AdvanSix Inc. Price & Performance (ASIX)

Good morning and welcome to Advance six's fourth quarter twenty twenty four earnings conference call. With me here today are President and CEO, Aaron Cain and Senior Vice President and CFO, Sid Mandashwar. This call and webcast, including any non GAAP reconciliations, are available on our website at investors.advance6.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 ks, further updated in subsequent filings with the SEC. This morning, we will review our financial results for the fourth quarter and full year 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 AdvanceSix's President and CEO, [indiscernible] 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 achieved commercial success and advanced our key growth programs in 2024 while navigating operational performance that did not meet our expectations. It was a testament to the resilience of all our dedicated teammates focused on delivering financial results and shareholder value, while remaining committed to continuously improving our health, safety and environmental performance as we recovered and learned from our challenges. We continue to benefit from our diverse product portfolio. With strong performance across our ammonium sulfate and acetone businesses. Robust market acceptance of our annual ammonium sulfate pre buy program also supported strong cash flow performance in the fourth quarter. Resulting in positive free cash flow for the full year. This past year, we funded key growth in enterprise capital investments. Including expansion of our granular ammonium sulfate capacity, return cash to shareholders to repurchases and dividends, and maintained prudent debt leverage levels. As we move into 2025, we are well positioned to support our strategic growth priorities and we continue to focus on making the necessary investments at the right time to support our long term performance. Lastly, I'd like to provide an update on two key developments.

On which we've made significant progress. First, we reached final settlement reflecting our ongoing efforts to recover losses associated with the $20.19 PES Q mean supplier shutdown. This included $5,300,000 of insurance proceeds in the fourth quarter of twenty twenty four and a final Omnibus settlement in the first quarter twenty twenty five approximately $26,000,000 In total, we have received approximately $39,000,000 of aggregated insurance proceeds since the 2019 event. Second, as one of the largest producers of ammonia along the East Coast, we were pleased to be one of the first industrial companies to be recognized for carbon capture through an approved lifecycle assessment enabling initial 45Q tax credits of $9,700,000 claimed in the fourth quarter. We both use CO2 as a feedstock and downstream products and sell to customers for beneficial reuse in various applications. Our initial credits were for the 2018 and 2019 tax years, we continue to pursue credits for subsequent periods. Both of these provide tailwinds from an earnings per share and cash flow perspective entering 2025. Now let me turn the call over to Sid to walk through the financials.

Thanks, Aaron, and good morning, all.

I am now on Slide four key items of the fourth quarter twenty twenty four financials Sales of $329,000,000 in the quarter decreased approximately 14% versus the prior year Sales volume decreased approximately 16% primarily driven by the delayed ramp The full operating rates following our plant turnaround, Market based pricing including continued strength in ammonium sulfate and acetone. Adjusted EBITDA of 10,000,000 declined $5,000,000 versus the prior year primarily driven by the timing and impact of plant turnarounds partially offset by changes in favorable sales mix including lower plant nutrients and nylon solutions export volumes. Favorable pricing net of raw material costs and insurance claim proceeds. As a reminder, the impact to pre tax income due to the plant turnaround in the quarter was approximately $47,000,000 compared to zero in the prior year period. Adjusted earnings per share of $0.09 increased by $0.19 versus the prior year This included the impact of $9,700,000 in 45 Q carbon capture tax credits that reduced our effective tax rate to 3.1% for the full year 2024 compared to 21.1% in the prior year period. Free cash flow was $30,000,000 in the quarter, up $8,000,000 versus the prior year. Cash flow from operations of $64,000,000 increased $4,000,000 versus the prior year primarily due to the favorable impact of changes in working capital.

Including our strong ammonium sulfate pre buy program in the quarter, Capital expenditures of $34,000,000 in the quarter decreased $4,000,000 Now let's turn to the next slide. On Slide five, we've summarized our full year 2024 financial results.

