LSB Industries Inc (LXU) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the LSB Industries, Inc., first-quarter 2016 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Kristy Carver, Vice President and Treasurer. You may begin your conference.

Thank you, Paula.

Please note that today's call will include forward-looking statements, and because these statements are based on the Company's current intent, expectations, and projections, they are not guarantees of future performance and a variety of factors could cause actual results to differ materially.

As this call will include references to non-GAAP results, please reference 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 would 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 2016 first-quarter conference call.

I will first review the key events during the quarter, including an update on El Dorado construction and start-up and its progress. I will then discuss an update on the market outlook for each of our businesses. Mark will then review our financial results and capital structure, and then I will provide a summary of our chemical plant operational status and review our key objectives for the remainder of 2016.

The first quarter of 2016 was a critical quarter for LSB and the key strategic path forward is now being realized. We have completed construction on our El Dorado ammonia plant and we are continuing our review of our strategic path forward to separate our two businesses.

Early in the first quarter, we felt the impact of lower pricing in the ag markets that carried over from the fourth quarter of 2015. Midway through the quarter, we saw strong improvement in demand and pricing as favorable weather led growers to get into the fields on an earlier-than-normal basis.

We have finalized construction of the El Dorado ammonia plant and we're well into the startup activities. We have full operational status of the reformers and the CO2 removal system and we are in operation of the ammonia synthesis loop and activating the catalyst.

Due to a power outage by the utility earlier in the week, we lost a couple of days in the startup process. The last major ammonia plant startup process is converting the ammonia gas into liquid form. We anticipate starting the ammonia refrigeration compressor this weekend, which cools and condenses the ammonia gas to liquid form. We expect to be producing full-strength ammonia within two weeks, if operations progress as we expect.

Our El Dorado management team, led by Greg Withrow and [Del Rappont], have done remarkable work. The dedicated team for construction finalization and startup have been working incredible hours and we are very appreciative of their efforts.

To date, our plant startup activities have gone well.

During the quarter, we also finalized the El Dorado, Arkansas, property tax negotiations and program, which will provide us with significant savings of property taxes each year. While this took considerable effort and cost, the tax savings will provide a very attractive payback of approximately 2.5 years.

During the quarter, we also finalized a UAN distribution agreement with CVR Partners. We believe this new agreement will provide improved sales netback pricing on our UAN production from our prior facility. We believe in the near term there may be periods when new production capacity comes online and provides a temporary surge of product to the market, which may lead to sales price fluctuations. We continue to be diligent on market pricing of ammonia and upgraded products.

We anticipate chemical product volumes to the mining sector will remain low in the near term while other agricultural and industrial chemical volumes and pricing remain reasonable.

Our operational improvement efforts are yielding improved earnings in our climate control business. We increased our operating margin by 170 basis points. We expect this trend of improved earnings to continue as we implement further improvement and consolidation activities.

Our chemical market -- our commercial markets in the climate control business remain strong, while the residential markets are not as strong as we would like. We see this trend of strong markets in the commercial market continuing for the remainder of 2016. Our bookings on commercial activity remain robust.

I will now turn it over to Mark to discuss our financial results and capital structure.

Thanks, Dan.

On page 6 of the presentation, we provide a consolidated summary statement of operations for the first quarter of 2016 as compared to 2015.

Total net sales were down for the quarter, driven by lower chemical sales, which I will go into some detail on the next slide.

Gross profit declined disproportionately to sales, primarily due to the $12 million of fees and other costs related to the one-time consulting services associated with the reduction of assessed property tax values for the El Dorado projects. We expect material savings in future periods through a reduction in property taxes paid.

Overall, SG&A was in line with 2015 expense, as slightly higher corporate expenses were offset by decreased SG&A in our chemical segment. We expect full-year consolidated SG&A expense to be in the range of $110 million to $115 million.

Adjusted operating loss, adjusted net loss, and adjusted EPS were all down for the quarter versus 2015, due to the decrease in sales and gross profit margins that I just discussed.

I would like to point out that our estimated effective tax benefit rate was approximately 4% for the quarter. The primary impact was the determination that a portion of our state net operating losses would not be utilized before expiration and therefore we established a valuation allowance accordingly. While it is unfortunate that we needed to recognize a significant portion of the full-year impact in the current quarter, we do expect our tax benefit rate to be in the same range for the full year of 2016.

