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% respectively relative to the same period last year.

Recently, however, UAN pricing has weakened, which we will discuss later in the call. Also well estimated on this chart is the agriculture ammonia price trend for the Southern Plains market, which is indicative of pricing we are seeing in this area so far in Q2.

With respect to our industrial products, the dynamic was reverse of what we saw for our agricultural products. While our industrial sales volume increased reflecting the continued strong U.S. economy, pricing was lower during the first quarter of 2019 relative to the same period last year.

As you can see from the black line on slide four, there has been a decline in the Tampa ammonia price which is the benchmark index used to price much of our industrial ammonia sales.

The lower Tampa ammonia price reflects elevated inventory levels that built up in the distribution channel over the course of the fourth quarter of 2018 and the first quarter of 2019 due to the challenging weather conditions which have caused a significant delay in fertilizer application.

However, there is a significant disconnect between the Tampa ammonia market and the pricing we are realizing for agriculture ammonia in the Southern Plains markets I mentioned earlier. Cheryl will provide you with more detail on our financial results later in the call.

Running our plants well is the primary aspect of our business that is largely in our control. And we have now been doing it for the last three quarters. This is evidenced by the EBITDA we generated in the first quarter in the face of a very difficult condition for fertilizer sales volumes and dropping industrial ammonia prices.

Realizing that weather is an ever present risk in our business, our first quarter performance makes us confident that under what most would view as more normal market conditions, we can deliver significantly stronger profitability. I'll discuss our 2019 outlook later in the call.

Now, John will go into more detail about the performance of our plans in Q1, their current status and provide an update on our operational initiatives.

John?.

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 reliability of the urea and nitric acid plants with several improvement projects slated for this summer's turnaround.

We are bringing in outside expertise to review our urea operation to assist and identify any additional improvements we can make. The new urea reactor, which we believe will significantly improve plant reliability, efficiency and overall operating performance will be put in service when we restart from this summer's turnaround..

Like Pryor, we brought in outside expertise to review our urea operation in an effort to improve reliability and operability of the plant. Cherokee's capital plant for 2019 continues to focus on improving safety and environmental and reliability. The Baytown nitric acid plant operates at 100% on-stream time excluding a plant catalyst change.

We are in the planning stages for a maintenance outage this fall that corresponds with Covestro's turnaround. Tie-ins will be made for the capacity project as well to replace the expander turbine case. To sum up, the operating performance of our facilities continues to improve.

As mentioned before, we are concentrating on communications, particularly at shift change through a structured process, and we'll be conducting leadership training all the way from line supervision to plant management.

In addition, our maintenance procedures, operating procedures and training programs are being overhauled and restructured for efficiency and improved operating performance. The goal is to run our plants best-in-class in the nitrogen chemical space. Now, I will turn the call over to Cheryl to discuss the financial results for the 2019 first quarter..

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 during the period. To give further clarity on the results of the quarter, Page 10 bridges our consolidated adjusted EBITDA for Q1 2018 of $23.1 million to adjusted EBITDA for Q1 2019 of 18.1 million.

Higher net selling prices contributed approximately $5.5 million to EBITDA, as we achieved higher net selling prices for our agricultural products, partially offset by lower selling prices for industrial ammonia due to lower Tampa ammonia benchmark pricing; lower sales volumes and related costs to move product to storage as a result of delayed sales caused by cold weather throughout much of the Midwest during the first three months of the year, which delayed the start of the spring application season and wait on adjusted EBITDA by approximately $8.3 million.

Additionally, higher costs, primarily related to natural gas and fixed costs impacted EBITDA by $2.2 million.

Overall, we were pleased with the solid operating performance of all of our plans, and had weather in our primary geographic end markets to what would be considered normal during our first quarter, we estimate that our adjusted EBITDA would have been approximately $26 million.

The good news is we have the product and storage and do expect to make that much of that volume in the second quarter.

One other thing I would like to point out as several of you have asked for more clarity into the underlying margins of the industrial and mining businesses, as those businesses are inherently more complex to model as compared to the agricultural market. As a result, on page 11, we have outlined the gross profit margins for each market.

Please note this presentation excludes depreciation amortization and turnaround expenses and therefore should represent the true underlying cash margins of each business. We have reconciled this back to gross profit as presented on the financial statements on Slide 20.

