Good day and welcome to the AdvanSix Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Adam Kressel, President of Investor Relations and Treasurer. Please go ahead.

Thank you, Dave. Good morning and welcome to AdvanSix's second quarter 2022 earnings conference call. With me here today are President and CEO, Erin Kane and Senior Vice President and CFO, Michael Preston. This call and webcast, including any non-GAAP reconciliations are available on our website at investors.advansix.com. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our business as we see it today. Those elements can change and the actual results could differ materially from those projected. And we ask that you consider them in that light. We refer you to the forward-looking statements included in our press release and earnings presentation. In addition, we identify the principle risks and uncertainties that affect our performance in our SEC filings, including our annual report on Form 10-K as further updated in subsequent filings with the SEC. This morning, we will review our financial results for the second quarter of 2022 and share our outlook for our key product lines and end markets. Finally, we'll leave time for your questions at the end. So with that, I'll turn the call over to AdvanSix's President and CEO Erin Kane.

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 robust second quarter results capping off a strong first half of 2022. Let me share a few highlights on slide three before Mike covers the details of our financials in a moment. The second quarter results reflected top and bottom line growth, sequentially end year over year. Strong commercial performance to meet customer demand more than offset higher inflation, as well as lower sales volume, primarily due to unfavorable weather conditions, driving a reduction of in-season fertilizer demand. The strength and advantage of our business model and diverse product portfolio and the continued execution to our long term strategies, again, enabled us to both navigate the challenges of supply chain and logistics disruptions, escalating raw material inputs and inflationary costs as well as to capitalize on resilient, underlying demand opportunities to deliver results this quarter. A healthy $78 million of free cash flow generated in the quarter reflects the quality of our earnings and supports our continued reinvestment in the business and return of cash to shareholders. This includes opportunistic share repurchases through July, as well as our announced 16% increase to our quarterly cash dividend for the third quarter. Our integration of US Amines is also progressing very well as expected, adding additional value to our portfolio. We continue to make meaningful progress on our sustainability initiatives and performance. We will soon publish our annual sustainability report, which highlights many of the ongoing initiatives happening around the organization integrated with our overall strategy. I encourage you all to take a read through it. And earlier this week, we were proud to announce that AdvanSix was recognized as a three-plus company with three or more women directors by 50-50 women on board. This recognition reinforces our commitment to equity, diversity, and inclusion at all levels. Our diverse end market exposure and competitive cost advantage provides resiliency, particularly in a global macro environment that is evolving real time. Looking forward, we expect continued healthy North America demand for nylon and chemical intermediates, as well as favorable underlying agriculture and nitrogen and fertilizer industry fundamentals into the 2023 planting season. In this environment, we are highly focused on executing what is in our control, including driving superior operational and commercial performance to meet the evolving needs of our customers, building capabilities to strengthen our innovation and portfolio resiliency, and enhancing our capital deployment. We are focused on driving best possible outcomes for our business in the current set of industry conditions and remain confident in our ability to target significant earnings growth in 2022 and build sustainable long term shareholder value. With that, I'll turn it over to Mike to discuss the financial details.

Thanks Erin. And good morning, everyone. I am now on slide four, where I'll highlight the second quarter, 2022 financial results. Overall, strong commercial execution supported significant sales earnings and cash flow growth. Sales totaled $584 million, up 33% compared to last year. Pricing was favorable by 32% comprised primarily of 26% higher market based pricing driven by our ammonium sulfate and nylon product lines. This was partially offset by lower pricing in chemical intermediates driven primarily by acetone, as we expected. To a lesser extent, raw material pass-through pricing contributed to 6% of top line growth, following a net cost increase in benzene appropriately. The acquisition of US Amines added approximately 5% to sales as well. Sales volume decreased approximately 4% driven primarily by unfavorable weather, driving a reduction of in-season fertilizer demand and lower production output, limiting supply of nylon resin and chemical intermediates compared to the prior year. Adjusted EBITDA was $105 million, an increase of approximately 32% versus the prior year. I'll walk through the key year of year variances on the next slide. Adjusted earnings per share of $2.30 was up approximately 40% versus the prior year. And finally, free cash flow reached $78 million and nearly doubled from the prior year. Cash flow from operations increased roughly $44 million year of year, primarily due to higher net income and the favorable impact of changes in working capital. CapEx of $18 million increased roughly $7 million year every year reflecting the timing of maintenance spend, as we expected. Now, let's turn to slide five. Here, we highlight a few of the key drivers of our second quarter adjusted EBITDA performance year over year. Pricing over raw materials was a $57 million benefit as we once again drove strong commercial execution to capture higher pricing. Tracking…

