Episode Transcript
[00:00:03] Speaker A: Welcome to INA Insights, where prominent leaders and influencers shaping the industrial and industrial technology sector discuss topics that are critical for executives, boards and investors. INA Insights is brought to you by Ina AI, a firm focused on working with industrial companies to make them unrivaled. Segment of one leaders to learn more about Ina AI, please visit our website at www. Dot ina dot AI.
[00:00:40] Speaker B: Welcome to our new episode of the Titanium economy podcast series hosted by Ina Insights. Today we are honored to host Mister Mark Berman, CEO of LSP, spans corporate governance, executive management and investment banking. Mark has been an instrumental force at LSB Industries since 2014. A renowned manufacturer and marketer of chemical products for agriculturally. Beginning as the senior vice president of corporate development, Mark's strategic acumen saw him ascend to the role of executive vice president chief financial officer in June 2015. His tenure has driving LSB Industries to new heights of success. Mark's journey in the corporate world extends beyond LSB Industries as he also comes with over 25 years of investment banking experience at firms like Sternagy, where he served energy practices from 2007 to 2014. He also held leadership roles at prestigious firms such as Payne Weber and Drexel Burnham Lambert. Mark's dedication to corporate various publicly held companies, including his own board at LSB Industries, then PHX Minerals, Noble International, Oakmont Acquisition Corporation and Robocom Systems International. Mark, very excited to have you here with us today and can't wait to dive into your wealth of experience.
[00:01:48] Speaker C: Thanks so much for having me.
[00:01:50] Speaker B: Perfect current role at LSB. Could you give us an overview of the company, especially its focus within chemicals, manufacturing, and anything you could tell us about the strategic direction and the outlook of the company would be great.
[00:02:03] Speaker C: Sure. So currently CEO and president of LSB Industries, and I sent it to that role at the end of 2018. So it's just a little over five years. LSB has been around for a lot of years and been in and out of a number of businesses. But in 2017, we divested our last large business and solely focused on the business that we are today, and that's a producer of nitrogen chemicals. So we take natural gas, upgrade that to ammonia, and then sell some ammonia in the marketplace, but most of that ammonia is upgraded to other products. We serve the agricultural market, so half of our production is sold as fertilizer and the other half of our production is sold as chemical, intermediate or feedstock to industrial companies and also in the mining services industry. We've been around for a while. We do that through three integrated facilities, one in Oklahoma, one in Alabama, and our largest facility in Arkansas. And then we also have a relationship in half for over 25 years with Covestra, where we manage one of the largest nitric acid plants in North America at their Baytown, Texas facility. As far as where we're going, we've got a lot of opportunity to really expand our business organically. And so we've got a lot of growth initiatives and reliability initiatives on our facilities. But the energy transition, obviously, is sort of breathe new life into the ammonia space. And we are actively looking to take advantage of that with several projects that we have going on one capture and sequestration project at our largest facility in Arkansas. And then we announced, in partnership with several large global players, a brand new low carbon ammonia plant in Deer Park, Texas, which is outside of Houston.
[00:03:52] Speaker B: Mark, since you brought up energy transition, let's talk a little bit about that, because that's a hot topic these days. Right. So in that context, in the context of the ongoing push for energy transition, what specific have to take or is taking to stay aligned with that?
[00:04:08] Speaker C: Yeah. So we're really big believers in decarbonizing and the overall energy transition. So how can we take advantage of that? As I mentioned, we make among it today, and the production process creates a lot of CO2. And generally speaking, we either capture that and sell it where customers use that as part of their own process, or we vent it and emit it into the air. So we're very focused on how do we capture carbon and really, how do we take advantage of the world's desire to really decarbonize. As I mentioned, we have two projects. One of them is at our largest facility, where we'll capture about 450,000 to 500,000 tons of CO2 and sequester that in the ground. Actually, we're lucky enough that under our 1400 acres of the plant site, we've got great saline formations that are necessary for sequestering CO2. And so the wells actually will be on our property. We have a partner called Lapis Energy that are subsurface experts. Right. We're not subsurface or geology experts. And so together, we filed a class six permit with the EPA to allow us to develop a sequestration well on our property. Why is that important? Well, by doing that project, we reduce our company CO2 footprint, or emissions footprint, by 25%. So that's pretty significant. We also can make money at it. So Lapis Energy intends to invest the capital to develop a sequestration site on our facility, and then they'll also develop the CO2 capture facility, and they will then qualify for the 45 Q tax credit as part of the Inflation Reduction act. But for that, they'll have to buy the CO2 from us. So they will do that, and that'll add about 14 or $15 million a year in profitability for us. But on top of that, we'll be left with about 375,000 tons of low carbon ammonia, and we'll be able to sell that, hopefully at a premium. And we've had a lot of really good discussions with a lot of our customers that tend to be global chemical companies that are all looking to reduce their own CO2 footprint and are looking to folks like us, suppliers to help them do that. So I'm really encouraged with those conversations.
