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spk01: Good morning and welcome to the Advance 6 fourth 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 touchstone 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, Vice President of Investor Relations. Please go ahead.
spk04: Thank you, Andrea. Good morning and welcome to Advance 6's fourth 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 fourth quarter and full year 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 Six's President and CEO, Aaron Kane.
spk00: Thanks, Adam, and good morning, everyone. Thank you for joining us and for your continued interest in Advancics. As you saw in our press release, Advancics navigated a continued challenging end market environment to close out 2023. We maintained our focus on long-term priorities, including portfolio simplification in the year and further investment for improved fruit cycle profitability. Our healthy balance sheet supported our performance as we maintained our organic investments and return of cash to shareholders. Core to our long-term strategy is accelerating growth in the most profitable areas of our portfolio, continuous improvement to strengthen the underlying earnings power of this business, and sustaining our cost-advantaged business model. While the nylon environment has been pressured by unfavorable global industry supply and demand conditions for several quarters now, we've continued to see resilient performance within our acetone portfolio and solid results from our plant nutrients business. We'll provide more color in our outlook for 2024 later in the call. Though as we look forward, our focus is to perform in the current set of industry dynamics and to execute on the levers in our control, including cost discipline and working capital optimization that will be key mitigations to our operational headwinds as we have started the year. To support our long-term potential, it is also key that we invest to address enterprise risk mitigation, advance our IT platforms to achieve digital transformation, and deliver growth through projects like our SUSTAIN program. Now, let me turn the call over to Mike.
spk05: Okay. Thanks, Erin, and good morning, everyone. Now on slide four, I'll provide a summary of the full year 2023 financials. Our results declined in 2023 against a record prior year. Sales were down 22%, primarily driven by pricing. Volume was flat overall, pointing to the benefits of our diverse product portfolio and cost-advantaged position. Adjusted EBITDA of $154 million was down 50% from the prior year, driven primarily by unfavorable market-based pricing, net of raw material costs. We continue to focus on expanding the earnings power of our business and improving annual through-cycle profitability as evidenced by the resilient performance relative to prior trusts achieved in 2019 and 2016. Adjusted EPS was $2.14 per share. Our effective tax rate was 21.1% versus 23.9% in 2022, primarily driven by research tax credits and tax benefits related to the vesting of equity compensation. We anticipate our full year 2024 effective tax rate to be approximately 24%. Free cash flow declined year over year as a result of the lower net income and the unfavorable impact of changes in working capital, as well as higher capital investments. Now let's turn to slide five to discuss the fourth quarter performance. Sales with $382 million decreased approximately 5% versus the prior year. Market-based pricing was unfavorable by 22%. This primarily reflects reduced ammonium sulfate pricing amid low raw material input costs and a more stable global nitrogen supply environment, as well as lower nylon pricing. Raw material pass-through pricing was favorable by 1% as a result of a net cost increase in benzene and propylene. Sales volume increased approximately 16% in the quarter, primarily driven by higher export shipments in both ammonium sulfate and nylon. Adjusted EBITDA was approximately $15 million, down from $67 million in the prior year period. Pricing of raw materials was by far the primary driver of the earnings decline. Performance across our caprolactam and nylon portfolio presented a significant headwind year-over-year. Ammonium sulfate on a net price over natural gas and sulfur basis was also down with lower pricing partially offset by a reduction of raw material input costs. Chemical intermediates price of a raw material spread was up, supported by an increase in acetone margin over propylene costs. Plant costs were a modest tailwind in the quarter, driven primarily by lower natural gas utility costs, while volume and other items were also favorable, reflecting higher ammonium sulfate and nylon export sales. Adjusted earnings per share was a loss of $0.10. The effective tax rate was 38.3% in the quarter. And finally, free cash flow was approximately $22 million in the quarter. Cash flow from operations of $60 million decreased roughly $9 million versus the prior year. This was primarily due to lower net income, partially upset by the favorable impact of changes in working capital. Capital expenditures of $38 million in the quarter increased $10 million versus the prior year, primarily reflecting increased spend on enterprise programs and other maintenance projects. Now let me turn the ball back to Erin.
