Greetings, and welcome to LSB Industries' Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to 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 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. 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. We have a lot to be excited about as we speak to you on the first conference call of 2021, from COVID vaccines being rolled out across the country, to our strong operating performance in 2020, to the extremely favorable trends in the nitrogen chemical markets. There is much to be optimistic about for the year. I want to thank our entire team for the success we had last year in achieving a record safety performance and setting several new production and sales volume records, all despite the impact of the pandemic. We're particularly proud of our record safety performance. LSB has undergone a fundamental change in the way our team thinks about safety and operations, striving for excellence and committed to best-in-class performance. Our total recordable injury rate for the full-year of 2020 was a record low of 1.06, with our Pryor facility and the Baytown facility we operate for a partner having operated without a recordable safety incident for the entire year. Our employees are dedicated to our Goal Zero initiative and have embraced a cultural change that has enabled us to produce these results. Our team should not only take great pride in our record safety performance, but also in the by-product of such performance, which is our improved operational results, as evidenced by the record production in sales volumes we generated in 2020. The strong safety and operational performance is particularly impressive when considering the added complications associated with COVID-19. As the pandemic drags on, our entire organization continues to strictly follow the protocols we've put in place almost a year-ago to prevent the virus from spreading within our manufacturing facilities…

Thanks, Mark, and good morning. Page 8 bridges our adjusted EBITDA for the fourth quarter 2020 of $10.4 million to adjusted EBITDA for the fourth quarter 2019 of $7.2 million. The improvement was due to continued progress in year-over-year production and sales volumes. The absence of any turnarounds this year, combined with better overall operating performance, allowed us to generate company records for both ammonia and UAN production, outcomes that are directly attributable to the investments we have made in our facilities over the last several years. Partially offsetting our operating performance improvement was the impact of pricing headwinds that we fought throughout 2020. Lower net selling prices negatively impacted fourth quarter adjusted EBITDA by approximately $9.6 million. However, with corn prices hovering around $5.25 per bushel, an anticipated increase in farmer income is expected to drive higher sales volumes and prices for fertilizers as growers seek to maximize yields. In fact, over the last month, we have seen pricing for our products significantly improve, and that makes us very optimistic for the year. Turning to Page 9. This chart illustrates the earnings power of our business. 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 sales volumes we estimate were lost as a result of the COVID-19 pandemic-related economic slowdown. We think that this analysis illustrates the true underlying operating improvements we've made to the business. With these adjustments, adjusted EBITDA would have been approximately $22 million in the fourth quarter of 2020, approximately 200% higher than 2019 fourth quarter adjusted EBITDA of $7.2 million. Though headwinds on fertilizer pricing and weakness in industrial and mining demand impacted the quarter by almost $12 million, as mentioned earlier, we have reason to believe we…

Thank you, Cheryl. The pandemic impact on demand has eased somewhat over the past two quarters, but still had an impact on our fourth quarter financial results, and we expect it to continue to have an impact on our 2021 first 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 fertilizer pricing. I said on the third quarter call, back in October, that I believe that there was reason for optimism with respect to the outlook for fertilizer prices in 2021, and this has proven to be true. As I mentioned earlier, current and future corn prices are the highest they've been since 2013, and that should result in approximately 92 million acres of corn planted this spring, which will likely prompt growers to have significant demand for fertilizers as they seek to maximize yields, particularly if corn prices remain at levels indicated by the futures market. Additionally, recent data we have been seeing points to a downward trend in imports from several countries that were shipping a meaningful quantity of product to the U.S. over the past year, which will reduce the overall supply of product in our domestic market. One particular dynamic that we remain focused on, though, is the historical relationship between urea and UAN. As you can see on Slide 14, over the past 10 years, UAN has typically traded at or above the price of urea on a nitrogen equivalent basis. However, since mid-2019, UAN began selling at a discount to urea for most of the period. Over the last month, both products have seen product selling prices increase sharply, with the UAN-to-urea discount narrowing, which we believe represents a reversion to the historical relationship. Additionally, in recent quarters,…

At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Travis Edwards with Goldman Sachs. Please proceed with your question.

