Q2 2023 LSB Industries Inc Earnings Call
Greetings and welcome to the L. S B industry second quarter, 20th twenty-three earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
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As a reminder, this conference is being recorded it is now my pleasure to introduce your host Fred <unk> Vice President of Investor Relations. Please go ahead.
Good morning, everyone do you want to be today, or Mark Behrami, Our Chief Executive Officer, and Cheryl Mcguire, Our Chief Financial Officer. Please note that today's call will include.
Because of the statements are based on the company's curtain 10 expectations and projections, they're not guarantee 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 L. S.
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.
We're happy to have the opportunity to speak with you today about our 2023 second quarter results.
[noise] outlook for the third quarter and full year of 2023.
I'd like to start by once again congratulating our team and they are outstanding safety performance.
The first six months of this year, we have zero, we've had zero recordable injuries and are trailing 12 months recordable injury rate as of June 30th 2000 twenty-three stands at 0.5, we are committed to ensuring that everything we do starts with safety.
Looking at our 20 twenty-three second quarter summary on page three of the presentation.
Manufacturing commercial teams perform very well during the quarter was translated into a solid increase in both production and sales volume compared to Q2 2022.
Pleased to say that our average pneumonia onstream rude for the second quarter and first half of 2023 indicates that we are making good progress towards our stated goal of operating or ammonia plans and a 95 per cent Onstream road.
Reflecting the processes and procedures, we've implemented coupled with our reliability investments, we expect to see that right continue to improve as we mature a new programs and get through next year's turnarounds.
As anticipated our financial results for lower compared to the second quarter of 2022.
This was due to a decline in market prices for nitrogen products relative to last year's high pricing levels, resulting largely from the impact of lower natural gas prices in Europe and weaker industrial activity in Asia.
Additionally, during the second quarter domestic you I and demand was below our expectations headed into the period as farmers opted to apply more urea.
To what had been a comparatively attractive pricing early this year for your rear versus you a an.
As we have generated significant free cash flow over the last 24 months and expect to continue to generate free cash flow even in the lower nitrogen pricing environment.
We have worked to balance investments and growth with return of capital to our shareholders.
Last year, we repurchased $175 million of common stock.
And during the second quarter of this year, we repurchased $125 million of outstanding debt.
Additionally, we repurchased $17 million of common stock under the $150 million stock repurchase program that our board authorized in me.
So collectively as of the 12 month period ended June 30th 2023, we have returned in excess of $317 million to shareholders.
We will continue to balance the use of our free cash flow to maximize long term shareholder value.
Lastly.
As I have mentioned previously we.
We submitted a tech capacity expansion project at our El Dorado site to the USDA for funding under their Fertiliser production expansion program or.
<unk> project was selected for consideration for funding and is open for public comments until the end of this month.
Assuming we continue through the process the EPA will conduct a further environmental review.
While we were excited about this project, we will continue to evaluated taking into consideration our markets the global economy.
Timing and sequence of the expansion and internal resources, we would hope to decide on the next steps in this third quarter subject to the Usda's timeline.
On page four of our presentation, we provide an overview of our end markets.
Prices remain above multi year averages, reflecting solid demand trends.
Dry conditions throughout many U S corn growing regions ongoing global uncertainties related to the war in the Ukraine and ongoing tight tight stuck to use ratios.
Accordingly, we expect corn prices to remain at levels that would support strong fertilizer demand as we move towards the next planting season.
In addition to strong corn prices, we believe that lower farm input costs relative to last year should further incentivise farmers to optimize fertilizer applications in the fourth quarter of 2023 and in the first half of 2024 as they seek to maximize yields for the next growing season.
Demand for industrial business remains steady nitric acid demand to stabilize global producers shift production from international facilities to the U S operations in order to take advantage of lower use input costs.
Demand for ammonium nitrate and mining applications as strong as the increase in infrastructure projects increases demand for acquiring an aggregate production and the growth in electric vehicles and other applications is increasing demand for middles in the U S.
Now I'll turn the call over to Cheryl will discuss our second quarter results in our outlook Cheryl.
Thanks, Mark and good morning.
Page five you'll see a summary of our second quarter financial results, we generated adjusted EBITDA at 47 million and adjusted EPS at 25 cents in the second quarter slightly below our expectations.
This is largely because of a more significant decline in selling prices than we had anticipated early in the corner along with lower sales volumes as Mark mentioned earlier.
Turning to page six you'll see a summary of our key balance sheet and cash flow metrics. During the second quarter of 2023, we generate at cash flow from operations at $44 million and had capital expenditures at 14 million translating into 30 million at free cash flow and a free cash flow.
