LSB Industries - Earnings Call - Q2 2020

Transcript

Speaker 0

Good morning thank you for standing by. Welcome to the LSV Industries 2Q twenty twenty Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

I will now turn the conference over to your host, Kristy Carver, Senior Vice President and Treasurer for LSV Industries. Thank you. You may begin.

Speaker 1

Thank you, David, and good morning to everyone. Joining me on the call today are Mark Baerman, our Chief Executive Officer and Cheryl Maguire, 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.

Speaker 2

Thank you, Christie, 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 once again begin by thanking all of our employees for their efforts in enabling us to continue to run our business in the midst of the pandemic crisis. Their hard work and commitment enabled us to continue to deliver an improved safety performance and to sustain our operations at a high level of efficiency during the second quarter. We continue to focus on improving our safety performance, which currently stands at a one point seven recordable injury rate for the last twelve months.

I'm extremely proud of our team for this accomplishment and their focus on continuous improvement in both safety and operating efficiency that's come to define LSB's corporate culture over the last several years. While the work never stops to reach our safety goal of zero and our targeted long term ammonia on stream rates of ninety six percent, we are well on our way. Slide three summarizes the main takeaways for our second quarter. 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-nineteen, we did a good job of 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 maximizing our product balance. In fact, had pricing been in line with the twenty nineteen second quarter, which wasn't robust itself, and industrial demand been consistent with the pre pandemic levels of just over four months ago, it would have resulted in an adjusted EBITDA that was approximately 10% higher than the second quarter of last year.

This demonstrates the improvements that we are making in the business that will allow us to capitalize on the return of industrial demand to pre pandemic levels and on improvement in nitrogen prices. Cheryl will provide more detail around this analysis later in the call. We were particularly pleased with our 6% year over year increase in total agricultural sales volumes for the quarter. This was driven by an 18% year over year increase in total UAN sales for the quarter, with our Pryor facility achieving record urea and UAN production for the quarter. The improvement at our Pryor facility was the direct result of the installation of the new urea reactor and other work that was performed on that plant during the twenty nineteen fourth quarter.

We also had strong HDAN sales for the second quarter. Looking at the performance of our three facilities collectively, we remain on track to exceed our 2019 production and sales volumes for the full year of 2020, which would result in record ammonia and certain other downstream production records. Unfortunately, as I mentioned earlier, selling prices for our agricultural products were significantly lower in the second quarter compared to the same period last year, and also declined relative to the first quarter of this year. The weakness was a function of continued excess ammonia inventory carried over from 2019 along with the closure of the Magellan pipeline last fall, which continues to disrupt ammonia movement, particularly in the Southern Plains market around our Pryor facility. UAN prices also weakened as we experienced a year over year increase in imports and a year over year decrease in exports resulting in more supply of product available to meet US demand.

Lower overall fertilizer prices also reflect the decline in corn prices over the course of 2020, which I'll discuss in more detail shortly. As you know, natural gas is the primary raw material for most of our products. So the lower year over year natural gas cost we experienced was a positive for our gross margins. It's worth pointing out, however, that the very low natural gas cost can be a double edged sword. While we reap the benefit of the lower cost to produce our products, gas costs at the levels we've seen worldwide for the past two quarters tends to allow marginal nitrogen chemical producers around the world to operate their manufacturing operations, leading to higher product supply, which puts pressure on product sales prices, which was another contributing factor to the fertilizer price weakness we experienced in the second quarter.

Low natural gas prices are good for our cost of manufacturing, but at some level, the cost benefit is more than offset by a deterioration of product selling prices. On slide four, we discuss the actions we have been taking to protect our team from COVID-nineteen. Since the pandemic hit in March, we have been strongly committed to doing everything we can to keep our employees, contractors, vendors, and customers safe and healthy. As the virus has spread more significantly into the states where our facilities are located, we've doubled down on the measures we have put in place. We've continued with strict protocols at all our facilities, including mandatory masks, social distancing, and regular health monitoring for our personnel.