Hey, good morning. Thanks for the color, and I appreciate the detail this morning. Just first was on some of the detail you provided around the disruptions you shared earlier last week, just on Pryor and EDC in 1Q, just wanted to confirm any details regarding the impact to EBITDA. And then, on a related note, were you able to get ahead maybe on any maintenance work there that normally would have been saved for a later date?

Good morning, Travis. So -- yes, I would say, as we've said in both the press releases that we put out related to the unplanned downtime from the weather event, I don't think will have a material impact. We weren't forward purchased on gas. We were unhedged on gas. We didn't have to worry about a spike in gas prices. And ultimately, we got curtailed on gas at both locations. So coupling that downtime with we were able to sell back some gas that we had forward purchased, I think the impact, as I said, will be marginal.

Got it. So selling back of that gas should more or less offset whatever loss of it, otherwise, from some disruption?

Yes. I don't know if it's going to completely offset that, but, again, I think the impact for the first six months will be minimal.

Got it. That's helpful. And then, maybe thinking about later outages even this year that you've got planned, now I know, in the past, maybe in -- with the former team, there has been some tendency to maybe adjust those outages, whether it's the timing or the length of those outages because of strong Ag market conditions. So I was just wondering, as we see pricing improving early in the year, as you think about that 3Q Cherokee outage, should we expect, I guess, is there any variability around the timing of that, the length of that? Is there a scenario where you would adjust, yes, sort of the timing of that outage if Ag market conditions really are, as strong as they are, continue to improve? Or any variability on that front?

Well, if we go back to, I guess, last quarter's earnings call, we indicated actually that we'd have two outages this year, one at Cherokee and one at Pryor. We've actually pushed Pryor from this year to next year. So basically, all of our facilities now are on three-year cycles. I think that we would -- I don't believe that we would push our Cherokee turnaround that's scheduled for this year. It is the third year for them. And I think it's really important that we make sure that we maintain the facilities so that they can run at optimal rates. So I really don't see that as we sit here today.

Okay. That's good to know the total color. And maybe one more for me I know we tend to discuss each quarter, but just on some of your comments around the refinancing, again, I think you provided helpful color in the release. But just as we think about the go-forward, should our expectation be that, assuming conditions hold, you are able to hit that sort of $100 million EBITDA threshold that you've talked about in the past, and so that this could actually be more a 2021 event? And again, so -- I know we've talked about it a little bit in the past, but any scenario where, if you do come to market, that gets upsized in order to take out a decent chunk of those preferred shares?

Well, yes, I think the conditions are pretty good right now, as Cheryl mentioned, for refinancing. So in May, the call premium drops down to a little over 103%. So it becomes much more advantageous and much more economical for us to refi. So we clearly will -- we'll consider that and look at it. I think that we could probably improve on rate and terms, and I think that's important. As far as upsizing it, I think we'll have to really take a look at that. One of the things that we are focused on is reducing our leverage and not increasing the leverage. Even though the preferred, as we've stated a number of times, is expensive, and we'd like to take that out, I don't want to leave ourselves in a position where we're overlevered again. So I think we are working on a number of other ways that we might work with our preferred holder to see if we can either repay some of that and/or just reduce it or maybe even consider discussing terms. So I guess the longwinded answer of saying I think we'll consider maybe increasing the size slightly, but I don't want to get ourselves in an overlevered position, especially as we're really -- markets are turning around, and we're ramping up the financial performance.

Our next question comes from Steve Ferazani with Sidoti. Please proceed with your question.

In terms of -- I know the nitric acid contract was just kicking off, I want to get your assessment of the early weeks and how that assessment would affect you pursuing more of those cost-plus contracts, and whether the rise in fertilizer prices after a while. I know you like to find the right balance between spot and the contracts. Just a general, what's happened over the last few weeks might affect the pursuing of future cost-plus contracts?