Our diverse portfolio, advantage of our integrated business model and favorable industry dynamics particularly in plant nutrients and acetone enabled us to successfully navigate the year and deliver full year adjusted EBITDA of $142,000,000 adjusted earnings per share of 196 and positive free cash flow. Now let's turn to Slide six. On the left side of the page, we've highlighted our cash flow profile by quarter I too would like to thank all our dedicated and talented employees for their efforts to overcome and learn from the impacts of our operational challenges while driving commercial success. This demonstrates our persistent focus on effectively running our business to drive profitability. Through 2024, we continue to fund key growth and enterprise investments including our sustained program, returned cash to shareholders and maintained prudent leverage levels. We ended the year at just about one turn of leverage and our healthy balance sheet continues to support optionality for value creative capital allocation initiatives moving forward. Now let's turn to Slide seven.

As Aaron mentioned, I will provide a bit more detail on the 45Q tax credits. We operate an approximately 600,000 metric ton ammonia plant at a Hopewell, Virginia facility from which CO2 is generated.

The captured CO2 is used as a feedstock in downstream products through chemical, conversion or sold to our customers for beneficial reuse in essential applications including food and beverage, coal chain storage and more. Our recently approved lifecycle assessment of greenhouse gas emissions allow the federal tax credit based on the amount of CO2 captured that would otherwise be emitted into the atmosphere. These credits are eligible as of Feb twenty eighteen when the tax code changed and applies over a twelve year period.

The 45Q credits represent a significant value driver for our business over the medium to long term the credits reduce our effective tax rate are calculated for utilization and are adjusted annually for inflation. We claimed 9,700,000.0 in the fourth quarter of twenty twenty four for the 2018 and 2019 tax years, and continue to pursue these credits, for subsequent periods. Now let me turn the call back to Aaron. Thanks, Sid.

I'm now on Slide eight to discuss each of our key product lines. Starting with our plant nutrients business. [indiscernible] continued strong performance in 4Q market acceptance of our pre buy program are further proof points to the resiliency of sulfur nutrition demand. Industry corn belt ammonium sulfate prices were up 15% year over year, In contrast, corn belt nitrogen pricing saw an 8% decline supporting healthy realized sulfur premiums. Moving into 2025, our order book is robust. And we are now sold out well into the second quarter, reflecting a favorable setup into the The combination of strong sulfur nutrition demand, and tailwinds from rising grain and nitrogen fertilizer prices is expected to support higher ammonium sulfate pricing in the first half year over year. Remain confident that the underlying industry fundamentals supported by crop prices, stock to use ratios and expected planted acres, among others will continue to support nutrient demand. We are, however, monitoring higher anticipated raw material prices namely natural gas and sulfur, which impact our overall price raw spread. Settle prices for both raws in the first quarter were higher than industry expectations and the forward curve in forecast would indicate a year over year headwind for 2025.

Long term, we remain excited about the growth prospects for this business and leveraging our expertise as a leader in this space. We continue to see strong demand for ammonium sulfate, as growers understand the value and seek ways to maximize crop yields.

Our multi year sustained growth program remains on track supporting market demand in North America with potential upside driven by increased adoption on soybeans. Anticipate production capability by the end of twenty twenty five to reach a milestone of 72% granular conversion up from roughly 70% at the end of twenty twenty four. [indiscernible] For nylon, persistent global oversupply conditions continue to pressure pricing and spreads. The Asia capital actium over benzene spreads have essentially bounced around trough levels exiting 2024.

Now expect a slower recovery off the trough. With improved domestic supply given the absence of supply chain disruptions in 2024. As a result from a volume perspective, it's been a relatively slow start to the year, including less disciplined competitive behavior impacting spreads in North America. Trade flows out of China, primarily to Southeast Asia and Europe, have also continued to limit pricing improvement globally. From a North American demand perspective, a lower interest rate environment in time is expected to favorably impact building construction end markets. However, the pace and size of those potential reductions likely to draw out the time for meaningful impact to translate to fiber and filament applications. Demand across engineering plastics and packaging remained stable overall With trade policy and tariffs potentially having the greatest impact, on pricing and demand in the auto value chain in the near term. As we navigate what has become a protracted downturn, in the cycle, remain highly focused on supporting improved through cycle profitability. By driving productivity, optimizing our regional and product sales mix, and continuing to promote the value proposition of our differentiated nylon offerings. While benefiting from running at higher operating rates relative to our peers.

