Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

LSB Industries, Inc. (NYSE:LXU)

Q4 2013 Earnings Conference Call

February 27, 2014 11:00 AM ET

Executives

Carol Oden – Investor Relations

Jack E. Golsen – Chairman and Chief Executive Officer

Tony M. Shelby – Executive Vice President and Chief Financial Officer

Barry H. Golsen – Board Vice Chairman, President and Chief Operating Officer

Analysts

Joe Mondillo – Sidoti & Company

Dan Mannes – Avondale Partners LLC

Roger Spitz – Bank of America/Merrill Lynch

Bruce M. Zessar – Advisory Research, Inc.

Keith Maher – Singular Research

David K. Deterding – Wells Fargo Securities LLC

Operator

Greetings and welcome to the LSB Industries Fourth 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.

I would now like to turn the conference over to your host Carol Oden. Thank you. Go ahead.

Carol Oden

Good morning. Thank you and welcome to the LSB Industries, Inc. 2013 fourth quarter 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, our 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.lsbindustries.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, February 27, 2014, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. After the question-and-answer session, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA.

We encourage you to view the PowerPoint PDF that is posted on our website at www.lsbindustries.com in the Webcast and Presentation section of Investors tab. Please note that the presentation starts on Page 3 of the PowerPoint.

Now, I will turn the call over to Mr. Jack Golsen.

Jack E. Golsen

All right. Thank you, Carol. Thank you all for joining our 2013 fourth quarter year-end conference call today. I would like to start today by providing on top and bottom line financial results. LSB sales for the fourth quarter were $149 million resulting in fully diluted earnings of $1.65 per share. LSB sales for the full year was $679 million resulting in fully diluted earnings per share of $2.37.

Although fourth quarter profitability benefited from insurance recoveries it was a challenge quarter – challenging quarter for LSB. There are number of reasons why the performance of the business did not meet our expectations, which we will describe on today’s call.

The greatest impact was that the Pryor plant was not operational during much of the fourth quarter. On behalf of the Board and management team and as one of the companies largest shareholders, I assure you that we share your frustration with the operational issues, LSB has experienced at our Pryor facility. We expected to have the facility back in operation during November, while we had a few days of uptime in December, performance continued to be impacted by specific issues that develop.

We believe we have a very valuable asset and the substantial upgrades that we have made and continue to make will reward shareholders over time. We are investing in plant reliability enhancements and environmental and safety upgrades at all of our chemical facilities, specifically at Pryor, these changes includes, hiring which no facility General Manager bringing in additional engineering support personnel dedicated to safety and reliability and gauging outside experts in several areas to help us assess our operations and reduce risks.

The installation of extensive monitoring and control equipment to enhance plant reliability with the remanufacturing of certain key pieces of equipment and expanded spare parts inventory and the utilization of industry expert consultants to assist and upgrading the operation.

Remember that when we brought Pryor online at the end of 2010, we undertook a process to restart a plant that have been shutdown for 10 years. We opportunistically acquired the plant understanding that if we decided to operate it that we would need to invest, update, recruit, and train personnel to operate it and problem solve to get it going on a sustainable basis.

We have been bringing the plant back to live. We have done that at a net cost of $67 million as of 12/31/13. We believe the new plant – that a new plant would cost up to $1 billion to replicate the Pryor plant to-date if we can secure permits necessary to operate it.

While the stops and stats are frustrating for all of us, we are working diligently to minimize them and take the necessary action to build substantial shareholder value. We are a relatively small company compared to the giants in our industry. And so we have had to leverage our entrepreneurial skills to acquire and build all of our chemical operations.

Barry is going to take sometime to take you through in detail of how the Pryor plant is set up and outline the upgrades and investments we have made within the key pieces of equipment. We hope to give you a clear sense of the work we have been doing to bring the plant up to standard and of the potential we believe Pryor has for our shareholder value creation.

With the exception of Pryor and the replacement project at El Dorado, all of our other chemical facilities are operational. At El Dorado the replacement of the 3 May, 2012 nitric acid capacity with a new asset plant and concentrator is well underway.

We are also making good progress with the addition of the ammonia plant at El Dorado and that work is not impeding normal operations at the facility. At El Dorado, we expect to have the asset plants fully installed and operational by mid-2015, and the new ammonia plant operational by the first quarter of 2016. Keep in mind, that any new plant there will be a ramp up time until we get to ideal capacity.

Those who of you who are familiar with our industry know that there are large – these are large complex projects, and we are dependent on contractors and equipment manufactures to meet our schedules. When fully operational these projects should provide El Dorado with expanded capacity improved efficiency and product mix flexibility. We believe that this should eliminate need to purchase ammonia half of the pipeline, which we also believe should result in a reduction of feedstock costs.

In addition, we anticipate producing excess ammonia, which will be able to inject or sell into the pipeline. Once again, based on anticipated market conditions we expect that these projects at El Dorado will contribute approximately $92 million to $100 million of incremental annual EBITDA when they are operational.

As we have relayed in the past to you. LSB is making these investments in our chemical facilities to drive growth and value creation and better position LSB to capitalize on favorable market dynamics. We also recently finalize the business interruption insurance claim for our Cherokee, Alabama plant. The funds have been received and have been recorded in the first quarter of 2014. Baytown, Texas plant is continued to operate with exceptional efficiency. Baytown is an OSHA VPP Star site, Star of excellence award the industry’s highest award for excellence more than 10 times.

In summary, we are taking a number of proactive steps in our chemical business that should enable us to achieve greater reliability from all of our facilities. The changes in management, additional staffing and equipment upgrades that have already been implemented will underpin any near-term improvement. However, the larger projects including the capital projects at El Dorado are being performed in sensitive areas in a large scale and therefore will take approximately two years before they are fully complete.

Also the addition of certain electronic controls, and other components require extensive engineering, installation and training ahead of putting the new plants into operation. From the macro standpoint agricultural market fundamentals are still historically strong although not as strong as they have been in recent prior years.

Turning to our Climate Control business, our Climate Control business continues to be place the profitable growth in line with projected gains in construction end markets. We recorded a modest improvement for the year driven largely by demand in the commercial and institutional end markets that we reserve. However, the residential market for our geothermal products has continued to be sluggish, as low natural gas prices have extended the payback of our geothermal HBA systems, which costs more than traditional heating and cooling systems.

It is important to note that we are not waiting for the construction end markets to ramp up. We have been hard at work achieving cost reduction to lean initiatives underway and all of our Climate Control operations, as well as developing new products and improving our existing units. Aggressive product development has allowed us to be leader in the markets we serve and to be recognize as a key player in this industry.

Before I turn the call over to Tony to speak in more detail about our financial results I want to address a significant change we have recently made in our corporate governance. In line with best practices in governance the Board of Directors unanimously voted to change the structure and reduce the size of the Board from 14 to 10, the connection with this position four of our Directors who have considered non-independent on the New York stock exchange rules and who have been Directors of the company’s since of it’s inception designed effective January 17th.

As of today our Board has 10 Directors, eight of whom are independent. As you can see we have many initiatives underway at LSB, we continued to be focused on positioning the business for growth and profitability, as our capital investments take hold and end markets improved. We also continued to execute our multi-year plan an attempt to improve our EBITDA growth.

With that, I’ll turn the call over to our CFO, Tony Shelby. Thank you.

Tony M. Shelby

Thanks Jack. As Jack indicated the fourth quarter was changing for a number of reasons, the most obvious being the life of production from the Pryor Facility, where we’ve also challenging as far as comparability to a normalize result due to the number of factors it require explanation. During this financial review we will discuss those factors and contracts results for quarter and the year to more normal expectation assuming ordinary plan operation with our exceptional unplanned downtime.

