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Edited Transcript of LXU earnings conference call or presentation 26-Jul-18 2:00pm GMT

Q2 2018 LSB Industries Inc Earnings Call

OKLAHOMA CITY Jul 27, 2018 (Thomson StreetEvents) -- Edited Transcript of LSB Industries Inc earnings conference call or presentation Thursday, July 26, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel D. Greenwell

LSB Industries, Inc. - Chairman & CEO

* John Howard Diesch

LSB Industries, Inc. - EVP of Manufacturing

* Kristy Carver

LSB Industries, Inc. - VP & Treasurer

* Mark T. Behrman

LSB Industries, Inc. - Executive VP of Finance & CFO

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Conference Call Participants

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* Joseph Logan Mondillo

Sidoti & Company, LLC - Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to LSB Industries' Second Quarter 2018 Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Kristy Carver, Vice President and Treasurer. Thank you. Please go ahead.

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Kristy Carver, LSB Industries, Inc. - VP & Treasurer [2]

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Thank you, Brenda. Good morning, everyone. Please note that today's call will include forward-looking statements and because 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 actual results to differ materially. As this call will include references to non-GAAP results, please reference the press release in the Investors section of our website, lsbindustries.com, for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

At this time, I would like to go ahead and turn the call over to Dan for opening remarks.

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Daniel D. Greenwell, LSB Industries, Inc. - Chairman & CEO [3]

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Thank you, Kristy, and good morning, everyone. We're pleased to have you on our call this morning and appreciate your interest in LSB Industries. Joining me on the call today are John Diesch, our Executive Vice President of Manufacturing; and Mark Behrman, our CFO.

Today, we'll discuss our 2018 second quarter results and provide you with our outlook for the third quarter and the second half of the year. I'll start out with an overview of the second quarter and then John will discuss our plant operations, followed by Mark, who'll drill into our financial performance and capitalization. Then I'll come back to provide you with our current thinking on the third quarter and the second half of 2018, after which we'll take your questions.

Our revenues for the second quarter of 2018 were $103.2 million, a modest decline from the same quarter last year after adjusting for the adoption of ASC 606 accounting standards, along with the sale of some business in the 2017 second and third quarters, but we were up on a sequential basis.

Adjusted EBITDA of $17.8 million was down about $4 million on both the year-over-year and sequential basis. Our results were adversely impacted by the unplanned downtime at our El Dorado facility and to a lesser extent our Pryor facility. As a result, we had lower production in volume of both agricultural and industrial products, resulting in reduced sales, lower fixed cost absorption and additional cost related to the repairs and the need to purchase ammonia from third-parties, which collectively had a negative impact on adjusted EBITDA of approximately $15 million for the quarter.

On the positive side, we saw a material year-over-year improvement in product pricing for UAN and high-density ammonium nitrate, our primary agricultural products and continued increase in sales for our mining products. Mark will provide you with more detail on our financial results later in this call.

The reliability of our plants remains our top priority, heading into the back half of the year. Our progress in this regard hasn't been linear as is typically the case with chemical processing facilities. As reflected in our second quarter results, we continue to work through various operational issues at El Dorado and Pryor plants and we're disappointed in the downtime during the period. Despite these short-term impediments, given the actions we've taken and the investments we've made over the past 3 years, we continue to move even closer to achieving our operating rates that we're confident -- and we're confident that all 3 of our plants can achieve and sustain.

Notably, we expect the actions we took to remedy the issues we experienced during the second quarter at both El Dorado and Pryor to have meaningful performance benefits in both the near and the long term.

Relating to Pryor specifically. We've received the final results of the studies, we had commissioned from BD Energy Systems and Black & Veatch on the facility, and they both confirmed there are no significant items we need to address other than those previously identified by ourselves. As a result, we see a clear path forward to optimizing the onstream rates at those facilities.

From a company-wide standpoint, our technological enhancements we've been making to our maintenance management systems are largely complete, and we expect to yield increasing benefits as the year progresses. Overall, I believe we're now positioned to capitalize on the favorable trends in our end markets in the second half of 2018, which I'll discuss later in the call.

Now I'll pass the call along to John, who'll go into more detail about the performance of our plants in the second quarter and their current status and the results and expected benefits from our new maintenance management system and the studies on our Pryor facility. John?

