UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 16, 2015
LSB INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 1-7677 | 73-1015226 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
| 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma | 73107 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (405) 235-4546
Not applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| x | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Section 8 – Other Events
| Item 8.01. | Other Events |
LSB Industries, Inc. (“LSB” or the “Company”) intends to make an investor presentation on Monday, March 16, 2015. The Company is furnishing the Investor Presentation as Exhibit 99.1 to this Current Report on Form 8-K, which lists or discusses certain disclosures about the Company and its business. A copy of the Investor Presentation, dated March 16, 2015, is also publicly available at: http://investors.lsbindustries.com. The content of such website is included for general information only and is not incorporated by reference in this Form 8-K.
Forward-Looking Statements
The Investor Presentation filed as Exhibit 99.1 to this Form 8-K 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”, or similar expressions, including, without limitation, potential spin or sale of the Climate Control Business and a potential MLP as to certain assets of the Chemical Business may be steps for consideration once the expansion projects are completed; benefits upon completion of the expansion projects; financial projections for future periods; and other forward-looking statements as described in the Investor Presentation under “Safe Harbor Statement.” Actual results may differ materially from the forward-looking statements as a result of various future events, including without limitation, the various factors described in the “Special Note Regarding Forward-Looking Statements,” and the “Risk Factors” contained in our most recent Form 10-K for the year ended December 31, 2014. These forward looking statements speak only as of the date of the Investor Presentation, and LSB expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in LSB’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Important Additional Information
The Company, 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 2015 Annual Meeting of Stockholders, including the election of directors. LSB intends to file a preliminary and definitive proxy statement and accompanying white proxy card with the U.S. Securities and Exchange Commission (the “SEC”) in connection with any such solicitation of proxies from LSB stockholders. LSB STOCKHOLDERS ARE STRONGLY ENCOURAGED TO READ ANY SUCH PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Information regarding the ownership of LSB’s directors and executive officers in LSB stock, restricted stock and options is included in their SEC filings on Forms 3, 4 and 5. More detailed information regarding the identity of potential participants, and their direct or indirect interests, by security holdings or otherwise, will be set forth in the proxy statement and other materials to be filed with the SEC in connection with LSB’s 2015 Annual Meeting. Information can also be found in LSB’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015. Stockholders will be able to obtain any proxy statement, any amendments or supplements to the proxy
statement and other documents filed by LSB with the SEC for no charge at the SEC’s website at www.sec.gov. Copies will also be available at no charge at LSB’s website at www.lsbindustries.com or by contacting David M. Shear, General Counsel and Secretary at (405) 235-4546.
Section 9 - Financial Statements and Exhibits
| Item 9.01. | Financial Statements and Exhibits. |
(d) Exhibits.
| 99.1 | Investor Presentation, dated March 16, 2015. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: March 16, 2015
| LSB INDUSTRIES, INC. | ||
| By: | /s/ Tony M. Shelby | |
| Tony M. Shelby | ||
| Executive Vice President of Finance and Chief Financial Officer | ||
| Exhibit 99.1
|
LSB Industries, Inc.
NYSE: LXU
Small- Cap Equity Conference
March 16, 2015
|
|
Safe Harbor Statement
The information contained in the presentation materials contain certain forward-looking statements. All these statements, other than statements of historical fact, are forward-looking statements.
Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “estimate” and similar statements of the future or of a forward-looking nature identify forward-looking statements, including but not limited to, all statements about or in references to the Architectural Building Index, Dodge Construction Green Outlook, or any McGraw Hill forecast, any references to future natural gas costs, ammonia costs, grain or corn demand or production, construction trends and demand, and the outlook for the chemical or climate control business.
The forward-looking statements include but are not limited to the following statements: major investments to reduce costs and increase facility reliability; positioned to benefit from strong agricultural market and economic recovery; product balance options; production capacity; impact of capital expansion projects; estimated completion and start up dates for new chemical facilities and their cost and production capacity; planned capital spending; outlook for Chemical and Climate Control; turnaround at Cherokee; future maintenance activities; Pryor facility reliability; Climate Control’s product sales; sales growth Q4 2014 and 2015; LEAN impact; future outlook.
You should not rely on the forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. We incorporate the risks and uncertainties discussed under the headings “Risk Factors” and “A Special Note Regarding Forward-looking Statements” in our Form 10-K for the fiscal year ended December 31, 2014, which contain a discussion of a variety of factors which could cause the future outcome to differ materially from the forward-looking statements discussed in this investor presentation. We undertake no duty to update the information contained in this investor presentation.
The term EBITDA, as used in this presentation, is 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 measurement. The Company believes that certain investors consider EBITDA a useful means of measuring our ability to meet our debt service obligations and evaluating our financial performance. EBITDA has limitations and should not be considered in isolation or as a substitute for net income, operating income, cash flow from operations or other consolidated cash flow data prepared in accordance with EBITDA. The reconciliation of GAAP and any EBITDA numbers discussed in this investor presentation are included in the appendix of this presentation.
| 1 |
|
|
|
Why LSB? Executing on strategic plan to drive growth and enhance shareholder value
Operates well-diversified business with differentiated market positions across two distinct
| 1 |
|
business segments |
| 2 |
|
Well-positioned in end markets with attractive industry fundamentals |
| 3 |
|
Implementing operating and capital improvement plan to enhance plant performance and reliability |
| 4 |
|
Strong financial position |
| 5 |
|
Focused on creating and delivering value to shareholders |
| 2 |
|
|
|
Company overview
LSB operates a well-diversified business with differentiated market positions across two distinct business segments
| 3 |
|
|
|
Business overview
Diversified industrial manufacturer of chemicals and
HVAC products sold into a wide range of end markets
Founded in 1968 and headquartered in Oklahoma City, OK; publicly traded (NYSE: LXU)
Chemical business operates 4 production facilities
El Dorado Chemical Company (“EDC”) (Arkansas)
Cherokee Nitrogen LLC (Alabama)
Pryor Chemical Company (Oklahoma)
El Dorado Nitric LLC (“Baytown”) (Texas)
Climate Control business operates 7 facilities located in
Oklahoma City (over 1 million square feet)
Financial snapshot:
2014 net sales of $732.5 million
2014 EBITDA of $89.8 million(1)
Net sales by business segment (2014)
Engineering and other
2%
Climate
Control
36%
EBITDA by business segment (2014)
Climate
Control
24%
Note: Excludes unallocated corporate expenses.
