Good morning and welcome to the AdvanSix fourth quarter 2020 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 your telephone keypad. 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, Director of Investor Relations. Please go ahead..

Thank you Chad. Good morning and welcome to AdvanSix’s fourth quarter 2020 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 including 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’ll review our financial results for the fourth quarter and full year of 2020 and share our outlook for our key product lines and end markets. Finally, we’ll leave time for your questions at the end. With that, I’ll turn the call over to AdvanSix’s President and CEO, Erin Kane..

driving positive sales volume growth, generating higher margins and earnings, and delivering positive and robust free cash flow while also reducing leverage.

We maintained continuous operations across our facilities including the execution of a large planned plant turnaround and successful implementation of health and safety protocols in the wake of the COVID-19 pandemic to protect our employees, contractors, assets, and other key stakeholders.

We mitigated the impacts of COVID-19 through proactive cost and productivity initiatives and ensured we remained in lockstep with changes in customer demand across our supply chain while continuing to invest for growth and improving the underlying earnings power of the business.

Our ability to withstand and overcome these challenges demonstrates the resilience and strength of our business model and portfolio diversity as well as the importance of our sustained efforts in building the foundation for long-term performance and shareholder return. I couldn’t be prouder of our team.

Mike will detail our financials in a moment, but as you can see on the left side of Slide 3, we’ve highlighted year-over-year variances for some key metrics in both the fourth quarter and full year.

I won’t mention them all, but you can see the significant improvement in performance, particularly our ability to generate an 11% increase in net income and $59 million improvement in free cash flow for the full year. Our fourth quarter 2020 EBITDA was the highest we’ve seen since the second quarter of 2018.

As we look forward, we do recognize we continue to navigate a COVID environment.

That said, we expect near term improvement in nylon demand, increased ammonium sulfate fertilizer demand though the upcoming planting season, and favorable acetone industry supply and demand balance to continue while also benefiting from our ongoing investments for differentiated product growth.

With our focus and rigor around operational excellence, we are targeting a record year of production output in 2021, supporting higher earnings and robust cash flow while making continued progress on our sustainability initiatives. We have a lot of excitement around our organization and the opportunities that lie ahead.

Our strategic priorities remain consistent as we support continued operational excellence and improving through cycle profitability, enhancing our portfolio resiliency through differentiated product growth and mix optimization and being strong and disciplined stewards of capital. Many have been waiting to look back on 2020 with hindsight.

We are taking those lessons learned and momentum we’re built into 2021 and remain confident in our ability to deliver long-term shareholder value. With that, I’ll turn it over to Mike to discuss the details of the quarter..

first, growth in sales volume despite the ongoing impacts of COVID-19; second, higher earnings driven by strong productivity and cost management and the favorable impact of lower raw material costs more than offsetting lower market pricing and an unfavorable mix impact.

For the full year, we saw an approximately $26 million cost reduction as we took a proactive approach to mitigate the impacts of COVID on our business. As we disclosed previously, we estimate roughly half of the full-year cost savings are more temporary in nature with the remainder more permanent.

Third, tax planning initiatives that resulted in a lower effective tax rate, and lastly higher free cash flow supported by an approximately $67 million reduction in capital expenditures. Now let’s turn to Slide 7 to further discuss our cash flow and leverage exiting the year.

On the left side of the page, we’ve highlighted the drivers of the robust $32 million of free cash flow in the fourth quarter, supported by net income and lower capital spend rates. As anticipated, free cash flow was positive for the full year.

In the quarter, we saw working capital roughly neutral as ammonium sulfate pre-buy cash advances largely offset other increases, including higher accounts receivable due to sharply higher sales in the fourth quarter compared to the third quarter.

As we previewed, our capex run rate has come down to more normalized run rates following the completion of several larger, high return growth and cost savings investments, and as we continue to drive discipline in our capital processes.

On the right side of the page, we’ve once again shown our leverage ratios or net debt over trailing 12-months adjusted EBITDA, going back to the end of 2018. Both net debt and adjusted EBITDA are calculated in accordance with the terms of our revolving credit facility.

