LSB Industries Inc (LXU) 2012 Q1 法說會逐字稿

Greetings and welcome to the LSB Industries first quarter 2012 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Carol Oden, PA to the Chief Executive Officer. Thank you, Ms. Oden, you may begin.

Thank you, again we would like to say welcome to the LSB Industries Inc. 2012 first 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.lsc-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, May 9, 2012, and therefore you are advised that time-sensitive information may no longer be accurate after the time of any replay. After this Q&A, I will have some important comments and disclaimers about forward-looking statements, and our references to EBITDA. We encourage 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. Please note that the presentation starts on Page 3 of the PowerPoint, and now I will turn the call over to Mr. Jack Golsen.

Thank you for joining us our conference call today. I assume you all have your PowerPoint open to Page 3. We released our 2012 first-quarter earnings report today, and we also filed our 10-Q for the quarter. For the first quarter, results were not as good as the same period last year. Net income was $14.3 million on sales of $190 million, or $0.61 per share, compared to $0.90 per share for the first quarter 2011.

As we previously informed you, our first-quarter results were impacted by both planned and unplanned downtime at our Pryor, Oklahoma chemical facility. We are at the height of a very robust agricultural season, and this downtime could not have come at a less-opportune time. Repairs to the urea plant at Pryor are underway, and expected to be completed before the end of June. The outlook for our agricultural business continues to be very good, and we expect to see gradual growth in our industrial markets as the economy continues to improve, that's if it improves.

Our Climate Control business is operating in a very competitive market, with lower margins than in prior years. Considering all this, overall, we believe that the outlook for LSB in total for the balance of 2012 is positive. We are continuing to manage LSB for the long-term benefit of our shareholders, and believe that we have substantially more potential to develop the Company. We are taking actions to grow and improve both of our businesses.

A couple of examples of these actions are the additional capacity we are adding at Pryor, and the introduction of our new, ground-breaking, ultra-efficient, Trilogy 40 geothermal heat pump line, both of which we will cover in more detail later in this call. Today, Tony will give you more details of these results, and Barry will cover market conditions throughout our operations, with a detailed outlook for both of our businesses for 2012. He will also give you a detailed update about Pryor. Now I will turn this call over to Tony Shelby, our CFO.

Thanks Jack. Our results for the first quarter are summarized on page 4 of the PowerPoint presentation. Comparing the first quarter 2012 to the first quarter of '11, fully-diluted earnings per share were $0.61, compared to $0.90, a decrease of 32%. The decrease, as we will explain later during this call, is due, in large part, to the approximately $0.33 per share impact of downtime at our Pryor, Oklahoma facility, offset by increases elsewhere. Consolidated sales were $190 million, an increase of $12.7 million, or 7%; operating income was $23 million, a decrease of $11 million, or 32%. Chemical was down $8.8 million, and Climate Control was down $2.6 million.

After interest expense, and an effective tax rate of 35%, net income was $14.3 million, compared to $20.9 million. The effective tax rate was lower than the statutory rate, due to [permit] differences for the allowable domestic manufacturing deduction in certain tax credits. Also and noted on this page, cash flow from operations was $11 million; after cash for capital expenditures of $16 million, payments of long-term -- current and long-term debt of $7 million, and other items, net cash decreased $12 million for the quarter. The decrease in cash for the quarter is due to seasonal uses of working capital, consistent with first quarter 2011. At quarter end, cash and short-term investments were $123 million; EBITDA for the quarter was $28 million, versus $38 million in 2011.

Turning to page 12, and comparing chemical quarter results to the year-ago quarter, sales for the quarter were $124 million, versus $111 million, an increase of $13 million or 11%; agricultural sales were $60 million, compared to $51 million. The increase is attributable to the strong market fundamentals for ammonium nitrate, UAN, and ammonia fertilizers. Although our UAN tons were lower due to the down-time in the Pryor facility, production and shipment of nitrogen fertilizer at our Arkansas and Alabama facilities reached record highs. Industrial product sales increased $3.5 million, or 10%, and mining product sales were approximately the same as one year ago.

Chemicals operating income for the quarter was $20 million, versus $29 million one year ago, or $8.8 million lower as result of the estimated $13 million impact of the downtime at the Pryor facility. The $13 million included $3 million imbedded loss from firm sales commitments of UAN that could be delivered, lost absorption and gross profit of $8 million, and repair costs of $2 million. The Arkansas and Alabama facilities both reported increases in operating income for the 2012 quarter, benefiting from strong demand for nitrogen products and much-lower natural gas prices.

Reflected on the chart on page 6 is the significant difference in Pryor's operating income for the first quarter 2012, compared to 2011, as result of lost production. The first-quarter 2012 results are not indicative of the second quarter 2012, in that we don't expect to lose 40-plus days of ammonia production, nor incur losses on firm sales commitments, both as occurred in the first quarter. We expect the Pryor facility to report positive results from the production and sale of anhydrous ammonia at a very good margins, into the fertilizer market, albeit not as profitable as if UAN was up-and-running.

To continue the quarter-over-quarter comparison, please refer to page 7. Climate Control sales were $63 million, slightly lower than one year ago; Climate Control's gross profit as a percent of sales decreased from 34% to 31%; and operating income was $5.8 million, down from $8.4 million in the first quarter of '11. In 2011, we began the first quarter with a backlog with fairly-good margins; conversely, we entered the first quarter of 2012 with the a backlog with much tighter margins. The lower margins were partially a result of a competitive environment resulting from continued lower construction activity, accompanied by increased raw-material component cost.

