Q3 2020 LSB Industries Inc Earnings Call
Greetings and welcome to the LSB industries third quarter 2020 conference call.
At this time all participants are in a listen only mode.
Brief 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 introduce your host Kristy Carver Senior Vice President and Treasurer. Thank you you may begin.
Good morning, everyone joining.
Joining me today on the call are Mark Behrman, our Chief Executive Officer, and Sheryl Maguire, our Chief Financial Officer.
Please note that today's call will include forward looking statements and because these statements are based on the company's current intent expectations and projections. They are not guarantees of future performance and a variety of factors could cause actual results to differ materially as this call will include references to non.
GAAP results. Please reference the press release in the Investor section of our website, Oh I speak industries Dotcom for further information regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.
At this time I'd like to go ahead and turn the call over to Mark for opening remarks.
Thank you Christie and good morning, everyone.
We're glad that you could participate in our call. This morning, and appreciate your interest in LSB industries.
I'd like to begin on slide three by acknowledging the commitment and dedication that our employees have shown to operating safely and improving our safety performance.
Our team delivered another strong operating performance across all of our owned and operated facilities during the third quarter and managed to achieve record production levels in several product categories, while doing it safely.
As indicated on the slide we've made significant strides with our safety performance over the course of 2020, which is something everyone at LSB should celebrate.
These days safety goes beyond the voting physical injury. It also encompasses something many of US took for granted only eight months ago, which is avoiding serious illness in the course of our workday.
With the ongoing spread of the COVID-19 virus. This is not something we all think about every day.
In this regard we credit to personnel at all of our facilities and offices remaining vigilant with the protocols, we put in place months ago to prevent transmission of the virus and have improved and upgraded a number of these policies and procedures as we've learned more about what actions. We can take that are most effective.
As everyone on this call knows all too well at this point, it's difficult to maintain a high level of intensity in attempting to manage the situation. It has many uncertain and unknown duration as what we've been dealing with since early this year.
Our view at this point is that we're going to have to continue to operate in the cobot environment until the end of 2021, we're planning accordingly.
Well, we wish this wasn't the case on the positive side, we're finding that we've developed in terms of protocols and disciplines in order to deal with the current situation will be able to integrate back into our overall approach to operating safely.
Slide four provides an overview of the key aspects of our third quarter, we generated significant increases in sales volumes in both agricultural and industrial and mining products as compared to the third quarter of 2019.
The year over year volume growth was the result of stronger production due to the absence of turnarounds in this year's third quarter relative to the turnarounds, we performed at Pryor and El Dorado in the same period last year I.
Additionally, prior once again at a record urea and UAN production, reflecting the continued improvement in the performance of its ammonia plant, which enabled us to optimize the utilization of the new urea reactor and the other upgrades that we made to the plant during the 2019 third quarter turned around.
In short while pricing on the AG side of our business was not cooperative and its anticipated demand for our industrial or money products weekend due to the impacts of COVID-19, we did a good job focused on the s. on focusing on the aspects of our business within our control, particularly with respect to the performance of our manufacturing.
Well it is rationalizing our operating costs and optimizing our product balance.
In fact had pricing been in line with the 2019 third quarter, which wasn't robust itself and industrial demand had been consistent with pre pandemic levels of approximately eight months ago. It would have resulted in an adjusted EBITDA that was more than 70% higher than the third quarter of last year. This.
This is reflective of the solid operational foundation, we have established that we expect it to enable us to capitalize on the recovery of industrial demand to pretend that Mike levels, which has been underway for several months and then what we anticipate will be an eventual improvement in fertilizer prices.
I will provide more detail around this analysis later in the call.
Unfortunately, as anticipated selling prices for our fertilizer products in the third quarter were well below the levels of the same quarter last year and also deteriorated as compared to the second quarter of this year.
The causes of this price weakness, particularly with respect to the year over year comparison remain the same as what we've discussed in the past several calls which are.
Continued excess ammonia inventory carried over from 2019, which has been significantly exacerbated by the pandemic induced reduction in ammonia demand from various industrial markets along with the negative impacts of the closure of the Magellan pipeline in September of 2019, which continues to disrupt ammonia movement.
Particularly in the southern plains market around our Pryor facility.
With respect to you in an unfavorable import export imbalance further weaken prices. So that's where laser however, we have seen imports pulled back significantly over the last several months.
Overall pricing for industrial or money products was also lower albeit to a much lesser extent than that of our agricultural products broadly speaking. This was the result of negative the negative impacts of the pandemic crisis on their end markets.
