AdvanSix Inc.

Good day and welcome to the Advanced Six Second 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, Matt. Good morning, and welcome to Advance6's second 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'll review our financial results for the second 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 Advance Six's President and CEO, Erin Kane.

Thanks, Adam, and good morning, everyone. Thank you for joining us and for your continued interest in Advancix. As you saw in our press release, Advancix delivered record sales, earnings, and margin performance in the second quarter, reflecting strong execution amid improving end market demand and tight industry supply conditions. Let me share a few highlights before Mike covers the details of our financials in a moment. This quarter's significant year-over-year and sequential improvement furthers the momentum we've built since last year. You'll recall we generated double-digit net income growth in full year 2020 in a very challenging environment. In the quarter, the industries in which we participate were presented with supply chain and logistics disruptions, escalating raw material inputs and inflationary costs, and on the positive side, underlying demand growth rates we haven't seen in some time. The strength of our business model and portfolio diversity and the continued execution to our long-term strategies again, enabled us to both navigate the challenges and capitalize on the opportunities to deliver the results you see on page three. We are highly focused on executing what is in our control, and when you look beneath the headline numbers, our record performance is bolstered by the improved earning space that we have been building since spin, which further provides an improved foundation for our sustainable long-term performance. Volume growth was supported by historically strong plant utilization rates at both our Hopewell and Chesterfield plants. We converted a record 66% of our ammonium sulfate into higher-value granular grades to meet the growing demands of our domestic customers. Sales of our differentiated products accelerated in all focus areas of high-value intermediates, high-purity applications, and differentiated nylons, as we're now reaching longer-term, mid-teen revenue growth rates, with profitability at more than two times the base business gross margin rate. The investments we've made in high return capital projects continue to generate strong returns at or above our 20% IRR targets in total. We are delivering considerable improvement from our historical pre-tax impact of planned plant turnarounds of approximately $35 million through efficiencies in our processes and executions and are now expecting an impact of $24 to $27 million for 2021. Finally, our balance sheet health provides flexibility and optionality for further value creation. As we look ahead, the outlook for our business remains favorable. We're expecting continued strong execution amid robust industry dynamics overall to support record post-spin earnings and cash flow in 2021. There's a lot to be excited about across the organization as we continue executing against a focused strategy to deliver long-term, strong, and sustainable shareholder returns. With that, I'll turn it over to Mike to discuss the details of the quarter.

