Greetings, and welcome to the LSB Industries Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please type– on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Fred Buonocore, Vice President of Investor Relations. Please go ahead.

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 2023 second quarter results and our outlook for the third quarter and full year of 2023. I'd like to start by once again congratulating our team on their outstand safety performance -- for the first 6 months of this year, we have -- we've had 0 recordable injuries and our trailing 12-month recordable injury rate as of June 30, 2023, stands at 0.5 and -- we are committed to ensuring that everything we do starts with safety. Looking at our 2023 second quarter summary on Page 3 of the presentation, our manufacturing and commercial teams performed very well during the quarter. which translated into a solid increase in both production and sales volume compared to Q2 2022. I'm pleased to say that our average ammonia onstream rate for the second quarter and first half of 2023 and indicates that we are making good progress towards our stated goal of operating our ammonia plants and a 95% onstream rate. Reflecting the processes and procedures we've implemented coupled with our reliability investments. We expect to see that rate continue to improve as we mature our new programs and get through next year's turnarounds. As anticipated, our financial results were lower compared to the second quarter of 2022. The -- this was due to a decline in market prices for nitrogen products relative to last year's high pricing levels, resulting largely from the impact of lower natural gas prices in Europe and weaker industrial activity in Asia. Additionally, during the second quarter, domestic UAN demand was below our expectations headed into the period as farmers opted to apply more urea. -- to what had been a comparatively attractive pricing early this year for urea versus UAN. As…

Thanks, Mark, and good morning. On Page 5, you'll see a summary of our second quarter financial results. We generated adjusted EBITDA of $47 million and adjusted EPS of $0.25 in the second quarter slightly below our expectations. This is largely because of a more significant decline in selling prices than we had anticipated early in the quarter, along with lower UAN sales volumes, as Mark mentioned earlier. Turning to Page 6, you'll see a summary of our key balance sheet and cash flow metrics. During the second quarter of 2023, we generated cash flow from operations of $44 million and had capital expenditures of $14 million translating into $30 million of free cash flow and a free cash flow conversion rate of approximately 64% and year-to-date, we've generated cash flow from operations and had capital expenditures of $103 million and $32 million, respectively. Our continued free cash flow generation enabled us to maintain a strong financial position. At the end of the second quarter, we had approximately $314 million in cash and short-term investments. This was after we repurchased $125 million of principal amount of our senior secured notes for $114 million cash and bought back $17 million of our stock under our current $150 million share buyback program that our Board authorized in May. As Mark mentioned, we are committed to a disciplined, multifaceted approach to capital allocation that balances return of capital to shareholders and investment in growth with our focus on maintaining an appropriate level of leverage. Relative to that, we ended the second quarter with $584 million in total debt and a net debt to trailing 12-month EBITDA leverage ratio of approximately 1x. Page 7 bridges our 2023 second quarter adjusted EBITDA of $47 million from adjusted EBITDA for the second quarter 2022 of $158…

Thank you, Cheryl. Page 8 depicts the downward trend in European and Asian natural gas prices over the past 10 months. The drop in gas prices in Europe caused largely by a combination of warmer-than-average temperatures this past winter, combined with increased storage inventories resulting from imports of LNG from the U.S. enabled European ammonia producers to come back online after curtailing production last year due to high feedstock costs. Even so, gas prices in Europe remain significantly higher than gas prices in the U.S. at approximately $10 an MMBtu equivalent, this equates to a gas cost of ammonia production in excess of $350 per ton for European producers. That's significantly higher and the Tampa ammonia benchmark of $2.95 for August and the U.S. gas cost to produce ammonia of approximately $125 per ton. We believe that the disconnect is one of the multiple factors pointing to higher ammonia selling prices later this year. Page 9 provides an overview and update on our low-carbon ammonia initiatives. We continue to make headway on advancing our blue ammonia project at our El Dorado facility and our green ammonia project at our prior facility, including entering into discussions with potential off-takers. These projects represent exciting opportunities to emerge as a leader in decarbonizing our industry. Not only do they have the potential to substantially reduce our carbon footprint, but we believe the economics of both should be very attractive. During the second quarter, we were pleased to add to our low-carbon ammonia activities with the announcement of our MOU with Amegy, a developer of ammonia to power technology. The goal of this relationship is for the 2 companies to collaborate on developing low carbon ammonia as a marine fuel. Ultimately, we expect to leverage our combined capabilities to demonstrate how clean ammonia can…

