Greetings, and welcome to the LSB Industries' Third Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Kristy Carver, VP 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 Web site, 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.

Good morning. Thank you, Kristy, and good morning to everyone. We are glad that you could join 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 Chief Financial Officer. Today, we will discuss our 2018 third quarter results and provide you with our outlook for the fourth quarter, and we will also share our initial thoughts on 2019. I'll begin with an overview of the third quarter, and then John will discuss our plant operations followed by Mark, who will go into detail about our financial performance and capitalization. Then I'll return to provide you with our current views of markets and provide some commentary on our fourth quarter and 2019 expectations, after which we will take your questions. Our revenues for the third quarter of 2018 were $79.8 million, an 8% increase from the same quarter last year after adjusting for the adoption of ASC 606 accounting standards along with the sale of the machine tool business in 2017 third quarter, despite the lost production in sales from the turnarounds during the quarter. As a reminder the calendar third quarter is typically our seasonally weakest period as a result of the lower out of season demand for our agricultural products. That occurs between the spring and fall application seasons. Our third quarter adjusted EBITDA was $8.7 million, which excludes the cost related to turnarounds performed at El Dorado and Cherokee facilities. If we also exclude the lost fixed cost absorption and lost sales resulting from the turnarounds, our third quarter adjusted EBITDA would have been materially higher. This compares to $3.5 million of adjusted EBITDA in the third quarter of last year when we had minimal turnaround activity.…

Thank you, Dan, and good morning. The El Dorado ammonia plant had an 89% on-stream time for the third quarter. We had two outages in the quarter. In August, we were down for five days replaced compressor vibration [indiscernible] clear our SCR catalyst modules that were causing pressure drop limiting production. In September, we took a five-day plant outage to replace the steam turbine rotor on the main air compressor with an upgraded more robust design. We've had two steam turbine rotor failures on this compressor since the plant was started up in 2015. This particular rotor design has had a history of failures in the industry. During the start up from this outage, we had a tube fail on a waste heat boiler, which extended the outage an additional five days to make repairs. In August, we took the DMW two nitric acid plant down for 10 days to install the new N2O abatement vessel. The unit is performing well. The plant is in full N2O compliance. The full cost of this unit is covered under the warranty. Our prior facility ammonia plant had 98% on-stream time for the quarter. The ammonia plant has been operating very well. The prior year plant urea plant has had some mechanical issues related to compressors and heat exchangers that caused some downtime and reduced rate operations. The urea plant is currently operating well. In order to address several of the mechanical issues we have had, we are installing a new natural gas Pryor boiler, which will come online in the fourth quarter of this year to further improve plant reliability. The urea reactor is also scheduled to be delivered in mid-November of this year with final installation during next year's turnaround. The Cherokee facility completed a 35-day maintenance turnaround in August with no injuries. There we major upgrades to the primary reformer, catalyst changes, inspections, and compressor overhauls. Excluding the turnaround, ammonia plant had 97% on-stream factor for the quarter. The operating performance of our facilities is improving. The reliability in operations improvement process has laid the groundwork for this improvement. Our next step is to improve operating and maintenance procedures as well as our training programs. I feel good about the direction we are going. As Dan has said previously, this is not a linear process. We will have our ups and downs, but we expect continued improvement as we upgrade our equipment and instrumentation along with the investments we are making in our people to the reliability in operations improvement process. Now I will turn the call over to Mark to discuss the financial results of the third quarter.

