Q2 2021 LSB Industries Inc Earnings Call
[music].
Greetings and welcome to LSP industries second quarter 2021 conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Dentation 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 I would now like to turn the conference over to your host Kristy Carver Senior Vice President and Treasurer.
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.
And because these statements are based on the company's current intent expectations and projections they are not guarantees.
These are future performance and a variety of factors could cause the actual results to differ materially.
As this call will include references to non-GAAP results. Please see the press release and the investors section of our website LSP industries Dot com for further information regarding forward looking statements.
<unk> and reconciliations of non-GAAP results to GAAP results.
In addition, we will discuss the recently announced exchange transaction with Eldridge and we direct you to the disclosures included on the last page of the slide deck accompanying this call for information regarding the exchange transaction the contemplated stockholder meeting.
And related proxy statement and participation and such solicitation.
At this time I'd like to go ahead and turn the call over to Mark.
Thank you Christie and good morning, everyone as always we appreciate your interest and OSB industries and are happy that you can join our call. This morning.
And we certainly have a lot to talk about today.
Between our record Q2 results the strong market environment for our products on both sides of our business, which gives us reason to be very optimistic about the second half of the year and our recently announced preferred stock exchange transaction. These are exciting times at LSP.
Well. Unfortunately, we are not yet at the point, where we can.
Meeting that the COVID-19, pandemic and the rearview mirror continued widespread vaccination and the U S has enabled many people to resume and close to normal life.
This is fueled economic activity across the nation can your degree that has exceeded even the most optimistic predictions about the pandemic recovery and in some cases has caused stress on our supply.
Team and shortages and price inflation for many products and services.
However, suffice it to say our key industrial end markets have been beneficiaries of the economic rebound as evidenced by the greater than 100% year over year growth and industrial product sales that you see in the earnings press release, we issued last night.
On the Agricole.
Cultural side of our business for market factors that came together in late 2020 early 2021 to ignite a surge and demand for the products, we produce and sell remain intact as we sit here today passed the midpoint of the year. These favorable market fundamentals are providing us not only with a favorable outlook for the second half of this year.
But also a strong optimism for 2022.
Beginning on slide 3 we summarize the key drivers of our agricultural end markets.
Commodity prices remained well above year ago levels, most relevant to our business the price of corn, while still down from recent highs is up more than 80% from 2.
Pillows and continues to sit at 8 year high levels.
The underpinnings of the strong pricing come from a multiple of factors, including the surge and exports.
Led by increased demand from China, and a rebound and ethanol production is driving and related fuel consumption have increased as the benefits of widespread COVID-19.
101 nation prompted many people to resume a more normal lifestyle, including traveling.
In addition to the impact from increased demand the price of corn also reflects global supply concerns.
Cause from drought conditions in Brazil, resulting in significant yield losses as well as the current worsening drought.
<unk> and United States that appears likely to negatively affect corn production for the upcoming harvest potentially reducing stock to use ratios.
Prices of other agricultural commodities have also seen steep increases, including beans, wheat, and cotton all creating a competitive environment for a finite number of acres, we have available for planting.
And the U S.
Approximately 91 million acres of corn were planted and the U S. During the 2020 fertilizer year, which was a slight increase over the 2019 fertilizer year.
The Usda's most recent forecast for the 2021 fertilizer year indicates nearly 93 million acres were planted which has translated.
And the winter very healthy demand for fertilizers.
Along with the strong corn market fundamentals that have driven and robust demand for fertilizers as farmer seek to maximize yields global shortages caused by production curtailments due to the February deep freeze and the central U S as well as unplanned downtime at several producers facilities.
<unk>, coupled with reduced imports have driven nitrogen prices to levels not seen and more than 7 years.
Turning to slide for with respect to our industrial and mining business. Our end markets have seen meaningful recovery since last spring.
As we've discussed on past calls nitric acid is a major input into a variety.
Variety of homebuilding products based on preliminary estimates as of the end of June.
And new housing starts.
Has risen above pre pandemic levels to a 15 year high building.
Building permit applications. However have declined recently, which appears to reflect the nationwide supply chain issues I referred to earlier.
We believe that new home starts will remain strong for at least the end of this year.
The auto industry is also a large consumer of nitric acid following on the halt and production that occurred as a result of the pandemic shutdowns in mid March of 2020.
U S light vehicle sales rebounded strongly through April 2021 to levels that.
And exceeded pre pandemic levels.
Over the past several months due to price inflation as well as the shortage of new car inventory that has occurred due to a shortage of automotive micro chips vehicle sales have receded, although they remain above a year ago levels.
We are watching the situation closely but at.
We're not seeing a drop and the nitric acid demand as a result of the near term U S. Automotive industry headwinds that we believe are likely to cease later this year.
As we've discussed on earlier calls we are also benefiting from the ramp up and nitric gas and volume associated with our new nitric acid customer agreement, which began.
And last quarter.
We've also benefited from strong trends and our mining and markets, where we sell a variety of products, including ammonium nitrate solution and low density ammonium nitrate and this.
And this is evidenced by our 30% year over year growth and mining related sales and the second quarter, which reached the highest level for OSB and.
This time for years.
Our increasing mining sales are being driven by a variety of factors, including the North America and copper market where prices for this metal currently stand at 10 year highs even after a recent pullback driven in part by growing production of electric vehicles.
Additionally, with residential construction.
<unk> booming throughout many regions and the U S production of aggregates has been at peak levels importantly, with respect to the future of our mining business over the past 5 years, we have reduced our exposure to coal mining from 33% of our total mining sales volume to what we anticipate will be less and 1% and 2021 on.
On mix shift that is serving us well.
We view the current demand trends, we're seeing across our key end markets as pointing towards continued increases in sales and prices of our industrial and mining products for the second half of 2021 and into 2022.
And for the last year and a half our commercial team has worked hard to put us in a sold out.
Position and we now seek ways to maximize our margins by optimizing our product balance and customer mix now.
Now I'll turn the call over to Sharon, who will discuss our Q2 financial results and our outlook for the balance of 2021 Sheryl.
Thanks, Mark and good morning.
Turning to page 5 you'll see a summary of our results for.
Our strong top and Bottomline performance largely reflect the increases in pricing for our products and both our agricultural and industrial and mining businesses. Our adjusted EBITDA of 46 million is a company record and adjusted EBITDA for the first 6 months of 2021 has almost exceeded full year adjusted.
For the quarter after 2020 and.
And there is still much room for improvement page 6 bridges, our adjusted EBIT for the second quarter 2021, net 46 million to adjusted EBITDA for the second quarter 2020 of $29.2 million.
The light Green bar illustrates just how great and impacts selling.
Price and has had on our results.
Partially offsetting the benefit of higher product selling price includes the impact of increased raw material costs, and creating natural gas, which are shown net and the $25.6 million price impact you see on page 6 and represented and $8.7 million headwind and the quarter.
Additionally, we experienced slightly lower volumes as compared to the second quarter of last year as a result of lower inventory heading into the quarter, primarily from curtailed production during winter storm here and the resulting drawdown of inventory to meet sales contracts during the first quarter combined with some wet weather patterns across the Midwest.
And southern Plains and May the good news is we have seen and an extension of the season into July as a result of the wet weather and the spring and that is contributing to continued firm pricing, thus far and Q3.
Before I pass the call back to Mark I'll review, a few important considerations as to how to think about the third quarter of.
