LSB Industries Inc (LXU) 2017 Q2 法說會逐字稿

Greetings, and welcome to the LSB Industries Second Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thanks, Danielle. 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. We appreciate your time and are pleased to have you on our call.

During our discussion this morning, we'll cover the 2017 second quarter results and provide our views of 2017 plant operations and nitrogen markets. John Diesch will give us a thorough overview of plant operations during the quarter and their current operating status. Mark Behrman will provide a comprehensive review of our financial results and liquidity position.

Our sales this quarter were approximately $123 million in the second quarter compared to $110 million in the prior year second quarter, an increase of $13 million or approximately 12%. Adjusted EBITDA of $22 million in the second quarter doubled from last year's results. Our volume increases were a large contributor of the improvement as well as plant cost savings and lower logistics costs. SG&A expenses were also reduced. Offsetting some of these improvements were lower selling prices and higher average natural gas costs.

During our calls from earlier in the year, we indicated we were in the process of selling our Marcellus Shale working interest and other excess buildings and land. We were able to close on the sale of the shale interest and a couple of small properties. Our net proceeds on these properties were approximately $16 million, and we still have additional assets for sale that should yield approximately $5 million before year-end.

Our plant onstream performance during the quarter at El Dorado and Pryor were disappointing. While these outages were caused by natural weather events and certain plant systems, the additional repair efforts, lost production and related sales and restart costs were approximately $7 million in the second quarter. We continue to focus on improving our onstream rates and are making the necessary upgrades to equipment, systems, engineering resources and personnel to achieve our onstream rate goals. John Diesch will walk us through these items in his discussion.

The early spring season started very well, and we were seeing high volume requirements and robust pricing. Key products such as agricultural ammonia and UAN were moving well until the excess rains started in the spring. Product volumes slowed as our customers waited to obtain orders from growers.

Producers, eager to continue moving product, reduced selling prices, and we started to see the sales price impact. The Tampa Ammonia Index moved from $340 a metric ton to $240 a metric ton during the period of April to June, and it was announced yesterday that it settled at $190 a metric ton for August.

We believe the new nitrogen capacities that were added during the past year and those currently coming online have yet to work out the required distribution channels to effectively place product to customers without incurring significant price reductions. Once the distribution channel matures throughout 2017, we anticipate some of the product price volatility will be reduced and prices should stabilize and, hopefully, improve.

Further, upgrading facilities for UAN and urea at some of the competitor locations were delayed, and excess ammonia volumes were placed into the market, which put additional pressure on ammonia markets. We currently anticipate our ammonia pricing in the third quarter of 2017 will be lower than the third quarter of 2016.

We do expect the unusually heavy price pressure on ammonia may subside a bit as the upgrading facilities for UAN and urea at competitor locations come on stream. However, we anticipate third quarter 2017 UAN prices will be comparable to the third quarter of 2016.

Ammonium nitrate seems to be holding its position in the market as a premium product, with pricing and volumes remaining strong relative to other nitrogen products. Industrial nitric acid pricing remains competitive as the coal market demand reductions for low-density ammonium nitrate saw increased nitric acid volumes go into the industrial markets instead of being consumed through the production of low-density ammonium nitrate.

We are seeing some improvements in demand for low-density ammonium nitrate as coal production has increased and construction and quarry activity has rebounded. We continue to enhance our product distribution and logistics footprint, and we'll further enhance our sales force. We believe the volumes we offer can be placed into the market with a higher net Brent price than we are currently achieving.

We are also upgrading our logistics efforts and personnel, and we anticipate being able to drive overall transportation costs down. We believe the savings, once fully implemented, can yield approximately $5 million per year.

I'll now turn the call over to John Diesch, who will review our plant operations for the second quarter. John?

Thank you, Dan. Good morning. Our Cherokee ammonia plant continues to operate at 100% onstream time. El Dorado and Pryor, however, had unscheduled downtime during the quarter.

The Cherokee facility continues to operate very well. It had 100% onstream time for the ammonia plant during the quarter, with urea and UAN production above plan. The Baytown nitric acid plant had 95% onstream time for the second quarter. The majority of the downtime was for scheduled catalyst change and to complete some minor maintenance.

At El Dorado, the ammonia plant continues to operate above 1,300 tons per day. The plant had an 87% onstream time for the second quarter. The plant had 100% onstream time of both April and May but continued to deal with shakedown issues in June. The plant was taken down to replace a coupling on the primary reformer induced draft fan and continues to have heat exchanger issues due to following tube leaks.

