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Presentation

Operator: Greetings, and welcome to the LSB Industries First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Fred Buonocore, Vice President, Investor Relations. Fred, please go ahead.

Fred Buonocore: 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. For more information about these risks and uncertainties that could cause actual results to differ materially from those projected or implied by forward-looking statements, please see the risk factors set forth in the company’s most recent annual report on Form 10-K.

On the call, we will reference non-GAAP results. Please see the press release posted yesterday 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.

Mark Behrman: Thank you, Fred, and good morning, everyone. The global economy has a lot of moving parts right now, not the least of which is the impact that U.S. tariffs could have on our business. While we don’t anticipate a big impact to our business, it has created a lot of uncertainty for both planned spending and potential capital projects. We’ll provide more color on this later in our comments. Turning our attention to the first quarter. On Page 4 of our presentation, we highlight some achievements during the quarter. Overall sales volumes improved 4% quarter-over-quarter, driven by solid improvement in sales volumes for ammonium nitrate and UAN. These gains are the result of higher ammonia production and better performance by our upgrading plants.

We’re pleased that the work to improve the reliability and efficiency of our facilities is yielding results, and we expect to see continued improvement as 2025 progresses. Not only did we increase our production and sales volumes during the first quarter, but we did so with zero recordable injuries across the organization. Congratulations to the entire team for embracing our Protect What Matters core value and demonstrating that our Goal Zero is achievable. Lastly, we continue to make progress with our decarbonization project at our El Dorado facility, which I’ll discuss later in the call. Now I’ll turn the call over to Damien, who will review current market dynamics and pricing trends. Damien?

Damien Renwick: Thanks, Mark, and good morning, everyone. I’ll begin my remarks today by addressing the tariff situation. You’ll find a summary of key points on this matter on Page 5. Much remains to be seen as to how the U.S. tariffs on imports will affect our business. So far, we’ve seen a significant uplift in domestic pricing for prompt delivery of urea due to tariffs and other factors. We expect this to persist through the current spring planting season. We believe our market exposure to retaliatory tariffs from other countries is limited. We export less than 10% of our sales with all our exports to Mexico and Canada. We also believe the impact to ag markets we serve will not be significant. Only 2% of U.S. corn exports were to China in 2024.

Lastly, some of the parts, components and equipment we use to maintain our plants are imported, mainly from Europe. We are evaluating any potential tariff implications for these imports, but we have already seen some pricing pressure from suppliers. We are also looking to source domestically wherever possible. Moving to Page 6. Demand for our industrial products remains robust. We continue to ramp up our ammonium nitrate solution volumes as we expand our industrial business. Copper mining activity and pricing remains strong. Global demand for copper has surged over the past year. Additionally, gold prices have continued to move higher. This price increase is driven by global economic uncertainty. As a result, U.S. gold mining activity continues to be strong.

Nitric acid continues to see healthy demand and pricing. We remain sold out. We also continue to see opportunities for growth with existing and new customers. Our primary constraint at this point is production capacity, and we are continually evaluating opportunities to increase our production capacity in both nitric acid and ammonium nitrate. On Page 7, we continue to see strong prices for our products. UAN prices continue to increase significantly. The current Nola UAN price of $350 per ton is 73% higher than the low price of full 2024. We are seeing strong demand along with insufficient import volumes, which has resulted in tight U.S. inventories. Urea prices have also strengthened considerably with Nola prices now above $500 per ton. This increase is due to seasonal demand, lack of imports, tariff pressures, robust demand from India and the continued ban on urea exports from China.

The Tampa Ammonia price has declined since the start of the year. This decline has followed falling natural gas prices in Europe. Europe continues to be the marginal cost producer for ammonia. This dynamic is underpinning ammonia prices globally. But despite this decline, ammonia prices remain attractive due to a globally tight supply and demand balance. U.S. ammonia producers continue to enjoy a significant cost advantage to those in Europe. We expect that spread to persist through the entirety of this year. The spring 2025 planting season is shaping up strongly with a significant increase in planted corn acres expected. The USDA reported in its prospective plantings report that producers intend to plant 95.3 million acres of corn this year compared to 90.6 million planted acres last year.

