LSB Industries, Inc. (LXU) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to LSB Industries’ Second Quarter 2021 Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kristy Carver, Senior Vice President and Treasurer. Kristy Carver: Good morning, everyone. Joining me today on the call are Mark Behrman, our Chief Executive Officer and Cheryl Maguire, our Chief Financial Officer. Please note that today’s call will include forward-looking statements and because 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. As this call will include references to non-GAAP results, please see the press release in the Investors section of our website, lsbindustries.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. In addition, we will discuss the recently announced exchange transaction with Eldridge and we direct you to the disclosures included on the last page of the slide deck accompanying this call for information regarding the exchange transaction, the contemplated stockholder meeting and related proxy statement and participation in such solicitation. Mark Behrman: Thank you, Kristy and good morning everyone. As always, we appreciate your interest in LSB Industries and are happy that you can join our call this morning. We certainly have a lot to talk about today. Between our record Q2 results, the strong market environment for our products on both sides of our business, which gives us reason to be very optimistic about the second half of the year and our recently announced preferred stock exchange transaction. These are exciting times at LSB. While unfortunately, we are not yet at the point where we can look at the COVID-19 pandemic in the rearview mirror, continued widespread vaccination in the U.S. has enabled many people to resume a close to normal life. This has fueled economic activity across the nation to a degree that has exceeded even the most optimistic predictions about the pandemic recovery and in some cases, has caused stress on the supply chain and shortages and price inflation for many products and services. However, suffice it to say, our key industrial end markets have been beneficiaries of the economic rebound as evidenced by the greater than 100% year-over-year growth in industrial product sales that you see in the earnings press release we issued last night. On the agricultural side of our business, the market factors that came together in late 2020, early 2021, to ignite a surge in demand for the products we produce and sell remain intact as we sit here today. Past the midpoint of the year, these favorable market fundamentals are providing us not only with a favorable outlook for the second half of this year, but also strong optimism for 2022. Beginning on Slide 3, we summarize the key drivers of our agricultural end markets. Commodity prices remain well above year ago levels. Most relevant to our business, the price of corn, while still down from recent highs, is up more than 80% from 2020 lows and continues to sit at 8-year high levels. The underpinnings of the strong pricing come from a multiple of factors, including the surge in exports led by increased demand from China and a rebound in ethanol production as driving and related fuel consumption have increased as the benefits of widespread COVID vaccination prompted many people to resume a more normal lifestyle, including traveling. In addition to the impact from increased demand, the price of corn also reflects global supply concerns, caused from drought conditions in Brazil, resulting in significant yield losses as well as the current worsening drought in the Western United States that appears likely to negatively affect corn production for the upcoming harvest, potentially reducing stock to use ratios. Cheryl Maguire: Thanks, Mark and good morning. Turning to Page 5, you will see a summary of our results for the quarter. Our strong top and bottom line performance largely reflect the increases in pricing for our products in both our agricultural and industrial and mining businesses. Our adjusted EBITDA of $46 million is a company record, and adjusted EBITDA for the first 6 months of 2021 has almost exceeded full year adjusted EBITDA for 2020, and there is still much room for improvement. Page 6 bridges our adjusted EBITDA for the second quarter 2021 of $46 million to adjusted EBITDA for the second quarter 2020 of $29.2 million. The light green bar illustrates just how great an impact selling price strength has had on our results. Partially offsetting the benefit of higher product selling prices was the impact of increased raw material costs, including natural gas, which are shown net in the $25.6 million price impact you see on Page 6 and represented an $8.7 million headwind in the quarter. Additionally, we experienced slightly lower volumes as compared to the second quarter last year as a result of lower inventory heading into the quarter, primarily from curtailed production during winter storm Uri and the resulting drawdown of inventory to meet sales contracts during the first quarter, combined with some wet weather patterns across the Midwest and Southern Plains in May. The good news is we have seen an extension of the season into July as a result of the wet weather in the spring, and that is contributing to continued firm pricing thus far in Q3. Before I pass the call back to Mark, I will review a few important considerations as to how to think about the third quarter of 2021. Pricing for our agricultural products remains strong and has not reset the way it typically does in the third quarter, which will be good news for our results for the period. Given our forward