LSB Industries, Inc. (LXU) Q4 2016 Earnings Report, Transcript and Summary

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 markets continue to be robust. Most of our industrial business has either Tampa ammonia of gas pass through link pricing mechanism. However, our sales price of our excess ammonia at El Dorado that is sold into the pipeline is indexed to Tampa ammonia and with the Tampa ammonia strengthening in the recent weeks we will benefit with increased pricing and improved margin. Our cost cutting activities along with our operational improvement efforts are yielding tangible financial benefits. Our fourth quarter EBITDA results were better than expected by over $6 million. Mark will provide further discussion on our results in his financial review. We do expect significant improvement in our operating results in cash flow as we move into 2017. We are very pleased with the operational improvements that we are seeing and John will provide an update on our plan operations and expectations for onstream rates. In 2017 we also expect to recover cost we incurred during 2016 as a result of warranty claims. The final amounts and final timing are yet to be negotiated however, we believe we are in a strong position to get a recovery from the contractors. I will now turn the call over to John to provide a brief recap of our operating performance in the fourth quarter and our view of 2017 onstream rates. John.

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 El Dorado production units are operating well and are producing to meet customer demand. The prior facility had ammonia plant onstream time of 90% for the fourth quarter with urea and UAN production above planned. The ammonia plant has had 99% onstream time so far in 2017. The rest of the upgrade plants are operating well to meet customer demand. The Cherokee facility also operate very well with 100% onstream time for the ammonia plant with urea and UAN production above planned for the fourth quarter. The ammonia plant has had 99% plus onstream time so far in 2017. The Baytown facility which is the single nitric acid plant was down for approximately two weeks in October for a schedule turnaround. The major drop was to install new cooler condenser heat exchanger the plant came up on October 24 and is operating very well. So far in 2017 the plants performing well at or above the budget of production levels. As mentioned in our call our last call we have pulled a significant amount of cost out of the planned budget in 2017 and as of today we are meeting those newly reduced expense budgets. Operationally we continue to expect 2017 to be a very good year. Now I will turn it over to Mark to discuss the financial performance of fourth quarter.