Barry will review the quarterly results and current market conditions in more exact detail and terms later. Capital expenditures. During the quarter, total capital expenditures were $13 million, including $1 million for the Climate Control business, and $9 million for the Chemical business. We are currently considering future capital spending of approximately $48 million, including $35 million at Chemical, and $13 million at Climate Control. The planned capital spending includes committed expenditures of $17 million, and planned spending is subject to change based on economic conditions and regulatory requirements, as well as opportunity for profit improvement that might arise from time to time.

Briefly reviewing our liquidity and capital resources, the summary on page 8 reflects a continuous strengthening of our liquidity and capital resources. Our balance sheet is in good shape, with $47 million of cash, in excess of total interest-bearing debt. In April of 2012 we amended the $50 million working capital revolver agreement to extend the maturity to March of 2016, along with other changes that have the effect of providing us more flexibility and lower cost. Currently there no outstanding borrowings against the line. The outstanding balance of the secured term loan is $71 million and long-term debt, including current portion, is $76 million.

At quarter end, 2012 stockholder's equity was $318 million, and the ratio of long-term debt to stockholder's equity was approximately 0.25 to 1. Also as noted on the slide, EBITDA interest coverage was 25 times. We continue to believe it is critical to maintain a strong cash position, to manage unexpected downturns in the global economy, and at the same time be prepared to take advantage of opportunities to grow the two business segments. Excuse me, I said $318 million for stockholders' equity, and it should be $308 million.

We've addressed our results with operations for the quarter, and the comparisons to the 2011 quarter in greater detail, in the MD&A in the 10-Q, which we filed earlier today, and suggest you review these disclosures and discussions for additional analysis. I will now turn the call over to Barry to discuss both businesses for the quarter, and the outlook going forward.

Thanks Tony. Since Tony covered the financial results, I'm going to focus on our sales activity, product backlogs where pertinent, and market drivers as we see them. I'm also going to give you a special update today on activities at our Pryor facility, and as result of that, this part of the conference call will be a little bit longer than it usually is.

To start, please turn to page 9, which shows our 2012 sales mix by the markets we serve. This is approximately the same as the mix for the full year 2011, two-thirds Chemical and one-third Climate Control. In our Chemical business, about half our sales were nitrogen-based agricultural fertilizers and associated products, the other half was industrial and mining products. In our Chemical business, approximately 79% were sales of various heating, ventilation, and air-conditioning products to commercial and institutional markets; the balance was the sale of geothermal heat pumps for single-family residential applications.

Focusing first on our Chemical business, please turn to page 10. Total sales in the first quarter were $124 million, up 11% over the first quarter of 2011. The largest increase was agricultural products, with sales 18% higher than the 2011 level; industrial sales were up 10%, and mining sales were flat. Turn to page 11 for sales of our key agricultural products. During the first quarter, tons shipped of UAN were 9% lower than during the 2011 first quarter, while net sales decreased only 6%, reflecting higher sales prices per ton. The decrease in tons sold was result of the planned and unplanned downtime at Pryor.

UAN shipments from our Cherokee facility actually increased over the first quarter of 2011. Agricultural-grade ammonium nitrate, or AN, tons shipped were 22% higher than the first quarter of 2011, and sales were 36% higher, again reflecting higher sales prices. Higher shipments of ag grade ammonium nitrate were driven by more acres of wheat planted than in previous years, a push by ranchers to rebuild depleted forage inventories, better weather conditions, and lower-than-usual starting inventories at the dealer level.

Our sales of ammonia to agricultural markets increased the most dramatically, compared to 2011. This was caused by both higher sales prices per-ton, and more ammonia available to sell from our Pryor Facility, as result of curtailed UAN production. As Tony mentioned, ammonia that would normally have been used to produce UAN was sold as fertilizer. Turning to our industrial and mining products on page 12, both sales dollars and tons shipped of nitric acid were above the first quarter 2011 level, reflecting increased demand. Tons shipped of industrial-grade AN were 2% lower than in the 2011 first quarter, primarily due to lower demand for coal as result of the relatively warm winter, and subsequent high inventories of coal. As a result of the contractual arrangements we have in place for the sale of this industrial-grade AN, lower sales volume did not impact our bottom-line.

On page 13 are some price trends for both the feedstocks we use and the key ag products we sell. The cost of natural gas continues to be very low. This is benefiting production costs at our Cherokee and Pryor facilities, which use natural gas as their primary feedstock. The conventional wisdom is that natural gas will remain low for some time.

The cost of anhydrous ammonia, the feed stock we use at our El Dorado, Arkansas and Baytown, Texas facilities, although slightly lower than in 2011, continues to be high, compared to previous years. Our current read on the market is that ammonia is about $445 per metric ton. High ammonia prices have increased production costs at our facilities that use of ammonia as a feedstock. 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 high ammonia costs don't impact our profitability on those sales. However, ag grade ammonium nitrate, also produced at El Dorado, is sold at spot-market prices. We have been fortunate that selling prices of ag grade AN fertilizer are also relatively high, mitigating the impact of high ammonia costs.

