Greetings, and welcome to the LSB Industries Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please type on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Fred Buonocore, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Joining me today are Mark Behrman, our Chief Executive Officer; and Cheryl Maguire, our Chief Financial Officer. Please note that today's call will include forward-looking statements and because the 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 see the press release in the Investors section of our website, lsbindustries.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. At this time, I'd like to go ahead and turn the call over to Mark.

Thank you, Fred. We're glad to discuss our second quarter results for 2023 and our outlook for the third quarter and the entire year. I want to begin by congratulating our team on their impressive safety performance. In the first half of this year, we had no recordable injuries, and our recordable injury rate for the trailing 12 months, as of June 30, 2023, is 0.5. We remain dedicated to prioritizing safety in all our operations. In our second quarter summary, our manufacturing and commercial teams have performed well, leading to notable increases in both production and sales volume compared to the same period in 2022. I’m pleased to report that our average ammonia on-stream rate for the second quarter and the first half of 2023 shows good progress towards our target of achieving a 95% on-stream rate for our ammonia plants. We expect this rate to continue improving as we advance our new programs and manage next year's turnarounds. As we expected, our financial results were lower than in the second quarter of 2022 due to a decrease in nitrogen product market prices compared to last year's highs, largely driven by lower natural gas prices in Europe and weakened industrial activity in Asia. Additionally, domestic UAN demand fell short of our expectations as farmers chose to apply more urea, which had been more attractively priced than UAN early this year. We have consistently generated significant free cash flow over the past 24 months and expect this trend to continue, even amid lower nitrogen prices. We are balancing investments in growth with returning capital to shareholders, having repurchased $175 million of common stock last year and $125 million in outstanding debt during the second quarter of this year. We also repurchased $17 million of common stock under the $150 million stock repurchase program authorized by our Board in May, totaling over $317 million returned to shareholders during the 12-month period ending June 30, 2023. We will continue using our free cash flow strategically to maximize long-term shareholder value. Lastly, I previously mentioned that we submitted a capacity expansion project at our El Dorado site to the USDA for funding under their fertilizer production expansion program. Our project has been selected for funding consideration and is currently open for public comment until the end of this month. Assuming we move forward, the EPA will conduct an additional environmental review. While we are excited about this project, we will thoroughly evaluate it based on our markets, the global economy, the timing of the expansion, and our internal resources, with a hopeful decision on next steps by the third quarter, depending on the USDA's timeline. In our presentation, we also cover our end markets. Corn prices remain above multi-year averages due to strong demand, dry conditions across many U.S. corn-growing regions, and ongoing global uncertainties related to the war in Ukraine, along with tight stock-to-use ratios. We anticipate corn prices to stay at levels that will encourage strong fertilizer demand as we approach the next planting season. Additionally, with lower farm input costs compared to last year, farmers should feel further motivated to optimize their fertilizer applications in the upcoming quarters to maximize yields for the next growing season. Demand for our industrial business remains stable, as nitric acid demand is consistent while global producers relocate production from international sites to U.S. operations to benefit from reduced input costs. Furthermore, demand for ammonium nitrate and mining applications is robust, driven by increased infrastructure projects boosting the need for quarrying and aggregate production, as well as the growing electric vehicle industry raising the demand for metals in the U.S. Now I'll turn the call over to Cheryl to discuss our second quarter results and outlook.