Yes. So the contract that Cheryl mentioned has kicked off, but that particular customer is down in the Gulf region, has also had some disruption with their plants. So I'd say it's in the first few weeks, it's been touch-and-go a little bit. We fully anticipate of ramping back our sales to that customer when their plant is back online. And I think they're anticipating no more than a couple of weeks, hopefully sooner than that. As far as industrial and mining versus agricultural sales, look, we've got a collection of assets, right? We've got three integrated facilities as others talk -- our competitors talk about this, we talk about the same thing. You've got flexibility within those manufacturing assets. And so at the end of the day, I think where we like the industrial and mining business, we also are looking to maximize our production, to make as much money as we can make. So I think we continue to look at that. And where we can flex it based on market pricing, we'll do that. But we do like the stability and the protection of the downside in our industrial and -- that the industrial and mining business gives us.

And then you commented on the improvement in UAN pricing and the slow recovery from that discount. Are you confident now that, that can return to historic levels? Because for a while there, it looked like almost it was becoming a more permanent repricing. What's your take on UAN right now?

Yes. I don't know that I would say I'm confident. I would say that the discount has narrowed some. I don't know that we're going to get back to the full historical relationship, where it trades at a premium. A lot of that has to do with the amount of domestic production that we have in UAN right now, and that, that market based on supply/demand dynamics is fairly balanced. But I do think we can expect that UAN will not trade as much at a discount as it has over the last year-and-a-half or so.

Okay. And then just one last quick one on the guidance. I'm assuming that given the pricing improvement and the fact that Q2 is generally higher volume, I'm assuming there's a significant ramp to that guidance? Or would you match it up Q1 to Q2? Essentially, would you expect more of a percentage improvement Q2 versus Q2 compared to Q1 versus Q1?

Yes. So Steve, I think that's -- that's correct. I mean, as we mentioned in our remarks, 30% to 35% improvement in EBITDA in the first half of the year. With respect to the pricing, I did point out that January and February orders were taken back in Q4. So yes, I think you'll see the majority of the upside in Q2.

Our next question comes from JP Geygan with Global Value Investment Corporation. Please proceed with your question.

Good morning. I appreciate your time. Your 2021 guidance for AN, nitric acid and other at 410 is about 105,000 tons higher than your 2020 actual production. Assume that's attributable to your nitric acid and L-band [ph] contracts, but can you remind us of the economics of those contracts? And then along the same line, in your prepared comments, you mentioned anticipating new contract awards in 2021 in industrial and mining products. Can you elaborate on which products you might expect new contracts in, or maybe where you have additional capacity?

Yes, good morning, JP. so -- yes, you're right. We are seeing some pretty significant growth in non-Ag products. It is -- a lot of that has to do with the new contract award that we got, but we have grown some other customer bases as well and brought on some other new customers, primarily in nitric acid. So I think where we have excess capacity is in nitric acid and AN solution, and we'll look to continue to grow that business. But as I said to one of the earlier questions, I mean, I think at this point, I think we've done a really good job in primarily selling out a lot of our production capacity. So now it's a question of where do we optimize and how can we optimize based on market pricing. Now obviously, if we take contracts on the non-fertilizer side of our business, we've got stipulated terms and conditions that we're contracted for. So we have a little less flexibility there. But I think we feel like we've got enough flexibility that we could take advantage of change in prices pretty quickly.

Will your growth in industrial and mining volumes materially affect your adjusted gross margins for those markets, or what we've seen historically?

No, I don't believe so.

Okay. Turning to your 2021 guidance on cost, your fixed cost guidance has come down a little bit versus 2020. I'm curious if you see additional room for cost savings on either fixed or variable costs?

Yes. Good morning, JP. I think I'd say -- Mark and I have both talked about $5 million of savings and fixed costs that we've been working on over the course of 2020 and into 2021. And so I think you're seeing that come out in the guidance that we provided. We're continuing to look at a few other areas where we think we may be able to optimize on costs. We are facing some headwinds on insurance costs, as I'm sure many in our industry are feeling. So that's offsetting some of our additional improvements that we're looking for. But I would say, yes, there are some further opportunities that we're looking at.

