Q1 2024 LSB Industries Inc Earnings Call

Participants

Fred Buonocore; Vice President, Investor Relations; LSB Industries Inc

Mark Behrman; Chief Executive Officer; LSB Industries Inc

Damien Renwick; Executive Vice President, Chief Commercial Officer; LSB Industries Inc

Cheryl Maguire; Chief Financial Officer; LSB Industries Inc

Joshua Spector; Analyst; UBS

Adam Samuelson; Analyst; Goldman Sachs

David Begleiter; Analyst; Deutsche Bank

Andrew Wong; Analyst; RBC Capital Markets

Robert McGuire; Analyst; Granite Research

Charles Neivert; Analyst; Piper Sandler

Presentation

Operator

Hello, and welcome to the LSB Industries First Quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded and is now my pleasure to turn the call over to Fred Buonocore, Vice President, Investor Relations. Fred, please go ahead.

Fred Buonocore

Good morning, everyone, and joining me today are Mark Behrman, our Chief Executive Officer, and Cheryl McGuire, our Chief Financial Officer. Also joining us today is Damien Redwood our Chief Commercial Officer. Please note that today's call includes forward looking statements. These 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. On the call, we will reference non-GAAP results. Please see the press release and the Investors section of our website, LSB Industries.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. As a reminder, we have a stockholder rights plan to protect certain tax attributes, please see the investor section of our website at LSB Industries.com. For further important details at this time, I'd like to go ahead and turn the call over to Mark.

Mark Behrman

Thank you for turning to page 4 of our presentation. First quarter results were in line with our expectations. Pricing was down year over year, but this was offset somewhat by stronger sales volumes and lower natural gas costs. We continue to generate positive free cash flow in the first quarter and used our strong cash position to repurchase our stock returning capital to our shareholders. We also reduced our debt by repurchasing notes during the quarter, further derisking our balance sheet. We continued to selectively repurchase our stock in notes post the first quarter and we'll seek opportunities to further both of those efforts.
Lastly, on the low-carbon ammonia initiatives, our two projects remain on track with the time lines that we discussed back in March and I'll provide more color on these later in the call.
Now I'm pleased to turn the call over to Damien Redwood, our Chief Commercial Officer, who will discuss the current market dynamics and pricing trends.
Damian?

Damien Renwick

Thanks, Mark, and good morning, everyone. I'm glad to speak with you today. On page 5 of our presentation, you'll see an overview of our agricultural end markets. Corn prices remain at levels that should translate into healthy income levels for farmers despite expectations for increasing US corn supply in the coming months. The December 24 corn futures price currently exceeds $4.60 per bushel. Usda recently reduced 2023 24 global stock estimates for key grains, including corn, providing some price support. In addition, the EPA recently extended the sale of 15% ethanol gasoline for E15 during the summer, which should provide further support for corn prices. We believe that farmers will remain motivated to maximize corn yields through the application of nitrogen fertilizers for the balance of the spring planting season. And again, in the fall after the harvest, ammonia prices have been underpinned by robust demand over the past several months with a strong pre-plant application season in the U.S., we also saw a variety of factors constraining global supply. This includes a number of cold weather related events in the U.S. impacting domestic production, the disruption of shipping through the Suez Canal that delayed start-up of new ammonia production capacity that was expected to come online early this year and natural gas supply issues in Trinidad. We also saw improved UAN pricing developed through Q1 as we continued to successfully execute our direct-to-customer marketing strategy. This allowed us to target pockets of demand with supply was limited as the UAN input pies continued below previous years. Urea prices were volatile in the quarter due to expectations of a resumption of Chinese exports. A dynamic that has historically had a negative impact on global urea prices. However, the Chinese government recently implemented further restrictions on urea exports delaying the infusion of additional supply into the global market while we don't sell urea, we do pay close attention to its pricing dynamics since urea pricing can impact pricing for our UAN and HDAN products. As we look forward through the remainder of the fertilizer season. Our order book is well positioned across our products to support our market perspectives on pricing and demand through May and early June. We have a good balance of forward orders with room to take advantage of spot sales through the application period depending on the product.
On page 6, we show pricing trends and forecasts for the key commodities that drive our agricultural business. The upper left-hand chart shows the price trend for the TTF, the European natural gas pricing benchmark relative to the price, the Henry Hub, the benchmark price for US natural gas pricing. European gas prices have increased over the last month as instability in the Middle East has offset some of the price decreasing through the end of 2023 and through Q1 following a warm winter and heavy LNG imports, still gas prices in the US remain a fraction of those in Europe, representing significant competitive advantage to U.S. producers. We believe the U.S. cost advantage will persist in the coming years.
As the chart indicates.
Page 7 summarizes some key dynamics at play in our industrial and mining end markets. Overall demand remained steady in our industrial business, reflecting the resilience of the U.S. economy. A significant amount of the nitric acid we sell is used to produce polyurethane polyurethane used to make phones is a major input to both auto and furniture manufacturing. As such, we closely track data related to U.S. auto production and furniture orders. The first two charts on the right hand side show trends in U.S. auto production and furniture manufacturing. The trends depicted on these two charts reflect the solid level of demand remaining generally stable over the past year that we experienced in our nitric acid sales.
As the third chart on slide 7 indicates mining production activity also remained relatively stable over the past several years. The recent decline in activity shown in the chart, is largely due to a reduction in coal production volumes reflected in the steep drop in the price of coal over the past year. We have very little exposure to the coal market. So this weakness had minimal impact on our business. On the contrary, we've experienced strong demand for ammonium nitrate, driven in part by healthy metals mining activity in support of electric vehicle production and other applications. The strong demand for metals is reflected in recent price trends for gold and copper, both of which are up significantly this year. As we look at both sides of our business, we expect fundamentals for nitrogen producers to remain attractive and stable for the foreseeable future.
Now I'll turn the call over to Cheryl to discuss our first quarter financial results and our outlook.
Cheryl?