As planned, our leverage was reduced in the fourth quarter of 2020, supported by continued robust cash generation, the normalization of the planned plant turnaround impact on our trailing 12 months of EBITDA, as well as debt pay down. We exited the year at a leverage ratio of two times, which is comfortably within our target range of 1 to 2.5 times.

We continue to expect a robust cash flow outlook for 2021 and leverage to continue trending lower. Now let me turn the call back to Erin..

lowered expectations for ending stocks, including corn and soybeans is translating into increased crop prices, which have surged in recent weeks and months to multi-year highs. The supply and demand balance has been supporting crop prices at these higher levels while the profitability outlook for growers continues to improve.

Stronger anticipated nitrogen fertilizer demand coupled with regional supply constraints and increasing input costs have supported increases in urea pricing, which in turn has supported other nitrogen pricing, including ammonium sulfate.

In this space, we will continue to monitor increases in industry raw material inputs as well, including natural gas and sulfur. Moving to chemical intermediates, we expect a favorable acetone industry supply and demand balance to continue into 2021. Acetone imports into the U.S.

remain low with global phenol industry utilization keeping supply and demand rather snug. Demand for acetone continues to be robust as a precursor into acrylic screens continue to be used as protective equipment at retail, offices and other locations.

We also continue to see strong demand for our chemical intermediates into paints and coatings, particularly with do-it-yourself home improvement projects on the rise during the pandemic.

As I mentioned in regard to nylon, auto demand has been recovering, and although we are further back in the value chain, a number of our products in the intermediate portfolio also serve that end market. We also continue to see growth momentum for our Nadone product line, which is a solvent used in various high value applications.

Let’s turn to Slide 10. As you may have seen in our press release earlier this quarter, we are further building on our longstanding leadership and expertise in ammonium sulfate and sulfur nutrition while creating further opportunities for growth in efficiencies across the value chain.

We continue to see increased demand for sulfur nutrition and ammonium sulfate has proven to deliver pound for pound the most readily available sulfur and nitrogen to a wide variety of crops, including wheat, cotton, corn, and soybeans.

We highlight a number of recent activities, including the value of ammonium sulfate on soybeans, a crop where AS is not applied today.

We are continuing to educate growers and retailers about recent lab and field trial results, particularly the benefits of ammonium sulfate which adds sulfur and supplemental nitrogen to their soybean crop management plans.

We believe farmers have a great opportunity to boost production through new nutrient management strategies with research showing yield increases as much as 10 or more bushels per acre.

Operationally, recent efforts and enhancements in crystallizer technology have supported our production output of more high quality, granular grade ammonium sulfate to meet the growing demand of our customers.

We are now targeting conversion of approximately 65% of the ammonium sulfate produced into this higher value granular form, which is an increase of roughly 5%. As a reminder, that granular product can earn a sales premium over the standard grade product of up to $50 per ton on average.

Lastly, we announced the recent acquisition of certain assets of Commonwealth Industrial Services, or CIS, which enables us to expand our offering to directly supply packaged ammonium sulfate to customers, primarily in North and South America.

It diversifies and optimizes our offerings to include a spray-grade adjuvant to support crop protection, a fire retardant insulation, as well as other specialty fertilizers and products for industrial use.

We also expect the addition of packaging and warehousing capabilities to bolster logistics and operational efficiency in our Richmond, Virginia area plants. We are very excited to welcome our new teammates and extend our industry-leading value chain for ammonium sulfate. Now let’s turn to Slide 11.

As you may have seen in our December press release, I wanted to spend a moment highlighting a number of achievements and the progress we made in 2020 as we continue to build a broad platform for sustainability and corporate social responsibility across our organization and with stakeholders.

We were proud to join with other industry leaders in a number of global sustainability initiatives, including active participation with the EcoVadis Corporate Social Responsibility Assessment that resulted in a gold rating, placing us in the top 4% of chemical industry peers.

In November we joined Together for Sustainability, a global procurement-driven initiative to assess and improve the sustainability performance of chemical companies and their suppliers. We were also a signatory to the U.N. Global Compact and made a pledge to Operation Clean Sweep.