Because of the latest heat exchanger issues, we have modified our cooling water treatment program. We will also be upgrading some of the exchanges from carbon steel-welded seam tubes to stainless steel seamless tubes. They will significantly reduce unplanned downtime.

The ammonia plant was down a total of 19 days in June to deal with these issues. The entire El Dorado complex was hit by 2 power failures during storms in July. On July 15, storms caused power failure that took the entire complex down for about 6 hours. The power company replaced and upgraded the insulators on the high-voltage distribution system that failed during the storm. While we were down during this outage, we proactively inspected and repaired additional heat exchangers that had been giving us problems.

The hard shutdown from the power failure also required the replacement of bearings under compressive train and the nitric -- new nitric acid plant as well as replacement of instrumentation and controls in several areas of the complex, all of which had been repaired. The ammonia plant was down approximately 5 days during this outage.

On July 23, the plant was hit by another storm and lightning strike that again took the complex down. We again had instrumentation and heat exchanger damage but to a lesser extent. The ammonia plant was down for 2 days. We are doing a detailed root cause analysis of the 2 storm events to further upgrade our power systems to reduce impacts from lightning and other incoming power disruptions.

Lastly, detailed engineering for the N2O abatement vessel of the new nitric acid plant has been completed by the fabricator. Fabrication is expected to begin early August, with installation in the fall of 2018.

The Pryor facility had an ammonia plant onstream time of 78% for the second quarter. The plant had 100% onstream time at April and June. In May, we unfortunately had a 16-day unplanned outage to repair tube leaks on the waste heat boiler that was caused by a control system malfunctioning on the boiler feedwater levels control system. To reduce the risk of a reoccurrence, the control system was upgraded to electronic devices with built-in redundancy and trip systems. Like the El Dorado, the plant has been hit by a number of storm-related power failures that has created mechanical and instrumentation issues in the plant. These incidents added an additional 4 days of downtime during the second quarter.

The plant had a power failure again on July 2 due to utility-related voltage drop; then another power failure in July 5, caused by a snake getting into the high-voltage distribution system. A decision was made at that time to pull forward the planned October maintenance turnaround after this incident. During this planned turnaround, we corrected problems in the high-voltage power system, changed catalysts in the primary reformer, replaced high-temperature piping between the primary and secondary reformers, completed numerous inspections to change out 2 compressor rotors and cleaned heat exchangers. The plant was down for 19 days in July, including the turnaround, came up last week and today is running well. We feel good that we completed the successful turnaround and addressed many identified issues.

We were disappointed in the ammonia plant performance at both El Dorado and Pryor this quarter. At El Dorado, we continue to identify work through shakedown issues. We have performance improvements in heat exchanger replacement planned for the 2018 turnaround that should further improve reliability of the plant.

At Pryor, the main issues have been related to electrical and process control. We are moving the engineering forward on the process control upgrades as well as electrical infrastructure improvements that we believe will improve reliability. We will also be kicking off in August a study by an outside engineering firm to evaluate and recommend additional reliability improvements that can be made to the plant. Reliability and onstream time continues to be the focus of our efforts at all the plants. We are making progress. I am confident in the team and the progress we are making. I believe we will continue to improve onstream time and reliability at all the plants.

Now I will turn the call over to Mark to discuss the financial results for the second quarter.

Thanks, John. On Page 10 of the presentation, we provide a consolidated summary statement of operations for the second quarter of 2017 as compared to 2016. In reviewing our continuing operations, total net sales and gross profit increased for the quarter, primarily related to increased production and sales volumes at each one of our facilities, which were partially offset by a decrease in average selling prices of our agricultural products.

Gross profit improved by more than $9 million versus the second quarter of 2016, despite an increase in depreciation of approximately $3 million related to the El Dorado expansion and an approximate 30% increase in the cost of natural gas in the second quarter of 2017 versus 2016. However, the second quarter of 2016 included approximately $4 million related to start-up and commissioning costs at our El Dorado facility.

In addition to the increase in sales I just discussed, gross profit increased as a result of improved production volume that gave us better absorption of fixed costs at all of our facilities, lower overall plant fixed costs and lower overall feedstock costs at El Dorado since we have been making our own ammonia versus buying ammonia off the pipeline.

