LSB Industries Inc (LXU) 2012 Q2 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Carol Oden, Executive Administrator of Assistance. Thank you, Ms. Oden, you may begin.

Thank you.

Again, we would like to say welcome to the LSB Industries, Inc 2012 second 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, August 8, 2012, 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. Please note that the presentation starts on page 3 of the PowerPoint.

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

Thanks for joining our conference call today. Today, I'm going to try to give you a comprehensive picture of the Company. The details of some of the things I mention will be given to you by Tony and Barry when I complete my section of this conference call.

This afternoon, we released our 2012 six-months second-quarter earnings report and we also filed our 10-Q for the quarter. Net income for the first six months was $40 million, or $1.72 per diluted share on $400 million sales. Net income for the second quarter was $26 million, or $1.11 per diluted share on sales of $209 million, compared to $1.22 per share in the second quarter of 2011.

Second-quarter results were below the same period last year but because of the recent events in our Chemical operations, I consider our results are acceptable. Also in last year's second quarter, we had an $8.6 million business interruption insurance recovery equating to $0.23 per share which somewhat skewed the quarterly comparisons.

As we previously informed you, our second quarter results were impacted by three events. These were unplanned downtime at our Pryor, Oklahoma, chemical facility to repair the urea plant, the destruction of the 98% nitric acid plant at our El Dorado, Arkansas facility, and the collateral damage to our other acid plants at the El Dorado site, caused by the explosion in mid-May.

To bring you up-to-date on what's been going on with these things, repairs to the urea plant at Pryor were completed the first week of July and the plant is now operational. However, we expect production at Pryor to be below targeted rates until we replace the converter in the main ammonia plant and make certain other modifications. We expect these to be completed early in 2013.

The repairs to our El Dorado plants have been made in remarkably short time. Two of the three remaining nitric acid plants are back in production and the third nitric acid plant is scheduled to be completed this month. Sulfuric acid plant repairs are expected to occur during the fourth quarter of 2012. A new nitric acid plant will replace the destroyed plant and we plan to install a separate nitric acid concentrator for the production of concentrated nitric acid. These projects should take at least two years to complete, due to delivery schedules on major equipment components for the new plant.

Our Climate Control business continues to operate in a very competitive market. It is profitable but sales volume has not completely recovered from the recent recession.

Overall, we believe the outlook for LSB for the balance of 2012 and forward for 2013 is positive. Please keep in mind that during the third quarter, we scheduled most of our plant turnaround. We suggested that you do not annualize the second quarter results, informing your expectation of our results for the year.

We also believe we have substantially more potential to develop the Company and we are increasing capacity at Pryor Oklahoma, Cherokee, Alabama, and El Dorado, Arkansas, to accommodate increased demand. Tony will give you more financial details and Barry will cover operations and market conditions throughout our businesses.

Now, I'll turn this call over to Tony Shelby, our CFO.

Thanks, Jack. Our results for the second quarter are summarized on page 4 of the PowerPoint presentation. Comparing the second quarter 2012 to the second quarter of 2011, fully diluted earnings per share were $1.11 compared to $1.22, a decrease of 9%. During both quarters, there were certain significant events in the Chemical business that affected the comparability of earnings for the two quarters, which we will describe in detail when we turn to business segment discussion.

Consolidated sales were $209 million, a decrease of $26 million or 11%. Operating income was $42 million, a decrease of $6 million or 12%. Chemicals operating income was down $3.6 million. Climate Control was down $1.9 million.

After interest expense and effective tax rate of 36%, net income was $26 million compared to $28.6 million last year. The effective tax rate was lower than the combined federal and state statutory rate due to our Section 199, allowable domestic manufacturing deduction. Also noted on this page, cash flow from operations was $45 million.

After cash for capital expenditures of $17 million, payments on current and long-term debt of $3 million and other offsetting item, net cash increased $25 million for the quarter. The increase in cash for the quarter was due to the seasonal sources and uses of working capital which would be consistent with the second quarter of 2011. At June 30, 2012, our cash balance, including short-term investments, was $149 million. EBITDA for the quarter was $48 million, versus $53 million in 2011.

Turning to page 5 and comparing Chemical's second quarter 2012 to the second quarter 2011, sales for the quarter were $138 million, versus $156 million, a decrease of $18 million or 11%. By product line, agricultural sales were $83 million, compared $82 million. And industrial and mining product sales were a combined $55 million, compared to $74 million in 2011, a 26% decrease.

So the question is, why in such a strong agricultural market were total sales down 11%? The answer is that we incurred unexpected interruptions of production at two of our major facilities. On page 34 of our 10-Q is a full discussion of downtime at our Pryor and El Dorado facilities during the second quarter of 2012, both of which Jack alluded to in the overview.

To summarize, after failed attempts to repair leaks in Pryor's urea plant reactor, we determined that the stainless steel liner was non-repairable and had to be replaced. The attempted repairs and subsequent replacement resulted in the urea plant being down for the entire quarter. Due to the downtime of the urea reactor, the Pryor facility was unable to produce urea and as a result, lost an estimated 70,000 tons of UAN production during the quarter. The impact was offset in part by the continued production of and sales of ammonia, primarily into agricultural markets at very strong gross profit margins.

Summarizing further, the El Dorado facility lost all acid production in mid-May due to damage caused by the explosion of the DSN plant. Without acid production, until the restart of one acid plant in mid-June, most production at El Dorado stopped. As a result, sales of all products were adversely affected.