All right, great. Thanks, Erin, and good morning, everyone. I'm now on slide four where I'll highlight the second 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. It was really a terrific quarter really across the board. Sales totaled $438 million. That's up 88 percent compared to last year. Sales volume in the quarter increased 32 percent, driven by improved end market demand across our product lines. Pricing was favorable by 56 percent, comprised of raw material pass-through pricing of 31 percent, following a net cost increase in benzene and propylene, and market-based pricing of 25 percent. The improvement in market-based pricing reflects higher pricing across each of our product lines. I will note market pricing and volume were also up meaningfully from the first quarter of 2021. EBITDA was a quarterly record of 76 million. That's up nearly 150% versus the prior year and up 38% sequentially compared to the first quarter of 2021. I'll walk through the key year-over-year variances on the next slide. Earnings per share of $1.53 increased $1.12 per share versus the prior year. In the quarter, we saw a higher effective tax rate compared to last year, primarily driven by two items that reduced last year's tax rate. First was the impact of changes in geographical sales mix on state tax, and second was additional research tax credits, which combined had a large impact to the tax rate last year due to lower income levels. We continue to expect the full year tax rate to be approximately 25%. And finally, cash flow from operations was robust in the quarter. reaching $52 million. That's up about $43 million compared to last year, primarily due to higher net income, partially offset by the unfavorable impact of changes in working capital. CapEx of $10 million was favorable by roughly $7 million year-over-year, reflecting capital process efficiencies and timing of project execution. Now let's turn to slide five. Here we highlight a few of the key drivers of our second quarter EBITDA performance year-over-year. Pricing over raw materials was roughly a $26 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 well, reflecting continued improvement in industry spread supported by tight industry supply while demand has steadily recovered. Ammonium sulfate on a net price over natural gas and sulfur basis was modestly down year-over-year, primarily reflecting the sharp increase in input costs in the quarter. You recall we benefited from historically low natural gas and sulfur prices for most of 2020. In the second quarter of 2021, the price of these inputs continued to spike higher year-over-year due to supply considerations and a strong agricultural environment overall. Sequentially moving into the second half of 2021, we expect these input costs to stabilize and anticipate benefiting from recent ammonium sulfate price increases. Improved volume and mix were approximately 26 million favorable in the quarter as well. We drove increased sales volume across all of our major product lines, reflecting our strong execution in a more favorable end market environment. Lastly, other items were approximately 7 million unfavorable in the quarter. Increased planned spend to support volume growth, higher incentive compensation expense, and an approximately $1 million unfavorable impact of planned planned turnarounds year over year were partially offset by roughly $2 million in favorability from initial insurance proceeds related to the 2019 shutdown of Cummings Supplier Philadelphia Energy Solutions, or PES. So overall, strong commercial and operational execution in the current set of industry conditions. I would also highlight that embedded in these results is a meaningful gross margin growth from differentiated products year over year. Our investments into high-purity applications, high-value intermediates, and differentiated nylon are generating solid returns for the business. Now, let's turn to the next slide. On the left side of page six, we've highlighted the drivers of the robust 42 million of free cash flow generation in the second quarter supported by net income and lower capex spend rates. Another very strong quarter from a cash flow perspective, building on the $43 million in free cash flow generated in the first quarter. Working capital was a roughly $10 million use of cash in the quarter, with customer advances representing a $17 million unfavorable impact, primarily reflecting sales from our fourth quarter ammonium sulfate pre-buy program, partially offset by other working capital. As we shared previously, our CapEx spend has come down in line with our targeted priorities for the year. We expect our CapEx run rate to increase in the back half of the year, however. We now anticipate a full year 2021 range of 65 to 70 million compared to our prior expectations of 70 to 80 million, reflecting efficiencies in our capital processes as well as timing of project execution. Improved cash flow generation enables more flexibility from a balance sheet perspective to create value for our shareholders, and our capital deployment framework is depicted on the right side of this page. It first starts with our operating cash flow, and we continue to expect robust generation for the remainder of 2021 and beyond. We anticipate base CapEx on a go-forward basis of roughly $75 million per year on average to sustain the business. That's a combination of our maintenance capital which supports high plant utilization rates, plus health, safety, and environmental capex, supporting safe and stable operations, as well as compliance and risk mitigation. We will also maintain prudent leverage levels and closely manage our cash and debt, and anticipate remaining within the target range of one to two and a half times net debt to EBITDA. As for discretionary choices to create value, we continue to favor high return organic projects. You recall we spent over $100 million on high return growth and cost savings capex since the spin. We started with a pipeline of $150 to $200 million and have executed against that targeting of projects with an IRR of approximately 20% or more. At current, that pipeline continues to be robust at roughly $50 to $100 million of smaller projects from which we continue to refine, prioritize, and execute against. The timing and size of these projects can vary quarter by quarter or year to year, but we would anticipate roughly 10 million of spend per year on average in these growth and cost savings projects. Next, we are targeting accretive M&A. We completed our first acquisition earlier this year with Commonwealth Industrial Services, or CIS, a packaged ammonium sulfate business. It was a relatively small acquisition, but as we've shared, the integration and synergy realization are progressing well ahead of plan. Although the timing of our next acquisition is something we can't predict, we maintain a disciplined approach and an active pipeline with a focus on bolt-ons that will provide growth and synergy opportunities. Lastly, return of cash to shareholders. This can come in the form of more structural returns, such as a dividend, particularly in the light of free cash flow generation and conversion, or more opportunistic in the form of share repurchases. As a reminder, we have repurchased over $100 million worth of shares since 2018 and have approximately $60 million remaining on our authorization. So overall, a disciplined capital allocation strategy that we believe is a value enhancer to our core strategies and a key focus to support attractive total shareholder returns. Now, let me turn the call back over to Erin.

