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LSB Industries Inc. (NYSE:LXU)

Q3 2012 Results Earnings Call

November 6, 2012 5:15 PM ET

Executives

Carol Oden - Executive Assistant

Jack Golsen - Chairman and CEO

Barry Golsen - President and COO

Tony Shelby - Chief Financial Officer

Analysts

Joe Mondillo - Sidoti & Company

Dan Mannes - Avondale Partners

Keith Maher - Singular Research

Wayne Archambo - Monarch Partners

Gregg Hillman - First Wilshire Securities

Operator

Greetings. And welcome to the LSB Industries Incorporated Third Quarter 2012 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, Ms. Carol Oden, Executive Assistant. Thank you, Ms. Oden. You may begin.

Carol Oden

Thank you. Again, we would like to say welcome to the LSB Industries, Inc. 2012 third 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.lsb-okc.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 6, 2012 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 PowerPoint PDF that is posted on our website at www.lsb-okc.com in the Webcast section of Investor Information tab. Please note that the presentation starts on page three of the PowerPoint.

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

Jack Golsen

Thanks, Carol. Good afternoon. Before starting our call today, we want to -- we want our friends in the Northeast to know that you’ve been in our thoughts throughout the storm and its aftermath. I understand there is another storm heading your way and I hope it misses you, but that is yet to be determined.

Okay. Now I’m going to start the conference call. Thanks for joining our call today. This afternoon we released our 2012 nine months and third quarter earnings report, and we also filed our 10-Q for the quarter.

Net income for the first nine months was $47 million or $2 per diluted share on $582 million sales. Net income for the third quarter was $6.7 million or $0.28 per share on sales of $182 million. Third quarter net income per share were roughly in line with last year’s third quarter, although 2012 third quarter sales were slightly higher than 2011.

As previously reported, our third quarter 2012 results were impacted by lower ammonium production at our Pryor, Oklahoma chemical facility. We estimate this reduced our income by $14 million, that’s in the quarter.

At Pryor, we are installing a single large Kellogg ammonia converter to replace the six small converters at this plant. We believe the single large converter will allow us to significantly increase ammonia output in 2013.

Also, we estimate the severe damage to the 98% nitric acid plant also known as the DSN plant at the El Dorado Facility in El Dorado, Arkansas and the collateral damage to our acid plant at the El Dorado site caused by the explosion in mid-May have reduced our third quarter profits by an additional $9 million. Most of these lost profits are expected to be recovered by insurance proceeds in a future period.

The repairs of our El Dorado plant have been made in a remarkably short time. Most of the collateral damage has been repaired. Three of our nitric acid plants are up and running and the sulfuric acid plant should be operational later this quarter and probably, this month. The DSN plant, which produced about 20% of the nitric acid, manufactured at El Dorado will not be repaired. Instead, we are replacing that plant.

Excuse me, the feedstock for two our Chemical operations is natural gas. The price of natural gas has historically been volatile. For the companies like LSB that use large quantities of natural gas are always looking for ways to fix at a low price the future costs of natural gas. This is usually done by some kind of a hedge.

On October 31st, which was last month, a subsidiary of our Chemical business purchased an interest in the Marcellus gasfield has a hedge to fix the future cost of a meaningful portion of future gas purchases.

This acquisition includes potential gas reserves equal to approximately 20% of our current annual natural gas requirements over the next eight years at an estimated present value of approximately $2.30 per Mcf, including development and operating costs. The current price of gas is approximately $3.40 per Mcf and is expected to increase in the next few years as the country converts vehicles and power plants to natural gas.

Our Climate Control business has been impacted by the recovery in construction taking longer than previously anticipated. Right now, the market is still soft. We have capacity to respond to the market as it improves.

Meanwhile, we continue to develop new products which we believe will have a positive impact on future results. Barry will discuss the market situation and outlook in more detail.

The 2012 third quarter was not an indicative reporting period for us and we expect a much improved fourth quarter in 2012 and further improvement in 2013.

Before turning the call over to Tony, I’m proud to report that once again LSB was named as one of America’s 100 best small companies by Forbes magazine published on October 22, 2012. Forbes looks a return on equity and revenues and earnings growth over the past year and over five years among companies doing under $1 billion in revenues.

Finally, since this is our last conference call for the year, the entire LSB team wants to wish all of you very best for the holiday season in the coming month.

Now, I will turn this call over to Tony Shelby, our CFO. Thank you.

Tony Shelby

Thanks, Jack. Before I review the specifics of general comment, historically our third quarter is the lowest quarter in terms of sales and earnings since it is in between agricultural seasons with low demand for our fertilizer products.

We scheduled most plant turnaround maintenance during this slower demand period, in addition to this seasonally lower sales, gross profit, lower overhead absorption plus turnaround expenses for the quarter.

There were also certain other significant advances in the Chemical business that affected the level of earnings in the third quarter. I will describe these events in detail when I return to the business segment discussions.

Our results for the third quarter of nine months ended September 30th are summarized on page four of the PowerPoint presentation. Comparing the third quarter 2012 to the third quarter 2011, consolidated sales were $182 million, an increase of $5.6 million or 3%.

Fully diluted earnings per share were $0.28, compared to $0.27. Operating income was $12 million, a decrease of $600,000 or approximately same as last year, but for different reasons.

After interest expense and an effective tax rate of 36%, net income was $6.7 million, compared to $6.3 million. The effective tax rate was lower than the combined federal and state statutory rates due to Section 199 allowable domestic manufacturer’s deduction and other tax credits.

Also noted on this page, cash flow from operations was $70 million, after cash for capital expenditures were $29 million, payments on current and long-term debt and other offsetting items were $3 million, net cash and short-term investments decreased $15 million for the quarter.

The decrease in cash for the quarter was due to the seasonal sources and uses of working capital consistent with third quarter of 2011. At September 30, 2012 our cash balance was $134 million. EBITDA for the quarter was $17 million or approximately same as 2011.

Turning to page five in Chemical, Chemical’s third quarter sales were $110 million versus $103 million last year, an increase of $7 million or 7%.

By product line agricultural sales were $33 million, compared to $30 million, industrial and mining product sales were a combined $77 million, compared to $73 million in 2011. Operating income for the Chemical business for the third quarter was $7.5 million, compared to $7.1 million last year.

In addition to the fact, pardon me, in addition to the fact that the third quarter is typically a lower than average quarter. There are certain operating conditions that exist in each quarter that require explanation. In last year’s 10-Q we explained the third quarter of ‘11 so I won’t cover that again this year.

Regarding Chemical’s 2012 third quarter, beginning on page 31 of our 10-Q is a full discussion of operating issues and circumstances at our Pryor and El Dorado facilities during the third quarter of 2012 that cause operator results to be less than otherwise would be expected. It also list that we are taking to return to normalized operating results.

To summarize, during the third quarter Pryor’s rate of ammonia production was only approximately 50% of the quarterly -- of the target rate of 600 tons per day during the quarter due to continued problems with the ammonia conversion process.

We estimate that as a result of the lower production of ammonium and based on market prices of ammonia and UAN during the period, third quarter operating income was $14 million lower than it could have been.

Further, as previously reported, the El Dorado Facility was damaged on May 15, 2012. This caused third quarter sales to be lower than otherwise would have been expected, resulting a lost over absorption in gross profit margins.

We also record losses on nitric acid and sulfuric acid purchases we made at a negatively spread to provide uninterrupted service to certain customers that rely upon existing supply agreements.