While we are on that subject, the chart on the lower-right shows pricing for ag grade, or high-density, ammonium nitrate. In April 2012, southern plains prices for AN were $445 per ton, compared to $360 per ton 12 months earlier. Increased selling prices, coupled with lower average ammonia feed stock costs during the first quarter, resulted in higher margins on agricultural grade AN, than during 2011. If you look at the chart on the lower left, you can see that the southern plains price of UAN was $410 per ton this April, compared to $345 per ton in April of 2011. Based on current market indicators, we believe that the price is about $425 per ton; however, we are the high-point of the season, and we expect prices to decline in the third quarter. The market for UAN is currently experiencing greater supply than a year ago, but the supply has been outpaced by demand. Other US manufacturers have stepped-up production to take advantage of good overall market conditions. Imports had increased earlier this year but have since leveled out.

Focusing on the outlook for the chemical markets we serve, page 14 lists several indicators for our agricultural products; all of these are favorable. Grain stock-to-use ratios, both worldwide and in the US, continue to be low; planting levels are generally very high, very high in the case of corn, which the USDA has predicted 96 million acres planted this season, a possible record. Market prices for corn and wheat remain high as well, so farmers are incentivized to plant and sell more. All of this is creating strong, continuing demand for fertilizers.

Finally, low natural gas prices have reduced the cost to manufacture UAN and ammonia at our plants that use it as feedstock. Factoring in the total cost of production, plus freight and distribution, North America is a low cost producer of nitrogen fertilizers. The industry consensus is that the positive fundamentals for the ag business should continue. In addition to general industry drivers, weather can have a significant impact on fertilizer use, demand, and prices. So far, weather conditions have been better this year than they were a year ago, but it is too early to know how to season will turn out. Taking all of these factors into consideration, we continue to be optimistic about our ag business.

Please turn to page 15. As you can see from the chart on this page, a very significant part of our business continues to be industrial and mining products. They're sold primarily to large customers, and most are sold pursuant to contractual cost plus and/or minimum take arrangements. Page 16 contains some market indicators for this area of the business. Most of these indicators forecast growth for the next few years.

Before turning to the Climate Control business, I should take a few minutes to update you on our Pryor chemical operation. Please turn to Page 17. I'm going to cover six areas in this part of the presentation, including a quick history to bring those new to LSB up-to-date, an overview of the Pryor facility process flow, which will put the rest of the discussion in context; a review of the planned improvement project we undertook during the first quarter; a detailed description of the current problem with the urea reactor, which is preventing the production of UAN at this time; a description of the fix we have planned for the urea reactor; and finally, update you on the status of the additional capacity we are the process of bringing online, following the receipt of permits.

So first, let's talk about history. The Pryor facility was originally constructed in 1966. The previous owner made major upgrades to it 1997, before shutting the facility down in 1999. LSB purchased the plant at a bargain price in 2001, when the previous owner became insolvent. When we bought the plant it was in shut-down condition, and we did not operate it. At that time, there was an oversupply of capacity in United States, and natural gas prices were relatively high so we kept the plant shut down until 2008.

By that time the supply/demand fundamentals for ammonia and UAN in the US had completely changed, and the cost of natural gas had come down. Beginning in 2008, we repaired staff and re-started the plant. We achieved the same production of ammonia during the fourth quarter of 2010, followed by sustained production of UAN in the first quarter of 2011. Despite the fact that we did not operate Pryor at its full capacity throughout 2011, it was very profitable, generating an operating profit of $52 million, and recouping our investment in the facility. Before we turn the page, the photos on the right-hand side of this page show the entire facility, the nitric acid plant, the urea plant, and the ammonia reformer; the last two, we will discuss next.

On page 18, there is a simplified process flow chart of the Pryor facility. It receives natural gas from the pipeline, the natural gas is processed in a plant, which produces anhydrous ammonia, referred NH3 on the chart. At this point, the ammonia can be sold as an end product, or further upgraded. Normally, part of the ammonia is upgraded to nitric acid, then to ammonium nitrate solution, which is then mixed with urea to produce urea ammonium nitrate, or UAN; meanwhile, another part of the ammonia is further processed in a special reactor to create urea. That urea is what is blended with the ammonium nitrate solution to create the UAN.

This is a very simplified version of what happens at the Pryor plant, which also creates and uses CO2 during the process, and for sale as an end product. An important thing to know about the Pryor plant is that even when the whole plant is operating at as it should, it is urea limited. In other words we have the capacity to produce more ammonia than is required to mix with all of the urea it can produce to make UAN. That's why we originally said that our production target was 325,000 tons per year of UAN, plus 60,000 to 90,000 tons of additional ammonia. The extra ammonia can be sold for either industrial or agricultural uses, but at this time most of the ammonia sold from Pryor is being used as fertilizer.

Continuing on page 18, the target production level for ammonia at the Pryor facility is 700 tons per day. Before an additional 60,000 tons per year we plan to add and to produce, after that addition. However, due to production limitations caused by restrictions in the flow of processed gas to heat exchangers and other mechanical restrictions, during 2011 the ammonia plant was unable to sustain production above 500 tons per day. Between January 3 and February 3 of 2012, a planned improvement project was performed at the Pryor facility to correct most of the restrictions and increase anhydrous ammonia production levels.

Of course, during that 31 day period, the facility was not in production, but was gradually restarted after the project was completed. The current production rate of ammonia is approximately 600 tons per day. Our plan is to eventually make other improvements at Pryor to boost ammonia production, and reach our target production rate of 720 -- 700 tons per day; again, this is before the additional 60,000 tons per year capacity, however at this time, we cannot predict when we will achieve that rate. By now you can see why the urea reactor is critical for the production of UAN.

