AdvanSix Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the AdvanSix First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Adam Kressel, Vice President, Investor Relations and Treasurer.

Operator

Please go ahead.

Speaker 1

Thank you, Betsy. Good morning, and welcome to AdvanSix's Q1 2023 earnings conference call. With me here today are President and CEO, Aaron Cain and Senior Vice President and CFO, Michael Preston. This call and webcast, including any non GAAP reconciliations, are available on our website at investors. Advan6.com.

Speaker 1

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 as further updated in subsequent filings with the SEC. This morning, we will review our financial results for the Q1 2023 and share our outlook for our key product lines and end markets.

Speaker 1

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.

Speaker 2

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 delivered solid earnings results in the quarter amid a continued dynamic macro environment and against a record Q1 in the prior year period. As a diversified chemistry company, our performance reflects the talents of our entire team, alongside the resilience of our integrated, efficient and cost advantaged business model. Our results were achieved in an environment that saw nitrogen fertilizer pricing reset year over year amid lower energy costs and improved supply.

Speaker 2

While down from last year's peak levels, ammonium sulfate value pricing remains robust. Headwinds in consumer durables And building construction end markets persist across portions of our nylon and chemical intermediates portfolio, while North American acetone supply and demand Continues to be balanced, supporting our performance. With confidence in the health of our balance sheet, We continued a disciplined deployment of capital in the quarter through increased capital expenditures and $18,000,000 of cash returned to shareholders in the form of share repurchases and dividends. We believe that AdvanSix offers a compelling investment thesis over the near, medium and long term. While we anticipate the challenges of an uncertain environment and expect demand weakness in certain market segments within our nylon and chemical intermediates product lines, we remain confident in our demonstrated ability to execute and perform through various macroeconomic cycles.

Speaker 2

We have meaningfully increased the earnings power of this business, and our healthy balance sheet supports performance in the current environment, while providing further optionality to deploy capital with a focus on maximizing shareholder value. Predominantly through increased conversion by approximately 200,000 tons per year. Now this project wins on multiple fronts as it is further targeting no net increase in energy consumption or emissions. We believe this investment will have a meaningful impact in helping to The world and is a win win for our customers as well as supporting our growth and sustainability initiatives. With sulfur demand remaining robust as a key nutrient supporting crop yields, we are committed to growing in this space.

Speaker 2

I'll note we have also applied for grant funding for Sustain from the USDA through the fertilizer production expansion program, supporting innovative domestic fertilizer production. Now lastly, before I have Mike discuss the financial details of the quarter, I wanted to take a brief moment to address the ongoing labor negotiations with our Hopewell South bargaining unit and associated economic strike. From the beginning of negotiations, We have endeavored to reach a contract through a transparent and good faith bargaining process to address the various needs brought forth by the union negotiations team. Our proposals maintain a market based, role specific wage approach, designed to ensure we are providing competitive wages to our employees, intended to improve attraction, retention and development of our workforce in order to support long term sustainable growth. Ahead of the bargaining process and consistent with historical practice, we developed robust contingency plans in the event of a work stoppage or strike.

Speaker 2

I'd like to thank our trained salary and contingent contract workers who have demonstrated an unwavering commitment to our customers and key stakeholders to ensure safe, stable and sustainable operations over the past several weeks. All parties are back at the bargaining table this week. We remain committed to continuing to bargain in good faith to reach a resolution to this situation. Now let me turn the call over to Mike.

Speaker 3

Well, thanks, Erin, and good morning, everyone. I'm now on Slide 4, where I'll provide a summary of the Q1 2023 financial results. Overall, solid results in the current environment and against a record prior year comparison. Sales of $401,000,000 decreased approximately percent in the Q1. Volume was down 9%, primarily driven by cautious buying behavior for ammonium sulfate Amid continued sequential nutrient pricing declines through the quarter ahead of the start of the domestic planting season.