Underpinning all of this is our ongoing commitment to being an ACC Responsible Care company, including having all of our AdvanSix sites RC 14001 certified. In the year, we also established our Sustainability Council under oversight of the newly created Health, Safety, Environmental and Sustainability Committee of the board.

The Sustainability Council is supported by subject matter experts throughout the organization to develop a holistic enterprise-wide view of sustainability. We look forward to sharing our next sustainability report in the coming months with you all, building on the enhanced ESG disclosures published last year.

Our sustainability efforts continue to mature in concert with our strategic priorities. Let’s turn to Slide 12 to wrap up before moving to Q&A.

Consistent with what we shared last quarter, our core focus areas for 2021 include continued operational excellence and improving through cycle profitability, enhancing portfolio resiliency, and strong capital stewardship. We are targeting a record year of production output in 2021 supporting higher earnings and robust cash flow.

We’re maintaining a rigorous focus on productivity and cost savings with approximately half of the 2020 cost savings living through based on structural and permanent actions taken throughout last year.

Commercially, as I’ve highlighted, we’re largely seeing the trends of the fourth quarter across the business continue into the first quarter of 2021 in addition to strengthening agricultural fundamentals. We have all seen the recent severe weather that has covered a large majority of the country, particularly down in the Gulf.

This is an evolving situation real time, and our focus at current is to protect our value chain and customers while minimizing disruptions.

We are bolstering growth through investments in our Nadone and [indiscernible] pipelines, serving differentiated and high value applications while continuing to optimizes our nylon offerings amid carpet end market declines.

We do continue to expect capex to be $80 million to $90 million in 2021, which does include a modest amount of spend towards high return growth and cost savings projects. We are focused on improving our return on invested capital and we will remain disciplined in our approach as we look to drive long-term shareholder value.

We expect leverage to remain within our target range and have approximately $60 million remaining under our share repurchase authorization. We’re maintaining a disciplined inorganic framework as we assess opportunistic acquisitions that would have strong portfolio coherence with our product lines and technologies.

CIS is a great example of this as we drive the sulfur nutrition value proposition while integrating their packaged ammonium sulfate business. To close where I started, we are gaining momentum and remain confident that AdvanSix is well positioned to deliver long-term shareholder returns. With that, Adam, let’s move to Q&A..

Thanks Erin. Chad, let’s open the line for questions..

[Operator instructions] The first question will come from Vincent Anderson with Stifel. Please go ahead..

Yes, good morning, and wonderful end to the year. Just to start it off in nylon, we’ve watched export prices out of Taiwan recover pretty rapidly ahead of their capro costs, which would seem to underscore the spreads that you’ve published in your slide deck.

Should we still be looking to Taiwan as kind of a price setter for the Asian markets, or is that maybe a naive view especially since their exports have continued to decline since really 2016?.

Great question, Vincent, and thanks for the compliment on 2020.

When we think about the global markets, as we’ve talked about in the past, it’s important to look where the clearinghouse of supply and demand meet, and as we’ve indicated, look at China, China has sort of anti-dumping components in place and expansion of their local regional supply, so the clearinghouse markers went to Taiwan and South Korea, and we still track those key markers because that is where the incremental imports around the world do go.

There is a strong connection in that region to providing a global picture of where the supply and demand have to meet. I do think that it’s still the right place to look.

As you know, we do see some disconnect and have seen a little bit more volatility in where pricing has moved real time, and you have to look at a broader lens on a composite over a couple of weeks, maybe a month to see, because we can see some temporal disconnects.

We saw that--you know, if you look in the chart, a big jump year-over-year, but that’s really tied to a one-month challenge in the prior year’s quarter, so that can often skew some of those metrics.

But I guess in short, to answer your question, we still believe that that’s the region to look at from a--where the global dynamics have to sort themselves out..

Perfect, thanks. This is maybe going a little far back, but if my memory serves, Goodrich used to operate a specialty nylon plant in Canada that was shut down a while ago, but it used to supply its tire manufacturing. It’s one area that we haven’t really heard you talk about potential applications for Nylon 6.

