LSB Industries, Inc. (NYSE:LXU)
Q3 2013 Earnings Conference Call
November 6, 2013 11:00 AM ET
Kristy Carver - IR
Jack Golsen - CEO
Tony Shelby - EVP and CFO
Barry Golsen - President and COO
Dan Mannes - Avondale
Joe Mondillo - Sidoti & Company
Keith Maher - Singular Research
David Deterding - Wells Fargo
Greetings and welcome to the LSB Industries Third Quarter 2013 Earnings 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 Kristy Carver. Please go ahead.
Thank you. Good morning. Welcome to the LSB Industries Inc. third quarter 2013 conference call. Today LSB’s management 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, November 06, 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 the webcast and presentation section of the Investors tab. Please note that the presentation starts on page three of the power point.
And now, I will turn the call over to Mr. Jack Golsen.
Thank you Kristy. Thanks for joining our third quarter 2013 conference call today. In the third quarter, while improving in some areas, we fell short of the expectations we held going into the quarter for a combination of reasons. We share our fellow shareholders frustration with the most recent disruption at our Pryor facility which had been operating at close to design capacity through much of the third quarter, but experienced periodic production issues as the quarter progressed. From a positive perspective the diagnostic system that we installed at Pryor earlier this year served their purpose, enabling us to curtail production gradually and preventing further comps.
For the purpose of those that joined the call late and for the fact that we were interrupted by a disconnect, I am going to start my summary introduction over. In the third quarter while improving in some areas, we fell short of the expectations that we had going into the quarter for a combination of reasons. We share our fellow shareholders frustration with the most recent disruption at our Pryor facility which had been operating at close to design capacity through much of the third quarter, but experienced periodic production issues as the quarter progressed. From a positive perspective, the diagnostic systems that we installed at Pryor earlier this year served their purpose, enabling us to curtail production gradually, preventing further complications. We expect to have the facility back in operation during November.
While the performance of Pryor has been erratic, over the past year we made progress towards the goal of sustained production levels through the upgrade of equipment and systems, the strengthening of our facilities management team, the implementation of new processes and procedures with the help of outside industry experts to supplement our internal engineering staff.
All of this has required significant time and investment, and although the result has not been an immediate linear improvement, we remain confident that our actions will ultimately enable this facility to deliver sustained production and substantial profitability.
Our other Chemical Facilities are operational, with the exception of the 20% of El Dorado’s pre-May 2012 nitric acid capacity that we are in the process of replacing with a new acid plant and a concentrator. Initial phases of this project, along with the ammonium plant we are installing at El Dorado are underway while we await permit approval. We expect to have the plants fully installed and operating by late 2015. When fully operational, these projects will provide El Dorado with expanded capacity, improved efficiency, product mix flexibility and should result from significant reduction of our feedstock cost at that operation.
We finalized additionally, in the quarter we finalized our insurance claim for El Dorado, which will be reported in the fourth quarter. We are still in discussions with our insurance carriers regarding claims at Cherokee, Alabama.
As we move toward the end of 2013, we look back at challenges we faced and the progress we have made and continue to make with our chemical business and feel confident about our ability to achieve greater throughput and reliability from our facilities. While agricultural prices are weakened over the past year, fundamentals remain historically strong and we intend to capitalize on these favorable dynamics in the coming quarters.
Turning to our Climate Control business, our Climate Control business continues to experience modest improvement, driven largely by the commercial institutional and markets, while the residential segment that we serve remains sluggish. Although geothermal systems are green alternative to conventional HVAC systems and are advantageous considering total lifecycle cost, low natural gas prices extend the payback carrying a financial investment in geothermal heat pumps a less compelling alternative to traditional heating and cooling systems in markets that use natural gas for heating.
Overall, our Climate Control business’s strong market shares and our primary product categories positions us to generate more meaningful growth when the construction cycles strengths. We believe our actions will lead to a significantly improved financial performance of 2014.
I want to thank you and now I want to turn the rest of this call over to Tony, who will then turn it over to Barry. Tony will give you the details that some of you have indicated you would like to hear about the Chemical business and our other businesses.
Thank you, Jack. Before reviewing the 2013 financial results in detail, a few comments about the third quarter. Although below our expectations during the quarter our consolidated operating income of $23 million was better than the third quarter of 2012. The improvement was primarily due to the Pryor and Cherokee facilities returning to production during the latter part of the second quarter, partially offset by much lower selling prices for nitrogen fertilizers and higher natural gas prices.
Also included in the quarter, [indiscernible] metals recoveries of approximately $9 million. Below the operating line was the cost of the early extinguishment of debt and higher interest expense reflecting the senior secured note financing that we closed in August 7th to fairly extensive expansion underway within our Chemical business.
For review of the comparative third quarter consolidated results, please turn to page 4 of the PowerPoint presentation. Net sales were $177 million or 3% below 2012. Operating income was $23 million, compared to $12 million. Interest expense was $5.4 million, compared to $1.5 million. The increase include interest on $425 million senior notes sold on August 7th. More about this later. After cost early extinguishment debt and provision for income taxes report net income of $10 million or $0.43 per share, compared to net income of $7 million or $0.28. EBITDA was $29 million versus $17 million.
Continuing on Page 4, for the first nine months of 2013 compared to the first nine months of ’12, net sales were $530 million or 9% below, operating income was $35 million compared to $77 million. After interest expense and taxes, net income was $18 million or $0.75 per diluted share, compared to $47 million or $2 per diluted share.
EBITDA was $54 million compared to $93 million. The significant decline in consolidated operating income and net income is primarily due to the loss of production in the Chemical business during first half of 2013 and to a lesser degree the effect on gross profit margins [indiscernible] our sales process and higher natural gas cost, partially offset by increased sales and profitability in our climate control business.
Please turn to Page 5 of the presentation to review Chemical results. For the third quarter 2013 compared to the third quarter 2012, net sales were $104 million, $6 million lower. Operating income was $18 million, compared to $8 million. EBITDA was $23 million, compared to $11 million. The 10 million increase in operating income is primarily due to the returns of Pryor and Cherokee facilities to production in the quarter and includes the impact of interest recoveries and precious metal recoveries and the effect of unplanned downtime for the quarter. To be more specific comparing 2012 to ’13 third quarter, Chemical’s operating income for the 2013 quarter as we said is $18 million and for 2012 it was $8 million. Adjusted for downtime of $23 million in ’12 and $7 million in ’13, the operating income as adjusted would be $25 million in ’13 compared to $30 million in ’12, a difference of $5 million.
