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spk04: Good day, ladies and gentlemen, and welcome to your LSB Industries second quarter 2022 earnings call. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero. At this time, it is my pleasure to turn the floor over to your host, Fred Bonacore, President of Investor Relations. Sir, the floor is yours.
spk00: Good morning, everyone. Joining me today are Mark Bierman, our Chief Executive Officer, and Cheryl McGuire, 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 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.
spk02: Thank you, Fred. We're happy to have the opportunity to speak to you today about our 2022 second quarter results and our outlook for the balance of the year. But first, I'd like to take a moment to acknowledge our founder and former chairman and CEO, Jack Olson, who passed away this past April. Jack's first priority was always his family, but after that, LSB was his creation and his fourth child. He was a highly successful entrepreneur, but more importantly, Jack touched many lives and was a very generous person. Recently, Jack told me he was very happy to see our team turn LSB around and prosper, and he believed that we had a bright future. Our goal every day is to make his belief a reality and we are grateful to have the opportunity to be a part of Jack's legacy. Turning to our 2022 second quarter, as summarized on page three of our presentation, we had an eventful quarter and once again delivered record top and bottom line performance. The strong results were driven by the favorable pricing environment for our products that we capitalized on with solid execution. I'd like to thank our employees for making this another excellent quarter and for their strong commitment to improving and growing our business and doing it safely. As a reflection of their hard work and contributions, our market capitalization is now much higher than it was at this time last year. And as a result, in late June, we were pleased to be added to the Russell 3000 and 2000 indexes. On page four of our presentation, we provide an overview of our end markets. In spite of poor weather conditions this spring, continued volatility of natural gas, and recent pressure on corn prices, we maintain a favorable outlook for continued strong selling prices for our products. The price of corn remains above multi-year averages driven by a variety of factors including strong demand for ethanol and China continuing to be a large export market for U.S. corn due largely to its demand for feed for livestock. Adding to strong domestic and international demand for corn, global supply has been and remains constrained and stock-to-use ratios are below historic average levels due in part to the wet spring reducing the number of acres of corn planted, the ongoing heat and drought conditions in the western U.S. and South America impacting yields, and all of this being exacerbated by the impact of Russia's invasion of Ukraine. While a recent deal has been struck for the unblocking of sea routes for Ukrainian Black Sea ports for the export of grain and fertilizers, which should increase supplies, it will not address the current low stocks. but unfortunately that deal is now in doubt with the bombing of the Port of Odessa. As a result of the increased demand and short supply of corn, we believe that corn prices will remain elevated and that farm profitability will remain attractive. We expect that acres of corn planted will remain robust and that farmers will seek to maximize their yields, creating strong demand for fertilizer. Additionally, the lack of fertilizer applied in the spring could translate to reduce yields for the current corn harvest, further tightening global corn supplies and reducing already low stock-to-use ratios. This would point towards farmers making a heavy fall ammonia application in order to replenish the nutrients in the soil to promote higher acres planted and higher yields for next year's crop. Longer term, we believe that it will take two to three years of good corn growing seasons to bring the stock-to-use ratios back in line with historical averages. Demand remains very stable for our industrial and mining products, despite weakening forecasts for economic growth. Pricing for our industrial products remains well above year-ago levels, reflecting continued strong nitrogen fertilizer demand, which is creating competition for nitrogen products, in addition to the continued strength in the ammonia export market, which is reflected in the Tampa ammonia price, to which a number of our industrial product contracts are indexed. With respect to U.S. natural gas feedstock price volatility, Many of our industrial product contracts are cost plus in nature, enabling us to pass through increases in natural gas costs. Overall, the demand and pricing trends we're seeing across the majority of our business adds to our confidence in the prospects for strong profitability and cash flow for the remainder of 2022 as well as for 2023. Now we'll turn over the call to Cheryl, who will discuss our Q2 results and our outlook. Cheryl?