I sure will discuss later, we ended the quarter with more than adequate liquidity to enable us to continue to implement our strategy for enhancing our sales and mark and Mark margins in the face of uncertain environment.
One particular success in that regard came with a new long term nitric acid supply agreement that we signed during the quarter.
Slide five provides an update on the state of our end markets and how demand trends have evolved as various aspects of the economy have reopened since economic activity bottomed in April.
On the agricultural side of our business approximately 92 million acres of corn were planted in the U.S. during 2020, which was an increase of 3% as compared to 2019. This.
This increase supported a healthy level of demand for fertilizers, although as I previously indicated it was not enough to boost <unk> product selling prices.
Approximately 40% of the U.S. corn crop is used to produce the gasoline additive ethanol.
The abrupt onset of the pandemic crisis last spring resulted in a sharp drop in automotive usage across the U.S. for several months, which translated into a dramatic reduction in fuel consumption and the coinciding reduction in ethanol demand.
Since hitting a low point in April ethanol production has rebounded sharply returning to near pit pre pandemic levels, which was largely attributable to what turned out to be a busy summer for drivers as Americans replace their vacation flights with road trips and people became generally less homebound.
The drop in ethanol production and the rebound than gasoline consumption has left us ethanol inventories at their lowest level in several years, which we think bodes well for corn demand in 2021.
With respect to our industrial or money business. Most of our end markets have seen meaningful recovery since last spring.
One of the largest of these is the auto industry, which is a major consumer of nitric acid after.
After a two month shutdown auto manufacturers resumed production in May.
In the months that followed us light vehicle sales surged and as of the end of September increased approximately 75% since the since the April low levels, which should support continued recovery of auto production.
Nitric acid is also a major input into a variety of homebuilding products as of the end of September U.S. housing starts and building permit applications had rebounded rebounded to near pre pandemic levels.
Products, we manufacture for mining applications, primarily low density ammonium nitrate.
Favorable indicators have been emerging from the sizeable north American copper market, where prices for this metal have risen to the highest levels in over two years. This.
This has been driving an increase in copper mining activity that we expect to persist for the foreseeable future, particularly given relatively new and growing copper demand drivers such as the mass production of electric vehicles Colin.
Collectively we view the current demand trends, we're seeing across the aforementioned key end markets as pointing towards continued increases in sales of our industrial and mining products in the fourth quarter and into 2021 to the extent that recent increases in covert cases in various regions throughout the country don't lead to another nationwide shut down.
I'll hand, the call over to Cheryl shortly but first I'd like to provide an update on the litigation that we brought against light those the general contractor of our El Dorado ammonia plant expansion project that span from 2013 to 2016 in which we incurred substantial cost overruns, we continue to seek more than $100 million in damages as compensation.
For Leidos is wrong doing which involve breach of contract fraud gross negligence professional negligence or negligence.
We are awaiting a new trial date and expect that to be in the first half of 2021.
Well looking forward to having our case heard by a jury and while we can't guarantee any outcomes in litigation. We believe the case has serious merits, we will continue to provide updates as appropriate.
Now show will go into more detail about our Q3 financial results Cheryl.
Thanks, Mark and good morning.
So I've been bridges, our adjusted EBITDA for Q3, 2020 at $10.2 million to adjusted EBITDA for Q3, 2019 of 11.1 million keep in mind that the third quarter as consistently our seasonally weakest quarter. The modest year over year decline is a result of lower selling prices largely.
In our agricultural market.
As Mark stated persistent elevated inventory levels for ammonia combined with the closure of the Magellan pipeline in September of 2019, as well as increased imports and decreased exports of you again over the last 12 months have continued to weigh on pricing.
Our selling prices offset by lower natural gas costs negatively impacted the third quarter by approximately 7.5 million. However, we were able to offset lower selling prices with continued improvement in year over year production. You may recall that we had an 18 day turnaround at our El Dorado facility.
And the 22 day turnaround at our Pryor facility in the third quarter of 2019 with no turnarounds in the third quarter of 2020 production and sales volumes for all our products contributed an increase in EBITDA of approximately 9.5 million year over year. In fact, we posted a second can.
Thank you the quarter of record urea and UAN production at our Pryor facility, which allowed us to achieve record you land sales out of our prior facility as well.
Continued headwinds from weaker industrial and mining demand as a result of COVID-19 impacted the quarter by approximately 1.7 million.
Turning to page eight this chart illustrates the earning power of our business under more normal, but not robust market conditions for comparative purposes.
We have normalized for both selling prices and natural gas prices to match those we experienced in 2019 and also added back lower sales volumes from lower demand directly resulting from the COVID-19 economic slowdown.
