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

Yes. I mean, UAN is bought pretty heavily starting in February and throughout the early part of June in a typical year, weather permitting. And then there's usually a summer field program that typically will occur in late July, although this year was earlier, and it started at the end of June. And that's where customers will come in and buy forward for a period of months, depending on how long the producers want to commit for and usually, those are at the lowest prices. So I think the dynamic has changed a little bit where a lot of producers might have historically sold through even the end of the year. So selling forward in July through December, the dynamics changed, and you're seeing more and more producers maybe sell 2 or 3 months forward as opposed to through the end of the year.

Got it. Another question from an investor. What's the rationale for Coke nitrogen decision to announce a new UAN capacity in the corn belt, given the length in the market, is it simply a move to upgrade ammonia?

That's a great question. I'd like an answer to that, too. I would have to say that without really having spoken to anyone or know -- at Coke or know what they're thinking, that -- generally speaking, over time, upgrading ammonia is going to give you back better margins. So taking free ammonia out of the marketplace and upgrading it to UAN over time is a smart move. So I would guess that would be what the rationale would be, but I don't know.

Thank you. You were saying that some producers want to -- getting back to the fill season and some producers are trying to move away from the fill season because you're -- they sell at lower prices, hurting their -- obviously hurting their price realization. Is that -- are -- what are you doing? Are you thinking about -- what is the -- previously how much did you sell during the -- that summer/fall fill season as a percentage of the total? And what are you trying to move it to?

Yes. So I'd say maybe up until 2 or 3 years ago, I think we were pretty similar to a lot of other players in selling out more towards the end of the year. The last 2 or 3 years, I think we've taken the position that on a fill program, we certainly -- again, like this year, at the end of June, we certainly were comfortable selling out initially through the end of September and then maybe into the first couple of weeks of October. I guess the way we tend to think about it now is we'd rather try and sell at higher prices, right? And so -- yes, there's a trade-off. Burden hands, so to speak, having orders to take you through generally a lower demand period of the winter, but there is storage around. People tend to use as much storage as they can, whether it's fixed storage or mobile storage. And generally speaking, if you go back historically, you've seen UAN prices rise sort of in the November, December time frame, if you've got enough wherewithal to continue to store your product. So the last thing you want to do is turn down production, right, because then you've lost those tons forever. But I think it's kind of a feel for how you think the market's going to unfold. Selling out through the end of the year generally takes the risk off the table, but you're locking in at lower prices, selling at it -- something less than that affords you the opportunity to sell at higher prices, but there could be some risk to that. So we've generally moved away from selling out through the end of the year and taking a little bit more risk, although I don't think it's much of a risk.

Thank you. What -- how much does North America import of nitrogen-based fertilizers now? Is it -- if I recall, a number of years ago, before all the new capacity was circa 50%. And I think for a while, it's gone down to about 25%, this is all pre-pandemic and that sort of thing. What do you think, for this year, 2020, the net imports of nitrogen fertilizer will be on a nitrogen basis?

Well, I don't know that I have a distinct answer. Pre-expansion, we used to import anywhere from 5 million to 7 million tons a year of ammonia. Now it's maybe 2 million to 3 million tons a year. Urea is still imported. Since we're not -- we don't sell closed urea, I'm not as up to speed, but I think it's still about a 4 million to 6 million ton a year market on an import basis. And UAN, today, when you really look at the dynamics of imports and then -- versus exports, we're probably at a fairly balanced -- we -- it might still be a slight import market. But generally, it's been a -- it's now a balanced market post the nitrogen expansion during the '15, '16, '17 time frame.

Have you seen UAN from Trinidad increase or decrease into North America over the last year or so?

From Trinidad specific, yes, I think it's actually decreased slightly.

Got it. Okay. We have another question coming. How much flexibility does your new storm -- storage dome contribute to shifting sales from low into the higher margin selling season? And what might the economic impact of this move be?

Yes. So one of the reasons that we built a new storage facility earlier this year was the impact of late fertilizer demand or delayed fertilizer demand in the spring. And so what we saw ultimately was in the second half of February and the first half of March, 2 years in a row, we were maxed out on storage and therefore, had to actually turn down production to the tune of 15,000 to 20,000 tons of product. So the new storage facility will allow us to store that product until the seasonal demand is really heavy. So high contribution margin on those 15,000 to 20,000 tons or additional tons. We really haven't given out the economic impact of it, but it's got a meaningful impact to us.

