LSB Industries Inc (LXU) 2015 Q4 法說會逐字稿

Greetings, and welcome to LSB Industries, Inc. fourth-quarter 2015 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kristy Carver, Vice President and Treasurer of LSB Industries. Thank you. You may begin.

Thank you. Please note on today's call, it 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 this morning's press release in the Investors section of 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 Dan for opening remarks.

Thank you, Kristy, and good morning everyone. Thank you for joining this morning's 2015 fourth-quarter conference call.

I will first review the permanent management changes during the quarter and then provide further information on the operating status of our chemical plants as well as an update on the El Dorado construction progress. We will then discuss the climate control operations and provide a summary of our key objectives for 2016.

I'm moving on to Slide 3. As most of you know, I became President and CEO in late December and Mike Foster joined the Company in January as our new General Counsel. Mike is an excellent partner and has hit the ground in full stride. He is a great addition to our executive team.

During the fourth quarter, we secured financing to allow for the completion of the El Dorado expansion. As you know, we also added three new board members. It's been a very smooth process. We will continue to review our board size and may seek ways to become more efficient and cost-effective.

The new nitric acid plant in El Dorado became operational during the quarter, and we also completed the cogeneration plant. These are state-of-the-art facilities and will be very efficient and will complement the new ammonia plant when it becomes operational.

We have previously reported the ammonia plant is on schedule and we are planning to initiate ammonia production early in the second quarter. We remain on that schedule and assume the weather pattern is normal.

We also reconfirm that our aggregate cost for the El Dorado expansion will be in the range of $831 million to $855 million. Included in those estimates are $46 million related to a general contingency estimate that we have previously reported. We will be surprised if we have to use more than 50% of that $46 million contingency.

We were disappointed by the financial and operational results for the fourth quarter. Our chemical operations were hampered by the lower volumes to the mining sector, as well as the slow fall agricultural ammonia application due to weather conditions. This resulted in price declines across all product lines for the fourth quarter as customers sat on the sidelines.

Additionally, we had unplanned downtime at our Cherokee plant during late December, and at Pryor during the quarter. Currently, both plants are operating at expected rates. Later in the call, we will discuss the actions that we are taking to improve our onstream rates.

Turning to Slide 4, recently we've seen significant improvement in the agricultural sector pricing and volumes. We continue to keep an eye on the market pricing of ammonia and the upgraded products as the new capacity additions come on stream. There may be periods from time to time where new production units come online and provide an initial surge of product to the market. The sales prices may fluctuate during these periods.

Our sales volumes to the mining sector remain low. We do not expect to see significant improvement in the mining sector in the near term.

Other industrial sales volumes and pricing should remain steady.

Slide 5, turning to the climate control business, we anticipate continued growth in the commercial and institutional markets. We should see reasonable sales growth in both of these markets we serve. We believe the trend of installing higher efficiency green products will continue.

Residential markets may continue to be impacted by low natural gas prices, and we continue to watch the residential energy efficient property credit -- property tax credit that is scheduled to expire at the end of 2016 if it's not renewed.

We are also pleased that our operational excellence activities have identified and implemented cost savings initiatives during the fourth quarter. We fully expect those initiatives to generate further meaningful contributions to operations in 2016.

2015 was a tumultuous year for LSB. We now have a focused management team and board and we are positioned for growth and improved operations in 2016.

At this time, I'd like to turn the call over to Mark Behrman to discuss our financial results and our capital structure.

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

On Page 6 of the presentation, we provide a consolidated summary statement of operations for the fourth quarter of 2015 and the full year of 2015.

Total net sales were down for the quarter driven by lower chemical sales, which contributed to lower gross profit. I will go into some detail in the next few slides.

Overall SG&A increased $3.4 million for the quarter versus the fourth quarter of 2014. That increase was primarily driven by higher SG&A at our chemical business of approximately $1.1 million related to additional training expenses at El Dorado, which we expect to end when the ammonia plant is in operation. Increased amortization costs related to the implementation of a new ERP system and increased compensation expense at El Dorado related to overtime associated with the start up the nitric acid plant. In addition to that, we had higher corporate expenses arising primarily from one-time severance costs of approximately $600,000, and increasing compensation and restricted stock award expensed, The non-allocation of certain executive salaries to the operating businesses that have been done in 2014, an increase in legal and professional fees related to various financing alternatives that were explored during the quarter and increased director compensation.

