LSB Industries Inc (LXU) 2011 Q3 法說會逐字稿

Greetings and welcome to the LSB Industries third 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, Ms. Carol Oden, Executive Secretary for LSB.

Again we would like to say welcome to the LSB Industries, Inc., 2011 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 7, 2011, and, therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. After the question-and-answer session, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We encourage you to view the PowerPoint PDF that is posted on our website at www.lsb-okc.com in the Webcast section of the Investor Information tab.

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

Thank you, Carol. Good afternoon.

Today, we reported third quarter and year-to-date results for 2011 compared to 2010. Although our year-to-date earnings are up substantially compared to last year, our third quarter earnings reflect higher than anticipated costs of extended maintenance turnarounds of our chemical plants, in addition to unabsorbed overhead and lost profits during the turnarounds.

Despite these turnarounds, we managed to earn considerably more in the third quarter of 2011 than in the third quarter of 2010. During today's discussion, we will review the past quarter. We will also present the outlook for the balance of 2011 and where possible, a look into trends we see unfolding in 2012.

All of our major chemical plants are now running and have been since September -- in September, October, and so far in November. However, during 2011, the severe drought in the south affected the timing of the fall planting season, which in turn has affected the agricultural part of our Chemical business.

Our order intake is robust, and we expect a strong fourth quarter, even though the planning season started late. Approximately 56% of our Chemical sales are to our industrial customers, and this business has been good, considering the general economy. As most of you know, most of this business is subject to cost-plus or take or pay agreements with our customers. Overall third-quarter Chemical sales were higher compared to 2010.

Third-quarter sales of our Climate Control products were also higher compared to 2010, and new order intake was slightly lower than last year. As we had forecast in earlier conference calls, Climate Control's gross margin declined during the third quarter. We have not yet experienced the expected economic recovery, which has affected the sales of these products.

You may be interested to know that Forbes' October 19, 2011 edition ranked LSB 7th among America's 100 best small companies. The rankings were based on earnings growth, sales growth, and return on equity in the past 12 months and over 5 years.

Now today, Tony will give you more detailed information about our numbers, and Barry will discuss conditions in the markets we serve. After Barry's discussion, we will open the conference call to your questions. Thank you.

Thanks, Jack.

Our comparative consolidated results for the third quarter are summarized on page 4 of the PowerPoint presentation. We reported fully diluted earnings per share of $0.27, compared to $0.17 for the third quarter last year. Third quarter consolidated sales were $177 million, an increase of $38 million or 27%, including a $30 million increase in our Chemical business and a $7 million increase in our Climate Control business.

Consolidated operating income was $12.5 million, compared to $8.5 million in 2010. Chemical operating income increased $5.9 million, and Climate Control was $1.4 million lower. EBITDA was $17.3 million.

Staying with page 4, following is a brief review of year-to-date results. Consolidated sales, $590 million, a 35% increase. Consolidated operating income, $95 million, an increase of $69 million. Net income, $56 million, versus $12 million in 2010. Diluted earnings per share, $2.39, versus $0.52 in 2010, and EBITDA year-to-date, $109 million. 2012 months, EBITDA was $144 million.

Turning to our third quarter results by business segment, please go to page 5. Third quarter 2011 sales for the Chemical business were $103 million, an increase of $30 million or 42%. The increase was across all major product lines.

Agricultural sales increased $11.6 million or 63%, though we were limited by lower production due to maintenance downtime. The increase in agricultural sales was attributable to the strong market demands for ammonia and UAN nitrogen fertilizers produced by our Cherokee, Alabama, and Pryor, Oklahoma, facilities, supported by strong market fundamentals for grain, including corn and wheat.

Industrial chemical sales increased $12.7 million or 42%, due to new customers and increased selling prices resulting from the pass-through of the higher cost of our ammonia raw material feed stock.

Mining product sales increased $5.9 million or 25%, also attributable to the higher cost of ammonia passed through in most selling prices. Chemical's gross profit for the third quarter was $10.7 million or 10.4% of sales, compared to $5.9 million or 8.1% of sales last year.

The increase in gross profit as a percent of sales was due in large part to the favorable mix of the more profitable global ammonia and UAN nitrogen fertilizer products. Selling prices for ammonia and UAN have increased significantly due to supply/demand fundamentals, accompanied by generally lower natural gas feed stock costs.

