LSB Industries Inc (LXU) 2013 Q1 法說會逐字稿

Greetings and welcome to the LSB Industries first-quarter 2013 conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Carol Oden, Administrative Assistant to the Chairman of the Board. Thank you, Ms. Oden, you may begin.

Thank you. Good morning. Welcome to the LSB Industries Inc. first-quarter 2013 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.LSBIndustries.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 7, 2013. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

After the Q&A, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We encourage you to view the PowerPoint PDF that is posted on our website at www.LSBIndustries.com in the Webcasts and Presentations section of the Investors 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, Carol. Good morning. I think I have a little allergy this morning, so if you have difficulty understanding me -- I hope you can understand me.

The first quarter of 2013 was the most unusual quarter in our history. Our two most profitable chemical facilities were out of operation during the entire quarter. Because of this, any comparison of operating results to prior quarters is not relevant.

So that you would be fully informed, during our last quarterly conference call, we advised you that our Chemical Business was continued to underperform during the first quarter due to the extended downtime at our chemical facilities, and we expected that situation to continue for part of the second quarter as well. We also reported that, with the exception of El Dorado, our facilities would be back to substantially full operations in the second half of 2013. That is the general picture.

And now I'm going to give you some details about the status of each of our chemical operations. Our El Dorado, Arkansas facility's nitric acid capacity is approximately 80% of the pre-May 2012 level and will continue at that level until construction of the new nitric acid plant is completed in 2015. El Dorado should improve its earnings potential with the addition of a planned anhydrous ammonium plant estimated to be completed and operational during 2015.

As to Cherokee, at the Cherokee, Alabama facility, all damaged equipment was replaced and approximately 25% of its process piping has been replaced as a precaution against further pipes breaking. All piping that could be subject to the type of rupture that occurred in November has been tested for metallurgical integrity. The Cherokee Facility started production last week and is currently increasing its production rates.

As to Pryor, the Pryor ammonia plant is running and has been achieving near design capacity production rates with a new, larger converter that was installed. Our target rate is 700 tons per day.

In starting both Cherokee and Pryor, we took extraordinary precautions by calling in industry consultants to confirm that all repair work and plant start-up protocols were done correctly. They also reviewed our practices and procedures for safety and reliability. This review caused delays while the consultants reviewed all the work done and workmanship of the repairs and modifications that were made. These steps, along with the newly-installed converter, should result in more consistent and reliable operations at both Cherokee and Pryor and higher sustained production levels at Pryor than we have experienced in the past.

As previously reported, the events are unrelated to each other. Severity and frequency of the events at our Pryor, Cherokee, and El Dorado facilities caused us to undergo a stellar re-examination of our process safety, management, reliability, and mechanical integrity programs. As a result, we have recently undertaken a concerted program to attempt to improve the reliability and mechanical integrity of our chemical plant facilities. The key component of the improvement program is the implementation of enhanced PSM programs to supplement the already-existing PSM programs. The improvement program includes engaging outside experts and consultants who specialize in risk management, reliability, and mechanical integrity, all part of PSM.

We are also recruiting and hiring additional corporate plant engineering and operational personnel. And we are accelerating the acquisition of additional spare parts to supplement our existing spare parts program. The program also includes the installation of additional automation and plant equipment protections.

With Pryor and Cherokee up and running, we expect the Chemical Business results to dramatically improve for the second half of the year.

Just a word about our Climate Control Business. Our Climate Control Business improved during the first quarter, reporting growth in sales and operating income with all product segments showing an improvement over the first quarter of 2012. The commercial and institutional side of our business continues to grow although sales of our residential products have been disappointing.

Now for the overall of both of our businesses. Considering the strong fundamentals of the agricultural markets we serve and the fact that our chemical facilities are now back in operation, the steps we have taken and will take to improve our chemical facilities; reliability and the anticipated rebound in construction, we are optimistic about the balance of 2013 and future years for both of our businesses.

That completes my comments and I'm going to turn the call over to Tony Shelby, our Chief Financial Officer.

Thank you, Jack. For the first quarter of 2013 compared to the first quarter of 2012, please turn to Page 4 of the PowerPoint presentation.

Net sales were $151 million, or 21% below 2012. Operating results were a loss of $237,000 compared to operating income of $23 million in 2012. After interest expense and a $745,000 tax benefit, we reported a net loss of $68,000, or $0.02 per share, compared to net income of $14 million, or $0.61, in 2012. EBITDA was $6.5 million versus $28 million in 2012.

Looking behind the numbers, as Jack indicated, the first quarter of 2013 was a very unusual quarter. Our Climate Control Business reported improved results, including a 12% increase in sales and a 9% increase in operating income. However, as summarized on Page 5 of the Chemical Business, the Chemical Business reported a much different outcome. As a result of the significant issues encountered at certain of our facilities, the Chemical Business sales were $47 million lower than in the prior-year quarter and their operations resulted in a pretax loss of $4 million compared to an operating income of $20 million in the 2012 quarter, a difference of $24 million.

As extensively reported in all of our public documents and press releases, the Pryor facility's primary ammonium plant and the Cherokee ammonia plant were both out of operations for the entire quarter. The effect of the downtime at the Pryor and Cherokee facilities is particularly impactive since these facilities, unlike El Dorado and Baytown, both use natural gas as a raw material feedstock and thereby capture the significant gross margin between the cost of natural gas and the market price for ammonia. As a result, Pryor and Cherokee are normally the most profitable facilities in our Chemical Business when they are in operation, and conversely have the biggest negative impact when the ammonia plants are not in operation.

Based on current market conditions and after recognizing $11 million of business interruption insurance recoveries, we estimate the effect on Chemical's first-quarter operating income resulting from downtime to be approximately $40 million to $49 million less than otherwise would have been expected.

The question then becomes, what is the impact of the downtime of the second quarter? Excluding the recognition of future insurance recoveries, we estimate the negative effect on Chemical's second-quarter 2013 operating income to be at a rate of $8 million to $9 million monthly for each, Cherokee and Pryor, until they were returned to full production.

