LSB Industries Issues Open Letter to Shareholders
- The Board and management team have the right plan in place to deliver value to LSB shareholders.
-
The proposals from
Engine Capital would deliver less value to LSB shareholders than the Company’s plan. - The Board and management team are closely aligned with shareholders and committed to effective oversight.
The full text of the letter from
Dear Fellow LSB Shareholder:
Your Board and management team have a proven track-record of value creation. The Board has overseen the expansion of LSB’s business and has delivered solid shareholder returns. Our two core Chemical and Climate Control businesses are positioned to benefit from strong demand in the markets they serve over the coming years. Demand for fertilizer is expected to remain steady, mainly as a result of population growth, an increasing shift globally to growing animal feed crops as people consume more protein and the use of bio-fuels. Nitrogen fertilizers, in particular, are expected to experience sustained demand because they must be applied each year and have a direct impact on farmers’ yields, creating an economic incentive for farmers to increase the amount of fertilizer used. LSB’s Climate Control business is expected to benefit from the growth in commercial and residential construction in an improving economy. Your Board and management team believe that our three-year operating and capital plan for our Chemical and Climate Control businesses will significantly increase EBITDA.
LSB’s stock price has increased by over 350% over the last five years, outperforming the Company’s peer groups1 coming out of the financial crisis.
The Board and management team believe that we have the right plan
in
place to deliver value to LSB shareholders.
The Company is making investments in LSB’s Chemical facilities necessary to drive growth and value creation, and better position LSB to capitalize on favorable market dynamics. LSB’s three-year capital spending plan includes:
-
$250 to $300 million for the construction and completion of an ammonia plant at theEl Dorado facility—this investment will significantly decrease LSB’s costs and eliminate its exposure to fluctuations in the price of ammonia in the spot market. -
$120 million for the new 65% nitric acid plant and concentrator also at theEl Dorado facility—this investment will replace lost capacity and add additional capacity to facilitate growth. -
Taken together, the capital investments in the
El Dorado facility, once complete, are expected to contribute approximately$90 to $100 million of incremental annual EBITDA, based on anticipated market conditions. -
$50 to $75 million in plant reliability enhancements, and environmental and safety upgrades at all of our chemical facilities. -
$35 to $40 million for the development of the Zena natural gas leasehold—this investment provides a partial hedge for the cost of natural gas, one of our key raw material inputs.
When the Board evaluated a wide range of financing vehicles to fund the ongoing capital investment program, it determined that the issuance of the new Senior Secured Notes was the optimal financing alternative. In addition, the Board believes that making these capital investments will deliver meaningfully greater value than would be achieved through a repurchase of the Company’s stock at current prices.
We are building a more stable and profitable enterprise
by
investing prudently for the future.
Our strategy is to invest in projects that generate the best returns for
our shareholders taking into consideration the risk and return on
investment. This strategy motivated our decision to build an ammonia
plant at
Ammonia, which is produced from natural gas, is the key component in the
production of all of our core, nitrogen-based products. Our
Our plan to build an ammonia plant will eliminate this disadvantage by
providing us with a reliable, low-cost source of this key input. El
Dorado’s new plant is expected to produce ammonia at a cost below
The plans enacted by the Board and management team also include the
construction of a new nitric acid plant and concentrator to replace the
productive capacity lost when El Dorado’s direct strong nitric acid
plant was damaged in
Overall, upon completion of the ammonia plant and the nitric acid plant
and concentrator,
The Board and management team have also taken steps to mitigate the risk of volatility in natural gas prices. Our investment in natural gas wells in the Marcellus Shale Formation will provide a partial hedge for the cost of this key raw material input.
We are enhancing operations and the reliability of our chemical facilities.
Your Board and management team have a long track record of building and
growing successful plants. For example, we have significantly grown the
In addition, the Baytown plant is one of the newest and most
technologically advanced nitric acid plants in
In addition to pre-existing programs, we have taken a number of steps to enhance the overall reliability and productivity of our Chemical facilities, including:
- Engaging outside experts who specialize in risk management, reliability, mechanical integrity and Process Safety Management;
- Recruiting additional corporate and on-site facility management, reliability, engineering and operational personnel;
- Accelerating the automation of plant equipment diagnostic and protective devices; and
- Expanding the acquisition of spare parts to supplement existing inventory of capital spares.
The management team has and continues to implement additional measures
at
We are growing the Climate Control business.
LSB’s Climate Control business has significant potential to grow revenues and profits due to projected increases in construction end markets, initiatives underway to launch new products and implementation of LEAN manufacturing practices. We have an extensive customer base with thousands of premier installations and an overall installed base of more than four million units. Commercial and institutional markets made up approximately 83% of LSB Climate Control sales during 2013. According to a recent McGraw Hill survey3, commercial construction—for the building types most important to our Climate Control business—is projected to grow 53% over the next four years, presenting significant upside to this segment of LSB’s business. We also expect to see growth from our residential end markets.
Given that the Company’s existing Climate Control manufacturing facilities have unused capacity, we expect to be able to meet increased demand for our products without investing in major plant expansions or building new facilities. We believe with increased capacity utilization and the positive economic outlook that is projected in commercial construction, LSB will be able to achieve meaningful margin expansion and earnings growth in the Climate Control business in the near to medium term.
The key components of our plan to drive growth in our Climate Control business include:
- Focusing on product niches, upgrading and expanding our current product offerings by introducing new products in all categories with an emphasis on product efficiencies and improved digital control systems;
- Continuing to develop the market for geothermal products, as well as products for green and energy-efficient construction and retrofit applications; and
- Continued focus on operational excellence: LEAN initiatives, product and service quality, waste elimination, process improvement and cost reduction.
