Q1 2021 LSB Industries Inc Earnings Call

April 29, 2021

[music].

Greetings and welcome to the LSP industries first quarter fiscal year 2021 conference call. At this time, all participants are in a listen only mode.

The question and answer session will follow the formal presentation, but the.

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's now my pleasure to introduce your host Kristy Carver Senior Vice President and Treasurer.

Christie you may begin.

Good morning, everyone. Joining me today on the call are Mark Behrman, our Chief Executive Officer, and Cheryl Maguire, our Chief Financial Officer.

Please note that today's call will include forward looking statements and because of the statements are based on the company's current intent expectations and projections. They are not guarantees of future performance and a variety of factors could cause the actual results to differ materially.

As of this call will include references to non-GAAP results. Please see the press release in the investors section of our website LSP industries Dot com for further information regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.

At this time I'd like to go ahead and turn the call over to Mark for opening remarks.

Thank you Christie and good morning, everyone as always we appreciate your interest in it let's be industries and are happy that you can join our call. This morning.

Of the difference of your mix.

At this time last year, we were staring into the unknown of the unfolding COVID-19 crisis.

Of the onset of the pandemic required us to rapidly implement protocols and procedures to keep our employees and their families healthy while enabling us as from the central business to continue to run our facilities.

It also caused a significant slowdown and in some areas in some cases of full shutdown of our industrial end markets and much of the U S economy in general at.

At the same time pricing of our agricultural products declined further from the already low levels of 2019.

The level of uncertainty we faced as individuals at the company and as a nation was historical in nature and daunting to say the least.

In the face of these challenges our team more than rose for the occasion integrating our COVID-19 mitigation procedures into our overall health and safety program to achieve outstanding results and they did this while remaining focused on our goal of continuous improvement in our manufacturing operations.

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

Flash forward to today.

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

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

We believe that these favorable trends are likely to persist throughout 2021 and into 2022 and because of the variety of the actions we've taken over the past several years, we think we are well positioned to capitalize on them.

Our first quarter was not without its challenges as widely documented in the news and as we discussed on our last earnings call historically cold weather across the regions in which we operate and the related impact on natural gas pricing and availability during February caused temporary shutdowns at two of our facilities and impacted our results for the period.

Despite these headwinds however by focusing on the aspects of our business within our control and executing well coupled with the improving demand and pricing trends in our end markets.

We generated double digit year over year growth in net sales and adjusted EBITDA.

Overall, it was a solid start to the year and we believe it sets the stage for significant improvement in our 2021 financial performance relative to that of 2020.

On slide four we summarize the key drivers of our agricultural end markets.

Commodity prices have continued on an upward trajectory since hitting an inflection point last fall. Most importantly for our business. The price of corn has more than doubled from 2020 lows and is now at levels not seen since 2013.

As discussed on our last call strong demand for for U S. Corn is being fueled by a combination of factors with the most prominent being the surge in exports led by increased demand from China.

And a rebound in ethanol production is driving and related fuel consumption have increased as the vaccines have rolled out enabling many people to get back to.

For normal lifestyle.

In addition to the impact from the increased demand the price of corn has also been impacted by the global supply concerns.

Being caused from drought conditions in Brazil in the western United States, which could reduce overall corn production.

Additionally, we have seen steep increases in the price of other agricultural commodities, including beans, wheat, and cotton all creating a competitive environment for a finite number of acres, we have available for planting in the U S.

Approximate approximately 91 million acres of corn were planted in the U S. During 2020, which was a slight increase over 2019.

The USD the Usda's. Most recent forecast for 2021 is for approximately 91 million acres, which we view as more than ample to drive very healthy demand for fertilizers.

With the strong corn market fundamentals has come a commensurate rebound in demand and pricing for fertilizer products. As you can see on slide five Tampa ammonia pricing has more than doubled over the past 12 months and expected UAS and each day and pricing have both increased substantially compared to the second quarter of 2020.

Corn and fertilizers are not the only commodities that have been experiencing rising prices as the economy has been recovering and the outlook for economic expansion continues to improve energy prices have been increasing significantly as well, including natural gas since.

