LSB Industries Inc (LXU) 2015 Q2 法說會逐字稿

Greetings and welcome to the LSB Industries second-quarter 2015 financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Carol Oden, Executive and Administrative Assistant for LSB Industries. Thank you, Ms. Oden, you may begin.

Thank you, good morning, welcome to the LSB Industries Inc. second-quarter 2015 conference call. Today, LSB's management participants are Barry Golsen, Chief Executive Officer and President; and Mark Behrman, Executive Vice President and Chief Financial Officer. Jack Golsen LSB's Executive Chairman will also join this question-and-answer session after the prepared comments.

This conference call is being broadcast live over the Internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.LSBindustries.com. After comments by management, a question-and-answer session will be held. Instructions for asking questions will be provided at that time.

And now I will turn the call over to Mr. Barry Golsen. Please turn to page 3 of the presentation.

Thank you for joining our conference call today. During this call, we will report to you results of the second quarter and also share some other information about LSB that is important to our shareholders.

We are very disappointed with the results for the quarter. Sales declined 9.4% for the quarter compared to the second quarter of 2014. Operating income decreased $21 million to $2.6 million, and adjusted EPS decreased to $0.02 per share compared to $0.47 per share in last year's second quarter. I will give you an overview of the most significant drivers of our results this quarter, and Mark will review the financial metrics and provide more detailed analysis later in the call.

During May, we had an unplanned outage in our Pryor facility that lasted 17 days primarily related to the repair of a heat exchanger in Pryor's ammonia plant that could not be repaired on site. This repair was completed and Pryor was returned to production.

Incidentally, for April and June, Pryor had at or near 100% on stream rates. Unfortunately, the May outage at Pryor occurred at the height of the ag season. By the time the facility was back online, it had missed much of the season for its products.

Going forward, Pryor will be able to sell all UAN products it produces pursuant to its off-take agreement with coke. While we're on the subject of Pryor, it just completed a 26-day planned turnaround and is the process of restarting. We have been implementing extensive reliability and safety enhancements at Pryor over the last three years and, coupled with its new management team, the facility has shown substantial improve performance over that time. While there are clearly still improvements to make, which we are in the process of making, we expect unplanned interruptions to continue to decline in frequency going forward.

While I'm reporting on the chemical business, I can report that Cherokee and Baytown facilities continue to run very reliably during the quarter. El Dorado ran at reduced rates due primarily to a lower demand for industrial grade ammonium nitrate.

There is a separate situation relating to El Dorado that is important for me to discuss with you. Three weeks ago, we announced to you that we expected the overall expansion project costs to increase to as much as $575 million, and we believed we could still maintain our original targeted startup schedule during the first quarter of 2016 for the ammonia plant. That report was based on representations made to us by our EPC contractor at that time during project review meetings which addressed the remaining scope of work, the time to complete the project, and the associated costs.

One action that was an outgrowth of those meetings was a decision by our EPC contractor to replace an underperforming mechanical and piping subcontractor with a different subcontractor already on the job working on a different section of the plant who had an excellent record of quality and performance. As a result of the detailed physical evaluation over the past three weeks of the work previously done by the dismissed subcontractor and other work remaining to be done, we have now determined that it is likely that there will be a push out into the second quarter of 2016 for startup of the ammonia plant, and we believe that the total investment to complete the expansion projects will increase to a range of $660 million to $680 million. To develop those cost estimates, we have scrutinized all work done by the dismissed subcontractor and have reevaluated all work left to complete that part of the project together with the replacement subcontractor and our commissioning subcontractor.

In addition, a team consisting of LSB senior corporate chemical engineering managers, all project managers for various parts of the expansion project, and El Dorado site management had extensive assessment meetings with each major subcontractor along with our EPC contractor and commissioning contractor. We reviewed the scope of all work remaining to be done on all parts and all systems of the project and associated cost estimates and timelines. After this detailed review, we believe that the revised cost and time of completion are accurate. A breakdown of the total cost increase by category is approximately as follows: 75% is related to piping, mechanical, and scaffolding; 8% electrical; 7% insulation; and 10% various other items.

In addition to the staff already assigned to work on this project, we have also retained an owner's representative firm to add additional oversight and control to projects schedule adherence and costs. The El Dorado expansion projects have been designed and we believe will be built to meet the highest standards of engineering and structural integrity with the goal of maximizing operational reliability, product quality, and safety.

While we are not pleased to have increased the cost estimate for the EDC expansion from what we previously announced a few weeks ago, we felt it was prudent to announce what we knew at the time. And since then, we've worked to refine that estimate further, unfortunately to the upside.

As we have stated previously, until the new ammonia plant is up and running, El Dorado will continue to incur the high cost of purchased ammonia and the cost of the incremental staff hired to run the new plant along with necessary training for all personnel at El Dorado, which collectively will translate into operating losses at the facility. Once the project is completed and operational, we expect dramatically to improve profitability at El Dorado beginning in the second quarter of 2016 with the new capacity at the plant expected to yield approximately $90 million of annual incremental EBITDA operating at full capacity.

Turning to our climate control business, bookings during the second quarter were lower than the 2014 second quarter but were the third highest in the past 10 quarters and have increased sequentially since the fourth quarter of 2014. We ended the quarter with a strong backlog in this business. Total sales were up 7% over the 2014 second quarter. However, operating income was down.

