LSB Industries Inc (LXU) 2016 Q3 法說會逐字稿

Greetings, and welcome to the LSB Industries third quarter 2016 conference call.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kristy Carver, Vice President and Treasurer. Thank you. You may begin.

Thank you, Christine.

Please note that today's call will include forward-looking statements. And because these statements are based on the Company's current intent, expectations, and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. As this call will include references to non-GAAP results, please reference the press release in the Investors section of our website, LSBIndustries.com, for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

At this time, I'd like to go ahead and turn the call over to Dan for opening remarks.

Thank you, Kristy, and good morning, everyone. Thanks for joining our call this morning, the 2016 third quarter conference call.

I'll first review the key events during the quarter and provide an update on the markets we serve and then discuss the operational status of our manufacturing facilities.

John Diesch started with the Company on August 1 as our Executive Vice President of Manufacturing and stepped into the crucible during his first week. This morning John is with us, and he'll provide a detailed discussion of our plant's operational status and discuss the downtime we had during the third quarter and certain items that carried over into the fourth quarter. John will then discuss the outlook for our operational status for the remainder of the fourth quarter and our expectations for on-stream performance for 2017.

Mark will lead a discussion of our financial results, liquidity and capital structure, along with a view towards our fourth quarter outlook. We believe that you will see we have sufficient liquidity, even in this low selling price environment, even if it extends throughout 2017.

I'll then make some limited comments on the announcements that we made yesterday regarding our strategic review. This strategic review is being initiated from a Board commitment we made to shareholders approximately 18 months ago to continually reassess our strategic alternatives to enhance value for our shareholders.

The third quarter of 2016 was a very tough quarter for LSB, and the key plant turnaround and maintenance activities have been completed. During the quarter, there were several very unique maintenance issues that John will review. Many of the repair items will be covered under warranty provisions from outside vendors.

We also made the decision to make further process and equipment enhancements to ensure that we operate at high on-stream rates during the balance of 2016 and throughout 2017. This was a tough decision, but one that we felt was necessary, and these improvements will provide the best outcome for the longer term.

Our Pryor plant is completely operational and producing at full rates in all areas. Our Cherokee facility is also producing at full rates in all areas. Baytown is also operating at full rates. Our El Dorado ammonia plant is also producing at full rates. However, we have further challenges with the new nitric acid plant.

In late July 2016 we initiated repairs on several heat exchangers and then identified a leak in our new nitric acid plant's nitrous oxide abatement vessel at our El Dorado facility. After extensive repairs were made, the plant returned to service at the end of August 2016. During this time we were able to supply customer requirements from our other nitric acid production facilities with limited financial impact.

We expensed all costs associated with these repairs in the third quarter. We expect to recover a large portion of these costs under warranty provisions in the contracts.

In late October 2016 the nitrous oxide abatement vessel redeveloped a leak, and this nitric acid plant was taken out of service. Upon further inspection and review, the plant's technology provider and their subcontractor determined that a new nitrous oxide abatement vessel may need to be fabricated after a metallurgical analysis is completed.

In order to operate this nitric acid plant while we wait for the permanent solution, a temporary bypass system will need to be developed and installed. The bypass system will take between 30 to 45 days to design and construct. Fabrication and installation of a new nitrous oxide abatement vessel, if needed, could take up to a year. The cost of this bypass system, any repairs or a new vessel fabrication and installation will all be covered under the warranty provisions of our original contract.

We have received a preliminary consent administrative order from the Arkansas Department of Environmental Quality to allow continued operation of this nitric acid plant after the bypass is completed and repairs are made or a new nitrous oxide abatement vessel is fabricated and installed. We expect to receive the final consent within two weeks.

Customers' shipments are not expected to be interrupted in the near term, as our El Dorado facility has a secondary nitric acid plant and our other facilities are able to provide the required shipments of nitric acid to our customers.

The estimated impact on our operating results for the fourth quarter of 2016 from this nitric acid downtime will be between $2.5 million to $3 million. Needless to say, we are deeply disappointed that we are having issues with our newly constructed nitric acid plant. However, we're happy that have a plan that will get us operating at name plate capacity in a relatively short period of time and that our contractors have acknowledged that this work will be done under warranty.

Turning to Page 3, a key strategic milestone during the quarter was closing on a $364 million sale of the climate control business, which occurred on July 1, 2016. We then deleveraged the Company with a portion of the proceeds by paying down $100 million of our senior secured debt and redeeming an aggregate of $80 million of preferred stock and accumulated dividends. This will reduce our aggregate financing costs by approximately $17 million per year.

We look to further reduce net leverage through sales of nonstrategic assets such as the machine tool business, excess building, a mothballed ammo pack equipment up in Pryor, oil and gas properties, and other miscellaneous assets. We estimate we will generate approximately $20 million to $25 million net of amounts owed in the next several quarters.

Our revenues for the quarter were approximately $80 million and were largely impacted by price declines as well as the turnarounds and extended downtime. As you know, we incurred significant period expenses associated with the turnarounds and repair work during the quarter, and Mark will provide a detailed analysis of the amounts in our financial discussion.

