Greetings and welcome to the LSB Industries' Fourth Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to Ms. Kristy Carver, Vice President and Treasurer. Thank you, Ms. Carver, you may begin.

Thank you, Manny. 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.

Thank you Kristy and good morning everyone. We appreciate your time and are pleased to have you on our call. During our call this morning we’ll cover our 2016 fourth quarter results and more importantly provide our views for 2017 plan operations in nitrogen markets. Mark will provide a comprehensive review of our financial performance for the quarter and an outlook for 2017 with a potential earnings power for the company as the market strengthens. As we previously announced we reduced leverage further during the quarter by paying down an aggregate $100 million of our senior secured notes after redeeming $80 million of preferred stock in the third quarter. Our sales were $85.4 million in the fourth quarter of 2016 compared to $90 million in the prior year fourth quarter. As strong volume increases in the fourth quarter of 2016 for most key product lines could not be offset by product sales prices that were substantially lower. Our sales team continues to aggressively seek markets where we have not served in the past. We are seeing the strong sales volume continue in the first quarter of 2017 and our order book is shaping up nicely for the second quarter of 2017. While sales prices in the fourth quarter of 2017 were lower than in prior year we saw agricultural market sales prices strengthen toward the end of 2016 which is carried over to our first and second quarter order book. We have seen an early ammonia application run in the southern plains and portions of the mid West which has led to very strong volumes during the first quarter of 2017. Our high density ammonia nitrate sales growth strategy yield positive results during the fourth quarter and we are excited about the continued prospect for growth in 2017. Our UAN…

Thank you Dan. Good morning everyone. I am please to say performance of Cherokee, Pryor and Baytown plants were extremely good in the fourth quarter and are performing as expected so far in 2017. As for El Dorado we continue to make progress and improve onstream time during the shake down period for the new ammonia and nitric acid plants with current production rates of both at or above the nameplate design. At El Dorado the ammonia plant production rates are currently at or above 1300 tons per day which is well above 1150 tons per day design. The ammonia plant had some downtime during the fourth quarter to repair heat exchanger tube leaks and make a design change as well as replace and upgrade some equipment. To permanently fix these recurring heat exchanger leaks we have put new heat exchanger on order. The ammonia plant had onstream time of 73% for the fourth quarter and since coming up after some early January downtime we have had 99% onstream time from January 10 through today. The new nitric acid plant had a 27 day outage in October to design and install a bypass around the nitrous oxide abatement vessel. If you recall we have well figures in the vessel making it inoperable. The vessel was removed and we received a temporary permit modification to allow us to bypass it and give us time for the technology provider to re-design build and install a new vessel. We expect this will take until the end of 2017 however, our temporary permit allows us to run on the bypass until May of 2018. Since the plant restarted following the bypass installation the plant has operated at 95% onstream time which included the day of downtime for schedule catalyst change. The rest of the…

Page 10 of the presentation, thank you, John. Page 10 of the presentation provides a consolidated summary statement of operations for the fourth quarter of 2016 as compared to 2015. In reviewing our continuing operations, total net sales and gross profit were down for the quarter primarily related to lower selling prices across our key agricultural product groups partially offset by higher production and sales volumes at each one of our facilities. In addition to lower selling prices gross profit declined versus the fourth quarter of 2015 as we incurred $8.5 million in additional depreciation expense in Q4 2016. A new ammonia plant at El Dorado went into production in mid year and we began depreciating that asset after entered service. Offsetting these two factors with improved production we have better absorption of fixed cost at all of our facilities lower plant fixed cost and lower feed-stock cost. As we discussed in the third quarter we implemented in the expense reduction program with the goal of reducing SG&A expenses by approximately $6 million annually. That goal was achieved and we are seeing some of the cost savings come through in this fourth quarter as consolidated SG&A was down approximately $4 million as compared to the fourth quarter of 2015. Approximately $3 million of the reduction is related to personnel cost reductions. Our current SG&A run rate is now between $30 million and $35 million for the year. You will note that we took impairment charge of $1.6 million during the fourth quarter of 2016. This represents the non-cash write-off of goodwill that was created when we purchased El Dorado in early 1980s. Interest expense for the quarter increased approximately $9 million over Q4 2015 as we stopped capitalizing interest related to the expansion at El Dorado when our new ammonia…

