LSB Industries' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 9.13 | About: LSB Industries, (LXU)

LSB Industries, Inc. (NYSE:LXU)

Q2 2013 Earnings Call

August 9, 2013 11:00 AM ET

Executives

Carol Oden – IR

Jack Golsen – Chairman and CEO

Tony Shelby – EVP and CFO

Barry Golsen – Vice Chairman, President and COO

Analysts

Joseph Mondillo – Sidoti & Company

Dan Mannes – Avondale Partners

Keith Maher – Singular Research

David Deterding – Wells Fargo Securities

Gregg Hillman – First Wilshire Securities

Operator

Greetings and welcome to the LSB Industries Second Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carol Oden of LSB Industries. Thank you. Please go ahead.

Carol Oden

Thank you, Brenda. Good morning listeners. Welcome to the LSB Industries, Inc. second quarter 2013 conference call. Today LSB’s participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, Executive Vice President and Chief Financial Officer. This conference call is being broadcast live over the Internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.lsbindusstries.com. After comments by management, a question-and-answer session will be held. Instructions for asking questions will be provided at that time.

Information reported on this call, speaks only as of today, August 09, 2013, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. After the Q&A, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We encourage you to view the power point PDF that is posted on our website at, www.lsbindustries.com in webcast section of investors tab. Please note that the presentation starts on page three of the power point.

And now, I will hand the call over to Mr. Jack Golsen.

Jack Golsen

Thanks Carol. Welcome to today’s conference call. On today’s call, we expect to update you on the current status of our activities and operations. Those of you who follow us know that we’ve been working on a bond offering, to raise funds to complete a substantial expansion of our El Dorado Chemical Facility. Two days ago, on Wednesday August 7th, we completed a $425 million bond issue and received the funds. Now, with this money we are in the progress of engineering and in a hydrous ammonia plant that will allow us to almost double our total ammonia production capacity. We are well on our way to constructing this plant, with the engineering and the purchase of some of the major long term lead items required for the plant. We are waiting the receipt of the permit from the Arkansas Department of Environmental Quality which is expected soon. When we receive it, we will break ground on the project.

In addition, we have already on order a new asset plant and a nitric asset concentrator, to replace the plant that exploded in May of 2012. We expect a significant amount of this plant to be paid for with the insurance proceeds. On the subject of the insurance proceeds, we continue to make progress in our discussion with our insurance carriers, on the amount due to us on our claim. We also expect that we will receive payments before the end of 2013. At this time, we are projecting that all these construction activities will be completed during 2015 I think it is. For your information, internally, we have tested our projections under various down trends scenarios, and believe that our capital expansions should be accretive to earnings. We are in the process of renewing, adding, increasing the size of in scope of, our long term contracts, to supply our customers with the additional capacity that will be available from the future expanded El Dorado plant. At this time, UAM production at our Pryor plant is sold out for the balance of 2013.

In addition, we have completed necessary repairs and upgrades to our Cherokee and Pryor facilities that restricted production rates and depressed our financial results in the first half of 2013. These facilities are now operating and we expect our chemical business results to improve significantly in the second half of the year, compared to the first half. In our Climate Control business, given the market leading positions of our products, we are well positioned to capitalize on the continued strengthening and demand for both the commercial, institutional and residential sectors. This should be lead to further increases in product sales, orders and backlog.

In the near term, our chemical facilities – with our chemical facilities back in production and a recovery underway in our Climate Control end markets, we are looking forward to reporting improving results as we progress through the balance of 2013 and 2014. So the big picture long-term outlook is strong for us, but I might add that we are not immune from the macroeconomic issues that could affect our internal projections in both our Chemical and Climate Control businesses. That’s my view of where we are and I’m going to turn the rest of the meeting over to Tony and Barry. Tony will review the financial position, post the bond offering and Barry will discuss the power, operations and market conditions. Thank you.

Tony Shelby

Thanks, Jack. Before reviewing the financial results in detail, a few comments about the first half. Our Climate Control business reported improved results including a 13% increase in sales, a 20% increase in operating income over the first half of 2012. However, our consolidated results for the first six months, was significantly below the corresponding period of 2012, due to downtime or reduced production levels at three facilities of our Chemical business. Due to this effect of the downtime, our consolidated operating income and net income for the first quarter were essentially breakeven and our second quarter results are well below 2012. We’ll review the effect of the downtime and the current status of each facility later this call. For a review of the second quarter 2013 consolidated results compared to the second quarter of ‘12, please turn to page four on the power point presentation.

Net sales were %202 million, 3% below 2012. Operating income was 12 million, compared to operating income last year of 42 million. After interest expense and taxes, we reported net income of $7.4 million or $0.31 per share compared to net income of $26 million or $1.11 in ‘12. EBITDA was 19 million versus 48 million. Continuing on page four, for the first half of 2013 compared to first half of ‘12, net sales were 353 million or 12% below ‘12; operating income was $12 million compared to $65 million last year. After interest expense and taxes, net income was $7.4 million or $0.31 per share, compared to net income of $40 million or $1.72 in 2012. EBITDA for the six months was 25 million compared to 76 million. The significant decline in consolidated operating income and net income is due to the effect of the loss production in Chemical business partially offset by increased profitability in our Climate Control business.

Turn to page five of the presentation to review Chemical results for the second quarter of ‘13 compared to the second quarter of ‘12. Net sales were $121 million or $17 million lower than 2012. Operating income was 6 million compared to 39 million in 2012 and EBITDA was 12 million compared to 43 million. Also on page five for the six month results, net sales, gross profit, operating income and EBITDA were all below the first half of last year, as a result of a loss production in those three facilities, but particularly at the Cherokee and Pryor facilities. During 2013, the Pryor facility’s primary ammonia plant and Cherokee ammonia plant were both out of operations for the entire first quarter and a significant number of days during the second quarter.

The effect of the downtime at the Pryor and the Cherokee facilities is particularly significant since each facilities unlike (inaudible) and Baytown both these natural gases as material feedstock and thereby capturing this significant growth margin between the cost of natural gas and the market cost for ammonia. As a result, Pryor and Cherokee are normally the most profitable facilities in our Chemical business and therefore had the biggest negative impact when the ammonia plants were not in operation. Based on market conditions during the first half, and after recognizing 14 million of business interruption insurance recoveries, we estimate the effect of Chemical’s first half operating income resulting from downtime to be approximately $60 million to $70 million less that otherwise would have been expected, including approximate $20 million in the second quarter.