Speaker 3

We also continue to see soft end market demand, particularly in consumer durables and building and construction, impacting portions of our nylon and chemical intermediates Pricing was unfavorable by 10% overall. Market based pricing declined 6%, Primarily reflecting lower ammonium sulfate pricing, while raw material pass through pricing was lower by 4%, following a net cost decrease in benzene and propylene. The acquisition of E. S. Means added approximately 3% to sales as well.

Speaker 3

Adjusted EBITDA was $65,000,000 I will highlight the key year over year variances on the next slide. Adjusted earnings per share was 1 tax rate was 21% in the quarter, down from 23.3% in the prior year, primarily reflecting a discrete adjustment in the quarter related to the vesting of equity compensation. I will note for the full year, we continue to expect an effective tax rate of approximately 24%. And finally, free cash flow was negative $23,000,000 in the quarter. Cash flow from operations of $2,000,000 decreased roughly $48,000,000 the prior year, primarily due to the unfavorable impact of changes in working capital, driven largely by the timing of Q mean payments and lower net income.

Speaker 3

Capital expenditures of $25,000,000 in the quarter increased $4,000,000 versus the prior year. Now let's turn to Slide 5. Here we highlight the key drivers of our Q1 adjusted EBITDA performance year over year. Pricing over raw materials was a $5,000,000 headwind. Tracking our key variable margin drivers, performance across our caprolactam and nylon portfolio over our key raws Was negative year over year, reflecting unfavorable supply and demand dynamics pressuring global pricing.

Speaker 3

Ammonium sulfate On a net price of our natural gas and sulfur basis was roughly neutral year over year as significantly lower pricing was largely offset By a reduction in input costs, reflecting strong commercial execution to capture our sulfur nutrient value proposition against the macro reset of nutrient values. And lastly, chemical intermediates price of overall spread was positive year over year, largely reflecting acetyl margin over propylene costs. Volume, including the impact of lower production, was approximately $15,000,000 unfavorable in the quarter. This largely reflects lower volume for ammonium sulfate as previously discussed and soft market conditions for our chemical intermediate products Tied to continued weak demand in building and construction and for consumer durables. We saw approximately $13,000,000 in higher costs, including Indirect spend inflation and plant spend primarily driven by additional maintenance expense and operational enhancements.

Speaker 3

While our utilization rates were not as robust as the prior year period, particularly at our Frankfurt Funeral plant, our integrated value chain and competitive cost position enables us to target running our plants at higher rates than the industry on average. Finally, all of items netted to roughly $5,000,000 unfavorable impact with higher SG and A costs reflecting upgrades to our enterprise resource planning systems and other functional support costs. Now let's turn to the next slide. On the left side of Page 6, we've shown our 1st quarter free cash flow, Which was unfavorably impacted by net working capital, driven largely by the timing of raw material payments as well as some impact basis driven by timing of payments, capital expenditures, plant turnarounds, our 4th quarter pre buy program amongst other items. I would highlight that over the last 12 months, our free cash flow yield is roughly 12% and our free cash flow conversion remains very strong at 92%, which reflects robust cash flow generation and quality of earnings our business model delivers.

Speaker 3

We've also maintained a very healthy return of cash to shareholders through share repurchases and dividends. As we look forward into the Q2, we do anticipate improvement in cash flow on a sequential basis compared to the Q1 of 23. We will however see the bulk of the impact from the unwinding of ammonium sulfate pre buy cash advances impacting our cash flow conversion in the second quarter. For the full year 2023, we continue to project CapEx spend to be approximately $110,000,000 to $120,000,000 This range reflects higher spend compared to 2022 to support critical infrastructure improvements, other maintenance, as well as additional growth in cost savings projects. Lastly, our 12 month net debt to EBITDA leverage ratio remains well below half a turn.

