LSB Industries, Inc. (LXU) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the LSB Industries' Third 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. I would now like to turn the conference over to your host, Kristy Carver, Vice President and Treasurer of LSB Industries. You may now begin.

Thank you, Brock. 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're pleased to have you on our call and appreciate your time. During our discussion this morning, we'll cover our 2017 third quarter results and provide our views of 2017 plant operations and nitrogen markets. We'll also share some early thoughts on the nitrogen markets for 2018. John Diesch will provide an update on plant operations as well as our significant initiatives on plant maintenance management. Mark Behrman will provide a comprehensive review of our financial results and our liquidity position. Our revenues were approximately $92 million in the third quarter of 2017 compared to $80 million in the prior year third quarter, an increase of $12 million or approximately 15%. The increase was largely attributable to higher shipped volumes despite the overall decrease in selling prices. Our marketing and enhanced distribution efforts continue to yield positive results. The improved EBITDA from the prior year third quarter was significant. Our volume increase were a large contributor of the improvement as well as plant cost savings. SG&A costs were also reduced by approximately $2 million from last year third quarter. We will continue to reduce SG&A costs as we move into 2018. Offsetting some of the improvements were lower selling prices and slightly higher average natural gas costs. Mark will cover that in his prepared comments. Although we continue to improve the operational of our plants, the on-stream performance during the quarter at our El Dorado and Pryor facilities were disappointing. We recognized that several of these outages were caused by natural weather events and certain plant systems. However, the additional repair efforts, lost production, and restart costs were approximately $3 million in the third quarter. We continue to have our key focus on improving the on-stream rates and are making the necessary upgrades to equipment, systems, engineering resources, and personnel to achieve our on-stream rate goals of averaging 95% at all of our plants. We're implementing a maintenance management system, which will provide us with state-of-the-art technology in assessing, managing, enhancing, and improving our maintenance activities. As you may have noticed in the press release, we've decided to replace the process gas pre-heat system at our Pryor plant while we've been down. This will extend our downtime until the third week of November. We had originally planned to perform this work in the 2018 turnaround, however, by completing it now, we do not anticipate a need for a turnaround in 2018 for the Pryor ammonia plant. We believe by completing this work now, it will enhance our ability to improve plant on-stream rates for the remainder of 2017 and 2018 and lead to a more efficient safe facility. John Diesch will walk us through these items in his discussion. We believe the new nitrogen capacities that have been added during the past year and those currently coming online are more effectively integrating and improving the required distribution channels to efficiently place products to customers without incurring significant price reductions. Once the distribution channel further matures over the next several quarters, we anticipate much of the product price volatility will be reduced and prices will improve. The third quarter saw improved volumes from the prior year third quarter and we are pleased with our sales and distribution efforts in a tough market. We will continue to seek key customers where we can grow our presence and improve our net debt pricing. Both our agricultural and industrial businesses continue to grow and we should see a positive impact from the recent increase Tampa ammonia prices and Gulf urea prices as many of our industrial sales have some link to the Tampa ammonia index. Tampa ammonia has increased from a low of $190 per ton in August to $305 per ton for November. It's a bit unusual for this strong appreciation to occur at this point in the season. Nitrogen import/export statistics indicate that the U.S. has a strong net decrease year-over-year and product coming into the U.S. So, long as international pricing remains competitive, we should see this net production trend continuing, thereby further stabilizing North American pricing. We currently anticipate our ammonia pricing in the fourth quarter of 2017 will be similar, if not a little bit higher, than the fourth quarter of 2016. However, we anticipate the fourth quarter of 2017 UAN prices will be comparable to the third quarter of 2017 as we have significant fall fill order requirements that were taken in late summer at lower prices. We do expect improved UAN and ammonia pricing for the first quarter of 2018. Ammonium nitrate seems to be holding its position in the market as a premium product with pricing and volumes continuing to remain strong. Industrial nitric acid pricing remains competitive as the coal market demand reductions for low-density ammonium nitrate saw increased nitric acid volumes go into the industrial markets as it was not being consumed by the production of low-density ammonium nitrate. We continue to enhance our product distribution and logistics footprint and will further enhance our salesforce. We believe the volumes we offer can be placed into the market with higher net debt pricing than we currently are achieving. We expect improved pricing as we move into 2018. We've engaged outside experts to assist us in upgrading our procurement efforts in personnel and will drive overall MRO cost down in 2018. Additionally, we'll be using outside maintenance experts who will assist us in implementing and fully utilizing the new maintenance management systems and processes. We have also engaged outside engineering firms that will assist us in further evaluating our Pryor facility for on-stream improvement opportunities. I'll now turn the call over to John Diesch who will review our plant operations for the third quarter. John?

