Greetings, ladies and gentlemen, and welcome to the LSB Industries First Quarter 2020 Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Kristy Carver, Senior Vice President and Treasurer. Thank you. You may begin.

Thank you, Jen. Good morning to everyone. Joining me on the call 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, 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 the 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.

Thank you, Kristy, and good morning, everyone. We are glad that you could participate in our call this morning and appreciate your interest in LSB Industries. Today I'll discuss our response to the COVID-19 crisis, what we're seeing in our end markets and provide you with a sense for what our second quarter has looked like so far. Then Cheryl will review our first quarter financials, discuss our current liquidity position and provide some data points for use in thinking about our second quarter expectations. Then I'll come back to wrap up. I'd like to start out by thanking all of our employees for their hard work and dedication in the implementation and practice of the protocols and procedures that we put in place to ensure that LSB is able to sustain operations throughout the pandemic. Their efforts not only enabled the continuity of our operations over the course of this unprecedented period of time, but they did so safely and highly effectively. In the first quarter we were very successful in this regard, with zero recordable injuries. Additionally, in April our El Dorado facility reached a new milestone, for two years without a loss time injury. I'm extremely proud of the team for these accomplishments and view it as a reflection of the strong safety culture we've developed across LSB over the past several years and that we work to continuously improve. We were also extremely pleased with the level of production achieved by our plants, which led to an 8% year-over-year increase in overall sales volume, despite demand headwinds on both sides of our business. Our Pryor facility's UAN production increased almost 30% from the prior year first quarter as a direct result of the new urea reactor we installed and other work that was performed on its…

Thanks, Mark, and good morning. Page 7 bridges our consolidated adjusted EBITDA for Q1 2020 of $15.6 million to adjusted EBITDA for Q1 2019 of $19.1 million. The year-over-year decline is a result of lower selling prices across all our markets. Continued elevated inventory levels for ammonia, combined with increased imports of UAN into the U.S. over the last 9 months, have continued to weigh on pricing. The lower pricing was partially offset by favorable natural gas costs, which averaged approximately 28% below the first quarter of 2019. Additionally, as Mark mentioned, production was strong for the quarter, which translated into overall higher sales volumes and lower plant costs as compared to the same period last year. Turning to Page 8, we have outlined first quarter gross profit margins for each of our market segments. This presentation excludes depreciation, amortization and turnaround expenses and, therefore, should represent the true underlying cash margins of each of our businesses. We have reconciled this back to gross profit as presented on the financial statements, on Slide 14. Our ag business gross profit margins decreased 600 basis points, from 14% in the first quarter of 2019 to 8% in the first quarter of 2020, primarily driven by lower ag selling prices, partially offset by higher production and sales volumes and lower overall natural gas costs. Gross profit margins in our industrial and mining markets remain robust, despite continued price pressure on the Tampa ammonia benchmark price. We remain focused on upgrading industrial ammonia into higher-margin products, like nitric acid. Upgrading ammonia to higher-margin products, combined with higher operating leverage from increased production, more than offset the lower Tampa ammonia selling price impact. Given the uncertainty around COVID-19, Page 9 outlines the actions we have taken to date to preserve liquidity. In mid-March we preemptively…

Thank you, Cheryl. We have continued to improve our business in the areas that we can control. We are focused on 3 key levers that will enable us to drive year-over-year improvement in financial results despite the disruptions and uncertainty created by the COVID-19 pandemic. It remains to be seen how and when a resolution of the crisis will occur and the path the U.S. economy will take as the resolution unfolds. Along with the pandemic disruption, the normal uncertainties of our business such as weather and pricing remain outside of our control. Despite these factors, we continue to view our ability to deliver strong performance in 2020 as very much in our control. As we discussed on our last quarter's call, we anticipate continued improvement to our onstream rates this year which, when combined with our expanded production capacities for urea and sulfuric acid and the absence of any scheduled turnarounds at our facilities, positions us very well to drive increased production and sales volumes in 2020. As I just mentioned, we have no scheduled turnarounds at any of our facilities this year. With the extensive work we completed at our Pryor facility during the third and fourth quarters of 2019, this facility's next turnaround is scheduled for 2021. Cherokee and El Dorado are now on 3-year turnaround cycles, with the next turnaround scheduled in 2021 and 2022, respectively. I've discussed previously that in order to capitalize on our higher expected production volumes we've been ramping up our sales and marketing efforts in recent quarters. Recently, we secured 2 new contracts for sales of LDAN and executed a new long-term contract to sell CO2 out of our El Dorado facility, where our customer will build a gas plant. The sale of CO2 will begin in the second half of…

[Operator Instructions]. Our first question comes from the line of Joe Mondillo, with Sidoti & Company.

