LSB Industries, Inc. Q2 FY2025 earnings call

• Sales volumes up 6% YOY due to AN and UAN improvements.
• 0 recordable injuries across the organization, demonstrating commitment to safety.
• Invested in business growth and bought back $32 million of debt.
• Industrial products demand robust, ramping up ammonium nitrate solution volumes; optimizing sales mix towards cost-plus contracts.
• Fertilizer products saw strong prices due to Spring planting season demand, tight global supply.
• CapEx in Q2 reflected investments in ANS loading and storage at El Dorado; continuing to invest in facility reliability and storage/logistics for industrial business.
• Low carbon project at El Dorado: partner Lapis completed well drilling, EPA technical review expected in Q1 2026.

Sales volumes increased 6% year-over-year driven by solid improvement in AN and UAN sales volumes. UAN had higher pricing and sales volumes, but was offset by materially higher natural gas costs. Revenue contribution from UAN and AN was positively impacted by increased volumes and pricing.

• Third quarter Tampa ammonia price at $487, UAN around $350; natural gas costs higher but expected to be less of a headwind than H1 2025.
• Expect meaningful increases in UAN and AN sales volumes, leading to lower ammonia sales as shifting to higher-margin products.
• Anticipate healthy year-over-year increase in adjusted EBITDA for Q3 vs Q3 2024.

• Natural gas costs remaining a potential headwind.
• Impact of tariffs on Chinese MDI imports and Russian fertilizer exports on nitric acid and nitrogen markets.
• Potential impact of Ukrainian strikes on Russian fertilizer plants and global trade redistribution.

Q: Just wanted to start on UAN. So the first half volumes were up sort of about 30,000 tons year-on-year. Coming into the year, you were looking to kind of potentially lift volumes up to 150,000 tons initially. How do you see sort of the outlook there for the second half now in terms of the size of the growth that you think you can generate? And what are you kind of doing to maximize that and capitalize on the really strong relative UAN pricing that we're seeing at the moment?

A: So we -- as you probably remember, we did an expansion of our UAN production back in September of last year, up at our prior facility. And while we're getting the maximum rates that we expected, we're still working out some kinks to do it consistently. So I think we're pleased that the plant itself operates at the higher rate and it's been fairly consistent, but we're still working on that. So I think we have expectations that the second half of the year should have higher UAN production out of that facility and then therefore, higher sales. Remember, though, we do have seasonality that we'll have to deal with, right, the first half of the year. Usually, you're going to see more products sold in the second half of the year.

Q: So we've seen an improvement in production and operating rates now, and I think you're pretty far down the path for operational improvements, which is great. Maybe can you just talk about more like on the cost side of things as those operating rates stabilize, where do you see costs trending over time? And I think there are some costs that are tied to the improvement programs as well like contractors and consultants and things like that. So as those required costs kind of fall off, like what can we expect on the overall cost side?

A: So first off, yes, we've made a lot of improvements on the operational side, but we still have a lot of initiatives going on that we believe can still add significant EBITDA to -- annual EBITDA to where we are today, right? I mean, the goal for ammonia plants is 95% consistently, right? Reliability is really key. The goal for our upgrading plants is, generally speaking, improved from where we are today. So I do think we still have some significant improvement that we can make that should translate into a meaningful increase in EBITDA. On the cost side, I'm going to turn it over to Cheryl. We have a lot of initiatives going on because we are now focused on not only just pulling costs out, but really creating efficiencies throughout the business that by themselves will create cost decreases.

Q: So we've seen an improvement in production and operating rates now, and I think you're pretty far down the path for operational improvements, which is great. Maybe can you just talk about more like on the cost side of things as those operating rates stabilize, where do you see costs trending over time? And I think there are some costs that are tied to the improvement programs as well like contractors and consultants and things like that. So as those required costs kind of fall off, like what can we expect on the overall cost side?

A: Andrew, we had said coming into this year that we would expect our costs to reach an inflection point in 2025 and then start trending down from there. In addition to that, we talked about $15 million to $20 million of cost reduction through efficiencies as Mark just mentioned. So we should be -- we're starting to work on that now. I think by the end of the year, we'll probably be, I would say, 25% complete towards the $15 million to $20 million target that we're looking for. So we'll see the balance of that come out across '26 and maybe a bit into '27.

Q: So we've seen an improvement in production and operating rates now, and I think you're pretty far down the path for operational improvements, which is great. Maybe can you just talk about more like on the cost side of things as those operating rates stabilize, where do you see costs trending over time? And I think there are some costs that are tied to the improvement programs as well like contractors and consultants and things like that. So as those required costs kind of fall off, like what can we expect on the overall cost side?

A: And I would say one thing to add to that. Keep in mind that when you make some changes now, we're not going to see the annualized benefit obviously until next year. So while we pull -- we're working on those initiatives today, we'll probably be able to report at the end of the year what the annualized effect is going into 2026.

Q: So we've seen an improvement in production and operating rates now, and I think you're pretty far down the path for operational improvements, which is great. Maybe can you just talk about more like on the cost side of things as those operating rates stabilize, where do you see costs trending over time? And I think there are some costs that are tied to the improvement programs as well like contractors and consultants and things like that. So as those required costs kind of fall off, like what can we expect on the overall cost side?

