit transitory with tropical storm Yuri, we did see and continue to see engineering plastics growth for our portfolio. It's an area of focus for us as we think about that application rate. So we certainly had and worked hard to meet the industry demand here and support it through a challenging time over the last couple of months. so I think there's a number of factors mostly all supply-side driven as you likely noted, but You know I would say is equally if not more sort of impacted by PA 6 6 as it is 6 at this time Yeah, no, thank you.

I kind of suspected that but I didn't want to make an assumption So so thank you, and then maybe just the last one very quickly, but you know I'm used to reading line charts You know And when a line goes up like someone, I don't know, I don't want to say anything, but someone has a medical condition and a line spikes up on a medical piece of diagnostic equipment, that kind of reminds me what's happening to the acetone price chart that you have been providing quarter after quarter. So, I mean, from your perspective internally, I mean, I'm sure you're enjoying very robust pricing and margins right now on that part. But for planning purposes, I mean, would you expect, you know, some imports or some, you know, adjustments in the market? I mean, how persistent, for planning purposes, I mean, how persistent or how, you know, what duration do you think these elevated spot market or small buyer, you know, acetone prices can, you know, continue on on this

trajectory or even remain at this level thanks and over the last you know couple of months here David right there there certainly is the supply side consideration but there's also been a significant input cost consideration here that has played through the market and influence you know underlying pricing as well you know on the raw material side we we have seen you know propylene ease off right as one consideration And then to your point relative to underlying supply availability, as I noted, materials have started to flow back as acetone availability throughout the world has improved. And we do need, let's call it 10,000 to 15,000 tons, give or take, to help balance out the market on a monthly basis. About 12 came in recently. you know, this month. So again, we're going to see that continuing to trend as phenol utilization globally rebounds. As you may recall, sort of, you know, that phenol and nylon recovery was something we were looking at, you know, from the impacts of COVID. Those were certainly, you know, hit hard. And, you know, I think as we look to the back half of the year, you know, certainly those are mileposts that we're watching. And, you know, phenol demand is improving. you know, an underlying trend for a number of its applications. And, you know, so again, its supply availability eases, and, you know, we would expect the moderation, as you point out, in any cycle here.

Okay, great. Thanks. That's it for me. Appreciate it.

No, thanks for all the good questions. This concludes our question and answer session. I would like to turn the conference back over to Erin Kane for any closing remarks.

Great. Thank you all again for your time and interest this morning. In the current set of industry conditions, we are driving best possible outcomes for our business. We deliver terrific results in the first quarter of the year and are hopeful you share our excitement about the opportunities that lie ahead. We are confident in our ability to create long-term and sustainable shareholder value as we continue to execute our strategies across the portfolio. So 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.