Good day, ladies and gentlemen, and welcome to the LSB Industries' Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Fred Buonocore. Sir, the floor is yours.

Good morning, everyone. Joining me today are Mark Behrman, our Chief Executive Officer; and Cheryl Maguire, our Chief Financial Officer. Please note that today's call 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 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.

Thank you, Fred. We're happy to have the opportunity to speak with you today about our 2022 third quarter results and our outlook for the final quarter of the year. As summarized on Page 3 of our presentation, we generated strong year-over-year growth aided by continued strong pricing environment and solid execution. Notably, we delivered these favorable results despite having performed turnarounds on 2 of our facilities versus only 1 turnaround in the third quarter of last year. The El Dorado turnaround began in mid-July and was completed in mid-August. While the Pryor turnaround began just at the Labor Day and was completed in mid-October. Successfully executing 2 turnarounds back-to-back was a substantial undertaking, and we completed them both safely. We expect improved plant performance from these activities. I'd like to thank our teams at both facilities for their tremendous efforts. Fortunately, we have no turnaround scheduled for 2023, which would be beneficial to our 2023 production and sales volumes as compared to 2022 and 2021 and allow us to focus on the continued progression of our manufacturing capabilities and growth initiatives. On Page 4 of our presentation, we provide an overview of our end markets. Corn prices remain above multiyear averages, driven by a variety of global factors, including drought conditions in the U.S. and South America and continued strong global demand. Domestic and worldwide stock-to-use ratios for corn remain at multiyear lows. Based on this supply construct, we believe that corn prices will remain elevated for the remainder of 2022 and through 2023 and that farm profitability will remain attractive, pointing to a meaningful increase in planted acres this spring. As we move into November, assuming the weather permits, we expect U.S. farmers will make a heavy fall ammonia application in order to replenish nutrients in the soil to promote higher yields for the 2023 crop. Longer term, we believe that it will take 2 to 3 years of good corn growing seasons to bring back the stock-to-use ratios back in line with historical averages. Demand for our industrial products remains largely stable. Industrial product pricing trends continue to be favorable, reflecting the impact of strong demand and continued strength in pricing for nitrogen fertilizers. The mining market has strengthened considerably over the past year as a surge in global coal mining activity has led to an increase in demand and pricing for our mining products. Similar to the industrial markets, the mining markets are currently competing with fertilizer demand lifting prices of these products as well. The demand and pricing trends we're seeing across our business add to our confidence in strong profitability and cash flow for the fourth quarter of 2022, and we remain optimistic about 2023. Now I'll turn over the call to Cheryl, who will discuss our Q3 results and our outlook. Cheryl?

Thanks, Mark, and good morning. Our strong performance relative to 2021 reflects the increased pricing across our businesses which, along with solid execution in both our manufacturing and commercial operations enabled us to overcome the impact of the 2 planned turnarounds that were performed during the quarter. Our third quarter adjusted EBITDA of $50 million is a record performance for us in the third quarter, which is our seasonally weakest period even in the absence of turnarounds. Additionally, we generated adjusted EPS of $0.27 in the quarter. Turning to Page 5, you'll see a summary of our key balance sheet and cash flow metrics. Our continued profitability enabled us to maintain a strong liquidity position. At the end of the quarter, we had approximately $450 million of total liquidity including approximately $385 million in cash and short-term investments. This is after we repurchased $100 million of our stock at a volume-weighted average price of approximately $13 per share. Regarding the repurchase of our stock. During the quarter, our largest shareholder completed a secondary offering of a portion of their stake in our company. As part of the offering, we took the opportunity to repurchase 5.5 million of our shares under our stock repurchase program. We deemed this in an efficient way to repurchase shares while not impacting the liquidity of our stock. Lastly, as we announced earlier this week, our Board increased our stock repurchase program by an additional $75 million, bringing the total repurchase authorization to $175 million. During the quarter, we generated cash flow from operations of $38 million and had capital expenditures of $16 million, translating into $22 million of free cash flow. We are pleased with our ability to strengthen our liquidity even in a seasonally slow quarter and where we lost meaningful production and sales…