All of the chemical facilities are currently operating at near design rates, with the exception that El Dorado’s natural gas production capacity will continue to be limited to approximately 80% of normal capacity until 2015, when the construction of the new net nitric acid plant is scheduled to be completed. The El Dorado and Cherokee downtime advance were unplanned and were (inaudible) events. We estimate the cumulative businesses in clients after deductibles to be approximately $140 million to $165 million on which we’ve received to-date $65 million. We anticipate we will receive the remaining estimated recovery of 75 million to 100 million during the remaining 2013 although there are no assurances.

Turning to the results of our Climate Control business, please go to page six. For the second quarter ‘13 Climate Control reported net sales of $77 million, increase of 15%. Gross profit was $25 million, as a percentage of sales improved to 33% compared to $21 million sales and 31% gross profit for 2012. Operating income increased to $9.5 million compared to $7.3 million in 2012. For the first half of 2013, Climate Control sales were $148 million, 13% above 2012 with gross profit and operating income increasing in terms of dollars, as well as a percent of sales. Okay, turning to liquidity capital resources at June 30, 2013 and recognizing that there was substantial changes post June 30, please go to page seven.

Compared to year end 2012, cash of $66 million is $32 million lower. Total interest bearing debt is $35 million higher and stockholder equity has improved slightly. At June 30, our $50 million working capital revolver loan facility was undrawn and remained so today. The $32 million reduction in cash for the six months included $7 million cash provided by operations, $30 million from net financing activities and $14 million of property insurance proceeds, offset by capital expenditures of $83 million. The capital spending plans for the calendar year 2013 to ‘15 include $250 million to $300 million for the construction of the ammonia plant at the El Dorado facility, $120 million for the new nitric acid plant and converter, also at the El Dorado facility and the planned expenditures also includes the spending for the reliability, care for integrity, environmental upgrades and safety at our chemical facilities, as well as record maintenance capital throughout the two business segments. As noted, some of these expenditures could extend beyond 2015 depending on construction delays. The planned capital spending will be funded by internal cash flow and insurance proceeds in the senior secured notes.

For a summary of the company’s debt and equity capital after giving pro forma effect to financing as of June 30th, please turn to page nine. After reviewing the long term debt markets, we selected the high yield market for a number of reasons, primarily due to the fundamental structure of this market including fixed interest rates, insurance covenants versus maintenance covenants and the general flexibility of the structure which best fits our practice of managing for the long term rather than a short term quarter to quarter. As (inaudible) today as Jack mentioned, we completed the issuance of $425 million or 7.75% interest senior secured notes due 2019. The use of proceeds includes the prepayment of $66.6 million existing term loan and for general corporate purposes including among other things, the planned capital expenditure we just discussed. Pending application of proceeds in accordance with net proceeds for the investor in short term investments highly rated money market bonds, U.S. government securities treasury bills, deposit and our short term commercial paper. During the period of disruption and Pryor to conclusion disruption, interest will be capitalized on cumulative costs consistent with GAAP generally accepted accounting principles. We’ve addressed our results of operations and financial commitments in greater detail in 10-Q and suggest that you view those disclosures and discuss it for additional information analysis.

I will turn the call over now to Barry to discuss the market drivers and the outlook for both of our business segments.

Barry Golsen

Thanks, Tony. Since Tony covered the financial results, I’m going to focus on our sales activity, order levels, product backlogs or (inaudible) and market drivers as we see them. I’ll also give you an update on progress with the major capital projects, primarily at our El Dorado facility. To start, please turn to page 10, which shows our 2013 second quarter to-date sales mix by the markets we serve. This is a change from historical mix due to the downtime at certain chemical operations and not typical. On page 11, we’ve also included the sales mix for the full year 2012, which is more typical of our sales mix with normalized chemical operations. Focusing first on our Chemical business please go to page 12.

Although, we have included data about our second quarter and year-to-date sales on this and the next two pages, comparisons for 2012 for the most part are not meaningful, because the Cherokee and Pryor facilities were not fully operating during a large part of the first half of 2013. Having said that, total sales for the Chemical business in the second quarter, were 121 million, down 12% from the second quarter of 2012. Total sales in the first half of 2013 were 199 million, down 24% from a year ago. With the exception of sales of natural gas which are new this year, and industrial assets during the second quarter of 2013, all major product categories listed were down relative to the second quarter and first half of 2012.

Please turn to page 13 for sales of our agricultural products. During the second quarter and first half of 2013, sales of AL fertilizers were lower than during the same period last year. Sales of UAN and ammonia were down as a result of downtime at our Cherokee and Pryor facilities, while sales of agricultural grade ammonium nitrate produced at our El Dorado facility were down due to market conditions primarily due to more imports than a year ago. El Dorado uses ammonia purchase from the pipeline as a feedstock so it’s not always competitive with imports at this time. This is one of the primary reasons for the planned ammonia plant at El Dorado and I’ll come back to that later in the presentation.

Turning to our industrial and mining products on page 14, for the second quarter both sales dollars and ton shipped of the nitric gas and sulfuric acid were above the second quarter 2012 levels. Nitric acid sales were up from our Baytown facility, due to increased acid consumption for polyurethane intermediates and new opportunities that arose during a permanent closure of a competitor’s nitric acid plant in the Baytown area. Sulfuric acid sales were up because 2012 sales were impacted adversely by the plant outage, at El Dorado which occurred in May of 2012. Industrial AN sales were lower, as a result of downtime at Cherokee. On page 15, are some priced trends for both the feedstock we use for key Ag products we sell. The cost of natural gas has recently decreased and continues to be relatively low, currently about $3.24 per MMBtu plus transportation cost. This benefit production cost at our Cherokee and Pryor facilities which use natural gas their primary feedstock, puts our El Dorado facility at a competitive disadvantage to plants that are using natural gas as a feedstock. The cost of anhydrous ammonia feedstock we use at El Dorado and Arkansas and the Baytown Texas facilities has declined. In July, it was 525 per ton compared to 690 per ton, a year earlier. Currently ammonia is priced at approximately for 470 per ton – per metric ton at Tampa.

