AdvanSix - Q1 2023

Transcript

Operator (participant)

Good day, and welcome to the AdvanSix first quarter 2023 earnings conference call. All participants will be in a 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 touch-tone 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, Vice President, Investor Relations, and Treasurer. Please go ahead.

Adam Kressel (VP, Investor Relations, and Treasurer)

Thank you, Betsy. Good morning and welcome to AdvanSix's first 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 first quarter of 2023 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.

Erin Kane (President and CEO)

Thanks, Adam. Good morning, everyone. Thank you for joining us and for your continued interest in AdvanSix. As you saw in our press release, AdvanSix delivered solid earnings results in the quarter amid a continued dynamic macro environment and against a record first quarter in the prior year period. As a diversified chemistry company, our performance reflects the talents of our entire team alongside the resilience of our integrated, efficient, and cost-advantaged business model.

Our results were achieved in an environment that saw nitrogen fertilizer pricing reset year-over-year amid lower energy costs and improved supply. While down from last year's peak levels, ammonium sulfate value pricing remains robust. Headwinds in consumer durables and building construction end markets persist across portions of our nylon and chemical intermediate portfolio, while North American acetone supply and demand continues to be balanced, supporting our performance.

With confidence in the health of our balance sheet, we continued a disciplined deployment of capital in the quarter through increased capital expenditures and $80 million of cash returned to shareholders in the form of share repurchases and dividends. We believe that AdvanSix offers a compelling investment thesis over the near, medium, and long term. While we anticipate the challenges of an uncertain environment and expect demand weakness in certain market segments within our nylon and chemical intermediates product lines, we remain confident in our demonstrated ability to execute and perform through various macroeconomic cycles. We have meaningfully increased the earnings power of this business and our healthy balance sheet supports performance in the current environment while providing further optionality to deploy capital with a focus on maximizing shareholder value.

To further continued investment against our core strategies, we announced today our SUSTAIN project, a multi-year investment in expanding our granular ammonium sulfate production predominantly through increased conversion by approximately 200,000 tons per year. This project wins on multiple fronts as it is further targeting no net increase in energy consumption or emissions. We believe this investment will have a meaningful impact in helping to nourish the world and is a win-win for our customers, as well as supporting our growth and sustainability initiatives. With sulfur demand remaining robust as a key nutrient supporting crop yields, we are committed to growing in this space. I'll note we have also applied for grant funding for SUSTAIN from the USDA through the Fertilizer Production Expansion Program, supporting innovative domestic fertilizer production.

Lastly, before I have Mike discuss the financial details of the quarter, I wanted to take a brief moment to address the ongoing labor negotiations with our Hopewell South bargaining unit and associated economic strike. From the beginning of negotiations, we have endeavored to reach a contract through a transparent and good faith bargaining process to address the various needs brought forth by the union negotiations team. Our proposals maintain a market-based, role-specific wage approach designed to ensure we are providing competitive wages to our employees, intended to improve attraction, retention, and development of our workforce in order to support long-term sustainable growth. Ahead of the bargaining process and consistent with historical practice, we developed robust contingency plans in the event of a work stoppage or strike.

I'd like to thank our trained salary and contingent contract workers who have demonstrated an unwavering commitment to our customers and key stakeholders to ensure safe, stable, and sustainable operations over the past several weeks. All parties are back at the bargaining table this week, and we remain committed to continuing to bargain in good faith to reach a resolution to this situation. Now let me turn the call over to Mike.

Michael Preston (SVP and CFO)

Well, thanks, Erin. Good morning, everyone. I'm now on slide four, where I'll provide a summary of the first quarter 2023 financial results. Overall solid results in the current environment and against a record prior year comparison. Sales of $401 million decreased approximately 16% in the first quarter. Volume was down 9%, primarily driven by cautious buying behavior for ammonium sulfate amid continued sequential nutrient pricing declines through the quarter ahead of the start of the domestic planting season. We also continue to see soft end market demand, particularly in consumer durables and building and construction, impacting portions of our nylon and chemical intermediates product lines. Pricing was unfavorable by 10% overall.

