Greetings and welcome to LSB Industries' First Quarter Fiscal Year 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] As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Kristy Carver, Senior Vice President and Treasurer. Thank you, Kristy, 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 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 for opening remarks..

Thank you, Kristy and good morning everyone. As always, we appreciate your interest in LSB Industries and are happy that you can join our call this morning. What a difference a year makes. At this time last year, we were staring into the unknown of the unfolding COVID-19 crisis.

The onset of the pandemic required us to rapidly implement protocols and procedures to keep our employees and their families healthy while enabling us as an essential business that continue to run our facilities. It also caused a significant slowdown and in some areas -- in some cases a full shutdown of our industrial end markets and much of the U.S.

economy in general. At the same time, pricing of our agricultural products declined further from the already low levels of 2019. The level of uncertainty we faced as individuals, as a company, and as a nation was historical in nature and daunting to say the least.

In the face of these challenges, our team more than rose to the occasion, integrating our COVID mitigation procedures into our overall health and safety program to achieve outstanding results and they did this while remaining focused on our goal of continuous improvement in our manufacturing operations.

In doing so, our people capitalized on the investments we made in plant reliability and product upgrading capabilities over the previous several years, and ultimately, delivered company record production volumes across our portfolios of facilities.

Flash-forward to today, with the widespread rollout of vaccines, emerging treatments, and greater overall knowledge and experience as to how to run our business and live our lives on a day-to-day basis amidst a pandemic, has come a rebound in much of the U.S. economy, including our key industrial end markets.

On the agricultural side of our business, a combination of factors has aligned to spark a surge in demand and pricing for the products we produce and sell.

We believe that these favorable trends are likely to persist throughout 2021 and into 2022 and because of the variety of actions we've taken over the past several years, we think we are well-positioned to capitalize on them. Our first quarter was not without its challenges.

As widely documented in the news, and as we discussed in our last earnings call, historically cold weather across the regions in which we operate and the related impact on natural gas pricing and availability during February caused temporary shutdowns at two of our facilities and impacted our results for the period.

Despite these headwinds, however, by focusing on the aspects of our business within our control and executing well, coupled with the improving demand and pricing trends in our end markets, we generated double-digit year-over-year growth in net sales and adjusted EBITDA.

Overall, it was a solid start to the year, and we believe it sets the stage for significant improvement in our 2021 financial performance relative to that of 2020. On slide four, we summarized the key drivers of our agricultural and markets. Commodity prices have continued on an upward trajectory since hitting an inflection point last fall.

Most importantly for our business, the price of corn has more than doubled from 2020 lows and is now at levels not seen since 2013. As discussed on our last call, strong demand for U.S.

corn is being fueled by a combination of factors, with the most prominent being a surge in exports led by increased demand from China and a rebound in ethanol production, as driving and related fuel consumption have increased as the vaccines have rolled out enabling many people to get back to more normal lifestyle.

In addition to the impact from the increased demand, the price of corn has also been impacted by the global supply concerns being caused from drought conditions in Brazil and the Western United States, which could reduce overall corn production.

Additionally, we have seen steep increases in the price of other agricultural commodities including beans, wheat, and cotton, all creating a competitive environment for a finite number of acres we have available for planting in the U.S. Approximately 91 million acres of corn were planted in the U.S. during 2020, which was a slight increase over 2019.

The USDA's most recent forecast for 2021 is for approximately 91 million acres, which we view as more than ample to drive very healthy demand for fertilizers. With strong corn market fundamentals has commensurate rebound in demand and pricing for fertilizer products.

As you can see on slide five, Tampa ammonia pricing has more than doubled over the past 12 months and expected UAN and HDAN pricing have both increased substantially compared to the second quarter of 2020. Corn and fertilizers are not the only commodities that have been experiencing rising prices.

As the economy has been recovering and the outlook for economic expansion continues to improve, energy prices have been increasing significantly as well, including natural gas.