Page 7 provides a summary of the chemical business's operating results for the first quarter of 2016, compared to the first quarter of 2015. Sales and gross profit were both down for the quarter, primarily as a result of significantly lower overall fertilizer pricing, partially offset by lower natural gas prices as feedstock at our Cherokee and Pryor facilities; low-density ammonium nitrate production and sales versus first quarter of 2015, where we were still under contract with Orica and they were required to pay for 60,000 tons per quarter irrespective of the amount they actually took; lower UAN and HDAN sales resulting from a slow start to the period; inventory hangover from the fourth quarter and some reluctance from buyers to pick up inventory in a declining pricing environment; and, lastly, the previously mentioned $12 million in one-time consulting fees and other costs.

As Dan mentioned earlier, we continued to experience headwinds in the mining market, driven by decreasing coal usage, which is expected to continue throughout 2016. As a result, we have revised our sales outlook for low-density ammonium nitrate sold into the mining sector from 110,000 to 135,000 tons for the year to 70,000 to 95,000 tons for the full year of 2016. We do expect increased ammonia sales of approximately 10,000 tons from previously announced guidance as a result of the lower LDAN production.

Page 8 provides a summary of the climate control business's operating results for the first quarter of 2016, compared to the first quarter of 2015. Sales were up for the quarter, primarily from increased sales of custom air handlers, combined with increases in commercial sales of order sourcing geothermal heat pumps, offset by a decline in sales of those products in the residential sector.

Gross profit increased as a result of increased sales, but gross profit as a percentage of sales increased approximately 120 basis points as a result of operational improvements being made throughout the business. Those operational improvements, coupled with some leverage in SG&A, resulted in significant improvements in operating income and EBITDA for the quarter.

Additionally, our backlog at March 31, 2016, was approximately $68 million, which was up about $1 million from December 31, 2015.

Page 9 outlines our expected capital spending for the remainder of 2016. As previously outlined, we believe that the overall cost of the El Dorado expansion project, including capitalized interest, will be between $825 million and $855 million. We anticipate the remaining CapEx to the expansion project to be between $29 million and $59 million, with the difference being the contingency that we've discussed of $30 million at the top end of the range. As of today, our current thinking is that we will come in towards the low end of the range.

For the remainder of 2016, we have additional planned CapEx in our chemical business other than for the completion of the EDC expansion project of between $36 million to $44 million, with another $7 million to $11 million in planned CapEx for both our climate control business and corporate. As I've mentioned before, some of the additional chemical CapEx may be deferred, should we choose to do so, without any impact on the reliability of the plants.

I would also like to point out that as we near the end of the El Dorado project we expect material increases in depreciation expense as those assets are placed in service. We anticipate consolidated depreciation and amortization to be $72 million to $75 million in 2016, and assuming a full year of the El Dorado expansion projects, between $82 million and $85 million.

Additionally, upon the completion of the El Dorado expansion projects, we will no longer be capitalizing interest and therefore our net interest expense will increase. As a result, for the full year of 2016, we anticipate consolidated interest expense to be in the range of $31 million to $32 million, net of capitalized interest of approximately $14 million, and $45 million on an annualized basis.

Moving to page 10, we outline our free cash flow. While we had a loss for the first quarter of 2016, we did have positive operating cash flow. Additionally, we had significant capital expenditures during the period, with the majority being spent on the expansion project in El Dorado. That resulted in negative free cash flow from operations for the quarter.

As Dan mentioned earlier, we are in the final stages of startup at our new ammonia plant and we expect to be producing ammonia in the next several weeks. This will be a major event for us and it will result in a significant reduction in capital expenditures and, we believe, a significant improvement in operating results at our El Dorado facility and in overall cash flow.

To that point, as discussed last quarter and in the appendix section of our earnings presentation, we provided an EBITDA sensitivity table that outlines the annualized earnings potential of our chemical business.

Page 11 outlines our capital structure as of March 31, 2016. Total cash at the end of the year was approximately $40 million, with total debt of approximately $537 million, excluding the unamortized discount and issuance cost associated with our debt and, lastly, outstanding preferred stock of $210 million. Additionally, at the end of the quarter our ABL was undrawn, with a little over $69 million of availability.

