Greetings, welcome to the LSB Industries first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Fred Buonocore, Vice President of Investor Relations. Thank you, sir. You may begin.
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 will include forward-looking statements. Because the statements are based on the company's current intent, expectations, and projections, they are not guarantees of future performance. 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 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.
Thank you, Fred. We're happy to have the opportunity to speak with you today about our 2023 first quarter results and our outlook for the second quarter and full year of 2023. I'd like to start by congratulating our team on their safety performance. As of March 31st, our trailing 12-month total recordable incident rate was below one. Out of all of our corporate goals, our Goal Zero, that's recordable incidents and injuries, is the most important. We're very pleased with the improvement we've had, and I would expect it to continue to drive lower. Looking at our 2023 first quarter summary on page three of the presentation, as anticipated, our financial results were down compared to the 2022 first quarter due to a decline in market prices for nitrogen products relative to the inordinately high pricing levels we benefited from last year.
While we can't control pricing trends, we can control the way we operate our facilities and market our products. We are pleased that through these efforts, we generated a solid increase in both production and sales volume compared to last year's first quarter. These investments in our facilities and the ongoing efforts to improve the reliability of our plants are paying dividends. On page four of our presentation, we provide an overview of our end markets. Corn prices remain above multiyear averages, driven by a variety of global factors, including drought conditions in parts of South America and in the U.S., and continued strong global demand. Domestic and worldwide stock-to-use ratios for corn remain at multiyear lows. We believe that it will continue to take two to three years of good corn growing seasons to bring back the stock-to-use ratios back in line with historical averages.
We expect corn prices will stay near current high levels through 2023. This, coupled with lower input costs relative to last year, should make the economics of planting corn very attractive to farmers. We believe that this will translate into an increase in planted acres in the U.S. this spring. The USDA estimates that approximately 88.6 million acres of corn were planted in 2022, and that approximately 92 million acres will be planted this year. An increase of almost 3.5 million in planted corn acres should lead to stronger demand for nitrogen fertilizers, and we are seeing an increase in orders with the planting season getting underway. It is also expected that there will be an increase in wheat acres planted in 2023, further increasing demand for nitrogen fertilizers. Demand for our industrial business is steady.
Nitric acid demand is stable, as the impacts of high inflation in the U.S. are offset by global producers shifting production from international facilities to the U.S. operations in order to take advantage of lower U.S. input costs. Demand for A.N. for use in mining applications is strong, as a growing infrastructure build has increased demand for quarrying and aggregate production, and the growth in electric vehicles and other applications is increasing demand for metals in the U.S. Pricing for nitrogen products has come down in recent months, largely due to a decline in European natural gas prices, coupled with a slow start to the U.S. fertilizer application season. Pricing has also been impacted by the lower demand for ammonia in industrial applications, particularly Asia, as well as reduced demand for use in phosphate production.
However, with China reopening from their COVID lockdown, we should see that trend start to reverse. Even so, demand trend continues to be solid across our business, and pricing remains at attractive levels. With no turnaround scheduled at our facilities this year and the continued improvement in our operations, we are well-positioned for a strong year-over-year increase in production and sales volume. We continue to expect 2023 to be a year of healthy profitability and cash flow. I'll turn the call over to Cheryl, who will discuss our Q1 results and our second quarter outlook. Cheryl?
Thanks, Mark. Good morning. We generated adjusted EBITDA of $51 million and adjusted EPS of $0.25 in the first quarter, slightly below our expectations headed into the quarter, largely because of a more significant decline in selling prices than we had anticipated early in the quarter, coupled with the slow start to the fertilizer application season.
Turning to page five, you'll see a summary of our key balance sheet and cash flow metrics. Our continued profitability enabled us to further improve our financial position. At the end of the first quarter, we had approximately $426 million in cash and short-term investments. During the first quarter of 2023, we generated cash flow from operations of $59 million and had capital expenditures of $18 million, translating into $41 million of free cash flow and a free cash flow conversion rate of more than 80%. Additionally, we ended the first quarter with a net debt to trailing twelve-month EBITDA leverage ratio of less than 1 times, well below our target leverage ratio in a mid-cycle or normalized pricing environment of below 2.5 times.
