Hello, everyone. Welcome to the Gabelli & Company Fireside Chat with LSB Industries. I'm Spencer Sebely, an analyst here. I'm just gonna read some important disclosures and then we'll get right into the call. Please be advised that this event is being recorded. This presentation is for information purposes only and should not be construed as investment advice or solicitation to invest. Past performance does not indicate future results. Investing involves risk, including loss of principal. Gabelli Securities, LLC is a member of FINRA/SIPC. Gabelli & Company Investment Advisers, LLC is an SEC registered investment advisor. We'll also be doing a Q&A section at the end after Bob and Mark Behrman, the Chief Executive Officer, talk for a bit. Please just submit your questions at the Q&A box on the bottom of your Zoom screen. Yeah. Bob, Mark, you guys wanna take it away? Appreciate it. Thanks, Spencer. Appreciate it. Thank you all for joining us. The purpose today, we're fortunate to have Mark Behrman here, Chief Executive Officer of LSB Industries, is really to kind of help people focus on, like, the 36,000 foot view here, right? The LSB as a corporation has substantially changed, it's been a huge evolution. We think that today it's really an interesting company that's extremely well-positioned, that has a very different background. It really has been a transformation. That's what I really want to do, talk about what that transformation is, what we think is a huge opportunity set in terms of valuation being very discounted, a strong balance sheet, a huge opportunity set in front of it. They've already done things that transform the business and are positioned to really continue to be opportunistic and grow from here. With that, I'm gonna ask Mark to start. I asked him to give a little history, and that probably even starts in 2014 when the two of us had breakfast in a little diner in Oklahoma City. Mark had just joined the company. You know, I have the good fortune of knowing Mark for a long time and have history here. Thanks, Bob, and good morning. Bob's right. I remember that breakfast in Beverly's, right, in Oklahoma City. You know, my background for almost 30 years actually was an investment banker. Oh, well, you did something odd to a change. That's true. Okay. I got to see a lot of different businesses, almost exclusively in the industrial sector. LSB actually was a client of mine for 10 years, and in 2014, I joined with the idea that, within a year, I would transition into CFO. At the time, kind of an interesting story. At the time, between the time I accepted and the time that I actually walked in the door, we had an activist situation. Starboard approached the company. The company really didn't know how to deal with that particular situation. I spent six months working with Credit Suisse on dealing with our activists. That was the first six months. You know, until I became Chief Financial Officer, which happened in mid-2015, I led investor relations and then started a corporate development effort. In 2015, June of 2015, I took over as chief financial officer. Just for some background, the company had announced a very large expansion project at our largest facility, which is in El Dorado, Arkansas, where they were going to build a brand new ammonia plant, brand new, large nitric acid plant, nitric acid concentrator, cogen facility, and then some infrastructure. The original budget was $520 million, which was a large project for the company. I would say two weeks after I took over as Chief Financial Officer, I realized that there was a cost overrun. I think people were surprised at first, the original cost overrun after two weeks was maybe $50 million or $60 million, the company had a balance sheet that could support it. more digging, unfortunately, the deficit grew larger and larger. Right. There was a change of management in September 2015. The board decided to make a change at the Chief Executive Officer level. We had a board member that came off to be interim Chief Executive Officer. Then after three months, he became permanent Chief Executive Officer. He and I went off to really figure out how are we gonna refinance the project, shut down the project, what we're gonna do, right? Let me stop for a moment and put that a little bit in context from an industry point of view. The industry saw opportunities to build out capacity. There may have been specific issues with LSB probably for sure, but there was industry-wide issues, right. There's CF doing the Donaldsonville, and there's been cost overruns tremendously. All these things were somewhat part of the process where the industry got a little ahead of itself, and it was expansion and all these kind of things. Yes. I would say two points on it. The basic premise of us doing the project, basically, producing ammonia versus buying ammonia was spot on. It made a lot of sense. Right. The industry, back in 2012, 2013, saw that natural gas prices, which is the primary feedstock for ammonia, really, were starting to drop precipitously. Primary reason was fracking. Lots of expansion. There were probably 36, and this is important for a conversation I'm sure we'll have later, but 36 different ammonia plants