AdvanSix Inc. (NYSE:ASIX) Q3 2023 Earnings Call Transcript
AdvanSix Inc. (NYSE:ASIX) Q3 2023 Earnings Call Transcript November 3, 2023
AdvanSix Inc. misses on earnings expectations. Reported EPS is $-0.29317 EPS, expectations were $0.01.
Operator: Good morning, and welcome to the AdvanSix Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would like now to turn the conference over to Mr. Adam Kressel, VP of Investor Relations and Treasurer. Please go ahead.
Adam Kressel: Thank you, Alan. Good morning, and welcome to AdvanSix's Third 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'll review our financial results for the third 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.
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 navigated continued challenging market conditions in Nylon solutions in the third quarter while executing our larger planned multi-site turnaround for the year as expected. These factors overshadowed resilient performance within our acetone portfolio and solid results from our Plant Nutrients business in the seasonally slowest quarter of the year and amid lower nitrogen nutrient values and raw material input costs. The nylon environment has been pressured by unfavorable global industry supply and demand conditions for several quarters now and has approached trough industry spreads.
In a global macro environment like this, our advantaged integrated business model, efficiency and diversification serve us well. We have a demonstrated playbook to navigate these dynamics, while maintaining our focus on smart, disciplined investments, and a healthy balance sheet which we have established to weather these conditions as reflected in our ongoing repurchases and an increased dividend. In the past quarter, we had three one-time transactions. As highlighted in our press release, supporting our portfolio simplification and execution of our long-term strategies. First, we accelerated our exit from the alliance with Oben, a third-party producer of films for the flexible packaging industry, under previously negotiated terms. This move provides both meaningful economic value and reduces business and operating model complexity while enabling us to focus on our capabilities in resin production and sales.
Second, we had a non-cash asset write-down associated with the licensee of certain legacy ammonium sulfate technology, operated at their fertilizer manufacturing facility. The licensee announced its intent to close its entire facility no later than August 31, 2024. And lastly, we made the strategic decision to exit certain low-margin oximes products, namely AAO and MEKO, underscoring our focus on profitability and sustainability. We expect a net neutral impact to 2024 earnings as a result of this exit. Through these actions, we are reducing complexity to ensure our investments and resources are aligned with supporting our customer success in areas of highest impact. This is core to our strategic approach to focus on accelerating profitable growth.
We've begun executing to our multi-year expansion in granular ammonium sulfate production through our SUSTAIN program. We also continue to progress on grant funding from the USDA, through the fertilizer production expansion program, which is in the midst of a public comment period to partner with farmers on innovative domestic fertilizer production. We have a proven track record of performance through a multitude of environments. We remain 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 in the current set of dynamics.
We believe that the underlying improvements we have made and smart investments we continue to make, support long-term sustainable performance and returns for AdvanSix and our key stakeholders. Now let me turn the call over to Mike.
Michael Preston: Okay. Thanks, Erin, and good morning, everyone. I'm now on Slide 4, where I'll provide a summary of the third quarter 2023 financial results. Sales of $323 million decreased approximately 33% in the third quarter. Pricing was unfavorable by 32% overall. Now to break that down, Market-based pricing was unfavorable by 24%. This primarily reflects reduced ammonium sulfate pricing amid lower raw material input costs and a more stable global nitrogen supply environment as well as lower nylon pricing due to unfavorable global supply and demand conditions. Raw material pass-through pricing was also a headwind, down 8% as a result of a net cost decrease in benzene and propylene. Sales volume declined approximately 1% in the quarter.
Adjusted EBITDA was approximately $7 million. I will highlight the key year-over-year variances on the next slide. However, I would note that the net favorable $4.5 million pre-tax income impact of the three one-time transactions that Erin mentioned earlier, have been excluded from our adjusted EBITDA results as well as adjusted EPS. Included in the appendix of the earnings presentation are the reconciliation and financial details associated with these transactions. Adjusted earnings per share was a loss of $0.36, the effective tax rate was 20.7% in the quarter. We now expect our full year 2023 effective tax rate to be approximately 23%. And finally, free cash flow was negative $4 million in the quarter. Cash flow from operations of $21 million decreased roughly $38 million versus the prior year.
Now this was primarily due to lower net income and the impact of changes in working capital, with less cash generated from working capital in the third quarter of '23 compared to the prior year period. Capital expenditures of $25 million in the quarter increased $3 million versus the prior year. Now let me turn to Slide 5. Here, we highlight the key drivers of our third quarter adjusted EBITDA performance year-over-year. We saw an approximately $17 million favorable benefit from planned plant turnarounds year-over-year. As a reminder, this year's multisite turnaround was primarily centered around our sulfuric acid plant, while last year's larger turnaround was focused primarily on our ammonia operations. And in 2024, we'll rotate back to our turnaround centered around our ammonia plant.