This $5 million difference includes lower market prices in 2013 of $7 million, higher natural gas cost in ’13 of $3 million higher maintenance and repair cost in ’13 of a $1 million, higher SG&A cost in ’13 of $2 million, offset by in 2013 insurance recoveries of $4 million and Climate [ph] recoveries of $5 million another $5 million. So we will address it further in the Q&A but that will give you an idea of how the 2013 quarter compares to the year ago quarter.
Please turn to next -- continuing with Chemical. Net sales gross profit operating income and EBITDA are well below the levels achieved in the prior year as a result of the lost production in three of our facilities during first half of ’13. We are on Page 5 talking about the nine months. The Pryor facility’s primary ammonia plant and the Cherokee ammonia plant were both out of operation for the entire first quarter and most of the second quarter. The effect of the downtime of Pryor and Cherokee facilities are particularly significant since these facilities, unlike the El Dorado and Baytown both use natural gases raw material feedstock and thereby capture the significant gross margin between the cost of natural gas and the market price for ammonia.
As a result, Pryor and Cherokee are normally most profitable facilities in our chemical business and therefore have a biggest negative impact on financial results when ammonia plants are not operation. Based on market conditions during the nine months of ’13 and after recognizing $18 million of business interruption insurance recoveries as a reduction cost of sales, we estimate the negative effect on the chemical business operating income resulting from downtime to be approximately $61 million to $74 million for the nine months.
All the chemical facilities were operational during the third quarter. However the El Dorado facilities nitric acid production capacity will continue to be limited to approximately 80% of historical capacity until 2015, when construction of the new nitric acid plant and concentrator is scheduled to be completed. The El Dorado and Cherokee downtime events that occurred in 2012 were unplanned and were insurable events. The El Dorado insurance claim for losses and damages was finalized in October of 2013 for $113 million, which consisted of $60 million previously paid and $53 million to be paid within 30 days. As a result an insurance recovery of $76 million including $23 million that was deferred gain at September 30, 2013 would be recognized as income in the fourth quarter.
The Cherokee claim has not yet been resolved. The insurers have advanced $15 million, of which $13 million was credited to income in previous quarters and $2 million recorded has been deferred in the September financial statements. We expect to finalize the Cherokee claim during the fourth quarter of ’13, although there are no assurances.
Turning to the results of our Climate Control business please go to Page 6. For the third quarter of 2013 as compared to the third quarter of ’12, Climate Control reported net sales of $17 million, 3% over 2012. Gross profit was $23 million, an increase of $3 million. Gross profit as a percent of sales was $33 million compared to 33% compared to 30% [ph] and operating income increased to $9 million compared to $7 million.
For the nine months Climate Control sales were $217 million, an increase of $19 million or 10%. Gross profit increased 16%. Gross margin was 33% as compared to the 31% and operating income increased 22%. For a review of our liquidity and capital resources at September 30 please turn to Page 7.
Our balance sheet reflects the additional leverage and the related cash investment resulting from the sale of the $425 million senior secured notes. After cost of insurance, net proceeds were $418 million. After using $67.2 million to pay the balance due on the secured term loan including an early termination fee, the net proceeds were invested in highly raised money markets, certificates of deposit and U.S. treasury bills, pending application of the net proceeds to the construction at the El Dorado facility and other disclosed uses.
Since the planned use of proceeds from the sale of secured notes including constructive assets over an extended period, switching in 2015 we classified certain of the cash investments as non-recurring. At September 30 cash and cash equivalents balance was $140 million, non-recurring cash investments was $280 million, for a combined total of $420 million.
Other significant cash flow during the quarter includes cash provided by operations $38 million, capital expenditures $40 million, insurance proceeds of $10 million. Concurrent with the closing of the issuance of the senior secured notes, our working capital revolver loan facility was increased from $50 million to $100 million with current availability of approximately $63 million. At September 30 the $100 million working capital revolver loan facility was undrawn and remains so today.
For a brief review of our capital spending plan, please turn to page eight. The previously announced capital spending plans through 2015 include the amounts invested to date for the various projects are as follows; $250 million to $300 million for the construction of multi-plant at the El Dorado facility, a $120 million for the new 65% nitric acid plant and concentrator, also at the El Dorado facility, improvement and reliability, mechanical integrity, environmental upgrades and safety at all of our chemical facilities and normal maintenance and growth CapEx at the Chemicals and Climate Control business. In addition during the construction period and until the completion of the construction interest will be capitalized only to a cost for the major projects.
The planned capital spending will be funded by non-current restricted cash and investments, working capital, internal cash flow and insurance proceeds. We have addressed our results from operations and financial commitments in greater detail in the 10-Q and suggest that you view these disclosures and discussions for additional information analysis.
I’ll now turn the call over to Barry to discuss the market drivers and outlook for both of our business segments.
Thanks Tony. I’m going to focus on sales activity, order levels, product backlogs that were pertinent, and market drivers as we see them at this time. I’ll also give you an update on progress with the major capital projects at our El Dorado facility which we referred to as EDC.
To start, please turn to Page 9, which shows you our 2013 year-to-date sales mix by the markets we serve. This is a change from historical sales mix due to the downtime at certain operations that we’ve discussed with you many times. On Page 10, we’ve also included the sales mix for the full year of ’12, which is probably more typical of our sales mix with normalized chemical operations.
Focusing first on our chemical business, please go to Page 11. Although we have included down about our third quarter and year-to-date sales on this in the next two pages, comparisons to 2012 for the most part are not meaningful because of all facilities were not fully operating during a large part of the first half of 2013 and a portion of the third quarter.
Having said that, total sales for the chemical business during the third quarter were $104 million, down 5% from the third quarter of ’12. During the third quarter of ’13, agricultural product sales were higher than the same quarter a year ago.
Natural gas sales are new this year so there is no relevant basis of comparison. All other major product category sales were down relative to the third quarter of ’12. Total sales during the first nine months of 2013 were $303 million, down 19% from a year ago. All year-to-date product sales were down compared to the first nine months of 2012.
Now please turn to page 12 for sales of our key agricultural products. During the third quarter, tons shipped were up for all agricultural products, as compared to the third quarter of 2012. This was due to less plant downtime in the current third quarter than a year ago in conjunction with increased seasonal buying patterns. However, market prices for all products were lower than a year ago which resulted in lower sales increases than product volume increases for UAN and ammonia and a decrease in sales dollars for AN.
For the first nine months of 2013 both tons shipped and sales were lower for all fertilizer products than the first nine months of 2012, as a result of both plant downtime and lower market prices for our products. Domestic market prices have primarily been driven downward by low priced imported urea.
Turning to our industrial and mining products on page ’13; for the third quarter nitric acid tons shipped were up, however, sales were lower due to lower ammonia feedstock cost which are a pass-through component of the sales price.
