LSB Industries Inc (LXU) 2017 Q1 法說會逐字稿

Greetings, and welcome to the LSB Industries First Quarter 2017 conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Kristy Carver, Vice President and Treasurer. Thank you. You may begin.

Thank you, Audrey. Good morning, and please note that today's call will include forward-looking statements, and because these statements are based on the company's current intent, expectations and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially.

As this call will include references to non-GAAP results, please reference the Press Release section 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 would like to go ahead and turn the call over to Dan for opening remarks.

Thank you, Kristy, and good morning, everyone. We appreciate your time and are pleased to have you on our call.

During our call this morning, we'll cover our 2017 first quarter results and, as importantly, provide updates on plant operations and the nitrogen markets. Mark Behrman will provide a comprehensive review of our liquidity and capital structure, and we are increasingly more positive on the company's outlook and our position in the nitrogen market.

Our sales were approximately $123 million in the first quarter of 2017 compared to $99 million in prior year's first quarter, an increase of approximately $24 million. This growth occurred despite a significant decline in selling prices. Product sales volumes increased significantly as our sales team captured additional market share and our plants operated well. We look for this trend to continue in the second quarter.

In our ag markets, UAN and high-density ammonium nitrate volumes were up approximately 67% year-over-year and ammonia sales volumes were up approximately 21%. Our sales of industrial ammonia were up approximately 36,000 tons over last year's first quarter. This is primarily due to the pipeline sales of ammonia from our El Dorado facility. Nitric acid sales to customers, other than Covestro, increased approximately 82% from prior year.

The mining market continues to have modest increases in low-density ammonium nitrate volumes, while ammonium nitrate solution sales volumes declined due to slower coal business in the Appalachian and nearby markets.

Our cost-cutting activities, along with our operational improvement activities, continued to generate tangible financial benefits. The first quarter's EBITDA was higher than our internal expectations. Mark Behrman will provide further discussion on our results in his financial review. We do expect further improvement in our operating results and cash flow as we move into the second quarter of 2017.

As we noted in last quarter's conference call, we expect to recover cost in 2017 that we incurred during 2016 as a result of warranty claims. The final amounts and final timing are yet to be negotiated. However, as we mentioned earlier, we believe we are in a strong position to recover amounts from the contractors.

I'll now turn the call over to John Diesch to provide a brief recap of our operating performance in the first quarter and our view of 2017 onstream rates. John?

Thank you, Dan. Good morning. We continue to have good performance in onstream time at all 4 of the LSB plant. At El Dorado, the ammonia plant continues to operate above 1,300 tons per day. The plant had a 90% onstream time during the quarter. As stated in the 2016 fourth quarter earnings call, we took the ammonia plant down in early January for 8 days to replace and upgrade the steam control system on the synthesis gas compressor turbine. The ammonia plant had 98% onstream time the remainder of the quarter. The new nitric acid plant had 96% onstream time during the quarter. Most of the downtime was for a scheduled catalyst change, with a couple of short outages to do some minor maintenance. Engineering has been completed for the new N2O abatement vessel. They are currently going out for bid to companies that will fabricate the vessel.

The Pryor Facility had ammonia plant onstream time of 96% for the first quarter, with urea and UAN production 103% of plan. The rest of the upgrade plants are operating well to meet customer demand. The Cherokee facility also operated very well with 99% onstream time for the ammonia plant, with the urea and UAN production 109% of plan for the first quarter.

The Baytown nitric acid plant had 100% onstream time for the first quarter with production on plan. I am very pleased with the performance of the plant. As a group, we continued to move reliability programs forward with training and implementation of precision maintenance at all our facilities. We have created reliability teams that are working on specific areas in equipment that we have identified for improvement.

Now I will turn the call over to Mark to discuss the financial results of the first quarter.

Thanks, John. Please turn to Page 10 of the presentation. It provides a consolidated summary statement of operations for the first quarter of 2017 as compared to 2016. In reviewing our continuing operations, total net sales and gross profit increased for the quarter, primarily related to increased production and sales volumes at each one of our facilities, which were partially offset by a decrease in average selling prices of our agricultural products.

Gross profit improved almost $18 million versus the first quarter of 2016. However, the first quarter of 2016 includes a onetime consulting fee expense of $12 million, making the true improvement in gross profit approximately $6 million, despite additional depreciation expense in the first quarter of 2017 of $6.5 million.

