LSB Industries Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the LSB Industries Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Listen only mode. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Fred Bonacour, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone. And answer session. Joining me today are Mark Behrman, our Chief Executive Officer and Cheryl McGuire, our Chief Financial Officer. Please note that today's call will include forward looking statements. And because the statements are based on the company's current intent, expectations and projections, they are not guarantees of future performance and a variety of factors could cause and answer session.

Speaker 1

As this call will include references to non GAAP results, please see the press release in the Investors section of our website, listen only to the operator. We will now begin the call to slide 9.0 for further information regarding forward looking statements and reconciliations of non GAAP results to GAAP results. Listen only mode. At this time, I'd like to go ahead and turn the call over to Mark.

Speaker 2

Listen. Thank you, Fred. We're happy to have the opportunity to speak with you today about our 2023 Second Quarter results and our outlook for the Q3 and full year of 2023. Listen only mode. I'd like to start by once again congratulating our team on their outstanding safety performance.

Speaker 2

For the 1st 6 months of this year, listen. We have had 0 recordable injuries and our trailing 12 months recordable injury rate as of June 30, 2023 and answer session. We are committed to ensuring that everything we do starts with safety. Looking at our 2023 and answer session. 2nd quarter summary on Page 3 of the presentation.

Speaker 2

Our manufacturing and commercial teams performed very well during the quarter, which translated into a solid increase in both production and sales volume compared to Q2 2022. I'm pleased to say that our average ammonia on stream rate for the Q2 and first half of twenty twenty three indicates that we are making good progress towards our stated goal of operating our ammonia plants at a 95% on stream rate. Listen, reflecting the processes and procedures we've implemented coupled with our reliability investments. We expect to see that rate continue to improve as we mature our new programs and get through next year's turnarounds. As anticipated, our financial results were lower compared to the Q2 of 2022.

Speaker 2

Listen. This was due to a decline in market prices for nitrogen products relative to last year's high pricing levels, resulting largely from the impact UAN demand was below our expectations headed into the period as farmers opted to apply more urea to what had been a comparatively attractive pricing early this year for urea versus UAN. As we have generated Significant free cash flow over the last 24 months and expect to continue to generate free cash flow even in a lower nitrogen pricing environment. We have worked to balance investments and growth with return of capital to our shareholders. Last year, we repurchased $175,000,000 of common stock.

Speaker 2

Listen only mode. And during the Q2 of this year, we repurchased $125,000,000 of our outstanding debt. Additionally, We repurchased $17,000,000 of common stock under the $150,000,000 stock repurchase program that our Board authorized in May. So collectively, as of the 12 month period ended June 30, 2023, we have returned in excess of $317,000,000 to shareholders. We will continue to balance the use of our free cash flow to maximize long term shareholder value.

Speaker 2

Lastly, as I have mentioned previously, We submitted a capacity expansion project at our El Dorado site to the USDA for funding under their fertilizer production expansion program. Our project was selected for consideration for funding and is open for public comments until the end of this month. Assuming we continue through the process, and answer session. The EPA will conduct a further environmental review. While we are excited about this project, we will continue to evaluate it, taking into consideration our markets, to the global economy, the timing and sequence of the expansion and internal resources.

Speaker 2

We would hope to decide on the next steps in this 3rd quarter subject to the USDA's timeline. On Page 4 of our presentation, we provide an overview of our end markets. Listen. Corn prices remain above multi year averages reflecting solid demand trends, dry conditions throughout many U. S.

Speaker 2

Corn growing regions, accordingly, we expect corn prices to remain at levels that would support strong fertilizer demand as we move towards the next planting season. Listen only mode. In addition to strong corn prices, we believe that lower farm input costs relative to last year should further incentivize listen only mode. We are pleased with our customers to optimize fertilizer applications in the Q4 of 2023 and in the first half of twenty twenty four as they seek to maximize yields for the next growing season. Mode.

