LSB Industries, Inc. (LXU) Q3 2024 Earnings Report, Transcript and Summary

Greetings, and welcome to the LSB Industries Third Quarter 2024 Earnings 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] As a reminder, this conference is being recorded. It is now my pleasure to introduce Fred Buonocore, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Joining me today are Mark Behrman, our Chairman and Chief Executive Officer; Cheryl Maguire, our Chief Financial Officer; and Damien Renwick, our Chief Commercial Officer. Please note that today's call includes forward-looking statements. 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. On the call, we will reference 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. As a reminder, we have a stockholder rights plan to protect certain tax attributes. Please see the Investors section of our website at LSB Industries for further important details. At this time, I'd like to go ahead and turn the call over to Mark.

Thank you, Fred. Turning to Page 4 of our presentation. We had an excellent safety performance in the third quarter. During the third quarter, we completed a major turnaround on our prior facility and kudos to the team as it was performed injury-free. Protect what matters is our most important corporate value, because what matters most to us is keeping our team members safe. In terms of our third quarter financial performance, our adjusted EBITDA improved significantly year-over-year despite performing a turnaround this year versus none in last year's third quarter. During the third quarter, we continued to invest in our Pryor facility. We completed a major turnaround that included many improvements to our plants. We expect that the work that was performed will lead to greater reliability and increased production volume, and we are already seeing the benefits. We continually seek to expand the production of our current manufacturing footprint. To that point, during Pryor's turnaround, we expanded its urea plant. This expansion is expected to allow us to produce an incremental 75,000 tons per year of UAN, an approximate 20% annual increase. We have already seen that volume ramp up to those levels during this fourth quarter. Additionally, during the third quarter, to support our growing industrial business, we completed the construction of an additional 5,000 tons of nitric acid storage at our El Dorado facility. This will now provide us with the ability to better optimize our sales mix and improve our margins. Lastly, we continue to make progress with our two energy transition projects, which I'll discuss later in the call. I'll turn the call over to Damien, who will review current market dynamics and pricing trends. Damien?

Thanks, Mark. Good morning, everyone. Page 5 summarizes some key dynamics in our industrial end markets. More than a third of our business comes from the North American operations of industrial customers. Our industrial business is built on contracted volumes and allows us to partially mitigate the more volatile agricultural business. We also like the consistently attractive margins of the industrial business that result from the cost-plus nature of our customer agreements. Going forward, a core part of our commercial strategy is to continue to grow the portion of industrial sales in our overall customer portfolio. We believe this will create a more stable and predictable earnings stream. Demand remained consistent across our industrial customers through the quarter. We are pleased with the continued stability of our North American end markets, when compared with some of the uncertainty we've seen in Asian and European industrial markets. With the continued resilience of the U.S. economy and consumer spending, we expect these attractive conditions to persist into 2025. One of our largest industrial products by sales volume is nitric acid, a key chemical input for polyurethane production. We track homebuilding and auto manufacturing trends because these two industries are major consumers of polyurethane. As you can see from the top two charts on Page 5, economic indicators for both markets also continue to be relatively stable. We believe that the recent easing of interest rates and expectations for further interest rate cuts could stimulate demand in both markets. That would lead to production rate increases and greater demand for nitric acid in 2025. We also continue to monitor new sources of nitric acid demand from increased semiconductor manufacturing and munitions production in the U.S. Overall we find the outlook for nitric acid demand very encouraging. Our other major product for industrial markets is ammonium nitrate, or AN, which is used in the mining of metals such as copper. As the chart on the bottom right shows, the value of copper production has increased significantly over the past year, driven by strong copper prices. Copper prices currently sit above multiyear average levels, driven in part by demand for electric vehicle production and the build-out of technology infrastructure. AN is also used for the production of aggregates, which is strongly correlated to new housing starts, given the infrastructure required to support housing developments. We believe declining interest rates could result in higher new housing starts and increased demand for aggregates. On Page 6 of our presentation, you will find a summary of current nitrogen market dynamics. The Tampa ammonia benchmark price has increased for four consecutive months due to a combination of factors, including global supply constraints resulting from increased natural gas curtailment in Trinidad, unplanned downtime and extended turnarounds at various international production facilities and disruptions to the transport of ammonia through the Suez Canal. Additionally, ongoing delays in the commissioning of new domestic production capacity and new Russian export capabilities, has provided support to ammonia prices. We expect this to continue through the fourth quarter. UAN prices have recently firmed following tightening urea market fundamentals, driven by production curtailments and healthy demand from India. We are also seeing price support from a favorable trade balance where U.S. exports remain high and imports low, compared to recent history. Buying interest has been steady, but overall relatively subdued as fertilizer retailers have taken a cautious approach with softening corn prices. However, as we move towards the spring 2025 planting season, we believe that this cautious approach will likely lead to some pent-up demand for UAN as retailers work to position themselves to cover all in-season demand. This could support pricing during the first half of next year. With respect to natural gas feedstock costs, the middle chart shows the gas price trend for the European TTF relative to the price for U.S. Henry Hub. Over the past six weeks, European gas prices have risen to levels not seen since late 2023, due largely to the geopolitical instability in the Middle East. This appears to be another factor supporting ammonia prices at current levels. While industry forecasts suggest an easing of the TTF during the first half of 2025, US natural gas prices are expected to remain a competitive advantage for domestic ammonia producers for the foreseeable future. On Page 7, we show pricing trends and forecasts for corn and other grain prices, which drive our agricultural business. From late August, US corn prices recently showed some strength on revisions of the USDA's updated ground outlook, which calls for smaller supplies, larger exports and reduced ending stocks relative to their earlier estimates. While 2025 pricing levels will be determined in part by the outcome of the current harvest, we expect to see corn prices at levels that should incentivize farmers to apply a healthy level of nitrogen fertilizer. Interest on farm loans is also a meaningful component of many farmers' cost structure and declining interest rates should have a positive impact on the demand for fertilizers. Corn futures currently sit around $4.40 per bushel for December 2025, suggesting some strengthening of pricing over the first half of next year. Now I'll turn the call over to Cheryl to discuss our third quarter financial results and our outlook. Cheryl?