The lower profit margin, lower fixed overhead absorption both combined with the negative spread on purchases had an estimated $9 million negative effect on El Dorado’s third quarter operating results.

Our insurance policy provides business interruption coverage after the first 30 days of the insured event, which we believe will cover these lost profits and extra expenses. However, we don’t expect to receive the first installment of business interruption proceeds earlier than the first quarter of 2013.

As a result, the business interrupt insurance offset these losses was not recognized in the third quarter. The insurance recovery will be recognized as a reduction of cost of sales in the quarter that the claim was made.

To recap the combined effect of lower ammonia production at Pryor, lower acid production at El Dorado and the losses on purchase of acids at El Dorado was lower our third quarter operating income by approximately $23 million. After tax this is roughly equivalent to $14 million net income or $0.60 per share.

Finally, during the third quarter our Cherokee Facility was out of production during planned maintenance turnaround for most of August significantly affecting its operating results for the quarter. I might add this is standard for the third quarter for at least top turnarounds.

Regarding the outlook for the 2012 fourth quarter, today ammonia production at Pryor has stabilized at 80% of the 600 tons per day target rate for the quarter and Pryor’s net back sales prices are higher than the third quarter.

If these trends continue throughout the quarter, the increase in production and processing should offset most of Pryor’s lost margin experienced in the third quarter. And we expect Cherokee to be in full production during the fourth quarter of 2012.

El Dorado is producing at approximately 20% lower rate than before May the 15th event. The losses on nitric acid and sulfuric acid purchase made a negative gross margin to provide service to the certain customers during -- will be much less during the fourth quarter.

Although, we do have business interruption insurance, we will continue to experience a timing delay between the effects of that interruption associate interest recovery until we complete construction of a new nitric acid plant at El Dorado in 2015. Barry will provide an update and current status for both Pryor and El Dorado, as well as the business conditions for all of our Chemical business markets and the business overview.

Reflected on the chart -- in the chart on page six is a quarter-by-quarter comparison of Pryor’s operating income for the periods beginning in the fourth quarter of 2010 when the facility reached sustained production.

This graph illustrates Pryor’s earnings potential. Certain quarters after 2010 have been impacted by mechanical issues due to our restart of Pryor which has been out of production for over a decade.

We believe we have addressed those issues and we expect that when the ammonia converter will replace early 2013, the Pryor Facility should be able to, better able to realize its potential.

Continuing with the quarter-over-quarter comparison by business segment, please refer to page seven. Climate Control sales were $68 million or $3.8 million lower than the year ago. Climate Control gross profit as a percent of sales was 30.1%, compared to 31.8%, and operating income was $6.9 million, compared to $8.7 million in the third quarter of 2011.

Generally, the decline in sales and operating income in 2012 reflects the continued softness in construction activities in the markets we serve. Barry will review Climate Control quarterly results and current market conditions in greater detail.

Turning to page eight, a summary of our liquidity position September 30, 2012, cash was $134 million, total funded debt was $74 million and stockholder equity was $342 million.

Capital expenditures during the quarter, total capital expenditures were $29 million, including $27 million from the Chemical business. As noted on page 38 of the 10-Q, at September 30, we had committed capital expenditures primarily in the Chemical segment in the range of $170 million to $180 million.

The committed capital expenditures included a $110 million to $120 million for the new 65% nitric acid plant and concentrated for El Dorado to replace the damaged DSN plant, which should substantially be funded by insurance proceeds. The remaining committed expenditure of $60 million is primarily for increased capacity and production efficiencies.

In addition, we disclosed on the same table additional plans, but not yet committed, expenditures at September 30 of $102 million to $112 million, including $90 million to $95 million primarily for plant acquisition of a development overtime of the working interest of certain natural gas properties locate within Marcellus Shale.

Two of our chemical plants Pryor and Cherokee use natural gas as their feedstock. Our investment in this working interest was made as an economical hedge against possible future rising prices of natural gas. The acquisition was completed on October the 31st.

The closing price was $49 million, the additional $38 million to $40 million will be further development of the lease-owned and we expect this will be funded by the cash generated by this investment.

And finally, as Jack mentioned and Barry will discuss further, we are considering the possible addition of anhydrous ammonia production plant at El Dorado Facility which will cost in the range of $250 to $300 million is estimated to require 24 to 36 months to complete.

We expect to finance some of the planned capital expenditures with the new long-term loan priced to the fixed rate of LABOR. However, the terms will depend upon market conditions at the time.

That concludes an overview of our results for the quarter. Our liquidity and capital resources at the end of the period and certain planned expenditures subsequent to quarter end.

We’ve addressed our results of operations for the quarter and the comparisons to 2011 quarter in greater detail in the MD&A of the 10-Q which we filed earlier today. And we suggest that you review these disclosures and discussions for additional analysis.

I’ll now turn the call over to Barry to discuss both businesses for the quarter and the outlook going forward.

Barry Golsen

Thanks Tony. I’m going to focus on our sales activity, product backlogs where pertinent, and market drivers. I’ll also give you an update on activities at our Pryor and El Dorado facilities.

To start, please turn to page nine which shows our 2012 sales mix by the markets we serve. For the first nine months of 2012, our sales mix continues to be approximately two-thirds Chemical and one-third Climate Control.

In the Chemical business, about 48% of sales were nitrogen-based, agricultural fertilizers and associated products. The other 52% were industrial and mining products.

In our Climate Control business approximately 82% were sales of various heating, ventilation and air conditioning products to commercial and institutional markets. The remaining 18% was the sale of geothermal heat pumps for single family residential application.

Focusing first on our Chemical business, please go to page 10. Third quarter sales were $110 million, 7% above the third quarter of 2011. Agricultural products sales were up 10% over the 2011 level with industrial and mining sales up 5% and 7%, respectively.

Increased Ag product sales were due to more ammonium nitrate sales than in the third quarter of 2011, while increased industrial and mining sales were primarily caused by high ammonia prices that were passed through to our customers, resulting in higher sales prices for many of our products.

Please turn to page 11, for sales of our key agricultural products. During the third quarter tons shipped of urea ammonium nitrate or UAN were 27% lower than during the 2011 third quarter, while net sales decreased 28%.

The decrease in tons sold of UAN was a result of limited ammonia available to produce UAN, primarily due to lower than expected ammonia production at Pryor during the quarter, but also due to firm sale commitments for anhydrous ammonia we were committed to satisfy. UAN shipments from our Cherokee Facility also decreased during the third quarter compared to last year due to an extended turnaround at Cherokee.

Tons shipped of agricultural grade, high-density ammonium nitrate or HDAN were 14% higher than the third quarter 2011 and sales were 26% higher. Higher shipments of HDAN were driven by generally better weather conditions than the previous year that have the effect of extending the period ranchers applied fertilizers to forage area.

Tons shipped of ammonia to agricultural markets increased 152% resulting in a 141% increase in ammonia sales compared to 2011. This was a result of having more ammonia available to sell.

Turning to our industrial and mining products on page 12. Sales of nitric acid and industrial ammonium nitrate increased 14% and 7%, respectively, whereas sales of sulfuric acid declined by 36%. Lower sulfuric acid sales were result of the explosion and subsequent downtime at El Dorado.

On page 13, are some price trends for both the feedstocks that we use and the key Ag products we sell. The cost of natural gas although about $0.50 higher than in its recent low point continues to be low. This is benefiting margins at our Cherokee and Pryor facilities, which use natural gas as their primary feedstock.