Market-based pricing declined 6%, primarily reflecting lower ammonium sulfate pricing, while raw material pass-through pricing was lower by 4%, following a net cost decrease in benzene and propylene. The acquisition of U.S. Amines added approximately 3% to sales as well. Adjusted EBITDA was $65 million. I will highlight the key year-over-year variances on the next slide. Adjusted earnings per share was $1.30. The effective tax rate was 21% in the quarter, down from 23.3% in the prior year, primarily reflecting a discrete adjustment in the quarter related to the vesting of equity compensation. I will note for the full year, we continue to expect an effective tax rate of approximately 24%. Finally, free cash flow was -$23 million in the quarter.

Cash flow from operations of $2 million decreased roughly $48 million versus the prior year, primarily due to the unfavorable impact of changes in working capital, driven largely by the timing of cumene payments and lower net income. Capital expenditures of $25 million in the quarter increased $4 million versus the prior year. Let's turn to slide five. Here we highlight the key drivers of our first quarter Adjusted EBITDA performance year-over-year. Pricing over raw materials was a $5 million headwind. Tracking our key variable margin drivers, performance across our caprolactam and nylon portfolio over our key raws was negative year-over-year, reflecting unfavorable supply and demand dynamics pressuring global pricing.

Ammonium sulfate on a net price over our natural gas and sulfur bases was rough, roughly neutral year-over-year as significantly lower pricing was largely offset by a reduction in input costs, reflecting strong commercial execution to capture all sulfur nutrient value proposition against the macro reset of nutrient values. Lastly, chemical intermediates price of a raw spread was positive year-over-year, largely reflecting acetone margin over propylene costs. Volume, including the impact of lower production, was approximately $15 million unfavorable in the quarter. This largely reflects lower volume for Ammonium sulfate, as previously discussed, and soft market conditions for our chemical intermediate products tied to continued weak demand in building and construction and for consumer durables. We saw approximately $13 million in higher costs, including indirect spend inflation and plant spend, primarily driven by additional maintenance expense and operational enhancements.

While our utilization rates were not as robust as the prior year period, particularly at our Frankford phenol plant, our integrated value chain and competitive cost position enables us to target running our plants at higher rates than the industry on average. Finally, all other items netted to roughly $5 million unfavorable impact with higher SG&A costs reflecting upgrades to our enterprise resource planning systems and other functional support costs. Now let's turn to the next slide. On the left side of page six, we've shown our first quarter free cash flow, which was unfavorably impacted by net working capital, driven largely by the timing of raw material payments, as well as some impact from the unwinding of ammonium sulfate pre-buy cash advances in the quarter.

As we've shared previously, there can be some lumpiness to our cash flow on a quarterly basis, driven by timing of payments, capital expenditures, plant turnarounds, our fourth quarter pre-buy program, amongst other items. I would highlight that over the last 12 months, our free cash flow yield is roughly 12%, and our free cash flow conversion remains very strong at 92%, which reflects robust cash flow generation and quality of earnings our business model delivers. We've also maintained a very healthy return of cash to shareholders through share repurchases and dividends.

As we look forward into the second quarter, we do anticipate improvement in cash flow on a sequential basis compared to the first quarter of 2023. We will, however, see the bulk of the impact from the unwinding of ammonium sulfate pre-buy cash advances impacting our cash flow conversion in the second quarter.

For the full year 2023, we continue to project CapEx spend to be approximately $110 million-$120 million. This range reflects higher spend compared to 2022 to support critical infrastructure improvements, other maintenance, as well as additional growth and cost savings projects. Lastly, our 12-month net debt to EBITDA leverage ratio remains well below half a turn. Overall, we remain in a favorable position with our healthy balance sheets, supporting performance in an uncertain macro environment and providing further optionality to deploy capital with a focus on maximizing shareholder value. Let me turn the call back to Erin.

Erin Kane (President and CEO)

Thanks, Mike. I'm now on slide seven to discuss each of our key product lines. Starting with nylon. We've seen global pricing pressured on the back of unfavorable supply and demand industry conditions. The Asia caprolactam over benzene spreads averaged roughly $800 per ton in the first quarter of 2023, reaching levels that we haven't seen since 2020. The global composite price raw spreads underperformed the Asia spreads on a sequential basis from the fourth quarter as the slower growth Chinese economy is leading to excess supply moving to other regions, namely Europe, at lower prices. From an end market perspective in North America, the fiber and filament space where we serve our carpet customers has seen continued slowdown in demand through the chain. Building and construction indicators on both the residential and commercial side have been lackluster.