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John Howard Diesch, LSB Industries, Inc. - EVP of Manufacturing [4]

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Thank you, Dan, and good morning. We continue to make progress on a reliability and operations improvement initiative. As we have discussed for the last several quarters, we are implementing an enhanced maintenance management system and indicated that implementation would be complete by the end of the second quarter. The implementation phase of our enhanced maintenance management systems with the assistance of our outside consultants is now complete. We have also added additional expertise in the maintenance reliability area at each of our facilities. Additionally, all of our maintenance departments are more efficiently scheduling, executing maintenance work and managing based on the data we collect.

Lastly, we continue to focus on more deep dive analysis of critical equipment to enhance our preventive maintenance programs. We are currently in the process of performing critical reviews of our operating procedures, maintenance procedures and training programs with the goal of enhancing all of our procedures and training programs and standardizing them across all our facilities. Commonality of practices and better trained and more educated maintenance and operation staff will assist us increasing the reliability of our operations. We will continue to increase training to improve the skill level of all our people.

The El Dorado ammonia plant had a couple of key issues during the second quarter, which caused downtime and the onstream factor for the quarter to be 62%. In May, steam turbine experienced a blade failure which required us to come down for 10 days to replace the rotor. This particular steam turbine has had a number of failures in the industry over the years. We are building a new rotor with an upgraded design, which will be installed in a short 5-day planned outage in August.

In June, a power failure combined with water-level transmitter failures on the ammonia plant steam system caused a loss of water to the auxiliary boiler and boiler tube failures as well as contaminated the SCR, NOx abatement system catalyst. The plant was down 27 days to replace tubes. While the replacement tubes are performing well, we continue to have some issues with the SCR catalysts that are currently limiting production in the ammonia plant. The catalyst in this unit will be replaced at the same time, as we install the new steam turbine rotor during the 5-day planned outage, I mentioned previously.

We have discussed previously the need to replace our nitric acid plant's N2O abatement vessel. The replacement vessel is nearing completion. It will be delivered in the next couple of weeks and will be installed the last week in August. As a reminder, the full cost is all covered under warranty. Also given that we have a second nitric acid plant, there will be no disruption to our customers or downstream operations.

Our Pryor facility ammonia plant had 65% onstream time during the quarter. The plant was down twice for approximately 12 days each to repair the leaks in the waste heat boiler. We have made enhancements to the boiler to improve its reliability. In addition, we are completing the design and getting bids to replace this boiler in the 2019 turnaround. There are also several other short outages to repair a leak in the MDEA CO2 removal system to replace a cracked thermal well on the inlink gas pipe into the primary reformer, to replace a steam pressure release valve, and once due to a power failure at a public-utility generating station.

With respect to the 2 engineering studies we commissioned, the BD Energy System study on the front end of the ammonia plant is complete. The key recommendation was to place the coal, mix gas preheat coil, with an upgrade of material constructions to improve the long-term reliability. This will be replaced during the 2019 turnaround.

The Black & Veatch reliability and risk assessment report has been completed as well. It reviewed the ammonia, urea, nitric acid plants and all electrical infrastructure. The study's purpose was to identify reliability risk, methods to reduce those risks and opportunities to upgrade and modernize those systems. The report reaffirms our initial assessment, which included continued inspections of vessels and the upgrade of instrumentation electrical systems, all of which we are in the process of implementing or would be included as part of the engineering phase of the facilities automation project.

As I have mentioned previously, we're replacing the urea reactor in the urea plant. The new urea reactor is nearing completion. It will be delivered and set in place early -- in the early fourth quarter with final tie-ins made during the 2019 turnaround.

The Cherokee ammonia plant had 100% onstream time during the second quarter. The plant started its 35-day turnaround on July 23. The extended length of the turnaround is for catalyst changes and the major upgrade to the primary reform. Our operating performance at El Dorado and Pryor during the second quarter was disappointing. We have completed detailed investigation at these equipment failures and have upgraded equipment or have a plan for future upgrades. Additionally, through our reliability process-improvement activities, we have upgraded or prevented the maintenance program. The reliability and operations improvement process we have just completed has laid the groundwork for improved reliability in all our facilities. I feel confident that we are on the right path to improve the reliability and onstream time at all our facilities beginning in the second half of 2018.