SG&A expenses decreased by over $2.5 million as we continue to focus on cost reductions. Interest expense for the quarter increased approximately $2.8 million over Q2 2016. As I outlined last quarter, the increase reflects the recognition of interest expense associated with debt used to fund the expansion of our El Dorado facility that we have been capitalizing until the new ammonia plant became operational in Q2 2016, at which time we began recognizing the interest on our income statement.

Lastly, adjusted EBITDA was $22.2 million for the quarter, an $11.1 million improvement versus Q2 2016, despite approximately $7 million in lost EBITDA from the unplanned downtime during the quarter that Dan and John outlined earlier. Please refer to our reconciliation of non-GAAP measures beginning on Slide 16 for further information on noncash and onetime costs associated -- incurred during the period.

In order to give further clarity on the results of the quarter, Page 11 bridges our consolidated adjusted EBITDA for Q2 2016 to Q2 2017. As I mentioned earlier, lower selling prices of our products continues to be a big drag on EBITDA as they had a negative impact of almost $7 million as compared to 2016.

Higher natural gas pricing also negatively impacted EBITDA by approximately $4 million. However, improved sales volumes of products for the quarter provided a more than $9 million EBITDA improvement. The sales volume increase was driven by the incremental production and related sales of ammonia from our El Dorado facility, which brought its new ammonia plant online in late May of 2016; improved sales of HDAN as we broadened our distribution of that product; and increased sales of LDAN into the mining sector as we have seen an increase in coal mining and a rebound in construction and quarry activity due to an increasing infrastructure build.

As we have discussed previously, a significant benefit to the new ammonia plant at our El Dorado facility was producing our own ammonia versus previously purchasing it. During the quarter, we picked up approximately $4 million in EBITDA versus the second quarter of 2016 by producing our own ammonia.

Lastly, we have been focusing on reducing our overall cost structure, and thus, lower plant distribution and corporate overhead costs contributed an additional approximately $9 million of EBITDA.

The right-hand column of this page reflects normalized EBITDA, which assumes that product selling prices were the same in both the second quarter of 2017 and the second quarter of 2016. But we realize that product selling prices move with the general market conditions. This analysis provides a view of the operational improvement activities that we have undertaken and the inherent earnings power of our assets. The year-over-year increase in EBITDA resulting from those operational improvements was $21 million.

With the spring fertilizer season over, the third quarter tends to be our seasonally weakest quarter, where selling prices for agricultural fertilizer products trend lower. The third quarter of this year, we'll see pricing for most products go back to pricing levels seen last year. However, as Dan mentioned earlier, there was an oversupply of ammonia causing ammonia prices to be depressed over last year's pricing. Yesterday, Tampa ammonia was priced for August at $190 per metric ton, down from an average of $313 per metric ton during the second quarter of 2017 and $260 per metric ton for the third quarter of 2016. And we are not seeing much premium over Tampa pricing for ammonia sales into the ag sector. With Tampa ammonia pricing trending lower, sales of many of our industrial products, which are indexed to the Tampa ammonia price, will follow suit.

Page 12 outlines our capital structure at the end of the second quarter of 2017. We ended the quarter with over $67 million in cash. Additionally, our ABL facility was undrawn and had approximately $40 million of availability at quarter end, giving us total liquidity of approximately $107 million. As a reminder, our ABL availability varies based on accounts receivable and inventory levels.

Total outstanding debt at the end of the quarter was approximately $418 million, excluding the unamortized discount and issuance costs associated with our debt. We also had outstanding preferred stock of approximately $173 million, including approximately $34 million in accrued and unpaid dividends.

As I have previously stated, for the remainder of 2017, we currently expect to continue to accrue dividends on our preferred stock as we are yet to meet the 2:1 fixed-charge coverage ratio needed to make restricted payments.

Lastly, I have previously discussed the sale of noncore assets. During the second quarter, we sold assets for cash, net of $3.5 million of debt, for $16.3 million. Combined with the asset sales in the fourth quarter of 2016, total asset sales are now over $21 million.

We are in the later stages of successfully divesting the last of the significant assets we have for sale. We expect that we will be completed by the end of Q3 2017, and we'll generate additional net proceeds of approximately $3.5 million. Assuming the completion of that sale, total net sales will be over $24 million.

Moving to Page 13, we outline our free cash flow. Cash provided from operations for the 6 -- first 6 months of 2017 was approximately $23 million. Additionally, cash flow from operations includes the semiannual interest payment on our senior secured notes that occurs every first and third quarter of each year.