The cost of anhydrous ammonia, the feedstock we use at our El Dorado, Arkansas and Baytown, Texas facilities continues to be high, compared to previous years and is recently increased to $720 per metric ton. High ammonia prices have increased production costs at our El Dorado and Baytown facilities.

The chart on the lower right shows pricing for Ag grade HDAN. In October of 2012, Southern Plains prices for HDAN dropped to $380 per ton, compared to $405 per ton 12 months earlier. It currently remains at about $380 per ton. This is the time of the year that we traditionally see a soft market.

We also believe that higher imports of urea are putting price pressure on HDAN. If you look at the chart on the lower left, you can see that the Southern Plains price of UAN was $330 per ton this October, compared to $380 per ton in October of 2011. Today pricing is about $320 to $330 per ton.

Focusing on the outlook for the Chemical markets we serve, page 14 list several indicators for our agricultural products. Most of these are favorable. Grain stock to use ratios both worldwide and in the U.S. continued to be low.

Planting levels are expected to be high for both corn and wheat. Market prices for corn and wheat remain high as well, so farmers are incentivized to plant and sell more. All of this is creating strong continuing demand for fertilizers that we produce.

Finally, low natural gas prices have reduced the cost to manufacture UAN and ammonia at our plants that use natural gas as a feedstock.

Factoring in, the total cost of production plus freight and distribution, North America is the low cost producer of nitrogen fertilizers. The industry consensus is that the positive fundamentals for the Ag business should continue.

In addition to general industry drivers, weather can have a significant impact on fertilizer use, demand and prices. Although last -- in last summer, many areas were affected by drought.

Many of the areas we serve have had more favorable moisture conditions through the fall with the exceptions of Kansas, Nebraska, Missouri and West Texas. As we predicted in our last call, lower crop yields last season should result in higher fertilizer demand next season.

Corn production for the ethanol industry is a subject that we are frequently asked about. Although, a major reduction of ethanol production can hypothetically affect the demand for corn and its demand for fertilizer, so far we’ve not felt any meaningful impact from the current level of reduced ethanol production.

We believe that with corn stock so low, reduced usage of that for ethanol has and will continue to be overshadowed by strong general worldwide demand for corn. Taking all of these factors into consideration, we continue to be optimistic about our Ag business.

Now, if you will turn to page 15, you can see from the chart on this page that despite lower sales caused by the explosion and subsequent downtime at El Dorado, more than half of our business continues to be industrial and mining products. They are sold primarily to large customers and most are sold pursuant to contractual cost plus and/or minimum take arrangements.

Page 16, contains some market indicators for this area of our business. Most of these indicators forecast growth for the next few years.

Before turning to the Climate Control business, I’d like to take a few minutes to update you on progress at our Pryor and El Dorado operations.

On page 17, there is an update on Pryor. During our last conference call, we reported to you that repairs to Pryor urea reactor were successful. That reactor continues to operate as expected.

We also advised you during that call that we had received permits to increase ammonia production at Pryor by 60,000 tons per year and we’re in the debugging process on two smaller ammonia plants. That process continues and we started limited production.

As we’ve reported during our last call, in subsequent communications, we continue to have considerable problems with the ammonia conversion process at Pryor during the third quarter.

We also advised you that to correct those problems, where we are installing a Kellogg ammonia converter replacing catalysts that are at the end of their useful life and installing a new chiller to lower high temperatures that reduce production capacity in hot weather.

Those plans are underway and we expect those changes to occur in early 2013 during a scheduled plant turnaround. We believe that all of these measures should allow us to achieve ammonia production rates at Pryor of approximately 600 to 700 tons per day.

Turning to our El Dorado Facility, please go to page 18. On May 15th, there was an explosion at the DSN 98% strong nitric acid plant at El Dorado, which we refer to as DSN. El Dorado was referred to as EDC, excuse me. We believe the DSN plant was damaged beyond feasible repair.

The sulfuric acid plant was seriously damaged and there was less serious damage to the other three nitric acid plants and other ancillary equipment. As Jack noted, since May 15th, we’ve made substantial progress with the repairs at EDC and the entire facility is back in operation except the DSN plant and the sulfuric acid plant.

The sulfuric acid plant should be back on -- be brought back online before the end of the year, this year 2012. However, as Tony pointed out, approximately 20% reduce nitric acid production will continue to affect EDC’s output until we add acid capacity to replace the DSN plant.

During the last conference call we advised you that we believe the DSN strong nitric acid plant was damaged too seriously to repair and will be replaced with the new 65% plant and concentrator. This will take at least two years to complete could cost over $100 million.

At that time, we believe the cost would be substantially covered by insurance. Although, we continued to believe the DSN plant should be replaced rather than repaired, recent comments from the engineering firm representing our insurance carriers indicate a preliminary termination that the DSN plant was not totally destroyed and is repairable.

The cost to repair which we believe maybe the basis of our insurance claim is not yet known, but is expected to be in the range of $50 million to $70 million. This does not include business interruption insurance proceeds, which are a separate issue. We will advise you when this situation is resolved.

Finally, with regard to EDC, although a final decision has not been made, we are considering the addition of an ammonia production plant at that location. Since EDC uses purchased ammonia as a feedstock, it is a competitive disadvantage to facilities that produce ammonia from natural gas.

The proposed plant would cost between $250 million and $300 million, and would take from 24 to 36 months to complete and would be funded with long-term debt. When we make a final decision about this plant, we will advise you as well.

Moving on page 19 contains some strategies and some of our key initiatives for 2012 for the Chemical business. We reviewed most of these with you on previous conference call. This page is here for you to reference and review later or for those of you who were not on those calls, so I’m not going to go over the details at this time.

Turning to our Climate Control Business. On page 20, you can see sales by major product categories. Total sales were approximately $68 million, a decrease of 5% compared to the third quarter of 2011.

Compared to third quarter 2011, sales of heat pumps were down 11%, fan coil sales were down 1% and sales of other products were up 14%, due to increases in sales of our custom air handlers and modular chillers, which are included in this other category.

On page 21, you can see that sales of products sold for use in commercial and institutional buildings were down 1%, while sales of our residential products all geothermal heat pumps were down 21%, lower than last year’s third quarter.

Total bookings during the third quarter were $66 million on par with the third quarter of last year. Commercial bookings were up 8%, while bookings of residential products continue to lag down 25% to the 2011 third quarter.

Our backlog of product orders at September 30, 2012 was $51 million, 6% higher than one year earlier and approximately 50% -- 15% higher than the $45 million backlog at 12/31/11. Total new orders in October were approximately $28 million and our backlog of product orders at October 31st was approximately $59 million.

Simply stated, the markets we serve continue to be soft. Commercial and institutional, construction appears to be recovering at a slower rate than previously anticipated. The specific markets we serve for residential products have been severely impacted by low levels of construction and low levels of investment in existing home.

The continuing low cost of natural gas, which is used as fuel for heating about 60% of the homes in United States has extended the payback period for our residential geothermal products in those markets that use natural gas. We believe that this has impacted our sales of residential heat pumps. We continue to hold our market leadership position with our geothermal products.

The next few pages of the PowerPoint deal with the market outlook for construction. On page 22, there is a graph that shows McGraw Hill most recent construction forecast for certain commercial and institutional building types. These are the sectors or building types that are the most important to us and comprise 61% of our total Climate Control business sales in 2011.

McGraw Hill is forecasting that in the aggregate, they will decrease by approximately 7% in 2012, which is a dramatic change from the 3% increase forecast just six months ago, reflecting the uncertainness of the economic recovery.