We have not been satisfied with the recent performance of our climate control business. As a result, we have made major management changes in three of its operations in an effort to improve results on a sustainable basis. The new management is acting quickly to cut costs and accelerate its operational excellence initiatives. We will continue our focus on these improvements as we believe that this business has significant upside potential. As we progress with these initiatives, we expect to capitalize on the strengthening demand which, given the operating leverage inherent in our climate control business, we believe should lead to margin improvement.

Turning to page 4, I'd like to discuss the market outlook of our chemical business. Focusing first on the general outlook for the agricultural markets we serve, indicators for our agricultural products are generally positive, although nitrogen prices will likely continue to be under pressure for the near-term.

Fortunately, natural gas prices are also lower. We expect next year's corn planting levels to be about the same as 2015, approximately 89 million acres. This past spring planting season, continuous excessive rainfall impacted parts of the markets we serve, which affected our sales of Ag grade AN. Although demand should remain strong for nitrogen fertilizers, the biggest influences on pricing will be the world's supply of urea and commodity crop prices, primarily the prices of corn. Current market prices for corn and wheat are lower than a year ago, however, all indications are that growers will continue to use nitrogen products to maximize yield.

At this time, while certain parts of the western United States continue to have extreme drought conditions, most of the markets we serve have had plenty of moisture and currently do not have drought conditions. We expect good planting conditions in our markets this fall. Pre-plant ammonia applications for wheat in the Southern Plains are expected to start during August.

Finally, Chinese urea exports to the US have increased to record levels and prices for urea are currently approximately $40 per ton lower than the year ago. The amount in price of imported urea, Chinese urea, could have an impact on pricing of all nitrogen fertilizer products as urea at some price level is a substitute for other products.

Overall, we continue to be optimistic about the market fundamentals for our agricultural business. As to the industrial markets we serve, most indicators are that the economy remains healthy, and so will the demand for the products we provide.

With respect to our mining products, given continued low natural gas prices, the US Energy Information Administration is forecasting a 7% decline in coal production for 2015.

As we forecasted on our Q1 call, low coal demand combined with the expiration of our agreement with Orica in early April resulted in lower sales and profits related to industrial grade AN for the second quarter. We expect this unfavorable dynamic to continue until new arrangements come into effect in 2016 after the ammonia plant at El Dorado is in operation and can produce competitive industrial grade AN.

To date, we replaced the majority of the ammonium nitrate volume that had formally been committed to Orica with new customer commitments although those arrangements did not have the same take or pay terms as the previous agreement with Orica. We are currently in negotiations with other potential customers of industrial grade AN for most of the balance of our production capacity that had previously been associated with Orica. We expect to have those in place when we start up the ammonia plant at El Dorado.

Turning now to our climate control business outlook on page 5. As I mentioned before, we ended the second quarter with a healthy backlog. There is robust level of productivity and strong pipeline of identified projects. All of this should result in higher sales in the second half of the year compared to the first half of 2015. The commercial sectors that are performing the strongest for us at this time are multifamily, education, hospitality, and healthcare.

In addition to the business activity we are experiencing, industry forecasting services indicate continued construction recovery and the outlook for continued growth in green energy efficient construction continues to be good.

In general, or the general consensus, of most economists and construction industry experts is that the construction recovery will continue. We are optimistic about the prospects for growth in our climate control business and the operating leverage that we anticipate will accompany that growth.

Now I'll turn the call over to Mark who will goes into more detail about our financial performance.

Thanks, Barry. As Barry indicated, our second-quarter results were disappointing compared to last year and certainly what we expected going into the quarter.

Page 6 of the presentation provides a consolidated summary statement of operations for the second quarter of 2015 and the first half of 2015. Net sales were down for the quarter driven by the lower chemical sales which contributed to depressed margins. I'll go into some detail in the next few slides.

Overall SG&A increased $7.5 million in the second quarter versus the second quarter of 2014. That increase was primarily driven by higher corporate expenses of approximately $3.9 million arising primarily from additional advisor fees incurred in the finalizing of a settlement with an activist shareholder which totaled $2.7 million, an increase in SG&A at our chemical business of approximately $1.7 million primarily from higher training expenses related to the incremental staff hired to run a new ammonia plant at EDC, an increase in railcar lease cost at EDC related to the sale of low-density ammonium nitrate, and additional maintenance costs related to railcars and related infrastructure also at EDC. And finally, an increase in SG&A at our climate control business of approximately $2 million related to higher warranty costs for specific claims and increasing freight costs as a percentage of sales from a shift in product and customer mix and an increase in personnel costs. Some of the warranty and personnel costs related to one-time items which totaled approximately $700,000.

Operating income and net income were both down for the quarter versus Q2 2014 due to the decrease in sales and gross profit margins and the increase in SG&A that I just discussed.

Page 7 provides a summary of the chemical business operating results for the second quarter of 2015 compared to the second quarter of 2014. Sales and gross profit were both down for the quarter primarily as a result of, one, the 17-day unplanned outage at Pryor's ammonia plant that Barry mentioned earlier, which reduced production and sales of both ammonia and UAN.