Agricultural products gross profit grew by 5 percentage points from 9% in the first quarter of 2018 to 14% in the first quarter of 2019.

This improvement was driven by improved selling prices for our agricultural products partially offset by the weather-related volume decline, excluding the impact on volume resulting from whether margins on the agricultural business what have been above 30%.

Industrial and mining products gross profit percentage decreased from approximately 49% in the first quarter of 2018 to 37% in the first quarter of 2019, primarily related to overall Tampa Ammonia benchmark pricing for the first quarter which decreased approximately $50 per metric ton to approximately $280 million per metric ton in 2019 versus $330 a metric ton for the same quarter last year.

Overall however solid margins for that business and above the mid-30% range we previously disclosed.

Looking forward to the second quarter of 2019 pleased turn to page 12, this page illustrates the average Tampa Ammonia price, our average realized net selling prices for UAN and HDAN and our average cost of natural gas for the second quarter of 2018 and compares that to the Tampa Ammonia price the expected average selling prices for UAN and HDAN based on forward sales of product or current spot market sales prices and the current average natural gas prices we are paying or have hedged.

Also shown is the estimated annual EBIDTA impact to us of $10 per ton movement in the Tampa Ammonia UAN and HDAN prices based on 2019 volume outlook and the $0.10 per MMBTU movement in natural gas prices, keep in mind that due to seasonality our quarters have significant variability with the second quarter typically our best quarter.

Tampa Ammonia has continued to trend downwards as a result of high inventory caused by the overall poor fall and spring agricultural ammonia application which has resulted in a backup of inventory in the U.S.

distribution channel that trend has continued into the second quarter with Tampa averaging approximately $245 per metric ton through the first two months of Q2 versus $265 per metric ton for the second quarter of 2018.

UAN pricing is expected to be slightly higher than last year whereas HDAN pricing is expected to be somewhat lower, increased net import for both products as compared to prior year has been a headwind with respect to our natural gas feedstock cost we have approximately 60% of our gas needs locked in for Q2 at approximately $2.40 per MMBTU.

The story for the second quarter of 2019 for us will be volume as I mentioned earlier we expect significantly higher volume in the second quarter as a result of the weather related delayed sales from the first quarter, so to sum up our view on the second quarter we expect material year-over-year improvement in sales volume.

However we do have some headwinds with the lower Tampa Ammonia pricing as compared to the second quarter of 2018.

Overall however based on where we are today assuming and overall weather conditions for this time of the year and continued strong operating performance we expect adjusted EBIDTA for the second quarter of 2019 to be materially higher than the second quarter of 2018.

Moving to page 13, we outlined our free cash flow, cash provided from operations for the first quarter of 2019 was approximately $7.1 million compared to $1.2 million for the same period of 2018. Operating cash flow includes higher working capital associated with higher inventory.

In addition, we have been focused on consolidating vendors across many different aspects of our business. In the latter part of 2018, we underwent a request for proposal related to gas supply, whereby we consolidated the purchase of natural gas across our three facilities.

Overall this provided cost savings and better gas management capability, as a result of the change in vendors approximately $6 million of natural gas payments that we typically would have made in early April were pull forward to the end of March this is purely a timing issue and does not reflect incremental expense on an annualized basis.

Capital expenditures predominantly related to reliability and maintenance investment were approximately $7.1 million for the first quarter of 2019 full year capital expenditures are expected to be approximately $35 million of which approximately $7.5 million relates to the sulfuric acid quarter which will be financed.

So, approximately $27.5 million of CapEx will be financed with cash. With respect to the sulfuric acid financing, we expect to draw down on this loan over the course of the year as the work on the sulfuric acid converter is completed. Page 14 outlines our capital structure at the end of Q1, 2019.

We ended the quarter with 21.7 million in cash and over 40 million of availability at quarter end, giving us total liquidity of approximately 62 million.

Continued higher inventory levels and delayed sales translated into a sustained short term working capital use of approximately 10 million which we expect to recede back over the next several months as we sell down the inventory and collect our receivables. In general, we expect to utilize the credit facility to manage our working capital affordably.

Total outstanding debt at quarter end was approximately 425 million including the unamortized discounts and issuance cost associated with our debt. We also had outstanding preferred stock of approximately 219 million including approximately 80 million in accrued and unpaid dividend. Now, I'll turn it back over to Mark to wrap up..

