Greetings. And welcome to the LSB Industries Third Quarter 2020 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, this conference is being recorded. It is now my pleasure to introduce your host, Kristy Carver, Senior Vice President and Treasurer. Thank you. You may begin.

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 actual results to differ materially. As this call will include references to non-GAAP results, please reference 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. At this time, I'd like to go ahead and turn the call over to Mark for opening remarks.

Thank you, Kristy, and good morning, everyone. We're glad that you could participate in our call this morning and appreciate your interest in LSB Industries. I'd like to begin on Slide three, by acknowledging the commitment and dedication, that our employees have shown to operating safely and improving our safety performance. Our team delivered another strong operating performance, across all of our owned and operated facilities during the third quarter and manage to achieve record production levels in several product categories, while doing it safely. As indicated on the slide, we have made significant strides with our safety performance, over the course of 2020, which is something everyone at LSB should celebrate. These days, safety goes beyond avoiding physical injury, it also encompasses something many of us took for granted only eight months ago, which is avoiding serious illness in the course of our workday. With the ongoing spread of the COVID-19 virus, this is now something we all think about every day. In this regard, we credit the personnel at all of our facilities and offices for remaining vigilant with the protocols we put in place months ago, to prevent transmission of the virus, and have improved and upgraded a number of these policies and procedures, as we've learned more about what actions we can take that are most effective. As everyone on this call knows all too well at this point, it's difficult to maintain a high level of intensity in attempting to manage a situation that has many uncertain and unknown duration as what we've been dealing with since early this year. Our view at this point is that we're going to have to continue to operate in the COVID environment until the end of 2021. And we are planning accordingly. But we wish this weren't the…

Thanks, Mark and good morning. Page 7 verges our adjusted EBITDA for Q3, 2020 of $10.2 million to adjusted EBITDA for Q3 2019 of $11.1 million. Keep in mind that the third quarter is consistently our seasonally weakest quarter. The modest year-over-year decline is a result of lower selling prices largely in our agricultural market. As Mark stated, persistent elevated inventory levels for ammonia combined with the closure of the Magellan pipeline in September of 2019 as well as increased imports and decreased exports of UAN over the last 12 months have continued to weigh on pricing. Lower selling prices offset by lower natural gas costs negatively impacted the third quarter by approximately $7.5 million. However, we were able to offset lower selling prices with continued improvement in year-over-year production. You may recall that we had an 18-day turnaround at our El Dorado facility and a 22-day turnaround at our Pryor facility in the third quarter of 2019. With no turnarounds in the third quarter of 2020 production and sales volumes for all our products contributed an increase in EBITDA of approximately $9.5 million year-over-year. In fact, we posted a second consecutive quarter of record urea and UAN production at our Pryor facility, which allowed us to achieve record UAN sales out of our Pryor facility as well. Continued headwinds from weaker industrial and mining demand as a result of COVID-19 impacted the quarter by approximately $1.7 million. Turning to page 8, this chart illustrates the earnings power of our business under more normal but not robust market conditions. For comparative purposes, we have normalized for both selling prices and natural gas prices to match those we experienced in 2019 and also added back lower sales volumes from lower demand directly resulting from the COVID-19 economic slowdown. This allows us…

Thank you, Cheryl. Well, we are by no means out of the words today. The pandemic impact on demand has eased somewhat over the past two quarters, but still had a meaningful impact on our third quarter financial results, and we expect will have a measurable impact on our 2020 fourth quarter. What has been a greater pressure on our financial results for a sustained period of time, however, has been the impact of historically weak pricing for fertilizer. To recap what we've discussed numerous times over the past year plus there's been an excess supply of ammonia and other fertilizer products due to a variety of factors including the wave of new ammonia production capacity that came online in 2015 to 2018 timeframe, extremely weather that impacted both harvest and planting seasons from late 2018 to essentially the entire year of 2019. The aforementioned closure of the Magellan ammonia pipeline, which has resulted in a lot of products sitting in a region at our Pryor facility serves, in the past had been transported to more distant geographies. And elevated import levels which is an indirect result of the low natural gas prices globally, and duties implemented in certain regions. We do believe, however, that there is reason for optimism with respect to the outlook for fertilizer prices in 2021. First, the fall corn harvest has been accelerating in recent weeks, and conditions are lining up well for a good fall ammonia application in order to get nutrients in the ground in preparation for the spring planting season. Second, corn future prices of over $4 a bushel are at levels only seen twice in the past four years. This strength has been driven by a surge in demand resulting from the rebound in ethanol consumption which I mentioned earlier, as…