In that regard, please note that we will frequently discuss the effective insurance recoveries, unplanned downtime that are affect with our reported numbers, in order to reduce reputation during the financial highlights, the phrase insurance recovery is recognized will be shortly insurance. An unplanned downtime will be refer to as downtime. Included in this financial review or separate tables they summarize the insurance claims and recoveries and the impact of downtime.

For a comparison of fourth quarter 2013 results to 2012, please turn to Page 4. Net sales were $149 million or 16% lower. Operating income was $70 million, included $76 million of insurance compared to $18 million, included $7 million of insurance in the prior year.

Sales and operating income were significantly lower than otherwise would been expected due to the downtime at the Pryor Facility. In addition, margins in our Chemical Business segment will lower due primarily to market conditions in the nitrogen fertilizer sector.

Sales and operating income Climate Control Business segment approximately same as in 2012. Interest expense were $7.3 million, net of $1.8 million capitalized during the development and our construction of our capital projects compared to only 437,000 in 2012. This increase reflects the higher level of debt incurred to financially capital expansion underway.

After provision for income taxes of approximately 40%, net income was $37 million or $1.58 per share compared to $12 million or $0.49 per share. Total cash included non-current restricted cash and investments was $435 million, because we have this construction projects underway that our long-term construction projects, the cash designated for these projects is classified is non-current.

The full-year 2013 results, compared to 2012 are highlight on Page 5, net sales were $679 million or $80 million lower than 2012. Climate Control sales increase $90 million offset by a decline in chemical. Operating income was a $105 million including $95 million of insurance, compared to $96 million last year, included $7 million of insurance.

Our Climate Control Business reported increased sales operating income a significant decline in consolidated sales and operating income was concentrated in our Chemical business that was attributable to the cost of ammonia production at the Cherokee Facility in the first half of 2013, downtime at our El Dorado Facility throughout the year and most recently in the fourth quarter, as well as the effect of less robust market conditions in the nitrogen fertilizer sector.

We will address these and other issues in the chemical financial review later. Interest expense was $14 million, net of $4 million capitalized during the development and/or construction of the capital projects. After a provision for income taxes and an effective tax rate of approximately 39%, net income was $55 million or $2.33 per diluted share, compared to $59 million or $2.49 per diluted share.

EBITDA was $133 million versus $117 million in 2012. Cash increased $337 million including cash provided by operations $54 million, property insurance recovery $66 million, net proceeds from the senior secured notes net of payoff of secured term loan $351 million and other items totaling $32 million, less capital expenditures of $157 million and acquisition of natural gas increased $9 million.

Turning to Page 6 for a review of chemical results, for the fourth quarter of 2013, sales were $78 million or 26% lower than the fourth quarter 2012. Operating income was $68 million including $76 million of insurance, compared to $15 million including $7 million of insurance in 2012.

Excluding the insurance effect in both quarters, operating income was $16 million less in 2013. The $16 million difference was primarily due to the lack of ammonia production at the Pryor Facility, lower naturals and fertilizer market prices, and higher natural gas prices in 2013 compared to the year ago period.

Ammonia and UAN production were also below capacity in 2012 due to downtime in both periods. We will address the effect in both years in the summary on Page 9. As noted on the bottom of this slide, there is a reference to downtime at Cherokee. It should be noted that when the repairs were completed in the second quarter of 2013, Cherokee has operated efficiently at normal rates of production for the remainder of the year.

For the calendar year 2013, sales were $381 million or 20% lower than 2012. Operating income was $88 million including $95 million of insurance compared to $82 million including the $7 million of insurance. The significant decline in sales and operating income excluding the insurance was primarily attributable to the loss of ammonia production during the first half of the year at our Cherokee Facility and throughout the year at our Pryor Facility, as well as less robust market condition for the nitrogen products that we did produce. EBITDA was $111 million and capital expenditures were $151 million.

Now turning to Page 7 for a review of climate control results. For the fourth quarter, climate control reported net sales of $68 million or approximately same as in the fourth quarter of 2012. Gross margin was 33.1% compared to 29.6% last year due to improvement in raw material costs and production efficiencies. After SG&A cost increases to support growth, operating income and EBITDA were approximately the same in both the 2013 and 2012 fourth quarters.

For the full year, climate control sales increased $19 million or 7% primarily as a result of an 8% increase in industrial and commercial products with an increase in the number of units sold and higher unit pricing.

The gross profit in dollars and as a percentage of sales both increased for the year as a result of higher sales volume and an improvement in raw material costs including copper, steel, and aluminum. Year-over-year operating income and EBITDA both improved by approximately $4.6 million.

Turning to Page 8 is a summary of the insurance recoveries recognized in the chemical financial section statements in 2012 and 2013 that we discussed throughout the review of these highlights.

Page 9, represents downtime loss production extra expenses insurance recoveries related to the Chemical business together at summary format. In all of our 2012 and 2013 quarterly filings, we discussed the specific downtime issues at the El Dorado, Cherokee, and Pryor facilities, and the effect on our financial results.

In the summary on this page, we are using the mid range of the disclosed earnings impact of loss sales, unabsorbed fixed overhead costs, and extra expenses all related to the downtime at the individual facilities. Also shown are the insurance recoveries for the same period.

The summary adds back the estimated impact with downtime to reported operating income and subtracts the insurance to arrive at a non-GAAP normalized number as both neither were included in the either year. The difference between 2012 and 2013 after those adjustments to normal production levels to adjusted to normal production levels is due to lower selling prices for agriculture ammonia, UAM, and ammonium nitrate, and to a lesser degree higher natural gas costs.

On Page 10 is a summary of our cash and capitalization. The significant increase in interest bearing debt will result in a negative interest spread during the construction period of 2014 and 2015, which will impact earnings. However, the expansion underway at our El Dorado facility will position our Chemical business to be more competitive after 2015, as we bring the ammonia production and expanded nitric acid capacity online.

Moving to Page 11, shown on this page is a summary of the committed and planned capital spending plan. The committed expenditures are the capital projects that have been approved by management and include projects already in progress including those at the El Dorado facility broken out separately in the table on the lower half of the page. As you can see, we expect high capital expenditures over the next two years and is therefore crucial for management to focus on execution of the plant.

We estimate the internal rate of return on the El Dorado expansion to be 15% to 17% based upon our estimated product mix, our market price for ammonia of $500 per metric ton and $5 natural gas.

We believe that these reasonable serve assumptions, but they are variable and subject to future market conditions. Before we conclude the financial review, a word or two about the first quarter 2014, although we do not provide specific earnings guidance, I think there are few issues affecting the first quarter and a typical situation that are somewhat obvious, but probably deserve a comment on management including.

Due to the downtime at the Pryor facility for most in the fourth quarter and during most in the first quarter of 2014 a period when we would normally be building a fertilizer inventory and earning into firm sales commitments for the spring season, Pryor will enter the season with very little inventory and those significant orders booked at current sales prices.

Number two, we are incurring significant extra one-time expenses during the first quarter at Pryor increased consulting and outside the third-party contractors. In addition, as well we have extra expenses we’re recurring for professional services at the corporate level.

Thank you for your time, I’ll now turn over to Barry discuss operations and our key initiatives.

Barry H. Golsen

I think before I address the operational initiatives Jack had another quick comment that he wanted to make.

Jack E. Golsen

Yes, I did when I opened my – the conference I was reading the wrong column and I got the wrong numbers on our results for the quarter and for the year. They were $1.58 per share where I said $1.65 and they were $2.33 per share where I said $2.37. So I would like to correct that.

Barry H. Golsen

Okay thanks Jack. I’m going to focus on our sales activity product backlogs were pertinent, and the market drivers as we see them and also during this presentation I would like to review the status of our chemical operations, the major capital projects in our chemical business and initiatives that we believe will increase tell us these value going forward.