Speaker 3

So overall, We remain in a favorable position with our healthy balance sheet, supporting performance in an uncertain macro environment and providing further optionality to deploy

Speaker 2

Thanks, Mike. I'm now on Slide 7 to discuss each of our key product lines. Starting with nylon, We've seen global pricing pressured on the back of unfavorable supply and demand industry conditions. The Asia caprolactam over benzene spreads Average roughly $800 per ton in the Q1 of 2023, reaching levels that we haven't seen since 2020. The global composite price for all spreads underperformed the Asia spreads on a sequential basis from the 4th quarter As the slower growth Chinese economy is leading to excess supply moving to other regions, namely Europe at lower prices.

Speaker 2

From an end market perspective in North America, the fiber and filament space where we serve our carpet customers has seen continued slowdown in demand through the chain. Building and construction indicators on both the residential and commercial side have been lackluster. In Engineered Plastics, where we serve applications such as auto, consumer durables and other industrial goods. Margin compression has persisted with resin pricing falling more significantly than the change in raw material input costs. Lastly, Packaging, While a more resilient end use for our business has begun to see demand softness tied to inventory destocking and inflationary pressures, impacting buying behavior in certain applications like bone and meat and protective packaging.

Speaker 2

Moving to ammonium sulfate. In the lead up to the North American spring, we saw nitrogen fertilizer pricing declines in the quarter amid lower energy costs and increases in global supply availability. However, underlying agricultural industry fundamentals, including crop prices, farmer profitability, expected planted acres and stock to use ratios, Have continued to support strong nutrient demand as we have moved into the season. Now that we are in the thick of the spring application, we are seeing demand outpace immediate for a number of fertilizer offerings, which has bolstered and boosted the price for U. S.

Speaker 2

Urea in particular. So as we have noted in the past, ammonium sulfate pricing tends to be less volatile than urea and has seen smaller price reductions through the winter. However, we have seen AS pricing tick up a bit in recent weeks as well on strong demand, and we are working to serve our key plant nutrients as the season progresses. And lastly, turning to chemical intermediates. Industry realized acetone prices over refinery grade propylene costs Continued to improve year over year in the Q1.

Speaker 2

While acetone demand downstream has seen some softness into the large fire end applications And we've navigated some industry plant turnarounds. We see supply is generally balanced. This has been supported by stable acetone imports into the U. S. Persistent lower phenol global rates global operating rates on reduced demand again into the markets like building construction and other industrial applications we've mentioned.

Speaker 2

Propylene costs have seen some movement higher, particularly in March, but spreads have remained steady given the supply and demand conditions I just highlighted. Our integrated operating model continues to serve us well in industry dynamics like these. Let's turn to the next slide. Underpinning our success at AdvanSix is our commitment to sustainability, and we continue to strengthen the linkage between our ESG performance and our corporate strategic priorities. On the environmental front, we have improved operational alignment to achieve meaningful reductions with respect to our carbon footprint, emissions, energy usage and water stewardship and are developing strategies for delivering the next set of step change in our impact.

Speaker 2

Importantly, we are completing our initial lifecycle assessment to establish the cradle to gate footprints for our products that our customers are requesting to help meet their decarbonization goals. We've highlighted today our granular ammonium sulfate expansion, which in addition to the other benefits I mentioned earlier, also represents a major step forward in sustainable water usage with an expected reduction at our Hopewell site of approximately 10%. Our people remain our greatest asset in the foundation of the enterprise. We are executing initiatives to drive a 0 incident safety mindset and progress on equity, diversity and inclusion at all levels of our organization, we can attract and retain the best talent that reflects the communities in which we operate to deliver on our promise and priorities. By the end of this year, we will have 13 scholars sponsored under the Future of STEM Scholars Initiative or FASI Scholarship Program, with about 60% of our current scholars joining us as summer interns.

Speaker 2

We have also implemented a governance framework serving to ensure accountability, oversight and robust ESG reporting and performance across all indicators. As we've been progressing our maturity in this arena, we're pleased to be recognized by a number of third party organizations for our commitment to corporate social responsibility, including our 2nd consecutive platinum rating by Ecovadis, positive recognition by CDP for Environmental Management And Public Company Board of the Year by the National Association of Corporate Directors, New Jersey Chapter among other recognitions and awards. Let's turn to Slide 9. Now our outlook for 2023 remains largely consistent to what we have shared previously. We continue to expect performance this year to demonstrate the resilience of our business model and our ability to navigate through the challenges of an uncertain environment.