Looking forward into future quarters, until we replace the approximately 20% of El Dorado lost acid capacity, El Dorado's future earnings will be adversely affected. We believe we will be reimbursed by our business interruption insurance coverage for that earnings effect but not in the same quarter as the loss. The business interruption insurance recovery will be recorded as income, in the quarter received.

Continuing with Chemical operating income for the quarter. Operating income for the quarter was $39 million versus $43 million a year ago. As indicated in the initial overview, there were certain significant events in the two quarters that affected the comparability as follows.

The second quarter of 2011 operating income was favorably affected by an $8.6 million insurance recovery. The second quarter of 2012 operating income was adversely affected by an absorbed fixed overhead cost and maintenance repair costs to the unplanned downtime at the Pryor and El Dorado facilities. The negative effect of the unplanned downtime in 2012 was partly offset by improved UAN margins and increased agricultural ammonium nitrate sales and margins. Barry will provide an update and current status of both Pryor and El Dorado with the business overview.

Reflected in the chart on page 6 is Pryor's operating income for the second quarter of 2012. The Pryor facility generated $13 million of operating income from the production and sale of anhydrous ammonia into the fertilizer market, which was less income than if you UAN was up and running and both products were available for sale.

Continuing with the quarter-over-quarter comparison by business segment, please refer to page 7. Climate Control sales were $68 million, or $10 million lower than a year ago. Climate Control's gross profit as a percent of sales was 31.1%, compared with 30.3% and operating income was $7.3 million compared to $9.2 million in the second quarter of 2011.

Generally, the decline in sales and operating income in 2012 for Climate Control is attributable to lower order intake during the first quarter of 2012 compared to the same quarter in 2011. The lower sales order intake is a result of continued lower construction activity in most of the markets that we serve. Barry will review the quarterly results and current market conditions in more exact terms and greater detail.

Capital expenditures. During the quarter, total capital expenditures were $23 million, including $22 million for the Chemical business. We are currently considering future capital spending for the remainder of 2012, of approximately $54 million, including committed expenditures of approximately $23 million. Chemical's plan and our committed spending for the remainder of 2012 is $46 million including $12 million rebuilding costs at the El Dorado facility. Planned spending is subject to change based on economic conditions, regulatory requirements, and opportunities for profit improvement that might arise from time to time.

Briefly reviewing our liquidity and capital resources, the summary on page 4 reflects a continued strengthening of our balance sheet. Cash in excess of total interest-bearing debt was $74 million. The outstanding balance of the secured term loan is $70 million and total long-term debt including the current portion is $75 million.

At June 30, 2012, stockholders equity was $335 million and the ratio of long-term debt to stockholders equity was approximately 0.22 to 1. Also as noted on the slide, EBITDA interest coverage was 33 times.

We have continued to strengthen our balance sheet which provides safety and soundness in a period when this global economy continues to be of concern. At the same time, LSB is positioned to be prepared to take advantage of opportunities to grow the two business segments. We've addressed our results of operations for the quarter and the comparisons to the 2011 quarter in greater detail in the MD&A and the 10-Q, which was filed earlier today. And we suggest that you review these disclosures and discussions for additional analysis.

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

Thank you. Since Tony covered the financial results, I'm going to focus on our sales activity, product backlogs where pertinent, and market drivers. I'll also give you an update, a little more detailed update, on our Pryor and El Dorado facilities.

To start, please turn to page 9 which shows you our sales mix for 2012 by the markets we serve. For the first half of 2012, approximately two-thirds was Chemical, and one-third, Climate Control. In our Chemical business, about 55% of sales were nitrogen-based agricultural fertilizers and associated products. The other 45% was industrial and mining products which were lower than usual, as a result of the explosion at El Dorado in May and the subsequent downtime in parts of that facility.

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

Focusing first on our Chemical business, please go to page 10. Second quarter sales were $138 million, 11% lower than the second quarter of 2011. Agricultural products were up 2% over the 2011 level. Industrial and mining sales were down 15% and 43%, respectively, primarily caused by the unplanned downtime at El Dorado.

Turn to page 11 for sales of our key agricultural products. During the second quarter, tons shipped of urea ammonium nitrate, or UAN, were 45% lower than during the 2011 second quarter, while net sales decreased 43%. The decrease in tons sold was a result of unplanned downtime at Pryor while its urea reactor was being repaired. UAN shipments from our Cherokee facility actually increased slightly over the second quarter of 2011.

Tons shipped of agricultural-grade, high-density ammonium nitrate, or HDAN, were 14% higher than the second quarter of 2011 and sales were 36% higher. Higher shipments of HDAN were driven by generally better weather conditions during the planting season, more acres of wheat planted than in previous years, and early push by ranchers to rebuild depleted forage inventories, and lower than usual starting inventories at the dealer level. Delayed shipments of urea and high urea prices also pushed some users to nitrate as a better alternative.

Tons shipped of ammonia to agricultural markets increased 65%, resulting in a 61% increase in ammonia sales compared to 2011. This was a result of having more ammonia available to sell from our Pryor facility due to curtailed UAN protection.

Turning to our industrial and mining products on page 12, sales of all products during the second quarter were lower than 2011. Again, this was a result of the explosion and subsequent downtime at El Dorado.