This significant increase is driving very strong fertilizer demand and is driving pricing for our products up significantly. On Page 8, the USDA has lowered its forecast for corn ending stocks. This forecast has provided support for corn prices. U.S. corn prices sit solidly above $4 per bushel, supporting favorable farmer economics. Now I’ll turn the call over to Cheryl to discuss our first quarter financial results and our outlook. Cheryl?

Cheryl Maguire: Thanks, Damien, and good morning. On Page 9, you’ll see a summary of our first quarter 2025 financial results. You can see the early benefits of the investments we’ve made in plant reliability and efficiency in our increase in net sales, driven in part by stronger volumes. Page 10 bridges our first quarter 2024 adjusted EBITDA of $33 million to our first quarter 2025 adjusted EBITDA of $29 million. Improved sales volumes, along with higher pricing for ammonia and AN were offset by materially higher natural gas costs. As we’ve discussed on previous calls, we like the contractual nature of our industrial business and the benefits this provides to our overall performance. On Page 11, we illustrate that many of our industrial contracts are cost-plus arrangements where we pass through the cost of the natural gas used to make products like nitric acid or AN and earn a fixed margin.

This type of arrangement allows us to contract out the volatility of natural gas prices is nonseasonal and provides stability to our business. In 2021, less than 20% of our sales volumes were cost-plus contracts. As we’ve grown our industrial business, we’ve grown this cost pass-through business to approximately 30% as of the end of Q1 2025, and we expect this to grow to 35% by the end of the year as we continue to optimize our product mix. Page 12 provides a summary of our key balance sheet and cash flow metrics. Our cash balance remains strong and our leverage ratio remains in line with our target level for a mid-cycle pricing environment. We will continue to make investments in the reliability of our facilities while also investing in storage and logistics capability to support our growing industrial business.

Turning to the second quarter outlook. The Tampa ammonia price currently sits at $435 a ton. Nola UAN pricing rose through April and is currently at its highest level in more than two years. While much of our UN volume for April was sold ahead of this increase, we expect to capitalize on the pricing strength for sales in May and June. Our natural gas costs settled just under $4 per MMBtu for April. However, U.S. gas costs have trended downward closer to $3 per MMBtu as we move toward May settlement, and we look forward to benefiting from that. From a volume perspective, we expect meaningful increases in both UAN and AN volumes compared to prior year. This will come with lower sales volumes of ammonia as we forego ammonia sales in favor of upgrading into higher-margin products.

One change to the full year outlook that we discussed on our Q4 2024 call relates to the turnaround that was scheduled for our El Dorado site for the second half of this year. We have elected to push this turnaround into the first half of 2026 as we have experienced delays in the delivery of key equipment we were planning to replace during the turnaround. As a result, we are increasing our ammonia production outlook for 2025 by approximately 30,000 tons. We are also lowering our estimated turnaround expense for the full year by approximately $15 million. And now I’ll turn it back over to Mark.

Mark Behrman: Thank you, Cheryl. Page 13 summarizes a key development with our El Dorado ammonia project. We are excited that in January, we achieved precertification status under The Fertilizer Institute’s: Verified Ammonia Carbon Intensity Program. This is a voluntary certification of the carbon footprint of ammonia production at a specific facility from well to production gate. The program utilizes a standard methodology to calculate the carbon intensity of a facility’s ammonia production. The program has been developed by industry experts and the results are audited by a third-party. Once the auditor provides a written report confirming that the carbon intensity was calculated by the facility according to the methodology, verified ammonia carbon intensity certifies the facility.