Thank you, Dan. Good morning. Our Cherokee ammonia plant continues to operate at 99% on-stream time. El Dorado and Pryor, however, had unscheduled downtime during the quarter. The Cherokee facility continues to operate very well. The ammonia plant had 99% on-stream time during the quarter with urea and UAN production above planned. The Baytown nitric acid plant had 92% on-stream time for the third quarter. Downtime was due to Hurricane Harvey from interruption of ammonia supplied to the plant from closure of the Houston ship channel. There was no hurricane damage to the plant. The El Dorado ammonia plant had 91% on-stream time for the third quarter, an improvement over on-stream time of 87% for the second quarter. Despite the previously disclosed thunderstorm lightning strikes that took the complex down, we have done a detailed root-cause analysis of the strong events and are further upgrading our electric power systems to reduce impacts from lightning and other incoming power disruptions, along with adding additional backup generators for critical equipment and control rooms. As was announced in the press release on October 16th, the El Dorado ammonia plant was taken out of service on October 3rd to repair and upgrade the refractory around the burdens of auxiliary boiler. Shortly after start-up from this outage, a leak developed on a process heat exchanger, the exchanger required significant repairs with the replacement of a section of the shell. The design of this unit will be upgraded and will be replaced in next year's turnaround. The plant prism production on October 22nd. With respect to the number two nitric acid plant at El Dorado, fabrication of the N2O oil abatement vessel has started. We expect the vessel to be delivered near the end of the third quarter of 2018 and installed during the planned outage in the fall of 2018. As a reminder, all costs related to its replacement are under warranty. The Pryor facility had an ammonia plant on-stream time of 85% for the third quarter, including the previously disclosed power failure issues. As a reminder, on our last earnings call, we mentioned the decision was made to pull forward the plant October maintenance turnaround after this instance. The plant performed the turnaround on July and made modification to high-voltage power systems, change primary reformer, replace high-tech piping between the primary and secondary reformers, completed numerous inspection, changed out two compressor rotors, and cleaned heat exchangers. As stated in the September 28th press release, the Pryor plant went down at September 23rd due to a fire in the convection section of the primary reformer. There were no injuries or hazardous material releases. Repairs were made to a number of piping systems, instrumentation, and also required catalyst change outs. Following an engineering analysis in mix gas pre-heat system, it was decided to replace the pre-heat coil and undergo material -- and upgrade the materials at construction. In addition, we are upgrading the design to reduce pipe stress on the entire convection section piping system, which was originally planned for the 2018 turnaround. The plant is expected to be down until the third week of November. Because of this extensive work we have undertaken, we do not anticipate taking a turnaround in 2018. A key component in improving reliability at all our plants is the maintenance management system. We are in the midst of a major overhaul of that system. This includes risks and criticality ranking of all our major equipment and instrumentation. We are improving the capability to allow us to do better analysis of equipment failures, root-cause analysis, and improve our preventative and predictive maintenance programs. In addition, we have hired an outside operational improvement firm to assist us and accelerate the implementation as well as improve our operating and maintenance procedures, implement precision maintenance, and improve our training programs. This firm will also assist us in centralizing our purchasing in stores to allow us to reduce cost and improve our buying power. We expect full implementation across all our plants for mid-2018. In early August, before the September event at our Pryor facility, we initiated two studies by outside engineering firms. BD Energy Systems, a leading specialist in the design of primary and secondary reformers, has analyzed the heat material balances across the plant with the emphasis on improving reliability, efficiency, and performance of the ammonia plant. We also initiated a risk and reliability study with Black & Veatch, another leading engineering firm. This study will look at reliability risk in the ammonia, urea, and nitric acid plants electrical infrastructure and the utility system. The study will identify reliability risk, methods to reduce those risks and opportunities to upgrade and modernize these systems. We expect completion of both studies by the first quarter of 2018. We recognize the need to improve reliability and on-stream time at all our facilities. The Pryor facility engineering studies are expected to identify all unknown risks and improve the overall operation. We have embarked on a major overhaul of our maintenance management reliability and operating systems, and expect significant improvement of on-stream time and lowering operating cost in 2018. Now, I will turn the call over to Mark to discuss the financial results for the third quarter.