In engineered plastics, where we serve applications such as auto, consumer durables, and other industrial goods, margin compression has persisted, with resin pricing falling more significantly than the change in raw material input costs. Lastly, packaging, while a more resilient end use for our business, has begun to see demand softness tied to inventory destocking and inflationary pressures impacting buying behavior in certain applications like bone and meat and protective packaging. Moving to ammonium sulfate. In the lead-up to the North American spring, we saw nitrogen fertilizer pricing declines in the quarter amid lower energy costs and increases in global supply availability. However, underlying agricultural industry fundamentals, including crop prices, farmer profitability, expected planted acres, and stock-to-use ratios, have continued to support strong nutrient demand as we have moved into the season.

We are in the thick of the spring application, we are seeing demand outpace immediate availability for a number of fertilizer offerings, which has bolstered and boosted the price for U.S. urea in particular. As we have noted in the past, ammonium sulfate pricing tends to be less volatile than urea and has seen smaller price reductions through the winter. We have seen AS pricing tick up a bit in recent weeks as well on strong demand, we are working to serve our key plant nutrients customers as the season progresses. Lastly, turning to chemical intermediates. Industry realized acetone prices over refinery-grade propylene costs continued to improve year-over-year in the first quarter. While acetone demand downstream has seen some softness into the large buyer end applications, we've navigated some industry plant turnarounds, we see supply is generally balanced.

This has been supported by stable acetone imports into the U.S. and persistent lower phenol global operating rates on reduced demand, again, into the markets like building construction and other industrial applications we've mentioned. Propylene costs have seen some movement higher, particularly in March, but spreads have remained steady given the supply and demand conditions I just highlighted. Our integrated operating model continues to serve us well in industry dynamics like these. Let's turn to the next slide.

Underpinning our success at AdvanSix is our commitment to sustainability, and we continue to strengthen the linkage between our ESG performance and our corporate strategic priorities. On the environmental front, we have improved operational alignment to achieve meaningful reductions with respect to our carbon footprint, emissions, energy usage, and water stewardship, and are developing strategies for delivering the next set of step change in our impacts.

Importantly, we are completing our initial life cycle assessment to establish the cradle-to-gate footprint for our products that our customers are requesting to help meet their decarbonization goals. We've highlighted today our granular ammonium sulfate expansion, which in addition to the other benefits I mentioned earlier, also represents a major step forward in sustainable water usage, with an expected reduction at our Hopewell site of approximately 10%. Our people remain our greatest asset and the foundation of the enterprise. We are executing initiatives to drive a zero incident safety mindset and progress on equity, diversity, and inclusion at all levels of our organization, so we can attract and retain the best talent that reflects the communities in which we operate to deliver on our promise and priorities.

By the end of this year, we will have 13 scholars sponsored under the Future of STEM Scholars Initiative, or FOSSI Scholarship Program, with about 60% of our current scholars joining us as summer interns. We have also implemented a governance framework serving to ensure accountability, oversight, and robust ESG reporting and performance across all indicators.

As we have been progressing and maturing in this arena, we're pleased to be recognized by a number of third-party organizations for our commitment to corporate social responsibility, including our second consecutive platinum rating by EcoVadis, positive recognition by CDP for environmental management, and Public Company Board of the Year by the National Association of Corporate Directors, New Jersey Chapter, among other recognitions and awards. Let's turn to slide nine. Now, our outlook for 2023 remains largely consistent to what we have shared previously.

We continue to expect performance this year to demonstrate the resilience of our business model and our ability to navigate through the challenges of an uncertain environment. We expect favorable underlying agricultural and fertilizer industry fundamentals to support a robust planting and application season. We anticipate improvement in ammonium sulfate domestic sales volume to increase in the second quarter, albeit in a lower nitrogen and raw material pricing environment. North American acetone supply and demand conditions remain balanced given lower phenol industry operating rates globally, while headwinds in consumer durables and building construction end markets persists across our nylon and other chemical intermediates product lines. This is expected to continue having implications for both volume and price.