Chemical
62%
Chemical
76%
LSB operates a well-diversified business with differentiated market positions across two distinct business segments
| (1) |
|
Includes insurance proceeds of $28.0 million 4 |
|
|
One of LSB’s two core businesses – Chemical
Business overview
Sales mix
Provides nitrogen based agricultural, mining and industrial chemicals to North American market
Leading merchant marketer of nitric acid in the U.S.
Major investments underway to reduce costs and increase facility reliability and capacity
Positioned to benefit from strong agricultural market with favorable margins
Mining products
15%
Industrial acids & ammonia
35%
Natural gas
3%
Agricultural products
47%
A key strategy is to optimize sales mix: industrial vs. agricultural
2014 sales: $455 million
Select customers
Cost-plus agreements versus spot market sales
Spot market
51%
Cost plus
49%
Approximately half our sales are non- seasonal and priced pursuant to cost-plus agreements
| 5 |
|
|
|
One of LSB’s two core businesses – Climate Control
Business overview
Sales mix
Provides specialty HVAC products to commercial, institutional and residential new construction,
By product type By end market
renovation and replacement markets, emphasis on green products
Market and technology leader for water source and geothermal heat pumps, and hydronic fan coils
Poised to benefit from the economic recovery, long- term trend toward green construction, and growth of emerging products
Other HVAC
products
13%
Hydronic fan coils
23%
Heat pumps
64%
Other
15%
Industrial
1% Office
7% Healthcare
6%
Retail
9%
Lodging
11%
Education
19%
Single Family
Residential
16%
Multi-Family
16%
Significant installed base of Climate Control products
2014 sales: $265 million
World Financial Center, NYC Chicago Hilton and Towers Wynn Resort, Las Vegas Disney’s Grand Floridian, Orlando Atlantis, Bahamas
Millennium Towers, NYC Bellagio, Las Vegas
MGM Grand, Las Vegas
Statue of Liberty
Trump Tower, NYC
| 6 |
|
|
|
Market overview
LSB is well-positioned in end markets with attractive industry fundamentals
| 7 |
|
|
|
Chemical Business – Diverse products with broad application
Products
Uses
Competitors
Agro-
Urea ammonium nitrate solutions (UAN)
Fertilizer for corn and other crops CF Industries, PCS, Koch Industries, Rentec, CVR Partners, imports
Chemicals
(47% of sales)
Ammonium nitrate
high density prills (AN)
Primary nitrogen component in NPK
fertilizer blends
CF Industries, imports
Ammonia High nitrogen content fertilizer primarily used for corn
Various
Industrial Acids, Ammonia
& DEF
(35% of sales)
Nitric acid Semi-conductor, nylon, polyurethane intermediates, ammonium nitrate
Sulfuric acid Pulp and paper, alum, water treatment, metals and vanadium processing
Ammonia Power plant emissions abatement, water treatment, refrigerants, metals processing
Diesel exhaust fluid (DEF) Exhaust stream additive to reduce NOx
emissions from diesel vehicles
CF Industries, PCS
Cytec, Chemtrade Logistics
Various
Various
Mining
Products
Ammonium nitrate – low density prills (AN) and AN solutions
Specialty emulsions for mining applications
CF Industries, PCS, Dyno Nobel
America
(15% of sales)
Specialty E2 ammonium nitrate
Surface mining, quarries, construction Imports
| 8 |
|
|
|
Agro Chemicals – attractive industry fundamentals
World situation North America is low cost producer of nitrogen fertilizers
Growing populations
Developing economies
Changing dietary habits (from grain to meat)
Natural gas is the primary feedstock for ammonia and all nitrogen fertilizers.
Due to large shale gas reserves, U.S. has relatively low natural gas prices vs. most places worldwide.
Natural gas is expected to average approximately $3.00 per MMBtu for 2015.
North American situation
U.S. Midwest delivered ammonia cost forecast
World grain shortages positively impact grain requirements in the U.S.
Despite lower grain prices, the USDA is projecting less than a 2% drop in corn acres planted in 2015 versus
2014.
Additional nitrogen application expected for spring
2015 to make up for 2014’s delayed and shortened application season.
U.S. grain stocks are at 12-year highs leading to lower current and expected corn prices.
($US/ton)
Source: Fertecon, PotashCorp (2014)
|
|
Chemical Business – LSB’s agricultural distribution
Pryor,
OK UAN Koch
Southern Plains & Corn Belt
UAN
Transammonia, The Andersons, CHS, Koch, et.al.
Eastern Corn
Belt
Ag Centers—35%
AN Distributors & Dealers
- 65%
Southern Plains, South Central, Midwest & West
Multiple distribution channels
Diverse geographic coverage
Longstanding customer relationships
Direct rail linkage to corn belt
|
|
Chemical facilities
El Dorado Chemical Co. Cherokee Nitrogen LLC Pryor Chemical Co.