Thanks, Damien, and good morning. On Page 8, you'll see a summary of our third quarter 2024 financial results. We generated adjusted EBITDA of $17 million. This is a material improvement over last year, despite significant planned turnaround maintenance at our prior location. As a reminder, there were no planned turnarounds in 2023. Our GAAP loss per share for the third quarter was $0.35. Keep in mind, this included the impact of approximately $16 million of turnaround expenses and approximately $6 million of non-cash charges for older assets taken out of service or disposed of during the period. Page 9, bridges our third quarter 2023 adjusted EBITDA of $9 million to our third quarter 2024 adjusted EBITDA of $17 million. Stronger selling prices, particularly for ammonia, contributed to the year-over-year change in EBITDA. Additionally, we benefited from lower natural gas costs during the period. As expected, sales volumes of our products decreased in the third quarter of 2024 as compared to the same quarter of 2023, as a result of the turnaround at our prior facility. We were able to partially offset the impact of the volume decrease from the prior turnaround with higher AN volume out of our El Dorado facility. The increased AN volume is a direct result of the operational improvement initiatives we have been making at that facility. Page 10 provides a summary of our key balance sheet and cash flow metrics. As a reminder, over the 12 months ended September 30, 2024, we bought back approximately $97 million in principal amount of our senior secured notes and approximately 2.7 million shares of our stock. Additionally, we continue to deploy capital to improve the reliability and safety of our facilities. Even with these activities, cash remains healthy at approximately $200 million with net leverage remaining at approximately 2.5 times. Looking to the fourth quarter of 2024, Tampa Ammonia has averaged $560 per metric ton quarter-to-date and NOLA UAN is currently around $230 per ton. With continued tighter inventories, ongoing global supply constraints, disruptions and geopolitical concerns, pricing should remain solid through the remainder of the year. Natural gas costs remain well below last year's pricing, averaging approximately $2.60 per MMBtu quarter-to-date. We expect this trend to continue through the balance of the year, benefiting our fourth quarter profitability. Our fourth quarter results will include the impact of a planned 35-day turnaround at our Cherokee facility. We estimate that the expenses associated with this turnaround will be approximately $15 million. Despite the planned maintenance event at our Cherokee facility, we expect a solid year-over-year increase in sales volumes of UAN as a result of the urea expansion completed at our Pryor facility in the third quarter. We also expect to have a year-over-year increase in AN and nitric acid sales, reflecting the operational improvements we've made to our downstream plants at El Dorado. As a result, we expect our fourth quarter EBITDA after adjustments for turnaround expenses to be significantly above our fourth quarter of 2023, despite lost production during planned maintenance activities at our Cherokee location in November. And now, I'll turn it back over to Mark.

