Greetings, and welcome to LSB Industries' First Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kristy Carver, Senior Vice President and Treasurer. Thank you, Ms. Carver. You may begin.

Thank you, Doug. Good morning, everyone. Welcome to our call. Joining me today are Mark Behrman, our Chief Executive Officer; John Diesch, our Executive Vice President of Manufacturing; and Cheryl Maguire, our Chief Financial Officer. 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 Investor 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'd like to go ahead and turn the call over to Mark for opening remarks.

Thank you, Kristy, and good morning, everyone. We're glad that you could participate in our call this morning and appreciate your interest in LSB Industries. Page three of the presentation provides highlights for the first quarter of 2019. We delivered strong operating performance during the quarter. John will get into more detail on our plant operations momentarily. But, I will point out that our three ammonia plants averaged an on-stream rate of 93% which was our third quarter in a row running at 93% or better. In fact for the past three quarters, we have averaged a 94% on-stream rate across the three ammonia plants which reflect the positive impacts of the leadership changes and reliability investments we made over the past few years. The material improvement in our plant performance is also a testament to our employees at the plant level, who have whole heartedly embraced our mission to become a best-in-class chemical manufacturer. And in addition to high on stream rates, value our environmental, health, and safety performance as part and parcel with success in our business. We thank them all for their continued efforts. Our first quarter revenues were $94.2 million while adjusted EBITDA was $18.1 million. These results were lower than the same period last year due to the impact of unfavorable weather across much of the Midwest during the period which led to lower sales volumes of our agricultural products and additional cost incurred to move product around to maximize storage of product. Page four depicts the multi-year trends for fertilizer pricing and natural gas cost. You can see here that with respect to our fertilizer products, UAN and HDAN prices are higher than they were in 2018. During the first quarter of 2019, we recognized increased pricing for these products of 54% and 5%…

Thank you, Mark, and good morning. Please turn to Page 6. Overall, I was pleased with our operating performance in the first quarter. I'm happy to say that the operating performance of all four plants so far in the second quarter has continued that trend. As Mark stated, we had a combined average on-stream rate of 93% for our ammonia plants for the first quarter and a 94% average for the past three quarters. Ammonia being the feedstock for the majority of our products has been our primary focus. We still have work to do, particularly in our urea and nitric acid plants. But the improvements we had put in place are making a difference. We're in the midst of planning for maintenance turnarounds at El Dorado and Pryor with Pryor being a large [indiscernible] numerous upgrades that we expect will materially improve the reliability of that facility. The El Dorado ammonia plant is operating well. We are planning a 14-day turnaround for August, which will include mainly inspections, heat exchange cleaning, and catalyst changes. We will then go to a three-year cycle for a turnaround -- with the next turnaround plant for 2022. Our two nitric acid plants continue to run very well. On the project front, in each stand reliability and capacity improvement project will take place in the third quarter. We will also be installing an upgraded expander turbine to improve efficiency in our DMW to nitric plant, which is part of the warranty agreements with KBR Weatherly that should help reduce our material gas usage by providing additional steam for a cogent facility. The sulfuric acid convertor reactor replacement project is on schedule and it's expected to be completed by year end. Our Pryor ammonia plant is operating well. We are currently concentrating on improving the…

Thanks, John, and good morning, everyone. Page 9 of the presentation provides a consolidated summary statement of operations for the first quarter of 2019 as compared to the first quarter of 2018. In reviewing our operations for the first quarter, total net sales in Q1 2019 decreased 6% to $94.2 million from $100.5 million in Q1 2018. As Mark mentioned, in our Ag business, we experienced stronger average net selling prices for UAN, ammonia and HDAN, which increased 54%, 12% and 5% respectively, quarter-over-quarter. The stronger pricing for these products was offset by lower sales volumes as a result of the persistent cold wet weather during the quarter. Net sales into our industrial markets were in line with last year as we were able to offset the decline in the Tampa, ammonia, benchmark with higher sales volumes of nitric acid and industrial ammonia, which increased 11% and 10% respectively. Sales volumes related to mining applications were slightly lower versus the prior year. However, we do expect to make up that volume in the second quarter. Gross profit decreased approximately $2.8 million as a result of lower overall net sales. Higher freight costs incurred to move ammonia internally for storage due to weather challenges and delayed application and higher gas costs in the first quarter versus the same time period last year. SG&A expenses decreased $1.1 million primarily reflecting a reduction in compensation related costs. Overall operating income and adjusted EBITDA for the first quarter of 2019 declined compared to the prior year period, primarily due to delayed product sales resulting from unfavorable weather conditions for farmers and the related costs. I will bridge EBITDA for you on Slide 10. Please refer to our reconciliation of non-GAAP measures beginning on Slide 19. For further information on non-cash and one-time costs incurred…