This allows us to view the operational improvement in our underlying business.
With these adjustments adjusted EBITDA would have been 19.4 million in the third quarter up 2020, almost 75% higher than 2019 third quarter. Adjusted EBITDA. We believe that this illustrates the improvements in our business from the many initiatives that we have completed over the last several years.
Oh, so keep in mind that selling prices in 2019 were not what we would consider representative of mid cycle pricing.
Turning to page nine we had outlined the gross profit margins for each of our market segment, representing the underlying cash margins of each of our business.
As you May as you can see from the slide our industrial and mining margins remain consistent at 37% year to date as we have been able to offset lower selling prices with higher production and sales volumes combined with lower natural gas costs and reduced fixed cost per ton of product. So.
So AG margins have been impacted by the very low selling prices, we have experienced across all of our fertilizer products. We would expect mid thirtys EBITDA margins in a more normalized mid cycle pricing environment.
Page 10 outlines our continued focus on liquidity, we ended the quarter with approximately 42 million of cash and 78 million of total liquidity during the third quarter, we refinanced an existing equipment loan at our El Dorado facility, adding approximately 18 million of liquidity to the balance sheet.
In addition, we repaid all outstanding borrowings on our revolving credit facility during the third quarter even.
Given the current low pricing environment, coupled with the ongoing uncertainty around COVID-19, we remain acutely focused on managing the downside risk to our business and maintaining adequate liquidity to operate through a continued period of some degree of market disruption.
We are actively seeking ways to improve our capital structure and lower our overall cost of capital. We believe that continued improvement in operating performance combined with improved pricing for our products will be a benefit in cheating those efforts.
Today, our senior notes are callable at 1.7% and in May of 2021, the call premium decline to one dollarsthree, 0.6% in the near term, we remain focused on preserving liquidity and managing through the pandemic. We are currently evaluating several additional avenues to lower cost of care.
Capital and we continue to work with our board of directors on a path forward.
With respect to the pricing environment for the fourth quarter of 2020. Please turn to page 11 as you can see from the slide you I N H, Dan and Tampa ammonia are expected to remain materially lower as compared to Q4 2019 as a result of the variety of factors discussed earlier.
Whereas natural gas is expected to remain in line with the fourth quarter of 2019, and approximately $2.50 per and then B to you on.
On a positive note, we expect to continue our trend of achieving higher year over year volume as we have no plan turnarounds in the fourth quarter and we expect to maximize downstream production of you I am a sand and other key products.
To sum up our view for the fourth quarter. Despite the much lower selling price environment, we expect higher production and sales combined with lower costs to drive a 40% to 50% improvement in EBITDA as compared to the fourth quarter of 2019.
And now I'll turn it back over to Mark to wrap up.
Thank you Cheryl.
Well, we are by no means out of the woods to date, the pandemic impact on demand has eased somewhat over the past two quarters, but still had a meaningful impact on our third quarter financial results and we expect we'll have a measurable impact on our 20 2024th quarter.
What has been a greater pressure on our financial results for a sustained period of time, However has been the impact of historically weak pricing for fertilizer.
To recap what we have discussed numerous times over the past year, plus there's been an excess supply of ammonia and other fertilizer products due to a variety of factors, including the wave of new ammonia production capacity that came online in 2015 20 to 2018 timeframe extremely wet weather that impacted both harvest and planting seasons from late 2018.
So essentially the entire year of 2019.
The aforementioned closure of the Magellan ammonia pipeline, which has resulted in a lot of product sitting in a region that are probably facility serves in the past has been in the past had been transported to more distant geographies.
An elevated import levels, which is an indirect result at the low natural gas prices globally and duties implemented in certain regions.
We do believe however that there is reason for optimism with respect to the outlook for fertilizer prices in 2021 first the full corn harvest has been accelerating in recent weeks and conditions are lining up well for a good fall ammonia application in order to get nutrients in the ground in preparation for the spring planting season. So.
Second.
Corn future prices of over $4, a bushel or levels only seen twice in the past four years. This strength has been driven by a surge in demand, resulting from the rebound in ethanol consumption, which I mentioned earlier as well as the U.S.D.A. expectations for lower corn inventory levels, reflecting a period of drought condition.
Ones.
Through the corn belt this past summer as well as the impact of a direct show that occurred across the Midwest back in August damaging nearly 10 million acres of corn.
Higher corn prices enabled grow is to earn more income which is important because their financial health is a critical underpinning of the fertilizer market.