As we noted in our last call, we task ourselves to review our historical corporate operations and remove excess costs that are not needed as a pure play nitrogen company. We worked aggressively during the third quarter to make that happen, and we have reduced corporate SG&A by approximately $6 million on an annual basis. We'll continue to aggressively review SG&A and plant costs with a goal of further cost reductions.

As we indicated in our recent conference calls, we believe in the near term there will likely be periods when new production capacity comes online and provides a surge of product to the market, which may lead to sales price fluctuations. During our third quarter we felt the impact of lower pricing in the agricultural and selected industrial markets. We believe this modest price environment will continue as additional North American capacity is brought online throughout the remainder of 2016 and during 2017.

However, we do expect to see modest improvement in pricing as we move into 2017, as the demand for fertilizer is expected to grow. Recently, we have seen some modest firming of market pricing.

Overall, we remain positive for product volumes into the ag markets we serve. We anticipate volumes to the mining sector will remain low in the near term, while industrial product volumes and pricing remains positive. We believe the medium- to long-term industry fundamentals will firm up and the North American producer will remain the most competitive in the world.

I'd now like to ask John to provide an operational review of our third quarter. John?

Thank you, Dan. Good morning, everyone.

I would like to first thank Dan and the Board of Directors for allowing me to be part of the LSB Industries organization. Over the last three months I've had the opportunity to spend a lot of time at the plants, with the management teams at each facility. I have to say I'm impressed with the knowledge and experience of the organizations.

As you know, other than the No. 2 nitric acid plant and concentrator at El Dorado, these are all plants that were originally constructed in the late 1960s and 1970s. A good deal of money and effort has been put into these facilities over the last few years. We are making progress, and we are improving reliability. I want to spend some time reviewing the most recent issues at the plants coming out of the turnarounds and post-startup of the nitric acid and ammonia plants at El Dorado.

First at El Dorado, the ammonia plant has performed at production rates at or above design. However, the team has been working through a number of commissioning and shakedown issues that are common in new plant startups.

Following the July power failure, we had a number of heat exchanger leaks which required us to come down and plug tubes. These exchangers were inspected and re-tubed prior to the original startup, but we have since decided to replace three of them due to the recent failures.

We had an outage following a plant trip in August due to an expansion joint failure from condensate buildup in a water hammer in a vent line. A new expansion joint and drains were installed in the vent line at that time. Additionally, we experienced a seal failure on the ammonia refrigeration compressor which required us to rebuild the seal.

Most recently, we had an outage to repair a broken control valve that supplies steam to the syngas compressor steam turbine. The new NAC/SAC nitric acid concentrator, I'm happy to say, is performing very well.

As Dan mentioned earlier, the No. 2 nitric acid plant has had some mechanical and performance issues since startup. As Dan stated, the plant is currently down due to a leak on a weld on the bottom nozzle of an in-tool abatement vessel.

All of the upgrades and repairs to this unit are under the technology providers' warranties. The plant had been producing at design capacity and concentration, and we expect it to perform once again once the plant is back up in operation following the installation of the N2O abater bypass. The rest of the El Dorado production units are operating well and are producing to meet customer demand.

At the Pryor facility, we had a scheduled turnaround in September, but we decided to move it forward about two and a half weeks due to a leak in the urea reactor liner. With the exception of the urea plant, the turnaround in the rest of the plant went well and was on schedule.

However, during the startup of the ammonia plant we had a gearbox fail on the air compressor. The gearbox rebuild and root cause determination delayed ammonia production by about 18 days. A lubrication issue was determined to be the cause, which has been resolved. Once up, the ammonia plant has been performing very well.

The urea reactor repair took 64 days. It was a long process due to cold well repair requirements and working in a confined space big enough for only one person. In addition to the liner repair, we upgraded the design of the internal trays to reduce potential future corrosion and leak points.

The plant began production October 30 and has been running very well. We expect Pryor to perform well the rest of this year and all of 2017.

At the Cherokee facility, we had a scheduled turnaround in August. While the turnaround was on schedule, during startup there was a failure of a gasket on the second stage of one of the three syngas compressors. In addition to replacing the gasket, we machined the gasket surface with a phonographic finish to improve the sealing surface and did this on the second stage of each of the compressors.

We also found it necessary to replace the suction bottle to the cylinder that had the leak. This is a cold pressure vessel and took about a month to fabricate, causing us to operate at reduced rates during this time.

Longer term, we will replace the second-stage cylinders on all three of the syngas compressors with a cylinder design that does not have this type of large flange face and will eliminate this potential leak point. Since completing the repair, the plant has been running very well, and we expect that to continue through 2017.

The Baytown facility, which is a single nitric acid plant, was down for approximately two weeks in October for a scheduled turnaround. The major job was to install a new cooler condenser heat exchanger. The plant came up on October 24 and is running well.