I want to point out that included in the fourth quarter of 2015 is a $3.5 million write-down of certain ammonia assets at our Pryor facility.

Adjusted operating loss, adjusted net loss and adjusted EPS rolled down for the quarter versus the fourth quarter of 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 fourth quarter of 2015 compared to the fourth quarter of 2014. Sales and gross profit were both down for the quarter primarily as a result of lower overall fertilizer selling prices and lower low-density ammonium nitrate production and sales versus the fourth quarter of 2014, where we were still under contract with Orica and they were required to pay for 60,000 tons per quarter of low-density ammonium nitrate irrespective of the amount that they actually took. That combined with the increase in SG&A discussed on the previous slide contributed to the adjusted operating loss for the quarter.

Page 8 provides a summary of the climate control business' operating results for the fourth quarter of 2015 compared to the fourth quarter of 2014. Sales were slightly down for the quarter, primarily from lower sales of residential heat pumps, and gross profit decreased as a result of the lower sales, but gross profit as a percent a sales increased approximately 50 basis points as a result of operational improvements being made throughout the business.

SG&A was down for the quarter and offset the loss in gross margin on the decreased sales, resulting in operating income and EBITDA for the quarter that was slightly above last year. (technical difficulty) our backlog at 12-31-2015 was approximately $67 million, which was up approximately $2 million from the prior year.

Page 9 outlines our expected capital spending for 2016. As Dan outlined earlier, we believe that the overall cost of the expansion project at El Dorado remains between $831 million and $855 million with the remaining CapEx on the El Dorado expansion as of the end of the year of between $126 million and $150 million, including a contingency of $46 million at the top end of the range. However, as you heard earlier from Dan, our current thinking is that no more than half the contingency will be needed, meaning that we believe we will come in at the lower end of the range.

Additionally, we have planned CapEx in our chemical business other than for the completion of the El Dorado expansion project of between $40 million and $48 million with another $8 million to $12 million in planned CapEx for both climate control and corporate. Keep in mind that some of the additional chemical CapEx may be deferred, should we choose to do so, without any impact on the reliability of the plants.

Moving to Page 10, we outlined our free cash flow. While we had a loss for the full year of 2015, we did have positive operating cash flow. Additionally, we had significant capital expenditures during the year with the majority being spent on the expansion project in El Dorado. That resulted in negative free cash flow from operations for the year.

We recently announced that we achieved mechanical completion on a new ammonia plant being constructed at El Dorado. We expect that plant to be operating and producing ammonia in the second quarter of 2016. We believe that will result in a significant reduction in capital expenditures, a significant improvement in operating results at our El Dorado facility, and the generation of positive cash flow from operations.

Turning now to Page 11, we outline our capital structure as of 12-31-2015. In the fourth quarter of 2015, we closed on the $260 million in financing that we discussed during our third-quarter earnings call. That financing included the issuance of $50 million of 12% senior secured notes and $210 million in preferred stock and warrants. This is reflected in our capital structure.

Total cash at the end of the year was approximately $127 million with total debt of approximately $530 million excluding the unamortized discount and issuance costs associated with our debt and $210 million in outstanding preferred stock. Additionally, at the end of the year, our ABL facility was undrawn with a little over $64 million of availability.

In February, we closed on a loan of $10 million against the CoGen facility that was built as part of the El Dorado expansion. We have the ability to borrow an additional $10 million against the CoGen facility, and we are currently in discussions with additional lenders to secure that. We will also receive an additional $5 million, representing the balance of our loan on the ammonia storage tank when it is complete, which we believe will be in the second quarter of this year.

Lastly, our loan and (inaudible) sale assets was due on February 1. Our lender agreed to push out the maturity date to April 1 in order for us to mutually determine the possibility of a refinance.

We are now near the start up of the El Dorado ammonia plant, which will signal the completion of the El Dorado expansion project. Once the plant is in operation for a period of time, we intend to seek to refinance our capital structure in order to improve our liquidity and to reduce our overall cost of capital.

Please turn to Page 12. At this time, I'd like to discuss our liquidity position and our cash needs for the full year of 2016 as of the end of the year. Our cash needs, assuming the top end of the range, are as follows: remaining CapEx needed to complete the El Dorado expansion project of $150 million; other planned CapEx for 2016 for chemical, climate control and corporate of $60 million; total interest and principal payments on our outstanding debt of $45 million; and the repayment of the Zena alone assuming we will not be able to refinance our $14 million, so therefore we have a total cash need for 2016 assuming the high end of the planned CapEx range of $269 million. I have not included the dividend payments on our preferred stock as our expectation is we will be accruing those payments for 2016.