Thanks, John, and good morning everyone. Page nine of the presentation provides a consolidated summary statement of operations for the third quarter of 2018, as compared to the third quarter of 2017, along with a year-to-date comparison. As discussed during the last several calls, beginning in Q1 2018, we adopted the new FASB revenue recognition standards. We along with many public companies have chosen not to go back and restate our prior year financial statements for its impact. For us, the biggest change resulting 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 on 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 of that business. In reviewing our continuing operations, excluding the impact of new revenue recognition standards and revenue from businesses sold in October of 2017, total net sales for Q3 2018 increased 8% to $79.8 million from adjusted net sales of $74.1 million in Q3 2017. This is illustrated later on slide 17. In our Ag business, we experienced stronger average net selling prices for ammonia, UAN, and HDAN, which increased 42%, 26% and 15% respectively quarter-over-quarter. While HDAN volumes 50% over the third quarter of 2017, as dry conditions in the cattle regions West of the Mississippi that we sell into experienced much needed rainfall, which combined with high cattle prices have given rangers the confidence to make fertilizer applications in order to grow more forage to get through trying…

Thank you, Mark. As we head into the final months of 2018, we expect conditions in both our agricultural and industrial markets to continue to support strong, healthy, year-over-year improvements in our financial results. On the Ag side, prices for fertilizers have driven sharply in recent months driven by a combination of factors, including substantially reduced imports as a result of new domestic capacity coming online, and with the impact of U.S. sanctions on Iranian source product. Rising raw material input costs for international producers as rising gas prices in Europe have steepened the cost curve in that region, while higher coal prices resulting from government mandated cut in coal production have increased prices of Chinese urea. And thirdly, temporary supply disruptions caused by extended summertime turnarounds on the part of several ammonia plants in Europe. As Mark mentioned earlier, we're seeing these factors reflected in the fall fill prices for fertilizer, with selling prices for our UAN that are approximately $50 a ton higher versus the same period in 2017. And ammonia out of Pryor that is over $100 per ton for the same period in 2017. Pricing for our industrial products is also benefiting from a decline in import volumes, which has driven up the benchmark Tampa ammonia price. We are the leasing merchant marketer or nitric acid in North America. And as a result are levered to multiple end markets, including housing, automotive, and paper processing, all of which have benefited from the continued strength of the U.S. economy. We have been closely monitoring our industrial end markets for evidence of an impact of import tariffs on Chinese product. Thus far we've yet to see any negative effects, although this may take some time to ripple through the supply chain to a point where we'd see a…

Thank you. [Operator Instructions] Our first question comes from the line of Joe Mondillo with Sidoti & Company.

Hi, guys. Good morning.

Good morning, Joe.

So a few questions, first on the new revenue recognition, I'm just wondering is it going to be about $15 million a quarter that's going to affect the upcoming couple of quarters.

Generally speaking, I think our revenues historically have averaged between $70 million and $90 million a year depending on Tampa ammonia prices and gas prices as we're indexed there. But you could make the assumption that it's spread out fairly evenly.

Okay. And then just to clarify, so, on the volume and cost absorption in terms of the turnarounds you lost about almost $5 million, you're estimating, of EBITDA and then additional sort of $8 million on incremental turnaround cost, so about $13 million relative to it a year ago. Assuming that's correct, El Dorado and Cherokee should not see a turnaround for the next couple of years, I think we're expecting a Pryor turnaround next year. And saw a Pryor turnaround last year. So can I just assume sort of that $13 million is an incremental bonus for next year or should next year's Pryor turnaround be a little different than next year's Pryor turnaround?

Well, Joe, we don't expect any turnaround at Cherokee into 2021. So those are on a three-year cycle. We do have a small turnaround in El Dorado which basically, if you want to call it vessel inspection turnaround for pressure vessels that are required by law. We didn't do those this year when we -- they're weren't due. And we didn't do those this year as we wanted to get the plant back up and running on that. So we'll have a small turnaround next year, and that'll be somewhere around 12 days or two weeks, somewhere close to that, for next year in El Dorado. But as I said, the cost is primarily -- you don't see substantial capital cost, that's primarily inspection-type activities. We may change a couple of heat exchangers while we're at it during that timeframe as well. So when we look at Pryor, we're probably talking about a 25 to 30-day turnaround. That's a pretty big turnaround because we're installing the new urea reactor. That'll be basically done before that turnaround, but we'll do the tie-ins during that timeframe, and we'll also be replacing it. So we have it, I call it, a small turnaround in El Dorado next year for some pressure vessel inspections and a couple of heat exchangers to replace. Other than that it's not that significant. And that Pryor will have one, and that should get us to get on a two-year turnaround cycle after next year's Pryor turnaround. And we'll put that new urea reactor in as well, so that should really help us from a urea and UAN uptime perspective. So that would be our turnarounds for next year.