<unk> 2021 pricing for our agricultural products remains strong and has not reset the way it typically does and the third quarter, which will be good news for our results for the period given our forward order book for you and we are principally sold out for the third quarter at prices above $300 a ton that compares to our average.
<unk> hundred 2020, you and selling price of $130 per ton and.
Additionally, we have solid agricultural ammonia and during the third quarter at prices north of $500 per ton, which compared favorably to our average Q3.2020 agricultural ammonia selling price of approximately $180 per ton.
Bridge Carsley offsetting some of the improved pricing as the impact from higher natural gas costs, which we expect will average over $3.50 per M and btu for the quarter or more than $1.50 higher per M and btu versus the third quarter last year. As a reminder, we have a 30 day turnaround scheduled at our Cherokee.
Deeper facility during this third quarter and direct turnaround expenses related to contractors and materials are expected to be approximately 7 to 7 and $5 million.
Lots of production and sales volume during the turnaround is expected to impact EBITDA by approximately $10 million to $12 million during the quarter.
<unk>, putting it all together despite the rising natural gas costs, and the $10 million to $12 million EBITDA impact from the turnaround at our Cherokee.
Cherokee facility, we expect significant year over year improvement and our third quarter results. We currently expect adjusted EBITDA for the period to be between 30 to 35.
Million or over 3 times that of the third quarter of 2020. This is traditionally our weakest quarter, given the historical reset of fertilizer prices.
Looking further out market fundamentals on all sides of our business are lining up well and we remain very optimistic and our ability to generate significantly improved Phi.
<unk> performance for the second half of 2021 and for 2022.
With respect to the balance sheet, we are very focused on the credit markets, which remain issuer friendly and as you may have seen we have been placed on credit watch for a ratings upgrade by both S&P and Moody's pending the outcome.
And the recently announced exchange transaction that Mark will discuss in more detail.
Additionally, we ended the quarter with approximately $68 million of liquidity and as of today liquidity is closer to $85 million. I'd also note that last month, we received formal notice that the entire principal balance.
And interest of the PPP loan that we received in April of 2020 under the cares Act was fully forgiven in the amount of $10 million plus interest I'll close out by saying that with a clear path to improving the capital structure, including lowering our cost of capital combined with the tailwind we have experienced.
And our business. We are very excited about the second half of 2021, and our prospects thereafter, and now I'll turn it back over to Mark.
Thank you Cheryl as announced on our press release, we issued last week, we signed an agreement with Eldridge to holders of our outstanding series E and F.
For and stuff to exchange their preferred shares for shares of <unk> common stock we summarize the key aspects of the proposed transaction on slide 7.
A brief history lesson for those of you that are new to OSB. We issued these preferred shares and late 2015 to fund the completion of the expansion of our El Dorado facility.
1 for the shares carry a high dividend rate of 14, 5%, which we have been paying and Collins since they were issued thus compounding the balance which now stands at approximately $300 million.
It was important to complete the El Dorado facility expansion and it allowed us to begin the production.
Ammonia at El Dorado, which in turn enabled us.
Our cost of ammonia, while also increasing our ammonia production capacity, giving us greater volume of ammonia.
To both sell and upgrade to other products, such as nitric acid and ammonium nitrate.
This investment has been a great benefit to our company and allowed us to achieve the kind of results, we posted and the second quarter.
The lower 2015 builders has been a supportive financial partner to LSP. Once this transaction is complete sales, which will become our majority stockholder and will be invested and the companys side by side with all our other common stockholders, including many of you.
And agreeing to this transaction, we believe eldridge is demonstrating their confidence.
Confidence and our business model and our outlook as their interest will now be directly aligned with our common stockholders.
This exchange will greatly simplify our capital structure and in doing so we expect it to unlock a number of opportunities that will enable us to more effectively achieve profitable growth consistent free cash flow and increase value.
Since to our stockholders.
Slide 8 summarizes the rationale and favorable implications of the transaction, but to review a few of the most compelling benefits.
We expect the elimination of this preferred stock liability could enable us to receive a more favorable credit rating on our debt, which currently carries an interest rate of 9 and 5.
<unk>, which we believe could allow us to refinance at significantly lower interest rate and materially reduce our annual cash interest expense.
We plan to reinvest this cash savings back into the growth of our business.
And next we anticipate the exchange will provide us with significantly increased financial flexibility and an opportune time.
And the business cycle, given multiyear high and nitrogen chemical prices and strong agricultural and industrial demand.
As illustrated on slides 9 and 10 by taking the balance of this preferred stock out of our leverage calculation, we effectively reduced our leverage ratio to 5.6 times on a pro forma basis as of June.
2021.
Given the favorable business environment, our strong plant operations and our outlook for material year over year improvement and adjusted EBITDA, We expect to further reduce our leverage ratio following the exchange transaction with target leverage of less than 4 times.
These actions will provide us with greater flexibility.
And third entity to pursue important strategic initiatives, including potential acquisitions organic growth opportunities and our expansion into blue and green ammonia and the clean energy markets.
While both Eldridge and LSP have agreed to this transformative exchange transaction. It does require approval from our stockholders.
<unk>, we're not affiliated with Eldridge to complete the exchange as part of that process, we expect to file a preliminary proxy with the SEC within the next week and then mail out a definitive proxy statement. Shortly thereafter, we anticipate holding a special meeting of our stockholders to vote on the exchange and early September.
We believe that our.
Our stockholders will recognize the value that this transaction brings to our company and we look forward to discussing that with them further.
Turning to slide 11.
The tremendous focus globally on reducing greenhouse gases, including significant government and public support and many countries has pushed hydrogen and ammonia to the forefront given.
And there are many benefits to reducing Cotwo <unk>.
Given that our belief is that the production of low carbon and no carbon ammonia and derivative products represents a compelling growth opportunity for us given their potential uses for reducing global carbon emissions.
For our existing knowledge and ammonia manufacturing handling storage and logistics.
<unk> positioned us extremely well to become a significant player in this arena and to help create a more sustainable environmentally friendly world and a way that we believe can create long term value both financially and socially.
Our current focus is on choosing a technology partner that will perform a feasibility study for each of our sites to determine the infrastructure.
To produce green or blue ammonia and its derivative products that will help support lsp's medium and long term commercial sustainability objectives.
We would anticipate the feasibility studies to be completed over the next 6 months and to be presenting a plan to our board of directors to approve during the second quarter of next year.
Last.
Lastly, in addition to opportunities to reduce our carbon emissions through the production of Blue and Green ammonia. We are focused on reducing our nitrous oxide emissions as its impact on warming. The atmosphere is almost 300 times that of carbon dioxide. We are currently reviewing options to achieve that.
Slide 12 summarizes our strategic plan.
And from this point forward beginning with the completion of our exchange transaction with Eldridge.
And it includes the critical new developments that I just discussed collectively we believe that these measures will enhance our ability to generate profitable growth and greater long term value for our stockholders.
Before turning the call over to the.
To begin the Q&A session I'd note, we will be participating and the credit Suisse 34th annual basic materials conference on Monday September 13th which will be conducted using a virtual format. We hope to speak with many of you during that event.
That concludes our prepared remarks, and we will now be happy to take questions. Thanks.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad and confirmation tone will indicate that your line is and the question queue. You May Press Star 2 if you would like to remove your question from the queue for.
Participants using speaker equipment and may be necessary to pick up your handset.
The uplift for pressing the star.
1 moment, please while we poll for questions.
Our first question is from Travis Edwards.
From Goldman Sachs. Please proceed with your question.
