Greetings. And welcome to the LSB Industries Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

It is now my pleasure to introduce your host, Kristy Carver, Senior Vice President and Treasurer. Thank you. You may begin..

Good morning everyone. Joining me today on the call 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 these 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 actual results to differ materially.

As this call will include references to non-GAAP results, please reference 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 for opening remarks..

Thank you, Kristy, and good morning, everyone. We're glad that you could participate in our call this morning and appreciate your interest in LSB Industries. I'd like to begin on Slide three, by acknowledging the commitment and dedication, that our employees have shown to operating safely and improving our safety performance.

Our team delivered another strong operating performance, across all of our owned and operated facilities during the third quarter and manage to achieve record production levels in several product categories, while doing it safely.

As indicated on the slide, we have made significant strides with our safety performance, over the course of 2020, which is something everyone at LSB should celebrate.

These days, safety goes beyond avoiding physical injury, it also encompasses something many of us took for granted only eight months ago, which is avoiding serious illness in the course of our workday. With the ongoing spread of the COVID-19 virus, this is now something we all think about every day.

In this regard, we credit the personnel at all of our facilities and offices for remaining vigilant with the protocols we put in place months ago, to prevent transmission of the virus, and have improved and upgraded a number of these policies and procedures, as we've learned more about what actions we can take that are most effective.

As everyone on this call knows all too well at this point, it's difficult to maintain a high level of intensity in attempting to manage a situation that has many uncertain and unknown duration as what we've been dealing with since early this year.

Our view at this point is that we're going to have to continue to operate in the COVID environment until the end of 2021. And we are planning accordingly.

But we wish this weren't the case, on the positive side, we're finding that we've developed in terms of protocols and disciplines in order to deal with the COVID situation, we'll be able to integrate back into our overall approach to operating safely. Slide four provides an overview of the key aspects of our third quarter.

We generated significant increases in sales volumes in both agricultural and industrial and mining products as compared to the third quarter of 2019.

The year-over-year, volume growth was the result of stronger production due to the absence of turnarounds in this year's third quarter relative to the turnarounds we performed at Pryor and El Dorado in the same period last year.

Additionally, Pryor once again had a record urea and UAN production, reflecting the continued improvement in the performance of its ammonia plant, which enabled us to optimize the utilization of the new urea reactor and the other upgrades that we made to the plant during the 2019 third quarter turnaround.

In short, while pricing on the ag side of our business was not cooperative, and its anticipated demand for our industrial and money products weakened due to the impacts of COVID-19.

We did a good job focusing on the aspects of our business within our control, particularly with respect to the performance of our manufacturing facilities, rationalizing our operating costs and optimizing our product balance.

In fact, had pricing been in line with the 2019 third quarter, which wasn't robust itself and industrial demand had been consistent with pre pandemic levels of approximately eight months ago, it would have resulted in an adjusted EBITDA that was more than 70% higher than the third quarter of last year.

This is reflective of the solid operational foundation, we've established that we expect it to enable us to capitalize on the recovery of industrial demand to pre pandemic levels, which has been underway for several months, and on what we anticipate will be an eventual improvement in fertilizer prices.

Cheryl will provide more detail around this analysis later in the call. Unfortunately, as anticipated, selling prices for our fertilizer products in the third quarter were well below the levels of the same quarter last year, and also deteriorated as compared to the second quarter of this year.

The causes of this price weakness, particularly with respect to the year-over-year comparison, remain the same as what we've discussed on the past several calls, which are the continued excess ammonia inventory carried over from 2019, which has been significantly exacerbated by the pandemic induced reduction in ammonia demand from various industrial markets.

Along with the negative impacts of the closure of the Magellan pipeline in September of 2019, which continues to disrupt the ammonia movement particularly in the southern plains market around our prior facility. With respect to UN an unfavorable import export imbalance further weakened prices for that fertilizer.

However, we have seen imports pullback significantly over the last several months. Overall pricing for our industrial and money products was also lower, albeit to a much lesser extent than that of our agricultural products. Broadly speaking, this was the result of the negative impacts of the pandemic crisis on our end markets.

As Cheryl will discuss later, we ended the quarter with more than adequate liquidity to enable us to continue to implement our strategy for enhancing our sales and margins in the face of uncertain environment. One particular success in that regard came with a new long-term nitric acid supply agreement, that we signed during the quarter.