spk03: Thanks, Mark, and good morning. Turning to page five, you'll see a summary of our results for the second quarter of 2022. Our strong performance relative to 2021 reflects the increased pricing for our products across all our businesses. Our second quarter adjusted EBITDA of 158 million is a company record. Additionally, we generated adjusted EPS of $1.22 per share in the quarter. Our strong profitability has contributed to our greatly improved liquidity situation. We currently have more than $500 million of total liquidity, including approximately $460 million in cash and short-term investments. Notably in the second quarter, we generated cash flow from operations of $135 million and had capital expenditures of $8 million, translating into free cash flow of $127 million, the highest free cash flow in our company's history. We ended the second quarter with a leverage ratio of below one time trailing 12-month EBITDA, and we expect that to decline further during the second half of 2022. As I have mentioned before, our target leverage ratio is now less than two and a half times in a mid-market or normalized pricing environment. On May 16th, our board authorized a $50 million share repurchase program as we believed our stock was undervalued and buying back our shares at these levels would be a return of capital to our shareholders. To date, and up until we went into our quarterly blackout period, we repurchased approximately $13 million of our stock at a volume weighted average price of slightly less than $18 per share. We expect to continue with our stock buyback program now that we are out of our blackout period. We view this buyback as just one part in a multifaceted approach to using our strong balance sheet to deliver value to shareholders. Mark will discuss some of our other initiatives later in the call. Page 6 bridges our second quarter adjusted EBITDA of $158 million to adjusted EBITDA for the second quarter of 2021 of $46 million. The light green bar illustrates the substantial impact selling price strength continued to have on our results. Our commercial team has done an outstanding job optimizing our product mix to take advantage of current market dynamics. The positive selling price impact is shown net of increased variable costs, primarily raw material costs, which increased by approximately $29 million versus the second quarter of 2021. Our natural gas costs rose substantially over the course of 2021 and through the second quarter of 2022 and remain elevated in the third quarter. As the green bar indicates, however, thus far, increased selling prices have exceeded the rising price of natural gas, and we expect to continue to benefit from this dynamic in the second half of the year. Partially offsetting the benefit of higher product selling prices was a modest decline in sales volume, which had an EBITDA impact of approximately $4 million. This related to delayed fertilizer purchases by farmers, particularly of ammonia and HDAN, due to wet weather in certain areas of the U.S. and dry conditions elsewhere. Lastly, other costs were higher in the period by approximately $2 million, primarily related to higher costs for supplies, materials, contractors, all underscored by the current inflationary environment, in addition to an increase in talent resources. Page seven illustrates the strong bottom line improvement we've delivered over the past several quarters and years. This is the result of favorable pricing trends, the operational improvements we've made at our facilities, new customer contracts, and investments we've made to optimize our product distribution and mix. We expect to further benefit from these factors in the second half of 2022. With respect to the third quarter, the NOLA UAN benchmark pricing is currently over $400 a ton. Additionally, the Tampa ammonia benchmark pricing settled at $1,100 per metric ton in August versus $625 per metric ton last August and could increase further due to very high natural gas prices in Europe impacting ammonia production in that region. While down from peak levels of earlier this year, pricing is still very strong and significantly higher than the last five years. Most importantly, as Mark pointed out earlier, we believe selling prices have a very solid foundation to remain at or above current levels for the foreseeable future. As a reminder, we are performing planned turnarounds at our El Dorado and prior facilities during the third quarter. Each turnaround is expected to last approximately 30 days and result in combined lower ammonia production of approximately 60,000 tons, which will also impact downstream production and sales of UAN, nitric acid, and other products. Furthermore, the NuStar ammonia pipeline, which we utilize to ship ammonia from our El Dorado facility, is also down for scheduled maintenance for approximately six to eight weeks in the third quarter, and will further lower ammonia sales in the third quarter. However, some of this is just timing because as we complete our turnaround at El Dorado and resume production, we would expect that ammonia production to move into inventory for sale in subsequent quarters. Additionally, gas costs are expected to be approximately double compared to the third quarter of 2021. However, despite higher gas costs, the planned maintenance of the new Star Ammonia pipeline, and two significant planned turnarounds of our own scheduled for the third quarter, and assuming these turnarounds go as planned, we expect third quarter 2022 adjusted EBITDA to be in the range of 40 to 50 million, which is above the third quarter of 2021. Looking to the fourth quarter, assuming some modest increase in pricing, which we typically see coming out of the summer months, and natural gas costs average in the $650 to $7 per MMBTU range, we would anticipate adjusted EBITDA for the fourth quarter to exceed last year's fourth quarter and put us around $400 million in adjusted EBITDA for the full year of 2022. As a reminder, adjusted EBITDA excludes the cost of turnaround maintenance and contractor expenses which are expected to be approximately 25 million for the full year. One caveat on our outlook. This is based on information we are seeing today. As you know, commodity pricing has been volatile over the last 12 months. And so with that being said, I look forward to providing further updates on our third quarter call. And now I'll turn it back over to Mark.