Extra cleaning and disinfecting of equipment and workspaces, working from home for employees not necessary to be on-site at our plans. Adjustments to the manner in which our personnel interact with delivery drivers, and restrictions and guidelines around travel, among other measures. These procedures have proven very effective as to date we have had no known cases of COVID-nineteen among our workforce. With no insight as to when we will see an end to this crisis, we will continue doing what we have been doing and continue to review and enhance our contingency plans so that we are prepared for changes as the pandemic continues to evolve. 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 our last earnings call in early May.

On the agricultural side of our business, the spring planting season unfolded much as we expected it to. USD estimates for the 2020 planting season now indicate that approximately 92,000,000 acres of corn were planted in The US. While this was below their initial forecast of 97,000,000 acres, which we and most industry participants viewed as aggressive, it still represents a 3% increase as compared to 2019. This increase supported a solid rise in demand for fertilizers, although, as I indicated previously, it was not enough to boost product selling prices. Throughout this past spring, as US citizens sheltered in place under stay at home orders and most aspects of The US economy were shut down, automotive usage across the nation dropped dramatically, which significantly reduced the consumption of gasoline.

This is important as the production of ethanol, a gasoline additive, accounts for approximately 40% of total US corn demand. So lower gasoline consumption has led to reduced ethanol demand, which has a significant impact on corn demand, expected corn inventories, and corn pricing. Since hitting a 2020 low point in April, ethanol production has rebounded sharply, returning to near pre pandemic levels as various aspects of the economy have reopened. While the disruption to the corn market has already been realized and may continue to be felt into 2021 due to expected elevated corn stocks, the ethanol market situation turned out to be better than we had initially anticipated. With respect to our industrial and mining markets, we experienced a drop in demand that we had anticipated for several of our products that are used by industries hard hit by the pandemic.

After halting production in mid March, the auto industry, which is a major consumer of nitric acid, reactivated their assembly lines during the May. This coincided with a rebound in US light vehicle sales, and while not back to pre pandemic levels, is a favorable indicator for nitric acid demand. The home building sector is also a sizable end market for nitric acid. Since bottoming out in April, key indicators of new home construction and demand for new homes has been making a steady recovery. Considering these favorable trends, and to the extent to which US economic activity continues to gradually increase in the coming months, we are cautiously optimistic that we will see some sequential improvement in our industrial volumes in the third quarter.

I'll hand the call over to Cheryl momentarily, but first I'd like to provide a brief update on the litigation that we brought against Leidos, the general contractor of our El Dorado Ammonia plant expansion project that spanned from 2013 to 2016, in which we incurred substantial cost overruns. We continue to seek more than $100,000,000 in damages as compensation for Leidos' wrongdoing, which involved breach of contract, fraud, gross negligence, professional negligence, and negligence. As we indicated on our call back in May, due to the onset of COVID-nineteen and the related court closures, the start of the trial was delayed from April until late September. As of today, due to the ongoing pandemic, the trial has been delayed again. We are awaiting a new trial date and we are looking forward to having our case heard by a jury.

While we can't guarantee any outcome in litigation, we believe our case has serious merits. We will continue to provide updates as appropriate. Now Cheryl will go into more detail about our Q2 financial results. Cheryl?

Speaker 3

Thanks, Mark, and good morning. Page seven bridges our adjusted EBITDA for Q2 twenty twenty of $29,200,000 to adjusted EBITDA for q two twenty nineteen of $32,000,000 The year over year decline is the result of lower selling prices, particularly in our agricultural market. As Mark stated, persistent elevated inventory levels for ammonia combined with increased imports and decreased exports of UAN over the last twelve months have continued to weigh on pricing. Sales volumes for our industrial and mining products decreased year over year largely due to the weaker demand as a result of COVID-nineteen impacts on our end markets. Overall, the impact to EBITDA from COVID-nineteen related lost volume was approximately $3,500,000 for the second quarter and approximately $5,000,000 for the first six months.

