AdvanSix Inc. Q3 FY2021 Earnings Call

Good morning and welcome to the AdvanSix Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Please go ahead.

Thank you, Andrea. Good morning and welcome to AdvanSix's third quarter 2021 earnings conference call. With me here today are President and CEO, Erin 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.advansix.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. We ask that you consider them in that way. 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 of the SEC. This morning we will review our financial results for the third 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 AdvanSix's President and CEO, Erin Kane.

Thanks, Adam, and good morning everyone. Thank you for joining us this morning and for your continued interest in AdvanSix. AdvanSix continued to execute well in the third quarter while supporting our customers in successfully navigating the current set of industry dynamics. We delivered robust sales, earnings, and margin performance as well as record quarterly cash flow. We achieved this through improving end market demand and tight industry supply conditions. Mike will cover the details of our financials in a moment. It's important to note that our integrated business model and unique combination of assets, coupled with our leading North American positions across our diverse product portfolio, are paying significant dividends for the business. The industries in which we participate were once again presented with supply chain and logistics disruptions, escalating raw material inputs, and inflationary costs. Our team continued to demonstrate that we can perform in all environments, and this quarter was no exception. Our performance was supported by strong pricing and volume improvements, including contributions from differentiated products and our continued execution to capitalize on near-term opportunities while driving our long-term strategies. Building off what we shared at our recent Investor Day, we feel very good about the foundation we've built in the last five years and how we are positioning the company going forward to drive performance and growth. We are highly focused on executing what is in our control, driving superior operational and commercial performance to meet the evolving needs of our customers. We're building capabilities to strengthen our innovation and portfolio resiliency and maturing our capital stewardship to enhance attractive total shareholder returns. There is a lot to be excited about; this past quarter we continued to expand our digital presence with our node storefront featuring a number of chemical intermediates and nylon products across our portfolio. We received our first commercial order for a newly introduced 100% post-industrial recycled nylon resins. We maintain conversion of roughly 65% of our ammonium sulfate into our higher valued granular grades to meet the growth demands of our customers. We were ranked 30th in Investor's Business Daily best of hundred ESG companies of 2021. We initiated a quarterly dividend of $0.125 per share, reflecting our confidence in free cash flow generation. And we completed a refinancing of our existing credit facility by entering into a new 5-year $500 million revolving credit facility, providing increased liquidity and flexibility at lower borrowing costs. As we look ahead, the outlook for our business remains favorable. We're focused on strong execution to close out an expected post-spin record year in 2021 and taking that momentum into 2022 as we align our long-term strategies with strong and sustainable shareholder return. With that, I'll turn it over to Mike to discuss the details of the quarter.

