AdvanSix Inc. (NYSE:ASIX) Q4 2023 Earnings Call Transcript
AdvanSix Inc. (NYSE:ASIX) Q4 2023 Earnings Call Transcript February 16, 2024
AdvanSix Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the AdvanSix Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Adam Kressel, Vice President of Investor Relations. Please go ahead.
Adam Kressel: Thank you, Andrea. Good morning, and welcome to AdvanSix's fourth 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 fourth quarter and full year 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' 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 a continued challenging end market environment to close out 2023. We maintained our focus on long-term priorities, including portfolio simplification in the year and further investment for improved through-cycle profitability. Our healthy balance sheet supported our performance as we maintained our organic investments and return of cash to shareholders. Core to our long-term strategy is accelerating growth in the most profitable areas of our portfolio, continuous improvement to strengthen the underlying earnings power of this business and sustaining our cost advantaged business model.
While the nylon environment has been pressured by unfavorable global industry supply and demand conditions for several quarters now, we've continued to see resilient performance within our acetone portfolio and solid results from our Plant Nutrients business. We'll provide more color on our outlook for 2024 later in the call. So as we look forward, our focus is to perform in the current set of industry dynamics and to execute on the levers in our control, including soft discipline and working capital optimization that will be key mitigation to our operational headwinds as we have started the year. To support our long-term potential, it is also key that we invest to address enterprise risk mitigation, advance our IT platforms to achieve digital transformation and deliver growth through projects like our SUSTAIN program.
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 full year 2023 financials. Our results declined in 2023 against a record prior year. Sales were down 22%, primarily driven by pricing. Volume was flat overall pointing to the benefits of our diverse product portfolio and cost advantaged position. Adjusted EBITDA of $154 million was down 50% from the prior year, driven primarily by unfavorable market-based pricing net of raw material costs. We continue to focus on expanding the earnings power of our business and improving annual through-cycle profitability as evidenced by the resilient performance relative to prior troughs achieved in 2019 and 2016. Adjusted EPS was $2.14 per share.
Our effective tax rate was 21.1% versus 23.9% in 2022, primarily driven by research tax credits and tax benefits related to the vesting of equity compensation. We anticipate our full year 2024 effective tax rate to be approximately 24%. Free cash flow declined year-over-year as a result of the lower net income and the unfavorable impact of changes in working capital as well as higher capital investments. Now let's turn to Slide 5 to discuss the fourth quarter performance. Sales with $382 million decreased approximately 5% versus the prior year. Market-based pricing was unfavorable by 22%. This primarily reflects reduced ammonium sulfate pricing amid low raw material input costs and a more stable global nitrogen supply environment, as well as lower nylon pricing.
Raw material pass-through pricing was favorable by 1% as a result of a net cost increase in benzene and propylene. Sales volume increased approximately 16% in the quarter, primarily driven by higher export shipments in both ammonium sulfate and nylon. Adjusted EBITDA was approximately $15 million, down from $67 million in the prior year period. Pricing of raw materials was by far the primary driver of the earnings decline. Performance across our caprolactam and nylon portfolio presented a significant headwind year-over-year. Ammonium sulfate on a net price over natural gas and sulfur basis was also down with lower pricing, partially offset by a reduction in raw material input costs. Chemical Intermediates price of raw material spread was up, supported by an increase in acetone margin over propylene costs.
Plant costs were a modest tailwind in the quarter, driven primarily by lower natural gas utility costs, while volume and other items were also favorable, reflecting higher ammonium sulfate and nylon export sales. Adjusted earnings per share was a loss of $0.10. The effective tax rate was 38.3% in the quarter. And finally, free cash flow was approximately $22 million in the quarter. Cash flow from operations of $60 million decreased roughly $9 million versus the prior year. This was primarily due to lower net income, partially offset by the favorable impact of changes in working capital. Capital expenditures of $38 million in the quarter increased $10 million versus the prior year, primarily reflecting increased spend on enterprise programs and other maintenance projects.
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. Starting with nylon. While significant year-over-year declines in industry spreads continued through the fourth quarter, we did begin to see some stabilization and improvement sequentially of prior trough levels. While this is encouraging, we continue to see weak demand and varying regional dynamics and trade flows, resulting in the global composite underperforming the Asia benchmarks. We've seen - China's global nylon exports reach all-time highs in 2023 as their slower growth economy led to increased low-priced exports to the rest of the world. Here in North America, the higher interest rate environment has unfavorably impacted building and construction markets as well as consumer spending, impacting packaging applications.
Consumer durables within the engineered plastics space has also remained weak, while all applications have been more resilient. As previously shared, for our business, we've seen a higher share of export sales, both caprolactam and nylon resin, which does come with a mixed consideration for our performance. While not at 4Q levels, our first half 2024 exports are expected to be higher year-over-year. In the fertilizer space, you've seen a multi-quarter reset in nitrogen pricing amid a more stable supply environment and lower energy costs. While we did see cautious buying behavior exiting the year, pricing did follow the initial fall fill in line with historical sequential averages. We remain confident that the underlying industry fundamentals supported by crop prices, fertilizer affordability and expected planted acres will continue to support nutrient demand into the 2024 spring application.