Thank you, Cheryl. As Cheryl indicated, natural gas prices continue to play a major role in elevated selling prices for our products. Page 8 illustrates how the spread between U.S. and European natural gas prices widened over the course of 2021 and continue to be volatile through the first 10 months of 2022. The spike in European natural gas costs that occurred in August resulted in many European nitrogen facilities being taken offline. Prices for European natural gas have recently trended lower due to seasonally warmer temperatures throughout Europe and a related buildup of gas inventory following substantial importing of LNG into the region. With that said, gas prices in Europe are still at levels that translate into an ammonia production cost of over $1,000 per ton. We believe that this -- that as we head into the colder winter months, we will see European natural gas prices move higher. However, even if that does not occur, European ammonia production costs will likely continue to be significantly above the cost to produce domestically, representing continued substantial advantage to U.S. nitrogen producers. As I look past Q4 into 2023, we intend to capitalize on what we anticipate will be a strong 2023 pricing environment to generate significant free cash flow, allowing us to pursue opportunities to expand our business and return capital to our shareholders. On Page 9, we show a summary of our key growth priorities. Employee safety is our primary focus every single day, followed by being good stewards of the environment and the reliability of our facilities. We continue to make improvements on all these fronts and have significant opportunities for further progress. As Cheryl mentioned, we recently performed extensive turnarounds at our El Dorado and Pryor facilities. We expect the work we completed at both locations to…

[Operator Instructions]. And our first question comes from Josh Spector from UBS.

Just I guess, Cheryl, you talk about the fourth quarter and your outlook there on the pricing side. What are you assuming in terms of inland pricing just given there's been a little bit of a disconnect there because the U.S. exports have increased? Do you think that, that normalizes and that helps your pricing in the fourth quarter? Or is that more of a next year-type phenomenon in your view?

Yes, I think we would expect to still see the pricing be in line with where it is today with that discount to Tampa. We might see that normalize over the course of 2023. But for -- for the fourth quarter, I would assume it is where it is today.

Okay. And just on the buyback increase. I mean you guys have been pretty clear about not wanting to necessarily reduce your flow. So how do you actually execute on that? And I guess, what's in your control there? And if you decide you don't want to go to open market buyback, but you don't get any additional opportunity for secondary repurchases, would you consider a special dividend or some other form of cash return and keep your flow intact?

Josh, so -- and I think when we look at our stock, we certainly have the opportunity to go out in the marketplace and purchase stock, but we also have a large shareholder that is very supportive of us, but has been invested in our company for actually 6 years, almost 7 years. And so we always have the opportunity to approach them and see if they would be willing to sell stock and negotiate a price. Absent that, I think it's probably a little early for us to do a special dividend or any kind of dividend. I think we've got some projects that we're looking at that could expand production capacity, and we think those have really nice returns on the capital employed. And so I think we need to get through that to determine what projects those are and what capital that would require before we implement a dividend, which I believe once you implement a dividend or even do a special dividend, there's the expectation that might be ongoing.

And our next question comes from Vincent Anderson from Stifel.

I understand the demand disruption side on European nitric acid for sure. But I'm just wondering, as you look out through this winter and into next spring, is there a potential for industrial nitrogen products to actually tighten under gas rationing because ammonia gets prioritized for agricultural use? And if so, how would, if at all, that kind of flow through your book of business?

Yes. So it's a great question. I mean, as I mentioned in the prepared remarks, when we were talking about industrial markets and mining markets, all of these markets are interrelated, right? Because they're all using and competing for nitrogen product. So if ammonia were to continue to move up in that scenario, we would expect to see other nitrogen prices move up as well. And obviously, that flows through to us by higher pricing for our nonfertilizer products.

Okay. That makes sense. And then I know it's a very different operating and commercial team even compared to last recessions. But can you maybe quantify your ability to flex between industrial and agriculture end markets if we did start seeing domestic softening?

Yes. So like our -- many of our competitors, right, these facilities generally have the ability to flex between markets, right? So you're trying to optimize your production. So we would -- I mean, we do this currently. I don't know that it would change much. But our commercial team has an outlook on the different markets that we sell into. We think we understand the pricing environment to the extent that you can in those markets. And we understand the customer demand. So I think their job as well as our job is to really understand our markets and optimize where we can. So if we saw a recession and we saw industrial demand drop, we would try and pivot towards either increasing fertilizer production where we could or the mining markets where right now, they're experiencing high demand for coal, and that means there's high demand for our low-density ammonium nitrate products and ammonium nitrate solution as well.

Okay. Got you. And then just last 1 really quick. Can you talk about the USDA initiative and maybe how clear the qualifications are for getting funding and what form that funding would take?

