Greetings and welcome to the LSB Industries' Second Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Kristy Carver, Vice President and Treasurer. Thank you, you may begin.

Thanks, Danielle. 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'd 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 discussion this morning, we'll cover the 2017 second quarter results and provide our views of 2017 plant operations and nitrogen markets. John Diesch will give us a thorough overview of plant operations during the quarter and our current operating status. Mark Behrman will provide a comprehensive review of our financial results and liquidity position. Our sales this quarter were approximately $123 million in the second quarter compared to a $110 million in prior year second quarter, an increase of $13 million or approximately 12%. Adjusted EBITDA of $22 million in the second quarter, doubled from the last year's results. Our volume increases were large contributor of the improvement as well as plant cost savings and lower logistics cost. SG&A expenses were also reduced. Offsetting some of these improvements were lower selling prices and higher average natural gas cost. During our calls from early year in the year, we indicated we were in the process of selling our Marcellus shale working interest and other excess buildings and land. We were able to close o the sale of the shale interest and the couple of small properties. Our net proceeds on these properties were approximately $16 million and we still have additional assets for sale this should yield approximately $5 million before year end. Our plant on-stream performance during the quarter at El Dorado and prior were disappointing. While these outrages were caused by natural weather events and certain plant systems, the additional repair efforts, loss production and related sales and restart cost was approximately 7 million in the second quarter. We continue to focus on improving our on-stream rates and are making the necessary upgrades to equipment, systems, engineering…

Thank you, Dan. Good morning. Our Cherokee ammonia plant continues to operate at 100% on-stream time. El Dorado and Pryor however had unscheduled downtime during the quarter. The Cherokee facility continues to operate very well. It had 100% on-stream time for the ammonia plant during the quarter with urea and UAN production above planned. The Baytown nitric acid plant had 95% on-stream time for the second quarter. The majority of the downtime was for scheduled catalyst change and to complete the minor maintenance. At El Dorado, the ammonia plant continues to operate above 1,300 tons per day. The plant had 87% on-stream time for the second quarter. The plant had 100% on-stream time in both April and May but continue to deal with shakedown issues in June. The plant is taken down to replace the coupling on the primary reformer induced draft band and continues to have heat exchanger issues due to following tube leaks. Because of the latest heat exchanger issues, we've modified our cooling water treatment program. We'll also be upgrading some of the exchangers from carbon steel welded seam tube to the stainless steel seamless tube. They will significantly reduce on plant downtime. The ammonia plant was down a total of 19 days in June to deal with these issues. The entire El Dorado complex was hit by two power failures during storms in July. On July 15th, storms caused power failure that took in the entire complex down for about six hours. The power company replaced and upgraded insulators on the high-voltage distribution system that failed during the storm. While we were down during this outage, we proactively inspected and repaired additional heat exchangers that had been giving us problem. The hard shutdown from the power failure also required the replacement of bearings on compressor train…

Thanks, John. On Page 10 of the presentation, we provide a consolidated summary statement of operations for the second quarter of 2017 as compared to 2016. In reviewing our continuing operations, total net sales and gross profit increased for the quarter primarily related to increased production and sales volumes at each one of our facilities, which were partially offset by a decrease in average selling prices of our agricultural products. Gross profit improves by more than $9 million versus the second quarter of 2016 despite an increase in depreciation of approximately $3 million related to the El Dorado expansion and an approximate 30% increase in the cost of natural gas in the second quarter of 2017 versus 2016. However, the second quarter of 2016 included approximately $4 million related to start-up and commissioning costs at our El Dorado facility. In addition to the increase in sales that I just discussed, gross profit increased as a result of improved production volumes that gave us better absorption of fixed cost at all our facilities, lower overall planned fixed cost and lower overall feedstock cost at El Dorado since we have been making our own ammonia versus buying ammonia off the pipeline. SG&A expenses decreased by over $2.5 million, as we continue to focus on cost reductions. Interest expense for the quarter increased approximately 2.8 million over Q2 2016. As I outlined last quarter, the increase reflects the recognition of interest expense associated with debt used to fund the expansion of our El Dorado facility that we have been capitalizing until the new ammonia plant became operational in Q2 2016 at which time we began recognizing the interest on our income statement. Lastly, adjusted EBITDA was 22.2 million for the quarter, an $11.1 million improvement versus Q2 2016 despite approximately $7 million in…

