LSB Industries, Inc. (NYSE:LXU) Q1 2024 Earnings Call Transcript

LSB Industries, Inc. (NYSE:LXU) Q1 2024 Earnings Call Transcript April 30, 2024

LSB Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to the LSB Industries’ First Quarter 2024 Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Fred Buonocore, Vice President, Investor Relations. Fred, please go ahead.

Fred Buonocore: Good morning everyone. Joining me today are Mark Behrman, our Chief Executive Officer; and Cheryl Maguire, our Chief Financial Officer. Also joining today is Damien Renwick, our Chief Commercial Officer. Please note that today’s call includes forward-looking statements. 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. On the call we will reference 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.

As a reminder, we have a Stockholder Rights Plan to protect certain tax attributes. Please see the Investors section of our website at lsbindustries.com for further important details. At this time, I’d like to go ahead and turn the call over to Mark.

Mark Behrman: Thank you, Fred. Turning to Page 4 of our presentation. First quarter results were in line with our expectations. Pricing was down year-over-year but this was offset somewhat by stronger sales volumes and lower natural gas costs. We continue to generate positive free cash flow in the first quarter and used our strong cash position to repurchase our stock, returning capital to our shareholders. We also reduced our debt by repurchasing notes during the quarter further de-risking our balance sheet. We continue to selectively repurchase our stock and notes post the first quarter and will opportunities to further both of those efforts. Lastly, on the low-carbon ammonia initiatives, our two projects remain on track with the timelines that we discussed back in March, and I’ll provide more color on these later in the call.

Now I’m pleased to turn the call over to Damien Renwick, our Chief Commercial Officer, who will discuss the current market dynamics and pricing trends. Damien?

Damien Renwick : Thanks, Mark, and good morning, everyone. I’m glad to speak with you today. On Page 5 of our presentation, you’ll see an overview of our agricultural end market. Corn prices remain at levels that should translate into healthy income levels for farmers. Despite expectations for increasing U.S. corn supply in the coming months, the December ’24 corn futures price currently exceeds $4.60 per bushel. The USDA recently reduced 2023-’24 global stock estimates for key grains, including corn, providing some price support. In addition, the EPA recently extended the sale of 15% ethanol gasoline, or E15, during the summer, which should provide further support for corn prices. We believe that farmers will remain motivated to maximize corn yields through the application of nitrogen fertilizers for the balance of the spring planting season and again in the fall after the harvest.

Ammonia prices have been underpinned by robust demand over the past several months, with a strong pre-plant application season in the US. We also saw a variety of factors constraining global supply. This includes a number of cold weather-related events in the U.S. impacting domestic production. the disruption of shipping through the Suez Canal, the delayed start-up of new ammonia production capacity that was expected to come online early this year, and natural gas supply issues in Trinidad. We also saw improved UAN pricing develop through Q1, as we continued to successfully execute our direct-to-customer marketing strategy. This allowed U.S. to target pockets of demand where supply was limited, as the UAN import pace continued below previous years.

Urea prices were volatile in the quarter due to expectations of a resumption of Chinese exports, a dynamic that has historically had a negative impact on global urea prices. However, the Chinese government recently implemented further restrictions on urea exports, delaying the infusion of additional supply into the global market. While we don’t sell urea, we do pay close attention to its pricing dynamics, since urea pricing can impact pricing for our UAN and HDAN products. As we look forward through the remainder of the fertilizer season, our order book is well positioned across our products to support our market perspectives on pricing and demand through May and early June. We have a good balance of forward orders, with room to take advantage of spot sales through the application period, depending on the product.

On Page 6, we show pricing trends and forecasts for the key commodities that drive our agricultural business. The upper left-hand chart shows the price trend for the TTF, the European natural gas pricing benchmark relative to the price for Henry Hub, the benchmark price for U.S. natural gas pricing. European gas prices have increased over the last month, as instability in the Middle East has offset some of the price decrease seen through the end of 2023 and through Q1 following a warm winter and heavy LNG imports. Still, gas prices in the U.S. remain a fraction of those in Europe, representing significant competitive advantage to U.S. producers. We believe the U.S. cost advantage will persist in the coming years, as the chart indicates. Page 7 summarizes some key dynamics at play in our industrial and mining end markets.