To fund our 2016 cash needs, we have a cash balance at the end of the year of $127 million, financing on our CoGen facility of $20 million, remaining funding on our ammonia storage tank, when completed, of another $5 million. So that will be a total of $152 million of sources of funds, and leaving a gap of $116 million -- $117 million in funding, assuming that we spend the full $150 million to complete the El Dorado expansion project. As Dan mentioned earlier, our current thinking is we do not anticipate spending more than half of the $46 million in contingency included in that number. So the $117 million in funding needed should really be $94 million.

Additionally, I have included the high end of the range for other planned CapEx which we believe is conservative. We expect the gap of $94 million to be funded by cash flows from a full year of 2016 operations and, if needed, a draw on our ABL facility which has over $64 million in availability. Additionally, as I mentioned earlier, some of the additional chemical CapEx for 2016 of $48 million may be deferred to 2017 without any impact on the reliability of the plants should we need to do so.

At this time, we believe that we have sufficient liquidity to meet our capital needs for 2016 and to continue to effectively operate our businesses.

Now I'll turn it back to Dan to discuss the status of our chemical operations and the status of the El Dorado expansion project.

Thanks Mark. On Page 13, you can see the operational status of our chemical facilities. We discussed the El Dorado status earlier in the call and we remain on point. Pryor is running well, and we've been performing detail inspections, repairs, modifications, and we continue to install additional equipment instrumentation to improve our onstream rates. We will continue this activity and we expect to initiate turnaround activities in late summer. We may move it to a later date in early fall if market conditions and our production rates provide the opportunity to move this data out.

Cherokee continues to run well after the hiccup in late December. We are planning a late summer turnaround. Baytown, as usual, continues to operate well.

Turning to Page 14, the remaining work to be performed on the El Dorado ammonia plant includes finalizing the commissioning activities, completing the instrumentation, preparing insulation for the heat affected areas, activating the catalysts, and the initial startup activities. We have an operations team that has been through rigorous training and many team members have prior ammonia plant experience. Assuming that the weather cooperates with us, we should see initial ammonia production early in the second quarter.

Mark will now discuss the chemical product sales volume outlook for 2016 on Page 15.

Thanks Dan. During 2015, on each earnings call, we provided a forward look on the next quarter's projected sales volume for our major chemical products. We've changed our policy and will now provide annual projected sales volumes for our major chemical products. Those are presented on Page 15. As we progress through the year, we will update the projected sales volumes if necessary.

Sales volumes for all ag products in 2016 are expected to increase over 2015 ag sales volumes with overall industrial and mining sales volumes for 2016 expected to increase over 2015 as well. The expected increase in 2016 sales volumes are being driven by higher onstream rates at our Pryor facility and, as a result of the completion of the expansion project at El Dorado, which lowers our cost of ammonia and increases our production capacity.

Moving to Page 16, we have updated our 2017 chemical EBITDA sensitivity analysis to reflect a range of natural gas and ammonia prices that is more representative of the current markets. This table is intended to provide an idea of how the movements in natural gas and ammonia affect our results, but is more directional as it is based on assumptions that are outlined at the bottom of the page. What you will see is that each $0.50 movement in the price of an MMBtu of natural gas has an approximate $10 million effect on EBITDA, and each $50 per ton movement in Tampa ammonia price, assuming the Tampa ammonia price is used as a proxy for the movement in other product selling prices, has an approximate $27 million effect on EBITDA.

The take-away here is twofold. First, that changes in both natural gas and selling prices of our products have a significant impact on our financial results, and second, that our chemical business has significant earnings power depending on the feedstock costs and the selling prices of our products.

Now I'll turn it back over to Dan to wrap up and discuss our focus for 2016.

Thanks Mark. Slide 17 provides a quick outline of our focus. As we look forward for the remainder of 2016, we have five major objectives to accomplish.

First, we believe we are on track to complete the El Dorado ammonia plant on time and within the estimates we've provided. We believe we will start initial production in April. It will likely take us a couple of months to ramp up the full nameplate production capacity of 1,150 tons per day. Our operations team is gearing up and they are ready to run the plant.

Second, we are fully engaged in detailed activities to improve our chemical plant onstream rates. Clearly, we see this as a critical process and we are strongly committed to make meaningful improvements from 2015.