Now I will turn the call over to Mark to discuss the financial results for the second quarter.

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Mark T. Behrman, LSB Industries, Inc. - Executive VP of Finance & CFO [5]

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Thanks, John, and good morning, everyone. Page 11 of the presentation provides a consolidated summary statement of operations for the second quarter of 2018 as compared to the second quarter of 2017, along with the year-to-date comparison. As discussed during our last call, beginning in the first quarter of 2018, we adopted the new revenue recognition standards. We along with many public companies, have chosen not to go back and restate our prior-year financial statements for this impact. For us, the biggest change from the implementation of the new revenue recognition standards is that sales and cost of sales from our Baytown facility will no longer be grossed up on our income statement. This has no impact to our EBITDA.

As you know, we managed the Baytown facility for third-party -- for a third-party, and as such going forward, revenues and costs will be recognized more in line with how we view this arrangement. From our perspective, this is a good change as it represents the true economic earnings and margin for that business.

In reviewing our continuing operations, excluding the impact of new revenue recognition standards and revenue from businesses sold in the second and third quarter of 2017. Total net sales in the second quarter of 2018 decreased 2% to $103.2 million from adjusted net sales of $105.2 million in the second quarter of 2017. This is illustrated later on Slide 19.

In our ag business, we experienced stronger average net selling prices for UAN, high density ammonium nitrate and ammonia, which increased 14%, 13% and 10% respectively quarter-over-quarter. The stronger pricing for UAN and high-density ammonium nitrate and ammonia was offset by lower sales volumes for these products as a result of lower onstream rates at our El Dorado and Pryor facilities.

With respect to our industrial sales, net sales volumes of nitric asset and other industrial products increased by 35% and 15%, respectively. And sales volumes for products relating to mining applications increased by 20% quarter-over-quarter. These higher sales volumes were partially offset by lower pricing for our nitric acid and industrial ammonia due to lower prices for natural gas and Tampa ammonia as many of our industrial selling prices are indexed to pricing formulas tied to natural gas and ammonia benchmarks.

Gross profit decreased approximately $8 million, as a result of costs associated with lower onstream rates, including lost absorption of fixed costs, repair expenses and cost to purchase ammonia during the quarter. We also incurred approximately $1 million of additional expense at El Dorado related to pulling the turnaround originally scheduled for the third quarter into the second quarter. These additional costs were partially offset by approximately $3 million of lower natural gas costs in the second quarter of 2018 versus the same quarter last year.

As a result of refinancing our senior secured notes in April, we incurred a loss on extinguishment of debt of approximately $6 million, of which $1.8 million was noncash. I want to point out that the provision for income taxes for the second quarter of 2018 was $4.3 million of expense compared to a benefit of $2.8 million for the same period in 2017. During the second quarter of 2018, we established a valuation allowance on a portion of our federal and our state deferred tax assets as we currently believe that it is more likely than not that a portion of these deferred tax assets will not be able to be utilized. We estimate the total amount associated with the valuation allowance will be approximately $16 million for the full year of 2018. Our current estimate is to have approximately $600 million in federal NOLs at the end of 2018.

Lastly, adjusted EBITDA for the second quarter of 2018 was lower compared to the prior-year period, primarily due to the downtime at our El Dorado and Pryor facilities. I will bridge the EBITDA for you on the next slide.

Please refer to our reconciliation of non-GAAP measures, beginning on Slide 18, for further information on noncash and one-time costs incurred during the period. I would like to point out that in today's presentation and going forward, as part of our calculation of adjusted EBITDA, we will add back to EBITDA the cost of all major planned turnaround maintenance. As you probably recall, under our current accounting policy, major repair and maintenance costs associated with the turnaround activities, including contractors, materials and direct labor, our expense has incurred as we have -- historically have performed turnaround activities on an annual basis.

That is different from some of our peers who are capitalizing and amortizing these expenses between turnarounds and, therefore, not including those costs in EBITDA. As we need to move to longer turnaround cycles at our facilities, with our Cherokee facility moving to a 3-year turnaround cycle after this year's turnaround, our El Dorado facility moving to a 3-year turnaround cycle at the next year's short turnaround, and our Pryor facility currently on a 2-year turnaround cycle, we believe that this is a more representative presentation. Keep in mind that adjusted EBITDA is only adjusted for the cost of maintenance expenses, and therefore, is not adjusted for any impact from lost volumes during the turnaround period.