Overall demand remains steady in our industrial business, reflecting the resilience of the U.S. economy. A significant amount of the nitric acid we sell is used to produce polyurethane. Polyurethane, used to make phones, is a major input to both auto and furniture manufacturing. As such, we closely track data related to U.S. auto production and furniture orders. The first two charts on the right-hand side show trends in U.S. auto production and furniture manufacturing. The trends depicted on these two charts reflect the solid level of demand remaining generally stable over the past year that we experienced in our nitric acid sales. As the third chart on Slide 7 indicates, mining production activity also remained relatively stable over the past several years.

The recent decline in activity shown in the chart is largely due to a reduction in coal production volumes, reflected in the steep drop in the price of coal over the past year. We have very little exposure to the coal market, so this weakness had minimal impact on our business. On the contrary, we’ve experienced strong demand for ammonium nitrate, driven in part by healthy metals mining activity in support of electric vehicle production and other applications. The strong demand for metals is reflected in recent price trends for gold and copper, both of which are up significantly this year. As we look at both sides of our business, we expect fundamentals for nitrogen producers to remain attractive and stable for the foreseeable future. Now, I’ll turn the call over to Cheryl to discuss our first quarter financial results and our outlook.

Cheryl?

Cheryl Maguire : Thanks, Damien, and good morning. On Page 8, you’ll see a summary of our first quarter 2024 financial results. We generated adjusted EBITDA of $33 million and EPS of $0.08 for the first quarter. Page 9 bridges our $33 million of adjusted EBITDA to our first quarter 2023 adjusted EBITDA of $51 million. Weaker selling prices relative to the prior year were once again the primary factor in the year-over-year change in EBITDA. The weaker pricing was partially offset by stronger sales volumes and lower natural gas costs. Page 10 provides a summary of our key balance sheet and cash flow metrics. We continue to use our strong cash position as an opportunity to further de-risk our balance sheet. In the first quarter, we repurchased $33 million of our notes, and year-to-date we’ve repurchased $75 million of debt.

We also repurchased approximately 700,000 shares of our stock during the first quarter and approximately 1.5 million shares year-to-date. We expect to opportunistically repurchase stock as the year progresses while continuing to invest in our assets to improve their performance. As a reminder, we have turnarounds scheduled at our Pryor and Cherokee facilities during the second half of this year. These turnarounds will be integral to our goal to improve plant reliability and efficiency. Looking forward, the second quarter of 2024, Tampa ammonia currently sits at $450 per metric ton and NOLA UAN is currently around $270 per ton. We expect some weakening in pricing for both products in the second quarter as we move into the normal seasonal slowdown as the spring planting season closes.

More specifically, we expect a sequential decline in our realized pricing for ammonia and our ammonia sales volumes given the strong spring ammonia run in the latter part of the first quarter. Additionally, the second quarter typically marks the transition away from ammonia fertilizer application, which is usually done prior to planting, to the application of other fertilizers such as UAN, which are typically applied post-planting. As a result, we expect higher UAN sales volumes both sequentially and year-over-year. Furthermore, although we anticipate lower realized fertilizer selling prices compared to last year’s second quarter, we do expect that impact to be largely offset by lower natural gas costs, which we expect will be approximately $2.10 per MMBtu in the second quarter, inclusive of transportation.

With respect to costs, we are ramping up our preparation for our Pryor and Cherokee turnarounds planned for the second half of 2024. We expect to incur approximately $2 million to $3 million of expense related to this prep work during the second quarter. Putting it all together, we expect our second quarter adjusted EBITDA to be lower than the second quarter of 2023, primarily due to lower realized selling prices. However, we expect a meaningful sequential increase in adjusted EBITDA over the 2024 first quarter as a result of higher sales volumes and lower natural gas costs. Looking beyond the second quarter, after six consecutive quarters of year-over-year declines in product selling prices, we expect pricing to be more in line with prior year quarters during the second half of this year.

And now I will turn it back over to Mark.

Mark Behrman : Thank you, Cheryl. Pages 11 and 12, pertain to the two low-carbon ammonia projects that we currently have underway. Page 11 summarizes the key information relating to our project with Lapis Energy at our El Dorado facility. This project remains on track with the timeline we discussed in early March. The main gating factor remains the approval of our Class VI permit application from the EPA. Receiving the Class VI approval will enable Lapis to commence construction and then begin capturing and permanently sequestering more than 450,000 metric tons per year of CO2 that we produce at El Dorado. We are in regular contact with the EPA about the permit application. We have been encouraged by the recent feedback indicating that the timeline for approval could be accelerated to mid 2020-2025 relative to our previous expectations at the end of 2025.

