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. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your Fred Buonocore, Vice President of Investor Relations. Thank you, sir. You may begin..

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..

Thank you, Fred. We’re happy to have the opportunity to speak with you today about our 2023 first quarter results and our outlook for the second quarter 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 one.

Out of all of our corporate goals, our goal zero that zero recordable incidents and injuries is the most important. We’re very pleased with the improvement we’ve had and I would expect it to continue to drive lower.

Looking at our 2023 first quarter summary on Page 3 of the presentation, as anticipated, our financial results were down compared to the 2022 first quarter 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 first quarter.

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. Foreign prices remain above multi-year averages driven by a variety of global factors including drought conditions in parts of South America and in the U.S.

and continued strong global demand. Domestic and worldwide stock-to-use ratios for corn remain at multi-year lows and we believe that it will continue to take two to three 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 2023. 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. this spring.

The USDA estimates that approximately 88.6 million acres of corn were planted in 2022 and that approximately 92 million acres will be planted this year. An increase of almost 3.5 million 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.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. input costs. Demand for AN for use in mining applications is strong as the 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 national natural gas prices, coupled with a slow start to the U.S. fertilizer application season.

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. Now I’ll turn the call over to Cheryl who would discuss our Q1 results and our second quarter outlook.

Cheryl?.

Thanks Mark. And good morning.

We generated adjusted EBITDA of $51 million and adjusted EPS of $0.25 in the first quarter, 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 will 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 first quarter, we had approximately $426 million in cash and short term investments.

During the first quarter of 2023, we generated cash flow from operations of $59 million and had capital expenditures of $18 million translating into $41 million of free cash flow and a free cash flow conversion rate of more than 80%.

Additionally, we ended the first quarter with a net debt to trailing 12-month EBITDA leverage ratio of less than one times, well below our target leverage ratio in a mid-cycle or normalized pricing environment of below 2.5 times.

Page 6 bridges our 2023 first quarter adjusted EBITDA of $51 million from adjusted EBITDA for the first quarter, 2022 of $101 million. 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 first quarter relative to last year, despite the previously announced loss 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 second quarter, the NOLA UAN benchmark pricing is currently at approximately $275 a ton, which is lower than our realized prices for Q1 2023.

Additionally, the Tampa ammonia benchmark price settled a $380 per metric ton in May versus an average of $728 per metric ton for Q1 2023. The changes reflect the factors that Mark stated previously. 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 2023 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 second quarter of 2023 as compared to the second quarter 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 second quarter adjusted EBITDA to be in the range of $50 million to $60 million 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..

Page 7 illustrates how the spread between U.S., European and Asian natural gas prices narrowed over the past eight 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. producers a continued advantage over European producers. On Page 8, we show a summary of our key growth initiatives.

Employees 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 zero 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 annual profitability and cash flow.

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 million 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 one or more of the projects we are evaluating. So I’ll take a moment to summarize how we see the cadence of the project development process going forward.

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 one or more of them commencing in the second half of 2023.

Should we decide to move forward with pre-feed studies for one or more of the projects we anticipate those studies could take as much as one 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 2024.

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.

Page 9 provides an overview and update of our blue, green ammonia projects. The two projects we have underway represent exciting opportunities to emerge as a leader in decarbonizing our industry.

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 through the production of low and no carbon products that build feed and power the world.

We expect these initiatives will lead to increased profitability 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&A session, I’d like to mention that we will be participating in the Goldman Sachs Leveraged Finance Conference on May 23 in Rancho Palos Verdes, California, the Stifel Cross Sector Insight 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. Thank you..

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Joshua Spector with UBS. Please proceed with your question..

Good morning. This is Lucas calling 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 to sort of be above the first quarter.

So I mean it seems like the outlook for pricing’s probably going to be sequentially realized prices declined and it’s 2Qand then again into the third quarter on the weak demand before maybe getting a pick up seasonally later in the year.

Is that – I mean, is that consistent with sort of what your expectations are? Or do your comments around it sort of bottoming, I mean, you’re assuming something is that it moves up more than that?.

Yes. I think you’ve categorized it pretty well. I think the second quarter and we’re halfway into the – almost two-thirds into the second quarter. And I think it’s going 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..

All right, thanks. And then just on the volume side, I mean, obviously the start of the season’s been delayed, so the volumes probably came in a little lighter for everybody than was expected in the first quarter.

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 $1.5 million in product funds for the year?.

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, theoretically the farmer will need – theoretically need another 400,000 tons of either urea or UAN.