Thanks Mark. Before we open the call up for questions, I want to address the update on the strategically alternatives review process that we issued yesterday afternoon. As you know last November, our board announced the commencement of a process to explore and evaluate strategic alternatives for LSB. The review process involved a comprehensive analysis of various opportunities available to the Company. After carefully considering the options and consulting with its financial advisors, the Board determined that a sale transaction would not be in the best interest of shareholders. While the Board will continue to work with its outside advisors to evaluate other strategic, financial and operational options to obtain an attractive value for shareholders, they've made the decision to terminate the formal sales process portion of the strategic review and focus on continuing to execute the turnaround initiatives that have been underway at the Company for the last several quarters, including improving plant reliability, streamlining costs at both the corporate and plant levels, expanding into new markets with enhanced distribution and reducing leverage and improving financial flexibility. LSB has been undergoing a major transformation and we expect to utilize our increased production capacity and enhance distribution activities to capitalize on what we expect to be a more favorable pricing environment in 2018. We commend our management teams and employees who continue to work tirelessly to move us forward on our goals. Thanks to their efforts. We believe LSB's outlook for profitability and positive cash flow is favorable. We recognize that much work remains to be done and we look forward to building on our accomplishments to-date. We remain focused on achieving our major objectives of operating at ammonia plant average on-stream rates of 95%, continuing the expansion of product sales into new geographic markets and positioning our business to capitalize on anticipated improvements and agricultural pricing in 2018. Additionally, the strength of our balance sheet continues to be a high priority and in the second half of 2017, we plan on pursuing improvement in our financial flexibility by both refinancing our debt and potentially deleveraging to extend maturity debts and reduce our overall cost of capital. Collectively, we expect these factors to lead to a stronger cash flow and attractive value for our shareholders. With that, I'll conclude our prepared remarks and open the call up for questions. Danielle?

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Joe Mondillo with Sidoti & Company. Please proceed your line is live.

Regarding the strategic opportunities, I am just wondering if there's -- how much is the market and pricing just to need start playing a role through the sort of final decision in terms of you have no possible buyers out there? And then how much there are sort of other factors play a role which maybe you know, are there sort of factors that are going on?

Joe, I think in our press release that we issued yesterday, we did say that while we're not going to share specific details of the process that the current outlook in the chemical sector and specifically the nitrogen sector, we believe that adversely affecting potential transaction opportunities. In other words, folks may not be leaning in at this point in time and we'll continue to look at it. I think we need to get a little bit better track record and meet ourselves, as we go forward we're going to do that and we'll continue to evaluate options. I think as we said in the press release, so we're still working on several things. As Mark mentioned, we intend to refinance before year-end and get our capital structure probably in a little bit better shape. So that's probably all the details I can share at this point in time.

Okay, thanks. In terms of the lower capital related to the unplanned shutdown in the second quarter here. You mentioned the $7 million number. Was that just maintenance cost? Or did that also include loss production?

Yes, that would be maintenance cost and any loss production and loss absorption from not having that production.

Okay. And then in regard to the tonnage guidance that you provided in the press release that looks sort of a very similar to the guidance that you provided last year going in the second half of the year. And I believe and you can correct me in terms of the turnaround, I thought we were expecting more turnaround last year than compared to this year in the back half of the year. But just could you give us part of your thinking on the guidance for the back half of this year compared to what you were looking at last year at this time?

I'd have to go back and look at what our actual volumes were for the third quarter and fourth quarter of last year. But we had originally put out an outlook on volume in our Q4 in our year-end earnings call. And the actual, for the first half of this year and plus the guidance that we put out for the second half, is wide in line with what we put out originally starting this year. So I don’t think anything has changed. I think it's more reiterating that we are comfortable with the volume guidance that we put out in several quarters ago.

Okay. And then so in related to that regarding which the unplanned shutdown in the second quarter here. In your original guidance, did you have sort of some unplanned downtimes just sort of baked in? Or did you pull the turnaround forward from the back half of the year so you are in a make-up for the in the back half?

