Good day and welcome to the LSB Industries Fourth Quarter 2021 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Fred Buonocore. Thank you. You may begin.

Thank you, Stacy. And 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 the 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 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. Mark?

Thank you, Fred. We're very happy to have the opportunity to speak with you today about our 2021 fourth quarter results. We posted record results for our fourth quarter and full year as we continue to run our plants reliably, which enabled us to capitalize on the strong market environment for our products on both sides of our business. First, I'd like to thank all of our employees for making this another excellent quarter and for their strong commitment to improving and growing our business. A lot of hard work has gone into bringing it to this point and I'm excited about what we can accomplish with our balance sheet and the market backdrop. As you all know, our number one focus is safety. We want all of our employees and contractors to go home safely every day and we are committed to providing a safe and healthy workplace for all our employees and stakeholders by implementing high safety standards to avoid any potential risk to people, communities, assets or the environment. Our 12-month rolling recordable incident rate at the end of 2021 was 1.15 incidents per 200,000 man-hours. However, our goal is 0 and so we have work to do to get there. The entire team is committed to improvement and we expect an improved safety performance in 2022. On Page 5 of our presentation, we summarize the key drivers for our agricultural end markets. Commodity prices continue to trade well above year-ago levels. Most relevant to our business, the price of corn continues to trade at near 8-year highs. The strong pricing is as a result of multiple factors, including ethanol consumption and production, which is currently near pre-pandemic levels as the US miles driven continue to recover from pandemic shutdowns as well as the impact of historically…

Thanks, Mark, and good morning. Turning to Page 7. You'll see a summary of our results for the fourth quarter and full year 2021. Our strong top and bottom line performance relative to 2020 reflects the increased pricing for our products across all our businesses. Our fourth quarter and full year adjusted EBITDA of approximately $90 million and $191 million are both company records. Additionally, in the fourth quarter and for the full year, we generated EPS of $0.72 and $0.85 respectively and we expect strong profitability to continue in the coming quarters. Page 8 bridges our fourth quarter adjusted EBITDA of $90.1 million to adjusted EBITDA for the fourth quarter of 2020 of $10.4 million. The light green bar illustrates the very substantial impact selling price strength had on our results after almost 4 years of trough market pricing. Partially offsetting the benefit of higher product selling prices was the continued increase in raw material costs, which are shown in the $16.8 million variable cost impact you see on Page 7. Our natural gas cost rose substantially over the course of 2021 and remained elevated during the first quarter of 2022, as compared to last year's first quarter. Relative to the operational improvements that enabled us to capitalize on the significant increase in selling prices in 2021, Page 9 shows how these enhancements translated into increases in actual ammonia production volume, which has increased meaningfully over the past several years, allowing us to capitalize on the pricing trends that emerged in 2021. Page 10 illustrates the strong bottom line improvement we delivered in 2021. This is the result of the favorable pricing trends, the operational improvements we've made at our facilities, new customer contracts and investments we've made to optimize our product distribution and mix. We expect to further…

Thank you, Cheryl. As we progress into 2022, we find ourselves better positioned and with more opportunity to grow than we've had at any time in our company's history. In addition to the strong financial foundation that we have established and the solid operational foundation we have created, we are also benefiting from the historically favorable pricing environment. Page 13 illustrates one of the key underpinnings of this pricing strength. As I discussed previously, the spread between US and European natural gas prices widened in an extreme manner over the course of 2021. This prompted a number of producers to curtail production during the third and fourth quarters of last year, exacerbating what was already a global shortage of ammonia in the face of rising demand. Natural gas prices in Europe, while down from December peak levels, currently are fluctuating between $21 and $24 in MMBtu equivalent, which represents a price that is more than 5x what we're paying here in the US. And although some European production has come back online, the impact on supply and pricing throughout the global nitrogen market has been pronounced and we believe will persist through 2022 and into 2023, even if gas costs decline further in the coming months. The bottom line is this dynamic represents a significant advantage to U.S.-based nitrogen producers. We intend to capitalize on the strong pricing environment, and the cash flow that we expect to generate as a result, in order to pursue opportunities to grow our business and create value for our shareholders. On Page 14, we summarize our priorities for 2022. The guiding principle in the way that we run our company is to protect what matters and what matters most are our people. The health and safety of our employees is and always will be…

Your first question comes from Steve Ferazani with Sidoti.

