AdvanSix Inc. Q2 2026 earnings call

Thank you, Debbie. Good morning and welcome to AdvanSix's Second Quarter 2026 Earnings Conference Call. With me here today are President and CEO, Erin Kane, and Senior Vice President and CFO, Patrick Day. 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 second quarter 2026 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.

Thanks, Adam, and good morning, everyone. We appreciate you joining us here today for our quarterly call. As you saw in our press release, our resilient second quarter results reflected a significant sequential improvement in earnings and cash flow amid what remains a highly dynamic macro environment, particularly in Plant Nutrients. Patrick will dive into the financials in a moment, but I would like to start the discussion today framing our key strategic priorities. To drive through cycle value creation and support total shareholder return with higher highs and higher lows, we remain focused on commercial execution, operational excellence, and disciplined capital deployment. These are the controllable levers that are critical to anchor our performance. On commercial execution, we continue to focus on winning with customers to profitably fill our plants and shifting product mix towards higher-value applications.

Our commercial teams continue to leverage both formula and market-based pricing mechanisms to recover inflationary raw material costs. In the quarter, strong pricing across Plant Nutrients, Chemical Intermediates, and Nylon Solutions offset higher sulfur, benzene, and propylene costs. Importantly, our year-over-year net price over raws impact was neutral in the quarter, which is a notable improvement from the first quarter headwind. On operational excellence, we are well-positioned through our integrated asset base, global low-cost position, and continued focus on productivity. Our base capital investments support safe, stable, and sustainable operations. As we discussed on prior calls, our ammonia turnaround was moved to the second quarter and scoped to align with our supplier's natural gas pipeline inspection. We are pleased to share that we executed to our expectations. Lastly, we are focused on generating meaningful operating cash flow to support disciplined capital deployment.

From a working capital perspective, our cash conversion cycle benchmarks in the top quartile among peers. Our significant runway of opportunity on Section 45Q carbon capture tax credits also supports future cash generation. As we allocate capital, our discretionary organic investments target greater than 20% returns. Our SUSTAIN growth program is generating returns in excess of 30%, and we remain on track to deliver product mix optimization with 75% ammonium sulfate granular conversion. This is an important milestone as we continue to align our production output with growing demand for sulfur nutrition. We will continue to ensure a well-managed balance sheet that will afford the investments for performance and growth. We continue to expect improved earnings and cash flow in the second half of the year compared to the first half as we build momentum into 2027.

While the near-term market environment has been mixed, our durable competitive advantage, portfolio resiliency across a diverse set of end markets, and our long-term positioning for growth underpin what we believe is a compelling investment thesis for AdvanSix. Let's turn to slide four. Based on our expectations coming out of the first quarter earnings call, a number of items played out as anticipated. Notably, the sequential improvement in net pricing over rising raw material costs was a primary driver of our earnings improvement. Both Nylon Solutions and Chemical Intermediates performed at or better than our expectations, with strong commercial performance and mix optimization supporting margins. Plant Nutrients volume, however, was lower than anticipated. The spring planting season saw a significant increase in grower input costs while crop and grain prices remained steady at lower levels. This unfavorably impacted farmer profitability and resulted in a reduction of fertilizer consumption overall.

Despite these challenges, we ended the full fertilizer year at near record volume performance for domestic granular ammonium sulfate. Lastly, our utilization rates were lower on operational performance, including the impact of our ammonia plant turnaround. With that, I'll turn to Patrick to discuss the financials.

Thanks, Erin. I'm now on slide five to discuss our results for the quarter. Sales of $421 million increased approximately 3% versus the prior year, comprised of 18% favorable pricing, partially offset by a 15% decline in volume. Raw material pass-through pricing was up 13%, following a net cost increase in benzene and propylene. Market-based pricing improved 5%, primarily driven by an increase in Plant Nutrients, reflecting higher nitrogen pricing amid increased sulfur input costs. Lower sales volume was primarily driven by more challenging agricultural fundamentals, including farmer economics, which resulted in a reduction of in-season fertilizer purchases. Adjusted EBITDA was $32 million, down $24 million from last year. I will highlight the key year-over-year variances in a moment. Adjusted earnings per share of $0.19 declined $1.05 versus the prior year.