[Operator Instructions] Your first question comes from Josh Spector with UBS. Please go ahead.

Yeah. Hi. Thanks for taking my question. First, I guess, I just wanted to clarify some of your comments on UAN and the summer fill program. So you talked about pricing kind of looking towards August and further out $300 plus in the bar. But I think you made the comment that your realized pricing is still below 2Q levels. Is that just an averaging effect? Or can you explain kind of what's going on there and the current spot rates, is there any chance you exit at a price higher than what you realized last quarter?

Good morning, Josh. How are you? So I think when you think about most of our products, particularly ammonia and UAN, you got a summer reset that occurs sort of late June or really early July. And we usually take an order book based on those prices for some length of time. I mean it's not significant. It's not months out there. So I think what we're going to see in the third quarter is a lot of summer reset prices during the quarter, and we'll realize a lot of these improvements in prices either late in the third quarter or early into the fourth quarter.

Got it. No, that makes sense. And just a question on the cost side. When we look at your cost ex gas, it looks like your costs are generally a good deal higher than they were a year ago over the last couple of years about $80 million a quarter, almost $200 a ton. From our math, that looks about almost 30% higher than where you would have been, again, ex gas costs over the past couple of years despite having no turnaround this year. So I'm just curious if you can give us some context about what might be going on there operational with gas costs higher? And if there's something structural or temporary driving any of that?

Well, we'd have to take a look at that. So I'm not -- I can't say I'm familiar with the 30% higher cost that you're referring to. So maybe we can follow up after the call. But I will tell you that product mix, obviously, has an impact on cost, right? The reason we upgrade from ammonia is because we're making more margin. So I think that could be part of it as we sold less UAN and more ammonia during the quarter.

Okay. Thanks. I'll follow up offline. I'll turn it over and get back in the queue. Thanks.

Thank you. Next question, David Begleiter with Deutsche Bank. Please go ahead.

Thank you. Mark, could you just clarify your comments on the guidance for Q3? I may have misheard the -- what it was expected to be versus the prior year. Thank you.

Yeah, I think Cheryl mentioned that we would see a sequential decline that was similar to what we saw last year.

Got it. Got it. And on Eldorado, has anything changed in your thinking over the last 3 months? Or again, do you do expect the decision this week from the federal government on this project for the maximum amount, is that still the current thinking?

Yes. I think, I think what I was referring to is really our comment period, right? So, we've got selected as one of the projects that they're considering for funding and then all of the projects that were selected have a public comment period, right? So that's open for public to make comments and the USDA would review those comments. That will aim at the end of this month. then the USDA has already told us that assuming that we move forward, they would want to do another environmental review. It's more whether it's NGOs or it's tribal and looking at any travel issues or things like that. And then after that, a little less -- I'm a little more hazy on what the process is, but we would hope that by the end of September, we would have a lot more clarity as to whether they're going to fund us or not. And then the expectation would be that they would fund up to 25% of the total project cost, which the full project is about $400 million, so that would be $100 million.

Very good. Thank you.

Next question, Andrew Wong with RBC Capital Markets. Please go ahead.

Hey, good morning. Could I just maybe clarify the Q3 EBITDA guidance? I think I heard Cheryl say that Q3 will be down sequentially similar to what we saw last year. So what does that mean? Does that mean EBITDA might be in like the $40 million, $50 million range similar to what we saw in Q3 of last year? Or -- is there a different sequential decline that I should be thinking about?