Current estimates for corn to be planted in the spring coal for between 91 to 92 million acres, which while flat with this year would still be a very good year that should prompt growers to placed significant orders for fertilizers as they seek to maximize the maximize yields, particularly if corn prices remain at at the levels indicated by the future.
As market.
With respect to other dynamics favorably impacting fertilizer pricing recent data we've seen points to a downtrend in imports, particularly of UN from several countries that were shipping a meaningful quantity of product to the U.S. over the past year.
We're also focused on the historical relationship between urea and UAN in as an indicator that you and prices are poised for recovery income coming months.
Slide 12 shows the multiyear price trend for you weigh in ammonia and urea.
And shown at the bottom of the slide is the multiyear trend for the three aforementioned products on a nitrogen equivalent basis, which illustrates how the price movement of these products is correlated.
You can see here that over the past 10 years you weigh in has typically traded at or above the price of urea on a nitrogen equivalent basis.
However, since mid 2019, you Leann has been selling at a discount to urea for most of the period.
We believe that the historical relationship where you weigh in trades in line or better than urea is likely to return in 20 in early 2021 based on both historical patterns and the favorable outlook for fertilizer demand given the previously discussed market environment for corn growers.
Collectively these factors make us cautiously optimistic that fertilizer prices will rise at least modestly in the coming months to levels that would still consider historically low but better than what we've experienced so far in 2020.
Now please please turn to slide 13, and I'll discuss our current view on how natural gas prices impact our business and our outlook for the coming year.
As I discussed last quarter, we continue to experience the double edged sword effect of low natural gas.
The primary feedstock for the manufacturing of most of our products low natural gas prices, which in Q3 were down nearly 17% from the already low levels of the third quarter of 2019 or a benefit to our gross margins, but such low natural gas prices also encouraged less sufficient marginal nitrogen chemical producers around the world.
World to run facilities that they might otherwise not which leads the product oversupply increased imports of product into the U.S.
All leading to pressure on product selling prices in our geographic markets.
This has been a meaningful factor in fertilizer price weakness for the past several quarters in the third quarter was no exception. However.
With natural gas prices moving higher in the U.S. and around the world, we are likely to see marginal producers reduce production, including western European producers, who tend to sit at the high end of the cost curve.
This slide also illustrates the trend of Henry hub, the primary us natural gas index versus to Europe based natural gas indices you.
You will see that back in the spring due to the onset of the pandemic throughout the world gas prices in Western Europe with the virus impact was particularly hard drops significantly wiping out our natural gas cost advantage here in the U.S.
This chart also illustrates how much faster natural gas prices in Europe are now rising relative to use price as a dynamic that we expect to benefit us nitrogen chemical producers in the coming year.
Turning to aspects of our business that are in our control. We're very excited about a number of initiatives that we've been successful in implementing in recent months that should lead to incremental lead to incremental EBITDA in 2021.
First and foremost as illustrated on slide 14 over the course of 2020, we've proven that we can run our plants with consistency and that production rates that will enable us to capitalize on the operating leverage thats inherent in our business model, which will become more apparent as product prices rose.
While we still got room for improvement in this regard we've been very pleased with the increased production volume. We've we've delivered through the first three quarters of 2020, and we are on track for record setting performances for consolidated ammonia production as well as record urea and UAN at Pryor facility.
Hey, Stan and sulfuric acid at our El Dorado facility and D.F. at our Cherokee facility.
Looking ahead to 2021, we expect to continue with strong production volumes, but as a reminder, we do have turnaround scheduled for both our Cherokee and Pryor facilities in the third quarter of next year, but.
But we believe that we can at least partially offset the impact of the fewer operating days for the year with further improvement in Onstream, Onstream and production capacity rates and detailed planning and tight management of these turnarounds.
On Slide 15. In addition to further highlighting highlighting our operating performance we summarized the other two legs of our strategy that have been and will continue to further drive our financial results.
Over the past several quarters, we've been very successful in our intensified sales and marketing efforts. A great example of this is the recent new long term supply contract to provide a customer with between 70000 to 100000 tons of nitric acid per year, while the terms of the contract for Ventas for providing details I can tell you that sales under this agreement.
We will begin during the first quarter of 2021 and will generate meaningful incremental annual EBITDA on a full year basis. This.
This contract along with the previously mentioned seal too and low density ammonium nitrate agreements is the result of our focused marketing efforts to sell our excess production capacity and change product mix in order to enhance our margins.
In order to support our growing order level stemming from our sales and marketing initiatives, we have been making strategic investments over the course of the past 12 months as we've discussed on previous calls in April we completed the installation of a new fertilizer storage facility that will enable us to further maximize our production as a result result.