The higher effective tax rate compared to last year was driven primarily by 45Q carbon capture tax credits claimed in the prior year period and changes in taxable income. We expect the full year 2026 effective tax rate to be in the range of 10%-15% prior to any additional 45Q claims. On a sequential basis compared to the first quarter, earnings and cash flow improved significantly with tailwinds across the portfolio from net favorable pricing over raw material input costs. Overall, a testament to the commercial performance in the first half of this year. Let's turn to slide six. In the quarter, we drove pricing improvement across the portfolio on both a year-over-year and sequential basis. This was supported by higher raw material pass-through pricing, as well as an increase in market-based pricing.

The primary driver of lower volume, both year-over-year and sequentially, was Plant Nutrients due to the in-season dynamics we observed. To a lesser extent, we saw modestly lower volumes quarter-over-quarter in Nylon Solutions and Chemical Intermediates. Across Nylon Solutions, resin volumes increased year-over-year on improved operational performance, while caprolactam volumes moderated in a soft demand environment for carpet applications. We saw a reduction overall in export volume sequentially in the second quarter. A more constrained production environment, including the planned turnaround activities, shifted our focus to serving our North American customers. Consistent with our ongoing operating approach, we evaluate the optimal product and geographic mix to ensure the best economic outcome for the integrated enterprise. Let's turn to slide seven. Here, we highlight the key drivers of our second quarter Adjusted EBITDA performance year-over-year.

We completely offset the significant raw material cost increase in the quarter through commercial execution and pricing actions. We thought it was important to highlight in this environment the magnitude of the input cost inflation that we were able to offset through pricing in the quarter. As you can see on the right side of this slide, raw material costs were a headwind of $72 million in the second quarter on a year-over-year basis. This was primarily driven by rising benzene and sulfur prices. We were able to fully recoup that impact through strong commercial execution with favorable market and pass-through pricing across the portfolio. On a sequential basis, while we incurred a $10 million headwind in 1Q, we saw that flip to a $39 million tailwind in 2Q. This was also supported by strong pricing in each business line, more than offsetting rising benzene, sulfur, and propylene costs.

Back to the bridge on the left side of the chart. Volume represented a $17 million unfavorable impact, primarily driven by lower sales in Plant Nutrients in the face of more challenging agricultural fundamentals, including farmer economics. Operationally, we saw an approximately $4 million unfavorable impact from the timing of planned plant turnarounds. Lastly, all other items netted to a $3 million headwind, with the impact of reduced production output partially offset by lower SG&A as planned. Let's turn to slide eight. On the left side of the page, we've shown our first half free cash flow generation for 2025 and 2026. Our year-to-date performance is largely tracking to last year when taking into account approximately $26 million of insurance proceeds in the prior year period.

Working capital, although improved year-over-year, has been a seasonal use of cash in the first half as expected. The primary driver of the improvement was disciplined inventory management. As we've shared previously, there is non-linearity in our cash flow on a quarterly basis. We look forward into the second half, we anticipate significant sequential improvement, notably as a result of our reduced CapEx run rate, working capital tailwinds, including our fourth quarter pre-buy program in Plant Nutrients, timing of annual payments paid in the first half, and 45Q cash tax credits. Let me turn the call back to Erin.

Thanks, Patrick. With the moving parts in our end markets, let's first take a deeper dive into what we're seeing in the Plant Nutrients market and specifically sulfur input costs, which have been key drivers of our first half performance. We realized lower in-season Plant Nutrients sales as a result of reduced grower application of nutrients. Ammonium sulfate demand softened significantly in 2Q after strong early season purchases as farmers prioritized applying nitrogen in the peak of the season above all nutrients, most notably ammonia. The season progressed, growers applied fertilizer, including ammonium sulfate, based on purchases and inventory that was in the channel. Despite weaker in-season sales, we still achieved one of our strongest fertilizer year performances in terms of total domestic granular volume. It is clear that we structurally improved our output and mix, supported by our SUSTAIN growth program.