Slide five provides an update on the state of our end markets and how demand trends have evolved as various aspects of the economy have reopened since economic activity bottomed in April. On the agricultural side of our business, approximately 92 million acres of corn were planted in the U.S.

during 2020, which was an increase of 3% as compared to 2019. This increase supported a healthy level of demand for fertilizers. Although, as I previously indicated, it was not enough to boost product selling prices. Approximately 40% of the U.S. corn crop is used to produce the gasoline additive ethanol.

The abrupt onset of the pandemic crisis last spring resulted in a sharp drop in automotive usage across the U.S. for several months, which translated into a dramatic reduction of fuel consumption and a coinciding reduction in ethanol demand.

Since hitting a low point in April, ethanol production has rebounded sharply returning to near pre pandemic levels, which was largely attributable to what turned out to be a busy summer for drivers as Americans replaced their vacation flights with road trips, and people became generally less homebound.

The drop in ethanol production and the rebound in gasoline consumption has left U.S. ethanol inventories at their lowest level in several years, which we think bodes well for corn demand in 2021. With respect to our industrial and mining business, most of our end markets have seen meaningful recovery since last spring.

One of the largest of these is the auto industry, which is a major consumer of nitric acid. After a two-month shutdown, auto manufacturers resumed production in May. In the months that followed, U.S.

light vehicle sales surged, and as of the end of September, increased approximately 75% since the April low levels, which should support continued recovery of auto production. Nitric acid is also a major input into a variety of homebuilding products. As of the end of September, U.S.

housing starts and building permit applications had rebounded to near pre pandemic levels. Products we manufacture for mining applications, primarily low-density ammonium nitrate, favorable indicators have been emerging from the sizeable North American copper market, where prices for this metal have risen to the highest levels in over two years.

This has been driving an increase in copper mining activity that we expect to persist for the foreseeable future, particularly given relatively new and growing copper demand drivers such as the mass production of electric vehicles.

Collectively, we view the current demand trends we're seeing across the aforementioned key end markets, as pointing towards continued increases in sales of our industrial and mining products in the fourth quarter and into 2021, to the extent that recent increases in COVID cases in various regions throughout the country don't lead to another nationwide shutdown.

I'll hand the call over to Cheryl shortly. But first, I'd like to provide an update on the litigation that we bought against Leidos, the general contractor of our El Dorado ammonia plant expansion project that spanned from 2013 to 2016, in which we incurred substantial cost overruns.

We continue to seek more than $100 million in damages as compensation for Leidos's wrongdoing, which involve breach of contract fraud, gross negligence, professional negligence and negligence. We are waiting a new trial date and expect that to be in the first half of 2021.

We're looking forward to having our case heard by a jury and while we can't guarantee any outcomes in litigation, we believe the case has serious merits. We will continue to provide updates as appropriate. Now, Cheryl will go into more detail about our Q3 financial results.

Cheryl?.

Thanks, Mark and good morning. Page 7 verges our adjusted EBITDA for Q3, 2020 of $10.2 million to adjusted EBITDA for Q3 2019 of $11.1 million. Keep in mind that the third quarter is consistently our seasonally weakest quarter. The modest year-over-year decline is a result of lower selling prices largely in our agricultural market.

As Mark stated, persistent elevated inventory levels for ammonia combined with the closure of the Magellan pipeline in September of 2019 as well as increased imports and decreased exports of UAN over the last 12 months have continued to weigh on pricing.

Lower selling prices offset by lower natural gas costs negatively impacted the third quarter by approximately $7.5 million. However, we were able to offset lower selling prices with continued improvement in year-over-year production.

You may recall that we had an 18-day turnaround at our El Dorado facility and a 22-day turnaround at our Pryor facility in the third quarter of 2019. With no turnarounds in the third quarter of 2020 production and sales volumes for all our products contributed an increase in EBITDA of approximately $9.5 million year-over-year.

In fact, we posted a second consecutive quarter of record urea and UAN production at our Pryor facility, which allowed us to achieve record UAN sales out of our Pryor facility as well. Continued headwinds from weaker industrial and mining demand as a result of COVID-19 impacted the quarter by approximately $1.7 million.

Turning to page 8, this chart illustrates the earnings power of our business under more normal but not robust market conditions.

For comparative purposes, we have normalized for both selling prices and natural gas prices to match those we experienced in 2019 and also added back lower sales volumes from lower demand directly resulting from the COVID-19 economic slowdown. This allows us to view the operational improvement in our underlying business.

