Greetings and welcome to the LSB Industries' third quarter 2016 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Miss. Kristy Carver, Vice President and Treasurer. Thank you. You may begin.

Thank you Christine. 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. Thanks for joining our call this morning, the 2016 third quarter conference call. I will first review the key events during the quarter and provide an update on the markets we serve and then discuss the operational status of our manufacturing facilities. John Diesch started with the company on August 1 as our Executive Vice President of Manufacturing and stepped into the crucible during his first week. This morning, John is with us and he will provide a detailed discussion of our plant's operational status and discuss the downtime we had during the third quarter and certain items that carried over into the fourth quarter. John will then discuss the outlook for our operational status for the remainder of the fourth quarter and our expectations for onstream performance for 2017. Mark will lead a discussion of our financial results, liquidity and capital structure along with a view towards our fourth quarter outlook. We believe that you will see we have sufficient liquidity even in the slow selling price environment, even if it extends throughout 2017. I will then make some limited comments on the announcement that we made yesterday regarding our strategic review. This strategic review is being initiated from a Board commitment we made to shareholders approximately 18 months ago to continually reassess our strategic alternatives to enhance value for our shareholders. The third quarter of 2016 was a very tough quarter for LSB and the key plant turnaround and major maintenance activities have been completed. During the quarter there were several very unique maintenance issues that John will review. Many of the repair items will be covered under warranty provisions from outside vendors. We also made the decision to make further process and equipment enhancements to ensure that we operate at…

Thank you Dan. Good morning everyone. I would like to first thank Dan and the Board of Directors for allowing me to be part of the LSB Industries organization. Over the last three months, I have had the opportunity to spend a lot of time at the plants with the management teams at each facility. I have to say, I am impressed with the knowledge and experience of the organizations. As you know, other than the number two nitric acid plant and concentrator at El Dorado, these are all plants that were originally constructed in the late 1960s and 1970s. A good deal of money and effort has been put into these facilities over the last few years. We are making progress and we are improving reliability. I want to spend some time reviewing the most recent issues at the plants coming out of the turnarounds and post-startup of the nitric acid and ammonia plants at El Dorado. First with El Dorado. The ammonia plant has performed at production rates at or above design. However, the team has been working through a number commissioning and shakedown issues that are common in new plant startups. Following the July power failure, we had a number of heat exchanger leaks which required us to come down and plug tubes. Theses exchangers were inspected and retubed prior to this original startup, where we have since decided to replace three of them due to the recent failures. We had an outage following a planned trip in August 10 due an expansion joint failure from condensate build up in a water hammer in a vent line. A new expansion joint drains were installed in the vent line at that time. Additionally, we experienced a seal failure on the ammonia refrigeration compressor which required us to rebuild…

Thanks John. As you can see, John has spent a lot of time at the plants and is making significant improvements and we believe those improvements will reflect themselves through the rest of 2016 and into 2017. And with that, I would like to turn it over to Mark to provide an overview of our financial results, our outlook and our liquidity position. Mark?

Thanks Dan. On page 11 of the presentation, we provide a consolidated summary statement of operations for the third quarter of 2016 as compared to 2015. As I mentioned in the last quarter, we closed on the sale of our climate control business during this third quarter and the gain on the sales, net of taxes and all remaining cost associated with the transaction, are included in discontinued operations. In reviewing our continuing operations, total net sales and gross profit were down for the quarter, primarily related to lower selling prices across our key agricultural product groups somewhat offset by higher volumes of UAN, HDAN and ammonia. While we had operational issues during the quarter that reduced production, sales were made from inventory picking up for most of the lost production. However, we ended the third quarter with lower inventory levels and that will impact sales for the fourth quarter. Gross profit further declined as we incurred cost related to the turnaround at our Cherokee facility as we had no turnaround in last year's third quarter. We had lower absorption of fixed cost at all of our facilities related to the previously discussed unplanned downtime. We incurred repair and maintenance costs associated with the downtime and we incurred repair and maintenance expenses related to the El Dorado nitric acid plant. We did benefit from lower feedstock cost during the quarter, but those cost did not decline as sharply as the product selling prices. Consolidated SG&A was down approximately $1.6 million as compared to the third quarter of 2015, primarily from the absence of severance costs for former executives that were incurred in the third quarter of 2015. As I mentioned on last quarter's earnings call, we began focusing on reducing overall SG&A, given the sale of our climate control business…