Two, lower low-density ammonium nitrate production and sales versus second-quarter 2014 where we were still under contract with Orica and they were required to pay for 60,000 tons per quarter irrespective of the amount that they actually took.

Three, increased operating costs largely related to maintenance and repairs, depreciation, and salary and wages. And lastly, lower overall fertilizer pricing partially offset by lower natural gas prices. That combined with the increase in SG&A discussed on the previous slide contributed to the lower operating income for the quarter.

From an operating standpoint, the Cherokee ammonia plant ran well during the quarter at an on-stream rate at approximately 95% while the prior ammonia plant ran at and on-stream rate of approximately 84% for the quarter including the downtime.

Additionally, excluding planned turnarounds, the Cherokee ammonia plant's quarterly on-stream rate has been 94% or higher in five of the last six quarters, and the prior ammonia plants quarterly on-stream rate has been 96% or higher in two of the last three quarters.

Page 8 provides a summary of the climate-controlled businesses operating results for the second quarter of 2015 compared to the second quarter of 2014. Sales increased approximately 7% driven by higher sales of our hydronic fan coil custom air handler and modular chiller products.

Gross profit increased driven by the increase in sales, while gross profit margin also increased 60 basis points primarily from favorable prices for raw materials and components. However, as I discussed previously, SG&A increased approximately $2 million offsetting the increase in gross profit and reducing operating income for the quarter.

We continue to see increased activity in the commercial construction sector, which is a tailwind for our commercial business; however, low natural gas prices continue to provide a challenge for growth for our residential business.

The strength in our commercial demand has resulted in an ending backlog of June 30, 2015, that was 10% higher than at the same time last year and 9% higher than at the end of Q1 2015.

Regarding the chemical business, I wanted to provide some additional color on the major items that impacted the second quarter of 2015 that I have previously discussed. Page 9 outlines the major items and attempts to provide the impact to operating income for each of these items. There are two items I want to focus on.

First is the sensitivity that the El Dorado facility has two low-density ammonium nitrate volumes now that our agreement with Orica has expired. Orica paid for 60,000 tons per quarter whether they took those tons or not. That included fixed overhead absorption and a profit. Now we are selling low density ammonium nitrate without the coverage of that fixed overhead which include salaries, wages and benefits, depreciation, insurance, utilities and other manufacturing expenses.

The second item is the increased SG&A and operating expenses at El Dorado. As we gear up for the ammonia plant going into operation, we have hired an experienced team that will operate the plant, and they have been going through training in order to be fully adept at operational and safety procedures when the plants comes online.

Additionally, since Orica previously covered the cost of railcar leases associated with their low-density ammonium nitrate tons, we are now incurring those costs. We also needed to add additional railcars to service multiple customers as opposed to serving only Orica. We will continue to incur those expenses until the ammonia plant goes into operation and the contracts with new customers for the purchase of low-density ammonium nitrate goes into full effect.

Page 10 outlines our expected capital spending for the remainder of 2015. As Barry outlined earlier, the overall cost of the expansion at EDC has increased to a total of between $660 million and $680 million. That means that the heavy CapEx spending should occur over the next two quarters. For the remainder of 2015, we expect CapEx to be between $223 million and $243 million with a possibility that a portion of their CapEx pushes into the first quarter of 2016.

I want to point out that some of the CapEx related to the chemical business that is associated with the major renewal and improvement projects in other categories are not necessities, and we are reviewing those items to determine what can be deferred until the second half of 2016.

Page 11 outlines our capital structure as of the end of the second quarter. Total cash and investments at the end of the quarter were approximately $158 million of which $15 million is reserved for the repayment of the loan on the Marcellus Shale working interest while total debt was approximately $470 million including approximately $19 million related to the Marcellus Shale working interest.

We expect to be able to fund our capital expenditures and cash needs for our operations from cash on hand, internally generated cash flow, working capital, our working capital revolver, and other additional financings.

We currently have $100 million ABL facility that has approximately $75 million of availability. Additionally, we have the ability to incur an additional $50 million in debt under the indenture governing our senior secured notes.

We are currently negotiating with third-party lenders for the financing for certain discrete pieces of equipment in connection with the El Dorado expansion projects and are under discussions with other financing providers to provide additional capital in order to complete the El Dorado expansion projects.

We also have the flexibility to reduce, delay the starting of, or terminate certain discretionary capital projects that we have planned to initiate during the balance of 2015 and 2016 in addition to other cost-cutting measures should it be needed.

Moving to page 12, we outline our free cash flow. The take away here is that until we complete the expansion at EDC we will have negative free cash flow driven by significant CapEx at EDC. That should change significantly when the expansion at EDC is complete and the ammonia plant is in operation. Since we are in the construction phase of our project, spending on the expansion project is at its highest levels.

Now I'll turn it back to Barry to discuss the status of our chemical facilities and a more detailed discussion on the timing of EDC expansion projects.

Thanks, Mark. Page 13 updates the status of each of our chemical facilities. In a nutshell, the Pryor facility successfully completed its turnaround and is in the process of restarting at this time. All other facilities are currently performing as expected.

Page 14 details the status of the El Dorado ammonia plant expansion project, which I already discussed with you. The project timeline is now driven by the execution of the construction process with the critical path item being installation of piping. Having terminated the underperforming contractor, piping is our main focus before installing controls and electrical equipment. As mentioned before, we have revised the completion and start-up date to the second quarter of 2016.