spk00: Thanks, Mike. I'm now on slide six to discuss each of our key product lines, starting with nylon. While significant year-over-year declines in industry spreads continued through the fourth quarter, we did begin to see some stabilization and improvement sequentially of prior trough levels. While this is encouraging, we continue to see weak demands and varying regional dynamics and trade flows, resulting in the global composite underperforming the Asia benchmark. We've seen China's global nylon exports reach all-time highs in 2023, as their slower growth economy led to increased low-price exports to the rest of the world. Here in North America, the higher interest rate environment has unfavorably impacted building and construction markets, as well as consumer spending, impacting packaging applications. Consumer durables within the engineered plastic space has also remained weak, while auto applications have been more resilient. As previously shared, for our business, we've seen a higher share of export sales, both caprolactam and nylon resin, which does come with a mixed consideration for our performance. While not at 4Q levels, our first half 2024 exports are expected to be higher year over year. In the fertilizer space, we've seen a multi-quarter reset in nitrogen pricing amid a more stable supply environment and lower energy costs. While we did see cautious buying behavior exiting the year, pricing did follow the initial fall fill in line with historical sequential averages. We remain confident that the underlying industry fundamentals, supported by crop prices, fertilizer affordability, and expected planted acres, will continue to support nutrients demand into the 2024 spring application. The USDA is projecting a decline in inflation-adjusted farmer profitability as a result of rising costs and lower crop prices. However, the absolute level remains at long-term historical averages. Overall, demand remains stable, and we are gearing up to serve our key customers as we move into the heart of the domestic planting season. Lastly, chemical intermediates. Industry realized acetone prices over refinery-grade propylene costs continued to improve in the fourth quarter. While acetone demand has seen softness, particularly into the large buyer end applications, we see supply as balanced to tight globally. This has been supported by persistent lower global phenol operating rates on reduced demand into value chains serving building and construction and other industrial applications. Across the rest of our intermediate portfolio, demand has remained soft. For our U.S. Amines business, which largely serves the ag chemical space, we've continued to face the stocking headwinds as retailers and growers work through higher inventory. Now let's turn to the next slide. As we shared in our press release, we expect CapEx of $140 to $150 million in 2024. This reflects increased spend to address critical enterprise risk mitigation and growth projects in addition to our core replacement maintenance and health safety and environmental investments. We recognize the challenges we're facing in some of our end markets. However, we continue to focus on making the necessary investments at the right time to support our long-term performance. We have a rigorous prioritization process that evaluates a variety of factors, including asset life, risk, compliance, return profiles, and other factors, culminating to an execution plan over the short, medium, and long term. We have two discrete enterprise programs at our Frankfurt Phenol plant, unrelated to the first quarter operational disruption, that are primarily driving the increased spend in 2024. These projects are targeting upgrades to critical infrastructure and operational efficiency. The first is a rehabilitation of our dock, which is critical to support our integrated value chain and movement of key raw and intermediate materials within our own system and to and from customers and suppliers. The second is an upgrade and the installation of a new boiler, which we expect to drive operational and cost savings benefits as well as reduce NOx emissions. Let's turn to slide 8 for more detail on the growth and cost savings investments. Our SUSTAIN program is the primary driver of near-term growth capital investment with approximately $75 million of spend between 2024 and 2027. Ammonium sulfate continues to be the primary go-to for sulfur nutrition with continued strong consumption growth. North American customers require the granular form of sulfate and our SUSTAIN program is designed to meet that growing need. As we progress this multi-year program, we endeavor to provide greater clarity to the timing of our investments and expected outcomes. As a reminder, SUSTAIN is a series of projects targeting expansion of our granular ammonium sulfate production, predominantly through increased conversion by approximately 200,000 tons per year. That represents a nearly 20% increase. This program wins on multiple fronts as it also targets no increases in net energy consumption or emissions. It also improves domestic customer logistics through improved efficiency for truck and rail loading. Benefits are expected to phase in over the investment period as individual components of each project come online. All projects are proceeding in front-end engineering design with investment and execution priorities now firmed up for the next two years. We expect production capability by the end of 2024 to reach a milestone of 68% to 69% conversion as compared to our current target of approximately 65%. And by completion of this program, we anticipate roughly 75% granular conversion. The return profile for a sustained program remains robust, with expected IRRs approximating our 20% target hurdle rate. We also continue to progress on grant funding from the USDA through the Fertilizer Production Expansion Program, supporting innovative domestic fertilizer production. Now let's turn to slide 9 to wrap up before moving to Q&A. Now more than ever, the strength of our business model and our position as a diversified chemistry company will serve us well as we navigate the current set of dynamics. We expect nylon industry margins to remain stabilized near current levels amid weak demand. This means that we continue to anticipate higher nylon solutions exports year-over-year in the near term. In our planned nutrients business, we anticipate strong seasonal demand supported by continued favorable ag industry fundamentals. So we do expect first half 2024 year-over-year pricing declines amid a lower nitrogen pricing environment. And in our chemical intermediates portfolio, we expect balance to tight global acetone supply and demand conditions. Operationally, we expect the pre-tax income impact of planned plant turnarounds to be $30 to $43 million in 2024 compared to approximately $30 million in 2023. The majority of this impact will be incurred in the third quarter. Now, before we conclude, I wanted to spend a moment providing an update on the previously disclosed process-based operational disruption at our Frankfurt manufacturing site. As a result of a delayed ramp to planned utilization rates, we are now anticipating a total unfavorable impact to pre-tax income in the first quarter of $23 to $27 million. This is comprised of the impact of lost sales and other additional costs, including purchases of replacement products and incremental plant spend. We are on the right path and have Frankfort currently operating at 65 to 75% of its planned utilization rates, which is enabling us to ramp back up Hopewell and Chesterfield to targeted rates. While this has been a difficult start to the year operationally, I would like to thank our customers and partners for the collaboration to mitigate value chain impact. And I'd also like to acknowledge our Advancics teammates that have been focused on the safe operation of our sites during this time for their commitment and focus on getting the job done. We have much of the year ahead of us and are committed to delivering for our key stakeholders. With that, Adam, let's move to Q&A.