Operationally, we remain focused on safe, stable, and sustainable performance and continue to target running our plants at disproportionately higher rates than the industry on average. Our expected CapEx and impact of plant turnarounds remains unchanged. Lastly, we continue to expect our effective tax rate for the year to be approximately 24% and anticipate cash pension contributions to be approximately $0-$5 million following our $20 million contributions in 2022, bringing our defined benefit plan to a nearly fully funded status. Let me turn to slide 10 and wrap up before moving to Q&A. As a diversified chemistry company, we take pride in our long legacy of success and our strong track record of serving as a trusted partner for our customers with a diverse product portfolio that meets the evolving needs of multiple end markets and applications.

It all starts with our essential chemistries that make innovative solutions possible. The range of our end market exposure helps insulate the company from significant variability in any one product line, as demonstrated by our results in several environments. Supplementing our exposure to diverse end use applications, we have enhanced our sales mix through our differentiated product portfolio and continue to make smart and disciplined investments in our assets to sustain and improve throughput and profitability.

With this focus on through cycle profitability and upside from our deployment of capital, we continue to focus on increasing the earnings power of this business. We are executing to a set of focused priorities, all of which are aligned to drive in the critical measures that underpin achieving durable free cash flow yield and top quartile conversion, compelling returns on capital and attractive long-term shareholder returns.

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

Adam Kressel (VP, Investor Relations, and Treasurer)

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

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Vincent Anderson with Stifel. Please go ahead.

Vincent Anderson (Research Director)

Hey, good morning and, nice job here. I wanted to start.

Erin Kane (President and CEO)

Good morning, Vincent. Yeah.

Vincent Anderson (Research Director)

Hey, guys. I wanted to start with the granulation project, Erin, just kind of It sounds like it might be a little bit of a slower rollout, and I just wanted to know if there's anything we should be thinking about with regards to the Hopewell footprint, you know, if there's maybe some downtime to squeeze any of that equipment in there.

Erin Kane (President and CEO)

Yeah. No, certainly. Happy to expand a bit more. You know, this is an exciting day for us. As you know, this is an important area for us and we've had, you know, opportunities to look at a variety of ways to think about a conversion. You know, this program allows us to aggregate a number of projects and think about this expansion project over the next few years. You know, as you pointed out, it's not a one big one big project, one big bang. We will be seeing benefits, you know, move forward with increased production capability next year and sort of full completion of the set of aggregate projects probably in the 2026 to 2027 timeframe.

You know, again, in projects, are in different stages. We continue to work through the engineering of them, and they have different kind of shapes and sizes. We thought it was important to pull them together, in a multi-year investment. You know, as we progress, we'll continue to give you all some, you know, further transparency to that. As you say, you know, we have to align the engineering to turn around, but not everything will require a significant turnaround, if you will, based on how we're thinking about it.

Vincent Anderson (Research Director)

Gotcha. Okay. Super helpful. Then kind of sticking with ammonium sulfate, you know, the U.S. is stabilizing a bit, but Brazil prices are still just a calamity and now we're seeing Chinese urea exports pick up a little bit, you know, albeit off a low base. I guess tying that into the overall Chinese capro industry, is there do you have a current view of the maybe the total system profitability for the Chinese players, just given this rapidly disappearing co-product revenue of theirs that they've been, you know, dumping into Brazil?

Erin Kane (President and CEO)

Yeah. When you think about the price points that we mentioned and them operating now at around $800 a ton spread, you know, we would, you know, put this back into the line at more of a variable sort of break even or versus a fully disciplined total cash cost, you know, approach. You know, it's certainly influencing the pricing in Europe, which now sits on top of, you know, European cash costs. You know, we're seeing a bit of that behavior, I think, just with the length, you know, that they're experiencing. Operating rates in China are probably approximated about 70%-75%. You know, Europe is still depressed at around 50%.

I think, as you note, all of these things are coming to play with where they, you know, effectively, you know, price into the market. Watching the recovery, you know, certainly in China and, their growth is important here.

Vincent Anderson (Research Director)

Okay. Yeah. That's, that's a helpful data point. I think typically they tend to revert back to around 60%-65%. I guess we'll see how that goes. In terms of nylon demand, have you seen enough demand decline yet, whether just destocking in carpet or industrial to have to begin shipping more capro proportionately? Are you still able to place all of your nylon today?

