LSB Industries Inc (LXU) 2011 Q2 法說會逐字稿

Welcome to the LSB Industries Incorporated second quarter 2011 conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Carol Oden. Thank you, Ms. Oden. You may begin.

Good afternoon. We would like to welcome you to the LSB Industries, Inc., 2011 second quarter conference call. Today LSB's Management participants are Jack Golsen, our 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 Web site 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, August 8, 2011, and, therefore, you are advised that time-sensitive information may no longer be accurate at 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 we posted on our Web site at www.LSB-OKC.com on the Webcast section of Investor Information tab. Mr. Golsen's presentation starts on page 3 of the PowerPoint. Now, I will turn this conference call over to Mr. Jack Golsen.

Thank you. Good afternoon. Before I make any comments today, I would like to issue a general caveat to all those that are listening. At this time, we cannot accurately predict the effect of the recent S&P downgrade and subsequent market turmoil will have on the economy as a whole on the markets we serve specifically.

All of the comments we will make today assume some return to normalcy in the near term. Of course, if that does not occur, we reserve the right to reconsider our ideas about the future as it relates to our markets.

Today we released the results of our 2011 second quarter. This was the most profitable quarter in our history and follows very strong fourth [quarters] of 2010 and first quarter 2011. As a result, we further strengthened our financial position and liquidity.

Approximately two-thirds of the earnings improvement this quarter was due to production at our Pryor, Oklahoma Chemical plant. Pryor Chemical has and should continue to contribute earnings to the future.

In addition the contribution of Pryor, both the rest of our Chemical business and our Climate Control Business had meaningful improvement and results compared to the second of 2010. At this time, the outlook for both of our businesses is positive, although we have moderated our near-term expectations for growth in our Climate Control Business.

The Climate Control Business outlook is based on recent construction industry forecast downgrades, general softness and consumer spending and increased material costs. The Climate Control Business performed well during the second quarter, but new orders were lower than the same period in 2010, and lower than the first quarter of 2011.

Despite the recent softness in new construction, particularly single-family residential, we expect overall sales of our HVAC products to increase this year. Although there is still uncertainty about what is ahead for the economy, we remain optimistic about the future of our Climate Control Business over the intermediate and long term, as we continue to emphasize the sale of more efficient green products. Our manufacturing facilities are equipped to handle a significant increase in volume.

The Chemical business outlook is based on supply-demand factors for nitrogen fertilizers in the agricultural sector and favorable indicators for the industrial mining markets we serve. Our Chemical business product demand and pricing have been good.

Agricultural sales got off to a slow start in the first quarter because of the extreme weather, but improved dramatically during the second quarter. Despite an interruption in Pryor's production in June, Pryor performed well during the second quarter.

The recent maintenance turnaround at Pryor was completed successfully, and we are continuing to work on expansion of Pryor's capacity. We expect to add a nitric acid plant, which has been permitted, and two small ammonia plants, if we receive permits as expected.

Finally, I would like to advise you that regarding the recent decline of our share price, we know of no corporate developments, fundamental to our business that would account for the recent decline in our stock price.

Thank you, and I'm going to turn this call over to Tony, who will discuss our recent financial results and balance sheet highlights in more detail, and Barry will discuss the Climate Control and Chemical business. Tony?

Thanks, Jack. Our comparative consolidated results for the second quarter are summarized on page 4 of the PowerPoint presentation.

In our earnings announcement for the second quarter of 2011, we reported fully diluted earnings per share of $1.22 compared to $0.27 for the second quarter of last year on a sales increase of $67 million, or 40%.

Second quarter net sales were $236 million. The $67 million increase in consolidated sales reflects an increase of $17 million by our Climate Control Business and a $49 million increase by our Chemical business.

Consolidated operating income for the quarter was $48 million. Chemical operating income increased $34 million, and Climate Control increased $2 million. EBITDA was $53 million.

Although we won't spend a lot of time on our first six months' results, on page 4 you can see that for the first half, sales were $413 million, a 38% increase. Operating income increased from $17 million to $82 million. Net income increased from $8 million to $50 million, and diluted earnings per share increased from $0.35 to $2.12.

