Good morning, and welcome to the AdvanSix Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Adam Kressel, Vice President of Investor Relations. Please go ahead.

Thank you, Andrea. Good morning, and welcome to AdvanSix's fourth quarter 2023 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 principal 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 fourth quarter and full year 2023 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' 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 navigated a continued challenging end market environment to close out 2023. We maintained our focus on long-term priorities, including portfolio simplification in the year and further investment for improved through-cycle profitability. Our healthy balance sheet supported our performance as we maintained our organic investments and return of cash to shareholders. Core to our long-term strategy is accelerating growth in the most profitable areas of our portfolio, continuous improvement to strengthen the underlying earnings power of this business and sustaining our cost advantaged business model. While the nylon environment has been pressured by unfavorable global industry supply and demand conditions for several quarters now, we've continued to see resilient performance within our acetone portfolio and solid results from our Plant Nutrients business. We'll provide more color on our outlook for 2024 later in the call. So as we look forward, our focus is to perform in the current set of industry dynamics and to execute on the levers in our control, including soft discipline and working capital optimization that will be key mitigation to our operational headwinds as we have started the year. To support our long-term potential, it is also key that we invest to address enterprise risk mitigation, advance our IT platforms to achieve digital transformation and deliver growth through projects like our SUSTAIN program. Now let me turn the call over to Mike.

Okay. Thanks, Erin, and good morning, everyone. I'm now on Slide 4, where I'll provide a summary of the full year 2023 financials. Our results declined in 2023 against a record prior year. Sales were down 22%, primarily driven by pricing. Volume was flat overall pointing to the benefits of our diverse product portfolio and cost advantaged position. Adjusted EBITDA of $154 million was down 50% from the prior year, driven primarily by unfavorable market-based pricing net of raw material costs. We continue to focus on expanding the earnings power of our business and improving annual through-cycle profitability as evidenced by the resilient performance relative to prior troughs achieved in 2019 and 2016. Adjusted EPS was $2.14 per share. Our effective tax rate was 21.1% versus 23.9% in 2022, primarily driven by research tax credits and tax benefits related to the vesting of equity compensation. We anticipate our full year 2024 effective tax rate to be approximately 24%. Free cash flow declined year-over-year as a result of the lower net income and the unfavorable impact of changes in working capital as well as higher capital investments. Now let's turn to Slide 5 to discuss the fourth quarter performance. Sales with $382 million decreased approximately 5% versus the prior year. Market-based pricing was unfavorable by 22%. This primarily reflects reduced ammonium sulfate pricing amid low raw material input costs and a more stable global nitrogen supply environment, as well as lower nylon pricing. Raw material pass-through pricing was favorable by 1% as a result of a net cost increase in benzene and propylene. Sales volume increased approximately 16% in the quarter, primarily driven by higher export shipments in both ammonium sulfate and nylon. Adjusted EBITDA was approximately $15 million, down from $67 million in the prior year period. Pricing of raw…

Thanks, Mike. I'm now on Slide 6 to discuss each of our key product lines. Starting with nylon. While significant year-over-year declines in industry spreads continued through the fourth quarter, we did begin to see some stabilization and improvement sequentially of prior trough levels. While this is encouraging, we continue to see weak demand and varying regional dynamics and trade flows, resulting in the global composite underperforming the Asia benchmarks. We've seen - China's global nylon exports reach all-time highs in 2023 as their slower growth economy led to increased low-priced exports to the rest of the world. Here in North America, the higher interest rate environment has unfavorably impacted building and construction markets as well as consumer spending, impacting packaging applications. Consumer durables within the engineered plastics space has also remained weak, while all applications have been more resilient. As previously shared, for our business, we've seen a higher share of export sales, both caprolactam and nylon resin, which does come with a mixed consideration for our performance. While not at 4Q levels, our first half 2024 exports are expected to be higher year-over-year. In the fertilizer space, you've seen a multi-quarter reset in nitrogen pricing amid a more stable supply environment and lower energy costs. While we did see cautious buying behavior exiting the year, pricing did follow the initial fall fill in line with historical sequential averages. We remain confident that the underlying industry fundamentals supported by crop prices, fertilizer affordability and expected planted acres will continue to support nutrient demand into the 2024 spring application. The USDA is projecting a decline in inflation-adjusted farmer profitability as a result of rising costs and lower crop prices. However, the absolute level remains at long-term historical averages. Overall, demand remains stable, and we are gearing up to serve our…

Great. Thanks, Erin. Andrea, can you please open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Vincent Anderson of Stifel. Please go ahead.