Yes, sure. Andrew, so what I was referring to is we generally see a pretty heavy sequential decline as you move from Q2 to Q3 because Q3 is the seasonally weakest quarter, as you know. And so if you look at Q2 of last year and you look at Q2 to Q3 and what the decline was there, it was ballpark 65%, 70% decline. I think you're going to see a similar decline this year if you compare the third quarter to the second quarter of this year.

Okay. That makes sense. And then I just wanted to ask maybe following up a little bit on the cost question. Maybe off a different way, like how would you say, in general, your non GAAP costs have been tracking this year versus maybe expectations going into this year or versus what you've seen in prior year levels?

Andrew, I would say that our costs are higher this year for several reasons. One is just general inflation. So we're seeing supplies increase, and we're seeing actually contract or cost increase outside contractor costs. But in addition to that, I think we elected to make some investments -- so I think this year, we probably have $10 million to $12 million for the year of additional higher costs. I would say, it was adding technical talent and other folks to push our reliability programs and safety programs forward. It was also bringing in some outside technical talent to help us really take a look at some of our assets and analyze how we can operate them better and maintain them better. So I think those are costs that we elected to take a rather than invest capital, right? It just turns out their expenses.

Okay. That makes a lot of sense. Thank you.

Next question, Adam Samuelson with Goldman Sachs. Please go ahead.

Yes, thank you. Good morning, everyone. I guess if I think about kind of as you're looking at waiting on the engineering designs for the debottlenecking. Have you gotten any better visibility at this juncture for just helping a frame size scope and thinking about the USDA -- potential USDA kind of funding contribution kind of what proportion of project kind of capital cost that could represent as we try to think about the net capital outlay?

Sure. So if we did the full project, which would be debottlenecking our ammonia plant or nitric acid plant and then we've actually changed the makeup of the project. Originally, it was to build a urea UAN facility, so to upgrade all of that to UAN. We're now thinking based on really our vision for the company and really where we're going and where the industry is going is really to produce lower carbon products rather than carbon -- it's called carbonated products. So -- it would be debottlenecking ammonia, nitric acid and then building a new granulation facility to either granulate or some HDAN derivative products. If we did the full project -- right now, I'd say conservatively, we're saying about $400 million to do the full project. We did it all at once. And the USDA would give us -- and we've asked for and they've moved us along so I guess they would support it, 25% of that, so that would be $100 million from the USDA. So our capital -- total capital outlay over a 3- to 4-year period would be $300 million.

Okay. Now that's really helpful color. And in the release and some of the prepared remarks, you talked about kind of some of the stronger industrial demand for nitric acid in particular. Any way to quantify that or put some -- help us frame that? I mean there's not a lot of industrial kind of chemical chains right now showing kind of strong volume trends and demand trends have been pretty characterized by a tremendous amount of destocking in the last 6 to 12 months. And so helpful just to frame kind of how -- what you're seeing amongst your customer set for nitric gas specifically?

Yes. I mean I think we're seeing some variability in customers. I would agree with you that I think customers are struggling a little bit. We do have contracts with our customers. And in a number of our contracts, there are take-or-pay provisions. So one way or the other, we're going to get paid for the product. Having said that, I think our commercial team has done a really great job. We're a customer maybe has to throttle back some of the production in their own plants or they've had plant issues, which happens. I mean everyone seems to -- we all have plant issues at some point in time. the team has really stepped up and found other avenues for that product, right, in the spot market. So I think we're just seeing demand solid demand across the board. And I think the other way to maybe think about it is we do have a strong -- a lot of strong tailwinds in the mining market. And so to the extent that we could shift some of that production and upgrade that nitric acid and if we have the capacity to upgrade it to either AN solution or April ban and sell it as into the mining market, then we can do that too. So I think across the board, when I think about the nonfertilizer markets, we've got some pretty good balance that allows us to really weather some of the variability and in the straight industrial market.