El Dorado Nitric LLC
Facility El Dorado Chemical Company Cherokee Nitrogen LLC Pryor Chemical Company El Dorado Nitric LLC
Location El Dorado, AR Cherokee, AL Pryor, OK Baytown, TX
Year Acquired/Built 1983 1999 2000 2000
Ammonia Design Kellogg Kellogg Pritchard -
Plant Area (acres) 150 160 47 2
Site Area (acres) 1,400 1,300 104 Bayer site
Feedstock ammonia natural gas natural gas ammonia
Agricultural Products UAN x x
High Density AN x
Ammonia x x
Urea x x
Industrial & Mining Products Nitric Acid x x x x
Concentrated Nitric Acid x
Sulfuric Acid x
Mixed Acid x
Carbon Dioxide x x
Ammonia x x
DEF x
Low Density AN x
AN solutions x x
Transportation to Market truck, rail truck, rail, pipeline truck, rail truck, pipeline
|
|
Annual production capacity of products available for sale
(Tons in thousands)
Facility El Dorado Chemical Company
Cherokee
Nitrogen LLC
Pryor Chemical
Company
El Dorado
Nitric LLC
Total
Feedstock ammonia /
natural gas
natural gas
natural gas
ammonia
Ammonia Production Capacity
220(1)/375
175
215
-
610/765
Products Available for Sale
Agricultural
Products
UAN
215
300
515
High Density AN (2)
110/300
110/300
Ag
P
Ammonia
125
30
85
115/240
Industrial & Mining
Products
Nitric Acid
45/200
30
410
485/640
DEF
15
15
Low Density AN (2)
220/220
220
AN solutions
85
85
Transportation to Market
truck, rail truck, rail, pipeline, barge
truck, rail
truck, pipeline
Red Font = production capacities after the completion of the ammonia and nitric acid expansion projects at El Dorado
| (1) |
|
Represents amount of ammonia currently purchased |
(2) Combined annual low density and high density AN production capacity is limited to 330,000/TPY due to the loss in 2012 of 90,000/TPY of nitric acid production capacity
12
|
|
Climate Control – Serving the industrial and commercial sectors
Water Source & Geothermal Heat
Pumps
(64% of sales)
Hydronic
Fan Coils
(23% of sales)
Products
Water Source
Heat Pumps
Geothermal
Heat Pumps
Hydronic Fan
Coils
Uses
Heating and cooling
Commercial / Institutional
Single family residential including new construction, renovation and replacements
Heating and cooling
Commercial / Institutional
Single family residential including new construction, renovation and replacements
Leading share in water source and geothermal heat pumps
Leading share in hydronic fan coils
Other
HVAC
Large Custom
Air Handlers Commercial
Modular
Chillers
Products
(13% of sales)
Make-up Air
Units
Large Custom
Air Handlers
Institutional
Industrial
13
|
|
LSB’s strategic plan
LSB is implementing operating and capital improvement plan that is expected to drive shareholder returns
14
|
|
Executing on strategic plan to drive growth and enhance shareholder value
Comprehensive upgrade of Chemical facilities
Improve plant on-stream rates
Reduce risks of unplanned downtime
Improving safety and plant reliability
Pryor facility reliability improvements
New senior management
Additional engineering support
Extensive monitoring and control equipment
Remanufacture or replacement of certain key pieces of equipment
Use of industry expert consultants
Expansion projects at El Dorado
Cost reduction
Capacity expansion
Product balance capability enhancement
Positioning the Climate Control business to generate significant margins
Growth in Climate Control business as construction cycle recovers
LEAN / operational initiatives in our Climate Control business
Increased profits through operating leverage
New management at ClimateMaster
15
|
|
Chemical Business – El Dorado expansion expected to improve operations / reliability and capacity
El Dorado ammonia plant
Overview and benefits
Capital investments of $275–$300 million
Reduces costs significantly (versus purchased ammonia)
Enhanced product balance opportunities
New production capacity
Currently purchase ~220,000 tons per year (“TPY”)
New ammonia plant capacity of
~375,000 TPY
Progress to date
$128 million spent through 12/31/14
Front-end engineering design completed
Foundations and plant infrastructure well in place
Commenced staffing and training in preparation for plant start-up beginning Q1 2016
2015 outlook
$147-$172 million to be spent to complete project
Complete aboveground piping, instrumentation and electrical and staffing and training
Mechanical completion of plant
Complete commissioning in Q4 2015 and start-up beginning in Q1 2016
El Dorado nitric acid plant and concentrator
Capital investments of $125–$130 million
Improves operating characteristics
Enhanced product balance opportunities
Replaces acid capacity and adds additional capacity for a total of
370,000 TPY
$96 million spent through 12/31/14
Detailed engineering completed to allow for project cost and schedule control
Foundations, structural steel and underground piping completed
Commenced staffing and training in preparation for start-up in Q3 2015
$29-34 million to be spent to complete project
Complete above ground piping and instrumentation and electrical in Q1/Q2 2015
Complete commissioning, staffing and training in Q2 2015
Start-up of both plants in Q3 2015
Completion of El Dorado projects expected by Q1 2016, on budget and on schedule with contemplated plan
Note: El Dorado expansion projects also include a total of $85-90 million related to other support infrastructure (OSBL) 16
|
|
El Dorado ammonia plant project on time and on budget
Rotating Equipment Purchase/Installation
File and Receive Environmental Permit (Air)
Front-end and Ongoing Engineering Design
Base Equipment Purchase/Installation
Spent: $128mm
To be spent: $147-$172mm
On budget:
Foundations & Concrete Base
Underground Piping Installation
Erection of Structural Steel
Other Equipment Purchase/Installation
Aboveground Piping Installation
Installation of Instrumentation & Electrical
Staffing Plant Operators
Staffing Plant Management & Engineers
Training of Staff
Commissioning
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016
100% Complete
75% Complete
Plant Start-up
Today
Start-up of
Ammonia Plant
90%+ Complete In Process / On Schedule
17
|
|
Nitric Acid plant & concentrator project timeline
Contract with Weatherly for Work
& Equipment Spent: $96mm
File and Receive Environmental Permit (Air)
Basic Engineering Package
To be spent: $29-$34mm
On budget:
Detailed Engineering Package
Foundations & Concrete Base
Underground Piping Installation
Erection of Structural Steel
Setting Equipment
Aboveground Piping Installation
Installation of Instrumentation & Electrical
Commissioning
Staffing
Training of Staff