Thanks, John and good morning. Page 12 of the presentation provides a consolidated summary statement of operations for the third quarter of 2017 as compared to 2016. In reviewing our continuing operations, total net sales increased for the quarter primarily related to increased production, leading to improved sales volumes at each one of our facilities, which were partially offset by a decrease in average selling prices for our products. Gross profit improved approximately $29 million versus the third quarter of 2016. In addition to the increase in sales volume that I just discussed, gross profit increased from improved production that gave us better absorption of fixed cost and lower overall plant fixed cost. As you may recall, our El Dorado ammonia plant came online in May of last year and therefore operated at an on-stream rate of 62% for the third quarter of last year as the plant gradually ramped up production as compared to an on-stream rate of 91% for the third quarter of this year. Additionally, during the third quarter of last year, our Cherokee and Pryor facilities experienced some operational hurdles coming out of turnaround that resulted in ammonia on-stream rates for the third quarter of last year of 87% and 70% respectively, versus ammonia on-stream rates for this year's third quarter of 99% and 85% respectively. One last impact on gross profit for the quarter is an approximately $600,000 loss from the purchase of 22,000 tons of UAN to cover customer orders that will be delivered in the fourth quarter this year. As Dan previously mentioned, SG&A expenses decreased approximately $2 million year-over-year as we continue to focus on cost reductions. Interest expense for the quarter decreased $4 million over the third quarter of 2016, as last year's third quarter included $1.8 million relating to the 12% senior secured notes that were repaid on October of 2016 and $2.2 million related to the consent solicitation process we completed during that quarter. Lastly, adjusted EBITDA was $2.8 million for the quarter, a $29.3 million improvement versus last year's third quarter adjusted EBITDA loss of $26.5 million and an improvement over the breakeven EBITDA guidance for the 2017 third quarter that I indicated on our last earnings call. The outperformance to our expectations three months ago was largely the result of favorable plant spending and better absorption of fixed cost. Please refer to a reconciliation of non-GAAP measures beginning on slide 16 for further information on non-cash and one-time costs incurred during the period. In order to give further clarity on the results of the quarter, page 13 bridges our consolidated adjusted EBITDA for Q3 2016 to Q3 2017. As I mentioned earlier, lower selling prices of our products continues to be a big drag on EBITDA as they had a negative impact of almost $6 million as compared to 2016. Additionally, natural gas pricing was slightly higher this quarter versus the third quarter of 2016, resulting in a further slight reduction in EBITDA. However, improved sales volumes of products for the quarter provided over $8 million of additional EBITDA. The sales volume increase was driven by increased sales of ammonia and UAN, with better production across all three facilities versus Q3 2016; improved sales of HDAN, as we continue to broaden our distribution of that product; and increased sales of LDAN, as our customers had several new contract awards and the market has experienced some pickup in coal production in the U.S. Lastly, as mentioned earlier, improved on-stream rates at our facilities and continued focus on reducing our overall cost structure, including plant and corporate overhead costs provided over $27 million of additional EBITDA as compared to Q3 2016. The right-hand column of this page reflects normalized EBITDA, which assumes that product selling prices were the same in both the third quarter of 2017 and the third quarter of 2016, but we realized that product selling prices move with general market conditions. This analysis provides a view of the operational improvement activities that we have undertaken and the inherent earnings power of our assets. The year-over-year EBITDA increase from those operational enhancements was approximately $36 million showing significantly improved operations. Looking forward to our fourth quarter. As Dan previously discussed, Tampa ammonia pricing in October increased $30 a metric ton over September's price to $245 metric ton, and will further increase $60 a metric ton for November to $305 a metric ton. This will be much improved from the fourth quarter of 2016 where Tampa ammonia averaged $215 a metric ton. With Tampa ammonia pricing trending higher, sales of ammonia and many of our industrial products, which are somewhat indexed to the Tampa ammonia price will follow suit. However, while we continue to make improvements in our on-stream rates and the reliability of our plants, our fourth quarter results will be impacted by the previously discussed downtime events at our El Dorado and Pryor facilities, which we estimate will lower fourth quarter EBITDA by between $7 million and $8 million. Additionally, UAN and ag ammonia sold for the fourth quarter will be subject to orders taken during the fall fill program that occurred in August during a lower pricing period. We expect that our sales of those products, after the first of the year, will be done at significantly higher prices. Page 14 outlines our capital structure at the end of Q3 2017. We ended the quarter with over $53 million in cash. Additionally, our ABL facility was undrawn and had approximately $39 million of availability at quarter end, giving us total liquidity of approximately $92 million. As a reminder, our ABL borrowing base will vary based on accounts receivable and inventory levels. Total outstanding debt at the quarter end was approximately $416 million, excluding the unamortized discount and issuance costs associated with our debt. We also had outstanding preferred stock of approximately $179 million, including approximately $39 million in accrued and unpaid dividends. As I previously stated, we currently expect to continue to accrue the dividends on our preferred stock as we do not meet the 2:1 fixed charge coverage ratio needed to make restricted payments. Last quarter, we indicated that we would seek to refinance our senior secured notes by the end of this year. We are continuously in discussions with our advisers and lenders and would consider a refinancing prior to the end of the year. However, conditions might be better in the first half of next year. We will continue to evaluate our options and timing. Moving to page 15, we outlined our free cash flow. Cash provided from operations for the first nine months of 2017 was approximately $19 million. Additionally, cash flow from operations includes the semiannual interest payment on our senior secured notes that occurs every first and third quarter of the year. Capital expenditures during Q3 2017 were approximately $9 million, with approximately $25 million invested to-date in 2017. We expect capital expenditures of approximately $10 million in the fourth quarter of 2017, which will put us right around $35 million for the full year. Additionally, as I mentioned previously, we sold off several non-core assets that generated approximately $23 million in gross proceeds year-to-date. That leaves free cash flow from operations and investing for the first nine months of 2017 at about $17 million. Of note, the non-core asset sales will increase to over $24 million as we receive the remaining proceeds from the final closing on the sale of our Summit Machine Tool business, which occurred in October. Net cash used for financing primarily reflects regularly scheduled debt payments, including $3.5 million payoff of debt associated with the sale of non-core assets, just discussed in our insurance premium financing. For the first nine months of 2017, we had a decrease in cash of $7 million. Now, I'll turn it back over to Dan to wrap-up.