Despite the recent mechanical issues, I am confident that plant operations will run well in 2017. LSB has invested heavily over the last few years in new equipment, control system upgrades and mechanical integrity programs to reduce downtime and improve reliability.

With this investment, the current management teams, I would expect that we can achieve our goal of averaging 95% on-stream rates for the three ammonia plants for the full year of 2017, which will significantly increase production and profitability.

Thanks, John. As you can see, John has spent a lot of time at the plants and is making significant improvements, and we believe those improvements will reflect themselves through the rest of 2016 and into 2017.

And with that I'd like to turn it over to Mark to provide an overview of our financial results, our outlook and our liquidity position. Mark?

Thanks, Dan.

On Page 11 of the presentation we provide a consolidated summary statement of operations for the third quarter of 2016 as compared to 2015. As I mentioned last quarter, we closed on the sale of our climate control business during this third quarter, and the gain on the sale, net of taxes, and all remaining costs associated with the transaction are included in discontinued operations.

In reviewing our continuing operations, total net sales and gross profit were down for the quarter, primarily related to lower selling prices across our key agricultural product groups, somewhat offset by higher volumes of UAN, HDAN and ammonia. While we had operational issues during the quarter that reduced production, sales were made from inventory, picking up for most of the lost production. However, we ended the third quarter with lower inventory levels, and that will impact sales for the fourth quarter.

Gross profit further declined as we incurred costs related to the turnaround at our Cherokee facility, as we had no turnaround in last year's third quarter. We had lower absorption of fixed costs at all of our facilities related to the previously discussed unplanned downtime.

We incurred repair and maintenance costs associated with the downtime, and we incurred repair and maintenance expenses related to the El Dorado nitric acid plant. We did benefit from lower feed stock costs during the quarter, but those costs did not decline as sharply as the product's selling prices.

Consolidated SG&A was down approximately $1.6 million, as compared to the third quarter of 2015, primarily from the absence of severance costs for former executives that were incurred in the third quarter of 2015. As I mentioned on last quarter's earnings call, we began focusing on reducing overall SG&A, given the sale of our climate control business and the current tough ag selling price environment.

We had an initial goal of reducing annual SG&A expenses by approximately $5 million. We have identified approximately $6 million in annual SG&A cost reductions. That full amount will be realized in 2017. We continue to review our overall SG&A and plant expenses, and we would expect to see further reductions during 2017.

Adjusted operating loss, adjusted net loss and adjusted EPS were all down for the quarter versus Q3 2015 due to the decrease in sales and gross profit margins that I just discussed. Please refer to our reconciliation of non-GAAP measures beginning on Slide 20 for further information on one-time costs incurred during the period.

In order to give further clarity on the results of the quarter, Page 12 bridges our consolidated adjusted EBITDA for Q3 2015 to Q3 2016. Lower selling prices of our products, offset by a small benefit from lower natural gas prices, negatively impacted EBITDA by more than $11.6 million as compared to 2015.

Higher overall sales volume for the quarter provided an additional $2.1 million of EBITDA. The sales volume increase was driven by better UAN production at our Pryor facility versus Q3 2015 and improved market conditions for the sale of our HDAN products.

As we have discussed previously, there are several benefits to the new ammonia plant at our El Dorado facility. During the quarter, we picked up approximately $5 million in EBITDA by producing our own ammonia versus previously purchasing it.

Additionally, we were able to sell approximately 47 thousand tons of ammonia that we produced to the pipeline under our agreement with Coke versus none last year. That resulted in an additional EBITDA of approximately $2.6 million even at today's low selling price environment.

As Dan and John previously discussed, we did incur repair and restart costs related to our issues at our nitric acid plant at our El Dorado facility, which impacted EBITDA by approximately $4.3 million. While we believe that we will be able to recoup most or all of these costs under warranty, we have expensed them to be conservative.

During the quarter, we performed a biannual turnaround at our Cherokee facility. The cost of that turnaround and the corresponding reduction in EBITDA was approximately $5.3 million.

As a result of the unplanned downtime during the quarter, we incurred costs related to repairs and had lower absorption of fixed costs at our facilities that resulted in a net reduction of approximately $11 million. However, this was partially offset by a pickup of approximately $4 million in EBITDA from improved fixed-cost absorption at our Pryor facility as a result of improved on-stream rates as compared to the third quarter of 2015.

And, lastly, as I mentioned earlier, lower SG&A contributed to the balance.

Page 13 outlines our capital structure as of September 30, 2016.

During the quarter we completed the consent solicitation with our senior secured noteholders. As a result, in September 2016 we redeemed approximately $80 million of our Series E redeemable preferred stock and related accrued dividends and the participation rights associated with that, and we agreed to call senior secured notes totaling approximately $107 million, including the call premiums. These notes were called in mid-October of this year.

We have made pro forma adjustments to the September 30 balance to reflect the call of the senior secured notes as if they had occurred on September 30. As a result, at September 30 total pro forma cash and cash equivalents was approximately $76 million, with approximately $23 million of availability on our ABL facility.