Our El Dorado and Baytown facilities use ammonia as feedstock. Most of the products we produce at Baytown and most of the industrial and mining products produced at El Dorado, are sold on a cost plus basis so changes in ammonia costs don’t impact our profitability on those sales. However, at grade AN also produced at El Dorado, is sold at spot market prices. Turning to other Ag products, prices for UAN have fluctuated over the past year and are lower at this time than they were a year ago. If you look at the chart on the lower left, you can see that price of UAN decreased from 335 per ton in July of 2012, to 315 per ton in July of 2013. Based on market indicators, we believe that the current UAN pricing is approximately 265 per ton to 310 per ton depending on distribution point locations. UAN prices have been impacted by low cost urea imports.

Looking forward, we have presold substantially all of the UAN production from our Cherokee facility for the balance of the year at an average price of approximately 260 per ton. We’ve also taken advantage of the recent drop in natural gas prices and locked in gas prices for the presold UAN at Cherokee. In July 2013, southern plains plant prices for high density ammonium nitrate or HDAN that is were $380 per ton compared to $465 per ton, 12 months earlier, current pricing is approximately $335 per ton. Currently southern plains ammonia is trading at about $55 per ton, lower than a year ago approximately $460 per ton. We are currently at the typical seasonal low price for all of our agricultural products.

Focused on the outlook for the chemical markets we serve, page 16 lists several macro indicators for our agricultural products, most of which continue to be favorable. Grain stock to use ratios both worldwide and in the US, continue to be well although projected high yields in the current planting season should increase these somewhat. Planting levels next spring are expected to be somewhat lower than this year, but still relatively high. Market prices for corn and wheat, although having recently declined, remained favorable to growers. So farmers have an incentive to plant and sell more. All of this should continue to create demand for nitrogen fertilizers. As previously mentioned, we have presold our Cherokee production for the balance of 2013. Finally, low natural gas prices have reduced the cost to manufacture many of our Ag products. North American produce nitrogen fertilizers are currently the lowest cost, factoring in the total cost of production, freight and distribution. The industry consensus is the positive fundamentals for the Ag business should continue in the near to midterm.

Despite general industry drivers, weather can have a significant impact on the fertilizer part of our business. As previously discussed, this year’s planting season was substantially the light. Wet and cold conditions in Northern markets delayed the season there while colder and dried conditions delayed the season in our Southwest markets. As a result of the late planting, ammonia usage was off. However, once the season began, weather conditions were generally good and industry wide sales of UAN were good as well. Unfortunately, we missed this opportunity because our UAN producing facilities were out of production during most of this period. Current weather conditions, with abundant moisture, have returned much of our market areas to normal, as opposed to the drought conditions prevalent in recent years and should lead to high fertilizer applications this fall. We continue to be optimistic about our agricultural business.

Please turn to page 17. Our industrial products were sold primarily to large customers pursuant to contractual cost flows and/or minimum tech arrangements. The two charts on this page indicate the shift that has occurred in our sales mix in 2013 from 2012 full year. In reality, very little change occurred and the shift from agricultural products to industrial this year was primarily driven by plant downtime. A very significant part of our business continues to be industrial and mining. Page 18 contains some of the market indicators for this area of the business, most of these indicators forecast growth for the next few years. Coal production in United States has declined as a result of low natural gas prices and environmental issues. However, most of our mining business is pursuant to long-term agreements with minimum annual quantity requirements.

Please go to page 19 to review the current status of our various chemical production facilities. El Dorado’s natural gas capacity is approximately 80% of its pre-May 2012 levels, and will continue at that level until we complete construction of our new Weatherly 65% acid plant and concentrator during 2015. Cherokee, resumed production in May 2013, is currently operating at its historical level. Pryor resumed production during late April 2013 and although encountered some close startups mechanical issues, it is operating at near design production rates. The Baytown facility is operating at optimum production levels. To recap, all of our chemical facilities are operating at near design rates as required except El Dorado which will have less nitric acid capacity until 2015.

Moving on page 20 lists our chemical businesses strategies and some of our key initiatives for 2013. Our primary focus is on plant safety, reliability and key capital projects. Focusing on capital projects, please turn to page 21. Earlier, Tony reviewed the capital budget with you, I will review some of the key projects in additional detail. As we previously mentioned, we plan to add another 375,000 ton per year ammonia plant to our El Dorado facility which we refer to as EDC. Whereas our Cherokee and Pryor facilities use natural gas as their primary feedstock which they convert to ammonia, EDC currently purchases ammonia from the pipeline. EDC currently uses approximately 220,000 tons per year of ammonia to satisfy its current production needs for the other products it produces. The planned ammonia plant will lower Al Dorado’s or EDC’s cost of production and provide approximately 155,000 per tons per year of ammonia capacity above EDC’s current usage. Part of that additional ammonia, will be used to convert to other products with EDC and part will be sold as ammonia via the pipeline that EDC currently purchases from.

The chart on this page shows the historical differential between purchasing and producing ammonia for the past three years. The current status of the ammonia plant project is as follows; we have applied for permits and the permitting process is well underway. Anticipating the eventual receipt of permits and to the extent allowed before actually receiving those permits, engineering work is underway. We’ve ordered certain long lead time items. We will soon execute an agreement with an EPC firm, to construct the ammonia plant. By the way, EPC stands for Engineer, Procurement and Construction. As we’ve stated, we plan to have the ammonia plant construction and in operation during 2015, probably the latter part of the 2015. We also plan to replace the DSN direct strong nitric acid plant that was destroyed at EDC, with the state of the art Weatherly 65% acid plant and concentrator. Permits have been applied for, engineering work is in progress, major equipment has been ordered and we expect the plant to be operational in 2015 as well. We will also engage in EPC contractor to continue the construction of this project. The new nitric acid plant will have a capacity of approximately 370,000 tons per year, as compared to 90,000 tons per year from the old DSN plant that is replacing. This will increase EDC’s nitric acid capacity by approximately 280,000 tons per year. At Pryor, we recently completed the installation of a natural gas to ammonia converter. We determined that the old converter was the bottleneck that was preventing Pryor from achieving its designed production rates. The new converter is working well and Pryor is operating at, or near designed production rates of ammonia. In addition to these projects, we continue to place a very high emphasis on safety, the environment and plant reliability.

