Q3 2024 LSB Industries Inc Earnings Call
Speaker Change: Greetings and welcome to the LSB Industries third quarter 2024 earnings conference call. At this time all participants are in a listen-only mode.
Speaker Change: A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Fred Buonocore, Vice President of Investor Relations. Please go ahead.
Fred Buonocore: Good morning, everyone. Joining me today are Mark Behrman, our Chairman and Chief Executive Officer, Cheryl Maguire, our Chief Financial Officer, and Damien Renwick, our Chief Commercial Officer.
Fred Buonocore: Please note that today's call includes forward-looking statements. These statements are based on the company's current intent, expectations, and projections. They are not guarantees of future performance and a variety of factors could cause the actual results to differ materially.
Fred Buonocore: On the call, we will reference non-GAAP results. Please see the press release in the investor section of our website, lsbindustries.com, for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.
Fred Buonocore: As a reminder, we have a stockholder rights plan to protect certain tax attributes. Please see the investor section of our website at LSB Industries for further important details. At this time, I'd like to go ahead and turn the call over to Mark.
Mark Behrman: Thank you, Fred.
Mark Behrman: Turning to page 4 of our presentation, we had an excellent safety performance in the third quarter.
Mark Behrman: During the third quarter, we completed a major turnaround on our prior facility, and kudos to the team as it was performed injury-free.
Mark Behrman: Protect What Matters is our most important corporate value because what matters most to us is keeping our team members safe.
Mark Behrman: In terms of our third quarter financial performance, our adjusted EBITDA improved significantly year over year despite performing a turnaround this year versus none in last year's third quarter.
Mark Behrman: During the third quarter, we continued to invest in our prior facility. We completed a major turnaround that included many improvements to our plants.
Mark Behrman: We expect that the work that was performed will lead to greater reliability and increased production volume, and we are already seeing the benefits.
Mark Behrman: We continually seek to expand the production of our current manufacturing footprint.
Mark Behrman: To that point, during Pryor's turnaround, we expanded its urea plant.
Mark Behrman: This expansion is expected to allow us to produce an incremental 75,000 tons per year of UAN, an approximate 20% annual increase.
Mark Behrman: We have already seen that volume ramp up to those levels during this fourth quarter.
Mark Behrman: Additionally, during the third quarter, to support our growing industrial business,
Mark Behrman: We completed the construction of an additional 5,000 tons of nitric acid storage at our El Dorado facility.
Mark Behrman: This will now provide us with the ability to better optimize our sales mix and improve our margins.
Mark Behrman: Lastly, we continue to make progress with our two energy transition projects, which I'll discuss later in the call.
Speaker Change: I'll turn the call over to Damien who will review current market dynamics and pricing trends.
Damien Renwick: Thanks Mark, good morning everyone. Page 5 summarizes some key dynamics in our industrial end markets.
Damien Renwick: More than a third of our business comes from the North American operations of industrial customers.
Damien Renwick: Our industrial business is built on contracted volumes and allows us to partially mitigate the more volatile agricultural business.
Damien Renwick: We also like the consistently attractive margins of the industrial business that result from the cost-plus nature of our customer agreements.
Damien Renwick: Going forward, a core part of our commercial strategy is to continue to grow the portion of industrial sales in our overall customer portfolio. We believe this will create a more stable and predictable earnings stream.
Damien Renwick: Demand remained consistent across our industrial customers through the quarter.
Damien Renwick: We expect these attractive conditions to persist into 2025.
Damien Renwick: One of our largest industrial products by sales volume is nitric acid, a key chemical input for polyurethane production. We track home building and auto manufacturing trends because these two industries are major consumers of polyurethane.
Damien Renwick: As you can see from the top two charts on page 5, economic indicators for both markets also continue to be relatively stable.
Damien Renwick: We believe that the recent easing of interest rates and expectations for further interest rate cuts could stimulate demand in both markets. That would lead to production rate increases and greater demand for nitric acid in 2025.
Damien Renwick: We also continue to monitor new sources of nitric acid demand from increased semiconductor manufacturing and munitions production in the US.
Damien Renwick: Overall, we find the outlook for nitric acid demand very encouraging.
Damien Renwick: Our other major product for industrial markets is ammonium nitrate, or AN, which is used in the mining of metals such as copper. As the chart on the bottom right shows, the value of copper production has increased significantly over the past year, driven by strong copper prices.
