Q4 2023 AdvanSix Inc Earnings Call
Participants
Adam Kressel; Director - Investor Relations; AdvanSix Inc
Erin Kane; President, Chief Executive Officer, Director; AdvanSix Inc
Michael Preston; Chief Financial Officer, Senior Vice President; AdvanSix Inc
Vincent Anderson; Analyst; Stifel, Nicolaus & Company
David Silver; Analyst; CL King & Associates, Inc.
Presentation
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 Kessel, 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'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 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 our 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 advantage 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 2020 for 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 cost discipline and working capital optimization that will be key mitigations 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 platform to achieve digital transformation and deliver growth through projects like our sustained program.
Now let me turn the call over to Mike.
Michael Preston
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 of $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 $50 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 for 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 marginal 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 $30 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 thus far, we think well, China's global nylon exports reached all-time highs in 2023 as a 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 plastic space has also remained weak for all applications have been more resilient. As previously shared for our business, we've seen a higher share of export sales, both catalog TAM and nylon resin which does come with a mixed consideration for our performance while not at 4Q levels, our first half 2020 for exports are expected to be higher year over year in the fertilizer space facing 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. We'll continue to support nutrient demand into the 2024 spring application. 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 continued 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 operating rates on reduced demand into value chain, serving building and construction and other industrial applications.
Across the rest of our intermediates portfolio, demand has remained soft for our US amines business, which largely serve the ag chemical space. We've continued to face destocking headwinds as retailers and growers work through higher inventory turns fine. As we shared in our press release, we expect CapEx of 140 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 culminated into an excellent execution plan. Over the short, medium and long term. We have two to three enterprise programs at our Frankfurt Pheno plant unrelated to the first quarter.
Operational disruption that are primarily driving the increased spend in 2020 for these projects are targeting upgrades to critical infrastructure and operational efficiency, the first of the rehabilitation of our dock, which is critical to support our integrated value chain and movement of key role in intermediate materials within our own system and to and from customers and suppliers. It certainly is the upgrade and the installation of a new boiler, which we expect to drive operational and costing benefits as well as reduce NOx emissions.
Let's turn to Slide 8 for more detail on the growth and cost-savings savings. 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 the 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 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 and front end engineering design with investment and execution priorities now firmed up for the next two 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 a 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 sort of dynamics. We expect now and industry margins to remain stabilize near current levels amid weak demand, it means that we continue to anticipate higher nylon solutions exports year over year in the near term.
In our Plant Nutrient business, we anticipate strong seasonal demand, supported by continued favorable ag industry fundamentals. And 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, and we expect the pretax income impact of planned plant turnarounds to be 30 to 43 million in 2024 compared to approximately 30 million in 2023. A majority of this impact will be incurred in the third quarter.
So before I conclude, I wanted to spend a moment providing an update on the previously disclosed process-based operational disruption at our Frankfurt manufacturing sites. 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 to 27 million. This is comprised of the impact of lost sales and other additional costs, including purchases of replacement products and incremental plants. We are on the right path and have raised, but 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?
Question and Answer Session
Operator
(Operator Instructions) Vincent Anderson, Stifel.
Vincent Anderson
Good morning, everyone, mining. So I wanted Good morning. I wanted to start with Amisol. The revenues in the quarter were better than at least I was expecting given where export pricing had lingered for most of the quarter. Were your overall volumes up year over year, or did you start to see better pricing in December, whether market bases placing tons and higher value regions?
Michael Preston
Yeah. From a year-over-year perspective, volume was up. If you look at the topline growth where we're looking at roughly 60 million of volume improvement from a year-over-year perspective, that's worth about $15 million, a 15% increase year over year. A good amount of that was ammonium sulfate. Also, a good amount of volume from a nylon and capitalized perspective. Most of that was exports. So for a US in particular, we had a really strong export quarter, and that's what drove the majority of the volume from a year-over-year perspective.
Vincent Anderson
Got it. Thank you. And that kind of feeds into my next question, which may be partially answered, but you recorded lower deferred income and customer advances, was that largely the result of absolute pricing? Or were your pre-buys consciously kind of managed lower this year?
And now when we think about sort of where the the fundamental market is and certainly we are on, I think our customer signals here as well as them approaching every year's pre-buy program and sell program. So we would say that our volumes were at sort of long-term historical averages. But pricing just given the entire complex on energy and nitrogen nutrient values was down.
Okay, excellent. I had a similar question around intermediates, that was a bit better than we were expecting. So I'm curious if that was really all acetone pricing, are we starting to see some early recovery in OXiGENE's and maybe the amines that go into agricultural use and the majority of reality intermediates improvement was more market related pricing.
Michael Preston
And most of that was with acetone. That's its own strength given the favorable supply demand conditions overall.
Adam Kressel
Sure.
Erin Kane
Okay.
Vincent Anderson
Then just real quick one. I'll give someone else a turn, but is there any risk here that you don't have enough output from Frankfurt to build inventory ahead of the planned turnaround and we see more purchase product and and around the third quarter or the second quarter or is this still at 65% to 75% of planned utilization. We're good in terms of balance of the year risk.
Erin Kane
Yeah, so certainly, the current rates we're at are supporting us with some modest purchases at this level to to bring back the full rates at the Hopewell and Chesterfield here, just given our normal level of integration, 75% to 80%, you can -- those numbers are out there relative to how the system works on average over long stretches. We certainly, as you might expect, we pulled forward the maintenance work at Hopewell just given the slowdown. So we are proactive in that nature.
And our key focus right now is to get our Frankfurt facilities stabilized and up and running, the systems returned, the return to flow to our customers who have been very collaborative with us during this time. And we are reevaluating our plans for the remainder of the year on timing and execution to be successful.
