Okay, good morning, everyone, and welcome to the twenty-second Best Ideas Conference here at CL King. I'm Dave Silver. I'm a senior managing director, director of research, equity research analyst here, and we're very pleased to have the management of AdvanSix join us for a fireside chat. Representing the company, we have Erin Kane, CEO, and Mr. Adam Kressel is vice president and treasurer. Okay, the format will be that the company will make some opening remarks, followed with a series of questions. If you'd like to ask a question, please use the dashboard or the box on your screen. Alternatively, if you prefer anonymity, you can email it to me at dsilver@clking, so D-S-I-L-V-E-R @C-L-K-I-N-G.com. Okay, great. With that, I'm gonna just turn the floor over to Erin and Adam for some opening remarks. Erin?
Great, Dave. Thanks. I'll just kick us off quickly by saying that today's conference may contain forward-looking statements that are based on our best view of the world and of our business as we see it today. Notably, our references to company financial performance are as of our earnings for the second quarter of twenty twenty-four, which we announced in early August, and I would refer you to our investor materials and other SEC filings for our full disclosures.
Great. Thanks for that reminder, Adam, and good morning, David. We appreciate this fireside chat opportunity, and thanks as well to all those who have joined the webcast for your interest in AdvanSix. AdvanSix is a diversified chemistry company, and we produce essential materials for our customers in a wide variety of end markets and applications that touch people's daily lives, such as building construction, fertilizers, agrochemicals, plastics, solvents, packaging, paints, coatings, adhesives, and electronics, just to name a few, and we strive to deliver best-in-class customer experiences and differentiated products in the industries of plant nutrients, chemical intermediates, and nylon solutions, which I'm sure Dave will want to dive into each of those product lines in a moment, but overall, we believe that AdvanSix offers a compelling investment thesis.
Our integrated, efficient, and cost-advantaged business model, including our unique competitive asset base, pricing mechanisms, and leading North American positions across this diverse set of end uses, is really core to our ability to execute and perform. And we have substantially increased the earnings power of this business as well over the last few years, with our focus on through-cycle profitability and the goal of generating higher lows and higher highs. We maintain a healthy balance sheet, which enables our capital allocation framework to provide upside and optionality for further value creation. We feel very good about the strategies we've implemented and our continued investments to support our expectations for AdvanSix's long-term sustainable performance. So with that, David, where would you like to jump in?
Okay, great. Thanks, Erin. I'm gonna start with maybe getting your view on the economic environment. So demand for a number of your products, which you cited, such as nylon fiber, acetone, and coatings intermediates, are tied to the general economy as well as auto and housing activity. So we would say costs for energy, fuels, and borrowing costs have been flat to lower in recent months, and the outlook is still, you know, impacted by geopolitical factors. How has demand trended overall, as well as for your most economically sensitive products? You know, what, if anything, has changed in the past few months?
Consistent with our earnings call, we continue to have several year-over-year tailwinds in the second half of this year, supporting our favorable earnings outlook. We have a continued tight acetone supply and demand environment. We continue to see modestly improving North American nylon industry spreads, and certainly, as we shared, we started the third quarter with a robust ammonium sulfate fill program at higher pricing levels compared to the prior year. But certainly, as you note, you know, nylon is probably one of our most exposed product lines to general economic, you know, macro trends. And in here, certainly, we are seeing modestly improved regional supply, right, amid our stable end-market demands. But this will be an area of, I would say, continued slower recovery.
Likewise, in the intermediate space, lower global phenol operating rates, as well, again, on that reduced demand into the value chain serving building, construction, and other industrial applications, continues to be sluggish as well. But that gives us the offset, and why we see the tight acetone supply-demand environment of which we are enjoying. And certainly, in the fertilizer space, we have continued to see sulfur demand growth, which again, is supporting the back half. So I would say what we've seen over the last three to six months continues to be consistent, with what we shared at the earnings call.