Damien Renwick: Copper prices currently sit above multi-year average levels, driven in part by demand for electric vehicle production and the build-out of technology infrastructure.
Damien Renwick: AN is also used for the production of aggregates, which is strongly correlated to new housing starts, given the infrastructure required to support housing developments.
Damien Renwick: We believe declining interest rates could result in higher new housing starts and increased demand for aggregates.
Speaker Change: On page 6 of our presentation you will find a summary of current nitrogen market dynamics.
Speaker Change: The TAMP Armonia Benchmark price has increased for four consecutive months.
Speaker Change: due to a combination of factors including global supply constraints resulting from increased natural gas curtailments in Trinidad, unplanned downtime and extended turnarounds at various international production facilities and disruptions to the transport of ammonia through the Suez Canal.
Speaker Change: Additionally, ongoing delays in the commissioning of new domestic production capacity and new Russian export capabilities has provided support to ammonia prices.
Speaker Change: We expect this to continue through the fourth quarter.
Speaker Change: UAN prices have recently firmed following tightening urea market fundamentals, driven by production curtailment and healthy demand from India.
Speaker Change: We are also seeing price support from a favourable trade balance, where US exports remain high and imports low compared to recent history.
Speaker Change: Buying interest has been steady, but overall relatively subdued as fertiliser retailers have taken a cautious approach with softening corn prices.
Speaker Change: However, as we move towards the Spring 2025 planting season, we believe that this cautious approach will likely lead to some pent-up demand for UAN as retailers work to position themselves to cover all in-season demand.
Speaker Change: With respect to natural gas feedstock costs, the middle chart shows the gas price trend for the European TTF relative to the price for US Henry Hub.
Speaker Change: Over the past six weeks, European gas prices have risen to levels not seen since late 2023, due largely to the geopolitical instability in the Middle East.
Speaker Change: This appears to be another factor supporting ammonia prices at current levels.
Speaker Change: While industry forecasts suggest an easing of the TTF during the first half of 2025, US natural gas prices are expected to remain a competitive advantage for domestic ammonia producers for the foreseeable future.
Speaker Change: On page 7 we show pricing trends and forecasts for corn and other grain prices which drive our agricultural business.
Speaker Change: From late August, US corn prices recently showed some strength on revisions of the USDA's updated Grounds Outlook, which called for smaller supplies, larger exports and reduced ending stocks relative to their earlier estimates.
Speaker Change: While 2025 pricing levels will be determined in part by the outcome of the current harvest, we expect to see corn prices at levels that should incentivise farmers to apply a healthy level of nitrogen fertiliser.
Speaker Change: Interest on farm loans is also a meaningful component of many farmers' cost structure, and declining interest rates should have a positive impact on the demand for fertilisers.
Speaker Change: Corn futures currently sit around $4.40 per bushel for December 2025, suggesting some strengthening of pricing over the first half of next year.
Speaker Change: Now, I'll turn the call over to Cheryl to discuss our third quarter financial results and our outlook. Cheryl?
Cheryl Maguire: Thanks, Damien, and good morning. On page 8, you'll see a summary of our third quarter 2024 financial results.
Cheryl Maguire: We generated adjusted EBITDA of $17 million. This is a material improvement over last year, despite significant planned turnaround maintenance at our prior location. As a reminder, there were no planned turnarounds in 2023.
Cheryl Maguire: Our gap loss per share for the third quarter was $0.35. Keep in mind, this included the impact of approximately $16 million of turnaround expenses and approximately $6 million of non-cash charges for older assets taken out of service or disposed of during the period.
Cheryl Maguire: Page 9 bridges our third quarter 2023 adjusted EBITDA of $9 million to our third quarter 2024 adjusted EBITDA of $17 million. Stronger selling prices, particularly for ammonia, contributed to the year-over-year change in EBITDA.
Cheryl Maguire: Additionally, we benefited from lower natural gas costs during the period.
Cheryl Maguire: As expected, sales volumes of our products decreased in the third quarter of 2024 as compared to the same quarter of 2023 as a result of the turnaround at our prior facility.
Cheryl Maguire: We were able to partially offset the impact of the volume decrease from the prior turnaround with higher AN volume out of our Eldorado facility. The increased AN volume is a direct result of the operational improvement initiatives we have been making at that facility.
Cheryl Maguire: Page 10 provides a summary of our key balance sheet and cash flow metrics.
Cheryl Maguire: As a reminder, over-the-12-months ended September 30, 2024.