Hi, good morning, everyone.

Morning, Vincent.

Good morning. I wanted to start with amsul [ph] The revenues in the quarter were better than at least I was expecting given where export pricing had lingered for most of the quarter. Were your overall volumes up year-over-year? Or did you start to see better pricing in December, whether market-base are just placing tons in higher-value regions?

Yes. Vincent, thanks for the question here. Yes, from a year-over-year perspective, volume was up. If you look at the top line growth, we were looking at roughly $60 million of volume improvement from a year-over-year perspective that's worth about $15 million -- a 15% increase year-over-year. A good amount of that was ammonium sulfate, also a good amount of volume from a nylon and caprolactam perspective. Most of that was exports. So for AS, in particular, we had a really strong export quarter, and that's what drove the majority of the volume from a year-over-year perspective.

Got you. Thank you. And that kind of feeds into my next question, which may be partially answered, but you recorded lower deferred income and customer advances. Was that largely the result of absolute pricing? Or were your pre-buys consciously kind of managed lower this year?

Yes. Now when we think about sort of where the fundamental market is, and certainly, we take our customers' signals here as well as approaching every year's prebuy program and sell program. So we would say that our volumes were at sort of long-term historical averages, but pricing just given the entire complex on energy and nitrogen nutrient values was down.

Okay. All right. Excellent. And then kind of a similar question around Intermediates. That was a bit better than we were expecting. So I'm curious if that was really all acetone pricing? Or are we starting to see some early recovery in oximes and maybe the amines that go into agricultural use?

Yes. I mean the majority of really the Intermediates improvement was more market-related pricing and most of that was acetone. Acetone strength given the favorable supply demand conditions overall.

Sure. Okay. And then just a real quick one, and I'll give someone else to turn. But is there any risk here that you don't have enough output from Frankfurt to build inventory ahead of the planned turnaround and we see more purchased product around the third quarter or the second quarter? Or is this still at 65% to 75% of planned utilization were good in terms of balance of the year risk?

Yes. So certainly, the current rates we're at are supporting us with some modest purchases at this level to bring back the full rate at the Hopewell and Chesterfield here. Just given our normal level of integration, 75% to 80%, you can - that those numbers are out there relative to sort of how the system works on average over long stretches. We certainly, as you might expect, we pulled forward the maintenance work at Hopewell, just given the slowdown that we are proactive in that nature. And our key focus right now is to get our Frankfurt facility stabilized and up and running. The systems returned, the return of flow to our customers has been very collaborative with us during this time, and we're reevaluating our plans for the remainder of the year on timing and execution to be successful.

Okay. All right. Thank you very much.

You bet.

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

Yes, hi. Good morning.

Good morning.

Yes. I wanted to maybe just start with maybe just a couple of details regarding the SUSTAIN program. And in particular, maybe I missed it before, but I wasn't aware of the grant funding from the USDA opportunity there. Could you just maybe touch on that? What is maybe the aspect of your project that is most directly, I guess, attributable or I can't think of the right word, but which would the funding request be tied to? Is it the emissions performance? Is it something in the actual process? Just if you could just talk about that broadly. And then if you could also size the amount of the potential grant funding range or whatever, that would be helpful. Thank you. And is the $75 million CapEx net of any grant funding? Or is that the gross figure before any funding? Thank you.

Certainly. So the grant from the USDA is actually in support of increased fertilizer production for U.S. growers and U.S. farmers. So really that given the growing need of sulfur in the country and our ability to generate more capacity and grow with those needs, we think we are a great match and certainly are working through the process with them. So it really just about improving that we have increased locally produced fertilizer for the U.S. market. And so that is the key. There are steps to the grant process, right? So we continue to proceed. And when we think about the opportunity set, it's between $10 million to $15 million opportunity for us against our total spend.

