LSB Industries Inc (LXU) 2016 Q4 法說會逐字稿

Greetings and welcome to LSB Industries' fourth-quarter 2016 conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Miss Kristy Carver, Vice President and Treasurer. Thank you Miss Carver. You may now begin.

Thank you Manny. 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 the 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. We appreciate your time and are pleased to have you on our call. During our call this morning, we will cover our 2016 fourth-quarter results and, more importantly, provide our views of 2017 plant operations and nitrogen markets. Mark will provide a comprehensive review of our financial performance for the quarter and an outlook for 2017 with the potential earnings power for the Company as the market strengthens.

As we previously announced, we reduced leverage further during the quarter by paying down an aggregate $100 million of our senior secured notes after redeeming $80 million of preferred stock in the third quarter. Our sales were $85.4 million in the fourth quarter of 2016 compared to $90 million in the prior-year fourth quarter as strong volume increases in the fourth quarter of 2016 for most key product lines could not be offset by product sales prices that were substantially lower.

Our sales team continues to aggressively seek markets where we have not served in the past. We are seeing these strong sales volumes continue in the first quarter of 2017, and our order book is shaping up nicely for the second quarter of 2017.

While sales prices in the fourth quarter of 2016 were lower than in prior year, we saw agricultural market sales prices strengthen toward the end of 2016, which has carried over to our first and second quarter order book. We have seen an early ammonia application run in the Southern Plains and portions of the Midwest, which has led to very strong volumes during the first quarter of 2017. Our high density ammonium nitrate sales growth strategy yielded positive results during the fourth quarter and we are excited about the continued prospect for growth in 2017.

Our UAN markets continue to be robust. Most of our industrial business has either a Tampa ammonia or gas pass-through link pricing mechanism. However, our sales price of our excess ammonia at El Dorado that is sold into the pipeline is indexed to Tampa ammonia, and with the Tampa ammonia strengthening in recent weeks, we will benefit with increased pricing and improved margin.

Our cost cutting activities, along with our operational improvement efforts, are yielding tangible financial benefits. Our fourth-quarter EBITDA results were better than expected by over $6 million. Mark will provide further discussion on our results in his financial review.

We do expect significant improvement in our operating results and cash flow as we move into 2017. We are very pleased with the operational improvements we are seeing, and John will provide an update on our plant operations and expectations for on-stream rates.

In 2017, we also expect to recover costs we incurred during 2016 as a result of warranty claims. The final amounts and final timing are yet to be negotiated. However, we believe we are in a strong position to get a recovery from the contractors.

I will now turn the call over to John to provide a brief recap of our operating performance in the fourth quarter and our view of 2017 on-stream rates. John?

Thank you Dan. Good morning. I'm pleased to say performance at Cherokee, Pryor and Baytown plants were extremely good in the fourth quarter and are performing as expected so far in 2017.

As for El Dorado, we continue to make progress and improve on-stream time during the shakedown period for the new ammonia and nitric acid plants with current production rates of both at or above the nameplate design.

At El Dorado, the ammonia plant production rates are currently at or above 1,300 tons per day, which is well above the 1,150 ton per day design. The ammonia plant had some downtime during the fourth quarter to repair heat exchanger tube leaks and make a design change as well as replace and upgrade some equipment.

To permanently fix these recurring heat exchanger leaks, we have put new heat exchangers on order. The ammonia plant had on-stream time of 73% for the fourth quarter, and since coming up after some early January downtime, we have had 99% on-stream time from January 10 through today.

The new nitric acid plant had a 27-day outage in October to design and install a bypass around the nitrous oxide abatement vessel. If you recall, we had well figures in the vessel making it inoperable. The vessel was removed and we received a temporary permit modification to allow us to bypass it and give us time for the technology provider to redesign, build, and install a new vessel.

We expect this will take until the end of 2017. However, our temporary permit allows us to run on the bypass until May of 2018. Since the plant restarted following the bypass installation, the plant has operated at 95% on-stream time, which included a day of downtime for a scheduled catalyst change. The rest of the El Dorado production units are operating well and are producing to meet customer demand.

The Pryor facility had an ammonia plant on-stream time of 90% for the fourth quarter with urea and UAN production above plan. The ammonia plant has had 99% on-stream time so far in 2017. The rest of the upgrade plants are operating well to meet customer demand.