Q4
Q1
Q2
Q3 Q4 Q1 Q2 Q3 Q4
Q1 Q2 Q3
2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015
100% Complete
90%+ Complete
In Process / On Schedule
Plant Start-up
Today
Start-up of DMW2 & Concentrator
18
|
|
Financial overview
LSB has a strong financial position
19
|
|
The Company has delivered value to shareholders, having outperformed its peer group coming out of the financial crisis
Indexed share price performance – last 6 years
442.4%
271.8%
242.3%
5.2%
M ar’09 M ar’10 M ar’11 M ar’12 M ar’13 M ar’14 M ar’15
LSB Nitrogen M LP HVAC
LSB’s Board and management have a track-record of delivering shareholder value
Notes: Nitrogen: Acron, Agrium, CF Industries, Incitec Pivot and Yara International
MLP: CVR Partners, Rentech Nitrogen Partners and Terra Nitrogen Company
HVAC: A.O Smith, AAON, Generac, Ingersoll-Rand, Johnson Controls, Lennox, Nortek, Schneider Electric and United Technologies
20
|
|
Segment summary statement of income
Chem ical Business
Calendar Year Ended Dec. 31,
$ in millions 2010 2011 2012 2013 2014
Sales $351.1 $511.9 $477.8 $380.7 $454.9
Gross Profit 49.3 130.7 97.7 46.2 66.6
Gross Profit % 14.0% 25.5% 20.4% 12.1% 14.6% Operating Income 31.9 116.5 82.1 87.8 51.3
Segment EBITDA $45.0 $131.2 $98.5 $111.4 $82.2
Adjusted EBITDA(1) $37.7 $122.6 $91.2 $16.8 $56.3
Clim ate Control Business
Calendar Year Ended Dec. 31,
$ in millions 2010 2011 2012 2013 2014
Sales $250.5 $281.6 $266.2 $285.0 $265.4
Gross Profit 86.4 88.2 81.0 92.9 82.4
Gross Profit % 34.5% 31.3% 30.4% 32.6% 31.0% Operating Income 35.3 32.8 25.8 30.4 21.7
Segment EBITDA $38.8 $35.5 $29.0 $33.6 $26.5
(1) Adjusted EBITDA excludes insurance recoveries of the following amounts: $7.5mm in 2010, $8.6mm in 2011, $7.3mm in 2012, $94.6mm in 2013, and $28.0mm in 2014.
Adjusted EBITDA for 2014 also excludes unrealized loss on forward natural gas purchase commitments of $2.1mm. See reconciliation on slide 43 of the appendix.
21
|
|
Solid financial position – strong balance sheet
($ in millions)
Dec. 31, Dec. 31,
2014 2013
Cash and Investments (including non-current) $272.6 $434.7
Total Debt(1) 457.3 463.0
Stockholders’ Equity 434.0 411.7
Total Capitalization 891.3 874.7
Debt to capital
52.9% 52.1% 51.4% 51.5% 51.3%
Dec. 31 2013 Mar. 31 2014 Jun. 30 2014 Sept. 30 2014 Dec. 31 2014
(1) As of December 31, 2014, total debt consisted of $425 million 7.75% Senior Secured Notes due in 2019; a $22.8 million Secured Promissory Note due in February 2016 and $9.5 22
million of equipment loans and capital leases. Our availability under the $100 million working capital revolver loan was $71.1 million at December 31, 2014
|
|
Capital structure
As of December 31, 2014
Cash and Investments $ (272.6) Senior Secured Notes (7.75%) 425.0
Other Debt 32.3
Total Net Debt $ 184.7
Overview of Outstanding Debt
Senior Secured Notes
$425 million
7.75%
Due August 2019
Working Capital Revolver
$100 million (L + 150)
$71.1 million availability
Expires April 2018
EBITDA for FY 2014 $ 89.8
Net Leverage Ratio 2.1x
EBITDA / Interest Expense 2.5x
Ratings Moody’s S&P Corporate Ba3 B+ First Lien Ba3 B+
Outlook Stable Positive
23
|
|
2017 targets by segment
Chemical Business
Climate Control Business
Financial Metrics:
2014-2017 Revenue Growth: 12%+ CAGR
2017 EBITDA Margin: 30%+
2017 Operating Margin: 20%+
Annual Production (tons):
Gross Ammonia 750,000 – 800,000
Net Ammonia 220,000 – 250,000
UAN 475,000 – 525,000
AN and AN Solutions 650,000 – 700,000
Nitric Acid(1) 80,000 – 100,000
On-Stream Rates(2):
Ammonia plants 95%+
Financial Metrics:
2014-2017 Revenue Growth: 10%+ CAGR
2017 EBITDA Margin: 15%+
2017 Operating Margin: 14%+
Operating leverage on incremental sales of 20%+
Lean/OpEx initiatives create additional 250+ basis points of margin
Minimal working capital and capex requirements lead to strong segment FCF generation
Selected bolt-on acquisitions could potentially enhance revenue growth
| (1) |
|
Does not include Baytown facility’s production |
(2) Weighted average based on average daily production rates at EDC, Pryor, and Cherokee and assuming normal turnaround schedules
24
|
|
Chemical Business target earnings power – 2017
$250
$200
$150
(EBITDA—$ in millions)
$90+
$45+
$11+ $200+
$100
$50
$54
$0
2014 Actual (1)
El Dorado (2)
Expansion
Increased On-stream (3)
Rates
Other (4)
2017 Target (5)
Chemical Business Drivers
Improved on-stream rates
Expanded capacity
Higher average daily production
Lower feedstock costs at El Dorado
Improved reliability
Higher annual production
(1) 2014 actual excludes $28 million of insurance proceeds and does not normalize for unplanned downtime during the year
(2) EDC expansion represents the projected EBITDA resulting from the operation of the new ammonia and nitric acid plants assuming $500 per ton ammonia prices and $5.00 per
MMbtu natural gas prices
(3) Assumes ammonia plants (Pryor and Cherokee) have an average on-stream rate of 95%+ for 2017 (4) Turnaround expenses (Cherokee turnaround moved from annual to bi-annual turnaround)
| (5) |
|
Targeted segment EBITDA does not include unallocated corporate expenses |
25
|
|
Chemical EBITDA—sensitivity analysis for 2017
(EBITDA—$ in millions)
Natural Gas per Mmbtu
$5.00 $4.50 $4.00 $3.50 $3.00
$600 $
265 $
273 $
282 $
290 $
299
$550 $
238 $
246 $
255 $
263 $
272
$500 $
211 $
219 $
228 $
236 $
245
$450 $
184 $
192 $
201 $
209 $
218
$400 $
157 $
165 $
174 $
182 $
191
Key factors in model above:
Average ammonia plants on-stream rate of 95%+
Average daily production rates are maintained
Mining sales volumes replaced at El Dorado
EDC ammonia plant and nitric acid plant are up and producing for the entire year
Assumes that a $50 per ton change in ammonia price is equivalent to a $21 per ton change in UAN price and a $23 per ton change in AN price
26
Ammonia per ton
|
|
Climate Control Business target earnings power—2017
$70
$60
$50
(EBITDA—$ in millions)
$20+
$8+
$5+
$60+
$40
$30
$27
$20
$10
$0
2014 Actual Operating Leverage Planned Performance
Lean/OpEx
2017 Target (2)
on Increased Sales
Improvement (1)
Initiatives
Climate Control Business Drivers
Rebounding end market demand
New product introductions
Operating leverage on higher volume
LEAN / operating expense initiatives
(1) Planned performance improvement at our custom air handler, modular chiller and construction services businesses through increased sales and margins
| (2) |
|
Targeted segment EBITDA does not include unallocated corporate expenses 27 |
|
|
Strategic committee results
