Q3 2022 Earnings Conference Call
November 02, 2022, 10:00 ET
Fred Bonacor - IR
Mark Behrman - President, CEO & Director
Cheryl Maguire - EVP & CFO
Conference Call Participants
Joshua Spector - UBS
Vincent Anderson - Stifel, Nicolaus & Company
Charles Neivert - Piper Sandler & Co.
Roger Spitz - Bank of America Merrill Lynch
Adam Samuelson - Goldman Sachs
Rob McGuire - Granite Research
Andrew Wong - RBC Capital Markets
Good day, ladies and gentlemen, and welcome to the LSB Industries' Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Fred Buonocore. Sir, the floor is yours.
Good morning, everyone. Joining me today are Mark Behrman, our Chief Executive Officer; and Cheryl Maguire, our Chief Financial Officer. Please note that today's call will include forward-looking statements, and because the 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.
As this call will include references to non-GAAP results, please see the press release 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.
Thank you, Fred. We're happy to have the opportunity to speak with you today about our 2022 third quarter results and our outlook for the final quarter of the year. As summarized on Page 3 of our presentation, we generated strong year-over-year growth aided by continued strong pricing environment and solid execution. Notably, we delivered these favorable results despite having performed turnarounds on 2 of our facilities versus only 1 turnaround in the third quarter of last year.
The El Dorado turnaround began in mid-July and was completed in mid-August. While the Pryor turnaround began just at the Labor Day and was completed in mid-October. Successfully executing 2 turnarounds back-to-back was a substantial undertaking, and we completed them both safely. We expect improved plant performance from these activities.
I'd like to thank our teams at both facilities for their tremendous efforts. Fortunately, we have no turnaround scheduled for 2023, which would be beneficial to our 2023 production and sales volumes as compared to 2022 and 2021 and allow us to focus on the continued progression of our manufacturing capabilities and growth initiatives.
On Page 4 of our presentation, we provide an overview of our end markets. Corn prices remain above multiyear averages, driven by a variety of global factors, including drought conditions in the U.S. and South America and continued strong global demand. Domestic and worldwide stock-to-use ratios for corn remain at multiyear lows.
Based on this supply construct, we believe that corn prices will remain elevated for the remainder of 2022 and through 2023 and that farm profitability will remain attractive, pointing to a meaningful increase in planted acres this spring. As we move into November, assuming the weather permits, we expect U.S. farmers will make a heavy fall ammonia application in order to replenish nutrients in the soil to promote higher yields for the 2023 crop.
Longer term, we believe that it will take 2 to 3 years of good corn growing seasons to bring back the stock-to-use ratios back in line with historical averages. Demand for our industrial products remains largely stable. Industrial product pricing trends continue to be favorable, reflecting the impact of strong demand and continued strength in pricing for nitrogen fertilizers.
The mining market has strengthened considerably over the past year as a surge in global coal mining activity has led to an increase in demand and pricing for our mining products. Similar to the industrial markets, the mining markets are currently competing with fertilizer demand lifting prices of these products as well. The demand and pricing trends we're seeing across our business add to our confidence in strong profitability and cash flow for the fourth quarter of 2022, and we remain optimistic about 2023.
Now I'll turn over the call to Cheryl, who will discuss our Q3 results and our outlook. Cheryl?
Thanks, Mark, and good morning. Our strong performance relative to 2021 reflects the increased pricing across our businesses which, along with solid execution in both our manufacturing and commercial operations enabled us to overcome the impact of the 2 planned turnarounds that were performed during the quarter. Our third quarter adjusted EBITDA of $50 million is a record performance for us in the third quarter, which is our seasonally weakest period even in the absence of turnarounds.
Additionally, we generated adjusted EPS of $0.27 in the quarter. Turning to Page 5, you'll see a summary of our key balance sheet and cash flow metrics. Our continued profitability enabled us to maintain a strong liquidity position. At the end of the quarter, we had approximately $450 million of total liquidity including approximately $385 million in cash and short-term investments. This is after we repurchased $100 million of our stock at a volume-weighted average price of approximately $13 per share.
Regarding the repurchase of our stock. During the quarter, our largest shareholder completed a secondary offering of a portion of their stake in our company. As part of the offering, we took the opportunity to repurchase 5.5 million of our shares under our stock repurchase program. We deemed this in an efficient way to repurchase shares while not impacting the liquidity of our stock.