Cheryl Maguire: We've brought back approximately 97 million in principal amount of our senior secured notes and approximately 2.7 million shares of our stock.
Cheryl Maguire: Additionally, we continue to deploy capital to improve the reliability and safety of our facilities. Even with these activities, cash remains healthy at approximately $200 million, with net leverage remaining at approximately 2.5 times.
Cheryl Maguire: Looking to the fourth quarter of 2024, Tampa Ammonia has averaged $560 per metric ton quarter to date, and Nola UAN is currently around $230 per ton.
Cheryl Maguire: With continued tighter inventories, ongoing global supply constraints, disruptions, and geopolitical concerns, pricing should remain solid through the remainder of the year.
Cheryl Maguire: Natural gas costs remain well below last year's pricing averaging approximately $2.60 per MMBTU quarter to date. We expect this trend to continue through the balance of the year, benefiting our fourth quarter profitability.
Cheryl Maguire: Our fourth quarter results will include the impact of a planned 35-day turnaround at our Cherokee facility.
Cheryl Maguire: We estimate that the expenses associated with this turnaround will be approximately $15 million.
Cheryl Maguire: Despite the planned maintenance event at our Cherokee facility, we expect a solid year-over-year increase in sales volumes of UAN as a result of the AREA expansion completed at our prior facility in the third quarter.
Cheryl Maguire: We also expect to have a year-over-year increase in AN and nitric acid sales, reflecting the operational improvements we've made to our downstream plants at El Dorado.
Cheryl Maguire: As a result, we expect our fourth quarter EBITDA, after adjustments for turnaround expenses, to be significantly above our fourth quarter of 2023, despite lost production during planned maintenance activities at our Cherokee location in November. And now I'll turn it back over to Mark.
Mark Behrman: Thank you, Cheryl.
Mark Behrman: Page 11 pertains to our Low Carbon Ammonia Projects.
Mark Behrman: Our Eldorado CCS project remains on track for us to commence production of low-carbon ammonia during 2026, pending the approval of the Class VI permit application.
Mark Behrman: The permit to construct will allow us to begin drilling two injection wells on our site in El Dorado. This permit is the critical path item for our project.
Mark Behrman: Earlier this year, we announced our first off-take customer for low-carbon ammonium nitrate solution that we'll produce at our Eldorado facility.
Mark Behrman: We are also in discussions with other potential customers for off-take agreements for low-carbon products.
Mark Behrman: With respect to our Houston Ship Channel project, as a reminder, it is a world-scale ammonia plant that will produce approximately 1.1 million metric tons of low-carbon ammonia.
Mark Behrman: We have completed our pre-feed and are currently in the process of reviewing the results of the study. Our next step will be a full feed study, which we expect to begin during the first quarter of 2025.
Mark Behrman: and take about 12 months to complete.
Mark Behrman: Upon completion of the FEED study, we would seek FID, which we are currently targeting for some point in the first half of 2026.
Mark Behrman: Given the significant costs of building a new world-scale low-carbon ammonia facility,
Mark Behrman: Off-take agreements with customers are the key to many of the announced projects moving forward.
Mark Behrman: As I've mentioned previously, our ability to secure long-term offtake agreements for the majority of the anticipated ammonia production is critical for us to greenlight FID on this project.
Mark Behrman: To that point, an encouraging development for customer demand is Europe's stance on low-carbon ammonia versus no-carbon ammonia.
Mark Behrman: Europe is now much more open to reducing their carbon emissions through the use of low-carbon ammonia.
Mark Behrman: We are now seeing various types of industrial manufacturers taking an interest in low-carbon ammonia due to the impending enactment of the EU's Carbon Border Adjustment Mechanism, or CBAM.
Mark Behrman: In addition to power generation and industrial applications for ammonia use,
Mark Behrman: We've been pleased at the pace at which low-carbon ammonia has been emerging as a potential marine fuel.
Mark Behrman: We are collaborating with Amogee, a New York-based technology company, on the development of ammonia as a marine fuel.
Mark Behrman: In September, Amogee successfully tested a tugboat retrofitted with an engine powered by ammonia.
Mark Behrman: Additionally, in August, Exmar, a Belgian shipping company, began building the first of six mid-sized gas carriers that will be powered by dual-fuel ammonia and LPG engines.
Mark Behrman: Finally,
Mark Behrman: Mitsui OSK Lines participated in a successful ammonia ship-to-ship transfer led by the Global Center for Marine Decarbonization.