Industrial grade AN or ammonia nitrate tons shipped and sales were both down due to lower demand for mining products. A portion of our mining sales decline did not impact gross profit due to a certain supply agreement with a customer that includes a contractual obligation to purchase a minimum quantity and allows us to recover our cost plus our profit irrespective of the volume of products sold.
On page 14 are some of the price trends for both the feedstock we use and the key Ag products we sell. The cost of natural gas continues to be relatively low in a broad historical perspective, currently about 346 per MMbtu plus transportation cost but higher than a year ago. Higher natural gas prices have increased our cost at Cherokee and Pryor facilities, which use natural gas as their primary feedstock. The cost of anhydrous ammonia feedstock we use at El Dorado and the Baytown Texas facilities has continued to decline. In October, it was $485 per metric ton compared to 715 per metric ton, a year earlier.
Currently ammonia is priced at approximately for $480 per metric ton at Tampa. Most of the products we produce at Baytown and most of the industrial and mining produced at El Dorado are sold on a cost plus basis. So changes in ammonia cost don't impact our profitability on those sales. However Ag grade ammonium nitrate also produced at El Dorado is sold at spot market prices.
Turning to other fertilizer 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 southern planes price of UAN decreased from $330 per ton in October of 2012 to $275 in October of '13. Based on market indicators we believe the current southern plans UAN pricing is approximately $260 to $280 per ton depending on the distribution point location.
UAN prices have been impacted by low cost urea imports and generally lower market prices for nitrogen products. Looking forward we have pre-sold substantially all of the UAN production from our Cherokee facility for the balance of the year and through January 2014 at an average price of approximately $260 per ton. We have also locked in gas prices for the pre-sold UAN at Cherokee through January.
In October of 2013 the southern plains priced for high density Ag grade ammonium nitrate or HDAN or AGAN was $345 per ton compared to $390 per ton 12 months earlier, current pricing is approximately $300 per ton.
Focused on the outlook for the chemical market we serve Page 15 lists several macro indicators for our agricultural products, most of which continue to be favorable. Grain stock-to-use ratios both worldwide and the U.S. continue to be low although projected high yields in the current planting season should cause these to increase. Corn planting levels next spring are expected to be somewhat lower than this year but still relatively high at over 90 million acres. At the same time an increase in nitrogen consuming wheat acres is expected.
Market prices for corn and wheat although having recently decline remain favorable to growers, so farmer have an incentive to maximize yields. All of this should continue to create demand for nitrogen fertilizers. As previously mentioned we have pre-sold our Cherokee production for the balance of '13 and through January of '14.
Finally relatively low natural gas prices have reduced the cost to manufacture many of our Ag products relative to previous years to past years. North America produced and nitrogen fertilizers are currently the lowest cost factoring in the total cost of production freight and distribution. The industry consensus is that the positive fundamentals for the Ag business although not quite as strong as they were a year ago given the movement in market prices should continue in the near to midterm. Despite general industry drivers, weather can have a significant impact on the fertilizer part of our business. At this weather conditions are generally favorable for planting.
There has been some recent discussion about the possibility of lowering the ethanol mandate. At this time there have been no new policy decisions. However if the current 18.1 billion gallons mandate is reduced to 15.2 million, which is a number that's been bounty to about and using the current estimate of 155 bushels per acre corn yields, this ethanol reduction would equate to approximately 6.5 million fewer acres of corn. But as we said there have been no decisions at this time or new policy.
Please turn to Page 16; our industrial products are sold primarily to large customers pursuant to contractual cost plus and or minimum type arrangements. The two charts on this page indicate a shift that's occurred in our sales mix in 2013 from the full year 2012, in reality very little mix changes. In the shift from agriculture products to industrial this year was primarily driven by plant down time.
A very significant part of our business continues to be the industrial and mining parts. Page 17 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 the United States has declined as the result of low natural gas prices and environmental issues. However a substantial amount of our mining business is pursuant to agreements with minimum annual quantity requirements in take or pay provisions.
Please go to Page 18, to view the current status of our various chemical production facilities. El Dorado’s nitric acid capacity is approximately 80% of its pre-May 12 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.
The Baytown facility is operating at optimum production levels. Pryor resumed production during late April 2013 and although it encountered some post startups mechanical issues, it operated at near design production rates for much of third quarter; however, intermittent mechanical issues which were detected by our recently installed diagnostic systems indicated we should reduce production rates.
We subsequently decided to perform certain unplanned maintenance activities which required us to temporarily curtail production. This was done during the second week of October. This maintenance activity is expected to be complete in November.
Moving on, Page 19 lists our chemical businesses strategies and some of our key initiatives going forward, our primary focus is on plant safety, reliability and key capital projects. Focusing on large capital projects, please turn to Page 20. As we previously mentioned, we planned to add another 375,000 ton per year ammonia plant to our EDC facility. EDC has historically used approximately 220,000 tons per year of purchased ammonia to satisfy its production needs for the other products it produces.
The planned ammonia plant should lower EDC’s cost of production and provide approximately 155,000 per tons per year of ammonia capacity above EDC’s historical usage. Part of that additional ammonia will be used to convert to other products at EDC and part will be sold as ammonia.
The chart on this page shows you the historical differential between purchasing and producing ammonia for the past three years. At today’s market conditions, the differential would be approximately $300 per ton. The current status of the ammonia project is as follows. We have applied for a permit that will cover both ammonia plant and the new nitric acid plant with concentrator.
A draft permit has been issued for both public and EPA comments. Both comment periods have expired. We anticipate issuance of the permit in the near future. To the extent allowed before actually receiving these permits, engineering work is underway. We have ordered certain long lead time items. We have executed an agreement with Lighthouse, formally known as SAIC, which is an EPC firm to construct the ammonia plant.
As soon as the permit is issued, we will begin physical activities on the El Dorado’s site that will lead to the ammonia plant construction. We plan to have the ammonia plant construction and in operation during the latter part of 2015. We also plan to replace the DSN, Direct Strong Nitric acid plant at EDC with a state of the art 65% nitric acid plant and concentrator. Engineering work is in progress on that project as well. Major equipment has been ordered and we expect the plant to be operational also in the latter part of the 2015.
We will also engage Lighthouse to complete 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 plant that it is replacing, increasing EDC’s nitric acid capacity by approximately 280,000 tons per year. In addition of these projects, we continue to place a very high emphasis on safety, the environment, and plant reliability.
Turning now to our Climate Control business, please turn to page 21. You can see sales by the major product categories we report on this page. Total sales for the third quarter were $70 million, a slight increase of 3% over the third quarter of 2012.