Cheryl Maguire

Thanks, Damian, and good morning. On page 8, you'll see a summary of our first quarter 2024 financial results. We generated adjusted EBITDA of $33 million and EPS of $0.08 for the first quarter.
Page 9 bridges our 33 million of adjusted EBITDA to our first quarter 2023 adjusted EBITDA of $51 million. Weaker selling prices relative to the prior year were once again, the primary factor in the year-over-year change in EBITDA the weaker pricing was partially offset by stronger sales volumes and lower natural gas costs.
Page 10 provides a summary of our key balance sheet and cash flow metrics. We continue to use our strong cash position as an opportunity to further de-risk our balance sheet. In the first quarter, we repurchased 33 million of our notes. And year to date, we repurchased 75 million of. We also repurchased approximately 700,000 shares of our stock during the first quarter and approximately 1.5 million shares year to date. We expect to opportunistically repurchase stock as the year progresses, while continuing to invest in our assets to improve their performance. As a reminder, we have turnarounds scheduled at our Pryor and Cherokee facilities during the second half of this year. These turnarounds will be integral to our goal to improve plant reliability and efficiency.
Looking forward, the second quarter of 2020 for Tampa ammonia currently sits at $450 per metric ton and newly UAN is currently around $270 per ton. We expect some weakening in pricing for both products in the second quarter as we move into the normal seasonal slowdown as the spring planting season closes. More specifically, we expect a sequential decline in our realized pricing for ammonia and our ammonia sales volumes given the strong spring ammonia run in the latter part of the first quarter. Additionally, the second quarter typically marks the transition away from ammonia fertilizer application, which is usually done prior to planting to the application of other fertilizers, such as UAN, which are typically applied post planting. As a result, we expect higher UAN sales volumes both sequentially and year over year. Furthermore, although we anticipate lower realized fertilizer selling prices compared to last year's second quarter, we do expect that impact to be largely offset by lower natural gas costs, which we expect will be approximately $2.10 per MMBTU in the second quarter, inclusive of transportation.
With respect to costs, we are ramping up our preparation for our Pryor and Cherokee turnarounds planned for the second half of 2024, we expect to incur approximately 2 to 3 million of expense related to this prep work during the second quarter. Putting it all together, we expect our second quarter adjusted EBITDA to be lower than the second quarter of 2023, primarily due to lower realized selling prices. However, we expect a meaningful sequential increase in adjusted EBITDA over the 2024 first quarter as a result of higher sales volumes and lower natural gas costs.
Looking beyond the second quarter after six consecutive quarters of year-over-year declines in product selling prices, we expect pricing to be more in line with prior year quarters during the second half of this year. And now I'll turn it back over to Mark.