Lastly, as we announced earlier this week, our Board increased our stock repurchase program by an additional $75 million, bringing the total repurchase authorization to $175 million. During the quarter, we generated cash flow from operations of $38 million and had capital expenditures of $16 million, translating into $22 million of free cash flow.
We are pleased with our ability to strengthen our liquidity even in a seasonally slow quarter and where we lost meaningful production and sales due to turnarounds at 2 facilities. We ended the third quarter with a net debt to trailing 12-month EBITDA leverage ratio of 0.8x. As I have mentioned before, our target leverage ratio is less than 2.5x what we believe to be our EBITDA generation during a mid-cycle or normalized pricing environment.
Meaning Tampa ammonia prices in the $500 to $600 per ton range, UAN prices in the $250 to $300 range and natural gas costs of approximately $5 per MMBtu. Page 6 bridges our third quarter adjusted EBITDA of $50 million to adjusted EBITDA for the third quarter of 2021 of $38 million. The positive selling price impact is shown net of increased variable costs, primarily raw material costs that increased by approximately $36 million versus the third quarter of 2021.
Our natural gas costs rose substantially over the course of 2021 and through the third quarter of 2022, but have eased somewhat in the fourth quarter. As the green bar indicates, however, selling prices have exceeded the rising price of natural gas, and we expect to continue to benefit from this dynamic in the fourth quarter of the year.
Volume was lower in the third quarter as a result of planned turnaround activity at both our El Dorado and Pryor facilities, which cost us approximately 53,000 tons of ammonia production. Lastly, other costs were higher in the period by approximately $5 million, primarily related to higher costs for supplies, materials and contractors, the addition of technical talent and cost for several commercial and corporate initiatives.
Page 7 illustrates the strong bottom line improvement we've delivered over the past several years. This is the result of favorable pricing trends, operational improvements, new customer contracts and investments we've made to optimize our product distribution and mix. We expect to further benefit from these factors in the fourth quarter of 2022 and into 2023.
Looking at the fourth quarter, the Nola UAN benchmark price is currently over $550 a ton. Additionally, the Tampa ammonia benchmark price settled at $1,150 per metric ton in November versus $825 a metric ton last November. Also, we believe that natural gas prices in Europe, which have moderated substantially in recent weeks, will trend back to previous levels, and that continue to impact the ability of UAN and producers to operate economically, translating into a continued supply-demand imbalance for nitrogen products and supporting strong pricing.
While U.S. natural gas costs have moderated over the last several weeks, following the natural gas trends in Europe, combined with an extension of warmer weather across the U.S., we do expect some upward pressure on gas cost as we head into winter months. We currently have approximately 70% of our gas needs locked in for the fourth quarter at approximately $7 per MMBtu, but we'll get the advantage of lower spot prices on the remaining 30% if prices remain below that level.
Sales volumes in the fourth quarter will be impacted by what remained of the planned turnaround activity at our Pryor facility and the somewhat lower inventory coming into the quarter from the impact of the turnarounds in Q3. Despite the impact of the lost production at Pryor in the early part of Q4 and our lower inventories headed into the quarter as a result of the planned turnarounds. We expect Q4 sales volumes of major products to be consistent with the fourth quarter of 2021.
Assuming nitrogen pricing remains at current levels and despite lower volumes from our previously discussed turnarounds, we expect the fourth quarter 2022 adjusted EBITDA to be in the range of $110 million to $120 million above the fourth quarter of 2021 results and our previous outlook that I communicated on our second quarter earnings call back in August. This would put our full year adjusted EBITDA at approximately $420 million to $430 million with the possibility of both the fourth quarter and full year increasing if pricing firms up in the coming weeks.
I look forward to providing further updates on our fourth quarter call. And now I'll turn it back over to Mark.
Thank you, Cheryl. As Cheryl indicated, natural gas prices continue to play a major role in elevated selling prices for our products. Page 8 illustrates how the spread between U.S. and European natural gas prices widened over the course of 2021 and continue to be volatile through the first 10 months of 2022.
The spike in European natural gas costs that occurred in August resulted in many European nitrogen facilities being taken offline. Prices for European natural gas have recently trended lower due to seasonally warmer temperatures throughout Europe and a related buildup of gas inventory following substantial importing of LNG into the region. With that said, gas prices in Europe are still at levels that translate into an ammonia production cost of over $1,000 per ton....