Given our cost advantage, our capital act in utilization rate at Hopewell is targeted to be 90% plus for 2025. Let's turn to Slide 10. Moving to Chemical Intermediates. Industry realized acetone prices over refinery grade propylene costs generally remained healthy amid continued balanced global supply and demand, As lower phenol operating rates continue, While for the year balance supply and demand conditions are expected, to support acetone spreads above cycle averages, Here, we have also seen a slower start to the year. With demand for acetone into the MMA markets remaining soft. Along with several downstream industry turnarounds occurring this quarter.

We're monitoring for any change in phenyl demand signals which can impact market supply. With potential interest rate cuts likely pushed out further, FEMA demand into building construction applications is also expected to be subdued. Demand across the chemical intermediates the rest of chemical intermediates, excuse me, remains mix overall. So many of these chemistries are high value applications in support of longer term growth and profitability. We are pleased to receive our new European patent grant in the fourth quarter for our EasyBlox 2PO product used as an anti skinning agent for outlet paints and coatings. Let's turn to Slide 11. To better help frame the various factors that impact our commercial results, Given a number of moving parts year over year and sequentially, we've highlighted here several relevant KPIs and industry pricing metrics. Starting with raw materials. Forward curves and forecast indicate significant year over year as sequential increases for both natural gas and sulfur prices in the first quarter as well as for the remainder of 2025. Natural gas and sulfur represented approximately 106% respectively, of our raw material costs in 2024. Implant nutrients while we do expect ammonium sulfate premiums over urea remain near the high end of historical ranges in 2025, The price roll spread is being impacted by these anticipated higher raw material prices.

As a reminder, roughly half of our total company portfolio is on formula or index based pricing. Where we can pass through changes in our raw materials. For ammonium sulfate, however, this business is all freely negotiated and market oriented. As farmers ultimately buy nutrients on their value.

Underlying nitrogen nutrient values influenced by urea prices, are currently based on industry marginal and producer gas costs out of Europe. And not The U. S. We then price our product with a premium for the value proposition of software nutrition. Another important dynamic is to highlight that our ammonium sulfate order book is typically sold out one quarter. As I mentioned earlier, we are currently sold into the second quarter, so industry pricing quoted today reflects sales we're recognizing several months out.

We'll also be unwinding our fourth quarter twenty twenty four pre buy cash advances throughout the first half of the year with the majority of those sales in the second quarter. For the remainder of our key product lines, we're seeing estimated spreads decline sequentially into the first quarter. Acetone spreads are off the prior year highs but are expected to remain above cycle averages. The global nylon spreads are near trough levels entering 2025, Lastly, we anticipate our first quarter nylon export mix to return to historical averages representing a sequential headwind. Let's wrap up on Slide 12 before moving to Q and A. While like many We continue to anticipate meaningful year over year earnings improvement for the full year 2025. This is supported by expected operational excellence, strong commercial performance across our diverse product portfolio. Our plant turnarounds are anticipated to be a tailwind year over year based on the scope and focus of this year's activities. We also expect CapEx to be in the range of $140,000,000 to $160,000,000 reflecting the planned progression of growth projects, including our Sustain program, and refined execution timing to address critical enterprise risk mitigation. Our organization's efforts are centered around improving through cycle profitability which requires us to drive productivity, optimize our regional and product sales mix and continue to promote the value proposition of our differentiated product portfolio.