Speaker 2

We expect favorable underlying agricultural and fertilizer industry fundamentals to support a robust planting and application season. As such, we anticipate improvement in ammonium sulfate domestic sales volume to increase in the Q2, albeit in a lower nitrogen and raw material pricing environment. North American acetone supply and demand conditions remain balanced given lower phenol industry operating rates globally, While headwinds in consumer durables and building construction end markets persist across our nylon and other chemical intermediates product lines. This is expected to continue having implications for both volume and price. Operationally, we remain focused on safe, stable and sustainable performance and continue to target running our plants at disproportionately higher rates than the industry on average.

Speaker 2

Our expected CapEx and impact of Plan turnarounds remains unchanged. And lastly, we continue to expect our effective tax rate for the year to be approximately 24% and anticipate cash pension contributions to be approximately $0 to $5,000,000 following our 20 $20,000,000 contributions in 2022, bringing our defined benefit plan to a nearly fully funded status. Let me turn to Slide 10 and wrap up before moving to Q and A. As a diversified chemistry company, we take pride in our long legacy of success and our strong track record of serving as a trusted partner for our customers. With a diverse product portfolio that meets the evolving needs of multiple end markets and applications.

Speaker 2

It all starts with our essential chemistries that make innovation innovative solutions possible. The range of our end market exposure helps insulate the company from significant variability in any one product line as demonstrated by our results in several environments. Supplementing our exposure to diverse end use applications, we have enhanced our sales mix through our differentiated product portfolio and continue to make smart and disciplined investments Our assets to sustain and improve throughput and profitability. With this focus on through cycle profitability and upside from our deployment of capital, We continue to focus on increasing the earnings power of this business. We are executing to a set of focused priorities, all of which are aligned to driving the critical measures that underpin achieving durable free cash flow, yield and top quartile conversion, Compelling returns on capital and attractive long term shareholder returns.

Speaker 2

With that, Adam, let's move to Q and A.

Speaker 1

Great. Thanks, Aaron. Betsy, can you please open the line for questions?

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. The first question comes from Vincent Anderson with Stifel. Please go ahead.

Speaker 4

Good morning and nice job here. So

Speaker 2

Good morning, Vincent.

Speaker 4

Hi, guys. So I wanted to start with the granulation project, Aaron, just kind of what the It sounds like it might be a little bit of a slower rollout and I just wanted to know if there's anything we should be thinking about with regards to the Hopewell footprint, if is maybe some downtime to squeeze any of that equipment in there.

Speaker 2

Yes. No, certainly and happy to expand a bit more and This is an exciting day for us. As you know, this is an important area for us and we've had Opportunities to look at a variety of ways to think about our conversion. This program allows us to aggregate a number of projects And think about this expansion project over the next few years. And so as you pointed out, It's not a one big project, one big bang.

Speaker 2

So we will be seeing benefits Move forward with increased production capability next year and sort of full completion of the set of aggregate projects Probably in the 2026 to 2027 timeframe. Again, in program projects are in different stages. We continue to work the engineering of them and they have different kind of shapes and sizes. So we thought it was important to pull them together in a multiyear investment. And as we progress, We'll continue to give you all some further transparency to that.

Speaker 2

And as you say, we have to align the engineering to But not everything will require a significant turnaround, if you will, based on how we're thinking about it.

Speaker 4

Got you. Okay, super helpful. And then kind of sticking with ammonium sulfate, the U. S. Is stabilizing a bit, but Brazil prices are still just The calamity and now we're seeing Chinese urea exports pick up a little bit, albeit off a low base.

