Greetings and welcome to the LSB Industries' Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder this conference is being recorded. I'd now like turn the conference over to your host Mr. Fred Buonocore, Vice President of Investor Relations for LSB Industries. Thank you, sir. You may now begin.

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 includes forward-looking statements. These statements are based on the company's current intent, expectations and projections. They are not guarantees of future performance and a variety of factors could cause the actual results to differ materially. On the call we 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. As a reminder, we have a stockholder rights plan to protect certain tax attributes. Please see the Investors section of our website at lsbindustries.com for further important details. At this time, I'd like to go ahead and turn the call over to Mark.

Thank you, Fred. Turning to page four of our presentation, while 2023 had its challenges particularly in the form of product selling price headwinds, when it came to aspects of our business within our control, we were very successful. This was particularly the case with our safety performance. For the full-year of 2023, our total recordable injury rate was 0.33, a significant improvement over 2022. Protect what matters is a fundamental company core value, and I'd like to thank our employees for continuing their efforts to attain our goal zero or zero recordable injuries. We know this is possible to achieve as 2023 was the 8th consecutive year without a recordable injury for our Baytown Nitric Acid plant team. This site has continued to strive for excellence and represents a model for what we believe all of our manufacturing operations can achieve. In addition to our safety performance, we were also pleased with how our ammonia plants ran over the course of the year. With respect to our fourth quarter financial results, adjusted EBITDA was lower, compared to the record fourth quarter of 2022. This was largely due to a decline in market prices for nitrogen products relative to the prior year, which was the case for each of our quarters during 2023. As we discussed on our last earnings call, in early October we announced our collaboration with INPEX, Air Liquide and Vopak Exolum Houston to develop a world-scale low-carbon ammonia production and export facility on the Houston Ship channel. This project represents an important step in the emergence of LSB as a leader in the global energy transition and is potentially transformative to our growth profile as demand for clean energy increases. Since commencing this collaboration, we've reached some key milestones in the development of the ammonia loop,…

Thanks, Mark, and good morning. On page 8 you'll see a summary of our full year 2023 financial results. We generated adjusted EBITDA of $133 million and EPS of $0.37 for the full year. These results were down from 2022, which was a record year for us due to the strong selling prices for our products. With respect to our 2023 fourth quarter, page nine bridges our $25 million of adjusted EBITDA to our record $105 million of adjusted EBITDA for the fourth quarter 2022. The story for the fourth quarter was much the same as the full-year. The impact of weaker selling prices for our products relative to the prior year is the major factor in the year-over change in EBITDA. Page 10 provides a summary of our key balance sheet and cash flow metrics. Despite the pricing headwinds for the full-year 2023, we generated approximately $138 million in cash flow from operations, with approximately $68 million in capital expenditures, translating into approximately $70 million of free cash flow. Given our strong cash position and in light of our decision to put the El Dorado expansion on hold, we are reevaluating our capital allocation strategy in order to proceed in a manner that balances return of value to investors with investment in our manufacturing assets. As our stated goal is to maintain our leverage at approximately 2.5 times debt to mid-cycle EBITDA, we will opportunistically reduce debt and repurchase stock, both while continuing to invest in our assets to improve our reliability and efficiency. Page 11 summarizes the key considerations with respect to our expectations for full-year 2024. The table in the upper left shows our estimated ammonia production and sales volumes for the year. We expect that our ammonia production will be down by approximately 34,000 tons, as…

Thank you, Cheryl. Pages 12 and 13 highlight the two low-carbon projects that we currently have underway. Page 12 represents our project with Lapis Energy at our El Dorado facility, which is on track. The main gating factor is the approval of our Class VI permit application from the EPA that will enable Lapis to begin construction, and then capturing and permanently sequestering more than 450,000 metric tons per year of CO2 that we produce at El Dorado. While the timing of the Class VI permit approval is largely out of our control, we are in regular contact with the EPA and their indications are that we are on track to receive the permit during 2025 and begin sequestering CO2 in early 2026. With that said, of course, this timing is subject to the EPA's review process. As a reminder, Lapis will receive the 45-Q tax credit of $85 per ton of CO2 sequestered since they will own the capture facility, but they will buy the CO2 from us. At the same time, we will be producing more than 375,000 tons of low-carbon ammonia annually, which we believe we will be able to sell at a premium. All combined, this should equate to an estimated $15 million to $20 million in annual incremental EBITDA for LSB. We have been pleased with our commercial team's ability to leverage this project as part of our new business development efforts as we have been receiving strong expressions of interest in potential long-term offtake agreements for the low-carbon products that we will be producing at El Dorado. Page 13 is our current expectation of the timing of our Houston Ship Channel low-carbon ammonia project with significant milestones. As a reminder, the project entails the design and construction of a world-scale ammonia plant that will…

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Josh Spector with UBS. Please proceed with your question.