So my first question related to the industrial mining side of the business. Don't talk about it as much as the ag side, but just given the downturn in that cyclical portion of the economy. You made some comments regarding it. I'm just more so curious sort of what the potential effects to the company's profits could be. And I know there's a lot of variables that are uncertain; specifically, how much do volumes decline. But could you give us an idea maybe relative to Slide 8 where you talk about the gross margins? They were up year-over-year in the first quarter. How are you thinking about, I guess, margin profile? And I guess we can make our assumptions based on the volumes you did last year on how we think those will play out.

Sure, Joe. Okay. So when we're looking at the margin for industrial in the first quarter, keep in mind that we really didn't start feeling the impact of COVID-19 until probably the middle of March. And so the impact from lost volumes was probably $1 million, or less, I would say, to the full quarter. Going forward, looking into April and May we're probably trending around $1 million, to a bit more, per month. So the total impact to the second quarter from the volume decline is probably close to $3 million, $4 million. If you think about margins in the first quarter for industrial and mining, Tampa was down but we had much higher operating leverage. El Dorado was record production, and they were a big contributor to lower fixed costs per ton, and gas was lower. So those 2 things, combined with upgrading more ammonia into nitric acid, really helped to drive the industrial margins in the first quarter.

Joe, we'd love to provide a little bit more color, but I think as we sit here today it's kind of hard for us to look out and know what the impact to the third or the fourth quarter is unless we know if the economy is going to, when it's going to come back and is it a V-shaped return or is it a U-shaped return. Right?

Right. And most of your contracts on that side are cost-plus. Right? So should the margin change that drastically?

Well, yes, they're cost-plus. I think volume has a big play on margins. Right? So the more product we produce with the same fixed costs, there's a lot of leverage there to do that.

Okay. Any way to help us understand sort of the decremental margins? I don't know. I'm just trying to understand what the downside potentially could be based on volume declines.

We'd have to think about it and come back to you.

Okay. So regarding the ag markets, CF Industries just reported last night, as I'm sure you're aware, and they sort of pointed out similar type comments that you made regarding the month of April. What was the dynamic throughout the first 4 months of the year? Was it that the weather was just so wet and that it just turned more favorably in the month of April? So all pent-up demand? And as you got closer to the planting season, just given uncertainty in that end market, is that what drove the demand in April? And then how are you thinking about sort of how the market trends? Because I imagine April and May are probably going to be pretty solid, just given the trends that we saw in April and the solid planting season. But given this whole dynamic with the economy and the ethanol side of things and the fact that if we do see a really good planting year you could see a very good, obviously, depending on maybe weather, a very good harvest at the end of the year. So you could be at the back half of the year looking into a dynamic of a lot of supply and consumption falling off with the ethanol market. So I'm just wondering if there's any other maybe dynamics or variables that may come into play that you're thinking about that could offset some of those factors or how you're thinking about it. And then I guess, lastly, I know this is a long-winded question, pricing. Could you see a, could pricing get lower than what we've seen over the last 12 months? Is there, is that possible?

Well, I'll try to remember all the questions. So I'm going to answer multiple questions probably at the same time. When you think about what happened during starting at the first of the year, we had petty similar weather when we started off this year as we did last year. And given what we went through last year, I think there was a nervousness in the marketplace. Right? It was a really tough spring season last year, with a lot of people jumping through hoops and a lot of logistical issues, and we started off this year seeing the same thing. So I think people got a bit nervous, all throughout the industry. We did then -- the weather improved dramatically, and I would say starting in March we started to see really good weather. And by and large, it's really continued and I think farmers really took advantage of that. And so as I mentioned in my prepared comments, where we are from a percentage of planting and putting corn in the ground, we're way ahead of last year and even ahead of the 5-year average. And so I think we've had a really good spring and it's not just us, obviously. It's everyone in the industry. And I think that will continue. The USDA did come out with revised planting acres for corn, at 97 million. Others in the industry have talked about 92 million to 95 million. I don't disagree with that. I think 97 million might be a bit aggressive. But we'll find out later this month when the USDA comes out with their monthly report. That being said, it's going to be a good corn planting season. So we'll have a lot of harvested acres. We'll have probably stock-to-use ratios that are higher than historical…

Right. What are you seeing as far as the imports coming into the country and how that's affecting supply and pricing?