Discuss each of our key product lines. Starting with nylon, we've seen price raw spreads modestly improve in the second quarter sequentially, relative to the first quarter of 2022 led by North America and Europe. The global cost curve has remained steep in this current energy environment with input cost continuing to rise, which has supported spreads relatively in line with marginal producer economics. In North America, where we primarily participate, we have seen pricing and spread fare better as reflected in the global composite seen on the chart here, outperforming the Asia benchmarks on a year-over-year basis. From an end market perspective, the North American market dynamics remain largely consistent to what we have seen in the past several quarters, including resilient demand and snug industry supply conditions. Residential construction markets have slowed with the rise in interest rates. However, recovery in commercial continues where nylon6 carpet has a strong presence. We've also seen packaging and engineering plastic resins demand remains steady. We know this portfolio is more sensitive to consumer demand, particularly for an engineered plastics resins. While we expect regional demand on balance to remain healthy, we are monitoring for lines of slow down in areas like consumer durable goods. Moving to ammonium sulfate, strong underlying ag fundamentals alongside elevated energy input costs drove significantly higher nutrient values in the second quarter on a year-over-year basis. As we shared previously, we did experience a compressed season due to weather, which led to in-season demand declines for most plant nutrients across much of the US. Despite some heightened macro uncertainty in the near term, overall underlying agricultural industry fundamentals remain favorable heading into the 2023 planting season, supported by among other items, crop prices, stocks-to-use ratios, nitrogen fertilizer supply as well as continued duties on imports from China.…

Thanks, Erin. Dave, can you please open the line for questions?

[Operator Instructions]. The first question comes from Vincent Anderson with Stifel. Please go ahead with your question.

Good morning. Is there anything to read into the higher sales growth and nylon relative to capro again this quarter just given they're both effectively priced off benzene?

No, nothing to read into there, Vincent. I would highlight that we do continue to benefit from pass-through pricing in nylon on the top line, but certainly the top line sales growth was achieved, again with the keen focus aligned to the regional supply-demand dynamics and to really capture the inflationary input costs and increasing focus on value-based pricing. The capro side has probably more formulaic, and the nylon has a bit more freely negotiated pricing.

Okay. That's good. And actually, just kind of carrying that line of thinking, over the last few years, you've generally been able to grow through headwinds in areas like automotive presumably just through higher and higher adoption of the new products you've brought to the market over that time. If we see kind of yet another round of headwinds for areas like automotive, like some of your peers are pointing out, how much confidence do you have in your current pipeline of leads to keep up that relative performance?

Yeah, so the focus here for nylon has been around mix optimization, enhanced portfolio resiliency. Again, we have sales into fiber and filament. Here again, we continue to see recovering demand in the commercial and hospitality markets. That is a key area, in which we continue to play and is an important consideration as we move forward and certainly ensure that value chains have the right inventory to supply there. On packaging, again, our demand has remained resilient there. Key barrier and durability performance characteristics. So we see that continuing. As you point out in engineered plastics, this is an area where we're working closely with our compounding customers in the auto consumer durable and electronic sub-segments. I think we have been much more diversified in the past in our focus, predominantly on the independent compounders to win. So broader reach, we we do have dedicated teams now, dedicated technical service folks and technical marketing. So I think we are in a position to, as always, navigate through that, but recognizing that we'll have to watch for signs and signals here of slowing growth and certainly recognize that- there are regional factors at play and while the North America region has fared favorably in the recent path that we have to be cognizant of the global considerations, which is probably where a little bit of what you're seeing in some of the other larger compounders as they think about the global dynamics that are happening in Asia and Europe.

Okay. That's helpful. And then turning over to fertilizers, I mean, we saw pretty sharp reversal in prices, pretty standard seasonally, probably had some help from the tough North American spring, but then if we're looking forward into the coming winter, it's not like things have really gotten much better from a supply side perspective. So I'm just wondering if you're willing to share anything at this stage about how you're thinking about approaching the pre-buying season, just given where prices are today versus where they were quite recently and kind of your outlook for supply-demand into early next year.

