LSB Industries Q1 2023 Earnings Call Transcript

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May 3, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the LSB Industries First 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Fred Bonacour, Vice President of Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Good morning, everyone. Joining me today are Mark Behrman, Our Chief Executive Officer and Cheryl Maguire, 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 the actual results to differ materially. As this call will include references to non GAAP results, Please see the press release in the Investors section of our website, lsbindustries.com, for further information regarding forward looking statements and reconciliations of non GAAP results to GAAP results. At this time, I'd like to go ahead and turn the call over to Mark.

Speaker 2

Thank you, Fred. We're happy to have the opportunity to speak with you today about our 2023 Q1 results And our outlook for the Q2 and full year of 2023. I'd like to start by congratulating our team on their safety performance. As of March 31st, Our trailing 12 month total recordable injury rate was below 1. Out of all of our corporate goals, our goal 0, that 0 recordable incidents and injuries We're very pleased with the improvement we've had and I would expect it to continue to drive lower.

Speaker 2

Looking at our 2023 Q1 summary on Page 3 of the presentation, as anticipated, our financial results were down compared to the 2022 Q1 Due to a decline in market prices for nitrogen products relative to the inordinately high pricing levels we benefited from last year. While we can't control pricing trends, we can't control the way we operate our facilities and market our products and we are pleased that through these efforts We generated a solid increase in both production and sales volume compared to last year's Q1. These investments in our facilities and the ongoing efforts to improve the reliability of our plants are paying dividends. On Page 4 of our presentation, We provide an overview of our end markets. Corn prices remain above multiyear averages, driven by a variety of global factors, including drought conditions in parts of South America and in the U.

Speaker 2

S. And continued strong global demand. Domestic and worldwide stock to use ratios for corn remain at multiyear lows and we believe that it will continue to take 2 to 3 years of good corn growing seasons To bring back the stock to use ratios back in line with historical averages, we expect corn prices will stay near current high levels through This coupled with lower input costs relative to last year should make the economics of planting corn very attractive to farmers. We believe that this will translate into an increase in planted acres in the U. S.

Speaker 2

This spring. The USDA estimates that approximately 88 point 6,000,000 acres of corn were planted in 2022 and that approximately 92,000,000 acres will be planted this year. An increase of almost 3,500,000 in planted corn acres should lead to stronger demand for nitrogen fertilizers and we are seeing an increase in orders With the planting season getting underway, it is also expected that there will be an increase in wheat acres planted in 2023, Further increasing demand for nitrogen fertilizers. Demand for our industrial business is steady. Nitric acid demand is stable As the impacts of high inflation in the U.

Speaker 2

S. Are offset by global producers shifting production from international facilities to the U. S. Operations In order to take advantage of lower U. S.

Speaker 2

Input costs, demand for AN for use in mining applications is strong As a growing infrastructure build has increased demand for acquiring and aggregate production and the growth in electric vehicles and other applications is increasing demand for metals in the U. S. Pricing for nitrogen products has come down in recent months, Largely due to a decline in European natural gas prices coupled with a slow start to the U. S. Fertilizer application season.

Speaker 2

Pricing has also been impacted by the lower demand for ammonia in industrial applications, particularly Asia, as well as reduced demand for use in phosphate production. However, with China reopening from their COVID lockdown, we should see that trend start to reverse. Even so, Demand trend continues to be solid across our business and pricing remains at attractive levels. With no turnaround scheduled at our facilities this year And the continued improvement in our operations, we are well positioned for a strong year over year increase in production and sales volume. As such, we continue to expect 2023 to be a year of healthy profitability and cash flow.

Speaker 2

Now I'll turn the call over to Cheryl, who will discuss our Q1 results and our 2020 and our second quarter outlook. Cheryl?

Speaker 3

Thanks, Mark, and good morning. We generated adjusted EBITDA of $51,000,000 and adjusted EPS of $0.25 in the first Slightly below our expectations headed into the quarter largely because of a more significant decline in selling prices than we had anticipated early in the quarter, coupled with the slow start to the fertilizer application season. Turning to Page 5, you'll see a summary of our key balance sheet and cash flow metrics. Our continued profitability enabled us to further improve our financial position. At the end of the Q1, we had approximately $426,000,000 in cash of $59,000,000 and had capital expenditures of $18,000,000 translating into $41,000,000 of free cash flow and a free cash flow conversion rates of more than 80%.