Well, imports ran pretty heavy. The fertilizer year starts on July 1. So July 1 through March, let's say, I don't think I have the most recent April data, but imports were ahead: for UAN, in particular; ammonia, not so much; urea, I think they were fairly similar or slightly down. So imports of UAN have really had an impact on UAN prices, and most of the increase in imports, as we've discussed on earlier calls, is really driven by the European tariffs that were implemented last October. And so there was more product. But I would say what we've seen and heard about April and so far in May is imports have really been curtailed. So they're down pretty significantly versus the level of imports that were coming in for the first 9 months.

Great. A couple of questions on operations. First off, in terms of the turnaround, you spent $13 million in 2019 on turnarounds. So we'll see that as a savings or as a positive for this year. What about productivity and any overhead absorption that's lost in those turnarounds? Is there additional savings on top of that $13 million that you would see on a comparison?

Well, I wouldn't call it savings. What I would say is that by not having turnarounds and the plant being down, you're going to absorb costs better. Right? Because you're producing during those times. So in addition to having little to no turnaround costs for this year, turnaround expense for this year, we should see our cost per ton lowered as we're able to spread those costs over more production tons.

Okay. And you were down I think for, was it, I can't remember if it was the Pryor plant or El Dorado, you were down, like, 60-plus days. I would assume lost cost absorption is pretty significant. Any way to quantify that, at all? I don't know if you have that.

I would agree it was very significant, and I don't think we have numbers that we could quantify it here.

Just at a real high level, Joe, if you think about Pryor running about 650, 675 tons a day over 60, 65 days, there's some significant higher production that we would expect coming out of the Pryor facility this year, as compared to last year.

And that's ammonia.

And that's ammonia, yes.

Great. Okay. And just in terms of the plant operations, over all, it sounds like they are running really well. Compared to a few years ago, you guys have made so much progress. But relative to the quarter and what you said within the quarter but then also April, I think you've stated all 3 are running at 100%. How much, if this is consistent throughout the year and I don't want to jinx here or anything, but compared to last year how significant would that be to profitability relative to what you ran at last year? Any way to think about that?

Well, last year, and Cheryl, correct me if I'm wrong, we ended the year at either 91% or 92% onstream.

91%, yes.

Our target that we laid out last quarter is 94% for this year. So just again by virtue of even if we just held fixed costs and we had better onstream and capacity utilization out of the plants, we're going to obviously have significantly higher margins and profitability off of that. At each marginal ton that we produce over what we've produced with the same fixed costs, really all your incurring is the variable cost and not the fixed costs. So yes, it's extremely -- the object is to run any chemical plant the highest onstreaming capacity utilization you can because you've got tremendous operating leverage, given the fixed costs that you have.

Okay. And last question for me, regarding the margin enhancement projects. Could you just -- I know you stated it, but I sort of missed it, what your expectation is for savings this year relative to those? And then, also, regarding that CO2 opportunity, how big of an opportunity is that? I know you said I think second half of next year maybe, but I'm just curious of what kind of an opportunity dollar-wise that could be.

So the first part, on the margin enhancement projects, we've talked about the kind of returns that we expect from them. I think I said that when fully operational it will be $6 million to $7 million of additional EBITDA on an annualized basis. And we would expect that we would finish those projects within the next 12 months. The CO2 project is one of those projects. So we are moving forward with that. And as I said, we completed another project, which was 20,000 tons of additional storage and positioning product to take advantage of that storage. Those projects generally have payback periods, not IRRs, of 2 to 2.5 years. So they're really high-margin, high-profitability, high-return projects. The CO2 contract that we signed -- taking a step back, at 1,350 tons per day of production at a high capacity utilization rate, we probably produce about 450,000 tons a year of ammonia out of El Dorado. Call it a similar amount of CO2 that we produce. And so I'll say that we've got the ability to sell maybe 400,000 tons of CO2. And so this would initially be a contract for about one-quarter of that. So call it maybe $1 million a year of additional EBITDA starting in the second half of next year.

Okay. And the $6 million to $7 million accounts for a full 100% sales of the CO2?

No, that's just the CO2 that we're selling pursuant to this contract. So we would still have 75% of the available CO2 to sell if we could sell it.