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Thank you. Our first question comes from line of Joe Mondillo with Sidoti. Please proceed with your question.

Hi, good morning, Mark. And Cheryl.

Good morning, Joe.

Good, morning. How are you?

I'm good, doing well. You guys are doing well? Just wanted to start off with the 4Q guidance that you've provided. I think you said 40% to 50% year-over-year improvement in EBITDA, I would have thought it would have been a little bit stronger quite honestly, primarily, given the fact that you don't have any plan or I guess last fourth quarter, you had a little bit of unplanned downtime, prior it was down I think half the quarter? So, that's number one. And number two pricing at this point, I think correct me if I'm wrong, is a little more comparable. Pricing came down a large part of 2019, and I think it's a little more comparable on a year-over-year perspective. So I would have thought you maybe would see a - setting up to see a better year-over-year improvement, but could any color there?

I think Cheryl gave you some indication of pricing in her prepared comments and certainly, as part of the earnings presentation slide. I think pricing is going to have a significant impact in the fourth quarter, as we've talked about, and I think others in the industry have talked about. Production actually should be up and up pretty significantly. But pricing will continue to weigh on the fourth quarter.

Okay, all right. And then just as far as the cost improvement initiatives, could you just clarify how much you're expecting sort of from the capital projects versus that $5 million of fixed cost savings that you mentioned?

Yes, we haven't given out any kind of EBITDA indication a range on some of the capital projects and the new contract awards. So, I'm kind of hesitant to give that out.

Well, I thought I have in my notes, prior notes that $10 million to $15 million of savings and I thought that was all related to the capital projects. And so I'm wondering if this $5 million is an addition to that. I thought you said $10 million to $15 million on the last conference call.

Yes, it's not in addition, it's part of.

It's part of. Okay. That's all I was wondering. And then I may have missed this. I think I remember hearing you mentioning this in your prepared remarks, Mark, but could you just go over what the update is on the Leidos trial again?

Yes, so, as you might imagine, during the pandemic, it's been really difficult to have elongated trials. We anticipate, I think a trial that will go three, four weeks or more. And so what you're seeing during the pandemic is shorter trials. So, we're going to have to wait and hopefully until the vaccine comes out earlier in the year and things start to maybe improve from a pandemic incurrence or the COVID-19 incurrence rate for us to get to a trial. So, right now we're talking about somewhere probably in the latter part of the first half of next year.

Okay. And then just the balance sheet. Any update on how you're thinking about approaching that, a lot going on in the financial markets this year, you've seen tremendous amount of improvement in your utilization rates of the plants pricings a little weak. But as we approach next year, things could get better. Any further thoughts, in addition to what you mentioned in your prepared remarks as far as refinancing the balance sheet?

Sorry, Mark, do you want to go ahead?

Yes, I mean, I think that, Cheryl mentioned, bonds are callable today at 107%. So, that's a fairly expensive to refinance. And so in May of next year, that call premium drops down to 103% range. And so that coupled with expectations that will continue to improve from an operating standpoint, but also, I think we'll see some better pricing in 2021, would lead us to probably, at least today sit here and say that, we want to get past that next May of next year, which hasn't dropped in the call premium, where things should improve, we'll start to see also less, much less of an impact on from COVID-19 on our industrial business, so that would be the current thought today.