announced, new builds, expansions, all in that 2012, 2015 timeframe. At the end of the day, seven got done. We were one of seven. Everyone had cost overruns. Right. Everyone else could support it with their balance sheet. We unfortunately couldn't. Let me digress again there too. The concept made a huge amount of sense. Yeah. of course, that's where we are today. Yeah. That opportunity and that differentiation is substantial and identifiable and quantifiable, and that's part of why the cash flows that you have today are there and probably sustainable. The concept was right. Absolutely. Execution, you know, was too many people in the door at the same time, so. Yeah. I think project management. Okay. The company had done smaller projects. $520 million complex project. Yeah. Right. Needed a whole different level of oversight and management. Yeah. I think, you know, it's easy to play Monday morning quarterback, but probably could have been done differently. Right. You know, fast-forward, we build out this facility. Before we do that, as I said, we had to really determine when they made a change of Chief Executive Officer, did it make sense to continue, or how are we going to fund the gap that we had in the cost of the project? We looked at selling the facility. We actually had another business. Our company had a very good and profitable HVAC business. They were a manufacturer of specialty HVAC products. Right. We looked at could we sell that? You know, again, my previous work, pointed me to the direction, and I had relationships with folks that were obvious buyers. Would we sell another plant? Could we do a structured financing? Ultimately, everyone knew that the company was in poor shape and tried to take advantage of it, right? Selling assets wasn't gonna make sense because we were giving them away. Right. We did a structured financing at the end of 2015, where we raised $210 million of preferred stock and another $50 million in tack-on notes to the publicly traded debt that we had outstanding. That was done with a group called Eldridge Industries. Away we went. We finished the project. Actually the potential buyers and the likely buyers of the HVAC business then came back and said, "Okay, we're only kidding. We'll give you a fair value for that business." We wound up selling it in mid-2016 for about 13 x trailing EBITDA. It was a really good transaction for us. At that point then, we were solely a nitrogen chemical player. The plant came up right before we sold that HVAC business in 2016, the ammonia plant. The rest of the plants had come up in late 2015. Now everything was up and running, and we were working kings out like you would do in any store build. So at that point, you know, we looked at the assets and said, you know, one, we have a holding company because I had a lot of businesses at one point in time, so we need to collapse the holding company, save on expenses, and rationalize all the expenses. Then the company really had gotten into the nitrogen chemical business through a series of acquisitions and never integrated those plants. They really ran standalone. There was no EVP of manufacturing. There was no common logistics, no common procurement. Right. Or consolidated, anything like that. I liken it to, we were now private equity investors that bought a family-owned business in a public arena. Right. We went off to do that. Along the way, I think the board, you know, wanted to see whether selling the business made sense or not. We actually ran a process. We had some interested folks, but quite frankly, the assets were not running very well and were not very efficient. The prices that we got for the company were not very attractive. Right. We made the decision at that point to really pull back and roll up our sleeves and really hunker down and focus on turning around the business. At the end of, I'd say mid-2018 towards end of 2018, I had already started to get involved more in the business as more Chief Operating Officer than Chief Financial Officer, although still retained the CFO title. The end of 2018, the Chief Executive Officer that they put in place, decided that, his contract was up, and it was time for him to go home. He had never moved to Oklahoma City and to do something different. The board asked me to step up, and take the Chief Executive Officer role, which I was flattered, I really wanted to have a conversation with the board, which I think they were surprised about. I have a great relationship with our board, and I did at that time too. The real focus was, look, you want to sell the company, you know, we can do that. It's kind of unexciting. I think there's a lot of value creation by turning around this company, but it's gonna take two to three years, four years to do that. Right. We need to get our manufacturing rates up, right? In the chemical business or quite frankly, in the petrochemical business, anytime you have big plants like that, you have a lot of really sunk-in fixed costs, a lot of fixed costs that whether you make 1 ton or 400,000 tons, need to be spread out, right? Getting rates up meant we were more reliable, but also more profitable. Right. We went off. The board was very supportive of that, said, "We get it, you