Yes. Hi, good morning. So I wanted to ask on a couple of things around UAN and from your comments during the prepared remarks. I think you commented that you're starting to see pricing move up. We're not really seeing that yet in a lot of the data that we track. So just curious if first, if you'd comment on maybe why it's lagged some of the inventory dynamics relative to urea, and then also what you're seeing now and what you view is the potential price catchup potentially for UAN?

Good morning, Josh. I would say that we've seen urea lead the pack, and so urea is up $75 to $100 from its low. We've seen UAN lag a little bit, and the reason I think UAN has really led the pricing increase just happens to be less imports coming into the U.S., especially with China putting an export ban on urea, and really being out of the market. UANs lagged a little. I think potential buyers, probably or at least were in a wait-and-see and believing that maybe urea prices would come back down, and then therefore UAN wouldn't follow it. We're now in a position where inventories are really tight on most fertilizers, a lot of that has to do with lack of imports, plus some of the storms that we had earlier this year took some production out and therefore lower inventories. So as we sit here today, we're really confident that inventories are really low out in the field. We're starting to see UAN pricing move to be more in a traditional relationship with urea, and we're encouraged by the buying patterns right now, and of course, early spring.

Okay, thanks. And I also wanted to ask just on your decision around the El Dorado expansion. I think it makes sense given the current environment. But I'd just be curious if you could share what you were evaluating, if you got to the point of saying what the cost would be for x tons, ex what the credit is? So we could think about kind of what options are on the table and maybe you'll be evaluating again in the future.

Yes, we're really excited about the project. So I'll start with that. It's not a question of, we looked at the economics and we can't make them work. We think we can make the economics work. And when we look at the project, we actually look at the project without the USDA funding, right? Because we don't have that in hand and we don't know what the requirements are to give us that grant. I think when we took a step back, we said prices are a little bit lower, so the market's a little bit soft in general. We've got two turnarounds coming up this year, which are extremely important to our reliability going forward. We've got our Houston ship channel project, which, quite frankly, we think will add a lot of value to the company as a whole. So a lot of initiatives going on. And really from a resource standpoint, we thought it'd just best to put that project on hold right now. And a whole doesn't mean it's gone forever. We have a lot of flexibility because it's a project that we can do at any time since it's debottlenecking existing assets. So again, we're excited about the project. We think it makes sense. I think the USDA, I don't want to speak for them, but I think they're pretty excited about the project and would like to see us do it. I think the timing has to be right for us.

Would you be willing to share what the cost was versus the tons?

No, I think we've talked about somewhere in the neighborhood of $400 million to $500 million for the full project. But there are three pieces to it, and we don't have to do a full project. We can do it plant-by-plant. So, as a reminder, it was debottlenecking our ammonia plant. So adding about between 60,000 tons and 75,000 tons a year of annual production. It was expanding our large nitric acid plant, and it was also building a new urea UAN plant to produce about 600,000 tons to 700,000 tons of UAN on an annual basis.

Got it. Thanks, Mark.

Yes.

Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Good morning. This is Anthony Mercandetti on for David. I'd just like to get some more detail on what you're seeing so far from the pre-spring planting season. Mark, would you say demand is below in line or above your expectations so far to start the year?

Well, I'd say, one, it's starting earlier. The weather is really cooperating. So we're starting. Well, we're not starting. We're seeing product kind of fly out of inventory. So I would say that it started earlier, and it's even probably a little heavier than we would have anticipated.

Okay. And then appreciate the insight into Q1. We're about two-thirds of the way through the quarter now. And again, just given those comments and what you're seeing on demand, how should we think about the ramp into Q2 as we get into really the heart of the spring planting season here?

I think Q2 is always our best quarter because it's the heart of spring. If we continue to see tightness in the marketplace from a supply standpoint, I think we'll continue to see some upward movement of pricing, or at least that's our expectations. We're pretty open as far as what we've sold for the second quarter for the most part. So we think we have opportunities to take advantage of higher pricing during the second quarter.

Great. Thank you.

Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Yes. Thank you. Good morning, everyone.

Good morning.