spk04: Great. Thanks, Erin. Andrea, can you please open the line for questions?
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Once again, that was star then 1 to ask a question, and at this time, we will pause momentarily to assemble the roster. And our first question comes from Vincent Anderson of Stiefel. Please go ahead.
spk02: Good morning, everyone. Good morning, Vincent. Good morning. I wanted to start with AMSOIL. The revenues in the quarter were better than at least I was expecting given where export pricing had lingered for most of the quarter. Were your overall volumes up year over year or did you start to see better pricing in December? you know, whether market-based or just placing tons in higher-value regions.
spk05: Yeah. Yeah, Vincent, thanks for the question here. Yeah, from a year-over-year perspective, volume was up. If you look at the, you know, top-line growth, we were looking at roughly, you know, $60 million of volume improvement from a year-over-year perspective. That's worth about 15% increase year-over-year. A good amount of that was ammonium sulfate, also a good amount of volume from a nylon and capital actin perspective. Most of that was exports. So for AS in particular, we had a really strong export quarter, and that's what drove, you know, majority of the volume from a year-over-year perspective.
spk02: Gotcha. Thank you. And that kind of feeds into my next question, which may be partially answered, but you recorded lower deferred income and customer advances. Was that largely the result of absolute pricing, or were your pre-buys consistent? consciously kind of managed lower this year?
spk00: Yeah, no, when we think about sort of where the fundamental market is, and certainly we take our customer signals here as well as approaching every year's, you know, pre-buy program and fill program. So we would say that our volumes were, you know, at sort of long-term historical averages, but pricing, just given the entire complex on energy and nitrogen nutrient values, was down.
spk02: Okay. All right. Excellent. Then kind of similar question around intermediates. That was a bit better than we were expecting. So I'm curious if that was really all acetone pricing, or are we starting to see some early recovery in oxymes and maybe the amines that go into agricultural use?
spk05: Yeah. I mean, the majority of really the intermediates improvement was more market-related pricing, and most of that was acetone. Acetone strength given, you know, favorable supply-demand conditions overall. Sure.
spk02: Okay. And then just a real quick one, and I'll get someone else to turn, but is there any risk here that you don't have enough output from Frankfurt to build inventory ahead of the planned turnaround, and we see more purchased product in, you know, around the third quarter or the second quarter, or is this still at 65% to 75% of planned utilization where we're good in terms of balance of the year risk?
spk00: Yeah, so certainly the current rates we're at are supporting us, you know, with some modest purchases at this level to bring back the full rates at the Hopewell and Chesterfield here. Just given our normal level of integration, 75% to 80%, you can, you know, those numbers are out there relative to sort of how the system works on average over long stretches. We certainly, as you might expect, we pulled forward the maintenance work at Hopewell, just given the slowdown, so we were proactive in that nature. And our key focus right now is to get our Frankfurt facility stabilized and up and running. The system's returned. The return of flow to our customers have been very collaborative with us during this time. And we're reevaluating our plans for the remainder of the year on timing and execution to be successful.
spk02: Okay. All right. Thank you very much.
spk01: The next question comes from David Silver of CL King. Please go ahead.
spk03: Yeah, hi, good morning.
spk00: Good morning.
spk03: Yeah. I wanted to maybe just start with maybe just a couple of details regarding the SUSTAIN program. And in particular, you know, maybe I missed it before, but I wasn't aware of the grant funding from the USDA opportunity there. Could you just maybe touch on that? What is maybe the aspect of your project that is most directly, I guess, attributable or, I can't think of the right word, but which would the funding request be tied to? Is it the emissions performance? Is it something in the actual process? If you could just talk about that broadly. And then if you could also size the amount of the potential grant funding, you know, arrange or whatever, that would be helpful. Thank you. Oh, and is the 75 million capex net of any grant funding or is that the gross figure before any funding? Thank you.
