LSB Industries, Inc.

Greetings, and welcome to the LSB Industries third quarter 2020 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 press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christy Carver, Senior Vice President and Treasurer, Thank you. You may begin.

Good morning, everyone. Joining me today on the call are Mark Bearman, our Chief Executive Officer, and Cheryl McGuire, 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 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 for opening remarks.

Thank you, Christy, 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 begin on slide three by acknowledging the commitment and dedication that our employees have shown to operating safely and improving our safety performance. Our team delivered another strong operating performance across all of our owned and operated facilities during the third quarter and managed to achieve record production levels in several product categories while doing it safely. As indicated on the slide, we've made significant strides with our safety performance over the course of 2020, which is something everyone at LSB should celebrate. These days, safety goes beyond avoiding physical injury. It also encompasses something many of us took for granted only eight months ago, which is avoiding serious illness in the course of our workday. With the ongoing spread of the COVID-19 virus, this is now something we all think about every day. In this regard, We credit the personnel at all of our facilities and offices for remaining vigilant with the protocols we put in place months ago to prevent transmission of the virus and have improved and upgraded a number of these policies and procedures as we've learned more about what actions we can take that are most effective. As everyone on this call knows all too well at this point, it's difficult to maintain a high level of intensity in attempting to manage a situation that has many uncertain and unknown duration as what we've been dealing with since early this year. Our view at this point is that we're going to have to continue to operate in a COVID environment until the end of 2021, and we are planning accordingly. While we wish this weren't the case, on the positive side, we're finding that we've developed in terms of protocols and disciplines in order to deal with the COVID situation, we'll be able to integrate back into our overall approach to operating safely. Slide 4 provides an overview of the key aspects of our third quarter. We generated significant increases in sales volumes in both agricultural and industrial and mining products as compared to the third quarter of 2019. The year-over-year volume growth was the result of stronger production due to the absence of turnarounds in this year's third quarter relative to the turnarounds we performed at Pryor and El Dorado in the same period last year. Pryor once again had a record urea and UAN production, reflecting the continued improvement in the performance of its ammonia plant, which enabled us to optimize the utilization of the new urea reactor and the other upgrades that we made to the plant during the 2019 third quarter turnaround. 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 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 optimizing our product balance. In fact, had pricing been in line with the 2019 third quarter, which wasn't robust itself, and industrial demand had been consistent with pre-pandemic levels of approximately eight months ago, it would have resulted in an adjusted EBITDA that was more than 70% higher than the third quarter of last year. This is reflective of the solid operational foundation we've established that we expect to enable us to capitalize on the recovery of industrial demand to pre-pandemic levels, which has been underway for several months, and on what we anticipate will be an eventual improvement in fertilizer prices. Cheryl will provide more detail around this analysis later in the call. Unfortunately, as anticipated, selling prices for our fertilizer products in the third quarter were well below the levels of the same quarter last year and also deteriorated as compared to the second quarter of this year. The causes of this price weakness, particularly with respect to the year-over-year comparison, remain the same as what we've discussed on the past several calls, which are the continued excess ammonia inventory carried over from 2019, which has been significantly exacerbated by the pandemic-induced reduction in ammonia demand from various industrial markets, along with the negative impacts of the closure of the Magellan pipeline in September of 2019, which continues to disrupt ammonia movement, particularly in the southern plains market around our prior facility. With respect to UAN, an unfavorable import-export imbalance further weakened prices for that fertilizer. However, we have seen imports pull back significantly over the last several months. Overall pricing for our industrial and mining products was also lower, albeit to a much lesser extent than that of our agricultural products. Broadly speaking, this was the result of the negative impacts of the pandemic crisis on our end markets. As Cheryl will discuss later, we ended the quarter with more than adequate liquidity to enable us to continue to implement our strategy for enhancing our sales and market margins in the face of uncertain environment. One particular success in that regard came with a new long-term nitric acid supply agreement that we signed during the quarter. Slide five 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 economic activity bottomed in April. On the agricultural side of our business, approximately 92 million acres of corn were planted in the U.S. during 2020, which was an increase of 3% as compared to 2019. This increase supported a healthy level of demand for fertilizers, although, as I previously indicated, it was not enough to boost product selling prices. Approximately 40% of the U.S. corn crop is used to produce the gasoline additive ethanol. The abrupt onset of the pandemic crisis last spring resulted in a sharp drop in automotive usage across the U.S. for several months, which translated into a dramatic reduction in fuel consumption and a coinciding reduction in ethanol demand. Since hitting a low point in April, ethanol production has rebounded sharply, returning to near pre-pandemic levels, which was largely attributable to what turned out to be a busy summer for drivers as Americans replaced their vacation flights with road trips and people became generally less homebound. The drop in ethanol production and the rebound in gasoline consumption has left U.S. ethanol inventories at their lowest level in several years, which we think bodes well for corn demand in 2021. With respect to our industrial and mining business, most of our end markets have seen meaningful recovery since last spring. One of the largest of these is the auto industry, which is a major consumer of nitric acid. After a two-month shutdown, auto manufacturers resumed production in May. In the months that followed, U.S. light vehicle sales surged, and as of the end of September, increased approximately 75% since the April low levels, which should support continued recovery of auto production. Nitric acid is also a major input into a variety of home building products. As of the end of September, US housing starts and building permit applications had rebounded to near pre-pandemic levels. Products we manufacture for mining applications, primarily low-density ammonium nitrate, favorable indicators have been emerging from the sizable North American copper market, where prices for this metal have risen to the highest levels in over two years. This has been driving an increase in copper mining activity that we expect to persist for the foreseeable future, particularly given relatively new and growing copper demand drivers, such as the mass production of electric vehicles. Collectively, we view the current demand trends we're seeing across the aforementioned key end markets as pointing towards continued increases in sales of our industrial and mining products in the fourth quarter and into 2021, to the extent that recent Increases in COVID cases in various regions throughout the country don't lead to another nationwide shutdown. I'll hand the call over to Cheryl shortly, but first I'd like to provide an update on the litigation that we brought against Leidos, the general contractor of our Eldorado Ammonia Plant Expansion Project that spanned from 2013 to 2016, in which we encouraged substantial cost overruns. We continue to seek more than $100 million in damages as compensation for Leidos' wrongdoing, which involve breach of contract, fraud, gross negligence, professional negligence, and negligence. We are awaiting a new trial date and expect that to be in the first half of 2021. We're looking forward to having our case heard by a jury, and while we can't guarantee any outcomes in litigation, we believe the case has serious merits. We will continue to provide updates as appropriate. Now, Cheryl will go into more detail about our Q3 financial results. Cheryl?