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spk04: Good morning and welcome to the Advance 6 Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. Please note this event is being recorded. I would like now to turn the conference over to Adam Kressel, Vice President of Investor Relations and Treasurer. Please go ahead.
spk03: Thank you, Alan. Good morning and welcome to Advance Six's second quarter 2023 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.advancix.com. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our business as we see it today. Those elements can change, and the actual results could differ materially from those projected, and we ask that you consider them in that light. We refer you to the forward-looking statements included in our press release and earnings presentation. In addition, we identify the principal risks and uncertainties that affect our performance in our SEC filings, including our annual report on Form 10-K, as further updated in subsequent filings with the SEC. This morning, we will review our financial results for the second quarter 2023 and share our outlook for our key product lines and end markets. Finally, we'll leave time for your questions at the end. So with that, I'll turn the call over to Advance 6's president and CEO, Erin Kane.
spk05: Thanks, Adam, and good morning, everyone. Thank you for joining us and for your continued interest in Advance 6. As you saw in our press release, Advance 6 delivered solid earnings and cash flow results in the second quarter amid a continued dynamic macro environment and against a record second quarter in the prior year period. The performance further illustrates the value and resilience of our diversified chemistry company. Our team executed on strong in-season demand for plant nutrients, albeit in a lower nitrogen and raw material pricing environment. They navigated unfavorable nylon industry supply and demand conditions and increased low-price imports, while continuing to experience balanced North American acetone supply and demand dynamics in our chemical intermediates portfolio. Our long-term confidence is reflected in continued share repurchases through July, as well as our announced 10% increase in our quarterly cash dividend for the third quarter. We continue to make meaningful progress on our sustainability initiatives and ESG performance. We will soon publish our annual sustainability report which highlights the terrific work happening around the organization integrated with our overall strategic priorities, including the recent launch of our 100% post-consumer recycled nylon, which I'll speak to later on this call. I encourage you all to take a read through it later this month. Looking ahead, our diverse end market exposure and integrated efficient and cost-advantaged business model provides resiliency, particularly in an evolving global macro environment. While we anticipate seasonality impacts within our plant nutrients business and demand weakness in certain market segments within our nylon solutions and chemical intermediates product lines, we remain confident in our demonstrated ability to execute and perform through various macroeconomic cycles. We are highly focused on what is in our control, including driving superior operational and commercial performance to meet the evolving needs of our customers, building capabilities to strengthen our innovation and portfolio resiliency, and executing against a balanced and disciplined capital deployment framework. Our organization's collective efforts are centered around driving best possible outcomes for our business in the current set of industry conditions while supporting sustainable long-term shareholder value. Let me turn the call over to Mike.
spk00: All right, thanks, Erin, and good morning, everyone. I'm now on slide four where I'll provide a summary of the second quarter 2023 financial results. Overall, our results were solid considering the current environment and against a record prior year comparison. Sales of $428 million decreased approximately 27% in the quarter. Pricing was unfavorable by 25% overall. Market-based pricing was unfavorable by 19%, primarily reflecting lower nutrient values, reducing ammonium sulfate pricing, as well as lower nylon pricing. Raw material pass-through pricing was also a headwind. down 6% following a net cost decrease in benzene and propylene. Volume declined approximately 2%, primarily driven by soft end market demand, impacting portions of our nylon and chemical intermediates product lines. This was partially offset by higher domestic ammonium sulfate volume to meet in-season customer demand compared to the prior year period, which was impacted by unfavorable weather conditions. Adjusted EBITDA was $66 million, and I'll highlight the key year-over-year variances on the next slide. Adjusted earnings per share was $1.25. The effective tax rate was 24.4% in the quarter, consistent with our full-year expectation for an effective tax rate of approximately 24%. And finally, free cash flow was approximately $16 million in the quarter, Cash flow from operations of $35 million decreased roughly $61 million versus the prior year, primarily due to lower net income and the unfavorable impact of changes in working capital driven largely by the unwinding of ammonium sulfate pre-buy cash advances this year versus prior year when there was no 2021 year-end pre-buy. Capital expenditures of $19 million in the quarter increased $2 million versus the prior year. Let's turn to slide five. Here we highlight the key drivers of our second quarter adjusted EBITDA performance year over year. Pricing over raw materials was roughly a $44 million headwind. Tracking our key variable margin drivers, ammonium sulfate on a net price over natural gas and sulfur basis was down year over year as significantly lower pricing was only partially offset by a reduction in input costs. Performance across our caprolactam and nylon portfolio over our key raws was also negative year over year, reflecting unfavorable supply and demand dynamics, pressuring global pricing in a low raw material environment. And lastly, chemical intermediates price of a raw spread increase year over year, largely reflecting acetone margin overfalling propylene costs. Volume and sales mix were approximately 2 million favorable in the quarter, largely reflecting higher plant nutrient sales as previously discussed. partially offset by soft market conditions for our nylon and chemical intermediate products tied to continued weak demand in building and construction and for consumer durables. We also saw an approximately $4 million favorable benefit from planned plant turnarounds year over year. Finally, all other items netted to a roughly $1 million unfavorable impact. Now let me turn the call back to Erin.