Version rate of approximately 64% year to date, we generate a cash flow from operations and had capital expenditures at 103 million and $32 million respectively.
Continued free cash flow generation enabled us to maintain a strong financial position at the end of the second quarter, we had approximately $314 million in cash and short term investments.
This was after we repurchased $125 million as principal amount of our senior secured notes for $114 million cash and bought back 17 million of our stock under our current 150 million share buyback program that our board authorized in May.
As Mark mentioned, we are committed to a discipline must be multifaceted approach to capital allocation that balances return of capital to shareholders and investment and growth with our focus on maintaining an appropriate level of leverage relative to that we ended the second quarter.
With $584 million in total that and and that that could trailing 12 month EBITDA leverage ratio of approximately one time.
Page seven breakfast at 2023 second quarter adjusted EBITDA at $47 million from adjusted EBITDA for the second quarter of 2022 of $158 million, which was the highest adjusted EBITDA quarter and Lsp's history.
Lower selling prices for our products relative to last year's record highs, where the primary factor in the year over year change in EBITDA.
On the positive side, our sales volumes were higher in the 2023 second quarter Valley.
Relative to last year as a result of stronger ammonia operating rates at our facilities, coupled with our successful commercial initiatives.
Now I will outline some factors to consider when thinking about our third quarter.
In terms of products selling prices the nitrogen fertilizer industry typically sees a summer reset during the season really slow third quarter. When the Summerfield program comes out and we saw that again this year than NOLA benchmark with reset at approximately $195 a ton.
July .
Haven't had a positive response to the first round of offers during the summer failed program. It was widely expected that offer levels would be erased.
That occurred earlier this week and was aided by the persistent firmness of local and internationally urea market as well as the rebound in corn prices.
At the time of the initial Summerfield announcements September NOLA urea barges were trading up to 300, <unk> $30 a ton with August trading sub 325 per ton delay.
The latest August September barge trades have been 55 to $60 a tonne higher with the market's continuing to rise.
This bodes well for you and and and pricing. However, current prices are still lower than our realized price for you and and and in the second quarter of 2023.
The Tampa ammonia benchmark price settled at $285 per metric ton in July the lower I realised average price of 370 per metric ton in Q2 of twenty-three with that said Tampa increased by $10 to $295 a metric ton for August .
The first monthly increase since October of 2022.
For the balance of the quarter, we expect to see continued but measured price appreciation for nitrogen products.
With respect to volume.
We expect to material improvement in the third quarter of 2023 versus the 2022 third quarter as we have no turnarounds. This year and we had turnarounds at our El Dorado and prior facilities last year.
However, I would note that during this third quarter, the new star pipeline that we used to distribute ammonia from our El Dorado facility will be down for six weeks were scheduled maintenance.
As a result, we will see a pretty sizeable sequential decline and ammonia sales volumes, but still immaterial increase relative to the third quarter of 2022.
We expect that additional inventory build during two three to be sold by the end of the year.
And thinking about costs 90 per cent of our natural gas feedstock cost for Q3 2023 are locked in at approximately $3.50 per MB to you. So roughly in line with the second quarter, but substantially lower than.
And the second quarter of 2022, which was approximately $7.15.
Putting it all together given the current pricing environment I outlined partition, partially offset by our expectations for strong year over year production and sales volume improvement, we expect our third quarter adjusted EBITDA to see a similar sequential decline as what we realized in our third quarter of 2000.
22.
Looking out to the fourth quarter, we believe that U a N N Ann prices should continue to increase and that ammonia will see pricing improve with demand factors beginning to materialize and now I'll turn it back over to Mark.
Thank you Cheryl.
Hey, James depicts the downward trend in European and Asian natural gas prices over the past 10 months.
The drop in gas prices in Europe caused largely by a combination of warmer than average temperatures. This past winter combined with increased storage inventories, resulting from imports of LNG from the U S.
Enabled European pneumonia producers come back online after.
Curtailing production last year to the Hudson stock costs.
Even so gas prices in Europe remained significantly higher than gas prices in the U S. At approximately $10 <unk> equivalent this equates to a gas cost of ammonia production and excess in excess of $350 per ton for European producers.
That is significantly higher than the Tampa ammonia benchmark benchmark of 295 for August .
In the U S gas costs to produce ammonia of approximately $125 per ton we.
We believe that the disconnect is one of the multiple factors pointing to hire ammonia selling prices later this year.
Page nine provides an overview and update on our low carbon ammonia initiatives.