Turning to our second quarter Business segment discussion, which begins on page 5, note that Climate Control's second quarter sales increased $17 million, or 29%. Their gross profit increased $4.6 million and their operating income increased $2 million.

The gross margin was 30.3% compared to 31.5% during the second quarter of '10. The reduction in gross margin as a percent of sales was primarily due to higher material costs and changes in product sales mix.

Turning to Chemical's second quarter results on page 6, sales were $156 million, an increase of $49 million, or 46%. The increase was across all major markets with agriculture up $31 million. Industrial sales up $12 million, and mining up $7 million. The most significant increase with agricultural, which included sales from Pryor facility of $33 million compared to $5.7 million in the second quarter of last year, a $28 million increase.

To recap the Pryor results, please turn to page 7. Pryor reached a sustained level of ammonia production in the fourth quarter of 2010. Market demand for ammonia was strong, supplies were tight, and prices were rising, so Pryor sold mostly ammonia in the fourth quarter and reported strong earnings.

During the first quarter of '11, Pryor reached sustained production of UAN and again produced strong earnings. During the second quarter of 2011, Pryor's operating income increased to $23 million. By comparison, Pryor reported operating loss of $2 million for the second quarter of 2010.

It should be noted that there are two unusual items that impacted Pryor's results during the second quarter of 2011. Operating income for the quarter included an $8.6 million business interruption insurance recovery relating to the damage in the ammonia plant that occurred at Pryor in June of 2010. Offsetting that was a negative effect on Pryor's operating income of an estimated $4 million due to unplanned downtime in June 2011 for maintenance and repairs resulting in loss of production and sales.

With that as background, Chemical's operating income for the second quarter of 2011 increased $34 million due in large part to the $25 million improvement in Pryor's operating results as well as a significant increase in gross profit on nitrogen fertilizer produced at our Cherokee facility and increased gross profit from industrial and mining product sales.

Before moving on, I'd like to remind listeners that typically our planned major maintenance turnarounds are scheduled during the third quarter when we have passed our major fertilizer production season. We just completed a longer than anticipated 30-day turnaround at the Pryor facility at a cost of $1.5 million, not including the effect on earnings due to the lack of production during to the 30-day turnaround.

Current estimates are that during third quarter, total turnaround costs, including Pryor, will approximate $4.5 million to $5.5 million, not including loss absorption while maintenance is underway. In addition we have planned turnaround costs for approximately $1.5 million during the fourth quarter of '11.

Returning to LSB's consolidated results, the combined state and federal tax provision, effective income tax rate for the quarter was approximately 38%. We have addressed our results of operations for the second quarter of 2011 in comparison to the same period of last year in much greater detail in the MDNA of the 10-Q which we filed earlier today, and we suggest that you review those disclosures and discussions for additional analysis.

Turning to our balance sheet, cash flow and capital resources, during the second quarter 2011, we had total capital expenditures of $13 million. We were planning additional capital spending in 2011 of $36 million, including $31 million at Chemical and $5 million at Climate Control.

In light of the present economic developments, we are reevaluating this. Of course all capital spending is subject to a third justification process before the final investment season is made.

For the first six months, cash flow provided by operations was $41 million including a seasonal increase in accounts receivable of $28 million. After investing in financing activities, including capital expenditures and other items, but excluding long-term borrowing and short-term investments, the positive cash flow for the first half was $14 million.

As summarized on page 8, considering our cash on hand of $116 million, and borrowing availability of the working capital revolver, we have significant liquidity available to grow the businesses and take advantage of any strategic acquisitions or expansions that might fit into our two business segments.

As noted on page 8 at the close of the second quarter, our long-term debt, including the current portion, was $87 million, and stockholder's equity was $256 million. We continue to believe that we should maintain a strong cash position and looked ahead at the $76 million that was due to material in 2012 and opted to amend and restate the term loan agreement during March of 2011.

At June 30, 2011, the loan balance was $74 million. All but $2.5 million of the 2007 convertible debentures were converted during March of 2011. In July, another $2 million of these debentures were converted into common stock, which reduced long-term debt by $2 million. Only $500,000 of these debentures remain outstanding to date.