Mark Behrman

Thank you, Sheryl. Pages 11 and 12 pertain to the two low-carbon ammonia projects that we currently have underway. Page 11 summarizes the key information relating to our project with labor synergy at our El Dorado facility. This project remains on track with the time line we discussed in early March. The main gating factor remains the approval of our Class six permit application from the EPA receiving the Class six approval will enable labs to commence construction and then begin capturing and permanently sequestering more than 450,000 tons metric tons per year of CO2 that we produce at El Dorado. We are in regular contact with the EPA about the permit application. We've been encouraged by the recent feedback indicating that the time line for approval could be accelerated to mid 2020 2020 25 relative to our previous expectations at the end of 2025. As a reminder, we expect lab is to receive the 45 Q. tax credit of $85 per ton of CO2 sequestered since they will own the capture facility but they will buy the CO2 from us. At the same time, we will be producing more than 375,000 tons of low-carbon ammonia annually. Collectively, we expect this to yield approximately 15 to 20 million in annual incremental EBITDA for LSB.
As we indicated last quarter, our commercial team is actively pursuing markets for the low-carbon products that we will be producing at El Dorado and our conversations to date have been very productive.
Page 12 summarizes the key aspects of our Houston Ship Channel, low-carbon ammonia project. As a reminder, the project entails the design and construction of a world-scale ammonia plant that will produce approximately 1.1 million metric tons of low-carbon ammonia. Samsung Engineering is performing or pre-FEED and that is expected to be completed during the third quarter of this year, at which point we expect FEED to begin, we anticipate a final investment decision in the second half of next year.
Regarding long-term offtake, we continue to work with potential customers to secure long-term offtake for the anticipated ammonia production. Based on our ongoing conversations, we expect offtakers to come from Asia, Europe and the US. The markets for low-carbon ammonia continue to take shape with many positive developments emerging in recent months, Gera, Japan's largest power company has a three-month trial underway using 20% ammonia to co-fire one of its coal-burning power plants with the goal of eventually using 100% ammonia in its plants as a means of dramatically reducing its CO2 emissions. The success of this trial would be groundbreaking in terms of providing the viability of ammonia used for large-scale power generation. While Japan has a first mover in this regard Europe, which has previously been entirely focused on green zero-carbon power generation is increasingly considering blue or low-carbon ammonia as a more practical emission reduction option. This is largely due to the currently prohibited high costs of producing green fuels. European governments are currently working on legislation intended to make low-carbon ammonia eligible for the incentives that now cover only green products. If this legislation passes, the global market for blue ammonia would be considerably larger than anticipated when we initially began the process of developing our projects. The marine industry is also keenly focused on ammonia as a potential fuel for large ships instead of high CO2 emitting diesel or bunker fuel, Fortescue and Australia materials and industrials company successfully used ammonia in combination with diesel as a marine fuel on one of its Singapore-based vessels. Interest in ammonia as a fuel continues to grow and there are numerous ammonia powered vessels on order and scheduled for delivery and entry into service as soon as 2026. We're very excited to be involved in this emerging clean fuels trend and expect to be one of the leading suppliers of low-carbon ammonia to these and other indices in the coming years. We have a lot of initiatives ongoing to improve our current operations that we believe will provide a meaningful increase in profitability and in turn shareholder value. Combining those with our low-carbon activities, we believe we're on our way to creating a profitable play on the energy transition. I'm excited about our future before we open it up for questions. I'd like to mention that we'll be participating in the following conferences in June.
The Stifel Cross Sector Insight Conference in Boston on June fifth, the Deutsche Bank Industrials Conference in New York on June sixth, the Wells Fargo's Industrial Conference in Chicago on June 12th, and the Jefferies Virtual ESG. Conference on June 20th, we look forward to speaking with some of you at those events.
That concludes our prepared remarks, and we will now be happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions)
Our first question today is coming from Josh Spector from UBS. Your line is now live.

Joshua Spector

Yes, hi.
Good morning. So I wanted to ask on one of your prepared comments when you talked about UAN prices higher because the supply demand is tighter in the U.S. through the second quarter, if you can kind of compare that to your comments about pricing moving down through the quarter. Obviously, there's seasonal factors as a part of that. But when do you think the supply demand in North America becomes maybe more balanced and links back to the cost curve versus a tighter dynamic?

Mark Behrman

I'm going to take that one.
Yes.