Thanks, Mark. As you've heard, we're excited for 2017 as it represents a full-year of all of our plans in a full operating mode. We expect growth in sales volumes and improved market pricing. Once we get through the first half of 2017, we anticipate some seasonal price moderation. We do not expect to see prices that we experienced in the second half of 2016. We believe the market now realizes the low prices in the second half of 2016 were unsustainable. Of course, we always have the unknown aspect of Chinese urea imports. North America is becoming more self-reliant because of the recent capacity additions. We believe the market has digested the new volumes and can better manage the supply chain surrounding the required imports. While nitrogen prices will continue to fluctuate in the global market, we believe the dramatic low swings we saw in 2016, should improve in 2017 and have less volatility. We are confident with our financial position and operational view for 2017. We believe 2017 will be a transition year from 2016 and earlier years. We will be at improved operating rates for 2017 and will continue to reduce cost. As Mark indicated in the financial review, we believe our operations cash flow will more than cover our capital spending needs and interest cost. In the excess funds, we'll likely go towards further delivering of our balance sheet. In 2017, we plan on encompassing the four key initiatives. 1) Improving the on-stream rates of our chemical plants. We have made and continue to make upgrades to the operations teams at our chemical facilities, continue to make investments of capital to enhance the reliability of our plants to these facility, in order to avoid unplanned outages, unplanned downtimes and reduce the frequency of plant turnarounds and…

Thank you. [Operator Instructions] Our first question is from Joe Mondillo of Sidoti & Company. Please go ahead.

Hi, everyone. Good morning.

Hi, Joe. How are you?

Hi, Joe.

Good, thanks. So, my first question is regarding the nitric acid bypass El Dorado. Just wondering if you could expand on what you sort of see if there is any risks behind that as we progress through the year in terms of your vendor that you're working with to try to fix that and then as well as any other risks amongst all the other plants to your 95% sort of on-stream goals?

Yes Joe, this is John. Yes, that process of designing a new vessel, there is going to be some modifications because of the material of construction. But these are technologies that are used in this industry and I'm not concerned about specific risk associated with the new vessel. We got what I consider 18 working on this redesign and with a lot of experience in this type of field. With regards to the other plants, I feel real good about where we are with the facilities. We had some issues during turnarounds and that's a purpose of a turnaround is identify things that we need to repair so we can have longevity and good on-stream time. And we took a little extra time, we made some modification and improved designs to help us get to the one to two years between turnarounds. And I feel good about '17 going forward.

Okay. And regard to the capital expenses that you're estimating for the year was probably at least $5 million to $10 million less than I was sort of anticipating sort of a maintenance level obviously. Maintenance levels are a lot lower than I was actually anticipating. But I'm just wondering is that $30 million to $35 million, is that maintenance levels or what is that encapsulating and is that an annual type of a run rate going forward or in terms of maintenance spending how are you looking at that?

Yes. Well, that's it's related to capital. It includes a general replacement of existing equipment as well as upgrades. So, that's our view. When we put together a five-year capital plan and this is based on our view of things we need to do in the facilities overtime during turnarounds and such to maintain our reliability and on-stream time. So, I'm good with the numbers we have forecast.

And is that sort of an average for the next five years or is that just 2017 sort of falling in place at 30 to 35 and we could see an uptick in 2018 or is that a normalized annual level?

Yes. I would say that's it what ebbs and flows a little bit but that's kind of the range that we see over the next five years. Average per year over the next five years.

Okay. And then I guess just lastly, in terms of fertilizer prices, Dan, you mentioned in your I guess last part of your prepared remarks regarding I guess you were insinuating maybe volatility is going to be a lot less this year but you also mentioned the low prices that we saw in the back half of 2016. I'm just wondering what your overall thoughts are on with all the supply that's coming online and I believe we just got a little bit more online at that OCI plant in the first quarter here. But it doesn't look like we're having anything else coming online going forward. But just in terms of pricing and what we saw in the back half of last year in particular, do you think we could potentially hit those prices again and just going forward just like your outlook there is?

I think I said in my comments that we expect prices in the first half of the year. We're pretty robust and we've seen as an early demand surge from ammonia and from AN and from UAN. So, we feel very good in the first half. And traditionally, Joe, in the second half after the seasons over, you see some moderation in prices, but as I indicated, we don’t see prices going down the levels that we saw in the second half of 2016. We saw a -- we think a dramatic over reaction to the market in 2016 the second half of the year. We do not see it going back. We believe the market has digested the new capacity, we believe that the distribution channels are being worked out. I think there were a lot of unknowns last year. I think a lot of those unknowns have been flushed out and in the distribution model, particularly as it surrounds imposes as being settled. So, while there is the traditional seasonal moderation, we don’t believe they're going to go back to levels that we saw in 2016.