Turning now to our Climate Control business, on page 22, you can see sales by the major product categories we report in our quarterly filings. Total sales for the second quarter were 77 million, an increase of 15% over the second quarter of 2012, with increases in each product segment. Comparing to the 2012 second quarter, sales of heat pumps were up 15%, fan coils were up 23% and sales of other products were up 2%. Total sales for the first six months were approximately 148 million, an increase of 13% over the same period in 2012, again, with increases in each product category. Compared to 2012, year-to-date sales for heat pumps were up 12%, fan coils up 23% and sales of other products up 8%. On page 23, you can see that the second quarter sales of products used in commercial and institutional buildings, were up 16% and sales of our residential products were up 8% compared to last year second quarter. On a year-to-date basis, sales of products used in commercial and institutional buildings were up 17%, whereas sales of our residential products were down 5%.

Total bookings during the second quarter of 2013, were 2% below the 2012 second quarter, with both commercial bookings and residential bookings down the same percentage. Year-to-date, our orders were up 3% for 2012 with commercial bookings up 2% and the residential bookings up 4%. The backlog of product orders at June 30, 2013, was 48.9 million, 3% lower than reported a year ago and 12% off the backlog at year-end. Total new orders in July were 20.9 million and our backlog of product orders at July 31st was also 48.9 million. As mentioned in previous conference calls, the commercial recovery has been slower than previously anticipated, and the market for our residential products continues to be somewhat soft. However, we continue to maintain our leading market shares for geothermal and water source heat pumps and for hydraulic fan coils. The next few pages of the power point, deal with the market outlook for construction.

On page 24, there is a graph that shows McGraw-Hill’s most recent construction forecast, for certain commercial and institutional building types. These are the building types that are the most important to us, as they comprise 63% of our total Climate Control business sales in 2012. As you can see from the graph, these sectors are all forecast to grow over the next six years. In the aggregate, they are expected to grow by just over 5% during 2013 and 66% through 2017. Three months ago, the same McGraw-Hill forecast indicated that in the aggregate these markets were expected to increase by 9% in ‘13 and 67% through 2017. Clearly the indications are for growth but how much and exact and when it will materialize exactly is difficult to pin down. In addition to monitoring construction forecast by sector, we also track the Architectural Billings Index which is considered to be an indicator for non-residential construction spending nine to 12 months in the future.

So if you turn to page 25, there is a graph of the ABI. June score of 51.6 makes 10 out of the last 11 months above 50, which indicates an expansion in billings. This is a very positive sign that the construction market is stabilizing. We believe the general consensus of most economists and construction industry experts, is that the recovery in commercial and institutional, new construction will continue albeit at a slower pace than originally predicted. While new construction remains a greater part of our business, approximately 70% of Climate Control business sales, renovation and retrofit of existing buildings have been and will continue to be an important market for us. Fortunately, all of our Climate Control business are well suited for this part of the market as well as new construction. During 2012, 18% of our Climate Control business sales were geothermal heat pumps used in single family residential applications.

Page 26 shows McGraw-Hill’s forecast for single family residential construction starts. McGraw-Hill forecasted that housing starts will increase from about 516,000 in 2012 to 640,000 in 2013, a 24% increase although in absolute numbers not tremendously high, and to over 1.1 million per year in 2015 to 2017. If this occurs, it should benefit our residential geothermal business. However, we do believe that low and relatively stable energy prices continue to dampen the customer enthusiasm for energy saving as alternative. An encouraging positive trend is the increase in green construction that has occurred in the last few years and is expected to continue. Now I showed you this on the last conference call, but for people that are new to the call this year, I included this again. On page 27, there is a graph that depicts the Dodge 2013 Green Construction Outlook published by McGraw Hill. It forecast that the green construction market will grow from approximately 85 billion in 2012, to between 204 million and 248 billion in 2016. This should benefit the sale of our highly energy efficient products, which includes our geothermal products and many of our other products as well.

Turning to page 28, we’ve listed our Climate Control business strategies and some key initiatives. Our primary initiatives for 2013 are the introductions of several new products and a heavy focus on lean operational excellence projects, intended to reduce costs, eliminate waste, streamline processes and improve quality. One accomplishment that we’re very proud of is that our innovative and ultra-energy efficient Trilogy geothermal heat pump series recently received the R&D 100 Award from R&D Magazine. This is widely recognized at the Oscars of Innovation. The R&D 100 Awards identify top technology products of the year and since 1963, they’ve recognized revolutionary technologies newly introduced to the market. Many of those have become household names to you, including things like the flashcube, automated teller machines, the halogen lamps, the fax machine, liquid crystal displays, photo CDs the Nicoderm anti-smoking patch, anti-cancer drugs and HDTV. Recent winners have included next generation MRI machines, laser metal forming tools and building blocks for fusion experiments. So we’re extremely proud of that award for the great technology that we’ve developed over the last couple of years. Finally, on a housekeeping note, Tony and I will participating in the Global Hunter Securities Top Idea Conference in Chicago on September 5th, and we hope to see some of you there.

That concludes the prepared portion of the call. I’d like to request that during the Q&A, you limit your questions to three or four so that others also have a chance to participate. If you have more questions, you can get back on the queue and ask them later. Operator, please poll for questions

Question-and-Answer Session

Operator

Certainly. We’ll now be conduction a question-and-answer session. [Operator Instructions]. And our first question comes from the line of Jo Mondillo with Sidoti & Company. Please proceed with your question.

Joseph Mondillo – Sidoti & Company

Good morning guys.

Barry Golsen

Hi, Jo.

Joseph Mondillo – Sidoti & Company

First question just on – was wondering if you could involves the El Dorado expansion and we’ve had a lot of sort of volatility with commodity prices and I know there is a lot of variables involved. But I’m just wondering if you could give us any idea or talk about a little color on the sensitivity of the 370 a ton of savings that you sort of guided to in the presentation that you put out a couple of weeks ago?