spk00: Certainly. So the grant from the USDA is actually in support of increased fertilizer production for U.S. growers and U.S. farmers. So really, given the growing need of sulfur in the country and our ability to produce to generate more capacity and grow with those needs. We think we are a great match and certainly are working through the process with them. So it really is just about improving that we have increased locally produced fertilizer, you know, for the U.S. market. And so that is the key. There are steps to the grant process, right, so we continue to proceed. And, you know, when we think about the opportunity set, it's, you know, between a $10 to $15 million opportunity for us against our total spent.
spk03: Okay. Thank you for that. I'd like to switch over to maybe to get some of your thoughts about the global supply-demand balance in nylon and caprolactam, and in particular, I guess, competitive reactions to the current fundamental environment. But my sense is that there are some producers, even with the stabilization that you cited in your charts, but there are some producers who are just not making suitable returns that, I don't know, would consider sustainable. From your perspective here, regionally, I guess, have you noticed any behavioral shifts? In other words, would the Chinese producers be reducing production rates in response to lower domestic demand, or have there been some adjustments in production or I don't know, the facilities that you see operating in Europe or elsewhere. But, you know, beyond shifting around your marketing strategies a little bit, have you noted any concrete shifts that, you know, might lend to a firmer fundamental balance, let's say over the medium term?
spk00: Yeah. Well, if I provide a little context for you, David, on sort of current operating rates, as we've seen certainly at the start of the year, you know, China is running closer to 80%. You know, that continues to be a strong, healthy rate for them. And there's a rate of which they need to export, you know, vis-a-vis sort of their internal domestic needs. That has had a ripple on the fact you've got the rest of Asia operating at about 4%. So when we talk about sort of the impact of these trade flows, China begins to export to the rest of the world, into the rest of Asia, into Europe. Europe is operating around 60% as well. You know, structurally, it is a higher-cost region, and so that is the area that we continue to watch. You know, when you think about the regional balances, you know, North America as the markets and demand recovers, are relatively balanced to slightly long. Europe is structurally long. The rest of Asia is structurally long, as is China to some degree as well. So I think you're asking around, are we seeing anyone yet announcing a sign of closure? Again, there are definitely lines that are not running, lines that are curtailed in rates. but we have not yet seen definitive calls made, but certainly the areas that we would watch would be those regions that are structurally long.
spk03: Thank you for that. Maybe the last question, and I apologize, I always feel like a dumb chemicals analyst here, but at a couple of points you You know, in talking about critical investments for the long term, I guess you use the terminology critical enterprise risk mitigation, right? And I'm kind of scratching my head there, but could you just flesh that out a little bit more? I mean, is this a cyber defense kind of thing or – What types of activities are included in a critical enterprise risk mitigation program as you envision it? Thank you.
spk00: Sure. One may ask us, as you may be trying to potentially poke here, is why couldn't we manage some of these programs within our base CapEx framework? And we could, but then we would then need to sacrifice the ongoing, I would say, sustaining replacement maintenance at some of our sites, right? Because these are larger projects in nature. They are lumpier in scale. And so when we think about enterprise risk, we think about supply chain risk. We think about climate risk. We think about cyber risk. We think about, you know, the totality of risk factors that, you know, we disclose in our 10K. Now, you know, when we think about these projects right now, we've got, you know, the dock. That dock at Frankfurt is the start of our entire value chain, right, and the length of service and its needs. And, you know, it's a large project for the scale. And it's not a Frankfurt dock per se. It's an Advancix dock, right, that is necessary to maintain for the entirety of the system. Okay. Likewise, the boiler, this is not a standard replacement maintenance boiler program that we would put into our base framework. Again, in our integrated value chain, this is a significant switch to handling a critical utility at a key site that's moving forward. Again, because of the approach we took for adding great redundancy and resiliency to a site, we put it in that category. long-term compliance risk, one might think. You know, regulatory changes could fall into this. If you think back to when we spun, we did have a program that we would view as enterprise, you know, critical risk mitigation associated with our multi-year NOx reduction program, right? So these are the types of things that, you know, we feel are over and above what would be prudent to manage into and, you within our base $75 million sustaining maintenance capex for each, you know, that manages the base of the business. Let me pause. I hope that helps a little bit.
spk03: Okay, great. Thank you. I'm going to get back in the queue.
spk01: Once again, if you would like to ask a question, please press star, then once. This will conclude our question and answer session. I would like to turn the conference back over to Erin Kane for any closing remarks.
spk00: Great. Thank you all again for your time and interest this morning. While there are puts and takes across our end markets and broader macro uncertainty, we have a demonstrated playbook and track record to navigate these dynamics. We'll continue to position our business for long-term sustainable performance through our smart and disciplined investments and focus on accelerating growth in the most profitable areas of our portfolio. With that, we look forward to speaking with you again next quarter. Stay safe and be well.
spk01: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
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