Okay, great. Thanks a lot, appreciate it.

Thank you. The next question is from Brent Rystrom of Feltl & Company. Please go ahead.

Thank you, good morning.

Hi Brent, how are you?

Hi, Brent.

Good, thanks. A couple of quick questions. You guys have previously talked about kind of a goal to get the three plants up to not necessarily world class but certainly a higher class in both performance and in the quality of the equipment and the systems. Dan, in the past when in the call, I think you've talked about '17 will be kind of the last major push to get you to that level. Is that still kind of the timing and what?

Well, I think '17 we're making good progress, Brent, on that. But we want to continue upgrading the control systems and beyond. And that's really I think when we get Cherokee and Pryor at 95% and El Dorado at 98% uptime. I'm talking about the ammonia plants. I think that would be something that would be will certainly what we're targeting. We're not expecting a 98% in El Dorado this year, in '17 but we certainly are expecting those other plants to form. I think we want to continue upgrading our control systems is some of the stuff that will be ongoing as John mentioned in his comments of 35 plus a million dollars. We'll continue to upgrade control systems. El Dorado has the latest and greatest control system. We want to push some of those systems out to the other plants particularly at Cherokee and Pryor. So, that work will be ongoing for the next couple of years.

Okay. Follow, I don’t want to follow-up but the question on spring demand. A lot of the upper Midwest and particularly, John, getting back to your old territory, we don’t have frost this year in the ground. So, my suspicion is we're going to have a fast and early spring application season. Is that something that you guys are expecting as well, not just down in the southern markets but also more in the Midwest?

Brent, this is Dan, I'll answer that. Yes, we're seeing that, actually we're moving ammonia and other products into Missouri and Kentucky as well. So, the Southern plants plus some of those I call it Middle states were moving product into those early. So, it has been an early positive season for us.

How should we think about volumes in pricing 1Q versus 2Q? Traditionally, the 2Q would be bigger and typically better pricing than 1Q does this change your thoughts in that traditional relationship given that it might be coming earlier?

No, I don't think so. I think keep in mind that some of the first quarter shipments were carryover for some of the lower pricing the orders we took in the fourth quarter. So, some of that carry over is coming into the first quarter of fulfilling those orders. Our Q2 pricing is, should be quite a bit higher than our Q1 pricing. So we have a good view towards our order book for the second quarter and we feel very positive on the pricing that’s coming into second quarter both volumes and pricing into the second quarter. So Q2 quarter pricing will be higher and I think primarily due to the carry over some orders that we had taken at the end of 2016 and keep in mind we had a substantial order book at Pryor that when that plant went down we had some of those orders that we had to fill in later in the fourth quarter of 2016 and then carryover in the first quarter. So those older lower priced orders will be coming out of our system completely but into the first quarter.

Brent, if you remember we have talked about this before, we generally for most of our products particularly on the [AX] side we don't have the problem selling out our products. We can produce it we can sell it. So as long as we are producing we are selling and that's why you won't see as much variability between first and second quarter.

From a volume point of view. From pricing it will be higher in the second quarter.

And then I believe it was in the last field trip down to EDC in November you talked about developing and I think you touched on this early in the call I was just hoping you might give us little more sense but you talked about developing some new distribution capability particularly with ammonia nitrate, any updates or thoughts on how that's going?

It's going just as we communicated to you back in November where we got a broader distribution strategy. It’s working and volumes are increasing we are happy and pleased with progress that we have made. It's something that we will continue to push forward and we are expecting 2017 volumes to be higher than 2016 volumes and it's working well. We are very pleased with it.

Yes, just to emphasize that point I mean for the full-year of 2016 we sold around 220,000 tons of HDAN and our sales volume outlook for 2017 is 260 to 280.

Good to see you guys. Congratulations on that, all the upstream rates and making the progress.

Thank you.

Thank you. The next question is from Stefan Neely of Avondale Partners. Please go ahead.

Hey good morning guys. Thanks for taking my question.

Hi Stefan how are you?