We had several stumbles in 2015 that we want to avoid in 2016. We now have the right team in place to tackle this issue. Richard Sanders will be leading this effort.

Third, we want to continue to expand our OpEx activities in the climate control business. We have already seen some of the initial positive impact in the fourth quarter of 2015 and early in 2016, and we anticipate this progress will accelerate throughout 2016. We are taking the right steps and the climate control management team have a sharp focus to keep this rolling.

Fourth, we plan to consolidate certain production and warehouse footprints in the climate control business and this is now underway. We should have this completed in the second half of 2016.

Fifth, we believe our capital structure is costly and we anticipate refinancing our secured debt and preferred stock to obtain a lower cost of capital. We anticipate this can be accomplished toward the end of 2016.

Management and our board, as previously announced, will continue to review our strategic alternatives for our business in order to maximize long-term shareholder value. These alternatives may include asset sales and/or separation of our two businesses.

That concludes our prepared remarks. Melissa, we can now open the call for questions.

(Operator Instructions). Dan Mannes, Avondale Partners.

A couple of questions. First, obviously on El Dorado, as I go back and I look at your third-quarter call, I think you commented at that point you're only looking to spend $70 million in 2016, and now you still have kind of $100 million to $150 million left. I'm wondering. Was -- maybe there were some delays in terms of a financing, is there a change in schedule, and, how if at all, did that impact the schedule?

I think what we said is, you're right, we had $70 million to $75 million left, but we also had a higher spend in the fourth quarter. We clearly had a lower spend in the fourth quarter. And we will complete the project on time, as we said, which means that we are compacting more construction and more activities in a shorter period of time, whether it's second shifts, Sunday shifts, or additional people on site to get it done on time.

The natural follow-up question there is are you taking more risk in the startup? And as you look through the steps between here and full production, where are the risks of things going wrong? I look at things like installing insulation. That doesn't seem that scary, but I am wondering if there are some other things there that are maybe more critical paths.

We are not increasing the risks. In fact, we are doing just the opposite. We are making sure we are going through very detailed precommissioning and commissioning activities, all of the work associated with that. The welding is done. The mechanical completion indicates that we are done with the construction. What we're doing now is making sure we are testing steam cleaning and testing the lines, so forth and so on.

The heavy work is done. The cranes are disappearing off the site, things like that. But there is still the installation of the instruments and the insulation. And insulation in itself is not a difficult task; it's just a normal process you go through.

So the risk of completion I think is reasonably low. However, in startup, you do have some risk. We think we've got it mitigated, but there are some risks in startup as you bring everything up to full temperatures and full pressures throughout the entire system, both the front end of the plant where you have higher temperatures and the back end of the plant where you have high pressures, over 2,000 pounds of pressure. So there are risks associated with that, but we think we've got an ops team who, by the way, has run ammonia plants before. Our team we have on board has run ammonia plants and particularly run a sister plant to this.

So we feel pretty good about the team, we feel pretty good about what we are doing, and there are startup risks. I think it's not risk of capital, significant capital, in the startup. It's a risk of time, not a capital risk. So that's how we view it right now.

Got it. If I could ask real quick about the fourth quarter, a couple of things that stuck out. Can you maybe comment? Were kind of the losses at the existing El Dorado plant, were they maybe worse than what you experienced in prior quarters? And secondly, I noticed the purchased natural gas costs as $3.00, which seems inordinately high. Did you have a bunch of presales in the fourth quarter and why was that so high?

Yes, so from an EBITDA perspective, just to give you some perspective, in 2014, we lost about $6 million at El Dorado in the fourth quarter. In the fourth quarter of 2015, we lost $11.5 million. So, clearly, we were impacted by two things at El Dorado. As I said in the prepared comments, losing the Orica contract and having less volume and low-density ammonium nitrate has really hit us pretty hard, but also we had about the same volume in sales of high density ammonium nitrate. But the price dropped from $318 a ton to $255 a ton. So we had a pretty significant loss from selling prices. Also (multiple speakers) from an SG&A standpoint, we still had some training expenses that we're not able to capitalize and so they are running through SG&A.

And on the gas side?

On the gas side, I'd like to tell you that we weren't forward purchasing. But as you know, we did have some pretty significant forward purchases throughout the year. And clearly no one expected gas prices to drop to the levels that they were. So we were locked in on gas for a large portion of our exposed gas usage position, and unfortunately the prices dropped.