We continue to make headway on advancing are blue ammonia project that are El Dorado facility and agreed ammonia project at our private facility, including entering into discussions with potential offtakers.
These projects represent exciting opportunities to emerge as a leader in the carbonized our industry now.
Only do they have the potential to substantially reduce our carbon footprint, but we believe the economics of both should be very attractive.
During the second quarter, we were pleased to add to our low carbon ammonia activities with the announcement of our Mou with imaging the developer of ammonia to power technology.
The goal of this relationship is for the two companies to collaborate on developing low carbon pneumonia as a marine fuel ultimately, we expect to leverage our combined capabilities to demonstrate how clean ammonia can become a primary fuel source for the commercial marine industry and to work with additional partners to develop the ecosystem and infrastructure needed to <unk>.
Support this transition.
Which would result in a major development and global efforts to reduce C O two emissions.
Lastly, we are in discussions with respect to several additional low carbon initiatives and look forward to announcing them at the appropriate time.
There is no question of 2023 has been a challenging year with respect to the headwinds from declining selling process at the same time. However, we are very pleased with the progress. We've made with our plans operations are continued balance sheet improvement R capital allocation program and a new business developments in clean energy.
We believe that collectively.
These make us accompany well positioned for growth in the coming years irrespective of commodity price trends.
Before I find the hand, the call back to the operator for the Q&A session I would like to mention that we will be participating in the seaboard virtual Summer conference on August 22nd.
UBS chemicals conference on September 6th in New York The Jeffries.
Industrial Conference also in New York on September 7th.
And the RBC Industrials conference in Las Vegas on September 12th.
Look forward to seeing many of you at those events.
Concludes our prepared remarks, and when will now be happy to take any questions. Thank you.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line isn't the question queue. You May press start to if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.
For pressing the star keys.
Your first question comes from Josh Specter with UBS. Please go ahead.
Yeah, Hi, Thanks for taking my question first I guess I just wanted to clarify some of your comments on you at in the Summer Pro program. So you talked about pricing kind of looking towards August it further out $300 plus and the large so I think you made the comment that you realise pricing is still below two Q levels is that just.
An averaging effect or can you explain kind of what's going on there and the current spot right is there any chance you exit at a price higher than what you realize last quarter.
Good morning, Josh how are Ya.
So.
I think when you think about most of our products, particularly ammonia in your way and get a summer reset that occurs sort of late June .
July .
And we usually take an order book based on those prices for some length of time I mean, it's not significant it's not months out there.
So I think what we're going to see in the third quarter is.
A lot of summer reset prices during the quarter.
And will realize a lot of these improvements in prices either late in the third quarter or early into the fourth quarter.
Got it so that makes sense and just a question on the cost side.
When we look at your cost X gas it looks like your costs are generally a good deal higher than they were a year ago and over the last couple of years about $80 million a quarter almost about $200 a ton.
From our math that looks about almost 30 per cent higher than where you would've been again X gas costs over the past couple of years, despite having no turnaround this year.
So I'm just curious if you didn't give us some context about what might be going on their operational caught fire and if there's something structural or or temporary driving any of that.
Well, we'd have to take a look at that so I'm not I can't say I'm familiar with the 30% higher costs that you're referring to something we can follow up after the call, but I will tell you that product mix obviously.
Has an impact on cost.
The reason, we upgrade from ammonia is because we're making more margin.
So.
I think that could be part of it as we sold list.
More ammonia during the quarter.
Okay. Thanks sale follow up offline I'll I'll turn it orange up back in the queue. Thanks.
Okay.
Thank you next question David back later with Deutsche Bank. Please go ahead.
Thank you Mark could you just clarify your comments on the guidance for Q3, I I may have misheard, the what was expected to be versus the prior year. Thank you.
Yeah, I think Cheryl mentioned that we would see a sequential decline that was similar to what we saw last year.
Got it got it.
El Dorado, if anything changed in your thinking over the last three months or again, you do expect decision this week from.
From the federal government on this project for the maximum amount is that still the current thinking.
Yeah I think.
I think what.
I was referring to is really comment period right. So we got selected as one of the projects that they are considering for funding and then all of the projects that were selected have a public comment period.
Right. So that is open for public to make comments and the USDA with review those comments that will end at the end of this month than.
Then the USDA has already told us that assuming that we move forward. They would want to do another environmental review it's more.
Whether it's <unk> or it's tribal and.
Looking at any trouble issues or things like that and.
And then after that uhm, a little less of him a little more <unk> with the process is but we would hope.