Since natural gas is the primary input to our manufacturing process the higher prices over the past several months were and we expect we will continue to be a partial offset to the gains we are recognizing from higher product selling prices, but importantly, we expect it to be less of the hang with headwind to profitability improvement as well.

Begin to fully benefit from the higher agricultural product prices.

Cheryl will discuss this in more detail shortly.

Turning to slide six with respect to our industrial and mining business. Most of our end markets have seen meaningful recovery since last spring.

One of the primary end markets for the nitric acid. We produce is the auto industry, which was forced to cease production at the <unk> at the onset of the product of the pandemic in mid March of last year.

As of the end of last month U S light vehicle sales rebounded from last april's lows by more than 100% and were actually above the pre pandemic level of the end of February 2020 by more than 5%.

Nitro gas. It is also a major input to a variety of homebuilding products based on preliminary estimates as of the end of March U S housing starts and building permit applications have rebounded to above pre pandemic levels and we're at the highest in several years.

With respect to the products, we manufacture for mining applications, primarily low density ammonium nitrate.

Favorable indicators have been emerging from the sizable north American copper market, where prices for this middle have risen to the highest levels in almost 10 years and the expectation is for pricing to continue at these levels, which could drive an increase in copper mining activity in the foreseeable future, particularly given relatively new and growing copper.

Demand drivers such as mass production of electric vehicles.

We view the current demand trends, we're seeing across our key end markets is pointing towards continued increases in sales and prices of our industrial and mining products over the course of 2021 and thereafter.

Before I hand, the call over to Sheryl I'd like to provide an update on the litigation that we brought against <unk>. The general contractor of our El Dorado ammonia plant expansion project.

As the pandemic has caused many trials to be rescheduled ours was not immune however, Arkansas Supreme Court has begun scheduling trials beginning in June and based on net we continue to believe that our trial will occur sometime this fall. We are looking forward to having our case heard by the jury and while we can't guarantee any outcome in the litigation with <unk>.

The leave our case has serious merits.

Now Cheryl will go into more detail about our Q1 financial results Cheryl.

Thanks, Mark and good morning.

Page eight our adjusted EBITDA for the first quarter 2021 of $17 3 million for adjusted EBITDA for the first quarter of 2020 of $15 6 million this and for.

<unk> was due to greater sales volume and improved pricing stemming from a multitude of factors that mark spoke about earlier.

Partially offsetting our operating performance and the improved demand and pricing environment was the impact of higher natural gas costs.

Increased insurance costs, and a small impact from the extreme cold weather event, we experienced in February of this year.

With respect to the weather event as you might recall, we generally lock in a portion of our natural gas usage out of fixed price and therefore, despite the significant impact of loss of production sales and higher cost.

Cause by the natural gas disruptions at both of our El Dorado and Pryor facilities, we were able to mitigate a big part of the loss with the sell back of natural gas and related contracts.

Turning to page nine we have outlined our adjusted gross profit margin for the past three years, which we believe represent the underlying cash margins of our business as you can see from the slide despite the significant drop in the average annual Tampa ammonia benchmark price from 2018 to 2020 alright.

Adjusted gross margins remained in the 23% to 24% range as we were able to largely offset weaker pricing with higher production and sales volume and reductions in fixed costs.

At the first quarter of 2021, we see the positive impact of these factors plus the benefit of improved product pricing, which provided us with some healthy margin expansion during the period.

With the recovery of the Tampa ammonia benchmark, we believe that as the year progresses, we will be able to improve our gross margin even further.

Page 10 outlines our current capital structure, we ended the quarter with approximately $14 2 million of cash and $56 million of total liquidity of.

As stated on previous calls we continue to actively seek ways to improve our capital structure and lower our overall cost of capital.

Believe that operating improvements made to date combined with the improved pricing environment for our fertilizer products and robust industrial and mining end markets will be of benefit in achieving those results.

As we highlighted on our call in February credit markets remain issuer friendly and with that in mind, we continue to evaluate several avenues to lower our cost of capital and look forward to discussing these with you in the coming months.

Before I turn the call back to Mark I'll review, a few important considerations as to how to think about the second quarter of 2021.