The Cherokee facility also operated very [well] with 100% on-stream time for the ammonia plant with urea and UAN production above plan for the fourth quarter. The ammonia plant has had 99%-plus on-stream time so far in 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 operating very well. So far in 2017, the plant is performing well at or above our budgeted production levels. As mentioned in our last call, we have pulled a significant amount of costs out of the plant budgets in 2017 and, as of today, we are meeting those newly reduced expense budgets. Operationally, we continue to expect 2017 to be a very good year.

Now I will turn it over to Mark to discuss the financial performance of the fourth quarter.

Page 10 of the present -- thank you John. Page 10 of the presentation provides a consolidated summary statement of operations for the fourth quarter of 2016 as compared to 2015. 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 partially offset by higher production and sales volumes at each one of our facilities.

In addition to lower selling prices, gross profit declined versus the fourth quarter of 2015 as we incurred $8.5 million in additional depreciation expense in Q4 2016. Our new ammonia plant at El Dorado went into production midyear and we began depreciating that asset after it entered service. Offsetting these two factors, with improved production, we had better absorption of fixed costs at all of our facilities, lower planned fix costs and lower feedstock costs.

As we discussed in the third quarter, we implemented an expense reduction program with a goal of reducing SG&A expenses by approximately $6 million annually. That goal was achieved and we are seeing some of the cost savings come through in this fourth quarter as consolidated SG&A was down approximately $4 million as compared to the fourth quarter of 2015. Approximately $3 million of the reduction is related to personnel cost reductions. Our current SG&A run rate is now between $30 million and $35 million for the year.

You will note that we took an impairment charge of $1.6 million during the fourth quarter of 2016. This represents the non-cash write-off of goodwill that was created when we purchased El Dorado in the early 1980s.

Interest expense for the quarter increased approximately $9 million over Q4 2015 as we stopped capitalizing interest related to the expansion at El Dorado when our new ammonia plant began operating midyear.

As we previously announced, we repaid $100 million of our debt in October from proceeds from the sale of our Climate Control business. As a result, we recognized a loss on extinguishment of debt of approximately $8.7 million that is reflected in a separate line item on our income statement.

Lastly, adjusted EBITDA was $2.8 million for the quarter, a $5.3 million improvement versus Q4 2015 EBITDA loss of $2.5 million. This also compares favorably to the fourth-quarter EBITDA guidance I gave last quarter as part of our Q4 cash flow outlook, which forecasted an EBITDA loss for the quarter of between $3 million and $5 million. The improvement in actual EBITDA versus forecast was primarily driven by improved operating rates that yielded better fixed cost absorption and provided more product for sale. Please refer to our reconciliation of non-GAAP measures beginning on Slide 17 for further information on non-cash and one-time costs incurred during the period.

In order to give further clarity on the results of the quarter, Page 11 bridges our consolidated adjusted EBITDA for Q4 2015 to Q4 2016. As I mentioned earlier, lower selling prices of our products was a big drag on EBITDA as they had a negative impact of more than $15 million compared to Q4 2015. However, improved sales volumes of products for the quarter provided an additional $11 million of EBITDA. The sales volume increase was driven by better on-stream rates at Pryor and Cherokee versus Q4 2015, improved sales of HDAN as we broaden our distribution of that product, increased ammonia sales as the new ammonia plant at El Dorado was producing during the quarter that was not yet in operation in Q4 2015, and increased sales of our acid products.

With improved on-stream rates yielding improved production during the quarter versus Q4 2015, we had significantly better absorption of our fixed costs. That, coupled with the reduction in planned fixed costs versus the fourth quarter of 2015 resulted in an improvement in EBITDA of over $8 million.

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 $6 billion in EBITDA by producing our own ammonia versus previously purchasing it.

As we have also previously discussed, we incurred repair and restart costs due to issues at our nitric acid plant at our El Dorado facility. These costs negatively impacted EBITDA during the quarter by approximately $2.3 million. Since we restarted the nitric acid plant in November, we stopped incurring any of these costs. We do not anticipate incurring these going forward. 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.

As John mentioned earlier, during the quarter, we experienced some downtime at our El Dorado ammonia plant during the shakedown period. As a result, we incurred costs related to repairs and had to purchase some ammonia to cover sales. That resulted in a reduction in EBITDA of $4 million. And lastly, lower corporate overhead contributed to the balance of the year-over-year EBITDA improvement.