spk05: Thanks, Mike. I'm now on slide six to discuss each of our product lines. Starting with nylon solutions, we've seen continued global pricing pressure on the back of unfavorable supply and demand industry conditions and increasing Chinese exports. The Asia caprolactam over benzene spreads averaged roughly $800 per ton in the second quarter of 2023, remaining roughly flat on a sequential basis, but down significantly year over year. The global composite price raw spreads underperformed the Asia spreads once again as a slower growth Chinese economy is leading to excess supply moving to other regions at lower prices. China exports are at an all-time high, and we're seeing the most acute challenges through the engineered plastic space, where not only low-priced nylon but also competitive material is coming into North America at an increasing rate. This comes at a time when demand overall has remained soft, leading to further margin compression. Across our other key end markets, building construction indicators have been mixed, and we've yet to see a volume of price recovery in the fiber and filament space where we serve our carpet customers or in wire and cable, which has exposure to residential applications. Lastly, packaging, while a more resilient end use for our business, has seen some demand softness tied to inflationary pressures impacting buying behavior in certain applications like bone-in meat and protective packaging. Moving to chemical intermediates, industry-realized acetone prices over refinery-grade propylene costs continue to improve year over year in the second quarter. While acetone demand downstream has seen some softness, particularly into the large buyer end applications, we see supply is generally balanced. This has been supported by stable acetone imports into the U.S. and persistent lower phenol global operating rates, on reduced demand into epoxy resin, polycarbonate, and nylon value chains serving building construction and other industrial applications. We also continue to monitor propylene costs, which ended the quarter at their lowest level since early 2020 on ample supply. Our integrated operating model continues to serve us well in industry dynamics like these. And lastly, in plant nutrients, we saw nitrogen fertilizer pricing decline through most of the first half of the year. amid lower energy costs and increases in global supply availability. As we have noted in the past, ammonium sulfate pricing tends to be less dynamic than urea, and we had seen smaller price reductions through the winter months. As anticipated, in-season customer demand picked up through the second quarter, supported by favorable underlying agricultural fundamentals. From a crop perspective, corn prices have seen some volatility with changes in projections of estimated planted acres and the ongoing drought concerns impacting potential yields. In the export market, we saw more cautious buying behavior out of places like Brazil as nitrogen prices fell, and although pricing has seen some recovery entering 3.2, it remains well below prior year levels. So overall, while we navigate through a multi-quarter reset here, as well as the third quarter seasonal dynamics in North America, which we'll discuss on the next slide, the underlying fundamentals continue to support firm fertilizer demand moving forward into 2024. Our plant nutrients portfolio, now with plans for further expansion of granular ammonium sulfate production, is a leader in the space and continues to support overall company performance and results. Let's turn to the next slide. We thought it would be helpful to spend a moment refreshing everyone on the seasonality impact we typically see in our ammonium sulfate business. Our ammonium sulfate fertilizer does experience quarterly sales seasonality, reflecting both geographical and product sales mix considerations based on the timing and length of the growing seasons in North and South America. The North American fertilizer season runs roughly from July, when the value chain begins restocking fertilizer, through June, when most application for the year's planting is completed. The new season fill begins in the third quarter and proceeds sequentially into the following spring, which is the peak period for key crop fertilizer application. As a result of this pattern, North American ammonium sulfate demand and pricing, particularly for a higher-valued granular product, are typically strongest in the first half of the year through application for the spring crop and then declined in the second half. To better illustrate the sequential seasonality considerations, the chart on the left-hand side of the page depicts the average price change from corn belt ammonium sulfate as published by Green Markets by quarter over the period from 2010 through current. As you can see, the trend reflects the dynamics just discussed. On average, we've seen industry prices in the corn belt decline roughly 10% from the second to the third quarter. And while there are a range of results across the quarters, depending on the environment in any given year, we've seen sequential declines into the third quarter in every year since 2010, except for 2021. The third quarter sequential declines over that period have ranged from a low single-digit decline to decreases of roughly 30%. Now, historically, these declines correspond to a sequential consideration of $10 to $15 million lower pre-tax income on average in a given third quarter relative to the second. However, in 2023, we anticipate the seasonality impact to be above the higher end of the historical range typically seen. I'd now like to turn to slide 