Good morning and welcome to the AdvanSix Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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.

Thank you, Alan. Good morning and welcome to AdvanSix’s second quarter 2023 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, 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 of 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 AdvanSix’s President and CEO, Erin Kane.

Thanks, Adam, and good morning everyone. Thank you for joining us and for your continued interest in AdvanSix. As you saw in our press release, AdvanSix delivered solid earnings results 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-priced imports while continuing to experience balanced North American acetone supply and demand dynamics in our chemical intermediate 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 you 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 advantage 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. Now let me turn the call over to Mike.

All right, thanks, Erin and good morning everyone. I'm now on Slide 4 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, 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 the 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 5. Here we highlight the key drivers of our second quarter Adjusted EBITDA performance year-over-year. Pricing of 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 lower raw material environment. And lastly, Chemical Intermediates price over raw spread increased year-over-year, largely reflecting acetone margin over falling 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 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.

Thanks, Mike. I'm now on Slide 6 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. Trying to export started at an all-time high and we're seeing the most acute challenges through the engineered classic space. We're not only low-priced nylon, but also competing materials 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 or 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 and certain applications like bone and meat and protective packaging. Moving to Chemical Intermediates, industry realized acetone prices over refinery grade propylene costs continued 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 or reduced demand in 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 levels 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 drug 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 3Q, 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 impacts 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’s 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 decline in the second half. To better illustrate this sequential seasonality, the chart on the left-hand side of the page depicts the average price change from corn belt built 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 million to $15 million lower pretax 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 a global platform in June, this new portfolio of products built 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 resin 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 and box packaging. The new PIR, PCR Nylon 6 materials offer the same excellent properties as conventional nylon products. They are drop-in replacements with no costly re-qualifications or costs to consumers and provide a solution to help companies meet their sustainability goals. We're in the process of finalizing a life cycle assessment comparing 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 multilayered film application, the recycled nylon 6 could potentially deliver an approximately 30% reduction in overall carbon footprint when compared to published numbers. Now let's turn to Slide 9 to wrap up before moving to Q&A. Our outlook for 2023 remains largely consistent with 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 planned 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 planned plant turnarounds to be $25 million to $30 million in the third quarter of 2023 totaling $20 million 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.

Great. Thanks Erin. Alan, can you open the line for questions?

We will now begin the question and answer session. Our first question comes from Vincent Anderson of Stifel. Please go ahead.

Yes. 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's based on your prior experiences would be feasible?

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 nylon businesses, and trade cases like these around the world. And we'll leverage our prior experience to participate in fair trade right if determined that that's the most appropriate action.

Okay, all right. And then can you just quickly remind us what types of agricultural products U.S. means going to and how did it perform this quarter given we've seen some pretty severe destocking and crop protection kind of everywhere else in the chemicals world?

Yes, no, and our experience here would be the same. As a reminder, we go into the herbicides down the glyphosate chain with our MEPA product offerings and certainly on the AG chemical side there is work and we did see more destocking that occurred based on the import levels that happened late last year. And so we have seen that impact and certainly demand through what would have otherwise been a strong season like we saw in dry fertilizer as — basically down the chain and retailers and growers work through the higher inventory. But again, I think the underlying fundamentals generally might support an opportunity set here as we come through into the next season.

Great. And if I could just ask a couple quick ones on the recycled content. So, if I remember correctly, your PIR nylon is tied 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?

Yes. If you think about the opportunity set that we have with our customers and their value chain, we can take opportunity sets of monomers and back from them, they're in their streams as well. And so it's an expansion if you think about that envelope opportunity set to be able to bring it back into our chain.

Okay, okay that makes sense. And then does Ogun already have food packaging products developed and ready to market with PCR nylon or is that your next step?

Certainly as we work with them in concert and create that opportunity set, so in Boba 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 and in some of the other converters.

Got you. Okay, all right. Thank you very much.

You bet.

Thanks, Vincent.