The right-hand column of this page reflects normalized EBITDA by assuming that selling prices are consistent in each period and excluding the costs incurred related to the nitric acid and ammonia plants at El Dorado, as we should not incur these costs going forward. While we recognize product selling prices move with general market conditions, this analysis provides a view of the operational improvement activities that we have undertaken. The EBITDA improvement quarter-over-quarter was a $26.8 million improvement, showing significantly improved operations.

Page 12 outlines our capital structure as of year-end 2016. We ended the year with $60 million in cash, which was higher than our previous outlook for cash that we gave during Q3 2016 earnings call as we had better-than-expected EBITDA, an earlier closing on a sale of a non-core asset, and a tax refund which we didn't forecast. Additionally, our ABL facility was undrawn and had $35.7 million of availability. We remain undrawn on our ABL facility and, as of January 31, 2017, we continue to be undrawn, and as a result of increased sales, we had $40.5 million of availability.

During the quarter, we repaid $100 million of senior secured notes and as a result, we now have $375 million in senior secured notes outstanding. That, combined with other debt of approximately $53 million, left us with a total outstanding debt at year-end of approximately $428 million, excluding the unamortized discount and issuance costs associated with our debt. We also had outstanding preferred stock of approximately $162 million, including approximately $22 million in accrued and unpaid dividends.

For 2017, we currently expect to continue to accrue the dividends in our preferred stock as we do not meet the 2 to 1 fixed charge coverage ratio needed to make restricted payments. However, should current trends in our end markets continue, we will consider using excess cash to reduce leverage either through the repayment of debt, or, if we meet the required fixed charge coverage ratio, the payment of accrued dividends.

Moving to Page 13, we outlined our free cash flow. The significant net income for the first 12 months of this year relates to the gain on the sale of our Climate Control business. Backing that out, we used approximately $22 million for operations for the year. We had significant capital expenditures during the year, 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 as we incurred slightly over $11 million in CapEx during Q4 2016.

As we have stated previously, going forward, we expect to incur maintenance capital expenditures of $30 million to $35 million that will focus on enhancing the safety and reliability of all of our plants. Net cash used by financing primarily reflects the redemption of preferred stock and the senior secured notes that occurred during the year.

Please turn to Page 14, where I will discuss our outlook for 2017. In addition to our outlook for sales volume by product, depreciation and interest expense, which we have provided in previous quarters, this quarter, we have added additional operating and financial metrics that we believe provide more transparency to help in understanding our business. Since 2015 and 2016 were a transition period for LSB, the historical results from these years are not particularly useful in projecting what our future performance should look like under more steady-state operations.

The metrics we are providing on Slides 14 and 15 are meant to serve as points of reference for how we currently are thinking about our targets for 2017. We've tried to capitalize -- we tried to capture potential variation in factors such as demand, on-stream rates and cost levels by using ranges. With that said, we do not plan to provide updates to all of these metrics on a quarterly basis with the exception of sales volumes or if there is a substantial change to our view on one of the other items.

Product sales volumes for the full year of 2017 are presented on the top half of the page. As a result of improved operating rates at all of our plants, aggressive marketing of HDAN and nitric acid and mixed acids at the El Dorado ammonia plant operating for a full year, all product sales volumes with the exception of AN Solution are higher than corresponding product sales volumes for 2016.

You will notice that we have separately edified nitric acid sales at Baytown. As many of you know, we manage the Baytown facility on behalf of Covestro, and receive management fees for managing the operations and marketing nitric acid at that facility.

Our agreement is structured so that we record all nitric acid sales and cost of sales for products sold out of that plant, including the full cost of purchased ammonia. In effect, our financial statements reflect the gross-up of sales and cost of sales. Therefore, when thinking about profitability for managing the Baytown facility, EBITDA has traditionally been between $4.5 million and $5.5 million annually, which represents a high single-digit EBITDA margin on that business.

On the operations front, as John has previously mentioned, given the CapEx we have invested over the last four years, including the work done last fall, we are expecting our three ammonia plants to operate at an average on-stream rate of 95% for the full year. Based on that, we are expecting to produce between 780,000 tons and 820,000 tons of ammonia for the year.

As far as turnarounds for the year, we have only one scheduled at Pryor, which will be in the fourth quarter of 2017, and is expected to last 21 days. The approximate expense of that turnaround will be about $2 million.