To start please turn to Page 12 in the presentation, which shows our 2013 sales mix by the markets we serve. The overall mix shifted significantly towards the climate control business during the year reflecting the lower sales of our chemical operations due to unplanned downtime in the first half of the year at our Cherokee facility and throughout the year at our Pryor facility.

We do not believe that 2013 was typical and expected our future sales mix will become more heavily weighted towards our chemical business as the operations increase uptime and our new investments come online.

Please turn to Page 13. Total sales for our chemical business in the fourth quarter and full year were $78 million and $381 million respectively compared to $105 million and $478 million in the prior year. Sales of all three of our principal product categories were lower than 2012 primarily due to plant downtime as a result and as a result comparison from period to period is really not meaningful.

Turn to Page 14 for sales of our key Ag products in the fourth quarter and full year. Again, comparisons to be between periods is not particularly meaningful due to downtime at our plants in 2013. In addition to lower volumes caused by downtime, market prices were lower driven by high Chinese urea exports during their low tariff period before firming later in the year. I will cover market pricing later.

Turning to our industrial and mining products on Page 15, tons shipped of nitric acid was 7% higher compared to 2012 fourth quarter due to higher asset demand, however sales dollars were lower by 16%. This was primarily due to lower ammonia feedstock costs which are pass-through to our customer pursuant to cost plus pricing arrangements.

Both sales dollars and tons shipped of industrial grade ammonium nitrate were lower than the fourth quarter 2012 levels reflecting decrease demand for ammonium products.

Turning to market trends on Page 16 are some price trends for both the feedstock we use and the key Ag products that we sell. The cost of natural gas continues to be relatively low on a historical basis, but has been exceptionally volatile caused by the extreme winter weather, the Tennessee 500 pricing point first of month index for January 2014 was $4.36 about a $1 above January 2013. February 2014 was a $1 over January at $5.57. The Tennessee 500 daily prices in February varied from $4.82 to $8.01. Gas price affect production cost at Cherokee, at our Cherokee Alabama and Pryor Oklahoma facilities which use natural gas as their primary feedstock.

The conventionalism is that with the exception of extreme seasonal weather spikes such as the one that we’re currently experiencing, continuously increasing shale gas production will not allow natural gas prices to increase substantially for sometime. The NYMEX gas price futures for the reminder of 2014 are in the mid $4 range. The cost of anhydrous ammonia the feedstock we use at our El Dorado, Arkansas and Baytown, Texas facilities had declined steadily over the past year, January 2013 and 2014 Tampa prices were $637 and $432 per metric ton respectively.

Currently ammonia is $460 per metric ton at Tampa, approximately $210 lower than a year ago. The decrease has lowered production cost at our facilities that use ammonia as a feedstock, although most of the products we produced at Baytown and most of the industrial mining products produced at El Dorado are sold on a cost plus basis. So ammonia cost fluctuations do not impact our profitability on those sales. However Ag grade AN products produced at El Dorado are sold at spot market prices.

We believe current low ammonia prices have been affected by delayed ammonia applications this year due to cold or frozen ground conditions resulting in higher than usual ammonia inventories and therefore lower prices.

Turing to Ag products, prices for UAN fluctuated over the past year and are below a year ago. If you look at the chart on the lower left you can see that the green markets price of UAN decreased from $320 per ton in January 2013 to $280 per ton in January 2014. Based on current market indicators we believe that prices are firming and will be in the $320 to $340 per ton range during the upcoming planning season. We do not expect UAN prices to significantly increase during the 2014 season.

In January 2014 green market prices for ammonium nitrate for $340 per ton compared to a $385 per ton 12 months earlier. Our outlook for AN this season is more or less the same as UAN in other words no significant increases. Summing this Page over the past year prices of natural gas have increased and the market prices of our fertilizer products have declined resulting in reduce margins per ton in this part of our business.

Focusing on the outlook for the chemical markets we serve Page 17 lists several indicators for our agricultural products most of which continued to be favorable. Planning levels are generally high, market prices for corn and wheat remain favorable to growers. So farmers have an incentive to plant. Grain stock-to-use ratios both worldwide and the U.S. although higher than the past few years are at or below historic levels, we believe all this is creating strong continuing demand for fertilizers.

Finally, generally low natural gas prices have reduced the cost to manufacture many of our Ag products well into the past periods. North American produced nitrogen fertilizers are currently the lowest costs factoring in total cost of production, freight, and distribution. The industry consensus is that the positive fundamentals of the Ag business should continue in the near to mid-term.

Despite general industry drivers, weather can have a significant impact on the fertilizer part of our business. Although some of the markets we serve as separate drought conditions, recent rain and show have improved the moisture outlook that may cause the delay in the start of the next planning, but may cause a delay in the start of the next planning season.

Cold or frozen ground conditions could delay the application of ammonia, but could also benefit the sales of other nitrogen products, such as AN and UAN later in the season. Overall, we continue to be optimistic about our Ag business.

Please turn to Page 18. Our industrial products are sold primarily to large customers pursuant to contractual cost plus and/or minimum take arrangements. The two charts on this page indicate the slight shifts that occur in our sales mix from 2012 to 2013. The shift from mining to industrial assets was primarily driven by plant downtime in the first half at Cherokee and lower customer demand. A very significant part of our business continues to be industrial and mining.

Page 19 contains some market indicators for this area of the business. Most of these indicators forecast growth for the next few years.

On Page 20, we’ve listed our Chemical businesses strategies and some four key initiatives going forward. In addition to increased emphasis on operational excellence and plant reliability, we continue to emphasize safety and environmental responsibility.

We continue to expand our Industrial business by adding new customers and perhaps new products. We will also continue to improve our agricultural distribution channel. We will work on several projects end at optimizing production rates at all of our plants that are continually online.

On Page 21, we discussed the status of each of our chemical facilities. El Dorado continues to run well with the exception of the capacity lost in May 2012. Cherokee is also operating well. Baytown operation is performing at optimum levels. I will come back to Pryor in a few minutes for a more detailed discussion.

On Page 22, addresses our Chemical business systems wide reliability improvement program. In addition to the preexisting elements listed at the top of the page, we’ve implemented and continue to implement significant changes in our Chemical business that we believe will result an improved plant safety, reliability and output.

At this point, I would like to focus on the Pryor Facility. First off familiarize you with the facility and its various components. Then I will discuss the measures we have taken to improve the Pryor. Finally, I will update you on Pryor’s current status.

Please go to Page 23. This is simplified process flow diagram of Pryor. In Pryor we convert natural gas to ammonia and further upgrade ammonia to nitric acid and ammonium nitrate solution. We also use the ammonium – ammonia we produced to make the urea and CO2. Also believe that urea and ammonium nitrate solution are combined to produce urea, ammonium nitrate or UAN which is used as a nitrogen fertilizer and this is by the way Pryor’s primary product.

We also sell ammonia by itself primarily as a fertilizer and CO2 as an end product although the ammonia we sell can also be used for industrial uses as well. On Page 24, you can see an aerial view of the entire Pryor facility for various plants within the facility that produce the products I just listed or outlined note the number four ammonia plant at the top of the photo.

On Page 25 is an inset of that ammonia plant which is the most complex part of the facility, particularly note the ammonia synthesis converter in purple and the compressors in dark green. We will mention those later.

On Page 26 and 27 we’ve listed individual sections of the four key plants at Pryor. The ammonia plant, the urea plant, and the two acid plants. I’m not going to review each and every section, but if you read this carefully you will see that we have performed extensive maintenance on refurbished or replaced most sections of these plants. When we restarted Pryor in 2010 it was an old facility that remained idle for about a decade.