Okay, thanks, Erin, and good morning everyone. I'm now on Slide 4, where I'll highlight the third quarter financial results. As you can see, it was terrific performance really across the board. Sales totaled $446 million, up 58% compared to last year. Pricing was favorable by 50%, comprised of raw material pass-through pricing of 22% following a net cost increase in benzene and propylene, and market based pricing of 28%. The improvement in market-based pricing was seen across each of our product lines. Sales volume in the quarter increased 8% driven primarily by improved end market demand across our ammonium sulfate, nylon, and Caprolactam product lines. EBITDA was $75 million, an increase of approximately $59 million versus the prior year. I'll walk through the key year-over-year variances on the next slide. Earnings per share of $1.51 increased from a prior year loss of $0.02 per share. Our earnings results were above the high end of our outlook we provided at our September 20th Investor Day, primarily driven by better-than-expected pricing, net of raw material cost, as well as the timing of ammonium sulfate sales. Finally, cash flow from operations was a quarterly record since then, reaching $76 million, that's up about $41 million compared to last year, primarily due to higher net income and the favorable impact of changes in working capital. CapEx of $13 million was favorable by roughly $3 million year-over-year, reflecting capital process efficiencies and timing of project execution. Now, let's turn to Slide 5. Here we highlight a few of the key drivers of our third quarter EBITDA performance year-over-year; pricing of raw materials was roughly a $40 million tailwind as we drove value through strong commercial excellence across the portfolio. 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 spreads supported by tight industry supply and demand. And as expected, ammonium sulfate on a net price over natural gas and sulfur basis turned positive year-over-year, reflecting the strong underlying agricultural environment as well as our ability to drive value above and beyond the sharp increase in input costs. The impact of planned plant turnarounds to pre-tax income was zero in the third quarter of 2021, versus approximately $20 million in the third quarter of 2020, representing an approximately $20 million benefit year-over-year. In 2021, our larger Hopewell plant's turnaround including our sulfuric acid plant is in the fourth quarter, which as of today is mechanically complete. Lastly, volume and other items were approximately $1 million unfavorable in the quarter; higher volume was largely offset by increased plant spend and sales support growth and higher incentive compensation expense. In the third quarter of 2021, we also had roughly $2 million of favorability from additional insurance proceeds related to the 2019 shutdown of cumene supplier Philadelphia Energy Solutions. Overall, a strong commercial and operational execution in the current set of industry conditions. Now, let's turn to the next slide. On the left side of Page 6, we've highlighted the drivers of the $63 million of free cash flow generation in the third quarter, supported by net income, working capital, and lower CapEx spend rates. Another very strong quarter from a cash flow perspective, building on the $85 million of free cash flow generated in the first half of the year. Working capital was roughly a $12 million source of cash in the quarter, with an increase in accounts payable, partially offset by other working capital. There are timing considerations when it comes to working capital, particularly around inventory and accounts payable related to raw material purchases. For CapEx, we now anticipate a full year estimate of approximately $63 million compared to our prior expectations of $65 million to $70 million, reflecting efficiencies in our capital processes and timing of project execution. This does represent a step-up sequentially in capital spending in the fourth quarter relative to our run rate year to date. Improved cash flow alongside robust earnings enables more flexibility to create value for our shareholders. As Erin mentioned earlier, our new credit facility also provides increased liquidity and flexibility at lower borrowing costs. Given the strength of our cash flows and our confidence in future cash generation, we have committed to a structural return in the form of a competitive dividend, which we intend to sustain and grow over time. We also continue to target accretive M&A and are building off the success of the CAS acquisition earlier this year. Overall, a disciplined and balanced capital allocation strategy that we believe enhances value to our core strategies and is a key focus to support attractive total shareholder returns. Now let me turn the call back to Erin.

