Q3 2019 Earnings Call
Greetings and welcome to LSB Industries third quarter 2019 earnings Conference call.
This time, all participants are gonna listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to turn the conference over to your host Kristy Carver Senior Vice President and Treasurer Psyche you may begin.
Thank you, Rob and good morning, everyone.
Joining me today on the call our Mark Behrman, our Chief Executive Officer, and Sheryl Mcguire, our Chief Financial Officer. Please.
Please note that today's call will include forward looking statements and because these statements are based on the company's current intends to 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 Investor section of our website L. S. The industry's dotcom for further information regarding forward looking statements and reconciliations of non-GAAP results to GAAP result.
This time I'd like to go ahead and turn the call over to Mark for opening remarks.
Thank you Christie and good morning, everyone.
We're glad that you could participate in our call. This morning, and appreciate your interest in LSB industries.
Our financial results were in line with our expectations for the third quarter, which as a reminder, is typically are seasonally weakest quarter given the fertilizer application season slows down after the second quarter once all crop planting occurs.
For larger manufacturer is generally try to scheduled turnarounds during a seasonally slower time of the year and we follow suit.
During the third quarter as previously announced to be performed scheduled turnarounds on two of our facilities that we expect to yield meaningful payoffs in the years to come more in that in a moment.
Despite lower ammonia prices, resulting from the weather issues, we've had throughout the Midwest or third quarter. Adjusted EBITDA increased from the same period last year aided by higher selling prices for you weigh in and it's Dan higher production and lower natural gas prices.
During the third quarter, we began turnarounds at our El Dorado and probably our facilities.
El Dorado was successfully completed in September Empire has completed all of its maintenance work and isn't startup.
First congratulations to both the El Dorado and prior teams forgetting the worked on safely the safety of our employees and our contractors remains our number one priority.
The turnaround a prior was the most extensive turnaround at that facility in our history. The good news is we didn't have any major finds a discoveries that would have taken a set of production for an extended period of time.
We did however, find some unplanned repair work that needed to be done since the goal of this turnaround was to ensure that we could materially improved the reliability of all the plants at this facility.
What's most important is that we believe we have addressed the issues that we identified in support of prior as long term a liability.
The extra time, we took the fix these issues combined with a few bad weather days.
And get it the turnaround from the estimated 30 days to approximately 50 days.
We now feel that we have materially improved our ability to operate the prior facility a consistently higher operating rates, allowing us to generate more product for sale with reduced production costs.
Beyond the usual significance of planned maintenance events with respect to efficiency and reliability.
These turnarounds were significant into additional aspects.
First we are now when a three year turnaround cycles at both our Cherokee and El Dorado facilities with the next turn around the Cherokee scheduled for 2021, and then El Dorado for 2022.
Our prior facility is comfortably on a two year turnaround cycle with its next turnaround scheduled for 2021.
Our plan is to not schedule any turnarounds for next year based on our current schedule and feelings about the condition of our plants.
The completion of this work positions us very well to capitalize on what we expect to be a stronger year for the agricultural market, which I'll discuss in further detail later.
And the continued growth in our industrial in mining businesses.
Secondly, as part of the turnaround the prior we installed a new your real reactor. This new equipment will enable us to increase daily urea production, allowing us to increase UAN production by as much as 100 tonnes per day.
Turnarounds on one important element of our overall ongoing initiatives to make our facilities more reliable I'm pleased to report that for the third quarter of 2019, excluding the periods of planned maintenance at El Dorado, one probably or or three ammonia plants. Once again averaged an onstream rate of 94% that gives us a 94% average onstream made for the past five quarter.
And we expect to continue to operate consistently in future quarters.
Well, we still have room for improvement as indicated by our stated goal of consistently achieving an ever John's drew made of 96% I feel comfortable stating that we are well underway to reaching that goal as a result of the positive impacts of leadership changes the capital improvements we've made over the last few years and the continued focus on an investment in improving our operating.
Processes and procedures.
Ultimately our goal is to be a best in class chemical manufacturer as measured not only by consistent operating rates, but also by a strong environmental health and safety record.
Everyday our employees show our commitment to this goal, particularly those those at the plant level and I want to thank them for their dedication and efforts.
