AdvanSix Inc. (ASIX) Q1 2018 Earnings Report, Transcript and Summary

Good morning. And welcome to the AdvanSix First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Adam Kressel, Director of Investor Relations. Please go ahead.

Thank you, Debby. Good morning. And welcome to AdvanSix’s first quarter 2018 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 Web site 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 way. We refer you to the forward-looking statements included in our press release and earnings presentation. In addition, we identify the principle risks and uncertainties that affect our performance in our SEC filings, including our annual report on Form 10-K. This morning, we’ll review our financial results for the first quarter 2018 and share with you 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.

Thanks, Adam and good morning everyone. Thank you for joining us and for your continued interest in AdvanSix. It was a dynamic first quarter to kick-off 2018. As you saw in our press release, AdvanSix especially navigated through the previously disclosed weather related production issue at our Hopewell Virginia facility, capture the benefits of improve market pricing and deliver higher free cash flow. Mike will detail the full results in a moment. So I would like to highlight the following. Sales were $359 million with higher pricing more than offset by volume declines related to the weather events, and EBITDA was $31 million, which included of roughly $30 million unfavorable impacts from the unplanned interruptions. We also generated over $13 million of free cash flow in the quarter, an increase of roughly $15 million over the prior year. These results continue to demonstrate the resiliency of our organization and the value proposition of our global cost advantage. I would like to once again expressly thank our employees who work diligently to safely return on operations to standards as well as the tremendous collaboration and partnership our customers and suppliers offer during the quarter, best possible outcome, as we navigated through an unprecedented weather event that resulted in the disruption to our operations. Although, these events represented a significant financial consideration in the first quarter, the underlying business performance remained strong and our outlook intact. This quarter we continue to see favorable supply and demand environment for our product lines overall. This has supported improved market based pricing, particularly in our nylon and chemical intermediate businesses. On the fertilizer side of the business, we’ve seen industry pricing seasonally firm through the quarter. However, the cold and wet weather across key growing regions in North America has driven a later start to the planning season, impacting the timing of fertilizer applications. We’ll share more detailed outlook in a moment. But in general, we continue to anticipate a similar supply in demand environment as we progress through the year. Our operational excellence and safe and stable production discipline are critical to our performance. We’ve been discussing the importance and output of our mechanical integrity and maintenance excellence program for several quarters now. This approach and the investments we’ve made are paying off. Taking the weather related headwind into consideration, plant production and costs to our site would have increased 1% versus the prior year, so a continuation of steady improvement we’ve seen in plant output. We’ve just begun our planned spring plant turnaround, and the full year schedule we presented previously remains intact. As a reminder, we continue to expect the $30 million to $35 million impact to pretax income across all of our manufacturing sites in total. We’re in line with what we occurred in 2017 and consistent with historical levels. As we think about the evolution of our company as a standalone organization, we remain focused on building upon on our core operational excellence with key growth oriented investments, targeting higher value products and application development. We’re also continuing to mature our capital deployment strategy. We announced in February that we amended our credit facility to an all revolver structure at lower borrowing cost, and we’re maintaining our capital structure that enable financial flexibility and optionality to drive further value for our shareholders. We’re deploying an incremental $20 million to $30 million of CapEx this year toward our high return growth and cost saving project pipeline that will drive benefit starting in the second half of 2019. Importantly, we have a healthy pipeline and investments that extend above and beyond these projects, which will position the company to drive incremental value over the long-term. Further, as you saw in the release this morning, our Board of Directors has authorized $75 million share repurchase program. Our first share repurchase authorization reflects confidence in our continued cash flow generation. All of this coupled with the significant benefits we expect in the recent passage of tax reform further position us well. With our plant turning at planned rates, we’re excited about the prospects for the remainder of 2018 and beyond. Our vertical integration and cost advantage position give us the confidence and flexibility to perform through dynamic market environment, and continue to provide a sound foundation for operational and financial improvement over the long-term. So with that, I’ll turn it over to Mike to discuss the details of the quarter.