Our ammonia plant at El Dorado is one of four North American plants to have received such a status. We expect this certification to be integral in our ability to secure sales agreements for our low-carbon ammonia and upgraded product output. Page 14 is an overview of the project at El Dorado. Our partner, Lapis Carbon Solutions, is completing the drilling of a stratigraphic injection well. Lapis is now gathering data to support the EPA in their continuing technical review of our Class VI permit application. Once our project receives EPA approval, we will use the same well for CO2 injections, allowing us to be very efficient. Based on our ongoing dialogue with the EPA, we continue to expect to begin CO2 injections by the end of 2026. Given the impact of U.S. tariff-related price increases and other global economic uncertainties on project costs, coupled with a slower-than-anticipated ramp-up of low-carbon ammonia demand, we have decided to put a pause on our Houston Ship Channel project.

While disappointing, we are excited that we will have approximately 250,000 tons of low-carbon ammonia available for sale out of our El Dorado site by the end of next year. We’re off to a good start in 2025. While we’re making meaningful production and sales volume improvements, we are continuing to grow and optimize our industrial business in order to increase the stability and predictability of our earnings stream. And as I mentioned, we’re on track to begin producing low-carbon ammonia at our El Dorado facility late next year. We plan to continue to invest in our core business to achieve our plant reliability goals. Additionally, we have a number of opportunities within our existing portfolio of assets to grow our profits while maintaining a strong balance sheet.

We will look to make investments in projects that increase our profits and cash flow while managing our leverage at a level appropriate for the uncertain economic environment. Collectively, we believe that these initiatives will translate into significant incremental EBITDA and shareholder value. Before we open it up for questions, I’d like to mention that we will be participating in the following events in the coming months: the UBS Energy Transition and Decarbonization Conference in New York on May 14, and the Deutsche Bank Industrials Materials and Building Products Conference in New York on June 5. We look forward to speaking with some of you at those events. That concludes our prepared remarks, and we will now be happy to take your questions.

Thanks.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Lucas Beaumont from UBS. Your line is now live.

Lucas Beaumont: Good morning. So I guess as we head into May, we’re seeing very strong derivative pricing sort of including UAN, that looks sort of set to peak here in the second quarter. On the other hand, ammonia has sort of been weakening and there’s expectations that the Tampa contract is probably going to shift a fair bit lower from May as well. So I guess with these diverging trends and just considering some of the timings in the order book that you mentioned earlier, Cheryl, I was just wondering if you could give us a bit more color on how we should think about the setup for LXU’s realized pricing here in the second quarter.

Mark Behrman: Hi, Lucas. I’ll take that one. So look, we’re seeing, as you said, good price increases for our UAN product. We’re well positioned to take advantage of that. We’re not fully sold out deliberately so through the end of second quarter, so we can capitalize on that pricing, and that will reflect in our results.

Lucas Beaumont: Great. And then I guess, just given that you’ve decided to sort of pause the Houston Ship Channel project, I was just wondering if you could kind of give us your thoughts now on your updated capital allocation priorities. Is there anything else on the CapEx side that you guys will look to do now to maybe drive an earnings improvement there or is it more back to repurchases and that sort of thing?

Mark Behrman: Yeah. Good morning, Lucas. I think there’s nothing — not a project on the horizon as we sit here today that we’ve committed capital to. We continually look at projects on our existing assets that we can do that will improve the operating results. But as we sit here today, we haven’t FID-ed any of those projects. From a capital allocation standpoint, as always, we’re going to focus on improving the reliability and the EH&S of our existing facilities. And so we’ll continue to do that, which I think as we stated before, is somewhere in the neighborhood of $60 million to $65 capital a year. And then after that, I think we will take a step back and look at investments in other projects, stock buyback and, of course, debt reduction.

Lucas Beaumont: Great. Thank you.

Operator: Thank you. Next question is coming from Kevin Estok from Jefferies. Your line is now live.