Is it still used in tire applications, and if so, is that an area of opportunity for you to explore?.

One of the areas of opportunity that that shutdown has presented itself is the growth in our wire and cable application space, so they did participate there, and certainly our wire and cable growth continues to be a great standout in our differentiated application growth for nylon.

In tires overall, historically there was a large demand for tire cord into what I would say is sort of the large--not performance tires, but large size tires, things that would go into construction type applications. That was a very large application in China at one point and particularly could still be found there.

Nylon 6 can still be found, although I would say it’s probably not as prevalent as it was years ago..

Okay, perfect. Thanks for clearing that up. Then just one more quick one and I’ll let somebody else have a turn here.

How many field trials do you have scheduled for 2021 on soybean acres, and a rough split between university-test fields and farmer fields?.

I’m going to ask that we--we’ll get you that detail in the exact numbers. I would say that certainly our field trials continue, and it’s--I can direct you, in our press release we had a link to a new microsite that we have up and running, providing information about our soybeans. Certainly Adam can follow up, but it was in our press release there.

I can say that we have been receiving positive feedback from our customers, and I think anecdotally we believe there actually could be--it’s actually moving to fields and potentially moving to the fields this spring as well. But I apologize, I don’t have the exact split here for you top of mind. I think we are seeing positive trends, absolutely..

Okay, perfect. Thank you very much..

[Operator Instructions] The next question comes from Chris Moore with CJS Securities. Please go ahead..

Hey, good morning guys.

Projecting turnaround costs in the $25 million to $30 million range in fiscal ’21, and I guess the question is what are the drivers there versus historically more in the $35 million to $40 million range, and is this level the new normal?.

Yes, good point Chris, and I appreciate you pointing that out. What we provided in the back of the presentation is the year-over-year and quarter-by-quarter impacts of the planned plant turnarounds.

To your point, we have seen an improvement in the spend if you go back a number of years, and this year we’re looking at $25 million to $30 million, which is down from last year of $31 million, and in 2019 roughly $35 million. We do believe $30 million is in that sort of range - $25 million to $30 million is roughly our new run rate.

This is an area that we’ve been very focused on terms of driving efficiencies, better planning, managing the scope, the duration, really driving the costs down, so I would say this has been an area we’ve been trying to drive productivity and efficiency and effectiveness in, and we do believe that’s roughly our new range.

Now I will say from year to year, depending on whether or not we do the sulfuric acid plant turnaround or the ammonia plant turnaround from year to year, you could see a bit of a fluctuation in that total amount but over time, we’re seeing a reduction..

Got it, helpful. It looks like nylon sales for consumer carpet is doing well.

Can you remind me what the mix normally is between consumer and commercial, and what that mix looks like currently?.

Great question. If you think back around the overall North American carpet market, overall let’s say fibers, you’ve got about 70% is residential and 30% is commercial, so that’s kind of when you think about all mix.

In the residential space, Chris, about 55% of that is going to be non-nylon and about 15% is going to be nylon, and then most of the commercial has been historically Nylon 6 or Nylon 66, so certainly when we look at where the mill rates were down year-on-year, we ended down about 10% we think, so certainly the residential space here has been a big backfill, if you will, I think just in the surge.

With every home sale, you get a renovation turn, and then with new builds you can get flooring going in as well, so hard to say. It’s been nice to see the rebound--I mean, our carpet customers are pulling at rates that were sort of pre-COVID, but I think it is definitely on the residential side that is bolstering that..

Got it. Helpful. Last one from me, there’s been lots of headlines recently regarding severe weather, particularly some disruptions down in the Gulf.

Are you seeing any challenges to your supply chain?.

Thanks for that question, Chris. First, let me point out some positives as we came into this week. As you know, there is a number of headlines, a number of force majeures, the situation is evolving real time.

We came into this running very strong [indiscernible] through Q4 all the way through January, you know, good, solid utilization, 90%-plus across our value chain with Hopewell performing very well in the mid to high 90s - again, a continued demonstration that our operational discipline and reinvestment efforts are truly paying off.

