Q4 2022 LSB Industries Inc Earnings Call

February 23, 2023

Greetings and welcome to the LSP industries fourth quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

And the answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on yourself and keep at it.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Fred Buonocore, Vice President of Investor Relations.

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

Note that today's call will include forward looking statements and because 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 this call will include references to non-GAAP results. Please see the press release in the investors section of our website.

S B 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.

Thank you Fred we're happy to have the opportunity to speak with you today about our 2022 full year and fourth quarter results and our outlook for the first quarter and full year of 2023.

2022 was a pivotal year in our company's history.

We delivered record financial results with year over year increases in sales and adjusted EBITDA of 62% and 117% respectively.

We generated strong cash flow a significant portion of which we returned to our shareholders through share repurchases, while at the same time substantially improving our balance sheet.

Our strong performance reflects the favorable trends in selling prices across all of our products coupled with our ability to operate our facilities reliably and sell all of our production at attractive margins. Thanks to our strategic commercial efforts. Additionally.

Additionally, we completed major turnarounds at two of our facilities to further improve their safety and reliability.

And a major step towards becoming a leader in the emerging clean energy industry, we signed agreements to begin development of low carbon and no corporate ammonia projects at two of our facilities.

Like to thank all of our employees for making this another excellent quarter and for the commitment to developing a culture of excellence at LSP industries.

Our team put together put our team put in a great deal of hard work and dedication in the years, leading up to 2022, which put us in a position to have a successful year.

While strong financial results are very important our primary focus is safety one of our core values is to protect what matters, where we strive consistently to protect the health and wellbeing of our employees contractors communities in which we operate and the environment.

We have set very high safety standards policies and procedures aimed at achieving our goal zero zero recordable incidents and injuries.

While we have made progress towards this goal in recent years, we still have much work to do to get where we want to be.

We expect that investments we've made in our facilities in 2022, and we will make in 2023 will help us make meaningful strides with respect to operating safely in the coming quarters and years.

Looking at the 2022 fourth quarter as summarized on page three of our presentation, we generated strong year over year growth aided by continued favorable pricing environment and solid execution.

Notably we delivered these results despite having had prior turnaround during the early part of the quarter and the impact of freezing weather on our Cherokee and El Dorado facilities in the final week of December .

On page four of our presentation, we provide an overview of our end markets.

Corn prices remain above multi year averages driven by a variety of global factors, including drought conditions in the U S and parts of South America and continued strong global demand.

Domestic and worldwide stock to use ratios for corn remain at multi year lows, leading us to believe that will take two to three years of good corn growing seasons to bring the stock to use ratios back in line with historical averages.

We expect corn prices will stay near current high levels through 2023, and that farm profitability will remain attractive pointing to an increase in planted acres. This spring versus last year.

The USDA estimates that an approximately 89 million acres of corn were planted in 2022 and that approximately 92 to 93 million acres will be planted this year.

This supports the view that nitrogen fertilizers will be in strong demand once the planting season gets underway in the coming weeks.

It is also expected that there'll be an increase in wheat acres planted in 2023 further increasing demand for nitrogen fertilizers.

With respect to our industrial products on the whole demand remained stable domestic end use markets continue to be stronger.

Then those in Europe , and Asia, which is supportive for our business.

While inflation and other economic pressures are impacting some parts of the chemical manufacturing industry mining activity remains strong and we see that continuing through this throughout this year.

Additionally, recent announcements from automotive manufacturers and suppliers indicate that some degree of improvement in auto production could unfold. During 2023 further supporting demand for the nitric acid that we produce.

While pricing for nitrogen products has come down in recent months largely due to a decline in European natural gas prices.

Demand trends continue to be solid across our business and pricing remains above historical averages.

With no turnaround scheduled at our facilities. This year, we are well positioned for a strong year over year increase in production and sales volume as such we expect another year of robust robust profitability and cash flow.

Now I'll turn it over the call to Cheryl who will discuss our Q4 results and outlook Cheryl.

Thanks, Mark and good morning, our fourth quarter adjusted EBITDA of 105 million is a record performance for us in the fourth quarter.

Finally, we generated adjusted EPS of <unk> 90 <unk>.

Warner.

Turning to page five you'll see a summary of our key balance sheet and cash flow metrics.

<unk> profitability enabled us to maintain a strong liquidity position at the end of 2022, we had approximately $458 million of total liquidity, including approximately $394 million in cash and short term investments. This is after we repurchased approximately $13 2 million shares.

Our stock at an average price of approximately $13 per share exhausting. The 175 million share repurchase program that we began in may of 2022.

As of the $13 2 million shares.