Partly offsetting the favorable increase in gross profit margin per ton for nitrogen fertilizer were the effects of scheduled turnarounds performed by most of the facilities, as well as certain unplanned maintenance, during which time the plants within these facilities were not producing and fixed overhead costs and maintenance costs were expensed.

With that as background, Chemical's operating income for the third quarter 2011 was $7.1 million, compared to $1.2 million in 2010, an increase of $5.9 million. As noted on page 6, the 2010 third quarter operating loss for the Pryor facility was $3.1 million.

Turning to Climate Control, page 7, sales for the quarter were $72 million, an 11% increase from 2010. Gross profit in dollars was approximately the same in both quarters at $23 million, but as a percent of sales declined 3.9 percentage points, due to higher raw material costs and sales mix, which Barry will describe in more detail.

Climate Control's SG&A expenses as a percent of sales was approximately the same in Q3 2010. However, Climate Control's operating income decreased $1.4, due to variable selling expenses that accompanied the 11% sales increase without a corresponding increase in total gross profit.

Returning to LSB's consolidated results, the combined state and federal income tax provision for the third quarter was approximately 41%, which is higher than the projected effective rate of approximately 37%, due to year-to-date adjustments of various estimates. We have addressed our results of operations for the third quarter of 2011 and comparisons for the same period of last year 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.

Turning to our balance sheet, cash flow, and capital resources, year-to-date capital expenditures are $33 million, including $27 million in Chemical and $4 million in Climate Control. For the remainder of 2011, we had planned spending $4 million at Climate Control and $14 million at Chemical, which excludes the expansion at Pryor.

Briefly reviewing our capital resources liquidity for the first nine months, cash flow provided by operations was $53 million. After investing in financing activities, including capital expenditures and other items but excluding long-term borrowings and short-term investments, the positive cash flow for the nine months year-to-date was $6 million. As noted on page 8, at the close of the third quarter, our cash was $108 million.

Our long-term debt, including the current portion, was $83 million, and stockholders' equity was $264 million. As of this date, all the remaining 2007 convertible debentures have been converted into common stock.

Considering our cash 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 other business opportunities. Based upon the uncertainty of the effect on the global economy surrounding the European sovereign debt issue, as well as other uncertainties, we continue to believe that we should continue to maintain a strong liquidity position, including cash on hand and borrowing capacity.

Now, I will 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 am going to focus on sales activity, product backlogs where pertinent, and market drivers as we see them. I'll also review upcoming key initiatives and our strategy for each of the businesses.

To start, please turn to Page 9 in the presentation, which shows our sales mix by the markets we serve for the first nine months of 2011. Chemical products were a higher percentage of our total sales than in past years, primarily due to increased volume and sales prices of our -- of products in our Chemical business and the addition of meaningful revenues from Pryor Chemical. We expect the overall mix will continue to tilt toward Chemical in the final quarter of 2011 for the same reasons.

Focusing first on our Chemical business, please turn to Page 10. Total sales in the third quarter were $103 million. As you can see, sales were up in all markets we serve, in total 42% over the third quarter of 2010. The largest increase was agricultural products, with sales 63% higher than the 2010 level.

Turn to Page 11 for sales of our key Ag products. During the third quarter, tons shipped of UAN were 78% higher than during the 2010 third quarter. Net sales increased even more as a result of higher sales prices per ton, coming in approximately 215% higher than the 2010 third quarter. The increase in tons sold was primarily a result of production at Pryor.

As for higher selling prices, over the past 12 months, UAN prices have increased dramatically, and I'll cover that in more detail later in the presentation. AN tons shipped were 32% lower than the third quarter of 2010, primarily as a result of the most severe drought since the Dust Bowl Era in some of our key market areas, plus intermittent production issues. However, increased market prices for AN mitigated the impact on sales, which were only 13% lower than the 2010 quarter.

Turning to our industrial and mining products on Page 12, both dollar sales and tons shipped of nitric acid and industrial-grade ammonium nitrate were above the 2010 levels, reflecting both increased demand and higher selling prices for our industrial and mining products. Tons shipped of sulfuric acid, typically a very small part of our overall sales, were slightly lower than 2010 levels, but sales were up, due again to higher sales prices.

Before turning to market trends, I would like to update you on our recent plant turnarounds Tony discussed earlier. At our Pryor facility, we had anticipated that the turnaround would last from two to three weeks. However, during the turnaround, we determined that repairs would be more extensive than planned. In addition, after the turnaround, we performed other unplanned maintenance work.

