Kristy Carver - VP and Treasurer Dan Greenwell - President, CEO, Director John Diesch - EVP of Manufacturing Mark Behrman - CFO, EVP.

Tyler Gately - Wells Fargo Erin Steele - Collin Company Hudi Miller - Brookfield Asset Management Lucy Insierra - HMT Investment Partner.

Greetings and welcome to the LSB Industries' First Quarter 2017 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. I’d now like to turn the conference over to your host Ms.

Kristy Carver, Vice President and Treasurer. Thank you, you may begin..

Thank you, Audry. Good morning and 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 section 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 appreciate your time and are pleased to have you on our call. During our call this morning, we’ll cover our 2017 first quarter results and as importantly provide updates on 2017 plant operations and the nitrogen markets.

Mark Behrman will provide a comprehensive review of our liquid and capital structure. And we are increasingly more positive on the company's outlook and our position in the nitrogen market.

Our sales were approximately $123 million in the first quarter of 2017 compared to $99 million in prior year's first quarter, an increase of approximately $24 million. This growth occurred despite a significant decline in selling prices.

Product sales volumes increased significantly as our sales team captured additional market share and our plants operated well. We look for this trend to continue in the second quarter. In our Ag markets, UAN and high density ammonium nitrate volumes were up approximately 67% year-over-year and ammonia sales volumes were up approximately 21%.

Our sales of industrial ammonia were up approximately 36,000 tons over last year's first quarter. This is primarily due to the pipeline sales of ammonia from El Dorado facility. Nitric acid sales to customers other than Cogestro increased approximately 82% from prior year.

The mining market continues to have modest increases in low density ammonium nitrate volumes while ammonium nitrate solution sales volumes declined due to slower coal business in the Appalachian and nearby markets. Our cost cutting activities along with our operational improvement activities continue to generate tangible financial benefits.

The first quarter's EBITDA was higher than our internal expectations. Mark Behrman will provide further discussion on our results in his financial review. We do expect further improvement in our operating results and cash flow as we move into the second quarter of 2017.

As we noted in last quarter's conference call, we expect to recover cost in 2017 that we incurred during 2016 as a result of warranty claims. The final amounts and final timing are yet to be negotiated. However, as we mentioned earlier, we believe we are in a strong position to recover amounts from the contractors.

I'll now turn the call over to John Diesch to provide a brief recap of our operating performance in the first quarter and our view of 2017 on-stream rates.

John?.

Thank you, Dan. Good morning. We continue to have good performance in on-stream time at all four of the LSB plant. At El Dorado, the ammonia plant continuous to operate above 1,300 tons per day. The plant had a 90% on-stream time during the quarter.

As stated in the 2016 fourth quarter earnings call, we took the ammonia plant down at early January for eight days to replace and upgrade the steam control system on the synthesis gas compressor turbine. The ammonia plant had 98% on-stream time, the remainder of the quarter. The new nitric acid plant had 96% on-stream time during the quarter.

Most of the down time was for scheduled catalyst change with a couple of short outages to do some minor maintenance. Engineering has been completed for the new N2O abatement vessel, they are currently going out for bids to company that will fabricate the vessel.

The prior facility had ammonia plant on-stream time of 96% for the first quarter with urea and UAN production 103% of plant. The rest of the upgrade plants are operating well to meet customer demand.

The Cherokee facility also operate very well with 99% on-stream time for the ammonia plant with urea and UAN production 109% of plant for the first quarter. The Baytown nitro gas plant had 100% on-stream time for the first quarter with production on plan. I am very pleased with the performance of the plant.

As a group, we continue to move reliability program forward with training and implementation of precision maintenance at all our facilities. We have created reliability teams that are working on specific areas and equipment that we have identified for improvement.

Now, I'll turn the call over to Mark to discuss the financial results for the first quarter. .

Thanks, John. Please turn to Page 10 of the presentation. It provides a consolidated summary statement of our operations for the first quarter of 2017 as compared to 2016.

In reviewing our continuing operations, total net sales and gross profit increased for the quarter primarily related to increased production and sales volumes at each one of our facilities which were partially offset by a decrease in average selling prices of our agricultural products.