As a reminder, we expect Lapis to receive the 45Q tax credit of $85 per ton of CO2 sequestered since they will own the capture facility, but they will buy the CO2 from us. At the same time, we will be producing more than 375,000 tons of low-carbon ammonia annually. Collectively, we expect this to yield approximately $15 million to $20 million in annual incremental EBITDA for LSB. As we indicated last quarter, our commercial team is actively pursuing markets for the low-carbon products that we will be producing at El Dorado, and our conversations to-date have been very productive. Page 12 summarizes the key aspects of our Houston Ship Channel low-carbon ammonia project. As a reminder, the project entails the design and construction of a world-scale ammonia plant that will produce approximately 1.1 million metric tons of low-carbon ammonia.

Samsung Engineering is performing our pre-FEED, and that is expected to be completed during the third quarter of this year, at which point we expect the FEED to begin. We anticipate a final investment decision in the second half of next year. Regarding long-term off-take, we continue to work with potential customers to secure long-term off-take for the anticipated ammonia production. Based on our ongoing conversations, we expect off-takers to come from Asia, Europe, and the U.S. The markets for low-carbon ammonia continue to take shape, with many positive developments emerging in recent months. JERA, Japan’s largest power company, has a three-month trial underway using 20% ammonia to co-fire one of its coal-burning power plants, with the goal of eventually using 100% ammonia in its plants as a means of dramatically reducing its CO2 emissions.

The success of this trial would be groundbreaking in terms of providing the viability of ammonia use for large-scale power generation. While Japan is a first mover in this regard, Europe, which has previously been entirely focused on green zero-carbon power generation, is increasingly considering blue or low-carbon ammonia as a more practical emission reduction option. This is largely due to the currently prohibitive high costs of producing green fuels. European governments are currently working on legislation intended to make low-carbon ammonia eligible for the incentives that now cover only green products. If this legislation passes, the global market for blue ammonia would be considerably larger than anticipated when we initially began the process of developing our projects.

The marine industry is also keenly focused on ammonia as a potential fuel for large ships instead of high CO2-emitting diesel or bunker fuel. Fortescue, an Australian materials and industrials company, successfully used ammonia in combination with diesel as a marine fuel on one of its Singapore-based vessels. Interest in ammonia as a fuel continues to grow, and there are numerous ammonia-powered vessels on order and scheduled for delivery and entry into service as soon as 2026. We’re very excited to be involved in this emerging clean fuel trend and expect to be one of the leading suppliers of low-carbon ammonia to these and other industries in the coming years. We have a lot of initiatives ongoing to approve our current operations that we believe will provide a meaningful increase in profitability and, in turn, shareholder value.

Combining those with our low-carbon activities, we believe we’re on our way to creating a profitable play on the energy transition. I’m excited about our future. Before we open it up for questions, I’d like to mention that we’ll be participating in the following conferences in June. The Stifel Cross Sector Insight Conference in Boston on June 5th, The Deutsche Bank Industrials Conference in New York on June 6th, The Wells Fargo’s Industrial Conference in Chicago on June 12th, and The Jefferies Virtual ESG Conference on June 20th. We look forward to speaking with some of you at those events. That concludes our prepared remarks, and we will now be happy to take your questions. Thanks.

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Q&A Session

Operator: Thank you. We’re now conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Josh Spector from UBS. Your line is now live.

Josh Spector : Yeah, hi, good morning. So, I wanted to ask one of your prepared comments when you talked about UAN price is higher because the supply-demand is tighter in the U.S. through the second quarter. If you can kind of compare that to your comments about pricing moving down through the quarter? Obviously, there’s seasonal factors as a part of that, but when do you think the supply-demand in North America becomes maybe more balanced and links back to the cost curve versus a tighter dynamic.

Mark Behrman : Damien, why don’t you take that one?

Damien Renwick : Yeah, Yeah. Hi, Josh, how you doing? Look, I think there’s a couple of elements to your question. So, first of all, we’re seeing pretty stable UAN prices. I mean, they took a turn up through Q1 and the early part of Q2. And really what we’ve seen, one of the key dynamics playing out here in the U.S. is, UAN imports have been tracking much lower than prior years and so that’s created some pockets of opportunity, as I said in my earlier remarks, where we’ve been able to sort of take advantage of that. You know, other factors that are going to come into play, we’ve got urea at the moment. The volatility in urea has, I guess, created a little bit of uncertainty for farmers and buyers. And so there’s forward buying to a limited extent, but we should see stable prices up until we start to see the reset. And at this stage, we’re not sure when that will be, but it’ll be towards the end of Q2.