The net result of the extended turnaround plus additional maintenance was a total of approximately 35 equivalent days of no production at Pryor during the third quarter. Since September 1,the Pryor facility has been up and running, and production has been back to normal rates. The Cherokee, Alabama, facility turnaround went as originally planned and lasted approximately three weeks. Cherokee is running at normal rates.

Turning to El Dorado, during the third quarter, we completed turnarounds on two regular nitric acid plants and began a turnaround on our Strong Nitric Acid Plant. The Strong Nitric Acid Plant turnaround was completed in mid-October. All of the El Dorado plants just mentioned are running at normal rates. El Dorado is currently in the middle of a turnaround on a third regular nitric acid plant as we speak.

During the last two conference calls we also discussed bringing online additional capacity at Pryor. At this time, we have completed all repairs we are allowed to make before actually receiving permits. When we obtain all required permits and complete the repairs and bring online the additional 2 plants, we expect additional production will be approximately 60,000 tons per year of anhydrous ammonia.

On Page 13 are some price trends for both the feed stock we use and the key Ag products we sell. The cost of natural gas continues to be low. This is benefiting production costs at our Cherokee, Alabama, and Pryor, Oklahoma, facilities. Both of those 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 anhydrous ammonia, the feed stock we use at our El Dorado, Arkansas, and Baytown, Texas, facilities, has continued to climb and is much higher than it was a year ago. This has increased production costs at these 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-grade AN produced at El Dorado was 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.

Turning to the products we sell, prices for these key products have increased over the past year, due to strong market fundamentals. If you look at the chart on the lower left, you can see that the Southern Plains price of UAN increased from $305 a ton in October 2010 to $380 per ton in October of2011.

Based on firm sales commitments and input from our sales force, we believe the current price is in the mid-300s. These prices change daily. Ammonia and high density ag-grade ammonia nitrate have also increased in their selling prices.

Focusing on the outlook for the chemical markets we serve, Page 14 lists several indicators for our agricultural products, all favorable. Grain stock to use ratios, both worldwide and in the US, are very low compared to the recent past. As a result, planting levels are generally high.

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

Finally, as I just mentioned, low natural gas prices have reduced the cost to manufacture many of our Ag products. North American-produced nitrogen fertilizers are currently the lowest cost to US farmers and ranchers, considering the total cost of production, freight, and distribution.

The industry consensus is that the positive fundamentals of the Ag business in the near or mid-term will continue. Despite general industry drivers, weather can have a significant impact on the fertilizer part of the business. As Jack noted earlier, recent weather conditions have somewhat delayed the fall ammonia application season, which could benefit the sale of UAN next spring, by the way. We continue to be optimistic about our Ag business.

If you turn to Page 15, we will turn to a section that relates to our Industrial business. Our Industrial business is primarily sold to large customers pursuant to contractual cost-plus and/or minimum take arrangements. The two pie charts on this page indicate the shift that has occurred in our sales mix from the full year 2010 to the first nine months of 2011, primarily a result of production at Pryor. A very significant part of our business continues to be industrial and mining.

Page 16 contains some market indicators for this area of the business. All of these indicators forecast growth for the next few years. Even though about 63% of our industrial sales during 2010 were pursuant to cost-plus or minimum take-type agreements, in the long run, it is better for us when our customers' businesses are growing and prospering.

On page 17, we've listed our Chemical 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. We are working on boosting ammonia and nitric acid production capacity at Pryor, and we also have several capital projects on the drawing boards.

Turning to our Climate Control business, on Page 18, you can see sales by the major product categories we reported in our 10-K and 10-Qs. Total sales were $72 million, an increase of 11% compared to the third quarter of 2010 as a result of higher heat pump and fan coil sales. Page 19 shows new product orders, sales, and backlog by quarter for 2008 through the third quarter of 2011.

Looking at the 2011 third quarter activity, total new product orders were $66 million, down 3% to the third quarter of 2010. Commercial and institutional orders were down 4%, while residential orders were up 2% compared to that 2010 quarter. Our total new orders for the first nine months of 2011 were $202 million, up 4% over the first nine months of 2010.