To give further clarity on the results of the quarter, Page 12 bridges our consolidated adjusted EBITDA for the second quarter of 2018 to adjusted EBITDA for the second quarter of 2017. The second quarter of 2017 adjusted EBITDA of $22.2 million included $0.5 million from businesses sold in the second and third quarters of 2017, including our working interest in the Marcellus Shale. For an apples-to-apples comparison, excluding the EBITDA from those businesses, adjusted EBITDA for the second quarter of 2017 was $21.7 million versus adjusted EBITDA of $17.8 million for the second quarter of 2018. The decrease in EBITDA was driven by higher net selling prices, which contributed approximately $3.8 million to EBITDA as we achieved higher net selling prices for UAN, high density ammonium nitrate and agricultural ammonia, partly offset by lower selling prices of both industrial ammonia and nitric acid as the Tampa ammonia pricing for the second quarter of 2018 decreased $30 a metric ton to approximately $265 a metric ton versus $295 a metric ton for the same quarter last year. Lower cost of our natural gas feedstock contributed approximately $3.3 million to EBITDA as we averaged $2.60 in MMbtu for the second quarter of 2018 versus $3.09 in MMbtu for the second quarter of 2017.

Lower sales volume versus the second quarter of 2017 decreased EBITDA by approximately $4.3 million. This was primarily due to the previously disclosed unplanned downtime during the second quarter, but also by lower sales of high density ammonium nitrate in the second half of June, as we saw imports being heavily discounted during the second half of May in order to get product moved. This did not hurt either our selling prices or product sales during May or the first 2 weeks of June, but did limit sales for the second half of June as a couple of big users of high density ammonium nitrate took advantage of these cheaper prices and had no need for additional late June tons. Somewhat offsetting the lower volumes associated with the downtime was 35% higher nitric acid volumes and 20% higher low-density ammonium nitrate volumes as we're able to capitalize on several coproducer outages for nitric acid while continuing to expand our marketing efforts for both our nitric acid and low-density ammonium nitrate products.

The second quarter of 2017, including a large precious metals recovery in the amount of $2.9 million related to several closed plants versus approximately $0.5 million of routine recoveries in the second quarter of 2018. And lastly, in addition to the sales volume impact from unplanned downtime in the second quarter, we also incurred approximately $4.3 million of impact, primarily associated with loss fixed cost absorption and higher maintenance and repair costs.

Summing up the quarter, as we indicated in our June 12 press release, the unplanned downtime during the second quarter of 2018 was expected to have a significant unfavorable impact on EBITDA. The impact was approximately $15 million, which offset but would have otherwise been a very favorable quarter for us.

Looking forward to the third quarter of 2018, please turn to Page 13. The EBITDA for the third quarter of 2017 was $2.8 million. Listed on the page is the average Tampa ammonia price, our average realized net selling prices for UAN and high-density ammonium nitrate and our average cost of natural gas for the third quarter of 2017. Also shown is the estimated annual EBITDA impact to us for a $10 per ton movement in the Tampa ammonia, UAN and high-density ammonium nitrate prices based on the previously disclosed 2018 volume outlook and a $0.10 per MMBtu movement in natural gas prices.

Current net selling prices for UAN, high-density ammonium nitrate and ag ammonia are showing increases of $30 a ton, $5 a ton and approximately $70 a ton over the third quarter of 2017 realized prices. And we expect our average natural gas pricing for the third quarter of 2018 to average approximately $2.70 per MMBtu or $0.20 per MMBtu improvement versus the third quarter of '17. We are also seeing higher Tampa ammonia pricing in the third quarter of 2018. Tampa was $280 a metric ton for July, which is approximately $600 -- $60 per metric ton higher than the average price for the third quarter of 2017. However, I want to remind you that we are currently undergoing the scheduled 35-day turnaround at our Cherokee facility, and we will be taking a scheduled 5-day planned outage at our El Dorado facility in September. These will have an impact on sales volumes. Additionally, as a reminder, the third quarter was our seasonally slowest quarter for our fertilizer business.