LSB believes there is merit to pursuing value creating alternatives once the operating and capital plan for the chemical business is implemented
28
|
|
Summary of strategic committee review
Independent, highly qualified committee of shareholder representatives
Strategic Committee established in accordance with April 2014 settlement agreement with Starboard
Value LP (“Starboard”)
Comprised of four independent directors: Webster (“Lance”) Benham, Charles Burtch, Daniel
Greenwell and William Murdy
Messrs. Greenwell and Murdy appointed to the Board in connection with the Starboard settlement
Collectively, Messrs. Benham, Burtch, Greenwell and Murdy possess extensive operational and financial expertise, as well as executive leadership experience in the climate control and chemicals industries
Mandate included a thorough evaluation of potential strategic alternatives
Sale of the Climate Control business completed as soon as realistically practicable – (9/30/2015) or once the business has regained strong momentum – (12/31/2016)
Spin of the Climate Control business completed as soon as realistically practicable – (12/31/2015)
MLP of the Chemical assets completed as soon as realistically practicable – (12/31/2015) or once the expansion at EDC is complete and the asset has a track record – (12/31/2016)
Continuing to execute the Company’s strategic plan
29
|
|
Robust strategic committee process
Process included holding numerous meetings over 8 months
Received independent financial, legal and tax advice, including discussions with outside legal counsel experienced in the formation of MLPs
Met with Starboard, reviewed materials prepared by Starboard and carefully considered Starboard’s input
Thoughtful analysis of financial implications of each alterative
Evaluated breakage costs associated with restructuring long-term debt
Tax consequences (as applicable) for each option considered
Estimated transaction fees and incremental corporate costs
Estimated refinancing benefits derived from breaking existing bonds
Evaluated near-term liquidity and leverage impacts to LSB implied by each alternative
30
|
|
Determination: Execute strategic plan at this time
Execution of Company’s existing strategic plan to drive profitable growth and create sustainable shareholder value is in best interests of all shareholders at this time and preserves optionality for pursuit of an MLP going forward
Timing is a core consideration for each alternative
Near-term spin of Climate Control Business would substantially increase leverage of LSB at a time when the Company most needs to preserve liquidity and maximize free cash flow
Sale of Climate Control Business now would fail to generate proceeds that reflect the potential of the business, given investments LSB is making to improve both sales volume and margins
MLP not appropriate at this time given recent market conditions / unique profile of an LSB MLP formed by the
Chemical Business assets
Optionality for establishment of an MLP in the future should be preserved and the Company should take the appropriate steps to enable the efficient establishment of an MLP should that make sense post EDC expansion
Strategic Committee will continue to evaluate all alternatives as current company initiatives underway are implemented and as market conditions warrant
Near-term focus on providing oversight / additional recommendations to LSB management team to assist in execution of the Company’s plan
Potential spin or sale of Climate Control assets from Chemical Business may be step for consideration once expansion projects at chemical facilities are complete
Implementing actions to lower production costs, improve manufacturing efficiency, drive sales growth and enhance profitability of the Chemical Business facilities
Implementing actions to grow the Climate Control Business and generate significant margin improvement in that business over the next several years
31
|
|
Spin-off would reduce liquidity and increase leverage on
LSB at a critical time for the company
At this point in time, the Committee believes the current operating conditions and business leverage render a near-term spin-off of the Climate Control business impractical
~ $33M bond breakage costs if bonds taken out at
12/31/15
Results in insufficient cash position to complete
EDC expansion projects
Bonds
Potentially challenging market conditions for a new issue to refinance existing bonds
Liquidity
Costs
Large amount of transaction fees and expenses at time when liquidity is scarce and cash is needed to complete key growth projects
Opportunity cost of focusing on spin of business versus executing business plan
Leverage
Unacceptably high leverage for Chemicals business following the transaction
While theoretically supported by cash flow, will not be supported in capital markets or will not receive attractive terms from investors
32
|
|
Seeking to access equity markets in near term will dilute long-term upside potential for lsb shareholders
While an MLP of the Chemical Business may be an appropriate strategy at a point in time post EDC expansion, now is not the
right time to focus Management resources on executing an MLP given the state of the markets and the growth projects on time and on budget
Yield
Relatively small MLP in size, absent the revenue benefit of the completed EDC expansion
As a result, post-IPO trading volumes would likely be low
This would impact liquidity and potentially result in an incremental discount by investors
Capex / Free cash flow
Need to complete EDC plant expansion projects limits near term cash flow available for distribution
MLP investors seek less volatile cash flows and more fully developed assets
Nitrogen MLPs are significantly more volatile over time than Nitrogen C-Corporations
Potential valuation discount given lack of scale
Valuation
Investors will not place premium value on unproven assets given the lack of track record of consistent production at Pryor at the time of an IPO
33
|
|
An MLP would not obtain optimal value given current market conditions
Sharp decline in MLP performance over past three years
Rising rate environment makes investment in MLP vehicles less attractive
Share / unit performance over the previous:
| 1 |
|
year 2 years 3 years |
Since July
2005
Performance since IPO – CVR and Rentech
Nitrogen C Corps 60% 56% 79% 547% Nitrogen MLPs (21%) (41%) (34%) 380%
2.11% (21%)
(25%)
10 Yr Treasury (average) 2.38% 2.44% 2.22% 3.25% Apr-11 Jan-12 Oct -12 Aug-13 May-14 Mar-15