Yes, so we originally -- well, first off, we never gave our quarterly outlook on volume what we shift annual. So, we always assume that we would have -- around the Pryor, in October, we said and so we were able to pull it forward, get it done in July and so in relatively the same time frame that we put out there, so which we were pretty pleased about. So we are still comfortable with the annual volume that we put out two quarters ago.

Okay. And then and regarding to the cost structure. I know over the last several quarters, you've talked about how there is additional opportunity to sort of lower the cost structure and we saw that here in the second quarter. Are we sort at the run rate at this point in time as to where you see the cost structure? Or you see other levers than can pull try to bring that down further?

Joe, as I mentioned in my prepared remarks, we think logistics is an area where we can see some additional cost savings. And I think I indicated that we see approximately $5 million that we can work to pull cost out, and we will do that over the next 12-months. So, I think we were looking at and we're seeing that over 12-months range. We have some additional SG&A that will be able to reduce for the second half of the year and then going into 2018 as well. So I think you'll see continued cost reductions as we get more efficient and we streamline our operations. So you'll still see some gradual cost reductions as we go forward. I don’t think the order of magnitude you've seen in the quarter-over-quarter would be quite as big, but we still have further cost reductions that we believe we can achieve.

The only thing I would add is from a timing standpoint, I think you probably don't see those costs -- the effects of those cost reductions until the beginning of '18.

I think that's right.

We're still working on something's that will allow us to put in place those reductions starting next year.

And then I expect two other questions. In terms of sort of your outlook, regarding the consistency of these plants, where do you think we are in terms of finally sort of hitting those three on-stream rates that you've shown in the sensitivity and outlook of the presentation? Do you think you can get there by 2018? Or you think it's going to be to get really good consistent results out of the plant? Do you think it's more so -- probably, maybe you're going to take a couple of years to get to a point where you're comfortable on saying that?

No, I think -- look I think, we stated earlier that we expect El Dorado will be at 97%. As John indicated, we had some weather related events that caused some downtime. We had talked earlier about some heat exchanger issues. We're repairing those, now, so, we fully believe that El Dorado in 2018 can run in the high 90-ish percent -- 97-ish or so. And our goal for Cherokee and Pryor is to hit the 95%. Cherokee is running at that right now and consistently runs in the high -- mid-to-high 90s. So, we believe Cherokee is already there. Pryor, as we indicated, we're making consistent upgrades and repairs to that facility and unfortunately we did had some electrical supply issues both from the utility and from the lightning -- effectively lightning strikes in the area. We're also upgrading electrical system there so that we can get that consistent -- that consistent approach. And as we've said all along, we're making long-term improvements where we can get this plant running on a consistent basis. That's taking a little bit longer than we thought and these lightning strikes didn't help matters. But I think clearly in '18, we believe we could get in the 95% range of -- on Pryor. So, I feel comfortable we can do it. I think we're well on our way to it. We got a plan well laid out on what improvements we're going to be making and the timing of those. And I think we just have to continue putting our shoulder to it and we're going to get there. So, we're fairly confident 2018 we can hit some high mid-90s and above on-stream rates for those plants.

Yes, Joe. This is John. Yes, we -- when we have the issues in the facilities, my approach is to determine into a root cause analysis to determine what's really causing a problem, not just fix it and bring the plant up as quickly as possible. Sometimes that takes a little longer to do that analysis, but it's important that we do it right. We upgrade systems whenever possible, so we can -- we don't have repeats. And that's what we're doing moving forward and so I feel confident that we continue to make these improvements and we'll hit these numbers.

And then just last one from me regarding the capital sector opportunities or anything out that you can provide in terms of potential avenues or where you can go with that? And also, I thought there was a two times leverage covenant ratio that didn't look towards it, you get to that by end of this year. And I thought that was maybe a restriction to at least the preferred. Do you think you can get to a place where you can pay off the preferred on a refinance possibility?