Mark Behrman: The trial was conducted to simulate bunker operations at the port of Dampierre in Australia, which is being evaluated as a potential major ammonia bunkering hub.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Collectively, these developments are very encouraging for the potential of ammonia as the preferred low-carbon fuel for the massive global shipping industry.
Speaker Change: These many activities are extremely encouraging that new uses and demand for ammonia will have significant growth over time.
Speaker Change: We intend to participate in that growth.
Speaker Change: We are increasingly optimistic about our prospects for generating near-term and long-term growth.
Speaker Change: We expect the progress we are making on increasing the production and sales volumes from our core manufacturing facilities to accrue to our profitability and cash flow in a meaningful way over the next 24 months.
Speaker Change: At the same time, our low-carbon initiatives represent incremental profit beginning in 2026.
Speaker Change: as well as potential transformative growth over the longer term.
Speaker Change: Both prongs of our growth strategy prioritize preservation of our balance sheet strength and our ultimate goal of delivering strong returns to our shareholders.
Speaker Change: Before we open it up for questions I'd like to mention that we will be participating in person at the Morgan Stanley Global Chemicals Ag and Packaging Conference on November 12th.
Speaker Change: and virtually
Speaker Change: in the New York Stock Exchange Industrial Day on November 19th and the Granite Research Management Conference Series on December 11th and 12th.
Speaker Change: We look forward to speaking with some of you at those events.
Speaker Change: This concludes our prepared remarks and we will now be happy to take your questions. Thank you.
Speaker Change: 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.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 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 before pressing the star keys.
Speaker Change: Your first question comes from Josh Spector with UBS. Please go ahead.
Josh Spector: Yeah, hi, good morning. I had a couple questions on the industrial side of your business. So I think at the start of the presentation and you guys were talking about potentially some improving trends there. So first I wanted to ask
Speaker Change: Is that just the expectation that things could improve, or are you actually already seeing some improvement in demand?
Speaker Change: And then related with that, if you could talk about the contracting side of industrial...
Speaker Change: And if there's more or less contracts, maybe open up for negotiation and how that plays into the demand picture favorably or maybe not favorably as we think about spread and contract pricing over the next year.
Speaker Change: Sure, I'm going to let Damien take that one. Yeah, thanks, Mark. Morning, Josh.
Speaker Change: and General Economic Activity that we can see some improvement, particularly if you see more infrastructure build out, housing development, etc, etc. So we're on a wait and see approach with that, but we're pretty confident about that.
Speaker Change: In terms of your second question...
Speaker Change: You know, the way we manage our customer portfolio and all of the associated contracts.
Speaker Change: is, you know, we're just careful not to cluster them so they're all expiring together so they're sort of laid out.
Speaker Change: Over time and you know, naturally some will be expiring and some are a little longer Terms, so, you know, we'll just deal with that as as they arise
Speaker Change: Okay, thanks. I'll maybe ask then a follow-up there. Just, I think you talked about getting more interest in contracts for lower carbon material.
Speaker Change: I mean, you have the agreement with Freeport. I guess, is there a way to frame this in the framework of that? You have about 450 kT of CO2 you're sequestering.
Speaker Change: How much is left of that potential lower carbon material to contract out based on the LAPIS agreement and the Eldorado changes alone?
Speaker Change: probably about two-thirds, maybe a bit more than that. Yeah I mean if you take it back we'll probably have about 375,000 tons of low-carbon ammonia.
Speaker Change: and so if we've contracted 150 of AN solution that's roughly 70,000 tons or so of that ammonia so we still have about 300 and call it 300,000 tons of low-carbon ammonia that we can sell as ammonia or upgraded product.
Speaker Change: Very clear. Thank you.
Speaker Change: Thank you.
Speaker Change: Next question, Andrew Wong with RBC Capital Markets. Please go ahead.
Andrew Wong: Hey, good morning. So, just with some of the operational improvements that we've seen and upgrades completed this year.
Andrew Wong: Could you provide maybe a bit of an early outlook into 2025 in terms of volumes, just given that there are also some bottlenecks next year? Or just maybe generally, do you expect production to be higher, lower, or maybe about the same?
Speaker Change: Well, morning Andrew. So what I would say is, you know, we've got two turnarounds next year. We've got another turnaround at Cherokee in the late summer.
Speaker Change: and then we've got our annual or three-year turnaround at El Dorado. So if you pro-form it for those being...