The ABL availability was adversely affected by the production downtime during the third quarter, as accounts receivable and inventory were lower than historical levels. Given our facilities are all producing, accounts receivable and inventory will increase back to more historical levels, and I would expect our ABL availability to increase back to the $30 million to $35 million range.

Total pro forma debt at the end of the quarter was approximately $435 million, excluding the unamortized discount and issuance costs associated with our debt. And we had outstanding preferred stock of approximately $156 million, including approximately $16 million in accrued and unpaid dividends. Dividends on our preferred stock will continue to accrue, as we do not anticipate paying them in cash in 2017.

Moving to Page 14, we outline our free cash flow. The significant net income for the first nine months of this year relates to the gain on the sale of our climate control business. Backing that out, operating cash flow was about breakeven for the nine-month period.

We had significant capital expenditures during the period, but, given the completion of the full El Dorado expansion project in the second quarter of this year, we are now back to incurring maintenance capital expenditures. Going forward, we expect to incur maintenance capital expenditures that will focus on enhancing the safety and reliability of all of our plants.

Net cash used by financing primarily reflects the redemption of the preferred stock that occurred during the quarter, and the restricted cash reflects the cash at the end of the quarter that we used to call the senior secured notes in mid-October, as I discussed previously.

Please turn to Page 15, where I'll discuss our cash flow for the fourth quarter.

We ended the third quarter with approximately $76 million in cash. We are forecasting a $3 million to $5 million EBITDA loss for the quarter, which is inclusive of the $5 million to $5.5 million loss from the carryover effect of the downtime in Q3 that we previously disclosed and the $2.5 million to $3 million EBITDA loss related to the additional costs stemming from the El Dorado nitric acid plant issues that Dan and John outlined earlier.

We forecast that there will be a $5 million to $10 million use of working capital during the quarter as we ramp up production and both receivables and inventories build along with a continued reduction in our payables. CapEx during the quarter will be between $12 million and $14 million, with a large part of the spend related to two new ammonium nitrate storage domes being constructed at our El Dorado facility. These are needed to expand our sales in both HDAN and LDAN.

Lastly, we have scheduled principle and interest payments during the quarter of approximately $5 million. Assuming those uses of cash and the accrual of the dividend on our preferred stock, we forecast that will end the year with between $42 million and $51 million in cash, with between $30 million and $35 million in availability under our ABL facility. Assuming that, our total liquidity would be between $72 million and $86 million at year end.

Rolling that forward for 2017 please turn to Page 16. On this page I will provide an estimate of the sources and uses of cash for 2017, excluding any forecasts for EBITDA for the year.

As I just mentioned, we forecast that we will end 2016 with between $42 million and $51 million in cash. We have identified certain noncore assets that we believe we can sell for net cash proceeds of between $20 million and $25 million. We are in the process of moving forward on this.

Assuming we are successful, that would increase our cash balance to $62 million to $76 million. Full-year maintenance CapEx is projected to be between $30 million and $35 million, and principle and interest payments will be approximately $40 million for the year. Of note, the $40 million assumes the sale of certain non-core assets by the end of the first quarter of 2017.

As a reminder, given our significant NOLs, we are not a cash taxpayer, and we also anticipate that we will continue to accrue the dividend on our preferred stock in order to preserve cash. As John outlined earlier, we anticipate that our facilities will run well, given the improvements that we've made over the last several years, and expect on-stream rates for our ammonia plants to average 95% for 2017. That would yield a significant improvement in EBITDA for the year.

Lastly, we expect that we will end the year with between $30 million and $35 million of availability under our ABL. Summing it up, we are comfortable that we have sufficient liquidity to ride out this low ag-selling price environment.

Page 17 outlines sales volumes for the fourth quarter and the full year of 2016 and some key financial metrics for the year. UAN sales are expected to be approximately 50,000 tons lower than previous guidance, primarily related to the reduced production at our Cherokee and Pryor facilities during the quarter and lower inventory coming into the fourth quarter.

Industrial ammonia sales are expected to be lower by approximately 15,000 tons to 20,000 tons as our El Dorado facility's ammonia plant had some lost production during the quarter, and we elect to build inventory to sell in future periods as pricing improves. The rest of the page outlines some key financial metrics for 2017.

Now I'll turn it back over to Dan to discuss our focus for the remainder of 2016 and for 2017.

Thanks, Mark.

I think you can see that we have sufficient liquidity to run our business even in this modest pricing environment.

On Page 18 it describes our focus for 2017. We have a very strong desire to improve our operating results. Recent unplanned downtime is a key metric for our company.

The significant turnaround and maintenance activities in the third quarter should allow us to achieve our targeted 95% on-stream rates for the ammonia operations in 2017. We accomplished this at Cherokee and Pryor during the first half of 2016, and we believe we can meet this target for the full year of 2017 at all of our ammonia plants.

Our expanded distribution initiatives for agricultural ammonium nitrate are progressing well. The market has shown that alternative suppliers for ammonium nitrate are welcomed. We want to increase our ag sales of this product in the remainder of 2016 and the full year of 2017.

