LSB Industries, Inc. (LXU) Earnings Call Transcript & Summary

Yes. We're definitely seeing recovery in the -- we've seen good recovery in the third quarter compared to where we were coming off of the first quarter and into the second quarter. When we think about the impact to the business, I think we -- lost sales were probably $3.5 million in the second quarter versus $1.5 million in the third quarter. So we're definitely seeing pickup in nitric acid and seeing that again continue to improve in the fourth quarter. Some of it was impacted with hurricanes. But you're right. I mean the -- we're seeing significant demand coming out of the housing markets. The automotive industry was slow to come back. I think they were operating at 50% for a while, but they're coming back stronger now, too. And so that certainly is helpful for nitric acid demand to finish the year.

And you've talked for some time now about improving the reliability of your plants. What are the specific actions that you're taking? And how much room for improvement is there?

Yes. So we've -- some of the specific actions that we've taken, I mean, we've invested about $1 billion of capital into the plants over the last 7 years. And most recently, back in the fourth quarter of '19, we put in a new urea reactor at Pryor. We put in a new sulfuric acid converter at El Dorado. We've upgraded our maintenance management system and have been very focused on preventative maintenance as opposed to running until the plant -- if something breaks and then you fix it, that can be expensive. So really more preventative in nature. We've really tried to upgrade our talent to make sure that we have the right people across the organization. So there's a lot of different things that we've been doing. And we're on track for several production records here in 2020. I mean we'll have record ammonia production, record UAN production, record sulfuric acid production, DEF -- I mean HDAN. There's some really good things that are happening. But we do still have some room for improvement and some additional work to be done. If you think about baseball, we're probably in the eighth inning. So definitely more work to be done over the next several years.

So when you kind of put it all together, is there a way you like to kind of contextualize or frame a range of outcomes for the earnings power of the company headed into next year?

Yes. So We think about it 2 different ways. Certainly, pricing recovery is one way to think about it. I think we believe we're in a low-pricing environment today and there's lots of optimism going into next year with respect to pricing. And so we do have a grid out there in our earnings presentation which basically shows benchmark pricing for Tampa and benchmark gas cost. And so if you say, assume a $300 Tampa environment and a $3 gas environment, the earnings power from an EBITDA perspective is around $120 million of EBITDA. So that gives you, I guess, a reference point in terms of the earnings power with pricing and the recovery of the fertilizer markets. But the other thing we spend a lot of time thinking about is pricing isn't really a good strategy, hoping for pricing to come back is not really a good strategy. So we're focused on how can we get to $100 million of EBITDA even in the current low pricing environment that we have today. And so with that, there's several things that we've been working on over the last 12 months and that will continue into next year. That adds that incremental EBITDA. And so a couple of things just for reference. We've signed a new nitric acid agreement for El Dorado facility. It's a 7-year contract for 70,000 to 100,000 tons of nitric acid, and that basically allows us to sell out the nitric acid capacity at El Dorado, effectively upgrading ammonia. And as you know, the more you upgrade, the better margins that you get from the business. And so that's one thing that we've done. A couple of other things where we've signed a new contract for a gas plant for CO2 at El Dorado. We currently vent CO2, so by having a gas plant there, we're capturing CO2 and selling it like we do at El Dorado or at Cherokee and Pryor. So incremental EBITDA from NaSH. We've got some new storage that we've added that allows us to position product better going into season and selling it in a high-price environment versus off-season. And so there's several things we're working on, some cost rationalization, some of the other work that has to be done to get us through the ninth inning on the operations' side, some recovery of COVID volumes. So there's several other things, I think, that will help get us to that $100 million of EBITDA even in a low price. So pricing recovery would just be gravy on top of that.

Okay. And maybe bridging that to your capital structure, I mean, obviously, the more EBITDA goes up, the more that helps the capital structure. But what other nonearnings-related initiatives you have to try to improve the capital structure?