Also, as you might imagine, since the plants have been out of production, we are starting the season late and with much lower inventory levels than normal. The ongoing negative effect on El Dorado's operating income is estimated to be approximately $1 million to $2 million a month.

The Pryor ammonia plant resumed production in late April. The Cherokee ammonia plant resumed production in early May. And the El Dorado facility's nitric acid capacity will continue to be limited to approximately 80% of normal until 2015.

We anticipate that we will receive additional business interruption insurance recoveries during the remainder of 2013 that will compensate for most of our Chemical Business' lost profits. As disclosed in the 10-Q, we also expect to receive property insurance recoveries related to El Dorado's damaged direct strong nitric asset plants in an amount equal to the agreed-to repair costs when and as agreed.

For a bit more detail on our Climate Control Business, please turn to Page 6. The Climate Control sales were $70 million compared to $63 million. Gross profit as a percent of sales was 31% in both quarters and operating income increased to $6.4 million compared to $5.8 million in the 2012 quarter. Orders received during the first quarter of 2013 and the backlog at the end of the first quarter of 2013 both increased as compared to the same quarter last year.

To briefly review liquidity and capital resources, please turn to Page 7. Although we've encountered operational issues in our Chemical Business that have negatively affected EBITDA and cash flow, our balance sheet and financial position continued to be solid. As compared to year end 2012, cash of $69 million is $29 million lower, total interest-bearing debt is $33 million higher, and stockholders' equity is about the same. Our $50 million working capital revolver loan facility remains undrawn.

The $29 million reduction in cash flow for the quarter included $20 million net cash used by operations plus capital expenditures of $44 million offset by the $35 million term loan proceeds. The increase in interest-bearing debt includes a term loan close this year to finance $35 million of last year's $50 million purchase of natural gas working interest in the Marcellus shale.

As disclosed in our 10-Q, we have extensive, committed, and planned capital expenditures. Committed expenditures are projected approximately $140 million to $160 million and include, among numerous other expenditures, the 65% nitric asset plant and concentrator and preliminary expenditures for the proposed ammonia plant, both at the El Dorado facility. The additional planned capital expenditures are in the range, approximate range, of $400 million to $450 million for projects, including the proposed ammonia plant at El Dorado, certain projects related to safety and reliability, the continued development of the natural gas leasehold, and repair profit improvement expansion projects primarily within the Chemical segment. These additional planned projects are subject to a number of economic considerations, final review and approval by management, and in most cases, permitting by the regulatory agencies. We expect to fund these expenditures from internally generated cash flow, insurance proceeds and third-party debt financing. We are currently considering various available options for third-party debt financing.

We have addressed our results of operations and financial commitments in greater detail in the 10-Q and suggest that you review those disclosures and discussions for additional information and analysis.

I will turn the call over now to Barry to discuss the market drivers and the outlook for both businesses.

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'll also give you an update on progress with major capital projects, primarily at our El Dorado facility.

To start, please turn to Page 8, which shows our 2013 first-quarter sales mix by the markets we serve. This is a change from prior periods due to the downtime at our Pryor, Oklahoma and Cherokee, Alabama, chemical operations and not typical.

On Page 9, we've also included the sales mix for the full year 2012, which is more typical of our sales mix with normalized chemical operations.

Focusing first on our Chemical business, please go to Page 10. Although we have included data about our first-quarter sales on this and the next two pages, comparisons to the first quarter of 2012, for the most part, are not meaningful because the Cherokee and Pryor facilities were not operating -- were not in operation during the 2013 quarter. Having said that, total sales in the first quarter were $77 million, down 38% from the first quarter of 2012. Sales in all major product categories were down relative to the first quarter of 2012.

Please turn to Page 11 for sales of our key agricultural products. During the first quarter, sales and tons shipped of UAN and ammonia were lower than during the 2012 first quarter, reflecting downtime at both Cherokee and Pryor. Sales and tons shipped of agricultural-grade ammonium nitrate, or AN, were lower than the first quarter of 2012, primarily due to the delayed start of the spring application season this year compared to the 2012 spring season which began somewhat earlier than usual, resulting in a drop in sales quarter-over-quarter. In addition, imports of AN have been substantially higher this year than in 2012, affecting the sale of domestically-produced products.

Turning to our Industrial and Mining Products on Page 12, both sales dollars and tons shipped of the various assets were below the first-quarter 2012 levels. Nitric acid sales decreased due to a planned maintenance turnaround at the Baytown, Texas facility during the first quarter and also the reduction of strong nitric acid sales resulting from the loss of El Dorado's direct, strong nitric acid plant that was destroyed in May, 2012. Sulfuric acid sales were lower due to reduced customer demand during the period. Industrial sales were lower as a result of downtime at Cherokee and lower demand for Mining Products.

On Page 13 are some price trends for both the feedstock we use and the key ag products we sell. The cost of natural gas has recently increased but continues to be relatively low, currently about $4 per MMBtu. This benefits production costs at our Cherokee and Pryor facilities, which use natural gas as their primary feedstock. The cost of anhydrous ammonia, the feedstock we use at our El Dorado, Arkansas and Baytown, Texas facilities, continues to be high compared to previous years.

Our current read on the market is that ammonia is about $587 per metric ton at Tampa prices. High ammonia prices have increased production costs at our El Dorado and Baytown facilities which use ammonia as feedstock. Most of the products we produced at Baytown and most of the Industrial and Mining Products produced at El Dorado are sold on a costs-plus basis, so high ammonia costs don't impact our profitability on those sales. However, ag grade AN also produced at El Dorado is sold at spot market prices. We've been fortunate that selling prices of AN fertilizer have been relatively high, somewhat mitigating the impact of high ammonia cost.