Having said that, we are disappointed with the third quarter bookings, which we believe reflect a slower recovery in the Commercial sector than previously anticipated. Although our Residential Geothermal new orders during the third quarter rebounded from the low second quarter level and were higher than 2010's third quarter, Residential sales continue to face economic and construction headwinds. I'll discuss the market outlook later in the presentation.

New orders in October were approximately 3% lower than October of 2010. Due to the lumpiness of our order intake, any one month's orders is not really particularly meaningful in our business.

Back to the third quarter, sales of our Commercial products were up 20%, while sales of our Residential products were down 12% compared to last year's third quarter. Our backlog of product orders at September 30 was $48 million, approximately 12% lower than one year ago.

Tony mentioned that the gross margin for the Climate Control business was 31.8% in the recent third quarter, compared to 35.6% % in the 2010 third quarter. If you have been on previous earnings calls, you will remember that we predicted this would probably happen. We have historically experienced lags between the time we receive material cost increases and when we have been able to pass them through to our customers. In this case, the market is extremely tight, and we are not able to predict when we will be able to increase prices for our products.

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 20, there is a graph that shows McGraw-Hill's most recent construction forecast for certain Commercial and Institutional building types.

These are the sectors that are most important to us. They comprised about 55% of our total Climate Control business in 2010. As you can see from the graph, these sectors are all forecast to grow over the next five years. McGraw-Hill is forecasting they will increase by approximately 94% through 2015. If this materializes, it should benefit all of our Commercial and Institutional product sales.

In addition to watching construction forecasts by sector, we also track the Architecture Billings Index. On page 21 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 the quarter at 50.5 in March.

However, during the second quarter, the ABI headed into sub-50 territory, ending at 46.9% in September. 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 decline in billings.

We believe 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. So, while new construction remains sluggish, renovation and retrofit of existing buildings will be an important market for us. Fortunately, all of our Climate Control products are particularly well-suited for this.

During the first nine months of 2011, 20% of our Climate Control business sales were geothermal heat pumps used in single-family residential applications. Page 22 shows McGraw-Hill's forecast for single-family residential construction starts. In fact, it shows 5 forecasts, starting with 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 about 9% from 2010.

Looking beyond 2011, McGraw-Hill forecasts that housing starts will increase from about 405,000 per year in 2011 to over 1 million per year in 2015 and 2016 period. If this occurs, it bodes well for our Residential Geothermal business. One trend we have seen develop during the 2010 and '11 is increased sales of residential geothermal as retrofit units or replacement units.

Prior to the recession, a majority of our Residential Geothermal sales were for new construction. However, we have seen this shift, with retrofit units comprising up to 70% of our Residential sales.

I was recently listening to a webinar presented by one of the major construction forecasting companies. During that call, one of the prominent economists said something to the effect that he was giving up trying to predict when the single-family Residential new construction market was actually going to recover.

Here at LSB, we don't think we are any smarter than he is. What we do know is that many economists believe that pent-up demand for new homes is developing and that when the recovery does finally come, business could be robust. So, we have continued to invest in our Residential Geothermal business in preparation for the recovery when it ultimately comes.

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. We also expect to see continued positive impact from the 30% federal tax credit that extends through the end of 2016 for Residential Geothermal heat pump systems.

Turning to page 23, we've listed our Climate Control business' strategies and some key initiatives. We will continue to be a group of niche companies. We will focus on green products. We will 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.

Finally, we will look for possible strategic acquisitions that could complement this business. We plan to introduce new products and introduce new online systems to enhance the front-end customer interface of our business. We recently began production at our dedicated modular chiller facility, located here in Oklahoma City, which we advised you was under construction in the last couple of conference calls.

By the way, on a final note, we just received notification this week that our new patent pending simultaneous heating and cooling on-demand chiller is the winner in the Green Building Category for the 2012 AHR Expo Innovation awards. AHR is air conditioning, heating, and refrigeration. That's the industry expo that we attend every year. We are proud of that, and I think the industry is recognizing those great products.

Before opening it up for questions, I'd like to mention that Tony and will be presenting at the Sidoti fourth annual conference in New York this week on Thursday, November 10. And we will also be presenting at the Baird Clean Tech conference in San Francisco on November 30. We hope to see some of you at that event.

Operator, you can please poll the listeners for questions at this time.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions).

Our first question is from the line of Eric Stine with Northland Capital Markets. Please go ahead.

