AdvanSix Inc. Common Stock

Good morning and welcome to the Advanced 6th Second Quarter 2025 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 a touchtone 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 and Treasurer. Please go ahead.

Thank you, Wyatt. Good morning and welcome to Advanced 6th Second Quarter 2025 earnings conference call. With me here today are President and CEO Aaron Cain and Interim CFO Chris Graham. This call and webcast, including any non-GAF reconciliations, are available on our website at .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 10K as further updated in subsequent filings with the SEC. This morning we will review our financial results for the second quarter 2025 and share our outlook for our key product lines and end markets. Finally, we'll leave time for your questions at the end. So with that, I'll turn the call over to Advancix's President and CEO, Aaron Kane.

Thanks, Adam, and good morning, everyone. We appreciate you joining us here today for our quarterly call. As you saw in our press release, Advancix delivered resilient earnings with strong sequential improvement in the second quarter while continuing to execute key growth and enterprise initiatives in support of long-term sustainable performance. Our second quarter results reflect our collective organization's execution and the advantages of our business model and diverse product portfolio amid an evolving macro environment. While we faced an earlier end to the spring domestic application season, earnings and cash flow improved sequentially from the first quarter, driven by strong volume and pricing performance from our plant nutrients business. End market demands across the rest of our portfolio remain softer overall, and we continue to navigate margin impact driven by higher raw material prices, namely natural gas and sulfur. Supported by our Healthy Balance Sheet, we have supplemented our commercial and operational performance with investment in growth and enterprise initiatives to sustainably improve through cycle profitability. We continue to focus on making the necessary investments at the right time to support our long-term performance. Our planned investment to upgrade our enterprise resource planning system is nearing completion, which will help streamline key processes across the organization while enhancing management tools and data analytics. We've also reduced our capex forecast for this year to a range of $135 to $145 million, reflecting the planned progression of our sustained growth program, refined execution timing to address critical enterprise risk mitigation, and tension prioritization in our base capex. As you may have seen, we released our 2024 Sustainability Report, which highlights the terrific work happening around the organization integrated with our overall strategic priorities. More recently, we were awarded a 2025 Gold Rating for Corporate Social Responsibility from EcoVadis, with our score placing us in the top 3% of all companies assessed. We also continue to progress on 45Q carbon capture tax credits, with another $8 million claimed in the second quarter, bringing our total to nearly $20 million for the 2018-2020 tax periods. This continues to represent a significant value driver for our company and stakeholders. As we move through the remainder of 2025 and navigate a dynamic environment, we are well positioned to support our strategic growth priorities as a U.S.-based manufacturer aligned to domestic supply chains and energy markets, as well as a diverse set of end-market applications. Lastly, we are happy to have Chris Graham on the call with us here today. Affected July 9, Chris stepped in to serve as our interim CFO until a permanent successor is named. He has tremendous leadership and financial experience, serving as our controller since 2016, and more recently as the Vice President of Strategic Financial Planning and Analysis. Prior to joining Advancix, Chris spent nearly 20 years at Honeywell in various finance leadership positions, including as controller of the aerospace division and earlier in his tenure as CFO of the Residents and Chemicals business that ultimately became Advancix. Let me now turn the call over to Chris to walk through the financials.