Barry Golsen

Well Jo that’s a good question. What we in previous conference calls when we’ve been asked the question about what we expect in savings to be in El Dorado now – What it would look like today and what it might look like on a going forward basis, I think we’ve been pretty consistent in responding that the market conditions there is a lot of moving parts to the answer to that question. There is the market price of the products, there is the price of ammonia all the inputs are subject to change. And I think we’ve said consistently, that they do change and we expect them to change. And as a result of that, that we have run numerous scenarios at various levels Jack mentioned today that we shocked our projections with some downtime scenarios. It’s obvious that if ammonia prices are lower now than they were a year ago or three years ago, then the spread is lower. We expect that spread to change over time, sometimes it will get bigger, sometimes it will get smaller. The price of the ammonia in the last year has varied between what is today at $700 per ton. And so, we expect that over the long haul that this is going to be a very profitable addition it will save us significant money and it’s going to be accretive to earnings and relatively short pay back to the project of this magnitude. But as to specifically addressing differential in savings, you can try and do the math yourself because everyone in the industry knows the computation to figure out what the cost of producing is. So that answers your question or not

Joseph Mondillo – Sidoti & Company

Yeah that was good enough, thanks. And then second question just related to the Pryor plant I was just wondering I think we had possible expectation that additional 60,000 may be up and running by the year end or early 2014 I was just wondering if you could give us an update on that capacity?

Barry Golsen

Well again on the previous conference calls, I think we did state that we were although not back burning that project we were giving it a much lower priority than focusing on the major plant at Pryor for obvious reasons and we’re still in that foster. So I would expect that, that has pushed out and it will push out in – for sure push out in 2014. As to an exact timing, we don’t have that available to give you because we quite honestly don’t know ourselves.

Joseph Mondillo – Sidoti & Company

Okay. And then just lastly, expectations on turnarounds in the third quarter, I know it should be a lot less than normal just given that a lot of the turnaround or maintenance has happened in the beginning of the year, I was just wondering if you could just give us an update on…

Jack Golsen

That’s great, Jo. We don’t have any significant turnarounds planned for the second half.

Joseph Mondillo – Sidoti & Company

Okay, great. Thanks a lot. I’ll hop back in queue.

Operator

Thank you. And our next question comes from the line of Dan Mannes with Avondale Partners. Please proceed with your question.

Dan Mannes – Avondale Partners

Thanks and hey everybody.

Barry Golsen

Hi Dan.

Dan Mannes – Avondale Partners

A couple of follow up questions, first starting on the El Dorado ammonia expansion. Number one, you’ve got a pretty good visibility on the capital cost 250 to 300, I was wondering, how close you’re to be able to sign the EPCs and how much of that cost is sort of either locked in or known versus how much if there is still somewhere…

Barry Golsen

Well some of that cost is locked in and some of that cost is subject to change as we get into the project. And I don’t have in front of me a breakdown to be able to give you – quantify specifically how much that is. Unfortunately, I just don’t have that information in front of me. Tony would you like to comment?

Tony Shelby

Dan the other thing to is I think Barry mentioned that we’re negotiating an agreement with EPC, it won’t be a turnkey cost, it will be time material and highly engineered and highly negotiating. So we have a – we feel certainly have in that range. I think we put on a schedule of 270 million but we don’t expect significant overruns over and above what we forecast.

Barry Golsen

I’ll just add to what Tony said, the reason some of it we can lock in on because some of the parts of the plant we purchased direct and some of the parts of the plant will be provided by the EPC. So, much of the part of purchase direct we’ve been able to lock the price. And the hardware, those are the major components we’ve been able to lock it or come within a very narrow range of expectations or variation. The part that is subject to change gets into the construction part itself and that is still in engineering. So as the engineering changes there are some variation and that will be the engineering will continue for a few more months until we break ground on it.

Dan Mannes – Avondale Partners

Okay. The next question El Dorado and I think in the presentation you noted an expectation may be 20% return on capital which we estimated then to be in the ballpark of 50 million to may be 60 million of annual EBITDA. Can you talk about what might be baked into that assumption? And how much of that is already, I don’t want to say locked in, but highly visible given the fact already going into contracted production at El Dorado?

Barry Golsen

Well you say contracted production we have as I said before we’re currently using about 220,000 of tons per year of ammonia at El Dorado and so, the first 220,000 tons of production will go to satisfy our current needs. That leaves us about 155,000 of additional ammonia and that additional ammonia, we have several optional things we can do with it. I mean we might be able to upgrade it into other product and sell it and we have – we’re talking to various customers about the potential of doing that. But I really don’t want to get specific or talk about any specific contracts at this time. It’s inappropriate to do that until it’s a done deal. But also this is on the pipeline and we’re currently buying from the pipeline and we’ve also – we can inject into the pipeline. And we plan any excess ammonia that we have that we can’t cover either with our current requirements or new requirements that we develop with customers, we can sell into the pipeline. And that’s what the plan is the overage will go into the pipeline.

Dan Mannes – Avondale Partners

Okay and to the initial question the 50 million to 60 million based on a 20% return, can you give us some indication of what that’s based from a pricing perspective?

Jack Golsen

Dan the return on capital direct result of the market process for ammonia urea – ammonia nitrate solutions and the cost of natural gas. So that’s going to move up and down, lift the average cost during the quarter of the year.

Dan Mannes – Avondale Partners

Yeah we understand that but you clearly made some assumptions to come up with that returns. So I was just wondering if you could tell us what they were.

Barry Golsen

Well we’re not going to give you the specifics of our internal projects we typically don’t do that as you know not discuss it generally. But in general sense, the five year return was not based on the current conditions, it was based on a more conservative look at the market indicators at some point in time in the future that included lower ammonia cost and higher natural gas cost. But as to the specifics, I don’t think it’s appropriate to put those out there at this time.

Dan Mannes – Avondale Partners

Understood. The last question as it relates to El Dorado

Barry Golsen

You should also include the assumption, that some of the products will probably be sold to the industrial sector on a negotiated basis. So it wouldn’t necessarily get full retail price. So when you’re looking and thinking about the savings that we can get within ammonia plant, it would be inappropriate to think that the full differential between the cost of produce and the current cost of ammonia will automatically drop to our bottom line. So there will be some that will be incorporated into contracts that will go back to customers to enhance the competitive nature of the business and to help negotiate longer term contracts and (inaudible) contracts.

