LSB Industries, Inc. (NYSE:LXU) Q4 2023 Earnings Call Transcript March 6, 2024
LSB Industries, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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.
Fred Buonocore: 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.
Mark Behrman: 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, which is our section of the project. Lastly in 2023, we repurchased $125 million of our outstanding bonds and repurchased approximately $29 million of our stock for a total return of value to shareholders of approximately $154 million. Page five of our presentation illustrates our ammonia production trend for the past several years, pro forma for turnarounds. This steady progress reflects the investments we've made in our facilities and the operating culture change that has occurred across our manufacturing facilities as we strive to be a top-tier operator of our plants. Ultimately, we believe these efforts will allow us to consistently operate at 95% capacity, which will equate to a full-year ammonia production level of 875,000 tons.
Our profitability is further enhanced as we will look to upgrade ammonia into higher valued downstream products, and in 2024, we will be intensifying our efforts to maximize the production of our downstream plants, while optimizing the mix of those products to capture the highest margins possible. Relative to the production capacity of our facilities, over the course of 2023, we evaluated several potential expansion projects at our El Dorado facility with the goal of materially increasing our capacity to produce one or more key products. After assessing the current commodity market conditions, coupled with the rising costs of construction, and access to the required technical capabilities, we determined that our best course of action at this time is to delay the expansion.
Balancing our resources to successfully execute on the multiple growth initiatives we have underway is something that we are very focused on as well. Lastly, as we've stated in the past, preserving the health of our balance sheet is one of our top priorities and we believe that our decision to delay the El Dorado expansion is consistent with that goal. We remain very interested in the El Dorado expansion and will continue to evaluate its feasibility and timing. Importantly, despite the delay, we will continue to work with the USDA on timing and eligibility for a potential USDA grant of up to $80 million towards the funding of this expansion project. On page six and seven of our presentation, we provide a current overview of our end markets and several commodity price dynamics that are important to our business.
On the fertilizer demand side, while the corn stock-to-use ratios have been increasing, which has historically been a signal of potential pressure on grain prices, the price of corn has remained resilient, as evidenced by the December 24 corn price of approximately $4.60 per bushel. At these levels, we believe farmer incomes are healthy and that strong incentive exists to maximize corn yields through the application of nitrogen fertilizers. As a result, we expect nitrogen fertilizer demand to be strong for the spring planting season, supporting robust fertilizer prices. In our Industrial business, overall demand remains steady as U.S. production remains stable, U.S. single-family housing starts have rebounded, and mining commodity prices remain stable.
Specifically to the products we sell, demand for nitric acid continues to be supported by the resilient U.S. economy, while demand for ammonium nitrate for mining activity has been strong, driven by the infrastructure-related production of aggregates, as well as metals mining to supply electric vehicle production and other applications. Lastly, on the cost and competitiveness of our business, the left-hand chart on page seven shows the price trend for the TTF, the benchmark for natural gas prices in Europe, relative to the price for Henry Hub, the benchmark price for natural gas in the U.S. European gas prices spiked during 2022 and have come down significantly in 2023 due to a combination of a warm winter, and heavy LNG imports. However, what is important to note is that gas prices in the U.S. continue to remain a fraction of those in Europe.
The key takeaway here is that this represents a significant competitive advantage to U.S. producers and is one that we believe will remain for the foreseeable future. Putting this all together, we believe that fundamentals for nitrogen producers are attractive and that demand and pricing trends should allow for solid profitability and cash flow for the foreseeable future. Now, I'll turn the call over to Cheryl to discuss our fourth-quarter results and our outlook. Cheryl?
Cheryl Maguire: 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.
A rustic farm field with a tractor spreadng nitrogen-based fertilizer in the background.
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 compared to 2023, due to the turnarounds we have scheduled at Pryor and Cherokee. Despite the turnarounds, however, we expect sales volumes for our downstream products to be up year-over-year, as a result of operational improvements and the completion of margin enhancement projects that we have underway at our Pryor and El Dorado facilities. The right side of the slide covers a range of variable and fixed plant expenses, as well as, SG&A and other expenses for 2024. Our expectations for fixed costs reflect investments we've elected to make in plant reliability, as well as overall inflation.