Thanks Mark. We continue to focus on executing on the plant and maintenance 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 making positive improvements in plant reliability and reducing SG&A costs 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 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 the improvements in agricultural pricing. Additionally, the strength of our balance sheet continues to be a high-priority item and in late 2017 or the first half of 2018, we plan to pursue improving our financial flexibility by both refinancing and potentially deleveraging to the extent maturity dates -- and to extend maturity dates and to reduce our overall cost of capital. Collectively, we expect these factors to lead to stronger cash flow and attractive value for shareholders. Lastly, you may have noticed that we had another announcement yesterday where we decided to reduce our Board size from 11 to nine members. This was largely due to seeking overall cost reductions in the business. We're grateful that both Bill Murdy and Jonathan Bobb voluntarily offered to resign in order to effectuate this reduction. We very much appreciate their efforts in support of the significant changes we have made over the past two years. Both Bill and Jonathan will be missed. We wish them the best of luck. With that, I'll conclude our prepared comments and open it up for questions. Brock?

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Joe Mondillo of Sidoti & Company. Please go ahead.

Hi guys. Good morning.

Good morning Joe.

Good morning.

Just wondering if you could comment on -- in regard to plant cost and corporate overhead, how much have you taken out of the business over the last -- this year or over the last couple of years? And then how much going forward do you see as still an opportunity?

Yes. So, I would say that plant costs which are, obviously, op and cost of sales, we've pulled $6 million to $7 million out annually. And on SG&A, we're closer to $7 million on an annual basis. And that occurred, really, starting in the second half of last year and really was implemented by the end of last year. Going forward, we are focused on continuing to reduce SG&A. But as Dan mentioned and John as well, we have a real focus right now on centralizing our purchasing and really reducing costs of overall procurement. We probably think that over a period of time, we can take out another $3 million there. And then we have a very big focus, as Dan mentioned, on logistics and really centralizing that logistics -- the whole logistics effort and over time, probably by the end of next year, we can probably pull out another $3 million there. So, I'd say we probably have another $6 million that we're very focused on pulling out by the end of 2018.