Okay, yes, that's what I figured. Just lastly, if, as far as your 4Q guidance, how are you thinking about the full application season relative to last year?

Yes, so the application season should be, we expect it to be significantly stronger than last year. Remember, last year, there was a very small window, was a really tight window to get ammonia down. And while the growers did that, and technology is much improved to do that. This year, there should be, much longer window for them to get ammonia down in the ground. And I'll tell you that, the Corn Belt itself was a bit behind as they either had too little or too much precipitation. But they've really over the last couple of weeks gone up. But you have seen pockets, where the fall application season is really strong right now like Minnesota. The harvest move pretty swiftly and ammonia application in that state was going really strong. Texas, the ammonia application is actually almost done. So, I think we would expect some pretty good demand in ammonia between now and the end of the year.

Okay, and I actually just have one last question, I'd be sort of miss if I didn't ask it. Just regarding the pricing that we're seeing in corn here. Any thoughts on if this is any more sustainable than the three or four times that we've seen it hit above four in the last four or five years any thoughts there?

Yes, I mean, I think I said as in my prepared comments, there's a number of variables that are really pushing corn to the levels that we're at today. And we were just recently on a few calls with some really good industry experts. And I think there's a really good feeling that the corn could sit in the 425 to 450 range. One of the things I didn't mention on the call is, China recently purchased, the several purchases of corn over the last several months. And I think that'll continue. I mean, I think that with the replenishment of the hog population that they lost due to the swine flu, and wanting to feed them in a different way. I think you'll see corn demand, pretty significant from China, which just will support higher pricing as the demand. I don't know about outstripped supply, but ultimately, it's much stronger demand.

Got it. Well, thanks for taking my questions. Good luck with the rest of the year.

Okay, thanks, Joe. And good luck.

Our next question comes from line of Travis Edwards with Goldman Sachs. Please proceed with your question.

Hey, good morning, Mark. Cheryl, thanks for the detail this morning and for answering our questions. I had a question on, you maybe talked about rising gas costs going into next year, potentially also having some benefit as marginal producers maybe lower production. Anyway to think about or any color that you can share and sort of your expectations for sort of that net impact on I guess margins or both pricing and on the cost side?

Well I don't know that there's a direct relationship on increase in natural gas prices versus selling prices. I would tell you that when I think about, higher gas prices, there's probably three variables that will offset that in my mind. One is, you've got steeper global nitrogen cost curve should drive higher selling prices here in the U.S. The second would be global demand remain strong. So we would expect U.S. markets to be less of a discount. And then third, I think, we believe that the worst is over for both ammonia nitrates, given the weaker industrial demand that we've seen in 2020 from the pandemic. So, I think, certainly weaker industrial demand in both in ammonia and in certain nitrate products, definitely has an impact on fertilizer prices themselves. So I think those three would lead us to believe that despite higher feedstock costs, we'll see selling prices - we should see selling prices sometime in 2021 really offset those higher feedstock costs.

Got it. That's helpful. That's the color I was looking for. Thank you. Maybe just to follow-up on the nat gas side. Any color you can share and sort of expectations for incremental working capital needs next year as those costs come up?

I'll let Cheryl to answer that one.

Yes. I mean, I'd say, I wouldn't think that would be very material, I'd say $1 increase in natural gas would probably drive about $4 million to $5 million of higher working capital needs. But on the flip side of that, we have some rising prices hopefully as well on the fertilizer price side. So I wouldn't expect it to be a material draw on working capital.

Okay, got it. That's helpful, thanks for those benchmarks. Question on the balance sheet. I know it comes up from time to time, but can you just refresh us on your latest thoughts on what to do with those preferred shares? I know, there's a little less urgency to address those in the near term. But we just getting investors asking about how that rising balance ultimately comes down. So just hoping to get maybe a refresh on your thoughts.

