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LSB Industries (NYSE:LXU)
Q1 2019 Earnings Call
May. 01, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings and welcome to the LSB Industries first-quarter 2019 conference call. At this time, all participants are in a listen-only mode. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kristy Carver, senior vice president and treasurer.

Thank you, Ms. Carver, you may begin.

Kristy Carver -- Senior Vice President and Treasurer

Thank you, Doug. Good morning, everyone. Welcome to our call. Joining me today are Mark Behrman, our chief executive officer; John Diesch, our executive vice president of manufacturing; and Cheryl Maguire, our chief financial officer.

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 would like to go ahead and turn the call over to Mark for opening remarks.

Mark Behrman -- Chief Executive Officer

Thank you Kristy, and good morning everyone. We're glad that you could participate in our call this morning, and appreciate your interest in LSB Industries. Page 3 of the presentation provides highlights for the first quarter of 2019. We delivered strong operating performance during the quarter.

John will get into more detail on our plant operations momentarily. But I'll point out that our three ammonia plants averaged an on-stream rate of 93%, which was our third quarter in a row we're running at 93% or better. In fact, for the past three quarters, we've averaged a 94% on-stream rate across the three ammonia plants, which reflects the positive impacts of the leadership changes, and reliability investments we made over the past few years. The material improvement in our plant performance is also a testament to our employees at the plant level who have wholeheartedly embraced our mission to become a best-in-class chemical manufacturer, and, in addition to high on-stream rates, value our environmental health and safety performance as part, and parcel with success in our business.

We thank them all for their continued efforts. Our first-quarter revenues were $94.2 million, while adjusted EBITDA was $18.1 million. These results were lower than the same period last year, due to the impact of unfavorable weather across much of the Midwest during the period, which led to lower sales volumes of our agricultural products and additional costs incurred to move product around to maximize storage of product. Page 4 depicts the multiyear trends for fertilizer pricing and natural gas costs.

You can see here that with respect to our fertilizer products, UAN and HDAN prices are higher than they were in 2018. During the first quarter of 2019, we recognized increased pricing for these products of 54% and 5%, respectively, relative to the same period last year. Recently, however, UAN pricing has weakened, which we'll discuss later in the call. Also illustrated on this chart is the agricultural ammonia price trend for the Southern Plains market, which is indicative of pricing we are seeing in this area so far in Q2.

With respect to our industrial products, the dynamic was reverse of what we saw for our agricultural products. While our industrial sales volume increased, reflecting the continued strong U.S. economy, pricing was lower during the first quarter of 2019 relative to the same period last year. As you can see from the black line on Slide 4, there's been a decline in the Tampa ammonia price, which is the benchmark index used to price much of our industrial ammonia sales.

The lower Tampa ammonia price reflects elevated inventory levels that built up in the distribution channel over the course of the fourth quarter of 2018 and the first quarter of 2019, due to the challenging weather conditions, which have caused a significant delay in fertilizer application. However, there was a significant disconnect between the Tampa ammonia market and the pricing we are realizing for agricultural ammonia in the Southern Plains markets I mentioned earlier. Cheryl will provide you with more detail on our financial results later in the call. Running our plants well is the primary aspect of our business that is largely in our control and we have now been doing that for the last three quarters.

This is evidenced by the EBITDA we generated in the first quarter in the face of a very difficult condition for fertilizer sales volumes and dropping industrial ammonia prices. Realizing that weather is an ever-present risk in our business, our first-quarter performance makes us confident that under what most would view as more normal market conditions, we can deliver significantly stronger profitability. I'll discuss our 2019 outlook later in the call. Now, John will go into more detail about the performance of our plants in Q1, their current status and provide an update on our operational initiatives.

John?

John Diesch -- Executive Vice President of Manufacturing

Thank you, Mark, and good morning. Please turn to Page 6. Overall, I was pleased with our operating performance in the first quarter. I'm happy to say that the operating performance of all four plants so far in the second quarter has continued that trend.

As Mark stated, we had a combined average on-stream rate of 93% for our ammonia plants for the first quarter, and 94% average for the past three quarters. Ammonia, being the feedstock for the majority of our products, has been our primary focus. We still have work to do, particularly in our urea and nitric acid plants, but the improvements we have put in place are making a difference. We're in the midst of planning for maintenance turnarounds at El Dorado and Pryor, with Pryor being a large turnaround with numerous upgrades that we expect will materially improve the reliability of that facility.