Thank you, Cheryl. Page 11 pertains to our low-carbon ammonia projects. Our El Dorado CCS project remains on track for us to commence production of low-carbon ammonia during 2026, pending the approval of the Class 6 permit application. The permit to construct will allow us to begin drilling 2 injection wells on our site in El Dorado. This permit is the critical path item for our project. Earlier this year, we announced our first offtake customer for low-carbon ammonium nitrate solution that we will produce at our El Dorado facility. We are also in discussions with other potential customers for offtake agreements for low-carbon products. With respect to our Houston Ship Channel project, as a reminder, it is a world-scale ammonia plant that will produce approximately 1.1 million metric tons of low-carbon ammonia. We have completed our pre-FEED and are currently in the process of reviewing the results of the study. Our next step will be a full FEED study, which we expect to begin during the first quarter of 2025 and take about 12 months to complete. Upon completion of the FEED study, we would seek FID, which we are currently targeting for some point in the first half of 2026. Given the significant cost of building a new world-scale low-carbon ammonia facility, offtake agreements with customers are the key to many of the announced projects moving forward. As I've mentioned previously, our ability to secure long-term offtake agreements for the majority of the anticipated ammonia production is critical for us to greenlight FID on this project. To that point, an encouraging development for customer demand is Europe's stance on low-carbon ammonia versus no carbon ammonia. Europe is now much more open to reducing their carbon emissions through the use of low-carbon ammonia. We are now seeing various types of industrial manufacturers taking an interest in low-carbon ammonia due to the impending enactment of the EU's Carbon Border Adjustment Mechanism, or CBAM. In addition to power generation and industrial applications for ammonia use, we've been pleased at the pace at which low-carbon ammonia has been emerging as a potential marine fuel. We are collaborating with Amogy, a New York-based technology company on the development of ammonia as a marine fuel. In September, Amogy successfully tested a tugboat retrofitted with an engine powered by ammonia. Additionally, in August, EXMAR, a Belgian shipping company, began building the first of 6 midsized gas carriers that will be powered by dual fuel ammonia and LPG engines. Finally, Mitsui O.S.K. Lines participated in a successful ammonia ship-to-ship transfer led by the Global Center for Marine Decarbonization. The trial was conducted to simulate bunker operations at the Port of Dampier in Australia, which is being evaluated as a potential major ammonia bunkering hub. Collectively, these developments are very encouraging for the potential of ammonia as the preferred low-carbon fuel for the massive global shipping industry. These many activities are extremely encouraging that new uses and demand for ammonia will have significant growth over time. We intend to participate in that growth. We are increasingly optimistic about our prospects for generating near-term and long-term growth. We expect the progress we are making on increasing the production and sales volumes from our core manufacturing facilities to accrue to our profitability and cash flow in a meaningful way over the next 24 months. At the same time, our low-carbon initiatives represent incremental profit beginning in 2026 as well as potential transformative growth over the longer term. Both prongs of our growth strategy prioritize preservation of our balance sheet -- strength and our ultimate goal of delivering strong returns to our shareholders. Before we open it up for questions, I'd like to mention that we will be participating in person at the Morgan Stanley Global Chemicals Ag and Packaging Conference on November 12 and virtually in the New York Stock Exchange Industrial Day on November 19, and the Granite Research Management Conference series on December 11 and 12. We look forward to speaking with some of you at those events. This concludes our prepared remarks, and we will now be happy to take your questions. Thank you.

Thank you. We will now be conducing a question-and-answer session. [Operator Instructions] Your first question comes from Josh Spector with UBS. Please go ahead.

Yeah. Hi, good morning. I had a couple of questions on the industrial side of your business. So I think at the start of the presentation, you guys were talking about potentially some improving trends there. So first, I wanted to ask, is that just the expectation that things could improve are you actually already seeing some improvement in demand? And then related with that, if you could talk about the contracting side of industrial and if there's more or less contracts maybe open up for negotiation and how that plays into the demand picture favorably or maybe not favorably as we think about spread and contract pricing over the next year?

Sure. I'm going to let Damian take that one.