Of this project, we are now able to store a significant amount of this fertilizer product in advance of the spring 2021 planting season.
And sell it when we believe that pricing is at optimal levels as the season approaches versus historically, having to sell it as it's produced at current prices.
We expect the returns on this investment given the greater margin, we can capture on sales in the coming months to be quite attractive and we're looking at several other opportunities of this nature that we expect will lead to further margin improvement over the course of the coming year.
Finally on our last call, we discussed potentially $5 million of annual savings. We believe we can attain through fixed cost reduction actions. We've identified in recent months, we expect to realize that through 2021 between this and the other actions, we're taking to improve our profitability and cash flow that I outlined.
Earlier, we remain more confident than ever about our potential to generate an additional incremental EBITDA completely independent of any increase in our selling prices. Our goal is to make substantial progress in this regard over the course of the next four quarters and we look forward to providing you with updates on our accomplishments.
This is now our third quarter reporting to you during the pandemic environment at the risk of using a cliche, we view the current circumstances as our new normal.
It's hard to fathom that this is the case given how we view the world less than a year ago, but with that said well our hearts go out to all of those who have been sickened and lost loved ones due to the virus as a company. We've learned a lot about our capacity to adapt and overcome new challenges to running our business.
I truly believe that these lessons will serve us well at some point in the future. When this pervasive threat has subsided in the meantime, we'll continue to focus on what is within our control in order to improve our operating and financial results, but more importantly to attend to our number one priority, which is the health and safety of our employees their families.
Friends co workers and everyone in our communities Weve remained ever grateful to our team for the concerted effort and attentiveness that they bring to our facilities and offices every day, and we think our customers suppliers and shareholders for their continued support.
Before I pass the call back to the operator to begin the Q and a session I'd like to mention that we will be participating in the Morgan Stanley Global chemicals, Agriculture, and packaging conference on November 10th the Sidoti Microcap Conference on November 19th.
Bank of America Merrill Lynch leveraged Finance conference on November Thirtyth.
And the UBI as Chicago agricultural and industrial Chemical conference on December 10th all virtually.
We hope to speak with you with some of you over the course of these events that.
That concludes our prepared remarks, and when we know we will now be happy to take your questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Joe Mondillo with Sidoti. Please proceed with your question.
Hi, Good morning, Mark and Sheryl Good morning, how are you.
Good doing well you guys are doing well just wanted to start off with the Fourq guidance that you provided I think you said, 40% to 50% year over year improvement in EBITDA.
I would have thought it would have been a.
A little bit stronger.
Quite honestly it primarily given the fact that you don't have any plan or.
Yes last fourth quarter, you had a little bit of unplanned downtime.
Downtime on Pryor was down I think have to corner. So that's number one and number two pricing at this point I think correct me if I'm wrong is a little more comparable you know pricing came down a large part of 2019 and I think it's a little more comparable on a year over year perspective.
I would have thought you maybe would see him.
Setting up to see a better year over year improvement, but could any color there.
Sure I think I think Cheryl gave you some indication of pricing in her prepared comments and certainly as part of the earnings presentation slide.
I think pricing is going to have a significant impact in the fourth quarter.
As we've talked about and I think others in the industry have talked about production actually should be up and up pretty significantly but pricing will continue to weigh on the on the fourth quarter.
Oh, Okay, all right and then just as far as far as the cost improvement initiatives could you just clarify how much you're expecting sort of from the capital projects.
Versus that $5 million of fixed cost savings that you mentioned.
[noise], Yeah, we haven't given out.
Any kind of EBITDA indication a range on some of the capital projects and the new contract Awards.
So I'm kind of hesitant to give that out.
Well I thought I have in my notes prior notes that $10 million to $15 million of savings and I thought that was all related to the capital projects. So I'm wondering if that's $5 million. In addition to that I thought you said 10 to 15 on the last conference call.
That's not in addition, it's part of it part of Okay. Okay. That's all I was wondering.
And then I may have missed this I think I remember hearing you mentioning this in your prepared remarks, mark but.
Could you just go over what the update is on the latest trial.
[noise] yeah. So.
Yes, as you might imagine.
During the pandemic.
It's been really difficult to.
Have elongated trials, we anticipate.
I think the trial that will go three four weeks or more and so what you're seeing during the pandemic is shorter trials.
So we're going to have to.
Wait and hopefully until the vaccine comes out earlier in the year and things.
Things start to maybe improve from a.
Pandemic or incurrence or the COVID-19 incurrence rate for.