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

Keep in mind that while pricing improvement did help our first quarter orders for you Anh, Dan and agricultural ammonia in the first two months of Q1 were taken back in Q4, and therefore were reflective of Q4 of pricing in other words due to order timing Q1 benefited from product selling price improvement.

The only a relatively minimal degree during Q2, we expect we will benefit to a much greater degree.

We expect the ammonia production for the second quarter to be at or better than the second quarter of 2020 and for that to translate into margin expansion as we execute on our strategy to upgrade in the downstream consumers of nitric acid, Alabama, New AAN.

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

Putting this all together, we expect EBITDA in the second quarter to be approximately 70% to 90% higher than the second quarter of 2020.

Now I'll turn it back over to Mark.

Thank you Cheryl.

At the beginning three months of 2021 was the first quarter that we would say we experienced little to no impact from the pandemic.

It was also the first quarter and more than two years, where we saw meaningful price increases for our agricultural products.

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

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

In recent weeks, we have seen this translate into significant demand for fertilizers as growers strive to maximize yields at the anticipated favorable market prices for corn.

Slide 11 illustrates an important market dynamic that we've been talking about on our past two conference calls.

The top chart shows the historical relationship between urea and Uhm.

For the better part of the past 10 years, UAS traded at or above the price of urea on a nitrogen equivalent basis.

Beginning in mid 2019, however, uhm began selling at a discount to urea for the balance of that year and through most of 2020.

This led us to believe as we indicated on past conference calls that we would see a reversion to the historical relationship with the UAS to urea discount ultimately narrowing or disappearing.

This is exactly what we've seen in the last month in fact on the nitrogen equivalent basis as you can see in the right hand, the ends of the Upper chart on slide 11, UA and as again trading at a premium to urea on a nitrogen equivalent basis, which bodes well for us as we were a seller of UAS.

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

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

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

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

As you heard from us over the past several quarters, we've been successful in all three of these fronts and we expect to continue to realize meaningful benefits from the progress we've made throughout the remainder of 2021 and going forward. Our operating performance has been yielding solid production volumes and is enabling us to lower our product cost and realized margin.

Spansion by optimizing our product mix to take advantage of higher selling prices.

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

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

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

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

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

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

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

In order to become more focused and effective in pursuing this opportunity. We've recently hired Hector <unk> highly experienced business development executive in the chemical industry as our director of clean energy.

He will look to assist us in developing and executing on our green ammonia strategy.

Look forward to providing you with further developments on this exciting opportunity in future quarters.

For turning over the call to the operator to begin the Q&A session.

Note, we will be participating in the following virtual investor conferences in the coming weeks.

The Goldman Sachs credit and leveraged Finance conference on May 17th the <unk>.

Adobe Microcap conference on May 20th.

The Keybanc capital markets industrial and basic materials conference on June 4th and.

And the Stifel Cross sector insight conference on June nine.

We look forward to speaking with some of you during these events.

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

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate that your line is in the question queue. You May press star two if you'd like to remove your the question.

For participants using speaker equipment.

The starting to pick up your handset before pressing the Turkey.

One moment, please while we poll for questions.

Thank you My first question comes from Travis Edwards with Goldman Sachs. Please proceed with your question.

Hi, Good morning. This is Barry Ray on for Travis Thanks for taking my question.

We still have elevated pricing I know you've talked previously about the traditional step down in ammonia and other nitrogen prices in the back half of the year, but can you give us any commentary on what youre expecting for full year EBITDA based on your price matrix for it looks like you can be a couple of being about 100 million of EBITDA. This year from is that a reasonable assumption or how should we think about that.

I think about the only thing we can say on full year EBITDA is.

We're pretty comfortable with the grid that we put out there and so based on the level of UA in ammonia prices.

You can land somewhere on that grid.

Got it thanks that's helpful.

And then and then the follow up you mentioned the impact from the winter storm could you provide the operating rates for the quarter or some quantification regarding the outages in the quarter.

Now, we don't usually provide operating rates.

On individual plants.

We're going to stay.

Stay away from that it's not something that we typically answer would disclose.

Okay got it. Thank you very much for your time.