know, go off and turn around the company." I would say over the next 12 to 18 months, we wound up changing over, or I wound up changing over a bunch of the senior management team. Right. The next level. Right. You know, my philosophy really, as you know, Bob, is really flat organization, no politics, and really just get things done. You know, there's hurdles in every part of the business, and we gotta figure out, you know, how do we get around those hurdles or jump over them or run through them or whatever it's gonna be. That's what we did. You know, I went out and, with the help of others and some board members, recruited some really great, senior leaders of the company. Right. People that are really great at what they do. Right. My job was to really provide guidance and support and the resources to get that done. Right. We did that. If you know, kind of point of reference, in 2017, 2018, our operating rates for our ammonia plants, since everything starts with the production of ammonia, were between 75% and 80%, which is really poor. The last three years, we've run between 90% and 92%, and there's still more room to improve, and that's our real focus. Where we wanna be is 95% consistently. A lot of low-hanging fruit in the beginning to increase that rate. Not much low-hanging fruit left. What it really is, it's not a lot of capital. It's not, you know, we've got to spend hundreds of millions of dollars to get there. You have to put in the right policies, procedures, PM programs, preventive maintenance program that, you know, have a really fulsome work order management system, right? That really drives everything. It's really just blocking and tackling to get it done. You know, you won't see going from low 90s just to 95%. Every year, we should see some incremental improvement for the next couple of years to get there. Right. We did that first. The commercial strategy came next, because if you can't produce the product, you don't have product to sell. Right. Historically, I think the company was really focused on selling tons and less focused on maximizing price. I don't know why. Right. We're all about optimizing our production. We can sell, as most people know, half of our business we sell as fertilizer, or half of our production. The other half is non-fertilizer, either as a feedstock for an industrial product. Right. To the mining industry. Right. Our commercial team really needs to optimize the product as to where we're gonna get the better pricing in each of those markets. Right. I brought in someone to lead that. He's done a phenomenal job, as has our head of manufacturing. Yeah. To really change the whole complexion of our commercial strategy. Once we did that, and that occurred, I'd say, 2021 and, in the first half of 2021, you know, pricing started to really improve in our industry, which is, of course, important. The whole financial complexion of the company changed. We were then able to convert that preferred that I referred to. You know, sat down with the preferred holder, talked about where we're going and where the growth opportunities are. Right. They were really excited about that, so they were happy to convert. Right. Into equity. That unlocked, you know, value there because the credit agencies, credit rating agencies really looked at that preferred as debt. Then we were able to go and refinance the balance sheet in September 20 21 and lower our interest rate by almost 350 basis points. That's a critical thing in my mind. Today, the company financially is a very different company than it's been. Yes. Therefore, people may even know the company and say, "I know that company." They don't, right? Therefore, the balance sheet today is really something that enables you to have all those operational advantages, to have that cost advantage of being in North America to really execute on that move. Right. Absolutely. Right. What's the balance sheet look like today? Yeah. We've got $700 million of gross debt, but we've got $450 million or so of cash on the balance sheet. Who would have thought you'd say that? You know, right. I remember when we had $50 million - $60 million. It's been a tremendous transformation financially. Right. EBITDA last year was over $400 million. We had some unprecedented pricing. Right. We're still, you know, base year EBITDA for our business is $200 million. Yeah. Plus or minus a little, depending on turnarounds and things like that. Yeah. Right. The market cap and the market is not recognizing that fact evaluations including very discounted given that kind of worst case situation in terms of what cash flow generation. We believe so. For sure. That makes sense because people have ideas. The other thing is, of course, there's so many moving parts in your business, right? Pricing has moved, and of course, the last year has accentuated all those things, right? You pointed out last year was a phenomenal year, and you know, may not be. It's clearly not going to be that every year, maybe again. All those things, people don't get the sense, I think, in terms of base case, what you can do and upside what you have, and more importantly, probably growth opportunities that you have in many different ways, and still plenty of levers