That by the end of September we would have a lot more clarity as to whether they are going to fund us or not and then.
The expectation would be that they would fund up to 25% of the total project cost, which full project is about $400 million, so that would be $100 million.
Very good thank you.
Mmm.
Next question, Andrew Wong with RBC capital markets. Please go ahead.
Hey, good morning can I, just maybe clarify the Q3.
EBITDA guidance I think I heard <unk> say that Q3 will be down sequentially.
Similar to what we saw last year so.
What does that mean does that mean EBITDA might be in like a 40 or 50 million dollar range similar to what we saw in Q3 last year or.
Is there a different sequential decline that I should be thinking about.
Yeah sure Hi, Andrew So what I was referring to is we generally see a pretty heavy sequential decline.
You moved from Q2 Q3 two.
Q3's, the seasonally weakest quarter as you know and so if you look at Q2 of last year and you look at Q2 Q3, and what the decline was there. It was ballpark 65, 70% decline Uhm I think you're going to see a similar decline this year if you compare.
The third quarter to the second quarter of this year.
Okay that makes that makes sense and then they just wanted to ask maybe following up a little bit on the cost question, maybe that's a different way like how would you say in general your non-cash costs have been tracking this year versus can be expectations going into this year are versus what you've seen in prior year levels.
Andrew I would I would say that our costs are higher this year for several reasons. One is just general inflation. So we're seeing supplies increase and we're seeing.
Actually contractor costs increase.
Outside contractor cause but in addition to that.
I think we elected to.
To make some investments so I think this year, we probably have $10 million to $12 million for the year.
Of additional higher costs.
I would say it was adding ticked.
Technical talent and other folks to push.
R.
Reliability programs and safety programs forward.
It was also bringing in some outside technical talent to help us.
Really take a look at some of our assets and.
Analyze how we can.
Operate them better and maintain them better so.
Think those are costs that we elected to to take in rather than invest capital right. It just turns out their expenses.
Okay that makes a lot of phones. Thank you.
Next question, Adam Samuelson with Goldman Sachs. Please go ahead.
Yes. Thank you you want everyone.
So.
Alright.
I guess, if you think about it.
As you are looking at waiting on the engineering designs.
For.
For the for the Debottlenecking.
Have you gotten any any better visibility at this juncture for.
Just helping a frame size scope and thinking about the USDA potential USDA kind of funding contribution kind of what proportion of project.
Capital costs that.
Could represent as we trying to think about the net capital outlay.
Sure.
So if we did the full project, which would be debottlenecking or ammonia plant nitric acid plant.
And then we've actually changed the make.
Of the project originally it was.
To build a <unk> facility, so to upgrade all of that to to UA and.
We're now thinking Bay.
Based on.
Really all of our vision for the company and really where we're going.
And where the industry is going is really to produce lower carbon products.
Rather than.
Carbon it's cold carbonated products. So it would be debottlenecking ammonia nitric acid and building a new granulation facility to either granulate H stand or some.
<unk> derivative products, if we did the full project right now I'd say conservatively, we're seeing about $400 million to do the full project, we did it all at once and.
And the USDA would give us.
And we've asked for and they've moved US along so that I guess, they would support at 25% of that so that would be $100 million from the USDA saw a cap on the total capital outlay over.
Three to four year period would be $300 million.
Okay now that some.
That's really helpful color.
And.
And and the release in southern Pride remarks talked about some of the.
Stronger.
Industrial demand for for nitric acid in particular.
Any way to quantify that or put some help us prime that does.
Does not a lot of industrial kind of chemical change right now showing kind of strong volume trends in demand trends has been pretty characterized by a tremendous amount of destocking and.
And the last six to 12 months and so helpful just to frame.
You are seeing amongst your customer set for for natural gas specifically.
Yeah, I mean, I think we're seeing some very ability and customers I would would agree with you.
That.
And I think customers are struggling a little bit and we do have contracts with our customers and in a number of our contracts there are take or pay provisions.
So one.
One way or the other you know we're going to get paid for the product.
Having said that I think are commercial team has done a really great job, where our customer maybe has has to throttled back some of the production in their own plant or they've had plant issues, which happens everyone seems to we all have plant issues at some point in time.
You know that the team has really stepped up and found other avenues for that product right in the spot market.
So I think we're just seeing.
Demand.
Solid demand across the board and I think the other way to maybe think about it is we do have.
A strong a lot of strong.
Tailwinds in the mining market and so to the extent that we could shift some of the production and upgrade that nitric acid and we if we have the capacity to upgrade it to either a and solution or.