Doing well. So, I wanted to follow-up little bit on the onstream rates that El Dorado obviously you are still working on getting that up to 98% do you have any kind of feel you said you wouldn't get this year but you have any kind of feel how long that is expecting you to take and maybe what the average onstream rate maybe for this year?

Yes Stefan, I think we indicated that we expect on average all of our facilities to be on average 95% rate for 2017 and clearly with the control technologies we have on El Dorado of another 12 to 18 months till we fine tune it and I think our expectations at that point would be that ammonia plant to be 98% or so onstream rate.

Okay, excellent. And also you talked about the turnaround schedule for this year and then having prior in Q4, I was curious do you have any and I think you may have mentioned this previously do you have any plans for taking prior to little bit more of a every other year schedule for turnarounds and then at some point in the future?

Yes. Stefan it’s John, yes we do I mean we strive to extend our turnaround and we are looking at all the locations actually, but yes Pryor there is still something that Dan mentioned upgrading instrumentation in control systems. That's one of the things that we are working on over a period of time. It's pretty expensive and so we kind we do sections of the plant each year to continue and as we improve those controls there is some upgrades and some equipment heat exchangers, proven water treatment things like that that allow us to extend our turnarounds and we are in that process right now. So I would say within say 2019 we are thinking that we will be going to two year turnaround from there on.

Okay, excellent. And I guess for Dan, I wanted to get a little bit and maybe you have already covered this earlier in the call but I may have missed it. Get your take on the import markets, how things are tracking there especially with all the domestic supply coming online. How do you see things shaking out there and going to the rest of the year we are seeing maybe a pullback in imports as we have more domestic production?

Well, I think it's clear that import market responded certainly in the second half of 2016 with low prices on the import stock comings. So they were down substantively and particularly the Chinese [riyal] I think the U.S. will continue to need imports although much less than most needed in the past. You have the issue with the Trinidadian gas supply, so the ammonia coming from Trinidad, the question is volumes will be there but the U.S. will still require imports. But, I think the risk profile of importers has changed dramatically over the last couple of years whereby cargo that used to be able to float in and push up river and distribute, they could make a margin without a lot of difficulty. I think that risk profile for import has changed with the domestic producers having the capacity here and the capacity growth. I think that's really changed it. So I think importers will have to be bold and be willing to take a lot of risk because I think domestic producers have the lion share of the market and the distribution channel. So, I think the volatility that imports had in the past will be significantly reduced as we go forward. I think that's probably the biggest key is import volatility and the movement of prices will hopefully be mitigated.

Okay, perfect. Thanks a lot. And congratulations on all that progress.

Thank you.

Thank you. The next question is from Roger Smith from Bank of America Merrill Lynch. Please go ahead.

Thank you and good morning.

Roger, how are you?

Good. I don't know if I heard correctly did you talk about some mildest operational issues in January and if you did what would be the EBITDA impact of that?

I think John mentioned that we had a little bit of operational downtime at El Dorado in the ammonia plant. But we will have minimal impact.

Minimal impact, okay. And I don't know if you would be willing to do this looking at the page 11, where you gave the normalized Q4 2016 EBITDA, the $24 million which I guess assumes Q4 2015 [indiscernible] prices how would that look if you were to adjust that normalized Q4 2016 EBITDA to Q1 2017 price levels?

Yes, we are not going to speculate on what our EBITDA would have been on 2017 price levels Roger.

Understood. Thanks very much.

Thank you. The next question is from Bob Amenta of JPMorgan. Please go ahead.

Thank you. Hi guys.

Hey Bob? How are you?

Good, couple of questions. One on just the dead amortization obviously your balance sheet shows short term financing of $8 million, another 13 or 14 coming due so is that I see the $6.5 million promissory notes in the 10(K) so do you really have 22 that you expect to have to pay off this year as shown in the balance sheet?

Well, the short term financing is really insurance financing. So we finance our all of our liability insurance. So that's payable monthly. So I wouldn't and that's part of our really operating budget. So no, the real debt pay down that we are talking about is $13 million.

Okay and then just sort of getting back to that chart you did on page 16 about the sensitivity it sounds like this obviously assume El Dorado is at 97% you’re at 84 so it doesn't look if I just took $3 and $300 just to pick a spot, it's 118 on this chart, it sounds like what you are saying is that EBITDA even though you won't be at 97% EBITDA this year based on what you think pricing might do or where it is now should be in that 17 or should at least be that 17 which is interesting CapEx. So, gas is three bucks ammonia is 300 you are not going to do 118 because El Dorado will not be ramped up to where it needs to be to make this chart relevant correct?