Dan Mannes – Avondale Partners

Right. And so while you may be foregoing some of the potential key profitability on the markets you’re taking some of the risks off the table and locking in may be more visible margins on it?

Barry Golsen

Right and that’s consistent with our business plan what it’s been historically.

Dan Mannes – Avondale Partners

Yeah

Barry Golsen

Take a certain amount of our business to be conservative and lock in.

Dan Mannes – Avondale Partners

Understood. The last question as it relates to El Dorado expansion, the debt financing you put in place, I don’t know if you filed the indenture for it, but this was a secured piece of debt when I think you originally went out for unsecured. Can you talk about some constraints you may have whether assets sales moving assets around etcetera given that it’s going to be secured?

Tony Shelby

Well may be I don’t think is anything that we would be considering but in terms of the ability to manage the business I think we’re in perfect shape with this additional funding. The security is not something we expect to go in but the market tightened up as we go through. But in terms of managing the business, I don’t think it’s going to have an impact on our plan.

Dan Mannes – Avondale Partners

Alright, that was really more talking about strategically whether down the road you’re looking to potentially separate the businesses we’ve obviously talked about MLPs etcetera I was just wondering if that might constraint you in any way on any strategic opportunities.

Tony Shelby

Well obviously you have to deal with collateral if you’re going go to do of an acid but at this point in time our longer term plan right now consist of completing the construction and increasing the capacity to these plants and we don’t have any short term and keep in mind this isn’t six year notes, these bonds are year maturity.

Dan Mannes – Avondale Partners

Got it. And then my final question is, you had mentioned you would also you’ve done some pre-selling of UAN I think you specifically highlighted Cherokee at 260 for the balance of the year. I didn’t catch did you also pre-sell at Pryor and if so, may be walk us through the pricing of it?

Barry Golsen

Well we basically have a de facto pre-sell situation at Pryor because by the virtue of our distribution arrangement that we have that we’ve discussed at the past, partner is required to take all the production that we can produce. Now it’s not at a fixed price, it’s at whatever the pocket price is at the time okay? So from a volume standpoint, we’re great for the balance of the year and from a locked in spread standpoint, we’re locked in at Cherokee but we’re not locked in at Pryor.

Dan Mannes – Avondale Partners

Perfect. Thanks a lot.

Jack Golsen

Thanks, Dan.

Operator

And our next question comes from the line of Keith Maher with Singular Research. Please proceed with your question.

Keith Maher – Singular Research

Good morning gentlemen. My first couple of questions had to deal with insurance recoveries. First question just on the El Dorado damage the acid plant I know your insurance carrier was saying it was repairable so you’re not going to get quite much money you’d hope. Do you have an idea as to how much you’re going to get? And you are going to get before the end of the year I think that was in the prepared remarks?

Jack Golsen

We disclosed that in the initial remarks. We have yet to receive 75 million to 100 million include there is the, negotiate within that range is what we think the range is for the recovery of the DSN plant.

Keith Maher – Singular Research

But some of that money I thought the 75 to 100 was related to business interruption insurance money?

Jack Golsen

It is.

Keith Maher – Singular Research

Okay.

Jack Golsen

But the recovery on the DSN plant. Please keep in mind we’ve already dealt with the net book value of that cost so that costs will all be beyond the net book value that we’ve already written off.

Keith Maher – Singular Research

Okay, that’s helpful. But then just to understand you’re saying you’re going to get about 75 million to 100 million in the insurance proceeds between now and at the end of the year is that?

Jack Golsen

And I also qualified it however, there is no assurance because with insurance companies you have to sort of move at their pace. We will receive that and we expect in ‘13 although it lasts with the insurances.

Keith Maher – Singular Research

Okay. But it wouldn’t be any more money than that, it just may – some of it may just come in ‘14 is that what you’re saying?

Jack Golsen

Seems like possible we expected in ‘13 but it could – some of it could leak over in ‘14.

Keith Maher – Singular Research

Okay. And then second question just about the expansion at the El Dorado, any chance so we can get some more details as to when in 2015 we’d see, obviously there is the nitric acid plants, there is the ammonia plants I guess would probably come online at slightly different times. I mean could we get a little bit color as to may be when in 2015, what quarter you might see that happen?

Barry Golsen

We’re too far off to be able to pin that down exactly. Primarily, we don’t have our permits yet and that will affect the start day then we can break ground because you’re not allowed to break ground until you get those permits. But what we’ve been saying is I think we need to be thinking about the back half of ‘15 not the front half of ‘15. And as this progresses, and we get the permits, and we get farther into and as we get closer to it, we’ll be able to nail that down a little better but it’s premature to try to nail it down to a month or even a very specific quarter at this point till we get those permits.

Keith Maher – Singular Research

Okay. If the permits – I mean you mentioned the state of Arkansas are there some federal permits involved as well like the EPA?

Jack Golsen

The way it works is we work with the Arkansas Department of Environmental Quality, they’ve been very cooperative. They are also very cautious. So once we get them to issue the draft the permit and EPA will overlook it and agree to it.

Keith Maher – Singular Research

Okay. And then just a final question on your tax rate, I don’t know if you could give any guidance going forward but should we assume kind of the tax rate what’s been here up in the high 30s going forward?

Jack Golsen

State and federal combined yes.

Keith Maher – Singular Research

Yeah okay. Alright that’s…

Jack Golsen

It’s a little bit lower than that certain period premium tax credits but 37 up I think is a good rule of thumb.

Keith Maher – Singular Research

Okay, great. Thanks. That’s all I had.

Jack Golsen

Thanks.

Operator

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

David Deterding – Wells Fargo Securities

Hi good morning guys.

Barry Golsen

We didn’t hear the name.

David Deterding – Wells Fargo Securities

It’s David Deterding at Wells Fargo.

Barry Golsen

Hi David.