We understand that we're operating in an uncertain environment, However, the macro backdrop for the industries we serve remains largely favorable overall. We expect strong sulfur premium supporting plant nutrients, and a constructive global ethanol supply and demand environment which should serve as a counterbalance to an anticipated slower recovery across our nylon solutions business. We continue to protect our healthy balance sheet, enabling our capital allocation framework to provide optionality for further value creation. Remain confident in the future prospects for AdvanSix, and are committed to delivering sustainable long term value to our shareholders. With that, Adam, let's move to Q and A. [indiscernible] Thanks Aaron. And Ajay, can you please open the line for questions?

Certainly. We will now begin the question and answer session. Today's first question comes from Charles Neibert with Piper Sandler. Please go ahead.

Good morning, everybody.

Couple of questions. One, on the conversion to granular side, you said you're heading for what 72%. I mean is there a max really given that you move a lot to the Latin American market, at certain times of the year, does that preclude going to that higher level ultimately, what level do you guys want to attain in terms of granular production on a [indiscernible] [indiscernible] And so we don't anticipate that our assets will get to $100,000,000 The 75% a nice stretch matching sort of the North American domestic And certainly on the export side, that is typically more in our standard grade that we focused on there at this time. But obviously, there is both a technical max that can be achieved and certainly making sure that we are driving to support our domestic customers.

Got it. Another question, is the phenol market still problematic and therefore creating some opportunity for your asset tone side since you guys consume a vast proportion of your phenol, are you still running at above let's say industry rates for phenol and therefore producing them more acetone and acetone remains sort of snug for that reason? Is that still situation out there?

I mean, you look at broader operating rates in The U. S, funeral rates are sitting at about 65 plusminus percent, and we are targeting a rate that is higher than that, obviously, because of our strong integration into our Capalactrim value chain. Obviously, given that the vast majority of what we produce is forward integrated So again, as we've talked in the past, for us acetone serves as a bit of a right, and a lower phenol operating rate. Environment.

Got it.

Then just on the carbon capture side, Avi, The assumption is that to be that you're going to you've collected twenty eighteen, 2019, you've got 2021, 2022, '23 and 2024 to still deal with. Is there any idea about just what 25% will produce, excluding anything you may get from prior years, do you guys have any estimate on that or any guidance on that number? What it might be? And I know it may or not occur in 2025, but just what are we potentially looking at there?

No, good question, Charlie, and I hope you're doing well. I think, look, the way to think about it is, it's taken us five years to get to this point, right, with all the approvals, filings, etcetera, for the 2018 and 2019 year. So on a run rate basis for the next several years, you could assume a $5,000,000 that it escalates given there's on our utilization and what is being published by the IRS in terms of credit schedule with inflation baked in. So that $5,000,000 $6,000,000 run rate would expand.

Okay. And then if I'm looking at I'm sorry, go ahead.

No, I was just going to say, the one thing to consider here, Kelly, is we're we do move sequentially because we have to file life cycle assessments for certain time periods and then go back and perfect claims. So when we think about sort of our timeframe here, we are moving sequentially. Just as that as a note for your consideration.

Okay. And then on that front, I mean, if you look at all the carbon capture you're doing now, is that basically all you can do, I mean physically can do or is there potentially more coming, meaning you have to have the offtake agreement, all the off takes and all the rest of that stuff But are you capturing all that you can or is there more that conceivably could be captured if you can find the home for it?

Yes. So effectively when you look at what we consume in internally and sort of incorporate through chemical conversion into our downstream products, And then with our three three partners for the uptake for beneficial reuse, We effectively have been emitting or benching very little process CO2 for quite some time.

Okay. Basically, you've got pretty much all you can get out of it. The number will be whatever whatever. Yes. The opportunity is to finally get the credit for it. Yes. Thank you. The next question comes from David Silver with CL King.

Please go ahead.

Okay. Hi. Thank you.

I guess I have several questions. First, let me just look here. First, if you don't mind, you did sketch out a range for capital spending in 2025 of $140,000,000 And I was hoping you could just take a minute and maybe Call out the different buckets there in particular. I mean, as I recall, I think $75,000,000 or $80,000,000 might be sustaining. So I'm kind of more interested on the discretionary side or the non sustaining side Certainly, some of that goes into the ammonium sulfate expansion. But can you just maybe take a minute and where else are you directing discretionary CapEx in '25? Thank you.