Yeah. So great question, as always, Vincent here. We opened our fill season targeting price level is consistent with our typical methodology, as we look at nitrogen nutrient values in our sulfur value proposition. Certainly, as you noted, the industry and the value chains are working through the seasonal reset coming off of a lighter spring. With us, I would say we were focused on the underlying fundamentals into next spring season. Again, as we discussed earlier, we do think it is highly supportive of strong, planted acres, robust nutrient values on supply-demand and energy input costs. The likely appreciation of crop prices, I would say it's a bit early for us to assess. I mean, this is a market that can move in weeks. So I think as we proceed forward, we'll certainly be prepared to share our thoughts as we report our Q3 earnings later in the year.

Okay. That's fair. If I could actually just tack on a procedural question then to that, can you maybe walk us through exactly how your fill season operates? Is this you basically posting a price and just seeing who will take it, or do you accept bids and then you will decide later how much of that volume you want to commit? Just kind of maybe walk us through procedurally how that works.

Yeah. So it's more probably straightforward. We post our open prices. Here again, I'll say we're in the mid to high four hundreds, again, consistent with our typical methodology. And we begin building our order book. We effectively watch how that fills up. We can extend the consideration year on year. There are a lot of factors that go into it, but we are accepting orders and moving forward into the fall season.

Okay, excellent. Thank you.

Our next question comes from David Silver with CL King. Please go ahead with your question. Go ahead, David.

All right. Am I coming through now?

Yes.

Okay, great. I just wanted to mention I had to join a little bit late, so I apologize if I'm going to be making you repeat yourself. So there's been a question I think about nylon related to benzene, and there's been a question about, I guess, the impact of, I guess, the still very elevated natural gas situation in Europe and certain other markets. And I'm wondering from your perspective, Erin, if you see the exceptionally high natural gas costs in Europe, not so much affecting fertilizer production. I think that's pretty well established, but what are you seeing on the nylon and caprolactam side? So in other words, a lot of, at least a couple of nylon producers there have highly integrated production complexes, multiple products. And at the beginning or near the beginning is ammonia. So Germany is obviously one market, but there are some others, but is it your opinion that this unusual natural gas situation in Europe is going to reduce the global supply of nylon or can the producers kind of alter their global networks to offset it? I mean pluses and minuses, but how do you see the supply for nylon and caprolactam responding to the current situation in natural gas and maybe any other raw materials?

Sure. And thanks for that question, David. As you note, certainly, natural gas, energy right across the board has steepened all the cost curves. Europe is the marginal producer for caprolactam at this time. And certainly, coupled, as you know, with the energy supply considerations, have impacted their operating rates. And they are also beginning to influence trade flows globally. Caprolactam operating rates in the US by comparison are around 90%, whereas they sit probably closer to 60% in Europe and about 65% to 70% in Asia. When we think about the regional structures, in nylon, the US is primarily balanced. Europe is structurally long. We would note that the current cost structure is much higher than potentially landed imports from Asia. So I think we are at a point of watching for where typical trade flow positions could shift, I think, on how the demand signal evolves and certainly with the global networks and the global over capacity that sits naturally in caprolactam and nylon that I think as the dynamic plays out in Europe, volumes could flow in different directions to compensate.

Okay, great. And if I could follow up, I think, on the comment that was made about the $50 million kind of discretionary list of projects that you could tackle, I was wondering if you might be willing to share a little bit of color on where those opportunities might lie. I mean, as I recall, you had coming- shortly after you became public, you launched the $150 million program that was, I guess, focused on your legacy facilities. I'm guessing some of the next wave of discretionary spend might focus on your acquired assets or maybe some targeted areas in new product development. So any color you might share would be helpful. Thank you.

Sure. I think you're thinking about it right. Certainly, as we have shared, we tackled a number of large projects out of the gate, out of our original pipeline. So the size of the products now tend to be smaller in nature. At our core facilities, they are focused on things like energy cost yield. We continue to refine our outlook on a roadmap for expanded granular ammonium sulfate conversion. We continue to refine projects that will allow expansion of sales growth over time in products like our cyclohexanone, solvents and high purity solvents there. And as you say, we've been hard at work on a pipeline of opportunities for the US Amines acquisition. And certainly, part of our ability to target that doubling of EBITDA in the next three to five years will require some projects as well. Again, these will be smaller in nature. They won't be sort of the $20 million, $30 million as they sit today and continue to work themselves through the engineering process. And so I think it's again a nice way for us to drive growth, but also just sort of core based underlying earning.