In addition to the ammonia plant being constructed at El Dorado, we are adding a 65% Weatherly nitric acid plant and concentrator. A timeline for this part of the project is outlined on page 15. At this time the nitric acid concentrator is in operation. The nitric acid plant is scheduled to be mechanically complete in September 2015 with production beginning in mid-fourth quarter 2015. On page 16, there's a recent photograph of the ammonia plant on the top of the page and below you can see a recent photo of the nitric acid plant and the concentrator.

On page 17, we outline our third-quarter 2015 chemical sales volume outlook.

Finally, I like to switch focus to the vision of LSB's future on page 17. As we have described to you over the past several conference calls, we are focused on value drivers, projects, and initiatives that have the potential to be transformative to the Company. We expect all of these initiatives to drive improved performance, enhanced profitability, and shareholder value creation.

Summing up, despite our still inconsistent financial performance, our efforts over the past several years to strengthen the reliability of our chemical operations have been yielding measurable improvement in the aggregate on-stream rates and production volumes. We are approximately a quarter delayed with our chemical expansion projects at El Dorado and costs for the project have increased. El Dorado will continue to operate at a loss until the projects are completed and the new plants are operational.

Bookings and backlog are strong in our climate-control business and we expect this will translate into higher sales with improved margins through operating leverage. We remain confident in our prospects for continued performance improvement and expect a material expansion of profitability beginning in the second quarter of 2016 when our new capacity at El Dorado is up and running. We believe that the strategic improvements we're making to bolster returns in both our chemical and climate-control businesses will allow us to capitalize on improving market conditions and drive enhanced value for all of our shareholders.

Before we turn the call over to the operator for the Q&A portion of the call, I want to touch on an announcement we made this morning regarding the work being done to determine the best strategy and governance structure for LSB.

Beginning mid last year, we have worked closely with the strategic committee and the LSB Board of Directors, which is comprised of independent directors, to position the Company to create sustained value for our shareholders. In its report to the Board, the strategic committee noted that the programs initiated by the management team including the expansion of the El Dorado facility, plant reliability enhancements in the chemical business, and the implementation of operational excellence activities in the climate-control business are progressing and are expected to improve Company's business and operational performance. As you know, these programs were initiated to enhance shareholder value and provide the Company with strategic flexibility.

In support of these objectives, LSB will take several actions including: establishing and operations committee to foster more direct interaction between the Board and management in execution of the Company's business strategy over the next 18 to 24 months. The members of this committee have extensive operational, financial, and industry experience. Implementing key operational performance measurement metrics related to the reliability of the Company's chemical plants into the lean initiatives. Engaging the services of an independent expert consultant to advise LSB on driving higher margins in the climate control business. And in addition, the Board will implement several improvements to its corporate governance and look to further strengthen the management team.

At a high level, we believe the improvements we are making across the business will increase performance and earnings growth, enhance profitability, and allow us to capitalize on the favorable market dynamics emerging in both our climate control and chemical businesses. We are pleased that the strategic committee has reaffirmed the value potential of our plan, and we believe that the initiatives and corporate governance improvements we announced today will further allow us to grow the business and increase value for our shareholders. We look forward to continuing to work closely with the strategic committee and the operating committee of the Board of Directors as we implement these enhancements and execute against our strategy to create sustained shareholder value.

With that, let's begin the Q&A portion of the call.

(Operator Instructions) Thank you, before opening for questions, I would like to thank you for listening. We request that you limit yourself to three questions so that others have the opportunity to ask as well. If you should have additional questions, please feel free to rejoin the question queue. (Operator Instructions)

Joe Mondillo, Sidoti & Company.

So, my first question is sort of a two-part question related to the financing for the project. Just in regard -- first part is regarding the increased budget. I'm just wondering how does this work regarding the subcontractor. Is there any way that there is a negotiation process regarding sort of the faulty work that that one subcontractor was doing? Or is this sort of a done deal terms of the budget that you're putting out here today?

And then, second part, is just wondering if you could give any more color regarding sort of your cash needs and your feeling going into the back half of this year and into 2016 regarding cash flow and your cash needs?

I'll take the first part of that question and Mark will take the second part of that question, Joe. With regard to the question you asked about the subcontractor, we will have a back charge claim, and at this point in time feel that that's all I -- is prudent to say about that because it's something that is in process at this time.

So you do -- you're confident that you're going to be able to recoup something?

At this point time, I don't want to speculate on that but that certainly would be our objective.

Okay.

You know Joe, as far as talking about -- let's walk through from the cash perspective. So let's just think about it from a high level for a second. We said that the new range is now $660 million to $680 million in total cast for EDC. We've spent $437 million to date. So that really leaves us $223 million to $243 million spend on the project.

We talked about how the cash that we had on hand, so after deducting about $15 million for the repayment of the Marcellus Shale working interest loan, we are left with $143 million of cash at the end of the second quarter. You subtract out $75 million on the working capital line. I mentioned that we have $50 million of additional debt available under the bond indenture.