Questions on guidance. First one, and you may have mentioned that, is how you're thinking about tax rate and the usage of NOLs this year.

We did use some NOLs in 2021, as you might expect, and certainly expect to use. I mean, we have about $600 million of NOLs available to us, which we would expect to use over the next several years. Of course, how much of that is going to depend on pricing.

Is there any part of your profit that can't be – the NOLs can't be directed at? So what I'm basically asking is can we think about a 0% tax rate this year?

Yes, for the most part. There's some very minor limitations, but yes, for the most part, I would say the majority or most of it.

Great. And then just a couple more on – one, SG&A seems like you're a little bit lower than I was expecting, how much you're trying to still look at costs given, even given the strength of the market. Because that even looks a little bit lower than this year, although there might have been some one-timers this year.

Yes, there was definitely some onetime costs in SG&A this year, Steve, with some of the exchange transactions that we did back in the third quarter, which added $3-4 million of additional cost to SG&A. And so we would expect those to not occur obviously going forward. So that's the reason for the SG&A decline.

Right. Then I just want to ask about volume improvement and CapEx. CapEx, I know you were obviously limiting CapEx the last couple of years until the market improved, but just the expansion on CapEx this year and how much that can help on volume. Given the 2 turnarounds, a little surprised you can get volume up this year and maybe the Southwest freeze is a factor last year.

Yes, so you're right. When you think about capital expenditures, I think we had, kind of, 2 issues over the last several years. The first is we're in an extremely low price environment so I think we're trying to be prudent about our spend and how we spent. And of course we had a pretty expensive balance sheet and so that refinancing obviously has reduced our interest cost and allowed us some additional cash to invest in the business. So in this business, in any commodity business, I think you hunker down in tight markets and when you're in much improved markets, you tend to spend. So we're definitely going to spend during 2 turnarounds that we have this year. We've done a fair amount of planning and outlining the scope of the work and we think we're going to come out in significantly better positions. So I think that'll bode well for post turnaround and the production and going into next year. For volumes being basically up this year since we have more lost days turnaround year-versus-year, as Cheryl said, I think it's a lot of improvements that we're doing at the plants that are providing us with additional capacity utilization to really produce more tons year-over-year.

Next question, Rob McGuire with Granite Research.

Terrific quarter. Congratulations. So can you discuss the storage and distribution margin enhancement projects that you expect to spend the $10 million to $15 million on this year?

Yes, I mean, I think we've said this over the last couple of years, the team's done a really good job in putting together a running list of opportunities in each of our sites to either increase storage and positions us to either run a plant at higher level to produce more product, or to position product in storage so that we can sell in season rather than out of season. There's a number of other projects that would also allow us to load more efficiently several products or load more of one product than we're currently capable of doing. And those should have higher margins as well. So -- and I think there's a lot of opportunities that we have that we'll spend money every year to continue to improve the efficiency of our manufacturing facilities and really our distribution capabilities.

And then can you talk about how the strong fall ammonia application season impacted your mix and what you expect for the spring?

Well, usually the fall ammonia season is a -- it's almost like a fortune teller of how the spring's going to come out, right, how much ammonia goes down on the ground. And so it was a really heavy fall application of ammonia for everyone so demand was really strong. So we participated in that. I think that really supports the 92 million or 93 million acres of corn that the USDA is really talking about for next year in the planting. And the only question will be how much – how strong was the fall versus the spring And will we see a little bit lighter ammonia application in the spring and then maybe more urea [UIN] post plant. But we anticipate – either way we anticipate to have a really strong fertilizer season for next year.