Speaker 3

Additionally, we ended the 1st quarter with a net debt to Page 6 bridges our 2023 1st quarter adjusted EBITDA of $51,000,000 From adjusted EBITDA for the Q1 2022 of $101,000,000 the lower selling prices for our products Relative to last year's record highs is the driving factor in the year over year change in EBITDA. On the positive side, Our sales volumes were higher in the 2023 Q1 relative to last year despite the previously announced lost production at our Cherokee facility in January due to the impact of the late December freeze event. The increase is the result of stronger Operating rates at our facilities coupled with our successful commercial initiatives. Looking at the Q2, the NOLA UAN benchmark pricing is currently at approximately $2.75 a tonne, which is lower than our realized prices for Q1 2023. Additionally, the Tampa Ammonia benchmark price Settled at $3.80 per metric ton in May versus an average of $7.28 per The changes reflect the factors that Mark stated previously.

Speaker 3

We do, however, think that prices are at or near a bottom, particularly ammonia, which will support our views going forward. Offsetting some of the price declines, 90% of our natural gas feedstock costs for Q2 2023 Are locked in at approximately $3.40 per MMBtu, which is materially lower than Q1 2020 3 of $5.66 per MMBtu. With our facilities running well And the recent pickup in fertilizer demand as the spring planting season gets underway, we expect higher overall sales volumes for the Q2 of 2023 as compared to the Q2 of 2022 further offsetting some of the selling price declines. Given our current order book and market prices, our view of forward prices and our locked in natural gas costs, We expect the 2nd quarter adjusted EBITDA to be in the range of $50,000,000 to $60,000,000 resulting in additional healthy free cash Flow generation and further strengthening of our balance sheet. And now, I'll turn it back over to Mark.

Speaker 2

Page 7 illustrates how the spread between U. S, European and Asian natural gas prices narrowed over the past 8 months, Largely as a result of warmer than average winter temperatures throughout Europe and lower industrial demand globally. Still, natural gas prices in Europe remain above 10 year averages at $10 to $15 an MMBtu equivalent, A multiple of what we're paying for in the U. S, giving U. S.

Speaker 2

Producers a continued advantage over European producers. On page 8, we show a summary of our key growth initiatives. Employee safety is our primary focus every single day, followed by being good stewards of the environment and the reliability of our facilities. We continue to make improvements on these fronts And have significant opportunities for further progress to meet our goals of 0 total recordable injuries and environmental releases and spills And 95% capacity utilization for our ammonia plants on average for a year. That would provide meaningful incremental Profitability and cash flow.

Speaker 2

On top of that, we believe we have the ability to increase the production capacity of our plants Through various debottlenecking initiatives, we continue to evaluate multiple potential projects that would significantly Increase our production and sales volumes and our profitability and cash flow. As we discussed on our last call, In December, we submitted an application for a federal grant under the USDA's $500,000,000 fertilizer production expansion program That would support several debottlenecking opportunities. We expect to learn if we will be awarded funds under this program in the next several months. Relative to our debottlenecking plans, I have received a number of inquiries regarding the timing of potential cash investments Should we move forward with 1 or more of the projects we are evaluating. So I will take a moment to summarize how we see the cadence of the project development process going forward.

Speaker 2

We expect to receive findings of feasibility studies currently being performed no later than the end of the second quarter. At that point, we will reevaluate the merits of the projects and decide whether to move forward with pre FEED studies for 1 or more of them commencing in the second half of 2023. Should we decide to move forward with pre FEED studies for 1 or more of the projects, we anticipate Those studies could take as much as 1 year for the largest of the projects we are considering with FEED studies being completed with pre FEED studies being completed in the second half of Once we received any studies, we will reassess all of the projects that we performed studies on And take into consideration the updated cost of each project, its expected return and utilizing our view of the multi year nitrogen market outlook and the overall global economy. Only at that time would we proceed with projects or move forward on any projects that met our return expectations. So in short, it would not be before the second half of 2024 when we would make any kind of investment decisions on any project and start spending meaningful capital And our views of the nitrogen markets in the global economy will certainly be a factor in driving us to those decisions.

Speaker 2

Page 9 provides an overview and update of our blue green ammonia projects. The 2 projects we have underway represent exciting opportunities to emerge as a leader in decarbonizing Not only do our blue and green ammonia projects have the potential to result in a substantial reduction of our carbon footprint, but additionally, we believe the economics of both should be very attractive. To sum up, While product selling prices have come down since the beginning of the year, with no scheduled turnarounds in 2023, we are moving into the rest of the year Expecting significant year over year increases in production and sales volume. That should allow us to generate solid profitability and free cash flow for the full year. At the same time, we continue to position LSB Industries to achieve our vision of becoming a leader in the energy transition in the chemical industry So the production of low and no carbon products that build, feed and power the world.