So really that leaves us on the low side, if the project only costs $660 million, that leaves us $45 million excess for other CapEx or $25 million on the high side. I had mentioned earlier and you can see on slide that we have about $30 million to $50 million of other capital projects scheduled for the second half of 2015.

So when you really subtract that out, there's $15 million excess, if we spend $660 million, and we have a deficit of $25 million if we spent $680 million. Of course, keep in mind that that excludes any expected operating cash flow for the second half of this year. So, I'm trying to -- I think I'm trying to give you a roadmap as to how maybe is the best way to look at it.

Yes, no, that's helpful. So it sounds like you have some levers to pull. It sounds like you have some leeway regarding the financials.

Well, you know we have some -- we have availability, as I said, under the working capital line. We can pull down another $50 million of debt under the bond indenture, and then I mentioned that we are in discussions with various financing sources for additional capital. So, I would expect that we would seek some additional capital.

Okay. And I missed the working capital flexibility that you have there. What are you expecting for working capital in the back half?

Well, I mean for working capital in general or the working capital line?

In regard to whether, you know, working capital's going to be a source of cash or use of cash?

No, I mean working capital generally runs between $75 million and $80 million and it's been pretty constant. So we don't usually have a lot of -- we don't usually have a lot of variability there.

Okay, that's what I thought. I was just wanting to confirm. The other question I had is regarding these costs, it looks like a decent portion of the costs that you cited were sort of one-time in nature but then some seemed like they could sort of recur. So at least maybe half of them are one-time. In the back half of the year, how are you looking at sort of these inflated costs that you saw in the second quarter?

I'm assuming you're talking about SG&A costs?

That's correct.

Okay. So as I mentioned, corporate expenses was up $3.5 million to $4 million. $2.6 million was from advisor fees that we paid. And so, we will not have that in the third quarter.

When we get to chemical, most of that it is at EDC. And as I went through that, I kind of talked about how those would be ongoing costs until we get the ammonia plant up and running, because they are all related to the expansion and/or the shifting of our contract from Orica to other customers. So when the plant comes up those costs will be absorbed into product sales.

On the climate-control side, I did point out that there was $700,000 of one-time expenses really related to specific warranty items, and then there was a one-time expense for personnel-related expenses. So I would look at climate control as certainly not having $700,000 of the $2 million of additional SG&A and then certainly on the corporate expense side, I would look at, at least $2.6 million as being gone, going from the third-quarter going forward.

And is that related to the settlement with activist fee, the $2.7 million?

Yes.

So you're looking at maybe $3 million of sort of one-time, or I guess actually more like $3.5 million to $4 million of one-time that you saw in this quarter?

Yes, I'd say $3.5 million is a pretty good number.

Okay. And then just lastly regarding the El Dorado plant, sort of the expectations in the back half of the year, I realize economics of that plant are still pretty tough given just the price of ammonia; however, it seems like ammonia prices have fallen faster than UAN prices over the last couple of months. Is that what you're seeing and if so, how is that going to effect the profitability at that plant relative to the first half of the year? Because if ammonia is falling faster than UAN, it should actually be somewhat of a positive for now.

Yes, so let me give you some perspective on EDC. We lost $10 million in the quarter, and honestly, I think that you should expect that going forward on a quarterly basis until we get the ammonia plant up and running.

Orica is a big part of that. We come off of the contract where we had a take-or-pay contract for 60,000 tons. So if you want to do sort of a comparison, second quarter of last year to this second quarter, we had a swing of about $9 million. Right? We lost in million dollars this quarter, we lost $1 million in the second quarter of last year. About $4 million of that swing was the loss of the Orica contract. We went from 60,000 tons that were being paid for, to in this past quarter, we sold 16,500 tons. So big swing there, and there's a lot of sensitivity to absorption of costs based on the amount of tons.

Going back to -- we don't sell you UAN out of EDC but we do sell high-density ammonia nitrate sold into the ag markets. Remember, it's all that spot pricing. So you really, while ammonia is a big component of that because we're using -- we're producing from purchased ammonia, believe it or not in the last quarter, UAN, I'm sorry, high-density ammonia nitrate prices dropped about 17% and ammonia prices dropped something less than that. So the margin differential compressed.

So it's not just looking at ammonia prices. We also got to look at the selling prices and how they drop relative to each other.

Okay. Just to clarify, you said $4 million of the $10 million loss was related to Orica?

Well, I said that there was a difference of $9 million between the two quarters last year, the second quarter, and $4 million was -- there was $4 million related to Orica of that $9 million.

Okay. And then the $5 million is related to the lower AN prices and higher ammonia?

Well, lower AN prices was about $3 million of the difference, and then remember we talked about SG&A being about $1.5 million. So that gets you to $8.5 million of the $9 million.

Okay, okay, thank you.

Stefan Neely, Avondale Partners.

So, I'm going to kind of run this down again. Covering the additional cost on the El Dorado, on EDC, you mentioned the there should be some discretionary costs that you can defer. Is that just the $11 million to $14 million that you highlighted in the slide or is there more than that?

No, I mean I don't have the slide in front of me but there's -- if you take out EDC, there is about $30 million to $50 million of other capital projects in the second half of 2015 that we outlined, and I'd say we're taking a look at that really hard to try and figure out what's real discretionary. Clearly we don't want to defer things that are related to safety in our plants or things that require maintenance. But there's always discretionary capital projects. So we are looking at that now. My gut tells me there's probably $10 million to $15 million of that that we could probably defer into the second half of 2016, but I think we need to do a more thorough review than just my gut.