So just to clarify, the $6 million to $7 million of savings regarding margin enhancements, that only accounts for this contract that's 25% of your CO2 exhaust?

Yes.

Our next question comes from the line of JP Geygan, with Global Value Investment Corp.

You've done a really nice job with plant improvements, as evidenced by high onstream rates and your high production volumes. Recognizing that efficiency, as measured by adjusted gross margin, is largely affected by production volumes and capacity utilization, can you discuss additional opportunities to achieve further efficiencies? And I know you've touched on a lot of these in the past, including procurement logistics, your consulting engagements, your margin-enhancing projects, but can you put that all into perspective?

Well, I can talk about some of the opportunities we have. I don't know that I can talk about dollars that that translates to. So we still continue to -- we have a real focus on continuous improvement, and I think I'm a big believer that every day you wake up, you can do something a little bit better. And so I think throughout the company we're looking at lots of opportunities, whether it's cost reductions because we can be more efficient in certain operations or ways that we do things, whether we can procure product in a more cost effective way, whether we can utilize outside contractors more efficiently, whether we can figure out ways to reduce or hedge against gas costs. So there's I think lots of opportunity throughout the company that we're reviewing today. The other thing is it's great to talk about expansion CapEx or expanding production, but I do think that we have a lot of opportunity to optimize what we have today, and that doesn't cost a lot of dollars. It's more rolling up your sleeves and really understanding how to fine tune the equipment and the plants that you have today. And so I think you'll continue to see that as we move along. We'll be able to, I'll call it, squeeze more production out of the facilities and the plants that we have today, which again when you're talking about an extra 10 tons a day, 50 tons a day in certain circumstances, it's high-margin production because you've got the fixed costs that are sitting there and really you're just talking about the variable costs against that production.

Okay. We've seen disruptions in the ammonia supply network in the past that have normalized after a period of time. I'm curious what you've observed following the shutdown of the Magellan pipeline and how long you might expect the effects of that to weigh on prices?

Interesting question. So if you look at the Magellan pipeline there were three main users on that pipeline, and that's pretty public on who they are. That pipeline was utilized to transport ammonia up the pipeline into storage locations and either offload there or position product in storage. That shutting down has really forced some of our competitors to really develop alternative distribution methods for distributing that ammonia and I think has also allowed Koch to really think at their Enid facility, in particular, that they're going to expand their urea production to utilize some of that free ammonia that they had been selling out of that facility. And so I think there's a lot more trucks that are being used. So the truck market is pretty tight in the Southern Plains market. And any time you have a tight truck market you're also going to see higher transportation costs. So it's had an impact on that. So I think we're probably 18 to 24 months away from some of the work that's being done to handle the new methods of distribution of that ammonia for it to normalize that market.

Okay. You'd mentioned a number of commercial engagements in your industrial and mining segments, but on your last call you'd mentioned one particular potential commercial opportunity, without disclosing the specifics of that. Is that included in one of the commercial opportunities that you've previously mentioned? Or is that still under negotiation? And can you give us any specifics around the status of that?

I think last call I mentioned supporting a customer on a new contract award for approximately 50,000 tons of low-density ammonium nitrate. That is one of the 2 contracts that I referred to.

Okay. Thank you. And then finally, Cheryl, I think I heard you say that you have assets for sale that would generate $20 million to $25 million of proceeds after the retirement of debt against those assets. Can you identify which assets are held for sale and/or the gross [Technical Difficulty].

Are you there?

Are you still there, JP?

Apologies. It appears his line has disconnected. Our next question comes from the line of Travis Edwards, with Goldman Sachs.

Actually, if you wouldn't mind sharing some color on the gross proceeds, from JP's question, just a quick follow-on, if you have color of the gross proceeds of the potential asset sales which sounds like have been delayed for now. But if you have more color on what the gross number could look like and then just confirming that after the debt is paid down it would be $20 million to $25 million left on the balance sheet.

I think that, and going back to JP's question, we don't have any assets held for sale. I think we've got one or two assets that we're exploring whether it makes sense to sell those assets and are the proceeds that we would receive a benefit to us or not. And so I think we're really only in a position to talk about the $20 million or $25 million of net proceeds.