From a volume perspective, we were able to offset some of this lost industrial and mining sales volume with higher production and sales of agricultural products, primarily UAN, as a result of record production from our Pryor facility. Additionally, these declines were partially offset by favorable natural gas costs which averaged approximately 25% below the 2019. Furthermore, in the 2020, we recognized $5,700,000 of settlements from vendors to recover certain expenses associated with the startup and operation of our new nitric acid plant constructed at our El Dorado facility in 2016, where the negative impact to our EBITDA was previously recorded. Lastly, we continue to closely monitor expenses and eliminate or defer spend where possible. And as such, plant costs were approximately $1,200,000 lower than the same period last year.

As Mark stated earlier, our second quarter operating performance was obscured by the depressed demand for our industrial and mining products as a result of the pandemic, coupled with a very low pricing environment for agricultural products. Page eight is intended to illustrate the improvements we are making in our business. For comparative purposes, we have normalized for both selling prices and natural gas prices to match those we experienced in 2019 and also added back lower sales volumes from lower demand directly resulting from the COVID-nineteen economic slowdown. This allows us to view the operational improvement in our underlying business. With these adjustments, adjusted EBITDA would have been $34,900,000 in the 2020, almost 10% higher than twenty nineteen second quarter adjusted EBITDA.

We believe that this illustrates the improvements in our business from the many initiatives that we have completed over the last several years. Also keep in mind that selling prices in 2019 were not what we would consider to be robust. Turning to Page nine, we have outlined gross profit margins for each of our market segments, which represent the true underlying cash margins of each of our businesses. As you can see from this slide, our industrial and mining margins remain robust, averaging approximately 40% as we've been able to offset lower selling prices with lower natural gas costs, lower fixed costs, and higher production volumes. Although ag margins have been impacted by the very low selling prices we experienced primarily for UAN and ammonia, we would expect mid 30 EBITDA margins in a more normalized mid cycle pricing environment.

Given the future uncertainty around COVID nineteen and the likelihood of continued ag pricing weakness, we have taken a number of actions to preserve liquidity, which are summarized on Page 10. We ended the quarter with approximately 69,000,000 of liquidity and we continue to closely monitor all nonessential spend until further notice. In April, we received a $10,000,000 PPP loan under the CARES Act. The loan has allowed us to avoid laying off or furloughing any employees, and we are maintaining our full employee base and keeping our plants fully operational during the pandemic. Additionally, we have been exploring the sale of certain non core assets that could generate additional cash after the repayment of debt of approximately 20,000,000 to 25,000,000 That process has been put on hold due to the pandemic.

However, we intend to resume exploring the sale of those assets when market conditions become more favorable. Lastly, we have additional levers to pull such as the refinance of existing equipment loans that would add additional liquidity. We remain acutely focused on managing the downside risk to our business and maintaining adequate liquidity to operate through a protracted period of market headwinds. Hopefully, this will not be the case, but we believe it to be prudent to plan as if it will. One final note on liquidity.

As we move into the 2020, our outlook for sustained low pricing for agricultural products as well as natural gas has implications for working capital and therefore the availability on our revolver. Lower selling prices lead to lower receivables and low natural gas costs means our cost of inventory is lower. Both factors lead to a lower borrowing base. However, since natural gas is a major input to our production cost, our overall working capital requirements are lower and therefore our overall liquidity needs to manage the business are also lower. So at $69,000,000 of liquidity at the June, we remain very comfortable heading into the second half of the year.

Page 11 outlines our capital structure at the end of Q2. We are actively seeking ways to improve our capital structure and lower our overall cost of capital. We believe that continued improvement in operating performance combined with economic recovery from the COVID nineteen pandemic and improved pricing for our products will be a benefit in achieving those efforts. Today, our senior notes are callable at $1.00 7, and in May 2021, the call premium declines to 103.6%. In the near term, we remain focused on preserving liquidity and managing through the pandemic.

However, we see several avenues to lowering our cost of capital and continue to work with our board of directors on a path forward. With respect to the pricing environment for the third quarter, please turn to Page 12. As you can see from this slide, UAN, HDAN and Tampa ammonia are expected to remain materially lower as compared to 2019 as a result of increased supply from the variety of factors discussed earlier. However, we do expect to offset a portion of the lower selling price with favorable gas dynamics. From a volume perspective, we expect continued pressure on demand related to COVID-nineteen, although to a lesser extent than what we experienced in the second quarter.