Eric, nice to talk to you today. Before we start the Q&A, what we would like to do this time is for each person that asks questions to ask three or four questions, and then let's rotate to give some of the other people time to ask questions. And we can come back and continue to go around if we have more questions.

Okay. Understood. Thanks for taking the questions. Just to clarify something from the prepared remarks, you said Pryor was down for 35 days. Was that 35 days in total? Or was that in addition to the planned two to three weeks?

That was in total, including. That was inclusive of.

Okay, then --

And those are equivalent days.

As opposed to consecutive.

As opposed to, yes, just consecutive days.

Okay, got it. Then, this might be in the 10-Q, but do you quantify or can you quantify the added expense that you incurred because of that additional downtime so we can kind of try to back into what the Chemical gross margin number might have been?

Does your question go to loss margin or expense of the maintenance or both?

Expense of maintenance but lost margin as well, if that can be quantified.

Our maintenance expense that we expensed during the third quarter for turnarounds was in the range of $6.5 million. If you look at the 10-Q, back in the MD&A, you'll notice that the gross profit percent on Chemical this quarter was 10.4%, versus 29% year-to-date. The big difference there is the downtime and the expensing off of the maintenance. For example, year-to-date, in the first 6 months we had $8.5 million of insurance recovery. If you take that out from the June year-to-date numbers and then take a look at the third quarter, we had about $11 million of lost absorption margin as compared to -- for the number of days that we were down, the 35 days at Pryor and 20-some odd days at Cherokee. That would have brought -- had that $11 million been in the gross profit category, we would have been closer to 26% margin, which is very close to year-to-date.

So in other words, just to amplify that a little bit. There was $6.5 million of cost for the turnarounds, plus an additional $11 million of lost margin and absorption.

Based on the number of days that we were down.

Okay. That's helpful. And then last one for me, and I'll jump back into line. Clearly, optimistic or positive about the fourth quarter in the Chemical segment. I mean, is that something that is above and beyond the typical seasonal improvement? Should this -- I mean, are you expecting -- are there reasons why this would be better than typical seasonality in Q4?

I think the reason that we make that comment is that, as you know, the agricultural part of our business, UAN and ammonia are very profitable right now. And looking forward to the fourth quarter, the majority of our capacity for urea, ammonium nitrate, and ammonia have been pre-sold on firm sales commitments. We know that -- Barry mentioned that the sales price was in the mid-300s, and we also know that natural gas is in the $4 range. Because of those reasons, we feel like we will have a strong fourth quarter.

Okay.

We also mentioned that the plants have run very steady in September, October, and November year-to-date. Those are the three factors that we are looking at.

Right. So maybe a little bit better than the typical fourth quarter for those reasons?

I couldn't really compare it to a typical fourth quarter, because, keep in mind, we just got Pryor up on a sustained basis in the fourth quarter of last year. So, this year will be -- we think the ammonia run is going to be strong in the fall fertilizer season. And production, assuming we maintain the production level that we are experiencing right now, should provide significant amount of product available to sell.

Okay. Thanks a lot.

Thanks, Eric.

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

Afternoon, everybody.

Hi, Dan.

A couple of follow-up questions, again, mostly on Pryor, not surprisingly. It looked like in your disclosures -- I guess it was $10 million or $11 million revenue in the third quarter. Can you give us an idea of how much volume was sold of ammonia and UAN out of Pryor?

Don't have that number in front of me, Dan, but I will take a look at it while this call continues, and we can circle back to that.

Okay. Can you -- I guess the follow-up to that would be, as of, I guess, the end of October, as of today, can you give us the tons per day of either ammonia or UAN that they are running at or Pryor is running at?

Pryor is running close to 500 tons a day. I think it's more like 470 right now. And urea is running north of 1,000 tons per day.

So UAN is now running at capacity? Because --

UAN is running north of 1,000 tons a day.

If I can clarify, that is capacity?

That is the current capacity, correct.

Of UAN.

Of UAN. 1,000 tons. 1,000 tons - 1,100 tons a day. Now, as we get ammonia up, we will have additional capacity for ammonia sales.

And at what -- I mean -- in the last several quarters, I don't know that we have gotten to 1,000 tons per day of UAN capacity before. Can you tell us sort of when you got there? I know that is something you were working on.

The last 10 days, we have averaged north of 1,000 tons per day.

Okay. And ammonia has been running at 500, you said, through the month of September?

Between 475 and 500.

