AdvanSix Inc (ASIX) 2018 Q1 法說會逐字稿

Good morning, and welcome to the AdvanSix First Quarter 2018 Earnings Conference Call. (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, Debbie. Good morning, and welcome to AdvanSix’ 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 website at investors.advan6.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 and 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' 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; captured the benefits of improved market pricing; and delivered higher free cash flow. Mike will detail the full results in a moment, though I'd like to highlight the following.

Sales were $359 million with higher pricing more than offset by volume declines related to the weather event. And EBITDA was $31 million, which included a roughly $30 million unfavorable impact from the unplanned interruption.

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 worked diligently to safely return our operations to standard as well as a tremendous collaboration and partnership our customers and suppliers offer during the quarter. We were successful in driving best possible outcome, as we navigated to an unprecedented weather event that resulted in the disruption to our operation. Although this event represented a significant financial consideration in the first quarter, the underlying business performance remain strong and our outlook intact.

This quarter, we continue to see favorable supply and demand environment for our product lines overall. As this is supported, it improves market-based pricing, particularly in our nylon and chemical intermediate businesses. In the fertilizer side of the business, we're seeing 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 planting season, impacting the timing of fertilizer application. We'll share more detail of outlook in a moment, but in general, we continue to anticipate a similar supply and 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 in output of our mechanical integrity and maintenance excellence programs 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 cost to our sites would have increased 1% versus the prior year, through a continuation of steady improvement we've seen in plant output.

We've just begun our plant spring plant turnaround and the full year schedule we represented previously remains intact. As a reminder, we continue to expect a $30 million to $35 million impact to pretax income across all of our manufacturing sites in total or in line with what we incurred in 2017 and consistent with historical levels. As we think about the evolution of our company as a stand-alone organization, we remain focused on building upon 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 costs, and we're maintaining a capital structure that enables 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 a high-return growth and cost-savings project pipeline, that will drive benefit starting in the second half of 2019.

Importantly, we have a healthy pipeline of 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 a $75 million share repurchase program. Our first share repurchase authorization reflects confidence in our continued cash flow generation. All of this, coupled with a significant benefit we expect from the recent passage of tax reform, further position us well. With our plants running 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 continued 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'm 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 a 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 a 2% favorable impact for market-based pricing and a 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 materials pass-through pricing, benzene and propylene increased modestly year-over-year, and as a reminder, both are oil derivatives and key inputs to our feedstock humin.

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 interruption 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 lost 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 a onetime write-off of financing fees associated with our lending 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 a roughly 1 point benefit in the tax rate. We expect to see more modest benefits associated with divesting of RSUs for the remainder -- for the remaining quarters in 2018.

Finally, the trend in free cash flow generation continue 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 products, and represented over 45% of our sales in the first quarter. By prior presentations, the chart on the right side of the page depicts the Asia benzene to caprolactam spreads and caprolactam to resin spreads, with the caprolactam price reflecting the Asia import contract in Taiwan and South Korea. We've also shown a global composite index, again, which encompasses benzene to caprolactam spreads across 4 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're going to see, we continue to see generally balanced to tighter supply conditions across North America and Europe. As we previously discussed, there were several planned and unplanned outages globally at the start of 2018, including our own, which kept industry supply tighter, overall. In China, government-imposed environmental constraints remain in place and have resulted in lower utilization, increased cost and further plant downtime. Availability of key feedstock materials have also been a challenge in this quarter.

So despite the market being structurally long, overall global nylon industry spreads have held up and continue to firm. In Asia, we have seen caprolactam pricing firm on balance 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 scheduled globally. In particular, it is expected that roughly 50% of the total capacity 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 for some of these projects and our balance against the continued 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 producer costs, and we continue to see steady nylon end market demand growth across the various applications we serve.

Let's turn to Slide 6. Moving to ammonium sulfate, which represented nearly 20% of our total sales in the quarter, we saw seasonal firming of 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%. As a reminder, our ammonium sulfate product is positioned with the added value proposition 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 2017. As for Corn Belt urea, industry prices in the first quarter saw a mid-single-digit improvement on both a year-over-year and sequential basis. As a reminder, urea is the largest nitrogen fertilizer by total consumption and tends to have an underlying influence in all of the nitrogen nutrient products. As a result of the same environmental policy considerations we've discussed impacting the nylon chain, we're seeing continuing reductions in China urea utilization, which most importantly, has impacted urea exports. The reduction into these Chinese exports works to balance out supply additions elsewhere, especially in the U.S., and has supported firmer global pricing.

Another phenomenon we're seeing play out in the early part of 2018 is the 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 fertilizer 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 spring season.

Lastly, we're monitoring 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 proper nutrition.