With these adjustments, adjusted EBITDA would have been $19.4 million in the third quarter of 2020, almost 75% higher than 2019 third quarter adjusted EBITDA. We believe that this illustrates the improvements in our business from the many initiatives that we have completed over the last several years.

Also, keep in mind that selling prices in 2019 were not what we would consider representative of mid-cycle pricing. Turning to page 9, we have outlined the gross profit margins for each of our market segments representing the underlying cash margins of each of our business.

As you may - as you can see from this slide, our industrial and mining margins remained consistent at 37% year-to-date, as we have been able to offset lower selling prices with higher production and sales volume, combined with lower natural gas costs and reduced fixed cost per ton of product.

So ag margins have been impacted by the very low selling prices we have experienced across all of our fertilizer products. We would expect mid-30s EBITDA margins in a more normalized mid-cycle pricing environment.

Page 10 outlines our continued focus on liquidity, we ended the quarter with approximately $42 million of cash and $78 million of total liquidity. During the third quarter we refinance an existing equipment loan at our El Dorado facility adding approximately $18 million of liquidity to the balance sheet.

In addition, we've repaid all outstanding borrowings on our revolving credit facility during the third quarter.

Given the current low pricing environment coupled with the ongoing uncertainty around COVID-19, we remain acutely focused on managing the downside risk to our business and maintaining adequate liquidity to operate through a continued period of some degree of market disruption.

We are actively seeking ways to improve our capital structure and lower overall cost of capital. We believe that continued improvement in operating performance combined with improved pricing for our products will be a benefit in achieving those efforts.

Today, our senior notes are callable at 107%, and in May of 2021, the call premium declines to 103.6%. In the near-term, we remain focused on preserving liquidity and managing through the pandemic. We are currently evaluating several additional avenues to lower our cost of capital, and we continue to work with our Board of Directors on a path forward.

With respect to the pricing environment for the fourth quarter of 2020, please turn to page 11. As you can see from this slide, UAN, HDAN and Tampa ammonia are expected to remain materially lower as compared to Q4 2019, as a result of the variety of factors discussed earlier.

Whereas natural gas is expected to remain in line with the fourth quarter of 2019 at approximately $2.50 per MMBtu. On a positive note, we expect to continue our trend of achieving higher year-over-year volumes, as we have no plan turnarounds in the fourth quarter, and we expect to maximize downstream production of UAN, HDAN and other key products.

To some of our view for the fourth quarter, despite the much lower selling price environment, we expect higher production and sales combined with lower cost to drive a 40% to 50% improvement in EBITDA as compared to the fourth quarter of 2019. And now I'll turn it back over to Mark to wrap up..

Thank you, Cheryl. Well, we are by no means out of the words today. The pandemic impact on demand has eased somewhat over the past two quarters, but still had a meaningful impact on our third quarter financial results, and we expect will have a measurable impact on our 2020 fourth quarter.

What has been a greater pressure on our financial results for a sustained period of time, however, has been the impact of historically weak pricing for fertilizer.

To recap what we've discussed numerous times over the past year plus there's been an excess supply of ammonia and other fertilizer products due to a variety of factors including the wave of new ammonia production capacity that came online in 2015 to 2018 timeframe, extremely weather that impacted both harvest and planting seasons from late 2018 to essentially the entire year of 2019.

The aforementioned closure of the Magellan ammonia pipeline, which has resulted in a lot of products sitting in a region at our Pryor facility serves, in the past had been transported to more distant geographies. And elevated import levels which is an indirect result of the low natural gas prices globally, and duties implemented in certain regions.

We do believe, however, that there is reason for optimism with respect to the outlook for fertilizer prices in 2021. First, the fall corn harvest has been accelerating in recent weeks, and conditions are lining up well for a good fall ammonia application in order to get nutrients in the ground in preparation for the spring planting season.

Second, corn future prices of over $4 a bushel are at levels only seen twice in the past four years.

This strength has been driven by a surge in demand resulting from the rebound in ethanol consumption which I mentioned earlier, as well as the USDA expectations for lower corn inventory levels, reflecting a period of drought conditions through the corn belt this past summer, as well as the impact of derecho that occurred across the Midwest back in August, damaging nearly 10 million acres of corn.

Higher corn prices enable growers to earn more income, which is important because their financial health is a critical underpinning of the fertilizer market.