Good morning. So, Mark and Cheryl, I was hoping to maybe take a step back. You did the Investor Day about a year ago now, the time you'd set a mid-cycle kind of EBITDA target of about $200 million, which assumed a $500 a ton Tampa Ammonia price, $260 UAN, and $4 gas. Those happen to be pretty close to the full-year averages for 2023. And on the gas side, close to what you realize in your COGS, even if Henry Hub was lower. The EBITDA was $133 million. Can you help us think about, do you still think that like under that set of pricing and operating conditions, the company is capable of doing $200 million before the benefits of some of the debottlenecking and growth actions? Or has kind of inflation on labor and plant costs and all the other variable expenses kind of eaten into the total company performance?

Yes. No, it's a great question. So it's one I asked about a month ago to my staff. I'm sitting there thinking the same thing, and quite frankly, I'm really comfortable saying that we're still around $200 million under those assumptions. So when we look back at 2023, I look at -- I think we're pretty transparent about it, and I think it's been certainly published that we locked in gas at higher prices than we would have liked to. So a lot of it though has to do with that $200 million is us running our ammonia plants at 95%. And as you can see in our earnings presentation, our target is to add another 60,000 or so tons of ammonia production per year. So that probably gets us another -- at those pricing levels, probably another $35 million to $45 million. And then it's pretty documented we had some issues with our downstream plants, namely our nitric acid plants, which really did not allow us to upgrade as much product as we would have liked. So I think those two things would factor into the balance of pushing us back up to that $200 million.

Okay. And maybe on the ammonia point, because I was reflecting on the outlook kind of guidance details you gave for '24, and going back to the '23 actuals versus what you said you targeted a year ago, and your gross ammonia production for '23 came in below what you targeted. And I know there was issue with the nitric acid plant, but I don't recall any major kind of unplanned downtime at the ammonia plant. So, can you talk about kind of what still has to happen to get that ammonia utilization up to where you want it to be?

Yes, I mean -- it's I'd say the continued maturation of our operating practices, it's not significant capital. Most of the capital that will be required is typically within our EH&S and reliability kind of in our annual maintenance capital, which is about $60 million, could take us a little bit of additional capital. But I just think it's -- I think if I look back five years ago, quite frankly, we were probably a bit devoid of technical talent. And we've worked really hard to bring on a lot of really high-quality technical people that we're really comfortable with, and when I look around the industry, I think we've got comparable people to what a lot of our competitors have today. So I think it's just -- it's really a lot of blocking and tackling to really focus on the right operating procedures, the right maintenance procedures, be predictive in our maintenance rather than wait for things to happen, right? I mean, that's never good. And I think our expectation would be that over the next 18 months to 24 months probably more like the 24 months that we're at that 95% rate.

Okay. And if I just squeeze one more in. You alluded to an earlier comment around the weather in January impacting industry production, and at least one of your peers publicly has commented to that effect as well. Did you have any issues in terms of your operating rates with the weather in January or you kind of ran as expected, and didn't impact your plants and your output?

Yes. We had a power outage down at El Dorado or El Dorado site, so that caused some downtime. But we also don't assume that we're going to run at 100% it either.

Okay. All right. That's helpful. I'll pass it on. Thank you.

Thank you.

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Good morning. This is Dan Rizzo on for Laurence. Thank you for taking my question. Is it possible -- I know you said -- I think you said the industrial demand is somewhat stable. Could we see a restock cycle there now or later in the year, just given some of the low inventories that probably and presumably your customers have?

It's always possible. I actually think that our customers are taking what we expected or more today. So I'd be surprised if it's got much of an impact on us. Most of our non-fertilizer business is contracted. We do leave some spot tons available. So on those spot tons maybe we could see some firming of price. I don't think it's going to be demand.

Okay. And then with the delay in El Dorado, some of the expansion there, I was just wondering how much your expected ROIC has changed in the last twelve months, just given the changing macro environment and how much that's playing into your thought process now and going forward?

Are you talking about kind of our return profile?

Yes.

Yes. I don't think the return profile has changed. I think that generally speaking our hurdle rate is going to be a 15% IRR or better on any project. So, would we consider a lower return on a project if we think it's got long-term -- sustainable long-term benefits to the company? We'd have to take a look at that. But generally speaking, our overall return profile hasn't changed.

All right. Thank you very much.

Sure.

Thank you. Our next question comes from the line of Andrew Rong with RBC Capital Markets. Please proceed with your question.

