Good day and welcome to AdvanSix's Second Quarter 2024 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Adam Kressel, VP of Investor Relations and Treasurer. Please go ahead.

Thank you, Chad. Good morning, and welcome to AdvanSix's second quarter 2024 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 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 with the SEC. This morning, we will review our financial results for the second quarter of 2024 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. We appreciate you joining us here today for our quarterly call. As you saw in our press release, we delivered a strong second quarter, with year-over-year improvement in sales, earnings, margin rate, and cash flow; and a return to targeted utilization rates across our integrated value chain. This performance reflects our collective organization's focused execution to capture commercial benefits and the advantages of our business model and diverse product portfolio. We realized a 6% improvement in sales reflecting higher domestic nylon volumes, a robust domestic application season for ammonium sulfate, and continued strength in acetone pricing. Our disciplined capital execution continued to support long-term performance and growth, including SUSTAIN, our Sustainable US Sulfate to Accelerate Increased Nutrition program. Overall, our team delivered strong operational performance, including near record production of granular ammonium phosphate. Additionally, we returned $8 million of cash to shareholders through dividends and repurchases. Looking ahead into the second half, we continue to have several year-over-year tailwinds supporting a favorable earnings outlook including a continued tight global acetone supply and demand environment, modestly improving North American Nylon industry spreads, and we started the third quarter with a robust ammonium sulfate Fill program at higher pricing levels compared to the prior year. We are highly focused on delivering the right outcomes for our stakeholders by 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 the disciplined capital deployment framework. We continue to positively position the enterprise to fuel future earnings and cash flow performance in support of robust total shareholder returns. Let me now turn the call over to Mike.

Okay. Thanks, Erin, and good morning, everyone. I'm now on Slide 4, where I will provide a summary of the second quarter 2024 financials and year-over-year performance. Higher sales of nylon and ammonium sulfate due to favorable North American supply and demand conditions and continued strength in acetone pricing drove favorable financial results. We saw a 6% increase in sales, 5% from increased volume and 1% from net pricing, which converted to a 19% increase in adjusted EBITDA of $78 million and a 24% increase in adjusted earnings per share of $1.55. Free cash flow was $17 million in the quarter, up 6%. Cash flow from operations of $50 million increased $15 million, primarily due to higher net income and the favorable impact of changes in working capital. Capital expenditures of $33 million in the quarter increased $14 million reflecting our planned increased spend on maintenance and enterprise programs. Now let's turn to Slide 5. Here we highlight the key drivers of our second quarter adjusted EBITDA performance sequentially from the first quarter of 2024. Overall, the quarter can be characterized by our team's ability to both capture the benefits of commercial tailwinds while driving a return to robust operational performance. The absence of the first quarter one-time impact associated with our Frankford site resulted in a $27 million benefit sequentially. Tighter North American supply and demand conditions across each of our product lines supported a $19 million improvement in pricing over raw materials and a $21 million benefit in volume and sales mix. As expected, ammonium sulfate price net of natural gas and sulfur costs was up sequentially as prices and demand seasonally strengthened. Plant costs and other items were approximately $10 million favorable, reflecting strong operational performance and lower plant spend, including a $2 million reduction in planned plant turnaround costs. Let's turn to Slide 6. Erin will dive further into each of our key product lines in a moment. But here on slide 6, we've shown our typical industry pricing charts to provide further context on the market dynamics this past quarter. For Nylon, global pricing remained relatively stable sequentially. The declines in Asia offset by improved North American spreads on tighter regional supply amid stable end market demand. In the Fertilizer space, corn belt nitrogen pricing saw a reduction overall in the second quarter relative to the first. In contrast, ammonium sulfate pricing strengthened in the quarter with industry corn belt prices up 25% sequentially with continued sulfur demand growth and reduced supply in North America. And in Chemical Intermediates, industry-realized acetone prices over refinery-grade propylene costs remain healthy.