Yes, to just wrap up the schedule. Cherokee has now completed a turnaround just this past quarter, as Dan said, not until 2021. El Dorado will have a short turnaround next year, and then we'll be on a three-year cycle and won't do a turnaround until 2022. Pryor will have a full turnaround next year; go on a two-year cycle and then 2021. And then at that point John and his team will make a determination as to whether we stick to a two-year or we go to a three-year.

Yes, it should be on three years.

Yes.

Okay. So it sounds like the turnaround at Pryor next year is going to be a little bigger and maybe a little more costly than last year's Pryor turnaround?

Yes, I don't know if it's going to be more costly because I said that urea vessel has already been bought and paid for and put in place. So I don't know that I'll be more costly.

Yes, I think you're probably -- I mean, if you're thinking about turnaround expenses, not capital you're probably talking about anywhere in the neighborhood of $6 million to $8 million of expenses for a 25 to 30-day turnaround. And then, of course, you've got the lost production and the lost sales of UAN and ammonia during that turnaround, so 25 to 30 days of lost production and sales.

Okay. While we're on Pryor, sounds like plant is doing pretty well from the sounds of it. Could you just maybe comment a little more on that? And then will there be any downtime expected in 4Q related to some of the work that you talked about that you're doing there, the boiler, the urea reactor, any --

No, I think the plant is doing well. We've made some substantive changes up there. We've added some additional engineering resources. And we believe that the maintenance system and the preventative maintenance program we're putting in place, those are longer-term results. And we believe that some of those are starting to bear fruit and will continue to bear fruit as we continue to enhance our maintenance and operating procedure. So we're continuing with the work on that, but I'll let John comment on a couple of things on that.

Yes, Joe, some of the other activities we had been doing that we've talked about in the past was we did some external studies and looked for it, and to identify some other potential issues with the plant. And out of those studies, the Black & Veatch study and such, we've identified some additional upgrades which we have made this year which will help overall reliability, so. And then we also identified some work we'll be doing in next year's turnaround out of those studies. And so the net-net is we're going to see much improved on-stream time from that facility.

Yes, our expectation, Joe, is we'll continue to get better and better as we go along. As I've said every now and then, we'll skin our knees, but it won't as substantive, hopefully, as we've seen in the past. So we will get better and better every quarter that we go forward.

And you might want to mention, I mean, we've got a real commitment to that facility because we're really gas advantaged there.

Right. Our gas costs at Pryor is below $2 in MMBtu. So if you think about it, you have less than $2 gas and you're selling UAN out of there for over $200, so it's a pretty good return. And ammonia there is a nice return as well. So we believe with the operating enhancements and the maintenance work that we're doing that long-term that is a very good plant. And the management team and the maintenance staff that we've upgraded I think is starting to bring that to light. And we'll get better on-stream and operating rates from that plant. It'll turn into a good plant for us.

Okay, good to hear. Also, I wanted to ask, a lot of these plants can manufacture several different kinds of end products, and you guys try to run them most efficiently to the most profitable end product based on pricing. In 3Q, taking outside of the turnarounds of course, how would you describe sort of the efficiency related to that amongst the three plants?