As Mark mentioned, we're finalizing construction of storage domes for high-density and low-density ammonium nitrate at our El Dorado facility. This will allow us to maximize our production and will assist our ability to load out product in a more efficient and timely manner in order to increase sales.

These domes should be completed in the early part of the second quarter of 2017. We believe there are growth opportunities with expanded ammonium nitrate sites without the need of significant capital spending.

This enhanced distribution footprint should strengthen our marketing capability and increase our netback margins. We plan to utilize the existing storage dome at our Cherokee facility to position ammonium nitrate for the surrounding markets. This dome has been idle for the past several years. It's ready to go.

Additionally, we're almost ready to use an existing dry bulk warehouse at our Pryor facility to distribute ammonium nitrate into that market. This facility has been vacant for the past several years. It's an excellent facility for us to distribute product. We believe these actions will increase our volumes, and so far we have seen very positive response from customers.

In this current tough operating environment we are also looking at cost reductions in all aspects of our business. We plan on further reducing our SG&A costs as well as reviewing and reducing our plant operating cost.

With that, I've finished our prepared remarks, but before we turn it over to Q&A I'd like to briefly discuss our strategic alternative announcement.

Yesterday we announced that LSB's Board of Directors has initiated a process to explore strategic alternatives available to the Company. The Company has engaged Morgan Stanley as our financial advisor to assist us with this process.

This in many ways is a continuation of the work that was recently undertaken by the Strategic Committee of the Board, and as part of the exploration of strategic alternatives we'll look at a range of alternatives, including, but not limited to, a sale of the Company or the continued execution of our business strategy.

Please note that the Company has not established a definite timeline to complete its review and no decision on any particular action has been reached at this time. As you well know, there can be no assurance that this process will result in any agreement or transaction, and we do not intend to discuss or disclose developments with respect to the Board's process unless and until the Board has approved a specific course of action.

Having made those comments, I'd like to remind you that the purpose of today's call is to discuss our third quarter results, and we ask you to limit your questions to these results. I want to thank you all in advance for your consideration and cooperation.

With that I'll ask the operator, Christine, to open the call up for questions. Christine?

Thank you.

(Operator Instructions)

Dan Mannes Avondale Partners.

Thanks. A couple of quick follow-ups and clarifications. First, as it relates to the EDC issues, both the nitrous oxide unit, I guess, and the heat exchangers, are all of those, number one, covered by warranty, and, two, does the warranty just cover the repair or also the forgone margin, I think the $2.5 million to $3 million that you had previously mentioned?

Yes, Dan, all of those items are covered under warranty with the original contractor and their subcontractors who manufactured some of that equipment. So those are all covered under those warranties.

With respect to the warranty claim, certainly all direct expenses and costs associated with that, that's covered. And we'll be negotiating any other costs that may be covered under those warranty costs.

So I think for sure the direct replacement of costs of those vessels and equipment will be theirs. The maintenance cost incurred to remove and replace those, rebuild those will be covered under warranty.

And then we'll be discussing other costs that we believe should be covered by those contracts. So that's how I'd like to leave it.

Okay, and you specifically quoted a number, I believe, for the nitrous oxide. I want to say $2.5 million to $3 million. Can you -- what was the dollar value for the third quarter, I guess, related to the heat exchangers?

When you say heat exchangers --

Didn't you --

-- yes, probably about a million dollars.

Okay, but there's an ongoing issue, because you said you're going to need to replace them, right?

Not those specific heat exchangers. Those have been repaired and replaced. We have the nitrous oxide vessel that needs to be repaired right now.

Okay, got it. Sorry, say that again, Dan?

No, that's it.

Got it. And then switching over real quick just to the fourth quarter, you obviously talked a little bit about a differential, a change in your volume outlook partially due, I guess, to the downtime at the Pryor urea unit, partially due to some rebuild on inventory.

You put a number out there for fourth quarter for EBITDA. Can you maybe give a little bit more color on any other items that might be impacting the fourth quarter, any -- I don't know if you can kind of re-sum for us some of the repair costs or other abnormal items you'll be incurring in the fourth quarter.

Yes, as I said on the call, Dan, so the fourth quarter will include two things. We had previously disclosed when we put out a press release in early August about the downtime, that there would be a carryover effect of $5 million to $5.5 million from that.

And so we were still dealing with issues up at Pryor throughout October, and then we had some issues on the ammonia plant in October, as John outlined. So that number includes the $5 million to $5.5 million for that, but it also includes $2.5 million to $3 million of additional expense that we'll incur in the quarter related to the nitric acid plant at El Dorado.

So until we get that bypass system up, which should happen later this month, we anticipate that there'll probably be costs incurred in that range. We are expensing them, and, as I said, I think we're taking a conservative position on that. But we do expect to get reimbursed for that.

Okay. Without giving us guidance, as you look at 2017 if you assume normal operations and a continuation of the current price environment, do you anticipate being EBITDA positive in 2017?

Yes.