Okay, great. Next question, I'll kind of title it Portfolio Transformation, so this will be from a longer-term perspective. But, you know, while your company name specifically refers to your historical relationship with Nylon 6, you know, the fact is that your share of revenues at AdvanSix that are derived from nylon and its precursor, caprolactam, has actually declined over the past few years, and your acquisition of specialty intermediates producer, U.S. Amines, is one factor in that, as well as your recent investments in further granulation capacity for ammonium sulfate. Looking perhaps two to three years down the road from now, how do you envision, you know, what your portfolio composition might evolve to?
Thanks, David. Certainly, we are more than a nylon company, and we've been working to clarify that narrative now for some time, and as a diversified chemistry company, you know, we take great pride in our long legacy of success and track record, serving as a trusted partner for our customers in so many aspects of this diverse product portfolio. You know, one may say we've actually been in intermediates and in ag for a longer period of time than actually nylon. We have to continue to work to meet the evolving needs of these end markets and applications. You know, first, the range of our end market exposure helps insulate the company from significant variability in any one product line, and I think we continue to demonstrate that through results in several environments.
Our product lines, you know, typically don't all move in tandem with each other, but importantly, every line of business has a distinct set of regional and global supply demand and competitive dynamics, right? Our focus, as we've shared previously, is to accelerate growth in the most attractive end markets. When you call out saying nylon revenues fall, that would certainly, you know, capture the cyclical considerations of that line of business, but also importantly, a reflection of our growth in plant nutrients and chemical intermediates. As we progress over the next few years, our portfolio composition, I would say, will continue to reflect that key strategy. We remain excited about the growth prospects of our plant nutrients business, leveraging our expertise as a leader in this space, through projects like SUSTAIN or the sustainable U.S. Sulfate to accelerate increased nutrition.
That program is progressing well and will continue to support growing market demand for sulfur nutrition. And you may have seen our announcement this morning regarding reaching a critical milestone of the USDA grant approval for this program. And as I mentioned in our chemical intermediates portfolio, acetone represents roughly 50% of our intermediate sales and is a key product line with a perform and optimize strategy to meet our customer needs, while also driving favorable sales and profitability mix. But the remainder of that portfolio, we really have a key strategic focus on placing our various chemistry platforms into high-value select applications. And that diversification of end market exposure, supports our sales and margin performance through applications like our Nadone cyclohexanone in the electronic space, or EZ-Blox in acrylic paints, especially means for ag, farm, and industrial applications.
C ertainly in our nylon solutions portfolio, which has been pretty competitive, we do remain highly focused here on supporting improved through-cycle profitability, because practical reality is we are operating in our third cycle since spin. H opefully gives you a little bit more context to our strategies relative to the three key product lines.
Gr eat. I'd like to maybe just build on your comment, your just recent comment about China. We'd like your perspective on China and its impact on fundamental balances in some of your products. So, sluggish economic recovery in China this year has the potential to negatively impact the fundamental balances in several of your products, including caprolactam and nylon six, as well as ammonium sulfate fertilizer. Could you just discuss the impact this year or the trend, the impact of China on fundamentals for your main products, and what's your outlook for the balance of the year?
Yeah. Well, certainly, globally, nylon demand remains quite mixed across major end uses. And there are, as you point out, varying regional dynamics, including competitive intensity and trade flows that are impacting that regional pricing. And, despite some of the long supply and demand fundamentals globally, estimated operating rates out of China are sitting at multiyear highs. And this is resulting in continued nylon exports to other regions, predominantly namely Southeast Asia, as we see it today. And, as you know here, David, certainly, China has built out its value chain in caprolactam and resin over the course of the last decade.
And it's w hy it's important for us to focus on, o ur strength and the regional dynamics here in North America, w here we see demand stable, right? Albeit on a lower base with the continued softness in building construction, b ut that is offset by the resilience in packaging and engineering plastics. Certainly as that industry supply has been constrained in North America in the recent months, that supports regional outperformance and in allowing us to see that the spreads here in North America to improve off the trough that we saw in the second half of 2023. But certainly, as we've shared, t he export region or the export o pportunity set is a flywheel for our nylon solutions business.