Thanks, Mike. I'm now on Slide 7, where we've included pricing and spreads across our product line. Starting with nylon, we've seen spreads further improving through the third quarter on a year-over-year basis while remaining roughly flat sequentially from the second quarter. The Asia Caprolactam where the benzene spreads average roughly $10.50 per ton in the third quarter, with the second quarter of 2021 and an increase from just over $600 per ton in the third quarter of 2020. Spreads are relatively in line with marginal producer economics, reflecting a more disciplined environment. We are monitoring potential impacts from dual policy controls in China on this value chain. The North American market continues to be characterized by robust demand with the backdrop of rising input costs and continued industry supply constraints globally. Overall, nitrogen industry pricing has significantly surged higher through the third quarter, supported by higher raw material input costs, industry supply constraints globally, and continued strong agricultural fundamentals including crop prices, stock-to-use ratios, and planted acres overall. As we have discussed previously, natural gas and therefore ammonia, as well as sulfur prices have substantially moved higher this year relative to historically low prices throughout most of 2020. We believe we're well positioned to succeed in this environment given our footprint here in the U.S., with access to key premium selling regions and our make-versus-buy advantage on feedstocks. As an example, natural gas prices in Europe have been roughly 5 to 6 times higher than here in the U.S. Overall, we would note that we did not see our typical ammonium sulfate seasonal price and mix impact sequentially in the third quarter. The better than expected results reflected improved domestic volume and pricing performance through the quarter. Lastly, industry realized acetone prices over refinery grade propylene costs, while still higher year-over-year, have further moderated sequentially into the third quarter as expected, and now into the fourth quarter on continued balancing of supply and demand. As a reminder, the small and medium buyer acetone price is reflective of roughly one-third of the domestic industry where pricing is predominantly freely negotiated. Let's turn to Slide 8 to discuss our preliminary outlook considerations for 2022. We are building on the momentum created this year as we head into next year. Across the various value chains we participate in, we continue to see rising input costs and industry supply chain disruptions, at a time when demand overall remains robust. Our ability to execute and navigate in this environment is core to our integrated business model, pricing mechanisms, and leading customer positions across a diverse set of end uses and applications. There are some puts and takes across the portfolio from a commercial perspective. In the nylon space, we expect steady North America demand and favorable end market conditions and tight industry supply. Residential construction has remained strong and we're seeing early signs of recovery on the commercial side. Packaging demand has remained healthy as well, demand for engineer plastics continues to be resilient; however, we are monitoring the effects of shift and other material shortages leading into the value chain. In this tight supply-demand environment, we remain focused on delivering to our brand promise of being our customers' trusted partner by meeting their volume and quality needs. In the short term, our priority is to ensure inventories are in line to meet our targeted service levels, while we continue to drive our longer-term development effort on differentiated nylon product offerings. In ammonium sulfate, a number of key agricultural indicators continue to trend favorably as well, and we expect robust industry fundamentals through the 2022 planting season. It's fair to say that this is the strongest Ag and fertilizer environment we've seen in the last decade. Underlying demand coupled with nitrogen industry supply tightness and rising input costs all have supported increases in pricing. With sulfur demand remaining robust as a key nutrient supporting crop yield, we continue our efforts to drive the sulfur nutrition value proposition down the value chain, as well as our initiatives to drive strong granular conversion of our ammonium sulfate product. Moving to chemical intermediates, we expect favorable demand trends to continue for our full product portfolio, which serves 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. Our recent 2BO expansion will enable further growth into outlet base paints and other applications as we continue to drive commercial traction in this product launch. We're also ramping up efforts to support anticipated growth of our nato and cyclohexanone product line, which is a solvent used in various high-value applications. Finally, we do anticipate further balancing as we've seen this year to continue North American acetone supply and demand into 2022. Operationally, we will continually focus on safe, stable, and sustainable performance while driving less variability in utilization rates, which as we've shared in turn drives higher returns for the business. We have ramped back up following our plant's fourth quarter 2021 plant turnaround. I would highlight that as part of the turnaround activity this quarter, we did identify additional required maintenance work at Hopewell, which delayed our restart, achieving four weeks now, several days later than planned. During this time, we did take the opportunity to pull forward some compliance and essential work that ultimately would have been completed in 2022. For the fourth quarter 2021, we now expect the pre-tax income impact from plant turnarounds to be approximately $19 million or roughly $4 million higher than the midpoint of our previous expectation. In 2022, we expect CapEx to be in the range of $95 million to $105 million, primarily reflecting an increase in base maintenance CapEx from 2021. This is tied to an increase in capital associated with our turnarounds and timing of project execution relative to this year. We are also still refining and executing against the roughly $50 million to $100 million high growth and cost savings project pipeline. However, as we share, these projects will generally be smaller in size than what has been executed over the past few years. Overall, we expect continued strong execution into next year with a number of tailwinds to support robust earnings and cash flow performance. Let's turn to Slide 9 to wrap up, before moving to Q&A. I'd like to return to our investment thesis that we shared at our recent Investor Day. Our integrated business model and unique combination of assets is a source of competitive advantage and positions us well in any environment. We continue to see that on display for the third quarter; we have leading positions across our product lines and are more than a nylon company with significant contributions from our ammonium sulfate and chemical intermediates portfolios. Our products have a variety and diverse applications where macro trends are supporting long-term growth. We significantly improve the base earnings power of the company with high return investments we've made in operational and commercial execution. Our differentiated products are providing good tailwinds for the company and we expect that will continue. Lastly, we are enhancing value creation through our disciplined and balanced capital allocation strategy. We have initiated a structural return of cash to shareholders in the form of a dividend and are excited about further opportunities to deploy capital. All of this positions us to drive total shareholder return over the short, medium, and long-term. With that, Adam, let's move to Q&A.

Great, thanks Erin. Andrea, can you please open the line for questions.

The first question comes from David Silver of CL King. Please proceed.

Thanks for the opportunity. So I have a few questions. I guess maybe I'd first like to drill down on the elements or the catalyst that drove your third quarter results above the guidance that you issued, I guess on September 28, as part of the Analyst Investor Day event. So what happened maybe in the last few business days of the month that led to that incremental upside? Thank you.