And do you anticipate that being sufficient to cover cash interests and CapEx, again assuming normal operations and even a continuation of current pricing?

I think yes, I think we feel comfortable that we could do that.

Okay. That's very helpful. And the last thing I want to talk about, I guess, is the pricing environment. Can you maybe talk about any material differentials between your realized prices and some of the market prices we're seeing, particularly as it relates to ammonia and what we're seeing in SAMBA?

Well, I mean, Dan, as you know, that's a good question, and as you know that there's a substantive portion of our ammonia that was out of El Dorado that we sell onto the pipeline, which is really a Tampa-based index. So we're achieving prices on a Tampa-related pricing environment. So that's one aspect of it.

Our agricultural ammonia, when we look at our net-net pricing compared to other folks we think we're doing very well compared to the rest of the competitors in the industry. Obviously it's lower than all of us would probably like. But obviously we're expecting some seasonal improvement as it goes forward into 2017.

So, while it's very low right now, I think the area that's probably too low and I would like to go up would be UAN. The price of UAN on a nitrogen basis is very, very low right now, and we're hopeful that that will move up modestly as we move into the season.

So I think we're seeing some positive signs on the market out there where we think prices have hit bottom. We don't see them going down any further at this point in time.

And we see some modest increases as we go forward in the next several months. It'll still be a modest pricing environment overall, but we do expect improvement over where we're at today.

Got it. And if you'll indulge me with one more on pricing, I know you guys don't have a ton of direct distribution, but just given what you hear from your retail channel, have you seen maybe not a material but just an improvement in demand at all? Because that seems to be one of the real challenges lately is just there's been almost no demand, which makes it really hard to come up with a price point. Have you seen actual kind of seasonal demand start to pick up yet that might allow a more normal pricing environment?

We have -- recently we have seen demand pick back up a little bit. So we're able to sell the product that we produce. And so I don't have concerns with demand at this time.

And we've said that the last couple of quarters. It was not a problem with agricultural demand. It was a pricing issue. But we have seen demand actually pick up.

I mean, right after the summertime, or in the July, August, even early September range demand was very, very slow. But we have seen some of the seasonal haul fill pickup, and we look for that to continue throughout the rest of the year and then as we get into the season for 2017.

Got it. Thanks for the color. Appreciate it.

Joe Mondillo, Sidoti & Company.

Hi, good morning, guys. I was just wondering if there's any possibility of restructuring the capital structure at all at this point, or is there really no options there in the near future?

Well, I think as part of our overall strategic review we're looking at all options, and I suspect that will be one of them, as well. As we said, we've just initiated this process. We haven't done a lot of work yet.

But as we go through that process we'll evaluate all options, including the one that you mentioned here. So I think that's up for discussion and for consideration by the Board, as well, on that process.

I mean, I guess, more specifically, obviously the preferreds are very costly. Do you see any option of getting around the restrictions maybe with the bondholders and being able to refinance some sort of structure with a bank and trying to pay off the preferreds? Or are the options sort of limited just given the restrictions?

No, I think that's a very question. I think it's a very good question. I think at this point in time we'd probably not like to comment on what we may or may not do. I think it's premature at this point in time to give real specifics, because there's still work to be done.

I think it's fair that we continue to look at our capital structure, and if there are opportunities to improve it, we're looking at that all the time.

Okay. In terms of the warranty related to the nitric acid plant, the work at El Dorado, I imagine you're anticipating some sort of cash payment in 2017. I just noticed it wasn't on the 2017 cash flow, maybe because you just don't know the timing and size.

Yes, I think the accounting rules are such that we're obliged to take the expense as we've incurred it. And, as Mark outlined, we have. And then as we receive the cash we'll record that at that point in time.

I think it's fair to say that there may be some warranty settlement in 2016 and then there may be some in 2017. The exact timing, I think, is still -- is not firm enough to give a projection on that. But between late 2016 and let's call it first or second quarter 2017 we should have most of that warranty cost reimbursed.

And we didn't include it on the 2017 sources of cash because I think we're just, again, trying to give a conservative view on what the sources of cash and the uses of cash are.

Right, understandable. Are we talking about a few million dollars or is this like $20 million plus, or could you just give a ballpark of what we're sort of talking about, potential cash?

Well, I mean, I talked -- I've already talked about $2.5 million to $3 million in the third quarter, and I think we outlined about $4.3 million in the third quarter. So whether we get all of that back or not, you're talking about $7 million, $8 million, and I think that's probably a starting point.

Okay. Okay. Also, I just wanted to ask, you guys provided a couple of quarters ago sort of a sensitivity chart related to sort of your EBITDA power relative to pricing. Was that chart accounting for the above name plate capacity of the 1,250 to 1,300 that you're sort of now looking at El Dorado, or was that -- what was that accounting for? Was that 1,000 at El Dorado?

It was 1,150.

1,150. Okay. And then just lastly, just wondering how you're anticipating on handling the preferred dividends, given the cash flow of the Company. Are you anticipating accruing those?

Yes, we would anticipate that we would accrue it all in 2017 to conserve cash.