Now we'll turn the call over to Barry to discuss the market drivers for both businesses, which account for the improved operating results in 2011 and our outlook for our Chemical and Climate Control businesses.

Thanks, Tony. Since Tony covered the financial results, I'm going to focus on our sales activity, product backlogs that were pertinent and market drivers as we see them. I'll also review upcoming key initiatives and our strategy for each business at a top level.

To start, turn to page 9 in the presentation which shows our sales mix by the markets we served for the first 6 months of 2011. Chemical products were a higher percentage of our total sales than in the recent past. The factors that caused that shift were increased volume and sales prices of our products in our Chemicals business and the addition of meaningful revenues from Pryor Chemical.

We expect that the overall mix will continue to tilt toward chemical in 2011 with a full year of sales activity at Pryor and with the continued higher sales prices for our chemical products. Within our Chemical business, sales of AG products will continue to be a larger percentage than we've had in the past several years as a result of Pryor Chemical's current concentration on AG product sales.

Focusing on our Climate Control business on page 10, you can see sales by major product categories as we report them in our 10-Ks and 10-Qs. Total sales were $77 million, an increase of 29% compared to the second quarter of 2010. Sales of all general product categories were up.

Page 11 shows you new product order sales and backlog by quarter for 2008 through the second quarter of 2011. Looking at 2011 second quarter activity, total new product orders were $64 million, down 10% compared to $72 million in the second quarter of 2010. Commercial and institutional orders were down 2%, while residential orders were down 33%.

I would like to remind listeners that during the second quarter of 2010, our new order level was very high. At $72 million, it was our highest bookings quarter of 2010 and also the highest booking quarter since the third quarter of 2008, up to and including the present quarter.

In fact, 2010 second quarter bookings of residential and commercial products have increased 48% and 26% respectively compared to the second quarter of 2009. Our total new orders for the first half of 2011 were $136 million, up 8% over the first half of 2010.

Having said all that, we are disappointed with the second quarter bookings, which we believe reflect a slower recovery in the commercial sector than previously anticipated and weakness in the residential markets we serve. I will discuss the market outlook in more detail later.

On a bright note our new orders in July were approximately 10% ahead of July in 2010. Commercial orders were up 10%, and residential geothermal orders were up 8% over July of last year.

Back to the second quarter, sales of our commercial products were up 43% while sales of our residential products were down 12% compared to last year's second quarter. Our backlog of product orders at June 30, 2011 was $50 million, approximately 3.5% higher than 1 year earlier, but lower than our first quarter of 2011 backlog.

The next few pages of the PowerPoint deal with the market outlook for construction. Most of the specific data and forecasts shown on these pages comes from McGraw-Hill, which is considered to be one of the best construction forecasting services available.

On page 12, there's a graph that shows McGraw-Hill's most recent construction forecast for certain commercial and institutional building types. These are the sectors that are the most important to us. They comprised about 55% of our total Climate Control business sales in 2010.

As you can see from the graph, these sectors are all forecast to grow over the next five years. In aggregate, McGraw-Hill is forecasting that they will increase approximately 4% during 2011 and more than double through 2015. If this materializes, it should benefit all of our commercial and institutional product sales. In 2008, before the recession impacted many of these sectors, these same building types comprised 70% of our Climate Control business sales.

In addition to watching construction forecasts by sector, we also tracked the architectural billings index. On page 13 is a graph of the ABI. Following a healthy upturn in the fourth quarter of 2010, the index was approximately level in the first quarter of this year, ending that quarter at 50.5 in March.

However, during the second quarter, the ABI headed into sub-50 territory, ending up at 46.3 in June. An index score of 50 indicates that architectural billings were approximately the same as the previous month. Any score above 50 indicates growth in billings, while any score below 50 indicates a decline in billings.

During 2010, 25% of our Climate Control business sales were geothermal heat pumps used in single-family applications. For the first 6 months of 2011, 19% of our Climate Control business sales were residential geothermal.

Page 14 shows McGraw-Hill's forecast for single-family residential construction starts. In fact, it shows three forecasts starting with the January forecast and progressing up to the current forecast. As you can see, as the outlook for residential construction has deteriorated over the past three quarters, McGraw-Hill has lowered their forecast and currently believes that in 2011, single-family housing starts will actually decline slightly from 2010.