The El Dorado ammonia plant is operating well. We're planning a 14-day turnaround for August, which will include mainly inspections, heat exchange cleaning and catalyst changes. We will then go to a 3-year cycle for turnaround with the next turnaround planned for 2022. Our two nitric acid plants continue to run very well.

On the project front, in HDAN, reliability and capacity improvement project will take place in the third quarter. We will also be installing an upgraded expander turbine to improve efficiency in our DMW2 nitric acid plant, which is part of the warranty agreements with KBR Weatherly that should help reduce our material gas usage by providing additional steam for our co-gen facility. The sulfuric acid converted reactor replacement project is on schedule and it's expected to be completed by year-end. Our Pryor ammonia plant is operating well.

We are currently concentrating on improving the reliability in every urea and nitric acid plants with several improvement projects slated for this summer's turnaround. We are bringing in outside expertise to review our urea operation to assess and identify additional improvements we can make. The new urea reactor, which we believe will significantly improve plant reliability, efficiency and overall operating performance, will be put in service when we restart from this summer's turnaround. As I mentioned, we have an extensive turnaround in the planning stage with numerous catalyst changes, vessel and equipment inspections, and overhauls in the ammonia, urea, and nitric acid plants.

Improvements include electrical upgrades in urea and nitric acid, the new urea reactor installation completion, a major overhaul of expanded turbine and instrumentation upgrades in our No. 4 nitric acid plant. We are confident that we will come out of this turnaround with significantly improved reliability that will lead to higher on-stream time. The Cherokee ammonia plant is currently running very well.

We expect this plant to mirror historical performance going forward. Like Pryor, we brought in an outside expertise to review our urea operation in an effort to improve reliability and operability of the plant. Cherokee's capital plan for 2019 continues to focus on improving safety and environmental and reliability. The Baytown nitric acid plant operated at 100% on-stream time, excluding a planned catalyst change.

We are in the planning stages for a maintenance outage this fall that corresponds with Covestro's turnaround. Tie-ins will be made for the capacity project, as well as to replace the expander turbine case. To sum up, the operating performance of our facilities continues to improve. As mentioned before, we are concentrating on communications, particularly at shift change, to a structured process, and we will be conducting leadership training, all the way from line supervision to plant management.

In addition, our maintenance procedures, operating procedures and training programs are being overhauled and restructured for efficiency, and improved operating performance. The goal is to run our plants best-in-class in the nature of the nitrogen chemical space. Now I will turn the call over to Cheryl to discuss the financial results for the 2019 first quarter.

Cheryl Maguire -- Chief Financial Officer & Senior Vice President

Thanks, John, and good morning everyone. Page 9 of the presentation provides the consolidated summary statement of operations for the first quarter of 2019 as compared to the first quarter of 2018. In reviewing our operations for the first quarter, total net sales in Q1 2019 decreased 6% to $94.2 million from $100.5 million in Q1, 2018. As Mark mentioned, in our Ag business, we experienced stronger average net selling prices for UAN, ammonia and HDAN, which increased 54%, 12% and 5% respectively quarter over quarter.

The stronger pricing for these products was offset by lower sales volumes as a result of the persistent cold wet weather during the quarter. Net sales into our industrial markets were in line with last year, as we were able to offset the decline in the Tampa ammonia benchmark with higher sales volumes of nitric acid and industrial ammonia, which increased 11% and 10%, respectively. Sales volumes related to mining applications were slightly lower versus the prior year. However, we do expect to make up that volume in the second quarter.

Gross profit decreased approximately $2.8 million, as a result of lower overall net sales, higher freight costs incurred to move ammonia internally for storage due to weather challenges and delayed application, and higher gas cost in the first quarter versus the same time period last year. SG&A expenses decreased $1.1 million, primarily reflecting a reduction in compensation-related costs. Overall, operating income and adjusted EBITDA for the first quarter of 2019 declined compared to the prior-year period, primarily due to delayed product sales, resulting from unfavorable weather conditions for farmers and the related costs. I will bridge EBITDA for you on Slide 10.