Thanks, Mark, and good morning. On Page 5, you'll see a summary of our second quarter financial results. We generated adjusted EBITDA of $47 million and adjusted EPS of $0.25 in the second quarter, slightly below our expectations. This is largely because of a more significant decline in selling prices than we had anticipated early in the quarter, along with lower UAN sales volumes, as Mark mentioned earlier. Turning to Page 6, you'll see a summary of our key balance sheet and cash flow metrics. During the second quarter of 2023, we generated cash flow from operations of $44 million and had capital expenditures of $14 million, translating into $30 million of free cash flow and a free cash flow conversion rate of approximately 64%, and year-to-date, we've generated cash flow from operations and had capital expenditures of $103 million and $32 million, respectively. Our continued free cash flow generation enabled us to maintain a strong financial position. At the end of the second quarter, we had approximately $314 million in cash and short-term investments. This was after we repurchased $125 million of principal amount of our senior secured notes for $114 million cash and bought back $17 million of our stock under our current $150 million share buyback program that our Board authorized in May. As Mark mentioned, we are committed to a disciplined, multifaceted approach to capital allocation that balances return of capital to shareholders and investment in growth with our focus on maintaining an appropriate level of leverage. Relative to that, we ended the second quarter with $584 million in total debt and a net debt to trailing 12-month EBITDA leverage ratio of approximately 1x. Page 7 bridges our 2023 second quarter adjusted EBITDA of $47 million from adjusted EBITDA for the second quarter 2022 of $158 million, which was the highest adjusted EBITDA quarter in LSB's history. The lower selling prices for our products relative to last year's record highs were the primary factor in the year-over-year change in EBITDA. On the positive side, our sales volumes were higher in the 2023 second quarter relative to last year as a result of stronger ammonia operating rates at our facilities coupled with our successful commercial initiatives. Now, I'll outline some factors to consider when thinking about our third quarter. In terms of product selling prices, the nitrogen fertilizer industry typically sees a summer reset during the seasonally slow third quarter when the summer fill program comes out, and we saw that again this year. The NOLA UAN benchmark was reset at approximately $195 per ton in early July. Having had a positive response to the first round of offers during the summer fill program, it was widely expected that offer levels would be raised. That occurred earlier this week and was aided by the persistent firmness of local and international urea markets as well as the rebound in corn prices. At the time of the initial summer fill announcement, September NOLA urea barges were trading up to $330 a ton, with August trading sub-$325 per ton. The latest August and September barge trades have been $55 to $60 a ton higher, with the markets continuing to rise. This bodes well for UAN and AN pricing. However, current prices are still lower than our realized price for UAN and AN in the second quarter of 2023. The Tampa ammonia benchmark price settled at $285 per metric ton in July, below our realized average price of $370 per metric ton in Q2 of '23. With that said, Tampa increased by $10 to $295 a metric ton for August, the first monthly increase since October of 2022. For the balance of the quarter, we expect to see continued but measured price appreciation for nitrogen products. With respect to volume, we expect a material improvement in the third quarter of 2023 versus the 2022 third quarter as we have no turnarounds this year, and we had turnarounds at our El Dorado and Pryor facilities last year. However, I would note that during this third quarter, the NuStar pipeline that we use to distribute ammonia from our El Dorado facility will be down for 6 weeks for scheduled maintenance. As a result, we will see a pretty sizable sequential decline in ammonia sales volumes but still a material increase relative to the third quarter of 2022. We expect that additional inventory build during Q3 to be sold by the end of the year. In thinking about costs, 90% of our natural gas feedstock costs for Q3 2023 are locked in at approximately $3.50 per MMBtu, so roughly in line with the second quarter but substantially lower than the second quarter of 2022, which was approximately $7.15. Putting it all together, given the current pricing environment I outlined, partially offset by our expectations for strong year-over-year production and sales volume improvement, we expect our third quarter adjusted EBITDA to see a similar sequential decline as what we realized in our third quarter of 2022. Looking out to the fourth quarter, we believe that UAN and AN prices should continue to increase and that ammonia will see pricing improve with demand factors beginning to materialize. And now I'll turn it back over to Mark.

Thank you, Cheryl. Page 8 depicts the downward trend in European and Asian natural gas prices over the past 10 months. The drop in gas prices in Europe is caused largely by a combination of warmer-than-average temperatures this past winter, combined with increased storage inventories resulting from imports of LNG from the U.S., which enabled European ammonia producers to come back online after curtailing production last year due to high feedstock costs. Even so, gas prices in Europe remain significantly higher than gas prices in the U.S. at approximately $10 per MMBtu. Equivalent, this equates to a gas cost of ammonia production in excess of $350 per ton for European producers. That's significantly higher than the Tampa ammonia benchmark of $295 for August and the U.S. gas cost to produce ammonia of approximately $125 per ton. We believe that the disconnect is one of the multiple factors pointing to higher ammonia selling prices later this year. Page 9 provides an overview and update on our low-carbon ammonia initiatives. We continue to make headway on advancing our blue ammonia project at our El Dorado facility and our green ammonia project at our Pryor facility, including entering into discussions with potential off-takers. These projects represent exciting opportunities to emerge as a leader in decarbonizing our industry. Not only do they have the potential to substantially reduce our carbon footprint, but we believe the economics of both should be very attractive. During the second quarter, we were pleased to add to our low-carbon ammonia activities with the announcement of our MOU with Amegy, a developer of ammonia-to-power technology. The goal of this relationship is for the two companies to collaborate on developing low-carbon ammonia as a marine fuel. Ultimately, we expect to leverage our combined capabilities to demonstrate how clean ammonia can become a primary fuel source for the commercial marine industry and to work with additional partners to develop the ecosystem and infrastructure needed to support this transition, which would result in a major development in global efforts to reduce CO2 emissions. Lastly, we are in discussions with respect to several additional low-carbon initiatives and look forward to announcing them at the appropriate time. There is no question that 2023 has been a challenging year with respect to the headwind from declining selling prices. At the same time, however, we are very pleased with the progress we've made with our plant operations, our continued balance sheet improvement, our capital allocation program, and our new business developments in clean energy. We believe that collectively, these make us a company well-positioned for growth in the coming years, irrespective of commodity price trends. Before I hand the call back to the operator for the Q&A session, I'd like to mention that we will be participating in the Seaport Virtual Summer Conference on August 22nd, the UBS Chemicals Conference on September 6th in New York, the Jefferies Industrial Conference also in New York on September 7th, and the RBC Industrials Conference in Las Vegas on September 12th. We look forward to seeing many of you at those events. That concludes our prepared remarks, and we will now be happy to take any questions. Thank you.