Thanks, Mike. The following three slides provide a deeper look at each of our product lines including industry spread trends tied to our key variable margin equations as well as market dynamics and performance drivers. For our Plant Nutrients business, spreads have strengthened in recent months. We believe this is reflective of an increasingly recognized software value proposition and observed growth in demand. We have entered the third quarter at higher ammonium sulfate pricing levels compared to the prior year as the value chain began restocking fertilizers supporting our new season order book. While we navigate typical seasonal pricing considerations and what many consider more cautious broader agricultural fundamentals, we know that farmers need yield to support their profitability. Our performance in Q2 at a time when nitrogen prices were on the decline, albeit with some supply tightness, coupled with the outcome of our Fill program, we believe are proof points to the resiliency of sulfur nutrition demand and supports our expectations to deliver improved year-over-year performance. Longer term, we remain excited about the growth prospects for this business and leveraging our expertise as a leader in this space. The projects within our SUSTAIN program are progressing well, including passing the environmental stage review of the USDA grant process and are continuing to track our target investment return profile of 20% plus. Year-to-date, we've achieved approximately 68% granular conversion and continue to anticipate reaching approximately 70% by the end of the year. This program will continue to support growing market demand for sulfur nutrition with estimated growth of 3% to 4% per year. In addition, we continue to receive positive feedback around product demand to support essential nutrition not only for traditional crops but for soybeans as well.

Now let's turn to slide 8. For Chemical Intermediates, the chart on the left represents a weighted average industry acetone over refinery-grade propylene margin. As you can see, acetone spreads have recovered amid tight global supply and demand conditions. This has been supported by persistent lower global phenol operating rates on reduced demand to value chains serving building and construction and other industrial applications. Acetone and phenol represent approximately 60% of our intermediate sales with acetone making up a vast majority of that. As a reminder, approximately 80% of our produced phenol is consumed by our downstream propyl operations while all of our acetone is sold externally. For us, acetone is a key product line with a perform and optimized strategy to meet customer needs while driving favorable sales and profitability mix. For the remaining 40% of our Chemical Intermediate portfolio, our key strategic focus is around placing our various chemistry platforms into select high-value applications. This diversification of end market exposure supports our sales and margin performance through applications such as our Nadone Cyclohexanone serving the electronic space, our EZ-Blox for alkyd-based paints, and specialty amines for agriculture, pharmaceuticals, and industrial applications.

Now let's turn to nylon solutions on slide 9. Here we've shown both the global composite caprolactam and North American resin over benzene spreads given the meaningful split of our monomer and polymer sales. Globally, nylon demand remains mixed across most major end uses. Varying regional dynamics, including competitive intensity and trade flows continue to impact regional pricing. Despite long supply and demand fundamentals, estimated operating rates out of China are sitting at multi-year highs, resulting in continued nylon exports to other regions, namely Southeast Asia. Here in North America, demand has been stable albeit on a lower base with continued softness in building construction offset by resilience in packaging and engineering plastics applications. Industry supply has been constrained in North America in recent months, supporting regional outperformance as evidenced in the charts. North American spreads have improved off the second half 2023 trough levels, and we expect further modest improvement through the remainder of 2024 given the tighter regional supply environment. For this business, we remain highly focused on supporting improved through-cycle profitability given we are operating in the third cycle since then. While our global low-cost position in caprolactam supports our ability to operate at disproportionately higher utilization rates and to meet demand where it exists through-cycle, our goal of generating higher highs requires us to drive productivity, optimize our regional and product sales mix, and continue to promote the value proposition of our differentiated nylon products. Supporting our current performance is an improved geographical mix as our export sales have moved back to an average historical level sitting at approximately 12% of our total nylon sales volume in the second quarter. Now before moving to Q&A, we would like to take the opportunity on the next two slides to reiterate and illustrate our through-cycle cash generation, how we allocate that cash, and the long-term returns we're generating for our business and shareholders. This is a business best viewed through the lens of long-term performance. The big picture can be missed on a short-term snapshot. Ample cash from operations has been generated to fund critical allocation priorities and our healthy balance sheet continues to provide flexibility and optionality when needed. Our approach to deploying cash is disciplined with a two-pronged framework of critical funding and discretionary choices to create value. From a critical funding perspective, we have our ongoing base CapEx including our maintenance projects and health safety and environmental spend as well as our enterprise programs to support long-term operational excellence and risk mitigation. And our dividend, which has grown since its initiation in 2021, serves as a dependable return of cash to our shareholders and fits very well within this framework, well supported by annual operating cash flow. All further capital allocation is discretionary where we fund growth and cost savings programs at robust returns, inorganic opportunities, and share repurchases. We've generated $1.2 billion of cash from operations since 2017. Through various conditions and cycles, this framework has allowed us to fund critical deployment, grow our dividend, and invest in our long-term performance and growth.