That being said, we would expect lost volume associated with COVID-nineteen to impact third quarter EBITDA by between 2,000,003 On a positive note though, we expect continued increased ammonia, UAN and sulfuric acid production and sales as a result of the reliability investments made in 2019 and from no planned turnaround work in the quarter. And so to sum up our view for the third quarter, despite the much lower selling price environment, we expect higher production and sales combined with lower costs to drive a 15% to 20% improvement in EBITDA as compared to the 2019. And now I'll turn it back over to Mark to wrap up.

Speaker 2

Thank you, Cheryl. Between the pandemic crisis and the record rainfalls in the Midwest throughout 2019, the past six quarters have held their share of challenges for our industry and our company. While these significant obstacles are outside of our control, what we have been successfully managing and will continue to manage are the aspects of our business that we can control. These include our safety performance, our manufacturing operations, sales of our products, our business development initiatives, our costs. With respect to our plant operations, we expect to deliver another year of improved on stream rates across our facilities for 2020 would result in record annual production for many of our products.

This success reflects the combination of the hard work and discipline of our teams to implement enhanced processes and procedures at our facilities, coupled with the investments we've made in reliability over the past several years. Beyond the increased sales volumes, we expect to generate from further improvement in our plant operating and daily production rates. We have secured and are actively pursuing business development and margin enhancement opportunities that when combined with several cost reduction initiatives, we believe will yield 10,000,000 to $15,000,000 of annual incremental EBITDA when fully implemented. We should see these opportunities and initiatives begin to yield results starting in early twenty twenty one. None of these improvements are reliant on increased selling prices for our products and are of course in addition to the lost EBITDA from the impact of COVID-nineteen that we expect to recover.

We've discussed several of these opportunities on previous calls, such as our intensified sales and marketing efforts aimed at selling out our higher expected production volumes. During the first quarter, we secured two new contracts for the sale of Eldon, both beginning in the second quarter. And although currently impacted by COVID-nineteen, when fully implemented, should represent between 40,050 tons of new volume. We also executed a new contract to sell approximately 100,000 tons per year of CO2 out of our El Dorado facility where our customer is building a guest plant. We expect to begin sales under this agreement in the 2021.

In addition to these contracts, we have several other dialogues underway regarding potential long term supply agreements that we are excited about. As we discussed on our Q1 call in April, we completed a key storage project that will allow us to further maximize our production of high density ammonium nitrate at our El Dorado facility, which we expect to enable us to achieve higher production, a lower cost per ton, and increase sales of that product throughout the year, particularly during periods of more attractive pricing. We're very excited about expected returns on this investment and have identified several other similar opportunities we expect to address over the next several quarters that would enhance both production and sales volumes and lead to an increase in our margins. Also included in our plan to bolster our profitability, regardless of the product pricing environment, are identified fixed cost reduction actions that we believe will result in approximately 5,000,000 in annual savings. So to sum it up, we see a clear path to an additional 15 to 20,000,000 of incremental EBITDA by continuing to focus on what is within our control.

The goal is to implement these actions over the next twelve months. With all of that said, while we are constantly focused on improving our EBITDA and cash flow and maximizing value for our shareholders, our number one priority remains the health and safety of our employees, their families, friends, coworkers, and everyone in our communities. The pandemic continues on, and while every day we learn of the accelerating spread of the virus in certain areas of the country and the world, we also learn of progress and hope in the battle to control COVID nineteen. In the midst of all of it, The US economy carries on, albeit hampered in many sectors, but also strongly rebounding in others. The products we make are an important part of that economy, and we believe that along with our strong operating performance evidenced by our solid financial performance in the second quarter in the face of a historically challenging environment, this performance makes us more confident than ever in our ability to deliver year over year improvement in EBITDA and cash flow for the full year of 2020.