Please refer to our reconciliation of non-GAAP measures, beginning on Slide 19 for further information on non-cash and one-time costs incurred during the period. To give further clarity on the results of the quarter, Page 10 bridges our consolidated adjusted EBITDA for Q1 2018 of $23.1 million to adjusted EBITDA for Q1 2019 of $18.1 million. Higher net selling prices contributed approximately $5.5 million to EBITDA, as we achieved higher net selling prices for our agricultural products, partially offset by lower selling prices for industrial ammonia, due to lower Tampa ammonia benchmark pricing, lower sales volumes and related costs to move product to storage as a result of delayed sales caused by cold wet weather throughout much of the Midwest during the first three months of the year, which delayed the start of the spring application season and weighed on adjusted EBITDA by approximately $8.3 million. Additionally, higher cost, primarily related to natural gas and fixed costs impacted EBITDA by $2.2 million.

Overall, we were pleased with the solid operating performance of all of our plants and had weather in our primary geographic end markets been what would be considered normal during our first quarter, we estimate that our adjusted EBITDA would have been approximately $26 million. The good news is we have the product in storage and do expect to make up much of that volume in the second quarter. One other thing I would like to point out, as several of you have asked for more clarity into the underlying margins of the industrial and mining businesses, as those businesses are inherently more complex to model as compared to the agricultural market. As a result, on Page 11, we have outlined the gross profit margins for each market.

Please note this presentation excludes depreciation, amortization and turnaround expenses and therefore, should represent the true underlying cash margins of each business. We have reconciled this back to gross profit as presented on the financial statements on Slide 20. Agricultural products' gross profit grew by 5-percentage points, from 9% in the first quarter of 2018 to 14% in the first quarter of 2019. This improvement was driven by improved selling prices for our agricultural products, partially offset by the weather-related volume decline.

Excluding the impact on volumes resulting from weather, margins on the agricultural business would have been above 30%. Industrial and mining products' gross profit percentage decreased from approximately 49% in the first quarter of 2018 to 37% in the first quarter of 2019, primarily related to overall Tampa ammonia benchmark pricing for the first quarter, which decreased approximately $50 a metric ton to approximately $280 per metric ton in 2019 versus $330 a metric ton for the same quarter last year. Overall, however, still solid margins for that business, and above the mid-30% range we previously disclosed. Looking forward to the second quarter of 2019, please turn to Page 12.

This page illustrates the average Tampa ammonia price, our average realized net selling prices for UAN and HDAN and our average cost of natural gas for the second quarter of 2018 and compares that to the current Tampa ammonia price, the expected average selling prices for UAN and HDAN, based on forward sales of product, or current spot market sales prices and the current average natural gas prices we are paying or have hedged. Also shown is the estimated annual EBITDA impact to us of a $10 per ton movement in the Tampa ammonia, UAN and HDAN prices, based on 2019 volume outlook and $0.10 per MMBTU movement in natural gas prices. Keep in mind that due to seasonality, our quarters have significant variability with the second quarter, typically our best quarter. Tampa ammonia has continued to trend downwards as a result of high inventory caused by the overall poor fall and spring agricultural ammonia application, which has resulted in a backup of inventory in the U.S.

ammonia distribution channel. That trend has continued into the second quarter, with Tampa averaging approximately $245 a metric ton through the first two months of Q2 versus $265 a metric ton for the second quarter of 2018. UAN pricing is expected to be slightly higher than last year, whereas HDAN pricing is expected to be somewhat lower. Increased net imports for both products as compared to prior year, has been a headwind.

With respect to our natural gas feedstock cost, we have approximately 60% of our gas needs locked in for Q2 at approximately $2.40 per MMBTU. The story for the second quarter of 2019 for us will be volume. As I mentioned earlier, we expect significantly higher volume in the second quarter as a result of the weather-related delayed sales from the first quarter. So to sum up our view on the second quarter, we expect material year-over-year improvement in sales volume.

However, we do have some headwinds with the lower Tampa ammonia pricing as compared to the second quarter of 2018. Overall, however, based on where we are today, assuming normal weather conditions for this time of the year and continued strong operating performance, we expect adjusted EBITDA for the second quarter of 2019 to be materially higher than the second quarter of 2018. Moving to Page 13, we outline our free cash flow. Cash provided from operations for the first quarter of 2019 was approximately $7.1 million compared to $1.2 million for the same period of 2018.

Operating cash flow includes higher working capital associated with higher inventory. In addition, we have been focused on consolidating vendors across many different aspects of our business. In the latter part of 2018, we underwent a request for proposal, related to gas supply, whereby we consolidated the purchase of natural gas across our three facilities. Overall, this provided cost savings and better gas management capability.