Speaker 2

We expect these initiatives will lead to And greater value for our shareholders in the years to come. I look forward to discussing our progress with you as we reach critical milestones in the development of all of our initiatives. Before I hand the call back to the operator for the Q and A session, I'd like to mention that we will be participating in the Goldman Sachs Leverage Finance Conference On May 23, in Rancho Palos Verdes, California, the Stifel Cross Sector Insights Conference in Boston on June 7 And the Wells Fargo Industrial Conference in Chicago on June 13. We look forward to seeing many of you at those events. That concludes our prepared remarks and we will now be happy to take any questions.

Speaker 2

Thank you.

Operator

At this time, we will be conducting a question and answer session. A confirmation tone will indicate that your line is in the question queue. We ask that you limit yourself to you limit your questions to 1 and a follow-up so that others may have an opportunity to ask questions. Our first question comes from Joshua Spector with UBS. Please proceed with your question.

Speaker 4

Good morning. This is Lucas Bylin on for Josh. I just want to sort of understand the pricing outlook comments a bit better. So I mean, With kind of where spot rates are currently, I mean, it looks like it's going to be mathematically difficult even if the spot prices rise to get 2Q realized pricing is going to be above the Q1. So I mean, it seems like the outlook for pricing is probably going to be Sequentially realized prices declined into 2Q and then again into the Q3 on the weak demand before maybe getting a Pickup seasonally later in the year.

Speaker 4

Is that consistent with sort of what your expectations are? Or do your comments around it sort of bottoming, then you're Assuming something that it moves up more than that?

Speaker 2

Yes. I think you've categorized it pretty well. I think the Q2, I mean, we're halfway into the almost 2 thirds into the second quarter.

Speaker 5

And I think it's going

Speaker 2

to be kind of hard even if we've got some uplift in price. We can realize some Maybe later in the quarter, but as a reminder, the spring season will typically end in June. I think it's kind of an unusual spring and that we're not seeing prices rise through the spring planting season. So I don't know if we'll see As much of a drop over the summer as we would historically have seen. So I think the stabilizing in prices will absolutely help us In the second half of the year.

Speaker 4

All right. Thanks. And then, just on the volume So I mean, obviously, the start to the season has been delayed, so the volumes probably came in a little lighter for everybody than was expected in the Q1. Are you kind of expecting to sort of just make that up on the volume shift into May with the late start of the season? Or Do you see that kind of impacting your full year targets of about $1,500,000 in product tons for the year?

Speaker 2

Yes, actually we don't see any impact to our volume. I think you're spot on. Late season means there might be switching of products. So If you think about ammonia for the fall and the spring combined, right, because I think we view it as total application Prior to planting, it was probably a little light actually, maybe by 200,000, 220,000 tons In total for both the fall and the spring. So assuming that the farmers need to make up that nitrogen shortfall, You theoretically, the farmer will need theoretically need another 400,000 tons of either urea or UAN.

Speaker 2

So we should see a pickup in 1 or both of those products and I think we are starting to see a pickup in urea and that's why pricing has moved up Fairly substantially over the last month or

Speaker 4

so. All right. Thank you. Sure.

Operator

Our next question comes from Adam Samuelson with Goldman Sachs. Please proceed with your question.

Speaker 6

Yes. Thank you. Good morning, everyone.

Speaker 2

Good morning, Adam.

Speaker 6

Good morning. So I guess I wanted to just clarify As we think about the guidance in the second quarter and there's obviously a lot of moving takes or moving pieces between gas and how you've hedged What's hedged versus the spot and obviously the product prices? As we move into the second half of the year, Can you remind us kind of how much natural gas you have kind of open A versus fixed price hedged versus kind of linked to cost plus industrial kind of contracts, just to think about the Sensitivity to lower gas and then what ammonia and ammonia and trade and UAN prices are doing, in the back half of the year?

Speaker 3

Hey, Adam. I think the simplest way to put that would be, we're about 3 50 to 3.70 per MMBtu hedged at 90% for the second half of the year.

Speaker 2

And I would add that that's 90% of our gas needs that aren't passed through to our customers.

Speaker 6

And remind me the percentage of gas needs that are passed through to customers, just to think about your total gas consumption?

Speaker 3

Depending on the mix, probably 15%, 20%.

Speaker 6

Got it. Okay. Now that's very helpful. And On the ammonia side, I mean, you've seen U. S.