Thanks Mark. I think you can see that we have sufficient liquidity to run our business even in this modest pricing environment. On page 18, it describes our focus for 2017. We have a very strong desire to improve our operating results. Recent unplanned downtime is a key metric for our company. The significant turnaround and maintenance activities in the third quarter should allow us to achieve our targeted 95% onstream rates for the ammonia operations in 2017. We accomplished this at Cherokee and Pryor during the first half of 2016 and we believe we can meet this target for the full-year of 2017 at all of our ammonia plants. Our expanded distribution initiatives for agricultural ammonium nitrate are progressing well. The market has shown that alternative suppliers for ammonium nitrate are welcomed. We want to increase our ag sales of this product in the remainder of 2016 and the full year of 2017. As Mark mentioned, we are finalizing construction of storage domes for high density and low density ammonium nitrate at our El Dorado facility. This will allow us to maximize our production and will assist our ability to load our product in a more efficient and timely manner in order to increase sales. These domes should be completed in early part of the second quarter of 2017. We believe there are growth opportunities with expanded ammonium nitrate distribution sites without the need of significant capital spending. This enhanced distribution footprint should strengthen our marketing capability and increase our net back margins. We plan to utilize the existing storage dome at our Cherokee facility to position ammonium nitrate for the surrounding markets. This dome has been idle for the past several years. It's ready to go. Additionally, we are almost ready to use an existing drive bulk warehouse…

[Operator Instructions]. Our first question comes from the line of Dan Mannes with Avondale. Please proceed with your question.

Thanks. Good morning everyone.

Good morning.

Good morning Dan.

A couple of quick follow-ups and clarifications. First, as it relates to the EDC issues, both the nitrous oxide unit and the heat exchangers, are all of those, number one, covered by warranty and two, do the warranty just cover the repair or also the forgone margin, I think the $2.5 million to $3 million that you had previously mentioned?

Yes. Dan, all of those items are covered under warranty with the original contractor and their subcontractors who manufactured some of that equipment. So those were all covered under those warranties. With respect to the warranty claim, certainly all direct expenses and cost associated with that, that's covered. And we will be negotiating any other costs that may be covered under those warranty costs. So I think, for sure, the direct replacement cost of those vessels and equipment will be there. The maintenance cost incurred to remove and replace those and rebuild things will be covered under warranty and then we will be discussing other cost that we believe should be covered by those contracts. So that's how I would like to leave it.

Okay. And you specifically quoted a number, I believe, for the nitric acid side as, I want to say, $2.5 million to $3 million. What was the dollar value for the third quarter, I guess, related to heat exchangers?

When you say heat exchangers, we have probably about $1 million.

Okay. But there is an ongoing issue, because you said you are going to need to replace them, right?

Not those specific heat exchangers. Those have been repaired and replaced. We have the nitrous oxide vessel that needs to be repaired right now.

Okay. Got it.

Go ahead.

Sorry. Say it again, Dan.

No, that's it.

Got it. And then switching up real quick, just to the fourth quarter. You obviously talked a little bit about a differential change in your volume outlook, partially due I guess to the downtime at the Pryor urea units, partially due to some rebuild on inventory. You put a number out there for fourth quarter for EBITDA. Can you maybe give a little bit more color on any other items that might be impacting the fourth quarter? Any, I don't know if you can re-sum for us some of the repair cost or other abnormal items you will be incurring in the fourth quarter?

Yes. As I said on the call, Dan, so the fourth quarter will include two things. We had previously disclosed when we put out a press release in early August about the downtime that there would be a carryover effect of $5 million to $5.5 million dollars from that. And so we are still dealing with issues up at Pryor throughout October and then we had some issues on the ammonia plant in October, as John outlined. So that number includes the $5 million to $5.5 million dollars for that, but it also includes $2.5 million to $3 million of additional expense that we will occur in the quarter related to the nitric acid plant at El Dorado. So until we get that bypass system up, which should happen later this month, we anticipate that there will probably be costs incurred in that range. We are expensing them. And as I said I think we are taking a conservative position on that, but we do expect to get reimbursed for those.

Okay. Without giving us guidance, as you look to 2017, if you assume normal operations and a continuation of the current price environment, do you anticipate being EBITDA positive in 2017?

Yes.

And do you anticipate that being sufficient to cover cash interest and CapEx, again assuming normal operations and even a continuation of current pricing?

I think yes. I think we feel comfortable that we could do that.

Okay. That's very helpful. And lastly I want to talk about, I guess, is the pricing environment. Can you maybe talk about any material differentials between your realized prices and some of market prices we are seeing, particularly as it relates to ammonia and what we are seeing in Tampa?