Hopefully you'll indulge me with the last question and I'll let on for someone else. As you look out for the balance of the year, where are you in terms of your gas position and also in terms of presale activity on UAN for the spring?

As of today, we have approximately 6.2 million MMBtus, so about 40% of our forecasted exposed natural gas usage, forward purchased at an average cost of $275.

Okay. And on the UAN presales? I don't know how heavily you're presold.

It's in normal course. As you know, it started out slow, buyers weren't able to come to the market. We are now seeing that volume pickup. But our presales are relatively low. So we did not lock in low UAN prices in the fourth quarter and in early January. So we have a fairly open book now that we are starting to see presales come in and play pretty heavily right now.

Sounds good. Thanks for all the color, guys.

Joe Mondillo, Sidoti & Company.

Good morning guys. My first question, just hoping to get a little more color on how you are looking at profitability for the year. In terms of that 2017 guidance that you provided, the sensitivity analysis, can we assume a similar sort of run rate starting in mid-second quarter when you get that El Dorado plant up and running?

I don't know that that's a good assumption. I think, as Dan indicated, we are building up volumes on the low-density side throughout the year. So depending on how we are able to build that up and build up our HDAN sales as well will depend on whether you could annualize the second half for the fourth quarter, but it's pretty seasonal. So it's kind of hard to annualize.

As far as where we will be in 2017, the only thing I would say is this. We put a sensitivity table together. I think, as I said, it's directional but it's fairly representative, within a range of where we think we will be. So you've got to pick your own natural gas price and where you think it will be for 2017, and where you think ammonia prices will be.

But clearly, people don't think that or the expectation out in the marketplace is that the price of natural gas probably won't be north of $3.00. So just looking down that $3.00 column, we've got a lot of opportunity to really hit that $200 million in EBITDA that we had targeted, and ammonia probably has to be a little over $400, or Tampa ammonia has to be around $400, and we will probably get there. But given where prices are moving around, I don't think it would be prudent for us to sit here and try and peg prices.

Right, no, understandable. I guess keeping in mind about the seasonality and such, what you have in the model for, say, the back half of 2017, should it be a similar sort of look or picture in the back half of 2016, or is there a dynamic regarding ramping up the El Dorado plant that makes it a little bit different than 2017?

I think, as I said in our prepared comments, it will take us a couple of months to get El Dorado ramped up. We also indicated that the mining sector, the mining sector is going through some pretty tough times right now, so we are not expecting volumes to rebound in the short-term for that. We are taking some initiatives in that area with L down in the low-density and, for that matter, in the high density for agricultural. We want to expand our agricultural reach for high density ammonium nitrate. We've got some good initiatives underway right now. Obviously, it probably won't yield true to here in the first half of the year. Some of it may a little bit, but we are really focused on that for the latter half and then on 2017. So we don't want to give guidance for 2016, but just describing what we've presented and some of the things we are taking action on.

All right. If I can ask about pricing then, in terms of the chemicals that you provide for the guidance, I assume all the agricultural chemicals are based on spot like they have been historically. Could you just walk through the industrial chemicals? Are they all based on -- I'm assuming they are not all based on cost plus just given that Orica contract that fell off, and you've talked about how you may get some of that back based on a spot basis. In terms of some of those industrial chemicals ramping up, what kind of pricing contracts do you have within those?

A lot of the industrial contracts are cost plus. But keep in mind that, as this new ammonia plant ramps up, it ramps up in El Dorado excess ammonia, which is going to be approximately 50% of the ammonia output will be pushed into the pipeline at we'll call it a current market price or market Tampa plus or minus concept. So most of that excess ammonia will go in at spot prices, monthly prices, as I said, based on a Tampa ammonia as adjusted. So I think our industrial products are largely indexed or cost plus except for the excess ammonia.

Okay. Is all of that increase in the industrial ammonia essentially excess from El Dorado?

Yes. As I said, about 50%, roughly 50% of -- once El Dorado is in full operational status, approximately 50% of the ammonia output from that will go into the pipeline. But as I said, we're trying to expand. We are taking initiatives to expand our agricultural ammonium nitrate. We want to be a player long-term in the industry. We want to continue producing it, and as well we've got some positions, some aggressive positions, we want to take in the low-density market as well.

If you look at our full-year sales volumes and you go down to industrial mining and other ammonia, the difference between what we did this year and what we are giving an outlook for for 2016 or what we did for 2015 and what we are giving an outlook for for this year is almost all the free ammonia that we are selling into the pipeline at El Dorado.