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 and this is benefiting margins 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 feedstock we use at are El Dorado, Arkansas, and Baytown, Texas, facilities although slightly lower during the second quarter than in the second quarter of 2011, continues to be high compared to previous years and has recently increased to $690 per metric ton. High ammonia prices have increased production costs at our facilities that use ammonia as a feedstock.

While we're on that subject, the chart on the lower right shows pricing for ag-grade HDAN. In July 2012, Southern Plains prices for HDAN were $465 per ton, compared to $390 per ton 12 months earlier. Increased selling prices, coupled with lower average ammonia feedstock costs during the second quarter, resulted in higher margins on agricultural-grade AN than during 2011. Currently, HDAN is selling at about $395 per ton.

If you look at the chart on the lower left, you can see that the Southern Plains price for UAN was $340 per ton this July, compared to $360 in July 2011. Today's pricing is about $320 to $330 per ton and it's on the rise. Prices have declined seasonally since our last conference call as we predicted they would at that time.

Focusing on the outlook for the Chemical markets we serve, page 14 lists several indicators for our agricultural products. Most of these indicators are favorable. Grain stock-to-use ratios both worldwide and in the US continue to be low. Planting levels are generally high, very high in the case of corn.

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 the low-cost producer of nitrogen fertilizers.

The industry consensus is that the positive fundamentals of the ag business should continue. In addition, to general industry drivers, weather can have a significant impact on fertilizer use, demand, and prices. Although there has an much publicity about the current drought, its impact was too late to affect the sale of our fertilizers during the second quarter and there should be little or no effect on demand for our products during the third quarter, since we're currently between planting seasons. The future impact could actually be positive for the sale of fertilizers, since lower crop yields this season should result in lower stocks and could also create higher fertilizer demand next season.

The big question mark is corn production for the ethanol industry. Although a major reduction of ethanol production could hypothetically affect the demand for corn and its demand for fertilizer, so far we have not felt any meaningful impact from the current level of reduced ethanol production. We believe this is attributable to the low-level of curtailed ethanol production, the reduced levels of corn stock, and the anticipated poor yield from the current corn crop. 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, despite lower sales caused by the explosion and subsequent downtime at El Dorado, a 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'd like to take a few minutes to update you on the progress at our Pryor and El Dorado operations. Please turn to page 17. During our last conference call, we described in detail our attempts to locate a leak in the urea reactor at our Pryor facility which ultimately resulted in the cessation of urea production from February 27 to July 6. This cessation was to facilitate repairs to that reactor. The objective of those repairs was to replace the stainless steel liner of that high-pressure vessel. Those repairs were successful and Pryor's urea reactor is now operational.

We also advised you during that call that we had received permits to increase ammonia production at Pryor by 60,000 tons per year and we're beginning the debugging process on two smaller ammonia plants. That process is now underway and we continue to expect to be in production by the end of the year.

If you've been following our progress at Pryor, you probably know that we have not been able to sustain ammonia production at our targeted production rate of 700 tons per day. For a short time, we were producing at about 600 tons per day but recently we've been producing ammonia at approximately 75% of that rate. In addition to the rate of production when running, operation has been intermittent rather than continuous. We have had several problems relating to the ammonia conversion process. We believe that most of these problems are a result of the fact that the current ammonia plant has six outdated small ammonia converters. To correct these problems, we plan to install a single, larger and more current design Kellogg converter early in 2013 to address the converter issues.

In addition to a new converter, we also plan to replace catalysts that are at the end of there useful life and install a new chiller to lower high temperatures that reduce production capacity in hot weather. We believe that all of these measures should allow us to achieve our targeted ammonia production rates at Pryor. At this time, our plan is to install the larger converter next to the old ones, while they are running and have a quick cut over with minimal disruption of production.

Turning to El Dorado, please turn to page 18. On May 15, there was an explosion in the DSN 98% strong nitric acid plant at El Dorado, which we refer to as EDC. Fortunately, no EDC team members or local townspeople were injured. However, the DSN plant was damaged beyond feasible repair. The sulfuric acid plant was seriously damaged and there was less serious damage to three other nitric acid plants, the prilling towers, and various ancillary equipment.

Since May 15, we have made substantial progress at EDC. A temporary control room was put in place. Two of the remaining nitric acid plants have been restarted and the third one is scheduled to restart by the end of August. The prilling towers were repaired and are in operation. The sulfuric acid plant will be brought back online before the end of 2012.

The DSN strong nitric acid plant was damaged too seriously to repair and will be replaced with a new acid plant and a concentrator. This will take at least two years to fabricate and install and should cost over $100 million, which should be substantially covered by insurance.

As we previously reported, we have property insurance coverage above a $1 million deductible. We also have business interruption insurance that activates 30 days after May 15. We're pleased with the progress as EDC so far and we'll keep you posted as appropriate in the future.

Moving on, page 19 contains our Chemical business strategies and some of our key initiatives. We reviewed most of these with you on previous conference calls and this page is here for your reference or for those of you who are not on those calls.

Now, please turn to page 20, where we will begin the discussion of our Climate Control business. You can see sales by major product categories on this page. Total sales during the quarter were approximately $68 million, a decrease of 12% compared to the second quarter of 2011. Compared to the second quarter of 2011, sales of heat pumps were down 14%, fan coil sales were down 11%, and sales of other products were down 10%.