Now let's turn to slide 11. Pulling it all together, the net outcome of an effective capital allocation framework is robust returns. And we believe for businesses like ours, ROIC is a key valuation metric. We've generated double-digit percentage returns on invested capital through the cycle, outperforming peers, which is a testament to the earnings power created from our investments along with our operational and commercial execution. We remain well-positioned to deliver as a diversified chemistry company with a playbook and execution to a set of focused priorities and strategies. We have a leading North American position, an advantaged asset base, and are aligned to a diverse set of end-market applications with an enhanced sales mix across the portfolio. We have increased the earnings power of this business with our focus on through-cycle profitability and the goal of generating higher lows and higher highs. And as I just shared, our capital allocation framework provides upside and optionality for further value creation. AdvanSix offers a compelling investment thesis. So with that, Adam, let's move to Q&A.

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

Thank you. We will now begin the question-and-answer session. And the first question today will be from David Silver from CL King. Please go ahead.

Thank you very much. I have a number of questions. I’d like to start with your comments about improved operating performance and higher utilization. I understand that running your vertically-integrated complex at high rates benefits you significantly. However, there was a challenge in the first quarter. Could you provide some insight into how close to optimal your operational execution was this quarter? For instance, would you say you achieved around 95% utilization as a target, assuming there were no disruptions? Did you operate as efficiently as possible, or is there still room for improvement going forward that could potentially increase your underlying earnings potential? Thank you.

Yeah. Well, thanks for the question. I have to maybe sort of start with a quote. I got an email this morning from a friend that had a Franklin D. Roosevelt quote that said, 'A smooth sea never made a skilled sailor.' And I know you call out our challenge in Q1, but for us, operational excellence is a forever pursuit right. I think when we talk about returning to operational rates in the second quarter we did indeed return sort of mid-to-high-90% range at Hopewell, which is the sweet spot of where we look to operate relative to our target. Certainly, the rest of the chain supports and fills in around that. But as you say, this is an area of continuous improvement. We know just continuing to create that safe, stable, sustainable operation over longer stretches inherently creates more operational leverage. Right? So it supported our results in Q2. We learn from every single challenge that we have. We improve our skill, we improve our capability sets, and bring that forward. And that really is the underlying tenant for operational excellence programs.

When you started with the FDR quote, I thought you were going to say in politics nothing happens by accident. But I like your quote better. Okay. I guess I would like to ask a couple of questions on, I guess, the ammonium sulfate side of your business. And maybe you could just characterize kind of the spring selling season. In other words, it looks like you had both high volumes and you were able to achieve reasonably good pricing relative to how I guess the benchmark pricing moved during the quarter. And I'd also say it was kind of in an environment where the comparable product urea was moving in one direction and your product was stable or even slightly higher towards the end. So maybe if you could just talk about that, did you just out-execute maybe some of your competition? Or how would you just characterize your ability to kind of execute very well in the fast-paced spring planning season, especially given a number of issues but one would be attractively priced comparable or close comparable products? Thanks.

Sure, I appreciate the recognition and the comparison. We believe we have positioned ourselves effectively as we head into the season, which is always crucial and something we are concentrating on as we begin the next fertilizer year. You might remember that we enhanced our own production and increased our output of granular ammonium sulfate. This has significantly helped meet the growing demand for this higher-value granular product in North America. We also procured additional volume to prepare for our customers' needs and offset the challenges we faced in the first quarter. What we are observing is a growing acknowledgment of the importance of sulfur nutrition, which is driving demand. In the recent quarter, we saw that not only did typical yields on corn improve by 10% to 50%, but there were also noticeable mid-single-digit yield increases on soybeans. When profitability is under pressure for farmers, yield becomes a critical factor for them. Our execution and positioning with our customers, along with the growth of the higher-demand products we are focusing on, reflect this demand. There was certainly some supply tightness that supported our performance. The fundamentals have allowed us to perform well, providing significant support in the second quarter and bolstering the Fill program we've initiated at the beginning of the third quarter, showcasing the resilience of demand for fertilizers, particularly for sulfur nutrition.

Thank you for that. I wanted to follow up on ammonium sulfate. You mentioned that there was some advantage due to the increased percentage of granular product available. Additionally, from a corporate perspective, are you beginning to view ammonium sulfate similarly to acetone? Both can be considered coproducts to some degree, and it seems that global pressures on Nylon have resulted in reduced availability of other products, much like we occasionally see with acetone. Is there any consideration of this, or is that too obscure?