Hi, good morning, and thanks for the time and on detail on the quarter.
And congratulations on the news release for partners and the current exchange I, hoping so low that probably over the next coming weeks and months.
And just on that note as you called out if youre able to complete that transaction and it should increase flexibility.
You talked about free furniture notes pursue some growth initiatives. Just curious if you could elaborate a little bit more on maybe the order of operations.
Handset, if and when the preferred transactions completed with here and just completed.
Far as capital allocation priorities do.
At first we finished the notes and then pursue these day in and Blue ammonia projects and then possibly M&A just curious how youre thinking about those things and order priority.
Good morning for Emmis how are you.
So yes look we intent.
To refinance shortly thereafter.
Assuming that we get a.
Positive and favorable vote from the shareholders on the exchange transaction.
Once we complete that.
And I think we'll continue to invest and our <unk>.
Existing.
<unk> CIS and spend capital, where we think we have the appropriate returns and appropriate hurdle rate.
That we put in place.
And clearly.
Blue and Green ammonia is an area that.
We want to make.
And I'll make a push and and so it will require some capital there as well.
M&A.
And I think I've been pretty public over the last 2 or 3 quarters about wanting to grow the company through M&A and this.
Cleaning up our balance sheet really gives us the 1 way to do that and so we've looked at a number of transactions and we'll continue to look at transactions and where we think that those.
Transcept.
Transactions.
We will be strategic and obviously accretive to shareholder value.
I think we'd like to pursue those.
Having said that.
If we're if these markets continues we think that they will for.
For the balance of this year and and even into next year.
And we generate a fair amount.
Amount of free cash flow.
I think we will have to look at capital allocation.
Considers.
The return of capital to shareholders as well, whether it's a stock buyback or a dividend, although and I don't want to make any promises that that.
And that's where we're going.
Certainly that all makes sense.
Appreciate the detail.
On your slides I noticed you had called out sort of.
Targeting sub 4 times leverage and a hub for us isn't too nitpicky, but curious as do you think about these growth priorities and I'm, assuming you have the support of fundamentals to get you below that 4 times or so and we think he will.
Is that for.
And then from his target leverage sort of a.
Target that you hope to maintain a preserved.
Pro forma for any of these growth initiatives or is that something you want to establish 1 once you get there and say hey, we'd be willing to take leverage up with that move and so we can find an attractive M&A opportunity on because of growth projects that require some debt for that we'd be comfortable.
For time, and plus times, whatever the number is but just getting outside of that range does on defense.
Yeah, No I think it's a great question. So first we have to we have to hit our target I mean, when I think about commodity businesses, and and where commodity business pricing can change pretty dramatically and the marketplace and a short period of time, so generally speaking.
And I think lower Leverages gets better and commodity businesses. So.
Below 4 times target could be 3.5 times on a run on a steady state.
If we found and M&A opportunity.
Would we lever up more to make that acquisition.
I think when.
When we really think about that.
There is a possibility that we would lever up more to make the acquisition what I think we'd want to see is a runway that within 12 to 18 months post acquisition that we could repay down.
Debt or generate the cash and have net debt that brings us back.
Check below for so I think we'd have to.
I feel comfortable that there is a runway that would get us back there and it would be a high probability runway.
Got it and it sounds like that for times, ultimately as sort of a benchmark and youre, hoping to be below even if your temporary weekend and out of that range.
And so super helpful..1 last quick clarifying question for.
And my share.
<unk> will give some detail on sort of on <unk> guidance and wanted to just clarify.
Does that 30 to 35 million and include an add back of $10 million to $12 million or is that before and it just sort of add back for the loss sales and volumes.
And that's before any add back.
And I will point.
Travis that there's 7 and a half million dollars of expense them for you know contractors and materials and that is added back but the loss production is not.
Okay. Thank you put clubs for those.
Cool.
Our next.
Question is from Rob Maguire with granite research. Please proceed with your question.
Good morning, Mark and Cheryl Congratulations on all your hard work paying off on the quarter and you recently announced plan with the preferred.
Thanks, Rob Thanks, Rob.
Can you explain your second quarter each day on volumes and how we should think about.
Now relative to your capacity to produce H, Dan, including how volume may have been affected as a result of shifting production to other products.
Yes. So if you looked at our first quarter <unk> and volumes were up over year over year.
And so we've got a really good first quarter.
Sold out of inventory because we.
Reduce all winter, we store and then we sell a lot of it and season.
And we did definitely lost on production during the February freeze.
So that hurt us.
And so we came into had a had a higher first quarter sales of aged and loss production.
And in February So we came into the second quarter with lower inventory.
And that's why you see a lower number having said that.
We were definitely starting to as I mentioned were and are sold out position. So we're really starting to look at.
Yes.
Pricing and the marketplace and where we're getting better returns.
<unk> and.
Nitric acid tends to be a bit.
EBITDA margins for us than high density even at the prices that we see in the marketplace today.
Great. Thank you.
And nice ramp on your nitric acid contract by the way as well when you look at the tonnage category for.
And nitric acid and other how should we be thinking about this going forward as the second quarter run rate of about 118000 tons sustainable.
Yeah, I mean, I would say, yes. It is I mean, we are still ramping up as well on that nitric acid contract.
<unk> and so I think it's reasonable to say that that's sustainable and maybe it could be a little higher as we continue to ramp on that contract and the next 6 months.
Great and then with regards to your turnaround schedule and and the next couple of years here any changes that we should.
Sure Bob.
No. We're in we're in turnaround now at Cherokee.
And as Cheryl indicated on <unk>.
Fair comments.
And then we've got right now our Pryor and El Dorado scheduled for next year and.
The low <unk> on 3 year turnaround cycles.
Great. Thanks, so much I have no further questions.
Thanks, Rob.
Our next question is with Steve for <unk>.
Sidoti and company. Please proceed with your question.
Hey, good morning, everyone.
I did want to ask a couple more questions about the guidance because obviously that's it that's right.
And be thinking of interest third quarter number.
And particularly with a turnaround.
So as I try to back into it.
Essentially god thinking that your average selling prices are going to be very very similar to Q and I know you walked through some of those numbers.
Yeah, Steve.
She really thinking there might be a little better than Q2 pricing from a realization point and I talked about you know 300, UAS and and I talked about 500.
And dollar ammonia.
In the AG markets and so I'm thinking.
A little higher than second quarter.
And remember Steve.
Good morning.
I was going to say just keep in mind that.
We had because of the freeze.
We had orders that we had to fulfill at lower prices that ran into the beginning of the second quarter.
We don't have that going into the third quarter.
How much geared for.
And I'm asking how much of your forward so how much you've already sold for third quarter.
And on UA and between our 2 facilities production facilities, we are principally sold out for the third quarter.
Okay. So you have a pretty good.
Take on on that third quarter.
That's all right now.
That's a fair statement.
Great.
And I'm thinking about your industrial versus AG mix, and typically youll see seasonality on the AG side.
Good.
As you continue to expand or even at this level does some of the seasonality.
And I'm up come out of this as your mix is more leverage towards industrial.
Yeah, I mean, there is still the industrial business clearly has less seasonality than the AG business, having said that.
When we talk about industrial REIT, where we're probably.
30.
Come on percent, maybe 40% pure industrial products with the balance being mining there is some seasonality and the mining business depending on the location right. If we're selling if we're delivering to our mine in Canada.
There's 3 or 4 months, where.
The demand is going to be much lower just because of the cold weather.