Okay. Thank you for that. I'd like to switch over to maybe to get some of your thoughts about the global supply-demand balance in nylon and caprolactam and in particular, I guess, competitive reactions to the current fundamental environment. But my sense is that there are some producers even with the stabilization that you cited in your charts. But there are some producers who are just not making suitable returns that, I don't know, would consider sustainable. And from your perspective here regionally, I guess, have you noticed any behavioral shifts in other words, would the Chinese producers be reducing production rates in response to lower domestic demand? Or have there been some adjustments in production or, I don't know, the facilities that you see operating in Europe or elsewhere. But beyond shifting around your marketing strategies a little bit, have you noted any concrete shifts that might lend to a firmer fundamental balance, let's say, over the medium term?

Yes. If I provide a little context for you, David, on sort of current operating rates, we've seen certainly at the start of the year, China is running closer to 80%. That continues to be a strong, healthy rate for them. And it's a rate of which they need to export vis-à-vis sort of their internal domestic needs. That has had a ripple on fact. You've got the rest of Asia operating at about 50%, right? So when we talk about sort of the impact of these trade flows, trying to begin to export to the rest of the world into the rest of Asia into Europe. Europe is operating around 60% as well. Structurally, it is a higher cost region. And so that is the area that we continue to watch. When you think about the regional balances, North America, as the markets and demand recovers are relatively balanced to slightly long. Europe is structurally long. Rest of Asia is structurally long as is China to some degree as well. So that's - I think you're asking around are we seeing anyone yet announcing a sign of closure. Again, there are definitely lines that are not running lines that are curtailed in rates, but we have not yet seen definitive calls made [ph] But certainly, the areas that we would watch will be those regions that are structurally long.

Sorry. Okay. Thank you for that. Maybe the last question, and I apologize, I always feel like a dumb chemicals analyst here. But at a couple of points, you - in talking about critical investments for the long term. You - I guess you used the terminology, critical enterprise risk mitigation, right? And I'm kind of scratching my head there, but could you just flesh that out a little bit more. I mean is this a cyber defense kind of thing? Or what types of activities are included in a critical enterprise risk mitigation program as you envision it? Thank you.

Sure. So one may ask us as you may be trying to potentially procure, is why couldn't we manage some of these programs within our sort of our base CapEx framework, right? And - and we could, but then we would then need to sacrifice the ongoing, I would say, sustaining replacement maintenance at some of our sites, right? Because these are larger projects in nature, they are lumpier in scale. And so when you think about enterprise risk, we think about supply chain risk, we think about climate risk, we think about cyber risk. We think of it - the totality of risk factors that we disclosed in our 10-K. Now when we think about these projects right now, we've got the dock, that dock at Frankfurt is the start of our entire value chain, right? And the length of service and its needs and it's a large project for the scale. And it's not a Frankfurt doc per se. It's an AdvanSix stock, right, that is necessary to maintain for the entirety of the system. Likewise, the boiler, this is a standard replacement maintenance boiler program that we would put into our base framework. And again, in our integrated value chain, this is a significant sort of switch to handling a critical utility at a key site that's moving forward. And again, because of the approach we took for adding rate redundancy and resiliency to a site, we put it in that category. But again, long-term compliance risk, one might think regulatory changes could fall into this. If you think back to when we spun, we did have a program that we would view as enterprise critical risk mitigation associated with our multiyear NOx reduction program, right? So these are the types of things that we feel are over and above what would be prudent to manage into and within our base $75 million sustaining maintenance CapEx for each - that manages the base of the business. Let me pause. I hope that helps a little bit.

Okay. Great. Thank you. I'm going to get back in the queue.

[Operator Instructions] This will conclude our question-and-answer session. I would like to turn the conference back over to Erin Kane for any closing remarks.

Great. Thank you all again for your time and interest this morning. While there are puts and takes across our end markets and broader macro uncertainty, we have a demonstrated playbook and track record to navigate these dynamics. We'll continue to position our business for long-term sustainable performance through our smart and disciplined investments and focus on accelerating growth in the most profitable areas of our portfolio. With that, we look forward to speaking with you again next quarter. Stay safe and be well.

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