Speaker 4

I guess Tying that into the overall Chinese Capro Industry, is there do you have a current view of maybe the total system profitability for the Chinese Players just given this rapidly disappearing co product revenue of theirs that they've been dumping into Brazil?

Speaker 2

Yes. When you think about the price points that we mentioned and them operating now at around $800 a ton spread, We would put this back into the line at more of a variable sort of breakeven or Versus a fully disciplined total cash costs approach, it's certainly influencing the pricing in Europe, which now That's on top of European cash costs. So it is we're seeing a bit of that behavior, I think, just with the length that they're experiencing. Operating rates in China are probably approximated about 70% to 75%. Europe is still depressed at around 50.

Speaker 2

So I think as you know, all of these things are Come into play with where they effectively price into the market. So watching the recovery certainly in China and their growth is important here.

Speaker 4

Okay. Yes, that's a helpful data point. I think Typically, they tend to revert back to around 60%, 65%. So I guess we'll see how that goes. In terms of nylon demand, have you seen enough demand decline yet, whether just destocking in carpet or industrial To have to begin shipping more capro proportionately?

Speaker 4

Or are you still able to place all of your nylon today?

Speaker 2

Yes. So in the environment, our View here is again with our capitalactam cost position, right, targeting again those dips for personal rates, which We continue to seek and target to achieve. In nylon, where we have seen the softness, We're using that opportunity now to, I would say, replenish and rebuild good inventory levels. I think you had asked us A quarter ago, how we might think about that. Over the course of the last couple of years, right, we covered other industry force measures.

Speaker 2

We had some of our own operational view. So as we're running well, we're reestablishing healthy levels of inventory, so we feel good about our position. And then we have started to export some caprolactam where the market provides those opportunities. Again, our cost position allows us to do that, but again, keep our assets full, get ourselves in good shape and then seek Those opportunities that we always have done during these time frames.

Speaker 4

All right, excellent. And then I want to sneak one last one in here and I'll give someone else a turn. But one of the big compounders pointed out the bead program in the infrastructure bill, which is it's stoling out something like $40,000,000,000 over the next few years to expand high speed Internet coverage. So my two questions on that are first, does your wire and cable business include fiber optic cable lines? And then assuming yes, If we were to see significant increase in demand from that product from that market over the next 4 to 5 years, is there anything we need to start thinking about From an incremental capacity perspective or can you shift as much of your nylon production to wire and cable as is necessary?

Speaker 2

Great question. And certainly all of these infrastructure programs and grants Of interest to our customers, to ourselves, but at current, we do not play into the applications into fiber optics. Most of our wiring cable is more feeder line for buildings, but noted. But right now, I think that's And probably not a direct opportunity set for Nylon.

Speaker 4

Okay. Thank you.

Operator

The next question comes from David Silver with CL King. Please go ahead.

Speaker 5

Yes. Hi, good morning.

Speaker 6

Good morning. Good morning.

Speaker 5

Yes. So I have a scatter of questions I think I'd like to start with the Hopewell South issue, if you don't mind. And you've been very clear about your stance including in the Press release today. But I was wondering if you could provide a little bit of historical background, Aaron, in since your long association with these assets. But just a couple of things.

Speaker 5

But firstly, what is the longer term You know, history was bargaining with Hopewell South. In other words, is this the first strike in a long time or A short time, is the Hopewell Self Bargaining Unit a recent creation? And then More to the point, when I read your releases, I see that the bargaining unit is comprised of, I don't know, maybe half a dozen different Units or separate unions. And I'm just wondering if that complicates Getting to a solution. In other words, if something's acceptable to the Triple workers and the food and commercial workers, but not to the journeyman pipe fitters.

Speaker 5

Does that prevent a solution or are the different Groups committed to voting together and agreeing with what the majority goes Going along with what the majority agrees with. So in other words, just maybe a little bit background on this and How we can assess maybe the duration and potential longer term impact as this Is labor situation continues? Thank you.