Page six bridges our 2023 first quarter adjusted EBITDA of $51 million from adjusted EBITDA for the first quarter 2022 of $101 million. The lower selling prices for our products relative to last year's record highs is the driving factor in the year-over-year change in EBITDA. On the positive side, our sales volumes were higher in the 2023 first quarter relative to last year, despite the previously announced lost production at our Cherokee facility in January due to the impact of the late December freeze event. The increase is the result of stronger operating rates at our facilities, coupled with our successful commercial initiatives. Looking at the second quarter, the NOLA UAN benchmark pricing is currently at approximately $275 a ton, which is lower than our realized prices for Q1 2023.
The Tampa ammonia benchmark price settled at $380 per metric ton in May versus an average of $728 per metric ton for Q1 2023. The changes reflect the factors that Mark stated previously. We do, however, think that prices are at or near a bottom, particularly ammonia, which will support our views going forward. Offsetting some of the price declines, 90% of our natural gas feedstock costs for Q2 2023 are locked in at approximately $3.40 per MMBtu , which is materially lower than Q1 2023 of $5.66 per MMBtu.
With our facilities running well and the recent pickup in fertilizer demand as the spring planting season gets underway, we expect higher overall sales volumes for the second quarter of 2023 as compared to the second quarter of 2022, further offsetting some of the selling price declines. Given our current order book and market prices, our view of forward prices, and our locked-in natural gas costs, we expect the second quarter adjusted EBITDA to be in the range of $50 million-$60 million, resulting in additional healthy free cash flow generation and further strengthening of our balance sheet. Now I'll turn it back over to Mark.
Page seven illustrates how the spread between U.S., European, and Asian natural gas prices narrowed over the past eight months, largely as a result of warmer than average winter temperatures throughout Europe and lower industrial demand globally. Still, natural gas prices in Europe remain above 10-year averages at $10-$15 in MMBtu equivalent, a multiple of what we're paying for in the U.S., giving U.S. producers a continued advantage over European producers. On page eight, we show a summary of our key growth initiatives. Employee safety is our primary focus every single day, followed by being good stewards of the environment and the reliability of our facilities.
We continue to make improvements on these fronts and have significant opportunities for further progress to meet our goals of zero total recordable injuries and environmental releases and spills, and 95% capacity utilization for our ammonia plants on average for a year. That would provide meaningful incremental annual profitability and cash flow. On top of that, we believe we have the ability to increase the production capacity of our plants through various debottlenecking initiatives. We continue to evaluate multiple potential projects that would significantly increase our production and sales volumes and our profitability and cash flow. As we discussed on our last call, in December, we submitted an application for a federal grant under the USDA's $500 million Fertilizer Production Expansion Program that would support several debottlenecking opportunities. We expect to learn if we will be awarded funds under this program in the next several months.
Relative to our debottlenecking plans, I have received a number of inquiries regarding the timing of potential cash investments should we move forward with one or more of the projects we are evaluating. I'll take a moment to summarize how we see the cadence of the project development process going forward. We expect to receive findings of feasibility studies currently being performed no later than the end of the second quarter.
At that point, we will reevaluate the merits of the projects and decide whether to move forward with Pre-FEED studies for one or more of them commencing in the second half of 2023. Should we decide to move forward with Pre-FEED studies for one or more of the projects, we anticipate those studies could take as much as one year for the largest of the projects we are considering, with Pre-FEED studies being completed in the second half of 2024. Once we received any studies, we will reassess all of the projects that we performed studies on and take into consideration the updated cost of each project, its expected return, and utilizing our view of the multiyear nitrogen market outlook and the overall global economy.
Only at that time would we proceed with projects, or move forward on any projects that met our return expectations. In short, it would not be before the second half of 2024 when we would make any kind of investment decisions on any project and start spending meaningful capital. Our views of the nitrogen markets and the global economy will certainly be a factor in driving us to those decisions. Page nine provides an overview and update of our blue green ammonia projects. The two projects we have underway represent exciting opportunities to emerge as a leader in decarbonizing our industry. Not only do our blue and green ammonia projects have the potential to result in a substantial reduction of our carbon footprint, additionally, we believe the economics of both should be very attractive.
