Good morning. Thank you for standing by. Welcome to the LSB Industries 2Q '20 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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 LSB Industries. Thank you. You may begin.

Thank you, David, and good morning to everyone. Joining me on 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 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'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 with a high level of efficiency during the second quarter. We continue to focus on improving our safety performance, which currently stands at a 1.7 recordable injury rate for the last 12 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 onstream rates of 96%, we are well on our way. Slide 3 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-19, 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 2019 second quarter, which wasn't robust itself, and industrial demand been consistent with the pre-pandemic levels of just over 4 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…

Thanks, Mark, and good morning. Page 7 bridges our adjusted EBITDA for Q2 2020 of $29.2 million to adjusted EBITDA for Q2 2019 of $32 million. 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 12 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-19 impacts on our end market. Overall, the impact to EBITDA from COVID-19 related lost volume was approximately $3.5 million for the second quarter and approximately $5 million 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 second quarter of 2019. Furthermore, in the second quarter of 2020, we recognized $5.7 million of settlements from vendors to recover certain expenses associated with the start-up and operation of our new nitric acid plant constructed in 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 $1.2 million 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 the very low pricing environment for agricultural products. Page eight…

Thank you, Cheryl. Between the pandemic crisis and the record rainfalls the Midwest throughout 2019, the past 6 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 and our costs. With respect to our plant operations, we expect to deliver another year of improved onstream rates across our facilities for 2020 that 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 million to $15 million of annual incremental EBITDA when fully implemented. We should see these opportunities and initiatives begin to yield results starting in early 2021. 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-19 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 2 new contracts with the sale of LDAN, both beginning in the second quarter.…

[Operator Instructions] Our first question is from Travis Edwards with Goldman Sachs.

Thanks for all the color on the quarter. It's great to see the progress on operations in the plants. Just had a question, kind of on that front. One, historically, you had shared the onstream rates by plant. I was wondering if you would be interested or willing in giving that commentary or color now. And then secondly, just as you've talked about deferring some of the nonessential cost to later this year, I was just wondering if that changes anything as far as the turnaround schedule going forward into next year?

Travis, thanks for the interest. It's Mark Behrman. So operating performance across the plants, the ammonia onstream rate was about 90% for the quarter. As you know, downtime or unexpected downtime doesn't come ratably throughout the year, 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% onstream 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 2 planned for next year.

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 as you think about addressing that capital structure, reducing finance costs, dealing with those preferred shares, are you thinking about 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 kind of conversations are you having internally, what you're hearing from preferred shareholders, bondholders about addressing both the 9.625% notes and the preferred notes?

Well, I certainly don't like 9.625% interest rate on our notes. And I don't like our credit rating. So we are very focused on ultimately improving our, the cost of our debt. And part of that will be improving the credit rating and becoming a single B credit. And 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 a bit of financial performance. So with some of the efforts that I outlined, we're really focused on a target of $100 million in annual EBITDA, irrespective of an improvement in price, so part of us addressing our capital structure is clearly to refinance the notes. And I believe if we continue to operate well, to 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.

Got it. Maybe a quick follow-up. I'll just sneak one more. On that note, regarding 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 any these metrics? Obviously, we have access to their reports, too, but I was just curious, are those conversations ongoing, or have you -- I guess, how -- what's the frequency of those conversations with the agency and talks to get to that single B rating?

Yes. So I can't comment on what the agencies' thoughts are or aren't. I think agencies are never definitive, nor do I expect them to be. As markets change and 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&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. And I think they're aware that we're improving our business, and that should lead to an improvement in credit rating.

Got it. I really appreciate the time, thanks for guys. I’ll back in queue.

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

Good morning Mark and Cheryl.

Good morning, Joe.

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 you describe the spring season?

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

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

Well, I think you're right. I think we're going to have some pretty high corn stocks. I can't -- I have to look back to see if they're record or not, but they're certainly some of the highest stocks that we've had over the last 10 years. And so I think that will have some impact on, certainly, corn pricing and then corn pricing always has an impact on fertilizer, and the price of corn will have an impact on how many acres are planted. So 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 ethanol demand. But as we pointed out in our prepared comments, ethanol demand has 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. So 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. So I think we'll have a -- 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 will be a robust year for corn acres planted in the next spring.