Capital expenditures during Q2 2017 were approximately $7.5 million, with approximately $16.4 million invested year-to-date 2017. We expect capital expenditures of $16 million to $19 million for the second half of this year and full year 2017 capital expenditures of $30 million to $35 million.

Additionally, as I have mentioned previously, we sold off several noncore assets this quarter that generated approximately $19 million in gross proceeds. That leaves free cash flow from operations and investing for the first 6 months of 2017 at over $25 million.

Net cash used for financing primarily reflects regular scheduled debt payments and the $3.5 million payoff of debt mentioned earlier, in addition to our insurance premium financing. For the first 6 months of 2017, we had an increase of cash of over $7 million.

Importantly, I would like to emphasize that with our total liquidity at the end of June at approximately $107 million and given the positive impact of our incremental ammonia production capacity and improving operations, we believe that we have more than sufficient liquidity to fund our cash needs over the next 12 months, even if this low selling price environment persists. One of our goals for the remainder of 2017 is to improve our capital structure and to lower our overall cost of capital. We intend to explore refinancing options that would achieve that goal later this year and to have something completed by the end of the year.

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

Thanks, Mark. Before we open the call up for questions, I want to address the update on the strategic alternatives review process that we issued yesterday afternoon.

As you know, last November, our board announced the commencement of a process to explore and evaluate strategic alternatives for LSB. The review process involved a comprehensive analysis of various opportunities available to the company. After carefully considering the options and consulting with its financial advisers, the board determined that a sale transaction would not be in the best interest of shareholders.

While the board will continue to work with its outside advisers to evaluate other strategic financial and operational options to obtain an attractive value for shareholders, they have made the decision to terminate the formal sales process portion of the strategic review and focus on continuing to execute the turnaround initiatives that have been underway at the company for the last several quarters, including improving plant reliability, streamlining costs at both the corporate and plant levels, expanding into new markets with enhanced distribution and reducing leverage and improving financial flexibility.

LSB has been undergoing a major transformation, and we expect to utilize our increased production capacity and enhanced distribution activities to capitalize on what we expect to be a more favorable pricing environment in 2018. We commend our management team and employees, who continue to work tirelessly to move us forward on our goals. Thanks to their efforts, we believe LSB's outlook for profitability and positive cash flow is favorable. We recognize that much work remains to be done, and we look forward to building on our accomplishments to date.

We remain focused on achieving our major objectives of operating at ammonia plant average onstream rates of 95%, continuing the expansion of product sales into new geographic markets and positioning our business to capitalize on anticipated improvements in agricultural pricing in 2018. Additionally, the strength of our balance sheet continues to be a high priority. And in the second half of 2017, we plan on pursuing improvement in our financial flexibility by both refinancing our debt and potentially deleveraging to extend maturity dates and reduce our overall cost of capital. Collectively, we expect these factors to lead to a stronger cash flow and attractive value for our shareholders.

With that, I'll conclude our prepared remarks and open the call up for questions. Danielle?

(Operator Instructions) Our first question comes from Joe Mondillo with Sidoti & Company.

Regarding the strategic opportunities, just wondering if there's -- how much did the market and pricing just being so tough playing a role to the sort of final decision in terms of no possible buyers out there? And then how much did it sort of -- other factors play a role, which I think we know -- are there sort of factors that are going on?

Joe, I think in our press release that we issued yesterday, we did say that while we're not going to share specific details of the process, that the current outlook in the chemicals sector and specifically the nitrogen sector, we believe, is at best adversely affecting potential transaction opportunities. In other words, folks may not be leaning in at this point in time, and we'll continue to look at it. I think we need to get a little better track record underneath ourselves as we go forward. We're going to do that, and then we'll continue to evaluate options. I think as we said in the press release, we're still working on several things. As Mark mentioned, we intend to refinance before year-end and get our capital structure probably in a little bit better shape. So that's probably all the details I can share at this point in time.

Okay. In terms of the lost capital related to the unplanned shutdowns in the second quarter here, you mentioned the $7 million number. Was that just maintenance cost? Or did that also include lost production?

Yes, that would be maintenance costs and any lost production and lost absorption from not having that production.

Okay. And then in regard to the tonnage guidance that you provided in the press release, that looked sort of very similar to the guidance that you provided last year going into the second half of the year. And I believe, and you can correct me in terms of the turnaround, I thought we were expecting more turnarounds last year than compared to this year in the back half of the year. So just could you give us sort of your thinking on the guidance for the back half of this year compared to sort of what you were looking at last year at this time?