Got back 9 million shares from our largest stockholder, who completed secondary offering of a portion of their position in our stock in August and November of 2022.

Through these transactions, we were able to reduce our shares outstanding by approximately 15% while at the same time, increasing the trading liquidity of our stock during.

During 2022, we generated cash flow from operations of $346 million and had capital expenditures of 46 million translating into a $300 million of free cash flow for the year. We turn we returned approximately 60% of our free cash flow to investors through our share repurchase program.

<unk>.

Additionally, we ended the year with a net debt to trailing 12 month EBITDA leverage ratio of less than one times well below our target leverage ratio in a mid cycle or normalized pricing environment of below two five times.

Page six bridges, our fourth quarter, adjusted EBITDA of $105 million to adjusted EBITDA for the fourth quarter 2021 of $90 million. The positive selling price impact is shown net of increased variable costs versus the fourth quarter of 2021.

Sales volumes were lower in the fourth quarter as a result of planned turnaround activity at our Pryor facility, which concluded in mid October and the loss of approximately one week of production in the fourth quarter at our Cherokee and El Dorado facilities due to the impact of freezing cold weather in late December .

Page seven illustrates the strong bottom line improvement we have delivered over the past. Several years. This is the result of favorable pricing trends operational improvement new customer contracts and investments we've made to optimize our products distribution and mix, while we anticipate 2023 EBITDA will be lower.

Then 2022 as a result of nitrogen pricing moderating off of peak levels, we still expect to generate substantial profit and cash flow what are their positioning us to implement our growth strategy, which mark will discuss later in the call.

Looking at the first quarter the NOLA UAS benchmark pricing is currently at approximately $265 a ton.

Additionally, the Tampa ammonia benchmark price settled at $790 per metric ton in February versus 1100 $35 per metric ton last February the year over year change largely reflects lower natural gas prices in Europe , which have come down from very high levels.

2022, and industrial demand softening in Europe and Asia.

With that said U S. Natural gas prices have also declined and currently stand at a fraction of the cost in Europe , keeping intact, the competitive advantage that U S nitrogen producers enjoy.

Relatively relative to our natural gas feedstock cost while U S gas costs have since moderated we do have approximately 75% of our first quarter gas needs locked in at approximately $6 30 per M. N V to you for Q1.

With respect to sales volumes as previously announced our Cherokee facility resumed production with a phase III start on January 14th 2023.

Despite lower production at that site in January and the delayed movement of fertilizer, resulting in volumes moving to the second quarter. We expect overall higher sales volumes of ammonia and UAS as compared to the first quarter of 2022, assuming reasonable weather conditions.

Newly nitric acid and volumes are expected to be in line with the healthy first quarter of 2022.

So given our view on sales volume and pricing locked in natural gas costs and the approximately $10 million impact from the Cherokee freeze event that impacted production through mid January .

We would expect the first quarter adjusted EBITDA to be in the range of 55 million to $65 million.

Please keep in mind, our expected EBITDA range for the quarter is based on our current view of pricing.

Looking forward to the balance of the year, we provide considerations for our full year 2023 on slides eight and nine on slide eight you can see our expected ammonia production and sales volumes for the full year of 2023.

As a result of expected improvement in operating rates due in part to our turnarounds at El Dorado and Pryor in 2022, and the absence of any turnarounds in 2023, we expect meaningful year over year improvement in ammonia production as well as all of our downstream products.

We expect to invest approximately $60 million to $80 million of Capex in our facilities during 2023.

This includes approximately $50 million to $60 million of investments related to plant reliability and safety with the balance earmarked for margin enhancement projects aimed at improving the efficiency of our operations expanding our commercial footprint and investing in storage and loading capabilities at our facilities.

Slide nine covers a range of variable and fixed plant expenses as well as SG&A for 2023, our expectation for fixed costs reflect the investments we've made in key talent to support our growth as well as inflation in wages and other costs.

Note that we expect our effective tax rate for the year to be approximately 25%. However, we do not expect to be material cash taxpayer in 2023, as we continue to utilize our Nols and now I'll turn it back over to Mark.

Thank you Cheryl.

As Cheryl indicated natural gas prices have come down significantly in recent months, which has led to lower albeit still historically strong selling prices for our products.

Page 10 illustrates how the spread between U S and European natural gas prices widened over the course of 2021 and continue to be volatile throughout 2022.

The spike in European natural gas costs during the third quarter of 2022 resulted in many European nitrogen facilities being taken offline.

Much of this production has come back online as <unk> prices for European natural gas trended lower due to warmer than average winter temperatures and lower industrial demand.

Still natural gas prices in Europe remain well above 10 year averages currently fluctuating between 15 and $20 <unk> Btu equivalent which is a multiple of what we're paying for in the U S.