Lastly, beginning in the third quarter of 29 team, we excluded certain specific legal costs in our calculation of adjusted EBITDA for 2019 and 28 in.
These costs are related to litigation, we brought against light owes to general contractor in our El Dorado ammonia plant expansion project, which began in 2013 and concluded in 2016, which incurred substantial cost overruns.
We are seeking more than $100 million in damages as compensation for Leidos is wrong doing which involve breach of contract fraud gross negligence professional negligence and negligence.
Related Lee in a prior year.
We were brought in as a defendant in a case, where global industrial a subcontractor involved with the expansion sought damages from like those we requested indemnifications from Leidos under the terms of our contracts with them and they did not honor that request. Therefore, we had to incur legal cost to defend ourselves we will be seeking reimbursement of these.
Legal costs as well.
Today, we have incurred approximately $10.6 million in legal and expert witness fees.
For prosecuting our claims against like those and defending the claims brought by global despite a request from lie those for indemnification, including $3.3 million in this most recent third quarter.
Our trial against Leidos is scheduled to begin in February 2020, and we anticipate that between now and then we will spend an additional $1 million per month as we prepare for the impending trial.
Well, we can't guarantee any outcome in litigation or the recoveries any damages we have vigorously pursuing this matter.
I'll discuss our market outlook for the balance of 2000 2020 later in the call.
No Sheryl will go into more detail about our Q3 financial results Cheryl Thanks, Mark and good morning, everyone page five of the presentation provides a consolidated summary statement of operations for the third quarter of 2019 as compared to the third quarter of 2018 and reviewing our operations for the third quarter total net sales.
In Q3, 2019 decreased 5% to 75.5 million from 79.8 million in Q3 of 2018 gross profit remained flat to prior year as we were able to offset lower selling prices, particularly for ammonia was solid ammonia operating rates and lower overall fixed.
And variable cost I.
Additionally, natural gas costs were 11% lower than the third quarter last year, and we expect that gap to widen in the fourth quarter adjusted EBITDA for the third quarter of 2019 was higher than last year and I will bridge EBITDA for you on the next slide with respect to legal costs related to our case.
That's why does given the significance of the cost particular, particularly in the third quarter of 2019, and our expectation of ongoing similar costs as we prepare for trial, we have adjusted EBITDA to reflect the add back of these onetime costs, which we believe as a truer reflection of ongoing up.
Ration.
Please refer to our reconciliation of non-GAAP measures beginning on slide 12 for further information on non cash and one time costs incurred during the period.
Page six branches, our consolidated adjusted EBITDA for Q3, 2018 of 10.6 million to adjusted EBITDA for Q3 2019 of 11.1 million.
Our year over year improvement reflects higher net selling prices for you and an eight stan coupled with favorable natural gas feedstock prices and lower overall costs.
Partially offset by lower selling prices for industrial products due in large part to a decline in the Tampa ammonia benchmark price as the tamper price declined approximately $90 per metric ton year over year from from an approximate price of $310 per metric ton in the third quarter of 2008.
Team to approximately $220 per metric ton in the third quarter of 2019.
Turning to page seven we have outlined the gross profit margins for each of our market segments. This presentation excludes depreciation amortization and turnaround expenses and therefore should represent the true underlying cash margins of each market.
Reconcile this back to gross profit as presented on the financial statements on Slide 13, as Mark pointed out the third quarter is our seasonally weakest period, given that we take the opportunity to perform planned turnarounds, which results in lower production and fixed cost absorption and overall reduced profit merge.
Since the El Dorado ammonia turnaround lasted 18 days in the quarter and the prior facility wasn't turnaround for 24 days in September with the balance in October as Mark mentioned.
While margins are generally lower in the third quarter as a result of lower demand and lower production due to the scheduled maintenance our AG business gross profit margins increased from 5% to 9% as we realized stronger sales volumes for UAN, and ammonia, which increased 26% and 11% response.
Actively year over year, primarily driven by higher production at Cherokee, which wasn't turnaround for 35 days in the third quarter of 2018.
Furthermore, agricultural net selling prices improved year over year with H., Dan and you, an increasing 13% and 4% respectively.