Your first question comes from Josh Spector with UBS. Please go ahead.

Yeah. Hi. Thanks for taking my question. First, I guess, I just wanted to clarify some of your comments on UAN and the summer fill program. So you talked about pricing kind of looking towards August and further out $300 plus in the bar. But I think you made the comment that your realized pricing is still below 2Q levels. Is that just an averaging effect? Or can you explain kind of what's going on there and the current spot rates, is there any chance you exit at a price higher than what you realized last quarter?

Good morning, Josh. How are you? So I think when you think about most of our products, particularly ammonia and UAN, you got a summer reset that occurs sort of late June or really early July. And we usually take an order book based on those prices for some length of time. I mean it's not significant. It's not months out there. So I think what we're going to see in the third quarter is a lot of summer reset prices during the quarter, and we'll realize a lot of these improvements in prices either late in the third quarter or early into the fourth quarter.

Got it. No, that makes sense. And just a question on the cost side. When we look at your cost ex gas, it looks like your costs are generally a good deal higher than they were a year ago over the last couple of years about $80 million a quarter, almost $200 a ton. From our math, that looks about almost 30% higher than where you would have been, again, ex gas costs over the past couple of years despite having no turnaround this year. So I'm just curious if you can give us some context about what might be going on there operationally with gas costs higher? And if there's something structural or temporary driving any of that?

We'll need to examine that further. I'm not familiar with the 30% increased cost you mentioned, so perhaps we can discuss it after the call. However, I want to point out that the product mix certainly affects cost. The reason we upgraded from ammonia is that it allows for better margins. This could explain the situation, as we sold less UAN and more ammonia during the quarter.

Okay. Thanks. I'll follow up offline. I'll turn it over and get back in the queue. Thanks.

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

Thank you. Mark, could you clarify your comments on the guidance for Q3? I may have misheard what was expected compared to the prior year. Thank you.

Yeah, I think Cheryl mentioned that we would see a sequential decline that was similar to what we saw last year.

Got it. Got it. And on El Dorado, has anything changed in your thinking over the last 3 months? Or again, do you expect the decision this week from the federal government on this project for the maximum amount, is that still the current thinking?

Yes. I think what I was referring to is really our comment period, right? So, we've been selected as one of the projects that they're considering for funding and all of the projects that were selected have a public comment period. That will aim at the end of this month. The USDA has already told us that assuming that we move forward, they would want to do another environmental review. It's more whether it's NGOs or it's tribal and looking at any travel issues or things like that. And then after that, I'm a little more hazy on what the process is, but we would hope that by the end of September, we would have a lot more clarity as to whether they're going to fund us or not. And then the expectation would be that they would fund up to 25% of the total project cost, which the full project is about $400 million, so that would be $100 million.

Very good. Thank you.

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

Hey, good morning. Could I just maybe clarify the Q3 EBITDA guidance? I think I heard Cheryl say that Q3 will be down sequentially similar to what we saw last year. So what does that mean? Does that mean EBITDA might be in like the $40 million, $50 million range similar to what we saw in Q3 of last year? Or is there a different sequential decline that I should be thinking about?

Yes, sure. Andrew, so what I was referring to is we generally see a pretty heavy sequential decline as you move from Q2 to Q3 because Q3 is the seasonally weakest quarter, as you know. If you look at Q2 of last year and you look at Q2 to Q3 and what the decline was there, it was ballpark 65%, 70% decline. I think you're going to see a similar decline this year if you compare the third quarter to the second quarter of this year.