Yes. Thanks, Josh. So I think we're probably talking about it more in the context of could improve. At the moment, we're seeing industrial demand pretty stable. It's been quite robust over the last couple of years. But I think there's certainly some signs there with interest rates and general economic activity that we can see some improvement, particularly if you see more infrastructure build-out, housing development, et cetera, et cetera. So we're on a wait-and-see approach with that, but we're pretty confident about that. In terms of your second question, the way we manage our customer portfolio and all of the associated contracts is we're just careful not to cluster them, so they're all expiring together. So they're sort of laid out over time. And naturally, some will be expiring and some are a little longer term. So we'll just deal with that as they arise.

Okay. Thanks. I'll maybe ask then a follow-up there. Just I think you talked about getting more interest in contracts for lower carbon material when you have the agreement with Freeport. I guess is there a way to frame this in the framework of that you have about 450 kt of CO2 you're sequestering. How much is left of that potential lower carbon material to contract out based on the Lapis agreement and the El Dorado changes alone?

Probably about two-thirds, maybe a bit more than that.

If you take it back, we'll probably have about 375,000 tons of low-carbon ammonia. And so if we've contracted 150,000 of AN solution, that's roughly 70,000 tons or so of that ammonia. So we still have about -- call it, 300,000 tons of low-carbon ammonia that we can sell as ammonia or upgraded product.

Very clear. Thank you.

Next question, Andrew Wong with RBC Capital Markets. Please go ahead.

Hi. Good morning. So just with some of the operational improvements that we've seen in upgrades completed this year, could you provide maybe a bit of an early outlook into 2025 in terms of volumes, just given that there are also some debottlenecks next year? And -- or just maybe generally, do you expect production to be higher, lower or maybe about the same?

Well, good morning, Andrew. So what I would say is we've got two turnarounds next year. We've got another turnaround at Cherokee in the late summer. And then we've got our annual or three-year turnaround at El Dorado. So if you pro forma for those being in production and that turnaround, we clearly would have better production year-over-year just by the very fact that we think we have improving operating rigs, but we've also debottlenecked the prior urea plant, and so we'll have higher UAN volumes year-over-year. I think we're a little early still on giving an outlook on volume for next year. But as we always do next quarter, Cheryl will do that and go through that on what our volume expectations are for 2025.

Okay. That's helpful. And then maybe a little bit more, I guess, philosophically, we've seen some transactions this year in the nitrogen space, and that would imply a higher valuation for your business. So maybe just two questions around that is, first, how much do the NOLs factor into any potential transactions? And secondly, I guess, like does it make sense for LSB to stay a public company?

Well, great questions. So NOL is about $250 million or so. So if you tax effect that for a tax rate of 25%, 20%, I mean, somewhere in that range. So we're talking about $50 million to $70 million of actual cash. So it's still meaningful. But as we continue to move forward, I would expect that, that would get reduced every year as we continue to make money and improve the business to make more money. Does it make sense for us to be a public company? Well, that's sort of a conundrum, right? I mean we are public today. We think having access to capital in the public markets is important. But we're a public company and we're for sale every day because there's a stock price that's out there. So I think right now, we're focused on improving the business and growing the business, and we've got a number of low-carbon projects that we're really excited about. And we're going to focus on that. We do look at M&A transactions. And so if there's a way for us to gain scale and get bigger, we're always interested in doing that. But we're pretty disciplined on how we think about M&A and what we're willing to pay for things. Certainly, we'll pay fair value. So, I guess in a roundabout way, I mean, we are public today, and there's benefits and not benefits to being public.

Okay, understood. Thank you.

Next question, Laurence Alexander with Jefferies. Please go ahead.

Good morning. Could you touch on a little bit over the next, say, four, five years, how you think about your bandwidth for working on the Houston Ship Channel, scaling up El Dorado, ramping it up and maintaining productivity? Or what you see as kind of -- or is there a give and take where productivity efforts might need to slow down a little bit just to make sure everything else ramps seamlessly?

That's a great question and it's actually one that we discuss pretty often internally about resources. So, you have internal resources, right, so employees. And so whether they're existing or new employees that we could hire, but you also have the opportunity to contract out technical talent. So, we're pretty adept at doing that, and we do work with a lot of engineering firms to do that. So, for instance, on the Houston Ship Channel project, we have a very -- one of our top technical folks really leading that project for us. So, we did pull him out of existing operations, but we supplemented him with contracted resources and very senior technical resources. So we've been able to do that. I think if we go into FEED and we move into FEED sometime late in the first quarter, we've got an organizational structure that is outlined and we'll need to put in place. And some of those will be permanent resources charged and subject to and working solely on the Houston Ship Channel project, and some of them will be supplemented with contracted resources. The carbon capture project at El Dorado, again, we're not -- we won't own -- we won't build and own the capture facility and the pipeline. Our partner, Lapis Energy will. So, from a manpower standpoint, it's not going to be a great drain on resources. We've got folks on site that are project managers and project leaders. And so they're working with Lapis on that in addition to other projects that are going on, on the site. If we were to debottleneck a plant or plants down at El Dorado or any other site, again, we'd have to really think about resource allocation. The one thing I can guarantee you is we're not going to drain our resources from our existing operations to make the improvements that we need to make. to supplement or move them on to a project and then slow down our improvement on our existing business. It's not something that we want to do.