Thanks, Mike. I'm now on slide seven. where we've included our typical pricing and spreads across our product lines. Starting with nylon, it's known that we've seen spreads further improving through the second quarter. Again, this quarter was characterized by robust end market demand, rising input costs, and continued industry supply constraints. The Asia Capital Actam over benzene spreads averaged roughly 10.50 per ton in the second quarter, which was an increase from just above $900 per ton in the first quarter of 2021, and up approximately $600 per ton in the second quarter of 2020. Spreads have recovered from trough levels and are relatively in line with marginal producer economics, reflecting a more disciplined environment commensurate with underlying supply and demand improvement. Now, overall nitrogen industry pricing also increased both year-over-year and sequentially through the second quarter, supported by strong agricultural fundamentals, including crop prices, farmer profitability, and planted acres overall. We've seen consistent strong fertilizer demand from pre-plant beginning in March through top dress applications here into July. In addition, we continue to track significantly higher raw material input costs for the industry. As Mike mentioned earlier, natural gas and sulfur prices were substantially higher in the second quarter of 2021 versus historically low prices throughout most of last year. And lastly, industry-realized acetone prices over refinery-grade propylene costs expanded further in the second quarter and made continued tight supply and demand balances in the U.S., with planned and unplanned downtime impacting supply across the value chain. 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 really negotiated. Small-medium buyer pricing has moderated, as you can see, exiting the quarter, but remains rather robust relative to last year and prior cycles. Let's turn to slide eight to discuss the outlook for our industries. As we've been sharing, we are experiencing improved end-market demand across the industries we serve amid tight industry supply. That diverse end market exposure is supporting our expected favorable outlook overall. In nylon, we've seen supply constraints across the industry value chain at a time when demand in North America has remained relatively strong. Carpet and rug mill rates have been steady as residential and remodeling macro trends are supporting demand domestically. And commercial construction activity has lagged residential in 2021. However, we expect improvement into next year. We also expect engineered plastics demand to remain resilient into auto, consumer and industrial, and electric and electronics applications, while food packaging demand for nylon is expected to remain steady. Growth in our base business is also being supported by a ramp up in our differentiated nylon portfolio, namely wire and cable and our copolymer offerings, which we anticipate continuing. Our nylon efforts remain focused on supporting asset flexibility, new product and application development, and customer qualifications to optimize our mix. In ammonium sulfate, a number of key ag indicators continue to trend favorably as well. As we are now entering the next ag cycle, we continue to expect strong agricultural industry fundamentals through the 2022 planting season. Underlying demand coupled with nitrogen industry supply tightness 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. As we've described at this time each of the last few years, we do expect typical North America ammonium sulfate seasonality to drive a higher mix of standard grade product sales into export markets in the third quarter. as compared to greater granular sales domestically at the height of the North American season in the second quarter. Now, historically, we've seen a sequential consideration of $10 to $15 million higher COGS on average in the third quarter. However, in 2021, given the improved market dynamics and higher pricing environment, we anticipate the seasonality impact to be at or slightly below the lower end of the historical range typically seen. Moving to chemical intermediates, we expect a strong demand to continue for our products, which serve a diverse set of end markets and customers across building construction, auto, paints and coatings, solvents, electronics, and pharmaceuticals, to name a few. We're supporting growth across the portfolio through investments in high-value and high-purity applications. As we previously discussed, our EasyBlox anti-skinning agent for Alkalid paints, as an example, has seen great commercial traction. We are currently executing capacity expansion for that oxygen portfolio to support robust regulatory-driven growth, particularly in Europe. Acetone industry fundamentals continue to be an area of strength, as I shared earlier. We anticipate those dynamics to remain strong and moving forward with continued balancing of supply and demand through the second half of this 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 target sustainable shareholder returns over the long term. We are focused on enhancing our day-to-day execution by strengthening our culture and core foundations of excellence, improving through-cycle profitability by driving superior operational and commercial performance, enabling sustainable long-term growth by enhancing our portfolio resiliency, and enhancing value creation through discipline and capital stewardship. In the current set of industry conditions, we remain focused on delivering on our trusted partner promise for our customers. With terrific results through the first half of 2021, the outlook for our business remains favorable. The continuation of strong underlying demand trends across our core markets, benefits from our high return capital projects and differentiated product portfolio, and our operational agility are all supporting our expectation for the strongest annual earnings and cash flow since SPIMP. The collective efforts of our 1,400 teammates have positioned the company for long-term success, and we are hopeful you share our excitement about the opportunities that lie ahead. We look forward to sharing more about our ability to deliver strong and sustainable shareholder returns at our upcoming investor day scheduled for September 28th. With that, Adam, let's move to Q&A.

Great. Thanks, Erin. And Matt, please open the line for questions.

We will now begin the question and answer sessions. To ask a question, you may 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 will come from Vincent Anderson with Stiefel. Please go ahead.