With the various actions we are taking, we are well positioned to continue that improvement in 2021. Our goal is continuous improvement so that we can emerge from the pandemic a more efficient company and capitalize on the opportunities to grow our business that we expect to present themselves. Before I pass the call back to the operator to begin the Q and A session, I'd like to mention that we will be participating in the Jefferies Virtual Industrials Conference on August. We hope to speak with some of you over the course of that event. That concludes our prepared remarks, and we will now be happy to take your questions.

Thank you.

Speaker 0

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press 2.

Our first question is from Travis Edwards with Goldman Sachs.

Speaker 4

Hey, good morning. Thanks for the time and thanks for all the color on quarter. It's great to see the progress on operations and the plants. Just had a question kind of on that front. Historically, you'd shared on stream rates by plant.

I was wondering if you would be interested or willing to in giving that com commentary or color, now. And then secondly, just as you've talked about, deferring some of the nonessential costs to later this year, We're just wondering if that changes anything as far as the turnaround schedule going forward into next year.

Speaker 2

Hey, Travis. Thanks for the interest. It's Mark Berman. So operating performance across the plants, the ammonia on stream weight rate was about 90% for the quarter. As you know, downtime or unexpected downtime doesn't come ratably throughout the year.

You usually get it in kind of a spurt and then you have a great run going forward. So we're still focused on the 94%, on stream rate for the year and we think that's, very achievable. As far as turnaround schedule, no, we have no plans, to change any of the turnaround schedules. We don't have a turnaround, any turnarounds planned for this year. However, we do have two planned for next year.

Speaker 4

Got it. Thanks. That's really helpful. You talked a little bit about the capital structure, which I know tends to come up on those calls. But with the call price stepping down next year, just wondering, again, you don't have to necessarily give specifics, but, you know, as you think about addressing that capital structure, reducing finance costs, dealing with those preferred shares, are you thinking about, you know, potential refinancing from the perspective of we want to hit a certain run rate EBITDA before we come to market?

Obviously, you're dependent on market conditions and whether higher markets are open, but more just wondering what kinds of conversations are you having internally, you're hearing from preferred shareholders, bondholders about, you know, addressing both the nine to five eighth notes and the preferred notes.

Speaker 2

Well, I certainly don't like nine and five eighths interest rate on our notes, I don't like our credit rating. We are very focused on ultimately improving the cost of our debt. And part of that will be improving the credit rating and becoming a single B credit. So one of the things we're really focused on, as I said earlier in my prepared comments, is the things that we can control to really drive improvement in the business, and obviously that translates to better financial performance. With some of the efforts that I outlined, we're really focused on a target of $100,000,000 in annual EBITDA, irrespective of an improvement in price.

Part of us addressing our capital structure is clearly to refinance the notes. I believe if we continue to operate well, continue to become more efficient, that certainly would be probably prudent given subject to market credit market conditions to refinance the notes sometime next year.

Speaker 4

Got it. Maybe a quick follow-up. I'll just sneak one more. On that note regarding, you know, getting the single b rating, I guess, as far as the conversations you're having with the agencies, have they given sort of indication as far as, you know, hitting these metrics? Obviously, we have access to their reports too, but was just curious, you know, are those conversations ongoing, or have you, I guess, how free what's the frequency of these conversations with the agency, and talks to get to that single b rating?

Speaker 2

Yeah. So I can't comment on what the agency's thoughts are or aren't. I think, agencies are never definitive, and nor do I expect them to be, as markets change. Both credit markets and, agricultural markets or industrial markets change, their thoughts and feelings change. But, we've had a pretty proactive, relationship with both Moody's and S and P.

We either meet with them or talk to them every quarter. And so I think, they understand sort of our metrics and where we're going and we'll continue to have these conversations. I think they're aware that we're improving our business and that should lead to improvement in credit rating.

Speaker 4

Got it. I really appreciate the time this morning. Thanks again. I'll get back in queue.

Speaker 2

Sure. Thanks.

Speaker 0

Our next question is from Joe Mondillo with Sidoti and Company.