We'd have to go back and look at what our actual volumes were for the third and fourth quarter of last year. But we had originally put out an outlook on volume in our Q4 -- in our year-end earnings call. And the actual -- for the first half of this year, plus the guidance that we put out for the second half, is right in line with what we put out originally starting this year. So I don't think anything's changed. I think it's more reiterating that we're comfortable with the volume guidance that we put out several quarters ago.

Okay. And then so related to that, regarding the still unplanned shutdowns in the second quarter here, in your original guidance, did you have sort of some unplanned downtime just sort of baked in? Or did you pull the turnarounds forward from the back half of the year, so you're going to make up for that in the back half?

Yes. So we originally -- well, first off, we never gave out quarterly outlook on volume. It was just annual. So we always assume that we would have a turnaround at Pryor in October, we said, and so we were able to pull it forward, get it done in July, and so -- in relatively the same time frame that we put out there, so which we were pretty pleased about. So we're still comfortable with the annual volume that we put out 2 quarters ago.

Okay. And then regarding the cost structure, I know over the last several quarters, you've talked about how there's additional opportunity to sort of lower the cost structure, and you -- we saw that here in the second quarter. Are we sort of at a run rate at this point in time, just where you see the cost structure? Or do you still see other levers that you can pull to try to bring that down further?

No, Joe, as I mentioned in my prepared remarks, we think logistics is an area where we can see some additional cost savings. And I think I indicated that we see approximately $5 million that we can work to pull costs out, and we'll do that over the next 12 months. So I think we're looking at it. We're seeing that over a 12-month range. We have some additional SG&A that we'll be able to reduce for the second half of the year and then going into 2018 as well. So I think you'll see continued cost reductions as we get more efficient and we streamline our operations. So you'll still see some gradual cost reductions as we go forward. I don't think the order of magnitude you've seen in the quarter-over-quarter will be quite as big, but we still have further cost reductions that we believe we can achieve.

Yes, the only thing I would add is just from a timing standpoint, I think you probably don't see those cost -- the effects of those cost reductions until the beginning of '18.

I think that's right.

We're still working on some things that will allow us to put in place those reductions starting next year.

Okay. And then I just had 2 other questions. In terms of sort of your outlook regarding the consistency of these plants, Dan, where do you think we are in terms of finally sort of hitting those onstream rates that you have shown in the sensitivity analysis of the presentation? Do you think you can get there by 2018? Or you think it's going to be -- to get really good consistent results out of the plants, do you think it's more so it's probably -- maybe you're going to say a couple of years to get to a point where you're comfortable in saying that?

No. I think -- look, I think we stated earlier that we expect El Dorado to be at 97%. As John indicated, we had some weather-related events that had caused some downtime. We had talked earlier about some heat exchanger issues. We're repairing those now. So we fully believe that El Dorado in 2018 can run in the high 90s percent, 97%-ish or so. And our goal for Cherokee and Pryor is to hit the 95%. Cherokee is running at that right now and consistently runs in the high -- mid- to high 90s. So we believe Cherokee is already there. Pryor, as we indicated, we're making consistent upgrades and repairs to that facility. And unfortunately, we do -- we did have some electrical supply issues both from the utility and from lightning, effectively lightning strikes in the area. We're also upgrading electrical system there so that we can get that consistent approach. And as we've said all along, we're making long-term improvements where we can get this plant running on a consistent basis. That's taking a little bit longer than we thought, and these lightning strikes didn't help matters. But I think, clearly, in '18, we believe we could get in the 95% range of -- on Pryor. So I feel comfortable we can do it. I think we're well on our way to do it. We've got a plan well laid out on what improvements we're going to be making and the timing of those. And I think we just have to continue putting our shoulder to it and we're going to get there. So we're fairly confident, 2018, we could hit some high mid-90s and above onstream rates for those plants.

Yes, Joe, this is John. Yes, we -- when we have issues in these -- in the facilities, my approach is to determine and do a root cause analysis to determine what's really causing a problem, not just fix it and bring the plant up as quickly as possible. Sometimes, it takes a little longer to do that analysis, but it's important that we do it right. We upgrade systems whenever possible so we can -- we don't have repeats. And that's what we're doing moving forward. And so I feel confident we continue to make these improvements, and we'll hit these numbers.