Please turn to page 19 of the diagram for a diagram of that reactor. The urea reactor is a large, high-pressure vessel, which is approximately 63.5 feet tall with an outside diameter of about 5 feet, and inside diameter of 4 feet. Ammonia, CO2, and a substance called carbonate, enter the reactor and are blended and turbulated inside the reactor at temperatures of 380 degrees Fahrenheit and the pressure of 3,200 pounds per square inch. The pressure is so high, that the wall of the reactor is almost 7 inches thick; the other 6.44 inches is comprised of four layers of high-strength carbon steel, to provide the strength to the vessel.

Because the chemical reaction inside is so corrosive, the reactor has a half-inch thick stainless steel liner. Normal operating pressures are so high in the reactor, that the stainless steel liner actually expands like a balloon and against the inner sides of the structural steel wall when the plant is operating, and contracts when the plant is turned off; this expansion and contraction is stressful. From time to time, the stainless steel liner can leak for number of reasons, so the reactor is equipped with leak-detection ports in the carbon steel plates, commonly called weep holes, to indicate when this occurs. They are supposed to indicate the approximate location of the leak, so that a visual inspection can be made to determine the exact location, and ultimately repair the leak.

Of course, it is unsafe to operate the reactor with a leak, due to the extremely high temperature and pressure, and the high corrosion potential of the urea to carbon steel. Three weeks after the planned improvement project on the ammonia plant was completed, during a routine visual inspection, fluid was observed coming out of the weep holes near the bottom of the reactor. We immediately ceased production and attempted to locate the leak. This took three weeks, utilizing specialized contractors and inspectors, to look for the leak, and to make repairs.

After completing that, what we believed was a good repair, and restarting the reactor, fluid continued to emit from the weep holes, indicating that the true cause of the leak had not been found. This procedure was repeated many times, and the reactor was subjected to several pressure tests of different types. Several different methodologies were employed to try to determine where the leak was, but we were not able to locate the leak. Although we do not know the cause of the leak at this time, we suspect that the liner might have microscopic cracks that only open up under extreme pressure.

After many failed attempts to locate the source of the leak, on April 25, we decided to replace the entire stainless steel liner. This is a very involved project, and again, we are using outside contractors who specialize in this kind of work. To begin, the entire reactor vessel must be removed from the urea plant, using a 240-ton crane, which must be assembled on-site. Now, put this in perspective, the reactor is about six stories tall. It has to be lifted up by a crane, the entire six-story-tall assembly, and taken out of the plant.

After removal, it is placed horizontally in special cradles, fabricated just for this purpose, and then it is opened up. Before repair, the internal components will be removed, then the old liner will be removed. Before the new liner can be installed, the inside of the carbon steel outer wall must be reconditioned to accept the new liner. This process is very tedious and labor intensive, and, by itself, can take up to two weeks, depending on the condition of the inside of the outer wall. Once the reactor is ready, the new liner will be installed in multiple pieces which are welded together, then the reactor is pressure-tested at close to operating pressures.

If it passes, the internal components are returned, and then the entire reactor is reinstalled in the plant, again using the crane. The entire process can take up to six weeks. It is extremely unfortunate that we experienced this failure at the height of the season for UAN. However, when you're dealing with high-pressure vessels, high temperatures, and corrosive materials, you cannot take any chances; safety and soundness dictate the course of action.

On a more positive note, on May 2, we received a permit to produce an additional 60,000 tons of ammonia per year at Pryor. As we discussed in earlier calls, we've already completed repairs to the additional ammonia plants that were allowed before receiving a permit; they are listed on page 20. In the next few days, we will begin trial operations and the debugging process; we expect to be in production before the end of the year. When we've achieved sustained production, we'll make an announcement. For clarity, we also included a chart of Pryor's current capacities, planned capacities after the new 60,000 tons per year is brought online, and our target capacities.

Moving on, on page 21 we've listed our chemical business strategies and some key initiatives for 2012. We reviewed these with you on our last conference call. This page is here for you to reference, or for those who were not on the last call.

Turning now to our Climate Control business, please go to page 22. You can see that sales on this page by major product categories, which we report in our quarterly filing. Total sales were approximately $63 million, a decrease of about 1%, compared to the first quarter of 2011. Compared to that first quarter of 2011, sales of heat pumps were down 4%, fan coils were up 6%, and sales of other products were also slightly up. On page 23, you can see the sales of products sold for use in commercial and institutional buildings were up 1%, while sales of our residential products were down 9%, compared to last year's first quarter. Total bookings during the first quarter were 12% lower than the 2011 first quarter, commercial bookings were 10% lower, and bookings of residential products were off by 21%.

Our backlog of product orders at March 31, 2012 was $47.4 million, approximately 19% lower than one year earlier, however, slightly higher than the $44.5 million backlog at December 31, 2011. During April, new orders were $20 million, and our backlog of product orders at the end of April, was approximately $47.6 million. Although our total bookings during the first quarter were slightly higher than the fourth quarter of 2011, the market continues to be soft. The commercial recovery has been slower than previously anticipated, and the market for residential products has been severely impacted by the lowest level of new home construction in decades, coupled with very low levels of investment in existing homes. As a reference point, through February, US shipments of residential air source heat pumps where down 24% from the same period in 2011, according to the Air Conditioning, Heating, and Refrigeration Institute. Despite the current low level of orders, we have maintained our leading market shares for geothermal and water source heat pumps and fan coils. I will discussed the construction outlook in a few minutes.