Damien Renwick

Hey, Josh, a joint And look, I think there's a couple of elements to your question.
So first of all, we're seeing pretty pretty stable UAN prices. I mean, they took a turn up through through Q1 and the early part of Q2. And really what we've seen one of the key dynamics playing out here in the US is UAN imports have been tracking much lower than in prior years. And so that's created some pockets of opportunity, as I said in my earlier remarks, where we've been able to sort of take advantage of that. Some other factors that are going to come into play. We've got urea at the moment. That's the volatility and the rail has, I guess, credit a little bit of uncertainty for farmers and buyers. And so this is forward buying to a limited extent, but some we should see stable prices come up until we start to see the reset. And at this stage, we're not sure when that will be, but it will be towards the end of Q2.
We think there's a bunch of pent-up demand over.
Yes, I think so on that in terms of the retailers and co-ops, they're buying closer to hand to mouth. So yes, there will be a time when that application really starts and kicks in, and there will be a surge of buying activity and and that will that will support pricing and brought through until we get to the end of season.

Joshua Spector

Thanks, Damian. I appreciate that. And I wanted to follow up on some of the guidance comments that Cheryl made on, I'll skip 2Q, but it seemed like when you were walking through the rest of the year you were talking about, I don't know if I heard you in terms of flat EBITDA for 3Q and 4Q versus prior year, or you're talking about flat volumes and if it's flat EBITDA, I guess 4Q would be surprising that you'd be calling that this early when I think your guidance on volumes was that volumes would be higher and I expect prices are probably seasonal less. So can you maybe clarify and talk through some of that.
Thanks.

Cheryl Maguire

And yes, sure, Josh. I think let me just clarify your question.
I did say in the script that, you know, after six consecutive quarters of lower pricing on a comparative basis that, you know, post Q2 to we would start to see normalization of pricing against the prior years. So you wouldn't have that big decline versus prior year comparative it periods.
Is that the point that you were referring to?

Joshua Spector

Yes, maybe I misheard pricing versus EBITDA on. I thought you were starting to guide towards second half EBITDA flat year over year.

Cheryl Maguire

So if I heard that wrong, and my answer is that, yes, just in relation to pricing, not EBITDA.

Joshua Spector

Thank you.

Operator

Thank you.
Take our next question today is coming from Adam Samuelson from Goldman Sachs. Your line is now live.

Adam Samuelson

Yes, thank you and good morning, everyone.
Wanting and ordering.
Morning. Maybe picking up on that last kind of line of questioning as we obviously kind of gave some framework on EBITDA for the second quarter, no longer thinking pricing would be a year on year headwind the second half of the year, I guess is we would think about what that would net to from a full year earnings perspective and then bridging to kind of the normalized EBITDA performance that you framed it back at the Analyst Day a little over a year ago, help us think about the operational uplift still to be realized after this year as we think about operating rates in the at the plants, obviously, there would be the incremental uplift from carbon sequestration and the Clean Ammonia. But just on the on the plant plant reliability point, what can that contribute kind of in 25 and 26? And what's your confidence level actually going?

Cheryl Maguire

Yes, sure, Adam.
I think what I would I would probably do is bridge from 2023, which we were around 133 million of EBITDA. And we've spoken to in the past about, call it 35 to 40 million of uplift from improved reliability. And I think what I would point out there is when we're talking about going to 95%, that's not just on ammonia. We also are assuming that we're not going to sell that product as ammonia. We've got capacity to go downstream and nitric acid, a end solution and UAN. So there's additional uplift there on that impact from the down stream production. And so if you take the one 33 add another 35 to $40 million from improved production, we are carrying some higher costs right now as we tried to accelerate some of these initiatives that we have on the go. That's another, call it, 10 to 15 million of EBITDA. We've got the urea expansion that we're doing at Pryor here in the third quarter. Some of those margin enhancement projects should add another 5 to 7 million of EBITDA. And then we've talked about the license agreement. And that's another, call it, 15 million of some carbon sequestration coming online in 2026. So that's how we think about the EBITDA uplift as we go through the next, call it 24 months.

Mark Behrman

As Adam has for us confidence in our ability to do it.
It's a great question actually.
And so we spent probably the last month, really spending time with our sites and our manufacturing leadership to create a roadmap on how we get to 95% of what it will take. And so I would say that we're highly confident that we can get there.