A: Damien, do you want to answer that? So in terms of the tariffs, I think it's honestly been a little hard to discern some of the impacts given some of the more pertinent market dynamics around supply and also being in the peak season of demand. But I think from a urea perspective, there's been, I think, some impact for the other products, probably not so much. Going forward, I think we're closely monitoring what happens with Russia, if there's any sort of tariff there and then any adjacent tariffs for other countries doing business with Russia. That's likely to have a more meaningful impact on nitrogen. So we're closely monitoring that. In terms of the onshoring of production here in the U.S., look, that's going to have a long runway until we start seeing anything material. I think in the in the shorter term, there are opportunities for the U.S. domestic market to take advantage of the current environment. We're seeing that a little bit with copper at the moment, right, like the support for U.S. copper domestically is in producers like Freeport and others, really focus on driving their efforts there and exploring with some priority expansion activities there. So I think that's certainly a tailwind for us and something that we're looking forward to seeing realized in the future.

Q: So we've seen an improvement in production and operating rates now, and I think you're pretty far down the path for operational improvements, which is great. Maybe can you just talk about more like on the cost side of things as those operating rates stabilize, where do you see costs trending over time? And I think there are some costs that are tied to the improvement programs as well like contractors and consultants and things like that. So as those required costs kind of fall off, like what can we expect on the overall cost side?

A: I would add on to that, that those activities make us really look at some potential debottlenecking or expansion because they underpin some of those expansions.

Q: This is Kevin on for Laurence. I guess my first one has to do with fertilizer prices. They've been pretty elevated like UAN. And I guess there's been some deterioration of farmer economics and that's, I think, largely because of lower corn prices. Are you seeing any signs of demand destruction, let's say, as of July from the farmer perspective of UAN?

A: Yes. Kevin, really through -- as we got through Spring season, we really didn't see much demand destruction at all, but moving through to fill, I think given where prices are, there's certainly some hesitancy from a retailer's perspective to buy. But I think that's really been consistent with what we've seen for the last 3 or 4 years. So it's probably more the new normal that we're seeing. And we're in a comfortable position coming out of Spring with our inventory, and we're comfortable with where our forward sales are sitting. So -- but we're monitoring it. Corn prices, we'd like to see it a little higher and that would help support farmer economics. But you might see a bit of an impact on the edges in that marginal corn plantings for next year. So yes, and I think the USDA is already sort of indicating some of that in its outlook.

Q: This is Kevin on for Laurence. I guess my first one has to do with fertilizer prices. They've been pretty elevated like UAN. And I guess there's been some deterioration of farmer economics and that's, I think, largely because of lower corn prices. Are you seeing any signs of demand destruction, let's say, as of July from the farmer perspective of UAN?

A: I think one thing that could possibly help corn prices. So we just negotiated a deal with the EU for them to purchase a lot of energy as part of that. I think the hope is that we'll see some ethanol being exported over to Europe, which will increase demand for ethanol and in turn demand for corn. So again, I think that plus there's the continued conversation going from E10 to E15 and gasoline could support some more demand from the ethanol industry and then supporting demand for corn.

Q: Mark, UAN, can you kind of tell us what you're seeing in terms of UAN import trends? And do you have any comments on the June, July Ukrainian strikes on the Russian fertilizer plants? Has there been any discussion about how that's impacting Russian export volumes?

A: Rob, so in terms of the import trend this year, fertilizer year imports for UAN were below last year. And I think that contributed to some of the tightness that we saw overall in the market. In terms of the drone strikes, et cetera, we haven't seen any immediate impact just yet and maybe that's because of where we're at seasonally transitioning into the next year and the fill period. And of course, there's still been no fill programs announced in the market. So that is an indication of how well balanced or comfortable the producers are at this stage. But it's clearly something that we're monitoring, but I think the bigger factor will be those tariffs that I talked about earlier. That's something that will have a more material impact going forward.

Q: Mark, UAN, can you kind of tell us what you're seeing in terms of UAN import trends? And do you have any comments on the June, July Ukrainian strikes on the Russian fertilizer plants? Has there been any discussion about how that's impacting Russian export volumes?

A: And I also think -- don't you think that the European tariffs on Russia as they gain some momentum and of course, the tariff rates and amounts go up, will have a huge impact.

Q: Mark, UAN, can you kind of tell us what you're seeing in terms of UAN import trends? And do you have any comments on the June, July Ukrainian strikes on the Russian fertilizer plants? Has there been any discussion about how that's impacting Russian export volumes?

A: Yes, it will certainly see a redistribution of global trade routes for UAN. So I think it will just see a shuffling. You might see some pricing impact as freight rates are impacted on the global trade. But yes, we've yet to see any immediate impact from that.

Q: Totally different topic, Leidos. Any changes with Leidos at this point in time that you could share with us, the lawsuit?

A: No. We are at least currently scheduled to go to trial, start the trial in late October, subject to our judiciary system making any changes.