In addition, Plant and SG&A costs were a $6 million tailwind in the quarter year-over-year, driven primarily by lower natural gas utility costs and lower functional spend. In the current environment, we're executing levers in our control, including an increased focus on cost controls. Pricing of raw materials was a roughly $45 million headwind and was the primary driver of the earnings decline compared to last year. Tracking our key variable margin drivers, performance across our caprolactam and nylon portfolio over our key raws was a significant headwind year-over-year. Chemical Intermediates price over raw spread was roughly flat year-over-year, as an increase in assets on margin over propylene costs, was largely offset by performance across the remainder of our Intermediates portfolio.
And lastly, ammonium sulfate on a net price over natural gas and sulfur basis, was up year-over-year as the lower pricing was more than offset by a reduction in raw material input costs. Finally, volume and sales mix were approximately $4 million unfavorable in the quarter largely reflecting higher nylon export sales this year compared to last. With softness seen across our key nylon end-markets in North America, we continue to leverage various sales channels to meet demand where it exists, including a higher share of exports. Now let me turn the call back to Erin.
Erin Kane: Thanks, Mike. I'm now on Slide 6 to discuss each of our key product lines. We'll dive into Nylon Solutions further in a moment. But the key takeaway here is that the declines we've been experiencing have continued. Global composite caprolactam-over-benzene spreads were down nearly 20% on a sequential basis in the third quarter and are now approaching prior trough levels. In the fertilizer space, we saw seasonal nitrogen fertilizer pricing declines in the third quarter. I would note that ammonium sulfate prices were much more stable than urea prices earlier in the year. So when urea was falling significantly, we didn't see a sharp of a decline in ammonium sulfate pricing and conversely haven't seen a sharp of a rebound either.
Overall, fertilizer demand remained stable and while global value chains continue to be more cautious in buying forward, our order position is very much in line with historical levels, and we remain confident in solid ammonium sulfate demand as we approach the 2024 spring application. Underlying agricultural fundamentals also remain favorable. From a crop perspective, corn prices have seen some fluctuations with changes in projections of estimated planted acres, but remain healthy relative to historical levels. Pharma profitability expectations have also remained resilient. And while raw material input costs have seen reductions recently, costs remain relatively high in other regions, steepening the industry cost curve and supporting higher overall nitrogen fertilizer prices.
So as we've navigated through a multi-quarter reset here and through the third quarter seasonal dynamics in North America, the underlying fundamentals continue to support firm fertilizer demand moving forward. Lastly, in Chemical Intermediates, industry realized acetone prices over refinery grade propylene costs continued to improve year-over-year in the third quarter. While acetone demand has seen 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 global phenol operating rates on reduced demand into value chains, serving building construction and other industrial applications. We also continue to monitor propylene costs, which declined again in the third quarter on weaker supply and demand.
Our integrated operating model continues to serve us well in industry dynamics like these. Now across the rest of our intermediate portfolio, demand has remained soft. For our U.S. amines business, which largely serves the space. We've continued to face destocking headwinds as retailers and growers work through higher inventory. Let's turn to the next slide. We thought it would be helpful to spend a moment and take a deeper dive on the nylon industry given the significant change we've seen over the past few months and the impact it has had on our business. Overall, we continue to see global demand declines across most key end markets, leading to further margin compression in the industry. Here in North America, the higher interest rate environment has unfavorably impacted building and construction markets, as well as consumer spending impacting packaging applications like bone-in meat and protective packaging.
In Engineered Plastics, Auto had been a more resilient end market for us. However, the recent auto workers' strike has reduced demand modestly. We continue to leverage various sales channels to meet demand where it exists. It does include a higher share of exports, both Caprolactam and Nylon resin, which does come from a mixed consideration for our performance. Exports represented approximately 13% of our total Nylon solutions volume in the first half of this year, and is anticipated to reach approximately 30% in the fourth quarter. This is in line with progression of the cycles as experienced previously, which have historically lasted 18 to 20 months. Amid the soft end-market demand, increased competitive intensity is impacting global trade flows and pricing dynamics.
We've seen China's global nylon exports reach all-time highs as their slower growth economy is leading to increased exports to the rest of the world, including Europe and North America at lower prices. In these regions, both nylon imports and domestic supply have been competing for market share with regional price premiums experiencing downward pressure from these low-priced import offerings. As you can see from the chart on the bottom left side of the page, the Asia Industry caprolactam-over-benzene spreads are well below cycle averages and are approaching prior trough levels as seen in both the 2015, 2016 and 2019, 2020 timeframe. They average roughly $650 per ton in the third quarter. Nylon resin pricing, which tracks as a spread to caprolactam has followed suit.