T he dynamics of China exports, who historically, w ere importers of caprolactam Nylon 6, a s they continue to shift to this net export position t hat has implications for t he global competitive dynamics and also sets really that price for the global market into those exports. Which is why it's really important for us to ensure that as the regional supply-demand dynamics improve, right, that we are capturing the opportunity to improve our geographical mix back into North America. And that is what we saw coming through the second quarter, and so we're back to sort of our average historical levels with exports at about 12% of our total Nylon sales. So that's sort of where we see the markets today.
W e have to continue to monitor the situation, right? It's putting pressure, obviously, on other areas of the world. We've seen some smaller assets start to shut down over the last few years, but certainly an area of continued monitoring. Now, as for ammonium sulfate, as you mentioned, certainly, as they produce caprolactam, they're also producing ammonium sulfate. But here in the U.S., Chinese ammonium sulfate is subject to anti-dumping duties until twenty twenty-eight. So China has really become the primary source of imports to Brazil, right? Another key ag economy, and certainly there and they're focused on Southeast Asia. So we've had to, over the last couple of years, really diversify our offerings outside of Brazil into other Latin American countries. We really focus now on areas like the Dom Rep, Peru, where we maintain really great relationships with our customers there.
Okay, great. I would like to follow up on your comment about ammonium sulfate, maybe just a question on the fertilizer outlook. But the past spring was quite constructive for your fertilizer business, with healthy domestic demand and strong pricing relative to other nitrogen fertilizer alternatives, including urea. W e're now in a period, I would say, of somewhat weaker major crop prices and somewhat lower farm incomes, while per-unit profitability for your ammonium sulfate product remains quite as attractive as you pointed out from a historical perspective. Can you just touch on maybe the six or twelve-month outlook for your AS business e ntering here, the post-harvest or fall field work period and potential, w inter planting or pre-buy demand?
C ertainly, and maybe to ground everyone on the webcast, in sort of our first half dynamics, as you mentioned, and as we shared on the earnings call, we certainly s aw nitrogen pricing see a decline, right, in the second quarter, but in contrast, ammonium sulfate pricing really strengthened through the second quarter, with industry Corn Belt pricing up 25% sequentially, with continued sulfur demand growth and reduced supply in North America, and we do believe that the strengthening of ammonium sulfate spreads throughout this year is reflective of an increasingly recognized sulfur value proposition, and observed growth in demand.
A s I had mentioned earlier, we did enter the third quarter at higher ammonium sulfate pricing levels, and this is a time of year where the fertilizer system in North America sort of resets into the next planting year. And that's important because it gave us an indication that as the value chain began restocking fertilizer, they certainly were supporting a robust new season, o rder book for us relative to this next season. And so while we continue to navigate what is typical seasonal pricing, as you know, in the back half of the year and certainly facing what many consider much more cautious, broader ag fundamentals, we know that farmers need yield to support their profitability, and that is what the sulfur nutrition is providing as a value proposition.
O ur performance here at a time when nitrogen prices were on the decline in Q2, albeit with some supply tightness, p lus the fact that the outcome of the fill program coming in through Q3 was so robust, really, we believe those are proof points to the resiliency of sulfur nutrition demand and continues to support our expectations to deliver improved year-on-year performance. We see sulfur nutrition with an estimated 3-4% CAGR growth per year, which is why it's so important for us to ensure that we are delivering on our SUSTAIN program.
D riving up our granular conversion, sitting at about 68% today, still looking to target 70% by the end of the year, which is enabling o ur customers here in North America to continue to support essential nutrition, not only for traditional crops, but also for soybeans, which we are seeing as well.