Well, if you really want to look at it let's take El Dorado first. We can sell ammonia, nitric acid, and ammonium nitrate. As you saw our volumes for ammonium nitrate in the third quarter, we're very, very strong, and increased over 50% from the year before. So there was a good market, a strong market, we sold more ammonium nitrate. There's also some acid business and some campaign business that we were able to capture, and we sold more acid. So to the extent that we can upgrade and gain additional we'll do that, or that we can switch ammonia for UAN at these facilities or nitric acid, we'll do that as well. So I think while you have some flexibility in the ag markets, you can be pretty nimble on doing that. And when there's particular price dislocations in certain markets you can take advantage of it. On the industrial side if there's someone else's plants go down, which we saw. Several competitors' plants went down, we were able to step in and supply that product. And we'll continue to see some of that in the fourth quarter as well. So I think we try to take advantage of every opportunity and every margin enhancement that we can make. And we're fairly nimble with what we can change.

Okay. And the lower volume in mining, would that have adversely affected or positively affected the margin in the third quarter?

No, I think you saw lower mining volumes. And as I think we talked about, and Mark talked about, that we expect that was a timing issue. And those are all going to go out in the fourth quarter. So that's something that I think is called a timing issue. But look, we were running high density very hard at that timeframe too, and we picked up 50% volume increase on that, so more butter less guns. That's how we look at it.

But if you saw that volume come in, in the third quarter, would that have boosted your EBITDA at all?

I'm sorry, would that have what? I didn't hear you, the last part.

Would that have boosted your EBITDA at all if saw that volume in the third quarter? In other words in the 4Q should we anticipate the recovery of this in 4Q, would actually help 4Q?

I would think a little bit. I don't want to overstate what it's going to benefit, but yes it would've helped, of course, additional volume…

Okay. Okay, last question and I'll allow someone else to take a chance. Usually from this time of year going into April-May, we tend to see prices actually rise through this period of time. This year, I think, is a little bit of an anomaly since we saw pricing pretty strong in the August-September time period. So just wondering, with all the dynamics, I know there's a lot of variables here in place. Just wondering sort of your thought on do see sort of pricing plateau maybe a little earlier or do you think maybe because corn acreage may be expected to be much higher next year than this year, maybe demand is strong. How do you see pricing trending through the spring season?

Yes, I think when we look at it we look at it in a couple of different ways. On a macro global basis, because as you well know, a lot of urea and ammonia are imported in here, so you're going to see prices at the Gulf that are sort of what everybody looks to see what's happening. And then you'll see inland prices that'll either be plus or minus from that. Our view is that certainly we have a good order book for the fourth quarter. We know what that is going to do. I think, as I said in my prepared comments, growers have been hesitant to step up and take a big -- I call it big order placement with the dealers out there. So you have dealers that are waiting for the growers to come in and place orders, so then they can in turn buy. With grain prices where they are right now you had growers be a little bit sluggish about coming in and placing those orders. So I don't see prices decreasing substantively from where we are today. I think we'll have to wait and see what first quarter and second quarter pricing. We don't have a substantial book on first and second quarter -- a little bit on first, but no substantial book on second at all. And so I think we'll wait and see. I don't expect a weakening of prices. But then until we see what's happening with grain prices, I don't think we can predict that they're going to go up substantially further from where they are today. Maybe somewhat, but I think we have to look at grain prices as sort of a leading indicator of what may happen with fertilizer pricing.

With the sentiment amongst the farming community and the tariffs and everything, how was the application -- I mean you said growers have been hesitant to purchase big orders. How was the application in the fall season then?

We have good order volume and good order book. So I think we feel very comfortable about our fall position and our position in the fourth quarter.

Okay. Okay, thanks a lot. I'll hop back in queue.

Our next question comes from the line of Peter Delgado with Global Value.

Yes. Hey, good morning, guys.

Good morning, Peter.

Yes, hey. I was wondering if you guys can just give us some more color on your CapEx outlook kind of going forward. I know you guys have been trying to keep that at an even level.

Yes. I think what we've said is we expect CapEx to be roughly around $35 million on an annualized basis. And that includes what I call normal replacement stay-in-business CapEx that doesn't include any major expansion or so. That's sort of a continual upgrading of equipment, replacement of equipment, things like that. So I'll put that in the stay-in-business capital. We're sort of looking at $35 million on an ongoing basis for that. It may move up a couple -- up or down a couple of million dollars over time year to year. But in 2019, we're probably at 35, this is our current view.