Speaker Change: I think we're a little early still on giving an outlook on volume for next year, but as we always do next quarter, Cheryl will do that and go through that on what our volume expectations are for 2025.
Speaker Change: Okay, that's helpful. And then maybe a little bit more, I guess, philosophically, we've seen some transactions this year in the nitrogen space.
Speaker Change: and that would imply higher valuation for your business. I mean, there's two questions around that. It's first, how much do the NOLs factor into any potential transactions? And secondly, I guess, like, does it make sense for LSB to stay a public company?
Speaker Change: Well, great questions. So our NOL is about $250 million or so. So if you tax effect that for...
Speaker Change: A tax rate of 25%, 20%, I mean somewhere in that range. So we're talking about 50 to 70 million dollars of actual cash.
Speaker Change: So it's still meaningful, but as we continue to...
Speaker Change: But you know we're a public company and we're for sale every day because there's a stock price that's out there, so
Speaker Change: We're going to focus on that. We do look at M&A transactions, and so if there's a way for us to gain scale and get bigger, we're always interested in doing that, but we're pretty disciplined on how we think about M&A and what we're willing to pay for things. You know, certainly we'll pay fair value.
Speaker Change: So, you know, I guess in a roundabout way, I mean, we are public today and, you know, there's benefits and, you know, and not benefits to being public. Okay. Understood. Thank you.
Speaker Change: For more information, visit www.FEMA.gov
Speaker Change: Next question, Lawrence Alexander with Jefferies, please go ahead.
Lawrence Alexander: Good morning. Could you touch on a little bit over the next, say, four or five years how you think about your bandwidth for working on the Houston Ship Channel, scaling up El Dorado, ramping it up?
Lawrence Alexander: and maintaining productivity, or what you see as kind of, or is there a give and take where productivity efforts might need to slow down a little bit just to make sure everything else, you know, ramps seamlessly?
Speaker Change: That's a great question, and it's actually one that we discuss pretty often internally about resources, so You know you have internal resources right so employees, and so whether they're existing or new employees that we could hire
Speaker Change: But you also have the opportunity to contract out technical talent, so we're pretty adept at doing that and we do work with a lot of
Speaker Change: engineering firms to do that. So you know for instance on the Houston Ship Channel project we have
Speaker Change: a very, one of our top technical folks really leading that project for us, so we did pull him out of
Speaker Change: existing operations.
Speaker Change: but we supplemented him with contracted resources and very senior technical resources, so we've been able to do that.
Speaker Change: I think if we go into feed, and we move into feed...
Speaker Change: and I'll be back sometime late in the first quarter. We've got an organizational structure that is outlined and we'll need to put in place. And some of those will be permanent resources charged and subject to and working solely on the Houston Ship Channel Project. And some of them will be supplemented with.
Speaker Change: contracted resources.
Speaker Change: The Carbon Capture Project at El Dorado.
Speaker Change: Again, we won't build and own the capture facility and the pipeline. Our partner, Lapis Energy, will. So, from a manpower standpoint,
Speaker Change: It's not going to be a great drain on resources. We've got folks on site that are project managers and project leaders, and so they're working with Lapis on that, in addition to other projects that are going on on the site. If we were to de-bottleneck,
Speaker Change: a plant or plants down at El Dorado or any other site. Again, we'd have to really
Speaker Change: think about resource allocation. The one thing I can guarantee you is we're not going to drain our resources.
Speaker Change: from our existing operations to make the improvements that we need to make to supplement or move them on to a project and then slow down our improvement on our existing business. That's not something that we want to do.
Speaker Change: And then longer term with the Houston Ship Channel, if ...
Speaker Change: If the end market demand sort of strengthens towards the end of the decade, you know, even before your project comes on stream.
Speaker Change: Would you consider an option of just locking in a return if someone else wanted to have access to the low carbon molecules but then they wanted to take the commodity spread risk?
Speaker Change: Yeah, so it's actually what we're contemplating, day one. So.
Speaker Change: I hope I've been pretty clear about this.
Speaker Change: We will not move into feed.
Speaker Change: Unless we've got
Speaker Change: some binding nature to it but we're not in the business of taking risk and building a plant and hope that people will come so our expectation is
Speaker Change: for somewhere in the period of 10 to 12 years and basically locking in the return because what we would do in the pricing of the product...
Speaker Change: It will be cost-plus, and the cost will include the cost that we're buying hydrogen from Air Liquide, so we can back-to-back that. So the whole idea here, and the whole vision, is to really have committed offtake for that project.