Yeah, thanks and congratulations on the quarter. Really. Thank you. Yeah. So, thank you for beating us over the head on the 3Q ammonium sulfate pricing dynamics. Always helpful to have that reminder. But maybe specific to this year, I know, you know, Brazil is in a little bit of a different agronomic environment than the U.S. has enjoyed. And it also has access to Chinese Amsol supply. So just, you know, given how strong the second quarter was, should we be expecting maybe a more pronounced decline into 3Q than normal?

So, no, I appreciate the comment. And, you know, just a kind reminder, you can get, again, caught up in the air. So thanks for noting, you know, the need to take this into consideration. We would actually guide to the lower end of our typical range we've seen. So if you go back over Last several years that we've modeled, we've typically talked about a $10 to $15 million range where we can see really kind of the mix between the domestic to the export views coming into play. But as we really look at this next ag cycle, you know, the export markets have firmed, you know, a bit here for standard and supply. We also – And we're seeing our fall fill pricing reset. Those levels here domestically have reset roughly 40% higher than 3Q of 2020. So we would guide you to the lower end of that range or perhaps even slightly below.

Okay. All right. Thank you. I didn't catch the fall fill pricing, so that's good to hear. I know this is harder to kind of quantify on the nylon side, but when we think about your differentiated intermediates and some of the investments that you've made there from a capacity perspective, you know, I'm curious if you'd be willing to start putting some numbers around that. I know you're doubling, I think you said, your oxymes capacity. So, what does a doubling of that look like from an EBITDA contribution, if you're willing to share?

Yeah, so again, because we have a consolidated P&L here, Vincent, it's hard for us to pull out the EBITDAs per product in that regard. But we kind of point to some factors for overall. We started out thinking about this combination of both you know, high value intermediates, you know, the target for the high purity applications and differentiated nylon that, you know, overall differentiated products represented 8% of our sales in 2017. You recall we had, you know, grown that to 12%, you know, last year in 2020. You know, at the conclusion of this year overall, you know, we would see and are expecting something more like a mid-teen, you know, long-term CAGR. If you look at sort of a four-year CAGR at that point, And, again, you know, these have growth margins that are really kind of tracking now at sort of 2X our base business. So you can kind of see that that is, you know, building to be meaningful, you know, margin growth. And you can kind of take a look at it from that perspective. You know, the 2PO or the oxymes, you know, again, here it's a number of oxymes, but that one in particular that we're investing in, you know, for instance, is you know, last year grew on a three-year CAGR of 45%. So on an introduction basis, we're coming up the curve, if you will, almost sort of asymptotically on that introduction and have seen great adoption, you know, continued into 2021. You know, these are assets we've had that we just had to sort of modify and sort of release capacity on. So really good investments for us here to continue reaching a nice end market. And again, a product that's going to lower the toxicology profile, you know, of the end product as well. So... kind of a win-win on the sustainability front as well as profitability.

All right. Thank you. And so I know you chalked it up to timing, but, you know, when you're having a great year and CapEx comes down anyways, you know, is there anything more that we should read into that, you know, whether it's just staying out of the way of your own assets while markets are so strong or, you know, are you maybe having trouble sourcing equipment or labor in this market today? Okay.

Yeah, no, I wouldn't read too much into it. You know, if you look at it from a year-over-year perspective, you know, last year, you know, this year we're down, you know, we spent $25 million in CapEx in the first half, which is below what you would expect from a typical run rate and down year-over-year because we're lapping some of the larger, you know, high return growth and cost savings projects. last year. You know, the scope of the turnaround this year is a bit smaller as well, requiring less capital. So that is a factor. The other thing is our growth and cost savings projects still continue, but the spend rate for those are closer to $5 million or less. And really the reason for that is as we develop scope and drive efficiency in our execution, we've been able to bring those costs down and the returns up for those. So that's actually a good news story. And we're not really slowing down projects. You know, we're driving, you know, efficiencies in our process, in our planning and our execution. But there is some project timing. So I will say in the second half, as you can look at our full year expectation for CapEx, the second half will be in that $40 to $45 million range. So it will be ramping up. And that's what I would anticipate as kind of our ongoing, you know, run rate, right, if you will. So... So we'll see that pick up here in the second half.

Okay, excellent. That's helpful. And then I guess just, you know, based on your results, I mean, it doesn't seem like you had any issues handling the disruptions in logistics and petrochemical production on your QMeans supply side. But is there anything specific that you want to call out there or anything to be mindful of into the back half of the year?