For us to get to a trial so right now we're talking about.
Somewhere probably in the latter part of the first half of next year.
Okay.
And then just the balance sheet any.
Any update on how you're thinking about approaching not you know a lot going on in the financial markets. This year Youve seen tremendous amount of improvement in your utilization rates of the plants up pricing is a little weak, but you know as we approach next year things could get better any.
Further thoughts in addition to what you mentioned in your prepared remarks as far as refinancing the balance sheet.
Sorry, Mark do you want to go ahead.
Yes, I mean I think that.
You know Cheryl mentioned, our bonds are callable today at 107, so that's.
The fairly expensive to refinance.
And so in May of next year that call premium drops down to one.
In one of those three range.
And so that coupled with.
Expectations that will.
We will continue to improve from an operating standpoint, but also I think we'll see some better pricing.
In 2021 would lead us.
It's probably at least today sit here and say that.
We want to get past that.
Next.
May of next year, which has a drop in the call premium.
Where things should improve we'll start to see.
Were also less much less of an impact on from COVID-19 on our industrial business. So that would be the current thought today.
Okay.
I figured just lastly, as far as far as your Fourq guidance. How are you thinking about the fall application season relative to last year.
Yes, so the application season should be we expect it to be significantly stronger than last year I remember last year. There was a very small window is really tight window to get ammonia down and well the growers did that and technology is much improved to do that.
This year there should be a.
Much longer window for them to to get ammonia down in the ground and I'll.
I'll tell you that you.
You know the corn belt itself was a bit behind as they either had too little or too much.
Reciprocation.
But they've really over the last couple of weeks caught up.
But you have seen pockets where the.
Fall application season is is really strong right now like Minnesota.
Harvests move pretty swiftly and ammonia application in that state was was going really strong Texas.
Ammonia application is actually almost done so I think we would expect some some pretty good demand in ammonia between now and the end of the year.
Okay, and I actually just have one last question I'd be sort of remiss if I didn't ask it just regarding.
The pricing that we're seeing and corn here.
Any thoughts on if this is any more sustainable than.
The three or four times that we've seen a hair above for in the last four or five years any thoughts there.
Yeah, I mean, I think I said in my prepared comments, there's a number of variables that are really.
Pushing corn to the levels that we're at today and.
You know we were just recently on a few calls with some really.
You know good industry experts and I think there's a really good feeling that the corn could sit in the 425 to 450 range.
One of the things I didn't mention on the call is.
China recently purchased several purchases of corn over the last several months and I think that'll continue I mean I think that.
With the replenishment of you know the hog.
Population that they lost due to the swine flu.
In wanting to feed them in a different way and.
I think you'll see corn demand, a pretty significant pretty significant from China, which just.
Will support higher pricing I'm as the demand.
Well I don't know, but outstrips supply, but ultimately it's much stronger demand.
Got it well thanks for taking my questions. Good luck with the rest of the year.
Okay, Thanks, Joe and good luck.
Our next question comes from the line of Travis Edwards with Goldman Sachs. Please proceed with your question.
Hey, good morning, Mark Sheryl Thanks for the detail this morning and for answering the questions had a question on you talked about rising Nat gas costs going into next year potentially also having some benefit as mortgage producers.
Maybe lower production anyway to think about or any color that you can share on sort of your expectations for sort of that impact on.
[music].
I guess margins or both pricing and.
On the cost side.
[noise], Oh, well I don't know that there's a direct relationship on.
The increase in natural.
Natural gas prices.
Versus selling prices I would tell you that when I think about you know higher gas prices is probably three variables that will offset that.
In my mind.
One is you've.
You've got a steeper global nitrogen cost curve should drive higher selling prices here in the U.S.
The second would be global demand.
Remained strong so we would expect us markets to be less of a discount.
And then third I think we believe that the worst is over for both ammonia nitrates.
Given you know the weaker industrial man the demand that we've seen in 2020 from the pandemic. So.
I think certainly weaker industrial demand in.
In both you know ammonia and in certain nitrate products.
Definitely has an impact on fertilizer prices themselves. So I think those three would.
Would lead us to believe that despite higher feedstock costs.
We'll see selling prices, we should see selling prices sometime in 2021 really offset those those higher feedstock costs.
Got it that's helpful. That's the code was looking for thank you maybe just a follow up on the Nat gas side any color you can share in sort of expectations for incremental working capital needs next year as those costs come up.
I'll, let Cheryl answer that one.
Yeah I mean.
No I'd say I wouldn't think that would be very material I'd say, a dollar increase and natural gas and you know probably drive about 40.