All right, so sorry about that. I was on mute. Erin, just a brief comment, if you could just add on today's announcement about the USDA grant in support of your sulfur-based fertilizer products. T hat's further validation of y our emphasis on that in recent years and the investments you've already made. A brief comment about the grant. Was it expected? Was it the size you had anticipated? I guess it's $12 million in total, but maybe just a comment on how that relates to your overall strategic programs in that area.
Sure. I t was, it was great to reach the, final stage, g rant process here is multifaceted. It has multiple phases to get to this critical milestone of a full approval. So we had been working through that process and, and as you say, just a, a validation, I think, of the recognition, that, we as leaders in this space and the technology that we have, in sulfur nutrition through the AS product, particularly the granular form, is a valued, and necessary essential nutrition for farmers in North America. The program continues to track , well to our target return profiles of 20%.
C ertainly, t he funding or the grant process, you sort of comes at critical milestones over the next couple of years given our progression to the program as agreed to, with the USDA. So you can think about it as sort of a one in five dollar sort of matching, if you will, as we continue to progress programs throughout, or sorry, individual projects throughout the program. So really pleased, it took a lot of resilience by the team, to get through the process, the first that we've actually achieved, so it's a great day to be able to, to announce it.
Great. If you don't mind, amongst your other recent announcements is the announcement of your next Chief Financial Officer. L ess than a week ago, you announced that Sidd Manjeshwar, apologies for the pronunciation is set to replace your current CFO, Mike Preston, who has been your first and only CFO since your spinoff in 2016, and who recently announced his retirement. So a couple of questions, but firstly, what were the key attributes you were looking for in your next financial leader?
S econdly, w hen you did announce the hiring, I guess he was quoted in the announcement as saying he's looking forward to driving quote, unquote, "you know, accelerated profitable growth," unquote, in support of your company's long-term sustainable performance. Just wondering if you could elaborate on how y our financial strategies can drive, a ccelerated profitable growth. Like, what was the envision when you used that, that terminology?
Sure. T hanks. We are really pleased to have announced the appointment of Sidd, certainly as our Senior Vice President and CFO, effective October first. And so he'll have global responsibility f or the fulsome set of typical financial a spects of the business, controllership, treasury, IR, internal audit, commercial finance, tax, financial planning analysis, and also procurement. And I would be remiss if I didn't take this opportunity to thank Mike here p ublicly for his leadership, service, and invaluable contributions. As you say, he is our f ounding CFO. But we are looking forward to bringing Sidd on and to adding his expertise as we continue to accelerate in this next chapter as a diversified chemistry company.
He's a seasoned strategic, I would say, financial leader. C ertainly has experience through chemicals and energy companies from investment banking to corporate roles, right? So really a vast set of experiences and learnings along the way that will allow us to really, as you say, and which is part of the core corporate strategy to accelerate growth in the most profitable areas. We need to ensure that we have and maintain our competitive cost position. So him leading procurement, ensure we're best in class there, is gonna be really important.
T he capital allocation strategies as we think about both the opportunities for funding organic and inorganic growth going forward. Again, just sort of the wide variety of experiences both in industry and adjacent markets i s really important to us as we c hart our path forward in this next chapter. I' m pleased Mike will stay on, as we had agreed an advisory role as well, to ensure a seamless transition through the end of the year.
Okay, great. Next question. S idd's not here now, so of course I'll ask the capital deployment question here. Sorry, but your company has been and remains a generator of significant free cash flow across the economic cycle. We would characterize your approach to capital deployment to date as balanced, with significant outlays for M&A, discretionary CapEx, buybacks, debt paydowns, and dividends. Can you maybe discuss the one to two-year outlook for discretionary spending, whether it's CapEx, bolt-on M&A, and w ith the relatively modest valuation of your stock, how do stock repurchases fit into your overall framework?