As a result of the change in vendors, approximately $6 million of natural gas payments that we typically would have made in early April, were pulled forward to the end of March. This is purely a timing issue and does not reflect incremental expense on an annualized basis. Capital expenditures, predominantly related to reliability and maintenance investments, were approximately $7.1 million for the first quarter of 2019. Full-year capital expenditures are expected to be approximately $35 million, of which approximately $7.5 million relate to the sulfuric acid converter, which will be financed.

So, approximately $27.5 million of capex will be financed with cash. With respect to the sulfuric acid financing, we expect to draw down on this loan over the course of the year, as the work on the sulfuric acid converter is completed. Page 14 outlines our capital structure at the end of Q1 2019. We ended the quarter with $21.7 million in cash and over $40 million of availability at quarter end, giving us total liquidity of approximately $62 million.

Continued higher inventory levels and delayed sales translated into a sustained short-term working capital use of approximately $10 million, which we expect to receive back over the next several months, as we sell down the inventory and collect on receivables. In general, we expect to utilize the credit facility to manage our working capital accordingly. Total outstanding debt at quarter end was approximately $425 million, including the unamortized discount and issuance costs associated with our debt. We also had outstanding preferred stock of approximately $219 million, including approximately $80 million in accrued and unpaid dividends.

Now, I will turn it back over to Mark to wrap up.

Mark Behrman -- Chief Executive Officer

Thank you Cheryl. As I stated earlier in the call, the strong and consistent performance of our facilities makes us confident in our ability to deliver improving profitability. As a result, we continue to expect 2019 to be a growth year for LSB relative to 2018. Along with our expectations for our ammonia plant on-stream rates to continue to average approximately 94%, we anticipate improved volumes for several of our products, which is what we have been experiencing thus far in the second quarter.

Turning to Page 15, as Cheryl discussed, pricing for our fertilizer products was a tailwind for us in the first quarter. This was a continuation of the trend we saw in the second half of 2018, albeit to a lesser magnitude, driven by diminishing supply as domestic capacity that came online during 2017, in addition to reduced volumes of low priced product being sold into the U.S. by China and others. Favorable dynamics for the U.S.

corn market, leading to expectations for increased acreage to be planted, further supports overall better agricultural product pricing relative to last year. We are currently realizing healthy prices for the ammonia that we're selling out of our Pryor and Cherokee facilities for agricultural usage. Pricing for ammonia into the corn belt and Southern Plains markets is averaging greater than $400 per ton, a significant premium to the April Tampa price of $255 per metric ton. Demand for agricultural ammonia is such that we can sell whatever we can produce at those two facilities at very favorable pricing.

HDAN is also moving very well and pricing has been relatively stable for the past several months, with average selling prices between $255 per ton to $235 per ton. However, sales volumes lagged until late March due to the weather issues we experienced. Through the hard work of our employees, we were able to store additional product until sales picked up. We increased capacity at some of our existing storage locations and positioned product on railcars at strategic locations where we could easily meet our customers' demands.

Late March, demand for this product picked up and we've been shipping strong volumes at favorable prices since then. One thing we're watching closely, though, is the volume of imports of HDAN. Imports over the last four months are up year over year, and that has put pressure on pricing in certain regions that we sell into. Rising import volumes have already had an impact on pricing for UAN, which has been steadily declining in price since early January, when pricing peaked at between $225 per ton and $235 per ton.

Current pricing in our primary agricultural markets is in the $180 per ton to $195 per ton range, largely due to a rise in imports over the last two quarters, from approximately 400,000 tons to approximately 900,000 tons. Most of the increase over the last three months is attributable to market anticipation of the implementation of anti-dumping duties by European Union countries on imports of UAN, prompting global UAN producers to turn to the U.S. market. The provisional anti-dumping duties went into effect on April 13, and will likely continue to impact the number of tons of UAN imported into the U.S.

These added imports are on top of already increased domestic production versus last year. Since the excessively wet weather has delayed much of the corn planting in the U.S., it's too early in the season to be applying UAN, and farmers have held off on making additional purchases of this fertilizer until tank levels are reduced. Over the last several weeks, we have started to see sales pick up. Fortunately, we have the flexibility to counteract some of the impact of weaker UAN prices.

Given the strong pricing that we've been experiencing for agricultural ammonia, we've increased the volume of ammonia available for sale, rather than upgrading it to UAN. With that said, as I previously mentioned, core market dynamics are strong and at some point as the spring progresses, we expect farmers to have a greater sense of urgency to get their crops in the ground. Since ammonia generally needs to be applied before the crops get planted and the ground in many regions has remained too wet to benefit from an ammonia application, we expect some farmers to simply skip ammonia and plant their corn. This would likely translate into additional UAN demand, and is likely to improve UAN pricing as we get further into the season.