Well, I mean, I think as Joe asked earlier about refinancing, I mean, I think that's one way to think about it. If we refinance our debt is that one way that we could maybe refinance for slightly higher amount and use some part of that to redeem some preferred. I think we'll take a look at that. We won't do it at the expense of creating too much leverage. So that's something that we're not interested in. As you know, we've got a lawsuit that we've talked about. And I think that's another form of cash generation and then there's a couple of other things that we're working on. So I don't think there's one silver bullet that really deals with the preferred. I think it's going to be a number of things that we've got going in discussion today that will help us reduce debt balance, and ultimately hopefully take the preferred off our balance sheet.

Yes, thanks for having walked through those different scenarios. I think maybe one more extension. Again, I know, Joe asked earlier the refi comes up seemingly every quarter, but in the past, you've just thrown out I think sort of $100 million of EBITDA benchmark is sort of a general level you'd like to achieve before considering refinancing. I know that's not a hard and fast rule by any means, but is that still generally how you're thinking about where you want this business to be maybe on a normalized basis from an operation standpoint, or I guess, can you bridge between how you're thinking about refinance sort of overall operations and where they're at?

Yes, so I mean, I think that's a good rule of thumb which I think most important and why that's an - that may be an important number for us, as we're really focused on improving our rating with S&P and Moody's. I think as you would agree, getting to a B will have significant implications on terms and rate. And I think that will be a really important for us.

Sure, appreciate that. And then maybe the last one for me. And maybe I'm grasping for straws here. But I know you'd mentioned that you haven't shared much as far as detail on quantifying sort of the new contract awards. Obviously, you've got a lot of new contracts coming in, which is great. Anyway, to even sort of ballpark specifically, or more specifically around what the nitric acid contracts look like? Again, I can understand you may have some limitations given on your grievance with the customer, but, 70,000 to 100,000 tons of nitric acid, sort of general ranges of potential EBITDA additions, or is it - can you not sure?

Yes, I think I'd probably rather not do that at this point, Travis.

Okay. Yes, no problem. I appreciate the color and the best of luck in the quarter and stay safe. Thanks.

Thank you. You too.

Our next question comes from the line of JP Geygan with Global Value Investment Corp. Please proceed with your question.

Good morning. Given the operational reliability that you've achieved at your plants, can you characterize next year's turnarounds relative to the cost and volume disruptions in previous turnarounds?

That's a good question. Well, I think we're still - I think the issue JP is really we're still in the planning stages of those turnarounds. So typically, we would say that they are 30 to 35 day turnarounds, another one at Cherokee, one or three year turnaround cycle. So we want to make sure that we're exercising the proper maintenance on that facility. As we finished that turnaround will go another three years without a turnaround. At Pryor, we did a pretty extensive turnaround last year. So we want to make sure that we continue that to do the work that we need to do to improve the operations and the reliability of that facility. I would tell you that, we're acutely focused on planning for those turnarounds in a much more expanded way than we've done historically, and acutely focused on trying to bring those days down. So I think it's probably a little early for us to give you some color on that, but I think next quarter we'll be in a much better position.

Okay, great. Can you give us any more color on the capital projects you have planned for 2021? And then in relation to your either planned or completed projects and particularly your product storage projects, have there been any new considerations to liquidity or working capital introduced?

Well, I mean, so some of the new contract awards, we are going to make some investments to improve both storage and loading and unloading to support that business. So those should be complete in the earlier part of next year. A couple of other projects that we're evaluating. So I don't know that it's worth given much color on that. We also talked about a CO2 and new long-term CO2 contract that we were awarded out of our El Dorado facility. And that requires a little bit of capital as well, to build certainly a pipeline to a gas plant that our customers building. So those are the things the two near-term projects that are underway, and then a couple of others that. We're evaluating that all we'll have probably two year or less payback. I don't know if that answered the question.

That's helpful. Yes. Thank you. Finally, your deck mentioned that you're on track to reach a 10-year high in sulfuric acid production. You've previously suggested that you would consider acquisitions in this area. More generally, can you talk about your appetite for acquisitive growth at this point?