Speaker 2

Demand for our industrial business remains steady. Nitric acid demand is stable as global producers shift production from international facilities listen to the U. S. Operations in order to take advantage of lower U. S.

Speaker 2

Input costs. Demand for ammonium nitrate in mining applications is strong as the increase and the growth in electric vehicles and other applications is and listen to the

Speaker 3

Q and A session.

Speaker 2

Now, I'll turn the call over to Cheryl, who will discuss our Q2 results and our outlook. Cheryl?

Operator

Thanks, Mark, and good morning. On Page 5, you'll see a summary of our 2nd quarter financial results. We generated adjusted EBITDA of $47,000,000 and adjusted EPS of $0.25 in the 2nd quarter, slightly below our expectations. Listen. This is largely because of a more significant decline in selling prices than we had anticipated early in the quarter, along with lower UAN sales volumes, as Mark mentioned earlier.

Operator

Turning to Page 6, you'll see a summary of our key balance sheet and cash flow mode. During the Q2 of 2023, we generated cash flow from operations of $44,000,000 and had capital expenditures of $14,000,000 translating into $30,000,000 of free cash flow and a free cash flow conversion rate of approximately 64%. Year to date, we've generated cash flow from operations and had capital expenditures of $103,000,000 $32,000,000 respectively. Our continued free cash flow generation enabled us to maintain a strong financial position. At the end of the second quarter, we had approximately to $314,000,000 in cash and short term investments.

Operator

This was after we repurchased $125,000,000 of principal amount of our senior secured notes for $114,000,000 cash and bought back $17,000,000 of to the stock under our current 150,000,000 share buyback program that our Board authorized in May. Listen. As Mark mentioned, we are committed to a disciplined, multifaceted approach to capital allocation listen only mode that balances return of capital to shareholders and investment in growth with our focus on maintaining an appropriate level of leverage. Listen only mode. Page 7 bridges our and $58,000,000 which was the highest adjusted EBITDA quarter in LSB's history.

Operator

The lower listen. On the positive side, our sales volumes were higher in the 2023 Q2 relative to last year as a result of and answer session. Stronger ammonia operating rates at our facilities coupled with our successful commercial initiatives. Listen. Now I'll outline some factors to consider when thinking about our Q3.

Operator

In terms of product selling prices, listen. The nitrogen fertilizer industry typically sees a summer reset during the seasonally slow Q3 when the summer fill program comes out, and we saw that again this year. The NOLA UAN benchmark was reset at approximately $195 a tonne in early July. Haven't had a positive response to the 1st round of offers during the summer fill program, it was widely expected that offer levels would be raised. That occurred earlier this week and was aided by the persistent firmness of local and international urea markets as well as the rebound in corn prices.

Operator

At the time of the initial summer fill announcement, September NOLA urea barges were trading up to to $330 a tonne with August trading sub $3.25 per tonne. The latest August September barge Trades have been $55 to $60 a ton higher with the markets continuing to rise. This bodes well for UAN and AN pricing. However, current prices are still lower than our realized price for UAN and AN in the Q2 of 2023. Listen.

Operator

The Tampa ammonia benchmark price settled at $2.85 per metric ton in July, below our realized average price of $3.70 per metric ton in Q2 of 'twenty three. With that said, Tampa increased by $10 to $2.95 a metric ton for August, the 1st monthly increase since October of 2022. Mix. With respect to volume, we expect a material improvement in the Q3 of 2023 listen versus the 2022 Q3 as we have no turnarounds this year and we had turnarounds at our El Dorado and prior facilities last year. Mode.