Since natural gas is the primary input to our manufacturing process, the higher prices over the past several months were and we expect will continue to be a partial offset to the gains we are recognizing from higher product selling prices.

But importantly, we expect it to be less of a headwind to profitability improvement as we begin to fully benefit from the higher agricultural product process. Cheryl will discuss this in more detail shortly.

Turning to slide six, with respect to our Industrial and Mining business, most of our end markets have seen meaningful recovery since last spring. One of the primary end markets for the nitric acid we produce is the auto industry, which was forced to cease production at the onset of the pandemic in mid-March of last year.

As of the end of last month, U.S. light vehicle sales rebounded from last April's lows by more than 100% and we're actually above the pre-pandemic level of the end of February 2020 by more than 5%. Nitric acid is also a major input to a variety of home building products. Based on preliminary estimates, as of the end of March, U.S.

housing starts and building permit applications have rebounded to above pre-pandemic levels and were at the highest in several years.

With respect to the 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 almost 10 years and the expectation is for pricing to continue at these levels, which could drive an increase in copper mining activity in the foreseeable future, particularly given relatively new and growing copper demand drivers such as mass production of electric vehicles.

We view the current demand trends we're seeing across our key in markets as pointing towards continued increases in sales and prices of our Industrial and Mining products over the course of 2021 and thereafter.

Before I hand the call over to Cheryl, I'd like to provide an update on the litigation that we brought against Lidos [ph], the general contractor of our Eldorado ammonia plant expansion project. As the pandemic has caused many trials to be rescheduled, ours was not immune. However, Arkansas Supreme Court has begun scheduling trials beginning in June.

And based on that, we continue to believe that our trial will occur sometime this fall. We are looking forward to having our case heard by a jury and while we can't guarantee any outcome in the litigation, we believe our case has serious merits. Now, Cheryl will go into more detail about our Q1 financial results.

Cheryl?.

Thanks Mark and good morning. Page eight bridges are adjusted EBITDA for the first quarter 2021 of $17.3 million to adjusted EBITDA for the first quarter of 2020 of $15.6. This improvement was due to greater sales volumes and improved pricing, stemming from a multitude of factors that Mark spoke about earlier.

Partially offsetting our operating performance and the improved demand and pricing environment was the impact of higher natural gas costs, increased insurance costs, and a small impact from the extreme cold weather event we experienced in February of this year.

With respect to the weather event, as you might recall, we generally lock in a portion of our natural gas usage at a fixed price and therefore, despite the significant impact of loss production, sales, and higher costs caused by the natural gas disruptions at both our El Dorado and prior facilities, we were able to mitigate a big part of the loss with a sell back of natural gas and related contracts.

Turning to page nine, we have outlined our adjusted gross profit margins for the past three years, which we believe represent the underlying cash margins of our business.

As you can see from this slide, despite the significant drop in the average annual Tampa ammonia benchmark price from 2018 to 2020, our adjusted gross margins remained in the 23% to 24% range, as we were able to largely offset weaker pricing with higher production and sales volumes and reductions in fixed costs.

Looking at the first quarter of 2021, we see the positive impact of these factors, plus the benefit of improved product pricing, which provided us with some healthy margin expansion during the period. With the recovery of the Tampa ammonia benchmark, we believe that as the year progresses, we will be able to improve our gross margin even further.

Page 10 outlines our current capital structure; we ended the quarter with approximately $14.2 million of cash and $56 million of total liquidity. As stated on previous calls, we continue to actively seek ways to improve our capital structure and lower our overall cost of capital.

We believe that operating improvements made to-date combined with the improved pricing environment for our fertilizer products and robust industrial and mining end markets will be a benefit in achieving those results. As we highlighted on our call in February, credit markets remain issuer-friendly.

And with that in mind, we continue to evaluate several avenues to lower our cost of capital and look forward to discussing these with you in the coming months. Before I turn the call back to Mark, I'll review a few important considerations as to how to think about the second quarter of 2021.