The current gas price level in Europe translates into an ammonia production cost an average of approximately $600 per ton and European ammonia production costs will likely continue to be significantly above domestic costs continuing to provide a substantial advantage to U S nitrogen producers.

For the year, we expect a continued favorable nitrogen pricing environment relative to the past decade.

We also have several company specific initiatives that are very much in our control representing the opportunity to enhance our efficiency increase our production capacity and enter the emerging clean energy market. We expect these opportunities will allow us to increase our profitability ultimately, resulting in increased value for our shareholders.

The actions, we've taken with our balance sheet over the past 18 months, coupled with a strong cash flow generated over the course of 2022 and expected to continue this year will provide us with the liquidity position that enables us to pursue multiple growth initiatives.

On page 11, we show a summary of our key growth initiatives.

As I mentioned earlier employee safety is our primary focus every single day, followed by being good stewards of the environment and the reliability of our facilities. We continue to make improvements on all these fronts and have significant opportunities for further progress.

Were completed at our El Dorado, and Pryor sites during 2022 will advance our safety environmental and reliability initiatives. Additionally.

Additionally, we believe that over the next two years the capital invest investments, we are making combined with the manufacturing initiatives. We are pursuing should increase the operating rates at our facilities translating into a meaningful incremental contribution to our profitability.

On top of that we believe we can increase the production capacity of our plants through various debottlenecking initiatives. We are currently evaluating multiple potential projects that could significantly increase our production and sales volumes and our profitability the.

The increase in nitrogen production capacity will also assist with the USDA has stated goal of increasing domestic fertilizer production to ensure that farmers have security of fertilizer supply and can meet their increasing demands.

In that regard at the end of December we submitted our application for a federal grant on the under the USDA is $500 million fertilizer production expansion program.

The maximum award under this program is $100 million.

We believe we are a highly qualified applicant given our opportunity to increase our production capacity of our existing manufacturing assets in a more timely manner and any new build production facility.

With respect to our clean energy initiatives, we continued to advance our blue and Green ammonia strategy. The two broad projects. We currently have underway represent compelling opportunities for us to emerge as a leader in decarbonising in our industry.

Not only do our blue and green ammonia projects have the potential to result in a substantial reduction to our carbon footprint, but additionally, we believe the economics of both to be very attractive.

Page 12 provides an overview and an update on our blue and green ammonia projects with respect to our Blue ammonia project in El Dorado as we discussed in our third quarter call. The increase of the 45 credit to $85 per ton of Sidoti captured and sequestered as maybe the economics of this project very attractive.

A critical step on our path towards commencing Ccs and blue ammonia production is obtaining a permit to operate a class six injection wells.

I am happy to say that earlier this week, we achieved a milestone on this project as the application for the approval of a class six injection well was filed with the EPA.

We have been told that the EPA review process could take between 18 and 24 months based on that timing. We continue to expect to begin capturing or sequestering cotwo at our El Dorado site in 2025, our analysis.

Indicates that once in operation This project should reduce our company's scope one carbon emissions by approximately 25%.

Regarding our Green ammonia project, we continue to expect that this project will qualify for the full $3 per kilogram of Cotwo federal incentives for hydrogen production rolled out as part of the inflation reduction Act and enabled us to produce approximately 30000 tons of zero carbon ammonia to sell to our customers.

We have completed extensive work in our feasibility study of this project and expect to announce our plans for it by the end of the second quarter to the extent. We proceed as anticipated we expect to begin producing some green ammonia in late 2020 for early 2025.

To sum up 2022, it was a year of significant highlights for OSB industries, we capitalized on the favorable market environment to materially strengthen our balance sheet, while at the same time investing in our facilities to enhance our manufacturing capabilities.

We enter 2023 with the expectation of a significant year over year increase in production volume given the absence of any turnarounds. This year, coupled with the opportunities we have to generate further volume improvements through the enhancements of our existing manufacturing footprint.

At the same time, we will continue to position LSP industries to be a leader in low carbon no carbon ammonia production. We expect these initiatives to collectively lead to increased profitability and greater value for our shareholders in the years to come and I look forward to discussing our progress with you as we reach critical milestones in the development of our projects.

Before I hand, the call back over to the operator for the Q&A session I'd like to mention that we will be hosting an investor day in New York on March 14th and we look forward to seeing many of you. There that concludes our prepared remarks, and we'll now be happy to take any questions. Thanks.

Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from Nigeria.

All participants using speaker equipment promoting necessary to pick up your handset before pressing the star keys.

One moment, please where we poll for questions.

Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed.

Good morning, everyone.

Good morning, guys good morning.

So I guess first question.