Well, I guess we are still evaluating our options. The credit markets are pretty issuer friendly right now and so it is affording a number of companies opportunities to refinance. Our debt has a maturity of August of 2019, so we certainly on the no guns of refinance, however, we maybe opportunistic and trying to take advantage of current markets. And so, I certainly think we can explore our pushing our refinancing of $375 million of senior secured notes and extending our maturities, and possibly maybe increasing at slightly to use some of those proceeds they preferred, but that remains to be seeing whether we can do that or not.

Our next question comes from David Deterding with Wells Fargo.

I noticed in the press release, you guys talked about recent sales of non-core assets obviously 18.8 million, but you also used the term further plan to enhance liquidity in coming quarters. Is this just -- I think I heard 5 and then 3.5 later for the other non-core assets sales by year-end. I want you just tell me what's number is the right one? And two, is there something beyond that that you are looking at to enhanced liquidity?

Well, from an asset sales standpoint as I mentioned, we still have one other major asset that we're are selling or in the process of selling and that would be our Summit Machine Tool business which is the legacy business that LSB has had. We expect to probably receive $3.5 million from the sale. We got a couple of other smaller assets whether it's some real-estate and some other things that we believe we can generate maybe up to another $1.5 million. So, I think in total, as Dan mentioned, I think we have another maybe $5 million of asset sales that we expect to be able to achieve by the end of this year. I think it's a little early for us to be talking about what other balance sheet enhancements we can do or what our refinancing might look like. And so not trying to avoid the questions, just think that we are in the early stages of having discussions on how we can enhance our balance sheet.

And we are talking with our -- clearly, we are talking with our Board and our strategic committee and advisors on that as well. And so I think as Mark said, there is still additional work to be done and we're doing that. So, it's an ongoing process that we will continue to work on and then keep you guys informed as appropriate.

Yes, I think we clearly believe given some uplift in market pricing that Dan alluded to in '18. That we could sometime in '18 see the 2 to 1 fixed charge coverage ratio, which would allow us as long as we have restricted payment capacity to pay off some preferred. So I think the plan going forward is to generate some excess cash and to figure out ways that we can reduce the preferred balance outstanding as that's an important fact before us, not only in reducing leverage, but also reducing our overall cost to capital.

Okay, that's a good segway and kind of my next question you were saying generate some excess cash. I think you told us on a couple of calls prior that you guys felt like EBITDA less CapEx plus interest expense would be positive this year. I know you kind of fit second half maybe a little bit tighter than you expected. If I look at your CapEx guidance of 30 to 35 and kind of interest expense 30 to 35 that would imply 60 million to 70 million of EBITDA for 2017. Is that still kind of where you stand?

I think David I think with what we've indicated in our third quarter pricing is, it's going to be pretty soft. If that third quarter pricing continues into the fourth quarter, I think that it'll be difficult for us to have EBITDA that covers both CapEx and the interest cost. We saw in the fourth quarter of last year and traditionally fourth quarter is higher than third quarter. But if the third quarter pricing extends into the fourth quarter, I think we'll have difficultly hitting those numbers that you indicated. So that's our current view right now. Right now, we don't have -- quite frankly, we don't have good visibility into the fourth quarter pricing as you might expect. So that's how I would characterize it at the current time.

Yes, and I would say that given a low pricing environment, David, I'm sure you can appreciate we look at our cost structure and we certainly look at capital that we spent. And while we talked about $30 million to $35 million in total for the year and 16 million to 19 million in the second half, clearly, we're sitting down as a management team looking at ways that we can possibly defer some of that capital spend. A lot of times you've got things that you've to do, there's things that you want to do and then you've got things that you wish you could do. So, we'll certainly be sitting down and discussing that and should we need to do that. I think we'll take a real hard look at it.

Yes, but I think one other things it's important to remember is, we're not -- things that are going to improve our reliability efforts, we'll continue. Those are must haves in our view and so we'll continue to make the investments or reliability improvements that we believe we need to do, so we're not going to short change operations long term, keeping those plants running is the best return on our investment we can make. So capital spending in that effort we'll do, whether it's for additional spares or things like that we'll look at risk adjust that or risk weight that and see what we need to do on that. But just want to be absolutely clear that capital needed to improve reliability we'll definitely spend and undertake those efforts.