As Mark covered on slide five, pricing has moved up dramatically over the last several months and we expect that pricing to be reflected more significantly in the second quarter.

Keep in mind that while pricing improvement did help our first quarter, orders for UAN, HDAN, and agricultural ammonia in the first two months of Q1 were taken back in Q4, and therefore were reflective of Q4 pricing. In other words, due to order timing, Q1 benefited from products selling price improvement to only a relatively minimal degree.

During Q2, we expect we will benefit to a much greater degree. We expect ammonia production for the second quarter to be at or better than the second quarter of 2020 and for that to translate into margin expansion as we execute on our strategy to upgrade into downstream consumers of nitric acid, LABN [ph], and UAN.

Natural gas trends excluding the unusual spike from the cold weather in February, has seen pricing rebound off Lowe's experienced back in early 2020 and we expect the cost of gas feedstocks to be approximately 50% higher than the second quarter of 2020.

Putting this all together, we expect EBITDA in the second quarter to be approximately 70% to 90% higher than the second quarter of 2020. And now I'll turn it back over to Mark..

Thank you Cheryl. The beginning three months of 2021 was the first quarter that we would say we experienced little to no impact from the pandemic. It was also the first quarter in more than two years, where we saw meaningful price increases for our agricultural products.

We have seen further price increases in the second quarter and we believe that these can be maintained on a year-over-year comparative basis for the remainder of the year and into 2022.

As I mentioned earlier, current and future corn prices are at the highest they've been since 2013 and forecasts call for approximately 91 million acres of corn planted this spring.

In recent weeks, we've seen this translate into significant demand for fertilizers, as growers strive to maximize yields at the anticipated favorable market prices for corn. Slide 11 illustrates an important market dynamic that we've been talking about on our past two conference calls.

The top chart shows the historical relationship between urea and UAN. For the better part of the past 10 years, UAN and traded at or above the price of urea on a nitrogen equivalent basis. Beginning of mid-2019, however, UAN began selling at a discount to urea for the balance of that year and for most of 2020.

This led us to believe as we indicated on past conference calls, that we would see a reversion to the historical relationship with the UAN to urea discount ultimately narrowing or disappearing. This is exactly what we've seen the last month.

In fact, on a nitrogen equivalent basis, as you can see in the right hand end of the upper chart on slide 11, UAN is again trading at a premium to urea on a nitrogen equivalent basis, which bodes well for us as we were a seller of UAN.

On slide 12, we summarized our strategy for improving our EBITDA and cash flow, which is comprised of three main elements.

First, optimizing the investments that we've made to improve reliability and production capacity, which allows us to capitalize on the strong pricing fundamentals we are seeing in the near to intermediate term and continuing to evaluate further investments.

Second, continue to focus on upgrading our margins by maximizing our downstream capacity and expanding our relationships with new and existing customers to increase sales of those higher margin products.

And lastly, evaluating additional investments at our facilities that would expand our production, storage, or logistics capabilities to take advantage of our expanding customer relationships or other marketing opportunities.

As you heard from us over the past several quarters, we've been successful on all three of these fronts and we expect to continue to realize meaningful benefits from the progress we've made throughout the remainder of 2021 and going forward.

Our operating performance has been yielding solid production volumes and is enabling us to lower our protocols and realize margin expansion by optimizing our product mix to take advantage of higher selling prices.

Sales under the new nitric acid contract we signed in late 2020 commenced in Q1 will allow us to recognize better capacity utilization at our El Dorado manufacturing facility going forward.

Looking ahead over the remainder of this year and beyond, we expect to make further progress with our operational effectiveness, as well as in our sales and marketing and business development initiatives.

As it relates to our focus on other growth initiatives, we are actively pursuing growth opportunities that we believe will enhance the overall value of the company.

Given the diversity of the products that we sell and the markets that we sell into, we are open to opportunities that would expand the production and sales of existing products, while adding additional regional presence or opportunities that would add production of new products to our portfolio that we can sell into our existing end markets.