Thank you, Cheryl. As I stated earlier in the call, a strong and consistent performance of our facilities makes us confident in our ability to deliver improving profitability. As a result, we continue to expect 2019 to be a growth year for LSB relative to 2018. Along with our expectations for our ammonia plant on-stream rates to continue to average approximately 94%, we anticipate improved volumes for several of our products which is what we have been experiencing this far in second quarter. Turning to page 15, as Cheryl discussed, pricing for our fertilizer products was a tailwind for us in the first quarter. This was a continuation of the trend we saw in the second half of 2018 albeit to a lesser magnitude driven by diminishing supply as domestic capacity that came online during 2017, in addition to reduced volumes of low priced products being sold into the US by China and others. Favorable dynamics for the US corn market leading to expectations for increased acreage to be planted further supports overall better agricultural product pricing relative to last year. We are currently realizing healthy prices for the ammonia that we're selling at our Pryor and Cherokee facilities for agricultural usage. Pricing for ammonia into the Corn Belt in southern plains markets is averaging greater than $400 per ton, a significant premium to the April temper price of $255 per metric ton. Demand for agricultural ammonia is such that we can sell whatever we can produce at those two facilities at very favorable pricing. HDAN is also moving very well and pricing has been relatively stable for the past several months with average selling prices between $255 per ton to $235 per ton. However, sales volume's lagged until late March due to the weather issues we experienced. With the…

Thank you. [Operator Instructions] Our first question comes from the line of Karl Blunden with Goldman Sachs. Please proceed with your question.

Hi, this is Travis Edwards on for Karl.

Hi, Travis.

A quick question on your -- hi, how it's going, on your guidance for 2Q, you noted that you expect to recapture the majority of loss volumes from the poor weather in 1Q, but the Tampa ammonia prices will also be lower, are you able to size the net impact to EBITDA that you expect to recover in 2Q?

Yes, Travis. Looking at the second quarter, I think we expect to pick up about $5 million of the volume that we lost in the first quarter. And with that being said, assuming our plants run at that targeted operating rate, which for the month of April all of our plants have been at a 100% on-stream time. And assuming weather doesn't have further impact, we would expect the second quarter EBITDA to be 50% to 70% above the first quarter of 2019. And that would be a record quarter for LSB if you think about since the start up of the EDC ammonia plant back in 2016.

Got it. That's really helpful color. Appreciate it. One more question from me. In your press release, your commentary on fiscal year '19 EBITDA guidance look pretty consistent to last quarter. I am just wondering if anything has changed there to the upside or downside. And then two, if you hit your guidance, are there any changes to how you are thinking about capital allocation priorities such as addressing preferred shares, high coupon debt, or even M&A?

I think that our view on '19 as mentioned is still -- we have a healthy growth here this year despite some of the movement in pricing. As Cheryl said, I think we will pick up material amount of the volume -- sales volume that we didn't get out in the first quarter and the second quarter. But, I think it's a little early -- it's still too early for us to give you view on year. It depends on really the weather and how the spring fully unfolds. CapEx is I think we stated last quarter was about $34 million - $35 million. Of which, Cheryl mentioned, $7.5 million is related to the sulfuric acid converter which is financed. So really CapEx for the year still remains at about $27 million.

Got it. Thank you very much.

Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Hi, good morning everyone.

Good morning, Joe.

Good morning.

One -- so a couple of questions on the quarter itself, the price realization was a lot better than I was looking for. I understand that you did sell forward some UAN at some better pricing I think and maybe even ammonia, but ammonia certainly was above sort of Gulf spot. So is spot pricing just much better in the regions that you are selling into? Or, could you just talk about how you were able to get such good pricing in the quarter itself?

Yes. I mean I think that as I mentioned in my commentary there is clearly a disconnect between Tampa ammonia or Gulf pricing and inland pricing. Part of that has to do with Tampa ammonia or Gulf pricing not a lot of liquidity. So there are not a lot of vessels coming in. And certainly the Tampa price, which is a negotiated price between Mosaic and Yara, is for a significantly lower volume that had been historically, right, so that whole dynamic has changed. On top of that, due to the weather, you've clearly got a lot of logistical issues whether it's barges sitting on rivers and not being able to get up river, or, trucks and really lack of trucks to move product around. So that's helped really improve the pricing in ammonia.