However, these sectors are forecast to increase approximately 7% in 2013 and 78% through 2017. If this future growth materializes, it should benefit all of our commercial and institutional product sales.

In addition to watching construction forecast by sector, we also track the Architectural Billing Index, which is considered to be an indicator for non-residential construction spending, nine to 12 months in the future.

On page 23, is a graph of the ABI. Any score above 50 indicates growth in billings, while any score below 50 indicates a decline in billings. This indicator was below 50 for most of 2011, finally breaking into positive ground last November.

Excuse me, however, after five months in positive territory, it get below 50 again in April of this year and remained there through July, through August and September the ABI indicated growth.

Obviously, there is no consistent trend and we believe that the general consensus of most economists and construction industry experts is that the recovery in commercial and institutional new construction will be slower than previously forecast.

One bright spot is that there appears to be a strengthening in the multi-family housing sector, which historically has been one of our strongest markets.

Moving on to sales of geothermal heat pumps used in single family residential applications. Page 24 shows McGraw Hill’s forecast for single family residential construction starts.

McGraw Hill’s currently forecasting that housing starts will increase from about 413,000 in 2011 to 490,000 in this year of 2012 to 610,000 in 2013, and to over 1 million per year in 2015.

If this future growth occurs, it should benefit our residential geothermal business. However, much of the benefit remains uncertain and we believe it depends to a certain extent upon the cost of energy.

Turning to page 25, we’ve listed our Climate Control businesses strategies and some key initiatives. Again, these are repeated from previous calls and I will not review them again with you now.

Before opening this up for questions, I’d like to thank you for listening and I would like to request that each of you please limit yourself to three or maybe four questions, so that others will have a chance to ask some questions as well. If you’ve got more questions, you can get back in the queue and asked them later on during the Q&A session.

Operator, you can please poll for questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Joe Mondillo of Sidoti & Company. Please go ahead.

Joe Mondillo - Sidoti & Company

Good afternoon, guys.

Jack Golsen

Hello, Joe.

Joe Mondillo - Sidoti & Company

So, I know you guys don’t generally talk numbers in terms of plant by plant, but I was wondering if you could sort of at least give us an idea where we are in the El Dorado plant compared to a year ago in terms of, are we even break-even at this point or just given to say -- give us an idea of what the profitability is at El Dorado in the third quarter and what you expect sort of going forward?

Jack Golsen

Joe, as you correctly pointed out, we don’t give profitability by individual plant facility. However, I will tell you that El Dorado was traditionally profitable and it’s somewhat seasonal because of the high density of ammonium nitrate during the fertilizer season, but it’s typically always profitable on a quarter-over-quarter basis.

However, it’s being impacted as we indicated by the 20% lower sales and few of the other activities, which we -- in the second quarter, we told you that it had a $7 million impact. In the third quarter, we are talking about the explosion and the aftermath.

In the third quarter, we mentioned it had $9 million impact and we’re telling you that it’s going to be substantially less than that going forward, probably in the $4 million to $6 million range is the impact.

So I won’t attempt to disclose what the profitability is at El Dorado except to tell you that it’s generally profitable and as Barry has told you, there’s been challenge behind cost of ammonia, so it’s not as profitable as Pryor and Cherokee. However, it is profitable and it is being impacted by the May 15th event.

Joe Mondillo - Sidoti & Company

Okay.

Barry Golsen

I’d like to add one thing to that -- add one thing that we’ll improve it on a going forward basis even before we replace the nitric acid capacity out in 2015, is when we get that nitric acid plant up and running during the fourth quarter and we won’t have to, I mean, the sulfuric acid…

Jack Golsen

Sulfuric acid.

Barry Golsen

… excuse me, and we won’t be buying and reselling sulfuric acid.

Jack Golsen

And that’s the reason of drop from the $8 million to $9 million range to $4 million to $6 million.

Barry Golsen

Yeah. Double impact. So if you are going to see some improvement in the fourth quarter.

Joe Mondillo - Sidoti & Company

Okay. And I guess, in terms of the $9 million, are there any random costs associated with that or is that just the lost production and sort of the leverage on that lost production?

Jack Golsen

Primarily, the lost overhead absorption and the loss margin. Now keep in mind, Joe, we will recover that in subsequent periods as the business interruption claim is collected. So that will be the -- business interruption claims will be recorded as a reduction cost of sales in the quarter that they are received/approved. And once -- I think once the first installment is received, we should receive an installment every quarter thereafter, so we’ll tend to watch itself out at some point.

Joe Mondillo - Sidoti & Company

Okay. And then I guess sort of remaining on a sort of a similar theme, but moving to Cherokee. Could you talk about or just give a little more color in terms of, you sort of talked that the downtime, the turnaround, seasonal turnaround was little more than usual or more than last year. Could you talk about that and sort of what the profits look like on a year-over-year basis at that plant?

Jack Golsen

Well, Cherokee had a turnaround in the third quarter last year. They had one this year. This one was about eight days longer. So it impacted the absorption in the profitability by certain amount. But Cherokee didn’t have any unusual problems. They just had more work to do this time.

Joe Mondillo - Sidoti & Company

So on a year-over-year comparison, are we seeing any benefit on the pricing side and then maybe offset by the longer turnaround or was it down year-over-year? Just trying to get an idea, because certainly it seems like that El Dorado and Cherokee is where at least in terms of my expectations came a little under expectations?

Jack Golsen

Let me take that. Well, I’m not sure what the question was except that…

Joe Mondillo - Sidoti & Company

I guess I’m just trying to determine, was the profits at Cherokee down on a year-over-year basis?

Jack Golsen

They were somewhat lower by about one week. If they were down three weeks and last year they have been more like closer to four weeks this year.

Joe Mondillo - Sidoti & Company

Okay. And then last question, I’ll jump back in queue. The industrial and mining sales compared to the second quarter on a sequential basis, it seem like they’ve jumped up pretty good. Could you just give some color on that side of the business and sort of what you’re seeing?

Jack Golsen

I think Barry covered that and the majority of the -- we did have some higher cost. But I think also, mostly the higher cost of ammonia was pass through in the pricing.

Barry Golsen

Remember most of that business is done on a cost slot basis, so and it’s usually a certain amount hard time that gets added not a percent. So that’s somewhat counter intuitive part of our business, because even though the tons can increase, and, excuse me, not the tons, the volume can -- the sales dollars can increase due to increased raw material costs, you don’t necessarily see an increase profit.

Joe Mondillo - Sidoti & Company

Okay. Okay. Thanks.

Barry Golsen

On the same tonnage.

Jack Golsen

On the same tonnage, you don’t see an increase in profit.

Joe Mondillo - Sidoti & Company

Thank you, Jack.

Operator

Thank you. The next question is from Dan Mannes of Avondale Partners. Please go ahead.

Dan Mannes - Avondale Partners

Good afternoon everyone.

Jack Golsen

Hi Dan.

Dan Mannes - Avondale Partners

I’ve got a couple questions on Pryor then I’ll probably hop back in queue then I have some more on another topics.

Jack Golsen

Okay.

Dan Mannes - Avondale Partners

So first on Pryor, just based on your dialogue, it doesn’t sound like there was an official turnaround in either Q3 or four, or am I mistaken? Like any plan turnaround?

Jack Golsen

That’s correct. I think we’re going to push the turnaround into the first few weeks of January.

Dan Mannes - Avondale Partners

And how long do you expect that to be a normal, two, three weeks for planning purposes?