As I indicated last quarter, we had a $14 million loan related to our Marcellus Shale assets coming due on April 1 and we would require capital to fund the repayment. However, on April 1, we successfully refinanced $12 million of that loan. We were very happy with the outcome, as it provides us with funds that we were not anticipating.

As I have said previously, once the El Dorado ammonia plant is up and producing for a period of time, we intend to refinance our capital structure in order to improve liquidity and reduce our overall cost of capital. We believe that we can complete a refinancing later this year or early 2017.

Please turn to page 12, where you will find a summary of our liquidity position and our cash needs for the remainder of 2016 as of March 31, 2016. Our cash needs, assuming the top end of the range at the El Dorado construction, are as follows. Remaining CapEx needed to complete the EDC expansion project of $59 million; other planned CapEx for chemical, climate control, and corporate of $55 million. Total interest and principal payments on our outstanding debt of $34 million.

Therefore, the total cash needs for the remainder of 2016, assuming the high end of the planned CapEx, is $148 million. I have not included dividend payments on our preferred stock as our expectation is that we will be accruing those payments in 2016.

To fund those cash needs, we have got cash at the end of the quarter of $40 million, additional financing on our cogen facility of $10 million, remaining funding on our ammonia storage tank of $5 million, and the balance will be funded from operating cash flow and the use of our ABL facility, which, as I stated earlier, has $69 million availability.

Keep in mind that our current thinking is that we don't anticipate spending the majority of the $30 million in contingency I have included in the numbers I just outlined. And I have included the high end of the range on other planned CapEx, both of which we believe is conservative. Additionally, as I mentioned earlier, some of the chemical CapEx for 2016 may be deferred to 2017 without any impact on the reliability of the plants, should we choose to do so.

At this time, we believe that we have sufficient liquidity to meet our cash needs for the remainder of 2016 and to effectively operate our business.

Now I will turn it back over to Dan to discuss the operational status of our plants, including El Dorado, and the Company's goals for 2016.

Thanks, Mark.

On page 13, we provide a summary of chemical plant activities and the planned turnaround timing in 2016. During these planned turnarounds, we will be making further process and equipment enhancements to ensure our onstream rates continue to improve.

Page 14 describes our focus for the remainder of 2016. We have a very strong desire to improve our operating results. Further, 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.

Lastly, next week we will be attending the Wells Fargo Industrial and Construction conference in New York. We will also be attending the BMO Farm to Ag conference later this month and the Avondale Partners Industrial conference in June.

This concludes our prepared remarks, and, Paula, we would like to open up the call for questions.

(Operator Instructions). Joe Mondillo, Sidoti & Company.

I just had -- first, I just wanted to ask regarding a couple -- some of the random costs. First off, the fair market value adjustment on participation rights, what is that in reference to?

Yes, so our preferred stock has a 2% participation right attached to it, and as I said last quarter, we are going to have to mark that based on the value of that participation right, which is a direct correlation to the stock price. As the stock moves up, we will have an expansion; as the stock moves down, we will actually have income.

Okay. And then, the professional fees of -- you realized $3 million this quarter. How ongoing is that going to be going forward?

I think that -- we incurred some professional fees this quarter really to upgrade our corporate governance and some of our policies and procedures, so that is more of a one-time thing. As we review our strategic alternatives, we are going to incur some professional fees and legal fees as we try and decide what path that we're going to go down. So, you might see some of that continue, but you won't see a full $3 million.

Okay. And then, I guess bigger picture, in terms of the chemical segment profitability and the long-term guidance that you have provided, obviously we are, I think, approaching that, getting to that profitability standpoint. But at what point do you see yourself actually getting there? Do you think you can achieve an annualized run rate related to the guidance that you provided in that matrix on page 19? Are you going to be able to achieve any of that run rate in this year?

Just wondering how far away we are to reaching the potential of the Company. I know we haven't even really gotten the new plant online, but just wondering if you could give any more color regarding that.

This is Dan. Let me give you an update, just to make sure you are absolutely clear on the plant.

We expect to be producing ammonia, full-strength ammonia, within a couple of weeks, and then I think we have talked earlier that it will take us probably a short while to get it up to full production capacity at 1,150 tons a day. That will take us a little while.