Sure, understood. And you said you were talking to, you know, looking at other sources of capital beyond this. Can you give us any color as to what you're thinking there? More debt, maybe a rights offering or anything like that?

Yes, look, it's early in the process, and I think I can't give a whole lot of details. I would tell you that any equity issuance would probably be really low on our list.

Okay, all right, fair enough. Moving on to Pryor, the 17-day outage that was entirely isolated to the Q. I didn't catch if you said that or not. And was there any reason why it wasn't disclosed?

I didn't get the first part. It was entirely isolated to --?

Sorry, to Q2. You don't expect to have to deal with any more issues outside of the quarter, do you?

No. I mean, as Barry mentioned, we can back up in June. We then came down for a planned turnaround, and that turnaround is finished and we are in start up right now.

As far as why we didn't announce it, honestly, we didn't think -- at the time that the outage happened it sort of took on a life of its own. We didn't think it was going to last that long. In fact out of the 17 days, 15 days were really related to the heat exchanger, and believe it or not, another two days for a problem in the industrial park. We had a water main problem in the industrial park that took us down for two days. And that was the industrial park wide. It wasn't specific to our plant.

But in retrospect, after that happened we should have made the announcement, and it won't happen going forward.

All right, it sounds good. And one last question on -- switching to climate. Could you explain the warranty issue that occurred during the quarter?

Yes, look we do regular warranty or accrue for warranty on an ongoing basis and, obviously, we review that every quarter and every month, in fact.

But there was a couple of specific things that happened in a couple of our businesses with some product that came back that necessitated us to increase the warranty expense for the quarter. So those were kind of one-time things that you don't normally happen but we felt it was prudent to accrue for those.

Sure. Okay. Thanks, guys. That's all my questions.

Brent Rystrom, Feltl.

Just a couple of quick ones, most of mine have been answered. Does the EPC contractor have any exposure to cost recovery on these overruns?

You know this is an on -- this is Barry responding. This is an ongoing area of discussion and it's an open issue. And I'm not trying to be evasive but at this point time, I feel that it's something that we really feel uncomfortable discussing. It's -- at this point we're having dialogue with the EPC contractor.

All right. You may have mentioned this, I apologize if you did. Could you remind us of how the agricultural chemicals from El Dorado will be sold? I don't recall what you said as far as off-take agreements or if you're just selling all of them on your own?

Would you repeat that please? I had little trouble hearing.

How will the agricultural chemicals from El Dorado be sold?

Well, they are sold now. We've got a salesforce that sells them, and none of that will change.

There will be no off-take agreements with the expansion of them. It will all be sold internally?

Well we're looking to have an off-take agreement with regard to any excess ammonia that is produced at that plan that we don't upgrade into other products, and also we look to have certain specific agreements in place on industrial AN. But with regard to the ag products which was your question, it will go through the traditional channels that we sold our ag products.

Keith Maher, Singular Research.

I want to just follow up a little on the Pryor outage. Just trying to understand, you mentioned the heat exchanger. I know that you'd replaced a lot of the parts there, understand, just maybe a little bit more details on why you had this failure.

Well, there were -- it just so happened it was an idiosyncrasy of this heat exchanger that when the failure occurred, which was -- had to do with a tube that ruptured, I believe. Because of where it was located in the heat exchanger, it was not a repair that could be made on site. It was one of those unusual -- most repairs are made on site when those things occur. And it had to be dismounted or demounted, sent out to a shop, repaired, and brought back. So it was an unusual occurrence.

Okay, thanks. Also just to understand the income statement, did you -- is that one charge for or one expense -- are you increasing the allowance for doubtful accounts and, if so, just trying to understand what the motivation was for that?

No, it's not an allowance for doubtful accounts.

Okay.

Are you talking about the one-time warranty expense?

Well, it was like $400,000 -- the $491,000 provision for losses on accounts receivable, $491,000.

I mean, we review accounts receivable on a quarterly basis, so if you're looking at that on the balance sheet, we might've taken an additional reserve but that's sort of normal course of business.

Okay, all right. And on the -- I know you have been working to replace the Orica business, and we talked about this some in the past. I know it's come up. The motivation there was to get, I assume, a bit better margin on that business. Is that the case? Because as I understood it, it was your choice to not re-enter that contract, to go out and try to replace that business. So I'm just trying to understand what the reasoning was behind that.

Well, I think the reasoning behind replacing Orica was, and I think we discussed this in the past, we sold Orica as well as CF Industries. And so CF made an announcement that they were going to increase -- they were going to further increase their agreement with Orica and increase the amount of tons that they were going to sell them. So for us, sort of the handwriting was on the wall. I mean we saw what that meant for us. It was a nuance within our contract. We had to give a one-year notice so that we could actually go out and talk to others to start marketing. So that at the end of the contract, we could fill it. So, yes, you know, we took the first step but I think it was more reactionary than anything else.

As far as the contracts that we have, you're absolutely right. If we are -- Barry talked about a majority of the previous volume that we sold or Orica took being replaced. If the contracts or a customers under their contracts take the stated volumes that are expected in that contract, we are about 90% and filled on the Orica volume.