To sum up, while product selling prices have come down since the beginning of the year, with no scheduled turnarounds in 2023, we are moving into the rest of the year expecting significant year-over-year increases in production and sales volume. That should allow us to generate solid profitability and free cash flow for the full year. At the same time, we continue to position LSB Industries to achieve our vision of becoming a leader in the energy transition in the chemical industry through the production of low and no carbon products that build, feed and power the world. We expect these initiatives will lead to increased profitability and greater value for our shareholders in the years to come. I look forward to discussing our progress with you as we reach critical milestones in the development of all of our initiatives.
Before I hand the call back to the operator for the Q&A session, I'd like to mention that we will be participating in the Goldman Sachs Leveraged Finance Conference on May 23rd in Rancho Palos Verdes, California, the Stifel Cross Sector Insight Conference in Boston on June 7th, and the Wells Fargo Industrials Conference in Chicago on June 13th. We look forward to seeing many of you at those events. That concludes our prepared remarks, and we will now be happy to take any questions. 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 that your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that you limit your questions to one and a follow-up so that others may have an opportunity to ask questions. You may reenter the queue by pressing star one. For our participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Joshua Spector with UBS. Please proceed with your question.
Good morning. This is Lukas Spielmann on for Josh. I just want to sort of understand the pricing outlook comments a bit better. I mean, with kind of where spot rates are currently, I mean, it looks like it's gonna be mathematically difficult, even if the spot prices rise to get two-tier realized pricing to sort of be above the first quarter. I mean, it seems like the outlook for pricing is probably gonna be sequentially realized prices decline into 2Q, and then again into the third quarter on the weak demand before maybe getting a pick-up seasonally later in the year. Is that, I mean, is that consistent with sort of what your expectations are, or do your comments around it sort of bottoming, then you're assuming something, if that it moves up more than that?
Yeah. I think you've categorized it pretty well. You know, I think the second quarter, we're halfway into the almost two-thirds into the second quarter. You know, I think it's gonna be kind of hard even if we've got some uplift in price. We can realize some, maybe later in the quarter. As a reminder, the spring season, you know, will typically end in June. I think it's kind of an unusual spring in that we're not seeing prices rise through the spring planting season. I don't know if we'll see as much of a drop over the summer as we would historically have seen. I think the stabilizing in prices will absolutely help us in the second half of the year.
All right. Thanks. Just on the volume side, I mean, obviously the start to the season's been delayed, the volumes probably came in, a little lighter for everybody than was expected in the first quarter. Are you kind of expecting to sort of just make that up on the volume shift into May with the late start of the season? Do you see that kind of impacting your full year targets of about 1.5 million in product tons for the year?
Yeah. Actually, we don't see any impact to our volume. I think you're spot on. late season means there might be switching of products. If you think about ammonia for the fall and the spring combined, right? Because, you know, I think we view it as a total application, you know, prior to planting. it was probably a little light actually, maybe by, you know, 200,000, 220,000 tons in total for both the fall and the spring. Assuming that the farmers need to make up that nitrogen shortfall, you know, you theoretically, the farmer will theoretically need another 400,000 tons of either urea or UAN.
We should see a pickup in one or both of those products, and I think we are starting to see a pickup in urea, and that's why pricing has moved up, you know, fairly substantially over the last month or so.
All right. Thank you.
Sure.
Our next question comes from Adam Samuelson with Goldman Sachs. Please proceed with your question.
Yes, thank you. Good morning, everyone.
Good morning.
Good morning, Adam.
Morning. I guess I want to just clarify as we think about the guidance in the second quarter, and then there's obviously a lot of moving takes or moving pieces between gas and what's hedged versus the spot and obviously the product prices. As we move into the second half of the year, can you remind us kinda how much natural gas you have kind of open versus fixed price hedged versus kind of linked to cost-plus industrial kinda contracts just to think about the sensitivity to lower gas and then what ammonia and ammonium nitrate and UAN prices are doing in the back half of the year?
Hey, Adam. I think the simplest way to put that would be, you know, we're about $3.50-$3.70 per MMBtu hedged at 90% for the second half of the year.
That I would add that that's 90% of our gas needs that aren't passed through to our customers.
Remind me the % of gas needs that are passed through to customers, just to think about your total gas consumption.
Depending on the mix, probably 15%, 20%.