We also had robust [indiscernible] inventory, so think about that as our intermediate chemicals, all those levels in place to buffer what is typically through this time of year seasonal supply chain challenges with storms, and also we knew that there were going to be known refinery turnarounds to be executed early in the first quarter.

But as you say, lots of headlines, the situation is evolving very quickly and by the day. In some cases, it’s rather opaque as we learn hour by hour here.

While we are located geographically away from the heart of the storm impacts, as you point out, it’s widely known we do source our key raw material from the Gulf and at current, all North American producers of cumene have declared force majeure, and also earlier in the week we did have some water supply instability from a supplier in Hopewell due to some icing that occurred through the mid-Atlantic.

I think it’s important to note, Chris, that we are running all of our plants; however, given the evolving nature of the situation, we have elected--and it wouldn’t be uncommon with patterns like this that we would de-rate our plants and proactively think about how we minimize disruption, so what we have done is proactively turned down rates.

We have brought forward what would have been planned maintenance already in the quarter, predominantly in March, forward into the back half of February. Again, one, it gives us time to assess the situation and gain some clarity on what’s going to happen.

A lot of indication that refiners are going to be restarting over the weekend, but certainly there are power utility transportation disruptions. We are absolutely focused on protecting our customers and certainly minimizing this disruption.

This is when our execution DNA kicks in, which is, I think, a strength for us and we demonstrated that strength last year as well.

We do at current have everything from suppliers, competitors, and customers all impacted, and obviously we’re working to navigate both the opportunity and the risks that the situation kind of brings, and really focused just staying in lockstep right now, Chris, with the situation with our suppliers and our customers as the evolving situation unfolds.

.

I appreciate the color. I’ll jump back in line..

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

Yes, hi. Thank you. I just wanted to follow up maybe on the previous question regarding the impacts from the situation in Texas. You focused right in on, I guess, the cumene supply situation, but could you just take a moment and just clarify whether you’re reliant on U.S.

Gulf sources for either natural gas or sulfur, or anything else to think about, as you said, right in this kind of fast evolving, real-time situation? Are there alternative sources from non-U.S. Gulf sources that you’re comfortable with for the other inputs to your overall production chain? Thank you..

Yes, happy to provide that clarity, David. Thanks for the follow-on here.

Certainly even with cumene, I think when we talked about how we have worked to mitigate even the 2019 shutdown of the east coast supplier, Philadelphia Energy Solutions, we talked about broadening the basket of suppliers, so we do have suppliers that are outside the Gulf, which is important to note, including the ability to import, so all those levers I think that we are pulling and have been pulling for the performance of the company and value chain going forward.

When it comes to natural gas, certainly you have seen restrictions. From where we sit geographically, we are predominantly pulling from molecules that are tied to the basins closer to us in that pipeline, so there are not restrictions in the area.

Certainly this time of year, it’s not uncommon for us to see some curtailments from time to time, just as natural gas lines are managing both residential as well as industry, but there is no disruption to natural gas for us at this point. Sulfur, as you well know, is also coming off the refinery complex.

Again, given we’re moving molten sulfur, logistics are important, so I think it’s fair to say that a vast majority of our sulfur comes from refineries outside the Gulf that are going to be geographically closer located to us, and again we see supply.

It’s one of the things, as I pointed on, and why we built up inventories through the end of 2020 - you know, on one hand you could see that based on high refineries, we’re operating just with COVID impacts and people not traveling, that all of these materials coming off the system could be challenged, so we’ve been proactively making sure that we were buying molecules ahead of time to keep our value chain protected..

Okay, thank you for that. Again, as you pointed out, it’s a real time, evolving situation. I was wondering if Mike could help me with the next one.

In the release, you talked about the year-over-year change, or you broke down the revenue change, the 4% growth in terms of volume plus-8, and then price, both list price increase and then the pass through effect of about minus-4.

I was wondering if you could do something similar on a sequential basis; in other words, how much of the 21% sequential bump in revenues was volume driven versus the price? However you might have that, that would be much appreciated. Thanks..

Yes, sure. Happy to do that.