Okay, great. Last question would be about capital deployment. So I personally was very pleased to see the increase in the dividend. I tend to believe that'll reduce the volatility of your stock over time. I'll probably eat those words tomorrow or the next day, but over time, I think shareholders will reward you for that. But I wanted to pick up maybe on the comment about "opportunistic" share prices. Your stocks really moved within a wide range over time. And I'm just wondering if you could maybe- if you have some rules of thumb or some guidepost that you might offer on what AdvanSix considers opportunistic in the context of share repurchase. Thank you.

David, we're going to, as you point out, deploy an opportunistic approach. Obviously, there are other considerations around when we could do the share repurchases, the amounts subject to certain reviews and information we have. So that is a consideration for sure, but you've seen what we've done. We've certainly disclosed the amounts and the share prices that we repurchase at. And I think that could help give you sort of a guidepost on how we think about things going forward. And again, we're just going to continue to be opportunistic. There are times where our share price does move around due to various different factors. And certainly, we like to have that opportunity to be opportunistic. We certainly have 50 million roughly of remaining authorization left to deploy and to use, and that will be our approach. And you'll continue to see that going forward here.

All right. Thank you very much. I appreciate it.

Again, if you have a question, please press star, then one. Our next question comes from Charles Neivert. Please go ahead with your question.

Quick question. Is there any opportunity to move some of the fertilizer product to Europe instead of South America? I mean, given Europe's exceptionally high cost and the fact probably cutting down a lot of the base products that are based off of ammonia and natural gas, or at least cutting back production significantly. Does that open any opportunities for Europe? And if Europe were a market, would it take the granular or the more standard product?

Yeah, it's certainly something to watch, Charlie. At current, Europe does and has historically exported portion of its ammonium sulfate both into North America, as well as into the South America markets. Certainly, as operating rates have drawn back, we've seen that perhaps tighten up a bit, but we continue to look at the opportunity. It is predominantly more of, I would say, granular oriented market, given the investments that [indiscernible] and others have made over time to create that higher value form, but certainly something that we will continue to explore, particularly as we look at the Chinese growth of sales of caprolactam into places like Brazil, where perhaps they're not even covering nutrient values as a consideration. Probably limited imports historically, but as you say, dynamics could change, right? So we'll stay nimble and agile and are looking at it.

And then sort of associated with that, have you seen any issues in Europe again, since capro is sort of, if you walk it back, you know, so has some natural gas basing to it, has that affected their ability to produce at all and therefore again, given maybe potential opportunities going forward, or is it just basically lifted global pricing because their cost structure is now so high and that ultimately might [indiscernible]?

Yeah, so certainly, they've declined in their utilization rate. We see from the trade statistics, certainly that they've pulled out of export markets in a pretty significant way in certain places. So I think the question is, will it tilt any further? But certainly with Asia supply being in the middle of the cost curve, that gets back to a little bit of the commentary earlier where those pounds can get into Europe below the manufactured cost. So as the global dynamic for demand plays out in the next couple of months, we're going to have to watch to see what that does. So it lifts certainly global prices, but as we've talked in the past that that global clearing price really gets set in Asia. And that's one that we have to watch closely as we proceed going forward.

Okay. In the last few weeks, maybe even less, there has been a really significant drop in the price of sulfur. Clearly, that's sort of part of the system you guys have to deal in. Is that going to give you any benefit and to what degree, or is there basically an automatic pass along for that price drop? Because I think it was pretty significant.

Yeah, no, we have seen a significant reduction in the pricing of sulfur and keep in mind, sulfur, when you look at it sequentially from the second quarter of the first, it was up 70%. So we're just going backwards from what has been a significant inflationary environment. In the second quarter, year over year, sulfur was up like 150%. So big numbers here. From what we've seen here, the price appears to have peaked here in the second quarter, and it is coming down sharply in the third. Some of that is fertilizer demand coming down a bit here as well as the demand from China reducing as well. And right now, it's dynamic, I would say. Certainly, the production of sulfur and the supply of sulfur has been pretty steady while we're starting to see the demand here tail off a bit, and we'll watch it. I mean, sulfur is a key consideration with respect to our raw materials right around that sort of 8% or 9% of our total direct material, but it is also incorporated as part of some of our formula contracts as well. So it would be an offset, but it's moving quite rapidly and we'll continue to monitor it very closely.