Okay. That makes sense. And then I just wanted to ask maybe following up a little bit on the cost question. Maybe off a different way, how would you say, in general, your non-GAAP costs have been tracking this year versus maybe expectations going into this year or versus what you've seen in prior year levels?

Andrew, I would say that our costs are higher this year for several reasons. One is general inflation, which has led to increased supply and contractor costs. Additionally, we chose to make some investments, resulting in an estimated $10 million to $12 million in higher costs for the year. This includes hiring technical talent and other personnel to advance our reliability and safety programs, as well as bringing in outside experts to analyze and improve the operation and maintenance of our assets. These are expenses we opted for instead of capital investments.

Okay. That makes a lot of sense. Thank you.

Next question, Adam Samuelson with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone. As you consider the engineering designs for the debottlenecking, do you have any clearer insights at this point regarding the scope of frame size? Additionally, how does the potential USDA funding contribution relate to the project's capital cost as we evaluate the net capital outlay?

Sure. If we proceed with the entire project, which involves debottlenecking our ammonia and nitric acid plants, we've also adjusted the project's focus. Initially, we planned to build a urea UAN facility to upgrade everything to UAN. Now, considering our company’s vision and industry trends, we're aiming to produce lower carbon products instead of carbonated ones. This would include debottlenecking ammonia and nitric acid and constructing a new granulation facility for granulating or developing some HDAN derivative products. If we undertake the full project, we currently estimate the cost to be around $400 million. If we execute everything at once, the USDA would likely provide us with 25% support, which amounts to $100 million. Therefore, our total capital expenditure over a period of 3 to 4 years would be $300 million.

Okay. That's very informative. In the release and some of the prepared remarks, you mentioned stronger industrial demand for nitric acid in particular. Can you provide more details or help us understand this better? Currently, many industrial chemical sectors are not showing robust volume trends, and the demand has been largely affected by significant destocking over the past 6 to 12 months. It would be helpful to get an idea of what you're observing among your customer base specifically for nitric acid.

Yes, I believe we are observing some variability among our customers. I agree that they are facing some challenges. We have contracts in place, many of which include take-or-pay clauses, ensuring that we will receive payment for the product regardless. That said, our commercial team has performed exceptionally well. When a customer needs to reduce production at their facilities or experiences operational issues, which is common, our team has successfully identified alternative channels for that product in the spot market. Overall, we are experiencing solid demand. Additionally, there are strong growth factors in the mining sector. If we can adjust our production and upgrade our nitric acid to AN solution or April ban and sell it in the mining market, we will pursue that option. In summary, considering the non-fertilizer sectors, we have a favorable balance that positions us well to manage variability in the industrial market.

Okay. I appreciate that color as well. Thanks.

Next question, Laurence Alexander with Jefferies.

This is Dan Rizzo on for Laurence. Could you tell me, in the past have you seen a lot of pre-buying that could provide a more of a near-term tailwind in the late in the third quarter and the early fourth quarter? Or are growers more than likely just to wait to see how things play out next year?

Well, that's a really great question. I'd say historically, what would happen is what you mentioned first. So with strong prices, farmers ultimately would be pre-buying, and we're still seeing a fair amount of that and would expect a fair amount of that. But this last year, the dynamic changed a little bit to a bit more just-in-time buying, which is a risk for the farmer because they're not only are they bidding on prices going down, but they're also having to deal with the logistical aspect of getting it just in time. So in order to kind of think about that as we take a step back, we still think there'll be a fair amount of pre-buying, but we've also now taken some additional storage locations, particularly for UAN to position product closer to our customers so that we can service easier and be the product of choice and handle the just-in-time.

And then just a follow-up. So with those additional storage facilities, does that mean anything meaningful to your inventory levels and working capital?

No, I would say nothing meaningful. What it does do is it allows us to store product to sell at higher points of the year or in season versus out of season. So, I think it allows us to have the optionality to do that. And of course, when you're talking about just in time and someone really needs product, they are willing to pay sometimes a higher price for that. So again, I think it gives us optionality to try and take advantage of anomalies in the market and ultimately get some higher pricing.

Thank you very much.

Well, as always, appreciate everyone's interest in LSB Industries. I hope you feel like we're making improvements at the company. We've got a significant amount of opportunity to really increase shareholder value. If you have any further questions, feel free to follow up with a call to Fred Buonocore, who leads Investor Relations for us, or Cheryl or myself, and I hope to see you guys at some of the conferences that we're going to be attending. Thanks, and have a great day.

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