LSB Industries, Inc. (NYSE:LXU) Q3 2023 Earnings Call Transcript
LSB Industries, Inc. (NYSE:LXU) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Greetings. Welcome to the LSB Industries' Third Quarter 2023 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. [Operator Instructions] Please note that this conference is being recorded. At this time, I'll turn the conference over to Fred Buonocore, Vice President of Investor Relations. Mr. Buonocore, you may now begin.
Fred Buonocore: Good morning everyone. Joining me today are Mark Behrman, our Chief Executive Officer; and Cheryl Maguire, our Chief Financial Officer. Please note that today's call 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. On the 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. As a reminder, we have a stockholder rights plan to protect certain tax attributes. Please see the Investors section of our website at lsbindustries.com 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. As noted on Page 4 of our presentation, our trailing 12-month total recordable injury rate at the end of the third quarter was 0.34. That is a reflection of the focused efforts of our entire team, and I'd like to thank them for continuing to embrace this important core value of our company. Turning to our financial results, we were disappointed with the results of the quarter versus our expectations heading into the quarter. our adjusted EBITDA was lower compared to the third quarter of 2022. While this is largely due to a decline in market prices for nitrogen products relative to last year, the results were also impacted by lower-than-expected downstream production, primarily in nitric acid. That somewhat limited our ability to upgrade ammonia, impacting our margins for the quarter.
Although we stubbed our toe early in the quarter, our plants have run better since early September with the exception of one of our nitric acid plants at our prior facility that had an expander failure. We expect that plant to be back in service by the end of November after we receive and install the rebuild expander. Cheryl will provide more color on the expected impact to our fourth quarter. We remain focused on our path to top quartile safety and reliability for all plants across our facilities. We also continued to progress on our growth initiatives. In early October, we announced a major milestone in the emergence of our company as a leader in the global energy transition. Our collaboration with INPEX, Air Liquide, and Vopak Moda, to develop a world-scale low carbon ammonia production and export facility on the Houston Ship Channel is potentially transformative to LSB's growth profile as demand for clean energy increases.
We are proud to be partnering with a group of companies of this caliber. More on this later. We submitted a project to expand our El Dorado facility with estimated costs of approximately $400 million. The USDA initially proposed to fund 25% of estimated project costs with $100 million maximum for an individual project. We recently learned that our project has been selected to receive funding under the USDA Fertilizer Production Expansion Program. However, the total amount of the funds requested by all the projects submitted to the USDA exceeded the total funds available under the program and the USDA elected to fund each project they selected at 80% of the requested amount. Therefore, assuming our project costs remain at approximately $400 million, we would receive a grant of approximately $80 million.
We continue to evaluate and refine the scope, costs, and timing for this project and look forward to providing a more detailed update on our fourth quarter conference call. Please keep in mind that the final approval for the funding is subject to the successful completion of an environmental assessment, which is underway and expected to be completed in the first quarter of 2024 and our acceptance of the terms and conditions of the grant documents, which we have not seen yet. On Page 5 of our presentation, we provide an overview of our end markets. Corn prices remain above multiyear averages, reflecting stable demand trends and ongoing dry conditions throughout many US corn-growing regions. We expect corn prices to remain at levels that would support strong fertilizer demand for the balance of 2023 and into 2024.
We believe that lower farm input costs over the next several months and the goal of maximizing yields should incentivize farmers to optimize fertilizer application in the fourth quarter of 2023 and in the first half of 2024. Demand for our industrial business remains steady, supported by the resilient US economy. Nitric acid demand is stable as some global producers continue to shift production from international facilities to the US operations to capitalize on lower US input costs. Demand for ammonium nitrate in mining applications is strong as the expansion of infrastructure projects increases the demand for coring and aggregate production and the growth in electric vehicles and other applications is raising the demand for metals in the US.
Now, I'll turn the call over to Cheryl to discuss our second quarter results and our outlook. Cheryl?
Cheryl Maguire: Thanks Mark and good morning. On Page 6, you'll see a summary of our third quarter financial results. We generated adjusted EBITDA of $9 million in the third quarter. As Mark mentioned, our results were impacted by lower-than-expected nitric acid production. Although sales volumes of nitric acid and derivative products were somewhat lower, we were able to meet the majority of our customer commitments by purchasing nitric acid or transporting product from our other facilities. The cost of purchasing and transporting nitric acid as compared to upgrading from ammonia, combined with higher maintenance and other costs, reduced our third quarter EBITDA by approximately $6 million. Page 7 bridges our $9 million of its third quarter adjusted EBITDA to our record $50 million EBITDA for the third quarter of 2022.
The impact of weaker selling prices for our products relative to last year is the major factor in the year-over-year change in EBITDA. Page 8 provides a summary of our key balance sheet and cash flow metrics. We generated cash flow from operations of approximately $17 million and had capital expenditures of approximately $9 million, translating into more than $8 million free cash flow. Despite the pricing headwinds, year-to-date, we generated approximately $120 million in cash flow from operations with $41 million in capital expenditures, translating into nearly $80 million of free cash flow and a free cash flow conversion rate of over 70%. We expect capital expenditures for the fourth quarter to be approximately $15 million to $20 million with CapEx for the full year of approximately $60 million.