Okay. And just in terms of your commentary on UAN prices for 2Q I guess, is part of the reason why you anticipate that pricing will be up compared to some of the spot pricing that we are seeing? Is that because of some of the volume that's pushed into 2Q that's contracted at much higher pricing? And then on top of that, how much I guess volume is not sort of forward priced? And is there any sort of -- is there a risk if price -- spot pricing in Gulf side of things continues to fall, will you see that in your regions? Or is pricing holding up in the regions that you are selling into?

I think we talked about pricing for UAN trending down since January for a number of factors, but I would say that what we are really seeing is pricing and we talked about is pricing improving $8 to $10 a ton in the second quarter of this year versus the second quarter of last year. And then one of the things that we would see naturally is UAN prices moving up as we get further into the spring. I mean I think that's pretty historical as to what happens. So, I don't think it's anything unusual to see some price improvement as you get corn planted in the ground and you start to see usage of UAN which is we are starting to see a little bit more volume over the last few weeks.

Okay. So, is it primarily just the anticipation of as demand picks up pricing should start to improve? Or, is there any forward price contracting related to the volumes that are pushed in this 2Q?

I don't think any forward volume is pushing pricing up today. I mean forward volume would be locked in at prices. I just think it's a normal price increase that you see as you get deeper into the spring.

Okay. And then I was just curious you talked about imports which was helpful to hear regarding some of the pricing that's happening. In terms of trade -- on the trade issues, I know Chinese imports have declined significantly to almost much less than they were two years ago. I am just wondering has any of that been affected by the trade issues? And more so, if we get a trade resolution, would you anticipate any sort of imports from China if there was a resolution?

I think one never really knows. I think we'll have to see how -- if and when there is a trade resolution, what the details of that are. But, I don't know that you'll see as part of that more Chinese urea coming into the United States as that's the primary product they would import. I think actually the trade tariff is probably Tamp bringing down pricing certainly of beans but also corn is getting swept up in that. And so I think it's artificially -- even though corn is not really impacted, I think it's artificially having an affect on downward pricing of corn. So, hopefully, with that past us, we can see corn prices start to move up a little bit from where they are today. And ultimately would be great to see us part of a tariff settlement, China taking -- importing more corn from the U.S. which has had also helped sort higher corn prices.

Okay, great. And then, you -- Mark, you mentioned I think towards the end of your period remarks about certain ways to save some operating cost. I am assuming that's mainly what we have talked about in the past in terms of procurement and logistics. Just wondering terms of those buckets at least, I don't know if there is any new sort of things that you found. But, how much have you realized or how much do you think you can see in savings going forward? I think we have mentioned maybe $2 million to $3 million or so, but just any more commentary on that?

Yes. So, I think historically I have mentioned $3 million to $5 million, and I think we listed a fair amount of that already, but I think there is still opportunities to get -- certainly get to the higher limit. And as we continue to look for ways to be more efficient, I think that there is a good chance that $5 million can be a higher number. But, I don't think we are prepared to talk in detail about that at this point.

Okay. And then I guess one of my last questions is regarding sort of liquidity and free cash flow. I think, Cheryl, you mentioned that due to the sort of higher than average inventories because of this volume being pushed out that you anticipate -- and correct if I am wrong, $10 million of inventory cash flow for the rest of the year? And then, I am just wondering if you can comment further on what you are thinking about working capital. And clarify what you said about CapEx as well in terms of the capitalized amount related to the sulfuric acid conversion? Thanks.

Okay. So, I guess to your point we are carrying more inventory today as a result of the fall and the spring's weather challenges. And we do expect to sell down the excess inventory although it is possible we may carry some higher inventory into the second half of the year. And we will manage that inventory with the working capital facility. But I think the other thing I would say, Joe, we are feeling fairly comfortable with our liquidity position. We have been around that $60 million total liquidity and if you think about what we have said with respect to interest of about $43 million CapEx, cash CapEx of $27.5 million is what I said in my prepared remarks. And then, you know, another $10 million of call it everything else being principal payments on some other smaller debt pieces and things like that. So overall, at the end of the year we expect to be at that minimum $60 million of liquidity, so we are comfortable with that.

Okay, great. I will hop back in queue, thank you.

Thank you

[Operator Instructions] Our next question comes from the line of JP Geygan with Global Value Investment Corp. Please proceed with your question.

Good morning. Thank you for your time. The first analyst touched on it but I would like to revisit, how you are thinking about your capital structure considering that your operational readability seems to have stabilized over the past two or three quarters and your EBIDTA outlook is generally positive, how do you think about your capital structure generally in the long-term sense.