Compared to the 2012 third quarter, sales of heat pumps were up 12%, fan coils were up 3%, whereas sales of our other products which is a category that combined several products were down 35%. Within the category of other products, chiller sales actually increased while sales of our large custom air handlers and engineering and construction services declined. Total sales for the first nine months were approximately 217 million, an increase of 10% over the same period in 2012
Compared to 2012, year-to-date sales for heat pumps and fan coils were up 12% and 15% respectively whereas the third quarter shortfall in sales of our large custom air handlers and engineering and construction services resulted in a 6% drop in sales of other products for the nine months as compared to a year ago.
On Page 22, you can see that the third quarter sales of products used in commercial and institutional buildings were up 1% and sales of our residential products were up 10% compared to last year’s third quarter. Sales of commercial and institutional products were impacted by the decline in large custom air handlers and engineering and construction services during the quarter.
On the year-to-date basis, sales of products used on commercial and institutional buildings were up 12% whereas sales of our residential products were flat with the expectations that sales of residential price will remain flat through the balance of 2013.
Total bookings during the third quarter of 2013 were 2% below the 2012 third quarter with both commercial bookings and residential bookings down. Year-to-date, our orders were up 1% over 2012 with commercial bookings up 1% and the residential bookings up 2%. Excluding orders for customer handlers, year-to-date bookings for all other commercial products stay close water source heat pumps and chillers were actually up 3.4% as of 9.13 compared to the same period in 2012.
The backlog of product orders at September 30, 2013, was 46.3 million, 10% lower than reported a year ago and 17% off the backlog at year-end. The decline in backlog is related primarily to our large customer handler products. Total new orders in October were 25.5 million and our backlog of product orders at October 31st was 47.6 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 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 our presentation, deal with the market outlook for construction.
On Page 23, 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 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 but it should be noted that McGraw-Hill’s has slightly down their out year estimate since the last forecast. In the aggregate, these sectors are expected to grow by approximately 7% during 2013 and a total 63% through 2017.
Three months ago, the same McGraw-Hill forecast indicated that in the aggregate these markets were expected to increase by 66% through 2017. Clearly the indications are for growth but how much and when it will exact and when it t 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.
On Page 24, there is a graph of the ABI. September score was 54.3, second highest of the year with billings accelerating every months since of the beginning of the summer. We believe that 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 is to renovation and retrofit of existing buildings or replacement products and we think this will continue to be an important market for us. Fortunately, all of our Climate Control business products are well suited for this part of the market as well as new construction. Through the first nine months of 2013, 16% of our Climate Control business sales were geothermal heat pumps used in single family residential applications.
Page 25 shows McGraw-Hill’s forecast for single family residential construction starts and they forecasted that housing starts will increase from about 516,000 in 2012 to 635,000 in 2013, a 23% increase slightly off from their last forecast and more than doubling to over 1.0 million in 2016.
If this occurs, it should benefit our residential geothermal business. However, we do believe much of the recent gains in residential construction were in track housing or lower priced housing a sector where first cost is a major consideration and a sweet spot for our geothermal products.
In addition, we believe that low and relatively stable energy prices, gas prices particularly continue to dampen the customer enthusiasm for energy saving as alternative particularly in markets that use natural gas as a heat source or as a heating fuel. An encouraging positive trend is the increase in green construction that’s occurred in the last few.
Now on Page 26, there is a graph that depicts the Dodge Green Construction Outlook published by McGraw Hill. We’ve included this in the last conference call that for people how are new to the call this quarter, I included it again. It forecast that the green construction markets will grow from approximately $85 billion in 2012, to somewhere between 204 million and 248 billion in 2016 and this should benefit the sale of our highly energy efficient products.
Turning to Page 27, we have listed our climate control business strategy and some key initiatives. Our focus includes the introduction of several new products and our concentration on lean operational excellence projects intended to reduce cost, eliminate waste, streamline processes and improve quality.
That concludes the prepared portion of the call. I would like to request that during the Q&A you please limit your questions to two primary questions plus perhaps one follow-up if necessary, so that others have a chance to participate. If you have more questions you can get back in the queue and ask them later. Operator, please poll for questions.
Thank you. We will now be conducting the question and answer session. (Operator Instructions). And our first question comes from the line of Dan Mannes with Avondale. Please proceed with your question.
Dan Mannes - Avondale
A couple of questions obviously centered around the Chemical business. First if we can start out on the downtime incurred both in the third quarter and then into the fourth, can you maybe give us a little bit of a better understanding what actually occurred at Pryor; number one did this relate to maybe some of the equipment you had recently replaced or previously replaced or was this downstream or impacted, just a little more color on what actually caused the intermittent output and then was ultimately your decision to take the plant down? That would be helpful?
I think that is a good question and I’m going to try to answer it as concisely as I can Dan. Just to remind those that may be weren’t listening before or that aren’t quite as focused on this as you are, we installed a new ammonia convertor and we had the plant down from I believe November to April for that ammonia convertor installation. And the primary reason was to increase the production rate because we had determined that was a bottleneck in the plant. Since returning to operation after the -- and let me also remind you that during that period we installed some new diagnostics, monitoring equipment, vibration monitoring equipment and diagnostic software to help us control the plant better and to get earlier warnings when things were getting out of tolerance at the plant.
Since we returned to operation, after installing the new ammonia converter our synthesis gas compressor had experienced a vibration in its second stage rotor bundle. There are three stages in that synthesis gas compressor. We were constantly monitoring that vibration. It was detected by our newly installed vibration and monitoring software and diagnostic software.
And as a result of those diagnostics, we knew that we were going to probably have to replace that second stage rotor bundle and we ordered a new one and we got it in and we had it online and the plan was just keep it as a spare or to change it out fairly quickly and it is normal to have these on hand for this type of equipment.
Our original intension was to have a relatively short outage around the arrival date of that spare rotor bundle, to install it while continuing to monitor the ongoing vibration until that time to ensure that it didn’t reach critical levels.
Separately and apart from that, we have a large motor that drives the syngas compressor that we have known was approaching its end of life, which is something you monitor on all components in a chemical plant. They come in, they are new, they have an expected life and you constantly are monitoring them to determine when you think the end of life of that component or that piece of equipment is.
In fact we had purchased a replacement motor and our plan was to install that motor during the next planned maintenance event or turnaround which was going to happen sometime next year. Since we had the compressor down for the rotor bundle change out that I mentioned a minute ago, we took advantage of that opportunity and we performed an internal inspection of the old motor.