As I discussed last quarter, a major new business development initiative that we've embarked on is the addition of a green ammonia element to our overall strategy.

We believe that green ammonia will be a compelling growth opportunity for us given the role it can play in reducing global carbon emissions through the many new potential applications that have been identified and our ability to capitalize on existing knowledge in ammonia manufacturing, handling storage, and logistics.

We're excited about the role we can play in creating a more sustainable, environmentally-friendly world, and for the long-term value that this could create both financially and socially.

In order to become more focused and effective in pursuing this opportunity, we've recently hired Hector Miravete, a highly experienced business development executive in the chemical industry as a Director of Clean Energy, where he will look to assist us in developing and executing on our green ammonia strategy.

We look forward to providing you with further developments on this exciting opportunity in future quarters. Before turning over the call to the operator to begin the Q&A session, I'd note we will be participating in the following virtual investor conferences in the coming weeks.

The Goldman Sachs Credit and Leveraged Finance conference on May 17th; Sidoti Microcap Conference on May 20th, the KeyBanc Capital Markets Industrial and Basic Materials Conference on June 4th, and the Stifel Cross Sector Insight Conference on June 9th. We look forward to speaking with some of you during these events.

That concludes our prepared remarks and we will now be happy to take any questions. Thank you..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Travis Edwards with Goldman Sachs. Please proceed with your question..

Hi, good morning. This is Bertie Ray [ph] on for Travis. Thanks for taking my question. We're still at elevated pricing. I know you've talked previously about a traditional set down in ammonia and other nitrogen prices in the back half of the year. But can you give us any commentary on what you're expecting for full year EBITDA.

Based on your price matrix chart, it looks like you could be eclipsing about $100 million of EBITDA this year.

Is that a reasonable assumption or how should we think about that?.

I think about the only thing we can say on full year EBITDA is we're pretty comfortable with the grid that we put out there. And so based on a level of UAN and ammonia prices, you could land somewhere on that grid..

Got it. Thanks. That's helpful.

And then as a follow-up, you mentioned the impacts from the winter storm, could you provide the operating rates for the quarter or some quantification regarding the outages in the quarter?.

No, we don't usually provide operating rates on individual clients, so we're going to stay away from that. It's not something that we typically answer or disclose..

Okay, got it. Thanks very much for your time..

Thank you. Our next question comes from Steve Ferazani with Sidoti & Company. Please proceed with your question..

Hi. Morning everyone. I have to follow-up on a brief commentary on tackling capital structure. We know that certainly next month call option price declines.

How are you thinking about it? But it seems like you open the door to other possibilities, is there any kind of color you can provide? And how you're thinking about given the way the market conditions are? How you're thinking about the capital structure? And what you might do in the next couple of months?.

Yes, so -- we absolutely believe that there's an opportunity for us to refinance. That opportunity has been present for some months now. As you mentioned, our call premium does step down on May 1st. So, that's this weekend. And suffice it to say that we've had some active conversations with investment banks about refinancing.

So, I would suggest that between now and the end of the third quarter, there's a strong possibility that we would be refinancing or existing senior secured notes and looking at that as part of potentially lowering our overall cost of capital..

Okay.

In terms of -- and I know, you don't want to provide full year guidance, but in terms of how you are internally preparing for the second half of the year, knowing that Q2, you should have the very, very strong ag sales, some potential -- some additional ammonia capacity coming back to the market the second half, how do you think about your ag versus industrial and mining pellets with the industrial side, as you noted, getting stronger now?.

Well, I mean, I think we actively manage our product balance. It's not something that you could manage on a day-to-day basis. But we certainly look at it at the beginning of the year. A lot of our industrial business is contracted, so we're committed to providing product to customers. So, it's not -- we can't not provide that.

But there's always spot sale opportunities. What I would say about the ag markets is typically you'll have a reset in fertilizer prices over the summer and we would expect to have a reset from prices from current prices.