Yeah, so appreciate that. And if you kind of look at where we've been in the first half, you know, on the Q means supply, obviously we talked about this in the last earnings call that we were well positioned. We had anticipated, you know, a heavy turnaround situation in January. So we had pre-bought that allowed us to navigate through you know, the first part of the year here rather well. The industry is operating with two current QMean force majeures. You know, again, we think our agility and our focus on our integrated supply chain and how we manage risk on an ongoing basis is going to allow us to navigate this well. But, you know, I think it is mindful that at least two suppliers that current are in force majeure in the third quarter.

Gotcha. And I'm just going to sneak one more in. It's great to see residential construction contributing to nylon demand. It's not really been part of the story in quite some time. In your conversations with customers, has it gotten to a point where it's more than just the sheer magnitude of residential investment overall, or are we actually starting to see maybe a little bit more penetration, so to speak, of carpeting?

Yeah, it's an interesting question and one that we continue to, you know, as you would imagine, kind of probe on with them. And as they are trying to uncover, you know, some of the trends here as well, because, you know, at face value, certainly the macro trends of remodeling, you know, folks being at home have driven up, you know, the demand relative to that also sort of resale is typically another triggering event for folks to look at replacement. And one of the considerations that we're trying to keep an eye out here is PET has been snug as well. And it's interesting, sort of older nylon machines can't run polyester, but newer polyester machines can run nylon. So it's one of the things that, probably more transitory, but certainly it's something that You know, we're watching it and should, again, as all of the value chains kind of realign themselves, you know, through the back half of the year is a consideration. But if you look at the mill rates, I mean, the mill rates are only, you know, recovered. And as we looked at them, you know, year over year, they're up 27%, you know, from a June basis. But when you go back to June 2019, they're only down about 4%. So if you kind of look at a two-year basis, whereas we were seeing, you know, steeper sort of 10% declines, you know, prior to the pandemic, you know, it does feel that perhaps, you know, things have certainly plateaued, if not picked up a little bit back on the soft side.

Excellent. All right. Well, thanks again, and best of luck on the rest of the year.

Appreciate it, Ben. Thank you. Thanks.

Our next question will come from David Silver with CL King. Please go ahead.

Okay, thanks. Good morning.

Good morning.

Good morning. Yeah. I had a question. This is more like an anchoring question, and it has to do with your use of the term record regarding this year's results. So I guess maybe I just would like to focus on either, you know, you pick the metric, but revenues and EBITDA maybe. When you talk about a record year that you're expecting, I'm just wondering, you know, what the timeframe is there. So, you know, your company's coming up on your fifth anniversary, and I guess 2017 was kind of a record year from that timeframe. But if you look back not too far beyond that, I mean, I think in the prospectus, there were some bigger years prior to when Um, advanced six was spun out, uh, 2012, 2013, I believe. And, you know, Aaron, I'm, I'm asking because I think you were directly in charge of the same assets at that time. So when, when you cite, um, record performance this year, is it, you know, just in the five years or so since your public or, you know, does it extend kind of, uh, further back. And if you had any perspective, I'm guessing you may have looked back there, but what is the potential for the current mix of assets and market fundamentals to drive results as high as the 2012-2013 levels? Thank you.

Yeah. So to clarify, Dave, we're talking when we say record, record outlook for this year, it is relative to the post-spin financials. So we're not comparing against financials prior to the spin. Clearly, those were carve-out financials under Honeywell, different structure at that time. So just want to clarify that going forward. And then in terms of the record, I mean, I think Aaron pointed out very, very well and very clearly that a lot of the things that we're driving across the business since 2017 are creating a very strong foundation for us to perform, execute in a very favorable environment, but also setting ourselves up for long-term value creation. We've talked about the differentiated products, the type of growth and returns we're seeing there. We talked about the CapEx investments, you know, the $100 million and the 20% internal rate of return that we're achieving, you know, as well as some of the other operational improvements around granular conversion, you know, improvements, you know, et cetera. So we feel very good about the underlying foundation of this company and how we've improved it since it's been and setting ourselves up. for record earnings since the spin and strength and good tailwinds as we go forward.