Sure. Vincent, yes, so we intend to apply for the grant under that program. The deadline is December 29. The guidance we're absorbing kind of as it comes out. It seems to be as long as you're not 1 of the top 4 fertilizer producers in the United States, you can apply for the funding. So we intend to do that. So that's the current...

Yes. There's a pretty detailed grant process and what's required, so we will have to -- and we are currently working on writing a grant proposal for a couple of the debottlenecking opportunities that we're reviewing now. So think of it as kind of a detailed business plan with an investment case thesis to it, and that's what we'll have to submit.

Okay. And just excuse my ignorance, but I don't normally see industries like this get funding. Can you clarify as a grant in this scenario cash? Or is it -- would it come in the form of some kind of like a tax credit? And I ask only just because I think you already have quite a few years of NOLs. And so I'm just trying to figure out exactly what that would look like.

Yes. So it's in the form of cash. And as you might remember, they announced $500 million of funding with the funding being about 25% -- no more than 25% of the project -- the project cost and a cap of $100 million per project.

And our next question comes from Charles Neivert from Piper Sandler.

A couple of quick questions. One, so far, we're sitting here early November, and you talked about based on the right weather that you would expect a fairly heavy ammonia sell into the ag markets. How much have you seen so far or what kind of interest is already being generated? Obviously, like you said, it will depend on weather as to how much actually gets applied. But are you seeing a strong response to sort of forward sales or near-term sales on that on ammonia right now?

Yes. I think in certain parts of the country, right, we've seen the harvest in probably a couple of weeks before what I would call normal. So I think we'll have a big window. But we -- there are certain parts of the country that are still in harvest. And we've also had pretty dry conditions. I know we've had some wet weather recently, but prior to that, it's been pretty dry. So I would say that the pull for fall ammonia has been slow. And I think similar to what we saw over the summer, where we saw ultimately the farmer maybe holding off on some purchases thinking that pricing would go down. I think we're seeing some of that as well. But I think given everything that we're hearing, we do expect ultimately a really strong fall ammonia applications based on the number of acres that we think that farmers will plant in the spring.

Got it. And other -- another question. Obviously, issues around the Mississippi River are causing at least some companies some problems. Is that an issue for you? Or is that for lack of a benefit to you guys because you don't need to deal with the river and all your deliveries would be pretty normal under the current circumstances?

Yes, I'll probably stay away from saying it's a benefit. It's certainly not hurting us, right, because we don't use the Mississippi or really any river systems too much to move our product. The thing that makes me probably a little more nervous is the railroad situation. And it's not just our industry, that's every industry across the country.

Right. I mean I don't want to say benefit, meaning you get business more of, does it seem to be lifting pricing in any of the places that are being, for lack of a better shorted product because they can't get up river?

Yes, I don't think we're seeing that yet. I think it's a little early to see that. What it is doing is it's causing some pressure on urea since you've got some urea -- you've got urea production and you've got imports coming in, in the Gulf and so if they can't get it up river, but they want to not sit on the product, you could see some lower pricing.

And our next question comes from Adam Samuelson from Goldman Sachs.

Yes. So maybe following up on the question on the river and the fall. Just how would you characterize kind of customer distributor inventories and behavior right now? Does the river issue -- are you seeing new inquiries from distributors because who are worried about getting product in their normal course of who can't get it off the river? Or how is that impacting some of those inland markets and creating -- is it actually creating new opportunities for incremental business? Or is it just creating a bigger kind of risk-off attitude on the whole chain because of the price volatility and uncertainty it creates?

Yes. I think -- I mean, we're certainly seeing new inquiries from folks that are inland that might have gotten products up from the Gulf or some other location using the river system. So I think as we -- if this continues over the next several weeks, months, couple of months where the river system is limiting how much product can come up river, I would expect to see more demand from customers that maybe we hadn't had before.

Got it. That's helpful. And then as we think about your -- some of the scoping of some of the capital projects that you're looking at on the debottleneck side. Any way to maybe put some -- bring on some dimensions on kind of the magnitude that the scale of the projects that are being contemplated? And how, if at all, USDA funding would or would not impact kind of how you would scope and size those investments?