Current estimates for corn to be planted in the spring call for between 91 million and 92 million acres, which while flat with this year, would still be a very good year that should prompt growers to play significant orders for fertilizers as they seek to maximize yields, particularly if corn prices remain at the levels indicated by the futures market.

With respect to other dynamics favorably impacting fertilizer pricing, recent data we've seen points to a downtrend and imports particularly of UAN from several countries that were shipping a meaningful quantity of product to the U.S. over the past year.

We're also focused on the historical relationship between urea and UAN as an indicator that UAN prices are poised for recovery in the coming months.

Slide 12 shows the multiyear price trend for UAN, ammonia and urea and shown at the bottom of the slide is the multiyear trend for the three aforementioned products on a nitrogen equivalent basis, which illustrates how the price movement of these products is correlated.

You can see here that over the past 10 years UAN has typically traded at or above the price of urea on a nitrogen equivalent basis. However, since mid-2019, UAN has been selling at a discount to urea for most of the period.

We believe that the historical relationship where UAN trades in line or better than urea is likely to return in 20 - in early 2021, based on both historical patterns and the favorable outlook for fertilizer demand, given the previously discussed market environment for corn growers.

Collectively, these factors make us cautiously optimistic that fertilizer prices will rise at least modestly in the coming months to levels that we'd still consider historically low, but better than what we've experienced so far in 2020. Now please turn to Slide 13.

And I'll discuss our current view on how natural gas prices impact our business and our outlook for the coming year. As I discussed last quarter, we continue to experience the double-edged sword effect of low natural gas.

At the primary feedstock for the manufacturing of most of our products, low natural gas prices, which in Q3 were down nearly 17% from the already low levels of the third quarter of 2019 or a benefit to our gross margins.

But such low natural gas prices also incur less efficient marginal nitrogen chemical producers around the world to run facilities that they may otherwise not, which leads to product oversupply increased imports of product into the U.S., all leading to pressure on products selling prices in our geographic markets.

This has been a meaningful factor in fertilizer price weakness for the past several quarters, and the third quarter was no exception. However, with natural gas prices moving higher in the U.S. and around the world.

We are likely to see marginal producers reduced production, including Western European producers who tend to sit at the high end of the cost curve. This slide also illustrates the trend of Henry Hub, the primary us natural gas index, versus two Europe based natural gas indices.

You'll see that back in the spring, due to the onset of the pandemic throughout the world, gas prices in Western Europe, with a virus impact was particularly hard dropped significantly. Wiping out our natural gas cost advantage here in the U.S. This chart also illustrates how much faster natural gas prices in Europe are now rising relative to U.S.

prices, a dynamic that we expect to benefit U.S. nitrogen chemical producers in the coming year. Turning to aspects of our business that are in our control. We are very excited about a number of initiatives that we've been successful in implementing in recent months that should lead to incremental EBITDA in 2021.

First and foremost, as illustrated on Slide 14, over the course of 2020, we've proven that we can run our plants with consistency and at production rates that will enable us to capitalize on the operating leverage that's inherent in our business model, which will become more apparent as product prices rise.

While we still got room for improvement in this regard, we've been very pleased with the increased production volume we've delivered through the first three quarters of 2020.

And we are on track for record setting performances for consolidated ammonia production, as well as record urea and UAN at our Pryor facility, HDAN and sulfuric acid at our El Dorado facility, and DEF at our Cherokee facility. Looking ahead to 2021 we expect to continue with strong production volumes.

But as a reminder, we do have turnaround scheduled for both our Cherokee and Pryor facilities in the third quarter of next year.

But we believe that we can at least partially offset the impact of the fewer operating days for the year with further improvement on stream and production capacity rates, and detailed planning and tight management of these turnarounds.

On Slide 15, in addition to further highlighting our operating performance, we summarize the other two legs of our strategy that have been and will continue to further drive our financial results. Over the past several quarters, we've been very successful in our intensified sales and marketing efforts.

A great example of this is the recent new long-term supply contract to provide a customer with between 70,000 to 100,000 tons of nitric acid per year.

While the terms of the contract prevent us from providing details, I can tell you that sales under this agreement will begin during the first quarter of 2021 and will generate meaningful incremental annual EBITDA on a full year basis.

This contract along with the previously mentioned CO2, and low-density ammonium nitrate agreements is the result of our focus marketing efforts to sell our excess production capacity and change product mix in order to enhance our margins.