Barry Golsen

I think that turnaround will probably be -- this is Barry s peaking.

Dan Mannes - Avondale Partners

Yeah.

Barry Golsen

A little bit longer than usual. Normally you would think of turnaround as being two to three weeks of the plant like that. But it is probably going to be three, maybe four weeks or a month and the reason is we have more equipment to install. As I just to refresh your memory, we’ve got that new ammonia converter which is going in.

We’ve got some cooling equipment that’s going in. We’re doing a few other things that were too small to mention, but they take time to do.

The other thing we are little bit concerned about is January is a tough time of the year. You can get some whether that -- you could see a week push out on it. So, we think that it’s prudent to give ourselves some slack from a timing standpoint when we are thinking about a turnaround in January.

Dan Mannes - Avondale Partners

Okay. No. That makes a lot of sense.

Barry Golsen

Okay.

Dan Mannes - Avondale Partners

In terms of the current output, you said you had 80% of the 600 ton per day target, what is change in the last few weeks? Are you able to kind of patch it just as write it out and fill the new ammonia converters online or what change that enabled that?

Tony Shelby

Dan, the problem is you cannot see inside of this converter. And as Jack and Barry mention, there is a series of conversion steps through that and you can’t see it, but sometimes it’s clear. There’s more gas being pushed through then at other times.

So at this point, probably the third quarter was a very low point in the year and is improved back to a little bit higher level.

Dan Mannes - Avondale Partners

But it sounds like just given that up and down nature, it might make sense for us to be a little bit conservative on the output. There is no guarantee that it’s going to be 80% for the whole quarter?

Tony Shelby

That is true.

Dan Mannes - Avondale Partners

Is that…

Tony Shelby

We feel like it stabilized at this point but November December there is still plenty of time left.

Jack Golsen

This is why we are still planning to proceed with the change-up, because we have seen sometimes where the current ammonia converter has produced at very high, actually on a day-to-day basis at or near-targeted rates. And we’ve seen -- but it’s been somewhat unreliable and we seen dates when times we couldn’t. And this is what we explained to you on the last conference call that it has been unreliable and inconsistent.

So, the reason for the change-up is to put a single piece of equipment that’s more current in there that we believe will be significantly more reliable than the six smaller older converters that are there now.

Barry Golsen

There is another big factor that affects every one of these plants all around the country, and that’s the temperature. We have had a hellacious summer’s and you cannot get production in the summer unless you add cooling, which is what we’re doing in this turnaround.

We’re adding a big giant cooling unit to try to get the same kind of production during the summer that we get during the cooler weather. Hopefully, we will be successful.

Dan Mannes - Avondale Partners

Okay. Two last quick on the Pryor then I’ll jump back in queue. As it relates to the third quarter and the 14 million deviation from plan, anyway you can break that down between the loss production margin side and loss absorption in one-time costs? That would kind of help me out because that’s where I’m having some trouble reconciling this quarter?

Tony Shelby

Are you referring to Pryor now?

Dan Mannes - Avondale Partners

Yeah. I’m still on Pryor, sorry.

Jack Golsen

The only fact I can tell you, Dan is what we’ve always talked about before this conference calls is that there is a conversion of something in the range of 30 mcf of gas on a ton of ammonia.

Dan Mannes - Avondale Partners

Yeah.

Jack Golsen

So if the – and the selling price of ammonia and UAN are, I would say historically high, but they are very high right now. So you’ve got a big script. So, if our production level is less than 600 tons for every ton you are below you are losing the spread on one ton of ammonia and so, you’ve got 31 mcf of gas say at $3.50. And you’ve got $100 more or less to convert the ton of cost to convert.

So you’ve got 30 times three. You got a couple of $100 cost in a ton of ammonia. So you can sort of figure that out for yourself, the spread on one ton versus number of tons that were down. That’s about as much guidance as I can give you.

Barry Golsen

Yeah. It’s just talk because we don’t know the exact tons produced and that’s why I’m wondering if there was…

Tony Shelby

I think we disclosed what level we were producing in the third quarter. I have to double check that but I think we told at what level, what percent of 600 tons per day we were producing.

Dan Mannes - Avondale Partners

Yeah.

Jack Golsen

We said about 50%.

Dan Mannes - Avondale Partners

About 50%.

Barry Golsen

So, if you look at it just in gross terms, they’re kind of illustrative of what Tony said. If you point out, if your ideal rate is at 600 tons per day, the gas costs are still about the same, but the overhead cost per ton would double at 300 tons per day.

Dan Mannes - Avondale Partners

Yeah.

Barry Golsen

Now that was offset to a certain extent. I think -- now I think I’ve said enough.

Dan Mannes - Avondale Partners

You did mention -- in your discussion you mentioned that we had about 15,000 tons of firm sales commitments at a price below market so that offset some of that.

Barry Golsen

Yeah.

Dan Mannes - Avondale Partners

Okay. And then, the last one on Pryor and then I’ll jump back, the 60,000 ton expansion, it sounds like that’s underway. Can you maybe give us any color on what you’ve encountered during the start-up and a reasonable expectation when that comes up, or given your experience with the balance of Pryor you may want to lay-off giving expectations along that line?

Barry Golsen

We are not going to -- we said before that we don’t want to give a definite date as to when they will be in coal production. Okay. But they are in limited production, now. So what goes on during limited production is that you try them on, you’ve done everything you think you need to do to get them in shape, you turn them on and run them and then you encounter some mechanical issues and at the same time you are -- these plants have not been run in over 10 years maybe longer. And so you’ve got operators on these plants that are not used to the plants.

And so they have to be trained and they may have to get used to the equipment and the idiosyncrasies and characteristics of equipment, some of the initial blips that you have or when an operator makes a mistake, and hopefully he makes it once and he learns from that that.

But this is what happens when you’ve got an old piece of equipment and you don’t have an operator that is an experienced operator that has been running it. We experienced on that particular piece of equipment.

Dan Mannes - Avondale Partners

All right. I hear you. Let me hop back in queue and let someone else have a shot.

Operator

(Operator Instructions) Our next question is from Keith Maher of Singular Research. Please go ahead.

Keith Maher - Singular Research

Good afternoon, gentlemen. I have another question about Pryor as well. When you complete these improvements that you have planned for early next year, were you talking about raising your target to 700 tons of ammonia per day? Is that -- I think we talked about that previously.

Tony Shelby

Yeah. You’re right.

Keith Maher - Singular Research

Okay. Just wanted to clarify. Also on the El Dorado expansion or the potential additional got a very new line at the El Dorado Facility. Well I think you said this but I was just curious, when would you’ll be making that decision, and also what is kind of the gating factor in getting that -- if you still decide to go ahead and do it.

I mean what is it that -- I don’t know if I’m -- I should say it takes a long time but is it a permitting processes or is it lead times and equipments which I can’t understand how long it takes to get that facility up and running?

Jack Golsen

We’re in the decision-making process now. We’re still gathering information that’s required to make that decision. And we don’t want to put a specific timeframe on when we’re going to make that decision at this time. Okay. But we’re working on it and we are working on it hard.

As far as the gate -- there are several factors. You do have the permitting process. You’ve got the ordering certain equipment and lead times that are involved and excuse me -- and some engineering work that has to be done as well.

So there is -- and then you’ve got the construction process itself when it’s finally -- when you finally start the construction process. So those are the four basic things that have to happen.