Adam Samuelson

That's helpful.
And then maybe another one for Charles. Just on the balance sheet, you buy back some stock, you also bought back some of them some of the notes in the quarter and seemingly further in April. Do you have a total target in mind for what you would be looking at to from a capital deployment perspective in terms of the buyback and debt repurchase this year?

Mark Behrman

Yes, I think that, um, so we bought back 75 million of debt to date and we've bought back another 10 to $12 million of Slovakia. So I think we've allocated about $125 million to buy back a combination of debt and stock and then we'll kind of take a breather there, see where we are see where some of our projects are and what our cash needs are. And then we'll make a decision on whether we move forward with continued purchases or not at that.

Adam Samuelson

That's really helpful. I'll pass it on.
Thank you.

Operator

Your next question is coming from David Begleiter from Deutsche Bank. Your line is now life.

David Begleiter

Thank you.
Good morning.
I'm Mark, just looking at natural gas prices, how are you thinking about taking advantage of these lower prices over the longer term?

Mark Behrman

Well, you know, it's a great question and we debate this internally and we debated it for the last five years. We seem to you want to take some, which we've tried taking some, I'd call it forward purchases because not really hedges, and we've won some of them. And last year, unfortunately, we actually lost in a big way, right? We lost the potential for, call it 40 million based on locking in at higher prices when the actual prices were somewhat lower. So I think we're taking the position right now that we lock in. We make sure that we have enough gas at the beginning of every month to lock in 90% of our gas needs. And that's combined with if we have any forward purchases of product primarily on the fertilizer side where we lock in the gas to lock in our margin there. If we've got any customers on the industrial side since they're primarily gas pass through that one, a lot more or less locked in, which doesn't happen very often, very infrequent. Actually, we'll lock that in as well. But going in and purchasing forward to really make a bet on where natural gas prices are going to be. There's a lot of conflicting views in the marketplace on prices going up, come towards the end of this year and into next year. And then you read a whole lot of other conflicting views on how much natural gas is actually coming out of the ground and of course, we've got LNG issues and what's going on there. So I think our strategy right now is to continue to buy primarily first of the months to lock in that gas. And then we're starting to think about the winter and do we actually hedge or buy forward some gas in the winter where it can be somewhat more volatile.

David Begleiter

Understood.
And just on the US buying debt versus stock, how do you decide the use of meal? What's more beneficial to us? Do you guys start with debt at any point any time Thank you.

Mark Behrman

Well, I think first, we've Cheryl has been pretty public in saying that and our target is 2.5 times leverage growth. And so we said 2.5 times leverage on mid market EBITDA, which is the 200 million that Charles referred to earlier.
So that would be 500 million.
So we're pretty much at 500 million with that 75 million on repurchase of debt, we know to make ourselves a bit more bulletproof and to allow us to continue to weather any storms and also fund capital projects. And I think we would consider delivering somewhat more just to give more comfort, right? We're in a somewhat volatile industry where pricing can move relatively quickly. And the last thing we want to do is ever being an over-levered position. So I think that's the first thing we think about when we think about it, we're lucky enough that we certainly have enough cash and liquidity that we can do both debt and stock right now. I hope I'm not going out there on a limb, but I think we all believe that our stock is pretty undervalued. So I think that now buying back some stock at these levels makes a lot of sense for us.

David Begleiter

Thank you very much.

Operator

Your next question today is coming from Andrew Wong from RBC Capital Markets.

Andrew Wong

Your line is now live 80 morning. Thanks for taking my questions on. Could you just maybe talk about your view on ammonium nitrate prices and going forward, it seems like the premiums have come down a little bit versus your RIA. Maybe just what's driving that? And Tom, could we see that rebound going forward Yes, good morning, Andrew.

Damien Renwick

I think you'll see a little bit of rebound going forward as we get into more more application and some of that natural demand for Orion comes through but in terms of some of those trends, I think there's been some some changes in demand in the marketplace. And so what we tend to say is that if pricing for iron gets gets too high, then you'll start to incentivize some switching to urea. So we're constantly sort of working against some of those dynamics. But some I think we're happy with with where things are at right at this very minute.

Andrew Wong

Okay, thank you.
And then, Tom, can you just talk about the collaboration with MOG? It comes to generate? Looks like initial testing is in Q three figure. What does that what does the opportunity for LSB. around that or if it's a success?

