Earnings Labs

LSB Industries, Inc. (LXU)

Q1 2022 Earnings Call· Wed, May 4, 2022

$14.81

+1.68%

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to this LSB Industries' First Quarter 2022 Earnings Conference Call. [Operator Instructions] And to get us started with opening remarks and introductions, I am pleased to turn the floor over to Vice President of Investor Relations, Mr. Fred Buonocore.

Fred Buonocore

Analyst

Thank you Jim. 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 wide variety of factors could cause the actual results to differ materially. As this call will include reference to non-GAAP results, please see the press release in the Investors section of our website, http://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 Behrman

Analyst

Thank you, Fred. We are very happy to have the opportunity to speak with you today about our 2022 first quarter results. As you can see on page 3 of our presentation, it was a great start of the year as we once again delivered a record top and bottom line performance driven by the strong pricing environment of our products that we capitalized on with solid operations and effective sales and marketing efforts. I would like to thank all of our employees from making this another excellent quarter for their strong commitment to improving and growing our business. There is no question that our results have benefited greatly by the strong pricing environment, a factor that is out of our control, but it has taken a great deal of work on the part of our team, to position us to deliver the kind of results we generated in the first quarter and to give us the favorable outlook that we have for the balance of 2022 and beyond. Financial results do not mean much if we are not operating safely. Our primary goal as an organization day in and day out is to ensure that all of our employees and contractors return home safely every day. We are committed to providing a safe and healthy workplace for all employees and stakeholders by implementing high safety standards to minimize potential risk to people, communities, assets and the environment. Our entire team continues to work hard towards our zero incident goal. And we expect to make great progress in this regard over the balance of 2022. On page 4, we summarize the key drivers of our agricultural end markets. Commodity prices continue to trade well above year ago levels. The price of corn, which is a key demand driver for our…

Cheryl Maguire

Analyst

Thanks, Mark, and good morning. Turning to page 6, you'll see a summary of our results for the first quarter of 2022. Our strong top and bottom line performance relative to 2021 reflects the increased pricing for our products across all our businesses. Our first quarter adjusted EBITDA of over $101 million is a company record. Additionally, in the first quarter we generated adjusted EPS of $0.69, and we expect strong profitability to continue in the coming quarters. Our strong profitability has contributed to our greatly improved liquidity situation. We currently have more than $400 million of total liquidity. On March 8, 2022, we completed a tag-on offering of $200 million of senior secured notes due 2028 bearing an interest rate of 6.25%. The purpose of raising these additional funds is to better enable us to pursue the organic and inorganic growth opportunities that we have identified for 2022, including de-bottlenecking of our facilities to increase production capacity and other growth projects. With respect to the timing of the offering, our intention was to get out ahead of a rising interest rate environment. Even following that new debt issuance, we ended the first quarter with a leverage ratio of below 1.5x trailing 12-month EBITDA. And we expect that to decline further during 2022. Notably, we now expect our annualized interest expense to be approximately $45 million, a modest increase relative to our previous interest expense guidance. As a result of the new notes. Page 7 bridges our first quarter adjusted EBITDA of $101.1 million to adjusted EBITDA for the first quarter 2021 of $17.3 million. The light green bar illustrates the substantial impact selling price strength continue to have on our results. The positive selling price impact is shown net of increased variable of costs, primarily raw material costs, which…

Mark Behrman

Analyst

Thank you, Cheryl. As I mentioned earlier in the call, natural gas prices have played a major role in increasing the selling prices of our products. Page 9 illustrates how the spread between U.S. and European natural gas prices widened over the course of 2021 and continued in a very volatile manner through the first 4 months of 2022. The historically high gas feed stock costs prompted a number of European producers to curtail production during the third and fourth quarters of last year exacerbating what was already a global shortage of ammonia and other nitrogen products in the face of rising demand. After surging in late February, following the Russian invasion of Ukraine, European natural gas prices have ease to around $30 in MMBtu. At the same time, LNG exports from the U.S. are increasing causing gas prices in the U.S. to rise to approximately $8 in MMBtu. Although some European production has come back online, the impact on supply and pricing throughout the global nitrogen market has been very pronounced. We believe the ammonia price trends we discussed earlier will persist through 2022 and into 2023, even if European gas costs decline further in the coming months. The bottom line is that this dynamic represents a significant advantage to U.S.-based nitrogen producers. We intend to capitalize in this strong pricing environment to generate significant free cashflow that will allow us to pursue opportunities to grow our business and create value for our shareholders. Page 10 shows a summary of our growth priorities for 2022. The primary mantra of our company is 'Protect what matters'. This is in reference to the health and safety of our employees and is a guiding principle of how we operate. So far in 2022, we have made meaningful progress in advancing our safety…

Operator

Operator

[Operator Instructions] We'll hear first from Steve Ferazani at Sidoti.