Keith Maher - Singular Research

Okay. That’s helpful. Also, since you didn’t mention it, the diesel -- business is there any color you could give there or is it just too small at this point to really make a big difference?

Jack Golsen

Too small to talk about.

Keith Maher - Singular Research

Okay.

Jack Golsen

We continue to make it sell everything we make.

Keith Maher - Singular Research

Okay.

Jack Golsen

We have contract with and they take everything we make.

Keith Maher - Singular Research

Okay. And maybe one final question on the Climate Control business. Are you doing anything like specifically advertising or any programs that help go out and kind of promote these green features of the products?

Barry Golsen

No. How well, we do and it depends on which product. The program is different for the commercial side of our business which is roughly 80% of our business than it is for the residential which is about, 20% of the business.

So in the commercial side of the business, remember that business - that business is sold, it’s a business-to-business type of situation. You’re not dealing with consumers per se. So, the food chain on that is if someone decides to build the bidding or renovate a building and they’ll hire an engineering firm typically to do the design of the mechanical equipment. And then ultimately they will pick contractor and the contractor will chose subcontractors.

So what we do is, we get involved in the early stages with owners, with engineers, to try to develop a preference for our equipment. We have a very extensive network of independent manufacturer’s representatives all over of the country in every major market. They are calling on most if not all of the major design engineering firms plus owners, plus all the contractors in their local market. And they are constantly visiting with them and they are keeping track of all the projects that are going on.

This is very much a hands-on people-to-people, business-to-business type of situation. So our goal is to develop specifications. By that I mean that our product is listed as the basis of the spec in a building that’s designed.

And the alternative to that it’s still in the commercial side of the business, there is a large part of the business that part is not planned but bid. That’s what we refer to and the industry is designed, build, and these are projects that never go out for bid or they very rarely go out for bid.

And that’s where team is formed with the contractor that someone has confidence in engineer and a vendor or group of vendors and they try to work out a project that never goes out to bid everyone feels comfortable as they’re trying to get the most optimum situation, so our arrest, again are working with in the design-to-build type situation.

On the looking out to the residential side of the business, we have -- we go to market that’s a two-step process where we sell our products to distributors that stock and they resell those products to installing contractor dealers. Those would be the type of contractor that will do service on your house or install a new unit when your unit finally fails and can’t be restarted or does an installation and new construction.

So, we have extensive programs with those dealer development programs to incentivize them to push our products. We do some national advertising. We do a lot of regional and local advertising with co-op ad programs with the dealers and the distributors in those markets.

We’re out doing significant training with installers, how to train our products. We do training with drillers how to drill geothermal loops, we have trainers that are out there and train the training programs. In addition to that, we run schools constantly.

We bring people here and we do them out around the country. We’ve had several events this year that we call geothermal where we have a day or two days of drilling examples where they go -- actually out into locations and they do installations where we get a lot of contractors. And they bring customers and distributors that come to those.

We’ve had several of those this year. I know there’s something I’m missing here. We have a website, a consumer website that’s geared to targeting and generating leads. So we have quite an extensive program that goes on constantly on that side of the business.

Keith Maher - Singular Research

Okay. Great. Thanks a lot. I appreciate it.

Jack Golsen

Thank you.

Operator

Thank you. Our next question comes from Wayne Archambo of Monarch Partners. Please go ahead.

Wayne Archambo - Monarch Partners

Yeah. Thank you. Good afternoon. In light of the multiples of four -- it’s a publicly traded nitrogen MLPs such as Terra, CVR and Rentech. Are you actively exploring the possibility of placing your Pryor Facility into an MLP structure?

And in such a structure, given where there is potential peer group is trading, would it be unreasonable to think it alone could be varied at the level equal to the current stock price today.

Barry Golsen

Excuse me, I could not hear your name, sir, because they said it so fast. Whom am I speaking to?

Wayne Archambo - Monarch Partners

Yeah. This is Wayne Archambo, Monarch Partners, a current institutional shareholder of your stock.

Barry Golsen

Okay. Thank you very much, Wayne. We have looked at and continue to look at MLPs or the structure of MLPs and the companies that have put part for all of their holdings into MLPs. At this time, we have not made a decision to do an MLP, we have no plans at this time to do an MLP.

Wayne Archambo - Monarch Partners

Could you just explore with us why you wouldn’t explore that if it has significant…

Tony Shelby

Well, there’s a couple of reasons. We said in last conference calls that we think that there are several pros but also several cons to MLPs. We had discussed those on previous conference calls. And we still think the same pros and the same cons hold.

In addition, right now our focus is really on substantial growth in this company and right now by getting into a structure where we would be committed to a distribution is counter to what our needs are in terms of funding growth on a going forward basis.

Barry Golsen

I mean I’ll just pass on, obviously if you’ve discussed this and looked at this we think there is significant value to be unlocked. And at the end of the day, it’s your job as well as the Board of Directors job to enhance shareholder value and we think this structure should be considered. And I don’t know to what extent you looked into this, but we think it has significant value -- it’s a hidden value in your company.

Jack Golsen

Well, Wayne, thank you. We appreciate your input. It will take your opinion under consideration.

Wayne Archambo - Monarch Partners

Thank you.

Operator

Thank you. Our next question is from Gregg Hillman of First Wilshire Securities. Please go ahead.

Gregg Hillman - First Wilshire Securities

Yeah. Good afternoon, gentlemen.

Jack Golsen

Hi, Gregg.

Barry Golsen

Hi, Gregg.

Gregg Hillman - First Wilshire Securities

On that -- the anhydrous ammonia front end that you’re studying for El Dorado.

Barry Golsen

Yeah?

Gregg Hillman - First Wilshire Securities

You mentioned the potential cost but what would be the output of that plant in terms of ammonia?

Barry Golsen

We are looking at -- right now the most likely scenario that we are considering is one that produces about 1100 tons per day of ammonia.

Gregg Hillman - First Wilshire Securities

Okay. So that would be…

Jack Golsen

Or you can take that tons 365.

Tony Shelby

330 days.

Jack Golsen

Development yeah.

Tony Shelby

In range of 375 and keep in mind we’ve got the El Dorado play uses about 220,000 tons a year.

Barry Golsen

And we use -- we buy the rest. We are buying…

Gregg Hillman - First Wilshire Securities

Would that plant be more efficient then what you are proposing to do in Pryor with the Kellogg format and the chiller?

Barry Golsen

It would be a more updated plant. It would be more, wouldn’t it be more updated than it is in that plant. I think that conversion factor would probably be slightly better.

Gregg Hillman - First Wilshire Securities

Okay. Thanks very much.

Barry Golsen

Thanks Greg.

Operator

Thank you. Our next question is from Dan Mannes of Avondale Partners. Please go ahead.

Dan Mannes - Avondale Partners

Hey, good afternoon again guys.

Barry Golsen

Hi Dan.

Dan Mannes - Avondale Partners

I figured I’d be the one asking the MLP question, but I reserve the right to ask another one.

Barry Golsen

Okay.

Dan Mannes - Avondale Partners

Now well first, I want to talk about the natural gas purchase. I can’t speak for other people, but it was a bit of a surprise to me, can you maybe give us a little bit of the background of when you started thinking about buying physical gas assets or working interest in gas as a hedge rather than just financial hedges? Because that this was, this is a sort of a new venture at least as I was concerned?

Jack Golsen

Well it is not a new venture. It’s just a new source of gas. We started maybe three or four years ago looking for ways to control the price of gas and keep it from getting out of hand so that our plants would be operated on an economically feasible basis. And we approached many major companies from Exxon to Chesapeake to a lot smaller…

Barry Golsen

Devon.