Operator

However, I would note that during this Q3, the NuStar pipeline that we use to distribute ammonia from our El Dorado facility will be down for 6 weeks for scheduled maintenance. As a result, we will see a pretty sizable sequential decline in ammonia sales volumes, but still a material increase relative to the Q3 of 2022. We expect that additional inventory build during Q3 to be sold by the end of the year. In thinking about costs, 90% of our natural gas feedstock

Speaker 3

listen only mode

Operator

for Q3 2023 are locked in at approximately $3.50 per MMBtu, listen, so roughly in line with the Q2, but substantially lower than the Q2 of 2022, listen, which was approximately $7.15 Putting it all together, given the current pricing environment I outlined, listen. We expect our 3rd quarter adjusted EBITDA to see a similar sequential decline as what we realized in our Q3 of 2022. Looking out to the Q4, we believe that UAN and AN prices should continue to increase and that ammonia will see pricing improve with demand factors beginning to materialize. And now, I'll turn it back over to Mark.

Speaker 2

Listen. Thank you, Cheryl. Page 8 depicts the downward trend in European and Asian natural gas prices over the past 10 months. The drop in gas prices in Europe caused largely by a combination of warmer than average temperatures this past winter combined with increased storage inventories listen only to the results of the LNG from the U. S.

Speaker 2

Enabled European ammonia producers to come back online after curtailing production last year listen only due to high feedstock costs. Even so, gas prices in Europe remain significantly higher than gas prices in the U. S. Listen. At approximately $10 an MMBtu equivalent, this equates to a gas cost of ammonia production in excess of $3.50 per ton listen only for European Producers.

Speaker 2

That's significantly higher than the Tampa Ammonia benchmark of $2.95 for August and the U. S. Gas cost to produce ammonia of approximately $125 per ton. We believe that the disconnect is one of the multiple factors pointing to higher ammonia selling prices later this year. Page 9 provides an overview and update on our low carbon ammonia initiatives.

Speaker 2

Listen. We continue to make headway on advancing our blue ammonia project at our El Dorado facility and our green ammonia project at our prior facility, including entering into session with potential off takers. These projects represent exciting opportunities to emerge as a leader in decarbonizing our industry. Listen only do they have the potential to substantially reduce our carbon footprint, but we believe the economics of both should be very attractive. During the Q2, listen only mode.

Speaker 2

We were pleased to add to our low carbon ammonia activities with the announcement of our MOU with Amogy, a developer of ammonia to power technology. The goal of this relationship is for the 2 companies to collaborate on developing low carbon ammonia as a marine fuel. Ultimately, and to work with additional partners to develop the ecosystem and infrastructure needed to support this transition, listen, which would result in a major development in global efforts to reduce CO2 emissions. Lastly, We are in discussions with respect to several additional low carbon initiatives and look forward to announcing them at the appropriate time. Listen only mode.

Speaker 2

There is no question that 2023 has been a challenging year with respect to the headwind from declining selling prices. At the same time, however, We are very pleased with the progress we've made with our plant operations, our continued balance sheet improvement, our capital allocation program and our new business developments in clean energy. We believe that collectively these make us a company well positioned for growth in the coming years, listen, irrespective of commodity price trends. Before I hand the call back to the operator for the Q and A session, mode. I'd like to mention that we will be participating in the Seaport Virtual Summer Conference on August 22, the UBS Chemicals Conference listen on September 6 in New York, the Jefferies Industrial Conference also in New York on September 7 and the RBC Industrials Conference in Las Vegas on September 12.

Speaker 2

We look forward to seeing many of you at those events.

Operator

And answer session. Listen. Your first question comes from Josh Spector with UBS. Please go ahead.

Speaker 4

Listen. Yes. Hi. Thanks for taking my question. First, I guess I just wanted to clarify some of your comments on UAN and the summer fill program.

Speaker 4

So you talked about pricing kind of looking towards August and further out $300 plus in the barge. But I think you made the comment that your realized pricing is Still below 2Q levels. Is that just an averaging effect? Or can you explain kind of what's going on there? And with current spot rates, listen only mode.

Speaker 4

Is there any chance you exit at a price higher than what you realized last quarter?

Speaker 2

Good morning, Josh. How are you? So, listen. I think when you think about most of our products, particularly ammonia and UAN, we get a summer reset that occurs sort of late June or really early July. And we usually take an order book based on those prices for some length of time.