<unk> 5.
So for the to answer your point.
Your question, Yes, the industrial business does from a mining business, absolutely has less seasonality than the fertilizer business.
And then when I looked at your your.
Cost of sales per ton.
And sequentially.
And natural gas prices down I'm, just trying to a sense of are you seeing non natural gas prices.
And your costs going up a bit here and how are you. Thank you for what those costs are you seeing cost inflation and triangle.
On the labor side as well.
And Steve it's primarily on the gas side.
And you got gas costs are.
$353.60 per M. N V to you right now on the third quarter. If you look at on here.
Average blend vs.
It was about $1.52 for this time last year.
So that was.
And really gas costs and of course, we see some higher costs from precious metals, just as a range.
As it relates to catalyst to run our asset business, but those are the 2 primary areas, where we're seeing higher cost.
But we're not seeing really not seeing any increase and labor costs.
And we are seeing slight.
Light increases and some supplies, but I wouldn't call them material.
Okay.
How does this.
And obviously everybody is already looking forward to next year and how you feel like you're positioned.
Obviously corn prices pulled back a bit here with thinking about China.
China imports.
Just thinking about your mix and you can't control fertilizer prices, but just how you think you're positioned into next year.
Yes, so I mean I'll start with the second half of this year.
Based on our forward order book and.
And where pricing sits today and.
And some of the pricing that's already been announced for the fourth quarter I feel really comfortable with our second half of this year and in fact, I would say the second half of this year should be.
And the expectation is to be better than the first half of this year.
For net going into next year.
Corn prices even.
Though they pulled back are still really good.
And $5 corn and $5.50 corn.
And historically has been a good price farmers are making money on.
And that's important.
I think we're still seeing some pretty good demand from China that could change.
I don't think we understand the dynamics there.
And that could change fast, but right now I think we're still seeing and demand I think what's interesting is.
And the corn.
Corn crop in Brazil.
It is really.
Not been a great year for them and so we're going to see.
Numbers.
And in Brazil.
And that should be lower than what was anticipated some months ago. We've also had some really.
And a hot and dry weather here in the Western United States, and I think we're going to see yield numbers coming out of.
And our western states that Midwest and western.
Coming out of a set of growing corn and that are going to be below expectations, So and I.
I think youre going to see a lot of acres planted next year.
And.
At North of $5 corn, that's a really strong market and we anticipate that fertilizer prices will still be relatively high.
And when compared to certainly the 2016 for 2020.
Pricing that we that we saw during those years. So we're pretty we're pretty excited about next year, we think that.
We continue to execute and we've got room to improve on our execution.
We will have.
And really good year.
Okay.
Thanks, so much for everyone and congratulations on the quarter.
Thank you. Thank you.
Our next question is from Brian <unk> with Robert W. Baird. Please proceed with your question.
Good morning, maybe just starting off.
Sure and any thoughts you have on the recently announced U S Department of Commerce investigation into dumping of UA and from Russia, and Trinidad and Tobago.
Yes, so I mean, the CF filed and anti dumping suit against Russia and Trinidad.
On imported UA.
And.
So I'm not going to.
Going to paraphrase it because I don't remember.
And certainly the exact.
Wording, but and.
The anti dumping suits.
The claim usually is.
And that someone who is importing is bringing in product at.
You might net.
Kind of.
I wouldn't say artificial pricing.
And very low pricing and dumping and here in the United States. So creates.
And our competition issue.
And so CF is claiming that.
Russian gas prices and in theory could be what they want.
So it's a totally different market than it is here for gas and so what's the actual cost of product coming in and with the cost is low than they can afford to for.
For lower selling prices.
And with Trinidad.
A bit different but it's the same concept. So I think you saw on antidumping.
Suit that was filed earlier this year is probably filed late last year on phosphate and it does follow suit and at the <unk>.
Same premise.
And I guess the tour is what impact do you think that could have on our business and get out.
UA and has been depressed over the last several years.
Couple of your peers have said that those flows that seem to disappear. So I'm just trying to get a sense from you. How you think that could impact pricing going forward.
Well, usually when you.
And when there is and anti.
Dumping suit and place and they put.
And with either a tariff.
Sarah for some kind of tax penalty on an importer you see imports moving into other countries.
So the supply then is taken out of the marketplace and you see price selling price appreciation on that particular product. So I mean, if that happens I would expect the same.
Okay.
And then can you provide any update on the latest lawsuit.
Yes.
So.
We.
And.
Still don't have a court date Unfortunately.
We have another hearing scheduled in the fall.
To sit down and talk about.
Next steps.
And certainly the surge in.
Covid cases, and Arkansas being.
A state that.
And it has a high number of cases in fact, I think the top 5 and the United States now.
Isn't helping matters.
Okay. So this is more than likely pushed into 2020.2.
Yeah, I would think so.
Okay and then.
I know circumstances are different.
But.
Sumit, Inc that the engie.
Engineering study that you're conducting on the Blue Green ammonia plant.
And sort of approved I guess 2 part question there.
How much capital you're willing to commit towards a project like that I know, it's gonna be returned dependent but more importantly.
Given the issue you had with the El Dorado project, how how is the company positioned today to.
Manage that construction and risk versus several years ago.
Well, yes, so let me answer the first part.
The magnitude of the investment is nothing like it would have been for the project that we did and El Dorado right that was $830.835 million. So.
It's significantly.
By multiples less than the capital commitment that we have made there.
Having said that it still has to provide us with the right returns.
And that's a big focus for us I.
I do think that being an early entrant into the market.
And is has a low <unk>.
A lot of value and has a lot of value for us and so I think we're focused on that as well.
Managing the project.
1 way you can do that.
We can get a fixed price contract.
Which we didn't do and the El Dorado expansion.
So that's 1 direction we could go.
The other.
There would be.
To have a much greater level of oversight and it.
Make sure that any contracted that would be working on this.
Certainly has skin in the game.
And as opposed to just the straight time and materials contracts. So I think there were a lot of lessons learned from that and.
We would take a lot of precaution.
And as to make sure that we would mitigate our risk.
Great and just final question for me.
Mentioned potentially M&A.
Would that be.
And this is all speculation, but would that be something you would fund entirely with debt or would you consider issuing equity alongside with that thank you.
Oh I think it's a hard question to ask to answer.
And I think Travis asked the question earlier about leverage and.
And being below 4 times and would we lever up for.
And M&A transaction and I.
I think my answer was that we would if we could see a clear path over the next.
For 18 months, where 12 to 18 months post closing of that acquisition that we could get leverage back down below so we're not afraid of levering back up.
For for a good acquisition.
Having said that I do.
Don't think you'd see us lever up.
Yes.
To lever up to put the company and a position where we couldnt see our way to Delever back down so.
And if that required some issuance of equity we would consider that.
But it has to be accretive to earnings otherwise it wouldn't make sense for us to do.
And just I appreciate the thoughts.
Sure.
Ladies and gentlemen, we have reached the end up for question and answer session and I would like to turn the call back over to Mark Behrman for closing remarks.
Well I want to thank everyone for participating on the call and appreciate your interest.
And a follow up questions feel free to give shareholder myself a call.
And we will be reaching out to some of you once we file the proxy to discuss.
And the exchange transaction further and looking for a favorable thank.
Thank you.
Okay.
This concludes today's conference you may disconnect your lines at this time.
If you all for your participation.
[music].
Thank you.
[music].
Okay.
[music].
And.
Yes.
[music].
Okay.