David Deterding – Wells Fargo Securities

Hey how are you Barry? I saw a nice step up in the Climate Control business this quarter $9.5 million, it looks like the backlog decreased a little bit there but the sales were up. Are we starting to see a C change and have we gone through that trough in the Climate Control business and we’re coming out of that now or are we really just working down the backlog here as we go forward?

Barry Golsen

Well I think it’s may be somewhere in between. I think a C change implies major significant bump up in this context. I think what we said was and what we’re seeing, is that if you look at the charts that I gave you on McGraw-Hill, that there is the expectation that over the next three to five years there is going to be some really significant growth in all the important markets that we serve, but we’re not exactly sure of the timing. The other thing you have to understand about this particular business is that, it’s a lumpy business as far as order intake. So you can see timing on key large orders really impact bookings in a given quarter or a given month. So we tend to look at over the long haul. But what we’re seeing out there is all positive indicators but not exactly sure of the pace that it’s going to increase, okay? And that’s – so we’re seeing activity levels up, we’re seeing the ABI up, we’re looking at these projections for McGraw Hill and others that are up. But we’re not going to be able to necessarily every single quarter see an increase in bookings. And therefore the backlog fluctuates and sometimes the backlog fluctuates because we are catering to customer demand as to when they need specific projects so we need to ship them, when they want them. I hope that answered your question?

David Deterding – Wells Fargo Securities

No absolutely, absolutely. And Tony, just on the insurance side of it just following up I know you said 75 million to 100 million is kind of what you expect to receive going forward and you received 65 million to-date. I just want to clarify, not all that 65 million has run through either in cost of sales, if it’s BI or the cash flow statement if it were an asset recovery some of that is still sitting in a current liability account, is that correct?

Tony Shelby

Yes that’s correct and deferred.

David Deterding – Wells Fargo Securities

Okay so there is some deferred that’s still to hit the statements here in that 65 million that you said you already received?

Tony Shelby

I think there is 21 million deferred at this point David.

David Deterding – Wells Fargo Securities

Perfect. And then can you just talk about I know you were talking about some balancing issues at Pryor that may have gone a little longer. It sounds like we’re up to that 700 tons per day in July where – sorry in August now where we sit. Did that bleed over when we weren’t running kind of full I mean should we think about some impact at Pryor in Q3 as far as not being up to that run rate?

Jack Golsen

Well keeping in mind that we came up during the period, there was a progression up to near design rates so we may not be right at 700 but close to it may be 650, 660 going to 700.

David Deterding – Wells Fargo Securities

Okay.

Jack Golsen

The hot weather will have one impact and another but for the most part we are very optimistic that this 700 will be a run rate.

David Deterding – Wells Fargo Securities

Great. That’s all I had guys. Thank you.

Jack Golsen

Thanks, David.

Operator

And our next question comes from the line of Gregg Hillman from First Wilshire Securities. Please proceed with your question.

Gregg Hillman – First Wilshire Securities

Yeah good morning. I’d like to continue along the Pryor question about Pryor. Historically you’re last 10 years where did Pryor kick out on a quarterly basis or on an annual basis in terms of the ammonia production?

Barry Golsen

Did you say over the last 10 years is that what you said?

Gregg Hillman – First Wilshire Securities

Yeah what was the year peak or the quarterly peak?

Barry Golsen

Let me just go back and do a little catch up on history with Pryor. We acquired Pryor about 14 years ago, and when we acquired it, it was in a shutdown condition. We acquired it out of a bankruptcy. It was maintained 14 years or more in a shutdown condition a similar to mothball condition not completely mothball. We did certain things to preserve it so that if we wanted to turn it on, we’d be able to turn it on. And then we started in about 2008 to – and 2009 to somewhat recondition the plant and get it ready to start up and we finally achieved production or sustained production in the fourth quarter of 2010.

So for the first three quarters of 2010, there was no production and it lost money, it lost about $17 million I think in that first three quarters. And then in the fourth quarter, we turned it on, and it made all that money back. So it ended up breaking even for 2010 but it only ran for one quarter. For 2011, it ran for most of the year and in 2011, my recollection was that it made operating income of about 42 million-ish and that was net of some insurance recoveries. So we actually recorded more income but take out the insurance recoveries, it was something like 42 million-ish. And I’ll also remind you that during 2011, we were still having problems with that bottleneck. So we were never able to get the full production or our targeted production let’s put it that way. So even at less than full production, we had a pretty profitable year for that operation in ‘11.

And in ‘12, we had issues during part of the year with a urea vessel in the first part of the year and then in the back part of the year we decided to take it down to make a major plant upgrade. So in the back part of the year, in the fourth quarter, it was down because we realized that we needed to de-bottleneck it and so we made the discretionary decision to take it down to make a major upgrade to the plant. So that’s the kind of the history in Pryor. So we haven’t really owned it long enough and operated it long enough to have a really long term view of trends with this plant relatively short term but that’s the history as it’s been for us since we turned the plant on.

Gregg Hillman – First Wilshire Securities

Okay. And then, just going forward, in terms of capacity I think you said 750 but I believe in cash cost you collected additional 60,000 that you’re working on reduction…

Barry Golsen

Excuse me we said our target production rates were 700 today we hit 700 on some days it’s less but we’re in that range approaching design rate. And then in addition to that, that we have another 60,000 tons per year from some ancillary or other ammonia plants that are currently not in operation that we plan to bring up probably sometime during 2014, which was originally planned for ‘13 but we pushed it out.

Tony Shelby

One thing that you could note is the year we made (inaudible) the plant never ran 500 tons per day.

Barry Golsen

That’s a good observation.

Gregg Hillman – First Wilshire Securities

Okay. Thanks very much for the insight there.

Barry Golsen

Okay.

Tony Shelby

So in other words, we haven’t really run it in today’s configuration historically so going forward, there will be a new configuration and the new converter.

Barry Golsen

Okay.

Operator

Thank you. [Operator Instructions]. Our next question comes from the line of Rob (inaudible) Tree Capital. Please proceed with your question.

Unidentified Analyst

Hi guys. Thanks for your increased disclosure on the insurance that was really helpful. Can you talk about what happened with the insurance on Pryor and why that was rejected?

