Earnings Call Transcript - LXU Q3 2024

Operator, Operator

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. 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.

Fred Buonocore, Vice President of Investor Relations

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 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 for further important details. At this time, I'd like to go ahead and turn the call over to Mark.

Mark Behrman, Chairman and CEO

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?

Damien Renwick, Chief Commercial Officer

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 multi-year 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 have 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, U.S. natural gas prices are expected to remain a competitive advantage for domestic ammonia producers for the foreseeable future.

Cheryl Maguire, Chief Financial Officer

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.

Mark Behrman, Chairman and CEO

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 two 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 six 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.

Operator, Operator

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

Josh Spector, Analyst

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 or are you actually already seeing some improvement in demand? And then related to 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?

Mark Behrman, Chairman and CEO

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

Damien Renwick, Chief Commercial Officer

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, etc. 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.

Josh Spector, Analyst

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?

Mark Behrman, Chairman and CEO

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

Damien Renwick, Chief Commercial Officer

If we look back, we'll likely have around 375,000 tons of low-carbon ammonia. Since we've contracted 150,000 tons of AN solution, that's approximately 70,000 tons of that ammonia. Therefore, we still have about 300,000 tons of low-carbon ammonia that we can sell as ammonia or as upgraded products.

Josh Spector, Analyst

Very clear. Thank you.

Operator, Operator

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

Andrew Wong, Analyst

Hi, good morning. With the operational improvements and upgrades completed this year, could you provide an early outlook for 2025 regarding volumes, especially with some debottlenecks expected next year? Additionally, do you anticipate production to be higher, lower, or about the same?

Mark Behrman, Chairman and CEO

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.

Andrew Wong, Analyst

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, does it make sense for LSB to stay a public company?

Mark Behrman, Chairman and CEO

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.

Andrew Wong, Analyst

Okay, understood. Thank you.

Operator, Operator

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

Laurence Alexander, Analyst

Good morning. Can you discuss your plans for the next four to five years regarding your work on the Houston Ship Channel, scaling up El Dorado, and maintaining productivity? Do you foresee any necessary trade-offs where efforts to improve productivity might need to slow down to ensure a smooth ramp-up of everything else?

Mark Behrman, Chairman and CEO

That's a great question, and it's something we often discuss internally regarding resources. We have internal resources, including employees, whether they are existing or new hires, and we also have the option to contract technical talent. We're quite experienced in that area and collaborate with several engineering firms to accomplish this. For example, on the Houston Ship Channel project, one of our top technical staff is leading that effort. We did reassign him from our existing operations but have supported him with contracted resources and very senior technical personnel. As we move into FEED late in the first quarter, we have an organizational structure prepared that we will need to implement. Some of these will be permanent resources dedicated solely to the Houston Ship Channel project, while others will be supplemented with contracted resources. Regarding the carbon capture project at El Dorado, we won’t own or build the capture facility or pipeline; our partner, Lapis Energy, will handle that. Therefore, from a manpower perspective, it shouldn't heavily tax our resources. We have project managers and leaders on-site who are working with Lapis, in addition to other ongoing projects. If we need to debottleneck a plant at El Dorado or another site, we will have to carefully consider resource allocation. One thing I assure you is that we will not detract from our existing operations to make necessary improvements for new projects, as we do not want to impede the progress of our existing business.

Laurence Alexander, Analyst

In the long term, regarding the Houston Ship Channel, if market demand strengthens toward the end of the decade, might you consider securing a return if another party wants access to the low-carbon molecules but is willing to take on the commodity spread risk?