As you saw, as you noted, we did have quite an increase in revenue in the fourth quarter relative to the third quarter, and the way you want to think about that is volumes were up sequentially in sort of the mid-teens range from a top line perspective, and we saw there is some domestic granular ammonium sulfate growth, some seasonality with that acetone, as well as caprolactam and nylon improvement overall in volumes, particularly in North America, so volumes were up strong in the fourth quarter relative to the third.

I’d say market pricing net of raw materials was pretty neutral. We did have an unfavorable impact fourth quarter versus third from a natural gas perspective. A lot of that, you would typically see from a seasonal perspective, and that was offset by better pricing for acetone sequentially.

Then you’re sort of left with the plant turnaround impact in the fourth quarter relative to the third, and that’s an $18 million change. Obviously we had a large impact in the third quarter and much less an impact in the fourth, so on an EBITDA basis, that’s about an $18 million change.

Those are, I would say the biggest changes when you look sequentially from third to the fourth quarter. .

Okay, thanks. I have one--maybe one more, and then I’ll get back in queue. Where did that go? Pardon me. Could you just talk about the effective of the CARES Act on your cash flow? I apologize [indiscernible]. .

Yes, sure. That’s the one thing that we wanted to make clear to everyone, because we did--as part of the CARES Act, we were able to carry back our NOLs. A lot of companies took advantage of that, and we did claim a refund of $12 million.

We had been anticipating receiving that before the end of the year, but it seems things with the IRS have been quite slow in terms of processing those refunds. We were pleased to see we were able to generate the cash and have a very strong conversion, cash conversion quarter even though we did not receive the $12 million refund.

But we do anticipate to receive that here in the first half of the year, hoping to push it, and if we can drive that and get that in the first quarter, we will, but that is the primary benefit that we’re seeing from the CARES Act.

The other element of the CARES Act, which you may recall relates to payroll taxes where we were able to defer about $6.5 million of payroll taxes in 2020, of which we have to pay that--pay 50% of that back in ’21 and 50% of that back in 2022.

But I would say those were the key elements of the CARES Act that we took advantage of, but that refund is still outstanding. .

Yes, thanks. I was going to ask you just about how that affects the cash flows from the CARES Act, both the receipt and then the repayment, so thanks - you anticipated that.

Just real quick, the energy tax credit, $3.8 million, is that a one-time item, or is your investment in the new boiler and whatnot, is that eligible for additional tax credits going forward?.

No, I would consider that a one-time event.

If you recall back in the second quarter of 2019, we did claim this credit on our return and we felt--and it does relate to the natural gas boilers, and at the time we concluded that we certainly had enough authority to claim the credit but needed some more analysis, some technical analysis as well as discussions with the DOE to be comfortable that we can reverse that and take the financial statement recognition of that.

The hurdle for that is getting to a more likely than not position on an uncertain tax position.

We claimed it on our return in the second quarter, booked the uncertain tax position, and in the fourth quarter we got comfortable enough that we were able to reverse that and then take the financial statement impact, which reduced the effective tax rate, as you saw.

Again, $3.8 million, a majority of that is part of that $12 million refund that we’ve claimed, and as you point out, it was roughly a $0.13 per share impact in the fourth quarter, and it had the impact on a full year effective tax rate basis, an impact of roughly 6.5% on our ETR.

It is one time, but what I will say, Dave, is that we continue to look for opportunities on how we optimize tax, on opportunities that we could drive on planning to manage our rate, and also manage our cash taxes, and we’ve been doing a lot of good things on that front and we’ll continue to look for opportunities going forward..

Okay, that’s great. I do have one more question, but I’m going to get back in queue. Thank you..

Ladies and gentlemen, 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 all again for your time and interest this morning. Facing one of the most challenging external set of circumstances this business has ever encountered, our collective organization delivered terrific results in 2020. We optimized our positions across the portfolio and executed levers in our control to deliver best possible outcomes.

We will leverage that momentum into 2021 as we execute against a focused strategy that we believe will allow us to outperform and deliver strong shareholder returns into the future. With that, we’ll 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. You may now disconnect..