Our inspection detected that a level of deterioration that was really beyond our previous expectations and we decided it wasn’t prudent to continue to operate with that motor. We felt that it was unlikely that the motor would actually make it to the next planned turnaround. And so rather than operate the motor until it failed, which could have some significant downstream consequences and repercussions throughout the plant, we made the decision at the time of the inspection to go ahead and replace that motor with the brand new motor that was on stand-by, that we had previously ordered.
Now I’m going to mention by the way this motor change out is not a simple matter. It is a huge motor. It costs $1.5 million. It is a 14,000 horsepower motor and it’s about as big as a freight container. The motor change-out, when we made the decision to do that significantly increased the length of the maintenance event. We knew that but it was something we felt that we needed to do. It was the safe and it was the reliable thing to do for the plant.
So following a standard practice at chemical plants, while we were down anyway to do the rotor bundle and then subsequently the motor change-out, we also took the opportunity to perform some other maintenance activities, including things like changing catalysts, cleaning heat exchangers, installation of some new instrumentation and various other inspections and small other items.
So summing up, without specific knowledge of the extent of deterioration of that syngas motor our expectation was initially for a very short outage and those outages occur in plants all the time and are not announcement worthy or press release worthy. But when we realized the duration of the outage would be longer than expected, we issued a press release. And that’s kind of the most concise way that I can sum up the events that led to the outage at the press release at Pryor.
Dan Mannes - Avondale
Okay, if I can just make three quick clarifications. Number one, it sounds like all of the stuff that you’re ultimately replacing were unrelated to the major replacement that you did last year or that you started in late ’12 on the non-commuter? This is a completely separate set of equipment? Number one. Number two…
Dan Mannes - Avondale
Number two, the second clarification was where these issues that you subsequently replaced, were those the reasons for the intermittency during the third quarter?
Well, to some extent it turned out yes because we had some, what we call electrical trips that subsequently we think were probably related to some of the deterioration in the motor that we discovered when we took the motor apart.
Dan Mannes - Avondale
Okay, and the third clarification on this is, at the time when you did PR that you were going to take the plant down from at some point in October until November, was there a reason why at that point you didn’t disclose the intermittency that occurred during the third quarter?
Well, we knew we had the conference call coming up and we felt that rather than give a cursory explanation, that we were going to go into it in much detail in this conference call. So we left it for the call.
Dan Mannes - Avondale
And then my second question, that was all one question. My second question relates actually to the chemical performance during the third quarter and I appreciate Tony’s attempt at maybe walking us through a year-over-year bridge which is helpful. But I wanted to maybe delve into that a little deeper. At a high level, when we look at the numbers, if you back out the precious metal gains and the insurance, it look like you up may be $1 million or so year-over-year in spite of much stronger production. So I’m wondering if you start from those points, I guess 8 million last year versus give or take 9 million this year excluding insurance and precious metals, can you sort of walk between the difference in those two numbers? Because it sounds like maybe maintenance cost and D&A and things like that were kind of bigger items this year than maybe we realized.
Well, we had, Dan we had, as I indicated much lower selling prices, only product that we produce in sale. We had a higher natural gas cost. SG&A costs were higher. Due to the downtime we had the higher maintenance repair cost. So what we tried to do is equalize the effect of the downtime and then account for that difference. So if you add back the estimate of the negative impact of the downtime in both the years, you’ve effectively accounted for the fact that you’ve equalized the production level in both years.
So although 2013 third quarter was disappointing, even after that adjustment we guessed market conditions here that everybody is aware of is driven by of the fact that, you’re in the third quarter, you’re in the offseason you’ve got the USDA forecasting major and pretty much in the stock used ratio. So people for the most part are reluctant to commit to a price. Sellers are reluctant to commit and buyers are reluctant to commit.
Our marketing department thinks this should break loose pretty soon but the growth [indiscernible] significant restocking gets started, that we elected to go ahead and move the product and keep in mind last year in the third quarter we had almost $14 million of firm sales commitments going into the quarter this year because the downtime in the first half year. We didn’t have much in the way of firm sales commitments. So there are lot of market conditions here that we don’t believe are true indicators of the long term view on the spread between our cost and the selling prices.
Dan Mannes - Avondale
But Tony could you went through kind of quickly in your prepared comments. Can you walk back through that math again real quick, just so I make sure I have it in terms of the comparison from Q3 to Q3? You went through kind of quickly originally?
What we did Dan, is we said okay operating income in the ’13 quarter was $17.17 million, call it $18 million $7.5 million last year, call it $18 million versus $8 million for a $10 million difference. If you add back the $23 million to 2012 and the $7 million to ’13 you basically have $25 million versus $30 million adjusted for downtime.
That’s a $5 million difference. So the difference was result of a number of things which tended offset to let down to 5 million. You have $7 million in lower selling process for nitrogen, primarily UAN and ammonia into the fertilizer markets. You had higher nitric gas cost, which costs affected the operating income by about $3 million.
Then you had the other miscellaneous higher maintenance repair and higher SG&A and by the way the higher SG&A is a result of all the outside engineering expertise that we brought into help us get these diagnostics in and to scheduling and preventing maintenance. So we have spent a lot of money that’s not necessarily going to be recurring cost in the future, but they were in this third quarter and probably some in fourth quarter also.
So if you add the 7, 3, 1, 2 that basically offsets the $8 million to $9 million that we had favorable and therefore the interest recovery of $4 million and catalyst recovery about $5 million, as you recall from time to time, we had to those catalyst recoveries and [indiscernible] and adjustment of the burn off of previous years of catalyst.
Dan Mannes - Avondale
Great. And just one question here, just a clarification and then a comment. How much of the increase and cost was D&A? I was just looking through it and it looked D&A for the segment crept up $2 million year-over-year. How much does that play into these numbers?
Dan Mannes - Avondale
Yes, D&A looks like was a deal higher year-over-year.
That has an impact. Obviously we’re spending, now the construction projects will not be depreciated until we turnkey the projects, but we have invested over $70 million in this plant since we began three years ago. So that depreciation does have some impact.
Dan Mannes - Avondale
You’re talking about Pryor?
Talking about Pryor.
Dan Mannes - Avondale
Well just the whole Chemical segment showed about $2 million up year-over-year in terms of D&A.
And so D&A will continue to increase as we go.
Dan Mannes - Avondale
Right, so just one comment and again thanks for walking through that. Going forward this might be really helpful for me and other investors, if you could provide to us sales volumes by ton and production volumes by tons of your major project products as well as average realized pricing, I think that will make it a lot easier for us to kind of reconcile results from period to period and I know that’s kind of best practice for a lot of other chemical companies? Thanks
I have noticed that a lot of the larger companies do that. We have an issue with disclosing average process on our contractual business because that’s confidential. We could consider that for agricultural in future.