In the last several weeks, we have started to see UAN prices move up. Pricing for much of our industrial ammonia sales are closely tied to the Tampa ammonia price, and that excess ammonia inventory has put significant pressure on the price. We believe that as inventories are reduced, the Tampa ammonia price will gradually increase, providing improved sales prices for that product. With that said, U.S.

GDP is expected to continue to grow in the 2% to 3% range with manufacturing expected to remain strong throughout 2019, which should support continued growth in our industrial product volumes. There's been a lot of conversation about delayed ammonia fertilizer application, delayed corn plantings, the number of additional corn acres planted and the switch from applying ammonia to UAN and urea. The chart on Page 16 shows the most active corn planting states, each state's approximate percentage of annual corn plantings, and each state's average corn planting dates. As you can see, seven states make up approximately 70% of all corn planted in the U.S.

In those states, corn planting dates run from mid-April to mid-May. So there is still time to get much of the corn planted. The issue becomes how much ammonia gets applied pre-plant or side-dress, and whether the ammonia that doesn't get put down on the ground will be made up with additional UAN and urea application after the corn is planted. As for corn acres planted, I believe we'll get a better idea over the next three to four weeks as to how excessive flooding in certain states will impact the number of acres that can be planted.

Page 17 outlines our business improvement initiatives that we discussed last quarter. Given our focus on the operating initiatives, which John outlined earlier, we expect our production facilities to continue to show improved operating performance and we are targeting an average on-stream rate across all three of our ammonia plants of approximately 94% for the year, matching what we have averaged the last three quarters. We continue to evaluate numerous opportunities to increase our sales volumes and expand our margins through new sales opportunities with both existing and potential customers. We are seeing success as evidenced by the increase in industrial sales volumes that we saw in the first quarter.

Lastly, we continue our efforts to operate more efficiently and reduce costs. While we have reduced significant costs over the last two years, we believe that there are still opportunities for improvement and we are focused on capturing those. Over the remainder of 2019, we expect these initiatives to translate into improved financial results. Lastly, I'll be attending the Goldman Sachs leveraged finance conference in LA next week on Thursday, May 7th, and the BMO farm to market conference in New York on May 16th.

And Cheryl will be attending the Cowen Industrial conference in New York on June 4th. That concludes our prepared remarks and we will now be happy to take your questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from the line of Karl Blunden with Goldman Sachs. Please proceed with your question.

Travis Edwards -- Goldman Sachs -- Analyst

Hi, this is Travis Edwards on for Karl. A quick question.

Mark Behrman -- Chief Executive Officer

Hi, Travis.

Travis Edwards -- Goldman Sachs -- Analyst

Hi, how's it going? On your guidance for 2Q, you noted that you expect to recapture the more -- majority of lost volumes from the poor weather in 1Q, but that Tampa ammonia prices will also be lower. Are you able to size the net impact to EBITDA that you expect to recover in 2Q?

Cheryl Maguire -- Chief Financial Officer & Senior Vice President

Yes, Travis. You know, looking at the second quarter, I think we expect to pick up about $5 million of the volume that we lost in the first quarter. And with that being said, assuming our plants run at targeted operating rates, which for the month of April, all of our plants have been at 100% on-stream time and assuming weather doesn't have further impact, we would expect the second-quarter EBITDA to be 50% to 70% above the first quarter of 2019. And that would be a record quarter for LSB, if you think about since the start-up of the EDC ammonia plant back in 2016.

Travis Edwards -- Goldman Sachs -- Analyst

Got it. That's really helpful color, appreciate it. One more question from me. In your press release, your commentary on fiscal year '19 EBITDA guidance looked pretty consistent to last quarter.

I'm just wondering if anything has changed there to the upside or downside. And then two, if you hit your guidance, are there any changes to how you're thinking about capital allocation priorities, such as addressing preferred shares, high coupon debt or even M&A?

Mark Behrman -- Chief Executive Officer

I think that our view on '19, as I mentioned, is still -- we'll have a pretty healthy growth year this year, despite some of the movement in pricing. As Cheryl said, I think we'll pick up material amount of the volume -- sales volume that we didn't get out in the first quarter in the second quarter, but I think it's a little early -- it is still too early for us to give you a view on the year. I think it depends on really the weather and how the spring fully unfolds. You know, capex, as I think we stated, last quarter was about $34 million, $35 million, of which as Cheryl mentioned, $7.5 million is related to the sulfuric acid converter, which is financed.