Yes. So I mean it's a little early for us to talk about economics. So I'm a little skittish on doing that. What I can tell you is when we think about debottlenecking projects, just in general, at El Dorado, we're looking at expansion of the production capacity at our ammonia plant down there and our largest nitric acid plant. We're also looking at expanding our urea production at both Cherokee and Pryor to produce more UAN. So those are probably the 4 primary projects. As far as USDA funding, I think we'll look at it without funding. And if the economics make sense there, then we would present them to the board and hopefully get the agreement to move forward. I think the -- if we're sort of on the edge on a project and the only way that we'll be able to move forward on the project is with USDA funding, I think we'll have to think long and hard about that. I look at the USDA funding has not whether we move forward or not, it's just creating opportunities for us to either get better returns. There might be a project that's sort of on the edge of where our investment returns profile is. And I guess that could push us forward.

Okay. And if I could just ask a clarifying question and Cheryl, I know you gave the expected EBITDA range for the fourth quarter. And I know there's noise quarter-to-quarter with the turnarounds and where inventories were, but can you help us maybe provide some banding on the sales volumes that drive that EBITDA in the fourth quarter?

Yes. So I would look to our fourth quarter last year, Adam, and that's going to give you a pretty good overview of where we would expect to see volume this year. So basically, flat to last year even despite kind of the 2 turnarounds coming in shorter on inventory and then the Pryor turnaround completing mid-October.

And our next question comes from Rob McGuire from Granite Research.

What portion of fourth quarter 2022 revenue will be at summer field pricing?

Say that again, Rob, I'm sorry.

Sure. What portion of your fourth quarter 2022 revenue will be at summer field pricing?

None.

Great. And can you discuss the relative strength that we're seeing in UAN relative to urea? What's driving it? And what you -- do you anticipate UAN to remain strong in the fourth quarter?

Yes. So as I mentioned earlier, the urea market is kind of choppy right now. I mean, every day, it seems to have swings up or down. This morning actually in the Gulf, Gulf pricing was up last couple of days, $35 a ton. So a lot of pressure on urea, which quite frankly, a lot of these products trade on a nitrogen content basis. So putting a little bit of pressure, I think, on some of the other nitrogen products. But we're really not seeing UAN pricing move down yet. I don't think that will happen as really urea sort of strengthens. I think is talking about doing another large tender. And so I think that will help strengthen the market a little bit. And maybe that's why we're seeing some strength in pricing around the world but also in the Gulf for urea. So UAN, we think will be in high demand. We think the pricing is really at levels that make a lot of sense for a farmer today given where corn and wheat and other commodity prices are. So we don't anticipate any pull off in prices.

And are you seeing an uptick in U.S. nitrogen exports in the marketplace? And if so, can you talk about what products and what producers are participating?

Yes. We're definitely seeing exports for those that can access the waterways and get to Europe. So it's primarily UAN and ammonia would be the 2 products that are getting exported as they are better price -- actually getting better netbacks by selling it to Europe than they are here in the United States. Anyone who's got Gulf access would be eligible to be an exporter of those products. We've seen a little bit of AN, very little bit of AN that's got exported. But again, ammonia and UAN would be the 2 main products.

Then last question. Can you give us an idea of the tonnage that was lost as a result of the turnarounds in the third quarter?

Sure, Rob. It was about 53,000 tons.

Of ammonia production.

Ammonia production.

And our next question comes from Andrew Wong from RBC Capital.

Just wanted to maybe ask a little bit on a blue ammonia project. I just want to ask on the blue ammonia project first. Can you just maybe update on the timing? And I think I thought that the Class 6 well permit might be some time in the second half of next year. Does that still kind of line up with getting that project up and running by 2025?

Yes. Actually, I said in the prepared comments, Andrew, that timing has moved up. So we would expect to file the Class 6 permit end of first quarter or early second quarter.

Okay. Sorry, I missed that. And then just on the contracts with the industrial customers, can you remind us on some of the duration and just the timing of when some of these new contracts might get renewed and expectations on pricing and margin for those contracts relative to what you've seen historically?

Well, generally speaking, the contracts on the industrial side can go on average, I don't know, 2 years to as long as 7-year contracts, somewhere in that range. And we've got contracts that roll all the time, right? They don't roll -- they're not all expiring at the same time. But we really haven't released to the public, when contracts roll off and new bids for those contracts have to come out. We have seen over the last year that as contracts have expired and we've renewed them given the demand for nitrogen products today, we've been able to really increase our pricing to meet that demand and not have that product go into competing products. So the commercial team has done a really good job in educating our clients on where the nitrogen markets are today. And where we think they will be over the next 18 to 24 months so that the customers really understand current market conditions.