Mark Behrman, Chairman and CEO

Yes. So, this is actually what we are considering from day one. I hope I've been clear that we will not proceed to the Front End Engineering Design stage unless we have secured a majority of the production. I don’t want to refer to it as take-or-pay agreements; it could be detailed term sheets that have some binding elements. We're not in the business of taking risks by building a plant in hopes that customers will come. Our expectation is that 75% to 85% of the expected production will be secured with customers committing to take-or-pay volumes on an annual basis for about 10 to 12 years. This will effectively lock in our return since the pricing of the product will be cost-plus, with costs including what we pay for hydrogen from Air Liquide. Our vision is to have committed offtake for this project to mitigate any commodity risk by pricing the offtake the same way we buy from Air Liquide. Once we have constructed, commissioned, and started operations, our main risk will be operational, something we handle every day as a core competency. We see this as building an annuity that provides a steady and acceptable rate of return on our investment. Does that make sense?

Laurence Alexander, Analyst

Yes. Perfect. Okay. Thank you.

Mark Behrman, Chairman and CEO

Sure.

Operator, Operator

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

Rob McGuire, Analyst

Good morning.

Mark Behrman, Chairman and CEO

Good morning, Rob.

Rob McGuire, Analyst

Hey, Mark or Damian, how far in advance are buyers purchasing nitrogen in the current market compared to what you have observed this year?

Mark Behrman, Chairman and CEO

We're observing a fairly cautious stance, almost a hand-to-mouth approach. However, some recent price increases, especially in urea, have led certain buyers in the market to consider taking a longer position for early next year. Nonetheless, the majority remains focused on immediate needs.

Rob McGuire, Analyst

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

Cheryl Maguire, Chief Financial Officer

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.

Rob McGuire, Analyst

Was there anything surprising regarding the CapEx or the turnarounds? Or was it just slightly higher than expected?

Cheryl Maguire, Chief Financial Officer

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 out of the ordinary.

Mark Behrman, Chairman and CEO

Couple million nodes.

Cheryl Maguire, Chief Financial Officer

Couple million, nothing out of the ordinary.

Rob McGuire, Analyst

Thank you. Regarding the Houston Ship Channel, you mentioned the bid scheduled for mid-2026 and production beginning in 2030. It seems like your timeline for production is a bit further out than expected. I’m curious about the reasons for that change.

Mark Behrman, Chairman and CEO

I think the situation is fluid. It could shift a bit, but we're being cautious and conservative about timing. There’s a lot that can happen between now and the final investment decision, especially considering the long lead times and supply chain issues. This reflects our cautious approach.

Rob McGuire, Analyst

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?

Mark Behrman, Chairman and CEO

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.

Rob McGuire, Analyst

Well, congratulations on that. Thank you.

Operator, Operator

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

David Begleiter, Analyst

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

Cheryl Maguire, Chief Financial Officer

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, Analyst

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?

Mark Behrman, Chairman and CEO

We're considering the project with our partner INPEX. For simplicity, let's say we each own 50%, though it may not be exactly that. If the project's cost is around $800 million for the ammonia loop, we expect project financing to cover 60% of that, which amounts to $480 million. That leaves us needing $320 million in equity or cash, so we would each contribute roughly $160 million. When I mention project finance, we have the option of following the traditional route or we may also explore the government loan program if it's still available.

David Begleiter, Analyst

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?

Mark Behrman, Chairman and CEO

That's an interesting question. Damian and I often discuss this topic. When considering sales to Europe, there's likely an expectation for some index, such as the Tampa Ammonia Index or Gulf Ammonia Index, along with the cost of CBAM, which is anticipated to increase starting in 2026. This timeline involves a journey from 2026 to 2034. For us, focusing on straight ammonia has its benefits. One advantage of capturing carbon at an existing facility with upgrading capabilities is that it allows us to sell low-carbon upgraded products, similar to what our commercial team accomplished with AN solution. We believe there are further opportunities in AN solution and potentially in nitric acid and other products, which provide us with a less competitive landscape and another essential product for many of our industrial customers.

Operator, Operator

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

Charles Neivert, Analyst

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?

Cheryl Maguire, Chief Financial Officer

Yeah. So Charlie, we generally buy first of month. So we're one 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.