So really cash capex for the year still remains at about $27 million.

Travis Edwards -- Goldman Sachs -- Analyst

Got it. Thank you very much.

Mark Behrman -- Chief Executive Officer

Sure.

Operator

Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Joe Mondillo -- Sidoti and Company -- Analyst

Hi, Good morning, everyone.

Mark Behrman -- Chief Executive Officer

Good morning.

Cheryl Maguire -- Chief Financial Officer & Senior Vice President

Good morning, Joe.

Joe Mondillo -- Sidoti and Company -- Analyst

So a couple of questions on the quarter itself. The price realization was a lot better than I was looking for. I understand that you did sell forward some UAN and some better pricing, I think, and maybe even ammonia. But ammonia certainly was above sort of Gulf spot pricing.

So is spot pricing just much better in the regions that you're selling into, or could you just talk about how you were able to get such good pricing in the quarter itself?

Mark Behrman -- Chief Executive Officer

Yeah, I mean I think that, as I mentioned in my commentary, there is clearly a disconnect between Tampa ammonia or Gulf pricing and inland pricing. Part of it has to do with Tampa ammonia or Gulf pricing, not a lot of liquidity, so there's not a lot of vessels coming in and certainly the Tampa price, which is a negotiated price between Mosaic and Yara, is for significantly lower volume than it had been historically, right, so that whole dynamic has changed. On top of that, due to the weather, you've clearly got a lot of logistical issues, whether it's barges sitting on rivers, and not being able to get up river or trucks, and really lack of trucks to move product around. So that's helped really improve the pricing in ammonia.

Joe Mondillo -- Sidoti and Company -- Analyst

OK. And then just in terms of your commentary on UAN prices for 2Q, I guess, is part of the reason why you anticipate that pricing will be up, compared to some of the spot pricing that we're seeing, is that because of some of the volume that's pushed into 2Q that's contracted at much higher pricing? And on top of that how much -- I guess volume is not sort of forward priced, and is there any sort of -- is there a risk if price -- spot pricing in Gulf side of things continues afore, will you see that in your regions, or is pricing holding up in the regions that you're selling into?

Mark Behrman -- Chief Executive Officer

I think we talked about pricing for UAN trending down since January, for a number of factors. But I would say that what we're really seeing is pricing, and what we talked about is pricing improving $8 to $10 a ton in the second quarter of this year versus the second quarter of last year. I mean, I think one of the things that we would see naturally is UAN prices moving up as we get further into the spring. I mean I think, that's pretty historical as to what happened.

So I don't think it's anything unusual to see some price improvement as you get corn planted in the ground and you start to see usage of UAN, which is -- we're starting to see a little bit more volume over the last few weeks.

Joe Mondillo -- Sidoti and Company -- Analyst

OK. So is it primarily just the anticipation of as demand picks up pricing should start to improve, or you know, is there any forward priced contracting related to the volumes that are pushing those 2Q?

Mark Behrman -- Chief Executive Officer

I don't think any forward volume is pushing pricing up today. I mean, forward volume would be locked in at prices. I just think it's a normal price increase that you will see as you get deeper into the spring.

Joe Mondillo -- Sidoti and Company -- Analyst

OK. And then I was just curious, you talked about imports, which was helpful to hear regarding some of the pricing that's happening. In terms of trade resolution -- the trade issues, I know Chinese imports have declined significantly to almost -- much less than they were two years ago. I'm just wondering, has any of that been affected by the trade issues, and more so, if we get a trade resolution, would you anticipate any sort of imports from China, if there was a resolution?

Mark Behrman -- Chief Executive Officer

Well, I think one never really knows, I think we'll have to see how that -- if and when there is a trade resolution what the details of that are. But I don't know that you'll see, as part of that more Chinese urea coming into the United States, because that's the primary products that we'd import. I think actually the trade tariff is probably, you know tampering down pricing, certainly of beans, but also corn is getting swept up in that. And so I think it's artificially -- even though corn is not really impacted, I think it's artificially having an effect on downward pricing of corn.

So, hopefully, with that past us, we can see corn prices start to move up a little bit from where they are today and then ultimately would be great to see as part of a tariff settlement, China taking -- importing more corn from the U.S., which would also help support higher corn prices.