Did it run at all in July and August?

Yes, it did, but as Barry indicated, the number of days that we were down were equivalent days. So they were -- there were some non-consecutive downtime days in there, unplanned days. It did run some, but as Barry indicated, we had 35 equivalent days of downtime --

During the quarter.

During the quarter.

I don't mean to be overly critical here, but on your second quarter call, it sounded like the ammonia plant was back up and running at that time, and that was in early August. And now it sounds like -- it sounds like it was not running well probably through most of the month of August, and I am just wondering if there was an opportunity to maybe give us a little bit more of a heads-up about this. I can't speak for other people. We were a little bit surprised by the numbers today.

On the conference call, we said that the turnaround was complete, and it was. But subsequent to that, we began to have some unplanned downtime, maintenance downtime.

Right. Okay. I'll let someone else jump on. I'll jump back in a sec.

Okay, sure.

(Operator Instructions).

Our next question is from the line of Joe Mondillo with Sidoti and Company. Please go ahead.

Good afternoon, guys.

Hi, Joe.

So, just to follow up, I guess, on the last call. Do you have an idea of what sort of the max capacity of Pryor is once you get everything online? Not including any additional capacity that you are investing in?

Do you mean the current capacity without the additional plants that we are working on that we don't have the permits for yet?

Correct.

Joe, as we have said in a couple of prior conference calls, our current run rate on ammonia is 500 tons a day. We have underway an engineering activity that we think we can get ammonia up to 700 tons a day. We are not making any forecasts as to when we'll have that done, but that is the longer-term plan for the existing plant. And we just mentioned that we're averaging 1,100 tons a day on UAN. Now, 700 tons a day on ammonia, if and when we get to that point, we will free up some additional ammonia for sales.

And as of that 1,100 UAN, do you foresee that expanding at all? Or do you think that is sort of full capacity?

Well, that is where we expect the average here in the fourth quarter.

And in the near -- in the future, do you see expansion, or just trying to get an idea --

We are probably urea capacity limited at that level.

Okay.

Not unless we get permission set up for another urea plant.

With the existing urea plant, that's pretty much -- we are urea-limited for UAN.

Okay. And then in terms of the maintenance, the maintenance was a total of $6.5 million. And how does that compare to prior years?

I don't have the prior year. I think it is about $4.5 million higher than the first -- than what we -- turnarounds that we experienced in the first half.

Okay. And excluding the prior, because I sort of have an idea of that, I know you -- I think Barry addressed what was going on at El Dorado and Cherokee. Could you just remind me or go over that again, why the additional capacity at those plants?

Please ask the question again. We're not sure we understand it.

At El Dorado and Cherokee plants, I missed it in the prepared remarks. Could you just go over why there was additional maintenance at those plants compared to past years?

No. At the Cherokee plant, that was a turnaround, annual turnaround during the third quarter. And it went pretty much as planned. It was planned to be approximately three weeks, and it was approximately three weeks.

And at the El Dorado plant, most of the plants underwent a turnaround.

Okay. So the only difference is the maintenance and everything going on up at Pryor?

Right.

Okay. Thanks. I'll get back in queue. Thanks a lot.

Thanks, Joe.

(Operator Instructions). Thank you. We have another question from the line of Dan Mannes from Avondale. Please go ahead.

A couple quick follow-ups on Pryor. First, in the quarter, you noted you had done some work on the 60,000 ton expansion. Can you frame out for us how much spending was done on that and whether that was capital expenditures or O&M?

That was capital expenditures on the two small ammonia plants.

And can you now estimate or give us update on what is left once you do get the permits to get this up and running?

I can't tell you the cost, but I can tell you the process.

Please.

Once we get the permits, we will be able to turn on the plants and see how they perform and determine if there is any additional work that has to be done on them, so that we can put them into full production. There will be a month or two of trial and error, and if we are real lucky, we will turn the key and off they'll go. But we don't expect that to happen. These plants have been out of service for about 11 years. We have done everything that we think we can do, which we are allowed to do under the rules of the environmental agency. And we can't do any more or go any further to see if there's anything else that has to be done until we get a permit. And so we expect to have the permit by the end of January.

Now, they have delayed it several times, not because of us but because of the agency. And at that time, we will determine if any more work has to be done on them and if so, what it is. And we will do it and eventually get them started.

Dan, are you there?

I am.