The Board believes that the proposals from
Despite our record of creating value, a recently formed hedge fund
called
The proposals from
- The Board believes that an MLP is not a viable structure for the Company’s chemical assets given the current near-term cash flow profile of those assets. Because MLP structures can be advantageous for assets with the right profile, the Board has carefully considered LSB’s assets relative to the characteristics of MLPs that have successfully created value and attracted investor interest.
In reaching its conclusion, the Board recognized that LSB is in the
early stages of a significant capital investment program to upgrade and
enhance the
Without the inclusion of
- The Board believes that the Company’s plan to grow the Climate Control business will deliver greater value to shareholders than a sale or spin-off of the business.
Given the attractive growth prospects of the Climate Control business and our assessment of the likely interest from potential buyers today, the Board believes that LSB would not receive a premium that reflects the inherent value of the business if it were to sell the Climate Control business.
With respect to a spin-off of the Climate Control business, the Board has taken into consideration that LSB shareholders would take ownership of equity in a sub-scale
stand-alone public company. This stand-alone company would face immediate challenges due to downward pressure on the stock caused by turnover in its shareholder base as chemicals-focused investors and certain index funds exited or significantly reduced their positions. Lastly, a spin-off would necessarily entail the dis-synergies of duplicative public company costs, corporate functions, fees associated with restructuring the Company’s debt indenture and other transaction costs.
Engine Capital’s valuation methods appear misleading.
In its letter,
For example, Engine Capital’s use of Rentech Nitrogen Partners’
(“Rentech Partners”)
Engine Capital’s use of CVR Partners’ facility as an additional means to
benchmark the value of LSB’s chemical assets suffers from similar
shortcomings. For example, like Rentech Partners’
Engine Capital’s failure to acknowledge the fundamental differences between the assets being compared significantly influences the results of their valuations and calls into question the credibility of its entire analysis.
LSB’s Board and management team are closely aligned with shareholders
and
committed to effective oversight.
Your Board of Directors and management team currently hold an ownership stake of approximately 19% of the Company, including convertible preferred stock, and our interests are closely aligned with LSB shareholders. Your Board and management team remain returns-focused and committed to successfully executing on the Company’s strategic plan. LSB believes that its existing plans will drive continued growth and value creation for all shareholders.
As recently announced, LSB has reduced the size of its Board of Directors from 14 to 10 members. Eight of the remaining 10 directors are independent.
LSB’s Board and management team are working hard to manage through the current macro environment and overcome recent operational challenges. We believe the improvements we are making to enhance capacity and upgrade facilities will stabilize operating performance and improve earnings growth, positioning LSB for enhanced growth and profitability.
On behalf of the Board of Directors and management team, we appreciate the continued support of LSB shareholders as we build value together.
Sincerely,
/s/
Chairman of the Board and CEO
1 Nitrogen peers:
2 Conservatively based on an assumed natural gas price of
3 Source: Fourth Quarter 2013 McGraw Hill Construction Market Forecast Service
4 Nitrogen MLPs referenced:
Advisors
About
LSB is a manufacturing and marketing company. LSB’s principal business activities consist of the manufacture and sale of chemical products for the agricultural, mining, and industrial markets, and the manufacture and sale of commercial and residential climate control products, such as geothermal and water source heat pumps, hydronic fan coils and modular geothermal chillers, and large custom air handlers.
Forward-Looking Statements
This press release includes certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements generally are identified by use of the words
“believes”, “expects”, “intends”, “anticipates”, “plans to”,
“estimates”, “projects”, “should” or similar expressions, including,
without limitation, statements regarding benefits from demands in the
markets we serve; growth in the commercial construction industry;
increased EBITDA due to our operating and capital plans; growth and
value creation; replacing lost capacity and adding additional capacity
to facilitate growth; our profitability; ammonia price volatility; the
price of ammonia to remain above our cost to produce it; cost of the new
plants; benefits to
Important Additional Information
LSB, its directors and certain of its executive officers may be
deemed to be participants in the solicitation of proxies from LSB
stockholders in connection with the matters to be considered at LSB’s
2014 Annual Meeting. LSB intends to file a proxy statement with
the
Reconciliation of Expected Operating Income to Non GAAP Measurement EBITDA
- Management uses EBITDA for purposes of making decisions that include resource allocations and performance evaluations.
- The term EBITDA as used herein is expected net income plus interest expense, depreciation, amortization, income taxes and certain non-cash charges unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurements.
- Operating income is as used herein as Income before interest expense and income taxes. Following is the calculation of EBITDA as referenced above:
|
EBITDA Range | |||||||
From | To | |||||||
(in millions) | ||||||||
Beginning during 2016: | ||||||||
• | Expected Operating Income | $ | 70 | $ | 80 | |||
Plus: | ||||||||
Depreciation and Amortization | 20 | 20 | ||||||
• | Expected EBITDA | $ | 90 | $ | 100 |
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Source:
LSB Industries, Inc.
Tony M. Shelby, 405-235-4546
Chief
Financial Officer
or
Investor Relations:
MacKenzie
Partners Inc.
Dan Burch / Larry Dennedy, 212-929-5500
or
Media:
Joele
Frank, Wilkinson Brimmer Katcher
Tim Lynch / Sharon Stern / Jed
Repko, 212-355-4449