Looking beyond 2011, McGraw-Hill forecasted housing starts will increase from about [420] in 2011 to over a million per year in 2014, and remain at that level through the end of 2015. If this actually occurs, it bodes well for our residential geothermal business. We also expect to see continued positive impact from the 30% federal tax credit that extends through the end of 2016.

One trend we have seen develop during 2010 and 2011 is increased sales of residential geothermal products as replacement units. Pryor to the recession, a majority of our residential geothermal sales were for new construction. However, we have seen this shift with replacement units comprising up to 70% of our residential sales. At this point, we cannot predict what will actually happen in the single-family residential construction market.

While the current McGraw-Hill construction forecast hold? When will the overhang of distressed property decline to the point that it's no longer impacting new construction? When will more home equity loans be available for major home upgrades? When will consumer spending habits rebound? At one point, if at all, will deferred replacement of old air conditioning and heating systems create a surge of demand? We wish we had the answer to all of those questions, but we do not.

One area that should continue to have a positive impact on our Climate Control business is the long-term trend toward green building construction. We discussed this at length during the last few conference calls. Most of our products are particularly well-suited for green construction projects.

Turning to page 15, we've listed our Climate Control business strategies and some key initiatives that are planned for 2011. We'll continue to be a group of niche companies. We'll focus on green products. We'll continue our strong push in the geothermal market. We'll continue to improve all areas of the business to maintain a high level of operational excellence. Finally, we'll look for possible strategic acquisitions that could complement this business.

During 2011, we plan to introduce new products, introduce new online systems to enhance the front-end customer interface of our businesses, and we expect to start production in our dedicated sheller plant during the third quarter.

Turning to our Chemical business, please go to page 16. Total sales in the second quarter were $156 million. As you can see, sales were up in all markets we serve, in total 46% over the second quarter of 2010. The largest increase was agricultural products with sales 61% higher than the 2010 level.

Turn to page 17 for sales of our key agricultural products. During the second quarter, tons shipped of UAN were 122% higher than during the 2010 second quarter, and net sales increased even more as a result of higher sales prices per ton, coming in approximately 250% higher than the 2010 second quarter.

The increase in tons sold was primarily the result of production at Pryor. As for higher selling prices over the last 12 months, UAN prices have increased dramatically. I'll cover that in more detail later.

AN tons shipped were 38% lower than the second quarter of 2010 primarily a result of intermittent production issues. However increased market prices for AN mitigated the impact on our sales, which were 21% lower than 2010. Shipments of Anheuser's ammonia to our agricultural markets increased substantially compared to the same period last year as a result of production at our Pryor facility.

Turning to our industrial and mining products on page 18, both dollar sales and tons shipped of most products were above 2010 levels, reflecting both increased demand and higher selling prices for our industrial and mining products.

Before turning to market trends, I would like to report on the progress of our major plant maintenance turnarounds and focus on Pryor. As Tony mentioned, we just completed the turnaround at Pryor. The plant is back up and running. It's producing ammonia and nitric acid, and it's in the process of restarting the urea plant in UAN production at this time.

We expect to achieve our planned 1,000 tons per day of UAN with the plant in its current configuration. During the last conference call, we also discussed bringing online additional capacity at Pryor. When we obtain all required permits and bring online the additional two plants, we expect additional production will be 60,000 tons per year of ammonia and 66,000 tons per year of nitric acid.

On page 19 are some specific price trends for both the feed stock we use and the key AG products we sale. The cost of natural gas continues to be low. This is benefiting production costs in our Cherokee Alabama and Pryor, Oklahoma facilities. Both of the facilities use natural gas as their primary feed stock. The conventional wisdom is that natural gas will remain low for some time.

On the other hand, the cost of Anheuser's ammonia, the feed stock we use at our El Dorado, Arkansas; and Baytown, Texas, facilities is much higher than it was a year ago. This has increased production costs at those facilities.

Most of the products we produce at Baytown, and most of the industrial and mining products produced at El Dorado are sold on a cost-plus basis, so increased ammonia costs do not impact our profitability on those sales.