$45 million of higher working capital needs, but you know on the flip side of that you'll have some rising prices hopefully as well on the fertilizer price side. So I wouldn't expect it to be a material a draw on working capital.
Okay got it that's helpful. Thanks for those benchmarks.
Question on the balance sheet I know it comes up from time to time, but can you just refresh us on your.
Your latest thoughts on what to do with those preferred shares I know, there's a little less urgency to address those in the near term, but we just get invest investors asking about you know how that rising balance ultimately comes down. So I was just hoping to get maybe a refresh on yourselves.
Well I mean, I think as Joe asked earlier about refinancing I mean, I think that's one way to think about it.
You know.
If we refinance our debt.
You know is that one way that you know, we could maybe refinance for slightly higher amount and use some part of that too.
To redeem some preferred I think we'll take a look at that well we won't do it at the.
At the expense of creating too much leverage.
So that's something that we're not interested in.
As you know we've got a.
The lawsuit that we've talked about I mean, I think that's another form of cash generation and then there's a couple of other things that we're working on so I don't think there is one silver bullet.
That.
That really deals with the preferred I think it's going to be a number of things that.
That we've got going in discussion today that will help US you know reduce debt balance and ultimately hopefully you know take the preferred off our balance sheet.
Yeah, thanks, rather than walk through those different scenarios I think maybe one more extension and again I know I'm sure.
Asked earlier lead the report comes out.
Seemingly every quarter, but in the past you just thrown out I think sort of the 100 million of EBITDA benchmark is so.
Sort of a.
General level you'd like to achieve before considering refinancing I know, that's not a hard and fast rule by any means but is that still generally how you're thinking about where you want this business to be and maybe on a.
Normalized basis for an operation standpoint, or I guess can you.
Bridge between how you're thinking about refining sort of overall operations or whether it.
[noise], Yes, I mean, I think that's a good rule of thumb.
Which I think most important and why that's an item that may be an important number for us is really.
Focused on.
Improving our rating with S&P and Moody's.
I think as you would agree.
You know getting to a single B will have a significant implications on terms and rate.
I think that will be a really important for us.
Sure.
Appreciate that and then maybe last one for me.
And then maybe on gas infrastructure, but I know Youd mentioned that you haven't shared much as far as detail on.
Quantify sort of the new contract awards, obviously, you've got a new caught a lot of new contracts coming in which is great any way to even sort of ballpark.
Specifically or more specifically around what the nitric acid contracts look like you are not.
Okay I understand you have some other stations given on your guidance for the customer, but you know the 70 100000 tons of nitric acid, you know sort of general ranges of potential EBITDA.
Additions or is it are you can you not sure.
Yeah, I think it probably rather not do that at this point Travis.
Yeah, No problem look I appreciate the color and best of luck in the quarter and stay safe thinks.
Thank you you too.
Our next question comes from the line of JP Geygan with global value Investment Corp. Please proceed with your question.
Good morning, given the operational reliability that you've achieved at your plants can you characterize next year's turnarounds relative to the cost and volume disruptions in previous turnarounds.
[noise] that's a good question [laughter].
Well I think we're still I think the issue JP is really we're still in the planning stages of those turnarounds I'm.
So typically.
We would say that they are you know 30 to 35 day turnarounds doesn't want to Cherokee.
On a three year turnaround cycle, so we want to make sure that.
We're exercise.
Exercising the proper maintenance on that facility as we finished that turnaround will go another three years without a turnaround at Pryor, we did a pretty extensive turnaround last year absolutely.
I want to make sure that we continue to do the work that we need to do to improve the operations and the reliability of that facility I would tell you that you know we are acutely focused on.
Planning for those turnarounds in a much more expanded way than we've done historically and acutely focused on.
Trying to bring those days down so I think it's probably a little early for us to to give you some color on that but I think next quarter, we'll be in a much better position.
Okay great.
Can you give us any more color on the capital projects you have planned for 2021 and then ill.
In relation to your either planned or completed projects and particularly your product storage project or projects.
Have there been any new considerations to liquidity or working capital introduced.
[noise] well I mean, you know some of the new contract awards.
We are going to to make some investments to improve both.
Both storage and you know loading and unloading.
To support that business, so those should be complete.
However in the earlier part of next year.
A couple of other projects that were evaluating so I don't know that its worth given.
Much color on that we also talked about a COO too.
New new long term Seo to contract that that we were awarded a out of our El Dorado facility and that requires a little bit of capital as well to build I'm certainly a pipeline to.
A guess plant that that our customers building so those.