Thanks, Erin, and good morning, everyone. I am now on Slide 4 where I’ll cover the first quarter financial results. Sales came in at $359 million, that’s down 5% compared to last year. Volume was down 8%, driven by 9% unfavorable impact from the weather related event in January due to record low temperatures at our sites in Virginia. Pricing was favorable by 3% overall and that included 2% favorable impact from market-based pricing and 1% benefit from the pass-through of higher raw material costs. We saw favorable industry supply and demand conditions in our nylon and chemical intermediates product lines. As for raw material pass-through pricing, benzene and propylene increased modestly year-over-year. And as a reminder, both our oil derivatives and key inputs to our feedstock came in. EBITDA of $31 million decreased $26 million versus the prior year, driven primarily by the weather event, partially offset by the favorable impact of market-based pricing. As we had previously communicated, the unplanned interruptions reduced pretax income in the first quarter of 2018 by approximately $30 million. That impact includes fixed cost absorption, repair and maintenance expenses, additional raw material costs, in addition to loss sales. Due to the impact of the weather event, net income and EPS also decreased on a year-over-year basis. Interest expense increased $1.6 million versus the prior year, driven by one time write off of financing fees associated with our amended credit facility, which was announced in February. The effective tax rate in the quarter was 23.5%, primarily reflecting the benefits of the Tax Cuts and Jobs Act. In addition, tax benefits associated with divesting of restricted stock units in the quarter drove roughly 1 point benefit in the tax rate. We expect to see more modest benefits associated with divesting of RCUs for the remaining quarters in 2018. Finally, the trend in free cash flow generation continued to improve. We generated approximately $30 million of free cash flow in the quarter, that’s up about $15 million from the prior year period. The increase year-over-year was primarily due to the favorable impact of changes in working capital and lower capital expenditures, partially offset by lower net income and a reduction in deferred taxes. Now, let me turn the call back over to Erin to discuss what we’re seeing in each of our product lines.

Thanks Mike. I’m now on Slide 5 to discuss our nylon product line, which includes our caprolactam resin and films product and represented over 45% of our sales in the first quarter. Like prior presentations, the chart on the right side of the page depicts the age of benzene to caprolactam spread and caprolactam to resin spread with the caprolactam price, reflecting the Asia import contracts in Taiwan and South Korea. We’ve also shown a global composite index again, which encompasses benzene and caprolactam spread across four regions; the U.S., Europe, China and the rest of Asia, and provides a weighted average view based on each region’s percentage of global caprolactam demand. As you can see, we continued to see generally balanced to tighter supply conditions across North America and Europe. And as we’ve previously discussed, there were several planned and unplanned outages globally at the start of 2018, including our own, which got industry supply tighter overall. In China, government imposed environmental constraints remain in place, and resulted in lower utilization, increased cost and further plant downtime. Availability of key feedstock materials have also been a challenge this quarter. So despite the market being structurally long, overall global nylon industry spreads have held up and continue to turn. In Asia, we have seen caprolactam pricing firm on balanced demand and supply. However, the sharp benzene swings in the prior year period have impacted year-over-year spread comparatives you may see on the right hand side. As we look forward to the second quarter, we expect global supply to remain snug, supporting industry spreads. There are once again a number of industry turnaround schedules globally. In particular, it is expected that roughly 50% of the total capital in China will be affected in some manner by plant turnarounds in the quarter. And while we continue to track potential capacity additions in the region, the timing remains uncertain to some of these projects and are balanced against to continue lower utilization we continue to see. Overall, the current favorable nylon industry conditions are expected to continue. Industry spreads have fluctuated near levels, we will continue to associate with marginal and producer costs, and we continue to see steady nylon end market demand growth across the various applications we serve. Let’s turn to slide six. Moving to ammonium sulfate, which represented nearly 20% of our total sales in the quarter. We saw seasonal firming in nitrogen prices in the early part of 2018. The graph on the right hand side plots urea and ammonium sulfate industry retail pricing on a nutrient basis. It’s always important to normalize pricing as urea contains 46% nitrogen, whereas ammonium sulfate contains 21%. And as a reminder, our ammonium sulfate product dispositions with their added value propositions of sulfur nutrition to increase yields of key crops. Based on third party data, we saw Corn Belt granular ammonium sulfate prices in the industry increase 5% on a year-over-year basis, while increasing 8% sequentially from the fourth quarter of 2017. As with Corn Belt urea, industry prices in the first quarter saw mid single-digit improvement on both a year-over-year and sequential basis. As a reminder, urea is a largest nitrogen fertilizer by total consumption intends to have an underlying influence in all other nitrogen nutrient products. As a result of the same environmental policy considerations we’ve discussed impacting the nylon change we’ve seen continuing reductions in China urea utilization, which most importantly has impacted urea exports. The reduction in these Chinese exports works to balance out the supply additions elsewhere, especially in the U.S. and has supported firmer global pricing. Another phenomenon we’ve seen payout in the early part of 2018 is a late start to the North America planting season due to the cold and wet weather in key regions. These delays have impacted the timing of fertilize application. However, we believe we’re well positioned to execute on spring demand, and we’ll remain agile as we move through the second quarter and the balance of the planting season. Lastly, we’re launching key indicators ahead of the fall season, including crop prices, supply and demand fundamentals and global trade flows, to name a few. The ag market environment remains dynamic and we’ll continue to stay focused on sustaining our ammonium sulfate value proposition on sulfur nutrition. Let's turn to Slide 7 for an update on chemical intermediates. Our chemical intermediates business, which represented about 35% of our total sales in the quarter, provides revenue diversification from the variety of co-products we sell. As we’ve done in the past, we’ve shown prices on the right-hand side of the page for refinery grade propylene and acetone based on third-party data. Prices for acetone, which represents roughly half of our chemical intermediate portfolio, will move with its own supply and demand dynamics that can also be influenced by underlying moves in propylene prices. In the quarter, we’ve seen phenol demand continue to strengthen globally, particularly in end uses such as building and construction, driving strong global operating rates in the resulting production of additional co-product acetone. While we did see phenol acetone industry supply rationalization in the U.S. at end of the first quarter, we are still seeing increased levels of acetone imports impacting regional pricing. Looking forward, we expect global markets for phenol and acetone to rebound with a shift in trade flows, and expect end market demand overall to remain favorable. With our vertical integration, we continue to fully utilize each unit operation of our broader supply chain, where we’re seeing demand remain relatively robust. As a reminder, our intermediate products are used as key inputs for a variety of end products, including in construction materials, paints and coatings and other industrial and consumer applications. Let me turn the call back over to Mike now to discuss cash flow.