Erin Kane (President and CEO)

Yeah. In the environment, you know, our view here is again, with our caprolactam cost position, right? Targeting again, those just proportional rates which, you know, we continue to seek and target to achieve. In nylon, where we have seen the softness, we're using that opportunity now to, I would say, replenish and rebuild good inventory levels. I think you had asked us a question a quarter ago, you know, how we might think about that. You know, over the course of the last couple of years, right, we covered other industry force majeures. You know, we had some of our own operational views. As we're running well, we're reestablishing, you know, healthy levels of inventory. We feel good about our position.

We have started to, you know, export some caprolactam where the market provides those opportunities. Again, our cost position allows us to do that. You know, again, keep our assets full, get ourselves in good shape and then, you know, seek those opportunities as we always have done during these time frames.

Vincent Anderson (Research Director)

All right, excellent. I wanna sneak one last one in here, and then I'll give someone else a turn. One of the big compounders pointed out the BEAD program in the infrastructure bill, which is, it's doling out something like $40 billion over the next few years to expand high speed internet coverage. My two questions on that are, first, you know, does your wire and cable business include fiber optic cable lines?

Assuming, yes, if we were to see significant increase in demand you know, from that market over the next, you know, four to five years, is there anything we need to start thinking about, from an incremental capacity perspective, or can you shift as much of your nylon production to wire and cable, you know, as is necessary?

Erin Kane (President and CEO)

Yeah, no, great question. Certainly all of these infrastructure programs and grants are, you know, are of interest to our customers, to ourselves. At current, we do not play into the applications into fiber optics. Most of our wire and cable is more feeder line, you know, for buildings, but, you know, noted. Right now I think that's, you know, probably not a direct, opportunity set for nylon.

Vincent Anderson (Research Director)

Okay. Thank you.

Operator (participant)

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

David Silver (Senior Managing Director)

Yeah. Hi, good morning,

Erin Kane (President and CEO)

Morning.

Michael Preston (SVP and CFO)

Good morning.

David Silver (Senior Managing Director)

Yeah. I have a scatter of questions here. I think I'd like to start with the Hopewell South issue, if you don't mind. You know, you've been very clear about your stance, you know, including in the press release today. I was wondering if you could provide a little bit of historical background, you know, Erin, in particular, since your long association with these assets. Just, just a couple of things. Firstly, what is the longer term, you know, history with bargaining with Hopewell South? In other words, is this the first strike in a long time or a short time? Is the Hopewell South bargaining unit a recent creation?

Secondly, more to the point, you know, when I read your releases, I see that the bargaining unit is comprised of, I don't know, maybe a half a dozen different units or separate unions. I'm just wondering if that complicates, you know, getting to a solution. In other words, if something's acceptable to the electrical workers and the food and commercial workers, but not to the journeymen, you know, pipe fitters, does that prevent a solution or are the different groups committed to, you know, voting together and agreeing with or, you know, agreeing with what the majority, you know, going along with what the majority agrees with?

In other words, just maybe a little bit background on this and, you know, how we can assess maybe the duration and potential, you know, longer term impact as this labor situation continues. Thank you.

Erin Kane (President and CEO)

Sure. Let me, you know, share, you know, a little bit of context here as you've asked for and, relative to where we sit. I would characterize our relationships with our unions across the entire enterprise as good, right? We have a long history of renewals and extensions and ratifications, you know, across the board. In Hopewell South in particular, the last strike was in 1987. To your point, it has been 36 years since we have, you know, seen and arrived at a situation like this. As you note, the Hopewell South bargaining unit is comprised of four separate unions.

When we think about this contract, our goal, right, we've been looking to achieve more unity by providing an equitable contract with wages that are competitive for all, not just for a segment of the union population. To your point right there is the current state of affairs, and that's what we're trying to achieve. And, you know, within the current state of affairs, we have to move. Again, we want to ensure that, you know, all roles have the ability to be paid to market competitive position, while we then need to maintain those groups that are already well-positioned in the market. That does present, you know, a different approach to what is necessary for the long-term vision of this company to attract, retain, and provide progression for our workforce.

You know, as you note and probably appeal back, there is, there is a level of difference, right, in the approach here, to accomplish those goals. I'll pause there.