Related to the nitrogen market.

I'd love to get your perspective on distributor kind of buying and inventory.

Spring application kind of pretty rapidly approaches.

Seem like the.

Channel in North America can pretty readily collected significantly.

So we think that's help me frame how.

Your order book is shaping up.

Going into spring and kind of where you might see pockets.

Demand that would be like a difficult place for current kind of supply demand.

Yes, so youre right.

It's been an interesting.

First few months of this year as.

Pricing.

Natural gas in Europe is coming down therefore cost of production in Europe is coming down and that's obviously put pressure on prices and so when that happens when you see prices falling.

Those generally tend to take a step back thinking that prices continue to go lower so I think it's been a bit of a standoff between.

Producers wanting to sell the product.

<unk>.

At an opportune time.

Adding up for spring and then.

Retailers and distributors sort of sitting back and ultimately the farmer sitting back as well.

As we head into spring, though I think the weather's really at least at this point been very helpful.

We've had.

Some really good weather patterns, we've had some rain.

Which has also helped and I think we're just starting to see.

The beginning of.

Buying for this spring.

I would expect that over the next two to three weeks will really start to see this kicked off as.

As we head in to.

To the planting season.

That's helpful and is there any differentiation there.

Zero.

Interesting how on that basis.

Certainly urea kind of actually cheaper.

It's the largest the corn belt.

Monday.

Do you see any.

Alex switching kind of resolved.

What we've seen some products switching.

<unk> urea given that urea is being so cheap relative to other products.

I think <unk>.

India announced the tender yesterday.

So I think that.

Should give some support to urea prices.

<unk>.

There'll be more demand in general and as we start to see prices increase in urea.

I think we'll see support for the pricing.

The fertilizer products so.

I think again I think we're in kind of a we've been in a kind of a funny period, where there is not much liquidity in the market.

And as we start to see the liquidity and we start to see.

And a lot of buying in the marketplace I think that will support higher prices and youll see urea prices.

Believe move up faster than both <unk> and ammonia.

Okay, and if I could squeeze in one more mark talked on the prepared remarks about an 18 to 24 month timeline for the <unk>.

Ccs class.

Last six wells per pad.

At El Dorado.

And by understanding.

One thing one excellent.

Only one company has ever gotten classics well permits approved.

So can you just help us kind of think about the confidence level that youre getting.

The timing of that of that approval process from from UBS.

Yes, so youre right to date there is only one.

<unk>.

Class six.

Permit that has been approved.

A numbers of years ago. It was back in 2014 and its an ADM site.

So there are.

We're in the region.

Six which is.

The EPA office set of Dallas.

So that includes.

Texas, Louisiana, Arkansas.

So there are a number of permit applications that had been filed.

We have been told and we took our time.

Really.

Developing the application.

Partner left the synergy did a lot of work on the geology.

And we did a good job I think interacting with the EPA and really talking to them about what they really want to see so I think we feel really good about the application that we submitted and we've been told that it is the most comprehensive application to date.

And whether that's true or not I don't know, but we said is what we've been told.

I think.

There is some.

I believe there is going to be a lot of pressure from Washington on the EPA to.

To start.

Moving through some of these applications and getting some approvals through.

Because it's a little bit.

No.

Yeah.

It's kind of it's kind of odd.

Odd to me that.

Washington is really.

Incentivize folks to invest in carbon capture through the changes that they made in the IRI.

Yet they really have an increased.

Any budgetary allocations to the EPA to add more staff. So I think thats part of the problem and I think the EPA is going to start to get a little pressure from Washington because.

Without getting through these permit approvals.

They are not going to see that.

That they want from the incentives that they've put into the iras. So.

I do think.

The 18 to 24 months is more of an estimate.

By the EPA so.

Could it go faster than that it's possible, but I think we're kind of planning really in at 18 to 24 month timeframe.

Okay, Great. That's all that's all really helpful. Thank you.

Thanks, Adam.

Our next question comes from the line of Josh Spector with UBS. Please proceed.

Yes. Thanks for taking my question just a follow up on the blue ammonia in the timeline there so.

We're reiterating your plan to start that up in 2025 permit takes two years should we think about LAPIS had built most of the infrastructure at sequestration equipment basically in parallel to that so that's a relatively quick turn on or two years does that push out your timeline until you start to see some of the benefit for that.

It's a good question.

I'm not going to say that theyre going to build a facility and sit there and wait and hope that we get these.

The permit approved but there are.

Engineering design is occurring as we speak.

So theres investment in capital for that long lead time items that are necessary.

Suspect that those will go on order.

And so by the time the permit comes I think we've shortened the period of.

Sure.

Waiting.