Yes.

Thank you. Our next question comes from Steve <unk> with Sidoti <unk> Company. Please proceed with your question.

Hi, good morning, everyone.

I'll have to follow up on any of you gave for a brief commentary on.

Tackling the capital structure, we know that certainly next month call option price declines.

Thank you Bob for it seems like you opened the door to other possibilities for any kind of color you can provide and how you're thinking about given the way the market conditions or how youre thinking about the capital structure and what you might do over the next couple of months.

Yes so.

We absolutely bill.

<unk> believes that the theres an opportunity for us to refinance.

The opportunity has been present for some months now.

As you mentioned.

All of our coal premium does step down on May 1st So thats this weekend and suffice it to say that we've had some active conversations.

With investment banks about refinancings so.

I would suggest that.

Between now and the end of the third quarter.

The strong possibility that we would be refinancing of <unk>.

Existing senior secured notes.

And.

Looking at that as part of.

Potentially.

Our overall cost of capital.

Okay.

In terms of and I know you don't want to provide for your guidance, but in terms of how you are internally preparing for the second half of the year of knowing that Q2, you should have the very very strong sales from potential of some some additional ammonia capacity coming back to the market the second.

Half how do you think about your your AG versus industrial and mining balance.

With the industrial side as you noted getting stronger now.

Yes.

Well I mean, I think we.

Actively.

Manage product balance.

It's not something that you could manage on the day to day basis.

But.

We certainly look at it at the beginning of the year of lot of our industrial business is contracted.

So we're committed to.

Providing product to customers. So we can't not provide that.

But there is always spot sale opportunities, what I would say about the AG markets.

Is typically youll have a reset.

In fertilizer prices over the summer and we would expect to have the reset from price.

From current prices.

But I don't think that Youll see a sum of reset.

Particularly on UAS.

As low.

Anywhere near as low as we've had the last couple of years. So I think we expect to see some bit of fertilizer pricing in the second half of the year on a comparative basis than we've seen in 2019.

Okay. That's helpful. And then just last one on just a modeling question.

Got it was useful color in terms of the insurance cost is top of the primary reasons for the sequential change from SG&A.

For the quarter. Besides obviously sales going up and then is that how we should think how should we think about SG&A going forward with the higher insurance premiums.

Yes.

That is the primary reason it is the insurance costs and I think you can assume that that would continue over the next couple of over the next three quarters.

Okay. That's very helpful. Thanks, everyone.

Sure.

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

Market share.

Good morning.

Alright.

Can you help us understand to what degree of smarter pricing of the AG market.

First quarter.

Rob we can't hear you.

I'll try this differently.

Yes.

Apologize for that can you hear me now yes.

Yes.

Very good.

Can you help us understand to what degree stronger pricing in the AG market is reflected in your first quarter results just considering that you of pre sold from product in Q4, and then early Q1, and then as it relates to the second quarter sales how much product was pre sold.

At late Q1 prices and will likely be reflected in the second quarter.

Yeah, Great question so.

I would say.

Most of the first quarter.

Was pre sold back late in 2020 for early 2021 so.

We really didn't see much benefit from higher pricing.

I would say when it comes to second quarter.

We're going to see significant benefit from a bump up in fertilizer prices.

Having the weather outage, though.

Several of our facilities.

We will have is probably roll a little bit of lower pricing into the second quarter, but overall I think we will be able to take advantage of the higher pricing in Q2.

That's helpful on that.

On the impact of Pryor and El Dorado.

During the quarter can you kind of kind of quantify the financial impact of those shutdowns.

Well I think.

Part of managing.

Our manufacturing facilities is also managing our guests purchasing.

On a GAAP book and so what I would say is.

The net impact because we were able to sell back some gas.

It was about $1 $5 million for the quarter.

So I mean.

I don't think that.

Sure.

We're comfortable talking about what was the actual manufacturing impact versus.

How much did we.

The benefit by the way the sell back of gas and things like that I think it's kind of in our view of its kind of all together.

Okay, Great and then.

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

Oh, well, that's a really great question I think.

For me.

I think about.