Okay. Great. And then in terms of -- I just wonder if you could provide a little more color on sort of your thinking regarding the fertilizer market going into 2018 and sort of the outlook, the trend, obviously and you mentioned this in your prepared remarks, obviously, it's been pretty -- quite strong relative to the season or the time of year. If we continue to see the seasonal improvement that we tend to do see in the first and second quarter from where we are right here, pricing could be pretty good relative to past years. So, just wondering, do you think that's a possibility that we continue to see this trend that we always see in the first half relative to here? Or what's sort of your thinking on the dynamics going on there?

Well, Joe, the moment I give you a linear analysis is the moment I'll be wrong, but we do see positive trends in pricing currently. We're hopeful with the facilities that have been in place, the folks have gotten the logistics model worked out fairly well, upgrading facilities on the back-end of these ammonia plants are up and running that should give a balance out to some of it -- some of the product supply. North American market hasn't been very attractive for imports for a reasonable period of time. And therefore, import product is down and so that does provide positive support for product pricing. But to -- as we indicated in our prepared comments, our fourth quarter pricing is largely -- will be largely determined on some fall fill orders we took back in August, which will be modest. We do expect first quarter pricing to improve significantly. Orders being taken today are at significantly higher prices. But we'll have to wait and see. I want to be cautious before I give a large price increase continuation as you outlined. I want to be cautious with that, but we do believe it's a positive market sentiment with pricing, but we'll have to wait and see if it last.

Okay. And then I missed -- I apologize, but I missed some of the remarks regarding the plants and some of the downtime that we're seeing in the fourth quarter. Just wondering if -- what's the risk of any extending time of downtime? How serious are the things that are going on? And is there a risk of further downtime at all?

Well, I mean, El Dorado, we had some downtime that we announced in October. Those repairs were completed. I think we announced those will be completed by the 23rd of October. They were done on the 22nd of October and so that El Dorado is finished. On Pryor, we indicated that we've made the decision to replace some process gas pre-heat system. The repairs are known. They're not risky repairs or unknown repairs. It's basically replacing the system with upgraded material as John indicated, the process gas pre-heat system. So, we'll have that done. We have the materials procured, we have the engineering done and now it's just a matter of putting it in place. We feel pretty confident with that third week of November date that we had mentioned. I think the positive side of that -- and it's what we've continued to do, is to the extent that we can accelerate repairs, make upgrades, it's been our practice to do them now versus later. In other words, take your medicine now, get them made and then that should allow for better uptime and reliability on a go-forward basis. So, that's what we're doing on this process gas pre-heat system at Pryor. And I think the risk profile of getting that in and up and running is moderate. It's how I would describe it. There's nothing unknown about it at this point in time. It's just physically doing the work and making the welds and installation and things like that. So, we feel pretty good about where the plants are right now. Got a little bit of work to do here the next three weeks at Pryor and feel good for the operating plan for the rest of the year and then going into 2018.

Okay. And then just regarding turnarounds. Obviously, Pryor, you mentioned that you're doing that now and that's -- so you're not going to see a turnaround in 2018. But regarding the other two major plants for 2018, could you remind us what the turnaround schedules for this year and what the outlook is for 2018 regarding that?

We should be doing a turnaround on El Dorado in 2018 in the third quarter. As John mentioned, we're going to do the N2O vessel as well when we're putting that in place. That may be done a little bit earlier, but that shouldn't take us down. And then Cherokee, Cherokee will have a turnaround in 2018 as well.

In third quarter most likely?

It could be third or fourth.

I think we're trying to push one too early in the fourth.

Yes, I think El Dorado will be in the fourth, early fourth.

Okay. And so in terms of comparables, 2018 versus 2017, third quarter should be -- maybe a little more downtime because of the turnaround to El Dorado and maybe Cherokee bleeds into the third quarter too? And then, I guess, maybe fourth quarter might be comparable relative to the fact that Pryor will not be down, but maybe Cherokee is down a little, is that...