On page 21, you can see that sales of products sold for use in commercial and institutional buildings were down 11%, while sales of our residential products were 19% lower than last year's second quarter. Total bookings during the second quarter were $66.8 million, or 4% higher than the 2011 second quarter. Commercial bookings were up 7% and bookings of residential products were off by 8%. Our backlog of product orders at June 30, 2012, was $50.2 million, slightly higher than one year earlier and approximately 13% higher than the $44.5 million backlog at December 31, 2011. Total new orders in July were approximately $20.8 million, and our backlog of product orders at July 31 was approximately $50.3 million.

Although our total bookings during the second quarter were the highest since the first quarter of 2011, the markets we serve continue to be soft. The commercial recovery has been slower than previously anticipated. The markets we serve for residential products have been severely impacted by low levels of construction and low levels of investment in existing homes.

In addition, very low cost for natural gas, which is used as a fuel for heating about 60% of the homes in the US, have extended the payback period for our residential geothermal products in those markets that use natural gas. We believe this has impacted our sales of residential geothermal heat pumps. One bright spot is that we have maintained our leading market shares for geothermal and water source heat pumps and fan coils.

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

McGraw-Hill is forecasting that in aggregate they will decrease by approximately 3% in 2012 which is an about-face from the 3% growth forecast a quarter ago. This reflects the slowness in the economic recovery. These sectors are forecast to increase 77% through 2017. If this future growth materializes, it should benefit all of our commercial and institutional product sales.

In addition to watching construction forecast by sector, we also track the architectural building index, which is considered to be an indicator for non-residential construction spending, 9 to 12 months in the future. On page 23 is a graph of the ABI. An index score of 50 indicates that the architectural building were approximately the same as the previous month. Any score above 50 indicates growth in buildings while any score below 50 indicates declining buildings. This indicator was below 50 for most of 2011, finally breaking into positive ground in November. However, after five months in positive territory, it dipped below 50 in April of this year and has remained there ever since. 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.

While new construction remains sluggish, renovation and retrofit of existing commercial and institutional buildings has been and will continue to be an important market for us. During the first half of 2012, 18% of our Climate Control business were sales of geothermal heat pumps used in single-family residential applications. Page 24 shows McGraw-Hill's forecast for single-family residential construction starts. They're currently forecasting that housing starts will increase from about 413,000 in 2011 to 490,000 in 2012, a 19% increase, and to over 1 million per year in 2015. If this future growth occurs, it should be beneficial to our residential geothermal business.

Again, turning to page 25 we've listed our Climate Control business' strategies and initiatives. Again, these are repeated from previous calls and I will not review them with you again at this time.

Before opening it up for questions, I would like to mention that Tony and I will be presenting at the Imperial Capital Global Opportunities Conference in New York City on September 19. We hope to see some of you at this event.

One more item and that is before I turn this over to the operator to poll for questions, I would really appreciate it, since we usually have several questions and we want to get everybody, if you'd try to limit your questions to three. And if you have more, just get back in line and we'll come back to you after other people have a chance to get their questions in. Operator, please open it up for questions.

(Operator Instructions)

Dan Mannes, Avondale Partners.

Hi, good afternoon, everybody. I want to ask quickly if we can get a little bit more color on the ammonia converter replacement project. Can you just give us a little more color on the timing? And how this at all correspondence, if at all, with the turnaround activity in the third quarter? If you could just walk us through the staging of the replacement?

Right now, what our plan is on this specific replacement, is to actually have the new one constructed right where it's going to operate, which is in a different location but near where the old ones are, adjacent to it. And we'll basically have all that done and so it'll be a very quick cut over. It will not be a situation where we're going to stop and take the old ones down and replace it with the new ones. Most of the work will be done while the old ones are still in operation. Right now, we're targeting some time in early 2013 for that cut over.

Have you already ordered this equipment? And do you have any estimate of what that cost is going to be?

Some of the equipment we already own. Some of the equipment is on order and the work is being done. Yes.

Dan, it's in the planned spending we talked about, but we think the total cost is going to be in the $6 million, $7 million range.

Got it. The last question on this topic, and then I'll hop back in queue, (inaudible) your turnaround for third quarter given the amount of downtime you've already had, particularly at Pryor this year, and contrasting to last year, when you have a turnaround and then a lot of downtime. Can you talk at all about what your plan is for the third quarter? Especially given -- looks like a pretty strong environment, at least for ammonia pricing.

Dan, let me clarify one point, we're going to do the Cherokee turnaround in third quarter but Pryor is going to be in the fourth quarter and we're doing that in conjunction with this converter installation. So there'll be a turnaround in the fourth quarter for Pryor, late in the quarter, and the converter will be added that same time. Hopefully, we'll have it in place, as Barry said, early in 2013.

Got it. Thanks for that color and I'll hop back in queue.

Thanks, Dan.

Joe Mondillo, Sidoti.

Good afternoon. I thought I heard -- it might have been Jack or Tony, I forgot who it might've been -- did you say you were trying to increase capacity at Cherokee?

Yes.

Could you give us some more color on that?

Yes. We're adding an acid plant.

A nitric acid plant.

Joe, as you know, we're somewhat ammonia-limited there but we do have a port there where we can increase ammonia capacity that way.

Okay. This is going to increase your ag chemical production?

Potentially.

And what's the timing on that?

Eight months. That's approximate timing.

Okay. And how significant is that compared to the existing capacity?

About equal.

Double the capacity?

Yes.

Of nitric acid.

Of nitric acid. So, I guess if you look at the total ag sales at that, what kind of addition is that going to be?