Turning to the financial outlook for 2017 on Page 15, we have provided additional financial metrics, including variable and fixed cost, which we believe provide additional clarity when looking at our business. Many of you have asked about fixed plant costs, and we have provided a range for those costs for 2017. We have identified certain fixed and variable costs that we believe we can reduce. We will be working on reducing those costs this year, but we have not included any reductions in the expense ranges provided.

Lastly, I discussed last quarter that we identified certain non-core assets that we expect to sell in 2017 for net cash proceeds of between $20 million and $25 million. During Q4 2016, we sold some idle equipment for approximately $5 million in net proceeds, leaving us additional assets to sell in Q1 and Q2 of 2017 that will generate between $15 million and $20 million in net cash proceeds. We are currently in negotiations on all of these assets.

2016 was a transition year for us. Our main goals were to complete the El Dorado expansion, to continue to improve the reliability of all of our plants, and to increase the sales and distribution of our products. We incurred numerous costs last year: to start up our new ammonia plants at El Dorado, to make repairs to a new nitric acid plant at El Dorado that we believe will be reimbursed under warranty, for additional plant expenses related to shakedown issues after the startup of our new ammonia plant at El Dorado, and for extended turnarounds at Cherokee and Pryor. We believe all of these issues are behind us.

We are excited about our prospects for 2017 as our forward sales orders for UAN and HDAN stretch into the second quarter at prices that are more favorable than what we saw in the end of 2016 and at the start of this year. We believe that we will generate EBITDA for the year that more than covers the top end of our outlook range for interest expense and CapEx for the year, and that our Q1 2017 EBITDA will exceed the adjusted EBITDA we had for Q1 2016 despite a much lower current selling price environment compared to Q1 2016.

On Page 16, we provide an EBITDA sensitivity analysis table. Many of you have seen this before, but, in the past, it only represented our chemical Business. This table now reflects sensitivities to consolidated EBITDA, which includes all corporate expenses. Please keep in mind that this table includes some assumptions. First, the Tampa ammonia price represents an average price for the full year. Second, it assumes that we are operating at close to desired on-stream rates which we expect to achieve over the next 12 to 18 months. Lastly, it assumes a consistent correlation between ammonia, UAN and HDAN, which at times may not be the case.

We believe that the sensitivity analysis reflects the earnings power of our business and shows that we have significant operating leverage from improved operations and increased product selling prices.

I'll now turn it back over to Dan to wrap up.

Thanks Mark. As you've heard, we are excited for 2017, as it represents a full-year of all of our plants in a full operating mode. We expect growth in sales volumes and improved market pricing. Once we get through the first half of 2017, we anticipate some seasonal price moderation. We do not expect to see prices that we experienced in the second half of 2016.

We believe the market now realizes the low prices in the second half of 2016 were unsustainable. Of course, we always have the unknown aspect of Chinese urea imports.

North America is becoming more self-reliant because of the recent capacity additions. We believe the market has digested the new volumes and can better manage the supply chain surrounding the required imports. While nitrogen prices will continue to fluctuate in a global market, we believe the dramatic flow swings we saw in 2016 should improve in 2017 and have less volatility.

We are confident with our financial position and operational view for 2017. We believe 2017 will be a transition year from 2016 and earlier years. We will be at improved operating rates for 2017 and will continue to reduce costs. As Mark indicated in the financial review, we believe our operational cash flow will more than cover our capital spending needs and interest costs. Any excess funds will likely go towards further delevering of our balance sheet.

In 2017, we plan on accomplishing four key initiatives -- number one, improving the on-stream rates of our chemical plants. We have made and continue to make upgrades to the operations teams at our chemical facilities, continue to make investments of capital to enhance the reliability of our plants at each facility in order to avoid unplanned outages, unplanned downtimes, and reduce the frequency of planned turnarounds, and continue the efforts to focus on safety throughout the entire operations.

Number two, broadening the distribution of our ammonium nitrate and nitric acid products. Given the reduction in our low-density ammonium nitrate sales from the declining use of coal, we have broadened our overall sales of high-density ammonium nitrate through a number of marketing initiatives that have broadened our addressable markets. Those initiatives have included storing ammonium nitrate at our Pryor and Cherokee facilities, and selling to new markets and customers out of those facilities. In addition, through our marketing efforts, we are working on expanding our market for nitric acid products to parts of the Western US and Canada.