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 hard work of our employees, we were able to store additional product until sales picked up.

We increased capacity at some of our existing storage locations and positioned trucks and rail cars at strategic locations where we could easily meet our customer's demands. Late March demand for this product picked up and we've been shipping strong volumes at favorable prices since then.

One thing we're watching closely though is the volume of imports of HDAN. Imports over the last four months are up year over year and that has put pressure on pricing in certain regions that we sell into.

Rising import volumes have already had an impact on pricing for UAN which has been steadily declining in price since early January, when pricing peaked at between $225 per ton and $235 per ton.

Current pricing in our primary agricultural markets is in the $180 per ton to $195 per ton range largely due to a rise in imports over the last two quarters, from approximately 400,000 tons to approximately 900,000 tons.

Most of the increase over the last three months is attributable to market anticipation of the implementation of anti dumping duties by European Union countries on imports of UAN, prompting global UAN producers to turn to the US market.

The provisional anti dumping duties went into effect on April 13 and will likely continue to impact the number of tons of UAN imported into the US. Each added imports are on top of, over the increased domestic production, versus last year.

Since the excessively wet weather has delayed much of the corn planting in the U.S., it's too early in the season to be applying UAN and farmers have held off on making additional purchases of this fertilizer until tank levels are reduced. Over the last several weeks, we have started to see sales pick up.

Fortunately, we have the flexibility to counteract some of the impact of weaker UAN prices. Given the strong pricing that we've been experiencing for agricultural ammonia, we've increased the volume of ammonia available for sale rather than upgrading it to UAN.

With that said, as I previously mentioned, core market dynamics are strong and at some point, as the spring progresses, we expect farmers to have a greater sense of urgency to get their crops in the ground.

Since ammonia generally needs to be applied before the crops get planted and the ground in many regions has remained too wet to benefit from an ammonia application. We expect some farmers to simply skip ammonia and plant their corn.

This would likely translate into additional UAN demand and is likely to improve UAN and pricing as we get further into the season. In the last several weeks, we have started to see UAN prices move up.

Pricing for much of our industrial ammonia sales are closely tied to the Tampa ammonia price and that excess ammonia inventory has put significant pressure on the price. We believe that as inventories are reduced, the Tampa ammonia price will gradually increase providing improved sales prices for that product. With that said, U.S.

GDP is expected to continue to grow in the 2% to 3% brains, with manufacturing expected to remain strong throughout 2019, which will support continued growth and our industrial product volumes. There's been a lot of conversation about the late ammonia fertilizer application, delayed corn plantings.

The number of additional corn acres planted and the switch from applying ammonia to UAN and urea. The chart on Page 16 shows the most active corn planting states, each state's approximate percentage of annual corn plantings and each state's average corn planting dates.

As you can see, seven states make up approximately 70% of all corn planted in the U.S. And those states corn planting dates run from mid-April to mid-May. So they are still trying to get much of the corn planted.

The issue becomes how much ammonia gets applied pre-plant or side dress, and whether the ammonia that doesn't get put down on the ground will be made up with additional UAN and urea application after the corn is planted.

As for corn acres planted, I believe we will get a better idea over the next three to four weeks as to how excessive flooding in certain states will impact the number of acres that can be planted. Page 17 outlines our business improvement initiatives that we discuss last quarter.

Given our focus on the operating initiatives, which John outlined earlier, we expect our production facilities to continue to show improved operating performance, and we are targeting an average on stream rate across all three of our ammonia plants of approximately 94% for the year, matching what we have averaged the last three quarters.

We continue to evaluate numerous opportunities to increase our sales volumes and expand our margins to new sales opportunities with both existing and potential customers. We are seeing success as evidenced by the increase in industrial sales volumes that we saw in the first quarter.

Lastly, we continue our efforts to operate more efficiently and reduce costs. While we have reduced significant costs over the last two years, we believe that there are still opportunities for improvement and we're focused on capturing those. Over the remainder of 2019, we expect these initiatives to translate into improved financial results.

Lastly, I'll be attending the Goldman Sachs leveraged finance conference in LA next week on Thursday, May 7, and the BMO Farm to Market Conference in New York of May 16. And Cheryl will be attending the Cowen Industrial Conference in New York on June 4. That concludes our prepared remarks, and we will now be happy to take your questions..

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..