Probably, Joe, what we'll do there is that plant gives us a really good solid backup on the other acid plant there. It also gives us additional capacity that we can backup the other plants with nitric acid. And we'll have the ability to import ammonia for our industrial business which pays on a cost-plus basis and divert more of our ammonia into UAN there. That's the plan.

Okay. And then, in terms of UAN prices, I was just wondering if you could give us your thoughts on the demand-supply dynamics holding them down year over year, despite the drought pointing to another big planting season in the 2013. Just wondering what are your market thoughts on what's going on? Why ammonia prices are so high? Why UAN prices are [tailing] down?

I think if you look at what some of the other big fertilizer companies are saying, there's an awful lot of ammonia was put down earlier this year because of the late season. Because of the droughts right now, I think people are hesitant to buy. But we believe the distribution and storage is pretty much stocked out now so UAN prices, as usual, will respond to when the demand kicks in. We think it's probably a low point right now.

I think your question went to ammonia, didn't it?

Both, in general. Just the market between ammonia and UAN?

Ammonia is very high right now. (inaudible) -- because of the tight supply.

We're a [net] importer of ammonia.

Okay. I guess, last question, in terms of the Climate Control, seems like backlog has increased a couple quarters here. It's the highest level since first quarter '11. I know you said the market's still a little weak but do you see a recovery slowly building? How are you looking at the business?

I am reluctant at this point to be very aggressive about talking about recovery because we've been so disappointed over the last couple years. The forecasters for construction, that do this for a living, have been missing this call. I don't believe that I know any more than they do and so I'm reluctant to do it.

We see anecdotally, what we hear from the field, is that there's a lot of activity. There's a lot of projects. There's a lot on the boards. But what we're also seeing is that projects delay, that they rebid, that they rebid not only once, but rebid several times. And the final decision to pull the trigger and go ahead seems to be very procrastinated. I wish I could give you a more definite answer as to what's going on out there. But we just think that this recovery is going to be slower than we did a year ago, than what we thought it was going to be a year ago. Or even slower than we thought it was going to be six months ago.

I think one of the problems is, the banks have tightened down on lending again. And there's very little project financing going on right now, from the banks, that is. They're having to seek alternate sources of borrowing because of the new law has kicked in and it's having an effect on the banks.

There's other factors that are affecting this and those who watch this closely -- I think we've run through any residual effect that there was from the stimulus. That's gone. We've seen much less governmental spending in the areas that we serve this year, than the last couple years. Consumer spending's very tight.

We're optimistic about the long haul for this. There's some pent-up demand. They are forecasting long-term growth that's pretty significant and we believe that in the long-term that that will probably happen. What we're iffy about -- and I think that most people probably are now -- is what will the real rate of growth be? When will it really occur? Will be according to the current forecast? Or will it push out again, like it has the last few cycles, couple years?

Okay. Thank you.

Thanks, Joe.

Rob Longnecker, [Daltry]

Could you provide a little more data on production of Pryor in the quarter?

What kind of data are you looking for?

How many tons of ammonia and tons of UAN, if there was any?

I think we mentioned that they didn't produce any UAN during the quarter at Pryor and they produced about 41,000 tons of ammonia.

Last year, they produced 25,000 tons of ammonia and 62,000 tons of UAN. This year, no UAN and 41,000 tons of ammonia.

41,000 tons. What was last year again? Of ammonia?

25,000. That's what they sold.

How much was produced in the quarter?

All of it. (multiple speakers)

You had pretty much sales equal production this year as compared to last year. We were converting a lot of it to UAN.

Got you, okay. You guys mentioned that the $100 million plan would be substantially covered by insurance. Do you have an estimate on how much you guys have to come out of pocket on that?

What we said before was that we have a $1 million deductible on our damage policy.

And then everything else is covered?

Hopefully. At this time, that's what we believe and that's what we hope.

Okay. And when do you guys think you'll be giving guidance on 2013 CapEx?

That will probably be either in the fourth quarter or first quarter of next year.

Okay. Thank you very much.

(Operator Instructions)

Gregg Hillman, First Wilshire.

Hi, good afternoon. Could you talk about the cost, the lead times, to put an ammonia producing facility in El Dorado?

You mean, if we were to decide to put in an ammonia producing facility? Well, the thing about ammonia facilities are that the cost varies significantly depending on the capacity. So that's a very broad question and you really have to narrow it down more to be able to give an intelligent answer.

Okay.

I can give you some guidelines. It's 36-month proposition, more or less. Some people will say 30 months. Some people say 36 months, from the time that you start. That includes engineering, the plant, and (inaudible) building it.

The cost will be anywhere from $200 million to $300 million, depending on the size of the plant. 700 tons a day, would be in the range of $225 million. 1,000 tons a day would be in the range of $250 million to $300 million. And that's inside [battery] limits.

Do you have to get in queue with the manufacturer that makes the stuff? In other words, if you don't decide in the next year or two, could they get other customers and that would to push you out like five years, if you the gist of my question?

It could happen.

There is a constraint in terms of the availability of the equipment necessary to build an ammonia plant?

It's not only the equipment to build the ammonia plant, but it's the number of qualified construction workers that are capable of working on these kind of projects in a geographically logical area.

Okay.

And the industries. Everybody knows the industry is already backed up, based on some of the other announcements that have been made.