And I think, obviously, on top of the money that we'll generate from selling CO2, we'll be able to generate additional income from selling a low carbon product. So we're really excited about that project. It's actually pretty near term, we think, based on conversations that we've had recently with the EPA, that sort of the mid year, next year will be approved to actually drill a well in sequester. And so by the end of 2025, we think that we'll be able to initiate and operate the carbon capture facility and start making a low carbon product. So we're really excited about that. But on top of that, we're excited about the potential new demand for ammonia. Ammonia has been around for a long time. It's traded globally. It's primarily used as a fertilizer. About 70% to 75% of all ammonia is used as a fertilizer, either directly, or most of it's upgraded to other fertilizers. And then the rest, obviously, is used for industrial purposes. And now we're talking about ammonia either being used as a hydrogen carrier, where ammonia is much easier to store, handle, and ship long distances, and then people will decrack hydrogen out of the ammonia. But it's also being really talked about and now tested to be used directly as a fuel source, both in power generation and in the marine industry. Those are the two largest. So those would be new demand centers for ammonia. So, based on that and some of the work that we've done with our partners, we developed a project in Deer Park, Texas, as I mentioned earlier, to build a brand new world scale, 1.2 million ton a year low carbon ammonia plant. And we're developing that in conjunction with Air Lakid Impex, who is Japan's largest EMP company, and then a global terminalling and storage company called Vopac. And they have a partnership on the site that we're going to develop with a company called Exelon. So sites called Vopec, Exelon, Houston. So again, we're really excited about that. All of that, though, will be demand driven. So we need to understand that this new demand will materialize. And I think the timing of these new markets is probably the most uncertain right now. It's the biggest wild card. So I think the key will really be to develop a facility. And then before we go to financial investment, decision to move forward on the project is to make sure that we've got a majority of the production of this new facility locked up contractually through long term offtake agreements with customers. So I think those are our first two projects that we're looking at. And then there's a number of other projects that we're in discussions on about partnering to develop, and I think that's one of the biggest keys. We're trying to develop some new industries here. Right. So that it's basically, I've heard the term nascent use before. So a nascent industry, because not one ton of low carbon hydrogen or ammonia is being sold today. So all of this is going to take partnerships. I don't think people can be arrogant enough to sit there and think that they're going to develop it themselves. So I think we're very focused on who our partners are and getting the right partners and making sure that we're all aligned. Both partners in a production facility, but also partners in offtake. Right. Because I think, again, in order to develop this new industry, everyone's going to have to probably have some skin in the game to participate and get it off the ground.
[00:09:59] Speaker B: That's right. That's right. And this is all great stuff, Mark, just hearing you see all of the clean energy transition and the impact of IRA come to life. It's great to hear.
Mark, you mentioned hydrogen as one of the new areas that you are exploring. And of course, like you talked about, there is a little bit of, like, there's lack of clarity around how that demand would ramp up. And also there are some challenges around the investment side of it. Right. Tell us how you're approaching that problem of, like, thinking of hydrogen as a new industry for your product, for ammonia, given the context of, like, the demand, the lack of clarity around demand, and also some of the challenges around, like, the high cost of investments.