Speaker 2

I mean, it's not significant, it's not months out there. So I think what we're going to see in the Q3 is A lot of summer reset prices during the quarter, and we'll realize a lot of these improvements in prices either late in Q3 or early into Q4.

Speaker 4

Got it. No, that makes sense. And just a question on the cost side. When we look at your cost ex gas, It looks like your costs are generally a good deal higher than they were a year ago and over the last couple of years, about $80,000,000 a quarter, almost about $200 a ton. From our math, that looks about almost 30% higher than where you would have been, again, ex gas costs over the past couple of years despite having no turnarounds this year.

Speaker 4

So I'm just curious if you can give us some context about what might be going on there operationally to drive costs higher And if there's something structural or temporary driving any of that?

Speaker 2

Well, we'd have to take a look at that. So I'm not I can't Can't say I'm familiar with the 30% higher cost that you're referring to, so maybe we can follow-up after the call. But I will tell you that product mix obviously Has an impact on cost, right? The reason we upgrade from ammonia is because we're making more margin. And I think that could be part of it as we sold less UAN and more ammonia during the quarter.

Speaker 4

Okay. Thanks. Yes, I'll follow-up offline. I'll turn it over and jump back in the queue. Thanks.

Speaker 5

Thanks.

Operator

Thank you. To your next question. David Begleiter with Deutsche Bank. Please go ahead.

Speaker 6

Thank you. Mark, could you just clarify your comments on the guidance for Q3? I may have misheard the What it was expected to be versus the prior year? Thank you.

Speaker 2

I think Cheryl mentioned that we would see a sequential decline That was similar to what we saw last year.

Speaker 6

Got it. Got it. And on Eldorado, has anything Change in your thinking over the last 3 months? Or again, do you do expect a decision this week from the federal government on this project for the maximum amount. Is that still the current thinking?

Speaker 2

Yes. I think what I was Referring to is really our comment period, right? So we've got selected as one of the projects that they're considering for funding and then all of the projects that were selected have a public comment period, right. So that's open for public to make comments and the USDA would review those comments. That will end at the end of this month.

Speaker 2

And the USDA has already told us that assuming that we move forward, they would want to do another environmental review. It's more, whether it's NGOs or it's tribal, looking at any tribal issues or things like that. And then after that, I'm a little less I'm a little more easy on what the process is, but we would hope that by the end of September, we would have a lot more clarity as to, whether they're going to fund us or not. And then The expectation would be that they would fund up to 25% of the total project cost, which the full project It's about $400,000,000 so that would be $100,000,000

Speaker 6

Very good. Thank you.

Operator

Listen. Next question, Andrew Wong with RBC Capital Markets. Please go ahead.

Speaker 5

Hey, good morning. Could I just Maybe clarify the Q3 EBITDA guidance. I think I heard Sheryl say that Q3 will be down sequentially, similar to what we saw last year. So what does that mean? Does that mean EBITDA might be in like the $40,000,000 $50,000,000 range similar to what we saw in Q3 of last year?

Speaker 5

Or Is there a different sequential decline that I should be thinking about?

Operator

Yes, sure. Hi, Andrew. So what I was referring to is We generally see a pretty heavy sequential decline, as you move from Q2 to Q3, because Q3 is the

Speaker 3

and listen and listen

Operator

and listen and listen and listen and listen and listen and listen and listen and listen

Speaker 3

and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and

Operator

listen and listen and listen and listen and listen and listen and listen and listen and listen and listen

Speaker 3

and listen and listen and listen and listen

Operator

and listen and listen and

Speaker 3

listen and listen and listen and listen and listen and

Operator

listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and what the decline was there. It was ballpark 65%, 70% decline. I think you're going to see a similar decline this year if you compare the Q3 to the Q2 of this year.

Speaker 5

Okay. That makes sense. And then I just wanted to ask maybe following up a little bit on the cost Question, maybe ask a different way, like how would you say in general your non gas costs have been tracking this year versus maybe expectations going into this year or versus what you've seen in prior year levels?