Got it. Okay. No, that's very helpful. Then on the ammonia side, and you've seen U.S. Gulf prices kind of move lower and kind of react to kind of seemingly surpluses in the international markets and kind of lower industrial demand. Are you seeing any evidence from your industrial customers for ammonia that activity levels are improving? I mean, ammonia market's an interesting place where it seems to have pushed off the high-cost producers from the curve in Europe and just trying to think about how that total market kind of rebalances as we go through into the second half of the year.
That's a great question. I mean, I think as we sit back and kinda try and figure out, you know, what's going on and why, you know, quite frankly, Gulf prices are not at the cost of production of Europe. I think we all have to keep in mind that China was closed for a while, and China was a net importer prior to that. Just as important, maybe more importantly, we've seen industrial demand for ammonia throughout Asia drop. So would expect that to pick up, you know, maybe in the second half of the year.
If we see, you know, more demand for imports from China, and we start to see some of that industrial ammonia demand, come back into the market in the second half, we would expect to see some strengthening of pricing.
Okay. That is all very helpful. I'll pass it on. Thank you.
Thank you.
Our next question comes from Andrew Wong with RBC Capital Markets. Please proceed with your question.
Hey, good morning. Just going back to the timing of your spending decisions. It looks like you've got a pretty healthy balance sheet right now, you know, over $400 million, sounds like there aren't really any major capital decisions potentially until H2 of 2024. Like, are there any plans for that cash in between now and then?
Yeah, it's a great question and one that we, kinda think about every single day. I guess I would think about it this way. We bought back $175 million worth of stock last year. We are sitting with a healthy cash balance, $425 million at the end of the first quarter. Suffice it to say that we've generated additional cash between then and now, and we expect to generate additional cash throughout the rest of this year. We have our annual meeting next week. We'll be with the board, and absolutely, we'll be discussing, you know, putting in another stock buyback.
Okay. How would the, like, debt versus buyback, what's the thought there?
Well, clearly, we wanna reduce some of our debt to bring down the leverage in a more normalized market. Our first call date is October of next year. you know, I think that's definitely something that we'll keep in mind as we move forward with, you know, sort of our allocation of capital.
Okay. Then just to follow up on the nat gas hedging. I think back on the Investor Day, there were some hedged nat gas numbers provided by Cheryl, and they seemed a little bit higher than what, I think Q1 ended up being and what you're guiding for Q2. So could you just kinda talk about what the positions are for the rest of the year? Was there maybe some offset that lowered some of those gas costs? Thanks.
Yeah, Andrew. Just to reiterate, we're hedged around $340 for Q2 and then, you know, $370-ish for the back half of the year.
You know, at the 90% that I just mentioned earlier. I think that's in line with what we provided at the Investor Day. I'm not sure if that answers your question, though.
Okay. If not, that's fine. It's just. Yeah. I was gonna say, one thing to keep in mind, you know, Cheryl mentioned that we're 90% hedged. We do have 10% open to lower spot prices. That may be what brought down the pricing a little bit as, you know, gas has dropped closer to $2. Okay, thanks.
Our next question comes from Rob McGuire with Granite Research. Please proceed with your question.
Good morning. Have you got a read just on product, or could you give us a read of product that was pre-sold heading into 2Q? You know, did you have product that was pre-sold? If so, from what time period were you pre-selling?
Yeah, Rob, we don't usually give out time frames of pre-selling and exactly how much we pre-sell. We certainly did have some pre-sold tons coming into the second quarter. As we had mentioned earlier, it was kind of a late start to the spring. I think some of our competitors, you know, talked about on their calls, you know, the sort of standoff of buying, you know, the people or the customers buying versus producers wanting to sell for a couple of months. You know, I think it's right now, you know, a lot of it's just in time and more spot pricing, and I think that's what, you know, the whole industry is seeing.
Thanks, Mark. Your inventory volumes appear to be lower on a year-over-year basis. Can you discuss your inventory levels and your perspective on perhaps where the inventory sit with other producers in the U.S.?
Yes. Morning, Rob. Our, of course, our cost of inventory is quite a bit lower. Just looking at the balance sheet, you'd see that. From a volume perspective inventory today, pretty much in line with where we would have been this time last year. Nothing really different.