Speaker 6

Gulf prices kind of Move lower and kind of react to kind of seemingly surpluses in the international markets and Kind of lower industrial demand. Are you seeing any evidence on the From your industrial customers for ammonia that activity levels are improving. I mean, your ammonia market is an In place where it seems to have pushed off the high cost producers from the curve in Europe and just trying to think about how that Total market kind of rebalances as we go through the into the second half of the year?

Speaker 2

That's a great question. I mean, I think as we sit back and kind of try and figure out, what's going on and why, Quite frankly, Gulf prices are not at the cost of production of Europe. I think we all have to keep in mind That China was closed for a while, and China was a net importer prior to that. And just as important, maybe more importantly, We've seen industrial demand for ammonia throughout Asia drop. And so, we would expect That could pick up maybe in the second half of the year.

Speaker 2

And so if we see more demand For imports from China and we start to see some of that industrial ammonia demand come back into the market in the second half, We would expect to see some strengthening of pricing.

Speaker 6

Okay. That is all very helpful. I'll pass it on. Thank you.

Speaker 7

Thank you.

Operator

Our next question comes from Andrew Wong with RBC Capital Markets. Please proceed with your question.

Speaker 7

Hey, good morning. So just going back to the timing of your spending decisions. So So it looks like you've got a pretty healthy balance sheet right now, over $400,000,000 but sounds like there aren't really any Major capital decisions potentially until H2

Speaker 6

of 2024. So like are there

Speaker 7

any plans for that cash in between now and then?

Speaker 2

Yes, it's a great question and one that we kind of think about every single day. So I guess I would think about it this way. We bought back $175,000,000 worth of stock last year. We are sitting with a healthy cash balance, dollars 4.25 at the end of the Q1 and suffice it to say that we've generated additional cash between then and now and we We expect to generate additional cash throughout the rest of this year. So, we have our annual meeting next week.

Speaker 2

We'll be with the Board and absolutely we'll be discussing putting in another stock buyback.

Speaker 7

Okay. And how would the like debt versus buyback, what's the thought there?

Speaker 2

Well, clearly we want to reduce some of our debt to bring down the leverage in a more normalized market. So our first call date is October of next year. So, I think that's definitely something that we'll keep in mind as we move forward with Sort of our allocation of capital.

Speaker 7

Okay. And then just to follow-up on the natgas hedging. I think back on the Investor Day, there were some hedged nat gas numbers provided by Sheryl and they seemed a little bit higher than what, I think Q1 ended up being and what you're guiding for Q2. And so could you just kind of talk about what the positions are for the rest of the year? And was there maybe some offset that lowered some of those

Speaker 3

Yes, Andrew. So just to reiterate, so we're hedged around $340,000,000 for Q2 and then $370,000,000 ish for the back half of the year. That's at the 90% that I just mentioned earlier. I think that's in line with what we provided at the Investor Day, I'm not sure if that answers your question though.

Speaker 7

Okay. No, that's fine. Yes.

Speaker 2

I was going to say one thing to keep in mind, Cheryl mentioned that we're 90% hedged. So we do have 10% open to lower spot prices. So that may be What brought down the pricing a little bit as gas has dropped closer to $2

Speaker 7

Okay. Thanks.

Operator

Our next question comes from Rob Maguire with Granite Research. Please proceed with your question.

Speaker 8

Good morning. Have you got a read just on product or could you give us a read Product that was pre sold heading into 2Q and did you have product that was pre sold and if so from what time period were you pre selling?

Speaker 2

Yes, Rob, we don't usually give out timeframes of pre selling and exactly how much we pre sell. We certainly did have some pre sold tons coming into the Q2, but as we mentioned earlier, it was kind of a late start to Spring and I think some of our competitors talked about on their calls You know the sort of standoff of buying, you know the people or the customers buying versus producers wanting to So, I think it's right now, a lot of it's just in time and more spot pricing. And I think that's what the whole industry is

Speaker 8

seeing. Thanks, Mark. And then your inventory volumes appear to be lower On a year over year basis, can you discuss your inventory levels and your perspective on perhaps where the inventory sit with other producers in the U. S?

Speaker 3

Yes. Good morning, Rob. So our of course, our cost of inventory is quite a bit lower. So just Looking at the balance sheet, you'd see that from a volume perspective inventory today, pretty much in line with where we would have been this time last year. So nothing really different.

Speaker 2

Again, I don't know that I care to talk about competitors or would even know where their inventories are. I would say that with Ammonia, spring application or spring fall combined application being off a couple of 100,000 tons, There is some length still into the ammonia market, but I'm not sure we've got As much length really or any length in urea or UAN, I think those are pretty tight markets.

