AdvanSix Inc. Q2 FY2025 Earnings Call

Good morning, and welcome to the AdvanSix Second Quarter 2025 Earnings Conference Call. 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. Good morning, and welcome to AdvanSix's Second Quarter 2025 Earnings Conference Call. With me here today are President and CEO, Erin Kane; and Interim CFO, Chris Gramm. This call and webcast, including any non-GAAP reconciliations, are available on our website. 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 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. 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 AdvanSix' 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, AdvanSix delivered resilient earnings with strong sequential improvement in the second quarter while continuing to execute key growth in 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 demand across the rest of our portfolio remains softer overall, and we continue to navigate margin impact driven by higher raw material prices, mainly natural gas and sulfur. Supported by our healthy balance sheet, we have supplemented our commercial and operational performance with investment in growth in 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 million to $145 million reflecting the planned progression of our sustained growth program, refined execution timing to address critical enterprise risk mitigation, and priority 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 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 through 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 in energy markets as well as a diverse set of end market applications. Lastly, we're happy to have Chris Gramm on the call with us here today. Effective 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 AdvanSix, 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 Resins & Chemicals business that ultimately became AdvanSix. 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 4, where I'll highlight the key items of the second quarter 2025 financials. Sales of $410 million in the quarter decreased approximately 10% versus the prior year. Sales volume was approximately 8% 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% 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% 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%. I'll walk through the year-over-year variations on the next slide. Adjusted earnings per share was $1.24 and our effective tax rate was 0.9% compared to 25.2% 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 prebuy 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 year-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 year-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 about $5 million year-over-year, primarily reflecting a reduction in caprolactam and nylon volume. Plant costs and other items were a $7 million headwind and with increased utility costs in part due to higher natural gas prices and the timing of planned turnarounds year-over-year. Let's turn to Slide 6. Through the enactment of the 1 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 expensing. We also note that the act continues to include 45Q tax credits that we discussed during our February call, 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 of greenhouse gas emissions allows a federal tax credit based on the amount of CO2 captured and utilized that would otherwise be emitted into the atmosphere. Approved assessments are valid for 3 years of claim deductions, and we plan to file our 2021 life cycle assessment 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 life cycle assessment 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 million 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 7 to discuss each of our key product lines, starting with our plant nutrient 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 third quarter of 2025, we have entered 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 field program. Given current corn futures, this is a positive reinforcement that the value chain believes in sulfur to improve economics for the same acreage. 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 lower-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 tariff 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 9. 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 the 2024 multiyear highs, margins remained 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 of 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 performing optimized 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 serving 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. So 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 strategic 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 AdvanSix 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?

Our first question will come from David Silver with Freedom Capital.

Yes. Am I coming through clearly, please?

Yes, David. Good to hear you.

Okay. Sorry. My phone is a little dodgy here. 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 on how the fall fill program is shaping up, and maybe overall, how you're looking at the next planning cycle. And then separately, there has been some variation in the pricing relationship between ammonium sulfate, at least on the list price basis, and then urea and some other nitrogen products. Could you maybe just touch on how you see that pricing relationship performing over the next several months?

Yes. First, I may start off by just reiterating that we're coming off a strong fertilizer year where we saw higher pricing continuing to drive our sales increase 7% in the fertilizer year with our domestic granular ammonium sulfate sales volume continuing to be supported by the benefits of the sustained growth program and the favorable North American supply and demand conditions. As we move into the next year, we started and have built up a robust order book rate supporting a strong anticipated fall fill program. Our team is focused on ensuring supply, which is supporting the pricing consideration. Regarding the premiums, when you look long-range, premiums for ammonium sulfate to urea have been in about the 75% range, and we expect similar numbers this year. However, a 75% premium on a $500 urea number reflects a much higher sulfur value than a 75% premium at a $300. We're still selling the sulfur value at a very good price, which is what we're focused on. As we achieve these robust premiums, it's clear that growers are seeing this value and their willingness to pay. Also, supply and demand dynamics will always be a factor to consider. We recognize that corn prices have come down relative to nitrogen costs, making the relationship a bit tougher for farmers. However, with the signs of strong demand for the 2025 fill program, we feel positive about the uptake and believe the value chain views sulfur as a key nutrient for improving economic performance on the same acreage. We'll be watching this closely.

Okay. Great. Next question, I think, would just be more on the chemical industry environment that you're operating in right now. Several major chemical companies have reported very weak results. Your results might be better than some that have recently reported. How do you view the stability or predictability of AdvanSix's profitability over the medium term, let's say through the next couple of quarters?

Certainly, we recognize that the environment has been dynamic across various value chains and applications. However, we remain cautiously optimistic given the diversified nature of our portfolio, which was reflected in our Q2 results. Our integrated business model and the pricing mechanisms we use have continued to support value across different parts of the business. We have the strength of being a U.S.-based manufacturer, with 90% of our sales staying within the U.S. We procure most materials domestically, so we are well positioned to capitalize on good end markets and thus, are relatively insulated from first-order impacts of tariffs. We have experienced some downstream uncertainty, particularly in nylon. However, overall, pricing has held, allowing us to see that expansion. On acetone, we are mostly impacted by market conditions in construction, which creates a bit of a natural hedge for us due to internal consumption. We have a diverse regional footprint, which gives us the flexibility to take advantage of various market opportunities. Our portfolio is balanced with a range of customers to drive performance in this current environment. The stabilization of propylene costs is also promising.

Okay. Great. Maybe I could just follow up. You did start your previous answer discussing your highly vertically integrated production chain. This quarter saw nylon sales down about 10%, while ammonium sulfate volumes were up 7%. As you look ahead, particularly at nylon, how confident are you that you can maintain high utilization rates and successfully place all your co-produced products in the market regardless of demand fluctuations?

Yes. We do have an integrated value chain that gives us a global cost advantage in the monomer for Nylon 6. This allows us to maintain higher utilization rates, which in turn supports the business model through diversification across various end-market applications. Our strategy in nylon currently leans toward being more selective with our export business. We recognize that global clearing prices are below cash costs for many players, particularly in Europe, where operating rates are significantly lower. Thus, we will maintain discipline in our navigation through these dynamics. In every cycle, we aim to create more degrees of freedom. This includes investing in synthetic production of ammonium sulfate as part of our road map to increase flexibility across our asset base. This strategy allows us to leverage various market opportunities while ensuring stable performance in North America, where we anticipate demand stability.

Okay. Great. Maybe my last question here would be a cash flow oriented question. I was hoping you could just expand on some of the levers you expect to improve cash flow through the end of the year, and specifically, the timing of expected cash flows from the carbon tax credit opportunity.

Thanks for the question. As we've shared, our expected second-half cash flow performance is anticipated to improve sequentially. Key levers include 45Q tax credits, for which we have worked with the Department of Energy and the IRS to get our 2018 life cycle assessment approved, covering the years 2018 through 2020. We have filed amended returns to claim those credits, which triggers an IRS audit. Once that audit is complete, we expect to receive our refund this calendar year. This is one significant lever for us. Another important item is our ammonium sulfate prebuy program, which negatively affects our cash flow in the first half but will contribute positively in Q4. Additionally, we're being prudent about our CapEx expenditure, ensuring we prioritize sustainment and growth programs while managing our base CapEx thoughtfully. Our strong balance sheet position further supports our outlook for improved cash flow in the second half of the year.

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

Yes, we're certainly one of them. Once again, claiming those credits on an amended return triggers an audit automatically.

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, improved 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.