Speaker 5

Good morning, Mark, Cheryl.

Speaker 2

Good morning, Joe.

Speaker 5

So the last handful of fertilizer application seasons have been really weak. And I know this year started off on a slow start, but now that we're sort of through the whole season, I'm wondering what your how would you describe the spring season?

Speaker 2

Yeah. I think we actually had a really good spring fertilizer season. Demand was up, obviously, with more acres planted this year versus last year. I think the demand was there. But as we mentioned, you know, pricing unfortunately wasn't what we had anticipated.

Speaker 5

And when we look towards the end of the year, you know, the USDA estimates, even though they brought down the planted acreage estimate, the stock to use ratio is still expected to be at multi decade highs, which I think is one of the reasons why, you know, corn prices are so low and, you know, maybe indirectly why fertilizer prices are low as well. Just curious on what your, you know, just general thoughts in regard to demand and application season later this fall and maybe going into next year.

Speaker 2

Well, I think you're right. I think we're gonna have some pretty high corn stocks. I can't you know, I've had to look back to see if they're record or not, but they're certainly some of the highest stocks that we've had, you know, over the last ten years. I think that will have some impact on corn pricing and corn pricing always has an impact on fertilizer and the price of corn will have an impact on how many acres are planted. You could see some acres rotated out of corn and into beans, depending on the price of beans.

I think that remains to be seen. I think on our first quarter call, ethanol was something that we were a little nervous about and the return of ethanol demand. But as we pointed out in our prepared comments, ethanol demand really come back fairly strong. And I think the more people you talk to about taking vacations this year, there's a lot of driving and a lot less flying. I'll be interested to see certainly end of this summer and into the fall what the gasoline usage would be and whether it's up year over year because people are just driving more.

I think we'll certainly match what we had last year as far as number of acres planted and you could see slightly more. But I don't think it'll be a robust year for corn acres planted in next spring.

Speaker 5

Okay. And any thoughts on the US dollar? You know, it's made a pretty drastic move over the last several months. And how that affects just the overall industry as far as corn, and then, I guess, maybe, you know, even more directly as far as, you know, maybe fertilizer imports and just wondering what your thoughts are and how significant that could, probably, I would think be a positive.

Speaker 2

Yeah. I think you're right. I mean, you know, what's gonna drive imports more is just pricing here in The US and North America. And so we're seeing some of the lowest pricing throughout the world for fertilizer products here in The States, and I think we've seen some pull back certainly with imports. This summer, we had an earlier than expected field program for UAN started about a month early than we would normally see.

The pricing was fairly low. I don't think it makes it very attractive for imports to come into The US. At some point, if you don't get imports into The US to a certain date, let's say kind of mid October, then the prospects of imports coming in really don't shut off and you don't have imports coming in until sometime in the early spring. I think more than the dollar exchange rate or anything like that, It's just the dynamics of where pricing is. I think we are seeing some less imports, particularly with UAN.

We're also seeing some in less imports with ammonium nitrate as well.

Speaker 5

Okay. And then I wanted to follow-up regarding the question that was asked before before me, on the onstream rates. I was just going back to what you did second quarter of last year, and I think it was around 94% compared to the 90% you did here. You mentioned in the press release that prior, I think, was at a record high. So I assume maybe Eldorado and Cherokee didn't run as well as last year.

Just curious on how the quarter went in terms of on stream rates at, you know, maybe specifically Cherokee and El Dorado and how you're thinking in the third quarter going forward?

Speaker 2

Yeah. So I'm not gonna comment on which plant ran well or not well. I think we've tended to report an average on stream rate across the plants. The one thing I'll say about on stream rates and even production is, and I think I said this to Travis earlier on the call, you don't get unplanned downtime that happens ratably every month, right? So reporting on a quarterly basis tends to skew things.

I think you really need to think about on a twelve month basis or on an annual basis, because you can have some downtime that affects a quarter and then you run really well for two quarters, higher than any targeted rate. So the average tends to be where your overall target is for the year. So far we're running well this quarter. We would anticipate nothing different. And so we anticipate having a really good high on stream and high production and hope to be able to report that for our third quarter.