Number three, reducing and controlling our cost structure. In 2016, we put in place SG&A expense reductions of approximately $6 million per year that we are realizing in 2017. In addition, in 2017, we have reduced plant costs at each of the manufacturing facilities by approximately $6 million. We will continue to review our overall costs and we believe that we will be able to reduce costs further during 2017.

Number four, selling non-core assets. In 2016, we identified assets that are no longer necessary in the operations of our business. Those assets include our working interest in the natural gas properties in the Marcellus Shale, our engineering products business, certain pieces of equipment and real estate. In the fourth quarter of 2016, we sold a portion of this equipment for approximately $5 million and we are in the process of selling certain other non-core assets, as Mark indicated, which could generate an additional $15 million to $20 million of net cash proceeds. That includes reducing any debt that's associated with these assets.

That concludes our prepared remarks. But before we move into questions, I would like to briefly comment on the process we announced in November to evaluate potential strategic alternatives available to the Company. The process is ongoing, and we will not be giving any update on the process until the board completes its review and approves a definitive course of action or concludes the review process.

I'd like to remind everyone that the purpose of today's call is to discuss our fourth-quarter results and outlook for 2017, so thank you in advance for keeping your questions on that subject.

Operator, I'd like to open it up for questions at this time.

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

Hi everyone. Good morning. So, my first question, just regarding the nitric acid bypass at El Dorado, just wondering if you could expand on what you sort of see, if there's any risk behind that as we progress through the year in terms of your vendor that you're working with to try to fix that, and then as well as any other risks amongst all the other plants to your 95% sort of on-stream goals.

This is John. Yes, that process of designing the new vessel, there's going to be some modifications because of the material of construction, but these are technologies that are used in this industry, and I'm not concerned about specific risks associated with the new vessel. You know, we got what I consider the A-Team working on this, this redesign, and with a lot of experience in this type of field.

With regard to the other plants, I feel real good about where we are with the facilities. We had some issues during turnarounds, and that's the purpose of a turnaround, is to identify things that we need to repair so we can have longevity and good on-stream time. And we took a little extra time. We made some modifications and improved designs to help us get through the one to two years between turnarounds. And I feel good about 2017 going forward.

Okay. In regard to the capital expenses that you are estimating for the year, it was probably at least $5 million to $10 million less than I was sort of anticipating at sort of a maintenance level. Obviously, maintenance levels are a lot lower than I was actually anticipating. But I'm just wondering. Is that $30 million to $35 million, is that maintenance levels, or what is that encapsulating? And is that an annual type of a run rate going forward? In terms of maintenance spending, how are you looking at that?

It's related to capital. It includes general replacement of existing equipment as well as upgrades. So -- and that's our view. We put together a five-year capital plan, and this is based on our view of things we need to do in the facilities over time during turnarounds and such to maintain our reliability and on-stream time. So I'm good with the numbers we have forecast.

And is that sort of an average for the next five years, or is that just 2017 sort of falling in place at $30 million to $35 million and we could see an uptick in 2018, or is that a normalized annual level?

Yes, I would say it ebbs and flows a little bit, but that's kind of the range that we see over the next five years, average per year over the next five years.

Okay. And then I guess just lastly, in terms of fertilizer prices, Dan, you mentioned in your I guess last part of your prepared remarks regarding I guess you were insinuating maybe volatility is going to be a lot less this year, but you also mentioned the low prices that we saw in the back half of 2016.

I'm just wondering what your overall thoughts are with all the supply that's coming online. And I believe we just got a little bit more online at that OCI plant in the first quarter here. But it doesn't look like we are having anything else coming online going forward. But just in terms of pricing and what we saw in the back half of last year in particular, do you think we could potentially hit those prices again, and just going forward, just what your outlook there is?

I think I said in my comments that we expect prices in the first half of the year were pretty robust and we've seen an early demand surge from ammonia and from AN and from UAN. So we feel very good in the first half.

And traditionally, Joe, in the second half, after the season is over, you see some moderation in prices. But as I indicated, we don't see prices going down to levels that we saw in the second half of 2016. We saw we think a dramatic overreaction to the market in 2016 in the second half of the year. We do not see it going back. We believe the market has digested the new capacity. We believe that the distribution channels are being worked out.

I think there were a lot of unknowns last year. I think a lot of those unknowns have been flushed out, and the distribution model, particularly as it surrounds imports, is being settled. So while there's the traditional seasonal moderation, we don't believe they're going to go back to levels that we saw in 2016.