And then longer term with the Houston Ship Channel, if the green -- if the end market demand sort of strengthens towards the end of the decade, even before your project comes on stream, would you consider an option of just locking in a return if someone else wanted to have access to the low-carbon molecules, but then they wanted to take the commodity spread risk?

Yes. So, it's actually what we're contemplating day one. So, I hope I've been pretty clear about this that we will not move into FEED unless we've got a majority of the production locked up in -- I don't want to say, take-or-pay signed agreements. It might be detailed term sheets with some binding nature to it. But we're not in the business of taking risk and building a plant and hope that people will come. So our expectation is 75%, 85% of the expected production would be locked up with customers that are committing to take-or-pay like volumes on an annual basis for somewhere in the period of 10 to 12 years, and basically locking in the return, because what we would do in the pricing of the product, it will be cost plus and the cost will include the cost that we're buying hydrogen from Air Liquide. So we can back to back that. So the whole idea here and whole vision is to really have committed offtake for that project to derisk any commodity risk by pricing the offtake with the same parameters as we're buying from Air Liquide. And then our real only risk once we've constructed and commissioned and got the site up and running is operations, and we do that every day. And that's a core competency. So the way we're looking at this is really building almost like an annuity where we can have a steady stream locked in at an acceptable rate of return on the capital that we're investing. Does that make sense?

Yes. Perfect. Okay. Thank you.

Sure.

Next question, Rob McGuire with Granite Research. Please go ahead.

Good morning.

Good morning, Rob.

Hey. So Mark, how -- or Damian, how far out are buyers purchasing nitrogen in today's market, just relative to what you've been seeing so far this year?

We're seeing a fairly cautious approach sort of close to hand to mouth, but some recent pricing -- price strengthening, particularly in urea has seen some buyers in the market start to think about taking a longer position into sort of Q1 next year. So -- but really, the majority is basically hand to mouth.

Great. And then Cheryl or Mark, can you discuss what drove CapEx this quarter and if that's going to continue?

Yes. We had the big turnaround at Pryor in the third quarter, Rob. So that was definitely a bigger investment from a capital perspective. We did a lot of good work at the Pryor facility. We do have the Cherokee ammonia turnaround in the fourth quarter. So we'll see some elevated capital there as well.

Was there any -- Cheryl, was there anything kind of surprising there in terms of the CapEx or the turnarounds? Or it just was a little higher than anticipated?

Yes. I mean, not really, Rob. I mean we did have a few fines that we addressed during the turnaround. That's pretty normal. So we did have a bit of a higher CapEx number, but nothing…

Couple million nodes.

Couple million, nothing out of the ordinary.

Thank you. And then on the Houston Ship Channel, you're discussing the bid to take place mid-2026 and production at the beginning of -- sorry, 2030. But that looked like your timetable was a little further out, particularly on the production. I'm just curious what's behind that shift?

Rob, I just think it's fluid. And I think that could it get pulled in some? Sure. I think we're trying to be cautious and conservative when we're thinking about timing. A lot to happen between now and, let's say, FID and whether we -- with the expectation of long lead time items and supply chain issues and other things, I think it's nothing more than some level of conservatism.

I appreciate that, Mark. And then lastly, the capacity utilization reliability improvements that you made at Pryor, can you just discuss what you're seeing out of Pryor's performance given those improvements and what you expect to see maybe over the coming three or four quarters, if we'll see any stair-step improvements in utilization?