Joe Mondillo -- Sidoti and Company -- Analyst

OK, great. And then you -- Mark, you mentioned, I think toward the end of your prepared remarks about certain ways to save some operating costs. I'm assuming that's mainly what we've talked about in the past in terms of procurement and logistics. I'm just wondering, in terms of those buckets at least, I don't know if there's any new sort of things that you found, but how much have you realized or how much do you think you can see in savings going forward? I think we've mentioned maybe $2 million to $4 million or so, but just any more commentary on that.

Mark Behrman -- Chief Executive Officer

So I think historically we have mentioned $3 million to $5 million and I think we've realized a fair amount of that already. But I think there's still opportunity to get -- certainly get to the higher limit and as we continue to look for ways to be more efficient, I think that there's a good chance that the $5 million can be a higher number, but I don't think we're prepared to talk in detail about that at this point.

Joe Mondillo -- Sidoti and Company -- Analyst

OK. And then I guess one of my last questions is regarding sort of liquidity and free cash flow. I think, Cheryl, you mentioned that due to the sort of higher than average inventories, because of this volume being pushed out that you anticipate, and correct me if I'm wrong, $10 million of inventory cash flow for the rest of the year. And then I'm just wondering if you can comment further on what you're thinking about working capital and clarify what you said about capex as well, in terms of the capitalized amount related to the sulfuric acid conversion.

Thanks.

Cheryl Maguire -- Chief Financial Officer & Senior Vice President

OK. So I guess, you know, to your point, we are carrying more inventory today as a result of the fall and the spring weather challenges. And we do expect to sell down the excess inventory, although it is possible we may carry some higher inventory into the second half of the year. And we'll manage that inventory with the working capital facility.

But I think the other thing I would say, Joe, we're feeling fairly comfortable with our liquidity position. We've been around that $60 million total liquidity, and if you think about what we've said with respect to interest of about $43 million, capex -- cash capex of $27.5 million, is what I said in my prepared remarks, and then, another $10 million of, call it, everything else being principal payments on some other smaller debt pieces and things like that. So overall, at the end of the year, we expect to be at that minimum $60 million of liquidity. So we're comfortable with that.

Joe Mondillo -- Sidoti and Company -- Analyst

Okay. Great. I'll hop back in queue. Thank you.

Cheryl Maguire -- Chief Financial Officer & Senior Vice President

Thank you.

Operator

[Operator instructions] Our next question comes from the line of JP Geoghegan with Global Value Investment Corp. Please proceed with your question.

JP Geoghegan -- Global Value Investment Corp. -- Analyst

Hey, good morning. Thank you for your time. The first analyst touched on it, but I'd like to revisit how you're thinking about your capital structure. Considering that your operational reliability seems to have stabilized over the past two or three quarters, and your EBITDA outlook is generally positive, how do you think about your capital structure, generally, in a long-term sense?

Mark Behrman -- Chief Executive Officer

Well, you know, I think in every quarter we seem to kind of touch on the same subject. So, I think we really need to get through this year and see how much improved this year is over last year. You're right, I think we're feeling more comfortable about the reliability of the operations and the stability of those operations, although, as John said, still more work to do. So I think what we'll do is, we're going to hunker down, and really focus on becoming more efficient this year, maximizing our operations, and really having a significantly better year this year.

And then I think we'll take a step back and see where the credit markets are, and our first call on our bonds is May of 2020. So, we'll have an opportunity to kind of relook at certainly our debt and the interest rates on our debt and see if there is an opportunity to improve the capital structure for refinancing. Certainly, we'd like to -- with any excess cash flow, we'd like to start to use that to delever. But we have to balance that with potential capital investments that we could make in our facilities; that would be growth opportunities and we're kind of looking at that as well.

So I think this is a pivotal year for us, and we're really looking forward to having an improved year and then taking a step back and seeing where we are in early 2019 -- 2020.

JP Geoghegan -- Global Value Investment Corp. -- Analyst

OK. You briefly touched on growing your industrial and mining segments, but I'm hoping you might elaborate on the opportunities you have to grow, either revenue or improve margins in each of those segments, and what needs to happen for that to occur.

Mark Behrman -- Chief Executive Officer

Yeah, I mean I don't think we're going to go into -- I'm going to get into specific details on customer opportunities. But the industrial sales and marketing team has done a really great job in growing the nitric acid business and our overall mixed acids -- concentrated acids business. And so I think that'll continue. There are certainly opportunities on that side for us to continue to grow that business, and we've got excess production capacity to produce at higher levels.