Tony mentioned that the gross margin for the Climate Control business had declined. We have historically experienced lags between the time we receive material cost increases, and when we've been able to pass them through to our customers. As we said on our last conference call, the market remains extremely competitive, and we are not able to predict when we will be able to increase prices to offset recent material price increases.

The next few pages of the PowerPoint deal with the market outlook for construction. On page 24 there's a graph that shows McGraw-Hill's most recent Construction Market Forecast report, Construction Forecasts For Certain Commercial and Institutional Building Types. These are the sectors that are the most important to us; they comprised 61% of our total Climate Control business of sales in 2011. As you can see from the graph, these are all -- these sectors are all forecast to grow over the next few years.

McGraw-Hill is forecasting that in the aggregate, it will increase by approximately 3% in 2012, and 87% through 2016. If this materializes, it should benefit all of our commercial and institutional product sales. In addition to watching construction forecast by sector, we also track the Architectural Billings Index which is considered to be an indicator for non-residential construction spending, 9- to 12-months in the future. On page 25 is a graph of the ABI. An index score of 50 indicates that the 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. After indicating struggling business conditions for most of 2011, the ABI finally reached positive territory for the last-five months in a row, landng at a score of 50.4 for January 2012.

Taking all this into consideration, we believe that the general consensus of most economists and construction industry experts, is that the recovery in commercial and institutional new construction is finally here, but it will be at a slower-rate than previously forecast. While new construction remains sluggish, renovation and retrofit of existing buildings has been, and will continue to be, an important market for us. Fortunately, all of our Climate Control products are well suited for this. During 2011, and continuing into the first quarter of 2012, 21% of our Climate Control business sales were geothermal heat pumps used single-family residential applications. Page 26 shows McGraw-Hill's forecast for single-family residential construction starts.

McGraw-Hill's forecasted housing starts will increase from about 435,000 in 2011, to 446,000 in 2012, less than a 3% increase, however, to over 1 million per year in 2015 and 2016. If this occurs, it should benefit our residential geothermal business.

Turning to Page 27 we've listed our Climate Control business strategies and some key initiatives. Again, these are repeated from our last call, and I would not review them again now. However, I would like to discuss one important new product. We recently announced the launch of our new, ultra-efficient Trilogy 40 geothermal series heat pumps. With energy efficiency rates of 40 at ground loop conditions, and 50 at groundwater conditions. These are truly break-through products, with efficiencies that far surpass any other heating and air conditioning product commercially available today. They also include the most advanced array of state-of-the-art features on the market. With the introduction of the Trilogy 40 series, we continue our tradition of technological and market leadership in our Climate Control business.

Before opening it up for questions, I'd like to mention that Tony and I will be at the BMO Farm-to-Market conference in New York City on May 15. We hope to see some of you at this event. And I would like, before I turn this -- open it up for questions, to request that you limit yourself to three questions and then if you have more we can recycle through at the end. Thank you very much. Operator?

(Operator Instructions) Eric Stein, Northland Capital Markets.

Hi, everyone, nice quarter. Just wanted -- if you could just give us your thoughts on the different dynamics between the UAN and anhydrous ammonia markets. Is it fair to say that you anticipate selling all that you produce in second quarter?

Yes, we expect to sell all the ammonia that we are producing the second quarter. Until such time during the second quarter that UAN comes up. As Barry indicated, initially we decided to replace the liner, we indicated it would be roughly 60 days, so we expect it's going to be back in production before the end of the second quarter. In the meantime, economics of producing anhydrous ammonia are very good right now, with $2.20 gas, roughly 31 NMB2s of gas in one ton of ammonia, and the selling price, as Barry indicated, the [Tampa] metric is in the $545 range. Of course, that's in metric, so the net back on that is very strong right now.

Okay, that's good to hear. Any chance that the down-time, what you're doing at Pryor, that, that eliminates or lessens the need for the typical turn-around that you do in the third quarter?

Certainly it will reduce any type of turn-around we might do in the urea plant, but we're really not forecasting that, right now. We are going to still do the turnaround in the third quarter. If it is easier than otherwise would've been, then that will be a plus.

Just curious about initial market acceptance and over the new Trilogy product, and when you think that might begin to impact results?

We are and limited production now and, full production toward the back-half of the year. It takes a while for us to get it in production, get it out at the distribution level; remember we have two steps, distribution, our distributors have to stock it, and after they have stocked it, they have to offer it to their dealers. So I would not really expect to see any serious impact, until either the very-end of this year, beginning of next year.

(Operator Instructions) Joe Mondillo, Sidoti & Company.

Thanks for the color on the Pryor plant, that was extremely helpful. First question has to do with, first of all, I was wondering what the sales were in the quarter at Pryor? And also if you could address the $8 million of lost gross profit absorption, how do you come to that estimate?

We essentially just took the lost production -- if you want to know what Pryor sold in the first quarter, we'll give it to you in tons, Pryor sold about 26,000 tons of UAN, versus 46,000 last year, and they sold about 14,000 tons of ammonia.

So you estimate, what, your capacity at the plant at how much profits you would have earned?