Until we get the permit and then hitting the button to start the process. So I think some things are done in parallel, but I don't believe.

If you are going to build a facility and just sit there and wait Norwood actually.

Okay. Thanks, and just on your industrial demand and it's interesting that you're talking about it as more stable and even in North America a lot of the chemical derivatives are seeing pretty significant capacity reductions. So I'm. Just curious how you can reconcile your demand for nitric at some of the other derivatives being stable.

Versus industry utilization declining are you, placing those tons elsewhere or is there something else going on or missing.

No I mean I think.

Key aspects of our commercial.

Organization is really optimizing where our products go.

So while we're seeing.

We could see some slowdown in the band of nitric.

We certainly have the ability to some degree to ramp up and production and sell products, both as industrial and even high density, which is fertilizer should we start to see some softening in our nitric market, but to date, we haven't seen that.

Okay. Thank you.

Our next question comes from the line of Andrew Wong with RBC capital markets. Please proceed.

Hey, good morning, Thanks for taking my questions.

Just regarding the application to the USDA for some funding on capacity expansions can you just talk maybe a little bit more about what the USDA looking forward like what kind of car.

Deteriorated, they're looking for.

There is different.

<unk> size and things like that.

And then just the timing on the decision.

I'll work backwards.

This is as good as mine on the timing.

I don't think they've ever.

Announced with timing would be I would tell you that there were two submission periods.

First one was.

The latter part of November and after about two months they chose a number of projects.

That qualified for funding and then they opened up a comment period.

The second window, which is what we.

When we applied was the end of December So I would hope that it's the same 225 months.

By the end of this month or middle of March.

Hearing back from the USDA positively that a project is approved.

And we can go to the next steps as far as what they were looking for I think the basic focus of the USDA was to increase domestic fertilizer production.

And to diversify away from the top for producers in the U S.

So were.

We're small enough that we're not a top four we're number six producer in the U S. So.

So we qualify there.

Project is that we submitted is really to expand.

Our ammonia production at El Dorado, our Nitro cancer production at El Dorado.

And then to build a.

Our urea plant and Union.

Facility.

So ultimately that would increase our <unk>.

<unk> production by about 600000 tons, a year, so that would be an upgraded product for us.

As we sit back that is one path.

I think.

The team has come together and focused on we've got a couple of other alternatives down at that site that we're evaluating as well and so it'll be interesting to see if the USDA comes back and approves that project.

And then we can have a conversation about them.

Conversation with them about that project and maybe some modifications to that project should we decide to do that.

Okay, and how does the funding work relative to.

Potential cost $2 be like is it a percentages it just on the unit goes shade with the USDA.

Well Theyre guideline says that they will fund.

25% to 25% of the total cost of the project with a maximum of $100 million per project.

Our project is a bit north of $400 million.

So that would be $100 million.

Mac's funding from the USDA.

So I don't know that Theres, a negotiation on the percentage because I think it's been stated up too.

So.

That's what we're seeking.

Okay perfect. Thanks, and then just maybe a question on just the market in general looking at night ammonium nitrate prices in the markets. It looks like they're holding up better than the other products <unk> and urea ammonia even.

Consistent with what you're seeing and I'm talking in the AG market.

And why might that be the case.

Yes, we are.

So it is a premium on a nitrogen equivalent basis to some of the other products. It is a specialty product.

Here in the United States.

So we've been a premium product and so.

We're happy with where the pricing is today relative to other fertilizer products.

Okay. Thanks.

Yes.

Our next question comes from the line of Vincent Anderson with Stifel. Please proceed.

Yes, thanks, and good morning.

I was hoping to kind of revisit that question.

Question, one more time, if you could provide maybe a bit more detail on your flexibility there because I know you've tried to deemphasize your mining exposure, but the HD product product is pretty pretty good from a margin perspective, if I recall. So could you just kind of quantify what you think is a realistic amount of nitric that can be redirected.

So those markets. If you if you really had two to keep operating rates up.

Well I mean.

So we've got the ability to produce.

About 100.

50 to 160000 tons, a year of low density ammonium nitrate.

And we've got the ability to produce.

About 300 or 310000 tons of high density ammonium nitrate on an annual basis.

And then of course.

And that's that's talking about art.

Grilling ore Pelletizing operations, I mean before that <unk> got ammonium nitrate solution and we do sell some solution into the mining market as well.

So I think we've got some flexibility should we see nitric.

Demand drop off to upgrade that to ammonium nitrate.

Either <unk> solution or <unk>.

<unk> form.

So we're not at those Maximums.

From a low density perspective.

As I mentioned in my prepared comments, we are seeing really.

Nice demand.

So we are sold out there.

We have some flexibility in our high density.