In addition to the increase in sales that I just discussed, gross profit increased from improved production that gave us better absorption of fixed cost at all our facilities, lower overall plant fixed costs and lower overall feedstock costs.

SG&A expenses decreased by $400,000 as we continue to focus on cost reductions. However, Q1 2017 includes about $1 million of additional legal and group insurance expense regarding various outstanding claims.

Interest expense for the quarter increased approximately $10 million over Q1 2016. As I outlined last quarter, the increase reflects the recognition of interest expense associated with debt used to fund the expansion of our El Dorado facility that we've been capitalizing until the new ammonia plant became operational midyear 2016, at which time we began recognizing the interest on our income statement.

Lastly, adjusted EBITDA was $20 million for the quarter, an $11.7 million improvement versus Q1 2016 adjusted EBITDA of $8.3 million. Please refer to our reconciliation of non-GAAP measures beginning on Slide 17 for further information on noncash and onetime costs during the period.

In order to give further clarity on the results of the quarter, Page 11 bridges our consolidated adjusted EBITDA for Q1 2016 to Q1 2017. As I mentioned earlier, lower selling prices of our products was a big drag on EBITDA, as they had a negative impact of almost $13 million as compared to Q1 2016. However, improved sales volumes of products for the quarter provided an additional approximately $18 million of EBITDA. The sales volume increase was driven by better onstream rates at Pryor and Cherokee versus Q1 2016, improved sales of HDAN as we've continued to broaden our distribution of that product, increased ammonia sales as the new ammonia plant at El Dorado was producing during the quarter and was not yet in operation in Q1 2016, and increased sales of our acid products.

Lastly, as we've discussed previously, a significant benefit to the new ammonia plant at our El Dorado facility is producing our own ammonia versus previously purchasing it. During the quarter, we picked up approximately $6.5 million in EBITDA versus the first quarter of 2016 by producing our own ammonia.

The right-hand column of this page reflects normalized EBITDA, which assumes that product selling prices were the same in both the first quarter of 2017 and the first quarter of 2016. While we realize that product selling prices move with general market conditions, this analysis provides a view of the operational improvement activities that we have undertaken and the inherent earnings power of our assets. The year-over-year EBITDA improvement for those operational improvements was approximately $24.4 million, showing significantly improved operations.

Looking forward to the second quarter, given our strong order book for fertilizer products, improved ag selling prices over prices we received in the first quarter of 2017, the continuation of the strong operating performance of our plants that John previously discussed, and our continued focus on expense control, we expect improved EBITDA versus our first quarter of 2017.

Page 12 outlines our capital structure as of Q1 2017. We ended the quarter with $45 million in cash. Additionally, our ABL facility was undrawn and had approximately $45 million of availability at quarter end, giving us total liquidity of approximately $90 million.

As a reminder, our ABL availability varies based on accounts receivable in (inaudible) an inventory levels.

Total outstanding debt at the end of the quarter was approximately $424 million, excluding the unamortized discount and issuance costs associated with our debt. We also had outstanding preferred stock of approximately $167 million, including approximately $28 million in accrued and unpaid dividends.

As I previously stated, for 2017, we currently expect to continue to accrue the dividends on our preferred stock, as we do not meet the 2:1 fixed-charge coverage ratio needed to make restricted pings. However, assuming current operating rates continue and market fundamentals continue to improve, we would use excess cash to reduce leverage either through repayment of debt or the payment of accrued dividends.

Lastly, I have previously discussed the sale of noncore assets. We are in the later stages of successfully divesting several of these assets and anticipate that the process will be complete at the end of -- by the end of Q2 2017. We expect to generate net proceeds, net of any debt on these assets, of between $15 million to $20 million.

Moving to Page 13, we outline our free cash flow. Cash from operations provided approximately $8 million for the quarter. That includes an approximate $7.3 million use of working capital from an increase in accounts receivables, as our sales continue to grow.

Additionally, cash flow from operations includes the semiannual interest payment on our senior secured notes. That will occur every first and third quarter of each year. Capital expenditures for the incurred -- capital expenditures incurred and paid during Q1 2017 were approximately $8 million, with another $6 million of capital expenditures incurred in previous periods and paid in Q1 2017.