Yes. Thanks, David. Good question. Yes, maybe I'll walk you through the framework and the various buckets like you suggested. So look, this year, it's $140,000,000 to $160,000,000 It's up from the $134,000,000 in 2024, but it primarily reflects the planned progression of our growth projects, including our sustained program, and a refinement, I'd say, on the execution timing over the various critical enterprise risk mitigation Also, there was a $10,000,000 carryover from 2024 to 2025 based on execution. So that's one piece of it. On the base maintenance capital, which improves and supports our safe and stable operations, Year over year, we expect that to be down and within our framework. That's offset by some of the enterprise programs, including spend for our Hopewell water permit. And then as you know the Frankfurt dock and boiler upgrade is supposed to wrap up this year. So that's another piece of it. Primarily the major driver moving the needle here is the growth capital investment related to sustain. Was roughly $8,000,000 last year and is projected to be in the $20,000,000 to 25,000,000 in 2025. [indiscernible] you think about this year versus next year as well, 26 spend is likely to be flat to down with that framework that we adopt in terms of how we bucket and budget for.

Okay, great. Thank you very much. Next question would be about the natural gas costs and in particular regional spreads. So Aaron, I think in your prepared remarks on maybe the KPI [indiscernible] touch on this briefly. But I do kind of track that regional spread from when it got extremely wide a few years ago. And it's certainly not back to where it was in, I don't know, 2021 or 2022, but it has been ticking up pretty noticeably through the last few months of the year. So firstly, I mean, I guess I was just wondering if you consider that kind of maybe a secondary or a background support to your fertilizer business? And then more directly, but do you think that that has redirected global trade in ammonium sulfate or other products impact on your competitiveness or competitive advantage in the domestic market?

Yes. So certainly from a nutrients or let's call it plant nutrients perspective, energy costs are important Certainly, as we think about how that impacts the marginal producer around the world for nitrogen, And certainly, the EU is currently the marginal producer And as part of certainly what is supporting the higher level urea prices, certainly in combination though with some supply disruptions, higher India demand, other things around the world, but isn't necessarily impacting global AS trade, if you will. It certainly is enabling a higher nitrogen based pricing and again in which we are then then working to drive our premium for software nutrition on top of that. So there is a play there, right, as a follow through on the nitrogen side. Relative to energy costs in Europe, to your point, it definitely does impact producers and other value chains in which we operate when we think about the chemical intermediates, peers that are producing pheno acetone in the region as well as certainly cabrolactin and nylon.

And so we continue to see that that impacts their utilization rates. And as we've seen in nylon, that continues to attract import from Asia and China because of where they sit on on the cost curve. So I think the dynamic has remained the same. It may just be sort of an amplification just given the current energy prices.

Okay. And again on ammonium sulfate, but you The improved sulfur values implied or direct on ammonium sulfate. And I'm just wondering I mean, there are very few fertilizer products that include sulfur directly, but in the domestic market, what is the most competitive way of providing that incremental sulfur, let's say, to a fertilizer blend, is that just elemental sulfur? Or is there another way that the channel gets sulfur they need other than through yours or someone else ammonium sulfate product?

Yes, there certainly are alternatives. Element of sulfur is the one as you point out, but when you just look at the sulfate form of sulfur that we provide, certainly it's the best option sort of pound for pound to deliver the attrition that the plants require elemental sulfur comparison has just different types of issues and becoming plan available from a timing standpoint because it has oxidized in the soil, which is slow, right? So again, we go back to sort of the years of field research the education that we spend with retailers and growers into the value chain, that AS certainly is, again, pound for pound, the best for software nutrition available.