So, I would look to the second half of the year as we will be producing ammonia at full capacity in the second half of the year.

With respect to the grid, if you want to call it, we use assumed pricing in there, so if the market differs either higher or lower, that could differ. But that is an indicative indication of the potential earning powers. I can't say what the market is going to do in the future, but should the market meet those pricing levels, then I think our operations will function on that grid.

Yes, the only thing I would add is, as Dan said, we will be ramping up to the full 1,150 tons per day of ammonia production, but once we get the plant online and as we are producing our own ammonia versus having to purchase ammonia, we will see some significant savings. So, we will start to see some of that in this quarter, but we won't see the full effect until the third quarter.

Okay, and then, I guess, added to this whole equation, I think you assume in that grid or that guidance grid that your onstream rates at all the plants are above 95%. So I guess that is still a big wild card, too, especially with Pryor. So, I guess, that -- could you provide any color regarding that because that's a big variable to the equation as well?

Yes, historically that has been a big variable. I think we are taking and have taken actions to decrease the variability of the onstream rates or the downtime.

So, as you saw in the quarter, we were well above 90% on both of those plants, and clearly we believe that El Dorado will be in the high 90%s and will continue to improve those onstream rates.

But, yes, that does assume that rate and I think we are rapidly approaching those onstream rates. So, I think the improvement activities we have taken are yielding results and we will continue to make those.

Yes, if we are thinking about the three plants, Cherokee was at 96% this quarter and has been 95% or above in four of the last six quarters or five of the last seven quarters. So, I don't think Cherokee really has an issue with that.

As Dan said, the new plant should run, and again, the grid is really for what we continue in 2017. So, I don't think we believe that the ammonia plant, the new ammonia plant at El Dorado, will run below 95% in 2017. And so, then we really are left with Pryor, which ran at 92% this quarter, and as Dan said, we are spending a lot of time at that plant really looking at ways to improve it. We have expanded the ways that we really planned for a turnaround, and we would expect by the beginning of 2017 for that ammonia plant to be running at 95%.

That's correct.

Okay, and then also, Mark, in terms of the liquidity of the Company with, obviously, you're going to be dealing with -- still challenged in the first half of the second quarter regarding the operations and the profitability, just given where fertilizer prices are before you get that plant up and running. Given the balance sheet and such, how risky or how close are we in terms of -- or how much legroom do we have with liquidity in the near term? If you could provide any sort of color regarding that, that would be helpful as well.

I guess the way I will answer it is I made a statement that we feel comfortable we have enough liquidity for 2016, so I wouldn't have said that if I didn't feel comfortable.

Okay. And then just lastly, in terms of the climate control business and the turnaround, restructuring, that we are doing there, could you just provide a little more info in exactly what you're doing? And I believe you stated that your goal is 200 to 300 basis points of margin improvement without seeing any revenue growth. Where are we -- what inning are we amongst this whole plan?

Well, I don't know that I would characterize it as restructuring. I don't think we have said restructuring. I think it -- characterize it as we are making operational improvements, things from leveraging purchasing opportunities, from line reorganization, from consolidating facilities, things like that, and just running it -- running it better, so putting a lot of focus on line organization and material purchasing and logistics.

So, all of those things, all of those things that we said we were going to do, we said late last year we were going to do them, we are doing and we will continue for the rest of the year. And if you put it in an inning, I would say we're in the fifth inning.

And so, fifth inning, that means we have -- have we realized half of the benefit of this so far or not really and you will probably see --

I think we described it as 170 basis points on operating earnings, what we have achieved quarter over quarter, so I think we are well on our way to -- I don't think it is an ending target. I think we will continue to look at these things and they're evergreen.

So, to the extent we can redesign products for ease of manufacturing, we will continue to do that. To the extent that we can leverage better sourcing, we will do that. To work on logistics, we will continue to do that. So, I don't find these as, hey, we're going to stop. I think it's an ongoing process all the time.

Okay, great. Thanks for taking my questions. Appreciate it.

Brent Rystrom, Feltl.

Quick, quick question. When you had mentioned -- I think, Dan, you had mentioned these, looking at the eventual separation of the businesses. Are you looking literally at a separation or are you also looking possibly at selling climate control?