So we should see a pickup in one 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 so..

Right. Thank you..

Sure..

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

Yes. Thank you. Good morning, everyone..

Good morning, Adam..

Good morning. So I guess, I want 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 – what’s hedge 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 versus 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 nitrate and UAN prices are doing in the back half of the year..

Hey Adam, I think the simplest way to put that would be we’re about 350 to 370 per MMBtu hedged at 90% for the second half of the year..

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

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

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

Got it. Okay. Now that’s very helpful. And then on the ammonia side, I mean, you’ve seen U.S. Gulf prices kind of move lower and kind of react to kind of seemingly surpluses in the international markets and kind of lower in industrial demand.

Are seeing any evidence on the – from your industrial customers for ammonia that activity levels are improving? I mean, your ammonia market is an interesting 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..

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 would expect that to pick up, maybe in the second half of the year.

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..

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

Thank you..

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

Hey, good morning. So just going back to the timing of your spending decisions so it looks like you’ve got a pretty healthy balance sheet right now, over $400 million. But sounds like there aren’t really any major capital decisions potentially until H2 of 2024.

So like are there any plans for that cash in between now and then?.

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 million worth of stock last year. We are sitting with a healthy cash balance $425 at the end of the first quarter.

And suffice it to say that we’ve generated additional cash between then and now and we expect to generate additional cash throughout the rest of this year. So we have our annual meeting next week we’ll be with the board and absolutely we’ll be discussing, putting in another stock buyback..

Okay.

And how would – like debt versus buyback, what’s the thought there?.

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..

Okay. And then just to follow up on the nat gas hedging, I think back on the Investor Day, there were some hedge nat gas numbers provided by Cheryl 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 gas costs? Thanks..

Yes, Andrew, so just to reiterate – so we’re hedged around 340 for Q2 and then, 370-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..

Okay, no, that’s fine. It just, yes..

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

Okay, thanks..

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

Good morning.

Have you got a read just on product or could you give us a read of 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?.

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 second quarter. But as we had mentioned earlier, it was kind of a late start to the spring.

And I think some of our competitors talked about on their calls, the sort of standoff of buying the people or the customers buying versus producers wanting to sell for a couple of months. 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 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.?.

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’ve been this time last year. So nothing really different..

Again, I’m not – 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 UAN. I think those are pretty tight markets. Thank.

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

Thanks Rob..

[Operator Instructions] Our next question comes from Laurence Alexander with Jefferies. Please proceed with your question..

Good morning. It’s actually Dan Rizzo on for Laurence. Thank you for taking my question.

You mentioned that there’s no turnarounds this year, should we think about that that there’ll be a lot more turnarounds next year? Or I guess how long is the spacing between the need for – for downtime for that?.

Yes. So we don’t have – as you said we don’t have any turn – scheduled turnarounds for this year. We do have two turnarounds scheduled for next year, one at our prior facility and one at our Cherokee facility. And then the following year we have one for our El Dorado facility. Cherokee is on a three-year turnaround cycle.

The same with El Dorado and Pryor is still on a two-year turnaround cycle..

Alright. Thanks a lot. And then your net-debt-EBITDA is fairly low and below what you kind of your I guess we term 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 don’t know for the next year or so until things turn up or there’s more clarity..

Well, I guess what I – how I would answer that about normalized EBITDA, we did $51 million in the first quarter. Cheryl gave a range of $50 million to $60 million for the second quarter, and we clearly expect in the second quarter to beat that first quarter number.

So even at the midpoint of $55 million, that’s $106 million for the front half and we don’t think that the back half is going to see much of a drop in pricing on average.

So I think we’re still right on $200 million of normalized EBITDA despite average ammonia prices for the year more than likely going to be less than the $500 [ph] that with the assumption in that $200 million 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..

Thank you very much..

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

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 in 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..

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

Because I mean, certainly that’s a big indicator or a big yes, indicator of where pricing would be going in, through the rest of the year if they wipe, if you can get the inventory has wiped clean, you got a much better chance of holding price through third quarter 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 side-dressing going on here, particularly to the wheat crop, but even to corn in some cases?.

Yes..

Okay. Again, that should help bring down numbers. All right. That’s all I got. Thanks very much..

Thanks, Charles..

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

Just one follow-up question. Urea – bounced to your higher as a result of the 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?.

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’s 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. 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..

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

I want to thank everyone for participating on our first quarter earnings call. Appreciate everyone’s interest and if anyone has any follow-up questions, please reach out to us. Thanks so much..

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