In order to support our growing order levels stemming from our sales and marketing initiatives, we have been making strategic investments over the course of the past 12 months. As we've discussed on previous calls, in April, we completed the installation of a new fertilizer storage facility that will enable us to further maximize our production.

As a result of this project, we are now able to store a significant amount of this fertilizer product in advance of the spring 2021 planting season and sell it when we believe that pricing is at optimal levels as the season approaches versus historically having to sell it as it's produced at current prices.

We expect the returns on this investment given the greater margin we can capture on sales in the coming months to be quite attractive and we're looking at several other opportunities of this nature that we expect will lead to further margin improvement over the course of the coming year.

Finally, on our last call, we discussed potentially $5 million of annual savings, we believe we can attain through fixed cost reduction actions we've identified in recent months. We expect to realize that through 2021.

Between this and the other actions we're taking to improve our profitability and cash flow that I outlined earlier, we remain more confident than ever about our potential to generate an additional incremental EBITDA completely independent of any increase in our selling prices.

Our goal is to make substantial progress in this regard over the course of the next four quarters. And we look forward to providing you with updates on our accomplishments. This is now our third quarter reporting to you during the pandemic environment. At the risk of using a cliche, we view the current circumstances as our new normal.

It's hard to fathom that this is the case given how we view the world less than a year ago. But with that said, while our hearts go out to all of those who have been sickened and lost loved ones due to the virus, as a company, we've learned a lot about our capacity to adapt and overcome new challenges to running our business.

I truly believe that these lessons will serve us well at some point in the future when this pervasive threat has subsided.

In the meantime, we'll continue to focus on what is within our control in order to improve our operating and financial results but more importantly, to attend to our number one priority, which is the health and safety of our employees, their families, friends, co-workers and everyone in our communities.

We've remained ever grateful to our team for the concerted effort and attentiveness that they bring to our facilities and offices every day, and we thank our customers, suppliers and shareholders for their continued support.

Before I pass the call back to the operator to begin the Q&A session, I'd like to mention that we will be participating in the Morgan Stanley Global Chemicals Agriculture and Packaging Conference on November 10th. The Sidoti Micro Cap Conference on November 19th. The Bank of America Merrill Lynch Leveraged Finance Conference on November 30th.

And the UBS Chicago Agricultural and Industrial Chemical Conference, on December 10th all virtually. We hope to speak with you - with some of you over the course of these events. That concludes our prepared remarks. And we will now be happy to take your questions..

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Thank you. Our first question comes from line of Joe Mondillo with Sidoti. Please proceed with your question..

Hi, good morning, Mark. And Cheryl..

Good morning, Joe..

Good, morning.

How are you?.

I'm good, doing well. You guys are doing well? Just wanted to start off with the 4Q guidance that you've provided.

I think you said 40% to 50% year-over-year improvement in EBITDA, I would have thought it would have been a little bit stronger quite honestly, primarily, given the fact that you don't have any plan or I guess last fourth quarter, you had a little bit of unplanned downtime, prior it was down I think half the quarter? So, that's number one.

And number two pricing at this point, I think correct me if I'm wrong, is a little more comparable. Pricing came down a large part of 2019, and I think it's a little more comparable on a year-over-year perspective.

So I would have thought you maybe would see a - setting up to see a better year-over-year improvement, but could any color there?.

I think Cheryl gave you some indication of pricing in her prepared comments and certainly, as part of the earnings presentation slide. I think pricing is going to have a significant impact in the fourth quarter, as we've talked about, and I think others in the industry have talked about. Production actually should be up and up pretty significantly.

But pricing will continue to weigh on the fourth quarter..

Okay, all right.

And then just as far as the cost improvement initiatives, could you just clarify how much you're expecting sort of from the capital projects versus that $5 million of fixed cost savings that you mentioned?.

Yes, we haven't given out any kind of EBITDA indication a range on some of the capital projects and the new contract awards. So, I'm kind of hesitant to give that out..

Well, I thought I have in my notes, prior notes that $10 million to $15 million of savings and I thought that was all related to the capital projects. And so I'm wondering if this $5 million is an addition to that. I thought you said $10 million to $15 million on the last conference call..

Yes, it's not in addition, it's part of..

It's part of. Okay. That's all I was wondering. And then I may have missed this.

I think I remember hearing you mentioning this in your prepared remarks, Mark, but could you just go over what the update is on the Leidos trial again?.