Kevin Estok: Hey, good morning. This is Kevin Estok on for Laurence Alexander. So my first one is just — so there’s been obviously quite a bit of talk around deregulation by the administration. And I guess I was wondering whether or not you guys have sketched out or maybe thought about how big of a tailwind or how it could help you guys, I guess, let’s say, related to permitting, etc. I guess many companies that we’re covering are actually saying that the impact is going to be quite minimal. And I guess I was wondering if you guys are thinking about it in the same way.

Mark Behrman: Yeah. Good morning. I would say, it is going to be quite minimal with the exception of the EPA, where we’re having numerous conversations. We did see, I’d say, a slow process before the change in the administration and the change in the head of the EPA and the regional offices. And we certainly saw a pause for a couple of months while they put new people in place to lead all those efforts. But since the time that Lee Zeldin took over the EPA and our new Head of the Region 6 office in Dallas of the EPA took over, we’ve seen a lot more activity and a lot more conversations, which is encouraging for us on our low carbon ammonia project at El Dorado. Other than that, though, I don’t think we’re going to see much change.

Kevin Estok: Got it. Okay. Thank you. And just I guess as a second question, you guys mentioned in the release that there’s potential pent-up demand, I guess, related to UAN at the retail and producer level. And I guess I was wondering if you could give a little bit more color there, certain specific dynamics there? And I guess it’s related to, I guess, higher corn acreages planting season. Just any color there would help be helpful. Thank you.

Mark Behrman: Yeah. Kevin, absolutely, it’s down to the higher corn acres forecast. So we talked about it in the prepared remarks around the USDA in the prospective plantings report forecasting over 95 million acres, and that’s a significant increase compared to last year. But the other compounding factor that we’re seeing in both urea and UAN is the fact that there haven’t been enough imports into the country to satisfy that demand. And so that’s putting strain on logistics, on river movements, demand on rail as well. And we’re all just working as hard as we can to satisfy that demand, and that’s also having an impact on pricing as well.

Kevin Estok: Thank you very much.

Operator: Thank you. [Operator Instructions] Our next question is coming from Andrew Wong from RBC Capital Markets. Your line is now live.

Andrew Wong: Hey, good morning. So, as you’re considering some of these potential upgrade capacity projects, can you just, I know nothing has been committed, but can you just talk about what those projects might look like from a CapEx basis, like how large that they might be? And what kind of margin benefits do you anticipate generally from a project that might increase your nitric acid or AN capacity?

Mark Behrman: Good morning, Andrew. Look, I think that while we’re doing some work to explore some of the expansion capabilities or potentials that we have, I think it’s probably too early for us to talk about the actual cost. We want to finish engineering studies before we sort of give you a gut number. I think that would be the most prudent. And with that, once we get a final or at least a more finalized capital number, then we can sit down and figure out what kind of EBITDA generation and returns there are and does the project even make sense. So we have the capability, and I think we’ve mentioned this in the past, to expand our urea production up at Pryor, which would be great because we’ll upgrade more free ammonia, which we’re always interested in doing to capture more margin.

We have the ability to expand our ammonia plant down at El Dorado to give us more ammonia, which hopefully then allows us to look at possibly expanding nitric acid or AN solution because we think there’s demand, particularly in AN solution. But I think it’s a bit too early for us to be talking about the capital cost to do that.

Andrew Wong: Okay. That’s fair. And then on the Houston Ship Channel project, the decision to delay there, makes sense, everything you’ve laid out. Is there the potential for revisiting that project in the future? And what might need to change for that to happen?

Mark Behrman: Yeah. Look, I think overall, we still believe that over time, there’ll be new demand generation for low-carbon ammonia. So I think for us, it’s really about uncertainty in capital costs right now as things are moving around. And one day we have tariffs and the next day we don’t. And this whole situation, I think it’s – I think everyone is going through that, and you see lots of projects being put on hold. In addition to that, I think there still is an unwillingness from some – from many actually buyers to actually transact at a cost that I think supports the returns on a facility. Now I believe that changes over time. But today, I think we’re not comfortable with that. So I guess the answer would be we’d like to participate either in the current project that we’re in and revisit that if the economics could make sense, and we could certainly put a deal together that would make sense or to actually participate in another project that’s maybe being developed and we can make an investment and maybe even operate or have some offtake or something like that.