Okay. And then just one another question for Barry, about the claims about geothermal heat pump, between you and WaterFurnace Industries. There seems to be a lot of claims going around, who has the best gizmo. How can I make sense of all that? Or how do you make sense of all that?

There's a fellow who is a writer for Forbes, who wrote a series of articles. I think ultimately he finally nailed it. But here's the way we view it. We announced our Trilogy series. When we announced it, we said it had a 40 EER and approximately a 5 COP. And for those of you who aren't familiar with these ratings, the EER is the cooling efficiency rating, and the COP is the heating efficiency rating. This is a substantial increase over the industry best previous, which was approximately 30 EER. Some of the models in our line up actually go as high as 42 EER. In addition to that, our product is capable of producing hot water free as a byproduct, 365 days a year, whether the unit's being used for cooling or heating. Now, in a typical home -- this is just an average number -- about 75% of all the energy is used for cooling and heating and the generation of hot water, about 60% for cooling and heating and about 15% for the generation of hot water.

After we announced ours, WaterFurnace announced another one. I think they have announced a 41 rating on there efficiencies approximately. Let's say it's a point or two higher. But theirs is not capable of generating as a free byproduct the generation of hot water year round. So, when we designed ours, we look at the possibility of designing a higher EER. We could've been capable of hitting a higher EER at a certain point. However, to do that it would not have been optimum for also including the heating capability. So we looked at it holistically and we said what's more important to the consumer, getting an extra point of EER or two, or having this capability of generating the heat year-round. And I think if you look at the net energy savings that's generated in ours versus the WaterFurnace unit, you'll find that over the course of the typical 12-month period, ours saves the users substantially more energy. And that's what we think counts, not whether at any given point we're hitting a slightly higher mark on one rating point. Does that answer your question?

Yes, thanks, Barry.

Sure.

Joe Mondillo, Sidoti.

Hey, guys. Just a couple follow-up questions. One, just regarding the increased capacity. Not only did you say Cherokee, but I thought you mentioned El Dorado as well. Just wanted to clarify, is that anything other than replacing the DSN plant? Are you planning on something else?

As we are going through the engineering process and the planning process for that plant, we're looking at and we're considering the possible expansion of some capacity there. We have not completely finalized that. We're not sure what that level will be. When we get farther along and we have something more definite, we'll let you know.

Okay. In terms of Pryor, I know you've been benefiting from the low nat gas prices. I was wondering kind of gross margin you're realizing at Pryor?

We really don't disclose gross margin on the plant-by-plant basis.

Joe, we've been through this before. You know what the sales price of UAN is. And you know how much gas is in a ton of UAN.

Right.

About 14, 13.

Okay, I got it. I just wanted to confirm my numbers.

And then just lastly, could you talk about the cash flow in the quarter? You saw a pretty big increase year over year in your operations cash flow despite all the issues you had at El Dorado and Pryor. Just wondering what's driving that?

Well, we had a printing press in the basement.

(laughter)

That's good to know.

That $25 million that we talked about was not year over year. That was from March 31 forward to June 30. Typically, that's a seasonal boost in your cash flow because your inventories are down, your receivables are down. And you're ready to start building inventory again.

Okay. You did $25 million last June, didn't you?

We did -- let me look at my notes here. That's right. We had a net cash increase $25 million for the second quarter of '12.

It was $25 million in second quarter of '12?

For the second quarter of '12.

Okay, comparable to last year?

Yes, and you can look in the Q for the six-month numbers, which I think net increase in cash for six months --

That's fine. I'll look it up. I thought you said $45 million for the second quarter. I think I just misheard you.

If you look at the cash flow in the Q on page 7, you have $56 million net cash provided by operations for six months. $45 million of that came in the second quarter.

So you did see $45 million in the second quarter?

Yes. But some of it was spent.

Net cash provided by operations for six months were $56 million and $45 million of that was in the second quarter.

(inaudible) cash flow.

Remember, we said out of that came $17 million for CapEx and $3 million for debt reduction and $25 million increase.

Right. So my question was, you did $45 million of operation cash flow in the second quarter of this year. You did $25 million over last year so I was wondering, in terms of your operational cash flow, what was driving a higher amount.

I don't have last year's in front of me except for the six months last year it was $41 million for six months.

Okay. (multiple speakers)

The difference will be in receivables and inventory,.

All right. Good enough. Thanks.

Dan Mannes, Avondale Partners.

Thanks. I just wanted to follow up quickly on the insurance side. When would you anticipate getting the property insurance on El Dorado? And how does that phase in with the timing of the big rebuild project?

I will tell you how that works. First of all, the insurance company has to come in and they're in already and have been in, and get their own engineering firm to determine whether or not it should be rebuilt and they'll the pay for rebuilt or pay for new. We've already determined that it's going to cost as much for rebuilt as it is for new. They have to satisfy themselves on that. And when they do, then we'll set up the procedure for them paying it over the period, probably -- I don't know how that works -- whether they give it to us all at once. Or they give it to us as we spend the money.

The way we're expecting it to happen is, keep in mind, Dan, it's replacement costs. So as we spend the money, we submit periodic claims and periodically we expect them to pay us.

So they may be a little out-of-pocket over time and then reimbursed, effectively?

There will be a time lag there and there will also be some due diligence on their part. But if things work the way they should, that's the way it will work.

And this may be an off-the-wall question, but for $100 million -- and I realize this is insured -- would you get an attractive rate of return given the contract, for this $100 million? I guess I'm trying to get my arms around that. That was a lot larger dollars than we were expecting.