Yeah.
And.
Uh huh.
And then.
[music].
Yeah.
[music].
Okay.
[music].
And.
[music].
Okay.
[music].
Okay.
And.
[music].
Okay.
Yeah.
[music].
[music].
Greetings and welcome to LSP Industries second quarter 2021 conference call. At this time all participants are in a listen only mode a question and answer.
And we 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 I would now like to turn the conference over to your host Kristy Carver Senior Vice President and Treasurer.
Good morning, everyone joining.
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 these statements are based on the company's current intent expectations and project.
Actions they are not guarantees of future performance and a variety of factors could cause the actual results to differ materially.
As this call will include references to non-GAAP results. Please see the press release and the investors section of our website LSP industries Dot com for further information regarding.
Regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.
In addition, we will discuss the recently announced exchange transaction with Eldridge and we direct you to the disclosures included on the last page of the slide deck accompanying this call for information regarding the exchange transaction.
The contemplated stockholder meeting and related proxy statement and participation and such solicitation.
At this time I'd like to go ahead and turn the call over to Mark.
Thank you Christie and good morning, everyone as always we appreciate your interest and LSP industries and I'm happy that you can join our call. This morning.
We serve.
And we have a lot to talk about today between our record Q2 results the strong market environment for our products on both sides of our business, which gives us reason to be very optimistic about the second half of the year.
And our recently announced preferred stock exchange transaction. These are exciting times and LSP.
Well Unfortunately.
We are not yet at the point, where we can look at the COVID-19 pandemic and the rearview mirror.
Continued widespread vaccination and the U S has enabled many people to resume a close to normal life.
This is fueled economic activity across the nation to a degree that has exceeded even our most optimistic predictions about the pandemic recovery and in some cases.
This has caused stress on our supply chain and shortages and price inflation for many products and services.
However, suffice it to say our key industrial end markets have been beneficiaries of the economic rebound as evidenced by the greater than 100% year over year growth and industrial product sales that you see in the earnings press release, we issued last.
Now on the agricultural side of our business for market factors that came together in late 2020 early 2021 to ignite a surge and demand for the products, we produce and sell remain intact as we sit here today passed the midpoint of the year. These favorable market fundamentals are providing us not only with a favorable outlook for the second.
Half of this year, but also strong optimism for 2022.
Beginning on slide 3 we summarize the key drivers of our agricultural end markets.
Commodity prices remain well above year ago levels, most relevant to our business the price of corn, while still down from recent highs is up more than 80.
3% from 2020 lows and continues to sit at 8 year high levels.
The underpinnings of the strong pricing come from a multiple of factors, including the surge and exports.
Led by increased demand from China, and a rebound and ethanol production is driving and related fuel consumption have increased as the benefits of <unk>.
Covid vaccination prompted many people to resume a more normal lifestyle, including traveling.
In addition to the impact from increased demand the price of corn also reflects global supply concerns.
And from drought conditions in Brazil, resulting in significant yield losses as well as the current.
Widespread drought and the western United States that appears likely to negatively affect corn production for the upcoming harvest potentially reducing stock to use ratios.
And prices of other agricultural commodities have also seen steep increases, including beans, wheat, and cotton all creating a competitive environment for a finite number of acres we have available.
Worst for planting and the U S.
Approximately 91 million acres of corn were planted and the U S. During the 2020 fertilizer year, which was a slight increase over the 2019 fertilizer year for.
And the Usda's most recent forecast for the 2021 fertilizer year indicates nearly 93 million acres were planted.
Available, which has translated into very healthy demand for fertilizers.
Along with the strong corn market fundamentals that have driven and robust demand for fertilizers as farmer seek to maximize yields global shortages caused by production curtailments due to the February deep freeze and the central U S as well as unplanned downtime at.
Reduces facilities, coupled with reduced imports have driven nitrogen prices to levels not seen and more than 7 years.
Turning to slide for with respect to our industrial and mining business. Our end markets have seen meaningful recovery since last spring.
As we've discussed on past calls nitric acid is a major.
Several into a variety of homebuilding products based on preliminary estimates as of the end of June U S. New housing starts.
Has risen above pre pandemic levels to a 15 year high bills.
Building permit applications. However have declined recently, which appears to reflect the nationwide supply chain issues I referred to earlier.
Input ever we believe that new home starts will remain strong for at least the end of this year.
The auto industry is also a large consumer of nitric acid following on the halt and production that occurred as a result of the pandemic shutdowns and mid March of 2020 U S light.
Vehicle sales rebounded strongly through April 2021.
Our levels that exceeded pre pandemic levels.
Over the past several months due to price inflation as well as a sort of a shortage of new car inventory that has occurred due to a shortage of automotive microchips vehicle sales have receded, although they remain above a year ago levels were.
We are watching the situation.
Closely but at this time, we're not seeing a drop and the nitric acid demand as a result of the near term U S. Automotive industry headwinds that we believe are likely to cease later this year.
As we've discussed on earlier calls we are also benefiting from the ramp up and nitric acid volume associated with our new natural gas and customer.
Agreement, which began last quarter.
We've also benefited from strong trends and our mining and markets, where we sell a variety of products, including ammonium nitrate solution and low density ammonium nitrate.
This is evidenced by our 30% year over year growth and mining related sales and the second quarter, which reached the highest level for OSB.
And several years on.
Our increasing mining sales are being driven by a variety of factors, including the north American copper market where prices for this metal currently stand at 10 year highs even after a recent pullback driven in part by growing production of electric vehicles.
Additionally, with.
OSP essential construction booming throughout many regions and the U S production of aggregates has been at peak levels and importantly, with respect to the future of our mining business over the past 5 years, we have reduced our exposure to coal mining from 33% of our total mining sales volume to what we anticipate will be less and 1% and 2020.
With resin on mix shift that is serving us well.
We view the current demand trends, we're seeing across our key end markets as pointing towards continued increases in sales and prices of our industrial and mining products for the second half of 2021 and into 2022.
Over the last year and a half our commercial team has worked hard to put.
'twenty, 1 sold out position and we now seek ways to maximize on margins by optimizing our product balance and customer mix now.
And now I'll turn the call over to Sharon, who will discuss our Q2 financial results and our outlook for the balance of 2021 Sheryl.
Thanks, Mark and good morning.
Turning to page 5 you'll see a summary.
Put us and results for the quarter, our strong top and bottom line performance largely reflects the increases in pricing for our products and both our agricultural and industrial and mining businesses. Our adjusted EBITDA of $46 million is a company record and adjusted EBITDA for the first 6 months of 2021 has almost exceeded.
Net full year adjusted EBITDA for 2020, and there is still much room for improvement page 6 bridges, our adjusted EBITDA for the second quarter 2021, and a 46 million to adjusted EBITDA for the second quarter 2020 of $29.2 million.
Light Green bar illustrates just how great.
And impact selling price strength has had on our results.
Partially offsetting the benefit of higher product selling prices was the impact of increased raw material costs, including natural gas, which are shown net and the $25.6 million price impact you see on page 6 and represented and $8.7 million headwind in the.
Additionally, we experienced slightly lower volumes as compared to the second quarter last year as a result of lower inventory heading into the quarter, primarily from curtailed production during winter storm, Yuri and the resulting drawdown of inventory to meet sales contracts during the first quarter combined with some wet weather pattern.
Quarter across the Midwest and Southern Plains and May the good news is we have seen and an extension of the season into July as a result of the wet weather and the spring and that is contributing to continued firm pricing, thus far and Q3.