Partially offsetting these gains were lower age stand volumes.
Which decreased 38% quarter over quarter, as we experienced unusually hot and dry weather in our primary geographic end markets during the third quarter as compared to last year. When there was greater rainfall during the quarter, creating additional demand.
Gross profit margins in our industrial in mining markets were comparable to last year as stronger sales volumes were offset by lower sales prices due to the continued price pressure on Tampa ammonia benchmark price overall industrial margins remain robust despite a very low Tampa environment.
Looking forward to the fourth quarter of 2019, please turn to page eight this page illustrates current expected average selling prices based on forward sales of product our current spot market sales prices and the current average natural gas prices, we are paying or have hedged. Additionally.
As you might recall in the fourth quarter of 2018, we received a 4.4 million favorable settlement with a subcontractor.
Excluding this recovery adjusted EBITDA for Q4, 2018, well that's been closer to 19 million and we expect adjusted EBITDA for the fourth quarter of 2019 to be in line with this level [noise].
Impacting the 2019 fourth quarter, our continued headwinds with the current Tampa ammonia pricing at $90 per metric ton lower than the fourth quarter of last year and lower production related to the carryover of the prior turnaround into the fourth quarter.
On the positive side, we have approximately 70% of our gas needs locked in for Q4 at approximately $2.40 per M. B to you. This represents a 30% reduction in gas cost as compared to the fourth quarter of last year.
Additionally, we continue it we continue to expect fourth quarter onstream rates that are ammonia plants, excluding the turnaround days at our prior facility to be inline with the last five quarters at approximately 94% and production rates of other downstream downstream products to improve.
Moving to page nine we outline our free cash flow cash provided from operations for the first nine months of 2019 was approximately 41 million compared to 38.8 million for the same period of 2018 capital expenditures predominantly related to reliability and maintenance.
Investments were approximately 20.5 million for the first nine months in 2019 cash Capex for the fourth quarter is expected to be approximately 10 million.
Page 10 outlines our capital structure at the end of Q3 2019, we ended the quarter with approximately 67 million in cash and over 33 million of availability on our revolving credit facility, giving us total liquidity of approximately 100 million.
Total outstanding debt at quarter end was approximately 457 million with net debt of approximately 390 million. We also ended the quarter with outstanding preferred stock of approximately 235 million, including accrued and unpaid dividends now I'll turn it back over to Mark to wrap up.
Thank you Sheryl.
The past 12 months has been a historically difficult period for farmers with cold wet weather that not only made soil conditions extremely non conducive to fertilizer application implanting, but also had ripple effect throughout the entire rail barge and truck distribution system.
Well, thus far the ustašas forecast only minimal only a minimal decline in planted and harvested corn acres from the expectations going into the year. We believe that ultimately the final assessment will show that both are down significantly from the current U.S.D.A. forecast 2018 in previous years.
More specifically, we believe both the acres harvested in yields per acre will be below the U.S. da current estimates.
The market appears to agree with this point of view as corn prices have risen back to the approximate $4 per bushel level down from the spike in price over the summer, but up from this time one year ago.
As a result of these indicators, we anticipate that farmers will plant a significant number of additional acres in the upcoming season as several current estimates call for between 94 95 million acres planted.
Based on that expectation, coupled with depletion of nutrients in the soil. After all the heavy wet weather various industry resources various industry sources expect that there will be happy fall ammonia application in the coming weeks conditions permitting.
We're already seeing ammonia application in selected parts of the country, where the weather has allowed corn to be harvested.
Over the past few months ammonia pricing has begun to recover with prices rising about $50 a metric ton in all markets we sell.
Additionally, the Tampa ammonia price.
Was priced at $260 a metric ton for November up approximately $40 a metric ton from its low point during the third quarter.
This is a positive sign as it indicates increasing expectations for demand and that excess inventory that has been in the distribution channel has been absorbed by the market.
We believe it also reflects optimism about the outlook for the agricultural market, which we believe is warranted.
With respect to you and pricing relative to the significant run up in the fourth quarter of last year you weigh in prices are back to more historical pricing behavior. We believe that on farm and retail are usually in storage is extremely low as the farmers are generally focused on harvesting their crops, which had set up a significant amount of demand.