Okay. And then just last one for me regarding the capital structure opportunities, is there anything else that you can provide in terms of potential avenues or where you can go with that? And also, I thought there was a 2x leverage covenant ratio that -- didn't look too likely that you get to that at the end -- by the end of this year, and I thought that was maybe a restructuring to at least the preferred. Do you think you can get to a place where you can pay off the preferred on a refinance possibility?

Well, I guess we're still evaluating our options. The credit markets are pretty issuer friendly right now, and so it is affording a number of companies opportunities to refinance. Our debt has a maturity of August of 2019. So we certainly are in the [no-gun] to refinance. However, we may be opportunistic in trying to take advantage of current markets. And so I certainly think we can explore pushing out refinancing our $375 million of senior secured notes and extending our maturities and possibly maybe increasing that slightly to use some of those proceeds to pay preferred. But that remains to be seen whether we can do that or not.

Our next question comes from David Deterding with Wells Fargo.

I noticed in the press release you guys talked about recent sales of noncore assets, obviously, $18.8 million, but you also used the term further plant enhanced liquidity in coming quarters. Is this just a -- I think I heard $5 million and then $3.5 million later for the other noncore asset sales by year-end. One, can you just tell me which number is the right one? And two, is there something beyond that, that you're looking at to enhance liquidity?

Well, from an asset sales standpoint, as I mentioned, we still have one other major asset that we're selling, we're in the process of selling, and that would be our summit machine tool business, which is a legacy business that LSB has had. We expect to probably receive $3.5 million from that sale. We've got a couple of other smaller assets, whether it's some real estate and some other things that we believe we can generate maybe up to another $1.5 million. So I think, in total, as Dan mentioned, I think we have another maybe $5 million of asset sales that we expect to be able to achieve by the end of this year. I think it's a little early for us to be talking about what other balance sheet enhancements we can do or what our refinancing might look like, and so not trying to avoid the question, just think that we're in the early stages of having discussions on how we can enhance our balance sheet.

And we're talking with our -- clearly, we're talking with our board and our strategic committee and advisers on that as well. And so I think as Mark said, there's still additional work to be done, and we're doing that. So it's an ongoing process that we'll continue to work on and then -- and keep you guys informed as appropriate.

Yes. I think we clearly believe, given some uplift in market pricing that Dan alluded to in '18, that we could, sometime in '18, hit the 2:1 fixed-charge coverage ratio, which would allow us, as long as we have restricted payment capacity, to pay off some preferred. So I think the plan going forward is to generate some excess cash and to figure out ways that we can reduce the preferred balance outstanding as that's an important factor for us, not only in reducing leverage but also reducing our overall cost of capital.

Okay. That's a good segue into kind of my next question. You were saying generate some excess cash. I think you told us on a couple of calls prior that you guys felt like EBITDA less CapEx less interest expense would be positive this year, and I know you kind of said second half may be a little bit tighter than you expected. If I look at your CapEx guidance of $30 million to $35 million and kind of interest expense $30 million to $35 million, that would imply $60 million to $70 million of EBITDA for 2017. Is that still kind of where you stand?

I think, David, I think with -- what we've indicated, third quarter pricing is going to be pretty soft. If that third quarter pricing continues into the fourth quarter, I think that it will be difficult for us to have EBITDA that covers both CapEx and the interest costs. We saw in the fourth quarter of last year -- and traditionally, fourth quarter is higher than third quarter. But if the third quarter pricing extends into the fourth quarter, I think we'll have difficulty hitting those numbers that you indicated. So that's our current view on it right now. Right now, we don't have -- quite frankly, we don't have good visibility into the fourth quarter pricing, as you might expect. So that's how I would characterize it at the current time.

Yes. And I would say that given the low price environment, David, I'm sure you can appreciate we look at our cost structure and we certainly look at capital that we spend. And while we talked about $30 million to $35 million in total for the year and $16 million to $19 million in the second half, clearly, we're sitting down as a management team looking at ways that we can possibly defer some of that capital spend. A lot of times, you've got things that you have to do. There's things that you want to do, and then you've got things that you wish you could do. So we'll certainly be sitting down and discussing that. And should we need to do that, I think we'll take a real hard look at it.

Yes, but I think one of the things that's important to remember is we're not -- things that are going to improve our reliability efforts, we will continue. Those are must-haves in our view. And so we'll continue to make the investments on reliability improvements that we believe we need to do. So we're not going to shortchange operations long term. Keeping those plants running is our -- is a best return on our investment we can make. So capital spending and that effort we'll do. Whether it's for additional spares or things like that, we'll look and risk-adjust that or risk-weight that and see what we need to do on that. But I just want to be absolutely clear that capital needed to improve reliability, we will definitely spend and undertake those efforts.