Looking forward to the fourth quarter, nitrogen prices are firming up. Tampa ammonia currently sits at $625 per metric ton, up strongly from the low of $285 per metric ton in July. This pricing recovery has been due in part to lower inventories throughout the global nitrogen distribution channel relative to several months ago. along with recent production outages at some large international ammonia plants. NOLA UAN is currently $260 per ton, up from approximately $190 per tonne in July. While we are glad to see pricing rebound, keep in mind, that our realized pricing in the fourth quarter will largely reflect prices for products sold forward during Q3. And in addition to some products sold at spot pricing. As a result, fourth quarter pricing is expected to be approximately 60% to 70% lower than a year ago.
However, the recent rebound in pricing sets us up well for 2024. As Mark mentioned, one of our nitric acid plants at our prior facility will not be back in service until the end of November. As a result, we intend to meet customer commitments with products transported from our other facilities and that additional cost is expected to be a headwind on EBITDA of approximately $3 million in the fourth quarter. Lastly, as a reminder, we are approximately 90% locked in on gas cost for the fourth quarter at approximately $4 per MMBtu. And now, I'll turn it back over to Mark.
Mark Behrman: Thank you, Cheryl. Page 9 shows the downward trend in European and Asian natural gas prices that began in late 2022, resulting from a warm winter and heavy LNG imports. The drop in gas prices enabled European ammonia producers to restart idle plants in the first half of 2023, which increased the global nitrogen supply. Over the past three months, European gas prices have reversed course and increased significantly from summer low levels, widening the spread against US gas prices. We believe this disconnect could represent a possible source of ammonia price support heading into the winter months. On Page 10, you'll find a summary of the recently announced Houston Ship Channel Blue Ammonia project. We're currently in the pre-FEED phase of developing a world-scale ammonia plant that is expected to produce approximately 1.1 million metric tons of ammonia, while capturing and permanently sequestering approximately 1.6 million metric tons of CO2.
The plant is planned for construction on Vopak Moda Houston Ship Shuttle Ammonia Terminal. The terminal site is equipped with storage and handling infrastructure and multiple deepwater births. LSB in partnership with INPEX, Japan's largest E&P company, plans to build and operate an ammonia loop using low-carbon hydrogen produced by Air Liquide, who will also be handling the carbon capture and sequestration. Additionally, Air Liquide will be supplying our nitrogen needs. We selected the supplier of the technology license basic, engineering design, proprietary equipment, and catalyst, and we are in negotiations to finalize the related agreements. In addition to engineering and design activities, we are working to secure offtake customers for the anticipated ammonia production.
We expect initial offtakers to be Japanese and South Korean power companies. We're very excited both in the caliber of the companies we are partnering with and the potential to transform LSB into one of the only predominantly low carbon ammonia producers in our industry. Page 11 provides an overview of our other low-carbon initiatives. We continue to be encouraged by our conversations with the EPA about our Class V permit application for the carbon capture and sequestration project at our El Dorado side. We remain comfortable with the timeline that calls for us to commence production of blue ammonia in the second half of 2025, and we are in discussions with customers about their interest in buying low-carbon products. With respect to our green ammonia project at our prior site, given the uncertainty around the 45 tax credits, combined with the project's current capital costs, this project is currently on hold.
We remain excited about this project and our opportunity to be an early entrant into the production of green ammonia and we continue to have discussions with potential off-takers for green ammonia supply, but we need clarity and finalization of the 45G tax credits before we can make a decision to move forward. The US has the lowest cost natural gas globally, and this drives a considerable amount of its electricity generation capacity. However, US electricity prices have increased relative to natural gas prices, which works in favor of natural gas and products produced from it compared to alternatives. That then is a considerable headwind for the build-out of industry based on sourcing power from the grid, which includes green ammonia production.
This development is also why we believe the path to blue ammonia is much easier than the path of green ammonia today, especially considering the lack of a green premium favoring production economics. Therefore, our current focus is on making sure we execute effectively on our El Dorado blue ammonia project and our Houston Ship Channel blue ammonia project as they both set us up well for the future. Despite facing the pricing challenges of 2023 we've made significant progress on several fronts that we expect to drive bottom-line growth and shareholder value. We continue to generate positive free cash flow, enabling us to maintain a strong balance sheet. We continue to make progress in advancing a number of core growth projects that I discussed earlier, and we expect to have greater clarity on these in the first quarter of 2024.
And we expanded our portfolio of low-carbon ammonia projects positioning us to be a meaningful contributor to the energy transition. I'm excited by the advancements that we are making and about our future. Before we open it up for questions, I'd like to mention that we will be participating in the Granite Research Management Conference series on November 14th and in the New York Stock Exchange Industrial Day on November 15th. We look forward to speaking with many of you at those events. That concludes our prepared remarks, and we will now be happy to take any questions. Thank you.
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