Those are the things that the two near term projects that are underway and then a couple of others that we.
We're evaluating that all will have.
Probably two years or less pay back.
I don't know if that answered the question.
That's helpful. Yes. Thank you finally, your deck mentioned that you're on track to reach a 10 year high and sulfuric acid production, you've previously suggested that.
You would consider acquisitions in this area.
More generally can you talk about your appetite for acquisitive growth at this point.
[noise], Yeah, I mean, I think I've said this previously we're getting to the point now where well we're not operating.
The optimum levels that we'd like to and we expect to you know where our plants are much more reliable.
You know were able to achieve record productions.
Hope to continue to do that as we improve the reliability.
So I think you know we're looking.
For opportunities out in the marketplace that would make strategic sense for us and that could be on the.
Fertilizer side of our business it could be in production that could be in storage that could maybe be in logistics and the love to take a look at that and then it certainly could be on the industrial side of our business and the key really is to to focus on on opportunities, where we can use our core competency is to really.
Hopefully improve the business and realize some synergies.
Great. Thanks for taking my questions.
Sure.
Our next question comes from the line of Brian Dirubbio with Robert W. Baird. Please proceed with your question.
Good morning.
Sure I think you guys do a little bit of hedging on natural gas can you give us a sense of what that looks like right. Now you are hedging program.
Sure you worry.
We're about 60% hedged for the fourth quarter I'm around $2.40 per and then B to you no.
Looking into next year, we're watching that closely we've got maybe 10% hedged for the first quarter were working with.
Ah you know our team here for some buying opportunities for next year. So we will be watching that closely over the next several months.
Got it and just can you give us details on the the ammonia storage.
Debt that you refinance that I think that was the $3 million that was due and full next year did you said you added 18. So is it you refinance that with 21.
When you net it 18 million of cash.
Oh, Yeah, I mean, we refinanced for 30 million in paid back 12 that was outstanding so far in that 18 million of additional liquidity to the balance sheet.
And.
What was the rate on that refinance.
Oh, it's right around that eight.
They have 9% range.
Okay and that person is like the 4% to 5%.
Great that was on the existing correct.
Correct.
Okay perfect.
Maybe switching gears there was an obscure filing.
Middle blog as well.
With the New York Stock exchange start talking about listing and registration of our preferred stock.
Sorry, because if I remember correctly when you did the last refinancing I think it was actually the sale of the each fact business you guys [laughter] thesis.
Easily got the preferred owners to push off there a quick update on their <unk> preferred stock and that could date I think is in 2023.
Three or 2024, so I'm just trying to think about you know it is you're talking about potentially refinancing how you're managing that put in is.
Is this filing sort of a first step to possibly listing those preferred shares. So you can remove the quick.
Restriction.
Yeah. So the filing that was in August.
I was actually.
Oh no.
No shareholder rights plan, So we've got 650, or so or actually a little more than $650 million of net operating losses.
And we wanted to ensure that we didn't lose those and there's some pretty complicated tax rules on ownership changes.
That people could easily trip, especially at a low <unk> in a low stock price environment. So that's what that filing is related to its an oil rights plan that we have in place.
Okay has nothing to do and just think preferred.
Okay got it.
But the <unk> it would be you would need possibly those preferred holders to renegotiate that put option.
If you are going to try to get any refinancing done is that correct.
[noise], yes, I think that.
You know it's occurred that last refinancing and I would suggest that a given that there are largest stockholder and you know we've had a really good.
Good relationship with the holder of the preferred that that shouldn't be an issue. If that's the world that we went down.
Understood.
Two last questions on the PTP loans, the 10 billion.
That we're going to find out next year, if you have to repay that or not.
Yeah, we meet all the qualifications.
To get that loan forgiving, so that would be our expectation.
Okay and then finally the lawsuit you know I know you're focusing on your suit against Leidos I think there was there like a $9 million judgment against you.
Earlier, this year sort of related to that.
Where do you stand with that I think you're killing that right now but he'll.
Where does that potentially stand in terms of timing because they'd be you know the lawsuit against Leidos.
Yeah. So there is no requirement to make any payments we are appealing it and it is part of the the greater lawsuit that we have with low dose.
Okay. So no no indication on when that appeal is going to be hard.
Nope.
Unfortunately not.
Got it great. Thank you.
Sure.
We have no further questions at this time I would now like to turn the floor back over to management for closing comments.
I want to thank everyone for listening to our conference call and for all the questions that we received hope you can see that we are making a lot of progress and hope to report on additional progress next quarter. Thank so much and have a great day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.