Barry Golsen

Well we didn’t follow the insurance claim on the downtime in ‘13 that was in 2012 we took it down realized it was a product claim. But in 2012 and ‘13 we did not have an insurance claim it was a shutdown to change out the converter. The claim that you’re referring to before was rejected because the insurance company took a position they couldn’t identify the exact cost of the crack in the retainer.

Unidentified Analyst

Got you. Okay. And it sounds like there is still some ongoing problems with the Pryor earlier in this quarter what were those? What were you issues there?

Barry Golsen

Well we made a very process upgrade in the fourth quarter and into the first quarter. We replaced the ammonia converter, the part of the ammonia plant that converts natural gas into ammonia. That was the bottleneck that was keeping us below 500 a day. And when you make a major – we took the plant down for few months, we made the change out and there are two things that affected us after we brought it up. One thing is that it’s typical after major plant outage as you’re bringing it up, that’s the time when the plant is stressed most, it’s stressed least when it’s operating at a steady state. But it’s stressed the most when you’re bringing it up. And we had a few mechanical issues that occurred on bringing it up one was a bearing and the other was what was the other one? I don’t recall what the other one is right now. Okay, we took the plant down and fixed those and got them up and that was fine. But then what we found was that with the new higher rate of production, that there needed to be some downstream balancing that went on and so we had been re-tweaking the balances downstream at certain parts of the plant to allow for the higher (inaudible). And that’s what occurred and that’s the explanation.

Unidentified Analyst

Okay. And are those – one of the other was talking about the presentation that you had out there is that somewhere on your IR site if you guys made that publicly available?

Barry Golsen

Yeah I think we filed an 8-K and we attached it most of it and – can you find that on our website? That power point is on the website.

Unidentified Analyst

Okay, great. Thank you. And last question can you talked about having some impact both your price urea. Could you also talk about how urea works in the competing products and kind of how switching might work towards in a way from that product?

Jack Golsen

Urea is a worldwide product. It’s a (inaudible) product for the most part it’s usually much lower than UAN but it doesn’t always set the price. It volatizes on the ground much sooner and it’s a lot less stable in terms of getting nitrogen to the plants. So the UAN in most according regions is a competitive product.

Unidentified Analyst

And urea is that so cheap that people decide to use kind of the (inaudible) product?

Jack Golsen

I’m sorry didn’t hear the question?

Unidentified Analyst

So the impact of urea became so cheap that people were happy to use it as an inferior product does that have any impact?

Jack Golsen

It has put some price pressure on AN and UAN yes, and it typically does that’s fairly common. I think (inaudible) urea every year.

Unidentified Analyst

Okay. Thank you very much.

Jack Golsen

Thank you.

Operator

And it seems we have no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Barry Golsen

Okay. Well this is Barry again. I’d like to thank everyone for listening and having interest in LSB and participating today. And we appreciate that interest on your ongoing support. If you’ll stay on the line, Carol Oden will now review certain important information about the content of our presentation today. Carol would you take it please?

Carol Oden

I will do that Barry. Thank you for listening today. This comments today contain certain forward-looking statements. All of the statements other than statements of historical fact are forward-looking statements. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate, and similar statements of the future of forward-looking statement nature identify forward-looking statements, including but not limited to all statements about or any references to the Architectural Billings Index or any McGraw-Hill forecast, including those pertaining to commercial, institutional and residential building for investor growth and McGraw-Hill forecasts regarding the total green retrofit, renovation markets and energy efficiency markets.

The forward-looking statements include but are not limited to the following statements – a new anhydrous ammonia plant will allow us to almost double our total ammonia production capacity; permits from the Arkansas Department of Environmental Quality will be received; when we receive them, we will break ground on the project; we expect a significant amount of this plant to be paid for with insurance proceeds; we expect that we will receive insurance payments before the end of 2013; we are in the process of renewing, adding and expanding our long-term contracts to supply our customers with additional capacity that will be available from the future expanded El Dorado plant; we expect our chemical business results to improve significantly in the second half of the year compared to the first half; in our Climate Control business we are well positioned to capitalize on the continued strengthening in demand from both the commercial/institutional and residential sectors, which should lead to further increases in product sales, orders and backlog; we are looking forward to reporting improving results as we progress through the balance of 2013 and into 2014; big picture long term outlook is strong for us; El Dorado facility’s nitric acid production capacity will continue to be limited to approximately 80% of normal capacity until 2015 when construction of the new nitric acid plant is scheduled to be completed; we anticipate that we will receive the remaining estimated insurance recovery of approximately $75-100 million during the remainder of 2013, although there are no assurances; planned capital spending; funding of planned capital spending; we plan to add a 375,000 ton per year ammonia plant to our El Dorado facility; the planned ammonia plant will lower El Dorado’s cost of production and provide approximately 155,000 tons per year of ammonia capacity; we will soon execute an agreement with an EPC firm to construct the ammonia plant; we hope to have the ammonia plant constructed and in operation during 2015; we also plan to replace the DSN, direct strong nitric acid plant that was destroyed at EDC with a state-of-the art Weatherly 65% acid plant and concentrator; we expect that plant to be operational in 2015; the new plant will increase EDC’s nitric acid capacity by approximately 280,000 tons per year; renovation and retrofitting of existing buildings have been and will continue to be an important market for us; positive trend is the increase in green construction that has occurred in the past few years and is expected to continue; our primary initiatives for our Climate Control business for 2013 are the introduction of several new products and a heavy focus on lean operational excellence projects intended to reduce costs, eliminate waste, streamline processes, and improve quality.

You should not rely on the forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. We incorporate the risks and uncertainties being discussed under the heading "special note regarding forward-looking statements" in our Annual Report Form 10-K for the fiscal year ended December 31, 2012 and Form 10-Q’s for the periods ending March 31, 2013 and June 30, 2013. We undertake no duty to update the information contained in this conference call. The term EBITDA, as used in this presentation, is net income plus interest expense, depreciation, amortization, income taxes, and certain non-cash charges, unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurements. The reconciliation of GAAP and any EBITDA numbers discussed during this conference call are included on the Q2-2013 Conference Call Presentation which is posted on our website. Thank you again. And this ends our conference call.

Operator

This does conclude today’s conference call. You may disconnect your lines at this time and thank you for your participation.

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