But I don't think that you'll see a summer reset, particularly on UAN as low -- anywhere near as low as we've had the last couple of years. So, I think we expect to see some better fertilizer pricing in the second half of the year on a comparative basis than we've seen in 2019..

Okay, that’s helpful. And then just last one -- just a modeling question.

I know I thought it was useful color in terms of the insurance costs, is that the primary reason for the sequential change in SG&A for the quarter besides obviously sales going up and then is that how we should think -- how should we think about SG&A going forward with the higher insurance premiums?.

Yes, that is the primary reason -- it is the insurance costs and I think you can assume that that would continue over the next three quarters..

That was very helpful. Thanks everyone..

Sure..

Thank you. Our next question comes from Rob McGuire with Granite Research. Please proceed with your question..

Mark and Cheryl..

Good morning..

Can you help us understand to what degree stronger pricing in the ag market is reflected in your first quarter?.

Rob, we can't hear you..

I'll try this differently, one moment. Apologize for that.

Can you hear me now?.

Yes..

Very good. I can you help us understand to what degree stronger pricing in the ag market is reflected in your first quarter results, just considering that you have pre-sold some product in Q4 and then early Q1.

And then as it relates to second quarter sales, how much product was pre-sold at late Q1 prices and will likely be reflected in the second quarter?.

Yes, great question. So, I'd say most of the first quarter was pre-sold back late in 2020, or early 2021. So, we really didn't see much benefit from higher pricing. I'd say when it comes to second quarter; we're going to see significant benefit from a bump up in fertilizer prices.

Having the weather outage, though, affect several of our facilities will have us probably roll a little bit of lower pricing into the second quarter, but overall, I think we'll be able to take advantage of the higher pricing in Q2..

That's helpful.

On that on the impact of prior in El Dorado during the quarter, can you kind of quantify the financial impact of those shutdowns?.

Well, I think part of managing our manufacturing facilities is also managing our gas purchasing and in our gas book, and so what I would say is the net impact, because we were able to sell back some gas, was about $1.5 million for the quarter.

So, I mean, I don't think that we're comfortable talking about what was the actual manufacturing impact versus how much did we benefit by the sell back of gas and things like that. I think it's kind of -- in our view, it's kind of altogether..

Okay, great.

And then green ammonia, just anecdotally, it's gained a lot of traction recently, how quickly can you enter that market? And how significant can that become?.

Well, that's a really great question. I think for me, I think about -- really creating what we believe is a good strategy for us, by the end of the year that would be the goal and then executing on that strategy.

Ultimately, I think, you don't enter a market like this, which is a nascent market, with both feet and jump in the water, I think, we'll dip our toe in by modifying one of our facilities, I believe, to produce anywhere from 15,0000 to 20,000 tons of green ammonia, that's the thought process today.

And enter that market and be a real participant and then have the ability to scale if the market really takes off. The one thing I'd say is it is a non-existent market today and so there's a lot of chatter. And there's a lot of announcements and a lot of MOUs being announced. And I think a lot of great activity and great intentions.

The reality is, is that it's pretty costly to manufacture green ammonia today. And so they'll have to be their government assistance, either in the capital needed to get into the market, or certainly in maybe credits back for reducing CO2 emissions.

And, of course, you have to have customers that are willing to pay higher prices for something that's carbon-free. So, it will -- I think we're really excited about it. We think that it's a huge market opportunity. Today, there's about 180 million tons of ammonia produced globally.

And based on some of the applications including in the Marine industry, in power industry and some of the other opportunities. If everyone went green, I mean, it could be double that, so over 300 million of ammonia production annually that would be required.

So, there really is a big market opportunity, but I caution in that I think it's going to be a slow developing market..

Thank you. I've no further questions..

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mark Behrman for closing comments..

I want to thank everyone for their interest in LSB Industries and if there are any follow-up questions, please feel free to give either Cheryl or I a call. Thanks so much..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day..