Okay. Your response to Travis' question about your capital structure was informative. I'm curious if I might ask one more question around that. And that would be, as you think about a recapitalization, would that -- would the proceeds from that be entirely devoted to retiring debt and/or preferred? Or would you see opportunities to, I suppose, borrow additional dollars to fund some growth initiatives, recognizing, Mark, that you said your goal is reduced to leverage.

Well, I think capital allocation is clearly an important aspect of how we operate the company, right? I mean, for a number of years, I think we've operated at significant leverage, and it would be nice to start to bring that down. So if we had projects that had really great returns, I think we'll look at that all the time. Generally speaking, we've been able to fund those projects, either from additional debt that we took on a couple of years ago to fund a few of those projects. But otherwise, it's really within cash flow because they're not tremendous dollar projects. So I think, first and foremost, though, we'd probably like to look to deleverage. I think that's extremely important for us. But keeping an eye on certainly capital projects that could provide appropriate returns, we absolutely would consider those.

Okay. And finally, as you think about green ammonia, can you provide any sort of additional information about the nature of investments, the dollar amount of investment or the timeframe over which we might expect that to take shape?

Yes. No, I don't think I can give you a dollar amount yet. I think, for us, one of the priorities that we have as a team is we fully intend to participate and really take advantage of what we think is -- will be an extremely lucrative and developing market in green ammonia. So by the end of this year, the latest, I would expect that we would be able to talk about a strategy and how we think we'll enter that market and maybe what locations and hopefully we'll put some dollars to that, but I don't think we're in a position to do that yet.

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

Good morning. Maybe just starting with the insurance cost. I did see you noted the $1.2 million headwind on Slide 8. Should we expect that headwind for -- throughout the year, in 2021, on a quarterly basis?

Yes. I mean, I think what I would say is we renewed our insurance in November of 2020. And so there's approximately a $3 million increase year-over-year for insurance costs. But we have been able to offset some of that insurance cost in 2021 with the savings that we've talked about, the $5 million. And so year-over-year, I'd say fixed cost should be lower as compared to last year, which we've kind of identified in our outlook on our -- in our guidance section.

And then how should we think about expenses for the Leidos litigation as you come up to that trial? What range should we think about? I know you take that out of adjusted EBITDA, but I'm just trying to reconcile it to actual cash.

Yes. So the trial, as Mark mentioned, is planned for the fall. And so that -- we've got $4 million of spend that we expect over the next, call it, six -- six months.

Yes, look, I mean we haven't spent anything really this first quarter. You'll see some spend in the latter part of the second quarter, with most of that spend being in the third quarter.

Got it. Understood. And then just remind me; with Pryor getting pushed off to 2022, you're going to have then El Dorado and Pryor in turnarounds next year. Is that correct?

I think that's on the drawing board right now. I think we'll sit and discuss whether it makes sense. Or can we possibly move El Dorado to the next year so that we actually would be on a schedule one every year as opposed to doubling up in the year.

Okay. And then just finally, I'm going through the map of a potential refinance situation. Say, when you think about the coal pricing fees, you probably have to borrow at least $460 million, maybe $465 million. What kind of coupon are you guys looking for in order to make this attractive? Because even though the 8% coupon, given the higher principal amount, it would only save you about $5 million a year?

Well, I certainly don't do that for a living anymore. So -- I -- we'll have to -- we've had lots of conversations with lots of investment banks about potential terms that we could issue at, and we're certainly pretty keen on looking at the markets and what's getting priced. So it could be as much as 200 to 250 basis point savings. So and I think we'll have to see, as we get closer, there's not an exact date. We don't have any deadline to get something done. So I think we'll be -- put ourselves in a position to launch a refi, should the opportune time come up, and it makes sense for us.

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Mark Behrman for closing comments.

Well, I want to thank everyone for their interest in LSB Industries. We appreciate all the questions. And if anyone has any further questions, feel free to reach out to us. Thank you so much.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.