Pryor predated the advent of current state of the art controls, restarting an old idle plant is never as easy as starting a new or completely refurbished plant. We made the decision to opportunistically acquire the plant into update it in a manner that we would get it going on a sustainable basis while also bring the plant online.

The magnitude of the project and time that would be required to get Pryor up to speed extended beyond our initial expectations. Although there are no guarantees, we believe that we are closed to achieving reliability at Pryor. We still have work to do on control systems and have a plan in place to install controls over the next new upgraded controls over the next two to three years. To do it right there are certain engineering studies which must be completed that take considerable time before those new controls can be installed, plus lead times and the installation itself which can be a lengthy process.

I want to walk you through at a high level the improvements that have been made to Pryor to upgrade it since we restarted the facility during the fourth quarter of 2010. For the most part, areas that we have invested in are in good condition. We replaced the primary reformer in the ammonia plant. We updated the C-1 Air Compressor. We replaced the liner of our urea reactor. We also replaced the old Pritchard ammonia converter, which was a bottleneck and installed a more current and improved design converter. After installing the new converter, we ran the plant for the next five months and improve production rates.

The next major area was upgrading the second stage of the C-4 Compressor in October of 2013. Because of the vibration detection devices we installed, we quickly realized that the compressor was not working properly, and we stopped the plant before any serious damage to people or equipment occurred. During the fourth quarter of 2013 from October to December, we had an industry expert rebuild the second stage of the C-4 Compressor and it was reinstalled. That’s when we brought the facility back online and briefly resume ammonia production in late December, early January.

However, in January a power surge or power outage rather in the industrial part where Pryor is located, cost of plants have suddenly shutdown resulting in a surge of synthesis gas that damage the third stage of the same C-4 compressor.

As a result, we rebuilt the third stage using the same industry expert and are currently in the process of restarting and testing the plant.

After the removal, and the reinstallation of a significant component rebalancing of the entire three stage compressor was required and this process takes additional time and patience.

While the third stage was being repaired and the plant was down, we took this opportunity to install certain equipment to minimize the effective surges in the future. As soon as it is available, we will install a complete anti-surge system to the C-4 compressor. Timing will depend on vendor lead times.

At this time, Pryor is in a start-up mode, it is producing ammonia, however lower than targeted rates. Pryor’s management team is focused on safety and reliability and over the next several weeks it will be monitoring all facets of the facilities performance and will increase those production rates at the appropriate time.

I would now like to take a moment to review with you the status of the capital investments that we’re marking in El Dorado.

Page 28 summarizes the key information related to the two major capital projects occurring at the site. The most ambitious and potentially impactful capital project we are working on is an ammonia plant that is under construction at the El Dorado facility this should increase El Dorado’s capacity and lower its production cost significantly since the cost spread between purchased and manufactured ammonia is substantial.

El Dorado currently purchase ammonia that it requires for feedstock from a pipeline at a much higher cost than the estimated cost of production with an ammonia plant. Our cost to produce ammonia at our Cherokee and Pryor plants as well as our analysis of the El Dorado plant support these projected reduced cost.

We expect that we will use most of the ammonia plant that we – of the ammonia that we produced to satisfy our current customers and we’re also some via the pipeline that we’re currently purchasing ammonia from.

In addition, to the ammonia plant we are adding 65% Weatherly nitric acid plant and concentrated to replace the direct strong nitric acid plant that was destroyed in 2012 while adding additional capacity. We expect that the total cost of these projects will be between $428 million and $498 million. We expect them to generate from $90 million to $100 million of incremental annual EBITDA. We also estimate the internal rate of return of these projects to be between 15% and 17%. Of course these numbers are subject to market condition at the time the plants are brought online in 2015 and early 2016.

We are using Lighthouse which was formally SAIC as our primary engineering procurement and construction contractor for the projects and many other industry recognized experts and suppliers. The parties there – we are working with on this investment had many years of experience and outstanding reputations in the industry as well as long histories with LSB.

In fact, Lighthouse is part of the construction team which led to the successful completion of the Baytown plant.

Page 29, shows a site plan of the El Dorado facility and the location of the ammonia and nitric acid plants plus new ammonia storage and facility control room. We commenced construction on both plants in November 2013, and at this stage have installed foundation pilings.

Page 30, shows an inset of a comparable sister plant for the ammonia plant. With all the key components identified, I would like to talk to you about the major components of this plant and our approach to ensuring the reliability of this plant when we bring it up in its new home at EDC.

Page 31, list all the key sections of the ammonia plant, which are color coated to the previous page. Essentially, all of the major components will be new or remanufactured to like new condition and specifications. For example, the internal working components of both reformers will be completely new. We’re only using the external shales which were previously in service. Waste heat recovery and CO2 removal will be remanufactured to like new condition, all compressors will be remanufactured to new specifications.

The ammonia converter will be remanufactured to like new condition. Every part of the plant will be completely inspected and tested for mechanical integrity. All electricals, plant automation and controls will be new and state-of-the-art. We expect that this will be an industry best practices plant.

Page 32 and 33, show the major pages and milestones for both the ammonia plant and nitric acid plant at EDC. At this time, we are on schedule and on budget. However, due to the magnitude of work to be completed in 2014, the next 12 months are critical to ensure that these project hold to both time and budget.

Although completion of projects of this magnitude is dependent on many suppliers and contractors, at this time we did not know of anything that will prevent on-time completion. Again, please keep in mind that there is always a ramp up of production at the start of phase of anytime a plant is brought online. We will keep you advise of the status of these projects on future calls.

Turning to our Climate Control business, please go to Page 34, which summarizes sales by major product category. Total sales for the fourth quarter of 2013 were approximately $68 million, the same as the fourth quarter of the prior year. Sales of heat pumps and fan coils of the quarter were both up 16%, the last year, however, sales of other products were down considerably primarily shipments of large custom air handlers and revenues from our engineering and construction services.

Management expects that both of these sectors will grow in the future. For the year, sales were $285 million, or 7% increase over the prior year with sales of heat pumps up 13% and sales of our fan coils up 16%. Although sales of our other products were down by 23%, primarily due to the decline in sales of large custom air handlers and engineering and construction services, partially offset by an increase in modular chiller sales. During 2013 we continued to maintain our leading market share positions in geothermal and water source heat pumps and hydronic fan coils.

In addition during 2013 the gross margin of our Climate Control business was 32.6% up from 30.4% a year before. This was generally driven by better product mix, raw material cost and improved overhead absorption related to the higher sales volume. From a product market perspective commercial product sales increased 8% during 2013 while residential product sales increased by 3%. However on Page 35 you can also see that orders decline in both product markets by 2% and that in the aggregate our backlog declined 28% from 2012 year end. Throughout the third quarter of 2013 new orders were about the same as 2012.

Our climate control sales team believes that the Q4 2013 in January 2014 booking levels were impacted by the extreme weather conditions and are optimistic about the pipeline of future business. Through February 2014 our year-to-date bookings including product orders in process were on par with last year.

Moving on to the indicators related to commercial and institutional construction, on Page 36 we show that McGraw-Hill expects 2014 will increase 9% over 2013 in the major vertical markets we serve in double digit growth in 2015 and 2016. The most recent thinking is that the key markets we serve are expected to grow by almost 50% through 2017 and 2018. The most recent release of the Architectural Billings Index by the American Institute of Architects is summarized on Page 37 coming in it 50.4 in January.

Indicating growth the ABI is a leading economic indicator for non-residential construction spending expected in the next nine to 12 months. Kermit Baker the AIAs Chief Economist commented “there is enough optimism in the marketplace that business conditions should return to steady growth as the year progresses”.