There will be a much more efficient acid plant the DSM plant because of the current technology. So yes. And the customers that we service from this give us a good margin.

Okay. Switching topics, going to the Climate segment. We've seen some mergers and acquisitions activity, particularly on the geothermal heat pump side. Have you seen any change to the competitive environment and/or are you anticipating any?

We've seen no significant change on the competitive environment. And as far as anticipating any, we don't see anything that's happened on the horizon and that was as of yesterday. Because I don't know what announcements occurred today while I was getting ready for the conference call. We don't see anything that we think will move the needle, in any way that we know of.

You're looking at GeoAffinity, got bought out, which was a smaller player. And then, obviously, we're seeing WaterFurnace doing some expansion internationally. I wasn't sure if that was interesting to you, for instance.

Well, it's interesting but that wasn't what your question was. Your question was, did we see it changing the competitive environment? And the answer was, not anything that we know of at this time.

Got it. And one other quick question. It wouldn't be a call if someone didn't ask. I know you have an ongoing review but have you given any further thought or any other incremental thoughts on the potential for an MLP for some of your assets?

Dan, we've looked at the MLPs that are out there. And we've looked at the MLPs structure and we've looked at several of the positive aspects of MLPs. And we've looked at some of the cons related to MLPs as well. So we've looked at this. Right now, currently, we don't have a plan to do an MLP.

Understood. But is that a definitive answer? Is this something that's continually revalidated?

Right now, at this time, we have no plan to do an MLP.

Okay.

When you're in business, you have to keep looking at everything and that's what we do. We can't say that we're not always looking at what's going out there in the market.

Were always evaluating everything.

Dan, one thing if we had a need for some serious cash, that could affect our -- at this point, as you know, we've got a very strong balance sheet, very liquid.

Understood.

Anymore questions?

Rob Longnecker, Daltry.

In the first week, you guys gave on the plant explosion, you talked about what percent of the income from that quarter came from El Dorado. I'm wondering if you could provide that for the current quarter as well?

Repeat that question again?

When you guys put out the press release on the plant explosion, I think you said that 29% of Q1 Chemical operating profit came from El Dorado. I'm wondering if you could provide a similar percentage for this quarter?

In this press release, we said we estimate the event reduced Chemical operating income for the second quarter by approximately $7 million.

That was a reduction. What he's asking is, is what was the operating income out of El Dorado during the period. We haven't really disclosed that.

Okay.

So we don't have that in front of us at the moment. And that's probably not a number we're going to disclose.

But the disclosure we made will give you a pretty good idea of the impact.

I'm sorry. Again, please?

Generally speaking, we're not disclosing profit on a plant-by-plant basis. The only exception historically we've made to that was with Pryor because it was a new start-up plant. On a going-forward basis, we're probably not going to disclose profit on a plant-by-plant basis. We felt at the time of the explosion that it was necessary to put in perspective what El Dorado meant to the big picture in our Chemical business so as a one-time special disclosure, we broke that out. But we probably, going forward, will not do that.

Okay. I appreciate the disclosure. It's one quarter. You never know whether that's a normal quarter or not.

Right.

And then looking at the notes in the Q, there's some commentary about an insurance claim receivable of $13.5 million. Is that what you think is now due to you by the insurance company, just on the property damage? Or what is that number pertaining to?

He's wanting some explanation of the $13.5 million. Insurance receivable.

What we've done there, is we've taken assets that have been destroyed and cost of rebuild and cost of repairing what's already been damaged, and set that up as a receivable. Then, when we collect the replacement cost of assets and recovery on insurance proceeds, that'll go against that. Basically what we've said, we've got some of these assets on the books for X. That will be a receivable. We spent so much cleaning up and putting the other three acid plants back into operation so we just accrued costs that we think are reimbursable by the insurance company.

Got you. Following up on the same question Dan had, about the $100 million because I was also surprised at the size of that number. If there weren't insurance proceeds coming into play here, would it make business sense for you guys to spend $100 million on that plant, as a [green teal]? In other words, when you get the return that you'd want to get on $100 million invested on that plant?

That's a little bit hypothetical for today. $100 million without replacement cost insurance, I couldn't answer that off the top of my head. I would have to look at it closely.

We had one of our major customers take the production of this plant.

What are those guys going to do for production for the next two years?

We've been keeping them going. We've been squeezing our other operations for product. We've been acquiring product on the market. We've been keeping them going during this period.

Keep in mind we're only about 20% short right now in acid so we can bring acid in and allocate some of our other customers.

Okay. Thank you very much.

Thank you, good question there. We would not proceed with the rebuild, with a replacement, if we did think it was economically feasible. We look for payback.

But you mean that excludes or includes of insurance money?

Either way.

So if you hadn't had this plan in the first place and you saw the business opportunity right now, you'd be comfortable spending $100 billion of your own money to build that plant?

The answer is yes and I think there's another thing that you have to look at. When you look at our whole complex of our whole Chemical business, all four plants, all four facilities, and all the different plants within those facilities, and you look at the mix of products that we have. And you look at the fact that it's necessary to get a product balance and to be able to shift back and forth and to be able to serve different customers, at different times, in different seasons, and as the demand wanes and flows, in the different sectors that we serve, having this as part of the overall complex has a significant value to it, in addition to looking at it as an isolated plant.

So you have to look at the big picture and you have to look at it holistically.