However, AG products produced at El Dorado are sold at spot market prices, but we've been fortunate that selling prices of those products have also increased to mitigate the impact of higher raw material costs at El Dorado.

Turning to the products we sell, prices for these key products have increased over the past year due to strong market fundamentals. As you can see on the lower left chart, UAN has increased from the low 200s to the mid 300s. These prices change daily. Ammonia and high density ammonium nitrate have also increased.

Focusing on the outlook for the chemical markets we serve, page 20 lists several indicators for our agricultural products, all of which are favorable. Grain stock-to-use ratios both worldwide and in the US are very low compared to recent past. As a result, planting levels are generally high.

Market prices for corn and wheat have increased over the past year, so farmers have a high incentive to plant and sell more. All of this is creating a high demand for fertilizers and the increased market prices we just discussed.

Finally as I just mentioned, low natural gas prices have reduced the cost to manufacture many of our AG products. North America is currently the low-cost producer of nitrogen fertilizers. The industry consensus is that the positive fundamentals for the AG business in the near or midterm will not change.

As we've always advised you, despite general drivers, weather can have an impact on the fertilizer part of our business. There's currently a severe drought that is affecting some of our mid south AG markets, particularly Texas and Oklahoma.

However, we expect to ship products to other freight logical markets and/or divert production capacity to other products. We're optimistic about our AG business.

Please turn to page 21. Our industrial business is primarily sold to large customers pursuant to contractual cost plus and/or minimum take arrangements. Most of our customers have indicated to us that they expect industrial demand to increase.

The two pie charts on this page indicate a shift that has occurred in our sales mix from the full year 2010 to the first half of 2011, primarily as a result of production at Pryor. A very significant part of our business continues to be industrial and mining.

Page 22 contains some market indicators for this area of the business. All of these indicators forecast growth for the next few years, even though about 69% of our industrial sales during 2010 were pursuant to cost-plus or minimum-take type agreements. In the long run it's better for us when our customers' businesses are growing and prospering.

On page 23 we've listed our Chemical's business strategies and some of our key initiatives for 2011. In addition to operational excellence, safety and environmental responsibility, we will continue to expand our Industrial business by adding new customers and perhaps new products. We will also continue to enhance our agricultural distribution channel.

This year, we plan to boost the ammonia production capacity of Pryor. We will also expand nitric acid and ammonia production at Pryor. We also have several capital projects on the drawing board.

Before opening this up for questions, I'd like to mention that Tony and I will be presenting at the Canaccord Genuity Growth Conference in Boston this Wednesday, August 10. We hope to see some of you at that event. Operator, you can poll for questions now, please.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment while we poll for questions. Thank you. Our first question comes from the line of Eric Stein with Northland Capital Markets. Please proceed with your question.

Hi, everyone. Nice quarter. Just wondering if we could touch on Pryor. Helpful to talk about that the turnaround is completed and that you're on your way to your goal of 1,000 tons per day.

Can you just put that in context of the levels that you saw in April and May, to give us an idea?

We were producing UAN at the rate of 800 million in April and May.

Okay. And do you think, is that 1,000 per day, is that something we should think of as being a fairly near-term even?

Yes.

And just shifting to the channel. It sounds like inventories are clearly tight. Any thoughts on -- and I know it's tough to predict -- but thoughts on when that might start to get filled a little bit? And then, in the context of that, how do you view whether that's a third or fourth quarter event?

I'm not sure I understand the question.

We're just curious. Do you think that third quarter is helped by the channel being filled a little bit with people deciding to buy then or possibly waiting until the 4th?

Eric, there's still a shortage out there. Most of the channels are empty.

Yes, I think -- okay.

Most of the channels are empty. There's still a shortage of UAN and ammonia.

Okay. I'm just trying to get a sense of trying to balance, just from a high level as far as modeling. It's third quarter, you're going to have the turnarounds, and just trying to think about what the fourth quarter will maybe look like compared to the third.

In talking to our AG distribution people, our salespeople, they are telling us that the channel is empty or relatively empty, almost completely empty, and that they expect imminently to see the channels start to fill, but we're not projecting when that will occur, whether it's going to be in the third quarter or the fourth quarter. It's hard for us to tell.