Speaker 2

Sure. So let me You know, share a little bit of context here as you've asked for and relative to where we sit. So I would characterize With our unions across the entire enterprise is good. We have a long history of renewals and extensions and Replications across the board. In Hopewell South in particular, the last strike was in 1987.

Speaker 2

So to your point, it has been 36 years since we have seen and arrived As you note, the Hopewell South bargaining unit is comprised of 4 separate unions. And when we think of this contract, our goal, right, We've been looking to achieve more unity by providing an equitable contract with wages that are competitive for all, not just for a segment of the union population. And so to your point, right, there is the current state of affairs and that's what we're trying to achieve. And Within the current state of affairs, we have to move. Again, we want to ensure that all roles have the ability to be paid to market competitive position, while we then need to maintain those groups that are already well positioned in the market.

Speaker 2

So that does present a different approach to what is necessary for the long term Vision of this company to attract, retain and provide progression for our workforce. So as you'd note and I'll let you peel back. There is a level of difference, right, in the approach here to accomplish those goals. So I'll pause

Speaker 5

there. Okay, great. And then just to follow-up, I mean, just a Couple of things, but you've assembled a contingent workforce. And I just wanted to clarify, but in your assessment that Contingent workforce can maintain safe and efficient operations of the Hopewell South indefinitely. Is that your okay.

Speaker 2

Yes. So we can I can provide some more color there too? Right, Our salaried and contingent workforce is comprised of, AdvanSix employees as well as our partner contractors, As well as contingent workers that we bring in and train. I can share it was down on Monday Myself, I can assure certainly based on what I saw and the time spent, this is a Collective team that is committed to serving our customers at this time. I would share they ran the plant Well in April, and we have a collaborative, engaged, empowered learning environment, that is Committed to our success and driving really great progress here for ourselves and for our customers.

Speaker 5

Okay, very good. I'd like to switch over to the fertilizer business. So I was listening to the comments from another nitrogen fertilizer supplier On their conference call and one issue that cropped up, bad pun there. One issue that came up Was kind of an expansion or a widening of the coastal inland spreads. In other words, it's Getting much more costly to move product up the river and into from New Orleans up the rivers to the desired Mid Corn Belt Destinations.

Speaker 5

And I would say that your particular Positioning right on the Eastern Corn Belt gives you a kind of a nice advantage here at a very nice Time of year for something like that to happen. And you did mention in your remarks that after a long slide, A long period of lower prices, most recently you said ammonium sulfate has picked up. So I'm just wondering if that logistical bottleneck plays to your advantage. Have you been able Do you see that in your particular regions? Have you been able to exploit that?

Speaker 5

And what does that mean for maybe demand your incremental demand for your product through the balance of the spring planting season? Thank you.

Speaker 2

Sure. Maybe just re echo that, again, you can have more volatility perhaps in Dynamism right to pricing in urea than you can see in ammonium sulfate. When we think about The comments, I think those comments were certainly logistics costs have moved up, but I think the logistics constraints and what's happening The river is also creating a supply shortage as we talked about too on immediate supply that allows Pricing to move in different spots regionally as the season is progressive. The Midwest is pretty large. For us, we think about the Midwest to NOLA, we would say typically, we see about a $45 spread for AS in those regions.

Speaker 2

But as you know, we and we shared in the past, we predominantly rail from Virginia out into the Corn Belt. We've been working to position our product into the region as we go. So certainly as we're in the thick of it and planting is underway, we've been able to see a bit of an uptick and capture some price. But that's hopefully a little bit more color as to how we see that situation.

Speaker 5

Okay, great. Thank you for that. Next question, I did want to ask you About your assessment to date of the U. S. Amines acquisition.

Speaker 5

So I think it's a little over a year or just about a year Since that business was acquired. And I guess I was just hoping you could discuss a few things. I guess number 1, how you feel the integration has gone? And also maybe I remember, I believe Mike was talking about a lot of kind of attractive incremental opportunities on the site And things like that. So just kind of your 1 year anniversary assessment of US amines, Has it met your goals thus far?