And what we're also seeing.

Which is kind of interesting is that mining clients are also gravitating to buying some high density as well and.

And using that given the tightness in the low density market.

Okay, No that's interesting and helpful. Thank you.

And then I guess, just kind of going into this year.

If you don't mind, maybe discussing any any high level changes to your commercial strategy for UAS and given this will be your first time in a while with the CVR partnership and maybe more importantly, without cvr's logistics assets.

Yes so.

Our chief commercial officer.

Done a really good job in recruiting.

Alrighty folks to lead our UAS effort.

So we're excited.

About selling our product directly I think.

Most companies would rather sell the product directly then use a distributor to distribute their products. So.

We're actually.

Developing a lot more relationships than we've had in the past.

Going farther than.

We have in the past, we're finding niches that.

Maybe we hadn't sold into in the past and so we think.

Net net debt.

<unk>.

The advantage that we're going to get by selling the product ourselves should result in a higher netback now whether that materializes or not we will have to play it out and see at the end of the year.

No.

In some type of analysis, if we could kind of figure that out but I think.

You mentioned CVR as logistics assets.

We've got our own logistics assets that we use in all other parts of our business. So we did have to <unk>.

To build a little bit and increase our railcar fleet.

Handel.

Additional UAS sales, but I think other than that.

We're really happy with the efforts so far.

Alright excellent well good luck on the rest of the year.

I'll pass it along.

Thank you.

Our next question comes from the line of Charles <unk> with Piper Sandler. Please proceed.

I may have missed this have you guys other than the first quarter, where you gave us what your gas price looks like have you guys done any hedging beyond into <unk> through the end of the year, what prices that or are we basically going to be spot market buyers going forward.

For the remainder of the year other than one Q and then as a follow up.

What is left in the share repurchase program. That's currently outstanding and I guess the intention given the way things are earning is that would probably get re up but where do we stand on both of those sit on that situation.

Good morning, Charlie.

So we're about <unk>.

25% locked in for gas for the second quarter.

Around $5 50.

And then 10% for the balance of the year.

For 2023, and that same kind of $5 50 to $6 range.

Generally we all lock more gas in the winter months, because that's when you have the highest risk of price volatility. So I think going forward over there.

Call. It six months Youll, just see us lock first of gas months first of month gas.

Just to take out any volatility over the months. So that's generally our strategy from a gas purchases perspective, and with respect to the share buyback. We are we fully exhaust at that $175 million.

And so that's kind of where we stand today.

Yes, I would say that.

Given the cash flow.

Generation that we're anticipating for this year.

You could see us implement another share buyback program and Thats in discussions now.

Okay.

Everything else has been answered for me. Thank you.

Thanks Charles.

Our next question comes from the line of Rob Mcguire with Granite research. Please proceed.

Good morning.

Hey, Rob Hey, Rob.

Would you discuss the drought that's been occurring in the U S last couple of years and your expectation for an impact this year.

No.

Well the extreme theres been extreme droughts.

I would say in the plains in the United States and Thats pretty documented.

Argentina has suffered from really bad drought conditions as well.

So I think both of those persist and I think.

We're seeing in Argentina crops really suffering from those drought conditions.

Conversely, Brazil's had some really.

Good crop conditions and should reach or is expected to reach record production, both in corn and soybean.

I think.

It could have an impact.

In more of an indirect way.

So.

Drought conditions have also resulted in increased hey usage for cattle.

No.

Non winter months and.

And that's especially.

In the northern and southern plans, so with U S cattle prices expected to continue.

Of an upward trend, we should see an increase in the production of <unk>.

Cattle and ultimately hey as inventories.

Historically low today so.

And that points towards.

And upwards of probably 10% increase in <unk>.

Hey acres planted and the potential of probably another.

Half a million tons of nitrogen demand from last year.

So I think.

I don't know that its going to have a severe effect.

In <unk>.

Acres planted for corn corn or soybeans.

Suppose if.

We don't get any precipitation.

Throughout the drought areas that it could have an impact, but we have seen some rain over the last.

Two weeks to a month.

Not enough.

But I do think it could have a positive impact.

On nitrogen demand for nitrogen demand based on demand for HAE.

I appreciate that and you mentioned the repurchase program.

Get renewed here, but.

Is it more attractive to reduce your debt or repurchase stock today.

Hello.

That's a great question.

It's something that I think we sit around the table and talk about ultimately.

We'd like to reduce debt.

Some and.

Bonds are callable in 2024, so next year.

So at September of next year so.

I think either we build the cash balance.

Then call some of the bonds at the call price.

Or.

We repurchase additional shares of stock or some combination of both so I think those are the discussions that we're having.