And further, we've got a very significant percent of our capacity sold on [per-sales] commitments for the third and fourth quarters.

Okay. Based on that, should we think about the fourth quarter potentially being better than the third?

We've always taken this posture that we're not going to give you guidance, Eric, so I don't think we're going to really deviate from that at this time.

Okay. Fair enough. Just wanted to get your thoughts.

Okay. And it sounds like we should still think about the industrial and mining. You're still positive about those segments, no change from the view of gradual growth on a sequential basis?

The mining business has contractual minimum. So that's a positive. And on the industrial side, we continue to see very strong demand for our industrial assets and ammonia.

Eric, back-tracking for a minute, we can't forecast sales or results in one quarter versus another in the future. What I can do is remind you that a majority -- most of our turnarounds in the Chemical business do occur in the third quarter. We've discussed that before.

Right.

And so that's a drag on sales to a certain extent and earnings in that quarter.

Right. Okay. Maybe just a last question. You touched on the drought and that you might shift some production to other areas. Is there any way to quantify some of the costs involved there and the impact that can have on the margins?

No way to quantify at this time, because we don't know exactly what that will be. But we've stated before in meetings that one of the benefits that we have of being a multi-product Company is that all of the products that we manufacture in every different stage that we manufacture them in, from the beginning all the way up to the end, are sellable products.

So that gives us flexibility in terms of what we produce, and that's what we're talking about when we say we can divert capacity if we need to. We might not need to. It just depends on what markets are taking products.

And plus, as Barry mentioned in the overview, we do have other freight logical markets for the agricultural grade of ammonium nitrate.

Okay. Maybe just one last question, then I'll jump back into line. Just on the Control side -- (multiple speakers)

Eric, I don't want to cut you off, but I would like to give some of these other guys a chance to ask some questions. We'll give you one more and then we'll move on, okay?

Sure. Just nice to step up there. It sounds like you're confident that you see growth for the remainder of the year. Just trying to square that with the bookings number being down a little bit. Thanks a lot.

So what's the question there exactly?

Is it more of a mix to some more off-the-shelf products, more quick-turn products that lead you to believe that there's some growth in the second half in the context of the backlog coming down?

Talking about climate control?

Well, we do have some visibility of what's in our backlog and when it's going to shift, so we're looking at that, but we're not -- as Jack mentioned, we kind of moderated our near-term outlook for growth, but we do still feel that we're going to see growth in the second half versus last year's second half and versus the first half.

Okay. Thank you very much.

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

Good afternoon, guys. So my first question has to do with the Chemical segment ex-Pryor and in particular the AG part of that business, so ex-Pryor. It looked like compared to last year, it was somewhat flattish.

No. It was up.

Is that ex-Pryor?

Yes, ex-Pryor. (multiple speakers)

The [rest of our] chemical business was up.

In the second -- (multiple speakers)

I'm sorry. Just looking at your AG sales.

Joe, in the second quarter, the ammonia nitrate, agriculture grade of ammonium nitrate, volume was down fairly substantially. It was very [mission] due to some intermittent production problems. But coming out of Cherokee, the UAN tons and dollars were up significantly; and of course, we had -- well, you mentioned the ex-Pryor.

So ex-Pryor, UAN sales were up significantly, and then we had some offset there on the AN side at El Dorado due to the issues that Barry mentioned.

Okay. Let me just address my question this way, then. The operating margin at the Chemical segment ex-Pryor, compared to the first quarter, which I calculated at 22%, it looks like it came in at 10% in the second quarter.

We don't break out operating margin as to the different parts of that business, really, in the Q.

With the information you give in the Q, you can sort of back into it, though. So I was wondering what was going on there.

If you look at gross profit, the Chemical business is 30%, and ex-Pryor, it was 20%, which was probably higher than last year.

Okay. I guess my bigger question is just, compared to the first quarter, pricing of those chemicals has improved about 15% sequentially, and it seemed like quarter to quarter, ex-Pryor, it seemed like the margin at the Chemical segment came down somewhat.

I don't have the sequential gross profit percent in front of me, but the gas prices continues to be flat to lower, and UAN prices continue to improve north of $300.