Speaker 2

Andrew, I would say that our costs are higher this year for several reasons. One is just general inflation. So we're seeing supplies increase and we're seeing, actually contractor costs increase, outside contractor costs. But in addition to that, I think we elected to make some investments. So I think this year we probably have 10 to $12,000,000 for the year of additional higher costs.

Speaker 2

A bunch of I would say it was adding technical talent and other folks to push our reliability programs and safety programs forward. And was also bringing in some outside technical talent to help us really take a look at some of our assets and and analyze how we can operate them better and maintain them better. So I think those are costs that we elected to take and rather than Invested capital, right. It just turns out their expenses.

Speaker 5

Okay. That makes a lot of sense. Thank you. Listen.

Operator

Next question, Adam Samuelson with Goldman Sachs. Please go ahead.

Speaker 7

Yes. Thank you. Good morning, everyone. So listen. I guess, if we think about kind of as you're looking at waiting on the engineering designs for the debottlenecking.

Speaker 7

Have you gotten any better visibility at this juncture for Just helping to frame size, scope and thinking about the USDA potential USDA kind of funding contribution, kind of What proportion of project kind of capital cost that could represent as we try to think about the net capital outlay?

Speaker 2

Sure. So if we did the full project, which would be debottlenecking our ammonia plant or nitric acid plant, And then we've actually changed the makeup of the project. Originally, it was to build a urea UAN facility, So to upgrade all of that to UAN, we're now thinking based on really our vision for the company and really where we're going, and where the industry is going is really to produce lower carbon products, rather than Carbon, it's called carbonated products. So it would be debottlenecking ammonia, nitric acid and then building a new granulation facility to either granulate HDAN or some HDAN derivative product. If we did the full project, Right now, I'd say conservatively, we're saying about $400,000,000 to do the full project.

Speaker 2

We did it all at once and the USDA would give us, and we've asked for and they've moved us along, so I guess they would support it 25% of that, so that would be $100,000,000 from the USDA. So our total capital outlay over 3 to 4 year period would be $300,000,000

Speaker 7

Okay. Now that's really and listen. And in the release and in some of the prepared remarks, you talked about kind of some of the Stronger industrial demand for nitric acid in particular. Any way to quantify that or put some help us frame that. I mean, there's not a lot of industrial kind of chemical chains right now showing kind of Strong volume trends and demand trends have been pretty characterized by a tremendous amount of destocking, in the last 6 to 12 months.

Speaker 7

And so it'd be helpful just to and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen

Speaker 3

and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen

Speaker 2

and listen and

Speaker 3

listen and

Speaker 2

listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen and listen I would agree with you that I think customers are struggling a little bit. We do have contracts with our customers and and a number of our contracts there are take or pay provisions. So, one way or the other, we're going to get paid for the product. Mode. Having said that, I think our commercial team has done a really great job, where our customer maybe has to throttle back some of the production in their own plant or they've had plant issues, which happens.

Speaker 2

I mean, everyone seems to So I think we're just seeing demand solid demand across the board. And I think the other Way to maybe think about it is we do have a strong a lot of strong tailwinds in the mining market. And so to the extent that we could shift some of that production and upgrade that nitric acid and if we have the capacity to upgrade it to either AN solution or AN, prilled AN and sell it as into the mining market, then we can do that too. So I think across the board when I think about the non fertilizer markets, we've got some pretty good balance that allows us to really weather some of the variability In the straight industrial market.

Speaker 1

Okay. All

Speaker 7

right. I appreciate that color. I'll pass it on. Thanks.

Operator

Next question, Laurence Alexander with Jefferies. Please go ahead.

Speaker 8

Good morning. This is Dan Rizzo on for Laurence. Could you tell me in the past, I mean, listen. If corn prices are as they are, have you seen a lot of pre buying that could provide a more of a near term tailwind in the late in Q3 and the early Q4? Or are growers more than likely just to wait to see how things play out next year?