Before I pass the call back to Mark I'll review, a few important considerations as to how to think about the third.
<unk> of 2021 pricing for our agricultural products remained strong and has not reset the way it typically does and the third quarter, which will be good news for our results for the period given our forward order book for you and we are principally sold out for the third quarter at prices above $300 a ton that.
It compares to our average Q3, 2020, and selling price of $130 per ton and.
Additionally, we have sold agricultural ammonia during the third quarter at prices north of $500, a ton, which compares favorably to our average Q3.2020 agricultural ammonia selling price of approximately 100.
Core dollars per ton.
Partially offsetting some of the improved pricing as the impact from higher natural gas cost, which we expect will average over $3.50 per M and btu for the quarter or more than $1.50 higher per M and btu versus the third quarter last year. As a reminder, we have a 30 day.
Turnaround scheduled at our Cherokee facility during this third quarter and direct turnaround expenses related to contractors and materials are expected to be approximately 7% to 7 and $5 million.
Lost production and sales volumes during the turnaround is expected to impact EBITDA by approximately 10.
$10 million to $12 million during the quarter.
Putting it all together despite the rising natural gas costs, and the $10 million to $12 million EBITDA impacts from the turnaround at our <unk>.
Turkey facility, we expect significant year over year improvement and our third quarter results. We currently expect adjusted EBITDA for the <unk>.
Period to be between $30 million to $35 million or over 3 times that of the third quarter of 2020. This is traditionally our weakest quarter given the historical reset of fertilizer prices.
Looking further out market fundamentals on all sides of our business are lining up well and we remain very optimistic and our.
To generate significantly improved financial performance for the second half of 'twenty, 'twenty, 1 and for 2020.2.
With respect to the balance sheet, we are very focused on the credit markets, which remain issuer friendly and as you may have seen we have been placed on credit watch for a ratings upgrade by both.
<unk> S&P and Moody's pending the outcome of the recently announced exchange transaction that Mark will discuss in more detail.
Additionally, we ended the quarter with approximately $68 million of liquidity and as of today liquidity is closer to $85 million. I'd also note that last month, we received for.
Ability owed us that the entire principal balance and interest of the PPP loan that we received in April of 2020 under the cares Act was fully forgiven in the amount of $10 million plus interest I'll close out by saying that with a clear path to improving the capital structure, including lowering our cost of capital.
Combined with the tailwind we have experienced and our business. We are very excited about the second half of 2021, and our prospects thereafter, and now I will turn it back over to Mark.
Thank you Cheryl as announced in our press release, we issued last week, we signed an agreement with Eldridge the holder of our outstanding.
And we'll next series E E and F..1 preferred stock to exchange their preferred shares for shares of <unk> common stock. We summarize the key aspects of the proposed transaction on slide 7.
A brief history lesson for those of you that our new day OSB. We issued these preferred shares and late 2015 to fund the completion.
Of the expansion of our El Dorado facility for.
The share is carry a high dividend rate of 14, 5%, which we have been paying and kind since they were issued thus compounding the balance which now stands at approximately $300 million.
It was important to complete the El Dorado facility expansion and it allowed us to begin the production of ammonia.
Standing at El Dorado, which in turn enabled us to lower our cost of ammonia, while also increasing our ammonia production capacity, giving us greater volume of ammonia.
And to both sell and upgrade to other products, such as nitric acid and ammonium nitrate.
This investment has been a great benefit to our company and allowed us to achieve the kind of results.
<unk> posted and the second quarter.
Since 2015, Belgium has been a supportive financial partner to LSP. Once this transaction is completed sales, which will become our majority stockholder and will be invested and the companys side by side with all our other common stockholders, including many of you.
And agreeing to this transaction.
Action, we believe Eldridge is demonstrating their confidence and our business model and our outlook as their interest will now be directly aligned with our common stockholders.
This exchange will greatly simplify our capital structure and in doing so we expect it to unlock a number of opportunities that will enable us to more effectively achieve profitable growth.
Consistent free cash flow and increase value for our stockholders.
Slide 8 summarizes the rationale and favorable implications of the transaction, but to review a few of the most compelling benefits.
We expect the elimination of this preferred stock liability could enable us to receive a more favorable credit rating on our debt, which currently.
And interest rate of 9 and 5 eights, which we believe could allow us to refinance at significantly lower interest rate and materially reduce our annual cash interest expense, we plan to reinvest this cash savings back into the growth of our business.
Next we anticipate the exchange will provide us with significantly increased.
Financial flexibility and an opportune time, and the business cycle, given multiyear high and nitrogen chemical prices and strong agricultural and industrial demand.
As illustrated on slides 9 and 10 by taking the balance of this preferred stock out of our leverage calculation, we effectively reduce our leverage ratio to 5.6.
6 times on a pro forma basis as of June 32021.
Given the favorable business environment, our strong plant operations and our outlook for material year over year improvement and adjusted EBITDA, We expect to further reduce our leverage ratio following the exchange transaction with target leverage of less than 4 times.
These actions will provide us with greater flexibility to pursue important strategic initiatives, including potential acquisitions organic growth opportunities and our expansion into blue and green ammonia and the clean energy markets.
While both Eldridge and LSP have agreed to this transformative exchange transaction.
It does require approval from our stockholders, who are not affiliated with <unk> to complete the exchange as part of.
That process, we expect to file a preliminary proxy with the SEC within the next week and then mail out a definitive proxy statement. Shortly thereafter, we anticipate holding a special meeting of our stockholders to vote on the exchange.
Early September.
We believe that our stockholders will recognize the value that this transaction brings to our company and we look forward to discussing that with them further.
Turning to slide 11.
And the tremendous focus globally on reducing greenhouse gases, including significant government and public support and many countries has put.
<unk> and nitrogen and ammonia to the forefront given there are many benefits to reducing cotwo.
Given that our belief is that the production of low carbon and low carbon ammonia and derivative products represents a compelling growth opportunity for us given their potential uses for reducing global carbon emissions.
Our existing knowledge and ammonia manufacturer.
Factoring handling storage and logistics.
<unk> and us extremely well to become a significant player in this arena and to help create a more sustainable environmentally friendly world and a way that we believe can create long term value both financially and socially.
Our current focus is on choosing a technology partner that will perform a feasibility study.
Study for each of our sites to determine the infrastructure needed to produce green or blue ammonia and.
And then its derivative products that will help support lsp's medium and long term commercial sustainability objectives.
We would anticipate the feasibility studies to be completed over the next 6 months and can be presenting a plan to our board of directors to approve.
During the second quarter of next year.
Lastly, in addition to opportunities to reduce our carbon emissions through the production of Blue and Green ammonia. We are focused on reducing our nitrous oxide emissions as its impact on warming. The atmosphere is almost 300 times that of carbon dioxide.
We're currently reviewing options to achieve that.
Slide 12 summarizes our strategic plan from this point forward beginning with the completion of our exchange transaction with <unk> and.
It includes the critical new developments that I just discussed collectively we believe that these measures will enhance our ability to generate profitable growth and greater long term value for our stockholders.
Before turning the call over to the operator to begin the Q&A session.
Note, we will be participating and the credit Suisse, 34th annual basic materials conference on Monday September 13th which will be conducted using a virtual format and we hope to speak with many of you during that event.
That concludes our prepared remarks, and we will now be happy.
For you to take questions. Thanks.