Yeah. So we're really excited about the work that they did during the turnaround. So first, from just a pure reliability standpoint, as is the case with most turnarounds, right, you've got degradation of catalysts and other things that are going on in your plants. So we kind of, I'll say, linked a little bit into our turnaround. Coming out of the turnaround, the team did a phenomenal job in the work that they did, and we're running at optimal rates on ammonia. So we're really happy with that. As far as urea and the expansion, we're super excited about that, and Damien is probably and his team are super excited about that because it's less ammonia to sell for us in the Southern Plains because we're going to upgrade it to UAN. And so that will add about 75,000 tons a year in additional UAN production. So the rate is about 1,350 or so a day in urea production, and we're really seeing that. I mean, we're not consistently hitting that every day, but we're hitting that. And I think we're on our way to being very consistent and reliable with that production. So again, I think the expansion of our urea plant and the upgrading to more UAN really is going well and as expected.

Well, congratulations on that. Thank you.

Next question, David Begleiter with Deutsche Bank. Please go ahead.

Hi, good morning. Mark and Cheryl, should turnaround expenses be up or down next year, given the turnarounds you've highlighted already?

So it's a bit early. We're going through that right now and really working through the cost of the turnarounds next year. I think, I would expect at this point to be something in the same ballpark as this year. - David Begleiter: Very good. And Mark, on the Houston project, are you thinking about in terms of the financing side, derisking that capital commitment for yourselves via either project financing or partners? Or are you satisfied with your ability to finance that project on your own?

Yeah. So the way we're thinking about the project is -- and again, we have a partner in INPEX. So let's just assume for simplicity purposes, we each own 50%. It won't be quite that. But if the project is -- I think, I've used an $800 million number before for the ammonia loop. If it's $800 million, the expectation would be the project finance 60% of it, so $480 million. That leaves us $320 million required of equity or cash. And so we'll each put in $160 million or so, and that's how we expect to finance it. Now when I say project finance, we can go the traditional project finance route or if the LPO, the loan program, government loan program is still open, we've started exploring that as well. - David Begleiter: Excellent. And last thing, Mark, just what are your updated thoughts on the price premium the market will pay, if any, for low-carbon ammonia over the next five to 10 years, perhaps?

That's an interesting question. Damian and I go back and forth on this. There's some -- probably when you're selling to Europe, there's an expectation that it's going to be some index. So let's just use the Tampa Ammonia Index, Gulf Ammonia index, something like that, plus the cost of CBAM, whatever that is because it's an increasing amount starting in 2026, right? So they're on a journey from 2026 to 2034. For us -- and that's straight ammonia. One of the advantages of capturing carbon at an existing facility that's got upgrading capabilities is you've got the ability to sell low-carbon upgraded products like our commercial team did a really good job of selling AN solution. And so we think that there are additional opportunities in AN solution. There could be opportunities in nitric acid. and some of the other products, which affords us a less competitive environment plus another product that's essential to a lot of our industrial customers.

Thank you.

Next question, Charles Neivert with Piper Sandler. Please go ahead.

Hey, guys. A bunch of ones. Is there any gas hedges that are on right now that are going to affect gas pricing for you guys for the next couple of quarters? Or are we basically beyond all of that now? We're just looking at market?

Yeah. So Charlie, we generally buy first of month. So we're 1 month ahead. So we'll lock November gas here in the next couple of days. So other than that, that's the majority of it.

Okay. And then in terms of the deal from Lapis ultimately, let's just say for the sake of argument, everything gets started on January 1, 2026. How much do you guys get from them? I know it's more or less a -- I won't call it a set amount, but it's not based on what the -- what they're going to be getting for the carbon dioxide, but how much should we expect added to the numbers beginning in 2026 annually?

Yeah. So it's between $30 and $35 a ton that they'll pay us for each ton of CO2 that they take from us in sequester. So assuming that it's 400,000 tons, it's roughly $14 million.

And that -- again, it's all based on running. Okay. Can you give me the timing? You have two turns for next year. Are they both going to be third quarter? Is one going to be third and then the other sort of third and fourth? Where should I put the hit?

I think it's both in the third quarter. You may have -- so the El Dorado turnaround will absolutely be in the third quarter, and you may have the Cherokee turnaround or the non-ammonia turnaround that they're doing that's end of third quarter, beginning of fourth quarter.

Okay. And then last question. The season was really good for the grain guys. The weather has been really terrific. They've harvested. They've done all these things. Yields are good. Have you seen anything around ammonia application this year being slower because the good weather is actually bad for ammonia application in the fall. Has there been any like low numbers that you've seen or people hesitant to buy? I mean the ground temperatures just aren't cold enough yet to hold it. So I assume application is really behind whatever schedule it would typically take.