8 to discuss the launch of our new 100% post-consumer recycled, or PCR, Nylon 6. Launched at the Global Pouch Forum in June, this new portfolio of products builds on our introduction of post-industrial recycled, or PIR, resins and films in 2021. Our effort here is to meet growing demand for environmentally friendly products by incorporating materials built on recycled monomers reclaimed from waste streams. Our approach uses an industry-accepted mass balance approach that is third-party certified annually. With more than 10% of our total resident capacity available to be sold with a PCR or PIR certification, this is another terrific opportunity for us to boost differentiated product growth while providing our customers a cost-effective path to sustainability. We're targeting customers across a wide range of applications, driving our value proposition across food and medical packaging that requires FDA compliance, automotive, carpeting, thermoformed and shrink packaging for meat and cheese, and bag-in-box packaging. The new PIR and PCR Nylon 6 materials offer the same excellent properties as conventional nylon products. They are drop-in replacements with no costly requalifications or cost to consumers and provide a solution to help companies meet their sustainability goals. We're in the process of finalizing a lifecycle assessment comparing our conventional Nylon 6 with our recycled offerings. We expect that it will show a significant carbon footprint reduction positioning this product to further contribute to our customers' decarbonization goals. Now to put this in perspective in a packaging application, Nylon's inherently larger footprint relative to polyethylene becomes an advantage when optimizing the overall package's carbon footprint. As an illustrative example, if you assume use of these products in a typical multi-layered film application, the recycled nylon six could potentially deliver an approximately 30% reduction in overall carbon footprint when compared to Plastic Europe's published numbers. Now let's turn to slide nine to wrap up before moving to Q&A. Our outlook for 2023 remains largely consistent to what we have shared previously. We continue to expect performance this year to demonstrate the resilience of our business model and our ability to navigate through the challenges of an uncertain environment. We expect favorable underlying agriculture and fertilizer industry fundamentals to continue. However, typical seasonality will be a key consideration to our expected sequential performance in the third quarter relative to the second. North American acetone supply and demand conditions remain balanced. given lower phenol industry operating rates globally, while headwinds in consumer durables and building construction end markets persist across our nylon and other chemical intermediates product lines. This is expected to continue having implications for both price and volume. Operationally, we are highly focused on the execution of our upcoming third quarter plant turnaround, which supports our ability to safely operate at higher utilization rates relative to our industry. We continue to expect the pre-tax income impact of plan-plant turnarounds to be $25 to $30 million in the third quarter of 2023, totaling $28 to $33 million for the full year. So overall, we are executing to a set of focused priorities, all of which are aligned to driving the critical measures that underpin compelling returns on capital and attractive long-term total shareholder returns. With that, Adam, let's move to Q&A.
spk03: Great. Thanks, Aaron.
spk04: Alan, can you open the line for questions? We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. 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 Vincent Anderson of Stifel. Please go ahead.
spk02: Yeah, good morning and nice job on the quarter. Good morning. Good morning. So purely hypothetically, how would a trade case against Nylon-6 from China compare to acetone or ammonium sulfate, just given trade data doesn't disaggregate Nylon-6 from other nylon products? Is that something that, based on your prior experiences, would be feasible?
spk05: Yes, certainly. Thanks for the question, Vincent. We want to keep all of our options open here and certainly ensuring fair trade practices is important to us as we continue to monitor the industry dynamics here. Our assessment is underway, and as you pointed out, we've been in this position in the past in both our ammonium sulfate and acetone businesses and trade cases like these around the world. And we'll leverage our prior experience to petition for fair trade if determined that that's the most appropriate action.
spk02: Okay. All right. And then can you just quickly remind us what types of agricultural products U.S. Amines go into, and how did it perform this quarter, given we've seen some pretty severe destocking and crop protection everywhere else in the chemicals world?
spk05: Yeah, no, and our experience here would be the same. As a reminder, we go into the herbicides down the glyphosate chain, you know, with our MEPA product offerings. And, you know, certainly on the ag chemical side, there were, and we did see more desocking that occurred based on the import levels that happened earlier. you know, late last year. And so we have seen that impact certainly in demand through what would have otherwise been, you know, a strong season like we saw on dry fertilizer as, you know, basically down the chain and retailers and growers work through that higher inventory. But again, I think the underlying fundamentals generally support an opportunity set here as we come through into the next season.