The way it works is, to put it in simple terms, we are not allowed to apply power to these and turn them over until we get the permits. So, what we can do is, we can look at them visually, inspect them, tear parts of them down and build them back up. But we can't actually turn the ignition on. We just can't do that.

So, what you do is take your best shot, and you repair or upgrade everything visually that you think might be problematic or that requires upgrading. And you hope that you catch everything, but inevitably, there is always something that you really can't catch until you turn it over and turn it on. We might get lucky and have caught everything, but usually you don't. So that is why we have been very reluctant to put a timeframe on this, because you just don't know. And that is what the situation is.

Makes sense, and given your experience with the bigger plant at Pryor, it is lessons learned, I guess.

We feel a little bit snake-bit on that one, so we are not going to be throwing any numbers out at you here.

It will not be as extensive as the big plant.

These are simpler and smaller. But still, we just feel like we shouldn't be throwing dates out there. And when we get them up and running, we will certainly advise you.

Sure. And one last question. This is more on the strategic side. We have now seen 3 MLPs of fertilizer assets out there. They seem to be fairly well received. They get pretty attractive multiples from the market. I wanted to I guess ask what is the long-term plan for your Chemical business, and is there a scenario where it would make sense for you guys to consider that kind of structure?

Well, you know, we have always said that -- and we are as a management team open to look at all possibilities and have and open mind about it. We know MLPs have become popular. There have been a couple of big ones. We know that they are particularly popular as a vehicle to raise money, if you need to raise money.

We also know that there seems to be some short-term pass-through valuation characteristics that are associated with these things. We don't know if those valuation characteristics will be sustainable in the long run, and we are watching and we are waiting, and we are observing what is going on in the market. I mean, as with any other opportunity, we are going to evaluate the MLP structure in the context of both our consolidated goals and our specific business segments. And if it looks like something that could be advantageous to the Company, for one of several reasons and it makes sense, we would consider it. But in the long run, we haven't gotten there to the point of being able to make any decisions. And so that's where we are on MLPs.

Got it. Thanks for that color.

Sure.

Dan, back to your earlier question about UAN production at Pryor.

Dan?

Yes, I am here.

Go ahead. We had roughly 35,000 tons of production of UAN in the third quarter.

Was there any ammonia, or did you upgrade all the ammonia to UAN? Was there any spare ammonia or was that just the UAN?

We did have some build up in inventory for the quarter.

I was going to say it looked like your revenue number of $10 million, if that was a -- you said, I'm sorry -- you said 30,000 tons?

Yes.

So around 350. That makes sense. Okay. Thanks.

Thank you.

Thank you. Our next question is from the line of Joe Mondillo with Sidoti and Company. Please go ahead.

I had a quick follow-up question. In terms of the additional capacity at Pryor that you're waiting for these permits, I thought, Barry, I thought you might have mentioned just 60,000 tons of ammonia. Wasn't the Pryor -- maybe I missed it on your prepared remarks, but wasn't the Pryor guidance on the last call 60,000 of ammonia, 66,000 of the nitric acid? Is that correct?

Yes, that's true.

Okay. And then also, I was wondering if you could talk about the rest of that property and what sort of assets you have on that property and if you are foreseeing any other expansion or investment in the property going forward?

Do you want to take that one?

Yes. What we have on the property is we have enhancements to the existing facilities that are producing. Plus, we have a second urea plant and we have two additional asset plants, small ones. One of them did not require a permit because it fell into the already permitted properties, and that has been turned on and is operating as needed. And there is a third small asset plant. I'm trying to think of what else there is there.

Are those all additional plants that aren't being utilized right now?

There is a third ammonia plant. In other words, we are going to bring up two, but we have another third one just like it, requires a little more work than the two we are working on or asking to permit. So there's quite a bit of additional potential there.

Okay. Everything that you just mentioned are sort of plants that you're not utilizing right now that you could potentially?

Right.

Okay. All right. Great. Thanks a lot, guys.

Thanks, Joe.

Thank you. Our next question is from the line of Eric Stine with Northland Capital Markets. Please go ahead.

Just one clarification for me. In the remarks, you talked about residential geothermal being 20%. I missed, was that a quarterly number or was that a year-to-date number?

That was a quarterly number. What? What was the question?

Just residential geothermal, what percentage that was in the quarter of Climate Control?

That was the year-to-date number. It was 20% of our Climate Control business sales year-to-date.