Okay, great. Thanks a lot. I appreciate it.

Brent Rystrom, Feltl and Company.

Thank you. Good morning. A couple of quick questions. You guys have previously talked about kind of a goal to get the three plants up to not necessarily world-class, but certainly a higher class in both performance and in the quality of the equipment and the systems. Dan, in the past [and in] travel, I thought you've talked about 2017 will be kind of the last major push to get you to that level. Is that still kind of the timing and thought?

I think, 2017, we are making good progress on that, but we want to continue upgrading the control systems and beyond. And that's really -- I think when we get Cherokee and Pryor at 95% and El Dorado at 98% uptime, I'm talking about the ammonia plants, I think that would be something that would be certainly what we are targeting. We are not expecting 98% in El Dorado this year, in 2017, but we certainly are expecting those other plants to perform.

I think we want to continue upgrading our control systems is some of the stuff that will be ongoing. As John mentioned in his comments of $35-plus million, we will continue to upgrade control systems. El Dorado has the latest and greatest control system. We want to push some of those systems out to the other plants, particularly at Cherokee and Pryor. So that work will be ongoing for the next couple of years.

Okay. A follow-up ?- not a follow-up, but it's a question on spring demand. A lot of the Upper Midwest, and particularly, John, getting back to your old territory, we don't have frost this year on the ground. So my suspicion is we are going to have a fast and early spring application season. Is that something that you guys are expecting as well, not just down in the Southern markets but also more in the Midwest?

This is Dan. I'll answer that. Yes, we are seeing that. Actually, we are moving ammonia and other products into Missouri, and Kentucky as well. So the Southern Plains plus some of those I call it middle states, we are moving product into those early. So, it has been an early positive season for us.

How should we think about volumes and pricing 1Q versus 2Q? Traditionally, the 2Q would be bigger and typically better pricing than 1Q. Does this change your thoughts in that traditional relationship, given that it might be coming earlier?

No, I don't think so. I think keep in mind some of the first quarter shipments were carryover for some of the lower pricing -- from orders we took in the fourth quarter. So some of that carryover is coming into the first quarter of fulfilling those orders. Our Q2 pricing should be quite a bit higher than our Q1 pricing.

So we have a good view towards our order book for the second quarter, and we feel very positive on the pricing that's coming into second quarter, both volumes and pricing into the second quarter. So Q2 quarter pricing will be higher, and I think primarily due to the carryover of some orders that we had taken at the end of 2016.

And keep in mind, we had a substantial order book out of Pryor that, when that plant went down, we had some of those old orders that we had to fill later in the fourth quarter of 2016 and then carry over in the first quarter. So those older, lower priced orders will be coming out of our system completely by the end of the first quarter.

If you remember, we've talked about this before. We generally for most of our products, particularly on the ag side, we don't have a problem selling out our products. If we can produce it, we can sell it. So as long as we're producing, we are selling, and that's why you won't see as much variability between first and second quarter.

And from a volume point of view ?- from volume, from pricing it will be higher in the second quarter.

And then I believe it was on our last field trip down to EDC in November, you talked about developing, and I think you touched on this earlier in the call, I was just hoping you might give us a little more sense, but you talked about developing some new distribution capabilities, particularly with ammonia nitrate. Any updates or thoughts on how that's going?

It's going just as we communicated to you back in November. We've got a broader distribution strategy. It's working. Volumes are increasing. We are happy and pleased with the progress that we've made. It's something that we will continue to push forward. We are expecting 2017 volumes to be higher than 2016 volumes. And it's working well. We are very pleased with it.

To emphasize that point, for the full year of 2016, we sold around 220,000 tons of HDAN. And our sales volume outlook for 2017 is 260,000 to 280,000.

Good to see, guys. Congratulations on all the up-stream rates and making the progress.

Stefan Neely, Avondale Partners.

Good morning guys. Thanks for taking my question. So, I wanted to follow up a little bit on the on-stream rates at El Dorado. Obviously, you are still working on getting that up to 98%. Do you have any kind of feel? You said it wouldn't get there this year, but do you have any kind of feel how long that is expecting you to take and maybe what the average on-stream rate may be for this year?