Really creating what we believe is a good strategy for us by the end of the year net.

That would be the goal.

And then executing on that strategy ultimately.

I think.

We don't enter a market like this which is a nascent market.

With both feet.

Jump in the water I think.

We'll dip our toe in bi.

Modifying.

One of our facilities I believe to produce anywhere from 15 to 20000 tons of green ammonia at least that's the thought process today.

And.

Enter that market can be of real participant and then have the ability to scale.

If the market really takes off.

The one thing I'd say is it.

It is a non existent market today.

So there was a lot of chatter.

And there's a lot of announcements and a lot of Mou is.

Being announced and I think of lot of great activity in great intentions.

The reality is is that.

It's pretty costly.

To manufacturer Green ammonia today, and so they'll have to be the government assistance.

Other than the capital need.

The needed to get into the market for us.

Certainly.

In maybe credits back.

For.

Reducing cotwo emissions and then of course, you have to have customers that are willing to pay higher prices.

For.

Something that's carbon free so it will I think we're really excited about it we think that it's a.

Huge market opportunity.

Today, there is about.

180 million.

Tons of ammonia produced globally.

And.

Based on some of the.

Applications, including <unk>.

The marine industry.

In power industry and some of the other opportunities.

Yes.

Everyone went green I mean, it could be.

Double that.

The over $300 million of ammonia production annually that would be required. So there really is a big market opportunity, but I caution in net I think.

It's going to be of slow developing market.

Thank you I have no further questions.

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

Well I want to thank everyone for their interest in LSP industries, and if there are any follow up questions. Please feel free to give the shareholder on the call. Thanks, So much.

Okay.

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

[music].

Greetings and welcome to the LSP industries first quarter fiscal year 2021 conference call. At this time all participants are in a listen only mode. A 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 the.

A reminder of this conference is being recorded it is now.

My pleasure to introduce your host Kristy Carver Senior Vice President and Treasurer. Thank you Christy you may begin.

Good morning, everyone. Joining me today on the call are Mark Behrman, our Chief Executive Officer, and Cheryl Maguire, our Chief Financial Officer.

This call will include references to non-GAAP results. Please see the press release in the investors section of our website LSP industries Dot com for further information regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.

At this time I'd like to go ahead and turn the call over to Mark for opening remarks.

Thank you Christie and good morning, everyone as always we appreciate your interest in the OSB industries and are happy that you can join our call. This morning.

Of the difference of your mix at.

At this time last year, we were staring into the unknown of the unfolding COVID-19 crisis.

Of the onset of the pandemic required us to rapidly implement protocols and procedures to keep our employees and their families healthy while enabling us as in the central business to continue to run our facilities.

It also caused a significant slowdown and in some areas in some cases of full shutdown of our industrial end markets and much of the U S economy in general at.

At the same time pricing of our agricultural products declined further from the already low levels of 2019.

The level of uncertainty we faced as individuals at the company and as a nation was historical in nature and daunting to say the least.

In the face of these challenges our team more than rest of the occasion integrating our COVID-19 mitigation procedures into our overall health and safety program to achieve outstanding results and they did this while remaining focused on our goal of continuous improvement in our manufacturing operations and.

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

Flash forward to today.

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

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

Overall, it was a solid start to the year and we believe it sets the stage for significant improvement in our 2021 financial performance relative to that of 2020.

On slide four we summarize the key drivers of our agricultural end markets.

As discussed on our last call strong demand for credit for U S. Corn is being fueled by a combination of factors with the most prominent being a surge in exports led by increased demand from China and a rebound in ethanol production is driving and related fuel consumption have increased as the vaccines have rolled out enabling many people to.

Back to more normal lifestyle.

In addition to the impact from the increased demand the price of corn has also been impacted by the global supply concerns.

Being caused from drought conditions in Brazil in the western United States, which could reduce overall corn production.

Approximate approximately 91 million acres of corn were planted in the U S. During 2020, which was a slight increase over 2019 the.

The USD the Usda's. Most recent forecast for 2021 is for approximately 91 million acres, which we view as more than ample to drive very healthy demand for fertilizers.