David Silver (Senior Managing Director)

Okay, great. Just to follow up, I mean, just a couple of things, but you've assembled a contingent workforce. I just wanted to clarify, in your, you know, in your assessment that contingent workforce can maintain, you know, safe and efficient operations of the Hopewell South indefinitely. Is that your, you know?

Erin Kane (President and CEO)

So-

David Silver (Senior Managing Director)

Okay.

Erin Kane (President and CEO)

Yeah. We can, I can provide some more color there too. Right. Our salaried and contingent workforce is comprised of AdvanSix employees as well as our partner contractors, as well as contingent workers that we bring in and train. I can share it was down on Monday myself. I can assure certainly based on what I saw in the time spent, this is a collective team that is committed to serving our customers at this time. I would share they ran the plant extremely well in April. We have a collaborative, engaged, empowered learning environment that is committed to our success and driving really great progress here for ourselves and for our customers.

David Silver (Senior Managing Director)

Okay. Very good. I'd like to switch over to the fertilizer business. You know, I was listening to the comments from another nitrogen fertilizer supplier on their conference call, and one issue that cropped up. Ooh, bad pun there. One issue that came up was kind of an expansion or a widening of the coastal inland spreads. In other words, it's getting much more costly to move product up the river. From New Orleans up the rivers to the, you know, desired Mid-Corn Belt, you know, destinations. I would say that, you know, your particular positioning right on the Eastern Corn Belt gives you a kind of a nice advantage here at a very, you know, nice time of year for something like that to happen.

you know, you did mention in your remarks that after, you know, a long slide, a long period of, you know, lower prices, most recently, you said ammonium sulfate has picked up. I'm just wondering if that, you know, logistical bottleneck, you know, plays to your advantage. Do you see that in your, you know, particular regions? Have you been able to exploit that? you know, what does that mean for maybe incremental demand for your product, you know, through the balance of the spring planning season? Thank you.

Erin Kane (President and CEO)

Sure. You know, maybe I just re-echo that, you know, again, you can have more volatility perhaps in or dynamicism, right, to pricing in urea than you can see in an ammonium sulfate. You know, when we think about, the comments, I think that those comments were certainly, you know, logistics costs have moved up, but I think the logistics constraints and what's happening on the river is also creating a, you know, supply shortage as we talked about too, you know, on immediate supply that allows pricing to move in different spots regionally, you know, as the season is progressive. You know, the Midwest is pretty large. You know, for us, we think about the upper Midwest, to NOLA. We would say typically, we see about a $45 spread for AS in those regions.

You know, as you know, we've shared in the past, we predominantly rail from Virginia out into the Corn Belt. You know, we've been working to position our product into the region as we go. Certainly as we're in the thick of it and planting is underway, you know, we've been able to see a bit of an uptick and capture some price. That's hopefully a little bit more color as to how we see that situation.

David Silver (Senior Managing Director)

Okay, great. Thank you for that. Next question, I did wanna ask you about your, you know, assessment to date of the U.S. Amines acquisition? I think it's a little over a year or just about a year since that business was acquired. You know, I guess I was just hoping you could discuss a few things. I guess, number one, how, you know, you feel the integration has gone. And also, you know, maybe I remember, and I believe Mike was talking about, you know, a lot of attractive incremental opportunities on the site, and, things like that. Just kind of your one year anniversary assessment of U.S. Amines, has it met your goals thus far?

You know, in that, let's say in that capital budget that you outlined, here, you know what, if anything, pertains to, you know, to the two locations that you acquired with U.S. Amines? Thanks.

Michael Preston (SVP and CFO)

David, thanks for the question. I will say we are very pleased with the U.S. Amines acquisition. Overall, the integration has gone very well. They've been operationally and functionally integrated with the company. We also recently upgraded their enterprise resource planning system to the latest generation of SAP. We feel very good about that. In terms of those attractive incremental opportunities for growth, you know, we continue to explore those. Some requiring some incremental investment at the site to be able to produce certain products that will be new. Those opportunities are coming to fruition. They do take some time and some commercial development as well as investment.

We are pleased with those opportunities and how they're coming to fruition, and we are still very optimistic in terms of the outlook for the business.