Now, keep in mind though they are not take-or-pay contracts, they are minimum volume contracts with penalties if they don't take those minimum volumes. But at the end of the day if they do take those volumes, on an apples-to-apples comparison, we make significantly more money from a margin standpoint then we would under Orica.

I'd like to just add one point of clarification to what Mark just said. When he said we were 90% filled, he's talking about 90% filled after we bring the new ammonia plant online.

Yes.

All right, thank you.

Bruce Zessar, Advisory Research, Inc.

I just wanted to come back again to the financing. I think with the Pryor question, Mark, you went through some of the math relating to the cash on the balance sheet. Just real quickly, my first question is how much cash you need to keep for operating purposes?

Well, I think we have at any point in time, as I said earlier, $75 million to $80 million of working capital. So you know if we had, if I had $20 million to $30 million to as much as $40 million, I think we would be fine. But I don't think we really need any more than that.

So I mean, so you need to run with $40 million cash on the balance sheet just operate the business day to day, right?

Now, I'd say we need to run with $40 million of availability of cash. So whether that's having a working capital line that's got $40 million on it or some other availability. I don't necessarily just have to keep the cash on the balance sheet.

Okay. So then I guess my question is going through this math here, you said that you can go out for $50 million under the bond indenture. How much additional are you looking for right now? Is it say another $50 million, so you're looking to have $100 million total financing? I mean, what are you looking for in total?

Well, Bruce, I don't think I'm prepared to answer exactly what the gap is right now. I think we need to do a little bit more work to do that, and it's too early in the game. But clearly I've outlined that if we are at $680 million instead of $660 million, we've got a cash deficit.

You mean a cash deficit based on what you can borrow under your revolver, the $50 million you can go out with under the bond indenture and cash on balance sheet. So you saying the delta is if you go to $680 million instead of $660 million?

For the most part, yes.

So to me it doesn't sound like beyond going out for the $50 million bond indenture, you'd need more than another $50 million on top of that. Am I right about that?

I think you're in the ballpark.

And it could be less, right?

It could be less. There are other measures that we could take, and we could cut back on some of the discretionary capital spending, yes.

All right, and then you didn't include the 2017 targets as you had in your fourth-quarter presentation and in first-quarter presentation in May. You did mention on the call, or maybe Barry did, that you still expect $90 million in incremental EBITDA from the capital projects at El Dorado on an annual basis once they're fully up and running. Are your 2017 targets still the same as they were in the last quarter's presentation?

Yes.

Okay. And then I know there's been some questions back and forth about Orica and trying to replace the volume. If Orica were to keep that running at the current -- the volumes lost and partially replaced from Orica. If you were to keep running at that run rate going forward, how does that impact your EBITDA target in 2017 on the chemical side of the business?

Well, I mean, it's kind of an interesting question. I mean, we have customers lined up to take -- that want the product and want to take it but they don't want to take it at the high cost that we can sell it at them today. So, I think we feel pretty strongly that when the ammonia plant comes up and online, the volumes that they're talking about in the contracts that we have, they'll take those volumes providing that the market is there.

So, I think that were talking about really is another $10 million a quarter for the next two or three quarters of losses at EDC but we would definitely not expect that to continue once the new ammonia plant is up and running.

Okay. That's everything I have for now. Thanks, guys.

Roger Spitz, Bank of America Merrill Lynch.

I just wanted to state this fact clearly to make sure it's clear in my own head. If we go to $680 million CapEx level, we're looking at a cash deficit of $25 million after drawing the $50 million that would be allowed under the bond indenture and maintaining the $40 million availability you require for working capital. Is that the way to think about it?

No.

I guess not, okay, I thought I'd ask.

We would be in a cash deficit of $25 million if we borrowed that $50 million and we fully drew down on our working capital line.

Okay, so you need another -- because you need $40 million also need another $40 million. So it's really, I should think of it as keeping the availability of $40 million you need to just to operate. It's really a $65 million cash deficit plus the drawing of the $50 million. That's way to think about it.

Again, I think Bruce had mentioned earlier about $50 million, now you're talking $60 million, $65 million. As I said, I'm not prepared to throw out the number but relatively in the ballpark, you know?

Okay. And you talked in the press release about funding some piece of the El Dorado equipment with third parties. Shall we assume that this would be done under the max of $35 million and 5% of assets capital lease carveout under the bond indenture, that this would be capital leased and you'd use that carveout?

Yes.

And regarding the $50 million basket, looks like you can lien that up assumedly in parity with the current bonds. Should we think about it as if you do that, that it would sort of still be in the same collateral pool such that if you -- the bonds would have an equal first lien under whatever you borrow on the $50 million as well as whoever you borrow it from would have the same parity claim on the rest of the collateral supporting the bonds? Is that correct?

I think that that would be a good assumption.

And lastly, would you in fact tap -- think about tapping it? Maybe you're not ready to comment on whether you would tap the bond?

It is certainly always out there and available but I don't want to comment on exactly what we're going to do on the $50 million. I don't think -- I'm not in a position to talk about that yet.