Okay. Thank you.

Thank you.

[Ali Mishan, Course Air]

A couple of quick ones. First on Pryor. The $10 million in reduced profit that you flag in the press release. Is that net of the increased sales of anhydrous ammonia?

Yes. We looked at what market was available for us on UAN that we lost. And then we looked at what we are able to generate in the way of ammonia sales. Keep in mind, we didn't have ammonia production for the entire quarter. And compared the marginal on that to the margin we would have. There were some of the costs in there as well, some embedded costs. So that was based upon with or without the UAN production.

Right. Okay. And then a follow-up to that. I think in the prepared remarks you guys mentioned one shouldn't annualize or run rate this quarter's results. Explain that a little bit, in terms of are we talking $1.11 that you reported? Or should we not (inaudible) run rate $1.60, which is what you would've done if you make the two adjustments on the Chemicals side?

We're not really going to talk $1.11 or $1.60 or anything. What Jack was really referring to was the fact that we do have most of our turnarounds that occur in the third quarter. We just wanted to draw that to your attention so that those of you who are trying to do out some expectations, we were reminding you that we do have those turnarounds.

And it's in the low part of the ag season.

Yes, that's right.

Okay. That makes sense. I guess the last question is, you guys have a balance sheet I see is strong, getting stronger as you generate cash. Now you have [an extra $3 a share] of net cash on the balance sheet. What the plans will be again, if you have plans yet, of what you're going to do as you build more cash?

As you can see by Tony's discussion of CapEx that the Chemical business has some significant capital requirements. Of course, some of that cash will be used for some of those projects. There's other opportunities that we haven't discussed that we look at all the time. We're always looking at cases of different ways to improve the operations, to de-bottleneck them, to add to capacity. There's growth opportunities there that aren't definite plans at this point but they're things we consider. There's opportunities to grow that business.

In the Climate Control business, we're expanding the facility this year. We're adding research and development, expanding our research and development facilities. There's expansion requirements as we get growth in the future in certain specific areas. We're also looking for the right kind of acquisitions in that business. There are all kinds of opportunities and so those are things we will use part of that cash for. But right now, as Tony mentioned, we feel, given that some of the global uncertainty, it really behooves us to keep our powder dry and to have more cash than you would normally have in what would be more normal times.

You brought up a good subject which we discuss all the time. What's the proper amount of cash for $800 million company, sales company, to have? All kinds of things happen. You can't run dry. You've got to make sure you can always pay your bills. $100 million is not excess. It's not considered excess for that size company, just for the ebb and flow of seasonal business and things that happen that are not forecast that you have to be able to take care of. People look at it like it's a lot of cash and why don't we do something with it? Well, we're protecting what they have. And helping what they have grow, is what we're doing.

Plus, we're positioning ourselves to take advantage of any opportunities that arise.

Okay, great. Thanks, guys.

Sure, thanks for the questions, Ali.

Gregg Hillman, First Wilshire.

I wanted to ask you about that permit that you've got for Pryor, for 50,000 tons of additional ammonia. How much does it cost to bring that up? And when will that be up?

We've said before, and I think we said in our prepared comments, but maybe we went over that very quickly that we weren't putting a specific timeframe on that. But our expectation was that it would be up by the end of year.

And we have planned about little over $6 million in CapEx for that, for the 60,000 tons.

Okay. Thanks very much.

Keep in mind that's the plant of sitting there. We're bringing one up that's already existing.

Right. Thanks, Tony.

You're welcome.

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, at this time, we'd like to thank you and we'd like to turn the meeting over to Carol Oden and she is going to make some important remarks, regarding forward-looking statements we might have made during the discussion today. Carol?

Thanks again for listening in today. The comments today contain certain forward-looking statements. All statements other than statements of historical fact are forward-looking statements. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate, and similar statements of the future or forward-looking statement nature identify forward-looking statements, including but not limited to, all statements about or any references to the architectural billings index or any McGraw-Hill forecast, including those pertaining to commercial, institutional, and residential building increases or industry growth. The forward-looking statements include, but are not limited to, the following statements. We expect production at Pryor to be below targeted rates until we replace the converter in the main ammonia plant and make certain other modifications. We expect these modifications to be completed early in 2013. The sulfuric acid plant repairs are expected to occur during the fourth quarter of 2012. We believe the outlook for LSB for the balance of 2012 and forward for 2013 as positive. We have substantially more potential to develop the Company until we replace approximately 20% of El Dorado's acid capacity, El Dorado's future earnings will be adversely affected. Conventional wisdom is that natural gas will remain low for some time. Outlook for the Chemical markets we serve are favorable. Positive fundamentals that ag business should continue. The drought should have little or no effect on demand for our products during third-quarter. We expect increased ammonia production at Pryor by the end of the year. We plan to install a single, larger and more current design Kellogg converter early in 2013. Measures should allow us to achieve our targeted ammonia production rates at Pryor. The plan is to install the larger converter next to the old one while they are winning and have a quick cut over, with minimal disruption of production. The new acid plant and the concentrator will take at least two years to fabricate and install.

You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. We incorporate the risks and uncertainties being discussed under the heading special note regarding forward-looking statements in our annual report, Form 10-K for the fiscal year ended December, 31, 2011, and Form 10-Q for the periods ended March 31, 2012 and June 30, 2012. We undertake no duty to update the information contained in this conference call. The term EBITDA 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 does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.