CVR Rent ech 10 Yr US T reasury
547%
380%
2.11%
Jul-05 Jul-06 Aug-07 Sep-08 Oct -09 Nov-10 Dec-11 Jan-13 Feb-14 Mar-15
Nit rogen C Corps Nit rogen MLP s 10 Yr US T reasury
Notes: Nitrogen C Corps include Yara International, Agrium, CF Industries, Incitec Pivot and Acron
Nitrogen MLPs include Terra Nitrogen, CVR Partners (IPO in April 2011) and Rentech Nitrogen Partners (IPO in November 2011)
34
|
|
Why LSB? Executing on strategic plan to drive growth and enhance shareholder value
Operates well-diversified business with differentiated market positions across two distinct
| 1 |
|
business segments |
| 2 |
|
Well-positioned in end markets with attractive industry fundamentals |
| 3 |
|
Implementing operating and capital improvement plan to enhance plant performance and reliability |
| 4 |
|
Strong financial position |
| 5 |
|
Focused on creating and delivering value to shareholders |
35
|
|
Appendix
36
|
|
Board with knowledge and expertise critical to the
Company’s success
Independent Board with new perspective
| 8 |
|
of 10 members are independent |
| 5 |
|
directors have been added in the last 24 months – two of whom were designated by Starboard |
Highly experienced relevant background in Climate and Chemical businesses
Significant public company board experience
Relevant backgrounds in chemical and climate control businesses, accounting and corporate
Deep governance and financial expertise
Board and management interest closely aligned with LSB shareholders
Board and management hold an ownership of approximately 20% and our interests are closely aligned with LSB shareholders
Board and management remain focused on shareholder returns
37
|
|
Management’s experience and past accomplishments will guide the successful execution of its current initiatives
Key initiatives
Building EDC ammonia plant to materially reduce future costs and add incremental ammonia capacity and product for sale
Comprehensive upgrade of Chemical Business safety and plant reliability systems to improve plant up-time and reduce unplanned downtime
Pryor facility reliability improvements
Including new senior management, additional engineering support, extensive monitoring and control equipment, remanufacture of certain key pieces of equipment, and use of industry expert consultants
LEAN / Operational Excellence initiatives in Climate Control Business to facilitate improved operational metrics and reduce costs
Launched search process for a President of the Chemical Business who has significant experience in multi-plant operations, sales/marketing and overall P&L responsibility
Key accomplishments
CEO Barry Golsen has a track record of successfully leading change and driving improvements at LSB
Grew the Climate Control business from $10 million in revenues and breakeven EBITDA to peak revenues of
$311 million and EBITDA of $44 million while creating leading market positions in the Company’s core
products
Diversified the Group’s business from a single product to multiple products while increasing the Company’s addressable market
Spearheaded the start-up of the Group’s heat pump business and the subsequent acquisition of its major competitor ($31 million in revenues) that was used as a base to attain leading shares in North America for water source and geothermal heat pumps
Since taking over leadership of the Chemical business
in 2013, Barry has already driven major operational and plant management improvements including several management changes within the business
Led the $425 million debt financing that is being used to fund the Expansion Projects at El Dorado
38
|
|
Significant progress has been made to improve reliability at Pryor
Key initiatives undertaken to-date
Use of industry expert consultants
Remanufacture or replacement of certain key pieces of equipment
Extensive monitoring and control equipment installed
Additional engineering staffing
New senior management team
Ammonia On-Stream Rate
83%
Ammonia Tons Produced
(tons in thousands)
178
63%
131
93
43%
2012 2013 2014
2012 2013 2014
39
|
|
Cherokee is well-positioned to be highly profitable
On-stream rate for ammonia increased from 67% in 2013 to 81% in 2014 with continued improvement to 95%+ in 2017
Expected 50-day production improvement
Extended turnaround performed in 2014 to change out certain end-of-life parts and move plant to a two-year turnaround cycle
Adds 14 days of additional production every 2 years
Implemented improved safety and reliability programs aimed at reducing plant downtime
Task force formed to define and implement specific initiatives to additionally enhance reliability
Committing to purchase a portion of our expected natural gas usage allows us to lock in primary feedstock costs at attractive rates
40
|
|
Climate continues to rebound from end-market recovery and internal initiatives
Construction markets are poised for a recovery to pre- recession levels…
Significant upside as industry drivers return to levels at / near historical norms
Driven by high energy efficiency
…and Climate Control has further benefited from internal initiatives
| 1 |
|
LEAN Operational Excellence Initiatives |
Commercial / Institutional / Multi-Family Starts
(Sqft in millions)
1,750
1,418 1,541
+9%
+12%
1,731
| 2 |
|
Strategic use of the current manufacturing footprint creates operating leverage on increased sales |
2008 2014 2015E 2017E
| 3 |
|
Introduction / commercialization of new products to further grow market share |
Single Family Residential Construction
(Starts in thousands)
1,626
| 4 |
|
New marketing approach to gain additional sales |
50-year median: 1,070
620 715
+15%
+43%
1,025
5 Replacement of management at ClimateMaster, the Company’s largest Climate Control business in order to capture the significant growth
2005 2014 2015E 2017E
potential
Source: Dodge Data & Analytics Construction Market Forecasting Service, Q1 2015; 50 Year Median – Census Bureau 41
|
|
EBITDA reconciliations
Reconciliation of Consolidated Net Income and Segment Operating Income to Non-GAAP measurement EBITDA. Management uses operating income by business segment for purposes of making decisions that include resource allocations and performance evaluations. Operating income by business segment represents gross profit by business segment less selling, general and administrative expenses incurred by each business segment plus other income and other expense earned/incurred by each business segment before general corporate expenses.