Okay. The two -- second-half 2015, the $254 million to $290 million CapEx, is there any pacing on that? Should we think it's about roughly 50-50 between the two, or is there some rough pacing on that between two quarters?

Well, I think most of our CapEx spending is EDC and, as I said, we are heavy into the construction phase. So I would assume it's pretty equal third and fourth quarter.

Mark, thank you very much.

Owen Douglas, Robert W Baird.

Thanks for taking my questions. A lot of good ones have been asked before. I wanted to quickly just get confirmation that you guys do have business interruption insurance, correct?

Yes.

Okay. So, I think in the past -- sorry, I don't have the notes to hand, but in the past you guys have been able to successfully get claims when there were these outages?

Well, yes, but there's a waiting period on those. So a 17-day outage, for example, at Pryor is less than the waiting period before the BI kicks in.

I'm sorry, can you explain what that waiting period is?

I think it's 45 days.

Yes, I believe it's 45 days, yes.

So you're saying that you would need to be down for 45 days before you would have a claim? So this 17-day interruption would not be covered by your policy?

That's correct.

Okay, understood. And if I could, just to make sure I'm sort of thinking about this right. I think in the past you guys have provided a sense for the benefit to be received from the El Dorado ammonia. What sort of the differential were you guys seeing in this most recent quarter, between the cost to produce ammonia and the market price?

Yes, it's between $250 and $270 a ton.

Okay, thanks for that. Just as I kind of think about the disruption, so you are saying that you guys missed the peak of season. So really this disruption -- this is one of those things where you have missed the boat and there's no way to really recoup any benefit from it, correct?

Yes. We didn't miss the whole season. We missed 17 days of the season. But you are right; once the season's past not like we can go back and restart.

I will add one comment to that. Because of the off-take agreement that we have at Pryor, which is different than the way we sell product from our other facilities into the ag sector, they are prepared, because of their storage and distribution system, to take UAN as we produce it. So it is somewhat less seasonal than our other facilities. So even though we did miss the peak of the season, we will be able to continue to sell UAN.

I see, understood. And just to go back to the comments with regards to the minimum volumes. This was with regards to the contracts for replacing the Orica off-take agreement. You mentioned that there were minimum volumes and you've spoken out a little bit about the maximum how that would look if they were to actually take what's ultimately contracted for. How should we think about the minimums relative to the volumes which Orica was taking previously.

I would say the minimums in those contracts are probably 50% to 60% versus the maximum of 90%.

Okay, I see. Well, thank you very much, guys.

Thank you. This concludes the Q&A portion of today's conference. I'd like to turn the floor back over to management for closing comments.

Thank you for participating today. We appreciate your attention and at like to turn the call over to Carol Oden who has some important forward-looking statements.

Thank you, Barry. Information reported on this call speaks only as of today, August 7, 2015. You are advised that time-sensitive information may no longer be accurate at the time of any replay.

The comments today and the information contained in the presentation materials contains certain forward-looking statements. All these statements other than statements of historical facts are forward-looking statements. Forward-looking statements include the words expects, intends, plans, believes, projects, anticipates, estimates, or similar expressions or statements of the future of forward-looking statements' nature identify forward-looking statements. And forward-looking statements contained in this presentation include but are not limited to the following statements: unplanned interruptions going forward, cost and timing to complete the El Dorado expansion projects, goal of the El Dorado expansion projects, results of operations and losses at El Dorado until a new ammonia plants up and running, expected improvements at El Dorado upon completion of the expansion projects, demand for climate controlled products, outlook for the markets served by our chemical business, Chinese urea replacing lost Orica chemical business, outlook for construction in, in the residential and commercial markets, expenses to be incurred until the ammonia plant goes into operation and contracts with new customers to purchase LDAN become effective, CapEx for the balance 2015, funding capital expenditures and cash needs, negative cash flow until El Dorado expansion projects have completed, cost savings once new ammonia plant is completed, third-quarter chemical sales outlook, improved performance and profitability and shareholder value balance of 2015, increasing profitability in 2016, objective enhanced shareholder value, future for our chemical and climate-controlled businesses, and actions to be taken as directed by our strategic committee and benefits of those actions.

You should not rely on the forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. We to incorporate the risks and uncertainties discussed under the headings risk factors and special note regarding forward-looking statements in our Form 10-K for the fiscal year ended December 31, 2015, and our Forms 10-Q for the quarters ended March 31, 2015, and June 30, 2015, which contain a discussion of a variety of factors which could cause the future outcome to differ materially from the forward-looking statements discussed in this conference call presentation. We undertake no duty to update the information contained in this conference call or the conference call presentation.

The term EBITDA as used in this presentation is net income plus interest expense, depreciation, amortization, income taxes, and certain non-cash charges unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurement. The Company believes that certain investors consider EBITDA a useful means of measuring our ability to meet our debt service obligations and evaluating our financial performance. EBITDA has limitations as it does not reflect all items of income or cash flow that affect the Company's financial performance under GAAP and should not be considered in isolation or as a substitute for net income, operating income, cash flow from operations, or other consolidated cash flow data prepared in accordance with GAAP. A reconciliation of GAAP and any EBITDA numbers as of the three months and six months ended June 30, 2015, and June 30, 2014, discussed in this conference call presentation are included in the appendix of this presentation. And that concludes our conference call.

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