Okay. Thank you for that. I had a couple of questions, I guess, about the volume growth this quarter. And, you know, you guys are definitely, you know, accurate in your reporting, but you're maybe doing the comparisons versus the pandemic affected conditions of a year ago. And I was just wondering, you know, I was trying to scratch my head and look at the sequential trends, two Q versus one Q. Can you kind of maybe break down the 16% revenue growth in the same manner that you broke down the year-over-year 88%, how much of that was volume? And in particular, I'm just kind of wondering if the second quarter reflected excess volume above what you could In other words, where you may be borrowing a little bit of sales volume from other quarters just due to the exceptionally robust demand. I mean, I didn't see it in your inventory numbers so much, but, you know, I think price and cost issues might be, you know, clouding that a bit. So, you know, kind of a price-volume view sequentially would be helpful. Thank you.

Yeah, sure. Happy to help. First of all, I wouldn't characterize our performance as we think about the second quarter versus the first quarter, or our performance in the quarter as borrowing from any other quarter. I mean, the quarter stands on its own. You saw the inventories were relatively flat in the second quarter relative to the first. But as you look at the sales growth from the first quarter, we did grow about 16%. A good percentage of that was really in pricing. A majority of that was in pricing. A really favorable price across the board, really across all product lines. And we did have sort of low to mid-single-digit growth in volume as well. So that gives you the primary drivers of the sequential performance from 1Q to 2Q.

And maybe if I could just add, because I think it's something we talked about as we were recovering through the pandemic from Q2 of last year, Dave, was the mix, particularly in nylon. I guess you recall that we had not only sort of the volume hit relative to the largest impact occurring in the nylon markets, But as we recovered, that put us in an exposure consideration to export, to meet demand where it existed. So if you think about revenues in Q2 of last year, 26% of our nylon revenues went to export. This year, it was seventh. So again, being able to bring our value proposition to our customers here in North America, as demand has recovered, you know, having that value proposition of being the, you know, sole producer, you know, of our, you know, high six concentration copolymers, right, it's playing out. So I think there's also, you know, consideration here on mix year over year that, you know, plays into that picture as well.

Okay. Thank you for that. My next question would be regarding, I guess, logistics and shipping costs and costs and logistical reliability and any other supply chain issues. So I think Vincent touched on it from a QMEAN perspective, but I was hoping you might expand that to a broader view of how you're viewing your logistics and supply chain comfort or your confidence. And just real quick, but I've had about 10 companies report, and my joke is there's been an unprecedented use of the term unprecedented to describe supply chain challenges. And I didn't hear any of that from Mike or Aaron in the opening remarks. So maybe just a broader comment on how you see your supply chain and any challenges that you anticipate in kind of meeting your internal targets over the next quarter or two. Thank you very much.

Sure. Yeah, I mean, certainly, Dave, things have been tighter. You think about how we transport a lot of our materials domestically and also in the export markets. You think about containerized ocean, rail, trucking. You know, we certainly have felt things being very tight, really, across the board and the amount of capacity available. Probably where we felt it the most is in trucking. You know, but again, we've We have very good, strong channels to market. We view this as one of our advantages and our strengths as we deliver products to customers. Things have been tight. There have been limits in capacity, but my sense is, overall, as we look back in the first half of the year, we've managed it very, very well. We've been able to secure the transportation we need to get and to deliver. to our customers, and frankly, we're very proud of that. We've seen some inflation in logistics overall, but we've been working hard to mitigate that through productivity projects, but also passing that through. As we've demonstrated, we're very good at it. So, you know, in terms of the second half of the year, we expect things to continue to be tight, but we're going to manage it. you know, as well as we could, and we anticipate that not being a hurdle to us to meet our objectives in the second half.

Okay, great. I do have one or two other questions. I don't want to kind of, you know, take up too much time, but will there be time to get back in queue? Yep. Okay, I'm going to stop there, and I'll get back in queue. Thanks very much.

Thanks, Dave.

Again, if you have a question, please press star then 1. Our next question will come from Charles Niebuhr with Piper Sandler. Please go ahead. Morning, guys.

Good morning. It's been a little while, so glad to be back. One question. At the current price for the shares, which have obviously elevated from their lows from a while back, and is it reasonable to be buying them back versus looking at the acquisitions? I mean, you know, obviously that's always the case that you have a certain amount of money you can spend on either acquisition, which would bring money in or buying the shares, which may be a great value as where the shares sit now is one of the other sort of, and have the lead on use of cash going forward. I mean, assuming they, you know, that shares generally sit in the range they are right now.