Speaker 2

Well, it's a really great question. I'd say historically, what would happen is what you mentioned first. So with strong prices, Farmers ultimately would be pre buying, and we're still seeing a fair amount of that and would expect a fair amount of that. But this last year, the dynamic changed a little bit, to a bit more just in time buying, which There's a risk for the farmer because they're not only are they betting on prices going down, But they're also having to deal with the logistical aspect of getting it just in time. So in order to kind of think about that as we take a step back.

Speaker 2

We still think there'll be a fair amount of pre buying, but we've also now taken some additional storage locations, particularly for UAN, to position product to where we think our customers much closer to our customers, so that we can service easier and be the product of choice and handle the just in time.

Speaker 3

And then

Speaker 8

just a follow-up. So with those additional storage facilities, what does that does that mean anything meaningful to your inventory levels and working capital?

Speaker 2

No, I would say nothing meaningful. What it does do is it allows us to store product, to sell at, higher points of the year or in season versus out of season. So I think it allows us to have the optionality to do that. And of course, when you're talking about just in time and someone really needs product, they are willing to pay, sometimes a higher price for that. So again, I think it gives us optionality to try and take advantage of anomalies in the market and ultimately get some higher pricing.

Speaker 3

Listen. Okay.

Speaker 8

Thank you very much.

Operator

Next question comes from Rob Maguire with Granite Research. Please go ahead.

Speaker 9

Good morning. Mark, in your opinion, what are the leading drivers behind nitrogen prices stabilizing over the last month?

Speaker 2

Well, first, I think when you look at urea, right, because urea is The largest used and traded fertilizer around the world. Urea prices have increased dramatically. So Just looking at prices this morning, around the world, urea is sold at north of $400 today. So it was a lot of tons in the East and so Middle East and Asia, in other parts, Certainly in Europe, but here in the States this morning, it drifted over $400 a ton. So Higher urea prices are really, I think, being driven by increased demand, Lack of Chinese exports, and then there have been some plant issues around the world that have caused, maybe A bit of a shortage at least today on urea.

Speaker 2

So with urea prices moving up, and again, everything all products trade listen to some extent on a nitrogen equivalent basis. And so you're starting to see pickup in other prices and particularly UAN prices. Ammonia is

Speaker 3

a bit

Speaker 2

different. Ammonia, about 30% of all ammonia is used industrially and we are, As Adam mentioned earlier, we are seeing industrial demand globally sort of down and particularly in Asia where it's not picked up yet, post COVID. So it's been a really slow recovery. So I think that dynamic is probably putting still putting some pressure on ammonia.

Speaker 9

And then do you have a formal fill program in place for the fall for UAN right now. And can you kind of give us an idea where you're seeing fall prices for UAN relative to, say, the lows of summer?

Speaker 2

Yes. So the summer reset program came out in early July. Almost all the producers offered limited volume. Once that was sold out, there was Really a lot of unmet demand. So this week pricing moved up anywhere from $20 to $40 a

Speaker 9

and listen. Okay, great. And then you talked about how farmers Did you apply more urea than UAN? Just the comparable attractive pricing differential there. Can you just tell us How do you think UAN and urea plays out from here through the year end?

Speaker 2

Well, I mean, UAN prices are much more attractive right now with urea up at $400 a ton. So, I would think that we would see a bit more demand on the UAN side than the urea side. That would be the expectation given where pricing is today.

Speaker 9

Listen. Okay. Thank you.

Operator

There are no further questions. I would like to turn the floor over to Mark for closing remarks.

Speaker 2

Listen. As always, always appreciate everyone's interest in LSB Industries. I hope you feel like we're making improvements at the company and we've got a significant amount of opportunity to really increase shareholder value. So if you have any Further questions, feel free to follow-up with a call to Fred Bonacore, who leads Investor Relations for us or Sheryl or and hope to see you guys at some of the conferences that we're going to be attending. Thanks and have a great day.

Operator

Listen. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Powered by Quartr
Earnings Conference Call
LSB Industries Q2 2023
00:00 / 00:00