Hey, good morning. So maybe just a higher level. I'm kind of curious how you feel about your sales mix on ag versus industrial sales. I think in the past, maybe you've mentioned, like Industrial sales does tend to give you a little bit more stability, and maybe you don't get some of that volatility that comes with the ag markets. And as that Lapis project comes online, and it sounds like there's more industrial demand for low-carbon ammonia, could your sales shift towards the industrial side a little bit more?

That's a really good observation. Yes. I think that as we focus more on being the leader of low-carbon products, and given that the US farming community might be one of the last adopters of paying for low-carbon products, I think you could and probably will see us skew more towards the industrial side.

And would the return profile on that be any different? You get more stability, or is it still just looking at those mid-teens returns, but it's just a different cadence?

Yes. I mean, it's again a great question. So if we're able to sort of contract our feedstock costs in a way that we can also hedge out that cost from a selling price perspective. And so, therefore, we have kind of a locked-in profitability providing that we run at certain operating rates. What we've then created is more of an annuity, right? So it's a stable base of earnings. And so for that, on a long-term asset of some significance or size, I think we'd have to take a step back and really consider a somewhat lower return profile but nothing significant.

Okay, that all makes sense. And just maybe just one quick one on Houston ship channel. I understand it's ATR that's being considered for the technology. Would the JV also consider using SMR with flu gas? And should that -- if that's the case, like should that work kind of run in parallel?

No, I think we're committed to an ATR. And remember, it's not a full ammonia plant. It's just we're going to own the ammonia loop. So Air Liquide is going to sell us under a long-term supply agreement, both hydrogen and nitrogen. And so the technology that they've chosen is they've got their own internally developed ATR technology.

Right. All right. Got you.

A lot of benefits to ATR technology, right? You can capture economically 95% plus of the CO2 generated, wherein in an SMR, you can economically capture about 60% of the CO2, with 40% which is generated during -- by the use of flue gas in that process. It's uneconomical to capture today. Now, I think we fully expect based on technologies that are being developed that at some point in time, we will be able to capture that flue gas or the CO2 generated in the flue gas process economically but we're not there yet.

Understood. Thank you.

Yes.

Thank you. [Operator Instructions] Our next question comes from the line of Rob McGuire with Granite Research. Please proceed with your question.

Good morning.

Hey, Rob.

Can you update us on when the margin enhancement projects are expected to be completed in 2024? And just an update on the expected EBITDA from them as well?

Yes. So the first project would be the installation of several nitric acid tanks down at El Dorado. In fact, I was just down there about a month ago to see some of the construction going on. We would anticipate that kind of the July timeframe. How much we should see on an annual basis, probably $3 million of additional EBITDA somewhere in that neighborhood. The second project is up at Pryor. It's an expansion of our urea plant from about what was 385 tons a day to about 485 tons a day. Although, today we're running that plant a bit higher than 385, as our technical teams are really doing a good job to push rates. So that will provide about 75,000 tons of additional UAN. So we'll make the margin difference between selling ammonia and then selling UAN, and it's about $5 million of annual EBITDA addition.

Thanks, Mark. And then shifting to the Houston ship channel. How should we be thinking about the potential EBITDA generation for LSB on this project?

Well, that's a great question. I mean, if you could tell me what the cost is. We're only in pre-feed now, but if we used an $800 million cost, and I'm not suggesting that that's the cost, I think we really need to go through our engineering, and we look at the types of returns that we would want. I would guess that, you know, for a very stable and steady stream of income, it's probably somewhere in the neighborhood of $150 million annually.

Thank you. And then just lastly, if I may, on a question, in terms of the delay of El Dorado, how long can you retain that USDA grant before the USDA decides that they'd like to give that to someone else? Or is there a window there?

I don't really have an answer for you because we don't -- we haven't been approved for the grant. So where we are is we were asked to do an environmental assessment which took us about four or five months. And as I've said before, it's not a traditional environmental review. So we submitted that. They've acknowledged that they've received it. I believe we're in a 30-day comment period right now or heading into a 30-day comment period. We don't anticipate many comments since we didn't have really any comments in the first comment period we had. At that point then they'll come back to us and tell us presumably that we are awarded the grant and what the terms are, so we don't even know what those terms are that we would have to meet. Assuming though that we get to that point, I think it's really probably a negotiation with the USDA. The original outline, although it was very high level, was you had five years once you were approved for the grant. So if we stuck to that, I think we've got a fair amount of time to really get our project done should it make sense for us to do.

Thank you, Mark.

Sure.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Behrman for any final comments.

Well again, thank you for all the questions and interest in LSB Industry and we appreciate everyone's support and look forward to speaking in the next quarter.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.