Let's turn to Slide 7 for an update on chemical intermediate. Our chemical intermediates business, which represented about 35% of our total sales in the quarter, provides revenue diversification from the variety of coproducts 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 intermediates' 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 use, such as building and construction, driving strong global operating rates and a resulting production of additional coproduct acetone. While we did see phenol and acetone industry supply rationalization in the U.S. near the end of the first quarter, we're 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 you're seeing demand remain relatively robust. As a reminder, our intermediate products are used as key inputs for a variety of end products, including 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, the chart on the left-hand side of the page 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 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 prioritize organic reinvestments in the business in the form of high return growth and cost savings CapEx and as 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 (sic) [$110 to $120 million]. 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, whether as more significant engineering to be had. Not all of these will come to fruition, but plenty of opportunity to generate incremental value for the company. As we've discussed previously, we plan to invest in incremental $20 million to $30 million towards high-return CapEx in 2018 that will bottleneck specific areas of our operations, optimize quality and improve our mix and cost position, overall. The 2 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 generally -- 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've discussed the impact from the weather-related production issue in the first quarter. As it relates to our planned turnaround schedule for 2018, we continue to expect a $30 million to $35 million impact to pretax income across all of our manufacturing sites in total. Given the circumstances of the unplanned downtime, we were fortunate that we're 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, 2/3 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 a $9 million to $10 million impact from planned turnaround in 2Q, following approximately a $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 a 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 13, 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 U.S. District Court of the Eastern District of Virginia, which requested documents related to the Hopewell facility's environmental air emissions and it's compliance under the previously disclosed 2013 consent decree. While we're still working to determine the exact reason and nature of these actions, we continue to cooperate fully with the authorities and are providing information and response to the subpoena.

We do not have any further updates to provide at this time, but I would like to reiterate that our plant production and cost to our sites was not affected by these events, and we continue to expect to operate safely plant going forward.

So with that Adam, let's move to Q&A.

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

(Operator Instructions) The first question comes from Chris Moore with CJS.

Maybe just real quick 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?

Sure, Chris. What I would share -- maybe just to reiterate to start that we do believe that the share authorization or the repurchase authorization truly reflects our confidence in continued cash flow generation and our commitment to continue to deliver value to our shareholders. What I would share that specific repurchases will be made time-to-time on the open market, 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 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.

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

Yes. When we look at the North American demand side, right, we continue to see robust consideration through the market, building 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 plastics, I think there are some things happening through automotive, although we do believe that lightweighting continues 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, right, 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 at both we and other participants did have challenges. So I think that always be -- could potentially be a wildcard 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 will be focused on.

Got it. Pricing was up 3%. 1% of that was the favorable impact from raw material pass-through. Do you see that likely continuing? Or what are you seeing on that front?

Yes. So Chris, as you know, we -- over 50% of our contracts are a form of a base. So we do a really nice job passing through changes of raw materials and we've shown that and demonstrated that normally 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. So -- 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 for nylon and capro.

Got it. Last question, really on the kind of growth CapEx. So there's 2 projects that roughly $50 million over the next '18 and '19. Then you talked about -- potentially, there are some bigger projects out there that would require more engineering. I wonder maybe just give a little bit of, maybe, a glimpse of what types of projects those might be?

Sure. There is quite a range inside that. Ranging from the ability to look at improving our buffers, right? So we've said we'll commence our operational events to growth, right, which is if you think about the full spectrum here. So in many cases, as we look through -- where our production ends up being caught and if had improved buffers, right, we can release more output. So there's projects that we're looking at in those realms. There are a number of projects that relate 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 and/or entitlement and looking at the opportunities to continue to push ourselves in that positive direction. So there are 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've talked about EZ-BLOX in our (inaudible) platform. So we'll continue to look at the need to expand there as well as with the other NPI projects that we have, how do we continue to support those as we progress through their commercial launches and buildouts.

(Operator Instructions) Our next question comes from Charles Neivert with Cowen.

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

No. I think, certainly, Q1 is confounded with the weather-related impact. So we're in a situation where certainly we were working to keep up. When 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 majeures, and again, continuing to see robust demand in that arena. Certainly, while there is residential builds that are improving, the commercial carpet tiles market continue to be growing at nice clips with those customers.

Okay. And then you mentioned that there was about a -- I think, it was a $2 million pull-forward of maintenance work because of the -- 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. No. No.

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.

Okay. It was just so to mention, but I wasn't sure if it was part of the numbers -- all the numbers you gave. Okay. 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 turns, so that they're basically not creating any further disruption to production? How do they sit -- both '18 and '19, obviously, costs in both periods?

Yes -- no, no. Great question. And it's our intent that they will not be adding to the projected turnaround schedule for 2019, that they will be worked on along side, but then tie-ins would be available to us during those outages.

Okay. 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 the differential between benzene, capro and Asia. Were 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 there was -- was there any period of time that you guys were able to collect on that, sort of, extremely large gap that existed briefly?

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

I ask 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 -- it was $200 or $300 a ton, although, brief. So I just wanted to make sure that wasn't really sort of part of the issue.

No, no, fair question.

(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 in our rigorous commitments, operational excellence, continuous enhancement of research and development capabilities and emphasis on longer-term growth-oriented investments. We have created a foundation that will position the company for strong and operational -- 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.