Jack Golsen

Devon, over the years to have conversations with them about selling us gas directly, so that we wouldn’t be subject to the financial curves and costs that buying forward were carrying with them. Because what they do is they factor in the future costs.

I mean nothing is for nothing. So you can say okay, gas today is $2 or $3 and I want to buy an eight-year supply for $3 because I think it’s going up to $5 or $6. You can’t do that.

You have to -- but you can buy what they -- based on, what they think the price will be over the time period that you are going to use it. And so they think it’s going up to $6 or $8 that’s factored into what you pay.

So, we turned a long time ago to finding our own supply of gas. But we have never been successful. We finally found one in the most prolific gas field in the United States today in the Marcellus field, where they’ve drilled the biggest gas wells and they have the biggest reserves of any place else in the United States. And we work without a deal, where our price to buy the gas was $2.40 delivered to the pipe.

Jack Golsen

Approximately.

Tony Shelby

Yeah. And it could be a little less.

Dan Mannes - Avondale Partners

And that’s dependent on the production levels et cetera?

Tony Shelby

What?

Jack Golsen

Yeah.

Tony Shelby

It depending on production levels and we had -- we’ve consulted with the top notch engineering firms, the top notch geologists, top-notch engineers. We’ve had EY go through the economics. We’ve had an outside attorneys look at our deal and we came to the conclusion that this was a good deal for us.

And so, this was the way we bought our gas. Now we are buying it now. We’re just buying it from a different place. And we’re buying it now subject to whatever the gas company wants us to charge us and whatever the prices are out there and this fix is our cost. That’s only on 20% of our usage.

Jack Golsen

Today’s usage.

Dan Mannes - Avondale Partners

And was this one of a multiple of gas production assets that you looked at potentially participating in or was this a standalone one that for whatever reason you found and met your needs?

Jack Golsen

No. I’ve looked all over. I looked at the Bakken, I’ve looked at Texas gas, I’ve looked at Marcellus gas, but generally it’s not available. Deal like this is not available. Companies like Procter & Gamble are in the deal along with us. They are one of the working capital -- working interest always with us. This is a good deal and so we took it.

Dan Mannes - Avondale Partners

Okay. And the last thing is this is 20% of your ballpark and I realize that won’t be identical, but 20% of your current usage.

Jack Golsen

Yeah.

Dan Mannes - Avondale Partners

Is this where you want to be or would you look actually at more assets like this?

Jack Golsen

Well, we probably would look at more assets like this. But something like this requires upfront cash, the same as a futures deals -- if you did it financial deals requires upfront cash.

So, we just have to look at it in the future. We want to see how this works out. And as I need to go up, we might do some more. It depends on what the situation is, what the price of gas is in the future.

When we look at this is, we discounted this present value 10% on the engineering reports plus we took additional haircuts on each category of gas that we were buying, some up to 50%, some at 30%, some at 10%, after the 10% present value discount. So, we bought it right and I think it’s a good deal for the company.

Dan Mannes - Avondale Partners

Okay. Quickly on the potential El Dorado ammonia addition, have you -- are you considering that in the context of sort of the number of announced fertilizer plants that would come online in the similar timeframe?

Barry Golsen

Yeah. It’s Barry. Jack mentioned to you that a substantial amount of that production we would be using internally. So, our choice is to buy gas or continue to buy gas, excuse me, ammonia on the market or to manufacture it ourselves.

Jack Golsen

We internally can use about 200 -- between 270 and 300 tons of ammonia a year, thousand a year, between 280,000 and 300,000 tons of ammonia a year.

Barry Golsen

And yeah, Dan, we are very aware of all these announcements. We happen to be in a position where we can have a real safety that, because we had the internal consumption of ammonia and we’re happen to be strategically located being on the pipeline. So, we think it’s a very safe investment for us. And there is an awful lot of additional capacity coming and we are aware of that.

Dan Mannes - Avondale Partners

Okay. No. I was just wondering in the context of both the availability for equipment, because most of them will be building ammonia plants as well. And then also you will be displacing some existing ammonia, which would then hit the market and maybe depress prices elsewhere. Again in the context of all these plants that have been proposed many of which probably won’t get built?

Jack Golsen

The effect on ammonia prices long-term is anybody’s guess. First thing it will happen probably is it will offset a lot of the imports that are coming in. And as long as North America is a low cost producer that will have lone effect. But that’s you’re talking about 2015, 2016, we can see that far ahead right now.

Barry Golsen

What we can see happening if all these companies would become producers is we’d be exporting ammonia. That’s one thing we can see.

Jack Golsen

As a country.

Barry Golsen

As a country, I’m talking about.

Dan Mannes - Avondale Partners

Okay. One last one and this is my quick one on the MLP. In the consideration of the MLP, because obviously you understand the issue and you at least looked at it whether your going to report or not as we will see. But would for instance both the El Dorado expansion which would then look MLP about not to mention Cherokee in these gas assets, does any of that makes sense in the context of that discussion, is that also part of the consideration?

Barry Golsen

I think the answer is exactly the same as my previous answer to you a quarter ago, which I think I should probably tape record since you’re probably going to be asking me the same question.

Every quarter on a going forward basis, I don’t say that lightly. But the answer is the same. We’re constantly looking at this. We are constantly considering this. We are keeping an open mind about it like everything else.

As Jack said on our last conference call, you always have to be looking at what’s out there and you always have to be willing to change your mind if you think the situation is the best. And our goal in the long run, in the long-term is to do what we think is best for the shareholders. And the key words there are long run.

So, we’re looking out and we’re thinking about things that as a company, we want to do strategically going out and we’re considering those things along with this when we make the decisions we make.

Jack Golsen

It’s never completely out of the table, Dan, but we’re always looking at it.

Dan Mannes - Avondale Partners

Understood. Thanks for the color.

Jack Golsen

Dan, one further found the gas. I’d just like to comment on this. We are not asserting that this is a fixed this $2.30, $2.40 is as a fixed number. It’s based on very-very conservative risk weighted reserve estimates that have been looked at by our numbers. So it will move around some depending on the operating costs and the amount of reserves that are actually there.

So, it’s an estimated amount. But we think it’s a very well thought out and we’ve had a significant due diligence process, where we have calculated this number, which we think is a very conservative number.

Tony Shelby

It’s lower than the current price and it’s substantially lower than what gas is selling for in the curve if you look out a few years on the curve.

Jack Golsen

It’s subject to few variables, quite a few variables.

Tony Shelby

Yeah.

Dan Mannes - Avondale Partners

Understood. Thank you very much.

Jack Golsen

Pessimistically, it’s a dollar less than the market now.

Tony Shelby

Yeah.

Operator

Thank you. Our next question is from Joe Mondillo of Sidoti & Company. Please go ahead.

Joe Mondillo - Sidoti & Company

Hey, guys. I understand this call is getting a little long here. But I just had one follow-up question and I was hoping that you could answer. I was wondering if you could just sort give 30,000 foot, your thoughts on the perspective of where we are at Pryor. Obviously this year has been some hiccups some speed bumps, just trying to get an idea of what your guys thoughts are?

How close are we to being a little bit more consistent with production and sort of your expectations with -- can this maybe be one final thing that we are going through early next year and then we can take advantage of the strong Ag markets just trying to get a bigger picture of your thoughts?