to pull, to execute, to continue to, at the margin, substantially improve the business. Yeah, I'm really excited about the prospects going forward for our business. Yeah. Yeah. Why don't you tell us, you know, a couple of those that are...? Yeah. I mean, first off, I would say, 'cause I think it's important, I mean, it's no fun turning around a business, right? I mean, you have the parts that, you know, look at what we did and everything, but you know, it's a lot of heavy lifting. Now I think to your point, we're in a position to let's go have some fun and let's grow the business, right? Right. What are the growth opportunities? I mean, internally, so just organically, irrespective of where the price is in the marketplace. Right. As I mentioned, we can improve our operating rates from kinda low-90s to mid-90s. You know, at mid-market pricing, that probably generates another $25 million a year in EBITDA. Right. We intend to capture that. We've also got what we'll call margin enhancement projects. Those are projects that produce or that increase production capacity, right? Because we have a finite production capacity with plants like that. Right. We operate. Right. Those margin improvement projects could be additional storage or installing loading racks in one plant site that we don't have them, and therefore, we can capture the logistic savings between one plant, production versus another. Right. It could be, increasing our ability to load so that we can be more efficient and faster, or without, could be self-loading racks, where we don't need our own people to do that. Yeah. There are a lot of different projects that we're working on. Keep in mind they all have to have a really optimal return or they're not worth doing, right? There's a big vetting process that we go through. We think that, the projects that we're sort of working, actively working on, you know, can probably generate another $10 million-$15 million of annual EBITDA. Right. Again, $35 million-$40 million just from that. Right. The last I would say, that takes us into a whole another category, and that is carbon capture. We do have two projects that we're working on, and we're big believers, and we can talk about why. At our largest facility in Arkansas, we partnered with a company called Lapis Energy that are experts in I'd say subsurface geology, right? That's not our game. We don't wanna operate injection wells or anything like that. But that's their background and expertise. We're going to put on carbon capture equipment, so we'll capture and then liquefy CO2, where we'll initially capture about 450,000 tons of CO2, and we'll inject it into a Class VI sequestration well on our property. Why is that important? It's important because many of the projects that are being talked about. We'll have to sell CO2 to someone who then is gonna transport it via pipeline 15 mi, 20 mi, 50 mi to get to a sequestration site that a lot of folks are building. One, I think the EPA, I don't know this, but my guess would be the EPA will have to do a lot more rigorous due diligence on the sequestration site that's got a number of CO2 emitters coming in at potentially different pressures. What they're really focused on is the well itself and the casing of the well, right? They don't want the CO2 to get out. Right. Otherwise, it's not permanently sequestered, and there could be other consequences. Our project's simple. It's on our 1,400 acres that we own there. It's good to be lucky. We have two great saline formations right below our property. It's actually below our property, our shut-in wells, so there's a lot of geology on it as well. Right. It's one emitter to one sequestration well. The pipeline actually from our plant to the proposed sequestration well is less than 1 mi. Right. It's really economical. What does that do for us? A couple of things. One, it reduces our CO2 footprint as a company by 25%. That project alone reduces our CO2 emissions by 25%. It then allows us to capture the full $85 credit from the 45Q that's in the IRA act that's out there. That will generate at least initially probably $15 million of annual EBITDA at $85 starting by 2026. We're gonna be left with 375,000 tons or so of low carbon or blue ammonia that we should be able to sell at some kind of premium to what we're selling today. Right. That's an optionality. You don't have to do one or the other. Either you sell blue ammonia or you get the credit. No, you get both. Okay. Yeah. Excellent. Yeah. We're excited about that because just capturing the CO2 and just taking advantage of the $85 per ton CO2 credit the 45Q credit allows us, as I said, about $14 million-$15 million a year. I mentioned $35 million-$40 million. Add $15 million on that, and that's $50 million-$55 million of additional EBITDA. Yeah. Nothing to do with price. That has no capital requirements on the part of LSB to do that. Yeah. The way we're set up now with Lapis, they're gonna put up all the capital. Okay. I mean, I don't wanna say that we'll never invest capital. I think we're looking at the economics now as to whether it makes sense for us to put up the capital for the capture facility and on that incremental EBITDA that we would get. The optionality is you