So to sum up our view of the third quarter of 2018, we feel that we should have a significant improvement in adjusted EBITDA versus the third quarter of 2017, provided we continue to operate at expected onstream rates.

Page 14 outlines our capital structure at the end of the second quarter of 2018. We ended the quarter with over $47 million in cash. Additionally, our ABL facility was undrawn and had over $34 million of availability at quarter end, giving us total liquidity of approximately $81 million. Total outstanding debt at quarter end was approximately $416 million, excluding the unamortized discount and issuance costs associated with our debt. We also had outstanding preferred stock of approximately $198 million, including approximately $58 million in accrued and unpaid dividends.

As we reported last quarter, in April we completed the refinancing of our senior secured notes by issuing $400 million of new 5-year senior secured notes with the proceeds used to repay our existing senior secured notes, pay the call premium on those senior secured notes, pay the fees and expenses of the transaction and paying the accrued and unpaid interest. The new notes have a 5-year maturity, are non-callable for the first 2 years and carry an interest rate of 9 5/8%. In addition, the notes include customary covenants related to debt incurrence and restricted payments. However, in addition to the traditional 2:1 fixed charge coverage ratio needed to make restricted payments, we have included a provision that provides us with an option to use any cash above a minimum of $65 million in total liquidity to redeem preferred stock, providing that we offer 50% of the potential restricted payment to the noteholders at a price of $103. If the noteholders choose not to accept the offer, then we will have the ability to use those funds to make further redemptions on -- of preferred stock.

As our financial results and liquidity position improves as a result of anticipated increased onstream rates, expectations for continued growth in sales volumes and the forecasted continued recovery of ag selling prices, we expect to have the flexibility to delever with our excess cash. Additionally, in connection with our refinancing, we entered into an agreement with the holder of our preferred stock to extend the date upon which they have the right to elect to have us redeem their preferred stock from August 2, 2019 to October 25, 2023, which is 6 months beyond the maturity of the new notes.

These were important steps for us as they provide us with greater financial flexibility, which we expect will allow us to execute our strategy aimed at delivering greater and more consistent cash flow and increased value for our shareholders. We were happy to receive continued support from previous noteholders and new investors in addition to our preferred stockholder.

Moving to Page 15. We outlined our free cash flow. Cash provided from operations for the first 6 months of 2018 was approximately $33 million. That includes approximately $8 million of additional interest that was paid when the notes were refinanced in April, which we didn't have during the first 6 months of 2017. The additional interest represents accrued interest from the last interest payment date until the repayment date of the notes.

Capital expenditures for the first half of 2018 were approximately $15 million, a reduction of $1 million from the prior-year period. And we now expect full year capital expenditures to be approximately $31 million as we have moved a few projects into 2019.

As I mentioned earlier, we refinanced our debt and received net proceeds of approximately $390.5 million from the issuance of the new senior secured notes. Those proceeds were used to repay the existing senior secured notes of $375 million with a balance used to pay a portion of the cost associated with the refinancing. For the first half of 2018, we had an increase in cash of $13.6 million, which was an improvement of $6.4 million compared to the prior-year period. Given the issuance of our new senior secured notes, cash interest is now projected to be approximately $42 million for the full year of 2018.

Lastly, we previously disclosed that we are in discussions to sell several pieces of real estate that we believe can generate approximately $6 million in cash. We expect those to close in the third quarter of this year.

Now I'll turn it back over to Dan to wrap up.

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Daniel D. Greenwell, LSB Industries, Inc. - Chairman & CEO [6]

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Thank you, Mark. Looking out to the balance of 2018, we're cautiously optimistic on our business prospects. From an ag market perspective, imports of fertilizer products have decreased significantly over the last 12 months. Additionally, at this time, in 2017, we were discussing how the completion of facility expansions by 2 of our competitors resulted in an inventory buildup in North American ag market. As we predicted at that time, that capacity was absorbed by market demand due in part to the displacement of imported products. At the same time, as I discussed on the last call, over the past year, the domestic distribution channel for fertilizers has been undergoing an evolution towards a more disciplined approach to price management, and we believe is now in a much healthier state than it was at this point in 2017.