And so if we can have sales opportunities, we certainly can produce it. There's other opportunities as well on AN solution, and even low density ammonium nitrate. And so I think we continue to pursue opportunities to grow that business. As we've talked about, I guess the last area of growth on the industrial side would be some growth in sulfuric acid business, and we are putting in a new converter there, and that will give us some expanded production capacity.

So we're focused on making sure that we've got customers on the other end, where we can produce it at maximum levels, and have sales that will match that.

JP Geoghegan -- Global Value Investment Corp. -- Analyst

Great. Thank you for your time.

Mark Behrman -- Chief Executive Officer

Sure. Thank you.

Operator

Our next question comes from the line of David Deterding with Wells Fargo. Please proceed with your question.

David Deterding -- Wells Fargo -- Analyst

Morning, hey, Mark.

Mark Behrman -- Chief Executive Officer

Hey, David.

David Deterding -- Wells Fargo -- Analyst

Just a quick question. Thanks for all the clarity on the guidance. It's actually really helpful. But I just had one question, could you remind us, I know there are some restrictions in your bonds on when you can pay -- start paying down the preferred.

Can you just remind us what that looks like and when you might be able to start to attack those?

Mark Behrman -- Chief Executive Officer

Yeah. So we -- when we refinanced back in April of last year, one of the provisions that we negotiated in our indenture is to allow us to have no limit on RP capacity, as long as we had $65 million of liquidity. So we have to have a minimum of $65 million of liquidity. And then at that point, we can actually use any excess capital to delever, and I say delever, meaning we can make -- we can use $0.50 of every dollar to redeem preferred, and with the other $0.50 of every dollar we can make an offer to the existing bondholders at $1.03 and to purchase bonds, and we would do that on a pro rata basis.

If the bondholders made the determination that they didn't want to be redeemed and take that redemption and those funds were claims, then we can use them to redeem additional preferred. So it's not a timing per se, it's more of where are we on the liquidity spectrum.

David Deterding -- Wells Fargo -- Analyst

Great. Appreciate the clarity. Thank you.

Operator

Our next question comes from the line of Doug Ellis with Xavier Family Office. Please proceed with your question.

Doug Ellis -- Xavier Family Office -- Analyst

Good morning guys. Thanks for taking my call. I'd just like to revisit the issue of pricing differentials between Gulf for UAN and Tampa for ammonia and the Inland pricing that you guys are receiving. You mentioned that there are a number of factors that are going into these differentials, and I was just wondering whether you are seeing, at least for the foreseeable future, these factors continuing or whether you see that going away and the benchmarks being more closely aligned with your realized pricing going forward.

Mark Behrman -- Chief Executive Officer

I think as I mentioned, really there's two main reasons why you have a fairly significant disconnect. The first being the weather impact and the lack of ammonia, due to distribution or logistical challenges. And so ultimately, as the weather improves, those will go away. However, the second part of it is the fact that ammonia Gulf prices really don't have a lot of liquidity.

And so it's really negotiated price. And I think the reason you're seeing less vessels come into the Gulf and then up -- ultimately up into Mid-Continent U.S. is global is an ammonia -- ammonia is a global product. So there are other opportunities to bring it in other regions of the world and so importers absolutely look at where they can get the best pricing.

And so right now, given the U.S. challenges, we're certainly not sitting with best pricing around the world. So I think, overall, liquidity will ebb and flow, but generally speaking, the amount of volume that's coming into the Gulf has certainly decreased compared to, you know, the average of the last five years.

Doug Ellis -- Xavier Family Office -- Analyst

OK. I appreciate that and congratulations to you guys. OK.

Mark Behrman -- Chief Executive Officer

Thank you.

Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Mark Behrman -- Chief Executive Officer

I want to thank everyone for their continued interest in LSB Industries. And if you have any follow-up questions, feel free to give us a call. Thank you so much.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Kristy Carver -- Senior Vice President and Treasurer

Mark Behrman -- Chief Executive Officer

John Diesch -- Executive Vice President of Manufacturing

Cheryl Maguire -- Chief Financial Officer & Senior Vice President

Travis Edwards -- Goldman Sachs -- Analyst

Joe Mondillo -- Sidoti and Company -- Analyst

JP Geoghegan -- Global Value Investment Corp. -- Analyst

David Deterding -- Wells Fargo -- Analyst

Doug Ellis -- Xavier Family Office -- Analyst

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