Mark Behrman : We think there’s a bunch of pent up demand though, right?

Damien Renwick: Yeah, I think so. In terms of the retailers and co-ops, they’re buying closer to hand to mouth. So, there’ll be a time when the application really starts and kicks in and there’ll be a surge of buying activity and that’ll support pricing right through until we get to the end of season.

Josh Spector : Thanks, Damien. I appreciate that. And I wanted to follow up on some of the guidance comments that Cheryl made. I’ll skip Q2, but it seemed like when you were walking through the rest of the year, you were talking about, I don’t know if I heard you in terms of flat EBITDA for 3Q and 4Q versus prior year, or if you’re talking about flat volume? And if it’s flat EBITDA, I guess, 4Q would be surprising that you’d be calling that this early when I think your guidance on volumes was that volumes would be higher and I expect prices would probably seasonal lift. So can you maybe clarify and talk through some of that? Thanks.

Cheryl Maguire: Yeah, sure, Josh. I think, let me just clarify your question. I did say in the script that, after six consecutive quarters of lower pricing on a comparative basis that post Q2, we would start to see normalization of pricing against the prior years. So we wouldn’t have that big decline versus prior year comparative periods. Is that the point that you were referring to?

Josh Spector : Yeah, maybe I misheard pricing versus EBITDA. I thought you were starting to guide towards second half EBITDA flat year-over-year. So if I heard that wrong, then that’s, pretty much answers it.

Cheryl Maguire: Yeah, just in relation to pricing, not EBITDA.

Josh Spector : All right, thank you.

Cheryl Maguire: Thank you.

Operator: Thank you, next question today is coming from Adam Samuelson from Goldman Sachs. Your line is now live.

Adam Samuelson : Yes, thank you, good morning, everyone.

Mark Behrman : Good Morning, Adam.

Cheryl Maguire : Good morning.

Adam Samuelson : Morning. Maybe picking up on that last kind of line of questioning is we obviously just kind of gave some framework on EBITDA for the second quarter no longer thinking pricing would be a year-on-year headwind in the second half of the year. I guess as we would think about what that would net to from a full year earnings perspective and then bridging to kind of the normalized EBITDA performance that you framed back at the Analyst Day a little over a year ago, help us think about the operational uplift still to be realized after this year as we think about operating rates at the plants. Obviously there’d be the incremental uplift from carbon sequestration and the clean ammonia, but just on the plant reliability point, what can that contribute kind of in ’25 and ’26 and what’s your confidence level in actually getting there?

Cheryl Maguire : Yeah, sure, Adam. I think what I would probably do is bridge from 2023, which we were around $133 million of EBITDA. You know, we’ve spoken to in the past about, call it $35 million to $40 million of uplift from improved reliability. And I think what I would point out there is when we’re talking about going to 95%, that’s not just on ammonia. We also are assuming that we’re not going to sell that product as ammonia. We’ve got capacity to go downstream in nitric acid AN solution and UAN. So there’s additional uplift there on that impact from the downstream production. So if you take the $133 million, add another $35 million to $40 million from improved production, we are carrying some higher costs right now as we try to accelerate some of these initiatives that we have on the go.

That’s another call it $10 million to $15 million of EBITDA. We’ve got the area expansion that we’re doing at Pryor here in the third quarter. Some of those margin enhancement projects should add another $5 million to $7 million of EBITDA. And then we’ve talked about the Lapis agreement and that’s another, call it, $15 million from carbon sequestration coming online in 2026. So that’s how we think about the EBITDA uplift as we go through the next, call it 24 months.

Mark Behrman : Yes, Adam, as far as confidence in our ability to do it, it’s a great question actually. And so we spent probably the last month really spending time with our sites and our manufacturing leadership to create a roadmap on how we get to 95% and what it will take. And so I would say that we’re highly confident that we can get there.

Adam Samuelson : And that’s helpful. And then maybe another one for Cheryl just on the balance sheet. You bought back some stock, you also bought back some of the notes in the quarter and seemingly further in April. Do you have a total target in mind for what you would be looking at from a capital deployment perspective in terms of buyback and debt repurchase this year?

Mark Behrman : Yeah, I think that, so we bought back $75 million of debt to-date and we’ve bought back another —