That's correct. And just to be exact I think we said that we felt comfortable that EBITDA for this year would exceed to $17 million.

Okay. So it's that cash I wasn't sure if you were drawing that 15 or 20 asset sales proceeds in there when you were talking about exceeding. So you are saying EBITDA by itself should exceed that and on top of that you will have $15 million or $20 million of assets.

Yes.

Okay. That's all I have, thanks.

Thank you. Our next question is from Gregg Hillman of First Wilshire Securities. Please go ahead.

Yes. Good morning gentlemen. Hey during the Investor Day, you mentioned having ammonia El Dorado would allow you to do more forward contracts on things like UAN without risking those in your shirt, is that prove to be the case so you are being able to sign up people more that's for volume?

Yes, I mean that's typically how the fertilizer markets have been operating for the last several years. Last ten years. When we didn't – when we were buying ammonia from the pipeline before El Dorado was up we couldn't go forward on our forward sales book because we were buying ammonia on a month to month basis. And the market really buys on that fashion. So we were playing around the edges for I call it spot order business which is a very tough way to live. So yes we are participating on a forward market actively right now which is fairly substance of change from what the company has done in the past but that's the way the market operates. And it's been beneficial to us. It's certainly been beneficial to us.

How many months do you go with that with booked orders?

It depends. I mean, we are well into the second quarter with some orders right now and feel pretty good about it. So it really depends on the time of the year and how the market is responding obviously the early, I call the early kick off to the market where guys felt like they needed the product, the order started coming in pretty quickly and we have got a good solid order book into the second quarter. So it just depends on the time of the year and the market sentiment. Sometimes they will buy aggressively. Last year we didn't see it at all. We didn't see forward order book at all. This year the market is different. So I guess the best way of saying it is its ups and flows depending on the market sentiment and the time of the year.

Okay and then I know you made the comments earlier in the call but can you just talk about how you are going to restructure your entire marketing at sales effort to be consistent with your new capacity?

We have already made those changes. We talked about that in the later, mid to later part of last year. We have made those changes and we are going to the market differently. We are approaching things differently now that we have produced ammonia. So those changes have been made. We just continue to be very aggressive in our market where we couldn't go forward in the past or couldn't make long term commitments for industrial customers because we didn't have the purchase – we had purchased ammonia and didn't have to produce ammonia we couldn't do that as much. We can do that now and we are doing that. So customers are viewing us differently than they had in the past and it's made a noticeable change in our effort. So, we don't see further restructuring we see a continuation of what we have been doing as you see from the volumes it seems to work and we are going to continue it and continue to be more aggressive with the marketing efforts.

And then finally, the coal market how much are you doing, selling into the coal market currently versus what you did a year ago and what you think will be year from now? And how are you going to replace that?

On the page where we talked about volumes there is a line called LDAN and AN solution that's primarily addressing the coal markets. I mean I think three years ago we were in the 200,000 tons ratio. Last year it backed off somewhere around the 100,000 tons and this year we are expecting obviously prices or volumes higher than that. But if you want to look at the mining and it's not all coal mining. Some of its stone query mining and metals mining in those tons but coal was the substantial portion that we lost. We indicated really in earlier calls that we had about 50% volume as a result of the coal mining decline. We are starting to build that volume back through other coal stone queries other metals mining contracts and the likes. So we are slowly building up back but we don't expect coal to generate the significant improvements in our sales volume.

And can some of that capacity you’re using for coal be directed towards AG?

Yes, we take the ammonium nitrate solution and then provide either through low density pro-tower or high density pro-tower and we want to sell as much upgraded products so we focused in improving our AG distribution model and our sales efforts in that area and very pleased with the outcome that we have gotten so far.

Okay and then just for mix, do you think your mix, your profitable mix being able to increase in the gross margin or I guess operating margin do you think that will continue to increase in 2018?

I missed your first part of your question. I couldn't hear.

Do you just see overall gross margin, will that continue to improve into 2018 also with improved mix?

Yes. We expect to see.

Okay. Thanks for your comments.

Thank you. We have no further questions at this time. I would like to turn the conference back over to management for closing remarks.

Okay. Well thank you very much for participating in our conference call this morning. We appreciate your time and we look forward to speaking with you again next quarter. Thanks so much and have a good day.

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.