At this time, we'll be conducting a question and answer session and you would like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate that your line is and the question queue. You May Press Star 2 if you would like to remove your question from the queue.
Call participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys 1.
1 moment, please while we poll for questions.
Our first question is from Travis Edwards.
From Goldman Sachs. Please proceed with your question.
Good morning, and thanks for the time and on detail on the quarter and congratulations on the news release for partners and the preferred exchange and hoping for a low there probably over the next coming weeks or months.
I guess on that note as you called out if you're able to complete that transaction and it should increase flexibility.
And you talked about true furniture notes pursue some growth initiatives just.
Especially if you can elaborate a little bit more on maybe the order of operations, if and when the preferred and transactions completed for extreme just completed.
Far as capital allocation priorities go does it force. We finished the notes then pursue these green and Blue ammonia projects and then possibly M&A just curious how youre thinking about those things and order.
A priority.
Karen Good morning, Travis how are you.
Great. So yeah look we intend to.
To refinance shortly thereafter.
Assuming that we get.
Positive and favorable vote from the shareholders on the exchange transaction.
Once we complete that.
And I think we will continue.
And just in our existing.
Existing business and spend capital, where we think we have the appropriate returns and appropriate hurdle rates that.
And that we put in place.
And clearly blue and Green ammonia is an area that.
We want to make.
And I'll make a push in and and so it will require some capital there.
There as well.
M&A I think I've been pretty public over the last 2 or 3 quarters about wanting to grow the company through M&A and this.
Cleaning up our balance sheet really gives us the 1 way to do that and so we've looked at a number of transactions and we'll continue to look at transactions.
And where we think that.
Those transactions.
We will be strategic and obviously accretive to shareholder value.
I think we'd like to pursue those.
Having said that.
And if we're if these markets continues we think that they will for the balance of this year and and even into next year.
And we generate a fair amount of free cash flow I.
And I think we will have to look at capital allocation.
Considers.
Our return of capital to shareholders as well, whether it's a stock buyback or a dividend, although and I don't want to make any promises that that that's where we're going.
That all makes sense and I appreciate the detail.
On your slides I noticed you had called out sort of Oh.
Targeting sub 4 times leverage and I hope this isn't too nitpicky, but curious as you think about these growth priorities.
You have the support of fundamentals to get you below that 4 times per se, but we think he will.
Is that for times target leverage sort of a.
Target that you hope to maintain a preserved.
Pro forma for any of these growth initiatives or is that something you want to establish first once you get there and you'd say hey, we'd be willing to take leverage up if that means we can find an attractive M&A opportunity or because their growth project that requires from debt for that.
And that we'd be comfortable going to 5 plus times whatever the number is but just getting outside of that range does on a cents.
Yeah, and I think it's a great question. So first we have to we have to hit our target I mean, when I think about commodity businesses, and and where commodity business pricing can change pretty dramatically and the marketplace and a short period of time so generally.
Generally speaking I think lower leverages gets better and commodity businesses. So.
Below 4 times, you know target could be 3 and a half times run on a steady state.
If we found and M&A opportunity.
Would we lever up more to make that acquisition.
I think.
When we really think about that.
There is a possibility that we would lever up more to make the acquisition what I think we'd want to see is a runway that within 12 to 18 months post acquisition.
And we could repay down.
Net or generate the cash and.
Net debt that brings us back below for so I think we'd have to feel.
We feel comfortable that there is a runway that would get us back there and it will be a high probability runway.
Got it so it sounds like that for times, ultimately as sort of a benchmark and we're hoping to be below even if youre temporarily going in and out of that range.
And so super helpful..1.
On a clarifying question for me shall give some detail on sort of on <unk> guidance and wanted to just clarify.
Is that 30 to 35 million and include an add back of $10 million to $12 million or is that before and it just sort of add back for the loss sales and volumes.
And that's before any add back.
And I will point out that there are 7 and $5 million on expense for.
For contractors and materials and that is added back but the lost production is not.
Understood. Thank you for the time as well that's low.
Our next question is from Rob Maguire with Granite Research. Please proceed with your question.
Good morning, Mark and Cheryl Congratulations on all your hard work paying off from the quarter and you recently announced plan with the preferred.
Thanks for Opex growth.
Can you explain your second quarter each day on volumes and.
And how we should think about them relative to your capacity to produce H, Dan, including how volume may have been affected as a result of shifting production to other products.
Yes. So if you looked at our first quarter and volumes were up over year over year and so we've got a really good first quarter.
Sold out of inventory.
Right because we produce all winter we store and then we sell a lot of it and season.
And we definitely lost on production during the February free is.
So that hurt us.
And so we came into <unk>.
Higher first quarter sales of aged and.
Tori and loss production and February so we came into the second quarter with lower inventory.
And that's why you see a lower number having said that.
But we would definitely starting to as I mentioned were and are sold out position. So we're really starting to look at.
For product pricing and the marketplace and.
And where we're getting better returns and.
Nitric acid, but tends to be.
Better margins for us and high density even at the prices that we see in the marketplace today.
Great. Thank you.
And nice ramp on your nitric acid contract by the way as well when you look at the tonnage.
Laurie for and nitric acid and other how should we be thinking about this going forward is the second quarter run rate of about 118000 tons sustainable.
Yeah, I mean, I would say, yes. It is I mean, we are still ramping up as well on.
Kathryn check asset contract.
And so I think it's reasonable to say that that is sustainable and maybe could be a little higher as we continue to ramp on that contract and the next 6 months.
Great and then with regards to your turnaround schedule and the next couple of years here.
On that and I and just so that we should be thinking about.
No. We're in the we're in turnaround now at Cherokee.
And as Cheryl indicated on putting on your prepared comments.
And then we've got right now our Pryor and El Dorado scheduled for next year and.
And they'll all be on 3 year turnaround cycles.
Great. Thanks, so much I have no further questions.
Thanks, Rob.
Our next question is with Steve for <unk>.
Sidoti and company. Please proceed with your question.
Hi, good morning, everyone.
I did want to ask a couple more questions about the guidance and obviously that's it that's right.
Huge third quarter number.
And particularly with the turnaround.
And as I try to back into it.
Essentially guide thinking that your average selling prices are going to be very very similar to Q and I know you walked through some of those numbers.
Yeah.
Steve.
And I'm actually thinking there might be a little better than Q2 pricing from a realization for Lincoln and I talked about you know 300, UA and and I talked about 500.
Dollar ammonia.
In the AG markets and so I'm thinking.
A little higher than second quarter.
Oh and remember Steve.
And <unk>.
I was going to say just keep in mind that.
We had because of the freeze.
We had orders that we had to fulfill at lower prices that ran into the beginning of the second quarter.
We don't have that going into the third quarter.
Yeah, how much gear for Scott.
And much of your forward so how much you've already sold for third quarter.
And on UA in.
And our 2 facilities production facilities, we are principally sold out for the third quarter.
Okay. So you have a pretty good take on on that third quarter.
And number right now.
That's a fair statement.
Great.
And I'm thinking about your industrial versus AG Nicks, and typically you'll see seasonality on the AG side.
And as you continue to expand or even if this level does some of the seasonality.
And that's come out of this as your mix is more leverage towards industrial.
Yeah, I mean, there's still the industrial business clearly has less seasonality than the AG business, having said that.
And when we talk about industrial REIT, where probably.
30.
5%, maybe 40% pure.
Industrial products with the balance being mining there is some seasonality and the mining business, depending on the location, but if we're selling and if we're delivering to our mine in Canada.