Great. And then just last one. I know you mentioned more than sufficient liquidity at $107 million, and if I -- say, $5 million more of asset sales, you're at $112 million of liquidity, which is much higher than it's been recently. Where do you feel comfortable in kind of saying it's your minimum amount of liquidity that you need to kind of run the business?

Yes. I think we're really comfortable if we had a total of $65 million to $70 million of total liquidity, so I think $30 million of cash and an unused revolver of $35 million to $40 million.

And then just working capital, looks like you're kind of flat year-to-date, $1.7 million source. How do you think about that the rest of the year?

I think you could see working capital requirements go up in the fourth quarter. I think that we've historically never been in a real position to build inventory going into the spring season. And I think that we, as a company, have really had a focus on making sure that we put ourselves in the best position to attack the spring fertilizer seasons. So I do think that we'll build up some inventory towards the end of the year in order to maximize our production in the first quarter of next year. So when I think about working capital, I'm talking about $5 million to $7 million or $5 million to $8 million. It's certainly not anything much more than that.

Our next question comes from Bob Amenta with JPMorgan.

A couple of follow-ups. I guess I just want to clarify, I might have missed it twice, I think. Did you give out, I guess, a lost EBITDA due to those unplanned outages for the second quarter? I heard a $7 million number, but I didn't know if that was lost EBITDA or if that was something else.

Yes, it was $7 million.

Okay, so that was $7 million. Okay. And then I guess the other stuff, you obviously -- sounds like you can't really -- you may not know much on the refi, but you talked in the past about wanting to get some good quarters under your belt in reliability, and I understand the lightning strike and stuff, some of that is out of your control. But kind of squaring that comment with also planning on getting something done by year-end on a refi, I mean, that leaves you only 1 reported quarter that you'll have by year-end, which is Q3, and obviously, Q3 is not a seasonally great quarter. I mean, you can still run the plants well, I guess, but is that -- how do you square those 2 things by getting it done yet not having many more quarters under your belt by then?

Well, we think, clearly, if we had a series of quarters, I'll call normalized quarters, that would be easier. But we've got a pretty good approach, we think. We've talked with some folks on that. And I think when we show them the downtime issues and the cause of that, which market is trying to clearly present here, the folks will see that, and we'll be okay with the financing process. I mean, it'd be easier if we didn't have the downtime, but we do, and we just need to walk folks through it and explain to them what we're doing to improve it so it doesn't recur, and I think we've got a good approach laid out. And as I said, we've shared it with some folks, and they believe that we could do that.

Okay. And then I guess the other question, sort of related, but the second half, I mean, you just talked a little bit with David about he went through the EBITDA, and you said $60 million, $70 million is probably not going to happen. But I'm trying to look, like last year's second half, I mean, between the third and fourth quarter, it was about negative $25 million and I guess lower pricing versus the increased volume. I mean, I look at Q2 and that kind of bridge you do to show kind of normalized. You did $11 million last year. Lower price has cost you $7 million. And I throw a higher gas in there, combine those, cost you about $10 million, but you made up about $9 million or $10 million due to the volume. And then you have these cost savings. I'm trying to figure out, versus minus $25 million last year second half, I mean, the pricing would indicate you would be worse than that in the second half of this year. But then on the offset, you have the higher volumes and some benefits to cost. I mean, I'm struggling just guessing at this to see how the second -- to get above 0 in the second half, just -- you'd have to make -- again, versus negative $25 million last year with lower pricing on top of that, is that -- it just seems like a high mountain to climb to get $25 million plus the offset of lower pricing.

Well, remember, the third quarter of last year was really a pretty disappointing quarter. As just said, we lost -- we had $26 million of negative EBITDA. We had, unfortunately, issues at all 3 plants during the quarter. If you go back to the release of the quarter, I think we outlined all the issues and what lost EBITDA was for each of the plants. So we clearly don't expect to have any of those issues this year. All with -- related to Cherokee and Pryor last year was really coming out of turnaround. We don't have a turnaround at Cherokee this year. We don't have a turnaround at El Dorado this year, and we've already completed our turnaround at Pryor. So we don't anticipate any issues related to turnaround or coming out of turnaround or restarts. So I feel comfortable saying that we're going to have a significantly better quarter than we had in the third quarter of last year. And even at these pricing levels, I would expect that we would be breakeven to slightly positive, and so that's a huge turnaround from last year.