order book for UAN, we are principally sold out for the third quarter at prices above $300 a ton. That compares to our average Q3 2020 UAN selling price of $130 per ton. Additionally, we have sold agricultural ammonia during the third quarter at prices north of $500 a ton, which compares favorably to our average Q3 2020 agricultural ammonia selling price of approximately $180 a ton. Partially offsetting some of the improved pricing is the impact from higher natural gas cost, which we expect will average over $3.50 per MMBtu for the quarter or more than $1.50 higher per MMBtu versus the third quarter last year. Mark Behrman: Thank you, Cheryl. As announced in the press release we issued last week, we signed an agreement with Eldridge, the holder of our outstanding Series E-1 and F-1 preferred stock to exchange their preferred shares for shares of LSB common stock. We summarize the key aspects of the proposed transaction on Slide 7. A brief history lesson for those of you that are new to LSB. We issued these preferred shares in late 2015 to fund the completion of the expansion of our El Dorado facility. The shares carry a high dividend rate of 14.5%, which we have been paying in kind since they were issued, thus compounding the balance, which now stands at approximately $300 million. It was important to complete the El Dorado facility expansion as it allowed us to begin the production of ammonia at El Dorado, which in turn enabled us to lower our cost of ammonia, while also increasing our ammonia production capacity, giving us greater volume of ammonia to both sell and upgrade to other products such as nitric acid and ammonium nitrate. This investment has been a great benefit to our company and allowed us to achieve the kind of results we posted in the second quarter. Operator: Our first question is from Travis Edwards from Goldman Sachs. Please proceed with your question. Travis Edwards: Hi, good morning and thanks for the time and detail on the quarter. Congratulations on the news release so far in the preferred exchange. I hope things are well for you over the next coming weeks and months. I guess on that note, as you called out, if you’re able to complete that transaction, it should increase flexibility. As you talked about three financial notes, pursue some growth initiatives. Just curious if you could elaborate a little bit more on maybe order of operations, if and when the preferred transaction is completed or exchange is completed, as far as capital allocation priorities go, is it first refinance the notes, then pursue these green and blue ammonia projects and then possibly M&A. Just curious how you’re thinking about those things in order priority? Mark Behrman: Good morning, Travis. How are you? Travis Edwards: Fine. Mark Behrman: So yes, look, we intend to refinance shortly thereafter, assuming that we get a positive and favorable vote from the shareholders on the exchange transaction. Once we complete that, I think we’ll continue to invest in our existing business and spend capital where we think we have the appropriate returns and the appropriate hurdle rate that we put in place. Clearly, blue and green ammonia is an area that we want to make a push in, and so it will require some capital there as well. M&A, I think I’ve been pretty public over the last two or three quarters about wanting to grow the company through M&A and this cleaning up our balance sheet really gives us the runway to do that. And so we’ve looked at a number of transactions, we’ll continue to look at transactions and where we think that those transactions will be strategic and obviously accretive to shareholder value, I think we’d like to pursue those. Having said that, if we’re – if these markets continue as we think that they will for the balance of this year and even into next year, and we generate a fair amount of free cash flow. I think we’ll have to look at capital allocation, always considers return of capital to shareholders as well, whether it’s a stock buyback or a dividend, although I don’t want to make any promises that, that’s where we’re going. Travis Edwards: Certainly. That all makes sense. And I appreciate the detail. On your slides, I noticed you called out sort of targeting some 4x leverage, and I hope this doesn’t too need to keep, but curious as you think about these growth priorities, assuming you have the support of fundamentals to get you below that 4x, we think you will. Is that 4x target leverage sort of a target that you hope to maintain or preserve pro forma for any of these growth initiatives? Or is that something you want to establish first once you get there, then you’d say, hey, we’d be willing to take leverage up, but that means we can find an attractive M&A opportunity or there’s a growth project that requires some debt for that, we’d be comfortable going to 5-plus X, whatever the number is, but just getting outside of that range. Does it make sense? Mark Behrman: Yes. No, I think it’s a great question. So first, we have to hit our target. I mean, when I think about commodity businesses and more commodity business, pricing can change pretty dramatically in the marketplace in a short period of time. So generally speaking, I think lower leverage is better in commodity businesses. So below 4x target could be 3.5x run on a steady state. If we found an M&A opportunity, would we lever up more to make that acquisition. I think when we really think about that, there is a possibility that we would lever up more to make the acquisition. What I think we’d want to see is a runway that within 12 to 18 months post-acquisition that we could repay