Turning to other ag products, prices for UAN fluctuated over the past year and are slightly lower at this time than they were a year ago. If you look at the chart on the lower left, you can see that Southern Plains price of UAN decreased from $410 per ton in April of 2012 to $380 per ton in April of 2013. Based on market indicators, we believe that current UAN pricing is approximately $345 per ton. We do not expect UAN prices to significantly increase during the 2013 season as they did in 2012 as a result of higher levels of imported urea in North America this year as compared to last year.

In April 2013, Southern Plains prices for high density ammonia nitrate, or HDAN, that is ag grade, were $390 per ton compared to $445 per ton 12 months earlier. Current pricing is approximately $385 per ton.

Our outlook for AN this season is more or less the same as UAN. We expect stable selling prices at about the current level unless the delay in starting the planting season lasts too long and suppliers reduce prices to move inventory.

Currently, Southern Plains ammonia is trading at about $70 per ton higher than a year ago, approximately $640 per ton. This should benefit our ammonia sales.

Focused on the outlook for the chemical markets we serve, Page 14 lists several macro indicators for our agricultural products, most of which continue to be favorable. Grain stock to use ratios, both worldwide and in the US, continue to be low. As a result, planting levels are expected to be high. Market prices for corn and wheat, although having declined recently, remain high, so farmers have an incentive to plant and sell more. All of this should create strong continuing demand for fertilizers.

Finally, low natural gas prices have reduced the cost to manufacture many of our ag products. North American produced nitrogen fertilizers are currently the lowest cost factoring in the total cost of production, freight and distribution. The industry consensus is that the positive fundamentals of the ag business should continue in the near to midterm.

Despite general industry drivers, weather can have a significant impact on the fertilizer part of our business. As previously discussed, this year's planting season has been substantially delayed and is not yet fully started. Wet and cold conditions in Northern markets have delayed the season there. Cold and dry conditions have delayed the season in our Southwest markets. Unless adverse weather conditions persist long enough to reduce planted corn acres, a late season could actually benefit sales of UAN. We continue to be optimistic about our ag business.

Please turn to Page 15. Our industrial products are sold primarily to large customers pursuant to contractual costs-plus and/or minimum take arrangements. The two charts on this page indicate the shift that has occurred in our sales mix from 2012 to the first quarter of 2013. Very little change occurred and the shift from agricultural products to industrial assets was primarily driven by plant downtime.

A very significant part of our business continues to be Industrial and Mining. Page 16 contains some of the market indicators for this area of the business. Most of these indicators forecast growth for the next few years.

Please go to Page 17 to review the current status of our various chemical production facilities. I'd like to reiterate Jack's comments here. El Dorado's nitric acid capacity is approximately 80% of its pre-May 2012 levels and will continue at that level until we complete construction of a new Weatherly 65% acid plant and concentrator during 2015. Cherokee resumed production last week and is currently increasing its production rates. Pryor resumed production during late April and is operating at near design production rates. The Baytown facility successfully completed a turnaround and is operating at optimum production levels.

Moving on, Page 18 lists our Chemical Business strategies and some of our key initiatives for 2013. Our primary focus is on plant safety, reliability, and key capital projects.

Focusing on capital projects, Jack mentioned that our El Dorado facility's results will improve when it becomes a producer rather than a buyer of anhydrous ammonia based on current market conditions and our forecast for market conditions in the future. As we previously discussed, we are planning to build an ammonia plant at our El Dorado facility. This should increase El Dorado's capacity and lower its production costs since the cost spread between purchased and manufactured ammonia is substantial. We are continuing the planning process and have filed for permits to start building the plant. Anticipating the eventual receipt of permits and to the extent allowed before actually receiving those permits, engineering work is underway. We have ordered certain long lead time items and some equipment has been sent to rebuilders. The construction of the ammonia plant is subject to us receiving permits, adequate financing, and board approval. If approved, we hope to have an ammonia plant constructed and in operation during 2015.

Also at El Dorado, we are progressing on the new Weatherly 65% acid plant and concentrator. Engineering work is in process, major equipment has been ordered, and we expect the plant to be operational in 2015.

With regard to safety and plant reliability, Jack outlined those initiatives to you earlier.

Turning to our Climate Control Business, on Page 19, you can see sales by the major product categories we report in our quarterly filings. Total sales were over $70 million, an increase of 12% over the first quarter of 2012 with increases in each product segment. Compared to the 2012 first quarter, sales of heat pumps were up 8%, fan coils sales were up 22%, and sales of other products were up 15%.

On page 20, you can see that sales of products used in commercial and institutional buildings were up 19% while sales of our residential products were down 15% compared to last year's first quarter.

Total bookings during the first quarter were 7% higher than the 2012 first quarter with commercial bookings up 6% and residential bookings also up 12%. Our backlog of product orders at March 31 was -- 2013 -- was $57.3 million, 21% higher than reported a year ago and 3% above the backlog at 12/31/2012. Total new orders in April where $26 million and our backlog of product orders at April 30 was approximately $59 million. Even though total bookings during the first quarter were the highest since the first quarter of 2011, the commercial recovery has been slower than previously anticipated. And the market for our residential products continues to be soft. However, we continue to maintain 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 21, there is a graph that shows McGraw Hill's most recent construction forecast for certain commercial and institutional building types. These are the sectors that are the most important to us as they comprised 63% of our total Climate Control Business sales in 2012. As you can see from the graph, these sectors are all forecast to grow over the next five years. McGraw Hill is forecasting that, in the aggregate, they will increase by approximately 9% in 2013 and 67% through 2017. If this materializes, it should benefit all of our commercial and institutional HVAC product sales.

In addition to monitoring construction forecasts by sector, we also track the Architectural Billings Index, which is considered to be an indicator for nonresidential construction spending nine to 12 months in the future. On Page 22 is a graph of the ABI. March's score of 51.9 is the eighth month in a row above 50, indicating expansion in billings. This is the longest run above 50 since 2007, before the construction market collapsed.

We believe the general consensus of most economists and construction industry experts is that the recovery in commercial and institutional new construction will continue, albeit at a slower pace than originally predicted. While new construction remains the greater part of our business, renovation and retrofit of existing buildings have been and will continue to be an important market for us, as well. Fortunately, all of our climate control products are well suited for this part of the market.