spk02: Great. And if I can just ask a couple quick ones on the recycled content. So if I remember correctly, your PIR nylon is fed with your own kind of internal manufacturing process waste, for lack of a better term. But what is the feedstock for the post-consumer recycled nylon?
spk05: Yeah, if you think about the opportunity set that we have with our customers and in their value chain, we can take opportunity sets of monomers and, you know, back from them, they're in their streams as well. And so it's an expansion. If you think about that envelope, you know, opportunity set to be able to bring it back into our chain.
spk02: Okay. Okay, that makes sense. And then does Oban already have food packaging products developed and ready to market with PCR nylon, or is that your next step?
spk05: Certainly, as we work with them in concert and, you know, create that opportunity. So in Bopa, you know, that's going to be in certain types of applications. Those are typically more mono-oriented type packaging. The multi-film would work through our partners in some of the other converters.
spk02: Gotcha. Okay. All right. Thank you very much.
spk04: Thanks, Vincent. Our next question comes from David Silver from CL King. Go ahead.
spk01: Okay, great. Good morning. Good morning. Yeah, I have a few admittedly scattershot questions here. First question would have to do with your balance sheet and, in particular, inventories. So your second quarter ending inventory balance is sharply higher than a year ago, and I'm guessing the units difference is greater than the dollar difference, just given the shifts in product pricing. So certainly some of that is related to your upcoming turnarounds, which may be underway now. But could you just maybe talk about your comfort level with the inventories as of June 30? And then in particular, did the buildup of inventory have a meaningful impact on your reported results in the second quarter? In other words, did it, you know, improve your unit margins if you produce more than your shipping? Thank you.
spk00: Yeah. Oh, I mean, good question. So when you look at the inventory number, as you point out, we ended the quarter with $226 million of inventory. And that was pretty flat relative to the first quarter, Dave, about a million-dollar increase and up about $10 million since, you know, the end of the year. So, you know, again, from a sequential basis, not much of a change. But as you point out, definitely a change from a year-over-year perspective. And when you break that down, looking at roughly a $70 million increase in inventory from a year-over-year perspective. You know, raws were up in that $15 million range, and we do have a lot of timing with respect to Q mean and based on the rotations and when we receive those, so that can certainly fluctuate from quarter to quarter. But the balance is really in the finished goods and the work in process. And as you point out, as we head into the turnaround, the planned turnaround here in the third quarter, We clearly like to head into those with, you know, higher inventory balances so we don't disrupt sales and ensure continuity of sales to our customer base. And so that's, you know, critically important to us. And as we roll through the turnaround in the third quarter here and through the second half as we come out of that, we would expect there to be a reduction in inventory, and that is what we are planning for here in the second half. And then as we've sort of pointed out, we have been faced with some soft demand, you know, conditions for, you know, nylon and certain intermediate products tied to building and construction as well as consumer durables. That's also been a consideration. And, you know, we continue to sort of optimize and navigate as we, you know, as we progress here in the second half. But we are expecting a reduction in inventory as we head through the turnaround in the second half of the year.
spk01: Okay, great. Thank you for that. And I would like to ask you about your CapEx plans for this year. So no change in your targeted full-year level, but I guess if you were just to divide that by four, the first half of the year you're kind of trailing the pace at which your full-year CapEx spend would play out. Can you just maybe talk about how you get from here to there? In other words, with the turnaround and everything and a number of, you know, diverse initiatives included in that somewhat larger spend this year. Just, you know, maybe just talk us through the back half of the year and how that spending might progress. Thank you.
spk00: Yes. Yeah, no, good question. In the first half, just to put some numbers around it, you know, our CapEx spend in the first half was roughly, you know, $44 million. And we're still guiding to a 110 to 120 amount for the full year, which means that, you know, the second half spend has to ramp up, you know, quite a bit about, Two-thirds of the annual spend then roughly is in the second half. And, you know, as we execute the turnaround, a lot of the capital equipment that we've been planning for will be, you know, installed and our CapEx will increase as a result. And so we do expect a ramp-up here in the third quarter and then another ramp-up in the fourth. And, you know, we talked about some of the projects that were focused on this year, which is resulting in the increased and elevated spend. Some of those critical infrastructure projects that we've talked about, particularly the, you know, some of the dock we have at our Frankfort facility, which we're performing some upgrades to, and some other projects as well. So that is driving the, you know, the spend for the year and what we expect here in the second half, Dave.