Right, okay. Thank you for that color. Second question here, the price of nat gas obviously has been kind of creeping back up over the past two months. You guys seem to hold a pretty competitive advantage obviously with the Pryor facility. Are you price competitive with the other facilities as well, or is that just for Pryor?

No, I think Pryor has a substantial basis differential $0.75 in MMPT or a dollar from time to time from the other facilities. But I as said, we're below -- we're sub through dollar gas right now. So that puts the other facilities $3 -- approximately $3 plus or minus a little bit. That's very competitive within the facility in North America.

Yes, at the other two facilities I think we've probably said this before, including the cost of transportation, the kind of approximate Henry Hub pricing, so both that is lower than in Cherokee.

Okay, great. Yes, thanks guys.

[Operator Instructions] Okay, it seems we have no further questions at this time. I would like to turn call back to Dan Greenwell for closing comments. Oh, I am sorry. We've just had someone else come in. We have questions from line of Joe Mondillo, Sidoti & Company.

Okay. Sorry for that last question. Just had a couple of follow-ups, I was having a little difficulty there. So you gave some pretty good color on I think on Tampa ammonia you commented on in terms of through the rest of this year. Just wondering on HDAN -- I know there is a little bit more dynamics there, what your sort of thinking is? Last year we saw a pricing flat from 3Q -- the average price from 3Q to 4Q. Should we anticipate any upside in HDAN prices from what we saw in the third quarter?

No, I think prices as I mentioned in our comments and just on other previous question, I think we see prices fairly steady for HDAN from Q3 to Q4. I don't see much appreciation. I think it looked to be very consistent with Q3.

Okay. The -- I think in the last quarter conference call, you mentioned that you have been doing some sort of things. I think centralized things on cost, and potentially, $3 million to $5 million of savings this year. I think you mentioned on the last call, you may have seen already $3 million year-to-date. Was there any incremental savings of what you were doing in 3Q and anything outside excluding the legal cost of course? How to think about that for 4Q?

No, I think we had continued progress on our purchasing activities. We centralized purchasing. We've also centralized some maintenance activities, things like that, some logistics and rail trucking activities, RFPs for different services. We continue to get cost savings. We have captured most of those that were going to capture for the year. We will continue to enjoy those for the rest of the year, but nothing notable new that we want to play out for this quarter or the fourth quarter. We are on track to hit our savings target for the year. I don't see that being a problem.

Okay. And I was just curious on the D&A that you saw on the quarter -- it is a little lower than the first two quarters of the year. What are you anticipating on sort of a quarterly run rate on D&A?

Well, I think annualized we are probably $70 million to $75 million. And I think that will probably be fairly consistent. Remember as we are depreciating off I guess ultimately depreciation will move down as we start to move through if we continue to maintain CapEx at around $35 million. So you could see it come down slightly year-over-year.

Okay. And last question from me, just on sort of a guidance that you have provided for at least for the 4Q sort similar EBITDA to the first quarter of this year, relative to the volume guidance that you gave which is pretty good, I understand HDAN is going to be down quite a bit from what you saw on the first quarter. But the rest of it looks actually up fairly good. And pricing is going to be very strong obviously. In terms of that commentary, how do you think about utilization rates? Do you sort of look at it as sort of your long-term goals of 95% plus? Or, do you think about a little conservatively under that?

Yes, I think in the fourth quarter we had indicated they will be around 94% is our current view. We obviously were just into the fourth quarter bit. But right now, I think we feel pretty good that we can get a system wide 94%. I think that our target goals that we have said is companywide, we would expect higher than that at El Dorado and Cherokee. We would expect those to be the mid 90s or above. And the Pryor, we still got some work to do. And so, we were targeting I think 2019 at 90-ish, 90% for Pryor and the rest of it being higher for blended average rate of somewhere around 95% companywide for the ammonia facilities.