Joe, I think the big thing you've got to focus on in the first quarter, as far as that $13 million, that $8.2 million that you mentioned is that ammonia was down over 42 days so that is what had the biggest impact, UAN was down most of the quarter, but ammonia was down for over 42 days, we were down in January, and then again in March, so that had the biggest impact on that $8 million you are talking about. We don't expect that to reoccur in the second quarter.

Right. What was your sales at Pryor, just value wise?

I gave you the tons, and you know approximately what the sales price is, Barry went over that.

I guess terms of the climate control business, it seems like residential orders were down 30%, I believe, it seems like (multiple speakers).

It was down 21%

It seems like continues to worsen, can you just talk about, directionally, how that business looks?

(multiple speakers)Well, it's a little bit of a confused quarter, to really understand why bookings were down. I didn't really want to go over this before, but there are some things that have affected the comparison. It's a little bit complicated, but first of all, in the first quarter of 2011, we had announced a price increase that was going to take effect towards the beginning of the second quarter, so we had a big rush of orders, which increased the normal order level we would've probably had, to some degree, in the first quarter of 2011.

Conversely, we announced another price increase in the fourth quarter of 2011, and we were getting some orders in under-the-wire at the end of the year, which took those orders away we think otherwise would've come in, in the first quarter of this year. So it is not really an apples-to-apples comparison, quarter-to-quarter. We also announced that we were coming out with this new line of heat pumps. We believe, and this is anecdotal and we cannot really quantify it specifically, that some of our distributors are holding back, and depleting their inventory to some degree, waiting for the new product come out.

They want to run down their old products before they start stocking up with new products. We had a little bit of a confused situation going on in the first quarter. Having said all that, the market is very soft in residential, as indicated by what I cited from the Air-Conditioning Refrigeration Institute numbers for conventional heat pumps, air-forced heat pumps, and so this is very soft market we are in right now.

Okay, great, and then last question in terms of the capacity guidance that you give specifically for Pryor, how should we think about that on the quarter-to-quarter basis? In other words, if your annual capacity is 325,000 tons of UAN, seasonally the second quarter is always the strongest, so is that 325,000 if you're running at mass-capacity every single quarter? Or is that estimated that the second quarter is going to be well above the third quarter? How should we think about that type of capacity that you are giving?

Joe, we have an off-take agreement for UAN, so we try to run UAN pretty much 24/7 so that we don't have to turn down the plant. We do have 40,000 tons of storage at the location, so we've got to run the most optimum way, by running pretty much during the year, except for planned down-time, and then we have an off-take agreements, requires our off-take partner there, to move the product during the off-season as well as during the season. But, you are right, the better margins are earned during the spring and fall seasons.

So what you are saying is, ideally, not including -- excluding the unplanned down-time, ideally Pryor UAN production should be running at the same exact production every single quarter? Except obviously, the third quarter?

More or less.

What about ammonia then I guess? Then, I really should have --

The best economics are if you run full-out of ammonia.

See you think you could sell the same amount of ammonia in the first quarter, second quarter, and fourth quarter?

Yes. Right now there's a shortage -- a very tight supply of ammonia, how long that will last, we cannot predict.

Joe, we'd love to take some more questions, but we'd like to give some of these other guys a chance too, if you don't mind.

No problem.

Do you want to get back in line and we'll get you in a few minutes?

Sure, no problem.

Dan Mannes, Avondale Partners.

A couple questions on a different topic. You talked about CapEx for the year, I think Tony said $48 million ballpark, $35 million in chemical and $13 million in climate. Can you talk about how much of that, either relates to the restart of those idled ammonia units, versus maybe other growth initiatives you have at chemical, if you can just sort of help us out with what the spending is going towards?

The answer to your first question, I don't have that in front of me, as far as how much of the 2012 spending would be on Pryor, but it is not as significant as you might otherwise think. We are bringing in about $6 million of spare parts and those numbers. We had $2 million in maintenance expense that we expensed off in first quarter so most of that had expensed off. So going forward, I don't think that's a major part of what's in here.

In the CapEx for chemical looking forward, we've got about $9 million of regulatory spending that we are doing to bring our plants to all in to compliance with these new, more stringent air-emission and water requirements, so we are continuing to spend quite a bit of money there to bring -- to continue to keep these plants in compliance. We've got about, including that $6 million of spare parts at Pryor, we've also got about $3 million of spare parts at the other locations, and about $15 million in maintenance CapEx, and then we've got about $10 million, $11 million of process improvements, where we expect to improve the process -- (multiple speakers) that are efficiencies due to those de-bottlenecking, and potentially do some pickups of additional business.

Okay. Real quick on the restart of those two idled units, I know when you restarted the primary units at Pryor, you had a bit of a drag from an operating perspective. Do you anticipate any incremental startup costs with those? Because you already had people on-site it will be more -- much smaller this time?

You hit the nail on the head. Before, we had to completely step the plant up to almost 100 people, and we had all of those people onboard before we were able to sustain productions, and we were -- all the overhead cost. The basic core of the plant, in terms of staffing is there, and we have some incremental staff has been added to these plants, but most of the staff is already there in the plant.

Okay. Then the last topic as it relates to cash is, you had a couple lines at the trail-end part of your press release, and you talked about opportunities to invest in growth across the business. Can you give us all of a bit of a better idea of what you're talking about, and by that I mean are you considering mergers and acquisitions, or is this primarily looking at reinvesting in your own? Then the last piece of it is also, do you consider buying back stock as being an attractive?