Speaker 5

And in that, let's say, in that capital budget that you outlined here, What if anything pertains to the 2 locations that you acquired with US Ammies? Thanks.

Speaker 3

Dave, thanks for the question. And I will say we are very pleased with the US Means acquisition. Overall, the integration has gone Very, very well. They've been operationally and functionally integrated with the company. We also recently Graded their enterprise resource planning system to the latest generation of SAP.

Speaker 3

So we feel very good about that. Yes, and in terms of those attractive incremental opportunities for growth, we continue to explore those, Some requiring some incremental investment at the site to be able to produce certain products that Will be new, and those opportunities are coming to fruition. They do take some time for the

Speaker 5

business. Okay. That's great. Thank you very much.

Operator

Thanks, David. The next question comes from Charles Neuert with Piper Sandler. Please go ahead.

Speaker 6

Good morning, everyone. Just a couple of quick questions. 1, on ammonium sulfate, you're going to be moving a lot more to granular over time. How much of your total Sulfate will be able to become granular when you finish with these projects out in 2026, 2027 as you were talking about.

Speaker 2

Yes. When you think about how sort of the math works, right, so it's additional 200,000 tons, but that would approximate to a roughly 75% overall conversion.

Speaker 6

Okay. So when it's all said and done, you conceivably under the right circumstances are going to sell 75 granular, 25% what standard, I guess they call it, grade?

Speaker 2

Yes. It could be standard soluble. That's the opportunity that we also pull into our packaging business. There's mid grade. So there are other cuts that will come off of that.

Speaker 6

It's a 75% granular, the one I'm focused on at this point. Okay. And then in terms of the choice to make the expansion, I assume it's based on Demand coming from your existing customer base plus some other some operations you may be able To take on I mean it's not just to do it to have it, it's more like just we know we can sell it, so we're willing to spend the money to get the upgraded product. I mean, it's sort of you're sort of following a project that's following demand as opposed to the other way around?

Speaker 2

Correct. When we think about North American software demand growth, right, it has continued to grow and will continue to grow based on its value proposition. So, yes, this is very much a business case oriented approach. In aggregate, We are reaching the investment levels that we have been consistently sharing. And so these are Good projects, and it's time for us to move relative to supporting our customer base.

Speaker 6

Right. And then when you as you get to the full level of granularity, is there going to be a change in the mix of sales in terms of Regions? I mean basically the reason you had some of the mix you had in part was because the South American market didn't wasn't really buying as much Granular, I know that that is picking up, but do you anticipate the tonnages starting to shift around to be more U. S. Based and therefore You'll have inventory and try and again sell more into the U.

Speaker 6

S. On the seasonal basis that it runs or you're still going to continue to sell pretty Split up between U. S. And South America, mostly South America and just there's just more granular to South America now?

Speaker 2

Yes. No, it is to support the North American market. So over time, we would anticipate that mix to shift, that geographical mix.

Speaker 6

Okay. And then in terms of the project, obviously, part of what you said is there's an energy savings and things of that nature. I mean, are you walking through Other parts of your business is irrespective of which it is and looking for places to Cut costs along the energy lines. Is this something that sort of I mean, we did that with coal going to the gas, Boilers, that kind of stuff. Are there more projects potentially that could take down energy consumption over time?

Speaker 2

Yes. As we think about our life cycle assessments and where our product carbon footprint, I mean, all of that is tied to how we think about where we want to focus going forward. And so there's emissions, energy that inform our options set. So We're wrapping that up as I indicated that will allow us to do a complete set of analyses to really think about where and how we support our Customers, relative to their decarbonization goals. And then obviously, energy gives us a win win both on the cost and sustainability side.

Speaker 2

But there relative to that footprint, we've got to figure out where it is in that road map. But certainly relative to our ongoing operational excellence, These are areas that we continue to look at, but I would say probably in this case, because it's conversion, There's no really net increase in consumption of raw materials, energy and then obviously working hard to get the sustainability benefits associated with water.