The USDA is projecting a decline in inflation-adjusted farmer profitability as a result of rising costs and lower crop prices. However, the absolute level remains at long-term historical averages. Overall, demand remains stable, and we are gearing up to serve our key customers as we move into the heart of the domestic planting season. Lastly, in Chemical Intermediates. Industry realized acetone prices over refinery grade propylene costs continue to improve in the fourth quarter. While acetone demand has seen softness, particularly into the large buyer end applications, we see supply is balanced to tight globally. This has been supported by persistent lower global phenol operating rates on reduced demand into value chain serving building and construction and other industrial applications.
Across the rest of our intermediate portfolio, demand has remained soft. For our U.S. amines business, which largely serves the ag chemical space, we've continued to face destocking headwinds as retailers and growers work through higher inventory. Now let's turn to the next slide. As we shared in our press release, we expect CapEx of $140 million to $150 million in 2024. This reflects increased spend to address critical enterprise risk mitigation and growth projects in addition to our core replacement maintenance and health, safety and environmental investments. We recognize the challenges we're facing in some of our end markets. However, we continue to focus on making the necessary investments at the right time to support our long-term performance.
We have a rigorous prioritization process that evaluates a variety of factors, including asset life, risk, compliance, return profiles and other factors culminating to an execution plan over the short, medium and long term. We have two discrete enterprise programs at our Frankfurt Phenol plant, unrelated to the first quarter operational disruption that are primarily driving the increased spend in 2024. These projects are targeting upgrades to critical infrastructure and operational efficiency. The first is a rehabilitation of our dock, which is critical to support our integrated value chain and movement of key raw and intermediate materials within our own system and to and from customers and suppliers. The second is an upgrade and the installation of a new boiler, which we expect to drive operational and cost savings benefits as well as reduced NOx emissions.
Let's turn to Slide 8 for more detail on the growth and cost savings investments. Our sustained program is the primary driver of near-term growth capital investment with approximately $75 million of spend between 2024 and 2027. Ammonium sulfate continues to be the primary go-to for sulfur nutrition with continued strong consumption growth. North American customers require the granular form of sulfate and our sustained program is designed to meet that growing need. As we progress this multiyear program, we endeavor to provide greater clarity to the timing of our investments and expected outcomes. As a reminder, SUSTAIN is a series of projects targeting expansion of our granular ammonium sulfate production predominantly through increased conversion by approximately 200,000 tons per year.
That represents a nearly 20% increase. This program wins on multiple fronts as it also targets no increases in net energy consumption or emissions. It also improves domestic customer logistics through improved efficiency for truck and rail loading. Benefits are expected to phase in over the investment period as individual components of each project come online. All projects are proceeding in front-end engineering design with investment and execution priorities now firmed up for the next 2 years. We expect production capability by the end of 2024 to reach a milestone of 68% to 69% conversion as compared to our current target of approximately 65%. And by completion of this program, we anticipate roughly 75% regular conversion. The return profile for our sustained program remains robust with expected IRRs approximating our 20% target hurdle rate.
We also continue to progress on grant funding from the USDA through the fertilizer production expansion program, supporting innovative domestic fertilizer production. Now let's turn to Slide 9 to wrap up before moving to Q&A. 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 expect nylon industry margins to remain stabilized near current levels amid-week demand. This means that we continue to anticipate higher nylon solutions exports year-over-year in the near term. In our Plant Nutrients business, we anticipate strong seasonal demand supported by continued favorable ag industry fundamentals. So we do expect first half 2024 year-over-year pricing declines amid a lower nitrogen pricing environment.
And in our Chemical Intermediates portfolio, we expect balanced to tight global acetone supply and demand conditions. Operationally, we expect the pretax income impact of planned plant turnarounds to be $38 million to $43 million in 2024 compared to approximately $30 million in 2023. The majority of this impact will be incurred in the third quarter. Now before we conclude, I wanted to spend a moment providing an update on the previously disclosed process-based operational disruption at our Frankfurt manufacturing site. As a result of a delayed ramp to planned utilization rates, we are now anticipating a total unfavorable impact to pretax income in the first quarter of $23 million to $27 million. This is comprised of the impact of lost sales and other additional costs, including purchases of replacement products and incremental plant spend.
We are on the right path and have Frankfurt currently operating at 65% to 75% of its planned utilization rates, which is enabling us to ramp back up Hopewell and Chesterfield to targeted rates. While this has been a difficult start to the year operationally, I would like to thank our customers and partners for their collaboration to mitigate value chain impact. And I'd also like to acknowledge our AdvanSix teammates that have been focused on the safe operation of our sites during this time for their commitment and focus on getting the job done. We have much of the year ahead of us and are committed to delivering for our key stakeholders. With that, Adam, let's move to Q&A.
Adam Kressel: Great. Thanks, Erin. Andrea, can you please open the line for questions.
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