Yes, I mean, I think, when you look at the downtime that we've had early in the third quarter from the lightning strikes, we do not anticipate that occurring again next year. And the other downtime that we've just talked about, we don't anticipate that occurring. And so, now, if you want to call it we're replacing that with turnarounds at El Dorado and at -- while Cherokee didn't have any downtime, we would anticipate that Pryor would have improved uptime and we wouldn't see the negative impact to that. So, when you look at our second and third quarter -- our second, third and -- sorry, our third and fourth quarter unplanned downtime cost, we'll be, hopefully, replacing that with some turnaround costs that we have next year. So, I don't know if that's going to be a wash, but it probably wouldn't be too far from it when you look at that downtime. Probably a little bit more for turnaround, but not by order of magnitude.

Okay. And just last question for me. Just regarding the potential refinancing options. I was just wondering do think there's any scenario where there's a refinance option where you could pay down the preferreds? Any scenario regarding that or most likely not?

I don't believe so at this point.

Okay. All right. That does it for me. Thanks a lot guys.

Thanks Joe.

The next question is from Owen Douglas of Robert W. Baird. Please go ahead.

Hi, good morning guys. Just sort of few questions left on some of these operational reliability initiatives. So, I just wanted to understand, are there any of those advisers working -- or has there been any advisers working in the third quarter or perhaps second quarter of this year?

There's been some work in the third quarter of this year, not a significant amount, but there has been some. Those were started in August as we indicated -- some of that work was started in August. The lion's share of it though will be done in the fourth quarter -- in the first quarter of next year.

Okay. And are you able to share with us any sort of ballpark sort of cost associated with that that we should be expecting?

No, I don't think it's something that order of magnitude that we believe should be disclosed. It's not that significant that we should disclose it in advance.

Okay. I see. And as far as you guys were talking about the refinancing and seem to leave open the possibility of refinancing before the end of this year, is that still a fair assumption?

Yes, I mean, as I mentioned, I think we're continually talking to our advisers and lenders. And if there's an opportunity to do it that makes sense, we certainly would like to take advantage of it. But if not, it might be better off waiting until the spring.

Okay. And on the liquidity standpoint. You guys, I think, have gotten something about $4 million of proceeds from that non-core asset sale. How do you feel about your liquidity heading into that inventory build period ahead of the spring selling season?

Yes, I think we've said before and I think we continue to repeat it, we're pretty comfortable operating with at least $30 million of cash and unused line which, one is between $35 million -- $40 million. And so we sit here today in significantly better shape than we were one year ago, and so I think we're fine. We feel okay.

Okay. Yes, because I haven't heard you guys say it that before. Beginning of the quarter, it's about $92 million of liquidity and -- but sort of executed this sales to a related party for about $3.5 million. So, just curious about that sale and whether or not -- basically, how necessary was that to execute at that point in time?

Yes, I mean, the Machine Tool business is not a strategic part of our company on a go-forward basis. It was a small business. While it had some -- a small positive cash flow impact long-term, it's not part of our strategy and we decided to dispose of. We got three separate bidders on it and they seemed attractive values that we got, so we took it.

Okay. Understood.

One of the things we've talked about previously and I don't think it will change, is we continue to review our assets. And where we have assets that -- either idle assets that are part of our chemical plants that we're not using, old facilities and we think there's value, we'll look to monetize that. And where there's other opportunities to monetize assets that don't really have an impact on our business, we'll continue to do that.

Okay understood. Well, thank you very much guys. Good luck.

Thanks.

The next question comes from David Deterding of Wells Fargo. Please go ahead.

Yes. It's Tyler Gately, on for David. Just a quick follow-up on the liquidity question. In the face of a rising ammonia prices, I mean, how do you guys think about working capital over the next couple of quarters?

I think that, as Owen just mentioned, we'd like to build up some inventory to head into the spring where we can actually sell products at higher prices. So, I think you can probably figure between now and the end of the year anywhere from $5 million to $7 million of additional working capital.

And then as you look into kind of Q1, Q2, I mean, assuming prices hold steady or tick modestly higher, I mean, is that something that you would continue to build or flatten out on top of that $5 million to $7 million?

No, I think it flattened out. I mean, when you're in season, you're producing and selling everything that you're producing. I mean, certainly, you want to sell it -- if they're good prices, you want to sell as high as you -- at higher prices and sell as much as you can because you certainly don't want to be sitting with inventory come June.

Sure. Great. Thank you.

The next question comes from Bob Amenta of J.P. Morgan Asset Management. Please go ahead.

Yes, hi. Good morning.

Hi Bob.