[00:10:47] Speaker C: Yeah. So, yeah, take our project, for example, the project, while we're still doing what's called pre feed engineering, to really narrowed down what we think the cost is of the overall project. They are expensive. So it's certainly in a neighborhood of $2 billion or more to develop the whole project. So that is quite a lot of money. And all of us have either boards of directors or shareholders that we report to. And when you invest capital, people have to think about what's the actual return on that invested capital. So I think once we can understand what the actual cost of the project is and what kind of returns we think we need to invest that capital, then you can actually back into what's your selling price have to be of your product, and then you can have some really meaningful conversations with potential customers and off takers for that. There is a lot of conversation today, and it's a lot of good conversation globally with folks in Asia, particularly Japan and South Korea, that are very focused on using ammonia as a partial fuel source for power generation, displacing some coal that they're using today in power plants. And then, of course, Europe has a lot of. There's a lot of conversations in Europe to maybe now start with low carbon ammonia versus zero carbon, or green ammonia or hydrogen. And so conversations are really good. I think there's a lot of interest, but at some point, we're going to have to put a stake in the ground and pen to paper, right? And we're going to have to have contracts that talk about real volumes for periods of time at particular stated prices or index prices. And I think we're heading towards that. I think there was a thought process that people would just build facilities, and the supply of low carbon ammonia or hydrogen will be there. And then, of course, people will come in and think about buying those particular products in order to support the investment. I think we're all going to have to come together and producers with the capital and customers with their commitment to offtake at prices that make sense. And that's how this will all get off the ground. So I'm excited about the conversations. I really do think that'll happen, but I think it'll probably happen a little bit slower than maybe most people think, as many things take longer than we think when we start them out.
[00:13:09] Speaker B: Exciting stuff, especially all the clean energy and hydrogen. Mark, going back to what you mentioned in your overview, right? He has a bunch of end markets as their focus. So there's agriculture, you mentioned feedstock, then industrials. Tell us, how does that diversified focus in terms of end markets help your business? I mean, of course, like, it gives you assume, it gives you a bit of leverage to also focus on some of these riskier bets or new bets like. Like hydrogen. But what else? What else does diversified egg market focus help you with?
[00:13:41] Speaker C: When we think about our business, a lot of our competitors are really focused on the ag industry, right? So they're really fertilizer companies. We're a bit different than that. We are much more diversified than our competitors. And the reason we like that is it allows us to really optimize our production, meaning we can play markets off each other. So if the ag markets are really roaring and we've got high prices for fertilizer, we certainly can sell it as fertilizer, but it also helps us push up price within our other markets. And generally speaking, where the fertilizer markets tend to be spot markets, nothing really long term contractual. The other parts of our business are generally contracted and are more cost plus to that business versus spot commodity prices. So again, we get a chance to play one off the other. Which means, though, that we have to have really distinct views on where we think the fertilizer markets are today and where they're going over a period of time. Because if we're going to sign a long term contract with an industrial customer, let's say a five year contract, we've got to have a view that that's a better five year bet for us than just selling into the fertilizer market. So I think it was really key for me to build a really good strategic thinking team on the commercial side that really could develop our understanding and better understanding of the marketplace, not just in the US, but also globally, as these are all global products. So again, it just, at the end of the day, I think what we're tasked with by our board and our shareholders is really optimizing the production that we have to make the most money that we can for our shareholders.
[00:15:21] Speaker B: And within the agriculture sector itself, Mark, you must be seeing a lot of changes, especially with food security as one of the key areas of focus. What kind of opportunities are emerging out of that? I know you said it's a smart business, but are you seeing any changes because of some of the recent trends in the agriculture sector?
[00:15:43] Speaker C: Well, I think in the United States, the USDA is really focused on food supply and food security. So they do have a program, a grant program, that is supporting onshoring of additional fertilizer manufacturing here in the United States. So domestic production versus foreign production are imports. So that's one thing. And the other thing that they're really trying to do is diversify what's a fairly consolidated industry here in the United States of fertilizer manufacturers. So part of that grant program is really to diversify the manufacturer of fertilizer in the United states as well.
I think there was a big push to produce more domestically and also to diversify the production so that's not as concentrated in a number of producers hands. So I think that's one trend that we're seeing. The other is just different ways that farmers are trying to take advantage of some incentive programs by the US government to decarbonize, right? So there's, it's slow to come around, but you're starting to see it more and more where farmers are using programs and practices to really decarbonize.
[00:16:56] Speaker B: Mark, as they famously say, we've been living in interesting times lately, right? With interest rate inflation, all the geopolitical tensions with China, US, between US and China, and then there's also the conflict in Europe.
How has it impacted the industries? And what have you been doing to navigate some of these challenges?