Yes, I think we indicated that we expect, on average, all of our facilities to be at an average 95% rate for 2017. And clearly, with the control technologies we have on El Dorado (technical difficulty) talking probably another 12 to 18 months until we find tune it, and I think our expectations at that point would be that ammonia plant should be at a 98% or so on-stream rate.

Okay, excellent. And also, you talked about the turnaround schedule for this year and having Pryor in Q4. I was curious. Do you have any -- and I think you may have mentioned this previously. Do you have any plans for taking Pryor to a little bit more of a every-other-year schedule for turnarounds at some point in the future?

This is John. Yes, we do. We strive to extend our turnarounds, and we are looking at all the locations actually. But yes, Pryor, there are still some things. Dan mentioned upgrading instrumentation and control systems. That's one of the things we are working on over a period of time. It's pretty expensive, and so we kind of do sections of the plant each year to continue.

And as we improve those controls, there are some upgrades and some equipment, heat exchangers, improving water treatment, things like that that allow us to extend our turnarounds. And we are in that process right now. So, I would say, within, say, 2019, we are thinking that we will be going to two-year turnarounds from there on.

Okay, excellent. And I guess for Dan, I wanted to get a little bit -- and maybe you've already covered this earlier on the call, but I may have missed it -- get your take on the import markets, how things are tracking there, especially with all of the domestic supply coming online. How do you see things shaking out there and going through the rest of the year if we are seeing maybe a pullback in imports as we have more domestic production?

I think it's clear that the import market responded certainly in the second half of 2016 with the low prices and the imports stopped coming. So they are down substantively, and particularly the Chinese urea. I think the US will continue to need imports, although much less than was needed in the past.

You have the issue with the Trinidadian gas supply, so the ammonia coming from Trinidad. The question is the volumes will be there. But the US will still require imports. But I think the risk profile of importers has changed dramatically over the last couple of years whereby cargoes that used to be able to float in and push up river and distribute, they could make a margin without a lot of difficulty.

I think that risk profile for importers has changed with the domestic producers. Having the capacity here and the capacity growth, I think that's really changed it. So I think importers will have to be bold and be willing to take a lot of risk, because I think domestic producers have the lion's share of the market and the distribution channel.

So, I think the volatility that imports had in the past will be significantly reduced as we go forward. I think that's probably the biggest key, is import volatility and the movement of prices will hopefully be mitigated.

Okay, perfect. Thanks a lot and congratulations on all the progress.

Roger Spitz, Bank of America Merrill Lynch.

Thank you. Good morning. I'm not sure I heard correctly. Did you talk about some modest operational issues in January? And if you did, what would be the EBITDA impact of that?

I think John mentioned that we had a little bit of operational downtime at El Dorado in the ammonia plant, but it will have minimal impact.

Minimal, okay. And I don't know if you'd be willing to do this, looking at the Page 11, where you gave the normalized Q4 2016 EBITDA, the $24 million, which I guess assumes Q4 2015 nitrogen prices, how would that look if you were to adjust that normalized Q4 2016 EBITDA to Q1 2017 price levels?

Yes, we are not going to speculate on what our EBITDA would have been on 2017 price levels, Roger.

Understood. Thanks very much.

Bob Amenta, JPMorgan.

Thank you. A couple of questions, one on just the debt amortization. Obviously, your balance sheet shows short-term financing of $8 million, and another $13 million or $14 million coming due. So is that -- I see the $6.5 million promissory note in the 10-K. So do you really have $22 million that you expect to have to pay off this year, as shown in the balance sheet?

The short-term financing is really insurance financing, so we finance all of our liability insurance. So, that's paid off monthly. That's part of our, really, operating budget. So, no, the real debt pay-down that we are talking about is $13 million.

Okay. And then just sort of getting back to that chart you did on Page 16 about the sensitivity, it sounds like this obviously assumes El Dorado is at 97%. You are at 84%. So it doesn't look like -- if I just took $3.00 and $300, just to pick a spot, it's $118 on this chart, it sounds like what you are saying is that EBITDA, even though you won't be at 97% EBITDA this year based on what you think pricing might do or where it is now, should be in that $70 million -- should at least be that $70 million, which is the interest and CapEx. So (multiple speakers) gas is $3.00 a share and ammonia is $300, you're not going to do $118 because El Dorado will not be ramped up to where it needs to make this chart relevant. Correct?

That's correct. Just to be exact, I think we said that we felt comfortable that EBITDA for this year would exceed the $70 million.