Yes, so, as you might imagine, during the pandemic, it's been really difficult to have elongated trials. We anticipate, I think a trial that will go three, four weeks or more. And so what you're seeing during the pandemic is shorter trials.

So, we're going to have to wait and hopefully until the vaccine comes out earlier in the year and things start to maybe improve from a pandemic incurrence or the COVID-19 incurrence rate for us to get to a trial. So, right now we're talking about somewhere probably in the latter part of the first half of next year..

Okay. And then just the balance sheet. Any update on how you're thinking about approaching that, a lot going on in the financial markets this year, you've seen tremendous amount of improvement in your utilization rates of the plants pricings a little weak. But as we approach next year, things could get better.

Any further thoughts, in addition to what you mentioned in your prepared remarks as far as refinancing the balance sheet?.

Sorry, Mark, do you want to go ahead?.

Yes, I mean, I think that, Cheryl mentioned, bonds are callable today at 107%. So, that's a fairly expensive to refinance. And so in May of next year, that call premium drops down to 103% range.

And so that coupled with expectations that will continue to improve from an operating standpoint, but also, I think we'll see some better pricing in 2021, would lead us to probably, at least today sit here and say that, we want to get past that next May of next year, which hasn't dropped in the call premium, where things should improve, we'll start to see also less, much less of an impact on from COVID-19 on our industrial business, so that would be the current thought today..

Okay, yes, that's what I figured.

Just lastly, if, as far as your 4Q guidance, how are you thinking about the full application season relative to last year?.

Yes, so the application season should be, we expect it to be significantly stronger than last year. Remember, last year, there was a very small window, was a really tight window to get ammonia down. And while the growers did that, and technology is much improved to do that.

This year, there should be, much longer window for them to get ammonia down in the ground. And I'll tell you that, the Corn Belt itself was a bit behind as they either had too little or too much precipitation. But they've really over the last couple of weeks gone up.

But you have seen pockets, where the fall application season is really strong right now like Minnesota. The harvest move pretty swiftly and ammonia application in that state was going really strong. Texas, the ammonia application is actually almost done.

So, I think we would expect some pretty good demand in ammonia between now and the end of the year..

Okay, and I actually just have one last question, I'd be sort of miss if I didn't ask it. Just regarding the pricing that we're seeing in corn here.

Any thoughts on if this is any more sustainable than the three or four times that we've seen it hit above four in the last four or five years any thoughts there?.

Yes, I mean, I think I said as in my prepared comments, there's a number of variables that are really pushing corn to the levels that we're at today. And we were just recently on a few calls with some really good industry experts. And I think there's a really good feeling that the corn could sit in the 425 to 450 range.

One of the things I didn't mention on the call is, China recently purchased, the several purchases of corn over the last several months. And I think that'll continue. I mean, I think that with the replenishment of the hog population that they lost due to the swine flu, and wanting to feed them in a different way.

I think you'll see corn demand, pretty significant from China, which just will support higher pricing as the demand. I don't know about outstripped supply, but ultimately, it's much stronger demand..

Got it. Well, thanks for taking my questions. Good luck with the rest of the year..

Okay, thanks, Joe. And good luck..

Our next question comes from line of Travis Edwards with Goldman Sachs. Please proceed with your question..

Hey, good morning, Mark. Cheryl, thanks for the detail this morning and for answering our questions. I had a question on, you maybe talked about rising gas costs going into next year, potentially also having some benefit as marginal producers maybe lower production.

Anyway to think about or any color that you can share and sort of your expectations for sort of that net impact on I guess margins or both pricing and on the cost side?.

Well I don't know that there's a direct relationship on increase in natural gas prices versus selling prices. I would tell you that when I think about, higher gas prices, there's probably three variables that will offset that in my mind. One is, you've got steeper global nitrogen cost curve should drive higher selling prices here in the U.S.

The second would be global demand remain strong. So we would expect U.S. markets to be less of a discount. And then third, I think, we believe that the worst is over for both ammonia nitrates, given the weaker industrial demand that we've seen in 2020 from the pandemic.

So, I think, certainly weaker industrial demand in both in ammonia and in certain nitrate products, definitely has an impact on fertilizer prices themselves.

So I think those three would lead us to believe that despite higher feedstock costs, we'll see selling prices - we should see selling prices sometime in 2021 really offset those higher feedstock costs..

Got it. That's helpful. That's the color I was looking for. Thank you. Maybe just to follow-up on the nat gas side.