[00:17:21] Speaker C: It's interesting times, to say the least, lots going on globally. So look, I think you have to really be reactive and agile because I think that's the key in times like this, I almost say it's like riding a roller coaster. You sort of have to have to navigate that roller coaster. And the person that can do that or the company that can do that, I think comes through the other side in good shape. So european gas prices obviously are significantly higher than us gas prices. And so I think from a production standpoint, the US and ourselves being part of that sit in a really good spot. So anyone who's using natural gas as a feedstock to make their product throughout the chemical industry and throughout the chemical chain has a distinct advantage over certainly european producers, but even other areas of the world that are importing gas through lng and other means. So I think we think about that long term and say how can we expand our production in a low carbon way that could really take advantage of the strategic nature of having low, the availability of low natural gas at low prices. So that's one thing. As far as some of the other impacts, again, I think you just have to look at how you can take advantage and what the dynamics are. Specifically when the Russia Ukraine war hit, I think prices in for fertilizer and then any other ammonia derivative or nitrogen product derivative spiked in price. And so obviously, we want to take advantage of the markets like that to the best that we can and figure out how we can use that to really be a catalyst to build our company long term. So in 2022, when prices spiked, I think our whole industry enjoyed, if not the best year in recent history, certainly one of the best years in recent history, which allowed all of us to really generate a lot of profitability, but also generate a lot of free cash flow so that we could use that to invest back into our businesses for continued reliability and expansion. But then think about building some new facilities, and I think that's what you're seeing, that there's healthy balance sheets out there that can take advantage of that. So, again, when I think you have displacements globally, there's nothing we can't plan for a war, and we can't plan for high interest rates or what we think might be high interest rates. I think you have to take advantage, really deal with, and try and take advantage of those situations as they come up.
[00:20:04] Speaker B: A good side of these interesting times is also the rise of AI, especially with generative AI. How is the LSB industries thinking about adopting the technology?
[00:20:16] Speaker C: Yeah, so it's really interesting when people talk about AI, I think everyone's got their own definition of what that really is and what it really means. So I'd like to say that we run chemical plants. A lot of them are automated. We have what's called digital distributed control systems within our plants, DC's systems. And so you can capture a lot of data. And really, today, more and more chemical plants around the world are run through the analyzing of data and looking at data, rather than a gut and feel, which maybe was kind of an old school way of doing it. And by that, I mean we've got, we can, we can monitor and look at temperatures of equipment, pressures that are in our plants, vibrations, you name it, I mean, and all that data comes in. So the use of, I'll call it data analytics and data science, some people might call that AI, really allows machine learning and the ability to really look at that data, create trends over time with more history and more data, and really alert a person to really take a look of an anomaly that they see with a piece of equipment that we might have in a plant before the human eye can see it. And so I think that's going to change our industry, because what you really want to do is you want to be, when it comes to large chemical or petrochemical plants, you really want to be predictive in your maintenance of those plants and maintenance of equipment, rather than reactive. And so the more we can do that, the more we can catch things before they really become issues for us. And so I think the use of AI to do that, AI data analytics. Data science, I think, will transform the way that we operate our facilities. We also can bring data in to central locations where it makes it even easier for data analytics and the people to take a look at the operations that we have today.
[00:22:08] Speaker B: Mark, let's shift gears a little bit and focus on your own personal and professional journey. Could you share some insights from your experience of serving as chairman of the board at PHX Minerals and the directorship at the Fertilizer Institute?
[00:22:25] Speaker C: Well, certainly being a senior leader at a company different than being a director. There clearly is a delineation between being in the day to day operations as my role as a CEO of LSP and then being on the board of directors of a company. Fertilizer Institute is the fertilizer industries trade group. And so I'm really, really happy that I'm involved with that on the board and on the executive committee and committed to that, because I think it's a really great organization and it brings together not only producers, but retailers, wholesalers, anyone who's associated with the fertilizer industry. And as a board, we definitely try and put our interests as leaders of companies aside and think about the overall industry. So that gives me different perspective on what other folks are doing in the industry and how to not just be thinking about what would be best for a particular company. Sitting on the board of a public company, obviously is very different, and so we have to deal with public company board requirements and SEC requirements and things like that. But I've been sitting on boards for the last 20 years, and so over that period of time, certainly board responsibilities have changed a lot and actually grown a lot, but clearly learned that difference between being a director and supporting and overseeing management on behalf of the shareholders, and actually being involved in the day to day decisions. It's a bit jarring at first, because if you've run a company, you want to just jump in there and help the management analyze things, maybe take a look at things and really help make decisions. But as a board member, that's really not your responsibility. So I think that being able to sit on boards has allowed me to get a better appreciation for what board members go through. And so I've got my own board as a CEO of LSB Industries. And so that relationship between myself and my board I can appreciate a lot more because I sit in their shoes on other companies boards.