David Silver (Senior Managing Director)

Okay. That's great. Thank you very much.

Erin Kane (President and CEO)

Thanks, David.

Operator (participant)

The next question comes from Charles Neivert with Piper Sandler. Please go ahead.

Charles Neivert (Managing Director)

Morning, everyone.

Erin Kane (President and CEO)

Morning.

Charles Neivert (Managing Director)

Quick questions. Yep. Just a couple of quick questions. One, on ammonium sulfate, you're gonna be, you know, moving a lot more to granular over time. How much of your total sulfate will be able to become granular when you're finished with these projects out in 2026, 2027, as you were talking about?

Erin Kane (President and CEO)

When you think about how sort of the math works, right, it's an additional 200,000 times. That would approximate to a roughly 75% overall conversion.

Charles Neivert (Managing Director)

When it's all said and done, you conceivably under the right circumstances are gonna sell 75% granular, 25%, what, standard, I guess they call it, grade?

Erin Kane (President and CEO)

Yes. It could be standard-.

Charles Neivert (Managing Director)

And-

Erin Kane (President and CEO)

soluble. You know, that's the opportunity that we also, you know, pull into our packaging business. There's mid-grade, you know, so there are other cuts that will come off of that.

Charles Neivert (Managing Director)

It's the 75% granular is the one I'm focused on at this point. Okay. In terms of the choice to make the expansion, I assume it's based on demand coming from your existing customer base, plus some other operations you may be able to take on. I mean, it's not just to do it, to have it's more like just we know we can sell it, so we're willing to spend the money to get the upgraded product. I mean, you're sort of following a project that's following demand as opposed to the other way around.

Erin Kane (President and CEO)

Correct. When we think about, you know, North American sulfur demand growth, right, it has continued to grow and will continue to grow based on its value proposition. Yes, this is very much a business case-oriented approach. You know, in aggregate, you know, we are reaching the investment levels that we have been consistently, you know, sharing. These are, you know, good projects. It's, it's time for us to move relative to supporting our customer base.

Charles Neivert (Managing Director)

As you get to the full level of granular, is there gonna be a change in the mix of sales in terms of regions, I mean, basically, you know, the reason you had some of what the mix you had in part was because the South American market wasn't really buying as much granular. I know that that is picking up. Do you anticipate the tonnages starting to shift around to be more US-based and therefore, you know, you'll have inventory and try and again sell more into the US on the seasonal basis that it runs, or you're still gonna continue to sell pretty split up between US and South America, mostly South America, and just, you know, there's just more granular to South America now?

Erin Kane (President and CEO)

Yeah. No, it is to support the North American market. You know, over time, we would anticipate that mix to shift, that geographical mix.

Charles Neivert (Managing Director)

Okay. In terms of the project, obviously part of what you said is there's an energy savings and things of that nature. I mean, are you walking through other parts of your businesses irrespective of, you know, which it is, and looking for, you know, places to cut costs along energy lines? Is this something that's sort of I mean, we did that with coal going to the gas boilers, that kind of stuff. Are there more projects potentially that could take down energy consumption over time?

Erin Kane (President and CEO)

Yeah. As we think about our life cycle assessments and where our product carbon footprints, I mean, all of that is tied to how we think about where we wanna focus, you know, going forward. There's emissions energy, you know, that inform, you know, our option set. We're wrapping that up, as I indicated. That will allow us to do, you know, a complete set of analyses to really think about where and how we support our customers, relative to their decarbonization goals. Obviously, you know, energy gives us a win-win both on the cost and sustainability side.

They're, you know, relative to that footprint, you know, we've got to figure out where it is in that roadmap. Certainly relative to our ongoing operational excellence, you know, these are areas that we continue to look at. I would say probably in this case, because it's conversion, there's no really net increase in consumption of raw materials, energy, and then obviously working hard to get the sustainability benefits associated with water.

Charles Neivert (Managing Director)

Got it. Last question on my side. If I'm looking for a signal or an indicator of maybe some improvement in a variety of different ways, Would one of those signals might be the pullback of Chinese exports to internal use? You know, you start seeing China being participating less, for instance, in the European market, which would be a signal that their own demand is picking up. You know, is that something we should be looking at? Or what other signals might we be looking at to sort of indicate a coming improvement perhaps in the nylon and/or sulfate business?