We are looking at all options. We are looking at all options, including both of those. I think we will have to decide, sit down, come up to a recommendation. I don't think we favor one over the other one at this point in time, but that could change. So, I think we're looking at all options, Brent.

Okay. From Donaldsonville, CF just said this morning that Donaldsonville is now shipping UAN into the market. You had mentioned previously you might see some near-term pricing disruption as new production comes online. Was that a reference to that or is that more just a general comment?

I think it's that plus the others. They have their Port Neal facility that should be coming online. Dyno is going to be coming online in the near term and then (multiple speakers)

I guess what I'm asking, Dan, is are you seeing that right now in the UAN markets in the South down there, that you are seeing a little impact of that plant starts production?

No, we are not. We are not seeing the impact. Keep in mind we sell UAN out of Cherokee and Pryor. We talked about the CVR deal that we did, changed over to CVR Partners, and I think we are looking to increase our netback pricings out of Pryor, but we have not seen that impact that they referenced.

All right. In the chemical EBITDA sensitivity analysis for 2017 on page 19 that was referenced earlier, you make a comment about an assumption that the sales are replaced from the mining sector with sales to the agriculture sector. Is there a favorable impact on that from a margin perspective?

I think we make the assumption that the margins are pretty similar.

All right. How is the high-density AN holding up in the South with all the rain you guys have been getting?

The market for high density, we have actually -- that was one of our focuses late last year and this year and will be continue to be. We have actually found things to be going pretty well with our high density.

We are expanding out to some customers we historically haven't reached out to and getting good response from them. So, we're reasonably pleased with our high-density markets and we look to expand our distribution in the high-density area.

Are you sensing that there has been a lot of leaching with all the rain, so there might be another opportunity to hit that market again, or is that not really (multiple speakers)

We see interest from a lot of folks of putting ammonium nitrate on corn, which is starting to -- that attribute is starting to grow. So, we are getting a lot of interest from that in some areas we traditionally haven't serviced, so I think that's an opportunity that we see probably more than anything. We haven't heard the leaching issue and that hasn't -- doesn't seem to have been a driver to date.

Okay. On the -- if you can clarify the timing as far as production. So, is production of ammonia expected to start meaningfully one week after this weekend's ramp of the ammonia compressor, one to two weeks? Is that what you are seeing?

We have given sort of a range. Just as I mentioned in our prepared remarks, 40 miles away from the plant the utility company had a major power line that went down that took us out of operation and slowed us down for a couple of days. Things like that may occur. You have significant rain delays if weather patterns move in. There's been a lot of rainy weather that has probably put us behind just a little bit of where we anticipated. But I would expect within two weeks we will be making full-strength ammonia out of that plant.

And again, just to clarify, that's two weeks from post the (multiple speakers) compressor?

Today, two weeks from today.

All right. And then, can you give us a little clarity on the time involved for the two turnarounds planned this fall, Pryor and Cherokee? (multiple speakers)

Typically, they are going to be from three to four weeks each.

Thank you very much, guys.

Stefan Neely, Avondale Partners.

I guess the follow-up, I wanted to talk a little bit about you noted you are reducing your expectation for LDAN sales this year. Do you see any sort of opportunities that I guess fill that gap, so to speak, from maybe incremental HDAN sales or ammonia?

Yes, that's clearly what we see is -- the mining market, as everybody -- it is well known the coal mining market is down substantially and we don't expect that to ramp back up in 2016.

So, clearly, we are -- as I said earlier to the last question, we are looking to ramp up our HDAN marketing efforts and distribution facilities. So we are doing that. And then, of course, we would anticipate selling more ammonia to the extent that we can upgrade it. We also have some nitric acid customers and potential new customers that we are going after fairly aggressively.

So, to the extent that we can upgrade, we will do that, and should we not, we are -- we will sell ammonia. But it is clearly our intent to expand our HDAN markets and we're going to be in HDAN and LDAN for a long time. That is a key part of our business and we want to -- we are telling customers we're going to be in it for the long haul. In fact, we are expanding our distribution efforts. So, that is something that we feel confident we can do.

Okay, perfect. That's helpful. And going off of Brent's first question in terms of your strategic -- getting your strategic initiatives here with splitting up the Company or potentially splitting up the Company, do you feel like you may need to make some strides there, essentially selling the climate business, in order to complete the refinancing later this year or into 2017?