Moving onto sales of geothermal heat pumps used in single family residential applications. Page 38, shows McGraw-Hill’s forecast for single-family residential construction starts. These products accounted for approximately 17% of all climate control sales during 2013. McGraw-Hill is currently forecasting that housing starts will grow by 85% from 2013 to 2016. If this occurs our residential geothermal business should benefit. As pointed out previously we continue to maintain our market share and leadership position with these geothermal heat pump products.

In summary, the general consensus of most economist and construction industry experts is that a recovery will be forthcoming although the timing is by no means certain or easily determine. We believe that there will be a strengthening in all the major sectors we serve especially housing and education. Another positive trend is the increase in green construction those occur in the past few years and as expected to continue. On Page 39, we provided a summary of the 2013 green construction outlook which is also published by McGraw-Hill in which we have shown you before.

It forecasts that the green construction market will grow from approximately $85 billion in 2012 to between $204 billion and $248 billion in 2016. We believe that this should benefit the sales of our highly energy efficient products.

Turning to Page 40, we’ve risked that our climate control business strategies and some key initiatives. Once significant item of note is our focus on operational excellence and lead initiatives. This is an aggressive program to identify cost savings and process improvements in our products and throughout all functions of the organization. We initiated this program during early 2013 and although it will be a multiyear effort, we are optimistic that it will improve the operating metrics and profitability of our climate control business.

During 2013, we developed and release several new products, including the following which is not a comprehensive list. Tranquility Series, digitals spilt system, geothermal heat pumps. This is the first geothermal spilt system incorporating variable water flow for higher efficiency in quicker, easier installations and highgate communicating controls for control monitoring and diagnosing the system and planning this on a thermostat or service tool.

New vertical stack water source heat pumps, which have the industries highest efficiency from these type units. They also contain highgate controls in our targeted to high rise apartments, or condominium, and hospitality industries. Highly, we also introduced highly energy efficient package roof top, make-up air units in sizes from 6 to 40 tons. We also introduced packaged air cooled chillers including expanded capacity offering up to 70 ton modules. The features that include pre-cooling, economizers pump packages, heat pump and simultaneous heating and cooling versions.

We also introduced ultra air handlers design for 4/4 cooling in office towers. These are designed to be used in both conventional overhead, as well as under floor air distribution systems. And finally, we introduced a new vertical floor series fan coil unit with higher efficiencies and enhanced indoor air quality features. We will continue to develop and introduce new products in 2014 in future years.

Throughout this call, we try to cover in detail the key value drivers that we are focused on in which we expect will increase LSB’s value in the near and mid-term. They are recapped on page 41. That the risk of being repetitious at the end of an already lengthy call I believe the worth reviewing again.

We are comprehensively upgrading our chemical businesses reliabilities systems, equipment and personal to improve safety plant up time in minimize unplanned interruptions. We have made significant investments to improve Pryor and we believe we have made important progress. We have major capital projects underway at El Dorado that will improve its profitability substantially. We will support the growth of our Climate Control Business as the constructed markets it serves grow over the coming years and expect to achieve operating leverage as that occurs. And finally, we are striving to increase efficiency and reduce operating cost in our Climate Control Business to lean operational excellence initiatives.

Before opening this up for questions, I’d like to thank you for listening today, and I’d like to request that each of you please limit yourself to three questions, so that others will have a chance to ask some questions as well. If you have more questions, if you get back in the queue and ask them later on during the session. Also we would like to limit questions to the subject we’ve covered today relating to the companies performance, future plans and market conditions et cetera. We do not intend to answer questions relating to the recent letter published by Engine Capital. Operator please poll for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Joe Mondillo with Sidoti. Please proceed with your question.

Joe Mondillo – Sidoti & Company

Hi, good morning guys.

Jack E. Golsen

Good morning, Joe.

Tony M. Shelby

Good morning, Joe.

Joe Mondillo – Sidoti & Company

So my first question is following, a lot of information to digest, is my interpretation of Pryor overall, is that obviously you’ve done a lot. And lot has gone over the last six months to 18 months to 24 months. And it sounds like, with your prepared remarks and going through sort of the pictures and the maps that you’ve shown, it seems like, you had every single part of that, property, you seem like highlighted, whether it was repaired or for it was brand new equipment.

It seems like the plant it’s nearly brand new at this point almost. My question is your best guess, knowing that there is always a chance of a step back, especially considering last two years. What is your sort of best guess, when talking to especially talking to this new manager of the plant, where we are in terms of getting to consistent production.

Jack E. Golsen

First of all, I don’t want to you misinterpret there. I know we present a lot of information to you, we presented it quickly, and if we get the impression at the entire plant was new that was not our intention, significant parts of the plant have been replaced and upgraded and refurbished and there are some new components in the plant. So it is still a plant, that is an over plant, that was significant improvements and investments that we made over the past three years.

Moving on our strategy has been to we believe we are close as we said to achieving reliability. At this time, and in the past, we have been asked about specific rates, when do you expect to see – achieve X rate or Y rate. At this time we are not going to do that, we are not going to speculate, we’ve instructed our plant management to take it slow, distressed, safety, stress reliability and that’s what they are doing and over the next few weeks, or maybe even months, that will be monitoring very, very carefully, every aspect of the plant along with helps from outside experts that we brought in and we will bring it up in due course.

As we believe to achieve that reliability and at this time, that’s the best guidance I can give you on that. And really don’t want to attempt to throughout a specific time.

Joe Mondillo – Sidoti & Company

Okay, fair enough, just to clarify where exactly we are, the plant is now being slowly brought up the speed at a very slow rates and they are going to continue to solely do that over the next several months is that essentially…

Jack E. Golsen

As we are operating at a reasonable rate now, that we are going to be, when you are bringing up a plant, there could be some – there could be some increase in rates, there could be some decrease in rates, while they monitor it to make sure that everything is working according to the way it supposed to work. And so that will occur in due course and we’ll keep you apprise of that and when we believe that it’s achieved sustained production that’s when operating long enough to feel confident, we will certainly advise our shareholders of that.

Joe Mondillo – Sidoti & Company

Okay. And how long is that been sort of operating, as it been just a couple of weeks or?

Jack E. Golsen

Yes, it’s been brought up recently within the last week.

Joe Mondillo – Sidoti & Company

Okay, okay. The other thing I want to ask was related to Pryor, obviously there is some one-time cost related to maintenance and I guess consultants. I was wondering if there is anyway to quantify sort of the one-time cost, so that when you do reach a reliable consistent production over a period of time, on a quarterly basis, what are the sort of one-time if you will take cost costing you at this point in time?

Jack E. Golsen

Well, Joe, we don’t want to drill down too far on specifics. But in the downtime numbers that I reviewed with you in the conference call, we include those extra rate maintenance costs. Now the comments that we made about the first quarter of 2014, we have consultants there that are working with the management team, and so those will be temporary. But for the most part once we achieve this reliability and sustain production, those costs will go back to normal.

Joe Mondillo – Sidoti & Company

Okay. So I guess my follow-up to that would be the $23 million to $29 million, if you add that back and subtract the insurance, I’m sorry, if you only add back the insurance, you get to a negative $9 million number. So if Pryor is completely shutdown and you add back the insurance, the overall Chemical business at negative $9 million? So does that imply the rest of your plants El Dorado and Cherokee are running at a negative profitability?

Jack E. Golsen

No, that’s not correct. If you look at the downtime that we had in 2013, we’ve had downtime in the Cherokee plant in the first half and throughout the year at Pryor with a lot of additional costs. But the Cherokee plant as we indicated in the prepared remarks has run very efficient at normal levels and efficiently and is converting natural gas and capturing that spread. So the only difference between the normalized numbers that you see on that, I think is in page 11, page – we gave you a calculation normalized results if you add back to them.

Joe Mondillo – Sidoti & Company

Right, right.