Just a couple of follow-ups on that. So, I was doing a liquidity analysis, I mean, would you say with the $7 million to $8 million you guys kind of expect on EBITDA hit, factoring that in, I mean, can you give any thoughts on EBITDA in Q4, positive, negative, near zero? I mean, I have it negative single-digits after factoring in $7 million to $8 million, I don't know if I'm way off base with the pricing increases that have -- that you mentioned in ammonia and stuff or--?

Yes. Bob, we typically don't give EBITDA forecast. I think Mark may provide a little further color on where we think we are. I gave some comments earlier on pricing -- where we anticipate pricing in the fourth quarter to be. We, historically, haven't given an EBITDA-specific quarter guidance, so I'm a bit hesitant to do that. But I would think, last quarter, we talked about we'd be positive, fairly positive in the fourth quarter with -- there's additional cost coming through on this downtime, we could be in the range of -- I really don't want to commit at this point, but Mark, I don't know if you have another comment on that.

Yes, I think your commentary is probably not far off. I mean I think we'll be marginally or moderately negative on EBITDA for the quarter.

Right. Okay. So, I mean again it sounds like liquidity is fine, but with that and interest -- or I'm sorry, CapEx of $10 million, you basically have nominal cash interest in the fourth quarter. You mentioned the working capital, so I kind of get you down to about that $30 million, but again, that should be the low point in liquidity. So, even though that's bumping up against kind of where you want to be, the fact that that's the low point makes you feel like that's just the temporary squeeze, I guess, basically.

Yes. The fourth quarter would always be the lowest point for us.

The lowest of liquidity. But Bob, we don't feel squeezed.

Yes, it's probably not the best word to use. But it's the low -- hopefully, the low point on liquidity in the cycle.

Yes, that we would agree with.

And then I guess just the other thing is -- I mean I know you guys always put this last page of the slide, about sensitivity. Just on the -- in the footnotes to that, it talks about some assumptions. And is there any reason to think, when you talk about an ammonia move of $50, meaning $20 in UAN, is there anything that has happened over the last few years or in the current market that that you feel that, that won't hold? Is that some historic relationship that is no longer valid? Or is that still, you think, pretty valid based on -- so it seems like your UAN pricing, obviously, it's just one quarter, but did not drop as much. I mean, so with anything you would think it would be better than that in terms of that grid, but I don't know if there is just -- if that's just the long-term average or if that's still valid I guess?

I guess, the way I would answer it is that's a historical relationship that probably over the last two to three quarters has not been there. And the reason that it's not been there is that UAN has lagged any kind of rebounded pricing that we've seen in urea, now ammonia. Even though UAN is now coming back, and so we're getting more back into historical relationships, it had been out of that relationship for some period of time.

Yes. UAN on a per nitrogen pound basis has here, over the last couple months, has been trading at a discount to urea, which is very unusual. As the price comes back in line, you probably are going to get a little bit more closer to historical trends, but we're going to have to wait and see if that's the case. Keep in mind that UAN is, basically, we're self-sufficient in North America, so there's not a lot of import products coming in. ,So we'll have to wait a little bit longer. And as I said in my prepared comments, it may take the next few quarters for all the logistics and distribution systems to mature a little bit more so that we get those historical trends back. Or if they come back and we'll just have to wait and see, but that's the historical correlation on UAN is probably not there right now in the market.

But I think we feel like that that grid that we put out there is fairly representative of how the business can operate in certain conditions with the assumptions that we have.

Right. I guess, just lastly, on the -- it talks about the turnaround expense, you had $35 million of CapEx or you're going to this year. I don't know if you have any thoughts on next year. And then my recollection, the turnaround -- so when you say $35 million, that would exclude any turnaround expenses if you have them and where would those slide in like if we ended up at $100 million of EBITDA, would I then -- I need to take off turnaround -- I'm just trying to -- I know we've talked about this before, but what do you see for next year of CapEx and turnaround? And where would turnaround be relative to EBITDA in terms of the income statement?

Yes. So, first off, the $35 million that we talked about this year includes turnaround costs and capitalized cost associated with the prior turnaround that we took back in August, July.

July.

July. Next year, we're probably talking $35 million to $40 million and that will include turnarounds for next year for two of the plants -- sorry, capital--

Well, I just wanted to refresh, just more from a -- I'm starting with EBITDA and trying to figure out next year how much cash you're going to generate or burn. With the $35 million to $40 million, is any of that already buried up in the income statement above the EBITDA line? Or am I double counting if I then subtract $40 million off that EBITDA number or no?