Speaker 5

Okay. And then regarding your preferred equity holders, I'm just you know, I haven't asked this question in, you know, at least over a year, but I'm just wondering, the accruals of the dividends, what is the relationship there or the ability to continue doing that?

Speaker 2

Well, we have the opportunity to either pay cash or pay in kind. Until we start to have some significant excess cash flow, we'll wind up paying in kind on the dividend. As we start to get EBITDA up to $100,000,000 or higher than that, my expectation would be to start paying that dividend in cash.

Speaker 5

And is there a threshold? You know, is there something in writing or in the you know, you know, in terms of the level of EBITDA where, you know, you have to be more disciplined on paying that, or is it just in kind?

Speaker 2

No. I mean, think that's an option that we have. We have the ability in our bond indenture to use any excess liquidity over $65,000,000 to repay either bonds and or preferred. And I would just encourage you to go through and look at the details of our indenture if you want more detail.

Speaker 5

Okay. Last question. The noncore asset sales, can you remind us what that is and what you're thinking on timing of that is?

Speaker 2

I think the timing's kind of unknown. Right? I think as Cheryl said, we already when we think the market's attractive for us to sell an asset, and the asset is a natural gas pipeline that we own down at our El Dorado, Arkansas facility.

Speaker 5

Okay. All right. Thanks a lot. Appreciate it. Have a good one.

Speaker 0

You too. Our next question is from JP Gigan with Global Value Investment Corp.

Speaker 6

Good morning. You've done a very nice job controlling costs both from a cost of sales perspective, which shows on your robust adjusted gross margins in a difficult environment, but also from an SG and A perspective. Your press release makes the statement that there are significant opportunities to further enhance operational efficiency. Can you put some more color around that?

Speaker 2

Sure. I talked about with some of the initiatives that we have, whether they're business development initiatives, operating initiatives, or even cost saving initiatives that we've got identified about, through those initiatives, an incremental 15,000,000 to $20,000,000 of annual EBITDA. So they would be a combination of business development opportunities like the new storage facility or dome that we built for high density ammonium nitrate and the ability to position product and also run higher production. We've also talked about CO2 sales out of Velvetado. To date, we do not sell CO2, we actually vent it.

And it's a product that we sell at our other two plants. Through really good efforts from our industrial sales and marketing folks, we've secured a twenty year agreement with a customer where they build a guest plant and they'll, buy about 100,000 tons of CO2 out of that facility. Better on stream rates, obviously are gonna give us, more production and better absorption of costs. And then, as we mentioned, we've got some, fixed cost savings identified, that we think can be anywhere from 4 to $6.04 to $7,000,000 of annual savings. So kind of going through all of those, we're really focused on achieving that 15,000,000 to $20,000,000 of incremental EBITDA from those initiatives.

And when you add the COVID impact back to that, which we wouldn't expect to see once the pandemic is either over or lessened and the economy gets back to some level of normalcy, the real focus is getting to $100,000,000 of EBITDA without any pricing improvement from where we are today. And the pricing improvement obviously will just be on top of that.

Speaker 6

Thanks. You've done a good job putting some numbers around your margin enhancement projects in terms of earnings with the 15,000,000 to $20,000,000 range. And I think we understand the timing of those projects and when we would expect to see the results come through to EBITDA. But can you talk a bit about how your working capital situation might develop, particularly as you look at storage projects like this HDAN storage dome where you presumably make a product or build inventory throughout the year with the intent of selling it in season?

Speaker 2

JP, is the question, does it will it require any additional working capital?

Speaker 6

Essentially. And can you give us an idea for how much or how that fluctuates throughout the year?

Speaker 3

Sure, JP. I'll take that one. Yes, I mean, we generally see some higher working capital needs as we head into the fourth quarter and into the first quarter. So we're producing product in the summer months, putting it in storage and then selling it in season. And so we'll see a little bit more working capital carry probably in that December, January, February timeframe.