down debt or generate the cash and have net debt that brings us back below 4. So I think we’d have to feel comfortable that there’s a runway that would get us back there, and it would be a high probability runway. Travis Edwards: Got it. So it sounds like that 4x ultimately is sort of the benchmark that you’re hoping to be below even if you’re temporarily in and out of that range. So super helpful. One last clarifying question for me, cheryl gave some detail on sort of the 3Q guidance. And wanted to just clarify, does that $30 million to $35 million include an add-back of $10 million to $12 million or is that before any sort of add-back for the lost sales of volumes? Cheryl Maguire: That’s before any add back. I did – I will point out Travis that there’s $7.5 million of expense for contractors and materials that is added back, but the lost production is not. Travis Edwards: Understood. Thank you for the time as well. Thanks a lot. Operator: Our next question is from Rob McGuire with Granite Research. Please proceed with your question. Rob McGuire: Good morning, Mark and Cheryl. Congratulations on all your hard work paying off in the quarter and your recently announced plan with the preferred. Cheryl Maguire: Thanks, Rob. Mark Behrman: Thanks, Rob. Rob McGuire: Can you explain your second quarter HDAN volumes? And how we should think about them relative to your capacity to produce HDAN, including how volumes may have been affected as a result of shifting production to other products? Mark Behrman: Yes. So if you looked at our first quarter, HDAN volumes were up over year-over-year. And so, we had a really good first quarter, sold out of inventory, right, because we produced all winter. We stored and then we sell a lot of it in season. We definitely lost some production during the February freeze. So that hurt us. And so, we came into – had a higher first quarter sales of HDAN, lost production in February. So we came into the second quarter with lower inventory, and that’s why you see a lower number. Having said that, we’re definitely starting to – as I mentioned, we’re in a sold-out position. So we’re really starting to look at product pricing in the marketplace and we’re getting better returns. And nitric acid tends to be better margins for us than high-density even at the prices that we see in the marketplace today. Rob McGuire: Great. Thank you. Nice ramp on your nitric acid contract by the way as well. When you look at the tenders category for and nitric acid and other, how should we be thinking about this going forward? Is the second quarter run-rate of about 118,000 tons sustainable? Cheryl Maguire: I mean, I would say, yes, it is. I mean, we are still ramping up as well on that nitric acid contract. And so, I think it’s reasonable to say that that’s sustainable and maybe could be a little higher as we continue to ramp on that contract in the next 6 months. Rob McGuire: Great. And then, with regards to your turnaround schedule in the next couple of years here, any changes that we should be thinking about? Mark Behrman: No. We’re in turnaround now at Cherokee as Cheryl indicated in our prepared comments. And then, we’ve got right now prior and El Dorado scheduled for next year. And they’ll all be on 3-year turnaround cycles. Rob McGuire: Great. Thanks so much. I have no further questions. Mark Behrman: Thanks, Rob. Operator: Our next question is with Steve Ferazani with Sidoti and Company. Please proceed with your question. Steve Ferazani: Hi, good morning. I did want to ask a couple more questions about the guidance because, obviously, that’s a huge third quarter number, particularly with the turnaround. So as I try to back into it, I mean, are you essentially thinking that your average selling prices are going to be very, very similar to 2Q? And I know you walked through some of those numbers. Cheryl Maguire: Yes. Steve, I’m actually thinking they might be a little better than Q2 pricing from a realization point. And I talked about 300 UAN and I talked about $500 ammonia in the ag markets. And so, I’m thinking yes a little higher than second quarter. Mark Behrman: Remember Steve that I was going to say, just keep in mind that we had – because of the freeze, we had orders that we had to fulfill at lower prices that ran into the beginning of the second quarter. We don’t have that going into the third quarter. Steve Ferazani: How much – do you have a sense of how much of your forward – so how much you’ve already sold for third quarter? Mark Behrman: On UAN, between our two facilities, production facilities, we’re principally sold out for the third quarter. Steve Ferazani: Okay. So you have a pretty good take on that third quarter number right now? Mark Behrman: That’s a fair statement. Steve Ferazani: Great. When I’m thinking about your industrial versus ag mix. And typically, you’ll see seasonality on the ag side. As you continue to expand or even at this level, does some of the seasonality come up – come out of this as your mix is more leveraged towards industrial? Mark Behrman: Yes. I mean, there’s still – the industrial business clearly has less seasonality than the ag business. Having said that, when we talk about industrial we are probably 35%, maybe 40% pure industrial products with the balance being mining. There is some seasonality in the mining business depending on the location, right? If we’re selling – if we’re delivering to a mine in Canada, there’s 3 or 4 months where their demand is going to be much lower just because of the cold weather. So to answer your point or your question, yes, the industrial business industrial and