With the strong corn market fundamentals has come a commensurate rebound in demand and pricing for fertilizer products as you can see on slide five.

GAAP ammonia pricing has more than doubled over the past 12 months and expected UAS and <unk> pricing of both increased substantially compared to the second quarter of 2020.

Corn and fertilizers are not the only commodities that have been experiencing rising prices.

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

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

But importantly, we expect it to be less of the hand with headwind to profitability improvement as we begin to fully benefit from the higher agricultural product prices.

Cheryl will discuss this in more detail shortly.

Turning to slide six with respect to our industrial and mining business. Most of our end markets have seen meaningful recovery since last spring.

As of the end of last month U S light vehicle sales rebounded from last april's lows by more than 100% and were actually above the pre pandemic level of the end of February 2020 by more than 5%.

Nitric acid is also a major input to a variety of homebuilding products based on preliminary estimates as of the end of March U S housing starts and building permit applications have rebounded to above pre pandemic levels and we're at the highest in several years.

With respect of the products, we manufacture for mining applications, primarily low density ammonium nitrate.

Favorable indicators have been emerging from the sizable north American copper market, where prices for this metal have risen to the highest levels in almost 10 years and the expectation is for pricing to continue at these levels, which could drive an increase in copper mining activity in the foreseeable future, particularly given relatively new and growing copper.

A manned drivers such as mass production of electric vehicles.

Before I hand, the call over to Sheryl I'd like to provide an update on the litigation that we brought against <unk>. The general contractor of our El Dorado ammonia plant expansion project.

The leave our case has serious merits.

Now share will go into more detail about our Q1 financial results Cheryl.

Thanks, Mark and good morning.

Page eight bridges, our adjusted EBITDA for the first quarter 2021 of $17 3 million to adjusted EBITDA for the first quarter of 2020 of $15 6 million. This improvement was due to greater sales volume and improved pricing stemming from a multitude of factors that mark spoke about earlier.

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

By the natural gas disruptions at both of our El Dorado and Pryor facilities, we were able to mitigate a big part of the loss with the sell back of natural gas and related contracts.

Turning to page nine we have outlined our adjusted gross profit margins for the past three years, which we believe represent the underlying cash margins of our business as you can see from this slide despite the significant drop in the average annual Tampa ammonia benchmark price from 2018 to 2020.

Our adjusted gross margins remained in the 23% to 24% range as we were able to largely offset weaker pricing with higher production and sales volume and reductions in fixed costs looking at the first quarter of 2021, we see the positive impact of these factors plus the benefit of improved product.

Pricing, which provided us with some healthy margin expansion during the period with the recovery of the Tampa ammonia benchmark, we believe that as the year progresses, we will be able to improve our gross margin even further.

Page 10 outlines our current capital structure, we ended the quarter with approximately $14 2 million of cash and $56 million of total liquidity as stated on previous calls we continue to actively seek ways to improve our capital structure and lower our overall cost of capital.

We believe that operating improvements made to date combined with the improved pricing environment for our fertilizer products and robust industrial and mining end markets will be of benefit in achieving those results.

Before I turn the call back to Mark I'll review, a few important considerations as to how to think about the second quarter of 2021.

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

The only a relatively minimal degree during Q2, we expect we will benefit to a much greater degree.

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

Putting this all together, we expect EBITDA in the second quarter to be approximately 70% to 90% higher than the second quarter of 2020 and.

And now I'll turn it back over to Mark.

Thank you Cheryl.

The beginning three months of 2021 was the first quarter that we would say we experienced little to no impact from the pandemic.

It was also the first quarter and more than two years, where we saw meaningful price increases for our agricultural products.

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

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

In recent weeks, we've seen this translate into significant demand for fertilizers as growers strives to maximize yields at the anticipated favorable market prices for corn.

Slide 11 illustrates an important market dynamic that we've been talking about on our past two conference calls.

The top chart shows the historical relationship between urea and UAS.

For the better part of the past 10 years, UA and traded at or above the price of urea on a nitrogen equivalent basis.

Beginning in mid 2019, however, uhm began selling at a discount to urea for the balance of that year and through most of 2020.