Okay.
Operator
David Silver, CL King.
David Silver
Yes, yes, hi. Good morning or any year.
I wanted to maybe just start with maybe just a couple of details regarding the SUSTAIN program and in particular, you know, maybe I missed it before, but I wasn't aware of the grant funding from the USDA opportunity there. Could you just maybe touch on that, what is maybe the aspect of your project that is most directly, I guess, attributable or wrote, I can't think of the right word, but would the funding request be tied to? Is it the emissions performance? Is it something in the actual process? If you could just talk about that broadly. And then if you could also size the amount of the potential grant funding, you know, range or whatever, that would be helpful.
Thank you.
And is that a 75 million CapEx net of any grant funding or is that the gross figure before any any funding?
Thank you.
Certainly. So the grant from the USDA is actually in support of increased fertilizer production for U.S. growers and U.S. farmers. So really that given the growing need of sulfur in the US in the country and our ability to grow to generate more capacity and grow with those needs. We think we are a great match and certainly are working through the process with them. So we're really just about improving that we have increased our local, we produced on fertilizer, you know, for the U.S. market. And so that is the key. There are steps through the grant process, right?
Erin Kane
So we continue to proceed.
And when we think about the opportunity set, it's between a 10 to $15 million opportunity for us against our total spend.
David Silver
Okay. Thank you for that. I'd like to switch over to maybe to get some of your thoughts about the global supply-demand balance in nylon and caprolactam and in particular, I guess, competitive reactions to the current fundamental environment but my sense is that there are some producers even with the stabilization that you cited in your charts. But there are some producers who are just not making suitable returns that I don't know, would consider sustainable and done from your perspective here, you know, regionally, I guess have you noticed any behavioral shifts? In other words, would the Chinese producers be reducing production rates in response to lower domestic demand? Or have there been some adjustments in production or and I don't know the facilities that you see operating in Europe or elsewhere, but beyond shifting around your marketing strategy a little bit. Have you noted any concrete shifts that might lend to a firmer fundamental balance, let's say, over the medium term, if I provide a little context for you, David, on sort of current operating rates, as we've seen, it certainly started the year in China is running closer to 80%.
That continues to be a in a strong healthy rate for them and a rate of which they need to export. These are the sort of their internal domestic needs, and that has had a rippling effect. You've got the rest of Asia operating at about 50% trade bonds only talked about or the impact of these trade flows. And I'm trying to again have to to export to the rest of the world on into the rest of Asia and into Europe.
Europe is operating around cigar as well. I'm you know, structurally it is a higher cost region. And so that is the area that we continue to watch it. And when you think about the regional balances in North America, as the markets and demand recovers in our relatively balanced slightly long in Europe is structurally long on rest of Asia structurally long as is on China to some degree as well. So that yes, I think you're asking around are we seeing anyone yet announcing a sign of closure?
Again, there are definitely lines that are not running on lines that are curtailed in rate. And but we have not yet seen a definitive call date.
Erin Kane
But certainly the areas that we would watch would be those regions that are structurally lower.
Vincent Anderson
Sorry.
David Silver
Okay. No, thank you for that. On maybe the last question, and I apologize. I always feel like a dumb chemicals analyst here, but I had a couple of points you interesting talking about critical investments for the long term. You was I guess, use the terminology critical enterprise risk mitigation, right? And I'm kind of scratching my head there, but could you just.
Yes, just flesh that out a little bit more. I mean is this a cyber defense kind of thing or what types of activities on, you know, are included in a critical enterprise risk mitigation program as you envision it?
Thank you.
So for either one, what may come after the do you maybe tie into and potentially ProCare is why why couldn't we manage some of these programs within our sort of our base CapEx framework and and we could. But then we would then need to sacrifice the ongoing, I would say, sustaining replacement maintenance at some of our sites, right?
Erin Kane
Because these are larger projects in nature.
They are nonbearing scale. And so do you think about enterprise risk?
We think about supply chain risk.
We think about climate risk.
We think about cyber risks we think about the totality of risk factors that we disclosed in our in our 10 K.
Now in what we think about these projects right now, we got on the docket that that docket Frankfurt is the start of our entire value chain and the length of service and its needs. And it's a large, large project for the scale of any it's not a frame per doc per se, is a AdvanSix stock trade that is necessary to maintain for the entirety of the system. Likewise, the boiler, this is a standard replacement status boiler program that we would put into our base framework again in our integrated value chain. And this is a significant sort of switch, a handling, a critical utilities on at a at a key site that's moving forward. And again, because of the approach we took for adding great redundancy and resiliency onto a site, it we put it in that category.
But again, long-term compliance risk.
One might think in a regulatory changes could fall into this. If you think back to when we spun, we did have a program that we would view as enterprise critical risk mitigation associated with our multiyear NOx reduction program, right? So these are the types of things that we feel are over and above what would be prudent to manage into and within our base $75 million sustaining maintenance CapEx for for each of the advantages of base business, I'm a part I hope that helps a little bit Okay, great.
Thank you.
David Silver
I'm going to get back in the queue.
Operator
(Operator Instructions) This will conclude our question and answer session. I would like to turn the conference back over Erin Kane for any closing remarks.
Erin Kane
Great. Thank you all again for your time and interest this morning. While there are puts and takes across our end markets and broader macro uncertainty. We have a demonstrated playbook and track record to navigate these dynamics. We'll continue to position our business for long-term sustainable performance through our smart disciplined investments and focus on accelerating growth in the most profitable areas of our portfolio.
With that, we look forward to speaking with you again next quarter. Stay safe and be well.
Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