And obviously that's in the latter half.

That's in the latter part of the year, latter half of the year, right.

Okay, sure. And then in terms of the Pryor plant, you've talked about how capacity there is [300,000] plus UAN, 85,000 ammonia. In terms of the guidance that you put out there, just because Pryor has been so volatile and there's been a lot of unplanned downtime over the years, including in 2015, in terms of that maximum capacity, where are you seeing Pryor being at in 2016, knowing that there could be unplanned events that continue (multiple speakers)

We see it better than 2015, I'll say that. We see 2016 being better than 2015. We got hit with some fairly unfortunate activities in 2015.

We don't see those recurring. As I said, we've got several, quite a few initiatives to improve the operational status, and in this turnaround that we are planning, we've got a pretty robust process.

As far as giving you plant-by-plant volumes or expectations, I don't think we want to do that. We've given it here on an aggregate basis, but we really don't want to go down on a plant-by-plant basis.

Okay. Then last question from me, just regarding the climate control business. I think a couple of years ago, you were doing similar revenue, and margins were in the double digits. I'm just wondering if you could comment on the profitability there, and how quick can you get back up to double digits? Does it take a lot of volume growth to get there? Just talk about the profitability of that segment and where it's been historically, and where it's going.

Obviously, the loss of the carrier business had a significant impact, and we've seen some fairly substantial improvements in air handling component. When we started that up, sales increased dramatically, and we probably weren't manned as well as we should have been. We took a lot of overtime and some inefficiencies. We've now rectified that, so we see pretty significant margin improvements.

I think the OpEx initiatives that we have undertaken are really going to leave some pretty good benefit this year. We are expecting some significant savings through consolidation of facilities, through consolidation, further consolidation of purchasing through more efficient line layout, more efficient labor utilization, things like that.

So while 2015 has seen quite a few changes, and I call it some headwinds, we see 2016 being stronger than 2015. As far as a date, giving you an exact date on when margins are going to be at what level, I'm not going to provide an exact date. But we certainly expect 2016 profitability to be much improved over 2015.

Okay, great. Thanks a lot.

Brent Rystrom, Feltl.

Thank you. Good morning. Just a couple of quick questions. EBITDA in climate control in 2015, was it about $25 million?

Yes.

Okay. When you look at Page 15 and you look at the various volumes that you're looking at for the year, can you give us a sense, not necessarily absolutely precise, but what portion of those volumes are related to the ramp up of El Dorado?

If you look at the product volumes, we are in HDAN market today. So the HDAN market will pick up margin by producing ammonia versus purchasing ammonia. We are selling ammonia already. Most that is coming out of Pryor, so that's nothing related to EDC. We don't sell UAN out of EDC.

So then you get down to really AN, which is the low-density AN under industrial and mining. And that certainly -- we're going to see improved volumes of low-density AN but not where we would like them to be. And that is certainly attributable to EDC.

And then obviously industrial ammonia, as I said to Joe earlier, most of the improvement or the increase in the forecasted ammonia is related to the free ammonia that we will have or the excess ammonia that we will have a EDC that we are going to sell into the pipeline.

The biggest profitability improvement obviously is manufacturing the ammonia versus purchasing the ammonia based upon a Tampa price during -- prior years, as we been purchasing ammonia at Tampa, and Tampa plus transportation if you want to call it that. And you've seen the volatility, and the price swings on that, and that will be producing ammonia. So the biggest value generator, the biggest profitability improvement, is we will switch from a purchased raw material to a produced raw material, and that will have a pretty meaningful impact.

Can you guys give us a sense of what the -- post the completion of the project and normalization of spend, what will corporate, general corporate expense look like? Is it a low $20 million, a mid $20 million run rate? Where would you characterize it?

I think maintenance CapEx --

He's talking about SG&A.

Oh, you're talking about SG&A?

SG&A at corporate, I'd say it's low $20s million as we sit here today, but I'll caveat that with we do expect to review most of the expenses that we have at corporate this year with an eye towards reducing that below $20 million.

That would be a key focus for us, is to get some of those corporate expenses that have layered in over time, to take those and reduce them.

On Page 16, looking at the EBITDA estimates that you have in that chart, does that reflect any corporate overhead or is that without allocation to corporate?

This is just chemical.