And grilled onion and sell it as into the mining market and we can do that too. So I think across the board when I think about the non fertilizer markets. We've got some pretty good balance that allows us to really whether some of the variability in.
In the straight industrial market.
Okay, Alright, I appreciate that car I'll pass on thanks.
Sure.
Next question Lawrence Alexander with Jeffries. Please go ahead.
Good morning. This is Dan was on for Lawrence could you tell me in the past have I mean.
If corn prices are as they are have you seen a lot of prebuying that could provide a more of a near term tailwind in the late in the third quarter and the early fourth quarter.
Our growers moral than likely just to wait to see how things play out next year.
Wow, that's a really great question I'd.
I'd say historically.
What would happen is what you mentioned first so with strong prices.
Farmers ultimately would be pre buying and.
And we're still seeing a.
A fair amount of that would expect a fair amount of that but this last year, the dynamic changed a little bit to a bit more just in time buying.
Which you.
He is a risk for the farmer because.
Not only are they bidding on prices going down.
But there were also having to to deal with the logistical aspect of getting it just in time.
So in order to.
To kind of think about that as we take a step back we still think there'll be a fair amount of pre buying.
But we've also now taken some additional <unk>.
Storage locations, particularly for you and.
To position product to where we think our customers much closer to our customers. So that we can service <unk>.
Easier and be the product of choice and handle the just in time.
And then just follow up so with those additional storage facilities, what does that does that mean anything meaningful to them to your inventory levels and working capital.
No I would say nothing meaningful what it does do is it allows us to store product.
To sell that high.
Higher points of the year or in in season versus out of season.
So I think it allows us to have the optionality to do that.
And of course, when you're talking about just in time and someone really needs a product.
They are willing to pay sometimes a higher price for that.
So again I think it gives us optionality to to try and take advantage of anomalies in the market and ultimately get some higher pricing.
Thank you very much.
Mmm.
Once again, if you would like to ask a question. Please press star one on your telephone Keypad next question comes from Rob Maguire with Granite research. Please go ahead.
Good morning.
Mark in your opinion.
Leading drivers behind nitrogen prices stabilising over the last month.
Oh well first.
Yeah.
I think when you look at your area right because you're as to.
The largest used and traded fertilizer around the world, you'll real prices have increased dramatically.
So.
Just looking at prices this morning around the world.
Yuri is sold at north of $400 today.
So.
It was.
A lot of tons in the east and so middle Eastern Asia.
And other parts certainly in Europe .
But here in the states this morning.
Drifted over $400 a tonne so higher urea prices prices are really.
I think I'm being driven by increased.
Increased demand.
Lack of Chinese exports.
And then there have been some plant issues around the world that have caused maybe.
A bit of a shortage at least today on your area. So.
So if you're real prices moving up.
And again everything all products trade.
To some extent on a nitrogen equivalent basis, and so you're starting to see pick up another prices in particular <unk> and prices.
Ammonia is a bit different.
Ammonia.
About 30% of all ammonia is used industrially and we are as I mentioned earlier, we are seeing industrial demand globally.
Sort of down and particularly in Asia, where it's not picked up yet post COVID-19.
So it's been a really slow recovery. So I think that dynamic described pudding still putting some pressure on ammonia.
And then do you have a formal fill program in place for the fall for you a N right now and you can you can.
Kind of give us an idea of where you are seeing far prices for you am relative to the savings to the load this summer.
Yeah, so the summer.
Some of the reset program came out in early July .
Uhm.
Almost all the producers offered limited volume.
Once that was sold out there was really a lot of unmet demand.
So this week pricing moved up.
You know anywhere from 20 to $40 a ton depending on location.
Okay, Great and then you talked about how farmers opted to apply more urea then U a N.
Just the comparable attractive pricing.
<unk> can you just tell us.
How do you think <unk> and urea plays out from here through the year and.
Well I mean.
UN prices.
A much more attractive right now with Yuri up to $400 a ton.
So.
And I would think that.
We would see a bit more demand on the UA inside then.
<unk>.
Yeah that would be the expectation given where pricing is today.
Okay. Thank you.
Okay.
There are no further questions I would like to turn the floor over to Mark for closing remarks.
Well I always as always always appreciate everyone's interest in LSP industries I Hope you feel like we're making improvements at the company and we've got a significant amount of opportunity to really increase shareholder value. So if you have any further questions feel free to follow up with a call to Fred <unk>, who leads investor relations.
<unk> for us.
Cheryl or myself and hope to see you guys at some of the conferences that we're going to be attending thanks and have a great day.
That concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
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