Any color you can share and sort of expectations for incremental working capital needs next year as those costs come up?.

I'll let Cheryl to answer that one..

Yes. I mean, I'd say, I wouldn't think that would be very material, I'd say $1 increase in natural gas would probably drive about $4 million to $5 million of higher working capital needs. But on the flip side of that, we have some rising prices hopefully as well on the fertilizer price side.

So I wouldn't expect it to be a material draw on working capital..

Okay, got it. That's helpful, thanks for those benchmarks. Question on the balance sheet. I know it comes up from time to time, but can you just refresh us on your latest thoughts on what to do with those preferred shares? I know, there's a little less urgency to address those in the near term.

But we just getting investors asking about how that rising balance ultimately comes down. So just hoping to get maybe a refresh on your thoughts..

Well, I mean, I think as Joe asked earlier about refinancing, I mean, I think that's one way to think about it. If we refinance our debt is that one way that we could maybe refinance for slightly higher amount and use some part of that to redeem some preferred. I think we'll take a look at that.

We won't do it at the expense of creating too much leverage. So that's something that we're not interested in. As you know, we've got a lawsuit that we've talked about. And I think that's another form of cash generation and then there's a couple of other things that we're working on.

So I don't think there's one silver bullet that really deals with the preferred. I think it's going to be a number of things that we've got going in discussion today that will help us reduce debt balance, and ultimately hopefully take the preferred off our balance sheet..

Yes, thanks for having walked through those different scenarios. I think maybe one more extension. Again, I know, Joe asked earlier the refi comes up seemingly every quarter, but in the past, you've just thrown out I think sort of $100 million of EBITDA benchmark is sort of a general level you'd like to achieve before considering refinancing.

I know that's not a hard and fast rule by any means, but is that still generally how you're thinking about where you want this business to be maybe on a normalized basis from an operation standpoint, or I guess, can you bridge between how you're thinking about refinance sort of overall operations and where they're at?.

Yes, so I mean, I think that's a good rule of thumb which I think most important and why that's an - that may be an important number for us, as we're really focused on improving our rating with S&P and Moody's. I think as you would agree, getting to a B will have significant implications on terms and rate.

And I think that will be a really important for us..

Sure, appreciate that. And then maybe the last one for me. And maybe I'm grasping for straws here. But I know you'd mentioned that you haven't shared much as far as detail on quantifying sort of the new contract awards. Obviously, you've got a lot of new contracts coming in, which is great.

Anyway, to even sort of ballpark specifically, or more specifically around what the nitric acid contracts look like? Again, I can understand you may have some limitations given on your grievance with the customer, but, 70,000 to 100,000 tons of nitric acid, sort of general ranges of potential EBITDA additions, or is it - can you not sure?.

Yes, I think I'd probably rather not do that at this point, Travis..

Okay. Yes, no problem. I appreciate the color and the best of luck in the quarter and stay safe. Thanks..

Thank you. You too..

Our next question comes from the line of JP Geygan with Global Value Investment Corp. Please proceed with your question..

Good morning.

Given the operational reliability that you've achieved at your plants, can you characterize next year's turnarounds relative to the cost and volume disruptions in previous turnarounds?.

That's a good question. Well, I think we're still - I think the issue JP is really we're still in the planning stages of those turnarounds. So typically, we would say that they are 30 to 35 day turnarounds, another one at Cherokee, one or three year turnaround cycle. So we want to make sure that we're exercising the proper maintenance on that facility.

As we finished that turnaround will go another three years without a turnaround. At Pryor, we did a pretty extensive turnaround last year. So we want to make sure that we continue that to do the work that we need to do to improve the operations and the reliability of that facility.

I would tell you that, we're acutely focused on planning for those turnarounds in a much more expanded way than we've done historically, and acutely focused on trying to bring those days down. So I think it's probably a little early for us to give you some color on that, but I think next quarter we'll be in a much better position..

Okay, great.

Can you give us any more color on the capital projects you have planned for 2021? And then in relation to your either planned or completed projects and particularly your product storage projects, have there been any new considerations to liquidity or working capital introduced?.

Well, I mean, so some of the new contract awards, we are going to make some investments to improve both storage and loading and unloading to support that business. So those should be complete in the earlier part of next year. A couple of other projects that we're evaluating. So I don't know that it's worth given much color on that.