The term EBITDA, as used in this presentation, is 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 measurement.
($ in millions)
Twel ve months ended 12-31
2010 2011 2012 2013 2014
LSB Industri es, Inc. Consol i dated
Net i ncome (l oss)
$ 29.6
$ 83.8
$ 58.6
$ 55.0
$ 19.6
Plus:
Interest expense
7.4
6.7
4.2
14.0
21.6
Depreciation and amortization 17.4 18.8 20.7 28.4 36.1
Provisions for income taxes 19.8 46.2 33.6 35.3 12.4
Loss from discontinued operations 0.1 0.2 0.2 0.2 0.1
EBITDA $ 74.3 $ 155.7 $ 117.3 $ 132.9 $ 89.8
Cl i mate Control Busi ne ss
Operati ng i ncome (l oss) $ 35.3 $ 32.8 $ 25.8 $ 30.4 $ 21.7
Plus:
Equity in earnings of affiliate
1.0
0.5
0.7
0.4
0.1
Depreciation and amortization 2.5 2.2 2.5 2.8 4.7
EBITDA $ 38.8 $ 35.5 $ 29.0 $ 33.6 $ 26.5
Chemi cal Business
Operati ng i ncome (l oss) $ 31.9 $ 116.5 $ 82.1 $ 87.8 $ 51.3
Plus:
Non-operating income
-
-
-
-
0.3
Depreciation and amortization 13.1 14.7 16.4 23.6 30.6
EBITDA $ 45.0 $ 131.2 $ 98.5 $ 111.4 $ 82.2
42
|
|
Other Non-GAAP Reconciliations
Reconciliation of Chemical EBITDA. We believe that the inclusion of supplementary adjustments to EBITDA are appropriate to provide additional information to investors about certain unusual items. The following tables provide reconciliations of EBITDA excluding the impact of the insurance recoveries and unrealized loss on forward natural gas purchase commitments.
($ in millions)
Chemical Business
Twelve Months Ended 12-31
2010 2011 2012 2013 2014
EBITDA
$ 45.0
$ 131.2
$ 98.5
$ 111.4
$ 82.2
Less:
Insurance recoveries
7.3
8.6
7.3
94.6
28.0
Unrealized loss on forward natural gas
purchase commitments — — (2.1)
Adjusted EBITDA
$ 37.7
$ 122.6
$ 91.2
$ 16.8
$ 56.3
43
|
|
What our chemical products are used for:
Agrochemical Products Uses
Urea Ammonium Nitrate Solutions (UAN) 28-32% N
Manufactured nitrogen content fertilizer
High nitrogen content fertilizer for corn and other crops with high nitrogen demand (wheat, milo, cotton)
E2 Ammonium Nitrate Prill (solid) 34% N
High nitrogen content fertilizer
Nitrogen consuming crops, forage areas and citrus. The primary nitrogen component in NPK (nitrogen, phosphorus, potassium) fertilizer blends
Fertilizer Blends
Custom blends with purchased phosphates, potassium, sulfur, micronutrients with produced ammonium nitrate
Special application for agri-business products to supply growers balanced fertility
Anhydrous Ammonia 82% N
Gas injected application
High nitrogen content fertilizer with highest percentage use for corn.
Industrial Acids, Ammonia, DEF Uses:
Concentrated Nitric Acid
Aqueous solution up to 99% concentration
Production of specialty fibers, nitrocellulose, gaskets, crop chemicals, mining products, metal treatment, nitric acid commercial blends
Nitric Acid Commercial Blends
Aqueous solution up to 89% concentration
Semi-conductor industry, manufacture of nylon and polyurethane intermediates, potassium nitrate compounds, ammonium nitrate production
Anhydrous Ammonia
Commercial grade and high purity refrigeration, metallurgical grade
Air emission abatement in power plants, water treatment, refrigerants, metals processing, and a wide variety of industrial uses
Mixed Acids
Blends of concentrated nitric acid and sulfuric acid/oleum
Diesel fuel additives, ordnance, herbicides and pharmaceutical grade nitroglycerine
Sulfuric Acid
98% and 93% concentrations, standard and low-iron grades
Pulp and paper manufacturing, alum, water treatment, metals processing, vanadium processing, other industrial uses
DEF (diesel exhaust fluid) Exhaust stream additive to reduce NOX emissions from diesel vehicles
Industrial Mining Products Uses:
Ammonium Nitrate Solutions
54% and 83% concentrations
Specialty emulsions for mining applications, other miscellaneous uses
Low Density Ammonium Nitrate Prills (solids)
Solid pellets with good porosity and flowability
Surface mining, quarries, construction
44
|
|
Typical facility process flow (Pryor)
NH3 (storage, trucks, rail)
Nitric
Acid
AN Solution
Natural Gas (pipeline)
Ammonia
Plant UAN
UAN (storage, trucks, rail)
CO2
Urea
CO2
Liquification
CO2 (storage, trucks)
Products are marketable at every intermediate and final stage of production.