Gross profit improved almost $18 million versus the first quarter of 2016. However, the first quarter of 2016 includes a one time consulting fee expense of $12 million making the true improvement in gross profit approximately $6 million despite additional depreciation expense in the first quarter of 2017 of $6.5 million.

In addition to the increase in sales that I just discussed, gross profit increased from improved production that gave us better absorption of fixed cost at all our facilities, lower overall planned fixed cost and lower overall feedstock cost. SG&A expenses decreased by $0.4 million as we continue to focus on cost reductions.

However, Q1, 2017 includes about $1 million of additional legal and group insurance expense regarding various outstanding claims. Interest expense for the quarter increased approximately $10 million over Q1, 2016.

As I outlined last quarter, the increase reflects the recognition of interest expense associated with debt used to fund the expansion of our El Dorado facility that we've been capitalizing until the new ammonia plant became operational mid-year 2016. At which time, we began recognizing the interest on our income statement.

Lastly, adjusted EBITDA was $20 million for the quarter, an $11.7 million improvement versus Q1, 2016 adjusted EBITDA of $8.3 million. Please refer to our reconciliation of non-GAAP measure beginning on slide 17 for further information on non-cash and one time cost during the period.

In order to give further clarity on our results for the quarter, page 11 bridges our consolidated adjusted EBITDA for Q1, 2016 to Q1, 2017. As I mentioned earlier, lower selling prices of our products was a big drag on EBITDA as they had a negative impact of almost $13 million as compared to Q1, 2016.

However, improved sales volumes of products for the quarter provided an additional approximately $18 million of EBITDA.

The sales volume increase was driven by better on-stream rates acquired in Cherokee versus Q1, 2016, improved sales of HDAN as we continue to broaden our distribution of that product, increased ammonia sales as the new ammonia plant in El Dorado was producing during the quarter and was not yet in operation in Q1, 2016 and increased sales of our acid product.

Lastly, as we've discussed previously, a significant benefit of the new ammonia plant at our El Dorado facility is producing our own ammonia versus previously purchasing it. During the quarter, we picked up approximately $6.5 million in EBITDA versus the first quarter of 2016 by producing our own ammonia.

The right hand column of this page reflects normalized EBITDA which assumes that product selling prices were the same in both the first quarter of 2017 and the first quarter of 2016.

While we realize that product selling prices move with general market conditions, this analysis provides a view of the operational improvement activities that we've undertaken and the inherent earnings power of our assets.

The year-over-year EBITDA improvement for those operational improvements was approximately $24.4 million showing significantly improved operations.

Looking forward to the second quarter, given our strong order book for fertilizer products, improved Ag selling prices over prices we received in the first quarter of 2017, the continuation of the strong operating performance of our plants that John previously discussed, and our continued focus on expense control, we expect improved EBITDA versus our first quarter of 2017.

Page 12 outlined our capital structure as of Q1, 2017. We ended the quarter with $45 million in cash. Additionally, our ABL facility was undrawn and had approximately $45 million of availability at quarter end giving us total liquidity of approximately $90 million.

As a reminder, our ABL availability varies based on accounts receivable and inventory levels. Total outstanding debt at the end of the quarter was approximately $424 million excluding the unamortized discount and issuance cost associated with our debt.

We also had outstanding preferred stock of approximately$167 million including approximately $28 million in accrued and unpaid dividends. As I previously stated for 2017, we currently expect to continue to accrue the dividends in our preferred stock as we do not need 2 to 1 fixed charge coverage ratio needed to make restricted payments.

However, assuming current operating rates continue and market fundamentals continue to improve, we would use excess cash to reduce leverage either through repayment of debt or the payment of accrued dividends. Lastly, I've previously discussed the sales of non core assets.

We are in the latter stages of successfully divesting several of these assets and anticipate that the process will be complete by the end of Q2, 2017. We expect to generate net proceeds, net of any debt on these assets of between $15 million to $20 million. Moving to Page 13, we outlined our free cash flow.

Cash from operations provided approximately $8 million for the quarter. That includes an approximate $7.3 million use of working capital from an increase in accounts receivables as our sales continue to grow. Additionally, cash flow from operations includes the semi-annual interest payment on our senior secured notes.

That will occur every first and third quarter of each year. Capital expenditures incurred and paid during Q1, 2017 were approximately $8 million, with another $6 million of capital expenditures incurred in previous periods and paid in Q1, 2017.