Dan, as you know, that's a good question. As you know that there is a substantial portion of our ammonia out of El Dorado that we sell on to the pipeline, which is really a Tampa-based index. So we are achieving prices on a Tampa related pricing environment. So that's one aspect of it. Our agricultural ammonia, when we look at our netback pricing compared to other folks, we think we are doing very well compared to the rest of the competitors in the industry. Obviously, it's lower than all of us would probably like but obviously we are expecting some seasonal improvement as it goes forward into 2017. So while it's very low right now, I think the area that's probably too low and would likely go up would be UAN. The price of UAN on a nitrogen basis is very, very low right now and we are hopeful that that will move up modestly as we move into this season. So I think we are seeing some positive signs on the market out there where we think prices have hit bottom. We don't see them going down any further at this point in time and we see some modest increases as we go forward in the next several months. It will still be a modest pricing environment overall, but we do expect improvement over where we are at today.

Got it. And if you will indulge me with one more on pricing, I know you guys don't have a ton of direct distribution but just given what you hear from your retail channel, have you seen, maybe not material, but just improvement in demand at all? Because that seems to be one of the real challenge lately as there is almost no demand which makes it really hard to come up with a price point? Have you see actual seasonal demand start to pick up yet that might allow a more normal pricing environment?

Recently, we have seen demand pick back up little bit. So we are able to sell the product that we produce. And so I don't have concerns with demand. And we have said that last couple of quarters. We do not have problem with agricultural demand. It was pricing issue, but we have seen demand actually pick up. Right after that the summertime and the July, August, even early September range demand was very, very slow, but we have seen some of the seasonal fall fill also pick up and we look for that to continue throughout the rest of the year and then as we get into the season for 2017.

Got it. Thanks for the color. I appreciate it.

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

Hi. Good morning guys. I was just wondering if there is any possibility of restructuring the capital structure at all at this point? Or is there really no options there and the near future?

Well, I think as part of our overall strategic review, we are looking at all options and I suspect that will be one of them as well. As we said, we just initiated this process. We haven't done a lot of work yet. But as we go through that process, we will evaluate all options, including the one that you did mentioned here. So I think that's up for discussion and for consideration by the Board as well in that process.

I mean I guess more specifically, obviously the preferreds are very costly. Do you see any option of getting around the restrictions, maybe with bondholders and being able to refinance some sort of structure with a bank and trying to pay off the preferreds or the option sort of limited just given the restrictions?

I think that's a very good question. I think at this point time, we would probably not like to comment on what we may or may not do. I think it's premature at this point in time to give real specifics, because there is still work to be done. I think it is fair to say that we continue to look at our capital structure and if there are opportunities to improve it, we are looking at that all the time.

Okay. In terms of the warranty related to the nitric acid plant, the work at El Dorado, I imagine you are anticipating some sort of cash payments in 2017. I just noticed it wasn't on the 2017 cash flow maybe because you just don't know the timing and size?

Yes. I think the accounting rules are such that we are obliged to take the expense as we have incurred it, as Mark outlined, we have and then as we receive the cash, we will record that at that point in time. I think it's fair to say, there may be some warranty settlement in 2016 and then there maybe some in 2017. The exact timing, I think, is not firm enough to give a f projection on that, but between late-2016 and let's call it first, second quarter of 2017, we should have most of that warranty cost reimbursed.

We didn't included it on the 2017 sources of cash because I think we are just again trying to give a conservative view on what the sources of cash and the uses of cash are.

Right, understandable. Is there a ballpark? Are we talking about a few million dollars or is this like $20 million plus? Or could you just give a ballpark of what we are sort of talking about potential cash?

Well I have already talked about $2.5 million to $3 million in the third quarter and I think we outlined about $4.3 million in the third quarter. So whether we get all of that back or not, you are talking about in $7 million to $8 million and I think that's probably a starting point.

Okay. Also I just wanted to ask, you guys provided a couple quarters ago sensitivity chart related to sort of your EBITDA power relative to pricing? Was that chart accounting for the above nameplate capacity of the 1,250 to 1,300 that you are sort of now looking at El Dorado? What was that accounting for? Was that 1,000 at El Dorado?

It was 1,150.

1.120, okay. And then just lastly, just wondering how you are anticipating on handling the preferred dividends given the cash flow of the company. Are you anticipating accruing those?

Yes. We would anticipate that we would accrue it all in 2017 to conserve cash.

Okay. All right. Thank you.

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

Hi guys. Good morning.

Good morning.

Good morning David.

Just a couple of quick questions here. On the EBITDA for the quarter, I think you had guided us to kind of an impact for the quarter of around $25 million hit to EBITDA when you put out your recent release a couple of weeks ago and we came in at negative $26.5 million. Is it safe to infer that basically you would been EBITDA breakeven for this quarter hadn't we not had the downtime based on current prices?