We're seeing these factors reflected in the fall fill selling prices for fertilizer with selling prices for our UAN that are approximately $30 per ton higher versus the same period in 2017 and ammonia out of Pryor that is approximately $70 per ton higher for the same period in 2017.

Overall, it appears the second half of 2018 is looking more promising than many would have thought a few months ago, especially considering the current drop in commodity prices. My feeling, however, is the commodity price -- commodity markets are over reacting to the trade disputes with China. That combined with factors, South American crop yields continue to fall behind last year's production levels, will cause the grain markets to have some recovery from their recent losses, further supporting overall fertilizer selling prices.

The dynamics for our industrial products are more straightforward. With demand generally tied to the strength of the overall U.S. economy, which continues to have slow, steady growth, our nitric acid business has had a continued growth over the last 3.5 years and it continues to be a big focus of our sales efforts. We are leading merchant marketer of nitric acid in North America, and we're focused on keeping that market position.

One curveball that we've been getting questions on relates to the recently enacted import tariffs. It's still too soon to tell what effects will be on our markets. But our current read is that a trade war with China could be detrimental to our sales in the certain industrial markets. However, we're not alone, as the trade war will affect many companies in the U.S. This all remains to be seen, and we'll provide you with updates as we gain further clarity.

With all that said, our outlook for our second half of the year calls for a significant improvement in adjusted EBITDA and free cash flow as compared to the same period last year because of the anticipated higher ag market pricing, our expectations for more consistent plant operating rates and a continued focus on growing our volumes in the industrial and mining sectors.

Looking more specifically at our 2018 third quarter, as Mark mentioned, we expect to deliver substantially improved performance results on a year-over-year basis, driven by the aforementioned selling pricing -- selling price trends and our expectation that our production facilities, all of which have been running well through July to date will operate at our targeted onstream rates. I'm confident the focus and actions we've taken on our maintenance systems, training, operating procedures will lead to improved up-time in the second half of 2018 and beyond.

As I mentioned last quarter, we believe further consolidation in the fertilizer space should occur. We believe that significant synergies can be realized and a more diverse and larger operation will provide better operational flexibility and product diversity. Larger platforms will compete more effectively. We expect to participate in that consolidation. Additionally, given that 50% of our sales are to the industrial and mining sectors, we will explore opportunities to increase our scale and product diversity to those markets.

Our focus internally continues to be on upgrading our product mix, improving our on-stream rates, driving better safety performance and broadening our distribution capabilities. We expect to sell our product more effectively and to improve our overall margins on the product that we do sell.

Before I'll wrap up, I'll note that Mark and I -- that Mark will be at the Jefferies Industrial Conference in New York on August 7, and I'll be at the Crédit Suisse Basic Materials Conference in New York on September 13. And Mark will be participating in the Sidoti Fall Conference in New York on September 27. We hope to see some of you at those events.

That concludes our prepared remarks. We will be happy to take your questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Joe Mondillo from Sidoti.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [2]

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So one thing I just wanted to ask Mark regarding the 3Q sort of guidance or outlook relative to 3Q of '17 was the expected turnaround effect to your EBITDA. Just wondering how much sort of lost production, cost absorption, maintenance expenses that aspect in this year compared to last year, I think we saw a turnaround at Pryor last year, if I'm correct. So I'm just wondering apples-to-apples how do we look at turnaround effect this year relative to last year?

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Mark T. Behrman, LSB Industries, Inc. - Executive VP of Finance & CFO [3]

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As we said, Cherokee has a 35-day turnaround. So what is it a fairly extended turnaround versus more traditional turnaround, which would be in the mid-25 days. So we're going to lose production for 35 days. We certainly talk about historically that ammonia production is in -- kind of in the 500-ton per day range and then we either sell some of that product and primarily upgrade most of that product to UAN and other downstream products. So I can't -- we haven't given out volumes for Cherokee specifically during that 35-day turnaround. But El Dorado, as John mentioned, and I touched on, we'll have a scheduled planned outage for 5 days. So that plant typically will produce 1,300 to 1,350 a day in ammonia and then obviously upgrade that to other downstream product. So I think, based on that, you should be able to figure out sort of what the lost production would be.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [4]

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And what about maintenance expenses. Is there any idea think about that -- would that be a couple of million dollars maybe? Or...