Speaker Change: to de-risk.
Speaker Change: any commodity risk by pricing the offtake with the same parameters as we're buying from Air Liquide and then our real only risk once we've constructed and commissioned and got the site up and running is operations and we do that every day and that's a core competency.
Speaker Change: So, the way we're looking at this is really building almost like an annuity, where we can have a steady stream locked in at an acceptable rate of return on the capital that we're investing. Does that make sense? Yep, perfect. Okay, thank you.
Speaker Change: Thank you.
Speaker Change: Next question, Rob McGuire with Granite Research. Please go ahead.
Rob McGuire: Good morning!
Rob McGuire: Good morning, Rob. Hey, so Mark, or Damien, how far out are buyers purchasing nitrogen in today's market just relative to what you've been seeing so far this year?
Speaker Change: Close to hand-to-mouth, but some...
Speaker Change: Some recent pricing, price strengthening, particularly on urea has seen some buyers in the market start to think about taking a longer position into Q1 next year, but really the majority is basically hand to mouth.
Speaker Change: Great, and then Cheryl or Mark, can you discuss what drove CapEx this quarter and and if that's going to continue?
Speaker Change: Yeah, we had the big turnaround at Pryor in the third quarter, Rob, so that was definitely a bigger investment from a capital perspective. We did a lot of good work at the Pryor facility. We do have the Cherokee ammonia turnaround in the fourth quarter, so we'll see some elevated capital there as well.
Rob McGuire: Cheryl, was there anything kind of surprising there in terms of the CapEx or the turnarounds, or it just was a little higher than anticipated?
Cheryl Maguire: Yeah, I mean, not really, Rob. I mean, we did have a few fines that we addressed during the turnaround. That's, you know, pretty normal. So we did have a bit of a higher capex number, but nothing, a couple million, nothing out of the ordinary.
Speaker Change: Thank you. And then on the Houston Ship Channel,
Speaker Change: You're discussing the FID to take place mid-2026 and production at the beginning of 2020, sorry, 2030. But that looked like your timetable was a little further out.
Speaker Change: particularly on the production. I'm just curious what what's behind that shift.
Speaker Change: You know, Rob, I just think it's fluid, and I think that...
Rob McGuire: Could it get pulled in some? Sure. I think we're trying to be cautious and conservative when we're thinking about timing.
Rob McGuire: a lot a lot to happen between now and let's say FID and whether we you know with the expectation of long lead time items and supply chain issues and other things I think it's nothing more than some level of conservatism
Speaker Change: I appreciate that, Mark. And then lastly, the capacity utilization reliability improvements that you made a prior. Can you just discuss what you're seeing out of prior's performance given those improvements and what you expect to see you know maybe over the coming three or four quarters if we'll see any stair-step improvements in utilization?
Speaker Change: Yeah, so we're really excited about the work that they did during the turnarounds.
Speaker Change: So first, from just a pure, you know, reliability standpoint, as is the case with most turnarounds, right, you've got degradation of catalyst and other things that are going on in your plants. So we kind of
Speaker Change: I'll say limped a little bit into our turnaround. Coming out of the turnaround, the team did a phenomenal job in the work that they did.
Speaker Change: and we're running at optimal rates on ammonia. So we're really happy with that.
Speaker Change: As far as urea and the expansion, we're super excited about that and Damien's probably and his team are super excited about that because it's less ammonia to sell for us in the Southern Plains because we're going to upgrade it to UAN and so that'll add about 75,000 tons.
Speaker Change: a year in additional UAN production. So the rate is about...
Speaker Change: Yeah, I'll...
Speaker Change: 1350 or so a day in urea production and we're really seeing that. I mean you know we're not consistently hitting that every day, but we're hitting that and I think you know we're on our way to being very consistent and reliable with that production. So again
Speaker Change: I think the expansion of our urea plant and the upgrading to more UAN really is going well and as expected.
Speaker Change: Congratulations on that. Thank you.
Speaker Change: For more information, visit www.FEMA.gov
Speaker Change: Next question, David Baiglater with Deutsche Bank. Please go ahead. Thank you. Good morning. Mark and Cheryl, should turnover expenses be up or down next year, given the
Speaker Change: The term I just highlighted already.
Speaker Change: So it's a bit early. We're going through that right now and really working through the cost of the turnarounds next year. I think I would expect at this point to be something in the same ballpark as this year.
David Baiglater: Very good. And Mark, on the Houston project, are you thinking about, in terms of the financing side, de-risking that capital commitment for yourselves?