Good. And then can you just talk about how the idling of the facilities or outages of facilities this quarter, both domestically and internationally, have impacted your operations during the quarter?

Are you talking about our net manufacturing operations or you're talking about just idling facilities that impact supply and then in turn price?

More so the industry. I think that there was a recent outage in the last week or 2, one of them was in Waggaman Louisiana. And just wondering if that impacted El Dorado or Cherokee.

No, it doesn't impact them directly. It impacts them in a way that we're taking more supply out of the domestic market, in a market that's already very tight with very low inventories. So at this point I think global inventories of nitrogen fertilizers are really low so any disruptions that you're going to have globally are going to have an impact on price.

Next question, DeForest Hinman with Walthausen & Co.

Can you just talk a little bit about the first quarter, how it's shaping up? Obviously, you're 2 months into the quarter already. Give us some ideas in terms of what you're seeing on the realization front. Are we just entirely spot, have we entered into any forward sales agreements in the first quarter?

Well, you're right. I mean, we've sitting here end of February so first quarter is basically over. So we are sold out for the rest of the quarter, as you might imagine. We have realized prices that are reflective of the market so we're really happy about that. Having said that, recognize that the industry does sell forward so there's always a time lag. So we definitely are not 100% spot just given the current market. So I think we'll have a really good quarter. And I think the pricing, as I said, will be relatively reflective of the market so we're happy about that. Going into the second quarter, I think we've taken a bit of a different approach. We haven't sold that much into the second quarter. I think we are very comfortable having taken just some orders for Q2. But like I said, it's held off on selling forward significant volumes as we believed that the prices would move up and I think that's coming through.

Okay. So then just directionally, second quarter, based on the way things are playing out, higher on EBITDA performance versus first quarter numbers?

Yes. I'm not going to -- we generally don't give out guidance on quarters, other than Cheryl giving an indication of the current quarter that we're in.

Okay. That's helpful. But it sounds positive.

Yes, I said that the second quarter is always our best quarter.

Okay. And then just in terms of how you're positioning the company as it relates to the gas outlook, it's been quite volatile. I think we've been just buying gas on a spot basis. Is that still the case going forward or would we look to hedge any of our exposure?

We actually generally enter any given month with most of our gas bought. The last thing we'd want to do, and we certainly – it was exacerbated last February during the freeze. We never want to go into any one month without being able to run our facilities or plants at minimum turndown rates. Right? You never want to have to shut a plant down. So we've been pretty consistent over the last 3 or 4 years about buying forward, particularly where we have forward orders to try and lock in margin, and having some small balance going into a month where it's, spot gas or gas daily. So that's where we sit today and we're pretty disciplined about that.

So is it 1 month or 2 months? Is that the number we should be thinking about?

1 month right now. Yes. And especially when you think about just gas in general for us, I mean the most volatile period for us is really winter. So we're very focused on heading into winter, having most of our gas locked for the winter. As we come out of the winter and we have less volatile weather, at least historically we did, we're more apt to go a little bit spot.

Okay. And then just kind of a 10,000 foot view question. Lots of changes to the capital structure over the last year or so and now looking forward, obviously very good macro overlay. And then we're seeing excellent results probably for the next 6 months or so. What does the balance sheet look like at the end of 2022? And I'm asking that from a perspective, you're seeing a lot of companies in the ag space really generating tremendous earnings in cash flow right now. Do you have any idea of where your debt to EBITDA could be or any internal target that the Board has thought about in terms of the appropriate leverage profile of the company, given the current environment and the outlook for 2022? And I have a follow-up.

Yes. I mean, I think my discussions and conversations with the Board have been that in a high price environment like this, we should be below 2x leverage. And that's irrespective – 2x leverage with our current business. If we're to go out and maybe acquire some assets or another company, I'd still like to stay below that 2x but it's possible we could see some increased leverage for a short period of time as we continue to generate significant, we can free cash flow and then get that below that 2x. So I think we've got an opportunity to use our free cash flow and our low levels of leverage to really go and grow the company.