We continue to expect capital expenditures of $30 million to $35 million for the full year of 2017 as we continue to focus on enhancing the safety and reliability of all of our plants. Net cash used for financing primarily reflects regularly scheduled debt payments in commercial and insurance premium financing.

We expect this to decrease over the year with the sale of certain non core assets and the repayment of the related debt.

Lastly as I mentioned last quarter, for the full year we expect EBITDA to more than cover the high end of our forecasted ranges of $35 million in CapEx and $35 million in interest expense and we anticipate positive free cash flow for the year. Now I'll turn it back over to Dan to wrap up. .

Thanks Mark. As you can tell we have an upbeat outlook for 2017. We expect growth in sales volumes and improved market selling prices as compared to the second half of 2016. Once we get through the first half of the year, we anticipate some seasonal selling price moderation.

However, we don't expect to see selling prices comparable to what we experienced in the second half of 2016. We believe the market now realizes the low selling prices in the second half of 2016 were unsustainable. Of course, we always have the unknown aspect of Chinese urea exports.

North America is becoming more self reliant because of the recent capacity additions and we believe the market has digested the new capacity additions that are in operation and will further integrate new additional volumes in the North American supply chain. We are confident with our financial position and operational view for 2017.

And we believe 2017 will be a transitional year from 2016 and earlier years. We expect to be at full operating rates for 2017 and will continue to focus on reducing cost. As Mark indicated in the financial review, we believe our operational cash flow will more than cover our capital spending needs and interest cost.

Any excess funds will likely go towards further de-levering our balance sheet. Lastly, we'll be attending several conferences in the next few months. In May, I'll be attending the BMO Farm to Ag Conference in New York.

And in June, Mark will be at the Avondale Partners Industrial Conference in New York and the Goldman Sachs Leveraged Finance Conference in New Orleans. That concludes our prepared remarks.

However, before we move into questions, I'd like to briefly comment on the process we announced in November to evaluate all potential strategic alternatives available to the company.

The process is ongoing and we'll not be giving any update on the process until the Board completes its review and approves a definitive course of action or concludes the review process. I'd like to remind everyone that the purpose of today's call is to do discuss our first quarter financial results and outlook for 2017.

So thank you in advance for keeping your questions to that subject. With that we'll open up the call for questions.

Audry?.

[Operator Instructions] Our first question comes from the line of David Deterding with Wells Fargo. Please proceed with you question. .

Hey, guys. This is Tyler Gately on for David. First, just a quick kind of housekeeping item. In your press release you mentioned capital addition for approximately $8 million in the first quarter. When I look at your 10-Q, the expenditures for PP&NE were about $14 million.

Can you reconcile that?.

Yes. So when you are looking at the $14 million, that's actually cash paid related to capital expenditures. So as I mentioned in prepared remarks, $8 million was for CapEx incurred in the first quarter. $6 million was for CapEx incurred in prior periods that were actually payout of accounts payable in the first quarter. .

Okay. And that kind of brings me to the follow up.

Would there be I guess that just that $6 million impact to your full year guidance of $30 million to $35 million? So kind of all in cash out the door from year end cash balance of max $41 million?.

Yes. So it would be $30 million to $35 million of CapEx incurred in 2017 and the other $6 million is just a normal accounts payable that's paid in the normal course of just doing business. So if you want to look at it from a cash standpoint I guess it would be $30 million to $35 million plus another $6 million related to CapEx. .

Perfect, perfect.

And lastly I know you can't update on the process for [Technical Difficulty] alternatives but now that the notes are almost two years out, how are you guys thinking through handling the security and maturity?.

Well, I think as you mentioned they are more than two years out and I think we see a call premium move down to 109 -- 101.9 come August, first part of August of this year. So I don't see us doing anything before the 1st of August this year.

But we have to evaluate the credit markets; we may go sooner than later depending on what the credit markets do or as you said we have two years out. So I think certainly before we get one year out we'll be taking a look at that. .

Thank you. Our next question comes from the line of [Erin Steele with Collin Company.] Please proceed with your question. .

Hi. Thanks for taking the call.

I am just wondering if you could comment on the orderbook through May some of that pricing maybe that in that orderbook how that fared throughout the quarter and how you kind of see that progressing and what is the transition of the second half year?.