Yes, I mean, David, it is a combination of really two things. One is ammonium sulfate domestic volume was a bit stronger than what we had anticipated, and we closed a bit strong, so that's really timing between the third quarter and the fourth quarter, so that may give us a little bit of a headwind in the fourth quarter, so really timing that drove half of that upside. The other half was better price draw results, particularly in the intermediate space; we had propylene that ended settling down just a little bit, little more favorable than what we expected, and that drove the other half of the favorability.

Okay. So I'm going to drill down on the fertilizer side of things now, but when I look through the quarterly results, I mean the one number - there were a lot of great numbers, but the one that really stuck out to me was the revenue performance in ammonium sulfate 3Q versus 2Q. I did not expect the revenues to be higher in the third quarter. Could you maybe just discuss - I see the price chart and this and that, but can you maybe discuss the elements that led to that kind of unseasonably strong revenue performance?

Yes, sure. Thanks David. Certainly when you look at where pricing was, let's say on July 1st to where things have really kind of been trending in the last couple of weeks. As you see on the pricing charts, the AS Cornbelt pricing is up 33%, the Cornbelt is up nearly 54% you have rising through this timeframe. Energy prices and natural gas, just have continued to drive forward what that means into the industries' cost base. So when we think about normal 3Qs, right, we've talked about this in the past, we tend to see our fall fill, your pricing resets for the next season. We had indicated pricing would be higher this fall than previous years as the industry reset. So we started out at a good spot. But as the situation became tighter, I think the volumes picked up domestically more than we would have anticipated and pricing moved up quickly as well. So when you think about that sequential consideration that we normally think about, it comes in both volume and mix.

Okay. And then maybe just one question on cash flow. I was a tiny bit surprised that the working capital - the net working capital usage was a $10 million benefit this quarter, and I'm thinking - I was just wondering how much of that might be an inability to get your full complement of raw materials on the one hand, and are you teed up for continued high utilization in the fourth quarter across your integrated chain?

Yes, I'm happy to take that. When you look at the working capital, most of that benefit is timing. When you look at the accounts receivable, it was actually unfavorable from a cash perspective; sales were up. So that's not a surprise. Inventories were slightly unfavorable by about $3 million. The big benefit in cash is in accounts payable, which was favorable by $20 million in the quarter. That was really more associated with timing when we're acquiring raw materials, particularly cumene. Regarding the fourth quarter, some of the working capital will probably reverse itself. The fourth quarter is likely to be a bit of a headwind.

The next question comes from Vincent Anderson of Stifel. Please go ahead.

So I'm wondering, can we expect to see you placing incremental capital into Europe over these next few months, just given the disruptions to their gas and ammonia availability, or is the U.S. market tight enough that with freight, it's still more profitable to keep most of your product here?

To your point, Vincent. Globally, there is quite a bit of tightness and disruption in this chain; given our long tenured relationships with our North American customers, as you think about how demand has come back, we've always said that our volumes will come back here and relative to supporting their demand and their needs. Right now, North American demand is robust. Appreciate that there are these considerations externally, but over long stretches being close to our customers, where we share 20 to 30 years in relationships, is the keen focus here to become their trusted partner first.

Actually, that makes perfect sense. And just kind of given it's coming up in that time of the year and with the huge swing in trade flows around acetone into the U.S., do you have any indication or maybe some history of the large buyer networks working with some of these new Asian suppliers to the U.S.?

Yes, I think the large buyer customers here and there, they're buying larger volumes that represent more or less two-thirds of the market. You can look at them on a geographical basis, and some do have the ability to potentially import. Most of our discussions are around security of supply, and that has been a focus really throughout a number of our value chains.

Yes, Vincent, the only other thing I'd add is that channel to the market, which is two-thirds of acetone going into primarily M&A, is highly contracted. We do have agreements that span over time for volumes, and as Erin indicated, security supply is really an important element of consideration with that channel.

Okay. I think it is helpful. I just had a couple of non-market-based questions. First, we've been hearing more and more labor shortages, and you in Virginia are maybe a little secluded from the bulk of the U.S. pet chem industry. So I was hoping you might be willing to discuss how you feel about your age distribution at your key assets and what kind of programs you run or explore to promote and secure skilled labor over the longer term?

Thanks, Vincent. Certainly, from a trend perspective, I would say that our demographics look very much like the broader industry; there is sort of a missing generation in the chemical industry based on tougher times and less hiring. So we have been supportive of programs and scholarships focused on enabling folks that are underprivileged and represented minorities to get into education. We're driving a pipeline here, and we believe we have a multifaceted program to develop our labor force.