During 2012, 18% of our Climate Control business' sales were geothermal heat pumps used in single-family residential applications. Page 23 shows McGraw Hill's forecast for single-family residential construction starts. McGraw Hill forecasts that housing starts will increase from about 517,000 in 2012 to 630,000 in 2013, a 22% increase, and to over 1 million per year in 2015 through 2017. If this occurs, it should benefit our residential geothermal business. However, we believe that low and relatively stable energy prices have dampened the consumer enthusiasm for energy-saving alternatives.

An encouraging positive trend is the increase in green construction that has occurred in the past few years and is expected to continue. On Page 24, there's a graph that depicts the 2013 Dodge Green Construction Outlook published by McGraw-Hill. It forecasts that the green construction market will grow from approximately $85 billion in 2012 to between $204 billion and $248 billion in 2016. This should benefit the sales of our highly energy-efficient products.

Turning to Page 25, we've listed our Climate Control Business' strategies and some key initiatives. Our primary initiatives for 2013 are the introduction of several new products and a heavy focus on lean projects intended to reduce costs, eliminate waste, streamline processes, and improve quality.

That concludes the prepared portion of the call. I'd like to request that, during the Q&A, you limit your questions to three or four so that others also have a chance to participate. If you have more questions, you can get back in the queue and ask them later. Operator, please poll for questions.

(Operator Instructions). Dan Mannes, Avondale Partners.

Congrats on getting both Pryor and Cherokee back up and running.

Thanks, Dan.

Sure thing. So a couple of questions, I will try to use all of my allotted four. First, as it relates to Cherokee, you noted that it is in the process of ramping back up. Can you give us maybe a frame of reference on how long it takes to ramp? And secondly, what the targeted ammonia production rate is once it gets back up?

Based on the current outlook, it will come up rather quickly. We are running close to 70% and we will continue to bring it up, and everything looks like it is moving ahead as projected, coming up slowly and under very careful conditions.

And target production is 500 tons per day of ammonia, more or less?

In that range. Did you save 500 tons per day, Dan?

Yes.

That is close.

Okay. Real quick on capital spend, $41 million in the quarter. Can you break that out between Pryor, El Dorado and Cherokee?

The majority of it is El Dorado, Toronto as we mentioned in the conference call. Part of it was the spending on the nitric -- the 65% nitric asset acid plant and some preliminary spending for engineering and so forth on the proposed ammonia plant.

Got it.

There were other -- I think Barry has some information he will talk about later that there was some significant spending on reliability and so forth.

Okay. And then on Pryor, it does mention in one of your slides an expansion program at Pryor. Is that the long-discussed 60,000 tons of incremental ammonia, or is that something else?

Yes, Dan, that's what that is. And you'll know, as you will remember from the last conference call, we put that on more or less the back burner during the change-out of the ammonia converter. And we said that we would get back to it this year after Pryor was up and running. So at this point in time, we don't have a definite time frame for that, but we expect to get on that and progress with it as the year goes by.

Makes sense to me to focus on the bigger unit first.

Yes.

Lastly on El Dorado, certainly on paper the economics look really compelling given where ammonia prices are and natural gas, but this is a pretty sizable investment. We are looking at somewhere between 30% and 40% of your current market cap. I was wondering if you could talk at all about anything you are looking at either in terms of debt financing that is nonrecourse or contractual on the other side in order to reduce your exposure to what is, frankly, a really large project relative to the size of the Company.

Well, I am hearing you. And the way we view it is that, right now, given the strength and the profile of -- the balance sheet and the profile of our Company, along with current conditions in the debt markets, we feel we have numerous alternatives available to finance the planned capital expenditures. And we're still looking at those alternatives.

But it's fair to say you haven't excluded the potential of doing it on a asset basis rather than on a parent basis?

Say that again?

You haven't excluded the potential to finance it at the plant level rather than at the parent level as a way to manage your risk?

We've really excluded no options at this point in time.

Sounds great. And then one last really quick one on the tax rate. Obviously tax, the rate was really low this quarter given the loss. Any change in maybe the full-year outlook on the tax rate?

Now, I think the federal rates are in the 35% range and state is 4% or 5%. And then we are working on a number of credits. You will notice, in the first quarter, we booked a fairly significant tax credit that was passed in 2013 retroactive to 2012. So that's the reason we have a positive cash tax provision rather than negative.

Got it. Thanks much, guys.

Walt Liptak, Global Hunter.

Thanks. Thanks in the press release for the overhang on a monthly basis. I wonder if you could maybe firm up some numbers for us and help us understand how much, as you ramp capacity, how much profitability will be coming back in the second quarter and then in the back half of the year?

Let me -- would you summarize that question real quickly? I think what you're asking me is what we see in the way of capacity back in production in the second quarter and in the second half?

Yes, that's right, and what that will mean to revenue and to operating profits.

Well, the second quarter, we gave some pretty specific information. That is that we are going to have Cherokee and Pryor up for roughly half of the quarter. And El Dorado is going to be at 80% of their nitric acid capacity. So the second quarter is going to be impacted by that. And we are starting the season late because the season is getting off to a late start from an ag standpoint but we are also starting late because the plants have just come up and we don't have a lot of inventory in stock. So, we are going to have to build inventory. And hopefully the delay in the season will allow us to catch up beginning in the second quarter.

The back half is anybody's guess in terms of total demand, but our expectation is that demand will be strong and the plants will all be running with the exception of the lower production at the El Dorado facility.

I think there will be one -- this is Barry. I think there will be one difference in the back half of the year for us this year as compared to previous years. That is that usually in the third quarter which is seasonally the lowest quarter for the ag market, we typically have plant turnarounds. And this year, because of the heavy maintenance and upgrades and things in the plant that we've been doing while they have been down, we will have minimal exposure to turnarounds in the last half of the year. Really the only planned turnaround at this point in time are at one of our facilities, and it will be a small one.