Okay. All right. Thank you.

David Deterding, Wells Fargo Securities, LLC.

Hey, guys. Good morning. Just a couple of quick questions here.

On the EBITDA for the quarter, I think you had guided us to kind of an impact for the quarter of around $25 million hit to EBITDA when you put out your press release a couple of weeks ago, and we came in at negative $26.5 million. Is it safe to infer that basically you would have been EBITDA breakeven for this quarter had we not had the downtime based on current prices?

Yes, so we actually guided $25 million to $26.5 million in the press release in early October, and we came in at $26.5 million. So, yes, I would say if we didn't have the downtime we would've broken even for the quarter.

Okay. And then just to go back to an earlier question, you guys said that you feel pretty good about EBITDA covering CapEx and cash interests next year under kind of current pricing. I guess I'm just trying to reconcile.

You had been kind of this quarter cash flow EBITDA zero under current pricing, and I know we had the downtime, but how do you reconcile getting to cover maintenance and cash interest expense if you're kind of breakeven under current pricing?

Well, we did -- we still did have a turnaround at Pryor, so we didn't account for that, right? And on a comparative basis it was in both quarters for 2015 and 2016.

And then there were some other expenses that we carried. We're still incurring some additional expense down at El Dorado to handle some of the issues that we faced at the ammonia plant.

As John said, we're still kind of working out some of the kinks in the plant. So we still have some extra outside contractors there and some extra cost. And so I think when you pull that out in a particularly low quarter and low pricing environment, I think we feel comfortable that we could cover those costs.

Okay. And then as I look at your 2017 cash flow outlook and I just kind of use the midpoint of your range, of the $42 million to $51 million kind of cash at the end of this year, and then kind of looking at interest and maintenance and noncash --noncore assets sales, it looks like we're plus or minus, kind of free cash flow neutral before any EBITDA for the year.

So, stripping that out, let's just say EBITDA, and this is a hypothetical, is zero again for the year. What are incremental -- what incremental levers do you have to pull from a liquidity perspective that maybe aren't on this page right here?

Well, we still have the balance of our ABL, should we need it, right? I mean, usually you have an ABL to handle changes in working capital. So we could do that.

I guess theoretically if we wanted to -- I'm not suggesting that we would want to -- but we do have the ability under our indenture with our senior secured noteholders to borrow another $50 million, $25 million on a (inaudible) basis to those bondholders and $25 million on a subordinate basis. So, again, not something I think we would choose to do, but if you're asking me is there other liquidity if we had to, that's available to us.

And I think it goes -- you assumed a hypothetical zero. We don't believe it's going to be a hypothetical zero.

Right. I'm just trying to figure out what the other incremental levers to pull would potentially be.

And then just last question on more of the market. We've seen coal prices really spike up, especially in the Asian region. I would have to think a lot of these Chinese urea players are losing money with the coal prices where they are.

Have you heard, in your contacts with market, have you heard anything about this, and if they are losing money and exports continue to go down how long that might take to filter through the rest of the world?

Well, I mean, I'm not an expert -- it's a really good question, but I'm not an expert on Chinese coal prices. But certainly their rising coal prices, with all the reports we have and our information, is that is putting a price floor under urea that ultimately is exported into New Orleans.

So we would expect that to slow down as we go forward, as long as those coal prices remain relatively high. So I think it is going to improve the North American producers' position as prices strengthen in the Gulf.

I mean, we saw that urea prices had moved up just a little while ago, and as we get closer to the season we do expect those to move up modestly again. And I think how long it'll take to reverberate back through the system, I think we'll see that in this entire season. Turning those exports on and off on a dime is a bit more difficult for them, as we understand it.

So I think it's a positive sign for the market, although I think it'll be modest, a modest price improvement. It's a positive sign that we're likely to see some prices firming just a bit here as move into the latter part of 2016 and into early 2017.

I think just to add, I mean, if we see imports into the US from China reduce, and a lot of people are worried about this new capacity coming online, and a lot of it's being upgraded to urea and UAN. And so clearly if we have less imports into the US that'll allow the new urea production capacity to come and find its natural distribution channels within the US on a quicker basis than it would if you had continued imports from China.

Great. And last one, just on the ABL, I saw it becomes current November 2017, a year out -- I'm sorry, April of 2017. Have you had any conversations with your bank group just regarding refinancing?

It's always ongoing.

All right. Thanks, guys.

Bob Amenta, JPMorgan.

Thank you. Just one follow-up, I may have missed it. The asset sales for next year, did you say what those were or what specifically assets those were, the $20 million?

I don't think we're going to identify specifically what they are, but we've got things on our balance sheet like our Marcellus shale working interest, and we still own a small engineered products company, and we have other pieces of equipment that are sitting on plant sites that from time to time we're presented with offers, and probably a good, opportune time to take advantage of those. So I would say that we've got a number of other noncore assets that we have on our books, and we'll look to monetize those.