Yes. So we have an expensive capital structure. The biggest contributing factor to that was some cost overruns that we had at our El Dorado plant during the ammonia expansion work that was done back in 2013 to 2016. So we had to go out and get some additional financing to help pay for those cost overruns at the plant. We have a -- we are -- we've been pretty public about litigation that we've brought against the general contractor for that work that was done. We're seeking over $100 million in damages for gross negligence and fraud. And we think that, that case has serious merits. And so of course, any award from that lawsuit would be used for fixing or paying down some of that preferred equity that we have on the balance sheet. The other thing too is, in addition to free cash flow, we do -- we're working on the earnings power of the company. And we think what that does is it allows us to refinance the senior notes. We have -- they're callable today at 107% in May of 2021, that drops to 103.6%. And so we think that if we can generate $100 million of EBITDA, for example, that allows us to probably get a re-rating on our debt and that would drop the cost of interest down to 200 basis points, maybe below where we are today. And so it allows us to take on a bit more debt and then pay off a portion of that preferred, which is callable at par. So there are several things that we think are paths to improving the capital structure.

And on the litigation against the EPC Contractor, where does that sit within the legal process at present? How close to a formal or informal resolution are you?

So I think that's probably one of the biggest impacts we've had as a result of the pandemic is the delay of the trial. We had been prepared to go to trial early in 2020. And that's a jury trial. And as you can imagine, not really conducive to a pandemic-type environment. And so It's been delayed. The litigation now has probably been delayed to this first half of 2021 before we'll be able to prosecute. But at the end of the day, we are ready to go and we think we have some serious merit to that case.

But it doesn't sound like it's something that's going to be settled anytime soon. It's going to go through -- expect to go through the actual court process.

Yes. I mean I think there's several paths I think that, that could go. But yes, for right now, we're planning on a first half of 2021, at least, to go to trial.

Okay. And how does -- how do you think at a high level, big picture, strategically, you look at the broader agriculture, chemical, ag chem, whatever, however you want to sort of line up your peers, you're certainly on the smaller side of the spectrum of the companies. You've got 3 plants. If -- maybe M&A is not on the top of your list of things to do as you manage the capital structure, but if you're kind of agnostic to the capital structure, what would you -- what would the strategic goals of the company be? Either to go out and add more assets? Or are there parts of the business that could be better owned by somebody else? Or do you want to be part of a larger entity? I mean what's the sort of long-term strategy here?

Yes. So I mean we agree. I think we're pretty small to be a public company and so we would like to grow the platform. And I think that makes a lot of sense in a couple of different areas. We would be looking for acquisitions that are kind of down the fairway in terms of providing synergies, whether would they be on the ag side but also on the industrial side. We really like the industrial business and there's opportunities that exist on that side of the business as well. And so we definitely would like to be the consolidator. There are some smaller companies out there that are in a comparable size to us. And so we think that there is a path to progress on growing the company. And we actually also think that a transaction like that would also act as a catalyst to fix the capital structure at the same time, potentially. So there's definitely some things that we would like to do to grow the company.

And would you characterize the -- I mean we're starting to see some transactions take place post -- COVID obviously shut things down for a long time. But in the last few months, we've seen a few different types of transactions take place, not so much on the ag side of equation but more on the sort of general chemical industrial side of the equation. Are you seeing dialogue pick back up? Are bid-ask spreads still very wide? Or how would you characterize the situation?

Yes. I mean I think that the pandemic certainly did shut things down for a while, but I would agree with you. We've definitely seen things start to pick back up in the conversations that we had. And so we've -- I think things are starting to look up.

Okay. All right. Let me see if we have questions from the so-called studio audience. I don't. Is there anything that we didn't talk about that you want to make sure that those listening are aware of?

I guess the only thing I would point out is LSB has been on a path to continuous improvement and really trying to improve the reliability of the plants and become a best-in-class chemical operator. And I think we've -- or hopefully, that has been noticed and people are seeing the improvements that we've been making and we'll continue to do so. And I think we have some good things happening and some good optimism heading into next year with respect to pricing as well as our focus on the things that we can't control on a day-to-day here at LSB. So we look forward to telling you more about our improvement in the future.

Okay. Excellent. I think with that, we'll end the session here. Cheryl, thank you very much for your time today. We appreciate it.

Thank you so much, Vincent. Have a good day.

You, too, now.