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Mark T. Behrman, LSB Industries, Inc. - Executive VP of Finance & CFO [5]

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Well, I mean, traditionally turnaround expense, right, because it's classified as turnaround expense would be for Pryor -- I think we talked -- I'm sorry for Cherokee, we talked about approximately $6 million during the turnaround. And for El Dorado it would be minimal, less than $1 million.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [6]

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Okay. And can you remind us how many days of turnaround you experienced since the third quarter of last year?

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Mark T. Behrman, LSB Industries, Inc. - Executive VP of Finance & CFO [7]

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John (sic) [Joe], I don't have that with me, but I can certainly get back to you on that.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [8]

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Okay. I got a couple of other questions. So actually one thing that caught my eye was the premiums. I look at Gulf pricing at sort of a benchmark of ammonia and UAN, and the premiums that you saw above that were the biggest in a few years this quarter -- in the second quarter. I'm just wondering, I know I think it's partially because they're international markets, but could you talk about that? And then do you anticipate seeing these kind of premiums that you saw in the second quarter in the back half of the year?

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Daniel D. Greenwell, LSB Industries, Inc. - Chairman & CEO [9]

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Well, look -- there is 2 -- there's really 3 ammonia pieces and they serve completely different markets. Number one, the excess ammonia that we put on the pipeline in El Dorado is really tied to a Tampa index. So that's really moves -- it really moves in accordance with the Tampa index. The ammonia that we sell at our Cherokee facility is largely refrigeration grade, which enjoys a significant premium over ag ammonia and we'll continue to do so. So we sell very little ag ammonia out of Cherokee. Our ammonia, we sell out of Pryor, is largely agricultural-grade ammonia or commercial-grade ammonia. And we had some favorable trends for ammonia demand, and we were able to hit the market at the right time. So I see -- I think we see some favorable trends in the markets we serve, because keep in mind, that a lot of the new facilities that came on, what you saw was the startup of their ammonia plants before they started up their upgrading plants be it UAN or urea, and there was a lot of excess ammonia floating out there on the market. As the upgrading plants were fully started, that consumed a lot of that excess ammonia that was floating out there in the market. So that did allow price appreciation on products that we serve in the market. So to the extent that -- those upgrading facilities continue to run, I think, you'll see a firm pricing for agricultural-grade ammonia as we go forward. Will it enjoy the exact premiums we saw in the second quarter? Don't know the answer to that. But we're optimistic on our ammonia price sales and that's really where we see the market.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [10]

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Okay. And then in terms of your second half production guidance. The ag volumes are up pretty considerably. Just wondering how much of that is related to just better onstream rates because of the downtime that we saw in the fourth quarter of last year? And how much is that related to you sort of balancing your focus of these plants more towards ag relative to industrial, just given the more favorable pricing that you're seeing?

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Daniel D. Greenwell, LSB Industries, Inc. - Chairman & CEO [11]

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Well, I think a significant increase is related to more reliable up time and more tons produced. We got those -- as Mark said the turnaround in Cherokee, but that's reflected in here. I think we expect better onstream rates. I think -- I don't want to leave you to the impression that we're going to sell more ag than industrial. We've got a very strong industrial market that generates healthy EBITDA margin. So we're continuing to focus on our industrial markets, particularly the nitric acids and the mining markets. So we continue to expect 50% or more -- we kind of related to industrial products, I think of our second half onstream rates combined with all 3 plants, we expect mid-90s -- in the mid-90s for onstream rates, as we come out of these turnarounds, and as we've made these repairs here in the second quarter. So we expect second half run rate to be pretty robust.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [12]

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At what pricing ag relative to your -- I'm just trying to think about sort of your cost-plus business on the industrial and mining side of things. At what point in time -- at what price on the ag side of ammonia or whatnot. Does it start to make sense that we have to start pushing volume from industrial mining to sort of the ag side of things?

