LSB Industries, Inc.

Good morning. Thank you for standing by. Welcome to the LSB Industries 2Q20 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star zero to signal an operator. Please note this conference is being recorded. I will now turn the conference over to your host, Kristy Carver, Senior Vice President and Treasurer for LSB Industries. Thank you. You may begin.

Thank you, David, and good morning to everyone. Joining me on the call 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 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 actual results to differ materially. As this call will include references to non-GAAP results, please reference the press release in the investor 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 for opening remarks.

Thank you, Kristy, and good morning, everyone. We're glad that you could participate in our call this morning and appreciate your interest in LSB Industries. I'd like to once again begin by thanking all of our employees for their efforts in enabling us to continue to run our business in the midst of the pandemic crisis. Their hard work and commitment enabled us to continue to deliver and improve safety performance and to sustain our operations at a high level of efficiency during the second quarter. We continue to focus on improving our safety performance, which currently stands at a 1.7 recordable injury rate for the last 12 months. I'm extremely proud of our team for this accomplishment and their focus on continuous improvement in both safety and operating efficiency that's come to define LSB's corporate culture over the last several years. While the work never stops to reach our safety goal of zero and our targeted long-term ammonia on-stream rates of 96%, we are well on our way. Slide 3 summarizes the main takeaways for our second quarter. In short, while pricing on the ag side of our business was not cooperative and, as anticipated, demand for our industrial and mining products weakened due to the impacts of COVID-19, we did a good job of focusing on the aspects of our business within our control, particularly with respect to the performance of our manufacturing facilities, rationalizing our operating costs, and maximizing our product balance. In fact, had pricing been in line with the 2019 second quarter, which wasn't robust itself, and industrial demand been consistent with the pre-pandemic levels of just over four months ago, it would have resulted in an adjusted EBITDA that was approximately 10% higher than the second quarter of last year. This demonstrates the improvements that we are making in the business that will allow us to capitalize on the return of industrial demand to pre-pandemic levels and on improvement in nitrogen prices. Cheryl will provide more detail around this analysis later in the call. We were particularly pleased with our 6% year-over-year increase in total agricultural sales volumes for the quarter. This was driven by an 18% year-over-year increase in total UAN sales for the quarter with our prior facility achieving record urea and UAN production for the quarter. The improvement at our prior facility was the direct result of the installation of the new urea reactor and other work that was performed on that plant during the 2019 fourth quarter. We also had strong aid stand sales for the second quarter. Looking at the performance of our three facilities collectively, we remain on track to exceed our 2019 production and sales volumes for the full year of 2020, which would result in record ammonia and certain other downstream production records. Unfortunately, as I mentioned earlier, selling prices for our agricultural products were significantly lower in the second quarter compared to the same period last year, and also declined relative to the first quarter of this year. The weakness was a function of continued excess ammonia inventory carried over from 2019, along with the closure of the Magellan Pipeline last fall, which continues to disrupt ammonia movement, particularly in the southern plains market around our prior facility. UAN prices also weakened as we experienced a year-over-year increase in imports and a year-over-year decrease in exports, resulting in more supply of product available to meet U.S. demand. Lower overall fertilizer prices also reflected decline in corn prices over the course of 2020, which I'll discuss in more detail shortly. As you know, natural gas is the primary raw material for most of our products, so the lower year-over-year natural gas costs we experienced was a positive for our gross margins. It's worth pointing out, however, that the very low natural gas costs can be a double-edged sword. While we reap the benefit of the lower cost to produce our products, gas costs at the levels we've seen worldwide for the past two quarters tends to allow marginal nitrogen chemical producers around the world to operate the manufacturing operations, leading to higher product supply, which puts pressure on product sales prices, which was another contributing factor to the fertilizer price weakness we experienced in the second quarter. So, low natural gas prices are good for our cost of manufacturing, but at some level, the cost benefit is more than offset by a deterioration of product selling prices. On slide four, we discussed the actions we have been taking to protect our team from COVID-19. Since the pandemic hit in March, we have been strongly committed to doing everything we can to keep our employees, contractors, vendors, and customers safe and healthy. As the virus has spread more significantly into the states where our facilities are located, we've doubled down on the measures we have put in place. We've continued with strict protocols at all our facilities, including mandatory masks, social distancing, and regular health monitoring for our personnel, extra cleaning and disinfecting of equipment and workspaces, working from home for employees not necessary to be onsite at our plants, adjustments to the manner in which our personnel interact with delivery drivers, and restrictions and guidelines around travel, among other measures. These procedures have proven very effective. As to date, we have had no known cases of COVID-19 among our workforce. With no insight as to when we will see an end to this crisis, we will continue doing what we have been doing and continue to review and enhance our contingency plans so that we are prepared for changes as the pandemic continues to evolve. Slide 5 provides an update on the state of our end markets and how demand trends have evolved as various aspects of the economy have reopened since our last earnings call in early May. On the agricultural side of our business, the spring planting season unfolded much as we expected it to. USDA estimates for the 2020 planting season now indicate that approximately 92 million acres of corn were planted in the U.S. While this was below their initial forecast of 97 million acres, which we and most industry participants viewed as aggressive. It still represents a 3% increase as compared to 2019. This increase supported a solid rise in demand for fertilizers, although, as I indicated previously, it was not enough to boost product selling prices. Throughout this past spring, as U.S. citizens sheltered in place under stay-at-home orders and most aspects of the U.S. economy were shut down, Automotive usage across the nation dropped dramatically, which significantly reduced the consumption of gasoline. This is important as the production of ethanol, a gasoline additive, accounts for approximately 40% of total U.S. corn demand. So lower gasoline consumption has led to reduced ethanol demand, which has a significant impact on corn demand, expected corn inventories, and corn pricing. Since hitting a 2020 low point in April, Ethanol production has rebounded sharply returning to near pre-pandemic levels as various aspects of the economy have reopened. While the disruption to the corn market has already been realized and may continue to be felt into 2021 due to expected elevated corn stocks, the ethanol market situation turned out to be better than we had initially anticipated. With respect to our industrial and mining markets, we experienced the drop in demand that we had anticipated Thank you for joining us. Key indicators of new home construction and demand for new homes has been making a steady recovery. Considering these favorable trends and to the extent to which U.S. economic activity continues to gradually increase in the coming months, we are cautiously optimistic that we will see some sequential improvement in our industrial volumes in the third quarter. I'll hand the call over to Cheryl momentarily, but first I'd like to provide a brief update on the litigation that we've brought against Lighthouse. and the general contractor of our Eldorado Ammonia Plant Expansion Project that spanned from 2013 to 2016, in which we incurred substantial cost overruns. We continue to seek more than $100 million in damages as compensation for Leidos' wrongdoing, which involved breach of contract, fraud, gross negligence, professional negligence and negligence. As we indicated on our call back in May, due to the onset of COVID-19 and the related court closures, the start of the trial was delayed from April Thanks, Mark, and good morning.