Yes. So we actually guided $25 million to $26.5 million in the press release in early October and we came in at $26.5 million. So yes, I would say if we didn't have the downtime, we would have broken even for the quarter.

Okay. And then just to go back to an earlier question. You guys said that you feel pretty good about EBITDA covering CapEx and cash interest next year under current pricing. I guess I am just trying to reconcile, you would have been, in this quarter, cash flow EBITDA zero under current pricing. I know we had the downtime. But how do you reconcile getting to cover maintenance and cash interest expense if you breakeven under current pricing?

Well, we still did have a turnaround at Pryor. So we didn't account for that, right. Then, on a comparative basis, it was in both quarters for 2015 and 2016. And then there were some other expenses that we carried. We are still incurring some additional expense down at El Dorado to handle some of the issues that we have faced at the ammonia plant. As John said, we are still working out some of the kinks in the plant. So we still have some extra outside contractors. They are having some extra costs. And so I think when you pull that out in a particularly low quarter and low pricing environment, I think we feel comfortable that we could cover those costs.

Okay. And then as I look at your 2017 cash flow outlook and I just use the midpoint of your range, the $42 million to $51 million cash at the end of this year and then looking at interest and maintenance and non-core asset sales, it looks like we are, plus or minus, free cash flow neutral before any EBITDA for the year. So stripping that out, let's just say EBITDA and this is a hypothetical, is zero again for the year, what incremental levers do you have to pull from a liquidity perspective that maybe on this page right here?

Well, we still have the balance of our ABL should we need it, right. I mean you usually have an ABL to handle changes in working capital. So we could do that. I guess theoretically, if we wanted to, I am not suggesting that we would want to, but we do have the ability under our indenture with our senior secured noteholders to borrow another $50 million, $25 on a pari-passu basis to those bondholders and $25 on a subordinate basis. So again, not something I think we would choose to do, but if you are asking me if is there liquidity if we had to, that's available to us. And I thing it goes, you assumed a hypothetical zero, we don't believe it's going to be hypothetical zero.

Right. I am just trying to figure out what the other incremental levers to pull could potentially be. And then just last question on more of the market. We have seen coal prices really spike up, especially in the Asian region. I would have to think a lot of these Chinese urea players are losing money with the coal prices where they are. In your contacts with the market, have you heard anything about this? And if they are losing money and exports continue to go down, how long that might take to filter through the rest of the world?

Well, it's a really good question, but I am not an expert on Chinese coal prices. But certainly there are rising coal prices. With all the reports we have and our information is that is putting a price floor under urea that ultimately is the exported into New Orleans. So we would expect that to slow down as we go forward as long as those coal prices remain at relatively high. So I think it is going to improve the North American producers position as prices strengthen in the Gulf. We saw that urea prices have moved up just a little while ago and as we get closer to the season, we do expect those to move up modestly again. And I think how long it will take to reverberate back through the system, I think we will see that in this entire season turning those exports on an off on a dime is a bit more difficult form as we understand it. So I think it's a positive sign for the market. Although I think it will be modest price improvement, it's a positive sign that we are likely to see some prices firming just a bit here as we move into the latter part of 2016 and into early 2017.

I think just to add, if we see imports into the U.S. from China reduce, a lot of people are worried about this new capacity coming online and a lot of it's being upgraded to urea and UAN. And so clearly if we have less imports into the U.S., that will allow the new urea production capacity to come and find its natural distribution channels within the U.S on a quicker basis that it would if you have continued imports from China.

Great. And last one just on the ABL. I saw it becomes current in April 2017. Have you had any conversations with your bank group just regarding refinancing?

It's always ongoing.

All right. Thanks guys.

Our next question comes from the line of Bob Amenta with JPMorgan. Please proceed with your question.

Thank you. Just one follow-up. I may have missed it. The asset sales for next year, did you say what those were or what specifically assets those were, the $20 million?

Well, I don't think we are going to identify specifically what they are but we have got things on our balance sheet like our Marcellus shale working interest and we still own a small engineered products company and we have other pieces of equipment that are sitting on plant sites that from time-to-time we are presented with offers and probably a good opportune time to take advantage of those. So I would say that we have got a number of other non-core assets that we have on our books and we will look to monetize those.

Okay. So these aren't things that would impact whatever $50 million, $75 million, whatever we try to calculate on EBITDA for next year based on ammonia prices and gas and all that? These are not EBITDA producing things in that sense?

Zero impact.

Zero. Okay. Thanks.

Our next question comes from the line of Owen Douglas with Robert W. Baird. Please proceed with your question.