We continue to expect capital expenditures of $30 million to $35 million for the full year of 2017, as we continue to focus on enhancing the safety and reliability of all of our plants.

Net cash used for financing primarily reflects regularly scheduled debt payments in our commercial and insurance premium financing. We expect this to decrease over the year with the sale of certain noncore assets and the repayment of the related debt.

Lastly, as I mentioned in the last quarter, for the full year, we expect EBITDA to more than cover the high end of our forecasted ranges of $35 million in CapEx and $35 million in interest expense, and we anticipate positive free cash flow for the year.

Now I'll turn it back over to Dan to wrap up.

Thanks, Mark. As you can tell, we have an upbeat outlook for 2017. We expect growth in sales volumes and improved market selling prices as compared to the second half of 2016. Once we get through the first half of the year, we anticipate some seasonal selling price moderation. However, we don't expect to see selling prices comparable to what we experienced in the second half of 2016. We believe the market now realizes the low selling prices in the second half of 2016 were unsustainable. Of course, we always have the unknown aspect of Chinese urea exports.

North America is becoming more self-reliant because of the recent capacity additions, and we believe the market has digested the new capacity additions that are in operation and will further integrate new additional volumes in the North American supply chain. We are confident with our financial position and operational view for 2017, and we believe 2017 will be a transitional year from 2016 and earlier years.

We expect to be at full operating rates for 2017, and will continue to focus on reducing costs. As Mark indicated in the financial review, we believe our operational cash flow will more than cover our capital spending needs and interest costs. Any excess funds will likely go towards further delevering our balance sheet.

Lastly, we'll be attending several conferences in the next few months. In May, I'll be attending the BMO FARM to AG conference in New York. And in June, Mark will be at the Avondale Partners Industrial Conference in New York and the Goldman Sachs Leverage Finance Conference in New Orleans.

That concludes our prepared remarks. However, before we move into questions, I'd like to briefly comment on a process we announced in November to evaluate all potential strategic alternatives available with the company. The process is ongoing and will not be giving any update on the process until the board completes its review and approves a definitive course of action or concludes the review process.

I'd like to remind everyone that the purpose of today's call is to discuss our first quarter financial results and outlook for 2017. So thank you in advance for keeping your questions to that subject.

With that, we'll open up the call for questions. Audrey?

(Operator Instructions) Our first question comes from the line of David Deterding with Wells Fargo.

This is Tyler Gately on for David. First, just a quick kind of housekeeping item. In your press release, you mention capital additions for approximately $8 million in the first quarter. When I look at your 10-Q, the expenditures for PP&E were about $14 million. Can you reconcile that?

Yes. So in our-- when you're looking at the $14 million, that's actually cash paid related to capital expenditures. So as I mentioned in prepared remarks, $8 million was for CapEx incurred in the first quarter, $6 million was for CapEx incurred in prior periods that were actually payout of accounts payable in the first quarter.

Okay, and that kind of brings me to the follow-up. I mean, would there be, I guess, that -- just that $6 million impact to your full year guidance of $30 million to $35 million? So kind of all in, cash out the door from year-end cash balance of max $41 million?

Yes. So it would be $30 million to $35 million of CapEx incurred in 2017, and then the other $6 million is just a normal accounts payable that's paid in the normal course of just doing business. So if you want to look at it from a cash standpoint, I guess it would be $30 million to $35 million, plus another $6 million related to CapEx.

Perfect, perfect. And lastly, I know you can't update on the process for the strategic alternatives, but now that the notes are almost 2 years now, I mean, how are you guys thinking through handling the secured note maturity?

Well, I think, as you mentioned, they're more than 2 years out, and I think we see a call premium move down to 109 -- and 101.9 come August -- first part of August of this year. So I don't see us doing anything before the first of August this year. But we have to evaluate the credit markets. We may go sooner than later, depending on what the credit markets do. Or as you said, we have 2 years out. So I think, certainly before we get 1 year out, we'll be taking a look at that.

Our next question comes from the line of Aaron Steele with Feltl and Company.

Just wondering if you could comment on the order book through May. Some of that pricing, maybe that -- in that order book, how that's paired throughout the quarter and how you kind of see that progressing, as you transition in the second half year.