In other words to kind of - let me restate what he just said. We have very specific individual contracts with customers that have confidentiality clauses that preclude us from disclosing specifics of those contracts, including the pricing of the products that are sold.
Also from a competitive standpoint and a marketing standpoint, it doesn’t make a sense for us to publish to the world the pricing that we have on a very specific contracts that we have in place, that are not at market price necessarily, okay. And so on the Ag side of the business, it’s sold its spot market, everybody knows what’s spot market is. There is no big mysteries there. But on half of our business it’s difficult for us to disclose that information because of the nature of the business and the relationships behind it.
Unless you want to tell your competitors what you’re doing.
Yes. So we will take under advisement what you’ve suggested on the Ag side, but we have that issue that we have to deal with; just so you understand.
Our next question comes from the line of the Joe Mondillo with Sidoti & Company. Please proceed with your question.
Joe Mondillo - Sidoti & Company
I think in terms of Dan was saying in the Ag volume, that alone would be extremely helpful. So I’d also relay that. But my question has to do with in terms of - I’m just trying to figure out exactly what happened in the quarter at Pryor and it seemed like the production that you disclosed in terms of ammonia production was pretty good actually in terms of expectation and utilization rates. So my question is, how much of that translated into sales versus I guess quarter end inventory and so I guess if you could just talk about sort of the operating performance of the plant outside of initial production of ammonia, that would be helpful?
Well, we talked in the 10-Q about the production level of 45,000 tons. Part of that gets converted into other products at Pryor and part of it gets sold as ammonia. So as I indicated, going into Q3, we didn’t have much in the way of inventory and we didn’t have much in way of sales commitments, but from a production standpoint inventories increased about 8000 tons but not much. So we pushed a lot of the product into the market at lower prices. So we had an increase of about 7,000 tons of UAM inventory during the quarter.
Joe Mondillo - Sidoti & Company
What about inventory of ammonia? I guess what I’m getting at is the 45,000 tons of ammonia, regardless of the lower prices and maybe the slightly higher prices in that asset, it seemed like the plant should have been more profitable and should have boosted the earnings and I think that maybe is why maybe people's expectations were a little higher. So I am just trying to reconcile that.
Essentially you get down to the other items that we talked about and that's lower pricing and higher natural has costs and SG&A and….
I mean I am just looking here at a chart that's showing some comparing year-over-year cost of the key things that impact it and for example ammonia, which we sell out of that plant compared to '12.'13 was over 200, market -- the general reported market numbers are about $220 a ton less for ammonia.
Nitrogen prices are down 30% from last time.
And of course gas was up $1. That translates to about $13 a ton. At the UAN level, and UAN selling prices compared to a year ago were down about $65. So you go about an $80 spread differential on UAN. I’m just roughing it out here, not doing an exact calculation. Over $200 selling price reduction in ammonia. So you have got an increase in gas costs. On ammonia it's not $13 a ton, it's more like $26 or it's more like $31 a ton differential in cost due to the increased gas cost. So you had a lot of fundamental shifts around on us that had the effect of compressing the potential margin on these products.
Joe Mondillo - Sidoti & Company
And you also mentioned the 8,000 tons of UAN was stored in inventory. So that's essentially, roughly 16,000 tons of ammonia of the 45. So essentially all the 45 wasn't really translated into sales per say.
Well, the increased inventory I had talked about was on UAN. So there is about 42 tons and ammonia and a ton of UAN. So we have been about half of that as far as the ammonia content of the UAN.
Joe Mondillo - Sidoti & Company
Okay. Second question I just had was the $160 million of other CapEx related to maintenance and other things. I was wondering how much of that has been spent already and if it's significant amount left over in the future, what is that sort of being budgeted for?
Joe, we didn't disclose what our exact spending was. What we talked about is the fact that these plants are for the most part, as previously announced, as far as what we're going to spend, and the spending is consistent with the percentage of completion, very mission that we’re running and permitting. So what we're doing is monitoring the spending, keeping it in line with our projected cost and our total cost over the three year period. So I think probably the best way to address that is that we're right on target as far as our spending versus our plan.
We can't get too far ahead here. We can't move certain expenditures until we have a permit. So I don't think the amount we spent today is as meaningful as the fact that we're on target and the spinning is consistent with the percentage of completion.
We did cover our FX in each period in the cash flow segment.
And if you notice in the current cash and the non-current investments, we have significant amount of cash and capabilities there to complete the plans.
Joe Mondillo - Sidoti & Company
I guess the point that I am sort of trying to get at is the $160 million, it looked like it had a lot to do with maintenance and revamping the plants and I guess my question of how much of that $160 million we have spent already. I am trying to get an idea of where we are in terms you're budgeting for revamping prior and updating it and putting in these diagnostics and I was just trying to get at how much of that $168 million you have spent already to date? Or where we are in terms of -- just where we are I guess.
I think we’re probably going to have to get back to you on that Joe, because I don't think we have a work paper on front of us and I just hate to wing it. Just look at our queues and see that, but we'll be glad to do that.
And our next question comes from the line of Keith Maher with Singular Research. Please proceed with your question.
Keith Maher - Singular Research
Question and this is specifically about insurance recoveries in Q4. I’m just trying to understand how much of that is going to flow through the income statement and where that’s going to show up.
As we indicated we’ve got additional $53 million to receive and we deferred $24 million, and [indiscernible] $24 million differed. So the $24 million and the $53 million will flow through when we receive the cash in fourth quarter as agreed.
Keith Maher - Singular Research
I know it summarize [ph] what reduction of cost of goods sold, where else would it show up?
Other income -- there another. That's as relates to the recent settlement on the issues at El Dorado. Now, if we come to a conclusion in the fourth quarter for the Cherokee claim, there will be some additional impact. But when Tony is talking about that, that’s what we know of today based on the actual settlement. But we also have the additional potential if we resolve the Cherokee claim and we’ll have additional settlement agreement on the Cherokee claim. We’ve already paid 15 million of which we differed to at the September balance sheet date. I don’t believe we disclosed what we anticipate on that at this point.
Keith Maher - Singular Research
So basically, El Dorado will be taking care of this quarter, then Cherokee could potentially see some effect going.
It could very potentially happen before year end. It could also push out to the first quarter because we’re not in total control of the timing on these things.
Keith Maher - Singular Research
Then I had a question about just SG&A. I mean you’ve mentioned obviously you’ve had some other expenses this year, just with all of the extra work that’s had to have been done. Next year, could you give us just some guidance on where you think the SG&A levels could be? Could they kind of drop back to where they were say in 2012?