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 plant began operating midyear. As we previously announced we repaid $100 million of our debt in October from proceeds from the sale of our climate control business. As a result we recognized a loss on extinguishment of debt of approximately $8.7 million that is reflected in the separate line item on our income statement. Lastly adjusted EBITDA was $2.8 million for the quarter a $5.3 million improvement versus Q4 2015 EBITDA loss of $2.5 million. This also compares favorably to the fourth quarter EBITDA guidance I gave last quarter as part of our Q4 cash flow outlook which forecast an EBITDA loss for the quarter of between $3 million and $5 million. The improvement in actual EBITDA versus forecast was primarily driven by improved operating rates that yield better fixed cost absorption and provided more products for sale. Please refer to our reconciliation of non-GAAP measures beginning on slide 17 for further information on non-cash and onetime cost incurred during the period. In order to give further clarity on the results of the quarter page 11 bridges our consolidated adjusted EBITDA for Q4 2015 to Q4 2016. As I mentioned earlier lower selling prices of our products was a big drag on EBITDA as they had a negative impact of more than $15 million compared to Q4 2015. However, improved sales volume of products for the quarter provided an additional $11 million of EBITDA. The sales volume increased was driven by better onstream rates of Pryor and Cherokee versus Q4 2015 improved sales of HDAN as we broaden our distribution of that product increased ammonia sales as the new ammonia plan at El Dorado was producing during the quarter it was not yet in operation in Q4 2015 and increased sales of our acid products. With improved onstream rates yielding improved production during the quarter versus Q4 2015 we had significantly better absorption of our fixed cost. That coupled with the reduction in plant fixed cost versus the fourth quarter of 2015 resulted in an improvement in EBITDA of over $8 million. As we have discussed previously there are several benefits to the new ammonia plant at our El Dorado facility. During the quarter we picked up approximately $6 million in EBITDA by producing our own ammonia versus previously purchasing it. As we have also previously discussed, we incurred repair and restore cost due to issues at our nitric acid plant at El Dorado facility. These cost negatively impacted EBITDA during the quarter by approximately $2.3 million. Since we restarted the nitric acid plant in November we stopped incurring any of these costs. We do not anticipate incurring these going forward. We believe that we will be able to recoup most of all of these cost under warranty, we have expensed them to be conservative. As John mentioned earlier during the quarter we experienced some downtime at our El Dorado ammonia plant during the shakedown period. As a result we incurred cost related to repairs and had to purchase some ammonia to cover sales. That resulted in a reduction in EBITDA of $4 million and lastly lower corporate overhead contributed to the balance of the year-over-year EBITDA improvement. The right hand column of this page reflects normalized EBITDA by assuming that selling prices are consistent in each period and excluding the cost incurred related to the nitric acid and ammonia plants at El Dorado as we should not incur this cost moving forward. Well we recognized product selling prices move with general market conditions this analysis provides a view of the operational improvement activities that we have undertaken. The EBITDA improvement quarter-over-quarter was $26.8 million improvement showing significantly improved operations. Page 12 outlines our capital structure as of year-end 2016. We ended the year with $60 million in cash, which was higher than our previous outlook for cash that we gave during Q3 2016 earnings call as we had better than expected EBITDA, an earlier closing on a sale of a non-core asset and a tax refund which we didn’t forecast. Additionally, our ABL facility was undrawn and had $35.7 million of availability. We remain undrawn on our ABL facility and as of January 31, 2017, we continue to be undrawn and as a result of increased sales, we had $40.5 million of availability. During the quarter, we repaid a $100 million of senior secured notes and as a result we now have $375 million in senior secured notes outstanding. That combined with other debt of approximately $53 million, left us with a total outstanding debt at year-end of approximately $428 million, excluding the unamortized discount and issuance cost associated with our debt. We also had outstanding preferred stock of approximately a $162 million including approximately $22 million in accrued and unpaid dividends. For 2017, we currently expect to continue to accrue the dividends in our preferred stock as we do not need the to-do on fixed charge coverage ratio and needed to make restricted payments. However, should coverage trends in our end-markets continue, we will consider using excess cash to reduce leverage either through the repayment of debt or if we meet the required fixed charge coverage ratio, the payment of accrued dividends. Moving to page 13, we outline our free cash flow. The significant net income for the first 12 months of this year relates to the gain on the sale of our climate control business. Backing that out, we used approximately $22 million for operations for the year. We had significant capital expenditures during the year of given the completion of the full El Dorado expansion project in the second quarter of this year, we are now back to incurring maintenance capital expenditures as we encourage slightly over a $11 million in CapEx during Q4, 2016. As we have stated previously, going forward, we expect to incur maintenance capital expenditures up $30 million to $35 million that will focus on enhancing the safety and reliability of all of our plans. Net cash use by financing primarily reflects to redemption of preferred stock in the senior secured notes that occurred during the year. Please turn to page 14, while I'll discuss our outlook for 2017. In addition to our outlook for sales volume by product, depreciation and interest expense, which we have provided in previous quarters, this quarter we have added additional operating and financial metrics that we believe provide more transparence to help in understanding our business. Since, 2015 and 2016 were a transition period for LSB, the historical results from these years are not particularly useful in projecting what our future performance should look like under more stead state operations. The matrix we're providing on slide 14 and 15 are meant to service points of reference for how we currently are thinking about our targets for 2017. We try to capture potential variation in factor such as demand, on-stream rates and cost levels by using ranges. With that said, we do not plan to provide updates to all of these metrics on a quarterly basis, with the exception of sales volumes or if there was a substantial change to our view on one of the other items. Product sales volumes for the full-year of 2017 are presented on the top half of the page. As a result of improved operating rates at all of our plants, aggressive marketing of HDAN and nitric acid and mixed acids at the El Dorado ammonia plant operating for a full-year. All product sales volumes with the exception of AN solution are higher than corresponding product sales volumes for 2016. You will notice that we have separately identified nitric acid sales at Baytown. As many of you know, we managed the Baytown facility on behalf of Cogestro and received management fees for managing the operations and marketing nitric acid at that facility. Our agreement instructions said we record all nitric acid sales and cost of sales for product sold out of that plant, including the full cost of purchased ammonia. In effect, our financial statements reflect a gross up of sales and cost of sales. Therefore, when thinking about profitability for managing the Baytown facility, EBITDA has traditionally been between $4.5 million and $5.5 million annually, which represents a high-single digit EBITDA margin on that business. On the operations front, as John has previously mentioned, given the CapEx we have invested over the last four years including the work done last fall, we are expecting out three ammonia plants to operate on an average on-stream rate of 95% for the full year. Based on that, we are expecting to produce between 780,000 tons and 820,000 tons of ammonia for the year. As far as turnarounds for the year, we have only one schedule at Pryor which will be in the fourth quarter of 2017 and is expected to last 21 days. The approximate expense of that turnaround will be about $2 million. Turning to the financial outlook for 2017 on page 15, we have provided additional financial metrics including wearable and fixed cost which we believe provide additional clarity when looking at our business. Many of you have asked about fixed plan costs and we have provided a range for those costs for 2017. We have identified certain fixed and variable cost that we believe we can reduce. We'll be working on reducing those cost this year, but we have not included any reductions in the expense ranges provided. Lastly, I discussed last quarter that we identified certain non-core assets that we expect to sell on 2017 for net cash proceeds of between $20 million and $25 million. During Q4 2016, we sold some idle equipment for approximately $5 million in net proceeds, leaving us additional assets to sell in Q1 and Q2 of 2017 that will generate between $15 million and $20 million in net cash proceeds. We are currently in negotiations in all of these assets. 2016 was a transition year for us. Our main goals for to complete the El Dorado expansion to continue to improve the reliability of all of our plants and to increase the sales and distribution of our products. We incurred numerous cost last year, to start up our new ammonia plants at El Dorado to make repairs to our new nitric acid plant at El Dorado that we believe will be reimbursed under warranty. For additional plant expenses related to shake down the issues after the startup of our new ammonia plant at El Dorado and for extended turnarounds at Cherokee in Pryor. We believe all of these issues are behind us. We are excited about our prospects for 2017 as our forward sales orders for UAN and HDAN stretched into the second quarter at prices that are more favorable than what we saw at the end of '16 and at the start of this year. We believe that we will generate EBITDA for the year that more than covers the top end of our outlook range for interest expense and CapEx for the year and that our Q1 2017 EBITDA will exceed the adjusted EBITDA we had for Q1 2016 despite a much lower current selling price environment compared to Q1 2016. On page 16, we provide an EBITDA sensitivity analysis table. Many of you have seen this before but in the past it only represented our chemical business. This table now reflects sensitivities to consolidated EBITDA which includes all corporate expenses. Please keep in mind that this table includes some assumptions. First, the Tampa ammonia price represents an average price for the full year. Second, it assumes that we are operating at close to desired on-stream rates which we expect to achieve over the next 12 to 18 months. Lastly, it assumes the consistent correlation between ammonia, UAN and HDAN which at times may not be the case. We believe that the sensitivity analysis reflects the earnings power of our business and shows that we have significant operating leverage from improved operations and increased product selling prices. I'll now turn it back over to Dan to wrap up.