I appreciate that, and c ertainly, w e tried to clarify a t the last earnings call that t he broader view here of capital allocation and prioritization, because t hrough the cycle, as you point out, ample cash has been g enerated to fund our critical allocation priorities. W hile we really strive to maintain a healthy balance sheet, which we think is important for a company like ours to provide flexibility and optionality when we need it, right? We're proud of the $1.2 billion of cash from operations that we've generated since 2017, and that has a llowed us, through various conditions and cycles, o ur framework has enabled, right, us to fund critical deployment, initiate and grow a dividend, right?
Certainly invest for long-term performance and growth. As you point out, k ind of called on, is we clarified the framework to be a little bit more two-pronged. Certainly, critical funding and then those discretionary choices to create value. I think everyone well understands our critical funding p erspective. This is our ongoing base CapEx. F or assets like ours, ongoing maintenance, health, safety, and environmental spend, and enterprise programs to support long-term operational excellence as a large manufacturing company, and risk mitigation is important, right? We also shared and put the dividend in perspective to the operating cash flows, which we think was an important message, given that this is a dependable return of cash to our shareholders.
It fits well into h ow to think about our annual operating cash flow. Now, on the discretionary side a s you point out, this is where we fund our high return growth and cost savings programs, and certainly look to deploy for inorganic opportunities as they become, present and available, and obviously the share repurchases. So certainly, top priority would be our organic growth in our wheelhouse, right, our high return growth and cost savings programs, the largest of which would be SUSTAIN. M ultiyear. We are trending below our $75 million original investment level, which is great, because as we progress through our engineering processes, w e're finding s ome improvement in that. But that's kinda key to certainly our 20% increase in granular conversion.
O n M&A, you know, we have done some smaller bolt-ons. We're gonna continue to maintain a disciplined approach, right? We are working and continue to work pipelines of targets. You know, certainly the space is perhaps, you know, heating up a bit more, but this is an area where it's really difficult to predict timing or when things become available. But it's important here for us to, you know, certainly ensure that whatever adjacency we think about or certainly bolt on, that is providing, you know, growth and synergy opportunities. And then, as you say, the return of cash to shareholders, I already talked about the dividend. We've grown that since initiation, 16% in 2020 to 10% last year. It will always be our intention, you know, to sustain and grow that over time.
Sh are repurchases, you know, we have our own intrinsic modeling, our intrinsic value modeling. We have, you know, long sought to be opportunistic in this space, in the context really of a long, or let's say more medium term, you know, view on our cash and debt levels. You know, the share repurchases also help us to manage dilution as well. So, we do have $60 million remaining on our current repurchase authorization, so it's still a lever in the mix.
N ext question is, maybe I should have asked this a little earlier, but, you know, just your overall cost, competitiveness, and steps you're taking to maintain or extend that. But, you know, your company is regarded as the world's lowest cost producer of caprolactam and nylon and related products. I consider that a function of several factors, including scale, the specific process, technology employed, your vertical integration, logistics, and other factors. And, you know, over the past couple of years, an unusually favorable, very steep regional disparity in natural gas costs between North America and some other regions, you know, was very important, but it's largely returned to maybe more normal relationships over the past several quarters.
Can you just discuss some aspects of your production, logistics, and marketing that contribute to that, you know, very high level of cost competitiveness? And, you know, what do you have underway that, you know, would sustain or strengthen that, you know, cost advantage or that, competitive advantage you have over much of your competition?
Thanks. Certainly, our integrated value chain and the business model sort of surrounds that inherent competitive advantage and sort of our unique combination of assets that sit here in North America. So, you know, our scale, the make versus buy economics for our key intermediates, you know, and ultimately, the technologies and the chemistries that we practice, you know, provide significant value, not just to the core caprolactam cost position, but, you know, also, as we've talked about here, this morning, the diversification of our business. Certainly, industry cost curves, you know, move with raw material inputs. They, they reshape as well, with adds across the chain. But through that time, you know, certainly, we maintain a strong competitive position.