Jack E. Golsen

I mean that pretty much is a normal calculation and the difference between 2013 and 2012 is – are the – as a result of the primarily the product sales, market prices of ammonia, UAN, and ammonium nitrate in the agriculture sector.

Joe Mondillo – Sidoti & Company

I guess the only thing that I’m confused is on Slide number 9, if you take that $18 million, take out the $26 million. So assuming Pryor is completely shutdown, you get to a negative $9 million, which assumes, I’m interpreting that Cherokee, that’s the rest of the plants Cherokee, El Dorado. So that negative $9 million is related to Cherokee and El Dorado and such, and I guess maybe some corporate costs on top of that, that’s where I’m just so little confused.

Jack E. Golsen

Thank you. The only difference there is that you’ve got a very – are you talking about the fourth quarter?

Joe Mondillo – Sidoti & Company

Yes, the fourth quarter.

Jack E. Golsen

You had a very late start to the ammonia application season, in fact, it hasn’t really started yet. So you had a fairly significant market conditions in the fourth quarter, but the other – the Baytown plant and the Cherokee plants are operational and profitable.

Joe Mondillo – Sidoti & Company

Okay, all right.

Jack E. Golsen

The El Dorado plant as you know is buying ammonia for the pipeline and converting it into nitrogen products. So there because of the lower capacity that we are running out now before we rail the new asset plant and the ammonia plant, they are running at pretty much at break-even right now in the fourth quarter.

Joe Mondillo – Sidoti & Company

Okay, all right. Good enough and I will hop back in queue.

Operator

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

Dan Mannes – Avondale Partners LLC

Thanks. First of all good afternoon, secondly, appreciate all the detailed insight on Pryor, and El Dorado, as well as the disclosed pricing volume on the [Indiscernible], so thanks for doing that.

And then secondly, I wanted to follow-up on Joe’s question, I guess I want to phrase it little differently, so when you look at the $24 million for Pryor in the fourth quarter, that is just the profit on the plant, that’s also a recovery on unabsorbed overhead.

So just to make sure I understand, when you’re looking at EBITDA effectively being flat in the Chemical business in the fourth quarter, part of that when you add back the insurance recoveries, I assume that’s because Cherokee and El Dorado and Baytown are positive, while at the same time Pryor has some amount of unabsorbed overhead given that briefly didn’t do anything in the quarter, am I thinking about that correctly?

Jack E. Golsen

That’s correct, Dan.

Dan Mannes – Avondale Partners LLC

Okay. So that $24 million is both recovery of the absorbed overhead as well as positive margin of some amount during the quarter.

Jack E. Golsen

Yes.

Dan Mannes – Avondale Partners LLC

Okay, got it. So, as we look forward, we don’t have a comp of operating history on Pryor in the last couple of years, in the last period we’re operating really well with the early part of 2011, can you talk about maybe any changes in the operating cost structure, how much high will cost be if at all going forward both G&A and O&M or maybe given some of the efficiencies maybe that won’t be as big of an issue?

Jack E. Golsen

Well, we haven’t increased the staff at Pryor significantly in the engineering and reliability areas. However, we believe that the improved reliability has achieved well more than overcome those to result in improved bottom line.

Dan Mannes – Avondale Partners LLC

Okay. The next question also in chemical, you probably saw one of your competitors signed a long-term agreement with Orca for supplying ammonium nitrate, it’s certainly greater than what I think you supplied at El Dorado. I’m wondering if that has any impact or is it all related to maybe what you’re going to do with El Dorado going forward post the ammonia expansion?

Jack E. Golsen

Well, we currently – on Orca, we currently have a contract with them that runs through April of 2015. And one of the characteristics of that contract as historically been that it is an exclusive, in other words, we are limited to exclusively selling that product to them.

Although we – as you know, we use to sell directly into that market before we had that arrangement. And we have – we are approached by customers on a continual basis wanting product, wanting to set up arrangements, but because of the limited capacity we’ve had in the past and that exclusive arrangement with Orca, we have to decline to move forward with any of those.

However, we expect, we’re not sure exactly what arrangement we will have with Orca after the end of the contract, but if it’s not an exclusive arrangement that satisfies our volume requirements, we expect throughout and build this business and with those other customers that are available out there in the market and that’s the approach that we are taking to it.

Dan Mannes – Avondale Partners LLC

So you don’t view this as a competitive threat, you feel like there is more than – there is ample demand for either ammonium nitrate to that end market or whatever end market you decide to sell to?

Barry H. Golsen

And diversifying the existing products.

Jack E. Golsen

That is correct.

Dan Mannes – Avondale Partners LLC

Okay. And then my last question on the Climate segment this is a little bit kind of a newer opportunity, but one of your large competitors on geothermal heat pumps are emerging better as Bosch signing arrangement with basically utility that would own the geothermal heat pumps and they are looking to expand utilization through that route. It is an exclusive agreement, but I imagine this is just the front end, I wondered if you looked at things like that is way to fray or reduce the installation costs to the end users is the way to get broader utilization of this type of product or is it maybe too immature for you at this point to look at?

Jack E. Golsen

We'll always look at anything that we think will increase our markets. Now we actually tried something similar to this about two to three years ago. And it did not really have the positive impact that we expected.

However as I said we are always hoping to looking for ways to increase our market and as you know our products are the most efficient in the industry and it could easily be used in such an arrangement with these of that company if they have an exclusive there are other companies that is essentially financing arrangement for the product and we would – we are willing to exploit that and we will exploit that.

Dan Mannes – Avondale Partners LLC

But do you review that as a way to maybe break open the market to create more ubiquity for this, I am contrasting perhaps with solar which given the advent of solar leasing by people like Solar City you are seeing much more mass adoption of a product and I am wondering if this might break the log jam a little for geothermal?

Jack E. Golsen

I think that is possible and as we – but I think a prognostic head on that, but as we get into it and explore it, I have more information. I mean, I hate to forecast or give guidance on what I think the market will do as a result of this because I do know that in the past this was attempted and as I said there wasn’t kind of traction that we expected at the time.

Dan Mannes – Avondale Partners LLC

Got it. Thank you very much.

Jack E. Golsen

Okay.

Operator

Thank you. And our next question comes from the line of Roger Spitz with Bank of America. Please proceed with your question.

Roger Spitz – Bank of America/Merrill Lynch

Thanks good afternoon.

Jack E. Golsen

Roger.

Roger Spitz – Bank of America/Merrill Lynch

Starting at – looking at Page 9 the normalized earning page, you have given us the fourth quarter of 2013 of the El Dorado, Cherokee and Pryor downtime we have Q1 is it possible to get the Q2 and Q3 do you have that and by any chance or can be provided at some point?

Barry H. Golsen

Roger, I would add to refer you back to our previous filings, I don’t have a summary of that in front of us for this particular call, but we outlined that in our quarterly financials. We have outlined in each one of the first three quarters, the insurance recoveries have been recognized and the downtime effect our earnings.

Roger Spitz – Bank of America/Merrill Lynch

Okay. that’s I will…

Jack E. Golsen

I will be happy as why that to you own a separate spreadsheets since its public acknowledge.

Barry H. Golsen

Roger, this will remind you when you are looking at this and comparing to the filings, Tony mentioned us before for purposes of this page, this slide to simplify we took the midpoint of the ranges. And you are going to see range because when you look back at those filings…

Tony M. Shelby

But I would be happy to prepare something insure to since its public data.

Roger Spitz – Bank of America/Merrill Lynch

Thank you for that. Looking at Page 11, at the capital spending, the planned – additional planned column is that would that all occur in 2015 and beyond or some of that occur in 2014? So do you just sort of give a range of what 2014 and 2015 CapEx that we should just plug into our model?

Tony M. Shelby

We didn’t have that handy right now.