Sure. Well, first of all, the orderbook we have for the first quarter we feel pretty comfortable with and a lot of those orders were secured earlier and we haven't seen the decline in pricing on ammonium nitrate that perhaps you read about in the publications for urea. So we just haven't seen that but we are always cautious.

There are still some books to take for June. We really haven't started selling into the second half of the year yet. So it's a bit too early. Naturally, we expect prices to moderate as we go out of season in the third quarter historically for the nitrogen business is the slowest quarter of the year.

So I think it's a little bit too early for us to call the second half pricing but I did say in my prepared remarks, we don't expect pricing to go to the low levels that we saw in the second half of 2016. We believe it will be above 2016 low pricing. So as I said, we are upbeat about our prospects for the total year. .

Okay.

And then are you seeing any pressure in the marketplace right now? Some recent plant startup you know has been -- those fronts being marketed in the market right now?.

Well, I think that's out there. Those plants are not starting in our particular area. We've seen more market pricing related to weather related events. As you might imagine with wet weather, ammonia cannot be incorporated into the soil or knifed in the soil.

So we've seen with rains around all around the country there has been a slowdown in ammonia application rates which would lead to higher application rates of UAN and urea. So we've seen a little bit a pressure on that. And I think everyone is expecting Tampa ammonia to move down a bit maybe $10 a ton or so. And we expect that to happen that.

But that's part of the seasonal but I do think -- we saw an early ammonia run in the beginning of the 2017 and now we see the ammonia run cooling off a bit because of weather related events. But as I said, our UAN book looks good and our ammonium nitrate book looks good as well.

So we don't sell urea so we haven't experienced the price pressures on that but naturally you'd expect some carryover to the products that we sell but so far we are cautiously optimistic about the second quarter. And then we'll have to wait and see how prices reset after the season going into third quarter. .

Okay, fine.

And then what areas are you looking to reduce some of the plant expense you called out the presentation there? And then how much room do you have to reduce some of those plant expenses and freight cost?.

Well, I think one of the key points is one you just mentioned is freight and logistics cost. We've got to focus -- we have close to 800 railcars and we've got to focus to manage those better and get a better handle on logistics and turn the course quicker, reduce freight rates, same for trucking rates and material handling in general.

So there are some work and some improvement we can get there. There is other common buying of turnaround expenses, other materials for plant operations, commonality amongst the plants to get some cost savings. So there are several different things that we anticipate doing. We also look at reducing SG&A cost further.

There are some areas that we've been focusing on and becoming more efficient. We also looked to continue that but I don't think we are giving a specific number here today on the amounts but we believe it will be a meaningful reduction of cost as we progress through 2017. .

Okay. And maybe just one more on the HDAN side. You mentioned in the press release how the -- you will be looking to store some of those -- going into 2018.

What kind of inventories build can we expect in all kind of progressing throughout 2017 and what kind of demand increases are you preparing for then in 2018?.

Sure. Well, what would anticipate doing it assumes in the early fall month of say September, October and even November, December. We anticipate manufacturing ammonium nitrate and then moving it out to our two facilities at one at Cherokee and down one Cherokee. And then bulk dry warehouse at Pryor.

And putting that material in position before the season starts. And it's likely we would build roughly 30,000 tons or so of ammonium nitrate at those two -- combined at those two facilities for selling to the season.

As you might imagine, last fall one of our plant was down, one of our nitric acid plant was down, we were unable to build much inventory to go in those facilities and we sold it directly out of the plant in El Dorado.

But this year we would look to do the same but we would look to have roughly 30,000 tons positioned in advance to sell into those markets direct when the season kicks-off in 2018. So that's our view of it and that's what we are currently anticipate..

Thank you. Our next question comes from a line of Hudi Miller with Brookfield Asset Management. Please proceed with your question. .

Good morning, guys. Two quick ones. I guess when we think about your sensitivity bridge, EBITDA [$5 million -$6 million], has the relationship between any of down stream product, the changes in ammonia prices changed or if we kind of still succeed to follow this trade where at today's prices comes out by [$100 million to $150 million EBITDA?].

Look, I think that sensitivity grid if you want to call it that in our materials on page 16 and our material provides a general indication. I mean to the extent you have a short-term correlation that's not a historical trend. I think it just that short term.