That is for the residential piece?

Yes. For reference, for the full year 2010, it was 25%. It is down a little, and it is down because of a couple of reasons. One is the decline in that sector, but also the increase in the commercial sector. So it's a smaller percentage of the total.

Okay. Thank you.

Sure.

Thank you. Our next question is from the line of Elie Mishaan with Corsair Capital Management. Please go ahead.

Quick question. You mentioned the usual maintenance expense in Q3. I think you said it was around $2.5 million, this quarter was $4 million higher. On that $2.5 million, what is the usual lost absorption versus the $11 million?

Let me clarify that. What Tony said was relative to the maintenance expense in the first 2 quarters. The turnaround maintenance. Originally, we had thought that the turnaround cost was going to be -- the cost part in the third quarter was going to be in the neighborhood of about $4.5 million, I believe. And it ran a couple of million dollars more as a result of the turnarounds being more extensive than we thought.

Okay. And in terms of the lost income on absorption, how much of that would you guys have planned for if it was $4.5 million maintenance expense?

Repeat that question. I did not follow that.

It sounded like in the quarter, other than the $6.5 million in maintenance expense, there was also fixed cost absorption effects of $11 million.

That included the lost margin on the sales of that production. If you took the equivalent days that we lost at Pryor and at Cherokee and produced the product and sold it, the margin would have been $11 million more or less.

Margin and contribution.

And contribution, just as a point of reference.

Okay. And that is sort of a separate number from the $6.5 million actual maintenance expense?

That's a separate number from the 6.5. Correct.

Just curious. In terms of where you looked and saw the quarter going before Q3, what would you have thought that $11 million would have been -- obviously have been a smaller number, right?

It would have been a smaller number. I think if we had two to three weeks scheduled for each one of the turnarounds, probably closer to three weeks, and we went -- we extended beyond that.

You know, as an interesting point, several years ago, we used a different method of expensing our turnarounds, where we estimated the cost for the year and we amortized it over the year equally so you wouldn't get these lumpy results. But the accounting board put out something which now requires us to expense everything when it happens. We can't accrue for an anticipation of a turnaround. And that has made a big difference in the reporting.

Okay.

Is that accurate?

Yes. You have to period cost all your turnaround calls now versus previously, two or three years ago.

Okay. Great. Thank you very much.

Thank you.

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to Management for closing comments.

Okay, I just wanted to thank you for your participation on today's conference call. Since it is our last conference call for the year, we wish all of you the best holiday season and the coming year. We appreciate your continued interest in LSB, and if you stay on the line, Carol Oden will have a special treat for you. She will be reviewing certain important information about our presentation today. Carol?

Thank you, Barry. Thanks again for listening in today.

The comments today contained certain forward-looking statements. All statements other than statements of historical facts are forward-looking statements. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate, and similar statements of the future are forward-looking statements in nature. Identified forward-looking statements, including but not limited to, all statements about or any references to the Architectural Billing Index or any McGraw-Hill forecast, including those pertaining to commercial, institutional, and residential building increases or [invest] growth and McGraw-Hill forecast regarding the total green retrofit, renovation markets, and energy efficiency markets.

Our order intake is robust, and we expect a strong fourth quarter. We have planned spending of $4 million at Climate Control and $14 million at Chemical. We should continue to maintain a strong liquidity position, including cash on hand and borrowing capacity. We expect that the overall mix will continue to tilt toward Chemical in 2011. We expect additional production will be 60,000 tons per year of ammonia.

We continue to be optimistic about our ag business. We will continue to expand our industrial business. We will also continue to enhance our agricultural distribution channel. We will continue to be a group of niche companies, focus on green, continue our strong push in the geothermal market. We will look for possible strategic acquisitions that could complement this business, and we plan to introduce new products and introduce new online systems.

You should not rely on forward-looking statements, because actual events or results may differ materially from those indicated by these forward-looking events as a result of a number of important factors. We incorporate the risk and uncertainties being discussed under the heading special note regarding forward-looking statements on our annual report form 10-K for the fiscal year ended December 31, 2010 and our quarterly report on Form 10-Q for the quarters ended March 31, 2011; June 30, 2011; and September 30, 2011. 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 and amortization, income taxes, and certain non-cash charges, unless otherwise described. EBITDA is not a measurement of financial performance, and again, 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 and that ends our conference call.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.