Erin Kane (President and CEO)

Yeah, I think it's a very good one that you point out. You know, right now with where their capacity utilization is, and then certainly their exports, I mean, we can kind of look at both what they're exporting directly. We, we would also kind of look at imports in the U.S. and, you know, in nylon, it's not necessarily imports of caprolactam or resin, but really the imports of the compounded products themselves as well. You know, I think the trade flow dynamic is probably the first place that we would look relative to, you know, seeing an opportunity for that, those green shoots to start arriving.

Charles Neivert (Managing Director)

Okay. Well, that's it for me for today. Thanks.

Michael Preston (SVP and CFO)

Okay, thanks.

Erin Kane (President and CEO)

Charlie.

Operator (participant)

Our final question today comes from Vincent Anderson with Stifel. Please go ahead.

Vincent Anderson (Research Director)

Yeah, thanks. I just had a couple more super quick ones. Have you seen any of the destocking headwinds from the paint customers in your oximes business, or has that organic growth offset most of that pressure?

Erin Kane (President and CEO)

Yeah, we certainly in the European paints and coatings have seen that pressure, Vincent, certainly in Q4. You know, we're just now starting to see maybe a little bit of life coming back into that space. Even in North America paints and coatings, we haven't yet seen a significant seasonal uptick that we would see. It feels like a little bit still to watch here, still to come.

Vincent Anderson (Research Director)

Okay, excellent. Then, you addressed most of my amines question or David touched on most of these, but maybe just to be more direct, because I don't trust my own math, but it looks like that business was actually up organically in the quarter. Is that correct?

Michael Preston (SVP and CFO)

When we look at it, Vincent, from a year-over-year perspective, we actually executed the transaction rather late in Q1 last year. Year-over-year, most of that impact would just be sort of the acquisition Q1 to Q1 on an apples to apples basis. That's what we see now. We'll have it obviously fully integrated in, you know, this year, and our comparisons will be fully organic as we, you know, as we move ahead.

Vincent Anderson (Research Director)

Okay. On a pro forma basis, would it have been up in 1Q?

Erin Kane (President and CEO)

You know, we can come back on that one. You know, relative to the dynamics, remember their main marketplace is, or main end markets here for us is in Ag, right? It's all the same dynamics. I don't have that top of mind for you, but it would have seen the same considerations of a slower start, you know, relative into, you know, the herbicide space, with rebounding coming here in Q2.

Vincent Anderson (Research Director)

Okay. Okay.

Erin Kane (President and CEO)

Adam can follow up with you.

Vincent Anderson (Research Director)

Yeah. Yeah, no worries. Last one, maybe a little left field, for Michael here, to keep him on his toes. The granulation project, you mentioned, potential USDA funding, which is interesting.

Michael Preston (SVP and CFO)

Yep.

Vincent Anderson (Research Director)

Also just kind of looking at, you know, it's energy neutral, it's saving a lot of water. It's technically a co-product rather than on-purpose chemical fertilizer. Most of your debt structure right now is, you know, a floating revolver line. You know, is there any thought here about green debt financing as part of maybe a broader review of your optimal capital structure and fixed versus floating debt?

Michael Preston (SVP and CFO)

Yeah. You know, certainly that is an option out there, and some companies have taken advantage of that with respect to sustainability investments at each of the sites. I will say that as we evaluate these opportunities, both for sustainability related investments as well as growth, you know, and expansion projects, we do look at all options. You know, for us, as we looked at the opportunity with respect to USDA potential funding and a grant, as well as the health of our balance sheet, we feel, you know, very comfortable with how we're funding this project.

Vincent Anderson (Research Director)

All right, great. That is all from me.

Operator (participant)

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

Erin Kane (President and CEO)

Terrific. Thank you all again for your time and interest this morning. Despite a dynamic set of industry conditions and a record comparison in the prior year, we delivered solid earnings results in the first quarter of 2023. Our diverse product portfolio and global low cost position continue to serve us well as we navigate the current environment. We feel very good about the strategies we've implemented, which continue to support expectation for AdvanSix's sustainable performance. With that, we look forward to speaking with you again next quarter. Stay safe and be well.

Operator (participant)

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