Greetings, and welcome to the LSB Industries' Second Quarter 2018 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, Kristy Carver, Vice President and Treasurer. Thank you. Please go ahead.

Thank you, Brenda. Good morning everyone. Please note that today's call will include forward-looking statements, and because these statements are based on the Company's current intent, expectations, and projections, they are not guarantees of future performance and a variety of factors could cause actual results to differ materially. As this call will include references to non-GAAP results, please reference the press release in the Investors section of our website, lsbindustries.com, for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. At this time, I would like to go ahead and turn the call over to Dan for opening remarks.

Thank you, Kristy, and good morning everyone. We're pleased to have you on our call this morning and appreciate your interest in LSB Industries. Joining me on the call today are John Diesch, our Executive Vice President of Manufacturing; and Mark Behrman, our CFO. Today, we will discuss our 2018 second quarter results and provide you with our outlook for the third quarter and the second half of the year. I'll start out with an overview of the second quarter and then John will discuss our plan operations followed by Mark, who will drove into our financial performance and capitalization. Then I'll come back to provide you with our current thinking on the third quarter and the second half of 2018, after which we will take your questions. Our revenues for the second quarter of 2018 were 103.2 million, a modest decline from the same quarter last year after adjusting for the adoption of ASC 606 accounting standards along with the sale of some business in the 2017 second and third quarters, but we were up on a sequential basis. Adjusted EBITDA of 17.8 million was down about 4 million on both the year-over-year and sequential basis. Our results were adversely impacted by the unplanned downtime at our El Dorado facility and, to a lesser extent, our Pryor facility. As a result, we had lower production volume of both agricultural and industrial products resulting in reduced sales, lower fixed cost absorption and additional costs, related to the repairs and the need to purchase ammonia from third parties, which collectively had a negative impact on adjusted EBITDA of approximately $15 million for the quarter. On the positive side, we saw a material year-over-year improvement in product pricing for UAN and high density ammonium nitrate, our primary agricultural products and continued increase…

Thank you, Dan, and good morning. We continue to make progress on the reliability in operations improvement initiative. As we have discussed for the last several quarters, we are implementing an enhanced maintenance management system and indicated that the implementation would be complete by the end of the second quarter. The implementation phase of our enhanced maintenance management systems with the assistance of our outside consultants is now complete. We have also added additional expertise in the maintenance reliability area at each of our facilities. Additionally, all of our maintenance departments are more efficiently scheduling executing maintenance work and managing based on the data we collect. Lastly, we continue to focus on more deep-dive analysis of critical equipment to enhance our preventive maintenance programs. We are currently in the process of performing critical reviews of our operating procedures, maintenance procedures and training programs with the goal of enhancing all other procedures and training programs and standardizing them across our facilities. Commonality of practices and better trained and more educated maintenance and operations staff will assist us increasing the reliability of our operations. We will continue to increase training to improve the skill level of all our people. The El Dorado ammonia plant had a couple of key issues during the second quarter which caused downtime and the on-stream factor for the quarter to be 62%. In May, a steam turbine experienced of blade flare which required us to come down for 10 days to replace the rotor. This particular steam turbine has had a number of flares in the industry over the years. We are building a new rotor with an upgraded design which will be installed in a short 5-day planned outage in August. In June, a power failure combined with water level transmitter failures on the ammonia plant…

Thanks, John, and good morning everyone. Page 11 of the presentation provides a consolidated summary statement of operations for the second quarter of 2018, as compared to the second quarter of 2017, along with a year-to-date comparison. As discussed during our last call, beginning in the first quarter of 2018, we adopted the new revenue recognition standards. We along with many public companies have chosen not to go back and restate our prior year financial statements for this impact. For us the biggest change from the implementation of the new revenue recognition standards is that sales and cost of sales from our Baytown facility will no longer be grossed up on our income statement. This has no impact to our EBITDA. As you know, we managed the Baytown facility for a third party and as such going forward revenues and costs will be recognized more in line with how we view this arrangement. From our perspective, this is a good change as it represents the true economic earnings and margin for that business. In reviewing our continuing operations, excluding the impact of new revenue recognition standards and revenue from businesses sold in the second and third quarter of 2017, total net sales in the second quarter of 2018 decreased 2% to $103.2 million from adjusted net sales of $105.2 million in the second quarter of 2017. This is illustrated later on Slide 19. In our ag business, we experienced stronger average net selling prices for UAN, high density ammonium nitrate and ammonia, which increased 14%, 13% and 10% respectively quarter-over-quarter. The stronger pricing for UAN and high-density ammonium nitrate and ammonia was offset by lower sales volumes for these products as a result of lower on-stream rates at our El Dorado and Pryor facilities. With respect to our industrial sales.…

Thank you, Mark. Looking out for the balance of 2018, we are cautiously optimistic on our business prospects. From an ag market perspective, imports of fertilizer products have decreased significantly over the last 12 months. Additionally, at this time in 2017, we were discussing how the completion of facility expansions by two of our competitors resulted in an inventory build-up in North American ag market. As we predicted at that time that capacity was absorbed by market demand due in part to the displacement of imported product. At the same time as I discussed on the last call over the past year, the domestic distribution channel for fertilizers has been undergoing an evolution towards a more disciplined approach to price management and we believe is now in a much healthier state than it was at this point in 2017. We are seeing these factors reflected in the fall fill selling prices for fertilizer with selling prices for UAN that are approximately $30 per ton higher versus the same period in 2017 and ammonia out of Pryor that is approximately $70 per ton higher for the same period in 2017. Overall, it appears the second half of 2018 is looking more promising than many would've thought a few months ago especially considering the current drop in commodity prices. My feeling however is that commodity markets are overreacting to the trade disputes with China. That combined with the fact that South American crop yields continue to fall behind last year's production levels will cause the grain markets to have some recovery from their recent losses, further supporting overall fertilizer selling prices. The dynamics for our industrial products are more straightforward. With demand generally tied to the strength of the overall U.S. economy which continues to have slow steady growth. Our natural gas…

[Operator Instructions] Our first question comes from the line of Joseph Mondillo with Sidoti.

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

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

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

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

And can you remind us, how many days of turnaround you experienced in the third quarter of last year?

Joe, I don’t have that with me, but I can certainly get back to you on that.

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

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

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

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

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

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

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

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

So, you have now recognized on the income statement, yes, sort of $3 million saving probably in the back half you will start to see that?

Remember that’s annualized. So in the second half, we will see our proportionate share. Just keep in mind, its cash savings or some of that to be could be capital, versus expense, one all be expense.

And then Mark just wondering sort of your working capital requirements for the second half?

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

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

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

Thank you. We reached the end of our question and answer session. I’d like to turn the floor back to management for closing comments.

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

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