Okay. That's helpful. And then just bigger picture question on the blue, green ammonia decision. You laid out some different things that are happening. I have followed along with those. There does remain some uncertainty as it relates to some of the tax credits. And you did mention some work that you guys are doing on the legislative front to help people understand that. But kind of a simple question, but a complex question, why does it make sense now to do these projects with some of that uncertainty? And then in the past, we have partnered with different entities with offtake agreements and then purchase types of contracts. Is this an investment where shareholders were thinking about LSB doing this alone, or would we be doing this with a partner that could help support with an offtake agreement or some type of investment capital?

Well, let's bifurcate the 2 opportunities, right? So blue ammonia is capturing the carbon so we would install carbon – or let's say, carbon capture equipment and liquefaction equipment would be installed on a plant. And since our biggest plant is El Dorado, let's just use that as an example. We would not – once that's done, you'd need to take away the liquid CO2 and then sequester it in the ground. We're not in that business, we don't build pipelines, CO2 pipelines, we don't operate wells or drill wells, so we clearly would partner with someone. And the only question is, at this point, on whether we own the carbon capture equipment and collect the 45Q credit, or does someone else put up the capital and own that and buy CO2 from us. So we're evaluating those opportunities. And while we think the increase in the tax credit or ultimately direct payment per ton of CO2 needs to be increased to $85, and it makes it much more economical and there'll be a lot more investment, at the current $50, it still would make sense for us. On the green side, that's really a different story. So that's really investing capital to install electrolyzers to modify the front end of a plant to take in the hydrogen produced from the electrolyzers. And we would partner with a technology partner there and we would obviously partner with a renewable energy partner. And then we would look for a partner to at least have a fairly substantial offtake agreement to at least defray a lot of the investment that we're making and at least cover costs before we would move forward on a project. But we've had a lot of discussions on that and I think that's something that we feel comfortable that we will be able to achieve.

Okay. That's very helpful. I'll just sneak in one more on the capital projects that you're working on as it relates to incremental capacity, debottlenecking. Can you help us understand what the return outlook is for those type of projects?

Sure. So on the $15 million of margin enhancement projects that we discussed earlier, I'd say that when up and fully operational, it's probably an additional $7 million of annual EBITDA. So pretty good return on that $15 million investment. As far as debottlenecking, I think, as I said, we have an opportunity to increase at each of our facilities, plants by 20% to 40%. I think we need to evaluate what the cost of that is. And then obviously that's a big conversation with not only our manufacturing folks, but with our commercial team to make sure that we can sell the incremental product and at what margins, and then can we get the appropriate return. And you can't look at it at just today's prices. You really have to look at it at mid-market pricing while pricing over a longer period of time to really understand that return. So I think we're a little early to do that. But we are excited that we have a lot of opportunity. I mean, one of the things that – as we sit here today, I mean, lots of other plants around the world have been debottlenecked and we really haven't done any of that in our facilities. And so there's a lot of opportunity to really do that. So that's just incremental tons. It's not a lot of fixed cost [dated] really. So it's really profitable tons if we can do it correctly and efficiently.

Next question comes from Brian DiRubbio with Baird.

Just a couple of questions. Cheryl, I just wanted to clarify for 2022, so $65 million of CapEx, and then another $15-20 million of turnaround expenses?

Correct.

Okay. Then Mark, M&A, how are you thinking about that? Are you thinking something on the vertical side or industry consolidation? And trying to sort of put that together with the current administration's sort of reticence to see industries consolidate more. I just want to get a sense of how you're thinking about your M&A opportunity set.