And on a completely different area, you guys talked about nylon packaging, and I know it's sort of a nice business for you guys. But given some of the movement in recycling in those programs and in some cases, companies like Dow and others have talked about trying to be more consistent through these multilayer packages and things like that so that a package is easily recyclable. Is that going to present any issues for nylon if it's sort of part of a larger packaging system, or is it just typically done on its own, not in layers and therefore recycling's not really- other people's recycling issues and changes in packaging is not going to be an issue for you guys?

No, it is certainly a long term trend that we have to watch and dive deeply in with our customers, Charlie, just given the macro considerations. I mean, nylon can be used by itself. It also is used in multilayer packages as well. One of the reasons behind our launch of our postindustrial recycled a hundred percent PIR resin was to help our customers in this space meet some of their targets as well. But again, as we dive into innovation for circularity, innovation in this area, again, nylon is further up relative to the amount used compared to a number of the other core, large reins and films, but it's something that we'll have to certainly watch over the long term.

Okay. Thanks very much. I'll pass on.

Our last question comes from Vincent Anderson with Stifel. Please go ahead with your question.

Yeah, thanks. I just wanted to ask a couple quick ones on cost. So I guess just first, are you seeing any meaningful increase in just given where octane prices have gone or is this market still pretty stable aside from the benzene and propylene pass-through component?

Yeah, so majority of our is under contracts, and typically they're either one year or multiyear agreements and at the adders are determined at the time of the contract finalization. And so we're highly contracted coming into this year. However, when you look at it from a spot perspective, certainly given the sort of the tightness we've seen overall in the marketplace, cumin adders on a spot basis have gone up. But again, we're primarily active really with our contracted suppliers and that's where we get a majority are our cumin. So we don't necessarily feel that spot movement. And obviously as we go forward here, we'll continue to interact with our suppliers with respect to contracting and work through the adders going forward as we approach those renewals.

Okay. Perfect. And then I assume you don't want to break out the utility versus gas dollar increase in that earnings bridge. So maybe if you could just talk about the structure of your utilities contracts. Are those kind of annually negotiated or you just kind of paying some kind of large customer rate and maybe a reliability premium? Can you just talk about how?

Yeah, sure. The pricing of the utilities is it's really mostly driven by natural gas. There is also electricity rates in there as well. And as you can imagine, Vincent, our plants are pretty energy intensive and subject to moves. And what you saw really in the second quarter when you look sequentially what natural gas prices did, they were up roughly 50% from Q1 to Q2. And so that does get reflected in our purchase costs with respect to natural gas for utilities and flows through our plant spend. And so that is a variable component and what we've done is we've worked very hard to make sure that across our product lines, we have that in front of us and we're doing everything we can for the sort of non-formula customers and the spot business, push as hard as we can to make sure we recover those utility costs, which is what we're doing in addition to any other non-material inflation. We also saw inflation on transportation costs as well in the quarter, which we are working here to actively recover through the commercial actions we've seen. So that's how we're managing the inflation and we're doing a good job getting through it and being able to get those costs covered here through again, the commercial actions we're taking.

Okay, great. Yeah. So it sounds like, just think of it as natural gas and not worry too much about [indiscernible]. And then, last one, I promise. We don't talk too often about phenol, but you have some merchant tons and those spreads to benzene look like they've exploded recently. I'm just wondering if you could give us a little bit of insight there.

Yeah. Most of our phenol-, again, we're a much smaller player given the fact that nearly 80% of our phenol is produced for downstream consumption into into Hopewell for both caprolactam, nylon and higher value derivatives. Our contracts here and the customers we serve are on formula contracts. So certainly I think on a spot oriented basis, which perhaps some of the larger players would be participating in, that could be the case, but we think about our sales as being predominantly contracted and those contract considerations would've been set in the fall of last year.

Okay. All right. Helpful. Thank you.

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

Thank you all again for your time and interest this morning. We delivered robust results in the first half of 2022 and are hopeful you share our excitement about the opportunities that lie ahead. We are executing to a set of focus priorities, all of which are aligned to driving the critical measures that underpin achieving durable, free cashflow yield and top quartile conversion, compelling returns on capital and attractive total shareholder returns. It is certainly an exciting time in AdvanSix for all of our key stakeholders. So with that, we'll look forward to speaking with you again, next quarter. Stay safe and be well.

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