Let me kind-of go in reversed order. Right now, we don't have any plans to buy back stock. We are not concluding that we might buy back stock, but we don't have an active program underway at this time. To get your other question, there's multiple things we're looking at, to grow and improve the business. As we just went to the CapEx, we have for the chemical business we have, in addition to that, we have various things were doing in the climate control business, we're adding on to our -- one of our plants, this year, that produces heat exchangers for all the other plants, produces air coils.

We are increasing our research and development facilities, test labs, which is for products for the future, we have other things that we are doing within that. We just started, this last year, a new plant for our chillers, and we plan to add another assembly line in that plant later this year for some new products that we are bringing on board. So, we continue from organic growth standpoint, we have substantial amount of investments that we can make, and things that we're looking at doing or are underway in various operations.

Above and beyond that, we've discussed this before in conference calls, we are looking for the right type acquisitions, that might be right for us. We don't have anything to announce to you at this time, but it is always something that we are doing, it's an ongoing process.

(Operator Instructions) Liz Noble, Set [Sail] Investments.

I wondered if you might elaborate a little bit more on some of the environmental regulations that you are needing to address?

I will do that. Would you mind repeating your name and company? We could not hear.

It's Liz Noble, and Set Sail Investments.

Okay, thank you, Liz.

I would tell you what we are doing, all of our acid plants, we're installing, we have a program to install Knox abatement equipment. That's one thing we are doing. In our El Dorado plant, we are setting up a pipeline for water, which is to dispose of the processed water, and treat it before we release it. In our concentrated nitric acid plant, we are installing the abatement equipment. All together we have, I think 12 plants that are going to get Knox abatement equipment over a period of several years. We are also upgrading our electrical switch gear and relocating it, so that it is not susceptible to contamination. And we have a whole list of projects, which we are always working on. So as soon as we finished these, I'm sure there will be some more. But what happens is we get new regulations coming out every few months from the EPA, and we have to do things to comply with those. That's why I think if they continue doing that, we will continue spending. And also if you see something that we think we should do for our own -- for safety or environmental improvement, we will do that.

And, the approximate capital expenditure for that is about how much?

What we said for this year it is -- we have about $9.5 million planned, but the entire Knox abatement project, that Jack was referring to over several years, is not completely included in that number.

No, over the next five years we will spend about $20 million, $25 million, in addition to this.

The primary target there is nitric acid plants. That's today's dollars.

Joe Mondillo.

A few follow-up questions. First off, just going back to my last question,. I'm just trying to in terms of the capacity that you put out there in terms of ammonia, it is 190,000 tons when you are not creating UAN. You just divide that by 4, essentially 47,500 tons is your max capacity of ammonia?

I don't understand the question. Are we looking at page 20?

Yes. If you're not producing UAN, you do 190,000 tons per year. So quarterly, is the max capacity 47,500 tons?

That's a good way of looking at it, on a quarterly basis. There's not an exact number of days in every quarter, but more or less, that's it.

Okay. Just wanted to confirm.

We try running these plants 24/7, Joe.

Right.

The other thing that you have to remember is that, traditionally, we do have the turnaround in the third quarter. So the way we look at these plants, is we factor a certain number of plant days, which are usually the days in the third-quarter that we have the turn-around, and then we factor for ourself another number of days per month that are unplanned, and it is not even, because of those turn-arounds in the third quarter.

Okay. So the second quarter could be higher than the third quarter?

It usually is.

In terms of ammonia production, (multiple speakers) during the turn, you'll have less in that quarter.

All right, the next question I have, it seems like your Ag sales at Pryor were up, if I'm doing the calculation right, upwards of over 40% year-over-year?

We have -- Cherokee was up from 50,000 tons to 60,000 tons, El Dorado was up from 45,000 tons to 55,000 tons, so you had some pretty good increases in the other two locations.

So I guess my question was, I thought it was under the assumption that those plants were sort-of running at near-max capacity last year, given the favorable fundamentals in Ag, and demanded everything. I guess that's not the case, so I was wondering how much more capacity do we have above where we are at right now?

I think that what you're seeing, in the first quarter this year, was very strong demand and very good up-time, at these other-two locations.

So it is more efficient production on your side?

I don't understand the question. I'd like to answer, but do you want to say it again?

Sure.

You thought we were at full capacity, right?

Yes.

How can we get at more production, if we are at full capacity?

We were not at full capacity of ammonium nitrate we had a much better demand season this year than we had last year. And the Cherokee plant had better up-time this year than it did last year first quarter, so we just -- the stars were kind-of aligned this quarter.

To refresh your memory, last year we had a real severe drought that really affected the whole -- primary markets for UAN were impacted last year.

Okay. Then I guess the third question is on the additional 60,000 tons of ammonia capacity, now that you have the permits, what sort of timing do you think that it will take to get that up and running?

Well, what we said was that we weren't going to say. What we said was that after the experience of not hitting it right on Pryor, and paying the consequences for that, we just decided that -- we've got a trial-and-error process here, but what actually has to happen is that the turn the plant on and they run it -- we are only allowed to do certain things before you get the permits. So you can't actually turn the plant on and run it, until you get the permits. Can't load it up with -- so now that they actually can run it, they are going to find things they couldn't find just from visual inspections, and the kind of things they did before they ran it, so (multiple speakers) They most likely will. So they are going to turn on and they are going to run it, and they're going to find problems, they're going to turn off and they are going to fix that problem, they are going to run it again until they find another problem, and so-on, until they think they've been through the whole plant and it runs. At this time, we really can't predict exactly how long it takes, but we feel pretty safe in saying it will happen before the end of the year, but we don't have an exact internal schedule, because we don't know.