Okay. And so if I could sort of take as if you are -- you come in under 94% unless pricing drastically sort of changes from where we at that you may see a little bit lower than the first quarter or vice versa?

When you say lower, I am not sure what you are referring to lower. Lower?

Well, you said the guidance -- the guidance that you sort of looked at for 4Q is that similar to 1Q? So, I am saying if you come in below the 94%, you would be lower than that 1Q sort of bar or vice versa if you actually came in higher.

Yes, I don't want to specifically say if we are 93.5, we are going to be lower. Or if we are 95, we are going to be higher. I think that's a level of precision I am not -- I can't really give you at this point.

Okay. I wasn't talking about that kind of precision, but yes, okay. I understand. Just lastly, just a follow-up on that, the 90% at Pryor, you had much higher in the third quarter, is that related to some of the work that you are doing, or why couldn't that be higher than 90%?

We are planning on doing some additional work. And that's what we have targeted right now with that additional work to be at around that rate. It would be higher. But as I as said we have got some work to do and we will embark on that work. Let's see what it looks like. It may take a little longer. It may take a little less time. So, I think our conservative estimate right now is 90%.

And I think, Joe, I mean you know us for a while now. I think that we've tried to be realistic, do we aim to run the plants at higher rates, of course, we do. I think we are realistic that we if we ran it at 90 consistently for a whole year while we are making a number of improvements that we will gain a great position to run higher by the end of next year.

Yes, I think beyond 2019 actually we had this turnaround done in '19, I think our expectations for Pryor will continue to march up sequentially to get to that 95%.

Okay. Well, that's really good news considering where we have been the past. So, it seems like you guys are definitely doing a good amount of improvement there, so appreciate the questions. Thanks a lot.

Yes, I think John's team has taken on very good programs and we are making good progress on that. We still have a lot of work to do. We are continuing as we said, we had our maintenance system we have put in place this year and our preventive maintenance procedures we are going to. We will continue enhance our operating procedures, our maintenance procedures, and our employee training. We have a vision on where we want to go with that. And that's what we want to do with our maintenance, continuing to improve the on-stream rates for plant. We know that's the greatest value creation for shareholders. And that's really what we want to do. So, are there any more callers in the queue?

Yes. We have question from line Karl Blunden with Goldman Sachs.

Hi, good morning guys. Thanks for the time. Just a question on the timing of earnings and how long it takes to pass through contracts, we had a nice run up in ammonia over the last six months or so, and the metrics you provided is helpful. When we think about how much time it takes for your earnings to move up, assuming the operating rates that you provide there? How long should it take to get to that run rate? For example, if you are 350 ammonia, you know, that's moved up from 300 of it, in a course of just a couple of months, how long does it take to be earning at that level?

Well, on the agricultural side, fertilizer prices will move up and down. So certainly if Tampa ammonia prices are changing on a monthly basis, right, they're priced monthly, if the market is going to move with the Tampa ammonia price, you can see it pretty immediately. Doesn't know it move with Tampa ammonia prices because it's inland pricing versus something down at the Gulf. When it comes to Tampa moving on the industrial side, it's really a good question, because we have -- as I think you know, we've got a lot of our industrial business that's contractual. And so, under those contracts, they're -- a lot of them are Tampa ammonia indexed that will -- some of them will be first of the month, and so if Tampa is changing on a monthly basis, their pricing will change somewhere one month lag and somewhere actually a quarter lag, so we kind of runs the gamut.

Got it. That's helpful, thank you.

Okay, thank you. I would now like to turn the call back over to Dan Greenwell for closing comments.

Well, we appreciate your participation in our conference call this morning. We look forward to delivering a solid fourth quarter, and then a much improved 2019. We hope you have a good day, and once again, thanks for your interest. Have a good day. Bye-bye.

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