Okay. I can certainly tackle both halves of that. Relative to the volume increase, we would put our estimate at about 35% of the granular sales volume increase was attributable to our increased production and that mixed benefit. And so that's an important trend for us as we continue to invest in our SUSTAIN program. So that's sort of Part 1. Part 2 relative to fertilizer and intermediates, we've shared the view in the past. We talk about the split by sales revenue, but when you look at what we produce by volume, fertilizer and intermediates are two-thirds, if not three-quarters of our production. So they're very important product lines for us. A bit different in the supply/demand global fundamentals where yes, phenol and acetone are leading to a tighter global acetone market. There definitely is quite a bit of ammonium sulfate still coming out of China. And that is predominantly headed to Brazil and other places. But again, we continue to see sulfur nutrition as a recognized need globally for boosting yields.

I want to express my appreciation for the new slide that illustrates the price of ammonium sulfate relative to raw materials. I have been tracking it myself, so I value you highlighting it this time. I have a question regarding the agricultural sector, specifically related to ag-chem or pesticides. You have a few product lines catering to the crop chemicals market, which has been oversupplied for over a year according to my sources. Customers built up inventories during the pandemic that exceeded normal buffer stock levels. From your perspective, regarding US Amines and parts of your oximes portfolio that fit into this area, has the situation improved? Are you able to sell more of your products, or have the ag-chem manufacturers managed to reduce the surplus that accumulated over the past couple of years?

Yes. Certainly, we continue and have experienced the headwinds, as you point out, in the ag-chemical business and certainly continue to see retailers and growers work through that higher inventory. And the value chain from MIPA through all the way to herbicides is really being impacted with low-priced Chinese imports of glyphosate salt, so saving on inventories have improved a little. That value chain is still working through. Certainly, the dynamics that we've been tracking and certainly you're hearing from others. I'd say the flip side, the adjuvants where we're selling some of the spray-grade ammonium sulfate that gets mixed into that did improve in the season indicating that there is some progress being made deeper in the value chain because that would be added in at the last step. So, some progress but certainly some ways to go relative to the underlying dynamics.

Okay. For my last question, I've noticed that your company seems to be one of the few that hasn't mentioned a weaker demand environment in the broader industrial sector during this earnings season. Could you share your perspective on why you maintain a relatively positive outlook for supplying the industrial sector? This hasn't been a widespread sentiment among others I've spoken to. Thank you.

I appreciate that. We also recognize that there are elements within the industrial manufacturing economy that face challenges. Overall, we are experiencing a slower recovery than what many anticipated a couple of months ago. However, I believe our diversification is contributing positively to our favorable year-over-year outlook for the second half. The most significant weakness in the recovery is in the building and construction sector, which we are closely monitoring. This affects the demand growth for Nylon resin and some areas of our Intermediates. On the other hand, the Automotive sector has remained stable and strong, and we have observed a resurgence in the resilience of Packaging within our Wire and Cable product lines. Therefore, our diversification strategy has proven beneficial as we approach the second half of the year.

Okay. That's great. Thanks very much. I appreciate all the color.

Thanks.

Thanks, David.

Have a great day.

And our final question comes from Charles Neivert from Piper Sandler. Please go ahead.

Yes. Just a few things. One, when you look at the SUSTAIN program and you're talking about an additional 200,000 tons of sulfate, how is that coming about? Or what's happening there? Can you sort of walk through the whole program and whatever expansion there might be?

Sure. As we have shared in the past here and can just kind of recapture for us, it's a series of programs and projects over the course of years that really is leading to that opportunity set. And so, it's going to take us a couple of years to get to the full output. It is a win-win across many ways because we're increasing the granular conversion here, which is enabling us to do this without great increases in consumption of energy or impact to water rates. There is a nice sustainability aspect to it, but it is a series of projects along that route right? So we're targeting 70% by the end of this year with really the full completion by 2027, and so as you think about just various aspects of how we're going to address this. It's not a new line; it's really dechoking, creating the ability for us to really just convert really standard up to granular is what's happening here over the course of the next few years. And we can certainly share there was a full page, I believe in the last earnings deck, that we could send back over to you, Charlie.

Yeah. I mean, but in terms of total available AS both granular and standard grades, your capacity hasn't actually increased in total because that's just a chemical conversion. So you either leave it as one type or the other, but it's just the amount of product you're converting that we're talking about in that 200,000?