Okay, and any thoughts on the U.S. dollar? 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 even more directly as far as maybe fertilizer imports and just wondering what your thoughts are and how significant that could probably, I would think, be a positive?

Yes, I think you're right. I mean, what's going to drive imports more is just pricing here in the U.S. 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 pullback, certainly with imports. I mean, this summer, we had an earlier-than-expected field program for UAN, started about a month early than we would normally see. And the pricing was fairly low. I don't think it makes it very attractive for imports to come into the U.S. and at some point, if you don't get imports into the U.S. 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. So I think more than the dollar exchange rate or anything like that, it's just the dynamics of where pricing is. So I think we are seeing some less imports, particularly with UAN. We're also seeing some -- less imports with ammonium nitrate as well.

Okay, and then I wanted to follow-up regarding the question that was asked before, before me, on the on stream 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 Pryor, I think, was at a record high. So I assume maybe El Dorado and Cherokee didn't run as well as last year. Just curious on how the quarter went in terms of onstream rates at maybe specifically, Cherokee and El Dorado, and how you're thinking in the third quarter going forward?

Yes. So I'm not going to comment on which plant ran well or not well. I mean I think we've tended to report an average onstream rate across the plants. The one thing I'll say about onstream 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 12-month basis or on an annual basis. Because you can have some downtime that affects a quarter and then you run really well for 2 quarters, higher than any targeted rate. And 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 onstream and high production and hope to be able to report that for our third quarter.

Okay. And then regarding your preferred equity holders, I'm just, I haven't asked this question in 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?

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

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

No. I mean I think that's an option that we have. We have the ability in our bond indenture to use any excess liquidity over $65 million 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.

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

Well, I think the timing is kind of unknown, right? I think as Cheryl said, we are ready 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.

Our next question is from JP Geygan with Global Value Investment Corp.

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&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?

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 million to $20 million 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 products and also run higher production. We've also talked about CO2 sales out of El Dorado. To date, we do not sell CO2. We actually vent it. And it's a product that we sell at our other two plants. So through really good efforts from our industrial sales and marketing folks, we've secured a 20-year agreement with a customer where they build the gas plant, and they'll buy about 100,000 tons of CO2 out of that facility. Better onstream rates, obviously, are going to 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 $46 million, $47 million of annual savings. So kind of going through all of those, we're really focused on achieving that $15 million to $20 million 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 less and then the economy gets back to some level of normalcy, the real focus is getting to $100 million of EBITDA without any pricing improvement from where we are today. And the pricing improvement, obviously, will just be on top of that.

You've done a good job putting some numbers around your margin enhancement projects in terms of earnings with the $15 million to $20 million 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 the, that you presumably make a product or build inventory throughout the year with the intent of selling it in season?

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

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

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 time frame.

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?

Well, obviously, it's going to be different at each plant, right? And yes. I mean I think I'm probably not in a 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 conversations that we're having.

Okay, great. Thank you, for your time.

Our next question is from Brian DiRubbio with Baird.

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

Our expectation is that we -- that should be forgiven.

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

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

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

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 if there was someone that was interested in buying the cogen facility and it made economic sense for us, I think we would consider it.

Understood. And just -- as you think about these targeted non-core asset sales, obviously, you're going to get the cash flow seized in. But sort of what cap rate are the buyers buying it at, or put another way, would be the hit to EBITDA that you would probably have to experience offsetting those proceeds?

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

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 average hit to EBITDA with those turnarounds?

Well, generally, from a maintenance cost perspective, probably $5 million to $6 million for each turnaround, and we generally add that back in adjusted EBITDA, because a lot of our peer group, they capitalize and amortize those. So that would be one of the main parts. And then generally, those turnarounds, 30 to 35 days for each facility. So if you think about Pryor, that's, call it, 675 tons of ammonia a day over 35 days, and then Cherokee runs about 515 tons of ammonia, so about 30 to 35 days of lost production.

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

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, we'll make a determination after next year's turnaround.

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

Yes. 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 has 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.

Understood. Great. Thank you.

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

Thank you. Appreciate the -- your and 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.

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