That increase prices.
Lastly, with our plants running well and without the need for any turnarounds in 2020.
We're optimistic that factors are lining up well for us to deliver significant year over year growth in adjusted EBITDA and free cash flow in 2020.
On previous calls I've discussed various business improvement initiatives that we've had underway to enhance our financial results.
We're very pleased with the operating performance of our plants and feel confident confident that they can now run with greater consistency that at any time in the company's history and with that extended unplanned downtime events. Our goal remains and onstream rate of 96% for ammonia plants, which we expect achieve over the next 12 to 24 months. However.
We're continuing out at the 94% onstream rates that we've averaged over the past five quarters combined with improvements we are executing in other areas our business will allow us to continue or growth in EBITDA.
On the commercial side of our business. We're in the final stages of negotiation with a customer to build a guess plant that are at or El Dorado facility that will USIO to generated from our El Dorado ammonia plants currently El Dorado as venting Seo too. So this new arrangement will enable us to generate incremental EBITDA using the product we are already.
He producing.
We expect a new guest plant to be completed.
At the end of next year at which time.
We will begin selling product to the customer.
Additionally, we were in discussions with several existing industrial and mining customers to expand our current relationships with them, allowing us to increase sales to those customers. This would utilize additional production capacity and change our product mix to higher margin products. We hope to provide more color on these efforts next quarter.
We've also talked previously about our efforts in supply chain management over the past two years, we've taken out approximately three and a half million dollars have caused by improving our procurement and logistics capabilities and focus and we believe there are additional cost that we can reduce overtime.
Additionally, we are revamping our inventory management processes and expect this effort to lead to a reduction in working capital as we become more efficient.
With respect to our previously announced margin enhancement capital projects, we have approximately $15 million of capital projects underway.
One of these projects isn't investment in additional storage capacity for fertilizer product. This new storage will allow us to manufacture product at higher production rates throughout the year lowering our cost per tonne, then store that product for future sale at higher demand at times of the year at more favorable prices.
We believe that this and the other projects. We are planning will generate an additional annual EBITDA of between six and $7 million when completed which we expect will be over the next 15 months. Additionally, we have another $5 million to $6 million of capital projects under review.
That would add additional EBITDA, if we elect to proceed with them.
Before I pass the call back to the operator to be in the to begin with Una session I'd like to mention that I will be participating in the Cowen chemicals metals and mining summit in New York on November 20 Onest.
And Sheryl will be attending the B of a leveraged finance conference in Boca Raton on December 4th we hope to see some of you at these events.
That concludes our prepared remarks, and we will now be happy to take your questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad confirmation tailwind to get your line is in the question Q.
You May proceed start to feel like to remove your question from the Q.
All participants uses speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment. Please why we poll for questions.
My first question comes from Joe Mondello with Sidoti and company. Please proceed with your question.
Hi, Good morning, Mark Im sure.
Good morning, Joe.
So first I wanted to just clarify what your expectation is for the fourth quarter I Miss.
I'm sort of what you anticipate usually you give an EBITDA basis I thought maybe you said comparable to last year, but could you just clarify what that was.
Yes, Thats right, Joe it's comparable to last year. After you exclude the settlement that we had in the fourth quarter of 4.4 million.
Okay, and then is that including the turnaround costs a prior.
No that's adjusted for the turnaround costs, we expect.
The turnaround our prior to me I don't know probably about a million dollars in the fourth quarter.
Okay, and then I guess I'm sticking with prior since.
<unk>.
You mentioned prior Im just.
Wanted to try to understand.
One.
This turnaround is complete would you characterize in the past is being.
Somewhat substantial in terms of onstream rates at that plant.
How can we.
Look or think about that plant in terms of.
Onstream rates going forward.
How should we see progress is gonna be over.
You know weeks' time, all of us on we're seeing significant improvements in onstream rates or how can we sort of think about.
Crew productivity or prior going forward.
It's a great question.
So I think ammonia is actually been running pretty well at Pryor.
As evidenced by the average 94% Onstream right. If it wasn't obviously the average would be lower.
But I do think we've done.
Fair amount of work during this turnaround that we can consistently produce at those higher rates.