Thanks, Erin, and good morning, everyone. I'm excited to be joining my first earnings call and look forward to engaging with the investor community. Let's take a look at slide four, where I'll highlight the key items of the second quarter 2020-25 financials. Sales of $410 million in the quarter decreased approximately 10 percent versus the prior year. Sales volume was approximately 8 percent of that change, primarily driven by softer demand in key nylon end markets, including engineered plastics applications serving the auto sector. Raw material pass-through pricing was down 5 percent following a cost decrease in benzene, which is a major input to cumene, our largest raw material and key feedstock to our products. Market-based pricing was favorable by 3 percent, driven by continued strength in plant nutrients, reflecting favorable North American ammonium sulfate supply and demand conditions. Adjusted EBITDA was 56 million, and adjusted EBITDA margin was 13.6 percent. I'll walk through the -over-year variations on the next slide. Adjusted earnings per share was $1.24, and our effective tax rate was 0.9 percent, compared to 25.2 percent in the second quarter of 2024, primarily driven by $8 million of 45Q tax credits claimed for the 2020 period. Cash flow from operations of $21 million decreased $29 million versus the prior year, primarily due to lower net income, 45Q tax credit cash timing, and the unwinding of prior year ammonium sulfate pre-buy cash advances. Capital expenditures of $28 million in the quarter decreased $5 million versus the prior year. This yielded a negative $7 million of free cash flow in the quarter. We expect free cash flow generation to strengthen in the second half, and are targeting a positive full-year free cash flow. Now let's turn to slide 5. Here we highlight the key drivers of our second quarter adjusted EBITDA performance compared with the prior period. Pricing over raw materials was unfavorable by $10 million. Tracking our key variable margin drivers, we saw a -over-year contraction in acetone margins over rising propylene costs in the second quarter, as we anticipated. In plant nutrients, while it was a strong domestic planting season, supported by higher ammonium sulfate pricing and revenue -over-year, margins were impacted by higher raw material costs, both in sulfur and natural gas. Lastly, we saw a modest margin increase in our nylon and caprolactam portfolio over declining benzene costs. Sales volume was unfavorable by $5 million -over-year, primarily reflecting a reduction in caprolactam and nylon volume. Plant costs and other items were a $7 million headwind, with increased utility costs in part due to higher natural gas prices and a timing of planned turnarounds -over-year. Let's turn to slide 6. Through the enactment of the One Big Beautiful Bill Act, we anticipate taking advantage of notable tax benefits, including a meaningful reduction in our cash tax rate, driven by 100% bonus depreciation and changes to research and development and expensing. We also note that the Act continues to include 45Q tax credits that we discussed during our which will enhance both earnings and cash flow for our business. As a reminder, 45Q credit for carbon capture and utilization became eligible as of February 2018 when the tax code changed and applies over a 12-year period. Our approved 2018 Life Cycle Assessment, or LCA, of greenhouse gas emissions allow a based on the amount of CO2 captured and utilized that would otherwise been emitted into the atmosphere. Approved assessments are valid for three years of claimed deductions, and we plan to file our 2021 LCA soon. These credits reduce our effective tax rate and are calculated based on the amount of CO2 captured and utilized each year. To date, based upon our approved 2018 LCA, we've claimed approximately $20 million in credits for the 2018 through 2020 tax years and continue to pursue these credits for subsequent periods. The 45Q credits represent a significant value driver for our business through an EPS benefit and lower tax obligations, improving our free cash flow. We anticipate an estimated incremental $80 to $100 million of potential opportunity remaining ahead of us for future periods. Now, let me turn the call back to Erin.

Thanks, Chris. I'm now on slide seven to discuss each of our key product lines, starting with our plant nutrients business. While we did have an earlier end to the season, favorable ammonium sulfate supply and demand conditions in North America supported higher pricing and increased sales volume for the total fertilizer year. As a reminder, the North American fertilizer year typically runs from July, when the value chain begins restocking, through June of the following year, when application is largely complete. As a result, it's important to view performance through this lens versus a calendar year. In the past fertilizer year, we delivered a 7% increase in domestic granular sales volume, which was enhanced by the progression of our sustained growth program. We continue to anticipate production capability by the end of 2025 to reach a milestone of 72% granular conversion, up from roughly 70% at the end of 2024. Moving into the new season fill, prices reset each year. We have entered the third quarter of 2025 at higher ammonium sulfate pricing levels compared to last year. There continues to be a robust acceptance of the sulfur value proposition amid underlying increases in global nitrogen pricing, primarily driven by supply-side impacts. While market-oriented prices must contend with rising raw material prices, we've seen strong uptake in our fill program. And given current corn futures, this is a positive reinforcement that the value chain believes in sulfur to improve economics for the same acreage. While we navigate typical seasonal pricing considerations and what many consider a mix set of broader ag fundamentals, we know that farmers need yield to support their profitability. Overall, we remain excited about the growth prospects for this business and leveraging our expertise as a leader in this space. Let's turn to slide 8. For Nylon, we continue to focus on optimizing performance in the current environment. While our caprolactam and resin margins over benzene once again expanded year over year in the second quarter, we are seemingly operating in a -for-longer macro environment. We're continuing to leverage our position to navigate this extended downturn with global oversupply conditions holding industry pricing steady amid declining input costs. Here in North America, demand has been mixed. Year to date, we've seen moderated fiber and filament demand into building construction applications. Packaging has been generally resilient, with end-market trends stable in meat and cheese packaging. The area that has seen the most headwind has been in engineering plastics, with a drawdown in auto inventories, alongside uncertain tariffs and trade policy impacting demand. Outside of the U.S., operating rates in China have moderated from earlier in the year as oversupply persists relative to soft demand in the region. As a result, trade flows out of China, primarily to Southeast Asia and Europe, have continued to limit pricing improvement globally. Overall, our efforts are centered around controllable levers to drive performance. This includes focusing on optimizing our fixed cost structure while upgrading sales volume mix and production output in the most profitable areas of the business. Let's turn to slide nine. Moving to chemical intermediates, industry-realized acetone prices over refinery-grade propylene costs declined year over year in the second quarter amid higher input costs. As you can see from the table on the right side of the page, although spreads are off at 2024 multi-year highs, margins remain healthy and in line with cycle averages. Phenol operating rates continue to remain lower globally on weaker end market demand, helping to support a more balanced acetone supply and demand dynamic. Into the third quarter, acetone demand is expected to modestly improve sequentially and we continue to see moderation of propylene costs from the first half 2025 highs. Acetone and phenol represent approximately 60% of our chemical intermediate sales, with acetone making up a majority of that. As a reminder, approximately 80% of our produced phenol is consumed by our downstream Hopewell operations. For us, acetone is a key product line with a perform and optimize strategy to meet customer needs while driving favorable sales and profitability mix. For the remaining 40% of our chemical intermediates portfolio, our key strategic focus is around placing our various chemistry platforms into select high-value applications in support of longer-term growth and profitability. While demand across this portion of intermediates continues to remain mixed into ag chemicals, electronics, and European paints and coatings to name a few, we did see steady revenues and margins in the second quarter year over year. Let's wrap up on slide 10 before moving to Q&A. As we shared previously, our business is aligned to domestic agriculture, manufacturing supply chains, and energy markets, and serves a diverse set of end-market applications. 2025 has been a dynamic year thus far, but we remain well positioned as an American manufacturer of essential chemistries. We have been operating with structural tariffs in place globally across our value chains for quite some time. We are adept at navigating an environment like this. We are largely insulated from first-order impacts of reciprocal tariffs with nearly 90% of our sales in the U.S. and our key product lines in a net import industry position. In times of uncertainty, we're keenly focused on delivering on controllable levers. This includes taking a measured and disciplined approach to cost and cash management, including tension prioritization of our base capital investments, and optimizing mix and production output for the most profitable parts of our business. We remain confident in the growth prospects for Advancix and are committed to delivering long-term value to our shareholders. With that, Adam, let's move to Q&A.