Okay. I appreciate that color as well. Thanks

Next question, Laurence Alexander with Jefferies.

This is Dan Rizzo on for Laurence. Could you tell me in the past have -- I mean, if corn plants as they are, have you seen a lot of pre-buying that could provide a more of a near-term tailwind in the late in the third quarter and the early fourth quarter? Or are growers more than likely just to wait to see how things play out next year.

Well, that's a really great question. I'd say historically, what would happen is what you mentioned first. So with strong prices, farmers ultimately would be pre-buying -- and we're still seeing a fair amount of that and would expect a fair amount of that. But this last year, the dynamic changed a little bit to a bit more just-in-time buying, which is a risk for the farmer because they're -- not only are they bidding on prices going down, but they're also having to deal with the logistical aspect of getting it just in time. So in order to kind of think about that as we take a step back, we still think there'll be a fair amount of prebuying, but we've also now taken some additional storage locations, particularly for UAN to position product to where we think our customers much closer to our customers so that we can service easier and be the product of choice and handle the just in time.

And then just a follow up. So with those additional storage facilities, what does that -- does that mean anything meaningful to your inventory levels and working capital?

No, I would say nothing meaningful. What it does do is it allows us to store product to sell at higher points of the year or in season versus out of season So, I think it allows us to have the optionality to do that. And of course, when you're talking about just in time and someone really needs product, they are willing to pay sometimes a higher price for that. So again, I think it gives us optionality to try and take advantage of anomalies in the market and ultimately get some higher pricing.

Thank you very much.

[Operator Instructions] Next question comes from Rob McGuire with Granite Research. Please go ahead.

Good morning. Mark, in your opinion, what are the leading drivers behind nitrogen prices stabilizing over the last month?

Well, first, I think when you look at urea, because urea is the largest used and traded fertilizer around the world. Urea prices have increased dramatically, so just looking at prices this morning, around the world urea is sold at north of $400 today. So, it was a lot of tons in the East, and so Middle East and Asia and other parts, certainly in Europe. But here in the States this morning, it drifted over $400 a ton. So higher urea prices are really, I think, being driven by increased demand, lack of Chinese exports. And then there have been some plant issues around the world that have caused maybe a bit of a shortage at least today on urea. So, with urea prices moving up, and again, everything, all products trade to some extent, on a nitrogen equivalent basis. And so, you're starting to see pickup in other prices and particularly UAN prices. Ammonia is a bit different, ammonia about 30% of all ammonia is used industrially, and we and Adam mentioned earlier, we are seeing industrial demand globally down and particularly in Asia where it's not picked up yet post COVID. So, it's been a really slow recovery. So, I think that dynamic is probably still putting some pressure on ammonia.

And then do you have a formal fill program in place for the fall for UAN right now? And can you kind of give us an idea where you're seeing full prices for UAM relative to, say, the loads of the summer?

Yes. So, the summer reset program came out in early July, almost all the producers offered limited volume once that was sold out, there was really a lot of unmet demand. So, this week, pricing moved up anywhere from $20 to $40 a ton depending on location.

Okay. Great. And then you talked about how farmers opted to apply more urea than UAN just the comparable attractive pricing differential there. Can you just tell us how do you think UAN and urea plays out from here through the year-end?

Well, UAN prices are much more attractive right now with urea up at $400 a ton. So, I would think that we would see a bit more demand on the UAN side than the urea side. And that would be the expectation given where pricing is today.

Okay, thank you.

There are no further questions. I would like to turn the floor over to Mark for closing remarks.

Well, as always, appreciate everyone's interest in LSB Industries. I hope you feel like we're making improvements at the company. And we've got a significant amount of opportunity to really increase shareholder value. So, if you have any further questions, feel free to follow up with a call to Fred Bonnie, who leads Investor Relations for us or Cheryl or myself, and I hope to see you guys at some of the conferences that we're going to be attending. Thanks, and have a great day.

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