Because consistency obviously is the most important thing here.
What I also believe is that you can see in 2020, some slightly higher rates coming from the ammonia plant. So.
What I think we really focused on is really our downstream production units and primarily our urea plant.
We did have a lot of.
Unplanned downtime in.
Over the last three years with a very old urea reactor and that's why we.
Two years ago, we made the decision to purchase a new state of the or urea reactor.
So really improve the reliability that plant.
You know clearly we want to produce at higher rates.
With urea so that we can convert that into your way in which is a higher more generally a higher margin product than just selling straight ammonia. So I think you'll see.
Shifts between ammonia sales and you weigh in sales on top of that as I indicated.
We expect that we'll get more production out of this new urea reactor could be as much as 100 tonnes a day so ill call. It maybe 20 530000 tons a year of additional production.
So I think what the goal of this turnaround.
Since it was very extensive was to really address numerous of the issues that we had identified and then you always go in and find discovery work.
That needs to be taking care of and so I think we're really comfortable and confident that we can run all of the plants being the ammonia plant urea plant in the nitric acid plants at significantly higher rates than we've done historically.
And the 25 to 30000 tons.
I know you're sort of ballpark, but that was related to walk.
Ammonia.
That's related to ultimately to you weigh in production and quite frankly.
We bought a you real react to that was larger than the previous reactor.
No. That's a ballpark I mean, we won't really know until we're actually producing.
For a.
A month or so and really see how it produces you're going to tweak the plant fine tune it and ultimately we'll get to a level that we feel really comfortable with.
Okay great.
And then just in terms of the demand supply dynamics out there in the market.
Side of things.
Could you talk about supply first off.
I understand sort of that.
But.
Given the weather over the last year. So could you talk about where supply is.
Compared to where it was.
At this time.
Well I mean, I think you a year ago.
We started to have really.
Poor weather in the fall of last year.
So.
Very weak ammonia application season.
It was really short truncated I think they will reports of maybe.
500 to 700000 tons of ammonia that was not applied as fertilizer. So you are a lot of buildup in in fertilizer in ammonia throughout the system and that persisted.
Throughout the spring as we had a really wet and cold spring.
I think we're at a point now where ammonia is some somewhat normalized.
I think where.
I'm totally there yet as evidenced by the pricing.
But we are starting to to see pricing recover so.
I think a lot of that ammonia that was.
Inventory.
By ourselves and other producers has really been pushed through the distribution channel.
[noise] you weigh in.
I think thats the product that.
In everyone's always talked about that after the.
One of expansions here in North America, as a product that's probably balanced.
So we are still seeing some UN imports, particularly after the you duties that were lifted.
The United States Trinidad in Russia.
So there was some product coming in here. So I think that's why you've seen you weigh in prices I'm not really have much of a rise over.
Over the last couple of months and you still.
Might see.
Price, we'll see what price recovery, but it won't be until later on this year early next year.
And then urea, which the product we don't sell but does have a significant impact on the market pricing.
Still is an importer.
And.
We're still short here in United States. So.
You know urea prices have been coming down globally.
As evidenced by a recent Indian the recent Indian tenders.
But I think.
You know sort of.
Pricing has hit.
Somewhat of a floor here.
I'm not seeing prices are going to increase.
Okay. So generally it sounds like you think supply in the market is generally sort of balance or close to being more sort of normalized plus balanced.
No, it's a little more dependent.
And.
So in terms of the fall application season, I've been reading the last week or two.
Ben a couple storm affected thing.
Yeah, I understand what you said in your prepared remarks, but any more color that you could provide.
Based on not only the fact that soil is under saturated with nutrients, but then also how about the dynamic of being solely in the year of harvesting because I think the harvest this quietly relative to normalize.
Is that going to play any effect that weather gets cold or whatnot. So what are your sort of in.
What is the risk here I guess, we have such a small window over a couple of weeks.
How are you thinking about.
Well I think you just said I mean, clearly there's going to be a smaller window than we would've liked because of a late harvest.
You know that we are starting to to see harvest catch up in certain areas and.
In areas that.
You know places like.
Like Nebraska, Missouri, Kansas.
We're starting to see soil Thompson generally soil temps or less than 50 degrees.