This led us to believe as we indicated on past conference calls that we would see a reversion to the historical relationship with the UAS to urea discount ultimately narrowing or disappearing.

This is exactly what we've seen in the last month in fact on the nitrogen equivalent basis as you can see in the right hand, the end of the Upper chart on slide 11, UA and as again trading at a premium to urea on a nitrogen equivalent basis, which bodes well for us as we were a seller of UAS.

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

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

As you heard from us over the past several quarters, we have been successful in all three of these fronts and we expect to continue to realize meaningful benefits from the progress we've made throughout the remainder of 2021 and going forward. Our operating performance has been yielding solid production volumes and is enabling us to lower our protocols and realized margin.

Spansion by optimizing our product mix to take advantage of higher selling prices.

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

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

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

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

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

In order to become more focused and effective in pursuing this opportunity. We've recently hired Hector <unk> of it a highly experienced business development executive in the chemical industry as a director of clean energy.

He will look to assist us in developing and executing on our green ammonia strategy.

Look forward to providing you with further developments on this exciting opportunity in future quarters.

For turning over the call to the operator to begin the Q&A session.

Note, we will be participating in the following virtual investor conferences in the coming weeks.

The Goldman Sachs credit and leveraged Finance conference on May 17th the <unk>.

Adobe Microcap conference on May 20th the.

The Keybanc capital markets industrial and basic materials conference on June 4th.

And the Stifel Cross sector insight conference on June nine we look forward to speaking with some of you during these events.

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

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You May press star two if you'd like to remove the questions in queue for participants using speaker equipment may be necessary to pick up your head of simple.

Core price in the Turkey.

One moment, please while we poll for questions.

Thank you My first question comes from Travis Edwards with Goldman Sachs. Please proceed with your question.

Hi, Good morning. This is Barry Ray on for Travis Thanks for taking my question.

We still have the elevated pricing I know you've talked previously about the traditional step down of pneumonia and other nitrogen prices in the back half of the year, but can you give us any commentary on what you're expecting for full year EBITDA based on your price matrix for it looks like you can be of costing about $100 million of EBITDA. This year from is that a reasonable assumption or how should we think about that.

I think about the only thing we can say on full year EBITDA is.

We're pretty comfortable with the grid that we put out there and so based on the level of UA in ammonia prices you can land somewhere on that grid.

Got it. Thanks, that's helpful and then and then as a follow up you mentioned the impact from the winter storm could you provide the operating rates for the quarter or some quantification regarding the outages in the quarter.

Now, we don't usually provide operating rates.

On individual plants. So we are in the.

Stay away from that it's not something that we typically answer for work with disclosed.

Okay got it thanks very much for your time.

Sure.

Thank you. Our next question comes from Steve <unk> with Sidoti <unk> Company. Please proceed with your question.

Hi, good morning, everyone.

Have the follow up on any of you get very brief commentary on.

Tackling the capital structure, we know that shortly next month the call option the price declines.

For you. Thank you Bob for it seems like you opened the door to other possibilities for any kind of color you can.

Can provide and how you're thinking about given where market conditions are.

Youre thinking about the capital structure and what you might do over the next couple of months.

Yes so.

We absolutely.

Believes that the theres an opportunity for us to refinance.

The opportunity has been present for some months now.

As you mentioned.

All of our coal premium does step down on May 1st So thats this weekend and suffice it to say that we've had some active conversations.

With investment banks about refinancing so.

I would suggest that.

Between now and the end of the third quarter.

The strong possibility that we would be refinancing.

Our existing senior secured notes.

And.

Looking at that as part of potentially.

Potentially lowering our overall cost of capital.

Okay.

In terms of and I know you don't want to provide full year guidance, but in terms of how you are internally preparing for the second half of the year of knowing that Q2, you should have the very very strong.

Tom potential of some some additional ammonia capacity coming back to the market. The second half how do you think about your your AG for Susan industrial and mining balance.

With the industrial side as you noted getting stronger now.

Okay.

Well I mean, I think we.

Actively.

Manage product balance.

It's not something that you could manage on the day to day basis.

But.

We certainly look at it at the beginning of the year of lot of our industrial business is contracted.