Speaker 8

Thank you. I'll circle back around in the queue.

Speaker 2

Thanks, Rob.

Operator

Our next question comes from Laurence Alexander with Jefferies. Please proceed with your question.

Speaker 9

Good morning. It's actually Dan Limonzo on for Laurence. Thank you for taking my question. You mentioned that there's no turnarounds this year. Should Should we think about that that there'll be a lot more turnarounds next year?

Speaker 9

Or I guess how long is the spacing between the need for downtime for that?

Speaker 2

Yes. So we don't have as you said, we don't have any scheduled turnarounds for this year. We do have 2 turnarounds scheduled For next year, one at our Pryor facility and one at our Cherokee facility. And then the following year, we have one for our El Dorado facility. Cherokee is on a 3 year turnaround cycle, same with El Dorado and Pryor is still on a 2 year turnaround cycle.

Speaker 9

All right. Thanks for that. And then your net debt to EBITDA is fairly low and below what you kind of your, I guess, we termed as your Mid cycle range. I was just wondering where we given where we are in the cycle, if we should expect it to remain relatively low, I I don't know for the next year or so until things turn up or there's more clarity?

Speaker 2

Well, I guess what I would answer that about normalized EBITDA. We did $51,000,000 in the Q1. Cheryl gave a Range of $50,000,000 to $60,000,000 for the Q2, and we clearly expect, in the Q2 to beat that Q1 number. So I'm even at the midpoint of $55,000,000 that's $106,000,000 for the front half. And we don't think that the back half I was going to see much of a drop in pricing on average.

Speaker 2

So I think we're still right on our $200,000,000 of normalized EBITDA Despite, average ammonia prices for the year, more than likely going to be less than the $500 that was the assumption in that $200,000,000 of normalized, Albeit gas prices are a bit lower too. So, yes, we're really comfortable on where we are with mid cycle EBITDA. And I don't know. I can't tell you how long prices will last at these levels or higher levels, unfortunately.

Speaker 9

Thank you very much.

Operator

Our next question comes from Charles Neivert with Piper Sandler. Please proceed with your question.

Speaker 5

Good morning, guys. Just a quick one. Obviously, we got a little bit of a late start this year, but the pace is picking up. Based on your best estimates right now, if pace continues through May and into early June depending on crops, Do you anticipate that the industry is basically going to wipe out most of its inventories going into The summer and the fall, so we can rebuild for a fall application or you think we got leftover when we finish up the spring even at the pace that we're moving on right now?

Speaker 2

I would expect that inventories would be really low coming out of the season.

Speaker 5

Because I mean, certainly that's a big Indicator or a big indicator of where pricing would be going in through the rest of the year. If they wipe if you can get the Inventories wiped clean, you got a much better chance of holding prices in the Q3 and then raising it through into the application season. Also, again, given the fact that some of the nitrogen looks like it's going on late, do you think there's a fairly high chance that there's going to be a lot of So, adjusting going on here, particularly to the wheat crop, but even to corn in some cases? Yes. Again, that should help bring down numbers.

Speaker 5

All right. That's all I got. Thanks very much.

Speaker 2

Thanks, George.

Operator

Our next question comes from Rob Maguire with Granite Research. Please proceed with your question.

Speaker 8

Just one follow-up question. Urea has bounced to your higher as a result of logistical bottlenecks. And I'm just asking if You're seeing that occurring with ammonia or UAN at this point? Or does this look like a very orderly distribution of nitrogen heading out to the fields this season?

Speaker 2

Yes, I would say the ammonia application season, right, is pretty much done. You may have Certain small pockets that are still planting or even pre plant, but not really much. I mean everything's pretty much in the ground at this point. So I don't think the spring planting season is going to have much impact on ammonia prices at all. I think it's going to be some of the factors that I talked about globally.

Speaker 2

As far as UAN pricing moving up, as urea prices have already moved up, I would say that the buyers really look at the differential in nitrogen pricing on a per ton basis Or per pound basis and there was a pretty large premium for UAN at the low urea prices. So that spread is really narrowed to more traditional spreads. But as the spring goes on and if demand continues to pick up, We will see some price appreciation or should see some price appreciation for UAN.

Speaker 3

We have reached the end

Operator

of our question and answer session. And I would now like to turn the floor back over to Mr. Behrman for closing comments.

Speaker 2

I want to thank everyone for participating on our Q1 earnings call. I appreciate everyone's interest and if anyone has any follow-up questions, Please reach out to us. Thanks so much.

Operator

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

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