From an input perspective, sulfur costs have moved up to record highs over the course of the last year. Elevated sulfur prices, amplified by the conflict in the Middle East, created demand destruction across the industry, most notably in phosphates, which represent approximately 50% of sulfur demand. The Tampa sulfur marker closed at another record of $705 per long ton in the third quarter, following $655 per long ton in the second. Third-party industry experts are forecasting a roughly $200 decline in sulfur prices entering 2027, which will be a tailwind for the next planting season amid what is likely tighter domestic ammonium sulfate supply. A sensitivity for impact to AdvanSix, every $100 per long ton change in sulfur raw material price equals an approximately $35 million cost impact on an annual basis.

In this environment, we have flex optionality to incrementally increase ammonia sales availability based on market dynamics across the entire value chain. Our plan for the full year 2026 is expected to be up 30% on ammonia sales volume compared to 2025, which was a prior record year. This reflects our ongoing debottlenecking efforts and the benefit of targeted replacement maintenance capital investments over time. With our positive experience securing our existing USDA grant in support of our SUSTAIN program, we're now planning to apply for their new fields grant to expand our ammonia capacity and increase nitrogen nutrition availability for domestic farmers. In addition, our previously announced DEF project is progressing through its evaluation phases as planned and if moved forward, would unlock more value off our integrated ammonia platform. Let's turn to slide 10 to highlight what we're seeing across the rest of the portfolio.

Moving beyond ag to our key nylon end markets across building construction, engineering plastics, and packaging, North American demand has not materially changed. Global pricing has moved up with higher input costs while raw material shortages, logistics constraints, and lower operating rates in China have tightened supply. Similar to nylon, end market demand across Chemical Intermediates into construction, coatings, and downstream industrials has been broadly stable. Phenol demand remains soft overall, driving lower global operating rates coupled with reduced acetone imports into the U.S., all of which are supporting tighter acetone supply and demand dynamics. Let's move to slide 11. Looking ahead, we have line of sight to several drivers in place to support second half sequential EBITDA and cash flow improvement. On earnings, we expect benefits from the absence of the first quarter winter storm impact and the completion of our larger planned turnaround in the second quarter.

We continue to target approximately $10 million savings exiting 2026 from our multi-year non-manpower fixed cost reduction program. In Nylon Solutions, we expect steady volume performance and continued focus on price rolls expansion through disciplined commercial execution and mix optimization. In Chemical Intermediates, we continue to expect cycle average performance for acetone spreads while our other products in the portfolio are performing to expectations. In Plant Nutrients at this point in the year, we've historically realized a $10 million-$15 million sequential headwind on earnings due to the reset of the North American fertilizer year beginning with the fall fill program. This year, we expect the impact to be greater given pricing dynamics amid higher sulfur input costs that have impacted the fill program outcomes.

Due to the sulfur late season demand as discussed, there was fertilizer inventory left in the channel, which prompted competitive intensity as players, including traders of imported and other domestic volume, sought to liquidate their positions without regard to producer economics. While this has near-term impact, we remain focused on serving our customers with a strong sulfur nutrition value proposition we have long built through sound agronomic research and grower yield benefits. Moving to cash, there are several tailwinds which Patrick highlighted supporting our stronger second half performance. Let's turn to slide 12 before moving to Q&A. We remain confident in the through-cycle value creation opportunity at AdvanSix. Our unique combination of assets and business model are core to our durable competitive advantage and long-term positioning. Key to our strategy is a focus on the levers we control: commercial execution, operational excellence, cash generation, and disciplined capital deployment.

As we move through the remainder of 2026 and navigate the current industry environment, we are well-positioned to support our strategic priorities as a U.S.-based integrated manufacturer aligned to domestic supply chains and energy markets, as well as a diverse set of end market applications. We believe the actions we're taking and strategic priorities ahead support AdvanSix to deliver improved performance and sustainable long-term value. With that, Adam, let's move to Q&A.

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