And then my final question, we're up in the Midwest here, and we are having an unusually warm end to winter. Starting on Sunday, it's going to be in the 50s or higher here. Normally it would be about 30. So we have what's called road bans and affect now which means the frost is coming out of the ground, which implies we're going to have a very early application season for planting fertilizers at time of planting and post planting. Does that present any issues or opportunities from the perspective of where you are positioned right now as far as that season going fast and early?

I think, clearly, we saw a slow fall season, so everybody had a little bit more inventory and buyers were hesitant to buy. A fast application or an early application for us is beneficial. We've seen the impact of that already here in the first quarter. So in our view, early application is positive, from our perspective, and as I said, we are seeing that already, both in volumes and in pricing.

All right. Thank you.

Roger Spitz, Bank of America.

This is Chris Ryan sitting in for Roger today. Thanks for taking my questions. My first question relates to the 2016 cash interest guidance. Could you give the 2016 cash interest guidance net capitalized interest, and how much is that capitalized interest?

Yes, so if you go to Page 12 in our presentation, so cash on the senior secured notes is $39 million. And then other payments are probably about $6 million, so you've got a total of $45 million of interest, cash interest. As far as capitalization and how much of that will be capitalized during the first three or four months, I'd have to get back to you on that.

Okay, thank you. And do you have a minimum liquidity requirement?

Not really. We'd love to run with maximum liquidity, but as long as we've got -- if we had an unused revolver of $60-plus million, I think we would be really comfortable running the business with that as a flex in working capital. So, I wouldn't say that we've got the minimum that we need to have in liquidity.

Okay, thank you. And would you be able to give us a run rate SG&A expense?

You mean for corporate or for overall SG&A?

Overall SG&A if you could.

Yes, so I would probably say we were $112 million in total SG&A for the year, we actually -- if you look in our 10-K, we actually reclass some expenses. They are in there now. We've got about $112 million in overall SG&A, and I would say that, on a normalized run rate, we are probably at $105 million.

Yes, as I said earlier, we are targeting SG&A reductions in 2016 to get some of the expenses that had been layer in, get them out of the business. And I think we accomplished a large piece of that at the end of 2015, or started that process, and we will see that continue during 2016.

Yes, I just want to go back to that. So, we had about $112 million, of which this year, due to a lot of unusual items, we had about $33 million in corporate, about $16.5 million in chemical, and about $62.5 million of climate control. The climate control number is a number that they are looking to reduce, but I don't know how much we will see as a reduction in climate control SG&A.

Chemical, we did have a lot of training expenses and a lot of other expenses related to that that we couldn't capitalize that were related to the EDC expansion project. So you should see that come down. And then I just told you earlier that that $33 million in corporate really should be in the low $20s million.

Okay, thank you. And how should we think about 2017 CapEx?

Probably in the -- I'll call it maintenance CapEx -- probably in the $45 million range. We see that as sort of an annual run rate for maintenance CapEx, and that's probably where we will end up. $45 million to $50 million is in the range.

Yes, I would say $45 million for chemical and another $5 million or so for climate control.

Right, so $45 million, $50 million.

Okay, thank you. That's all my questions.

David Deterding, Wells Fargo.

Thanks for taking my question. First, I just want to talk about the climate control business, and you talked about the backlog being up slightly from last year, but down quarter-over-quarter. Could you just talk about -- have you seen the backlog change commercial versus residential, and would you expect that backlog to change any more in 2016 versus what we saw in 2015?

We've seen the backlog for commercial to move up. As I indicated earlier, we've got air handlers and chillers. That business is robust and the backlog is moving up on them and we are seeing that in 2016 as well. So that's been a strong piece of the business.

As you know, the residential side of things, low natural gas prices doesn't stimulate a lot of demand, so I think we are modest and actually down a little bit in that area. But overall we are up I think about 3% or so. But I'd say the commercial institutional business is moving in an upward trend.

Okay. And then in just regards to the Zena loan that became due February 1 and you've moved it to April, what are your -- when you say refinance that, what are your options there, and is that loan with the people that you purchased the natural gas leasehold with?

No, the loan is with a third-party lender. And we have outlined in our liquidity analysis the full repayment of that, but we are updating our reserve analysis and our PV-10 analysis and calculations to really sit down with the bank and see if there's an opportunity to refinance some of that so that we don't have to make the full payment to pay off the full balance of the loan.

Okay. And then the last piece I've got just reading through some of the new covenants, it looks like, on the preferred equity investment, it looks like our read of it is that, before you could take out the preferred equity, you would have to pay down the senior secured notes. Is that your understanding as well? And if there was a sale of the business, say, to climate controller or split as you talked about earlier, those notes would have to come out as well? If you could just comment on that?