That's it for me. Thank you for answering my questions.

Sure. Thanks, Rob.

Our next question comes from the line of Brian <unk> with Baird.

Please proceed.

Good morning, just as I look at your key growth initiatives could you give me a sense of your priority on organic versus accretive acquisitions versus the <unk> clean energy strategy.

Sure.

So the way we think about.

<unk>.

The clean energy strategy.

And the way it's set up right now is the carbon capture project requires zero capital.

So our partner is going to put up all the capital and then.

They're going to buy the Sidoti from us.

And obviously, we will generate.

Earnings from that.

The Green ammonia project will require capital.

But I'd.

I would say relative to other capital projects or M&A activities.

They would not be significant.

From the organic side.

We've talked about the Debottlenecking on this call.

So I think it'll.

It'll be interesting to see whether we get funds from the USDA for that project as I mentioned.

It's approximately $400 million to do that project.

And that's at a high level, we certainly haven't done.

A deep feasibility study or engineering study.

But the big difference between $300 million for us and $400 million for us.

As far as M&A activity.

In my experience.

<unk> you.

You could identify assets that you think would.

It would be good fits strategically.

For your company, but you never know when they become available.

And so it's kind of hard to tell you.

From a capital standpoint.

<unk> fits in.

If an acquisition came up that made sense for us.

And we thought it was a good strategic fit and we could.

Buy it at a price that was accretive for us.

May trumps something.

From an organic growth standpoint, because those kind of projects, we can put on the shelf and then.

We look at them a year or two down the road, whereas if something's for sale and you don't act on it.

More than likely it doesn't come up for sale for some period of time forever.

I don't know if that gives you a flavor for that.

It does and I guess.

Probably not going to comment directly on this but there is the asset that is up for sale and just sort of wanted to BB.

Understanding of.

Sort of pursuing it.

Dyno Nobel plant and <unk> versus some of these projects is just as you think about that.

Well, you're right I'm not going to comment on a specific.

Asset for sale or process.

I would just say that.

Between myself and our head of corporate development, our jobs to go and look at asset strategically and see what's out there and if it would make sense for us so if something's for sale.

Good bet that we're taking a look at it.

Understood and then just final question for me is you talked about.

Good morning expansion.

Maybe from the USDA and then the balance 300 billion, possibly plus how would you think about funding of that I mean, you did raise additional debt last year.

Top transaction Youre sitting on a fair amount of cash on the balance sheet today.

Should we think about that cash is potentially funding that would you.

Or is that something that you, possibly fund down the road it will be at the debt markets.

No I think that all things being equal.

The organic expansion.

The debottlenecking that we want to do at El Dorado, we would use cash on our balance sheet, we would not raise any additional debt to do that.

Very good I appreciate all the thoughts thank you.

Yes.

And our next question comes from the line of Deforest Hinman. Please proceed.

Hey, a couple of questions can you talk about your expectation for cash taxes.

Either rate wise or dollar wise.

2023, I still believe we have a pretty sizable Nols that wasn't I don't think that was discussed.

Good morning for US now we have no material cash tax payments in 2023.

Okay. That's helpful and then.

There's been a couple of questions on the capital deployment.

Maybe if you could just take a step back in.

Just help people understand what's going on.

Guys are kind of in the.

Strange situation, where.

You have a pretty sizable dollar balance of debt, but at the same time have this pretty sizable cash balance.

Simultaneously you did a pretty sizable.

Share repurchase authorization seemingly pretty attractive pricing.

But if you look at the context of <unk>.

Going to the capital markets and raising.

$200 million of.

Additional.

Debt.

And really not.

Using it for anything you're kind of getting a negative arbitrage by.

Putting that debt on the balance sheet. So.

Can you just help us understand the contacts was there a deal that.

We thought was going to happen and then it didn't happen.

And if we're thinking about the cash balance going forward and the idea.

Dating.

Share repurchases organic investments whats the appropriate level.

Cash that should be on.

The balance sheet.

I'll pause there.

Sure good morning.

So, yes, we did raise $200 million.

In March of last year.

I'll, just say that we thought we had a use of proceeds for that $200 million, but.

It didn't materialize.

As we sit here today.

The negative spread on that as interest rates have moved up.

We.

Raise that additional debt at the opportune time.

Is 3% or a little less than 3%.

Given where we've invested in so.

I think it was.

There was.

Our purpose to do it but the fallback was we knew we had some internal projects.

And we knew that interest rates were also going up at the time I mean, I think the fed really indicated that and if you look back now.

I don't know how many times the fed raise rates.

Maybe five six times so.

So we would never be able to raise the debt at those levels today.

So I'm kind of.

Kind of happy that we did it.

<unk>.