3 or 4 months where their.
Their demand is going to be much lower just because of the cold weather.
And so to answer your point.
Question, Yes, the industrial business does from a mining business, absolutely has less seasonality than the fertilizer business.
And.
And then when I look at your <unk>.
Cost per sales per ton.
And sequentially.
And natural gas prices down I'm, just trying to get a sense of are you seeing non natural gas prices are your costs going up a bit here and how are you thinking about those costs are you seeing cost inflation and general and on the labor side as well.
And Steve it's primarily on the gas side and you know got us there.
$3.53.60 per M. N V to you right now on the third quarter. If you look at on here.
Average blend and versus you know it was about a $1.50 cheaper than this time last year and so.
That was.
Italy gas costs and of course, we see some higher cost on precious metals.
As it relates to catalyst to run our asset business.
And the 2 primary areas, where we're seeing higher cost.
But we're not seeing really not seen any increase and labor costs.
And we are seeing slight.
<unk> increases and some supplies, but I wouldn't call them material.
Okay.
How does this.
And obviously everybody is already looking forward to next year and how you feel like you're positioned.
Obviously corn prices pulled back a bit here with thinking about China.
Primary on imports.
Just thinking about your mix and you can't control fertilizer prices, but just how you think youre positioned into next year.
Yes, so I mean I'll start with the second half of this year.
Based on our forward order book and.
And where pricing sits today and.
China and some of the pricing Thats already been announced for the fourth quarter I feel really comfortable with our second half of this year and in fact, I would say the second half for this year should be and.
And the expectation is to be better than the first half of this year.
And for net going into next year.
Corn prices, even though.
They pulled back on.
And really good.
And $5 corn and $5.50 corn.
Historically has been a good price farmers are making money.
And that's important.
I think we're still seeing some pretty good demand from China that could change.
I don't think we understand the dynamics there.
And.
That could change fast, but right now I think we're still kind of on demand I think what's interesting is.
And the corn.
Corn crop in Brazil.
It is really.
Not been a great year for them and so we're going to see.
Numbers.
Coming out of Brazil.
That should be lower than what was anticipated some months ago.
And so had some really.
Hot and dry weather here in the Western United States, and I think we're going to see yield numbers coming out of.
Western states that Midwest and western.
And states that are growing corn that are going to be below expectations. So and I think youre going to see a lot of acres planted next year.
And that north of $5 corn, that's a really strong market and we anticipate that fertilizer prices.
We will still be relatively high.
Baird.
Certainly the 2016 for 2020.
Rising that we that we saw during those years. So we're pretty we're pretty excited about next year, we think that.
And we continue to execute and we've got room to improve on our execution.
And we will have a.
A really good year.
Alright, thanks, so much everyone and congratulations on the quarter.
Thank you. Thank you.
Our next question is from Brian <unk> with Robert W. Baird. Please proceed with your question.
Good morning, maybe just starting off.
And comparing any thoughts you have on the recently announced U S Department of Commerce investigation into dumping of UA and from Russia, and Trinidad and Tobago.
Yes, so I mean, CF filed and anti dumping suit against Russia, and Trinidad on imported UAS.
And.
So I'm not I'm going to.
And I'm going to paraphrase it because I don't remember.
And certainly the exact.
Wording, but.
And anti dumping suits.
The claim usually is.
And that someone who is importing is bringing in product at.
And.
And yet.
Kind of.
I wouldn't say artificial pricing and.
And very low pricing and dumping and here in the United States. So creates.
And our.
Competition issue.
And so CF is claiming that.
Our Russian gas prices and in theory could be what they want.
So it's a totally different market than it is here for gas and so what's the actual cost of product coming in and if the cost is low than they can afford to to.
The lower selling prices.
And with Trinidad.
A bit different but it's the same concept. So I think you saw on antidumping.
Suit that was filed earlier this year is probably filed late last year on phosphate and it does follow suit and at the same premise.
And I guess the thought as you know.
What impact do you think that could have on the business and get out.
UA and has been depressed for the last several years.
A couple of your peers have said that those flow seem to disappear and so I'm just trying to get a sense from you. How you think that could impact pricing going forward.
Well, usually 1 yet.
And when there is and anti.
Dumping suit and place and they put.
And we with either a tariff.
Ara for or some kind of tax penalty on and import or you see imports moving into other countries.
So the supply then is taken out of the marketplace and you see price selling price appreciation on that particular product. So I mean, if that happened I would expect the same.
Okay.
And then can you provide any update on the latest lawsuit.
Yes.
So.
We.
And still don't have a court date Unfortunately.
We have another hearing scheduled in the fall.
To sit down and talk about.
And next steps.
And certainly the surge in.
Covid cases, and Arkansas being.
A state that.
And it has a high number of cases in fact, I think they are top 5 and the United States now.
Isn't helping matters.
Okay. So this is more than likely pushed into 2022.
Yes, I would think so.
Okay and then.
I know circumstances are different but assuming that the engineer.
Engineering study that you're conducting on the Blue Green ammonia plant.
And sort of approved I guess 2 part question there.
And how much capital you're willing to commit towards a project like that and how it's going to be returned dependent but more importantly.
Given the issue you had with the El Dorado project, how how is the company positioned today to.
Better manage that construction risk versus several years ago.
Yeah.
Yes, So let me answer the first part the.
And the magnitude of the investment is nothing like it would have been for the project that we did and El Dorado right that was 838 under the $35 million. So.
And it's significantly.
And by multiples less than the capital commitment that we have made there.
Having said that it still has to provide us with the right returns.
And that's it.
Big focus for us.
Do think that being an early entrant into the market.
And is has a low <unk>.
Value and has a lot of value for us and so I think we're focused on net as well.
Managing the project.
1 way you can do that is you can get a fixed price contract.
Which we didn't do and the El Dorado expansion.
So that's 1 direction, we could go the other.
It would be to.
And to have a much greater level of oversight and at <unk>.
Sure that and.
Any contracted that would be working on this.
Certainly has skin in the game.
And as opposed to just the straight time and materials contracts. So I think there were a lot of lessons learned from net and.
Think we would take a lot of.
And to make sure that we would mitigate our risk.
Great and just final question for me.
Mentioned potentially M&A.
Would that be.
And this is all speculation, but would that be something you would fund entirely with debt or would you consider issuing equity alongside with that thank you.
Well I think it's a hard question to ask to answer.
And I think Travis asked the question earlier about leverage and.
And being below 4 times and would we lever up for.
And on M&A transaction and I think my answer was that we would if we could see a clear path over the next.
To 18 months for 12 to 18 months post.
Closing of that acquisition that we could get leverage back down below so we're not afraid of levering back up.
For for a good acquisition.
Having said that.
And I don't think you'd see us lever up.
12 to lever up to put the company and a position where we couldnt see our way to Delever back down so.
And if that required some issuance of equity we would consider that.
But it has to be accretive to earnings otherwise it wouldn't make sense for us to do.
I appreciate the thoughts.
Sure.
Ladies and gentlemen, we have reached the end of a quick question and answer session and I would like to turn the call back over to Mark Behrman for closing remarks.
I want to thank everyone for participating on the call and appreciate your interest.
And a follow up questions feel free to give Cheryl and myself a call.
And we'll be reaching out to some of you once we filed a proxy to discuss.
And the exchange transaction further and looking for a favorable for thank.
Thank you.
Okay.
This concludes today's conference you may disconnect your lines at this time thank.
If you ever for your participation.