Yes. None of it is up above EBITDA. So, it's -- yes.

Okay. Okay. So, it's a true subtraction. Okay. That's all I had. Thanks.

Thanks Bob.

The next question is from Lucian Tira of HPS Investment Partners. Please go ahead.

Thanks guys. A couple of other questions I had were already addressed. I was just kind of wondering, given some of the operational issues that have -- that keep popping up every quarter and the professional health that you guys are now getting and addressing those, what do you expect, timing-wise, for us to be able to say, okay, I have much more conviction in this 95% operating rate that you're driving to. Is this a second quarter of 2018, given that's when these studies are done? Or is that the time when a bunch of items will be implemented and therefore, it's more like an end of 2018 timeframe?

Well, let's keep in mind that our Cherokee plant ran a 99% this quarter and it said of four quarters of plus 95%, so we think we've gotten things going on that pretty well. The El Dorado plant -- look, lightning strikes in that. We couldn't necessarily predict that, although we're making improvements in backup power and some other things that little bit lessen the impact of those. But to the extent that they still occur, we may have those -- and I can't predict when those will occur. The improvements that we've been making over the last several years, we believe has improved our uptime and the volume show that. I mean what we're trying to get to is an overall 95% for the company on a company-wide basis, so that's really our target. The Pryor needs more work, we know that. We think we're getting there. We've made the decision, as I said, to accelerate the process gas pre-heat system to get us -- to get it in service before we anticipate it. So, all of these things we're doing will continue to improve our uptime. Every now and then, something comes up and grabs us by surprise. We think the number of events and the severity of those events is going to continue to lessen as we go forward. So, I think we're pretty confident that we can do it. We're making improvements. As I described the people before, we'll continue to have a skinned knee every now and then, but we don't believe it will require surgery and stitches and that's how we would characterize it. All companies have skinned knees on plant operations and we're not immune to that, but we've been improving every year. We'll continue to improve. And we think 2018, our goal and our objective is to have that overall average 95% for the company up and running for 2018.

Got it. Appreciate it. Thank you.

The next question comes from Jeff Geygan of Global Value Investment Corp. Please go ahead.

Hey, good morning gentlemen. Appreciate your time today [ph].

Thank you.

Two questions for you. Number one, you indicated that there are consultants or outside experts that you brought in to do studies and reliability analysis. I presume there's some type of cost associated with that?

There is. These are outside engineering firms and maintenance experts. So, yes, there is some cost associated with that.

Presumably the results of their study that will be available in Q1 of 2018 will suggest that there are certain improvements that need to be made. With your CapEx projection for 2018 of $35 million to $40 million, what if any of these study results have been factored in?

Well, we factored in -- we have some -- in that $35 million to $40 million, we have some improvements factored in. We do have some flexibility as to where that cap was always directed within our overall plan. And based upon what we see and hear and look at the, I call it, the best payback opportunities, we'll put that capital in the right place as a result of these. There may be some things that were not expecting that we'll take a look at, and have to consider those as well. But I think in the overall $35 million to $40 million, we will balance our cap spending with that overall plan. So, I think we'll keep within those parameters.

All right. That's interesting to know. Secondly, Mark, the grid that you referenced on page 19 of your deck, which is very helpful, appears not to have changed from the last few times that you have presented that, which surprised me a little bit given your comments earlier about cost reduction in your COGS. Is this something that I misunderstand? Or would it be reasonable to suggest you update these numbers?

No, I think that we anticipated making some expense reductions and we've included it already in that grid.

I see. So, previously it was reflecting forward thinking that this will be a steady-state, is -- are these numbers then inclusive of the projections that you gave us earlier today of roughly, I thought you said $3 million reduced cost from your production?

No, they don't include any going forward cost reductions.

All right. I appreciate the clarification. Thank you and good luck.

There are no additional questions at this time. I'd like to turn the call back over to Dan Greenwell for closing remarks.

Great. Thank you. We -- once again, we very much appreciate your time this morning and are always happy to take your calls if you have further questions after this meeting. But we look forward to speaking with you once we finish the year end and I wish everybody a good day. Take care. Bye-bye.

This concludes today's conference. You may now disconnect your lines. Thank you for your participation.