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 continue the efforts to focus on safety throughout the entire operations. 2) Broadening the distribution of our ammonium nitrate and nitric acid products. Given the reduction in our low density ammonium nitrate sales from the declining use of coal, we have broadened our overall sales of high-density ammonium nitrate through a number of marketing initiatives that have broadened our addressable markets. Those initiatives have included storing ammonium nitrate at our Pryor in Cherokee facilities and selling to new markets and customers out of those facilities. In addition, through our marketing efforts, we are working on expanding our market for nitric acid products to parts of the Western US and Canada. 3) Reducing and controlling our cost structure. In 2016, we put in place SG&A expense reductions of approximately $6 million per year that we're realizing in 2017. In addition, in 2017, we have reduced plant cost that each of the manufacturing facilities by approximately $6 million. We'll continue to review our overall cost and we believe that we'll be able to reduce cost further during 2017. 4) Selling non-core assets. In 2016, we identified assets that are no longer necessary in the operations of our business. Those assets include our working interest in the natural gas properties in the Marcellus shale, our engineering products business, certain pieces of equipment and real-estate. In the fourth quarter of 2016, we sold a portion of this equipment for approximately $5 million and we are in the process of selling certain other non-core assets as Mark indicated, which could generate additional $15 million to $20 million of net cash proceeds that includes reducing any debt that's associated with these assets. That concludes our prepared remarks but before we move into questions, I'd like to briefly comment on the process we announced in November to evaluate potential strategic alternative available to the company. The processes ongoing and we will not be giving any update on the process until the board completes its review and approves a definitive course of action or concludes the review process. I'd like to remind everyone that the purpose of today's call is to discuss our fourth quarter results and outlook for 2017. So, thank you in advance for keeping your questions on that subject. Operator, I'd like to open it up for questions at this time.

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.