Jack Golsen

Okay. Let me, I got you to just your question, Joe. Let me give you our perspective. As we said before and for callers that for people that are listening who have not been on previous calls or are new to this story. We acquired this plant now about 13 years ago more or less and it’s that idle for 10 years. And we did not have any operating history on this.

So, when we started to renovate it. We brought in some outside experts. We used our own engineers and we surveyed it. And short of tearing every piece of equipment down and dismantling it and putting it back together, which is not feasible. We made all the repairs that we thought were probably required before we started the plant.

But you never know when you start a plant like this that’s been gone for so long. In addition to that, we had the higher there is approximately -- about 100 people at that location, 140 people at that location now. And we had three or four people there before we started.

So we had to higher end and some of those were experienced operators and some of those had to be trained. So over -- we now have two years of operating history under our belts.

We started and we finally got into sustain production in the third quarter -- in the fourth quarter of 2010 and here we are starting the fourth quarter of 2012. So, despite the fact that before we ran it, we thought that we had probably coverage most items that we could detect without a full complete dismantling like I said. We discover there are several problems and we -- I’m not going to recap those for you now.

But we’ve had several things that have made the plant pick up, all the way to shut it down. And as we have -- as we’ve encountered those problems we’ve gone in and we’ve done either replaced or significantly repaired most of the major the equipment in the plant.

We think after two years of operating it at this point, that we have probably uncovered most of the major issues in the plant. Now, we can’t give you any guarantees on a going forward basis. But we think that we have. In addition to that, we’ve now got a workforce there that’s got two years of history.

Also on a going forward basis, one of the things that we’re doing is we’re in the process of installing a more updated control system at this plant. Now, this is not that something that happens instantaneously, but it is over the next two to three years we will be replacing an old type control system with a new up-to-date, state-of-the-art control system.

So, between all of the replacements that we made of parts and change outs and they just now running it for few years, now having a much more experienced, workforce there of operators and engineers who have learned the idiosyncrasies of this plant. And with the improvement that will go forward even more with the control systems. And particularly with the change that we are making in the first quarter, we think and we believe that this plant will be more reliable going forward than it has been looking backwards.

Barry Golsen

It has to. I want to add a little bit to that. We originally acquired this plant. It was closed down the banks had it and we didn’t want somebody else to buy it and start producing product. Because the prior owner was a price cutter and he would produce product and take it down into Arkansas, Texas, Oklahoma and Louisiana and cut the price ridiculously.

And he wouldn’t listen to -- he had no idea what is costs were and he went bust out. We were prayed that somebody else would get this plant and do the same thing, because it’s very tempting. If you can generate the volumes, take any price you can get it. So, our intent was not to have that plant ever operate again.

So we sat down, we tried to sell it overseas. And we had four or five deals, but none of them materialized, China to Russia to Romania to a couple other countries to the Middle East. And meanwhile, the market situation changed, and we took a look at it and said, we think we can make this into a business.

And so, we took the shot. And we did exactly what Barry said, we called in experts, top engineering firms, everybody looked it over. We showed them what we plan to do. They thought that that was adequate at the time. And so we turned on the plants and we made those changes and as we have gone, we’ve corrected the problems that have arisen.

Like some of them have to do with pipe within the ground that rusted, for example, nobody knew it, nobody could tell. It just did and it caused the problem. That’s the typical kind of thing that happened. And so this plant, our equity in this plant -- this plant has paid for itself at least two times over in two years.

So, that’s the way we look at it. And we think if we can get it really operating then it will be probably the most profitable plant in the United States barring the new plants that have been announced for billions of dollars.

Jack Golsen

And in our return on investment standpoint.

Barry Golsen

Yeah. From a return on investment standpoint.

Tony Shelby

We are not there, yeah.

Jack Golsen

Yeah.

Barry Golsen

So, I hope that gave you little more color on it. I think we are feeling good about where we will be after the end of the first quarter when we get this complete.

Joe Mondillo - Sidoti & Company

Great. Thank you very much for that explanation.

Jack Golsen

Okay.

Joe Mondillo - Sidoti & Company

Just lastly, could I get the prior sales for the third quarter?

Tony Shelby

I don’t think we break that we don’t break that out, Joe.

Joe Mondillo - Sidoti & Company

You give out the profitability of the plant?

Tony Shelby

No. We did give the -- we said what the operating income was which was I can’t remember exactly what it was it’s in the…

Joe Mondillo - Sidoti & Company

Yeah. It was $5.7 million I was just wondering, if I could get the sales on what…

Tony Shelby

I don’t think we disclosed that.

Barry Golsen

You mean on Pryor?

Tony Shelby

Yeah. We don’t disclose specific plant by plant sales. No.

Jack Golsen

I can tell you that.

Joe Mondillo - Sidoti & Company

It’s just such a big part of the story and a big part of earnings.

Barry Golsen

We’re not going to set that precedent now. Because our plan is at some point in time, when we get this plant to the point that it’s reliable. It will just blend in with the other plants as far as reporting their differences in segments.

Tony Shelby

Yeah. Yeah.

Jack Golsen

And keep in mind, while we are -- while, the ammonia production was limited. We were -- we really couldn’t go out very far as far as sales commitments in the third quarter.

Joe Mondillo - Sidoti & Company

Okay.

Barry Golsen

Some days you’re selling UAN, some days you’re selling ammonia.

Joe Mondillo - Sidoti & Company

Okay. All right. Thanks, guys.

Jack Golsen

Thanks, Joe.

Operator

Thank you. We have no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Jack Golsen

We just want to thank you for turning in. And I’d like to turn the call over to Carol Oden, who has some very important comments that she would like to make for you about the statements we’ve made today. So, Carol, would you please start.

Carol Oden

I will do that. This presentation and the comments being made today contain certain forward-looking statements. All statements other than statements of historical facts are forward-looking statements within the meaning of the federal securities laws. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate and similar statements of a future or forward-looking statement nature, identify forward-looking statements, including but not limited to all statements about or any references to the Architectural Billings Index or any McGraw Hill forecast including those pertaining to commercial, institutional and residential building increases or industry growth.

The forward-looking statements include, but are not limited to the following statements. We don’t expect underwriters to receive the first installment of business interruption insurance until the first quarter of 2013. We expect that the $38 million to $40 million investments in further development of the natural gas working interest recently purchased will be funded by the cash generated by this investment.

And anhydrous ammonia production implant is actually, El Dorado Facility will cost in the range of $250 million to $300 million and required 24 to 36 months to complete. We expect to finance plans capital expenditures with the new long-term loan at a fixed rate over LIBOR.

The single large scale ammonia converters replacing the six small converters, the catalyst replacement and the addition of the new teller will allow significantly increase ammonia asset in 2013 at our Pryor Oklahoma Facility. Our sulfuric acid plan is expected to come back online this year. We continue to develop new products, which we believe will have a positive impact on future results.

The price of natural gas is expected to increase in the next few years. The indicators for our agricultural products have most favorable, planting its levels are expected to be high to both corn and wheat. We expect continued strong demand for fertilizers. We expect to begin production at the two smaller ammonia plants at our Pryor Oklahoma Facility by the end of the year.

You should not rely on 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, 2011 and Forms 10-Q for the periods ending March 31, 2012, June 30, 2012 and September 30, 2012. We undertake no duty to update the information contained in this conference call.

The term EBITDA is used in this presentation as 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 measurement. We will post on our website reconciliation to GAAP of any EBITDA numbers discussed during this conference call. Thank you for listening today.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And have a wonderful day.

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