Look, I think, as I said to Brent on the earlier question, we are looking at all options. We are not foreclosing any type of option, be it a sale, be it a separation, so forth and so on, but we are looking at all options and haven't concluded on any of them and there is still work to be done.

I don't think it's a requirement for us to --

No, no.

-- refinance our debt.

Okay, I would assume it would probably not hurt.

My last question here, going to the climate business, we are seeing a lot of your peers in the climate business showing some pretty nice growth in sales and whatnot. Are you guys seeing any of that activity at all?

I think in the commercial market we clearly are. Commercial market, which you know is the majority of our business, commercial market we are seeing good strength. The residential market, with the natural gas prices the way they are, I don't think people are anxious to put in new facilities. So the residential side of things, we haven't seen the growth or the strength of the bookings that we would have liked.

So on the commercial side, we like what we see. On the residential side, not so much.

Okay, perfect. That's all I got. Thanks, guys.

David Deterding, Wells Fargo.

Thanks for taking my questions. If I look at slide 12 on sources of funds, Mark, am I reading this right that cash on hand was $40 million and then the cogen financing, it sounds like you have already gotten that $10 million cash in the door?

No, we -- if you went back to last quarter, we talked about $20 million of cogen financing, so we did close on $10 million and we're in conversations with various parties to close on another $10 million.

So the first $10 million is included in that $40 million figure?

Yes.

Okay, perfect. And then just anecdotally reading, farm income, the lowest it has been in many, many years, but it seems like farmers are still out there planting in the fields. What are you guys hearing anecdotally from your conversations with people on application rates this year and this season?

We haven't seen substantial changes and our customer base hasn't indicated there are substantial changes. The indications are that if you want to grow so many bushels per acre, you need nutrients to do that, and the application rates or the customer feedback we have gotten, there haven't been any substantial changes to that.

And I think earlier in the quarter, a lot of this was -- a lot of this discussion you just mentioned occurred in the fourth quarter and, I would say, in the first half of the first quarter. Everybody was in a sour mood. Nobody was buying anything. Prices were extremely low. And then, all of a sudden, it kicked in and we saw pretty substantial increases in volumes and pricing and the market firmed up and customers really want our material. We're still seeing a good, strong demand right now and we're still seeing prices that we think are reasonable.

One thing to keep in mind, we just -- we were just talking about this. Export of corn is probably the largest it has been in some time, and so if you look at corn futures, they have moved up some. And so, as we have always said and the whole industry has really said, $4 is the dividing line here. At $4 or above, the farmers' mood and mentality and feelings are a whole lot better. Below $3, everyone starts to get a little cost conscious. So, we're heading up to that $4 again.

All right, great. Thanks, guys.

Roger Spitz, Bank of America Merrill Lynch.

Would you be able to provide any guidance on how we should be thinking about 2017 CapEx?

No, we haven't given any guidance. We don't obviously see any new construction facilities. El Dorado will be completed. But we haven't provided guidance on 2017.

But, obviously, if we're doing turnarounds at Pryor and Cherokee in 2016, you wouldn't expect a substantial turnaround in El Dorado in 2017. It is relatively new and you have the normal maintenance CapEx items that would go through, but we have not provided an outlook or a view for 2017 yet.

I think, Roger, what we say in the Q is that general maintenance CapEx in the chemical business will run between $40 million and $60 million.

Great. And the Zena Energy promissory note, $12 million that was refied on April 1, how should we think about that? Did you refi with another promissory note of $12 million, the same coupon, or something else?

Yes, it was $12 million with the same terms.

Same terms, okay, so you basically just pushed it out, for intents and purposes.

Yes.

All right, thank you very much.

Matt Farwell, Imperial Capital.

Thanks for taking my question. I just wanted to go to the sensitivity analysis, since this is so simple and elegantly done. If I could just look at the current spot prices, ammonia in the roughly the $300 range and 2017 gas futures in the $350 range, that pinpoints around $[126]. Is that roughly where you are or does that factor in the differentials for the two commodities?