So you want soil temps is.
As low as possible, but not freezing obviously.
So I think harvest is catching up what I'd say about the application window is.
You know, there's a lot of really modern technology out there for applying ammonia.
They can get up a lot of ammonia in the ground really quick.
With a lot of the new technology in the uplift and you know sort of the application technology that they have so.
I think it's a little too early to call I think we'll know over the next two weeks maybe.
Maybe stretching three weeks I'm really how this all plays out but.
You know I think I think we'll have an ammonia run I'm not sure at as we sit here today, you know how strong or heavy it might be.
Okay, and then just with regard to.
Productivity improvement projects you have underway I just wanted to make sure that I understood. Your prepared remarks, you at 15 million of the 20 million.
That you announced earlier this year of Capex projects underway and within five to six months, we should start seeing annualized savings of 67 million did I hear that correct.
No I think that within 15 months. So by the end of next year, we would have completed all the projects.
Not to say that along the way, we won't complete projects and we should see some incremental EBITDA.
But by the end of next year, we'll have finished all those projects and on an annualized basis, we should see $6 million to $7 million, an EBITDA incremental EBITDA.
Okay, and that's related to the full 20 million.
Okay, No that's related to the 15.
And if we elect to proceed with additional projects that we're evaluating.
That would add incremental EBITDA on top of the.
Okay.
And then the CEO to venture at El Dorado is there any other information that you can provide in terms of how big of an opportunity this could be terms of profit.
I think I'd, probably rather wait until.
Next quarter.
Hopefully we would have completed.
And on negotiations and signed the contract moving forward.
And so I'll be able to give it a little bit more color to that.
Okay, and then just two last questions in terms of the lighthouse.
The legal case there.
Is there any.
Timing I know these things are very difficult then they couldn't be per along.
How long it's going to take was there any timing estimate of how you know when we think we could see an initial.
Yeah.
To the case itself.
It's going to take.
Good morning.
Well as I mentioned I mean, we have a trial date in February so.
So thats definite.
We are.
Working hard with or legal counsel in our.
Experts to prepare for that trial, and we will be ready to try the case in February .
So weather.
In whether whether things happened before then.
You know there's a settlement now settlement I mean are our position is in our focus is we will be ready to try the case in February .
And do you have any idea how long of a trial this could be.
I'd say, it's probably yeah estimate is like four weeks.
Okay.
And then the last question just in terms of the balance sheet.
I, just wondering sort of what your thoughts are with this call they coming up in early 2020, and how you've been able to <unk>.
Make so much progress with the plants in the onstream rates sort of what you're thinking is heading into a approaching that called <unk>.
Whether we think we could potentially refinancing.
Potentially maybe take.
Just wondering what your updated thoughts on that.
Yeah, John So you're right. The first call date on the bonds as May have 2020, and as Mark mentioned and as we look forward to 2020 or would we expect to see improving fertilizer demand you know driven by higher corn pricing depleted nitrogen in the feels strong planting intentions for next.
Here and all of that combined with you know we don't have any scheduled turnarounds in 2020. So all that being said, we do expect stronger EBITDA generation in 2020, which will bring more options. We think a to look at our balance sheet and well continue.
Evaluate those options as we get into 2020.
So I think it almost zero said, it's really once you hit a first called it at that point honestly it becomes a mass exercise.
You know, what's the what's the coal premium what's the reduction in rate that we could get.
Versus what's the call premium and so we'll have to take it will be in a position to take a look at it and if it makes sense to do something you know at or add or post. The first call date, we'll do that and we'll continue to evaluate it.
Second call date, the co premium lowers and so as I said, it's really.
It's a math exercise at that point.
Can you just remind us.
When the second.
Called it is and what the premium is on that.
Yes, so the coal premium on May of 2020 is one of those seven so it's seven seven points of call premium and then it drops down to one ofour in may of 21.
Okay, Great alright, thanks for taking my questions appreciate it.
Our next question is from JP Guy again with global value Investment Corporation. Please proceed with your question.
Hey, good morning. Thank you for all the detail you provided on this call.
Have a few follow up questions.