Okay. So you said cash flow, I wasn't sure if you were throwing that $15 million or $20 million of asset sale proceeds in there when you were talking about exceeding. So you're saying EBITDA by itself should exceed that, and on top of that, you will have $15 million or $20 million hopefully of assets?

Yes.

Okay, that's all I had. Thanks.

Gregg Hillman, First Wilshire Securities.

Good morning gentlemen. Dan, during investor day, you mentioned having ammonia in El Dorado would allow you to do more forward contracts on things like UAN without risking losing your shirt. Has that proved to be the case? Are you being able to sign up people more in advance for volume?

That's typically how the fertilizer market has been operating for the last several years, the last 10 years. When we were buying ammonia from the pipeline before El Dorado was up, we couldn't go forward on our forward sales book because we were buying ammonia on a month-to-month basis. And the market really buys in that fashion.

So, we were playing around the edges for I call it spot order business, which is a very tough way to live. So, yes, we are participating in a forward market actively right now, which is a fairly substantial change from what the Company had done in the past. But that's the way the market operates, and it's been beneficial to us. It's clearly been beneficial to us.

How many months do you go in advance with booked orders?

It depends. We are well into the second quarter. We are well into the second quarter with some orders right now, and feel pretty good about it. So it really depends on the time of the year and how the market is responding. Obviously, the early -- I call it the early kickoff to the market where guys felt like they needed the product, the orders started coming in pretty quickly, and we've got a good, solid order book into the second quarter.

So it just depends on the time of the year and the market sentiment. Sometimes they will buy aggressively. Last year, we didn't see it at all. We didn't see much of a forward order book at all. This year, the market is different. So I guess the best way of saying it is it ebbs and flows, depending on the market sentiment and the time of the year.

Okay. And Dan, I know you made some comments earlier in the call, but can you just talk about how you're going to restructure your entire marketing and sales efforts to be consistent with your new capacity?

We've already made those changes. We talked about that in the latter -- or mid to latter part of last year. We've made those changes and we are going to the market differently. We are approaching things differently now that we have produced ammonia. So those changes have been made.

We'll just continue to be very aggressive in a market where we couldn't go forward in the past or couldn't make long-term commitments for industrial customers because we didn't have the purchase -- we had purchased ammonia and didn't have the produced ammonia, we couldn't do that as much. We can do that now and we are doing that.

So customers are viewing us differently than they had in the past, and it's made a noticeable change in our efforts. So, we don't see further restructuring. We see a continuation of what we've been doing. As you see from the volumes, it seems to have worked. And we are going to continue it and continue to be more aggressive with our marketing efforts.

And then finally, the coal market, how much are you doing -- selling into the coal market currently versus what you did a year ago and what do you think will be a year from now? And how are you going to replace that?

On the page where we talk about volumes, there's a line called LDAN and AN solution. That's primarily addressing the coal markets. I think, three years ago, we were in the 200,000 ton ratio. Last year, it backed off to somewhere around 100,000 tons. And this year, we are expecting obviously prices or volumes higher than that.

But if you want to look at the mining, and it's not all coal mining, some of it is stone quarry mining and metals mining and those tons, but coal was the substantial portion that we lost. So we indicated earlier, in earlier calls, that we had about a 50% volume as a result of the coal mining decline.

We are starting to build that volume back through other I call it stone quarries, other metals mining contracts and the like. So, we are slowly building it back. But we don't expect coal to generate significant improvements in our sales volumes.

And can some of that capacity you were using for coal be directed towards ag?

Yes. We take the ammonia nitrate solution and then prill it either through a low-density prill tower or a high-density prill tower. And we want to sell up as much upgraded product, so we focused on improving our ag distribution model and our sales efforts in that area, and are very pleased with the outcome that we've gotten so far.

Okay. And then just for mix, do you think your mix, your profitable mix, being able to increase your gross margin or I guess operating margin, do you think that will continue to increase in 2018?

I missed your first part of your question. I couldn't hear.

Just the overall gross margin, will that continue to improve into 2018 also with improved mix?

Yes, we expect it to.

Okay. Thanks for your comments.

Thank you. We have no further questions at this time. I would like to turn the conference back over to management for closing remarks.

Thank you very much for participating in our conference call this morning. We appreciate your time and we look forward to speaking with you again next quarter. Thanks so much and have a good day.

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