spk01: Okay. Thank you for that. One question to go back maybe to the nylon chain and the market dynamics right now, and in particular, China. There's a lot of consensus on the fact that China is exporting a lot of nylon that they can't place domestically, nylon in its precursor. But I was just wondering, are they, in your opinion, are there other nylon chain products that they are also, you know, you're seeing the same type of opportunistic export behavior perhaps out of China? And then, you know, I'm thinking of ammonium sulfate firstly, but anything else that you think is kind of filtering into the markets that we need to keep an eye on? Thank you.
spk05: Yeah, sure. I can provide some context, you know, in the chain. You know, as you point out in our remarks, you know, China export vines globally, you know, now sort of equate to, you know, three times the size of Chesterfield's, you know, capacity, right? So the equivalent of three of our nylon plants are now being exported globally from China. And certainly, I just say that is in a slower growth environment for them and certainly pressuring opportunity sets into Europe, but then also into North America. And as I shared, predominantly coming in in the engineered plastic space, and that is also carrying downstream to where – you know, plastic engineered compounds made of nylon six are also coming in, you know, pressuring and competing with our customers. You know, we extend that to, you know, sort of the broader chain, obviously, you know, Global Flake, Caprolactam, is being exported as well. And then the result in ammonium sulfate, which we have seen for a number of years now. And, you know, Chinese, you know, AS production exports effectively as they have expanded their capacity in land for caprolactam that has brought ammonium sulfate. Ammonium sulfate has been flat in domestic consumption there. So effectively, with every addition that they have added, that ammonium sulfate is being exported globally. And that has reached nearly 13%. sort of million tons if you think about it. So it's a significant, you know, consideration in the global marketplace. And that is predominantly, I mean, they are heading into Brazil, Southeast Asia. And so that's just a little bit of context in that regard, right? So I can certainly expand if there's anything more as a follow-on, but that is what we're seeing Yeah.
spk01: And as you answered earlier, I mean, there tends to be a bit of a crazy quilt of trade restrictions and whatnot that go both ways, which kind of complicates the analysis. But no, thank you for that. Erin, big picture question here. So I'll preface my remarks by saying I'm not a professional economist, but I've been a you know, careful observer for a long time. And I would just, again, stipulate, uh, this is kind of a two faced or a schizophrenic, uh, economy that industrial economy that we're in that I haven't really, I have a tough time finding a comparison, you know, just with the puts and takes, uh, as I look around, but in your opinion, is the United States now in an industrial recession? In other words, are the negatives broad enough that they're outweighing the positives that are out there? If so, how does that change how you operate maybe tactically over the next few quarters?
spk05: Sure. Well, as you point out, there is data that underpins the backdrop of the macro environment that we are operating in. We are in the business of producing great chemistries and essential chemistries that are used on the value chain for consumer goods and essential products. impact millions around the world. But the reality is, you know, you've got S&P Global manufacturing PMI that is contracted for 11 months in a row. You have U.S. manufacturing PMI as of July that is contracted for nine straight months in a row. You know, the evidence of destocking, you know, reduction of global operating rates, I think is you know, certainly strong indication of the dynamic that you are suggesting. And as I pointed out, we've been here before. You know, this is a business that we have, you know, continued to focus on you know, the core first principles and in environments like this, you know, our cost advantage business model and efficiency comes into play. We are fortunate that we are able to run disproportionately higher utilization rates accordingly. So that supports our through cycle profitability. And we continue, as you know, to focus on the areas of opportunity to expand the underlying earnings of this business through smart capital investments, you know, throw our bolt-ons on M&A. And, you know, effectively our cost focus as well will need to come into play if this is to continue to be, you know, extended. But, you know, certainly this is not something that's just happening. You know, this is a dynamic that has been progressing now for, in some aspects of our business, for the better part of a year.
spk01: Okay, great. I really appreciate your thoughts on that. Thank you.
spk00: Sure.
spk04: This concludes our question and answer session. I would like now to turn the conference back over to Erin Kane for any closing remarks.
spk05: Thank you all again for your time and interest this morning. Despite a dynamic set of industry conditions and a record comparison in the prior year, We are proud that we delivered solid earnings and cash flow results in the second quarter of 2023. Our results once again demonstrated the strength of our business model and our position as a diversified chemistry company. While there are puts and takes across our end markets and broader macro uncertainty, we are focused on executing what is in our control, including our rigorous commitment to operational excellence, continuous enhancement of our long-term growth capabilities, and making smart and disciplined capital deployment decisions to drive higher returns. With that, we look forward to speaking with you again next quarter. Stay safe and be well.
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