Okay. And then another one is a philosophical question. Does LSB have a place as an independent operator? And does it allow you to control your own destiny? And if not, what's the endgame?

Well, I think we do have a place as an independent operator. I mean, our plants are strategically located in areas that make sense to have plants. Cherokee, Alabama plant is one of only a couple of plants east of the Mississippi River that sells UAN or produces and sells UAN, and we've got access to river, rail and truck. And so that puts us in a good position on the eastern corn belt or to access the eastern corn belt or East Coast. Prior -- our prior facility really touches on the Southern Plains market, but also allows us to even sell into the Western corn belt in UAN and ammonia. And then our El Dorado facility, we have the NuStar pipeline running right through that facility, so that gives us some flexibility on selling product in addition to truck and rail. But also, we've got really good access of going out West with products. So yes, I think we can certainly stay independent. What I would say is we're a small public company. So I think we've -- ultimately, we've got to grow the platform or if we can't grow the platform, then we could -- should consider being part of someone else. So I think we'll look at all -- we always look at all options, besides having a fiduciary responsibility as a Board, to look at all options. I think we're realistic. We create value by improving the existing operations. And then I think we've got a lot of optionality once we've done that, and we're not there yet, but I think we've done a good job to improve them.

Actually, going back to when you answered the M&A question earlier in the chat. You sort of answered the question talking about -- referring to the fact that your plants are more reliable now. And I know when it was public that you were looking at that, your plants didn't have the reliability that you've now been enjoying. Can we infer from that, that, that was one of the important stumbling blocks to getting the value you needed to get at the time when you were going through that process?

Oh, I'm sure that was a contributing factor. But I think when you go back to the end of '16 and the first half of '17, I think it was probably the lowest price environment for fertilizers that we've had certainly in the last 10 years and probably a greater period of time than that. So I think there was a lot of uncertainty in the marketplace when people were not in acquisition mode, in particular. So I think there were a number of dynamics that probably led to the outcome that we have or that we had at that point. But now that we've improved the operations, I do think that there's a real opportunity for us to take the platform that we have, continue to improve it, but use this platform to grow significantly and become a bigger player in the nitrogen chemical space or the broader chemical space.

And then in applying nitrogen typically ammonia, urea for UAN, what are the major determinants of why a farmer might use one versus the other, besides what they had used last year, I suppose? And the farmers -- individual farmers tend to shift between the 2 based on certain things happening, say, in the weather or obviously, price differences between the types of -- main types of ammonia -- nitrogen?

Yes. So I think that the first thing -- and again, not having been a farmer, I'm just -- it's more hearsay, and from what I've learned in talking to the farmers and other folks in the industry. But soil conditions and how fertilizer interacts and works with those -- with the particular soil on your -- on a farmer's land will have some direct implications as to what he uses. So farmers tend to like to use particular fertilizers, and they like to stay with them if it's working. So you don't see farmers just switch every year. Having said that, if one fertilizer becomes a lot cheaper than another, price is a consideration. And so that does come into play. Not with ammonia so much, right? Because ammonia is applied only either post-harvest or preplant, some top-dress. But generally speaking, you're looking at urea, you're looking at UAN and in some applications you're looking at straight AN.

Got it. Well, one thing to mention is, I mean, I guess the equipment -- or I guess the question is, is the equipment to apply the different types of ammonia -- by different I mean ammonia's a gas, UAN's a liquid, urea is a solid. I would -- is the equipment to apply these very different among the 3? And therefore, some farmers don't have the capability to easily use a different ammonia than the one they're -- they have the facilities to apply each one with?

Yes, that's correct. And so that could be a limiting factor as well, although a lot of retailers today not only provide product, but they provide services. So as that's evolved, I think that becomes less and less of an issue. Certainly, the larger farmers have much more of their own equipment, smaller farmers tend to work with retailers and have them do applications with them.

Got it. Actually, it looks like we're just over the half hour. So Mark, I want to thank you very much for this fireside chat and for participating in our Leverage Finance Conference. Thank you very much.

All right. Thank you, Roger. And any questions from anyone, please feel free to give me a call directly.

Good bye.