Excellent. And then just because you brought it up, so playing around on this node website, it looks pretty interesting. Can you just describe how this operates from a commercial perspective; is this like sales drop from distributors or is it more like a lead generator where the customers are directed to you?

Yes, so the latter at this point, Vincent. This digital platform is just another opportunity for us to broaden our reach into formulators, focusing on what we specify and look for in products with various attributes and benefits. In the background, we are providing technical expertise and of the like; it's a lead generation, and we'll look to continue seeing how that can really play forward for us.

The next question comes from Charles Neivert of Piper Sandler. Please go ahead.

A couple of quick questions. One, I'm looking at your chart for ammonium sulfate, and obviously, the last month or so, we've seen a real movement on time, saw the nitrogen pricing, but sulfate seems to be lagging a bit. Do you expect to close that gap up again? I mean, it seems to periodically open up and then re-close. So looking at where things are right now and some of the prices that have gone off. Is that something you expect in the fourth quarter numbers?

Yes. Certainly, when you look at the pricing of ammonium sulfate and urea, we watch urea because it provides the underlying nitrogen value, and we are focused on earning the premium associated with ammonium sulfate. The ammonium sulfate market does continue to appreciate in price, and we expect that to continue to move forward.

And, Charlie, just one consideration with that as well is the rapid escalation with natural gas. If you think about the variable margin for ammonium sulfate, it's less sulfur, less natural gas. We saw a 40% increase in natural gas in the third quarter; we're looking at another 40% increase in the fourth quarter. Ammonium sulfate pricing is moving in a favorable direction, but remember to also consider the escalation in natural gas.

And with regard to Brazil, are you moving product down into that region, or has there been any logistics issues you’re having to deal with? I mean, I'm assuming that pricing down there is also moving up fairly nicely, so what do you see going on in the Latin American market going forward?

Yes. I appreciate that, and I gave some of the data points for the Cornbelt, but AS granular in Brazil is up 60% as well; you see significant appreciation, particularly on the tightness of materials coming out of Europe and even Asia. In terms of logistics, we’ve been able to continue to secure transportation for our customers to take that material down into South America.

And then just one quick follow-up. Some of the plastics producers have been able to move a lot of product into the Latin American market, more than they usually have, because competitors typically have not been able to get product there. Is that something you guys are seeing on the fertilizer side, or is there an opportunity for nylon as well?

Yes, it's something to watch for. Given China has played significantly into Brazil, particularly post-anti-dumping measures. As you know, China has put an export ban on fertilizers as of October 15th, but it does not include ammonium sulfate to date. We understand that there have been reports suggesting that they could potentially add ammonium sulfate to the ban. So it's something to watch going forward.

The last question is a follow-up from David Silver of CL King. Please go ahead.

Yes, hi, thanks very much. So I'll just make a suggestion your company name might be M Sulfix or something, I don't know. Sorry, that's all I could come up with on short notice.

Short notice that.

So I am actually going to maybe grab Vincent's comment about production disruptions starting with ammonia in other regions and Charlie's comment about excellent demand. This is more kind of a marketing philosophy question. So, given this is a borderline shortage condition already in my opinion, looking ahead to spring: has your philosophy with marketing your fertilizer volume changed? Is the security of supply to customers that have been with us for a long period of time more being managed from the selling office now? How has that thinking about marketing your product for the next few quarters changed?

Alright David. I want to give a shout out to our plant nutrients team, a set of individuals that really know the industry well, with a great pulse on where things are, that prioritize growth while extracting value for the propositions we deliver. I think the frequency of our conversations with customers has changed with the market moving at the pace they are. There’s a bit more communication around where our order book is and how we can think about balancing security of supply for customers that have been with us for a long period.

Thank you for that perspective.

You bet. Appreciate it. They're working hard.

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

Perfect, thank you all again for your time and dialogue and interest this morning. The third quarter results represented standout performance and I'm very proud of how our organization continues to support our customers while navigating the current environment. We continue to execute against focused strategies, aligning with our ability to drive and achieve attractive total shareholder return over the long term. I hope you are as excited about our future as we are here today. 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 and you may now disconnect.