Thanks Erin. I’m now on Slide 8. As we’ve previously shown with the chart on the left hand side of the page, it shows our cash flow from operations and also capital expenditures on a trailing 12 month basis, through the first quarter of 2018. And as you can see, we’ve maintained an improving trend in cash generation, while our capital investments have remained relatively steady. Improved free cash flow generation is expected to continue, and we do have several levers to drive that performance, such as improving earnings, efficient working capital performance and also higher value product mix. As our cash flow generation continues to improve, our capital deployment strategies continue to mature. We have prioritized organically investment into business in the form of high return growth and cost savings CapEx, and has a healthy pipeline of investment opportunities. In total, we’ve developed a pipeline of over 15 projects with potential spend in the $150 million to $200 million range. This pipeline consists of projects focused on cost savings, asset flexibility and improving plant buffers amongst other benefits. We also have larger potential projects in our pipeline that we’re evaluating where there is more significant engineering to be had. Not all of these will come to fruition but plenty of opportunities are generating incremental value for the company. As we’ve discussed previously, we plan to invest an incremental $20 million to $30 million towards high return CapEx in 2018, and we’ll debottleneck specific areas of our operations, optimize quality and improve our mix and cost position overall. The two projects we’re approving this year have capital appropriations north of $50 million, so we’ll see additional cash outflows in 2019 as these assets are placed into service. As Erin mentioned earlier, we’ll begin to see returns on these specific projects in the second half of next year. In addition, as Erin shared, we are very excited to announce this morning that our Board of Directors has authorized the company to repurchase up to 75 million of its common stock. That’s just another step to deliver value to our shareholders as we execute a disciplined capital deployment approach. Now let’s turn to Slide 9 for a quick recap of our outlook for 2018. Our outlook remains generally intact from what we shared with you last quarter. From a commercial perspective, we anticipate industry conditions to continue as we progress through the year overall. Operationally, we discussed the impact from the weather related production issue in the first quarter. As it relates to our plant turnaround scheduled for 2018, we continue to expect $30 million to $35 million impact to pre-tax income across all of our manufacturing sites in total. Given the circumstances of the unplanned downtime, we were fortunate that we were able to pull forward a modest amount of that work into the first quarter with the remainder of the turnaround schedule intact for the remainder of the year. Roughly two thirds of the full year impact is expected to be incurred in the third quarter with about 30% in the second quarter. Now this translates to $9 million to $10 million impact from plant turnaround in 2Q following approximately $2 million impact in the first quarter. As we look forward to the rest of 2018, we expect robust operational performance. Lastly, cash generation continues to be key focus area for us in 2018. And as I just discussed, with the expectation of ongoing strong working capital performance and tax reform continuing to have a favorable impact on net income and cash flow. We continue to expect our full year estimated effective tax rate to be approximately 25%, and the cash tax rate to be approximately 15% with the adoption of full expensing of CapEx following tax reform. We’re also executing on our pipeline of high return growth and cost savings CapEx projects that will drive future earnings and cash flow, while further expanding our capital deployment with the authorization of our new share repurchase program. So overall a lot to be excited about in the quarter and as we move forward through the rest of the year and beyond. Now let me turn the call back to Erin before we move to Q&A.