don't have to put up anything, and you get the $15, and you get blue ammonia. Correct. You have, at some later date, the option to put up some capital based on a rate of return to get incremental value. Exactly. It would be somewhere in the neighborhood of $25 million. What's the return on that $25 million? What's the incremental EBITDA we could generate? Right. Yeah. Optionality. We like optionality. That sounds to me like a CO2 project that's extremely comprehensible, that even a slow guy like me can understand. You know, I hear a lot of carbon sequestration, I just don't know what that means and how to quantify it. Here, this is a great example of doing something that's clearly a great outcome for a great economic result. Yeah. I mean, we're not going out and building, at least today, we're not going out and building a 1 million ton a year plant and hopefully we can get offtake for all of that and, or build a spec plant and hope they'll come. I mean, that's too speculative for us. Right. I think it's too speculative for anyone, quite frankly. Right. Yeah. Three different avenues of growth, all internal, all without increasing any production capacity, and $50 million-$55 million sort of at mid-market pricing. We're pretty excited about that. You know, we start talking about, debottlenecking. I know everyone gets all nervous about debottlenecking and has had bad experiences with companies who have tried to debottleneck plants. It's actually pretty standard in our industry. It's been done a lot of times. We wanna be prudent about it, and we wanna be thoughtful about it. Does it make sense for us, and where does it make sense? You know, we had a recent, Investor Day, where we laid out debottlenecking, and it was kind of the full monte of what we might do. As we look at the economy and as we look at our industry and as we look at, you know, the risks associated with doing a full debottlenecking throughout the El Dorado facility, you know, we'll weigh that and more than likely we'll pull back some and do it maybe in stages. That's of course, against the greater context of, you know, a huge advantage for your industry is the fact that the feedstock is natural gas in North America. The feedstock in North America, as people realized 10 years ago, was an opportunity that would be long-dated, that continues to obviously be long-dated, and we continue to see people moving to America to therefore make fertilizer here, seeing that opportunity. The backdrop is extremely supportive for you, and the timing, as you say, is at your election and at your option as you determine how much free cash flow you have and where best to invest it. Yeah. I think we're seeing a couple of things all driven by, or primarily by low natural gas prices here relative to anywhere else around the world. Right. You know, we think, well, gas is low today, but even when it went to $5, $6, $7, it was still relatively low compared to others, right? It probably had a bigger spread then. It did. It got higher. Yeah. The world looks at that and says, "Okay, if I'm going to expand, where am I gonna expand? Right. It's really the U.S. It helps us in a number of different ways. I mean, a lot of our industrial customers are now onshoring or expanding here. Right. That's good because hopefully that leads to more demand for us, right, for our products. Yeah. Why low natural gas costs? Quite frankly, easy to do business here. Right. The political environment is pretty good versus maybe the Middle East where they have very cheap or free natural gas, right? I mean, different dynamics make it really easy. Onshoring, labor, the cost of labor and the availability of labor and technical labor, because I think what people don't realize in all these plants that, you know, new plants that are announced are all, you know, they don't have the capital yet, most of them. Even if they did, who's gonna run the plant? Ammonia is a hazardous material. Right. Needs to be handled properly, stored properly, shipped properly. Right. You need technical expertise to do all of that. Yeah. You could train people. Right. You know, then you're dealing with kind of newly trained folks. I think not just ourselves, but any ammonia producer today has a leg up on everyone else. Right. That's talking about, building or actually building brand new greenfield plants. Yeah. Let me run back to you really have built out a management team across the organization that enables you to have the people to execute in a very different place than when you took on the expansion of El Dorado. Yeah. I'm really excited. I mean, I have a great management team. They're all experienced. They're all, you know, we've gelled. I mean, it's why are people here? Why? You know, I always ask them all the time, "Why'd you come to the company?" Like, I'm always curious. Like, maybe we can make it better. Maybe there's things we need to enhance. Most people, will say they came to the company because there's a lot of excitement around what we're doing. Yeah. It's easy to do business. We have a really easy platform to do business. As I mentioned, there's no politics, it's flat. Quite frankly, one of the biggest things we pride ourselves on is we make decisions pretty