That is the primary consideration. There are definitely some options we are exploring that could lead to further releases, and we will continue to assess those within our system. However, it is important to note that the conversion itself is valuable, especially considering the premium we receive from transitioning from standard to a higher grade.

I wanted to clarify my understanding that this isn't an actual increase in capacity but rather a shift towards higher value and profitability, with only a minimal change in the tonnage available. What specific tonnage do you have available? Additionally, are you considering the possibility of carbon capture related to the ammonia unit, and potentially creating green or blue ammonia? This could contribute to your AS molecules and possibly add even more value. Is this something you are looking into?

Currently, most of our CO2 has been captured for beneficial reuse for several years. We have partners at the Hopewell site who are utilizing that CO2 in valuable applications within the food and beverage industry and cold chain storage. The mid-Atlantic region has a significant poultry and pork industry, making the beneficial reuse quite high in that area, alongside its use in beverages. We are actively capturing CO2 and have established strong partnerships to manage its utilization effectively.

I think the people involved in offtake aren't upset because CO2 doesn't, for lack of a better term, disappear. You can’t obtain the green credit, but you still have some credit for the sales it generates. When I look at AS, do you believe that there's an understanding of sulfur's value as an input? Do you think this will lead to a better spread over urea in the future? Historically, there has been a defined relationship with a certain spread over time. Do you think this is something that will increase due to the growing realization? Have you observed more acceptance of AS in the US? Are we just partially replacing the Chinese products that used to come in? How do you see that market changing?

Yes. I mean, certainly as we've shared, there is that consideration on the baseline nitrogen nutrition price of which we're working the premium for the sulfur value proposition. But we do believe certainly the willingness to pay and the acceptance of the sulfur proposition has been one that again our field research, our agronomists have been out, but we certainly are seeing it strengthen the last 18 to 24 months. We expect sulfur consumption to continue to increase accordingly, and there's a clear willingness to pay for that boost to yield.

And depending on how much over the stock nitrogen additions, considering with where corn is going, anything you can do to boost yield under these kind of situations at relatively minimal cost, I think is going to get looked at pretty, positively. On the Nylon side of things, has there been any particular market that's been making things a little bit better? Or is it really spread across all the basic Nylon markets?

Yes. In North America, this is definitely the region we want to emphasize, as we are committed to supporting our customers here. We've seen increased resilience, particularly in our Engineering Plastics, which is supported by automotive demand. Packaging has also rebounded. While we faced pressures a few months ago due to food inflation, those numbers have improved, bolstering revenue in Packaging and other areas that had previously slowed down. The building construction sector seems stable now, but it remains the most challenged due to the macroeconomic conditions related to interest rates and the slowdown in residential mortgage activity. On the commercial side, growth is occurring, but not at the levels we're used to. We recognize this deceleration. Additionally, there have been supply considerations that have allowed us to not only benefit from the recovery but also to gain market share.

Got it. Natural gas obviously, has been moving downward quite a bit over the last month, few months in particular. Are you guys hedged in any way? Or are you able to take pretty much full advantage of the decline in gas particularly, obviously, on the ammonia unit, but just in general? And is that something in terms of the AS spread that's going to make it look better even as the market moves into a seasonally weaker period and your sales shift toward South America and maybe a little less granular and a little more of the standard product? But I assume that gas should help a lot.

Yes. Charlie, we as a natural course, normal course, we don't hedge natural gas. It is a consideration in terms of the variable cost for ammonium sulfate and fertilizers and can impact the pricing in the marketplace. Therefore, there is I'll call it a longer-term correlation over time with respect to end-market pricing and that feedstock. So as a normal course, we don't hedge. With respect to the forward look, we did see a bit of a spike in natural gas in July, but it did correct and come back down and settle at a lower level in August. And we'll continue to watch it. But net-net, overall I'd say, for Q3 our expectation is that natural gas costs will be up a bit, and then we'll obviously monitor it closely here as we get into the fourth quarter.

I think that does it for me today. Thanks very much.

Thanks, Charlie.

And ladies and gentlemen, this concludes today's question-and-answer session. I will turn the conference back 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 continued operational and commercial benefits that our team captured and drove to support our second quarter performance, as well as the key considerations for our favorable earnings outlook. 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 feel very good about the strategies we've implemented and our continued investments to support expectations for AdvanSix's long-term sustainable performance. With that, we look forward to speaking with you again next quarter. Stay safe and be well.

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