Okay. I imagine some additional costs are going to come online then just due to that?

It is possible.

They should not be major. We went through this process many years ago in Cherokee, and today that's a plant that runs full out -- is probably our best plant in time on-line.

Okay. And also in terms of, and I don't know if this was asked earlier, but ammonia, places haven't bounced back as much as UAN prices have, they're still under where they were one year ago. I imagine that may be due to natural gas prices being so low. Could you talk about the profits of ammonia versus (multiple speakers)--

Ammonia is the last month or so has jumped up (multiple speakers)

It jumped up in May from 470 metric, cap it at 545

What are the profits of ammonia like, compared to one year ago, given where natural gas is?

We don't really disclose profit-per-ton, but you can do the math. You know what the content is per-ton of gas was -- you just have to look at what it was exactly a year ago, look at what the price was and you can more or less get a good picture.

Can you tell me if it was above or below, or even, directionally?

You have got to keep in mind that gas $2.25 now, last year it was over $3 or something, so you've got a little bit of improvement there, and the Tampa price right now is as high as it was last year, so the economics are as-good, or better.

You probably have $1-per-$1,000 difference in your gas price from last year.

(multiple speakers) So that's only about $31 or $32, so the big impact is the fact that there's a tight supply in Tampa price right now is as-high or higher than it was last year.

Okay. Then just lastly if you talk about the gross margin on the climate control side, it was 31% for the quarter, but how do you feel about that, given the raw material prices, do you guys see any price increases in the near future, or how are you feeling about that gross margin?

What we said in the conference call, and I know we threw a lot of stuff at you, so maybe you didn't hear it, was that we really couldn't predict when we were going to be able to take enough price increases to overcome the material cost increases. We're -- it is not one unified price structure. I mentioned we had taken some price increases on the residential product, that's a small part of our overall business, only about 20%, it is a different competitive situation with that, than when you're bidding large commercial projects. We are trying to put the price increases, as we feel the market will take them. It is really hard to predict when that process is -- when we are going to be able to get to that process or if we will be able to. (multiple speakers)

Matthew Dodson, Edmunds White Partners.

Can you repeat your name and firm please, we couldn't hear.

I'm sorry. It's Jon Evans with Edmunds White Partners. Can you just talk a little bit about your thoughts on your customers' re-sales? So once you get past the spring season here, as you go into the fall season, if corn comes down, are you worried about the re-sale or not at all?

We think that corn at $6, of course, is pretty high. If it drops to $5 we don't expect economics change for our business.

It can go down as low as $4 and we are still in good shape.

The real question, I think, is once we are through this spring season, the general consensus is that the fertilization of the plant is well-ahead of where it traditionally is, so we would expect to see some decline in pricing -- maybe the middle of June, or after June, as distributors begin to restock. And typically, what happened in the first part of this year is that de-stocking, the re-stocking was slow because the buyers were ready for lower prices, and some were waiting for higher prices, so you had sort of an impasse for a while, then when they started the buying process back up, so that could be reoccur. A lot of it depends on when people make the buying decision. The fact is to have to buy at some point.

Right, because you cannot skip UAN or ammonia, right? If you are planting corn?

Not for grain, that's right.

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

Okay, thanks for listening in today. We appreciate it and we would like to turn the meeting over now to Carol Oden, who will cover some forward-looking statements about the content of the presentation today. Carol?

Thank you again for listening today. The comments today contained certain forward-looking statements. All statements [as in statements of] historical facts are forward-looking statements. Statements that include the words except, 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 Buildings Index or any McGraw-Hill forecasts including those pertaining to commercial, institutional, and residential building increases or industry growth and McGraw-Hill forecasts regarding the Tunnel-Green retrofit renovation market and energy efficiency market. The forward-looking statements include, but are not limited to, the following statements, repairs to the urea plant at Pryor are expected to be completed before the end of June; we expect to see gradual growth in our industrial markets; we believe outlook for LSC and [Poland] for the balance of 2012 is positive; we're taken actions to grow and improve both our businesses; we don't expect to lose 39 days of ammonia production as we did in the first quarter.

The Pryor facility should report positive results for the production and sale of anhydrous ammonia to the fertilizer market; currently considering future capital spending of approximately $48 million; the cost of natural gas will remain low for some time; expect the product (inaudible) of UAN to decline in the third quarter; the positive fundamentals in the Ag business should continue; we continue to be optimistic about our Ag business; we plan to produce an additional 60,000 tons per-year of ammonia at Pryor; our plan is to produce an additional 60,000 tons per-year of ammonia at Pryor; our plan is to eventually make other improvements at Pryor to boost ammonia production.

We expect additional ammonia plants at Pryor to be in production toward the end of the year; we believe that the recovery in commercial, institutional, new construction is fine this year, it will be slower than previously forecast. (multiple speakers) 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 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 physical year ended December 31, 2011, and form 10-Q for the period ending March 31, 2012. We undertake no duty to update [information] contained in this conference call. The current EBITDA is 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 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.