Okay. I'll take it offline, then.

And, Joe, we'll take a closer look at that, but I think our gross profit percentages in the second quarter were comparable, with the one exception that we had the ammonia nitrate lower volume.

Okay. The second question that I had was just in terms of the capacity increases at Pryor. First off, is that all agriculture related chemicals?

No, it's not. It can be either.

It can be either?

Agricultural or industrial, depending on where the demand is.

Okay. And how are those chemicals going to be priced? Are they going to be based on spot or cost plus?

Spot.

Okay. Spot. And could you give us an idea in terms of how profitable these chemicals are compared to UAN or ammonia?

You're talking about the addition at Pryor?

Yes.

The primary addition we've got is the 66,000 tons of additional -- or the 60,000 tons of additional ammonia and we're talking about a sales price of $500-some a ton, just like the agricultural side.

That's comparable to the other ammonia that you sell. What about nitric acid, I guess is the other question?

It would be comparable to what we're doing at El Dorado nitrogen and El Dorado chemical.

Okay.

The margins on industrial acids are less than agricultural right now, but they're still very healthy margins.

Okay. And then the last question, and I'll hop back in queue to give someone else a question, is just related to the gross margin at Climate Control.

Yes.

I know you've talked about that the last couple of quarters, and you were cautious to think that it may trend down. It looks like it came in at, what, 30% roughly? (multiple speakers)

Thirty point.

30.3%, I think.

Yes.

Could you just talk about what caused that to come down and what you're thinking?

I think what caused that to come down were exactly what we discussed in the last few conference calls that we expected to happen and predicted would happen, and that is that we have seen material prices increase. It's still very, very competitive out there. The industry in general is operating at less than full capacity.

Competitors are trying to fill up their factories, and so there's some low prices out there on the street, and we have not been able to pass material prices through as fast as we historically were able to. We've always historically been able to eventually pass material prices through, albeit sometimes with a lag. And we predicted that the lag might be longer this time, and that's what we see happening, and that's what's going on out there.

The mix, we did have a slightly lower residential mix this quarter. Residential tends to have a higher gross profit than our commercial business. That impacted it as well.

Okay. And then, in terms of the pricing, could you say, or is it possible to say, if you saw the brunt of the higher raw material prices before passing through pricing? In other words, do you possibly see a sequential improvement going forward in terms of those gross margins?

Can't predict that. Not able to predict at this time. I'm not saying it won't happen, but I'm just not able to predict it.

All right. Great. Thanks a lot.

If you can tell us what's going to happen to copper and aluminum and steel, we'll give you the answer. (laughter)

Thank you. (Operator Instructions) Thank you. Our next question is from the line of Dan Mannes with Avondale Partners. Please proceed with your question.

Hi, good afternoon. A couple of follow-up questions. I need to ask a little bit more about Pryor. You guys said the turnaround was complete. Can you tell us when? Was it yesterday? Was it a week ago? Just any time frame there?

Just in the last few days, they've been in the process of bringing it up.

And that's the ammonia plant at this point?

Yes, so far, they brought up the ammonia production and the nitric acid production, and they're in the process of bringing up the urea and the blending operation that results in the UAN production.

Got it. I think I heard Tony say that you've already entered into firm pricing for much of Pryor for Q3 and Q4. Did I hear that right?

Not for Pryor; for Cherokee. Well, yes, as a matter of fact, we have for Pryor also. I take that back. Pryor, we've committed close to 35% of their capacity; and Cherokee about 45%.

Okay. And you've also locked in gas against that, or are you open on gas?

We've locked in -- we use about a million one per month, and we've locked in -- we have a natural hedge on about 260,000 of that each month. On the 75% that's remaining, we've locked in about 40%. So altogether, we've got about 50% of our gas covered.

And that's through the period under which you have firm commitments for both Pryor and Cherokee?

Yes.

Got it. Real quick on the expansion. Aside from the permits -- and we'll as soon you'll get them in due bureaucratic course. You didn't go ahead with these ammonia plants originally. Is there any reason to think these will be more difficult to bring up than the prior-Pryor plants, or is there anything unique about these we should be aware of?