All right. That's fair. And then you're talking -- that breakeven comment, you're talking about Q3?

Yes.

Or the whole -- and the second -- Q4 is usually -- I mean, doing a couple million last year, is that kind of normal, for a lack of a better word? Or...

Oh, it's normal. No, I think we still had some carryover downtime into the fourth quarter of last year from the issues that we had in the third quarter. And the pricing environment, while better than the third quarter, was still not robust. So I would hope that assuming that current pricing environment doesn't roll into the fourth quarter and stay throughout the whole fourth quarter, that we could do at least what we did last year or better.

So -- and again, sorry to keep pinning them, but in the second half of this year, a modestly positive EBITDA. I mean, your -- it doesn't sound that you're expecting negative EBITDA in the second half of this year even at current pricing. It may not get you to $60 million or $70 million, but you're at $40 million, what, $45 million year-to-date, $43 million year-to-date. I mean, it sounds like you're expecting some positive number of EBITDA in the second half of this year, even if it's not $30 million. It could be $2 million, it could be $5 million, but it doesn't sound like you think it's going to be negative in the second half.

That's probably a fair statement.

And then just lastly, and I don't know how you answer, that -- the chart you guys give, the sensitivity is obviously great. It makes certain assumptions. I'm assuming that this assumes 95, give or take, percent utilization. But I'm assuming if you run at 85%, let's just say hypothetically, that you can't just take in this matrix a number and then reduce it by 10% or 15% or whatever, 85% versus 95%. I mean, it's more punitive than that. Is that fair to say?

Yes. I would say it is, but it's not drastically punitive from just a pure pricing. This chart really is -- assumes certain operating levels. And the chart really is incremental step-downs on pricing. So that would be sequential from dollar to dollar. But you're right, when you turn down plant rates, you've got certain fixed overhead that are going to have to be spread out over other time. So it's not...

Nonlinear. It's a nonlinear cost.

Yes. It's more punitive.

Yes, and that's what I just -- I mean, again, just because it's closest to $100 million, to make it simple, $2.50 and $250 on this chart's essentially $100 million. So if all of a sudden you run at 85%, it's not going to be $85 million. It would be something -- would it be significantly less than that? Or would it be modestly less? And again, I'm not trying to pin down a number. I'm just trying to understand like how -- if you struggle a little at 90%, how meaningful that is to these numbers. Is 90% horrible compared to these numbers? Or just it'll be a little worse?

I think 90% is not horrible, but I'm certainly not prepared to talk about the difference between 95% and 90%. But you start to get -- if you run at 70%, it would be horrible.

Our next question comes from Gregg Hillman with First Wilshire Securities Management.

John, could you talk about the backup power for some of the plants like in El Dorado? I mean, do you have backup power capacity? And how many days can that go for? And does it make sense to invest in more backup power capacity?

We do produce power to El Dorado, Gregg. It's not enough to operate the entire complex. So what -- the system is designed if we lose outside power that it will -- what we call island, in other words the ammonia plant, the new nitric acid plant and some of the other resources will continue to operate off the generated power that we produce. We have a gas-fired boiler. However, there are situations like what happened here just recently where you get a direct lightning strike that takes out the whole system, and you can't 100% prevent it. But there -- and that's one of the things we're doing right now is doing a root cause analysis to try to improve that situation, build in some additional redundancy and control systems that would allow us to operate through a storm systems and -- but it is stuff we're always looking at.

Okay. And can you do a joint venture with other people in the El Dorado area to get like joint back power -- backup power?

We -- there's been some significant upgrades in the power -- we have a loop system that was installed with a utility that improves this overall reliability. But again, it doesn't 100% -- it's not going to 100% guarantee when you have storm failures such as that. With regards to additional -- at least at this point in time, we haven't looked at doing any type of joint venture to add additional power production at our site.

Okay. And you have no plans to invest in backup power -- more backup power?

Other than system upgrades with our existing system, which we are looking at right now, more related to redundancy and control systems.

Ladies and gentlemen, we have reached the end of our Q&A session. I would now like to turn the floor back over to Dan Greenwell for closing comments.

Well, thank you, Danielle, and thanks to everyone for joining our call this morning. We hope to keep you updated as we continue to progress with the company. And I very much appreciate your time today, and I look forward to speaking with you again at the end of the third quarter. And thanks so much, and have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.