This is more of a longer term view over time that if those correlations exist which we think they will revert to the norm that grid holds true and we believe it still holds true. But if for example, if some of the upgraded products get out of correlation for the long term we would look to update this.

But right now we believe that they will hit the long-term correlation they historically had maybe with the little bit of discount that we've already reflected in here. So we believe this holds true and will continue to hold true.

And if it looks like if they don't then we'll adjust it I think at one point when they weren't holding true we took this sensitivity grid out because they weren't holding true but right now we believe over time that is a long-term view and trend that we would expect to continue ..

And is this also incorporates the coke offtake premium for the excess ammonia at El Dorado?.

It does. Yes. .

Okay. Then I guess one last question.

Can you could guys just talk about given the wet weather that we've had here and the lack of ammonia application, how do you think about what that mean going forward, is there some like late demand that will pump through or is all that product already, farmers, resellers, distributors and -- two months or application and planting season of kind of ready --.

Well, I think it's going to be a mix to mixed bag. And I say that for the following reason. Number one, you'll see some side dress ammonia applied once the corn crop emerges. Some guys will side dress ammonia later in the year.

And we do expect some of that to occur but then you also see switchover from urea and UAN and in the western corn market we are seeing an increase use in ammonium nitrate being applied after post emergence of the corn.

So that's a new trend that's been occurring over the last two to three years that seems to be increasing certainly a market that we are continuing to serve. So we would expect that as well. But I think it will be a mixed bag.

There is a chance for some ammonia but once you get a crop in, guys typically don't like to do a lot of side dressing of ammonia but it will occur. So it will be a mixed bag. It will probably trend towards less ammonia and more of the upgraded products just as how I would characterize it. .

I guess just follow up to that in terms of initial planting and initial application, is there still some late demand due to the weather?.

I think most people have bought their first round of nitrogen. I do expect some demand coming up here in the next couple of weeks or so that we would expect where guys are reloading after their first volumes have gone out. But I wouldn't say significant late in demand.

Most folks have procured their nitrogen for the season and we are talking about volumes that would be supplemental volumes versus their base loading of their nitrogen needs. .

Is there a range of thing about what percentage added on side dress for traditional application?.

At this point I don't have a prediction. It's really local market and I don't have prediction on that. .

Thank you. Our next question comes from the line of [Lucy Insierra, with HMT Investment Partner]. Please proceed with your question..

Hey, guys. Thanks so much for taking my question. I was wondering whether you could comment at all on any potential erosion you are seeing in the Corn Belt premium going into second half and next year.

What do you guys think of the pride that the historical relationship holds?.

Well, I think it in second half of the year. I said earlier we really haven't started selling in the second half of the year yet. So I don't know the answer. I don't know the answer of the question but I think that I think that price premium is there. The distribution assets are there.

Whether it will hold or not with more inland producers coming online I think it's yet to be determined. I know there is a new plant schedule to really come online here the second half of the year, the OCI plant and we will wait and see.

Although I'll be -- we don't necessarily sell into the Illinois area Indiana so whether that premium holds in that area versus our markets we sell into is yet to be seen. But I think that's to be played out. So I don't have an answer on that. .

Got it.

And then finally are you guys still seeing Chinese urea setting marginal prices for well urea now and nitrogen in general or how should we think about that?.

Well, they have always been -- they've always -- Chinese urea imports have always had a significant impact on the overall nitrogen market. And to the extent that China decides to export and it comes into the gulf area, we'll continue to see that.

But I don't know for calling the marginal producer but clearly they have an impact and you have to look at what's the pricing. If we see pricing levels we saw last year, I think those imports will stop. But as I indicated in comments, we don't see prices going that.

So we would expect Chinese urea imports to continue whether they are the marginal producer or not, I'll -- I think we have to wait and see. But as I indicated we don't sell a lot of urea. We sell no urea in fact but it does might carry on some of other products. .

Thank you. Ladies and gentleman that does conclude our question-and-answer session. At this time, I'll now turn the call back to your President and CEO, Dan Greenwell for closing comments. .

Well, thank you, everyone. We appreciate your time on this morning's conference call. We look forward to updating you on our next conference call in July. And hope you have a great day. Thank so much. .

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