Pryor facility process flow is typical of plants with natural gas feedstock.
Pryor and Cherokee use natural gas feedstock. El Dorado and Baytown use ammonia feedstock.
45
55
|
|
Climate control sales & marketing data
December 31, 2014 Sales Mix Data
By end market By distribution channel
Commercial:
100%
75%
50%
25%
0%
2008 2014
Retail
Single Family Education Healthcare Multi Family Office Lodging
Other
220 Commercial representative firms with 347 locations
1,900+ Sales Engineers
Residential (Geothermal):
600 Residential distributor locations (approx.)
4,000 Residential contractor-dealers (approx.)
Plus: OEM distribution channels
Product & market sales mix – various perspectives
Export
Contracting
6%
Residential
16%
Chillers 2%
4%
Air Handlers
7%
Heat Pumps
64%
OEM
14%
Fan Coils
23%
Commercial
& Institutional
78%
Direct
86%
46
|
|
Focus on geothermal heat pumps
How does a GHP system work?
?
?
Typical Residential Geothermal System
Geothermal benefits:
The Earth absorbs approximately 50% of all solar energy and remains at nearly a constant temperature year round (below a few feet deep).
A GHP system uses a ? sealed in-ground heat exchanger (loop) filled with fluid and a ? GHP unit to exchange energy between the house or building and the earth.
In winter, fluid in the loop absorbs energy from the earth and carries it to the GHP where it is converted (compressed) to a higher temperature and sent as warm air into the house or building.
In summer, the system reverses, transferring heat from the house or building into the earth.
GHP systems work year round, in all climates, in both individual residences and large commercial buildings, providing both conditioned air and domestic hot water (as a “free” by-product).
Energy cost reduction & positive cash flow – the most energy efficient HVAC technology available – up to 80% more efficient than conventional systems.
Residential energy usage
Conventional System Geothermal System
Fed Tax Credits—30% residential & 10% business +
accelerated depreciation, + state/utility incentives
GHP’s are an alternative form of renewable energy
Green refrigerants—non-ozone depleting
“Free” domestic hot water
Noise free operation – no noisy condensing unit
Extremely long lived vs. conventional systems (50 year loops)
47
|
|
Typical GHP costs and savings
For a GHP System in a 2,500 sq. ft. new house in St. Louis, MO (typical middle America) Installed Cost of a 4 ton GHP System = $6,000 per ton (12,000 Btu/ton).
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
System Operating Cost Comparison
GHP vs. Conventional Systems
This analysis compares these systems:
Payback (GHP vs. Hi-Eff Gas Furn+AC)
Installed cost of GHP $24,000
Less: 30% Fed tax credit (7,200) GHP cost after credit 16,800
Cost for Hi-Eff Gas + AC (12,000) GHP premium cost 4,800
Annual Energy Savings $1,248
Payback in Years 3.8
$1,000
$0
Geothermal
16 SEER
10 SEER
93% Efficient
80% Efficient
93% Efficient
80% Efficient
80% Efficient
80% Efficient
Positive Cash Flow
Heat Pump
Standard Heat Standard Heat
Natural Gas
Natural Gas
Propane
Propane
Oil Furnace
Oil Furnace
Pump
Pump
Furnace with
Furnace with
Furnace with
Furnace with
with 16 SEER with 10 SEER
Annual Energy Savings $1,248
16 SEER A/C 10 SEER A/C 16 SEER A/C 10 SEER A/C
A/C
A/C
Lighting & Appliance Heating Cooling Hot Water
Annual P&I on GHP Premium
(6% int. – 10 yrs.) (636)
Annual Cash Savings $612
Note: System installed costs are different throughout the U.S due to varying local conditions and labor costs. Savings vary due to weather conditions, user preferences, and local 48
utility rates. Costs and savings in St. Louis are estimates and subject to change
|
|
The Company will present its recommendation with respect to the election of directors in its proxy statement to be filed with the Securities and Exchange Commission. The date of the 2015
Annual Meeting of Shareholders has not yet been scheduled.
49
|
|
Notes:
50
|
|
LSB Industries, Inc. is headquartered in
Oklahoma City and does business through
its subsidiaries, with seven HVAC manufacturing and distribution facilities in Oklahoma City, chemical plants in Texas, Arkansas, Alabama
and Oklahoma and an engineered products distribution center in Oklahoma City. Approximately 1,900 total employees.
Investor Relations:
Company Contact:
Mark Behrman
Phone: 405-235-4546
Email: mbehrman@lsbindustries.com
The Equity Group, Inc.
Fred Buonocore
Phone: 212-836-9607
Email: fbuonocore@equityny.com
Linda Latman
Corporate Offices:
16 South Pennsylvania Avenue Oklahoma City, Oklahoma USA Phone: 405-235-4546
Fax: 405-235-5067
Email: info@lsbindustries.com
Common Stock:
NYSE ticker symbol LXU
Auditor:
Ernst & Young LLP
Phone: 212-836-9609
Email: llatman@equityny.com
Fax: 212-421-1278
Website: www.lsbindustries.com
51