Jack E. Golsen

Well, I think that we will not spend that money unless it is a payback.

Roger Spitz – Bank of America/Merrill Lynch

Okay.

Jack E. Golsen

We are subject to the additional plant is subject to review and approval specific AFEs.

Roger Spitz – Bank of America/Merrill Lynch

Okay.

Jack E. Golsen

I think he is asking for a number.

Tony M. Shelby

Understand. But..

Jack E. Golsen

I don’t think we have that breakout right in front of us right now.

Roger Spitz – Bank of America/Merrill Lynch

We will come back to that or we can go with what you have on this Page. I guess lastly am I correct that subject post January 2014 $28 million insurance coverage for Cherokee all the insurance proceeds that might come in door have now come in doors that is right or is there something else?

Tony M. Shelby

The $28 million that is coming in the first quarter I think concludes the..

Jack E. Golsen

It’s in already.

Tony M. Shelby

It’s in already. It concludes the reinsurance insurance recoveries.

Roger Spitz – Bank of America/Merrill Lynch

Thank you very much.

Jack E. Golsen

Roger I will tell you that I believe that board approval and majority of the additional plant will occur in 2014 and 2015.

Roger Spitz – Bank of America/Merrill Lynch

Okay. Thank you for that.

Operator

Thank you. And our next question comes from the line of Bruce Zessar with Advisory Research. Please go ahead with your question.

Bruce M. Zessar – Advisory Research, Inc.

Yes thanks. I had a couple of questions first on Pryor, I know you don’t want to pin yourself down to a time when you think normalized production will happen again but is it fair to say that you are confident that you will reach normal production at Pryor sometime in 2014?

Jack E. Golsen

Yes.

Tony M. Shelby

Yes and Bruce I think it is also I think you should also assume that when you bring a plant like this up, there is a normal flow of products through a plant that is efficient level of production. And from that point forward then you are bringing up to the higher level, so you could assume that we are running the plant when it is running it is running at efficient level.

Bruce M. Zessar – Advisory Research, Inc.

I want to turn back to capital spending, I guess tab 11 and I was also looking at Page 35 of the 10-K and there is a line item in there for El Dorado that wasn’t favorable for which is other support infrastructure for outside battery limits. And I am just wondering why that $50 million to $60 million is getting added in now and wasn’t there before?

Jack E. Golsen

Outside battery limits consists of tankage and pipeline connections primarily and those connect to the pipeline and to have sufficient storage capacity.

Tony M. Shelby

I think if you look at this schedule it was in the current 10-K that we filed yesterday and the one that is in this schedule they are consistent, we have expanded the disclosure in the current 10-K more we have had in previous 10-Ks and been more I think the definition has changed somewhat in terms of the way we show the planned and additional planned, but it’s consistent with all the information that we’ve had in our investor presentation during the road show that’s on our website.

Barry H. Golsen

And it doesn’t achieve…

Bruce M. Zessar – Advisory Research, Inc.

Well, let me just ask you though, because I’m looking at your third quarter 10-Q and I’m comparing the disclosure in that, you can look at Page 11 of the presentation or Page 35 of the 10-K, and the total amount of CapEx committed in planned capital expenditures in the third quarter 10-Q was $465 million to $520 million. And now the number is $511 million to $594 million, which is an increase of $46 million to $74 million.

And most of it seems to fall into that new line items for support infrastructure to El Dorado. And I’m just asking why it is in the last three months that that suddenly getting added to the bottom line on CapEx, because it wasn’t there in your third quarter disclosure. And it was significant, that’s why I’m asking.

Jack E. Golsen

I don’t know that it’s broken out, I don’t know that is not included in the third quarter. I would have to check back with the way we calculate it. But I think it’s more definitional in total, I think it’s more of a total number that it is a OSBL, because the OSBL has been in our planned and approved spending since day one as far as the infrastructure at El Dorado.

Tony M. Shelby

Bruce, why don’t we pull those after the call, pull those out and look at them, and look at the work papers specifically and get back to you with a more specific answer after we have a chance to study them.

Bruce M. Zessar – Advisory Research, Inc.

Yeah, I would just tell you, just write this down, look at Page 40 of our third quarter 10-Q and then look at Page 35 of the 10-K or Page 11 of the presentation. And there is a difference there an increase of $46 million to $74 million, most of it is in that OSBL line that wasn’t there before.

Jack E. Golsen

We’ll reconcile that for you and come back to you.

Bruce M. Zessar – Advisory Research, Inc.

Okay. All right, thanks. That’s everything I have for now, thanks.

Jack E. Golsen

Thanks, Bruce.

Operator

Thank you. And our next question comes from the line of Keith Maher with Singular Research. Please go ahead with your question.

Keith Maher – Singular Research

Good morning. I had a question of – just a quick follow-up on that insurance recovery in Q1, in addition to the $28 million with that $13.4 million in the insurance receivable also becoming through gap I mean?

Jack E. Golsen

I think we collected that in 2013.

Keith Maher – Singular Research

Okay. I’m sorry, go ahead.

Jack E. Golsen

It just did not flow through as income was charged against the receivable.

Keith Maher – Singular Research

Okay, got it. Also you had mentioned that you invested $67 million in Pryor, was that kind of an all in number over the years, and does that just include, investing in physical infrastructure.

Jack E. Golsen

I’m sorry, I didn’t understand the question.

Keith Maher – Singular Research

You had mentioned, I think to make the case that Pryor, if you build it from scratch and cost affiliates and yet you’ve currently invested like as you mentioned $57 million. And I was just trying to understand what that $57 million included?

Jack E. Golsen

I can tell you that’s on or across from the day we acquired it till 12/31.

Keith Maher – Singular Research

Our net cost.

Jack E. Golsen

Net cost.

Tony M. Shelby

That’s net of income that’s been generated by the operations to-date. So in another words, since we – since we’ve been repairing at as we went and encountered issues and made additional capital investments, that was offset by income that was being generated at the operation from time to time, so that’s a – at today that’s our net investment.

Keith Maher – Singular Research

Okay, fair enough. And in terms of I mean the IRR the 15% to 17% you are mentioning for the other area expansion. The one assumption looking – and you are going to share would be just a timeframe for that and I assume it’s pretty long timeframe – assets have a long life?

Jack E. Golsen

That’s correct.

Keith Maher – Singular Research

Could you again tell me how long?

Barry H. Golsen

We can, you are talking about the terminal value calculation?

Keith Maher – Singular Research

Yes, yes and that has…

Jack E. Golsen

He is asking about the terms, the calculation of terminal value.

Keith Maher – Singular Research

Yes.

Barry H. Golsen

I believe that’s 20 years or 30 years I’m going to take a look at it.

Keith Maher – Singular Research

Okay, all right. And final question just on the climate control business and I understand your backlog that provides you with kind of visibility, but it look like I mean the trends for 2013 it seem to be declining orders and then obviously backlog was following that. Should we read anything into that I mean in terms of what was causing that?

Barry H. Golsen

Well I think if you look at the orders quarter-by-quarter through the third quarter we were approximately leveled with 2012 and where we saw the big fall off in orders was in the fourth quarter and lot of that we believe was impacted by the winter weather conditions and so that that we don’t believe that any one quarter necessarily indicates trend.

Okay, now what I also mentioned at the call was that when we look at our year-to-date of new orders that we’ve actually booked plus that what we call in our business which are orders that are being processed through that haven’t officially hit the backlog yet and which varies up and down from time-to-time, that is on par with last when you add those two things together that the order levels on par with last year. And that we have a nice pipeline of business that our sales team is looking at and they feel good about that pipeline of business.

Keith Maher – Singular Research

Okay, thanks. That’s all I have.

Jack E. Golsen

Okay.