Sure. Well, first of all, the order book we have for the first quarter, we feel pretty comfortable with, and a lot of those orders were secured earlier. And we haven't seen the decline in pricing on ammonium nitrate that, perhaps, you've read about in the publications for urea. So we just haven't seen that. But we're always cautious. There's still some book to take for June. We really haven't started selling into the second half of the year yet. So it's a bit too early. Naturally, we expect prices to moderate as we go out of season, and the third quarter, historically, for the nitrogen business, is the slowest quarter of the year. So I think it's a little bit too early for us to call the second half pricing. But I did say in my prepared remarks, we don't expect pricing to go to the low levels that we saw in the second half of 2016. We believe it'll be above 2016 low pricing. So as I said, we're upbeat about our prospects for the total year.

Okay. And then are you seeing any pressure in the market place right now? You know some recent plant start-ups, are you seeing those tons being marketed in the market right now?

So I think that's out there. Those plants are not starting up in our particular area. We've seen more market pricing related to weather related events. As you might imagine, with wet weather, ammonia cannot be incorporated into the soil or knifed in the soil. So we've seen, with the rains around -- all around the country, there's been a slowdown in ammonia application rates, which would lead to higher application rates of UAN and urea. So we've seen a little bit of pressure on that. And I think everyone is expecting Tampa ammonia to move down a bit maybe $10 a ton or so, and we expect that to happen. But that's part of it is seasonal, but I do think -- we saw an early ammonia run in the beginning of the year -- beginning of '17, and now we see the ammonia run cooling off a bit because of weather-related events. But as I said, our UAN book looks good, and our ammonium nitrate book looks good as well. So we don't sell urea. So we haven't experienced the underprice pressures on that. But naturally, you would expect some carryover to the products that we sell. But so far we're cautiously optimistic about second quarter, and then we'll have to wait and see how prices reset after the season going into the third quarter.

Okay. And then in what areas are looking to reduce some of the plant expense you called out in the presentation there? And then how much room do you have to reduce some of those plant expenses and freight costs?

Well, I think one of the key points is one you just mention is freight and logistics costs. We've got to focus -- we have close to 800 railcars, and we've got to focus to manage those better and get a better handle on logistics and turning the cars quicker, reduce freight rates, same for trucking rates, and material handling in general. So there is some work and some improvement we can get there. There is other common buying of turnaround expenses, other materials for plant operations, commonality amongst the plants to get some cost savings. So there’s several different things that we anticipate doing. We also look at reducing SG&A costs further. There are some areas that we've been focusing on and becoming more efficient, efficient with, so we'll look to continue that. But I don't think we're giving a specific number here today on the amount, but we believe it'll be a meaningful reduction of cost as we progress through 2017.

Okay. And then maybe just one more on the HDAN side. You mention in the press release how the -- you'd be looking to store some of those -- that tonnage going into 2018. What kind of inventory build can we expect kind of progressing throughout '17? And then what kind of demand increases are you preparing for then in 2018?

Well, what we would anticipate doing it is in the -- in the early fall months or so, September, October and even November and December, we anticipate manufacturing ammonium nitrate and then moving it out to our 2 facilities at 1 at Cherokee, the down one Cherokee, and then the bulk-dry warehouse at Pryor, and then putting that material in position before the season starts. And it's likely we would build roughly 30,000 tons or so of ammonium nitrate at those 2 -- combined at those 2 facilities to sell into the season. As you might imagine, last fall, when our plant was down, when our nitric acid plant was down, we were unable to build much inventory to go in those facilities, and we sold it directly out of the plant in El Dorado. But this year, we would look to do the same, but we would look to have roughly 30,000 tons positioned in advance to sell into those markets direct when the season kicks off in 2018. So that's our view of it, and that's what we currently anticipate.

(Operator Instructions) Our next question comes from the line of Hudi Miller with Brookfield Asset Management.

Two quick ones. I guess, when we think about your sensitivity grid, (inaudible) is there relationship between any downstream products to change if the ammonia prices changed? Or should we kind of still continue follow this grid, where yesterday's prices comes out like $100 million to $150 million?

Okay. I think that the sensitivity grid, if you want to call that, in our materials on Page 16 -- and our materials provides a general indication. I mean, to the extent you have a short-term correlation, that's not a historical trend. I think it's just that a short term. This is more of a longer-term view over time that if those correlations exist, which we think they will revert to the norm, that, that grid holds true, and we believe it still holds true. But if -- for example, if some of the upgraded products get out of correlation for the long term, we would look to update this. But right now, we believe that they'll hit the long-term correlation that they historically have had, maybe with a little bit of discount that we've already reflected in here. So we believe this holds true and will continue to hold true. And if it looks like they don't, then we'll adjust it. I think, at one point when they weren't holding true, we took this sensitivity grid out, because they weren't holding true. But right now we believe, over time, that is a long-term view and trend that would expect to continue.

And does this also incorporate the Coke the (inaudible) for the excess ammonia at El Dorado?

Yes, it does. Yes.

Okay. And then, I guess, one last question. Could you guys just talk about, given the wet weather that we've had here and the lack of ammonia application, how do you think about what that means going forward? Is there some like late demand that will come through? Or is all that product ready at farmers, retailers, distributors' ends, where the next 2 months or application and plants includes that is already in view?

Well, I think it's going to be a mixed bag, and I say that for the following reason. Number one, you'll see some side-dress ammonia applied once the corn crop emerges. Some guys will side-dress ammonia later in the year, and we do expect some of that to grow. But then you also see switch-over from urea and UAN, and in the western core market, we're seeing an increase use in ammonium nitrate being applied after post emergence of the corn. So that's a new trend that's been occurring over the last 2 to 3 years that seems to be increasing in certainly a market that we're continuing to serve. So we would expect that as well. But I think it'll be a mixed bag. There is a chance for some ammonia. But once you get the crop in, guys typically don't like to do a lot of side-dressing of ammonia, but it will occur, so it'll be a mixed bag. But it'll be -- it'll probably trend towards less ammonia and more of the upgraded product. Just how I would characterize it.

I guess, just a follow-up to that. In terms of the initial planting and additional application, is there still some late demand due to the weather?

Well, I think most people have bought their first round of nitrogen. I do expect some demand coming up here in the next couple of weeks or so that we would expect where guys are reloading after their first volumes have gone out. But I wouldn't say significant late demand. Most folks have procured their nitrogen for the season, and we're talking about volumes that would be supplemental volumes versus their base loading of their nitrogen needs.

Is there a range to think about what percentage that is on side growth versus additional applications?

Yes, at this point, I don't have a prediction. It's really local markets, and I don't have prediction on that.

Our next question comes from the line of (inaudible) with (inaudible) Investment Partners.

I was wondering whether you could comment at all on any potential erosion you're seeing in the Corn Belt premium going into second half in the next year. Or do you guys think that the historical relationship holds?

Well, I think, so in second half of the year, as I said earlier, we really haven't started selling in the second half of the year yet. So I don't know the answer. I don't know the answer to the question. But I think that price premium is there, the distribution assets are there. Whether it'll hold or not with more inland producers coming online, I think, is yet to be determined. I know there's a new plant scheduled to really come online here in the second of the year, the OCI plant, and we'll wait and see. Although I'll be -- we don't necessarily sell into the Illinois, Iowa area, Indiana. So whether that premium holds in that area versus our markets that we sell into was -- is yet to be seen. But I think that's to be played out. So I don't have an answer on that.

Got it. And then finally, are you guys still seeing Chinese urea asset in marginal prices for, well, urea now and nitrogen in general? Or how should we think about that?

Well, they've always been -- they've always -- Chinese urea imports have always had a significant impact on the overall nitrogen market. And to the extent that China decides to export and it comes into the Gulf area, we'll continue to see that. But I don't know if we're calling the marginal producer, but clearly, they have an impact, and you have to look at what's the pricing. If we pricing at levels we saw last year, I think those imports will stop. But as I indicated in my comments, we don't see prices going up. So we would expect Chinese urea imports to continue. Whether they're the marginal producer or not, I'll -- I think we have to wait and see. But as I indicated, we don't sell a lot of urea. We sell null urea in fact, but it does carry on of some of our other products.

Ladies and gentlemen, that does conclude our question-and-answer session. At this time, I'll now turn the call back to your President and CEO, Dan Greenwell, for closing comments.

Well, thank you, everyone. We appreciate your time on this morning's conference call. We look forward to updating you on our next conference call in July, and hope you have a great day. Thank you so much.

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