quickly. A lot of companies, bigger companies and bigger competitors. Yeah. It could take two weeks, three weeks to kind of make some decision. We get together, we sit down, we try and have the best information that we have. You make decisions. Not every decision is gonna be right, but you know, that's life and kind of then you change course, right? Right. Yeah. people like coming to work here. Yeah, the management team that we have today, that was built this way by design can run a much larger organization, and that's really the focus, the intention. You did mention debottlenecking, and you talked about the savings and the opportunities that's there, but that requires some capital. Yeah. Right? I guess that's part of the equation in terms of how do you figure that out. Is that- Yeah. How do you think about it? Yeah. I mean, when you think about any debottlenecking project or even, you know, let's say we were to build a replacement site or a new site, or for a plant on El Dorado. Whether it's anything new or anything debottlenecked, it's a project. You got to think about, it starts with a feasibility study. You do some work internally, we hire, you know, a technology provider or an EPC contractor. Right. That we use. We tend to, like to use or at least lately a firm called Black & Veatch, very well known. In the industry. We work with them. They'll provide a feasibility study to us. We then refresh our models. We kind of look at the market and what do we think about costs, what do we think about the pricing that we have in our model going forward, 'cause we have to have a view on that. You go to what's called a pre-FEED. Right. That kind of includes some engineering. It kind of narrows down the plus or minus in any project, right? You kind of relook at things again. You really sit down and have a more, let's say healthy conversation even with the board at that point, because next step would be really to do a full FEED study. Right. Which generally takes, you know, nine-12 months to do a FEED study, depending on the size of the project or the complexity of the project. You kind of really now plus or minus, you know, call it 15%, and you're really deciding at that point, what's my final investment decision? The reason I'm laying this out is, you know, this isn't you're spending the capital or starting to spend, you know, globs of capital tomorrow. That's probably all of that from start to finish is probably a year and a half to two-year process. When we look at it, any debottlenecking that we would do, right, any big project, that would require a lot of capital, we're probably not spending that capital until 2025. We're sitting here in 2023. We think about, you know, obviously, timing of cash flows. Right. Timing of cash generation, and that goes into a whole thought process when we're talking about capital allocation, right? What do we do with the funds? How much cash do we wanna keep on the balance sheet versus how much do we wanna give back to shareholders in some manner? Then you go from there. Of course, you've talked over the years, and you've looked at acquisitions, M&A, so that's part of the opportunity set that I'm sure must be there. How does that enter into the equation? Well, absolutely. You know, I think as we take a step back and we go to a 30,000 foot level for a second. Decarbonizing the world is going to happen. You and I are old enough to have lived through a couple of other, I'll call them green waves. Yeah. They were short-lived. I think it was more country specific. It was more about the arbitrage between natural gas prices and some alternative form of energy. Right. We know that from our geothermal heat pump business- Right. ... AFC business, right? You look at that and all of a sudden gas prices come down and then no one really cared anymore. Today, it's very different. Today, there's a global effort to decarbonize. Right. You've got governments around the world incentivizing people or taxing people, depending on the country or the union. You've got private capital, lots of private capital, with energy transition funds and infrastructure funds, and all kinds of people wanting to get involved. You know, when we look at it, I think hydrogen is extremely important. You know, when you look at hydrogen versus ammonia, hydrogen's got some properties that really prop up ammonia. For instance Hydrogen is really difficult to transport. You can do it through pipeline, which is the most efficient, but pipelines, you can't go hundreds and hundreds of miles or thousands of miles on a pipeline. It's not efficient to put hydrogen on a ship because actually hydrogen has to be stored at - 200. 47? Yeah, I think it's $247. You're right. Where ammonia is like -$30. Right. You know, one, it's much more difficult from a cryo perspective to do that for hydrogen, but also there's a lot of energy lost when you have to do that. Right. People then, everything started with hydrogen, but people now have really transitioned to, we can use ammonia directly. We can use ammonia as a transport medium for hydrogen. What's in ammonia? Hydrogen, right? You can decrack the hydrogen out of ammonia, and there's a lot of folks working on that technology and very successfully.