Well, I think there are opportunities that are right down the fairway for us, right? So, that could be an acquisition of facilities that are similar to what we have today but maybe are in different regions or offer different product sets so we broaden our product lin. Might be better distribution [meet]. We may have customers that are closer to an acquired facility than they are closer to our facilities today. And of course, logistics play a large role in the cost of fertilizer, in particular would make us more cost competitive and increase profitability. Then there's, I think, other opportunities that are derivatives of what we do today. So could be someone that's making a product that's not – they're not ammonia basic. In other words, they don't produce ammonia so they're purchasing ammonia. So could be opportunities for us to provide that ammonia, usually not directly, it'd be in some type of swap situation, or provide some other product. And then on the industrial side, I think that there could be some products that are manufactured that, again, have some overlap to what we do today and maybe are sold to customers that we have today, so we've already got a customer relationship. So I think there's – as we look at out there, there are a number of opportunities for us to really grow the platform. I think we have to do it smartly. We have to do it efficiently. We have to be disciplined. Growth for growth sake doesn't really make a lot of sense. It's got to be accretive to shareholder value. And it's got to have – I often get asked what about just adding legs to the stool and being sort of a diversified chemical company? I don't think that's something that we really look at doing. I think ultimately anything that we acquire, there's got to be something that's overlapped with our existing business. I think when you have just diversified chemical businesses with separate businesses that really don't have any synergies, you don't get full value in the marketplace. And it's something that we're focused on. As far as the administration, look, our industry in North America is pretty consolidated, right? We've got 3 large players in CF, Nutrien and Koch, and we're a small player in North America so we don't believe that us acquiring any other facilities or another company would come under any FTC scrutiny. But you have to go through that process, but in the scheme of things, when you look at fertilizer, we're still a very small player. And even if we acquired someone and doubled the size of the company, we'll still be relatively small.

Got it. That makes sense. And then just, I know you talked about a lot of investments that you want to make. So as we think about capital allocation priorities over the next few year or so, given the backdrop, given the free cash profile, is that really towards – just on further investments, whether in blue ammonia or additional capacity investments?

Well, when I think of capital allocation, and quite frankly, it's the first time we've been able to think about the last 4 or 5 years, so it's kind of refreshing. But I think we've got a lot of return opportunities organically. And then I think, as I said, as we just discussed, I think we have a number of opportunities externally. So we certainly have to consider those. But we also have to look at debt reduction. And we certainly look at – I think we're early to be looking at a dividend or anything like that. I think we've got other things that we need to invest in before we get to that point. But at some point, you start thinking about if we're throwing off a significant amount of free cash, whether a dividend makes sense or not. But as I said, I think it's a little early for that. So I think we need to start looking at everything. Right now, I think for the next year or 2, I think we've got investment opportunities that will provide significant shareholder return and we'll focus on those. And as the market – as time goes by and as the market settles down to a more normalized level, we'll take a look at where we are and what opportunities we have.

Next question, Rob McGuire with Granite Research.

So just with the regards to blue ammonia, as you think about the next few years, does anything have to happen logistically in the U.S. in order for LSB to distribute to new end markets? Or can you reach those new end markets using the logistics that are already in place?

Rob, are you talking specifically about if we were to capture the carbon and now we've got blue ammonia, how would we distribute that?

Yes.

Yes -- no, I think that there's opportunities for us to distribute blue ammonia or another derivative product, right, of that today. I don't see that as being an issue. So the infrastructure's in place to do that. Whether we sell it directly – or our industry, it is very educated and it happens all the time where people swap product, particularly ammonia. So I think that whatever's in place today would allow us to do that.

Great. One other quick question. Can you discuss the expected tonnage impact of the turnarounds at El Dorado and Pryor and should all those tons come out in the third quarter?

Yes, for the most part, that's all third quarter, Rob, and it's about 50,000 tons.

Thank you. I would like to turn the floor over to Mark for closing comments.

Well, I want to thank everyone for their interest in LSB Industries. I hope you can see that the team's working really hard to really generate improved results. They're starting to show, which is really exciting for us, and I think we've got a lot of opportunity going forward to really use 2021 as an inflection point for us and really start to generate increasing returns. Before I go though, I would like to say that we should keep the people of Ukraine in our thoughts and prayers as we've got some really unfortunate developments that happened last night and this morning. So again, thank you for your interest.

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