So I think we’re open to that, but I think we just got to be very prudent about what project we get involved in and what’s the right timing. So today, I think it doesn’t make sense for us.

Andrew Wong: Great. Thanks, Mark.

Mark Behrman: Sure.

Operator: Thank you. Next question today is coming from Rob McGuire from Granite Research. Your line is now live.

Robert McGuire: Good morning. Just a couple of big picture topics. So Bloomberg reported a couple of weeks ago that China halted U.S. LNG purchases due to the trade war, and it’s boosting supply and lowering gas prices over in Europe. Do you have a view? And if so, could you just kind of share it with regards to, is it better for Europe to import ammonia or LNG from the U.S. and maybe the reasons why behind that?

Damien Renwick: Hi, Rob. That’s a tricky question, I guess. From an ammonia perspective, European ammonia producers will really just be evaluating, okay, what’s the forward outlook on their natural gas purchases and pricing. And then they’ll weigh that up against their own landed price for an import, right? So it’s really a make versus buy decision. And we’ve been in that realm now for a number of years, particularly as Russian natural gas has disappeared from Europe. And I don’t see that sort of changing at all anytime in the future unless there’s some resolution between Russia and Ukraine and then back to Russian natural gas supply into Europe. In terms of LNG, I think it’s much the same really. You’ve got the Europeans trying to import sufficient natural gas to keep the lights on and make sure they’ve got enough gas in the system for power, for residential and industrial use. So — and I’m sure they’ll look to transact upon that at the best possible price.

Robert McGuire: Thanks, Damien. And then any further color on potential legislation over in Europe supporting the use of blue ammonia or CBAM updates, anything you guys are seeing on the ground?

Damien Renwick: No. We’ve seen some positive developments with the IMO recently where they outlined their sort of carbon incentive/tax program as it relates to marine fuels. And so we think that that — it’s rather complex. So once everyone’s had the time to digest what that means, I think we’ll see a continued shift there targeting low carbon fuels. In terms of CBAM, look, I think we’re still on track for the start-up of the transition into CBAM next year. And there’s — we hear rumors about potential delays or changes, but nothing firm that we’re aware of.

Mark Behrman: And while there’s conversation in Europe, certainly the EU with what would the carbon intensity scores of a low-carbon ammonia versus a zero carbon ammonia look like, there’s not been anything finalized.

Robert McGuire: That’s great. I really appreciate it. Just one other last quick one. Are you seeing a bigger disparity in what you’re selling your ammonia at inland relative to Tampa?

Damien Renwick: I think we’re seeing pricing that’s consistent with what you’d expect to see in the middle of season or just after application for ammonia, Rob. So nothing really too far out of the ordinary there.

Robert McGuire: Thanks, guys.

Operator: Thank you. [Operator Instructions] Our next question today is coming from Charles Neivert from Piper Sandler. Your line is now live.

Charles Neivert: Good morning, guys. You mentioned already that you’re delaying some scheduled turnarounds because of equipment and things like that, delays there. Is there any chance that the — some of these delays also leak out into the carbon project at El Dorado? I mean you’re talking about second half of 2026 with all the — and there’s a lot still going on. But is there any risk to the equipment and needs that are there that might get — that might push it out any further?

Mark Behrman: Good morning, Charlie, No, I don’t think so. We’re talking about — I mean some of the main things we’re talking about on the compression facility are compressors. So we’ve — actually, our partner, Lapis has already had discussions about the timing of delivery of equipment and they’re on the precipice basically of making orders for long lead time items. So I think based on delivery times and if they get ordered over the next couple of weeks, I think we’re really comfortable that we have no problem meeting the time line that we talked about, which is the end of next year.