Hi guys. I wanted to just really get a sense for, so as you can talk about these operational improvements and the fact that you have some production offline now limiting 4Q, how should I think about ramping your ability to sell product and/or work down some working capital in 2017?

Well, I think as we indicated earlier, that we are at full rates at the Pryor and Cherokee and at Baytown. So all three of those plants are operating at full rates. And the ammonia plant in El Dorado is operating at full rates. We should have the nitric acid plant up and running in El Dorado before Thanksgiving. So we would expect El Dorado to be running at full rates on all operations, including the nitric acid plant pre-Thanksgiving. With respect to working capital, we see building working capital a little bit. As Mark said earlier, we depleted a lot of inventory during the downtime and we are building a little bit of ammonium nitrate inventory to get out to those distribution domes or distribution sites that I spoke of earlier for the season. So we will build a little bit of working capital here over the next several months. But that will, obviously be deleted as we move into the ag season in the April, May timeframe. That will be worked right back down. So we would expect a little bit of working capital build, but it should be cleared out shortly after the season. We think we have a fairly good handle on our inventory levels. We did miss a few ammonia sales into the pipeline when El Dorado facility was down, but as I said, I think we are up and running now and reasonably confident that we can keep those plants back at that 95% rate where we were in the first half of the year, particularly at Cherokee and Pryor and the work we have done at El Dorado and the rates that we are currently running at right now on the ammonia plant we are very comfortable that we should be able to hold those throughout the year and into 2017.

Okay. So you are pretty confident, it sounds like, in your ability to meet that spring selling season. And have you had conversations with any customers? Have then expressed any sorts of concerned about your ability to meet their demands?

No. We are confident we can meet their demand and no one has had any queries or any concerns on our ability. We keep our key customers that we have sales agreements with, we keep them informed as to our status and we work well will them. So no issues at all.

Okay. And switching gears a little bit now to the industrial side of things. Coal prices have soared recently and I believe that's spurned a little bit of interest in restarting some mines domestically or increasing production there. Are you started seeing any of that pull through some demand for your products?

It's a really good question. We are seeing a good stable flow of product going into the mining sector. However, it made a step change down on a lot of these coal plants were shut down a year ago or nine months ago. So there was an overall reduction in volume and we expect that step change to be permanent, although we have seen we have a reasonable volume of product going out right now. And if the market continues to improve, we will probably oversee a modest pickup. But we don't expect significant increases in volume into that market. A steady and slightly growing volumes here in the last several months, but we look at that as just a steady growing piece but not anything significantly changing over the next several quarters.

Remember, while we are seeing coal prices increase, there is always going to be a lag in the timeframe of people restarting mines and when the demand for our AN product would be.

Well, keep in mind that with the significant reduction in the raw coal production, there was a lot of excess capacity out there in the market and there's still a lot of excess capacity of low-density ammonium nitrate out in the market. So there is plenty of producers that are willing and able to produce it. And I don't see prices moving up dramatically on that. I think some volume can be easily served by the existing capacity.

Okay. And then a final one. I am not sure if I missed this one earlier, but have guys provided and sense for how you think about 2017, given where you are seeing gas prices, you are seeing the market right now, your conversations with customers? Do you have a sense for how 2017 EBITDA will compare to 2016 which was a year with a lot of one-offs?

I think it's a really good question. What I can tell you is the things that we said before. We expect to fully sell out all our volumes that we have. So we don't see this is a demand issue, absent the low-density ammonium nitrate for the mining market. We see all of our products being sold that we can produce. And we intend to run at full capacity. With respect to pricing in the market, I will try to provide a few comments on our view. We see some modest improvement of prices. I don't think it's something that's going to be very dramatic, but we do see that. And in general, markets outlied our other CapEx and cash flow items, but we haven't provided a forecast of EBITDA and right now, I don't think we are prepared to do that. But we think 2017 will be better than 2016.

Yes. I would say, we started really focusing on 2017 in the latter part of 2015 and we knew that 2016 would be not this challenging but a somewhat challenging year for us and a transition year for us because we have had new facilities and a major expansion done at El Dorado and we were still working on really working out a number of issues that we had up at Pryor. I think we always talked about a 95% average onstream rate for ammonia then and we continue to believe that we can do that. So we would expect significant improvements in 2017 over what you saw this year.

Okay. Well, thanks very much guys.

Thank you. We have reached the end of the question-and-answer session. Mr. Greenwell, I would now like to turn the floor back over to you for closing comments.

Well, thanks everyone for participating in our conference call. We appreciate your interest and look forward to speaking to you next time. Thanks so much and have a great day.

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