First this is been as you noted an atypical year for the agricultural segment given weather patterns, you spoke about ramifications of whether in corn planting harvesting on Q4 application or fall application, but I'm wondering if you can provide some sort of directional commentary about.
Oh, the ramifications of this year's planting harvesting into 2020, and 2021, particularly as it pertains to our pricing demanded your adjusted gross margins, which it looks like held steady throughout it difficult period.
[noise] Act increased.
Well that was a mouthful.
[laughter].
[laughter].
If I'm understanding the question I mean, I think the industry.
A lot of industry folks have sort of centered around 94 95 million acres planted for the.
You know for the next a corn season right. So 1920.
And so with that we should see some strong demand.
In fertilizer, particularly since we're going to be less than $90 million 90 million acres. This year.
So you should see a lot lot more demand than we saw this year.
You know if it if the logic holds true that would translate into you know weather permitting a lot more ammonia that goes into the ground. This fall and therefore, they come back in the spring.
Farmers will come back in the spring and obviously put down some more ammonia preplanned.
And then obviously, we'd have urea and UAN going down.
And they stand in some cases going down.
During the planting season so.
I think.
I think the expectation.
Is that you Sta is high.
I think if you talk to a lot of people on the ground.
They're seeing something a whole lot different than what the U.S. da is reporting.
We won't know that until sometime next month.
I think we'll get a better indication hopefully, we'll get a better indication of what's really out in the field. So.
You know obviously.
Both.
Both production and spreading out those fixed costs over.
You know a larger production base and then pricing have a has a significant impact on the margins that you're talking about industrial amani margins have really held steady so I'm really pleased with that.
Despite a really low Tampa environment. So if we get any pickup in Tampa, you'll see those margins.
Go from as Sheryl pointed out you know, 30% EBITDA margins back up to 35% to 37% you should see that.
And then you know the AG margins really.
You know, we've always said that in mid market pricing.
You know ammonia north I mean ammonia north of $300 a ton.
You know Tampa ammonia.
You know you weigh in a $180 to $200 a ton on H. Stanmore you know.
To 25 to 242, and I mean, we should see our AG margins more than a 30% EBITDA.
Your range.
So I don't know if that answered the question.
Yes, it did very accurately thank you.
Moving onto provided quite a bit of detail around this pipeline of capital projects, particularly your $15 million worth of projects currently underway.
I'm wondering if you might address areas outside of.
These capital projects, where you could grow production by growing sales.
Particularly with or I'm, sorry in the industrial and mining segments, where you might have some additional capacity.
[noise] well, we look at that everyday and I know our sales team is working aggressively to increase sales of.
Are they in any in solution.
In a in a pretty difficult market right I mean.
We've got cold declining.
Utilities talking about continuing.
Closures of coal fired power plants.
No one really ramping up Nat gas.
Powerplants.
However, the flip side to that is.
Precious metals pricing is actually pretty good so we're seeing growth out west in precious metals mining and then the Korean construction is also still growing.
So I think we've positioned ourselves pretty well.
To be the what I believe to be it the preferred supplier of M&A in solution.
And I think the team does a really good job offering a high level of service, which I think it's important.
But on the industrial side.
Nitric acid is a core product for us.
You know, we compete with others that might come in and out of the nitric acid market as a upgrading that nitric acid to other products, you know slows off and they've got excess nitric acid. We've been in it for 30 years, we're known for people know us that we've got backup plan. So I think thats important so they've done a really good job.
And growing the nitric acid business for us and it's a real focus to continue to do that and I think you'll see nitric acid sales with some of the things. We're working on you should see nitric acid sales.
Have some pretty meaningful growth.
In 2020.
Going into 2021, and so yeah.
We're working hard we're doing it.
Great.
There's sulfuric acid reactor is I believe scheduled to be operational by either late this year or early next year is that still on schedule.
Actually should be in early November which should be.
Installed at a turn around and up and running.
And what does the increasing capacity between the old and new facilities.
Well I think historically, we've been somewhere between 125 and 135000 tons of sales of of sulfuric acid.
Yes, I would say you should probably see.
10 to 15000 tons a year of increased production so call it.
You know 10, 12% of increased production.
And sales.
Great.
You talked about some of the.