Given the pressure on pricing, we are highly focused on driving productivity to improve unit profitability. We also continue to promote and sell the value proposition of our differentiated nylon products, including our new post-industrial and post-consumer recycled offerings. Let's turn to Slide 8. While future cycles may not be predicted by historical ones, we wanted to give some context and perspective to the industry performance for our key product lines over the last decade. As you may recall, we first presented this view at our 2021 Investor Day and the presentation of these charts is slightly different than our typical quarterly pricing charts. Here, we are sharing industry spreads. Those key spreads that connect to our core variable margin equation for the business.
The caprolactam chart represents the Asia import Taiwan caprolactam price less Korea benzine, the ammonium sulfate chart represents Corn Belt ammonium sulfate price, less natural gas and sulfur, and the acetone chart is a weighted average margin, assuming the split of acetone large buyer by 2/3 and a small medium buyer by 1/3 over refinery-grade propylene. The cycles predominantly move with supply and demand dynamics and are inherently linked to underlying marginal producer cost curve economics. To note, there have been some structural changes in the market over this period. These include caprolactam and nylon capacity expansions in China and U.S. ammonium sulfate and acetone anti-dumping import duties. As you can see, we have both short- and long-cycle considerations and all cycles do not move in sync.
So what does this mean for our business? Despite the near-term challenges we're facing in nylon, we continue to focus our resources and investments in areas of the business with high value and opportunity. We're seeing that play out across our plant nutrients and chemical intermediates product lines, which don't have the same cyclicality profile as nylon. The March of 2019, when our markets are facing a downturn, we continue to make smart investments to position our business for long-term sustainable performance. And we're doing that again now with investments across our IT platforms to support digital transformation, driving further improvements in operational performance and supporting long-term growth through projects like our SUSTAIN program.
Now let me turn the call back to Mike.
Michael Preston: Okay. Thanks, Erin, and I'm now on Slide 9. We continue to execute to a set of focused priorities to drive long-term shareholder returns by concentrating our resources and efforts around higher-value components of our portfolio. The simplification of our portfolio supports our customers' success in areas of highest impact. As mentioned earlier, we made the decision to accelerate the exit of our alliance with Oben, recording a gain of $11.4 million in the third quarter. Going forward, we will continue to supply resin to Oben while further developing our largest and most strategic customer relationships for growth across the product line. We also made the strategic decision to no longer supply specific low-margin oximes products, namely AAO used for crop protection and MEKO used as a legacy anti-skinning agent for paints.
Revenue and profit of these products are immaterial on an enterprise-wide basis, and the market outlook was challenged, particularly given investments required for future environmental compliance and other regulatory pressure. This exit will enable us to leverage a capacity release of caprolactam and maintain a focus on our higher-value EZ-BLOX product, which is a drop-in replacement for MEKO and alkylate paints. We expect a net neutral impact to 2024 earnings as a result of this exit. Simplification enables us to focus our resources in the most profitable areas of our business. A great example of this is in our plant nutrients business. Our plant nutrients portfolio is a market leader and continues to support overall company performance and results.
With sulfur demand remaining robust as a key nutrient supporting crop yields, we are committed to growing in this space through our multiyear sustained program. We anticipate reaching a first milestone of 68% to 69% granular ammonium sulfate conversion level by 2024 year-end. Now let's turn to Slide 10 to wrap up before moving to Q&A. As we look forward, we are operating in a challenging macro environment, particularly as it relates to our Nylon Solutions business. Global PMIs remain in contraction. Building and construction indicators remain subdued Higher interest rates have impacted a number of consumer-oriented end-markets and geopolitical risks have heightened uncertainty around the world. Now more than ever, the strength of our business model and our position as a diversified chemistry company will serve us well as we navigate the current set of dynamics.
We've been here before and have proven that we can successfully deliver for our key stakeholders, including customers and shareholders. While we expect nylon industry margins to remain at prior trough levels through year-end, we do expect more favorable fundamentals for plant nutrients and North American acetone to continue. CapEx for the full year 2023 is tracking to approximately $115 million which reflects increased spend due to critical infrastructure, other maintenance and growth in cost savings projects. We're committed to driving best possible outcomes in the current set of industry conditions and executing levers in our control, including a rigorous commitment to operational excellence, remaining disciplined on cost, optimizing working capital and making smart investments to drive higher returns.
Now with that, Adam, let's move to Q&A.
Adam Kressel: Great. Thanks, Mike. Alan, can you please open the line for questions?
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