Thanks, Erin. Wyatt, can you please open the line for questions?

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one, 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 two. At this time, we will pause momentarily to assemble our roster. Again, it is star, then one, on your touchtone phone to ask a question. Our first question will come from David Silver with Freedom Capital. Please go ahead.

Hi. Good morning. Am I coming through clearly, please?

Yes. Good to hear you.

Okay. Sorry. My phone is a little dodgy here. Okay. Thank you very much. So, several questions. I think the first one would be on the ammonium sulfate business. And I was wondering if you could maybe give us a little bit of a look ahead, maybe on how the fall fill program is shaping up. And, you know, maybe overall how you're looking at the next planning cycle. And then separately, you know, there has been some variation in the pricing relationship between ammonium sulfate, at least on the list price basis, and then, you know, urea and some other nitrogen products. Could you maybe just touch on, you know, how you see that pricing relationship performing, I guess, as the next several months play out? Thank you.

Yeah. Thanks for that. And, you know, first I may start off by just reiterating that, you know, we're coming off a strong fertilizer year. And where we saw higher pricing, you know, continuing to, you know, drive our sales increase 7% in the fertilizer year, you know, with our domestic granular AF sales volume, you know, again, continuing to be supported by the benefits of the sustained growth program. And the favorable North American supply and demand conditions. You know, as we roll forward here into the next year, we started and have built up a robust order book, right, supporting a strong anticipated fall fill program. Again, here, again, just a compliment to, you know, the work done by our team as growers continue to recognize the software value proposition. You know, every year we're continuing to see more and more interest in fill programs, particularly as players on the value chain are focused on ensuring supply, which is supporting the pricing consideration. You know, when you think about the premiums, when you look long range and long term, you know, premiums, really ammonium sulfate to urea have been in about the 75% range. We're expecting similar numbers this year. I would note though, David, that, you know, when you think about a 75% premium on a, let's call it a 500 type urea number, that's a much higher software value than a 75% premium, let's say at a 300 as an example. So, you know, we're still selling the software value at a very, you know, good price, which is what we're really focused on. And so, you know, as we achieve these robust premiums, it's clear that growers, right, are seeing that value willingness to pay. And then obviously, you know, that supply demand will always play a factor. So, you know, each year we're, you know, seeing perhaps that we may be decoupling a bit from, you know, nitren based on that growing software value proposition. I would say we're cognizant of the broader environment. We see that corn prices have come down relative to nitrogen costs and, you know, that relationship is a bit low. So, we recognize farmer economics are a bit more challenging. But again, with the signs of the overall good fill program in 2025, we're seeing that strong uptake on our demand, which is a positive reinforcement that the value chain does believe in software as a key nutrient to improve economics for the same acreage. So, we'll have a lot more to go, but things are looking in the right direction.