Mark Behrman

Yes.
Well, look, I think one of the things that people are now starting to really talk about when we're talking about low-carbon development. And this whole energy transition is we can build all the facilities we want, but it's really going to be demand driven. And I think when we started our conversations with Amegy and and talking about how we can work together, so they've got in our system, Peridex that allows people to basically convert the existing engines to run on ammonia because they've got ammonia to a fuel cell. If you saw the hydrogen and hydrogen into the to the engine. So part of what we've talked about was really working together to develop the inland marine marketplace here in the United States, a big market, a lot of vessels going up and down the rivers, a lot of dirty fuel used. And so for them to sell systems, there needs to be the availability of low-carbon ammonia and for us to sell low-carbon ammonia into that marketplace that needs to be engines that can run on that. So it really it's kind of like hand and glove in the way that it fits. So we're really working with them to trying to develop that market and really work with Washington to really understand the opportunity and work with U.S. Coast Guard to get them to understand what it would take and get the right permitting. And I think that's why I believe that's why their test has been delayed, which was supposed to happen towards the end of last year is that it's taken longer to educate on the political scene and as well as Coast Guard. But I think they've made a lot of progress, and we're excited about that that's great.

Andrew Wong

Thank you.

Operator

(Operator Instructions) Rob Dwyer from Grant research. Your line is now live. Rob, perhaps your phone is on mute.

Robert McGuire

Thanks so much and good morning. Could you please talk about your healthy increase in downstream production volumes? Perhaps just elaborate on what's behind that? And if you take a contingent could continue on a year-over-year basis for the remainder of 2024?

Damien Renwick

Yes, good morning, Rob.
But basically, we were sold out on all of our downstream plants.
So as we get improved performance from those assets, then we're in a good position to sell them and increase the volumes. And that's exactly what we've been doing right across the board. So it's pretty simple in that aspect.
Yes, I think in fact, we've got about 200,000 tons of ammonia that we sell in El Dorado and inject into the pipeline to a customer that we'd love to find a way and we're working diligently to find a way to upgrade. So I think we've still got some more upgrading capabilities. We'll take some more capital to do that, not like an expansion that we've talked about in the past, but we think that there's certainly margin enhancement as we move forward.

Mark Behrman

And the other a bit of margin enhancement that we continually revise is basically what's the mix, right? And how do we optimize that mix? And what's the position on pricing or term of contract or whatever we take on those upgrades. And yes, yes.

Cheryl Maguire

And I think one other thing I would point out, Rob, is that when you're thinking about Q1 to Q2, we and I kind of alluded to it in the script, we expect to see further increase in volumes on all of our downstream production for UAN and nitric acid. And then, of course, you'll see a corresponding decrease in ammonia sales as we look to continue to upgrade further.

Robert McGuire

So that's helpful from all three of you.
Thank you Moving on, how would you characterize the strength of the spring application and what does that tell you about future demand? In other words, could you also talk about it if you think there was some pull-forward from 2Q into two into Q1. You kind of touched on it in your comments, but if you can elaborate, I'd appreciate it.

Damien Renwick

Yes. Look, I think the way the season is setting up, it's looking pretty good. Planting is running ahead of the 5-year average. I think in the last report we're about at about 27% versus 22% on average. So that's all pointing to to a good season.
Look, clearly, we had a really strong pre-plant run on ammonia and but we're now really focused on what that means for UAN and some of the other nitrogen products. And we think we're well positioned to take advantage of whatever the season throws at us. And we're confident that it will be a pretty healthy spring this year.

Robert McGuire

Okay.
I appreciate that.
And then lastly, could you kind of touched on this in the past, but can you discuss the mining industry's push this decrease or its carbon footprint? Are they under different pressure than the rest of corporate America? Or is it it's just simply there's they're keeping up with everyone else?

Damien Renwick

That's an interesting question is probably a bit. I'm a bit of both.
I think from the day that the mining industry is trying to decarbonize and some of the big producers have a really strong effort on that. You know, they've all got sustainability reports and and people responsible for for driving improvements there. So yes, we're seeing some of that come through in some of our discussions with them on our low-carbon offerings as we look to commission our project at El Dorado. So I think we're well placed to take advantage of that and you know what, yes, we hope that they continue to trend push to decarbonize their supply chains.

Robert McGuire

But just to follow on, do you think that there's more demand for low-carbon ammonia in the next few years when you start producing coming from mining or industrial, as it probably will look about the same costing, it will look about the same it's had to split the Please standby.