spk02: Thank you, Cheryl. 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 continued to be volatile through the first half of 2022. Historically high European gas costs, which are currently over $65 on MMBTU, have seen a number of facilities taken down over the last several months. At these levels of natural gas, That puts ammonia production costs over $2,000 per ton. If these prices remain at current levels, then we would anticipate additional production closures. This supply disruption is exacerbating what is already a global shortage of ammonia and other nitrogen products in the face of rising demand. As a result of this dynamic, we expect ammonia prices to remain well above multiyear averages for the balance of 2022 and for the full year of 2023. even if European gas costs decline in the coming months. This natural gas arbitrage and result in lower costs of ammonia production represents a significant advantage to U.S.-based nitrogen producers. We intend to capitalize on the strong pricing environment to generate significant free cash flow, allowing us to pursue opportunities to grow our business and create additional value for 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 the reliability of our facilities. We continue to make improvements on both fronts and have significant opportunities for further improvement. As Cheryl mentioned, this summer we are performing turnarounds at our El Dorado and prior facilities. We expect the work we are performing at both locations to advance both our safety and reliability initiatives and move us closer to our goal of being a best-in-class chemical manufacturing company. With respect to organic growth initiatives, we believe that we can increase the production capacity of our plants through various de-bottlenecking initiatives. Over the course of this year, we plan to evaluate multiple potential projects that we believe will contribute to an increase in our sales volumes and profitability and that meet our return profile. With respect to our M&A activities, we recently brought aboard a Director of Corporate Development, Brian Jensen, in order to focus our efforts in this area. Given our substantial liquidity and favorable cash flow outlook, we are in a strong position to pursue accretive M&A opportunities, and we are actively pursuing this initiative. With respect to our clean energy initiatives, we continue to advance our blue and green ammonia strategy, as we believe that these projects represent a compelling opportunity for us to become a leader in the emerging clean energy markets. Our blue ammonia project at our El Dorado site continues to progress as planned. Phase one of the project, which consisted of deeper geological studies, well and plume formation modeling, and assessing conditions of depleted wells nearby, has been completed and no surprises were found. Geological modeling and simulation work in preparation for a class six permit application and the engineering design of the capture facility are ongoing. We anticipate filing our class six permit application with the EPA in the first half of 2023. In May, we announced our plans to develop our first green ammonia project that we highlighted on page 10. To summarize, we entered into agreements with ThyssenKrupp Uta and Bloom Energy to develop a project to produce approximately 30,000 metric tons of zero carbon or green ammonia per year at our prior Oklahoma facility. ThyssenKrupp is currently performing a feasibility study, which includes developing the engineering design to convert a small portion of Pryor's existing conventional or gray ammonia capacity into green ammonia. Pending results of the feasibility study, we will then seek Board approval. The green hydrogen produced from the electrolyzers that will be used in the ammonia production process could potentially qualify for federal incentive programs such as the production and investment tax credits that are under evaluation by Congress. Before I hand the call back to the operator for the Q&A session, I'd like to mention that we'll be participating in the Jeffries Industrial Conference on August 10th in New York, the Seaport Summer Virtual Investor Conference on August 23rd, the Credit Suisse Specialties and Basic Conference on September 14th in New York, and the Deutsche Bank Leverage Finance Conference on September 21st in Scottsdale, Arizona. We hope to speak with many of you during these events. That concludes our prepared remarks, and we will now be happy to take any questions. Thank you.
spk04: Thank you. The floor is now open for your questions. If you do have a question or comment, please press star 1 to signal at this time. Again, that's star 1 to signal for a question. If you're using your mute function, please pick up your handset to make sure your signal reaches our equipment. And we will pause briefly to assemble our queue. And we do go into our first question from Rob McGuire with Granite Research. Please go ahead.
spk01: Good morning and congratulations on your quarter.
spk02: Thanks, Rob. How are you?
spk01: Very good. Thank you. Hey, have you witnessed pricing degradation taking place? And are we past that? Are there still some pockets where pricing degradation is having an impact on sales?
spk02: I would say that we're in a kind of a choppy market, right? I mean, this is the time of the year where there's the lowest demand on the fertilizer side. So there's always kind of a, you know, I'd say a bit of a standoff between, you know, producers and then folks who are buying fertilizer. So I think we're seeing pricing certainly stabilize. And I think over the last week to 10 days, we've seen ammonia move up. You know, as I mentioned earlier, there's a shortage around the world and export opportunities from the U.S. The U.S. Gulf prices and Tampamonia prices moved up. With respect to urea, we've seen urea start to move up over the last week to 10 days. So I guess, you know, to sum it up, I don't think we're seeing much price degradation, but we're not seeing significant increases either.
spk01: Thank you. And can you discuss if there are products in addition to ammonia that has experienced significant uptick in inventory? And if so, what are those drivers?
spk02: Well, I think Cheryl pointed out, so we're probably carrying a little bit more ammonia inventory coming out of the planting season than we would normally have. However, we're going to take advantage of the higher tamp ammonia prices, so it turns out to be a really good thing. Probably high-density ammonium nitrate, probably have a little bit more inventory than we would normally have as well, and I think a lot of that has to do with the weather, first being wet and then being really dry, as well as cattle prices as high-density ammonium nitrate is used on pasture land.
spk01: Thank you, and then just shifting gears and lastly over to the prior green ammonia project, will the green ammonia replace existing ammonia capacity or will you continue to have that gray ammonia capacity on the side in case you want to ramp your production there?
spk02: Yes, so the way we're thinking about it and the way we've asked Tison to look at it is You know, we want to install 30 megawatts of electrolyzer capacity to produce approximately 30,000 metric tons of green ammonia. But what we're designing will have the ability to switch from green, where we'll run the electrolyzers, to gray, where we'll just feed natural gas into the plant. So in theory, if somehow renewable energy prices went upside down, and we didn't want to produce green, we could just switch over and produce the traditional way that we produce today.
spk01: Thank you. That answers all my questions.
spk02: Thanks, Rob.
spk04: At this time, there are no further questions. We turn to Mark Bearman for closing remarks.
spk02: Well, I want to thank everyone for joining our call today. I'm really proud of the team and the job that they've done to produce a record quarter. I think we have a lot of exciting things going on that will add a lot of value on a go-forward basis, and we aim to talk about them over the next couple of quarters as we make further progress on those initiatives. Thank you, and have a great day.
spk04: Thank you. This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
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