Steve Ferazani

Analyst

Congratulations on the blue ammonia announcement. You said you were going to work pretty quickly on that, and indeed you, you announced it already. I just want to get a sense, and I think you were pretty clear on this, but financial impact over the next couple of years, which sounds like it is going to be absorbed entirely by Lapis, but is there anything we should expect? And then just to clarify, into 2025, the benefit to you will be the higher prices of potentially higher prices of blue ammonia. Is that how we should be looking at it?

Mark Behrman

Analyst

Yes. So Lapis is going to fund 100% of the capital costs. And we will have minimal outlay between now and when we go into operation in 2025. From a revenue generating point or profitability standpoint, they will own the carbon capture equipment, so they'll capture the 45Q credit, but they will purchase, for a price, the CO2, that we generate out of the facility. And that coupled with what we think is a modest premium that we can sell blue ammonia for over current gray ammonia today should be the profitability that we would expect to start to see in 2025.

Steve Ferazani

Analyst

Great. Cheryl, if you could just restate that the EBITDA guidance for Q2. I just want to make sure I heard that correctly.

Cheryl Maguire

Analyst

Yes. 50% to 70% above the first quarter of 2022. And that's almost 4x above the second quarter of 2021.

Steve Ferazani

Analyst

Great. When I think about -- when I see the numbers you report and your volume was a little bit lighter, and you went through the issues with weather, wherever your EBITDA and operating margin were particularly strong. I'm looking at your sequentially, your cost of sales because natural gas prices were higher. Production was higher, but your cost of sales was lower, and I'm trying to figure out if that's a mix issue or what. Because you're even -- the number hit my estimate, despite the lower volume and natural gas prices were higher. What led to that?

Cheryl Maguire

Analyst

So we are upgrading more product and we do shift -- we are shifting towards more nitric acid, so of course that's impacting the margin. With terms of some of that higher gas cost it's sitting in -- some of that's sitting in inventory, right? Cause we did build some inventory because of the delayed season. And so you'll see some of that come through in Q2.

Steve Ferazani

Analyst

And that leads to my next question, which is how much -- because it looks like your inventory is, as you said higher, does that mean you can catch up in terms of volume in 2Q? As some of these weather issues -- if we see less wet weather, can you catch up on volume in Q2?

Cheryl Maguire

Analyst

Yes, we believe so.

Steve Ferazani

Analyst

Okay. Fair enough. And then last one for me before I turn over. And I know everyone hates talking about taxes, but the miss was entirely on that tax expense. Can you explain that a little bit, given your NOLs?

Cheryl Maguire

Analyst

Right. So, we do have the NOLs, so we don't expect to be a cash tax payer, but we do of course still have to record the expense on the provision line and we would expect that to average around 17% effective tax expense for the year.

Steve Ferazani

Analyst

And that's entirely noncash?

Cheryl Maguire

Analyst

Entirely noncash.

Operator

Operator

Next we'll hear from Rob McGuire at Granite Research.

Rob McGuire

Analyst

Congratulations on the quarter.

Mark Behrman

Analyst

Thanks Rob.

Rob McGuire

Analyst

Have you experienced any issues using Union Pacific accepting shipments delivering on time? Anything similar to what CF experienced during the quarter?

Mark Behrman

Analyst

Right now, we think we're in good shape.

Rob McGuire

Analyst

Can you discuss any trends that you are seeing with this year's spring planting season so far? Is there any substitution going on from one nitrogen product to another?

Mark Behrman

Analyst

Well, it's probably a little early to see that. But we would expect that with delayed planting, we are certainly behind the 5 year average of where we would be to where would be normal for this time of the year. That would probably see less ammonia put on the ground and more UAN or urea in our case, it would be advantageous to see UAN put down.

Rob McGuire

Analyst

All righty. And then would there be any production downtime associated with the blue ammonia product project at El Dorado as you implement?

Mark Behrman

Analyst

Well, that's a great question. I don't believe so. But I guess it remains to be seen and we wouldn't see any of that until sometime in the second half of 2024.

Rob McGuire

Analyst

And then are there any milestones that we should be looking for in terms of when we would expect, say, the Class 6 well to be approved? Or what should we be thinking of in terms of watching this project progress?

Mark Behrman

Analyst

I think – yes, I mean the approval would be a great milestone. But the time frames to get approval lots of conversation about that. I think the milestone for this project is the actual filing of the Class 6 permit application. Once we get that on file – we won’t file unless we believe that the project backs up all the assumptions that we have today, the saline formation is more the than large enough to handle the CO2 that we expect to put into the ground and we have a high likelihood of getting the Class 6 permit approved. So I think the real milestone would be the filing of that Class 6 permit application.