We don't know anything at this time that -- (multiple speakers)

Wait a minute. I know the answer to that. I think I do. Would you repeat the question, please?

Yes. I was just wondering if, when you originally decided to restart Pryor, you didn't restart these units. I was wondering if there was anything different or more complicated or in worse shape about these units than the balance of Pryor which you've already restarted?

No, there's not.

They just happen to be smaller?

These units are not as complicated as our large ammonia plant.

Got it. And then in terms of -- actually I think you covered the mix issue on Climate. You did have a little bit of a mix change in Q2. So you did move a little bit away from residential.

Yes. We mentioned that residential is a lower percent of our total sales.

Got it. And then any feedback you've been getting on the residential side in terms of potential for growth, especially given the more aggressive advertising campaigns you've seen by some of your peers, or is that getting washed away in a tough residential environment?

I would say the latter. It doesn't seem to be having a huge amount of impact.

Got it. Thanks.

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

Hi, guys. I just have one follow-up question, and it really has to do with what the last gentleman was asking in terms of the capacity additions at Pryor. I was wondering if you have an estimate and a timeline on bringing those up to speed. Is it going to be longer or as long as bringing up the existing Pryor units?

Well, we intentionally -- we've told -- I think the last time we discussed this, we made a decision that we're not going to put a definite timeline out there, and our rationale is that we're starting up plants that have been out of commission for some time, and we're letting our engineers do this in due course without putting unreasonable pressure on them to hit a specific deadline, although they're doing it as fast as they can. We did not want to put a timeline out there and then miss it. And so we've just made the decision that we're not going to throw a timeline out there.

But generally speaking, these are smaller plants and less complicated, like Jack said, and we don't expect them to take near the time that it took for the other, but the key thing here is getting permits, because we have to get permits first.

And so, we're really waiting for those permits, and that's probably going to be the governor as to timing on this whole process.

Okay. Could you just say if you were in the very early stages of this or a quarter of the way through?

I think we've said all that we really want to say at this point.

Okay. Great. Thanks a lot.

It appears there are no further questions. I would like to turn the floor back over to you.

Thank you. So thank you very much for listening today, and I'd like to turn the meeting back over to Carol Oden. This is usually the highlight of our conference call, and Carol will now talk to you about forward-looking statements that we might have made during the conference call. Carol?

Thank you, Barry. Thanks, again, for listening in today. The comments today contain certain forward-looking statements. All statements other than statements of historical fact are forward-looking statements. Statements that include the words expect, intend, plan, believe, plan, 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 architectural billing index or any McGraw-Hill forecast including those pertaining to commercial, institutional, and residential building increases or industry growth and McGraw-Hill forecast regarding the total green, retrofit renovation market and energy efficiency market.

The outlook for both of our businesses is positive we can sell all of the AG and industrial products that we can produce. We expect to add a nitric acid plant and two small ammonia plants in the first quarter of 2012. We expect overall sales of our HVAC products to increase. We remain optimistic about the future of our Climate Control business. We are planning capital spending in 2011 of $36 million. We expect that the overall mix will continue to tilt toward chemical in 2011. Sales of AG products will continue to be a larger percentage than we have had in the last several years.

We also expect to see continued positive impact from the 30% federal tax credit through the end of 2016. Increased sales of residential geothermal as replacement units. There will continue to have a positive impact on our Climate Control business as the long-term trend toward green building construction.

We will continue to be a group of niche Companies focused on green, continue our strong push in the geothermal market. We will continue to improve all areas of the business to maintain a high level of operational excellence. We will look for possible strategic acquisitions that could complement this business.

During 2011, we plan to continue to produce new products, introduce new systems that enhance the front-end customer interface of our businesses, and we expect to start production in our dedicated chiller plant during the third quarter. We will expand the air-quilt manufacturing facility. We are optimistic about our AG business. We will continue to expand our industrial business. We plan to boost ammonia production capacity of Pryor chemical. We will expand nitric acid ammonia production at Pryor.

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, 2010 and our 2011 second form 10-Q. 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.

We will post on our Web site reconciliation to GAAP of any EBITDA numbers discussed during this conference call. Thank you, and that ends our conference call.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.