Yeah. Charlie, you're spot on. Yes, it's been terrific weather for harvest and yields are terrific, and we should see record yields this year for the US corn crop. But yeah, we do need to see some rain, and we do need to see those soil temperatures come down probably 10, 15 degrees for ammonia to be able to start being applied. So it is running a little what I would call behind schedule. Buyers are fairly well bought, but we think if there's, any incremental needs, there'll be some additional purchases. But we're just -- yeah, everyone is just waiting and seeing. There's not a lot of activity at the moment.

Okay. And to what degree do you guys have touch to that particular market? I mean, is that something that's significant for the fourth quarter -- third quarter, fourth quarter sales or sales you've already made into for fall on ammonia?

I wouldn't say it's hugely material. We've got surplus ammonia that comes out of Pryor that we participate in the market with. So -- but most of our sales are already locked in, and we're in a pretty comfortable position.

Okay.

Charlie, I'd also add,…

All right, Thanks very much. Oh go ahead.

Charlie, I'd also add, we've got less exposure to ammonia coming out of Pryor with the recent expansion of the urea plant at Pryor, so moving more UAN and less ammonia going forward.

Got it. Overtime, is that something you guys are really looking at as moving less ammonia? I mean the way you talked about with the below carbon, you want to take it upstream a little more or downstream a little bit more in order to get away from the most competitive market. Is that sort of now a strategic priority is to the degree you can get away from ammonia itself?

Yeah, I think so, Charlie. I mean we would much be preferring to sell UAN or our upgraded products rather than the base product.

I think the other thing, when you think about Pryor and its location, we can't forget -- we certainly don't forget that there used to be the Magellan pipeline, and there's no pipeline anymore. So that the distribution patterns of how ammonia is distributed from our competitors in that area has changed and put some pressure on the marketplace. So as much as we can upgrade out of Pryor is what our expectation would be.

Got it. Okay. Great. Thanks very much.

Sure.

[Operator Instructions] Next question comes from Peter Gastreich with Water Tower Research. Please go ahead.

Thank you. So good morning Mark and team and congratulations on your progress so far this year and thanks for taking my question. For low-carbon ammonia, I understand your strategy is going to target where you see the demand, and that's in the industrial applications. But for that part that will remain in fertilizer, how far do you think we are from seeing the market assign some kind of value to the prospects for low-carbon ammonia in fertilizer applications? I'm just asking this in the context that in the last few weeks, we've seen the DOE come up with $3 billion in conditional loan commitments for sustainable aviation fuel projects. So we have a pretty big chunk of the ethanol industry that's on low carbon production as well. So overall, I'd just be interested in your thoughts regarding that. Thank you.

Yes. So what I would say is, a farmer using low-carbon fertilizer is just a fertilizer with no benefit, we're light years away from that, right? There's no -- not many farmers that are going to be willing to do that, at least that's the feedback that we've gotten. To your point, though, on ethanol -- ethanol, low-carbon ethanol being used as a feedstock for sustainable aviation fuel is definitely something that a lot of people are looking at. And when you think about creating low-carbon ethanol, the biggest driver of that is capturing the CO2 and sequestering it. So that's where you get the biggest reduction in CI score. However, using low-carbon corn also further reduces that CI score. So that is important for them. And it's much more tangible and measurable than better tilling practices and just other things that farmers can do. So there is a lot of focus on that, and we have had several conversations with ethanol producers about that. And so what we might see in the future, and it's not that far off, if legislation allows ethanol producers to really get the incentives that are in programs today, you might see ethanol producers directing corn growers to buy low-carbon fertilizer and then paying them a premium for that. A lot of that, though, will depend on the extension of what's called 45Z, which is part of the tax code. And that's really -- what people are really waiting on now is will that be extended because it expires in 2026. So I think, again, similar to 45V with low carbon hydrogen -- I mean, green hydrogen or green ammonia and people waiting on final legislation for that, people are now waiting to see whether 45Z gets extended. If it gets extended, I think that using low-carbon fertilizer to produce low-carbon corn for ethanol, low-carbon ethanol production could have some real legs. But I think we're in a waiting pattern for right now.

Great. Thank you very much.

Sure.

There are no further questions at this time. I would like to turn the floor over to Mark for closing remarks.

Well, thank you, everyone. And as always, thanks for the interest in LSB Industries. I hope you can see that we're making progress. And if you have any further questions, please feel free to give us a call or e-mail us. Thanks.

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