Let me say this. I’m not prepared at this point to give you total SG&A guidance, but with regard to the things that have to do with beefed up reliability at these plants and programs that we’ve implemented and personnel that we’ve either hired to planned to hire, you could see on an ongoing basis that somewhere in the neighborhood of north of $2 million a year increased costs on a going forward basis. We had initially more than that the first year because we had some one time consulting services that won’t repeat, but they will reduce on a going forward basis, that based on the personnel that we either have currently -- when we started the program to beef up the programs between the personnel and some ongoing outside services that will be required, some inspection services and some consulting services is probably going to be north of $2 million a year.
And that’s basically engineering people.
Yes, engineering resources, reliability resources, some maintenance resources focused on reliability throughout the plants. Basically, it was about 14 headcount total increase by the time we’re done and it came out to about a 1.5 million a year in total on headcount and then you’ve got other consulting services and outside services and that could range from 0.5 million to a 1 million a year for a while. So that’s why I’m saying it’s going to be north of 2 million in totals. But I’m not sure of exactly what the numbers will be and then in addition to that you get to phase in of these and timing of these various.
That assumes there are no more government regulations that require more.
Keith Maher - Singular Research
And just one question on the Climate Control business. You touched in particular on the residential side and you touched on this in the prepared remarks, but it does seem like there is starting to see a bit of rebound in the mid to higher end housing, which is obviously more of a target for your geothermal products. Do you think you’re starting to see that? Obviously the residential orders have done a little bit better I guess so far this year?
Well, we’re seeing a lot of activity but I always hate to talk about activity before it materializes, and to actual results but we are seeing definitely more activity in that area.
And our next question comes from the line of David Deterding with Wells Fargo. Please proceed with your question.
David Deterding - Wells Fargo
Just had a quick question on the CapEx spending a little bit, just to delve in, it looks like year-to-date you spent about $114 million. You’ve laid out about $650 million here. Assuming we get the permits in the fourth quarter, which is I think you guys, as the assumption is, how do you think about capital spending in 2014? How much of this $650 million would be spent in 2014 and then obviously the fourth quarter this year? I’m just trying to get the capital budget kind of the laid out of the next couple of years?
Well, the ammonia plant, we aren’t sure as to when that’s going to be completed, then we can really accelerate the spending. But that aside, the majority of it would be spent in ’14. The majority of what we are spending on the nitric acid plant and the concentrator, the RSBO will be spent in ’14. Some of the spending on the chemical plant, excuse me, ammonia plant will probably push out into ’15.
David Deterding - Wells Fargo
So we can think about most of this as being pretty heavily for 2014 weighted?
I think so.
David Deterding - Wells Fargo
And then can you…
On the permitting.
David Deterding - Wells Fargo
Right. And then can we just talk about mining a little bit? I mean you talked about some minimum take or pay arrangements. Does mining still have another leg down here? Are we kind of at a low point volume wise that you guys think that you will continue and we will see a pick up or kind of how are you thinking about the mining segment going forward?
The majority of our business is concentrated in circus [ph] coal. Everything you read is that coal production is down in all areas of the country. Demand is starting to pick up a bit. As Barry indicated an overview that we have -- most of our business is based upon a minimum quantities but there is an effect, that doesn’t help us on the top line because you certain fixed cost and profits paid for irrespective, they take or not but we believe that demand in 2013 is going to continue to be relatively low.
The only area that is really doing well is out west.
If you look, I’m going to refer you back to Page 17 in the presentation in the PowerPoint presentation that we put out on the website. Now I’m going to start off with the disclaimer and that these are not our numbers and we don’t take responsibility for these numbers. But they are published numbers. So the Department of Energy, the Energy Information Agency, every year they publish an outlook for various types of fuels and energy and coal is one of them and in the upper left hand corner of that page, you can see what the long term outlook is for coal.
And they have subdivided it into Aplasia, the west in total. So they are projecting kind of a bottoming out here around say 16 it looks like. And then some pickup in the west that they are showing Aplasia as kind of declining and then leveling out but the west picking up, in total picking up and that is where most of our market is. So I don’t know if this will come to pass. This is a changing fluid situation but I will just point those statistics out to you.
Our line of the western coal is exported.
David Deterding - Wells Fargo
And then just lastly, we are hearing about some dumping of urea from the Chinese on to the U.S. market. Are you seeing any impact on your business from the urea flowing into the U.S.?
Yes, we mentioned that in the call, we kind of went over it quickly but it is a nitrogen product although not the same nitrogen products as the one that we typically sell. We produce it but we don’t sell it as an end product at this time and it has definitely had the effect of depressing the price of other nitrogen products, including UAN. Okay. And to some extent AN. So that has definitely had an impact.
Today’s paper said that the Chinese shut it off again. They shut off their export.
Yes. And they tend to do that. There is some sort of a tear out that’s invoked or not invoked and that impacts their export versus their internal usage. But from our standpoint it’s hard for us to predict what they are going to do going forward with that.
And the next question comes from the line of [indiscernible]. Please proceed with your question.
Just in terms of Pryor, obviously a lot is going on in the last year. I wonder if you could just take a step back and give us kind of a big picture overview of what has been fully replaced, if there is anything major left that hasn’t been fully replaced and just kind of help us understand where we stand on I guess affectively like a full read through over that plant?
Well when we first started putting the plant together, we basically replaced the reformer. Then we ultimately replaced the liner of the urea plant which was essentially, that was like complete rebuild. So essentially it’s like your new urea plant because the liner is what’s critical in that plant. Should we call, we had that. We then replaced last year the ammonia convertor, which was replaced. We’ve added a lot of instrumentation. We’ve added, there is a lot of small things throughout the plants that are not major vessels but that are valves and various things throughout the plant that have been replaced. What am I not thinking about, Jack?
Give them the background of that. That’s important, because we’re replacing all the stuff.
Yes, so gradually what we’ve done is we work through the plant and where we’ve had issues we’ve replaced these various - we’ve either upgraded or refurbed or replaced these various components. We have plans going forward to continue to upgrade the automation of that plant and this is a process that you can’t do overnight, it takes a while to convert it. But this plant had old instrumentation and we’re upgrading it with new state of the art digital instrumentation and sensors. We added the GE manufactured Bentley Nevada vibration systems and information gathering that tells you several of the large pieces of equipment, that give you an heads up as to vibration that is either within or without the normal vibration range at the operation.