Okay. That's great. And then maybe just some questions on production. You mentioned there were some things done during the turnaround that should help on the operating rates. Can you kind of talk about what some of those things were? And some of your maybe preliminary expectations for next year? It sounded like you're pretty positive on the operating rates for next year. And for this year, it looks like maybe production is coming in a little bit lighter than what initially was expected. Like were there any sort of unexpected kind of impact that happened that kind of came up this year? And then just maybe remind us on the cadence of turnarounds going forward? I know 2023, you mentioned that there won't be any, but there's like a certain cadence for the year. If you can just remind us that mix.

Yes. So I'd say on production for this year, I think any time you go 3 years between turnarounds, you're going to see from coming out of turnaround to going back into that turnaround over that 3-year period, you're going to see operating rates deteriorate some over that period of time. So I would say that we certainly saw that at Pryor where we had a bit lower ammonia production rates coming into our turnaround. But we're really excited about the work that we did in the Pryor ammonia plant. The front end of our ammonia plant, the reformer, we did a lot of major work there where we actually re-harp or retubed that whole front end of the ammonia plant. So we think that plus compressor work, plus other piping work that might have caused some vibration issues that we had all resolved. And we have significant expectations for the reliability of that plant and the production of that plant. Our urea plant at Pryor, we started the implementation of DCS system or distributed control systems, so automation in that plant that will allow us to run that urea plant, I'd say, more reliable at more consistent rates, which means we should get more consistent UAN production out of that facility. So again, a lot of work went into Pryor, a lot of planning for that, and we're expecting a significant improvement in the operating rates of actually all the plants at that facility. At El Dorado, we did a lot of inspections that we had to do, but we did some work on our compressors particularly in the ammonia plant that we think will provide more consistency and reliability in the way we operate those plants. Same thing in our nitric acid plants that actually have been running really well. The team has done a really great job there in running those plants full out to meet all the demand that we have. So we're excited about the work and the investment that we made. We think it will pay dividends there. And I would say expectations for next year, I think I've said previously that we're in the low 90s operating rates on our ammonia plants. We would look to increase that at least a couple of percentage points for next year moving towards our goal of 95% over the next 18 to 24 months.

And so could you remind us on the cadence on the turnarounds?

Yes. So as we mentioned, right, we just did El Dorado and a Pryor turnaround, we won't have any turnarounds in '23. We'll do another 2 year -- we'll do a 2-year turnaround at Pryor. So we'll have a turnaround there in '24 as we really push the automation of that site. So we'll complete the installation of DCS in the urea plant, and we'll either do partial or full DCS implementation in the ammonia plant at Pryor. We'll also have a turnaround in '24 Cherokee. And then prior we'll either be on a 2 or 3 year after that. We haven't made a decision yet. And then Cherokee is on a 3 year turnaround cycle. So '24 and then '27. And then in '25, we'll do a turnaround at El Dorado, and we should be on a 3-year turnaround cycle after that.

And our next question comes from Roger Spitz from Bank of America.

I don't know if you said this in the prepared remarks, but do you still expect 2022 CapEx to be $65 million?

Yes. I think $60 million to $65 million.

Great. And any initial guidance, how we should think about 2023 CapEx, same order of magnitude or something different?

Well, we're finishing up our budgeting process for the year. And I would tell you that certainly, it will be $60 million to $65 million, but -- as we go through the conversations in this process, you may see us increase that by $10 million to $15 million. So I would say somewhere between $60 million and $80 million as we will land.

Perfect. And lastly, in terms of Q4 working capital cash inflow or outflow, any thoughts you can provide on that?

So I mean, we're carrying some higher receivables, of course, just given the market we're in, inventory costs a little higher given where gas costs are. But -- and I guess, I would say also some slightly higher payables given we're coming out of the turnaround. So net-net, so Roger, no really significant swings for the quarter versus what we would expect over an average period.

I'm sorry, you're saying it could be a relatively larger swing than normal seasonality for the working capital movement in Q4?

No. If I had to put dollars, I'd say, $5 million to $10 million, Roger, nothing material.

And that appears to be all the questions at this time. I'd now like to turn it back to management for any closing remarks.

Well, again, I appreciate all the interest in LSB Industries. I think we've got a number of exciting things that we're working on, and we hope to update you next quarter. Thank you so much.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.