Speaker Change: We are either project financing or partners or are you satisfied with your ability to finance that project on your own?
Mark Behrman: Yeah, so the way we're thinking about the project is, and again, we have a partner in IMPEX.
Mark Behrman: So, let's just assume for simplicity purposes, we each own 50%. Won't be quite that, but...
Mark Behrman: If the project is, I think I've used an $800 million number before for the ammonia loop.
Mark Behrman: If it's $800 million, the expectation would be to project finance 60% of it, so $480 million.
Mark Behrman: that leaves us $320 million required of equity or cash. And so we'll each put in $160 million or so, and that's how we expect to finance it. Now, when I say project finance, we can go the traditional project finance route, or if the, you know,
Mark Behrman: LPL, the loan program, government loan program is still open, you know, we've started exploring that as well.
Speaker Change: Excellent. And last thing, Marcus, what are your updated thoughts on the price premium the market will pay, if any, for low-carb ammonia over the next five to ten years perhaps?
Speaker Change: That's an interesting question. Damien and I go back and forth on this.
Speaker Change: Probably when you're selling to Europe, there's an expectation that it's going to be some index. So let's just use the Tampa Ammonia Index, Gulf Ammonia Index, something like that, plus the cost of CBAM, whatever that is, because it's an increasing amount starting in 2026. So they're on a journey from 2026 to 2034.
Speaker Change: For us, and that's straight ammonia, one of the advantages of capturing carbon at an existing facility that's got upgrading capabilities is you've got the ability to sell low-carbon upgraded products like
Speaker Change: our commercial team did a really good job of selling A.N. Solution. And so we think that there are additional opportunities in A.N. Solution. There could be opportunities in nitric acid.
Speaker Change: and some of the other products, which, you know, affords us a less competitive environment plus another product that's essential to a lot of our industrial customers.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Next question, Charles Weber with Piper Sandler, please go ahead.
Charles Weber: Morning guys. A bunch of questions. Is there any gas hedges that are on right now that are going to affect gas pricing for you guys for the next couple of quarters or are we basically beyond all that now we're just looking at market?
Speaker Change: Thank you.
Speaker Change: Yeah so Charlie we generally buy first of month so we're one month ahead so you know we'll lock November gas here in the next couple of days so other than that that's the that's the majority of it.
Speaker Change: Okay, and then in terms of the deal from Lapis ultimately, let's just say for the sake of argument everything gets started on January 1, 2026.
Speaker Change: How much do you guys get from them? I know it's more or less a...
Speaker Change: I won't call it a set amount, but it's not based on what they're going to be getting for the carbon dioxide, but how much should we expect added to the numbers beginning in 2026 annually?
Speaker Change: So it's between 30 and 35 dollars a ton that they'll pay us for each ton of CO2 that they take from us and sequester So assuming that it's 400,000 tons, you know, it's roughly 14 million dollars
Speaker Change: And that, you know, again, it's all based on learning. Okay. Give me the timing. You have two turns for next year.
Speaker Change: Are they both going to be third quarter? Is one going to be third and then the other sort of third and fourth? Where should I put the hit?
Speaker Change: Thank you.
Speaker Change: I think it's both in the third quarter. You may have.
Speaker Change: So the Eldorado turnaround will absolutely be in the third quarter, and you may have the Cherokee turnaround, or the non-ammonia turnaround that they're doing, that's end of third quarter, beginning of fourth quarter.
Speaker Change: Thank you.
Speaker Change: And then last question.
Speaker Change: The season was, you know, really good for the grain guys, you know, the weather's been really terrific, they've harvested, they've done all these things, yields are good.
Speaker Change: Have you seen anything around ammonia application this year being slower because the good weather is actually bad for ammonia application in the fall?
Speaker Change: Has there been any like low numbers that you've seen or people hesitant to buy? I mean the the ground temperatures just aren't cold enough yet to hold it so I assume application is really behind whatever schedule it would typically take.
Speaker Change: Yeah, hey Charlie, you're spot-on. Yeah, it's been terrific weather for harvest and yields are terrific and you know we should should see record yields this year for the U.S. corn.
Speaker Change: crop but
Speaker Change: You know, buyers are fairly well bought, but we think if there's any incremental needs there'll be some additional purchases. But we're just, yeah, everyone's just waiting and seeing. There's not a lot of activity at the moment.