Okay. So as we think about the back half of the year, how much of the profit -- and considering weather as well as less maintenance in the back half of the year, how much can you make up from this quarter?

I'm just going to make a general statement. And that is that, as you know, we have a strict corporate policy of no guidance. So other than talking about the plants being in operation and the impact of what that is when they are down, which we feel that the investors need a general understanding of, we do not give specific guidance on profitability.

That is correct. And Walt, the only other thing I would add to that is keep in mind that we will have insurance recoveries potentially in the quarter that will flow through either as other income or costs of sales.

Okay. Yes, I appreciate that.

I wonder if we can just do a real quick review on the plant expansion at El Dorado in 2015. And if you put some numbers on the capacity that that is going to be producing at and an idea of the type of return level that we might see from it.

Well, this was the last same question that we got in the last conference call. And what we said was, and the plan is still the same, that the ammonia plant will produce approximately 375,000 tons per year of ammonia.

As to predicting the level of profitability and/or the return on investment or payback, what we said was essentially the same as the answer to your last question. In other words, we are not going to give specific guidance on what those numbers are, but what we do know is that if you look at the cost to produce ammonia in today's market, for example -- and this is always a snapshot because the market conditions change -- that there is roughly 30 tons of ammonia -- excuse me, MMBtus of natural gas in every ton of ammonia. And then there are some production costs. Let's say industry standards are roughly $80 to $100 a ton, and then you look at that compared to current cost of ammonia.

Now, those are industry numbers; those are not our specific numbers. And of course, this plant won't come online until 2015, and no one knows exactly what the market conditions will be in 2015. However, we did shock our projections and we took down the sales price of ammonia; we took up the sales price of natural gas. So we didn't forecast at today's close to optimum market conditions; we forecasted at a somewhat degraded market condition.

Having said all that, we feel that it will probably -- that it will reach our own internal hurdle rates every way we look at it based on justifying the investment, but we are not prepared to give a specific ROI or a specific profitability --.

Okay, got it. It's a moving target.

Exactly.

One other factor is that we are going to produce 375,000 tons at El Dorado based on the forecast. And currently, we are only purchasing and processing about 250,000 tons, so there will be some additional capacity and some potential growth.

Okay. And then if we could switch gears to climate, the revenue growth year-over-year was very good considering some of those construction statistics that you cited. So, the growth rate is I think above that 9% that you showed. Is that something you think is sustainable throughout the year on these easy comparisons?

In this business, the only absolute visibility you have is your backlog. And beyond that, it's anyone's guess. But we look at indicators. We look at the, as I said, we look at the Architectural Billings index. We look at the general construction forecast. We have specific input that we get from our salesforce and the various subsidiaries of large projects and even medium-size projects. So we have activity that is on the boards, design boards, that we know of, of future projects that aren't up for bid yet.

Having said all that, it's really hard to predict. Now, it used to be, before 2008 or 2009, before the collapse of the construction market, we had more confidence about projecting the outlook for the year. We are still very -- even though there tends to be an uptick in construction, we thought there was going to be an uptick a couple of years ago and it never happened. So we are somewhat reluctant to throw specific numbers out.

But having said that and closing this out, we are optimistic about the balance of the year. And we hope that the activity, the bookings level that we've seen in the last few quarters, continues.

Okay, got it. Okay, good look on the back half and the second quarter. Thanks.

Thanks, Walt.

Joe Mondillo, Sidoti & Company.

The first question has to do with Climate Control. And I was just wondering if you could expand on the lean initiatives that you mentioned and what kind of cost savings that we will see in the future.

You know, lean initiatives, the concept of lean is a comprehensive organizational effort that really questions why you do everything you do in the operation in an attempt to reduce anything that is not value added in the eyes of a customer. Ultimately what it is geared to do is to streamline your processes, reduce waste, reduce non-value-added labor and to improve quality and increase your throughput time, which has a corresponding reduction in cost. It's not an initiative that occurs in six months or 12 months. It's an ongoing change of lifestyle for a business. And typically when you look at an initial lean initiative in a business, it's usually a five-year process, but you keep going forever and you keep refining.

You see a lot of benefits typically from the studies that we've seen and other companies that have undertaken this, in the first three years, you see a lot of benefit. You continue to see benefit in the fourth and fifth year. We have internal targets for what we expect to achieve but those would be equivalent to forecasting and projecting income. And so we since we don't give guidance, I'm not going to really address that. But we think that there's some substantial progress to be made in our operations and they are things that we -- should benefit the business going forward.

Okay. And then in terms of the gross margin that you saw in the quarter, it seemed like it bounced back pretty nicely compared to the back half of 2012. Anything unusual like an unusual product mix or anything like that? Or does it seem like maybe profitability is firming up?

Well, at the gross profit line, I don't think there was anything unusual.

So do you guys feel like maybe things are firming up and improving on that level, at least in the near term?

The numbers pretty much speak for themselves.

We can't predict on a going-forward basis what level of profitability there will be because we don't know how competitive the market will or will not be. We can only control our internal costs. We can't control where the market goes.

Okay. And then also regarding your natural gas exposure, I was wondering if you could, first off, tell me what was the contribution to the Marcellus shale royalties? Then also, where are you in terms of being hedged to natural gas?

I will take that one. We don't get royalties. We get production income. And then --

Could you inform us what the production income was for the quarter?

We don't break that out.

The way we would characterize that, Joe, is that the leasehold we have will produce about 20% of -- a number of approximately 20% of our MMBtus we purchase each quarter, each month. And our average cost after you calculate all of the leasehold costs and depletion, appreciation, et cetera, is about $1.50 per MMBtus. And so that's the way we are looking at this, is that it is an offset to our purchases.

It's a hedge.

Okay, is this the first quarter with the contributions of that?

Yes. Actually, we did not benefit to -- this quarter was an anomaly. Since we did not produce, our ammonia plants didn't produce the first quarter and we still produced and sold the gas, we did have income from it. But starting with --

You are not --?