And then just last one, I know you mentioned more than sufficient liquidity, a 107 million and of a say 5 million more of asset sales are at a 112 million liquidity which is much higher than it's been recently. Where do you feel comfortable in kind of saying it's your minimum amount of liquidity that you need to kind of run the business?

Yes, I think we're really comfortable, if we had a total of $65 million to $70 million of total liquidity. So I think 30 million of cash and an unused revolver of 35 million to 40 million.

And then just working capital looks like you're kind of flat year-to-date, 1.7 million sourced, how do you think about that the rest of the year?

I think you could see working capital requirements go up in the fourth quarter. I think that we've historically never been a real position to build inventory going into the spring season, and I think that we as a company that really had a focus on making sure that we put ourselves in a best position to attack the spring fertilizer season. So I do think that will build us some inventory towards the end of the year in order to maximize our production in the first quarter of next year. When I think about working capital, I'm talking about $5 million to $7 million or $5 million to $8 million is certainly not anything much more than that.

Our next question comes from Bob Amenta with JP Morgan.

Couple of follow-ups, I guess I just want to clarify I may have missed it twice I think. Did you give out I guess the loss EBITDA due to those unplanned outrages for the second quarter? I heard a 7 million number, but I didn’t know if that was loss to EBITDA or that is something else.

Yes, it is it was 7.

Okay. And then I guess the other stuff. Obviously, it sounds like you can't really or may not know much on the refi, but you talked in the past about wanted to get some good quarters onto your belt and reliability. And I understand the lightening strike and stuff some of this out of your control, but kind of just to squaring that comment with also planning on getting something done by year-end on a refi. I mean we've already -- that leaves you only one reported quarter that you'll have by year-end which is Q3 and obviously Q3 is not a seasonally great quarter. I mean you can still run the plants well I guess. But is that -- how do you square those two things about getting it done yet not having many more quarters onto your belt by that?

Well, we think clearly, clearly if we had a series of quarters I thought normalized quarters that would be an issuer. But we've got a pretty good approach, we think we've talked with some folks on that and I think when we have shown the downtime issues and across to that which market is trying to clearly represent here, the folks would see that and it will okay with the financing process. I mean it would be easier, if we didn’t have the downtime but we do and we just need to walk folks through it and explain to them what we are doing to improve it, so it doesn’t recur. And I think we've got a good approach laid out, and as I've said, we've shared it with some folks and they believe that we could that.

Okay. And then I guess the other question sort of related, but the second half I mean you just talked a little bit with David about, he went through the EBITDA, and you said 60 to 70 is probably not going to happen. But I'm trying to look like last year's second half between the third and fourth quarter, it was about negative 25 million and I guess lower pricing versus the increased volume I mean I look at Q2 and that kind of bridge you do to show kind of normalize. You did 11 last year lower prices cost you 7 and nitro higher gas in there. Combining those cost you about 10, but you made up about 9 or 10 due to the volume and then you had these cost savings. I'm trying to figure out versus minus 25 last year's second half. I mean the pricing would indicate you would be worse than that in the second half of this year. But then on the offset you have the higher volumes and some benefits to cost. I mean I'm struggling and I'm just guessing at this to see how second and to get above the zero in the second half just you have to make, again versus negative 25 last year with lower pricing on top of that. Is that -- it just seems like a high mount to climb is to get 25 plus the offset of lower pricing?

Well, remember the third quarter of last year was really a pretty disappointing quarter. As you said we lost -- we had $26 million of negative EBITDA. We had unfortunately issues at our all three plants during the quarter. If you go back to the release of that quarter, I think we outlined all the issues and what the loss to EBITDA was for each of the plants. So, we clearly don’t expect to have any of those issues this year. All with related to Cherokee and Pryor last year was really coming out of turnaround. We don’t have a turnaround at Cherokee this year. We don't have a turnaround at El Dorado this year and we've already completed our turnaround at Pryor. So we don't anticipate any issues related to turnaround or coming at a turnaround or restart. So, I feel comfortable saying that we're going to have a significantly better quarter than we had in the third quarter of last year. And even at these pricing levels, I would expect that we would be breakeven to slightly positive and so that's a huge turnaround from last year.