Speaker 6

Last question on my side. If I'm looking for a signal or an indicator of maybe some improvement In a variety of different ways. And is it would one of those signals might be the pullback of Chinese exports To internal use, you start seeing China being less participating less, for instance, in the European market, which would be a signal that their own demand is picking up. Is that something we should be looking at or what other signals might we be looking at to sort of indicate a Coming improvement for Aptiny in the nylon and or sulfate business?

Speaker 2

Yes. I think it's a very good one that you point out. Right now with where their capacity utilization is And then certainly their exports, I mean, you can kind of look at both, what they're exporting directly, but then We would also kind of look at imports in the U. S. And in nylon, it's not necessarily imports of capri Actam or resin, but really the imports of the compounded products themselves as well.

Speaker 2

So I think the trade flow dynamic It's probably the 1st place that we would look relative to seeing an opportunity for those green shoots to start arriving.

Speaker 6

Okay. Well, that's it for me for today. Thanks.

Speaker 2

Okay. Thanks, Charlie.

Operator

Our final question today comes from Vincent Anderson with

Speaker 4

I just had a couple more super quick ones. Have you Seeing any of the destocking headwinds from the paint customers in your oxseems business? Or is that organic growth offset most of that pressure?

Speaker 2

Yes. We certainly in the European Paints and Coatings have seen that pressure, Vincent, certainly in Q4 and we're just now starting to see maybe a little bit of life coming back into that space. And then even in North America paints and coatings, we haven't yet seen a significant seasonal uptick that we would see. So it feels like a little bit Still to watch here, still to come.

Speaker 4

Okay, excellent. And then, you addressed most of my Aimmune's question or David Danically in the quarter, is that correct?

Speaker 3

Yes. So when we look at it, Vincent, from a a year over year perspective, we actually executed the closed the transaction rather late in Q1 last year. So year over year, most of that impact would just be sort of the acquisition Q1 to Q1 On an apples to apples basis. So that's what we see now. We'll have it obviously fully integrated in this year and our comparisons will be Fully organic as we move ahead.

Speaker 4

Okay. But on a pro form a basis, would it have been up In 1Q.

Speaker 2

Yes. It was we can come back on that one. Relative to the dynamics, remember, their main marketplace is Our main end markets here for us is in ag, right? So it's all the same dynamics. So I don't have that top of mind For you, but it would have seen the same considerations of a slower start relative into the herbicide space with rebounding coming here in Q2.

Speaker 2

So Adam can follow-up with you.

Speaker 4

Yes, no worries. And then last one, maybe a little left field for Michael here to keep him on So the granulation project, you mentioned potential USDA funding, which is interesting. Yes. But also just kind of looking at It's energy neutral. It's saving a lot of water.

Speaker 4

It's technically a co product rather than on purpose chemical fertilizer. And most of your Debt structure right now is a floating revolver line. Is there any thought here about green debt financing as part of maybe a broader review of your optimal capital structure and fixed versus floating debt?

Speaker 3

Yes. Certainly, That is an option out there and some companies have taken advantage of that with respect to sustainability investments at each of the And I will say that as we evaluate these opportunities, both for sustainability related investments as well as Growth and expansion projects, we do look at all options. And for us, as we looked at the opportunity with respect to USDA potential Funding in a grant, as well as the health of our balance sheet, we feel very comfortable with how we're funding this project.

Speaker 4

All right, great. That is all from me.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Erin Kane for any closing remarks.

Speaker 2

Terrific. Thank you all again for your time and interest this morning. Despite a dynamic set of industry conditions and a record comparison in the prior year, we delivered solid earnings results in the Q1 of 2023. Our diverse product portfolio and global low cost position continue to serve us well as we navigate the current environment. We feel very good about the strategies we've implemented, which continue to support expectations for Advanix's sustainable performance.

Speaker 2

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. You may now disconnect.

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Earnings Conference Call
AdvanSix Q1 2023
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