Operator

Operator

[Operator Instructions] We'll hear from DeForest Hinman at Walthausen & Co.

DeForest Hinman

Analyst

Just as it relates to the guidance, can you help us with some of the mechanics there? I think last quarter you discussed some of the realizations that you were seeing. Can you kind of talk about product realizations in the April time period? And then any color on the expectations on the tonnage side? I don't know if the whole number makes sense. I'm just looking at some of the math you had volumes down in the first quarter, but I think last year you did 400,000 tons of product in the second quarter.

Mark Behrman

Analyst

Yes. DeForest, we don't -- I mean, we don't generally give out volumes from quarter to quarter. I think as Cheryl mentioned, volumes are down a bit in this first quarter due to some of the delayed application. And I think the question was, do we expect to make it up and we do. So we have got product sitting in inventory that should be sold in the second quarter, in addition to all the production that we have in the second quarter. As far as realized prices we are sold forward on some on UAN for the quarter. We are not sold out for the second quarter by any mean and we have done that by design, as we believe that the strategy will yield higher net back prices for UAN. On ammonia, the bulk of our ammonia is really sold pursuant to a contract that we have, with quote out of El Dorado and that's Tampa linked. So we like the high Tampa prices right now. And so, as we have said in calls earlier, it's indexed to Tampa at a slight discount. So other than that, I think we're experiencing pretty current prices in the marketplace and that should drive of us to have a very significant increase in our second quarter.

DeForest Hinman

Analyst

Okay. That’s helpful. And then just any update on the M&A side, I know we have been looking at some deals, talking to different people, is this current strength in the market delaying things, because everybody’s making so much money, it is hard to delineate what the appropriate multiple is any color you can provide in terms of timing you did raise the debt so we have that sitting on the balance sheet now kind of a negative arbitrage. So I think shareholders would like to have a better idea of what, what is that money going to be used for? Did I lose you?

Operator

Operator

Mr. Hinman? This is the operator. I do show our speakers are still connected. Allow me to check their line.

DeForest Hinman

Analyst

Okay.

A - Mark Behrman

Analyst

DeForest, are you there?

DeForest Hinman

Analyst

Yes, I'm back. Hello? I don't know if I got cut off or you got cut off.

Mark Behrman

Analyst

Yes, I mean, I was saying that we have got a significant organic growth opportunities through de-bottlenecking and we think that those could have, and should have, if we move forward with them, significant additional EBITDA generation on an annual basis, but they will take a meaningful amount of capital. So cash is fungible, whether they are used for internal projects or they are used for M&A. On the M&A side, as we said before, there's nothing that's imminent that we are I can talk about timing of anything and until you sign a purchase agreement, there's no reason to talk about the timing of anything. From a market standpoint, I would just say that generally speaking, people don't buy at full multiples at high market prices and people don't sell at multiples at low market prices. And usually there's a middle ground as these are long live assets and you get a look at it over multiple cycles. So I think if there is a strategic nature to transactions, then people become more reasonable. And if it's just buying an asset then maybe it's not the right time buy an asset.

DeForest Hinman

Analyst

Okay, great. That's helpful. And then just on this carbon sequestration project, it just seems very interesting, especially if you have a third party putting up all the capital, I mean, the return on that's phenomenal. Can you just help us understand how that is structured, any color in terms of what they would be paying you for that carbon and you did touch on the potential for the change to the tax credit in the future, is the contract currently structured in such a way that if it did change in the future, we would be able to benefit further from that, from that change.

Mark Behrman

Analyst

Yes. So we have built into the contract, a dollar per ton that they’re going to pay us, under the current $50 per ton tax credit regime. If it increases to $85, we will have a outsized portion of that will come back to us.

Operator

Operator

And we'll take a follow-up question coming from Rob McGuire at granite research.

Rob McGuire

Analyst

Just one other question here. Can you give us an idea of UAN pricing relative to your EBITDA guidance for the quarter, what we should be thinking about?

Mark Behrman

Analyst

Well, we’ve got less than 50% sold forward. So that means that greater than 50% of our sales volume for the quarter, we should be able to capture current pricing.

Operator

Operator

Ladies and gentlemen, this does conclude today's question and answer session. At this time, I am pleased to turn the floor back over to our management team for any additional or closing remarks.

Mark Behrman

Analyst

Well, thank you for participating in our first quarter earnings call and for your interest, as we said earlier, we’ll be attending a couple of conferences this quarter. So we hope to see you there. Thanks so much.

Operator

Operator

Ladies and gentlemen, this does conclude today's LSB industries' first quarter conference call, and we do thank you all for your participation. You may now disconnect your lines, and we hope that you enjoy the rest of your day.