Yes. I mean, I think I've said this previously, we're getting to the point now, where - while we're not operating at the optimum levels that we'd like to and we expect to. Where plants are much more reliable, we're able to achieve record productions, which we'll hope to continue to do that as we improve the reliability. So I think, we're looking for opportunities out in the marketplace that would make strategic sense for us. And that could be on the fertilizer side of our business, it could be in production, it could be in storage, it could maybe be in logistics, and I'd love to take a look at that. And then it certainly could be on the industrial side of our business. And the key really is to focus on opportunities where we can use our core competencies to really hopefully improve the business and realize some synergies.

Great. Thank you for taking my questions.

Our next question comes from line of Brian DiRubbio with Robert W. Baird. Please proceed with your question.

Good morning, I'm sure I think you guys do a little bit of hedging on natural gas. Can you give us a sense of what that looks like right now, your hedging program?

Sure. We're about 60% hedged for the fourth quarter, around $2.40 per MMBtu. Looking into next year, we're watching that closely. We've got maybe 10% hedged for the first quarter. We're working with, our team here for some buying opportunities for next year. So, we'll be watching that closely over the next several months.

Got it. And just can you give us details on the ammonia storage debt that you refinance. I think that was the $3 million that was due in full next year, that you said you added 18. So, is that you refinanced that with 21 and you netted 18.0 million of cash?

Yes, I mean, we refinanced for $30 million and paid back $12 million that was outstanding. So, for a net $18 million of additional liquidity to the balance sheet.

And what was the rate on that refinance?

It's right around that 8.5% to 9% range.

Okay, and that versus like the 4% to 5% weight, that was on the existing. Correct?

Correct.

Okay, perfect. Then maybe switching gears, there was an obscure filing, middle of August, with the New York Stock Exchange, talking about listing and registration of preferred stock. Because if I remember correctly, when you do the last refinancing, I think it was actually this the sale of the HVAC business. You guys basically got the preferred owners to push off their put date on their preferred stock. And but that could data I think is in 2023, or 2024. So, I'm just trying to think about, as you're talking about potentially refinancing, how you're managing that put in, is this filing sort of a first step to possibly listing those preferred shares, so, you can remove the put restriction?

Yes, so the filing that was in August, was actually an NOL shareholder rights plan. So, we've got $650 or so actually a little more than $650 million of net operating losses. And we wanted to ensure that we didn't lose those. And there's some pretty complicated tax rules on ownership changes that people could easily trip, especially in a low stock price environment. So, that's what that filing is related to, it's an NOL rights plan that we have in place.

Okay…

It has nothing to do with existing preferred.

Okay, got it. But it would be possibly those preferred holders to renegotiate that put option. If you are going to try to get any refinancing done. Is that correct?

Yeah, I think that, it's occurred that last refinancing, and I would suggest that, given that they're our largest stockholder, and we've had a really good relationship with the holder of the preferred that shouldn't be an issue with. If that's the world that we went down.

Understood. Two last questions, the PPP loan for $10 million that we're going to find out next year if you have to repay that or not?

We meet all the qualifications to get that loan forgiven so that would be our expectation.

Okay, and then finally, the lawsuit, I know you're focusing on your suit against Leidos. I think there was like a $9 million judgment against you earlier this year, sort of related to that. Where do you stand with that? I think you're appealing that right now but where does that potentially stand in terms of timing vis-à-vis, the lawsuit against Leidos?

Yes, so there's no requirement to make any payments, we are appealing it and it is part of the greater lawsuit that we have with Leidos.

Okay. So no indication on when that appeal is going to be heard?

No, unfortunately not.

Got it. Great. Thank you.

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

I want to thank everyone for listening to our conference call and for all the questions that we received. Hope you can see that we're making a lot of progress and hope to report on additional progress next quarter. Thanks so much and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.