I think we have said this before. We think this is representative of how our business can perform under certain natural gas prices and certain ammonia prices, ammonia being a proxy for our other products. I don't think we're going to comment on exactly where we are in the grid or I think that's -- we think this represents a pretty good picture of how our business will operate.

Okay. And then on the cash capital spending slide, slide 9, you don't outline any requirements for working capital, and then startup costs are just general overhead, lack of overhead cost absorption while El Dorado is being ramped. Have you given any guidance on what those costs might be in the second quarter or the third quarter?

I think we haven't, but I think when we go two slides later and we start -- or three slides later and we talk about our liquidity position and the remaining sources of funds being operating cash flow, included in our operating cash flow would be expenses that would be needed to ramp up the plant.

Got it.

But we have taken that into account.

Okay, that's all I have. Thanks very much.

Owen Douglas, Baird.

Thanks for taking the question here. A lot of good ones have been asked already, so I just really wanted to get a sense for as you guys are seeing the market right now, just from the supply/demand standpoint. We have a better corn crop outlook. Are you guys starting to see any of that play through in terms of possibly starting to get a little bit of price support in terms of some of your products, relative to the raw materials?

Let me first clarify. Approximately 50% of our business is industrial business and apparently 50% is agricultural-based business on the chemical side of things.

So, to the extent we look at our product mix, ammonium nitrate, ammonia, and nitric acid coming out of our -- and UAN coming out of our plants, I think we -- the markets we serve, we know where we fit in those markets. We have a general idea who our competitors are in those markets and we feel comfortable with our position.

You always like to see prices higher, but we know we are a small producer in a big field of producers. So, I think in general we are reasonably happy with our product netback pricing.

As I said earlier, we have a new UAN agreement that will be effective June 1 with CVR Partners, who will be marketing our UAN, and they sell a lot of UAN into that market area, and we think we will achieve a higher netback pricing than we historically have on that product.

So, right now, I would say the new capacity coming online, you heard our comments on that. We have to watch that, but I think the market is taking that into account.

And then, of course, there is the import effect. Should imports increase significantly, that will clearly have a price pressure in the market, so we have to watch that as well.

But I think all in all we feel that prices will be reasonable. I'm not going to say they're going to be positive. I'm not going to say they're negative. We think they're going to be reasonable at this point in time.

Okay, I guess I will take that and keep it moving. Thanks very much, guys.

If I knew what prices were going to do six months from now, who knows what I would be doing.

Joe Mondillo, Sidoti & Company.

Just a couple of follow-up questions. First, regarding pricing, do you see any other opportunities to achieve better pricing anywhere in any of the plants?

I think what we mentioned several times already on the call is we are looking to expand our ammonium nitrate distribution, so we do think there are opportunities to increase pricing and increase volume.

So, I think we are undertaking strong efforts right now on the marketing side and distribution side to improve our footprint in HDAN, in high-density ammonium nitrate, for our agricultural customers.

In addition, we are working very hard on LDAN, too. Obviously, the mining market is down, so we are putting a lot of additional effort into reaching out to folks we may not have historically reached out to.

So, yes, I think we are doing a lot of things to try to improve our netback pricing and our volumes.

Yes, I think the pricing in a lot of our business, or at least half of our business, is commodity driven. I don't know that we're going to be able to really dictate pricing, but I think volume is really the focus here.

And as we said, 50% of our business is industrial markets and a lot of those are index-based pricing, and it is index-based pricing, be it gas, be it Tampa, be it Gulf type related pricing, so we will be subject to those market fluctuations as well.

Okay, and then in regard to the cost side of the chemical segment, you mentioned in the Q regarding some variable costs, specifically electricity, which is a pretty big percentage of the variable cost. First off, what is the breakout of variable versus fixed? And then, how much is your electricity expenses increasing this year?

We don't provide that level of breakout, nor that level of granularity, on our costs, so I don't think we're going to do that at this point.

Okay. And then, just two other questions. In regard to the refinancing, is there any -- could you give us a feel on what you're thinking in regard to timing? How many quarters do you think you need to see of improved cash flow and the probability of successfully getting a refinance deal? Just any other color regarding any of that would be good.

As I said, I think our goal is to try and get a refinancing done by the end of this year or early in 2017. I would tell you that a lot of that is going to be dictated by the debt markets, though in a frothy market we will have to probably show less of a track record of cash flow down at El Dorado than we would in a more tepid market. So, I think it is going to be market driven more than anything else.