Okay. No, thank you. Yes, and I knew there would be agronomic benefits based on the form of the sulfur. Question on nylon. But you did call out increased competitive pressures. And I was hoping you might be able to just add a little bit more color there. So is this the case where I don't know, the sloppy marketing is maybe showing up in the form of extra spot product availability or is this the type of thing where maybe there's competition in unexpected kind of end markets where you're having to defend some maybe long held contract business. But and I guess I'm asking that as kind of a metric for whether this is something that might last a quarter or two or whether it's maybe more structural. But if you could maybe just touch on where the increase competitive pressures in the domestic market are [indiscernible] [indiscernible] Sure.

You think just sort of kind of the standard sort of supply demand fundamentals, demand has been relatively stable, right? I think it's mix across the end markets relative to where it sits from, let's say, history or pre COVID levels. Fiber and filament is down and during stable given kind of where the value chains exist today. The big difference between 2024 and 2025 is we were transparent in our operational disruptions North American competitor had several force majeure as well last year. And so the supply side was a bit tighter domestically. Certainly, we saw imports continuing to supply, right? So I think it's a natural consideration of where folks are establishing and looking to either gain or defend share as you say in the in the year given sort of that fundamental change. Relative to timing, Dave, I think what we wanted to clarify in remarks is that Clearly this chain is dealing with persistent oversupply. And we need to continue to watch, I think, third party views are that it's reached a point like in many other value chains, right, where ultimately some restructuring, some exits have to take place here. And we I would note there were recent announcements Uwe is a large multinational operating in the space is going to seize production of capital actum and nylon in Japan by March of twenty twenty seven.

They're going to remain running their their plant in Spain. Solana in The Czech Republic is exiting capital lactam by mid-twenty twenty five. So there's some start These two announcements are not fully restructuring, but I think this is where we're always been watching it And so again, hence sort of our commentary that this is going to be a slower recovery Then perhaps we had previously anticipated.

Okay, very good. And then maybe just the last one for me. But you've called out the positive outlook for your fertilizer products sold into the ag ag markets. You also make some chemicals that end up in crop chemicals and pesticides and whatnot. Would you say the outlook for that portion of your business is also as robust or positive or not not tracking, but how might your broader ag portfolio be doing above and beyond the ammonium sulfate? [indiscernible] we do certainly see kind of a continued challenge in the ag chemical space I think that there's challenges that might see similar sentiment from others, although it's kind of mixed depending on perhaps what chemical you you are operating in and where you sit. So So we continue to contend with low price competition in China certain markets. Particularly in our means business. So this is an area where certainly we see our downstream customers who are taking our products and transforming into glyphosate type products are also experiencing some challenges. So this is a space we continue to perhaps see lag relative to the positive trends we're seeing in the dry fertilizer space.

Okay, terrific. That's it for me. Thank you very much. Thanks, David. The next question is a follow-up question from Charles Neibert with Piper Sandler.

Please go ahead.

Yes, just on a quick thing, you were talking about nylon production in China maintaining a fairly high level despite issues in their economy. Has that created anything or any sort of additional competition for you guys or seeing any extra product from the AS side since they are running a lot of capital as well?

To run the nylon has that created any issues in any particular markets or you're just not seeing anything at this point?

Certainly, all of that capitalaxan production does come with ammonium sulfate output as you [indiscernible] Albeit it comes out at a different ratio, but China has been primarily focused on the Brazil market. And so we have continued to see increasing exports there and their focus there and as a reminder we do have the antidumping in The U. S. Here. So obviously, when you look at sort of the two largest markets that exist today, They are focused there and that enables us to continue to grow here in North America.

All right. That's it for me. Thank you. Great. Thanks, Charlie.

Thank you. This concludes our question and answer session. I will now turn the call back over to Aaron Kane for closing remarks.

Thank you all again for your time and interest this morning. Looking forward, we are confident in our demonstrated ability to perform through a multitude of environments. We are well positioned to deliver improved earnings performance year over year supported by our resilient business model our position as a diversified chemistry company and our strategic growth focus.

We are confident in our strategies to support higher 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 your lines.