We're disciplined in how we thought about using it.

But now we've got it available to us and I think someone earlier asked a question about how we would fund and.

An expansion or Debottlenecking.

And that would be with cash on our balance sheet, which would include the $200 million that we raised.

So I think.

We've got the capital now.

And the wherewithal to really.

Fund a number of different projects.

To me, that's kind of exciting from a capital allocation standpoint, thinking about cash on the balance sheet versus.

Debt versus stock buybacks I mean.

First off I think when we think about.

We refer to are smaller projects and Cheryl talks about margin enhancement projects.

All of those projects that we have elected to move.

To move forward on all have minimum.

IRR.

And many of them are higher than that.

So there is a hurdle rate.

So investing in those projects.

<unk>.

I think.

I think we bought back.

About 13 million shares of stock.

So we actually reduced store.

Float by all of our outstanding shares by <unk>.

15%.

So I think that was attractive for us last year as we move forward I think we just have to balance.

Where do we think we're going to generate.

The highest ultimate shareholder return.

Whether it's investing in our internal projects buying back stock or ultimately, reducing some debt. So I don't think its.

Anything different than most other companies go through where they are really thinking about what's the best use of that cash is going to give the best long term returns to our shareholders.

Okay. That's helpful. And then just when we're thinking about the submission for the grant proposal.

Is there any sort of color.

Color inside of that document that says if we.

We're going to get X amount of grant look at our balance sheet.

We already self funded.

Another portion of it our project is better than someone else that.

Maybe has like.

I'll use the word you used the word hypothetical they are hypothetical funding from us.

Third party.

That part of the submission does that mean.

For the next.

Six months, we have to have a certain amount of cash on the balance sheet.

So thats.

A great point and yes, it was actually a point that we stressed in our application.

Debt.

Unlike a lot of other projects that might seek funding in addition to the USDA grant.

Got the cash in our balance sheet. So if a project is $400 million and we need.

To invest $300 million of our $1, it's sitting there waiting waiting to happen so.

I think that is a differentiator we believe it is.

So I would hope that that really comes into play so not only can we move faster because we're debottlenecking an existing facility rather than building brownfield or greenfield, but we don't have to worry about raising capital that is sitting there ready to invest so.

How long does it have to sit there I would imagine that.

If we hear of positive feedback from the USDA.

That ultimately.

If we're lucky enough that they're going to.

Grant us $100 million once the Grand happens.

Im not sure that we have to keep cash on our balance sheet I think cash is fungible.

Also generating a fair amount of free cash so.

Don't really see that as an issue I didn't address one question that you asked earlier and that was about minimum cash balance on our balance sheet.

I think internally, we've determined that ultimately we'd like to keep the $100 million of cash on our balance sheet I think it's prudent to do that given <unk>.

Price volatility normally have.

Our selling prices, but also the price of natural gas.

And so that could have an impact on margins.

Okay. Thank you so much for answering my questions.

Sure.

Thank you.

A question and answer session I would like to turn the call back to Mark Behrman for closing remarks.

I want to thank everyone for joining the conference call.

For your interest in OSB industries, hopefully, we see you see that we've accomplished a lot so far.

We've got high expectations of what we're going to accomplish in 2023, and we've got a lot of opportunity for beyond 2023 hope to see you all at our Investor day. Thanks, So much.

This concludes today's conference remote disconnect your lines at this time. Thank you for your participation and have a great day.

[music].

Greetings and welcome to the LSP industries fourth quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

And the answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your cell phone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Brett Pulmicort, Vice President of Investor Relations.

Good morning, everyone. Joining me today 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 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 this call will include references to non-GAAP results. Please see the press release in the investors section of our website.

S B 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.

Thank you for it we're happy to have the opportunity to speak with you today about our 2022 full year and fourth quarter results and our outlook for the first quarter and full year of 2023.

2022 was a pivotal year in our company's history.

We delivered record financial results with year over year increases in sales and adjusted EBITDA of 62% and 117% respectively.

We generated strong cash flow a significant portion of which we returned to our shareholders through share repurchases, while at the same time substantially improving our balance sheet.

Additionally, we completed major turnarounds at two of our facilities to further improve their safety and reliability.

And a major step towards becoming a leader in the emerging clean energy industry, we signed agreements to begin development of low carbon and no carbon ammonia projects at two of our facilities.

I'd like to thank all of our employees for making this another excellent quarter and for the commitment to developing a culture of excellence at LSP industries.

Our team put together put our team put in a great deal of hard work and dedication in the years, leading up to 2022, which put us in a position to have a successful year.

We set very high safety standards policies and procedures aimed at achieving our goal zero zero recordable incidents and injuries.