Charles Neivert, Analyst

Okay. In relation to the deal with Lapis, let's assume everything begins on January 1, 2026. What is the expected amount you will receive from them? I understand it is not a fixed sum and is not determined by their earnings from carbon dioxide, but what should we anticipate being added to the figures starting in 2026 each year?

Mark Behrman, Chairman and CEO

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.

Charles Neivert, Analyst

Could you provide the timing for the two turns next year? Will they both occur in the third quarter, or will one be in the third quarter and the other in the third and fourth quarters? Where should I expect the impact to be reflected?

Mark Behrman, Chairman and CEO

I think both turnarounds will occur in the third quarter. The El Dorado turnaround will definitely be in the third quarter, and the Cherokee turnaround or the non-ammonia turnaround is expected to be at the end of the third quarter or the beginning of the fourth quarter.

Charles Neivert, Analyst

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.

Damien Renwick, Chief Commercial Officer

Yes, Charlie, you're right. The weather has indeed been great for harvest, and we expect to see record yields this year for the U.S. corn crop. However, we do need some rain, and soil temperatures must decrease by about 10 to 15 degrees before ammonia can be applied. So, the process is a bit behind schedule. Buyers have made their purchases, but if there are any additional needs, we anticipate some more buying. Right now, everyone is just waiting and observing, and activity has been limited.

Charles Neivert, Analyst

Okay. How much exposure do you have to that particular market? Is that a significant factor for sales in the third or fourth quarter, or for sales you've already made for fall ammonia?

Mark Behrman, Chairman and CEO

I wouldn't say it's very significant. We have surplus ammonia from Pryor that we participate in the market with. However, most of our sales are already secured, and we are in a fairly comfortable position.

Cheryl Maguire, Chief Financial Officer

Charlie, I'd also add,…

Charles Neivert, Analyst

All right, Thanks very much. Oh go ahead.

Cheryl Maguire, Chief Financial Officer

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 we're moving more UAN and less ammonia going forward.

Charles Neivert, Analyst

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?

Mark Behrman, Chairman and CEO

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

Damien Renwick, Chief Commercial Officer

I think it's important to consider Pryor and its location. We shouldn't overlook the fact that the Magellan pipeline used to be there, but it's no longer in operation. This has changed the distribution patterns of ammonia from our competitors in the area, placing some strain on the market. Therefore, we expect to focus on upgrading as much as we can out of Pryor.

Charles Neivert, Analyst

Got it. Okay. Great. Thanks very much.

Damien Renwick, Chief Commercial Officer

Sure.

Operator, Operator

Next question comes from Peter Gastreich with Water Tower Research. Please go ahead.

Peter Gastreich, Analyst

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.

Mark Behrman, Chairman and CEO

Yes. A farmer using low-carbon fertilizer currently sees it as a product without benefits, and many farmers aren't inclined to adopt it based on the feedback we've received. Regarding ethanol, the use of low-carbon ethanol as a feedstock for sustainable aviation fuel is generating interest. The primary factor in producing low-carbon ethanol is capturing and sequestering CO2, which significantly lowers the carbon intensity score. Additionally, utilizing low-carbon corn can also decrease that score, making it a key consideration. This approach is more concrete and measurable compared to other practices like improved tilling. We have engaged in discussions with ethanol producers on this topic. In the near future, if legislative conditions permit ethanol producers to access current incentives, they may encourage corn growers to use low-carbon fertilizer and offer premium payments. However, this hinges on the extension of what is known as 45Z in the tax code, which is set to expire in 2026. Similar to the situation with 45V concerning low-carbon hydrogen, there is anticipation around the potential extension of 45Z. If it is extended, the use of low-carbon fertilizer for producing low-carbon corn for ethanol could gain traction, but for now, we are in a holding pattern.

Peter Gastreich, Analyst

Great. Thank you very much.

Mark Behrman, Chairman and CEO

Sure.

Operator, Operator

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

Mark Behrman, Chairman and CEO

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.

Operator, Operator

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