Yeah. Yeah, I mean, it's a good question, Charles, and that's part of the reason I think why we wanted to be very clear on our capital deployment framework and why we've shown, you know, the prioritization of that in the presentation. You know, the first of which we've talked about in the past is, you know, funding our growth and cost savings projects, which we are. But we're also very active with respect to evaluating M&A opportunities. And we did our first one here in the first quarter. That one is paying off. It's performing very, very well ahead of expectations. And in terms of return of cash to shareholders, clearly we're going to be continuing to evaluate more of a structural return. you know, specifically a dividend. And we'll view share repurchases as more opportunistic going forward. You know, we've done quite a bit historically. We've repurchased $100 million worth of the company, which was over 10% of the company since 2018. So we feel very good about what we've done. And we will continue to evaluate that on an opportunistic basis.

Great. Well, thanks. And, you know, obviously, the shares keep going up. It makes share repurchases sort of less of a lower probability given especially the success you've already had on acquisition. Another question, you're keeping or you're heading towards fairly conservative like net debt to EBITDA. I think you mentioned between 1 and 2.5. And I think most would consider that fairly conservative. But given the time being in that range or on the low end of that range is sort of reasonable. But If things keep going the way they are, you're generating more cash, you're starting to grow a little bit better cliff, is it more reasonable to think you might tend toward the high end of the range and then give yourself a little bit more financial flexibility to work things? I know that being a cyclical industry, two and a half can quickly turn to three and a half or four if you get one of these cyclical downturns. Are you guys going to start, you know, if things continue as they are, do you think you feel more comfortable at the upper end of the range, or is that just the range you want to keep ongoing no matter what?

I mean, look, we'll continue to evaluate the range. I'd say right now we're comfortable in that range of one to two and a half, and You know, being at the low end of the range where we are today offers us a lot of flexibility around what we can do with respect to creating, you know, additional value, whether it be through M&A or, you know, return a cash to shareholders. So very good. I wouldn't say being where we are will make us more comfortable to go way above that range. You know, we still feel very good about that range and, again, feel very comfortable where we are and, again, affording us the flexibility and the optionality as we go forward.

And, Charlie, I would just, you know, characterize that as, you know, for how we look today, right? Obviously, as, you know, we enhance size, free cash flow profile, margin stability. you know, over time, right, that range could look very different to your point as to, you know, what the portfolio looks like in the future and as we continue to enhance the resiliency of those kind of, you know, core evaluation metrics.

Yeah, I mean, clearly the hope is things get to the point where you feel comfortable, let's say, in the low end being 2 to 2.5 because you've your upper end really doesn't put you beyond, you know, in a position where it gets very uncomfortable. And if you're at the sort of the low end of the current range, things get a little ugly. You really end up at the high end of the range or maybe a pitch above it, but it really doesn't put you in any real jeopardy. Another last question for me is, you know, propylene costs seem to be all over the place over the last year or so. I mean, they've been really volatile. Is there anything you guys are doing to try and, deal with that volatility, or is there anything you can do to help deal with that volatility, or do you end up, since you have price pass-throughs, you don't really care?

You know, look, I mean, propylene has been volatile, as you mentioned. You know, things got very tight in Q1 with the winter storm, and we saw propylene prices really spike up in Q1, and then sequentially as we got into Q2, they moderated and actually had gone down one of the few raw materials that sequentially went down in the second quarter versus the first quarter. But, you know, the way we protect ourselves is through our formula-based contracts. And, you know, as we've talked about in the past, you know, half of our business is on formula contracts. And so, you know, we pass that through. And for the remaining portion that's not on formula, we do a great job getting out there, getting those price increases in if raw materials go up and, make sure we recover any exposures. And that, as you can see, has been demonstrated quarter after quarter here. Given the inflation that we've seen across a lot of the raw materials that we buy, we've been successful in doing that. So hard to control the price of propylene overall. Obviously, we track it and we keep close eyes on the supply and demand and how things are progressing, but they'll feel very good about how we respond and how we recover. And really, again, a testament to our business model and the fact that we protect our variable margin.

Great. Well, thanks very much, guys. That's it for me today.

Perfect. Good to hear from you. Thanks, y'all.

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

Great. Thank you all again for your time and interest this morning. I'm very proud of how our organization continues to support our customers while delivering terrific results. The outlook for our business remains favorable as we are executing the focus strategies within our value creation roadmap, and we are confident in our ability to create long-term and sustainable total shareholder returns. So with that, we'll look forward to speaking with you again next quarter. Stay safe and be well.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.