We expect our effective tax rate for the year to be approximately 25%. However, we do not expect to be a material cash taxpayer in 2024, as we continue to utilize our NOLs. In the table at the bottom right of the slide, you'll see that we expect to invest approximately $60 million to $80 million of CapEx in our facilities during 2024, with approximately 80% for investments related to plant reliability and safety, and the remaining 20% earmarked for margin enhancement projects, aimed at increasing production volumes, additional storage capacity for downstream products, and improving the efficiency of our operations. Two projects that we're particularly excited about are the expansion of our urea capacity at our Pryor facility and the construction of additional nitric acid storage at our El Dorado facility.
The Pryor urea expansions will enable us to produce an additional 75,000 tons of UAN per year, giving us the ability to upgrade more of the ammonia we produce at that facility into a higher-margin product. At El Dorado, the addition of 5,000 tons of nitric acid storage allows us to better optimize our product mix, ultimately translating into incremental profits. With respect to our outlook for the first quarter, Tampa ammonia currently sits at $445 per metric ton, down from $625 in late 2023. NOLA UAN is currently around $240 per ton. Factors weighing on global ammonia prices include a heavy ammonia application by U.S. farmers this past fall that could limit spring pre-plant application, the impact of lower natural gas feedstock costs in Europe relative to early last year, and sluggish nitrogen demand from Asian and European industrial producers.
Urea prices on the other hand have been rising in the U.S. due in part to an absence of Chinese imports, rendering supply, relatively tight ahead of the spring planting season. We have recently started to see this flow through to UAN prices, a trend that we believe will continue. With respect to natural gas feedstock costs, we expect a significant decrease relative to last year when we had gas pricing locked in for most of the year. We are currently locking in gas at the beginning of each month for one month ahead, as well as layering in forward gas purchases in line with our forward sales of product. We expect this to allow us to capitalize on the current low prices, which should enhance our margins. For the first quarter, we expect our cost of gas to average approximately $3 per MMBTU, which includes the higher-cost gas used in December production that was sold during the first quarter.
Based on current pricing levels and volume trends, we expect our first quarter 2024 adjusted EBITDA to be lower than the first quarter of 2023 when the average Tampa Ammonia price was more than 55% higher than the average for this year's quarter. With that said though, we do expect a healthy increase in adjusted EBITDA for Q1 '24 relative to the fourth quarter of 2023, representing a solid start to the year highlighted by strong ammonia demand, improved downstream production, and lower natural gas costs. And now I'll turn it back over to Mark.
Mark Behrman: 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 produce approximately 1.1 million metric tons of low-carbon ammonia. The plant will be constructed on Vopak Exolum's Houston ship channel ammonia terminal, which currently is equipped with storage and handling infrastructure and multiple deepwater berths. LSB in partnership with INPEX, Japan's largest E&P company, plans to build and operate an ammonia loop using low-carbon hydrogen produced by Air Liquide, who will be handling the carbon capture and sequestration. Air Liquide will also be supplying our nitrogen needs. Since announcing the project several months ago, we've taken some meaningful steps in its development, including our selection of KBR as the provider of the technology licensing and proprietary engineering design for our ammonia loop.
Additionally, we have selected an engineering firm to perform a pre-FEED that will refine the cost estimate for the ammonia loop, which we expect to be completed during the third quarter of this year. At the same time, we are working to secure our off-take customers for the anticipated ammonia production. Based on our ongoing conversations, we expect off-takers to come from Japan and South Korea. More recently though we have had conversations with potential European off-takers, and are encouraged as we now believe Europe to be a viable target market as well. While we are in the early phases of this project, we are encouraged by the progress we've made thus far and by the level of engagement, commitment, and cooperation of the companies we are partnering with in this leading-edge endeavor.
2023 was a significant -- with a year of significant progress for us in the transformation of our company, while product selling price trends were unfavorable, we were still able to generate meaningful cash flow and maintain our strong financial position. We achieved a solid increase in ammonia production volume and we did it while significantly improving our overall safety performance. Combined, these accomplishments are a clear indicator that our ongoing safety and reliability initiatives are taking root. Additionally, we positioned ourselves to be a leader in the production of low-carbon ammonia products that we believe will be a critical enabler of global energy transition. During 2024, we expect to make even greater strides in enhancing the earnings power of our manufacturing assets through the capital investment and increased operational discipline.
At the same time, we are focused on advancing our low-carbon ammonia projects, which we believe will enable us to significantly reduce our company's carbon footprint, while also representing a source of meaningful bottom-line growth and increased value for our shareholders over the next several years. Before we open it up to questions, I'd like to mention that we will be participating in a Granite Research Management Conference Series on March 20th and 21st. That concludes our prepared remarks, and we will now be happy to take any questions. Thank you.