So we're committed to.

Providing product to customers. So we cannot provide the.

But there is always spot sale opportunities, what I would say about the AG markets.

Is typically youll type of reset.

In fertilizer prices over the summer and we would expect to have the reset from price.

From current prices.

But I don't think that Youll see a sum of reset.

Particularly on UAS.

As low.

Anywhere near as low as we've had the last couple of years. So I think we expect to see some bit of fertilizer pricing in the second half of the year on a comparative basis than we've seen in 2019.

That's helpful. And then just last one on just a modeling question.

Got it was used for color on terms of the insurance cost is top of the primary reason for the sequential change from the SG&A.

For the quarter. Besides obviously sales going up and then is that how we should think how should we think about SG&A going forward for stuck with the higher insurance premiums.

Yes.

That is the primary reason it is the insurance costs and I think you can assume that that would continue over the next couple of over the next three quarters.

Okay that was very helpful. Thanks, everyone.

Sure.

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

Mark and Sheryl.

Good morning.

Alright.

Can you help us understand to what degree of smarter pricing of the AG market.

First quarter.

Rob we can't hear you.

I'll try this differently.

Yes.

Apologize for that can you hear me now yes.

Yes.

Very good.

At the late Q1 prices and will likely be reflected in the second quarter.

Yeah, Great question so.

I would say.

Most of the first quarter.

Was pre sold back late in 2020 for early 2021, so we really didn't see much benefit from higher pricing.

I would say when it comes to second quarter.

We're going to see significant benefits from a bump up in fertilizer prices.

Having the weather outage, though.

Several of our facilities.

We will have is probably roll a little bit of lower pricing into the second quarter, but overall I think we will be able to take advantage of the higher pricing in Q2.

That's helpful.

Net.

On the impact of Pryor and El Dorado.

During the quarter can you kind of quantify the financial impact of those shutdowns.

Well I think.

Part of managing.

Our manufacturing facilities is also managing our <unk>.

Guests purchasing.

On a GAAP book and so what I would say is.

The net impact because we were able to sell back some guests.

Was about $1 5 million for the quarter.

So I mean.

I don't think that.

We're comfortable talking about what was the actual manufacturing impact versus.

How much did we.

The benefit by the way the sell back of gas and things like that I think it's kind of in our view of its kind of all together.

Okay, Great and then.

Green ammonia just anecdotally it's gained a lot of traction recently, how quickly can you enter that market and how significant can that become.

Well, that's a really great question I think.

For me.

About.

Really creating what we believe is a good strategy for us by the end of the year that.

That would be the goal.

And then executing on that strategy ultimately.

I think.

We don't enter a market like this which is a nascent market.

With both feet Inc.

Jump in the water I think.

We'll dip our toe in bi.

Modifying.

One of our facilities I believe to produce anywhere from 15 to 20000 tons of green ammonia lease that's the thought process today.

And.

Enter that market can be of real participant and then have the ability to scale.

If the market really takes off.

The one thing I'd say is.

It is a non existent market today.

And so there was a lot of chatter.

And there's a lot of announcements and a lot of Mou use.

Being announced and I think of lot of great activity in great intentions.

The reality is that it.

It's pretty costly.

The manufacturer Green ammonia today, and so they'll have to be either government assistance.

Either in the capital needs.

The needed to get into the market for us.

Certainly.

In maybe credits back.

For.

Reducing cotwo emissions and then of course, you have to have customers that are willing to pay higher prices.

For.

Something that's carbon free so it will I think we're really excited about it we think that it is.

Huge market opportunity.

Today, there is about.

The 180 million.

Tons of ammonia produced globally.

And.

Based on some of the.

Applications, including <unk>.

The marine industry.

In power industry and some of the other opportunities.

Yes.

Everyone went green I mean, it could be.

Double that.

Over $300 million of ammonia production annually that would be required. So there really is a big market opportunity, but I caution in net I think.

It's going to be of slow developing market.

Thank you I have no further questions.

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

Well I want to thank everyone for their interest in AOSP industries, and if there are any follow up questions. Please feel free to give the shareholder on the call. Thanks, So much.

Okay.

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

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