Okay, great. Thank you for that. Next question, I think, would just be more on the chemical industry environment that you're operating in right now. So, I guess we're most of the way through the current earnings season. And a number of, you know, major chemical companies have reported, you know, what I would say were very weak results. Your results may be, you know, there's some puts and takes there, but you're probably, you know, not as bad as some that have reported in recent days. Maybe if you could just, you know, focusing on maybe the more petrochemical oriented products and markets that you're dealing with. You know, given the tariff uncertainties and some weak regional economies here, I mean, how do you view, you know, the stability, I guess, or the predictability of advances, you know, profitability, I guess, or market opportunities, let's say over the medium term, let's say through the next couple, two, three quarters. Thank you.

Certainly, we do recognize that, you know, the environment in which we're operating in, you know, has been dynamic, right? And a number of value chains, number of end applications. But we remain cautiously optimistic, given the diversified nature of our portfolio. And I think that came through in the Q2 results, right? And coupled with our integrated business model. It also includes our formula and index based pricing mechanisms that have continued to support pricing and value across various parts of the business. Relative to the broader uncertainty, relative to others, we have the strength of being a U.S. based manufacturer. You know, all of our assets, you know, are here. 90% of our sales are staying within the U.S. And certainly, we're procuring, you know, most materials from the U.S. 98% of all of our suppliers spend is procured domestically. So we get the opportunity set relative to good value in end markets in this region. And, you know, as we've shared before, relatively insulated from first order impacts, you know, to tariffs. We do have the downstream, you know, uncertainty, if you will. And that's probably predominantly what we see in nylon. You know, the price overall spreads have increased. You know, we're pleased to see that pricing has held, right, in this environment. So that's allowed us to, you know, see that expansion, particularly with benzene. And it really just focused on the stability, driving the opportunity sets into those end markets where we are, you know, can get a differentiated price and hold that stability. You know, in acetone, you know, phenol is mostly impacted given the environment, you know, down into building construction. You know, as we shared, that creates a bit of a natural hedge for us because 80% of our phenol is consumed internally. And, you know, so globally, that is, you know, keeping acetone relatively balanced in the near term. Here again, you know, pricing, you know, holding, we have a portfolio that is well balanced between small, medium and large buyer, you know, customers. So it's affording us, you know, flexibility to move where the value is in the market. We did have to contend with, you know, a spike in propylene costs earlier this year. Those have stabilized and moderated. You know, so I think that the diversity, the regional footprint and just our flexibility, we've long said that we can navigate through a number of, you know, macro environments. And I think the goal here is to continue to put those proof points on the board.

Okay, great. Thank you for that. Maybe if I could just follow up. I mean, you did start off your previous answer with the idea of, you know, you operate a highly vertically integrated, you know, production chain. And this was a quarter where you, I think you cited nylon sales down around 10%. But the ammonium sulfate volumes, I'm sorry, nylon volumes down about 10% and ammonium sulfate volumes up, I think, 7%. And, you know, you've added on with comments about acetone, which I appreciate. But looking ahead, I mean, it can get a little tricky at, you know, different, under different market environments to, you know, confidently, I guess, place all of your products, including those that might be experiencing weaker demand. So, again, as you maybe as you look forward, you know, maybe thinking about nylon in particular. I mean, how confident are you or what strategies are you looking at to kind of make sure that, you know, you can maintain those high utilization rates that give you pretty nice cost advantages. And, you know, you're able to place all of your, you know, co-produced products, you know, into a reasonable market, reasonable markets. Hope that made sense. Sorry.