T hat natural gas position, as you pointed out, also, you know, contributed to, you know, what we saw in the ag environment as well, because that definitely drove up energy, you know, cost curves kind of around the world and influenced nitrogen pricing as well. But certainly, you know, there's the cost position, there's the inputs, but we'd be remiss if we didn't kind of talk about it a little bit here is that, you know, our pricing mechanisms and ensuring that 50% of our business is on formula or index-based contracts, you know, also ensure that as raw materials move around, you know, they're contractually passed through with very little lag.... So, you know, it's important to maintain that position, as you say.
We talked about China earlier, this morning as well, and, you know, so it's kind of a forever pursuit, David, relative to our operations, you know, at a Hopewell facility, and certainly integration through the chain. So, you know, we benefit from being able to run disproportionately higher operating rates that serves to, you know, spread a fixed cost position. But that fixed cost position has to be driven with, you know, great procurement strategies and productivity programs. It links to our processes for capital, right? To ensure that every capital project contributes to, you know, strengthening and preserving that cost position as we go forward. And we have made some significant CapEx investments, as you may recall, in the last couple of years.
Whether it was our boiler program to move off of coal to natural gas to ensure that you know, our merchant caprolactam you know, was at the right quality, and that was a capacity release as well. So again, ensuring that all of these particular aspects are knitted well together are really important. You have to remember that caprolactam cost position also takes into consideration you know, the ammonium sulfate technology as well, which again, we believe we're leaders in. You know, the growing of the granular conversion you know, is also critical you know, to sustaining that position as well. So hopefully that gives you a little bit more color commentary.
David, I think you might be on mute still.
Sorry about that. Okay, I'll ask a couple of questions here, because why not? But firstly, what would you say is the priorities of your board? In other words, when you meet with your board, you know, you have a cyclical business, sometimes your, you know, margins are wider than at other times, and this and that, but you know, you have to manage for the longer term or across the cycle. So when you meet with your, you know, very experienced board, what tends, qualitatively, to be the key issues that they're bringing up these days? And then lastly, is there anything, you know, I didn't, we didn't really cover that you consider important? What might we have discussed that maybe I didn't ask you about?
Is there, you know, an unusual growth opportunity or, strength in a particular product line? So anyway, I'll finish up there, and I'll let you speak. Thanks, Erin.
Sure. Thanks, David, and, you know, certainly, boards play a critical role to, to running the company, and particularly in oversight. Really, in two key areas, I would say for us is, you know, long-term strategy, you know, to drive shareholder returns, and certainly, you know, the culture, people, and talent, you know, to do so. So, you know, I think that, we spend a lot of time focusing in on, on strategy, in on performance, you know, diving to, to understand sort of, opportunity sets to enable, you know, the broader markets to recognize, you know, the strength of the strategies, the strength of performance.
Because certainly, you know, we think that, there is a distinct, you know, gap for us to close there, you know, relative to what we believe the intrinsic value of the company is. And, you know, when, it comes to sort of how we spent our time here, you know, this morning, you know, David, you always, you know, cover the full gamut and, you know, we appreciate, you know, as such. You know, I think continuing just to help folks, understand, right? The strength and the diversification, the strength and the opportunity set to grow in the profitable areas of plant nutrients and chemical intermediates while we work to, you know, address the cyclicality and, I would say, sort of economic variability that we experience through the nylon business, in a stabilization type strategy.
C ertainly we have been good stewards of cash in a strong and balanced and disciplined capital allocation framework. And, you know, as we continue to drive forward, that is what we're here, you know, to do. And certainly, you know, that has been core to our playbook that we believe has shown our ability to execute and perform over the years and through cycles, and look forward to, you know, continuing to get that narrative out and having folks understand it. So I appreciate the time.
Okay, great. We are at the end of our allotted time. I'd like to thank Erin and Adam for sharing their perspectives and insights on the company. I'd also like to thank the audience for their participation. With that, I'll call an end to the discussion. Have a great rest of the day, great rest of the conference, everyone.