So these aren't things that would impact whatever, $50 million, $75 million, whatever we try to calculate on EBITDA for next year based on ammonia prices and gas and all that. These are not EBITDA-producing things in that sense.

Zero impact.

Zero. Okay. Thanks.

Owen Douglas, Robert W. Baird & Company, Inc.

Hi, guys. I wanted to just really kind of get a sense for, so, as you can talk about these operational improvements and the fact that you have some production offline now, limiting 4Q, how should I think about your ramping your ability to sell product and/or work down some working capital in 2017?

Well, I think, as we indicated earlier that we're at full rates at Pryor and at Cherokee and at Baytown. So all three of those plants are operating at full rates. And the ammonia plant in El Dorado is operating at full rates.

We should have the nitric acid plant up and running in El Dorado before Thanksgiving. So we would expect El Dorado to be running at full rates on all operations, including the nitric acid plant, pre-Thanksgiving.

With respect to working capital, we see building working capital a little bit. As Mark said earlier, we depleted a lot of inventory during the downtime, and we're building a little bit of ammonium nitrate inventory to get out to those distribution domes or distribution sites that I spoke of earlier for the season.

So we'll build a little bit of working capital here over the next several months. But that'll be, obviously be depleted as we move into the ag season in the April-May time frame that'll be worked right back down. So we would expect a little bit of working capital build, but it should be cleared out shortly after the season.

We think we have a fairly good handle on our inventory levels. We did miss a few ammonia sales into the pipeline when El Dorado facility is down.

But, as we said, I think we're up and running now and reasonably confident that we can keep those plants back at that 95% rate where we were in the first half of the year, particularly at Cherokee and Pryor. And the work we've done at El Dorado and the rates that we're currently running at right now on the ammonia plant, we're very comfortable that we should be able to hold those throughout the year and into 2017.

Okay. So you are pretty confident, it sounds like, in your ability to meet that spring selling season. And have you had conversations with any customers? Have they expressed any, what's the word, sort of concern about your ability to meet their demands?

No, we're confident we can meet their demand, and no one's had any queries or any concerns on our ability. I mean, we keep our key customers that we have sales agreements with, we keep them informed as to our status and we work well with them, so no issues at all.

Okay. And switching gears a little bit now to the industrial side of things, I mean, coal prices, net coal prices have soared recently, and I believe that's sort of spurring a little bit of interest in restarting some mines domestically or increasing production there. Are you guys starting to see any of that pull through some demand for your products?

That's a really good question. We're seeing a good, stable flow of product going into the mining sector. However, it made a step change down when a lot of these coal plants were shut down a year ago or nine months ago.

So there was an overall reduction in volume. And we expect that step change to be permanent, although we've seen -- we have a reasonable volume of product going out right now, and if the market continues to improve we'll probably see a modest pickup.

But we don't expect significant increases in volume into that market. A steady and slightly growing volumes here in the last several months, but we look at that as just a steady growing piece, but not anything significantly changing over the next several quarters.

Yes, remember, I mean, while we're seeing coal prices increase there's always going to be a lag in the time frame of people restarting mines and when the demand for our AN product would be.

Well, keep in mind that with the significant reduction in overall coal production there was a lot of excess capacity out there in the market, and there's still a lot of excess capacity for low-density ammonium nitrate out there in the market. So there's plenty of producers that are willing and able to produce it, and I don't see prices moving up dramatically on that. I think some volume can be easily served by the existing capacity.

Okay, and final one, I'm not sure if I missed this one earlier, but have you guys provided any sense for how you think about 2017, I mean, given where you're seeing gas prices, you're seeing the market, right now, your conversations with customers? Do you have a sense for how 2017 EBITDA will compare to 2016, which was a year with a lot of, I know, one-offs?

I mean, I think that's a really good question. And what I can tell you is things that we've said before.

We expect to fully sell out all our volumes that we have. So we don't see this as a demand issue, absent the low-density ammonium nitrate for the mining market. We see all of our products being sold that we can produce, and we intend to run at full capacity.

With respect to pricing in the market, I've tried to provide a few comments on our view. We see some modest improvement in prices. I don't think it's anything that's going to be very dramatic, but we do see that.

And in general Mark has kind of outlined our other CapEx and cash flow items, but we haven't provided a forecast of EBITDA and right now I don't think we're prepared to do that. But that's -- we think 2017 will be better than 2016.

I would say we started really focusing on 2017 in the latter part of 2015. And we knew that 2016 would be not this challenging, but a somewhat challenging year for us and a transition year for us, because we've had new facilities and a major expansion done in El Dorado.

I mean, we're still working on really working out a number of issues that we had up at Pryor. I think we always talked about a 95% average on-stream rate for ammonia then, and we continue to believe that we can do that. So we would expect significant improvement in 2017 over what you saw this year.

Okay. Thanks very much, guys.

Thank you. We have reached the end of the question-and-answer session.

Mr. Greenwell, I would now like to turn the floor back over to you for closing comments.

Well, thanks, everyone, for participating in our conference call. We appreciate your interest and look forward to speaking to you next time. Thanks so much, and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.