Yeah. Again, I don't know that I care to talk about competitors or would even know where their inventories are. I would say that with ammonia, spring application or spring fall combined application being off a couple of 100,000 tons, there is some length still into the ammonia market. I'm not sure we've got as much length really or any length in urea UAN. I think those are pretty tight markets.
Thank you. I'll circle back around in the queue.
Thanks, Rob.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Laurence Alexander with Jefferies. Please proceed with your question.
Good morning. It's actually Dan Rizzo on for Laurence. Thank you for taking my question. You mentioned that there's no turnarounds this year. Should we think about that there'll be a lot more turnarounds next year? I guess, how long is the spacing between the need for downtime for that?
We don't have, as you said, we don't have any scheduled turnarounds for this year. We do have two turnarounds scheduled for next year. One at our Pryor facility and one at our Cherokee facility. The following year, we have one for our El Dorado facility. Cherokee is on a three-year turnaround cycle, same with El Dorado. Pryor is still on a two-year turnaround cycle.
All right. Thanks for that. Then your net debt to EBITDA is fairly low and below what you kind of your, I guess, we use termed as your mid-cycle range. I was just wondering given where we are in the cycle, if we should expect it to remain relatively low, I don't know, for the next year or so until things turn up or there's more clarity?
Well, I guess how I would answer that about normalized EBITDA, we did $51 million in the first quarter. Cheryl gave a range of $50 million-$60 million for the second quarter. We clearly expect.
Okay.
in the second quarter to beat that first quarter number. Even at the midpoint of 55, that's $106 million for the front half. We don't think that the back half is gonna see much of a drop in pricing on average. I think we're still right on our $200 million of normalized EBITDA, despite average ammonia prices for the year more than likely gonna be less than $500. That was the assumption in that $200 million of normalized, albeit gas prices are a bit lower too. Yeah, we're really comfortable on where we are with mid-cycle EBITDA. I don't know I can't tell you how long prices will last at these levels or higher levels, unfortunately.
Great. Thank you very much.
Our next question comes from Charles Neivert with Piper Sandler. Please proceed with your question.
Morning, guys. Just a quick one. Obviously, we got a little bit of a late start this year, the pace is picking up. Based on, you know, your best estimates right now, if pace continues through, you know, May and into early June, depending on crops, do you anticipate that the industry is basically gonna wipe out most of its inventories going into the, you know, the summer and the fall so it can rebuild for a fall application? You think we got left over when we finish up the spring, even at the pace that we're moving on right now?
I would expect that inventories would be really low coming out of the season.
I mean, certainly that's a big indicator or a big indicator of where pricing would be going in, you know, through the rest of the year if you can get the inventories wiped clean, you got a much better chance of holding price through the third quarter and then raising it through into the application season. Again, given the fact that some of the nitrogen looks like it's going on late, do you think there's a fairly high chance that there's gonna be a lot of side dressing going on here, particularly to the wheat crop, but even to corn in some cases?
Yes.
Okay. That should help bring down numbers. All right, that's all I got. Thanks very much.
Thanks, Charles.
Our next question comes from Rob Maguire with Granite Research. Please proceed with your question.
Just one follow-up question. Urea's bounced here higher as a result of logistical bottlenecks, and I'm just asking if you're seeing that occurring with ammonia or UAN at this point, or does this look like a very orderly distribution of nitrogen heading out to the fields this season?
Yeah, I would say the ammonia application season, right, is pretty much done. You may have, you know, certain small pockets that are still planting, or even pre-plant, but not really much. I mean, everything's pretty much in the ground at this point. I don't think the spring planting season's gonna have much impact on ammonia prices at all. I think it's gonna be some of the factors that I talked about globally. As far as UAN pricing, moving up, as, you know, urea prices have already moved up, I would say that, you know, the buyers really look at the differential in nitrogen pricing, on a per ton basis, or per pound basis. There was a pretty large, you know, premium for UAN at the low urea prices.
That spread has really narrowed to more traditional spreads. As the spring goes on and if demand continues to pick up, we will see some price appreciation or should see some price appreciation for UAN.
We have reached the end of our question and answer session, and I would now like to turn the floor back over to Mr. Behrman for closing comments.
I wanna thank everyone for participating on our first quarter earnings call. Appreciate everyone's interest, and if anyone has any follow-up questions, please reach out to us. Thanks so much.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.