Speaker Change: Okay and to what degree do you guys have touch to that particular market? I mean is that something that's significant for the fourth quarter, third quarter, fourth quarter sales or sales you've already you know made into for fall on ammonia?
Speaker Change: I wouldn't say it's hugely material we've got a surplus of money that comes out of prior that we we participate in the in the market with so but most of our sales are already locked in and you know we're in a pretty comfortable position
Speaker Change: Okay, all right, thanks very much. I'd also add we've got less exposure to ammonia coming out of Pryor with the recent expansion of the Urea plant at Pryor, so moving more UAN and less ammonia going forward.
Speaker Change: Got it. Over time, is that something you guys are really looking at is moving less ammonia? I mean the way you talked about with the low carbon, you want to take it upstream a little more or downstream a little bit more in order to get away from the most competitive market. Is that sort of now a strategic
Speaker Change: priority is to the degree you can get away from ammonia itself.
Speaker Change: Yeah I think so Charlie, I mean we would much be preferring to sell UAN or our upgraded products rather than the base product. I think the other thing when you think about prior and its location
Speaker Change: We can't forget, we certainly don't forget that there used to be the Magellan pipeline and there's no pipeline anymore so that the distribution patterns of helammonia is distributed from...
Speaker Change: Our competitors in that area has changed and put some pressure on the marketplace, so as much as we can upgrade out of prior is what our expectation would be.
Speaker Change: Got it. Okay, great. Thanks very much.
Speaker Change: Once again, if you would like to ask a question, please press star one on your telephone keypad. Next question comes from Peter Gastrich with Water Power Research. Please go ahead.
Peter Gastrich: Thank you. So good morning Mark and team and congratulations on your progress so far this year and thanks for taking my question.
Peter Gastrich: You know for low-carbon ammonia, I understand your strategy is going to target, you know, where you see the demand and that's in the industrial applications
Peter Gastrich: But for that part that will remain in fertilizer, how far do you think we are from seeing the market assign some kind of value to the prospects for low-carbon ammonia in fertilizer applications? I'm just asking this in the context that in the last few weeks...
Peter Gastrich: We've seen the DOE come up with $3 billion in conditional loan commitments for sustainable aviation fuel projects. We have a pretty big chunk of the ethanol industry that's on low carbon production as well. So overall, just be interested in your thoughts regarding that.
Speaker Change: Thank you very much.
Speaker Change: Yeah, so what I would say is...
Speaker Change: Farmer using low-carbon fertilizer as just a fertilizer with no benefit, you know, we're like light years away from that, right? There's no, there's no, not many farmers that are going to be willing to do that, at least that's the feedback that we've gotten. To your point though on ethanol,
Speaker Change: You know, ethanol, low-carbon ethanol being used as a feedstock for sustainable aviation fuel is definitely something that a lot of people are looking at. And when you think about creating low-carbon ethanol,
Speaker Change: The biggest driver of that is capturing the CO2 and sequestering it. So that's where you get the biggest...
Speaker Change: reduction in CI score.
Speaker Change: However, using low-carbon corn also further reduces that CI score, so that is important for them, and it's much more tangible and measurable than
Speaker Change: you know, better tilling practices and just other things that farmers can do. So there is a lot of focus on that and we have had several conversations with ethanol producers about that and so we what we might see in the future, and it's not that far off, if
Speaker Change: you know, corn growers to buy low-carbon fertilizer and then paying them a premium for that. A lot of that though will depend on the extension of what's called 45Z.
Speaker Change: which is part of the tax code and that's really, what people are really waiting on now is will that be extended because it expires in 2026.
Speaker Change: So I think, again, similar to...
Speaker Change: 45Z with, you know, low-carbon hydrogen, I mean, green hydrogen or green ammonia, and people waiting on final legislation for that, people are now waiting to see whether 45Z gets extended. If it gets extended, I think that...
Speaker Change: using low-carbon fertilizer to produce low-carbon corn for ethanol, low-carbon ethanol production, could have some real legs. But I think we're in a waiting pattern for right now.
Speaker Change: Great, thank you very much.
Speaker Change: Sure.
Speaker Change: There are no further questions at this time. I would like to turn the floor over to Mark for closing remarks.
Mark Behrman: Well thank you everyone and as always thanks for the interest in LSB Industries. I hope you can see that we're making progress and if you have any further questions please feel free to give us a call or email us. Thanks.
Speaker Change: Thank you. This concludes today's teleconference. We thank you for your participation. You may disconnect your line at this time.