We also talked about a CO2 and new long-term CO2 contract that we were awarded out of our El Dorado facility. And that requires a little bit of capital as well, to build certainly a pipeline to a gas plant that our customers building. So those are the things the two near-term projects that are underway, and then a couple of others that.

We're evaluating that all we'll have probably two year or less payback. I don't know if that answered the question..

That's helpful. Yes. Thank you. Finally, your deck mentioned that you're on track to reach a 10-year high in sulfuric acid production. You've previously suggested that you would consider acquisitions in this area.

More generally, can you talk about your appetite for acquisitive growth at this point?.

Yes. I mean, I think I've said this previously, we're getting to the point now, where - while we're not operating at the optimum levels that we'd like to and we expect to. Where plants are much more reliable, we're able to achieve record productions, which we'll hope to continue to do that as we improve the reliability.

So I think, we're looking for opportunities out in the marketplace that would make strategic sense for us. And that could be on the fertilizer side of our business, it could be in production, it could be in storage, it could maybe be in logistics, and I'd love to take a look at that.

And then it certainly could be on the industrial side of our business. And the key really is to focus on opportunities where we can use our core competencies to really hopefully improve the business and realize some synergies..

Great. Thank you for taking my questions..

Our next question comes from line of Brian DiRubbio with Robert W. Baird. Please proceed with your question..

Good morning, I'm sure I think you guys do a little bit of hedging on natural gas.

Can you give us a sense of what that looks like right now, your hedging program?.

Sure. We're about 60% hedged for the fourth quarter, around $2.40 per MMBtu. Looking into next year, we're watching that closely. We've got maybe 10% hedged for the first quarter. We're working with, our team here for some buying opportunities for next year. So, we'll be watching that closely over the next several months..

Got it. And just can you give us details on the ammonia storage debt that you refinance. I think that was the $3 million that was due in full next year, that you said you added 18.

So, is that you refinanced that with 21 and you netted 18.0 million of cash?.

Yes, I mean, we refinanced for $30 million and paid back $12 million that was outstanding. So, for a net $18 million of additional liquidity to the balance sheet..

And what was the rate on that refinance?.

It's right around that 8.5% to 9% range..

Okay, and that versus like the 4% to 5% weight, that was on the existing.

Correct?.

Correct..

Okay, perfect. Then maybe switching gears, there was an obscure filing, middle of August, with the New York Stock Exchange, talking about listing and registration of preferred stock. Because if I remember correctly, when you do the last refinancing, I think it was actually this the sale of the HVAC business.

You guys basically got the preferred owners to push off their put date on their preferred stock. And but that could data I think is in 2023, or 2024.

So, I'm just trying to think about, as you're talking about potentially refinancing, how you're managing that put in, is this filing sort of a first step to possibly listing those preferred shares, so, you can remove the put restriction?.

Yes, so the filing that was in August, was actually an NOL shareholder rights plan. So, we've got $650 or so actually a little more than $650 million of net operating losses. And we wanted to ensure that we didn't lose those.

And there's some pretty complicated tax rules on ownership changes that people could easily trip, especially in a low stock price environment. So, that's what that filing is related to, it's an NOL rights plan that we have in place..

Okay….

It has nothing to do with existing preferred..

Okay, got it. But it would be possibly those preferred holders to renegotiate that put option. If you are going to try to get any refinancing done.

Is that correct?.

Yeah, I think that, it's occurred that last refinancing, and I would suggest that, given that they're our largest stockholder, and we've had a really good relationship with the holder of the preferred that shouldn't be an issue with. If that's the world that we went down..

Understood.

Two last questions, the PPP loan for $10 million that we're going to find out next year if you have to repay that or not?.

We meet all the qualifications to get that loan forgiven so that would be our expectation..

Okay, and then finally, the lawsuit, I know you're focusing on your suit against Leidos. I think there was like a $9 million judgment against you earlier this year, sort of related to that.

Where do you stand with that? I think you're appealing that right now but where does that potentially stand in terms of timing vis-à-vis, the lawsuit against Leidos?.

Yes, so there's no requirement to make any payments, we are appealing it and it is part of the greater lawsuit that we have with Leidos..

Okay.

So no indication on when that appeal is going to be heard?.

No, unfortunately not..

Got it. Great. Thank you..

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments..

I want to thank everyone for listening to our conference call and for all the questions that we received. Hope you can see that we're making a lot of progress and hope to report on additional progress next quarter. Thanks so much and have a great day..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day..