Starting with the use of the gas, we will buy that much less gas -- it will bring down our average cost of gas by the spread between our actual cost of 20% of our gas and what we pay for the other 80%.

Right.

Okay. And the production income that you saw this quarter, should it be similar over the next three or four quarters?

No, it's not going to show as an income item. It's going to show as a reduction in our cost of gas.

Okay.

In other words, it would be the same as any other kind of hedge. It's going to show a reduction of the cost of the commodity you are hedging.

No, I completely understand that, but you are receiving an income or you are receiving cash. I was just wondering what that cash contribution for that was or what's it going to look like over the next three or four quarters. Because it is essentially new revenue or cash or income, however you look at it, for the first four quarters until it thereafter seems like it will be a hedge.

No, it's not that. It's was just an anomaly in the first quarter because we weren't using the gas. When we started using the gas, that means that we are offsetting 20% of our gas purchases with $1.50 gas rather than $4 gas.

So Joe, based on what Jack just told you, it's similar to a derivative. You estimate what you want to fix your costs of gas and instead of doing a derivative, we just made a direct purchase. And it will reduce the cost of our purchase and consumed gas going forward when we are in production.

Okay. All right, thanks.

No, I just don't understand -- I want to make sure I understand -- that I've said it correctly is what I'm saying.

We are good.

But thanks, Joe.

Keith Maher, Singular Research.

And I apologize. I joined toward the end of your presentation, so if I ask something you already talked about, just send me to the replay.

My first question was just about what happens when we have a situation like we have this year where the spring is kind of cold. Does this ultimately affect the amount of seed that gets planted, or is it really just going to get delayed further into the year?

I think it is planted. But what happens is the first planting usually catches anhydrous ammonia and if the season is late, it's too late for ammonia, they go to UAN. And I think that is what is happening this year.

Okay. And then on insurance proceeds, I see you got some from Cherokee. Should I take that to mean you didn't get anything related to El Dorado this quarter?

I'm sorry, ask that again.

Yes, you mentioned you got some insurance proceeds, business interruption insurance proceeds, related to Cherokee, but you didn't mention El. Dorado is that just because this quarter nothing came in for El Dorado?

Let's see. We got some advances but not the cost of cleanup I guess, didn't we?

We received primarily from El Dorado -- Cherokee, yes. We got, in this quarter, we got -- we recorded $10 million on Cherokee cost of sales.

Okay. Can you give us any more details as to how much more insurance you think you are going to get and how long are these payments --?

We covered that in the script and --

Okay, sorry.

-- (multiple speakers) coming down to the fact that we received some of the business interruption but most of what we received so far has been unallocated by the insurers. So we've had to make some assumptions. But we still have yet to receive the recovery on the direct strong nitric acid plant and we disclosed what the range of likelihood is at -- in the 10-Q, we disclosed the likelihood of that. I think it's somewhere between $48 million and $73 million. We haven't received that and we still expect to recover most of our lost profits going forward.

Okay, and a question on the potential of El Dorado ammonia expansion, earlier I think you --

Excuse me a second, Tony needs to amend his statement.

$48 million to $73 million, that's an old number. It's actually $48 million to $60 million. Excuse me.

Okay, all right. And then just moving on to El Dorado, just in another answer to a question, I think you said you have a need at that facility for about 250,000 tons of ammonia and the expansion would produce 375,000. And then you were talking about potential growth. And I just want to understand. Does that mean you might try to use some of that production internally by producing more fertilizer and chemicals, or you would sell the ammonia on the market?

Well, Joe, here is the way it will work.

This is Keith.

Oh, is this Keith?

Yes.

I thought Joe was still on. Here is the way it will work. The first ammonia we will use to make the products that we sell directly, the downstream products. Then there will be some excess ammonia, and we will have contracts to sell the excess ammonia on the market. And that will go at something close to market price. And if the products we make, if that market grows, then it will eat into the surplus ammonia that we have to sell on the market.

Okay.

I don't know if I'm being clear enough.

No, no, no, that is definitely helpful. That was helpful.

And then finally, on the natural gas hedging, you don't have to go back into detail, but were you implying about 20% of your cost is hedged or exactly how should we think about that?

We are currently, our capacity right now is that we use about 1 million Mcf a month. And this is about -- this leasehold investment is about 20% of that 1 million per month. And we have an average cost we said of about $1.50, so when we are in production, that will just reduce about 20% of that purchase each quarter.

Okay, thanks. That's all I had.

The reason it's difficult to understand is it comes off of one pipeline but we can't take it direct from that pipeline. So we have to sell it on one pipeline and buy it on another. If we had a direct hookup from the Marcellus to our plant, then you wouldn't even have this conversation.

All right. Thanks a lot.

Bruce Zessar, Advisory Research.

I first had a question similar to on the February call. If you look at all of the plants assuming they had been up and running instead of having the downtime, you say in the press release that there was about $40 million to $49 million adverse to operating income in the Chemical Business because of the different plant issues.

So I guess my question is you showed an operating loss for the Chemical Business of roughly $4 million in the quarter. If you add back that $40 million to $49 million, that would effectively mean your operating income would've been somewhere in the range of $36 million to $45 million positive in the Chemical Business in the quarter if all of the plants were up and running correctly. Is that right?

Well, we had extra costs that is insurable cost. And we had downtime which precluded us from producing gross profits. So, we looked at what we had in the way of extra costs, unabsorbed overhead, and lost profits on sales that we were unable to make and came up with the range of $40 million to $49 million. Now, keep in mind that we had some insurance recoveries in both periods, but we have this -- it's a range and it's based on estimates. So we are not really forecasting what we can do in the future, but we are just using the --

Tony, I am not asking about what you may do in the future, but that $40 million to $49 million you wrote in the press release was net of insurance recoveries.

Correct.

So, what I'm saying is if you literally read what you wrote on Page 2 -- "For the first quarter of 2013, we estimate that the cumulative negative effect on our pretax income from these incidents and issues, net of insurance recoveries recognized, was in the range of $40 million to $49 million..."