[00:24:35] Speaker B: Mark, also, as we mentioned in our introduction, you've also spent a significant number of years in investment banking. Could you talk a little bit about that? What was your focus during those years, sure.
[00:24:48] Speaker C: So I was a banker for many years, primarily in the industrial sector with a big focus on capital goods industry, industrial services, and then overall manufacturing, which includes chemical manufacturing. I think the one thing that I took away from that industry or that really helped me out when I joined LSB Industries is I learned a lot. I learned what makes good companies tick and what makes them really successful. And then what do management teams do that don't make companies successful? And quite frankly, it's a very simple philosophy for me. It's really all about the people. So when you think about it, doesn't matter what industry it is like, we're in a capital intensive industry, but you could be in a capital light industry. Some of the service company people make things work. And so as leaders, I think we've got to empower our people. First off, you have to really hire the right people. Right. So, subject matter experts in the areas that you're hiring them for. So you hire really good people, and then you've got to empower them. You've got to allow them to do their jobs, to make decisions. You know, you set up the guidelines, you provide the right platform for people, you provide them the right resources, and then you let them go. And I think sometimes people have a really hard time with that. But I think if you go back and look at every successful company, it's really, it's been made a success by the team and the people. Right. Because smart people figure out a way to get things done, and it's about getting things done, and it's about trying to do it in a, in a way that's not bureaucratic. So here at LSB, we were, I was lucky enough, really, when they asked me to become CEO at the end of 2018, to have the opportunity to really develop a culture. And one of the things that I really wanted to do was create an entrepreneurial environment, a flat organization that can be agile and make decisions pretty quickly. And, of course, empowerment became a really big thing for me. So lucky enough that we've got a great management team here, have stepped up to the plate and really done a wonderful job in turning the company around and putting us in position to really grow and take advantage of now a great opportunity and energy transition. But again, it goes back to. So the thing I really learned out of all those years is really, besides the skill set of merger and acquisitions and financings of companies and things like that, and being a general advisor is the people make the company successful. So good teams figure out a way to make things work. And not so good teams can take a great business, unfortunately, and make it underperform. And so it's all about the people.
[00:27:28] Speaker B: That's so true, Mark. And Mark, finally, so you've spent so many years through your investment banking career and now at LSB and also your board positions in the industrial sector, which is the sector that we like to call as the titanium economy, saying that it's not the rust Belt, it is the powerhouse of the american economy. Right. With, with all of the jobs that it's creating and with all of its contribution to the GDP.
Any closing thoughts on the sector, on where it is headed and what do you see as the outlook, especially now with all of the policy changes, the IRA and the Chips act and everything?
[00:28:07] Speaker C: I'm really bullish on manufacturing in the US. And what you're seeing is a lot of companies close down european facilities and either bring production to existing facilities that they own here in the states that maybe don't have the operating, the highest operating rates and increase those operating rates or a lot of development of new manufacturing facilities here in the states. Look, we've got, again, low cost of natural gas and generally power. We've got renewables that are burgeoning all over the place, whether it's wind or primarily wind and solar.
We've got incentive programs that are in place today to really drive the investment of capital. And we've got a workforce that, generally speaking, when you look around the globe, is pretty educated. And so I think we have an opportunity here in the United States to really increase and expand our stature within the global community of how we're thought about manufacturing. There was a big push for a number of years to offshore manufacturing, to go to China, to go to Asia, to go to Mexico. And I think, quite frankly, it's a renaissance now, and we're going to see a lot more production here in the United States. It's also given, I think, your earlier comment about so many things going on around the world and so many events. It's an easy place to do business with, generally speaking, a good political climate and a good business climate. And so I think that's really important.
[00:29:40] Speaker B: Awesome. Thank you, Mark. And it was a pleasure to have you here with us today. And thank you so much for sharing your thoughts.
[00:29:47] Speaker C: All right. Thank you for having me.
[00:29:53] Speaker A: Thanks for listening to Ina Insights. Please visit Ina AI for more podcasts, publications and events on developments shaping the industrial and industrial technology sector.