Charles Neivert: Yeah. And also, I mean, I know that they’re obviously — they’re footing the bill for all of the equipment and the build-out. Is there any risk to the deal that you guys have struck between the two of you in terms of what the payout would look like going forward or is it really — it’s strictly based on the payments from the government for the carbon and you’re just getting that whatever piece that you’re going to be getting, and that won’t change. Obviously, their profit does if their costs get higher.

Mark Behrman: Yeah. We have a CO2 sales agreement in place with them. That’s been heavily negotiated. So we’re really comfortable with us being able to receive the dollar per ton of CO2 that we’ve agreed to.

Charles Neivert: Okay. Thanks very much.

Mark Behrman: Sure.

Operator: Thank you. Our next question today is a follow-up from Lucas Beaumont from UBS. Your line is now live.

Lucas Beaumont: Thank you. So just with the shift that you’ve outlined going more towards cost-plus kind of pricing on the contracts. So I just wanted to — I mean, you’re targeting 35% by the end of this year. I guess two things. I just wanted to understand, where would you like to kind of get that to, I guess, over the medium term? And then secondly, sort of what has your assessment been on how that’s going to kind of impact your margins over the cycle? So I mean, I’m sure it’s going to reduce the volatility in your earnings year-to-year. But I guess are you having to give anything up over the cycle, do you think from a margin perspective to get that or would it be similar?

Mark Behrman: Yeah. I think our commercial team does a really good job of trying to optimize our production. So you will see swings year-to-year and contracts, even on the industrial side where we have contracts, I mean, they roll off and we’ve got to make a decision on whether we want to re-up a contract for a longer term or we think the spot market in the ag markets based on our views, are better play, at least for the next 12 months, 18 months, whatever it might be. If I had to think about what would be an optimal mix, certainly 50-50 is something that — so that 35% moving up to 50% is probably something that would make sense for us. I think in any given year or over a given couple of years, you could see that move up to 60% or you could see it move down to 40%.

So probably somewhere between 40% and 60% industrial with the balance obviously being ag. From a margin perspective, absolutely, you’re right. It’s going to give us much more stability and comfortability on what our earnings profile looks like. And from a margin perspective, it really just depends. I mean it’s — if you look over a 10-year period on some of the products, the same conversations at some point that customers who are used to maybe pricing off of a Tampa index or something like that, and we’d like them to now price off of a gas plus contract. And the commercial team, again, does a really good job. And let’s go back over the last 10 years and look at how pricing has — the actual pricing was over the last 10 years versus if you went gas backed or cost plus and what that might look like.

So I think we’ll — margins overall over a period of time should actually be relatively similar. We will lose where there’s a huge spike in fertilizer pricing since we — like we saw in 2022, but we are trading that off for a lot of downside protection in our earnings.

Lucas Beaumont: Great. Thanks. And then I just wanted to follow up with one more on the cost increases on the equipment side of the maintenance that you sort of called out. I guess just maybe, I don’t know if you’re able to size that for us relative to your cost base in 2024. I mean if the tariffs that we’re in — I’m assuming this is a tariff driven, if they were in place today, I guess, how much of a cost impact would you expect kind of on that base?

Cheryl Maguire: Yeah. Hey, Lucas. We took a look at that. On the expense side, water treatment chemicals, things like that, probably looking at maybe $1 million over the year on the expense side. On the capital side, we’ve got the majority of our equipment kind of ordered. And so thinking maybe could see $2 million there. That’s best guess today. It’s a moving target.

Lucas Beaumont: Great. Thank you.

Operator: Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to Mark for any further closing comments.

Mark Behrman: Great. Appreciate everyone joining the call today and appreciate everyone’s support. So if there are any other questions, feel free to give us a shout, and we’ll have a conversation and hopefully answer your questions. Thanks, and have a great day.

Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.