Got it. Okay. Thank you. A question just sort of back on operations. I know you talked a little bit about some of the challenges obviously on the industrial side, but potentially partially offsetting that with either new contract wins which you had talked a little bit about or maybe benefiting in some other areas of your business. And I appreciate, Cheryl, you quantifying sort of the quarterly impact maybe to the downside of lower industrial volumes. But is there any way you can maybe share a bit of color on where, specifically, some of that offset may be coming or quantify what that offset could look like over the next couple of months and quarters?

Well, one shift is to sell more agricultural product. Right? Sell more fertilizers in a pretty robust marketplace right now. So obviously we've got the flexibility in our facilities to shift production to that. I think the other is we do sell some other industrial products that have not really lost any demand. And so to the extent we can shift production to those products we've done that, as well.

Awesome. Thank you. Just on free cash flow, I know you talked about in your press release the plan to defer some CapEx to maybe later this year. And I can appreciate that there are a lot of moving pieces. Just wondering how you were thinking about free cash flow for the year. Do you see that above breakeven levels? And then as we progress into 2021, just the trajectory of your free cash flow. And again I can appreciate you've got the $10 million loan to help preserve payment and you've got, like you said, that $20 million to $25 million that could come and get put on the balance sheet down the road. But hoping to get a little bit better picture around free cash flow trajectory for the business.

So yes, I think that's certainly our expectation. Assuming we return to some level of normalcy in the second half of 2020 reflects our original thinking. But as Mark said in his comments, we see a potential headwind in ethanol demand. So we're certainly watching that. We haven't assumed any sale or any proceeds from some of the assets. That's not included in how we're thinking about it. But we certainly are -- it is going to depend on what the second half of the year looks like.

I think as we sit here today, assuming that we have, as Cheryl said, kind of a return to normalcy of the economy and somehow we don't have tremendous ethanol headwinds, we would still anticipate being cash flow positive.

Yes.

And that's obviously without an asset sale.

Awesome. That's great. Yes, let's hope for that. Just a last question, on the Leidos case, which I can appreciate that I'm potentially misunderstanding a piece of this. I understand that it's been put on hold really until September, but just wondering if LSB does get a favorable ruling in that case and has some portion of the damages being paid back to you or returned to you, could those damages get paid all at once? Is there sort of a delay from determination to when LSB would actually get awarded some damages? Or would those damages ultimately get paid after an appeal is made or things like that? Just wondering, again moving pieces, looking at potential upside risk to cash flow from the Leidos case. But again appreciate that it's a lot of moving pieces and you probably can't speak to everything there.

So as is with any lawsuit, it can go in a lot of different directions. Right? So we could win an award, Leidos can absolutely appeal that and it would go to appeal before there was any actual dollars paid out. There could be a settlement in the middle. There's lots of different ways that it could transpire. So I think for myself I'm just anxious to finally try this. We were ready to try this in April and anxiously awaiting doing that and then obviously the pandemic broke out. So I think we're set now for September 21, I think is the date. And I hope we're in better shape as a country and we're kind of past most of the shutdowns and the pandemic and we're able to try that case, because I think we have a really solid case.

Our next question comes from the line of Brian DiRubbio, with Baird.

Just a few questions. With the delay in the Leidos case are you going to be still spending the same amount on a quarterly basis for the next couple of quarters?

No.

Okay. Do you have any guidance on what that spending will be? Or is it going to zero?

There probably will be a little bit in April, probably I'd say less than $0.5 million, and that should taper down to pretty well zero through the back half of the third quarter when we start to ramp up a little bit to go to trial.

Okay. Perfect. The PPP loan, the $10 million, is that a grant? Or is that a loan?

It is initially a loan, and whether it's a grant or not is whether we meet guidelines set out by the government and whether the government approves that. So it remains to be seen, as I think the guidelines continue to shift.

Okay. So that's TBD on that.

Yes.

Perfect. Just a point of clarification, 2019 adjusted EBITDA, that already excluded your turnaround costs. Correct?

Yes.

Okay. Just wanted to clarify that. And then I know the potential asset sales is something down in the future, but with those are you targeting EBITDA-producing assets or non-EBITDA-producing assets with that?

That's a really good question. How do I put it? Yes, it would be some impact to EBITDA.

Ladies and gentlemen, this concludes today's question-and-answer segment. I would like to turn the floor back to management for closing comments.

Well, I really appreciate everyone's interest in LSB Industries. Hopefully you see that we're making some progress in the business, both operationally and in other areas of our business. And we appreciate your interest. And stay safe. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.