Great. Before moving to Q&A, I just wanted to take the opportunity to address the events that occurred at our Hopewell Facility back in mid-March. As you are aware, on March 13th, a federal search warrant was executed at our Hopewell plant. On the same day, the Company was served with a grand jury subpoena issued by the US District Court of the Eastern District of Virginia, which requested documents related to the Hopewell facility’s environmental air emissions, and it’s compliant under the previously disclosed 2013 consent decree. While we are still working to determine the exact reason and nature of these actions, we continue to cooperate fully with the authorities, and are providing information in response to subpoena. We do not have any further updates to provide at this time. But I would like reiterate that our plant production across our sites was not affected by these events, and we continue to expect to operate safely at plant, going forward. So with that, Adam, let’s move to Q&A.

All right. Thanks Erin. Debby, can you please open the line for Q&A?

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Chris Moore with CJS. Please go ahead.

Maybe just on the share repurchase, just with respect to the comments you just made on Hopewell. Do you need any further clarity with respect to those issues before you can actually begin implementing the share buyback program?

So I’d share -- maybe just to reiterate at the start that we do believe that the share authorization and the repurchase authorization truly reflects our confidence and continued cash flow generation, and our commitment to continue to deliver value to our shareholders. What I would share is that specific repurchases will be made time-to-time on the other markets, including through the use of a 10b5-1 trading plan. Of course, the size and timing of these repurchases will depend on a number of factors, including price, market and the economic conditions, legal considerations and other factors. So I think we’re in a good position and we look forward, and are pleased to have this lever available to the company.

So it looks like the nylon spreads remain attractive as you come into the second half of Q2. What are the wild cards that could change the current North American supply demand balance, both positively, negatively and in the second half?

When we look at the North American demand side, we continue to see robust considerations through the market, builder construction is doing well, carpet has been robust for us through the start of the year and that we expect will at least continue for the foreseeable future as we continue to talk with our customers there. Packaging is still growing as well, engineering and plastics. So I think there are some things happening through automotive. Although, we do believe that lightweighting continue to be a positive trend. I think that when you look at the supply side, there is the consideration that with the exit of Fibrant that has taken 25% of the capacity out of North America, it has brought the market into balance. And certainly, we saw snugness in Q1 as both we and other participants did have challenges. So I think that could potentially be a wild card transparently. But again, we expect that the work that we have been doing over a number of years continues to support our ability to soundly and safely and stably run our plants at continued higher output. And so that’s what we’ll be focused on.

The pricing was up 3% and 1% of that was favorable impact from raw material pass-through. Do you see that likely continuing or what are you seeing on that front?

Chris, as you know, over 50% of our contracts are form of a base, so we a really nice job passing through their changes in raw materials. And we’ve shown that and demonstrated that not only in Q1 but all of last year. It's difficult to predict where raw materials are going to go, going forward. A lot of it will depend on the price of oil and other factors as it relates to benzene and propylene overall. But as you look at Q1, the nice thing to see is that we did see not only that raw material pass-through, we also saw the market based pricing, which is again evidence of favorable industry supply demand conditions, particularly through the nylon and caprolactam.