Well, I think in every quarter we have seemed to kind of touch on the same subject. So I think we really need to get through this year and see how much improve this year is over last year, you are right I think we are feeling more comfortable about the readability of the operations and the stability of those operations, although as John said, still more work to do. So, I think what we will do is we are going to hunker down and really focus on becoming more efficient this year, maximizing our operations and really having a significantly better year this year and then I think take a step back and see where the credit markets and our first call on our bonds is May 2020. So, we will have an opportunity to kind of re-look at certainly our debt and the interest rates on our debt and see if there is an opportunity to improve the capital structure for refinancing, certainly we would like to within the excess cash flow we would like to start to use that to de-lever, but we have to balance that with potential capital investments that we could make in our facilities that would be growth opportunities and we are kind of looking at that as well. So, I think this is a pivotal year for us and we are really looking forward to having an improved year and then taking a step back and seeing where we are in early 2020.

Okay. You briefly touched on growing your industrial and mining segment, but I am hoping you might elaborate on the opportunities you have to grow either revenue of improved margins in each of those segments and what needs to happen for that to occur?

Yes, I mean we are going to into -- I am going to go into specific details on customer opportunities, but the industrial sales and marketing team has done a really great job and growing the nitric acid business and our overall mixed assets, high concentrated assets business. And so, I think that will continue there are certainly opportunities on that side for us to continue to grow that business and we got the excess production capacity to produce at higher levels, so we can have the sales opportunities we can certainly produce it. There're other opportunities as well on AN solution and even ammonium nitrate. And so, I think we continue to pursue opportunities to grow that business as we thought about get the last area of growth on the industrial side would be some growth in sulfuric acid business, we are putting in a new convertor there and that will give us some expanded production capacity. So, we are focused on making sure that we got customers on the other end where we can produce at maximum levels and have sales that will match it.

Great, thank you for your time.

Sure thank you.

Our next question comes from the line of David Deterding with Wells Fargo. Please proceed with your question.

Hey, good morning. Hey, Mark.

Hey, David.

Just a quick question, thanks for all the clarity on the guidance it's actually functionality helpful but I just had one question, could you remind us, I know there are some restrictions in your bonds on when you can start paying down the preferred, can you just remind us what that looks like and when you might be able to start to impact those?

Yes. So, when we refinanced back in April of last year, one of the provisions that we negotiated in our indenture is to allow us to have no limit on our peak capacity as long as we had $65 million of liquidity. So, we have that minimum of $65 million of liquidity and then at that point, we can actually use any excess capital to de-lever. And I say de-lever meaning, we can make -- we can use $0.50 of every dollar to redeem preferred and with the other $0.50 of every dollar we can make an offer to the existing bond holders at 103 and to purchase bonds. And we would do on a pro rata basis. If the bond holders make a determination that they didn't want to be redeemed and take that redemption and those funds were claims then we can use them to redeem additional preferred. So, it's not a timing, per se, it's more of where are we on the liquidity spectrum.

Great, appreciate the clarity. Thank you.

Our next question comes from the line of Doug Ellis [ph] with [indiscernible] Family Office. Please proceed with your question.

Good morning, guys. Thanks for taking my call. I'd just like to revisit the issue of pricing differentials between Gulf for UAN and Tampa for ammonia and the inland pricing that you guys are receiving. You mentioned that there are a number of factors that are going into these differentials and I was just wondering whether you are seeing, at least for the seeable future, the factors continuing or whether you see that going away and the benchmark being more closely aligned with your realized pricing going forward?

I think as I mentioned, really, there's two main reasons why you have fairly significant disconnect, the first being the weather impact and the lack of ammonia due to distribution or logistical challenges. And so, ultimately as the weather improves, those will go away. However, the second part of it is the fact that ammonia Gulf prices really don't have a lot of liquidity and so, it's really negotiated price. And I think the reason you're seeing less vessels come into the Gulf and then ultimately up into mid-continent U.S., ammonia is a global product so, there are other opportunities to bring it in other regions of the world. So, importers absolutely look at where they can get the best pricing and so, right now given the US challenges we're certainly not sitting with best pricing around the world. So, I think overall liquidity will ebb and flow but generally speaking the amount of volume that's coming into the Gulf certainly decreased compared to the average of the last five years.

Okay well, I appreciate that and congratulations you guys. Okay.

Thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

I want to thank everyone for their continued interest in LSB Industries and if you have any follow up questions, feel free to give us a call. Thank you so much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.