mining business absolutely has less seasonality than the fertilizer business. Steve Ferazani: And then, when I look at your cost of sales per ton sequentially and natural gas prices down. I’m just trying to get a sense of are you seeing non-natural gas prices or your costs going up a bit here? And how are you thinking about those costs? Are you seeing cost inflation in general and on the labor side as well? Cheryl Maguire: Steve, it’s primarily on the gas side. Gas costs are $3.50, $3.60 per MMBtu right now in the third quarter, if you look at our average blend versus about $1.52 for this time last year. So it’s primarily gas costs. And of course, we see some higher cost on precious metals just as it relates to catalyst to run our asset business. But those are the two primary areas where we’re seeing higher costs. Mark Behrman: We’re not seeing – really not seeing any increase in labor costs. We are seeing slight increases in some supplies, but I wouldn’t call them material. Steve Ferazani: Okay. And then, how does this – now obviously, everybody is already looking forward to next year and how you feel like you’re positioned? Obviously, corn prices pulled back a bit here. We’re thinking about China imports. Just thinking about your mix and you can’t control fertilizer prices, but just how you think you’re positioned into next year? Mark Behrman: Yes. So I mean, I’ll start with the second half of this year. Based on our forward order book and where pricing sits today and some of the pricing that’s already been announced for the fourth quarter. I feel really comfortable with our second half of this year. And in fact, I would say, the second half of this year should be – and the expectation is to be better than the first half of this year. Going into next year, corn prices, even though they pulled back are still really good, $5 corn, $5.50 corn historically, it’s been a good price, farmers are making money, and that’s important. I think we’re still seeing some pretty good demand from China. That could change. I don’t think we understand the dynamics there. And that could change fast. But right now, I think we’re still seeing demand. I think what’s interesting is the corn crop in Brazil has really not been a great year for them. And so, we’re going to see numbers coming out of Brazil, that should be lower than what was anticipated some months ago. We’ve also had some really hot and dry weather here in the Western United States. And I think we’re going to see yield numbers coming out of Western states that Midwest or western states that are growing corn, that are going to be below expectations. So – and I think you’re going to see a lot of acres planted next year. I think at north of $5 corn, that’s a really strong market. And we anticipate that fertilizer prices will still be relatively high compared to certainly the 2016 to 2020 pricing that we saw during those years. So we’re pretty excited about next year. We think that if we continue to execute, and we’ve got room to improve on our execution, we’ll have a really good year. Steve Ferazani: Okay. Thanks so much everyone. Congratulations on the quarter. Mark Behrman: Thank you. Cheryl Maguire: Thank you. Operator: Our next question is from Brian DiRubbio with Robert W. Baird. Please proceed with your question. Brian DiRubbio: Good morning. Maybe just starting off, do you mind sharing any thoughts you have on the recently announced U.S. Department of Commerce investigation into dumping of UAN from Russia and Trinidad, and Tobago? Mark Behrman: Yes. So I mean, CF filed an antidumping suit against Russia and Trinidad on imported UAN. So I’m not – I’m going to paraphrase it because I don’t remember certainly the exact wording. But in anti-dumping suits, the claim usually is that someone who’s importing is bringing in product at kind of I wouldn’t say artificial pricing and very low pricing and jumping it in here in the United States. So it creates a competition issue. And so, CF is claiming that Russian gas prices in theory could be what they want. So it’s a totally different market than it is here for gas. And so, what’s the actual cost of product coming in? And if the cost is low, then, they can afford to lower selling prices. With Trinidad, it’s a bit different, but it’s the same concept. So I think you saw an antidumping suit that was filed earlier this year is probably filed late last year. On phosphate and it just follows suit with the same premise. Brian DiRubbio: And I guess the thought was, what impact do you think that could have on the business? And UAN has been depressed over the last several years, couple of your peers have said that those flows have seemed to disappear. So I’m just trying to get a sense from you how you think that could impact pricing going forward? Mark Behrman: Well, usually, when you – when there’s an anti-dumping suit in place and they put either a tariff or some kind of tax or penalty on an import or you see imports moving into other countries. So the supply then is taken out of the marketplace. And you see price – selling price appreciation on that particular product. So I mean, if that happen, I would expect the same. Brian DiRubbio: Okay. And then, can you provide any update on the latest lawsuit? Mark Behrman: Yes. So we still don’t have a court date unfortunately. We have another hearing scheduled in the fall to sit down and talk about next steps and certainly, the surge in COVID cases in Arkansas being a state that has a high number of cases. In fact, I think they’re top five in the United States now, isn’t helping matters. Brian DiRubbio: So this is more than