Are you going by conversations that you have had, though, or what you are thinking and later this year you will reach out, starting to reach out to bankers, and is that where we are at? Just wondering, just curious.

Look, I'm not going to give you an inning that we're in on refinancing discussions, so I think Mark's comments were pretty comprehensive and we will -- we gave you our guidance on later part of the year or first of next year, depending on the market, so I can't tell you what inning we're in.

Okay, and then just lastly, in regard to climate control, in terms of the 35% gross margins, 14% op margins that we saw several years ago, is that mainly a product mix where we need to see residential and geothermal really start to come back to achieve those or can you do that by the operational excellence improvements that you are attempting?

I think when we saw 35% gross margins back in, I guess, the 2007/2008 time frame, there was a big ramp up in geothermal. So geothermal -- residential geothermal carries a significantly higher gross margin.

I don't think we're going to see that, given the low natural gas prices, so we will have to get there other ways, and I think given the operational initiatives that we have got underway and what we think we can accomplish with that business, I think it is -- it is not a stretch to say that we could get back there, but it is going to take a lot of work to do that.

It is also going to be really dependent on product mix. Clearly, heat pumps carry our highest margin, and then we move down in margin from there with the other products. So, to the extent that we can grow our heat pump business, which we believe we can, then that will help us get to that gross margin level as well.

Look, we are going through product redesign efforts. We are going through product optimization efforts, standardization across all the different businesses within climate control. So, there are a lot of levers that we can pull and are pulling right now.

So, I think you will -- as we said earlier, I think you'll see a continued improvement in operating earnings from climate control, and whether or not we can get back to those levels exactly, I don't know, but I know we can make a lot of improvement from where we are today and that's what we are doing.

Okay, great. Thanks a lot. Appreciate it.

Brent Rystrom, Feltl.

Just a couple quick questions. I am curious. CVR Partners said that so far they haven't seen a ramp of business that would be coincidental with a 6 million acre ramp in corn acres. I am curious if in your plans you have seen any reflection that would lead you to believe -- because in particular Oklahoma, Kansas, Texas were states where a lot of those acres were going to be added. I'm wondering if you have seen anything in your business in the second quarter that would imply that 6 million acres is indeed there.

I think we see all of our volumes being sold out, so I don't -- they certainly sell a lot more than we do. But we see that our volumes will be sold out, and whether or not that reflects on the broader market, I can't answer that, Brent. I don't know. But from our perspective and our capacity, we feel comfortable that we will sell and move that material.

I am not so worried about you selling or not selling, I'm just curious. They said it just -- the market didn't have the feel like it was up 6 million acres, as far as the demand out there.

Yes, they sell a lot more than we do, in a little bit of a different area. So, I can't comment on their comments, other than we feel comfortable that we will move our volumes and we see a good market. I don't --

We haven't seen pricing appreciation --

Right.

-- which would usually come from that increased demand.

Okay, and then just to clarify, probably for both of you, just because I want to make sure we're not thinking about this wrong, both CF and CVR have said that ammonia pricing has recovered very nicely. I know you have said that, but I just want to clarify. They both implied we are back to summer fill rates as far as ammonia pricing, compared to where we were last year on summer fill.

Is that a somewhat similar pattern to what you have seen? So you realized a net ammonia price of [$337] in the first quarter. Are you seeing that come back up to where you were late last year, summer of last year?

I don't want to give a forecast on pricing. We don't talk in those specifics. But earlier in the quarter, ammonia was really suffering, and we did see a strong comeback midway through the quarter and we feel pretty good about the pricing right now on the ammonia. So, I would say that our sentiments are very similar to theirs.

All right. Thank you very much, guys.

This concludes the question-and-answer session for today's conference. I would now like to turn the floor back over to management for any additional or closing remarks.

Great, thank you. We certainly appreciate your time this morning on the conference call. As I mentioned, we will be seeing investors in the next couple of weeks at conferences and then in June. We look forward to speaking with you, and as usual if you have any questions, feel free to give Mark or myself a call, and thanks for your time this morning. We appreciate your interest. Have a good day.

Thank you. This concludes your conference. You may now disconnect.