So we’ve been and we’re always doing things, like for example we put this brand new 14,000 horsepower motor in. That happens just in the life of a plant. As things get to the end of their life, you replace them with new parts. Typically with a plant that over -- it's kind of an airplane that you fly in, you’re getting on 50 and 60 year old airplanes and flying them all the time, which probably doesn’t give you much comfort but they’ve been in for maintenance and the whole thing’s been, the engines have been replaced several times, the instrumentation has been replaced several times, et cetera. And that’s the way these chemical plants are. Over time you end up replacing and refurbing pretty much the whole plant.
I think you got to go back to the fact that when we bought this plant it was shut down and we had to re-staff it and we had to start it up
I know little bit about the history. But I guess is there major stuff that’s still kind of done that you guys are expecting to do in the next couple of years or at this point do you feel like the major stuff has been replaced and is done?
We think that the major pieces of equipment have been replaced or brought up to speed. There are things that we can further do to enhance reliability that we will continue to do but they aren’t replacing major pieces of equipment, that we know at this time.
We have the ability to diagnose what needs to be done and get it done during the turnarounds hopefully going forward.
I think, I mean this raises an issue that I think is kind of the elephant in the room about Pryor, which is we’ve had a lot of these trials and tribulations with Pryor and everyone’s wondering, are we ever going to get Pryor up to speed? Everyone’s wondering is it ever going be reliable? Everyone’s very frustrated and there is no one more frustrated than we are here. Well, by the way, one other thing that we’ve done is we’ve really invested heavily in increasing the capital spares at Pryor, so that when we do have an issue, we can deal with it quickly, much more than it had before.
But coming back to the elephant in the room, or the big picture of Pryor; I think that with the benefit of hindsight and with knowing now, what we knew then and recognizing that Pryor was a different case than any of our other plants, when we acquired El Dorado, it was an up and running plant. It had its issues and we improved it overtime but it was up and running and fundamentally sound and it had been running for many years. The same situation with Cherokee. The plant in Baytown was a brand new state of the art plant when we put it in. But Pryor was a plant that history wise was out of commission for 10 years and we I think underestimated what it would take to get it up and running.
If I had to do this thing all over again and it was three years ago and a shareholder was asking me, while we were having a conference call about what the expectations are for Pryor. What I would have said was we’ve got a great diamond in the rough here, a terrific value with the lot of potential. We’re going to need to upgrade it as we go and it’s going to be difficult to predict exactly how long that’s going to take. And it’s going to be bumpy until we get it finally up to speed. And that’s kind of where we are but I think we’ve pretty much been through most of the plant at this time.
And what we have is something with thrust.
Yes that’s right. We have a total investment in this plant now and somewhere I think in the mid-80s. If you net out from that, the retained earnings from the profits we’ve made we probably have a net investment in that thing in the mid-60s and based on that plants that are going in now and recently at quotes that we’ve gotten for plants that we’re working on including, all of the other ancillary equipment et cetera, you’re looking at a plant that if we had to replicate it, would be somewhere between $600 million and $700 million. And so we think that even though it has been unreliable so far and it hasn’t achieved our expectations yet or it’s potential, that when we get there, that it is going to be a very valuable asset.
So what inning do you guys think it’s in now if you had to guess? I mean, you have the three years of hindsight that you said, it’s going to be - whatever it’s going to take to get us to where it’s running smoothly and now you guys have done all this work. You think you’re at the seventh inning and it’s just kind of fine tuning from this point or is it still too early to tell?
Well, I am not much of a baseball fan but that.
Okay, me neither. You can use a percentage if you want.
It’s hard to exactly quantify but I can say this. Beside all the pieces of equipment that we replaced or referred, we’ve got now 3 years of operating history with the staff that we had to bring in. So that staff is much more well trained. We have run in not only - we have increased all the internal engineering staff and we brought in some outside experts, industry experts to help us improve and install systems that didn’t exist in the plant that we had before, that are key systems that are geared to reliability. For example, a computerized maintenance management system, which that plant did not have, our other plants do, but that one didn’t have it initially. So anyway, and the new ammonia convert, all the things that we’ve done that we’ve talked about, we’re significantly down the road and we’re much closer to being there. I hate to try to quantify it specifically based on history. I have learned one lesson through this process and that’s to not to try put an exact time fence on this process.
Well, it looks like you’re making - the diagnostic run is obviously helping.
Yes, that’s a big step forward because I think if that same situation had occurred two years ago before the diagnostics, the plant would have run until it crashed and it would have been a much longer outage and it would have cost much more.
Are you guys going to put out a release when it’s back up and running or is that just going to be something that we’re going to hear about in the next call?
I think if it’s - we haven’t’ really discussed that yet. If we do, it will be after we’ve sustained it and we’re are very comfortable with it. Because when you’re coming up you have ups and downs as you come up take few days.
From my perspective it would be nice if you guys get it up and running it back to normal, I’d appreciate a release because that’s probably how we learn about things so.
We understand and we appreciate that comment.
We have reached the end of the question-and-answer session. I would now like to turn the call back over for closing comments.
Okay, I’d like to turn the call. We’d like to thank everybody here for having an interest in LSB and your participation today and we appreciate that. If you will stay online, Kristy Carver will review certain very import information about the content of our presentation. So Kristy, would you please present that?
I will, thanks Barry. We’d like to thank everybody for listening today. The 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 a future nature identify forward-looking statements. These are including but not limited to all statements about or any references to the Architectural Billing 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, any references to coal production, polyurethane production capacity growth, U.S. pipe production or basic and organic chemical trends.
The forward-looking statement include but are not limited to the following statements; our actions will ultimately this facility to deliver sustained production and substantial profitability. We expect to have the plant fully installed and operating by late 2015. Pryor is expected to be in production during November 2013. Projects will provide El Dorado with expanded capacity, improved efficiency, product mix flexibility and should result in a significant reduction of feedstock cost. We believe our actions will lead us to a significantly improved financial performance for 2014.
Our capital spending plan, positive fundamentals and favorable indicators for the Ag business, effective lowering the ethanol mandate corn production, El Dorado's nitric acid capacity will continue at current level until we complete construction of a new Weatherly 65% acid plant and concentrator during 2015. We anticipate issuance of the permit in the near future.
We plan to have ammonia plant constructed and in operation during the latter part of 2015. We plan to replace the DSN, Direct Strong Nitric acid plant in EDC level of industrial and mining sales, timing and or completion of planned initiatives, capacities, savings and or efficiencies expected from capital projects. Recovery in commercial and institutional new construction will continue. Increase in green construction should benefit the sale of our highly energy efficient product.
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 period ending March 31, 2013, June 30, 2013 and September 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 Q3 2013 Conference Call Presentation which is posted on our website. Thank you again. And this ends our conference call.
This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!