Speaker 6

Okay. Thank you. And then as you talk about bringing on new customers and developing existing customers, I'm a little curious, there's obviously some sort of capacity constraint given that you have finite production resources. And I realize that conversation is nuanced given your ability to shift between products. But can you give us an idea for how much additional capacity you could produce?

Speaker 2

Well, obviously it's going to be different at each plant, right? Yeah, I mean, I think I'm probably not in

Speaker 4

a

Speaker 2

position to say that today and be in a better position in the third quarter, on our third quarter call after we get through some of the additional conversations that we're having.

Speaker 6

Okay, great. Thank you for your time.

Speaker 0

Our next question is from Brian DeRuebo with Baird.

Speaker 7

Good morning. A couple of questions for you. The PPP loan, the $10,000,000 do you have to repay that?

Speaker 3

Our expectation is that we that should be forgiven.

Speaker 7

Okay. And when are you gonna have final determination on that?

Speaker 3

You know, we're working through kind of the rules and regulations, and, you know, I suspect over the course of the next six months, we should know more on that.

Speaker 7

Okay. Got it. And then as the noncore assets, know, in addition to the natural gas pipeline, you have the cogen facility at El Dorado. Is that something also that you consider possibly selling?

Speaker 2

Well, that's a great question. I mean, we've looked at that and we have spoken to several parties that focus on either acquiring or building cogen facilities on industrial sites. It's not something that we're focused on today, but there was if someone that was interested in buying the cogen facility and it made economic sense for us, I think we would consider it.

Speaker 7

Understood. And just as you think about these targeted noncore asset sales, obviously, going to get the cash proceeds in, but

Speaker 2

sort

Speaker 7

of what cap rate are the buyers buying it at? Or put it another way, would be the hit to EBITDA that you'd probably have to experience offsetting those proceeds?

Speaker 2

Yes. I think we're not in a position to talk about that.

Speaker 7

Okay. Understood. Just two more for me. You have two turnarounds scheduled for next year. Can you remind me sort of what's been the the average hit to EBITDA with those turnarounds?

Speaker 3

Well, generally, from a maintenance cost perspective, you know, probably 5 to 6,000,000 for each turnaround,

Speaker 7

and

Speaker 3

we generally add that back in adjusted EBITDA because a lot of our our peer group, they capitalize and amortize those. So that would be one of the main parts. And then generally those turnarounds, you know, thirty to thirty five days for each facility. So if you think about prior, that's, call it, six seventy five tons of ammonia a day over thirty five days. And then Cherokee runs about five fifteen tons of ammonia, so about thirty to thirty five days of lost production.

Speaker 7

Okay, got it. And then your next one is not until '20 do you have one in 2022 or is it now 2023?

Speaker 2

Yes. So we've got Cherokee and Pryor both in turnaround in the third quarter of next year, and then we've got El Dorado in 2022. And then Cherokee and El Dorado are on three year turnaround cycles and Pryor will make a determination after next year's turnaround.

Speaker 7

And just, Mark, maybe just more of a broader question. I know the plants are running well after a string of years where they weren't. But given the oversupply nature of the industry right now, why run the plants full out when you're sort of contributing to the price decline? And that's not for you specifically. It's obviously an industry question, but just love your thoughts there.

Speaker 2

Yeah. I mean, so, first off, we're a pretty small player in the industry. So I think even if we ran our plants lower, I don't believe it had much of an impact in the industry. From again, from our perspective, if you can run the plants and each incremental ton that you produce you can make money on, well then it makes sense to run the plants. And I think that's probably the general feeling in the industry.

I can't speak for others. You'd have to ask them, but as long as you're making money, people are going to run at higher operating rates. Because once you lower your production rate and you don't produce those tons, they're lost forever, right? You can't make them back up.

Speaker 7

Understood. Great, thank you. Sure.

Speaker 0

Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Mark Berman for closing remarks.

Speaker 2

Thank you. Appreciate everyone's interest in LSB Industries. I hope you see that we're making progress. And if there are any follow-up calls, feel free to give us a call, and we'll be happy to answer any questions. Thanks so much.

Speaker 0

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.