Cost savings in these initiatives or I'm, sorry storage initiatives lowering your future working capital requirements on can you give us an idea of what level of working capital you're comfortable with.
Long term or what you're targeting in terms of working capital.
[noise] Oh.
I don't think I'm in a position to tell you exactly how much yet I think it's going to.
When you have when you have a project like this you always find there's pockets of.
Of inventory that you're probably in it and over inventoried situation. So I think you worked down those situations.
So I think we'll be in a position next quarter.
To give at least some range or some idea of what we think working capital generation will be.
Once we complete the.
Inventory management exercise that we're going through.
Okay and my final question is what is the venue for the Lydalls trial.
You mean, where is it located.
Correct.
It's an El Dorado, Arkansas.
Or I wouldn't court will that be heard.
State Court.
Okay.
Alright, great. Thank you for your time.
Got it.
Our next question is from Travis Edwards with Goldman Sachs. Please proceed with your question.
Hi, good morning, Thanks for the time and and the detail.
For the quarter you guys highlighted a number of projects that youve, either started or potentially start that would add incremental EBITDA have you quantified the total incremental EBITDA both of the projects that you started like the margin enhancement initiatives as well as the projects that are currently pending.
Oh, well Travis I think we talked about.
You know $15 million worth of projects that are underway that will generate an additional $6 million to $7 million of.
EBITDA once fully up and running which we expect to be no later than the end of next year.
I guess for the other projects, though have you quantified any of the potential another not maybe not under way yet, but what the the potential buyback could be.
Well I think I'd, probably rather wait until we greenlight the projects I don't get anyone's hopes up here.
Okay, No that's fine a separate question again on the.
Kind of legal issues I know your front as you mentioned that no liability is necessarily been established for the claims by global industrial.
But are you able to share with that liability might look like just according to what they are claiming.
If there is say an unfavorable really a free next year or just any more detail now on the done what the determination could look like for you.
Well first off.
I believe we have a liability I mean, we didn't get we didn't get sued we got brought into the lawsuit.
And matter of fact, we have an indemnification agreement.
With lie dose that they did non or so ultimately.
We will seek.
Reimbursement of our legal costs based on the indemnification agreement that has been executed so.
We don't have any liability.
Got it Awesome and then last question. It was just to just wanted to confirm but do you your expected turnaround cost add back in force you 19.
I will just be approximately $1 million.
Hi, it'll be a million dollars for prior we also have the sulfuric acid turnaround in the fourth quarter that Mark just mentioned is that finishing up here in November where we're installing a new sulfuric acid converter and the turnaround expenses associated with that should be about him and millions and millions.
Uh huh.
Got it I.
I appreciate the time thank you.
Thanks.
Our next question comes from Roger Spitz with Bank of America. Please proceed with your question.
Thanks, Good morning.
Good morning.
<unk> for the widest legal fees you gave us the Q3 18 in Q3 19 as well as nine months is it possible to provide those on a quarterly based for the quarters. We don't have made in Q1 Q2 18 Q4, a 10-Q, one Q2 19. Please.
Sure No problem. So Q1 at 18, a 500000 Q2 of 18 600000.
You three we provide it Q4 of the 18 1.8 million.
Q1 of 19 900000.
Q2 of 19 1.5 million.
Perfect and that gets your 10.6.
I would.
There are any legal fees are right the widest prior to 2018.
No nothing that because again.
And in Q4, a chain you took a 4.4 million vendor settlement benefit.
It looks like that was that benefit.
Adjusted EBITDA.
Benefited from that 4.4 million benefited meaning it wasn't backed out.
Benefit is that is that correct.
That's correct, we didn't adjust for it basically because we had taken the expense in prior periods been hadn't backed out that expense.
Okay.
Was that vendor.
Sure wasn't something to do with Wilson or what was what was on all of what was I know it was yeah. It wasn't related to last at all.
As a separate contractor that we heard dispute with.
Hi, Thank you very much.
Ladies and John Weve reached the end of the question answer session I would now like to turn the call back to Marc Baumann for closing comments.
Well I want to thank everyone for being on the call and we appreciate the appreciate the interest in LSB industries, and if there any follow up calls feel free to cultural and myself. Thank you.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.