So what I am saying is if you add that back into the $4 million operating loss you reported, what you are effectively saying is that if these plants were operating correctly that the business estimated in the first quarter would have probably earned operating income in the range of $36 million to $45 million? Isn't that right?

That is correct, if our assumptions were accurate.

Right. That's what I just want to know I'm doing the math right. So then if you compare that alternative universe where everything is operating correctly and you would have reported estimating $36 million to $45 million in operating income in the Chemical Business compared to $20 million in the first quarter of 2012, that's a significant improvement. And I guess my question is, is that largely due to ammonia prices being significantly higher than they were in the first quarter of 2012?

Well, there's two things there. One is we had a -- if you look back at last year's first quarter, we announced there was a $13 million adverse impact due to the fact that the Pryor urea retainer was being replaced or being repaired.

Converter.

Converter, excuse me.

Go back to 2011 and you will see -- I think --

Anyway, we had a $13 million impact on the first quarter last year so to equalize it too, you've got to add that back to the $24 million.

All right, that's fine. So --

So to continue with it, there were better pricing and cost relationships in this quarter than there were last year.

Okay, that's fair enough. And then the next question was, in looking at the 10-Q, is there any -- I was looking at each of the insurance recovery estimates. Is there any prospect for additional recovery at El Dorado, or are you done with the insurance on that?

No, no. As we said, we still have the property damage claim for the direct strong nitric asset plant that was destroyed, so we still have that property claim. That will hopefully be received sometime in 2013.

Okay, but do you still have --

Ongoing (inaudible). And the way it works is you have a claim, which is the policy says it will cover you for your losses and/or the cost of repair. And so that means that, first of all, there's a decision to be made. Do they agree that it should be repaired or not? And then if you decide you want a new one because you don't want to take a risk of repairing, then it becomes a negotiation. The number still comes out what is supposed to be fair, but that means we don't know the exact number. It is a negotiation. We know what the new one will cost, but the question is will they accept that number? And sometimes they do and sometimes they don't. All of that ends up, on these big claims, ends up being a negotiation in the end. (multiple speakers)

All right, so I just want to make sure I understand. On Page 34 of the 10-Q, there is a one-line paragraph that says, as of March 31, there was no insurance claim receivable balance relating to this event, referring to El Dorado. So that just means that you didn't have an existing claim going but you'll have another one?

The reason that comment is there is, as we incurred costs, rather than expense them, we would put them on our balance sheet as a receivable. But that doesn't mean that we don't have a claim. We just don't record the claim. That would be considered contingent income. So we have to wait until the claim is actually agreed to by the insurance company before we can set it up as a receivable.

So, in other words, what you are looking at on the balance sheet has nothing to do with the actual claim on the repair costs. It has to do with cleanups and other costs we incurred that were insurable.

Okay, all right. And the last question I had was to better understand the hedge you are getting out of the working natural gas interest you have in the Marcellus shale. How much natural gas does LSB consume in a typical quarter? A range would be fine. How many --?

The Pryor and Cherokee plants, which both produce ammonia from natural gas, consume roughly 1 million MCF per month. And of course when we do the El Dorado plant, that will all change, but right now we use about 1 million MCF a month, consume about 1 million per month in the -- that is consumed to produce ammonia. Now, we also have other gas requirements for it that are considered to be production gas.

Okay, but is that 1 million at Pryor and another 1 million at Cherokee?

No.

1 million combined.

All right, so total then.

Sometimes it goes a little higher.

Or less.

Okay, so you will buy more -- and then you naturally buy more if go forward with the El Dorado plant?

Actually, if Pryor is up and running the way it should be, the way we expect it to be, it will use more than Cherokee. So will probably go to 1.2 million. We don't know for sure what it will do.

Okay, all right. That's all the questions I had. Thank you.

Gregg Hillman, First Wilshire Securities.

I have some questions concerning safety. I had heard that 90% of the accidents in the petrochemical industry are caused by operator error. I was wondering if you think that is correct. And also, are there simulators available for your plants that you could train people on, have them go through different scenarios before they have them, kind of like in the nuclear industry? I know there simulators for all the nuclear plants. And also whether you plan to get such simulators?

Well, first of all, the first question that you asked -- are you there?

Yes, I'm here.

The first question you asked was about the petrochemical industry and you asked us to verify that.

Yes.

And I don't have petrochemical industry numbers to be able to verify that or not. So I can't -- no one here can really answer that question, okay? Because this is not considered petrochemical.

As to simulators, the training process for operators includes many different aspects. What you are talking something about is something kind of like a flight simulator? Is that what you are talking about? That basically (technical difficulty)

Yes.

There are various protocols are used for training their operators are given certain fact circumstances and they say, if this happens, what do you do? If it goes -- if they range, if a certain piece of equipment goes into a range, what is your first reaction? What's your second reaction? Et cetera. And so this is part of the training process. As to whether there are actual simulators or not, I can't answer that question right now.

If you happen to find one, let us know. I never heard of one.

Okay. Thanks a lot. And then finally, continuing on safety, the explosion in Waco, Texas, have you heard anything about -- and I know it's fairly early -- anything about potential fallout from that or something in terms of proposed regs that might come out of that?

Well, right now, there's a lot of talk about different things. There is no definitive cause. And what I have seen going around has to do more with the Fertilizer Institute, talking about complying with -- having some type of self compliance type of standards. Although, in our operation, a lot of these operations like the West, Texas operation, are small, independent operations, so there is really no oversight of those operations. And this is distinguished significantly from our operations where we have corporate oversight and we require that our operations comply with all applicable regs, et cetera. So if there was industry oversight that basically came in and said, we are going to make sure that you are in compliance with all applicable regulations, it would probably have minimal impact on us since we already comply with all applicable regulations.

That we know about.

Yes, that we know about. Now, whether there will be any new regulations on top of the various ones that are out there, we really don't know at this time.