And Dan you're talking that breakeven comment, you're talking about Q3.

Yes.

Or the whole second, the second of Q4 is usually I mean what doing a couple of million last year is that kind of normal for a lack of better word or?

Oh, it's normal. No, I think we still had some carryover downtime into the fourth quarter of last year from the issues that we had in the third quarter. And the pricing environment was better than the third quarter, we're still not robust. So I would hope that assuming that current pricing environment doesn't roll into the fourth quarter and stay throughout the whole fourth quarter that we could do at least what we did last year or better.

So, again sorry to keep pinning that, but in the second half of this year, a modestly positive EBITDA, I mean it doesn't sound you're expecting negative EBITDA in the second half of this year even at current pricing. You may not get to the 60 or 70, but you're at 40 -- about 45 year-to-date -- 43 year-to-date. I mean it sounds like you're expecting some positive number of EBITDA in the second half of this year even if it's not 30 or could be two, could be five, but it doesn't sound like you think it's going to be negative in the second half.

That's probably a fair statement.

And then lastly and I don't know how you'll answer that, like chart you guys gave the sensitivities is obviously great, it make assumptions. I'm assuming that this assumes 95% give or take utilization, but I'm assuming if you run at 85% let's just say hypothetically that you can't just take in this metric same number and then reduce it by 10% or 15% or whatever 85 as versus 95. I mean it's more punitive. Is that fair to say?

Yes, I would say it is, but it's not drastically punitive from just a pure pricing. This chart really is -- assumes certain operating levels and the chart really is incremental step downs on pricing. So that would be sequential from dollar-to-dollar. But you're right, when you turn down plant rates you've got certain fixed overhead that are going to be spread out over other tons, so it's…

It's nonlinear.

Yes.

So, it's a nonlinear.

It's more punitive.

Yes, and that's what I just, I mean, again just because it's closest to a 100 to make it simple, 250 and 250 on this chart, essentially a 100 million. So if all of a sudden you ran at 85%, it's not going to be 85 million, it would be something. Would it be significantly less than that? Or would it be modestly less than that? And again I'm not trying to pin down a number, I'm just trying to understand like how if you struggle a little at 90%, how meaningful that is to these numbers, is 90 horrible compared to these numbers, or just that'll be a little worse?

I think, 90 is not horrible, but I'm certainly not prepared to talk about the difference between 95 and 90. But you start to get -- if you ran at 70 it would be horrible.

Our next question comes from Gregg Hillman with First Wilshire Securities Management.

John, could you talk about the back-up power for some the plants like in El Dorado. I mean do you have back-up power capacity and how many days can that go forward? And does it make sense to invest in more back-up power capacity?

We do produce power to El Dorado, but Greg it's not enough to operate the entire complex. So what the system is designed if we lose outside power that it will, what we call island, in other words the ammonia plant, the new nitric acid plant and some of the other resources we will continue to operate off the generated power that we produce. We have a gas fired boiler, however, there are situations like what happened here just recently where you get a direct lightening strike that takes out to the whole system and you can't 100% prevent it. But there -- and that's one of the things we are doing right now is doing a root cause analysis to try to improve that situation, building some additional redundancy and control systems that would allow us to operate through a storm systems. But it is something we're always looking at.

Okay. And could you do a joint venture with other people in the El Dorado area to get like joint back-up power?

There has been some significant upgrades in the power -- we have a loop system that was installed with the utility that improves this overall reliability. But again it doesn’t 100% -- it's not going to 100% guarantee when you have storm failures such as that. With regards to additional at least at this point in time we haven’t looked at doing any type of joint venture to add additional power production at our site.

Okay. And you have no plans to invest in back-up power, more back-up power?

Other than system upgrades with our existing system which we are looking at right now, more related to that redundancy in control systems.

Ladies and gentlemen, we have reached the end of our Q&A session. I would now like to turn the floor back over to Dan Greenwell for closing comments.

Well, thank you, Danielle. And thanks to everyone for joining our call this morning. We hope to keep you updated as we continue to progress with the Company and very much appreciate your time today and look forward to speaking with you again at the end of the third quarter. And thanks so much and have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.