Last question really on the growth CapEx, so there is two projects that roughly $50 million over the next '18 and '19. And you talked about -- potentially there’s some bigger projects out there that would require more engineering. I wondered maybe just give a little bit of -- maybe a glimpse of what types of projects those might be?

There is a quite a range inside that, ranging from the ability to look at improving our buffer. So we’ve said we’ll commence our operational event to growth, which as we think about the full spectrum here. So in many cases as we look through where our production ends up being caught and if we had improved buffers, we can release more output, so those projects that we’re looking at in those rounds. There are a number of projects as it relates to direct material yield, which again are great cost savings oriented projects as we continue to benchmark across all of our operations, how we’re operating against new builds under our entitlement and looking at the opportunities to continue to push ourselves in that positive direction. So there are a number of projects, both at Frankfurt and Hopewell that we’ll continue to look at there. As well as growth oriented projects and expansion of new platform. So we talked about EZ-Blox in our two [indiscernible] platform. So we’ll continue to look at the need to expand there. As well as with the other NCI projects that we have, how do we continue to support those as we progress through their commercial launches and build-out.

[Operator Instructions] Our next question comes from Charles Neivert with Cowen. Please go ahead.

Just a few quick things, one, you mentioned carpet markets. Was there anything in the first quarter from weather issues, we saw lot of construction base companies having weather issues. Was there anything that you think slowed down carpet during the quarter that might have affected your numbers a little bit?

I think certainly Q1 is compounded with the weather related impact. So we were in a situation where certainly we were working to keep up -- and you look at our sales certainly that was impacting the value chain through the mix. But we’ve been working to catch back up. And as we’re fully off the force majeure -- and again, continue to see robust demand in that arena. Certainly, while there is residential builds that are improving, the commercial carpet tile markets continue to be growing at nice puts with those customers.

And then you mentioned that there was about -- I think it was $2 million pull forward of the maintenance work, because of during the course of the outage. Was that part of the $30 million that you guys mentioned in terms of lost earnings or was that…

No, Charlie, that’s actually separate from the $30 million. So that would be related -- that’s within the $30 million to $35 million of 2018 turnaround costs.

It was just mentioned, but I wasn’t sure if it was part of the numbers -- all the numbers you gave. The projects that you guys are going to be working on over ’18 and ’19. Are they going to cause any production disruption beyond the normal maintenance trends or are they going to be done during maintenance turn, so that they’re basically not creating any further disruption to production. How do you base it, both ’18 and ’19 obviously cost in both periods?

Great question and it’s our intent that they will not be adding to the projected turnaround schedule for 2019 that they’ll be worked on alongside but then finance would be available to us during those outages.

And last there was a period I guess part of late last year and early this year, where there was a fairly large spike in differential between benzene, capro and Asia. Would you able to collect on any of that? I know it wasn’t very long lived and obviously probably during the course of the outage that created issues. But was there any period of time that you guys were able to collect on that extremely large gap that existed briefly?

No, I think we would just reiterate that again, we were able in the quarter to capture the benefit of the overall market based pricing. Certainly, as we navigated through the events, in the force majeure event is that would have limited our ability to capture spot oriented sales during that time. But we are pleased that even through the challenges that we had that we’re able to deliver fairly robust performance here in the quarter and to capture the market pricing that was available.

I asked only because if any of that was in there then obviously that would be hard to repeat, given -- like I said, it was a fairly extreme gap opening $200,000 or $300,000 a ton although brief. So I just want to make sure that wasn’t really part of the issue. Okay, great thanks very much.

Thank you [Operator Instructions]. At this time, there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Erin Kane for any closing remarks.

Thank you, Debbie. And thank you all again for your time and interest this morning. Our results this quarter again demonstrated our ability to navigate a dynamic environment and highlighted the resiliency of our organization. We have a focused strategy that we’re executing against, built on rigorous commitments to operational excellence, continuous enhancement of research and development capabilities and emphasis on longer term growth oriented investments. We’ve created a foundation that will position the company for strong operational and financial performance for years to come. We’ll look forward to speaking with you again next quarter. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.