Okay, great. Good morning.

Good morning.

Yes, 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 balances 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 or 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 improve your unit margins? Obviously you produced more than you shipped. Thank you.

Yes. No, 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 $1 million increase and up about $10 million since the end of the year. So 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. 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 plant turnaround here in the third quarter, we clearly like to head into those with higher inventory balances. So we don't disrupt sales and ensure continuity of sales to our customer base and so that's 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 conditions for nylon and certain intermediate products tied to building and construction as well as consumer durables that's also been a consideration. And we continue to sort of optimize and navigate 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.

Thank you for that. I would like to inquire about your capital expenditure plans for this year. While your targeted full-year level remains unchanged, it seems that your spending in the first half of the year is trailing behind the expected pace for the full year. Could you elaborate on how you plan to bridge this gap, considering the turnaround and various initiatives contributing to this larger expenditure this year? Please walk us through the anticipated spending in the latter half of the year. Thank you.

In the first half, our capital expenditure was approximately $44 million, and we are still projecting a total for the year between $110 million and $120 million. This indicates that spending in the second half will need to increase significantly, comprising about two-thirds of the annual total. As we work on our turnaround, we will install much of the capital equipment we have planned, leading to a rise in our capital expenditure. We anticipate an increase in the third quarter followed by further growth in the fourth quarter. We have discussed various projects focused on this year that are contributing to the elevated spending, including upgrades to the dock at our Frankfurt facility and other critical infrastructure projects. This spending is what we expect to see in the second half.

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. You know, there's a lot of consensus on the fact that China is exporting a lot of nylon that they can't place domestically, nylon and its precursor. But I was just wondering, are there in your opinion, are there other nylon chain products that they are also you're seeing the same type of opportunistic export behavior perhaps out of China? And then 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.

Yes, sure. I can provide some context in the chain. You know, as you point out, China export volumes globally now sort of equate to three times the size of Chesterfield's capacity. 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 pressing opportunity sets into Europe, but then also into North America. And the share predominantly coming in the engineered plastics space and then that is also carrying downstream to where the plastic engineered compounds made of nylon 6 are also coming in, pressuring and competing with our customers. We extend that to sort of the broader chain. Obviously, global flake caprolactam is being exported as well, and then the result in the ammonium sulfate, which we have seen for a number of years now, and Chinese AS production exports effectively as they have expanded their capacity inland. For ammonium sulfate, consumption has been flat in domestic consumption there. So effectively, with every addition that they have added, ammonium sulfate is being exported globally and that has reached nearly 13 million tons. So it's a significant consideration in the global marketplace. And that is predominantly heading into Brazil, Southeast Asia. And so that's just a little bit of context in that regard. I can certainly expand if there's anything more as a follow on, but that is what we're seeing in the value chain.

Yes. 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 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 careful observer for a long time. And I would just again stipulate this is kind of two-faced or a schizophrenic economy that industrial economy that we're in that I haven't really, I have a tough time finding a comparison just with the puts and takes 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? And if so, how does that change how you operate maybe tactically over the next few quarters?

Sure. Well I mean, 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, right that impact millions around the world. But the reality is you've got S&P Global manufacturing PMI that has contracted for 11 months in a row. You have U.S. manufacturing PMI as of July that has contracted for nine straight months in a row. The evidence of destocking, reduction of global operating rates I think is certainly a strong indication of the dynamic that you are suggesting. And as I pointed out, we've been here before. This is a business that we have continued to focus on the core first principles and in environments like this, 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 areas of opportunity to expand the underlying earnings of this business through smart capital investments, through our bolt-ons on M&A. And our effectively our cost focus as well will need to come into play if this is to continue to be extended. But certainly this is not something that's just happening. This is a dynamic that has been progressing now for in some aspects of our business for the better part of the year.

Okay, great. I really appreciate your thoughts on that. Thank you.

Sure.

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

Thank you all again for your time and interest this morning. Despite the 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.

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