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Daniel D. Greenwell, LSB Industries, Inc. - Chairman & CEO [13]

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Well, I think the industrial business, overall, generates EBITDA margins that are pretty healthy in the 30%-plus range. And on the ag sector, I think there's still some room for improvement, particularly on UAN to get up to that margin level. Ammonium nitrate for ag has been a very profitable product for us. We're seeing our volumes grow on that, and we're continuing to push more products. So I can see us growing ammonium nitrate and then reducing our industrial ammonia sales as we upgrade more of that product. So I can see that's which being done at El Dorado. At Pryor, we're 100% ag on ammonia already. So I continue seeing that -- I don't see us changing that to industrial. And then as I mentioned in Cherokee, the margins for the refrigeration grade, which is the largest portion of the product we produce there, we'll continue to serve the industrial market because the margins are much higher and selling prices are much higher per ton than on an ag basis. So the primary switch I can see is increasing our nitric acid and our ag and mining ammonium nitrate in El Dorado from ammonia sales to those upgraded products. That's probably the largest shift I could see as we go forward as ag markets improve and the mining market demand improves, we make more money selling those upgraded products than we sell -- than selling industrial ammonia into the pipeline.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [14]

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Okay, great. And then in the 10-Q, I noticed something where you talked about -- I think it has to do with the restructuring that you're doing and more to the centralized cost sourcing, I think, that you've talked about in the past. And you stated in that 10-Q that you're going to start see sort of annualized savings of $3 million to $5 million. Does that -- has that -- have we already started seeing some of those annualized savings? If not, when did those sort of start to hit going forward?

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Mark T. Behrman, LSB Industries, Inc. - Executive VP of Finance & CFO [15]

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We've had a real big focus on centralizing our procurement and really looking at a lot of our MRO and specific items, I mean that's prioritized. But we said $3 million to $5 million, I think we have achieved and identified and negotiated $3 million of annual cash savings to-date. We are in the process of implementing that with some new lenders and new suppliers, and we should start to see some of that in the second half. And then obviously for the full year of '19, that'll be part of our plan is to reduce the cash cost by $3 million. There still is, I'd say some other low-hanging fruit that we'll work on, and I think over the next maybe 12 months. We'll see if we can't realize the other $2 million.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [16]

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Okay. So you have not recognized in -- on the income statement yet sort of $3 million savings, but probably in the back half you'll start to see that?

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Mark T. Behrman, LSB Industries, Inc. - Executive VP of Finance & CFO [17]

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Yes, we'll start -- remember, that's annualized. So in the second half, we'll see our proportionate share. Just keep in mind it's cash savings and some of that could be capital versus expense, but it will all be expense.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [18]

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Okay. And then, Mark, just wondering sort of your working capital requirements for the second half.

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Mark T. Behrman, LSB Industries, Inc. - Executive VP of Finance & CFO [19]

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I mean, I think they're going to be fairly stable as I've talked about before. The only real change in working capital would be if we position product for higher prices, the different point in the season, and so we would build up some inventory. Other than that, our working capital needs within a band of $5 million, fluctuates extreme would be $10 million, but nothing different than that.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [20]

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Okay. And then just last one from me. The accrued interest on the preferreds was about half of what you've been trending at in the quarter. Just wondering what's going on there? And is there anything that's going to make that continue at that level?

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Mark T. Behrman, LSB Industries, Inc. - Executive VP of Finance & CFO [21]

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Yes, I don't -- I'm not sure that it is half. I mean, you -- we can follow up with call and we'll walk through that, but I don't -- there's nothing that's different on the preferred.

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Operator [22]

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We've reached the end of our question-and-answer session. I'd like to turn the floor back to management for closing comments.

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Daniel D. Greenwell, LSB Industries, Inc. - Chairman & CEO [23]

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Well, we very much appreciate your interest in LSB. I think as we've outlined here, we had some unfortunate downtime during the second half, a rotor in El Dorado, a boiler in El Dorado. We've got a plan and those are going to be fixed and a boiler in Pryor. Those caused our outages in the second quarter. As I said, we think we've got those fixed and addressing those, and we look to have a much more positive outlook in the second half of the year. And then as we go into 2018, as we've made significant enhancements in our maintenance, training and operating procedures. So we're fairly optimistic, we are on the right path. Second quarter was a tough quarter for us. But I think we look forward to much more positive results for shareholders in the second half of the year and then going on into '19. And once again, we appreciate your interest, and we hope you have a good day. Thanks so much.

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Operator [24]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.