Okay. Thanks.

Rob Longnecker, Jovetree.

I'm just trying to get a little more detail on the insurance. I was looking through the notes in the Q. First, on El Dorado, I think you guys said you have gotten $40 million paid out when you allocated it, $28 million to property insurance and $11 million to BI. Does that mean in your range of $48 million to $60 million, the estimated cost of repair, that you've already received $28 million of that $48 million to $60 million?

No, we still have that claim to receive.

So when you talk about you allocated I think $28.6 million to a property insurance claim, what is that referring to then?

It's referring to --

Cleanup.

The cost to repair the other damages to the location.

Got you. Okay. Thank you.

You know --

And then you also --

There was a lot of peripheral damage to the acid plants which we've had to fix.

Got you. And then you mentioned that there $11 million was allocated to a business insurance claim. What time period does that cover?

Well, it's more a matter of the fact that they are making advanced payments unallocated, so we've had to make that assessment ourselves. And the accidents didn't occur until November of 2012.

No, May 15.

May 15.

Excuse me, May 15 at El Dorado and the Cherokee one is November of 2012.

So, is that just from the accidents through the end of 2012 that that $11.4 million covers?

It is an arbitrary allocation based on everything that we have incurred up to a point, so you're still -- we're still looking at an accumulated amount of business interruption claim minus what we've applied against it.

Okay. And then, on Cherokee, you talked about that you've gotten payments of $15 million approved. What time period does that cover?

There again, that was just an advance payment. It was covering, for the most part, recoverable costs.

Okay. And then is it looking like the notes -- it looks like the prior claim got rejected, so is there no business insurance you expect to get on Pryor?

We didn't claim on Pryor. Oh, you mean the disclosure we made on the urea reaction liner?

Right.

That was denied.

So there is no BI expected on Pryor? It's just on Cherokee and El Dorado?

That is right. That is correct.

Okay. And then when you guys talked about the new ammonia plant and you talked about stress testing and things like that, and you said it clears your internal hurdle rate. What is that hurdle rate? How do you think about that?

Well, our internal hurdle rate is not a specific number. It has to do with all facts and circumstances, evaluation of the plant, the plant's competitive nature, where it sits in the market, the benefits of having the production of ammonia, additional capacity, etc., as well as the specific financial numbers.

And so, in other words, maybe a hurdle rate could be a misnomer. It meets our all facts and circumstances test, which is a better answer than the answer I gave before.

Got you. Okay.

As Barry indicated, when we did our forward look, we shocked the projection on both sides, the cost side and the sales side.

Got you. Okay. Thank you very much.

Shaun Nicholson, SBH.

Just a quick question on the prior understanding that -- where we are at in the season here. Would you guys be running full out on the UAN side at this point and then using the leftover ammonia to sell in the open market, or is it more economical right now as you guys ramp the ammonia to utilize that?

It really depends on market conditions at the time, but the idea now is to get the -- to convert as much of the ammonia to UAN as possible.

Okay. And if you just run at 600 tons per day, say, on average, that leaves about 50,000 or so tons of ammonia, I think.

Let me see just a minute. That's right. That's pretty close.

Okay. And then the next 60,000 ton addition, when that comes on, obviously that is just additional you can sell into the market. Would you guys need another permit for that? Because I know you have a permit to run up to 700 tons per day.

That one is already permitted. That one we got a quick permit on that.

Okay. So that's just more of once you get --

(multiple speakers) just getting to it.

So once you get comfortable with the current production --

Yes.

-- You could always add that in as the season winds down.

Well, it's a question of those small plants are -- it's a specialized knowledge. And so the training for those little plants is different than the training for the large plant. And so we have to train the people on those small plants.

And have you guys started putting in the new control rooms yet? Or where are we at in that process with Pryor? I know you guys were going to upgrade the control rooms.

Specifically do what?

You're thinking about the probes and sensors and so forth.

Yes. I had visited there a while ago. Tony and you guys were talking about basically revamping the control rooms to get it more up to speed.

Yes, they will all be revamped. They will be operating with a dashboard.

And to answer your question specifically, some of those have been installed already. And some of those will be installed on a going-forward basis. Yes.

It takes several years to get everything installed.

Right. Okay. Thank you.

Thanks, Shaun.

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

Well, I'd like to thank everyone for having interest in LSB and participating today. And we appreciate that interest. If you will stay on the line, Carol Oden will review certain important information about the content of our presentation today. Carol, would you take it?

I will do that. Thank you for listening today.

The comments today contain certain forward-looking statements. All of the 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 of forward-looking statement nature identify forward-looking statements, including but not limited to all statements about or any references to our potential Billings Index or any McGraw-Hill forecast, including those pertaining to commercial, institutional and residential building (inaudible) for investor growth and McGraw-Hill forecasts regarding the total green retrofit renovation markets and energy efficiency markets. The forward-looking statements include but are not limited to the following statements -- El Dorado could improve its earnings potential with an anhydrous ammonia plant addition; Cherokee production rates are increasing; we expect the Chemical Businesses to dramatically improve for the second half of the year; we are optimistic about the balance of 2013 and future years; Ongoing negative effect on El Dorado's operating income is estimated to be approximately $1 million to $2 million a month; we will receive additional business interruption recoveries during the remainder of 2013; we expect to receive property damage insurance recovery; additional plant projects; third-party financing; UAN and AN prices; El Dorado's facility results will improve; planning to build an ammonia plant; increase El Dorado's capacity and lower production costs at El Dorado (inaudible) 65% nitric acid plant and planned ammonia plant should be operational in 2015.

You should not rely on the 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, 2012 and Form 10-Q for the period ending March 31, 2013. We undertake no duty to update the information contained in this conference call.

The term EBITDA, as used in this presentation, is net income plus interest expense, depreciation, amortization, income taxes, and certain noncash 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. The reconciliation of GAAP and any EBITDA numbers (technical difficulty) conference call presentation which is posted on our website.

Thank you again. 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.