likely pushing to 2022? Mark Behrman: Yes, I would think so. Brian DiRubbio: Okay. And then, I know circumstances are different, but assuming that the engineering study that you’re conducting on the blue/green ammonia plant is sort of approved. I guess two-part question there. How much capital are you willing to commit towards a project like that? I know, it’s going to be return independent. But more importantly, given the issue you had with the El Dorado project, how is the company positioned today to better manage that construction risk versus several years ago? Mark Behrman: Well, yes. So let me answer the first part. The magnitude of the investment is nothing like it would have been for the project that we did in El Dorado, right? That was $830 million, $835 million. So it’s significantly by multiples less than the capital commitment that we had made there. Having said that, it still has to provide us with the right returns and that’s a big focus for us. I do think that being an early entrant into the market. Is – has placed a lot of value, it has a lot of value for us. And so, I think we’re focused on that as well. Managing the project, one way you can do that as you can get a fixed price contract, which we didn’t do in the El Dorado expansion. So that’s one direction we could go. The other would be to have a much greater level of oversight and to make sure that any contractor that would be working on this certainly has skin in the game, as opposed to just a straight time and materials contracts. So I think there are a lot of lessons learned from that. And I think we would take a lot of precautions to make sure that we would mitigate our risk. Brian DiRubbio: Great. Just final question for me, as you mentioned potentially M&A. Would that be a – and this is all speculation. But would that be something you would fund entirely with debt or would you consider issuing equity alongside of that? Thank you. Mark Behrman: I think it’s a hard question to ask – to answer. I think Travis asked the question earlier about leverage and being below 4x and would we lever up for an M&A transaction. And I think my answer was that we would, if we could see a clear path over the next 12 to 18 months or 12 to 18 months post-closing of that acquisition that we could get leverage back down below. So we’re not afraid of levering back up for a good acquisition. Having said that, I don’t think you’d see us lever up to lever up to put the company in a position where we couldn’t see our way to de-lever back down. So, if that required some issuance of equity, we would consider that, but it has to be accretive to earnings. Otherwise, it wouldn’t make sense for us to do. Brian DiRubbio: Understood. Appreciate the thoughts. Mark Behrman: Thank you. Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Mark Behrman for closing remarks. Mark Behrman: Well, I want to thank everyone for participating in the call and appreciate your interest. If you have any follow-up questions, feel free to give Cheryl and myself a call. And we’ll be reaching out to some of you once we file the proxy to discuss the exchange transaction further and looking for a favorable vote. Thank you. Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.LXU Ratings Summary
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Deutsche Bank Lowers Price Target on LSB Industries, Shares Fall 5%
LSB Industries (NYSE:LXU) shares fell more than 5% intra-day today after Deutsche Bank analysts lowered their price target for the company to $9 from $11 while maintaining a Buy rating. The analysts noted that LSB expects Q3 EBITDA to rise significantly year-over-year, excluding $15 million in turnaround expenses, driven by higher prices and reduced costs for natural gas and other inputs. However, the quarter-over-quarter EBITDA is anticipated to decline by 62%.
LSB is also making progress on its two low-carbon ammonia projects. The company recently signed a five-year agreement to supply up to 150,000 metric tons of low-carbon ammonium nitrate solution (ANS) to Freeport Minerals, with deliveries starting in January 2025 from its El Dorado, AR facility. The contract includes a premium pricing for the low-carbon ANS compared to the conventional version. The El Dorado Low-Carbon Ammonia Project, in partnership with Lapis Energy, is expected to be operational by Q1 2026, reducing LSB’s Scope 1 CO2 emissions by approximately 25% and generating an additional $15-$20 million in EBITDA.
Deutsche Bank Lowers Price Target on LSB Industries, Shares Fall 5%
LSB Industries (NYSE:LXU) shares fell more than 5% intra-day today after Deutsche Bank analysts lowered their price target for the company to $9 from $11 while maintaining a Buy rating. The analysts noted that LSB expects Q3 EBITDA to rise significantly year-over-year, excluding $15 million in turnaround expenses, driven by higher prices and reduced costs for natural gas and other inputs. However, the quarter-over-quarter EBITDA is anticipated to decline by 62%.
LSB is also making progress on its two low-carbon ammonia projects. The company recently signed a five-year agreement to supply up to 150,000 metric tons of low-carbon ammonium nitrate solution (ANS) to Freeport Minerals, with deliveries starting in January 2025 from its El Dorado, AR facility. The contract includes a premium pricing for the low-carbon ANS compared to the conventional version. The El Dorado Low-Carbon Ammonia Project, in partnership with Lapis Energy, is expected to be operational by Q1 2026, reducing LSB’s Scope 1 CO2 emissions by approximately 25% and generating an additional $15-$20 million in EBITDA.