Yeah, no, I believe I know where you're, where you're heading trying to tease out here. And, yes, right, we do have an integrated value chain that integrated value chain, you know, bring strength to create, you know, our global cost advantage in the monomer for nylon 6. Right. So that does afford us, you know, as we've shared in the past, to be able to run, you know, higher utilization rates, you know, than others, which then, as you say, then supports, you know, the further strength of the business model around the diversification of the product. And, you know, the end market applications that we reach with, you know, our diversified chemistries and the other product lines. You know, when we, when we think about that, and oftentimes, you know, we drive to meet demand where it sits, you know, I would say in nylon right now, as we think about the geographic mix, we're being more selective in our export business. You know, in past years, more volume might have been better, but when you look at, you know, really where, you know, the global clearing prices, you know, below cash costs for a number of players, you know, Europe is struggling, you know, I think operating rates there are well, you know, 60% or less. You know, we're going to really maintain some discipline as we navigate these current dynamics, you know, on the flip side, you know, through these cycles, you know, it's important. We've been working to create, you know, more degrees of freedom for ourselves, you know, and we learn that through each cycle. You know, we create levers for ourselves. And, you know, one of the things that we've mentioned in sustain is investing in, you know, the capabilities around some synthetic production of AS as well. It's part of that, you know, roadmap, you know, to allow us again, you know, how do you navigate through these times, you know, create more flexibility, you know, across the asset base and perhaps we've had in the past that allows us to take advantage, you know, of the various market opportunities as we go. So, you know, even in a, you know, challenge global nylon environment, you know, we still see North America here is stable, you know, so that's affording our utilization rates and then coupled with, you know, the technology and, you know, operational levers that we've created for ourselves, you know, give us, you know, the agility that we're demonstrating here and, you know, we'll continue to seek more of that as we go forward to ensure that we can drive performance in our other product lines. And not just be held, you know, solely to what we can, can what we produce there.

Okay, great. Thank you. Maybe my last one here would be a cash flow oriented question. And, you know, I was hoping you could just build on the comments you've made in your prepared remarks. But, Chris, you know, as I look at the first half cash flow statement, I mean, there, you know, there were some sources, I guess, of the reduced operating cash flow totals, you know, year to date. And, you know, I was just hoping you could comment on some of the levers or some of the bigger items where, you know, you either expect a meaningful pickup in improvement in cash flow through the balance of the year, or maybe where your incremental flexibility, you know, might be to kind of, you know, some levers you might have to support free cash flow generation, you know, even in a less than robust environment. And then secondly, I was hoping, you know, you did provide some big picture numbers on the carbon tax credit opportunity, which was great. But I was just wondering if you might be able to comment on the expected timing of when those cash flows might be received. And so, for instance, you've claimed, I believe, 20 million thus far. You know, I'm guessing there hasn't been much received there. But when, you know, when should we expect, you know, meaningful cash to be received, you know, from the carbon tax credit program? Thank you.

Yeah, thanks. Thanks, David, for the question there. You know, as we have shared our expected second half, cash flow performance is expected to be sequentially better. I would point to probably two larger levers that we're tracking as we move into the second half. 45Q is one of those levers. So just as a little bit of background into the collective process is, you know, we've been working with the Department of Energy and the IRS, and we've got the 2018 LCA approved, which does cover the 2018 through 2020 years. Based on that approval, we've gone and filed amended returns to claim that credit. Those amended returns automatically trigger an audit. And we need to work with the IRS through that audit. Once the audit's complete, we would expect to receive a refund on those credits. And we believe that these will happen in the current calendar year. So that's one item. I think our second, probably significant item that we would point out to help understand our position on why we believe second half cash flow is going to be better is I would point out our ammonium sulfate pre-bite program, which by design is a headwind on cash in the first half. I would expect us to continue this program. And so we would see a positive cash flow in Q4 of this year. And that would be consistent with our regular practice sort of year over year. A couple other things maybe to point out relative to cash flow. We are trying to be very thoughtful about capex spend. Obviously, we continue to give priority to sustain and other sort of growth programs, but we are being much more thoughtful about how we deploy sort of the base capex in the current environment. I would point out our healthy balance sheet position with our debt levels at the lower end of our target range. And as well would point out our trailing 12-month free cash flow position and performance as an indicator of how we typically perform in a second half environment. So hopefully that gives you some context and some thoughts there around why we believe it's going to be sequentially better. And I appreciate the question, David.

So just to clarify, you're one of the rare taxpayers that's actually looking forward to an IRS audit this year. Is that right?

Yeah, I don't think we're the rare, but yes, we're certainly one of them. And once again, when you claim those sort of credits on an amended return, it automatically gets triggered for going on it.

Okay, very good. That's all I have. Thank you very much for all the detail. Appreciate it.

Great. Great. Thanks, David. We look forward to working with you at Freedom Capital.

Very good. Yes, same here. Thank you.

With no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Erin Kane for any closing remarks.

Thank you all again for your time and interest this morning. We hope this call and discussion have clarified the key considerations that supported our second quarter performance and outlook across our key end markets. The strength of our business model and our position as a diversified chemistry company will serve us well. And we continue to expect performance this year to demonstrate our resilience. We are confident in our strategic vision to support safe, stable, and sustainable operations, improve through cycle profitability, and total shareholder returns. With that, we 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.