Operator

We're experiencing technical difficulties. Please do not disconnect. Please standby. The speaker line has now rejoined for it.
I believe, Rob, you were you online for question one.

Robert McGuire

Yes, indeed, just touching base on sort of at that time or I'm just good. Can I move on if you don't mind, are there any meaningful upgrades taking place in the turnarounds to uptick your on-stream rates?

Damien Renwick

Yes, Rob, we've got a urea expansion that we're pursuing and implementing it at Pryor. And that'll that will help us produce another 60 to 70,000 tons of UAN per year. And the rest of the turnaround scopes really for both dump sites, Pryor and Cherokee is really going to be focused on improving reliability.

Mark Behrman

So we expect to come out of the turnarounds with much higher operating rates and and that obviously would just improve product for sale. So yes, we're looking for these are major turnarounds for us. We're very focused on them and actually is a fair amount of capital that we're deploying into the turnaround.

Robert McGuire

Thank you.

Operator

Yes, our next question today is coming from Charles Neivert from Piper Sandler. Your line is now live.

Charles Neivert

Morning, guys. Just one quick question. The SG&A percentage seems to be on the rise lately. Is there any particular reason for it? Or should we expect it to stay at a higher level or is that going to come back to where it had been over the last couple of years?

Mark Behrman

No.
Charlie, I think you're going to see us carry an extra 10 to $15 million in SG&A for the next 12 to 18 months, maybe 24 months as we push reliability programs. Some of that is obviously rolling up to and the cost of sales, but some of it, we're carrying a bit as corporate overheads. So and we would see once we achieve the reliability rates that we've outlined, we definitely should see some reduction in expense.

Charles Neivert

And then in terms of the like a net debt to EBITDA, multiple new designs have a target in mind. I mean, admittedly, EBITDA has been moving around a little bit over the last year. The trailing 12 months has seen some big movement. But when things flatten that hands to begin to level off and get less and less volatile. Do you guys have a target in mind as to where you'd like to be when it all worked its way through.

Mark Behrman

Yes, no more than 2.5 times levered.

Charles Neivert

That's all for me. Thanks.
So gas has come down quite a bit. Obviously, it's still much higher than the US, but having seen where it lies beginning the obviously incredibly high numbers, but where it is now, does it seem like you're going to see some of that European production come back online form of $50.40 ammonia. It might not be exceptionally profitable, but it might be enough to keep them in the game considering they've got the protection of somebody having to move product into the area. They just might be easier for on that. Why do you see any increase in European production because of the lower gas numbers coming out of there.

Mark Behrman

Look, I think the European producers will probably want to see some more sustained pricing levels in order to get some confidence to restart operations. So I think there's still a lot of water to pass under the bridge in that aspect. I think that plants that have restarted will continue on, and I think we'll see a little bit of the status quo continue for some months now.
So I think it depends on import prices versus cost of production, right? And so where those levels are. And so I think if gas is low here and natural gas is much higher in Europe, but relatively low compared to where it's been over the last several years. And that puts a cap sort of on ammonia prices in general might be still cheaper for them to import. So I think it's really just a total economic decision.

Charles Neivert

It's the only one growing in Nepal, completely sort of like in the ACS chose to close the UK ammonia operation, but supply ammonia from the outside. Any of those any of the current players in and around Europe might consider closure any their substitution or just outright closure of the facility?

Mark Behrman

Look, not that some that we've heard of late. I think most of the producers like WuXi F. and BISF. some time have already made their moves coupling that Europeans have closed down facilities.
Yes, but I think the the rest of probably some further operating Happy to do so. And down those suspended or shut down?
You know, we haven't heard anything of that turning into a permanent closure.
I think the only thing that people will start to face after some period of time is you can't just shut down the facilities. You do have that expensive to maintain it, right, because you have to be able to maintain it so that you can turn it back on. So at some point, I think the cost of maintenance we'll forced some decisions.

Charles Neivert

Okay. That's it from me.

Operator

Thanks.
Doug Baker, we reset of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing remarks.

Damien Renwick

Thank you.
As always, thanks so much for your interest in LSB Industries. And if you have any follow-up calls of follow-up questions, feel free to call us, and we'll be happy to answer them. Thank you and have a great day.

Operator

Thank you.
That does conclude today's teleconference.
You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.