Sure. Essentially, all of our assets are pledged to security under the notes. So secured debt holders obviously want to be repaid first prior to unsecured preferreds. So I think that your reading is correct and that's our understanding. But to the extent that we repaid a debt preferred, it would go towards the secured debt first. In the hypothetical you gave, that would be a similar case.

So if we -- as I think we discussed earlier, a little bit different treatment whether we spun off one of our businesses or we sold one of our businesses. in a spinoff, we would have to figure out a way to refinance the notes out and more than likely the preferred as well. On a sale of the business, it's a pretty traditional clause in that we need to actually -- the preferred updates the indenture, and any sale of assets would go to repayment of debt.

Thank you guys.

Gregg Hillman, First Wilshire Securities.

Hey Mark. On the interest due for the redeemable preferred, what are the dates for that and the amounts and your plans and whether you're going to pick it or not?

So, as I said earlier, we do plan for 2016 to pick or accrue those dividends. It's a May and November dividend payment dates. And the total amount was 14% on $210 million, so that's $29 million non-compounded and obviously slightly higher, since it's a compounding if we accrue it.

Okay. And then hopefully you will refinance that so you won't have that necessarily in 2017.

A real focus for 2016, and it would be our expectation.

Okay. Thanks Mark.

(Operator Instructions). Dan Mannes, Avondale Partners.

I had a couple of quick follow-ups. First, as it relates to the climate segment, you did show some margin improvement year-over-year. I guess I was expecting a little bit more. Can you talk about maybe any benefits you got for lower raw costs or maybe some of that was given back through pricing?

Obviously, we expect more of that to roll through in 2016 as contracts come up in this current year. We did get a little bit of it. We did get a little bit in the fourth quarter. We expect quite a bit more in the first quarter and beyond in 2016.

And we've got some labor improvements in the fourth quarter as well. As I said, we expect to get further efficiencies. We're going to consolidate some footprint in the latter half of 2016 as well.

So, I think the run rate you saw in the fourth quarter is sort of the start of it. We fully expect more of those initiatives and savings impact to show up here in the first quarter and in the remaining quarters. But there are certain products we have to be competitive with with respect to pricing. Particularly as it relates to residential, we have to be competitive, we intend to be competitive, and we'll just have to see how the market turns out, but we may have to give up a little bit on pricing. We hope not, but we want to participate in the market and we will participate in the market. So there may be a little bit of that along the way.

I think one of the things to add to what Dan said is product mix has a lot to do with our margins. We start out at residential geothermal heat pumps having the highest margins for us as far as products, and then you work your way down to some of our other products.

And so you would like to see the margin improve, the overall gross margin percentage, improve every quarter. But some of that does have to do with product mix. We could find ourselves in the position where we've got a really growing air handler business and, generally speaking, air handlers tend to have lower gross margins than a residential geothermal heat pump. So it's great that the business is growing and we get more absolute gross margin dollars, but we wound up -- we wind up seeing our gross margin percentage a little bit lower.

But it does impact mix from quarter to quarter --

Yes.

-- and a little bit of seasonality depending on the time of the year.

Okay. And then one quick follow-up. You did mention you're continuing to kind of have an ongoing review on strategic alternatives. I just wanted to kind of square that with your commentary as it relates to your current financing and taking that out. Does that kind of leave the door open that you are not going to -- that you don't necessarily need to wait until El Dorado is complete to potentially do something with climate? Because we've kind of assumed that you wouldn't do anything until second half of the year. Is it incorrect to rule that out?

I think, as I said in the prepared statements, we along with the board are continuing to review all of our alternatives for the business to focus on long-term shareholder value. As we said, this may include sales of assets. It may include separation of the business.

With respect to the financing, refinancing, we believe that lenders will want to see that that plant is up and running before they lend against it. And in fact, we think our best opportunity for rate is when that is demonstrated to them that it is running. So to the extent you can get it running and show them that it's running well according to the design capacity, I think you're going to get a much more attractive rate in the market versus doing it pre-operational status. So, I think, in our minds, we want to get the lowest possible rate and we're probably going to have to wait just a little bit until we get it up and running. So that would be -- that's why I said it'd likely to be in the latter part of the year.

Understood. Thanks.

Thank you very much for participating in our call today. We really appreciate your time and thank you for your interest, and hope everyone has a great day. Thanks so much.

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