Operator

Thank you. And our next question comes from the line of Gregg Hillman with First Wilshire Securities. Please go ahead with your question.

Jack E. Golsen

Good morning Gregg.

Operator

Okay. So our next question comes from the line of David Deterding with Wells Fargo. Please go ahead with your question.

David K. Deterding – Wells Fargo Securities LLC

Hey, good morning guys.

Jack E. Golsen

Hi, David.

David K. Deterding – Wells Fargo Securities LLC

Just a couple of quick ones from me, it looks like in your last presentation that you had in Q3, you had roughly $40 million to be spent kind of on a go forward basis in a climate control business and now you’re down to $5 million to $11 million. It looks like in the presentation here on Page 11, can you just kind of talk about what got cut out of there and is that $5 million to $11 million is that really pretty much just a maintenance level of CapEx there?

Jack E. Golsen

Dave on climate control in a previous presentation we had close to $40 million in plant spending and this one it’s $5 million. He was asking what might have been cut out.

Barry H. Golsen

I don’t think we have…

Jack E. Golsen

Yes, we did, but one of the things is we had a plant addition that was earlier plant that we have cut out because we believe that through our lean efforts that we will be able to get more utilization out of our existing facilities. So that’s been taking out from previous and as far as the – that’s the major item, that’s the major item.

David K. Deterding – Wells Fargo Securities LLC

Okay, perfect. And then it looks like going through the K that you had some spending on natural gas, working interest in the fourth quarter, can you just kind of comment on that will we see any more of that going forward in 2014 or 2015?

Jack E. Golsen

We had an opportunity to increase our working interest percentage in the Marcellus Shale and those working interest that we’ve already in, and we took advantage of it recovery package working out to be a very efficient hedge for us.

David K. Deterding – Wells Fargo Securities LLC

Okay. And then my final question is just, it with respect to $90 million to $100 million in incremental EBITDA, could you just kind of breakdown the mix as you guys think about that $90 million to $100 million versus Ag versus mining versus asset.

Jack E. Golsen

I think is – I think is probably more Ag related that it is industrial and mining, but it’s actually a benefit coming from the nitric acid capacity as well as the ammonia because we’ve able to upgrade and diversify our product mix. And we’ll have more product that available to upgrade versus where we had in the past. So as the combination of stronger margins in the Ag business, because we’re able to capture that spread between natural gas and the purchase price of ammonia that we’ve been, having to bypass because we’re buying the ammonia.

On the other hand a lot of the ammonia that we have excess will later be able to upgrade it or sell it on to the into the pipeline to a couple of large customers. So we expect if that would be a significant part of it also and that will be either, that we’ll classify that is industrial, but it go to Ag.

David K. Deterding – Wells Fargo Securities LLC

When you think about the plant currently, if you were running a full capacity would you say that’s 50% Ag and how would breakout the rest?

Jack E. Golsen

The rest operated in the past is about 40% Ag, 40% mining and 20% assets. But that product mix will change overtime with the additional capacity that we have for ammonia and nitric acid.

David K. Deterding – Wells Fargo Securities LLC

That’s all from me guys. Thank you.

Jack E. Golsen

Thanks David.

Operator

Thank you. And our next question comes from the line of Bruce Zessar with Advisory Research. Please go ahead with your question.

Bruce M. Zessar – Advisory Research, Inc.

Yeah, I just add a quick follow up question, looking at the assumptions on the payback the IRR 15% to 17% where you are assuming for the sake of modeling ammonia at $500 per metric ton and $5 dollar natural gas. Did you model it out assuming say ammonia $400 per metric ton with $5 dollar natural gas and what kind of IRR that generated?

Tony M. Shelby

I really can’t disclose a lot of different internal rate of return, but Bruce we model ammonia down to $400. We also model higher natural gas and in every case we still had a reasonable internal rate of return. We do a number of models with a lot of different assumptions and the range I’ve given you is one that we feel very comfortable with that is conservative there are model from both sides. And but all the modelling we did taking ammonia down to $400 and gas up to $5 still gave us the reasonable return.

Jack E. Golsen

And we also did some models that actually have higher internal rates of returns as Tony said, we currently can find the range to what we felt was more of a logical range.

Tony M. Shelby

There is one other very factor the prices that you are hearing are not the prices that we go on our market because you have high transportation costs, that have to be added to the price that you see in the market, depending on where they are, so our ammonia sales for more here. And that markets that we’re in because of the transportation, so 460, 450 price on ammonia is $5 here or maybe a little more, I’m kept up with the – changes were occurred lately.

Jack E. Golsen

Short answer to your question, yes we didn’t do the model at that level Bruce.

Bruce M. Zessar – Advisory Research, Inc.

All right, fair enough. One other question, turning to the balance sheet, I mean since you’ve issued that debt, you had a relatively modest amount of net debt because lot of the cash just on the balance sheet, but have you modeled out, looking out, say 12 to 18 months, when you put out a lot of your money invested in these project, but they haven’t come online, where does your net debt position get to at that point in time?

Jack E. Golsen

I think the models that I’ve looked at and we run a continuous model on this is that we continue to have an undrawn revolver and we have roughly $50 million cash on the balance sheet.

Bruce M. Zessar – Advisory Research, Inc.

So that’s kind of a, that’s the low point before you bring these projects online and they start generating cash.

Jack E. Golsen

Within $50 million to $75 million, I mean there are lot of variables, but we’d run it, we’d run a number of models, in some cases, we have an undrawn revolver some time we’re going partially against the revolver.

Bruce M. Zessar – Advisory Research, Inc.

Okay, that’s everything I had thank you.

Jack E. Golsen

Thank you.

Barry H. Golsen

Okay, so I like to jump in here. This is Barry again. We’ve been at this an hour and a half now, and the call has been very long, and much longer than usual. Yes, I think at this point, we are going to cutoff questions. I know that some of you probably have more questions and we’ll be glad to talk to you on an individual basis. And we can arrange one on one calls afterwards. But we appreciate your participation today. And we appreciate your continued interest in LSB.

At this time I’m going to turn the call over to Carol Oden, who is going to give you some important Safe Harbor language.

Carol Oden

Thank you, Barry. Information reported on this call, speaks only as of today, February 27, 2014. And therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. The comments today and information contained in the presentation materials contain certain forward-looking statements. All 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 forecasts, any references to natural gas cost, ammonia cost, fundamentals of the Ag business and basic inorganic chemical trend.

The forward-looking statements include, but are not limited to the following statements, substantial upgrades to reward shareholders over time, achieving Pryor potential, expected timing to have the acid plant to new ammonia plant fully installed and operating. Elimination of our need to purchase ammonia as the pipeline should result in reduction of feedstock costs, production of excess ammonia which we will be able to sell into the pipeline projects – at projects that El Dorado will contribute approximately $90 million to $100 million of incremental annual EBITDA.

We will continue to execute our three-year plans, plans to fund high capital expenditures over the next two years. Our future sales mix, UAN prices, demand for our fertilizers achieving liability at Pryor uses as most of the new ammonia that we produced, inventory order level at Pryor. We expected that the total cost of these projects will be between $420 million and $490 million.

We expecting to generate from $90 million to $100 million of incremental annual EBITDA. We also estimate the interim rate of return on these projects to be between 15% and 17%. Condition of the major components within ammonia plant growth in sales in the Climate Control Business the lean initiative will improve the operating metrics and profitability of our Climate Control Business.

We will continue to develop and introduce new products in 2014 in future years. You should not relay 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. 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 Q4 2013 Conference Call Presentation which is posted on our website. Thank you, this ends our conference call.

Operator

Thank you for your participation, ladies and gentlemen. You may disconnect your lines at this time and have a wonderful day.

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: transcripts@seekingalpha.com. Thank you!

Source: LSB Industries' CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts