LSB Industries Inc (LXU) 2013 Q2 法說會逐字稿

Greetings and welcome to the LSB Industries second-quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carol Oden of LSB Industries. Thank you. Please go ahead.

Thank you, Brenda. Good morning, listeners. Welcome to the LSB Industries Inc. second-quarter 2013 conference call. Today LSB's participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, Executive Vice President and 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, August 9, 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 Webcast and Presentation 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.

Thanks, Carol. Welcome to today's conference call. On today's call, we expect to update you on the current status of our activities and operations. Those of you who follow us know that we have been working on a bond offering to raise funds to complete a substantial expansion of our El Dorado Chemical .

Two days ago on Wednesday, August 7, we completed a $425 million bond issue and received the funds. Now with this money, we are in the progress of engineering an anhydrous ammonia plant that will allow us to almost double our total ammonia production capacity. We are well on our way to constructing this plant with the engineering and the purchase of some of the major long-term lead items required for the plant.

We are awaiting the receipt of the permit from the Arkansas Department of Environmental Quality, which is expected soon. When we receive it, we will break ground on the project. In addition, we have already on order a new acid plant and a nitric acid concentrator to replace the plant that exploded in May of 2012. We expect a significant amount of this plant to be paid for with insurance proceeds.

On the subject of insurance proceeds, we continue to make progress in our discussion with our insurance carriers on the amounts due to us on our claims. We also expect that we will receive payments before the end of 2013.

At this time, we are projecting that all these construction activities will be completed during 2015, I think it is.

For your information, internally, we have shock tested our projections under various downturn scenarios and believe that our capital expansion should be accretive to earnings. We are in the process of renewing, adding, increasing the size and scope of our long-term contract to supply our customers with the additional capacity that will be available from the future expanded El Dorado plant. At this time, UAN production at our Cherokee and Pryor plant is sold out for the balance of 2013.

In addition, we have completed necessary repairs and upgrades to our Cherokee and Pryor facilities that restricted production rates and depressed our financial results in the first half of 2013. These facilities are now operating and we expect our Chemical Business results to improve significantly in the second half of the year compared to the first half.

In our Climate Control Business, given the market-leading positions of our products, we are well positioned to capitalize on the continued strengthening and demand for both the commercial, institutional, and residential sectors. This should lead to further increases from product sales, orders and backlog.

In the near term, our Chemical Facilities -- with our Chemical Facilities back in production, and recovery underway in our Climate Control end markets, we are looking forward to reporting improving results as we progress through the balance of 2013 and 2014.

So the big picture long-term outlook is strong for us. But I might add that we are not immune from the macroeconomic issues that could affect our internal projection in both of our Chemical and Climate Control businesses.

That is my view of where we are and I am going to turn the rest of the meeting over to Tony and Barry. Tony will review the financial position post the bond offering and Barry will discuss our operations and market conditions. Thank you.

Thanks, Jack. Before reviewing the financial results in detail, a few comments about the first half.

Our Climate Control Business reported improved results including a 13% increase in sales and a 20% increase in operating income over the first half of 2012. However, our consolidated results for the first six months were significantly below the corresponding period in 2012 due to downtime or reduced production levels at three of the facilities in our Chemical Business.

Due to the effect of this downtime, our consolidated operating income and net income from the first quarter were essentially breakeven and our second-quarter results are well below 2012. We will review the effect of the downturn and the current status of each later in this call.

For a review of the second-quarter 2013 consolidated results compared to the second quarter of 2012, please turn to page 4 on the PowerPoint presentation.

Net sales were $202 million or 3% below 2012. Operating income was $12 million compared to operating income last year of $42 million. After interest expense and taxes we reported net income of $7.4 million or $0.31 per share compared to net income of $26 million or $1.11 in 2012. EBITDA was $19 million versus $48 million.

Continuing on page 4 for the first half of 2013 compared to the first half of 2012, net sales were $353 million or 12% below 2012. Operating income was $12 million compared to $65 million last year. After interest expense and taxes, net income was $7.4 million or $0.31 per share compared to net income of $40 million or $1.72 in 2012. EBITDA for the six months was $25 million compared to $76 million.

The significant decline in consolidated operating income and net income is due to the effect of the lost production in the Chemical Business, partially offset by increased profitability in our Climate Control Business.

Turn to page 5 of the presentation to review Chemical results for the second quarter of 2013 compared to the second quarter of 2012. Net sales were $121 million or $17 million lower than 2012. Operating income was $6 million compared to $39 million in 2012 and EBITDA was $12 million compared to $43 million.

Also on page 5 are the six-month results. Net sales, gross profit, operating income, and EBITDA were all below the first half of last year as a result of the lost production in those three facilities, but particularly at the Cherokee and Pryor Facilities.

During 2013, the Pryor 's primary ammonia plant and the Cherokee ammonia plant were both out of operation for the entire first quarter and a significant number of days during the second quarter. The effect of the downtime at the Pryor and Cherokee Facilities is particularly significant 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 and therefore have the biggest negative impact when the ammonia plants are not in operation. Based on market conditions during the first half and after recognizing $14 million in business interruption insurance recoveries, we estimate the effect on Chemical's first-half operating income resulting from downtime to be approximately $60 million to $70 million less than otherwise would have been expected, including approximately $20 million in the second quarter.

All of the Chemical facilities are currently operating at new design rates with the exception that El Dorado's nitric acid production capacity will continue to be limited to approximately 80% of normal capacity until 2015, when the construction of the new nitric acid plant is scheduled to be completed.

The El Dorado and Cherokee downtime events were both -- were unplanned and were insurable events. We estimate the cumulative business interruption property claims after deductibles to be approximately $140 million to $165 million of which we have received to date $65 million. We anticipate we will receive the remaining estimated recovery of $75 million to $100 million during the remainder of 2013 although there are no assurances.

Turning to the results of our Climate Control Business, please go to page 6.

For the second quarter of 2013, Climate Control reported net sales of $77 million, an increase of 15%. Gross profit was $25 million as a percent of sales improved to 33% compared to $21 million sales and 31% gross profit percentage in 2012. Operating income increased to $9.5 million compared to $7.3 million in 2012.

For the first half of 2013, Climate Control sales were $148 million, 13% above 2012 with gross profit and operating income increase in terms of dollars as well as a percent of sales.

Okay, turning to liquidity and capital resources, at June 30, 2013, and recognizing that there was substantial changes post-June 30, please go to page 7.

Compared to year end 2012, cash of $66 million is $32 million lower, total interest bearing debt is $35 million higher as stockholder equity has improved slightly. At June 30, our $50 million working capital revolver loan [reserve drawned] and remains so today. The $32 million reduction in cash for the six months included $7 million cash provided by operations; $30 million from net financing activities; and $14 million of property insurance proceeds, offset with capital expenditures of $83 million.

The capital spending plans for the calendar years 2013 to 2015 include $250 million to $300 million for the construction of the El Dorado Facility. $120 million for the new 65% nitric acid plant and converter, also at the El Dorado Facility, and the planned expenditure also includes spending for the improved reliability, mechanical integrity, environmental upgrades and safety at our Chemical facilities as well as regular maintenance CapEx throughout the two business segments.

As noted, certain of these expenditures could extend beyond 2015, depending on construction delays. The planned capital spending will be funded by internal cash flow, insurance proceeds and the senior secured notes.

For a summary of the Company's debt and equity capital after giving pro forma effect of the financing as of June 30, please turn to page 9.

After reviewing the long-term debt markets, we selected for a number of reasons. Primarily due to the fundamental structure of this market including fixed interest rates, incurrence covenants versus maintenance covenants and the general flexibility of the structure which best fits our practice of managing for the long term rather than short term quarter to quarter.

As announced on August 7 and as Jack mentioned, we completed the issuance of $425 million of new 7.75% interest senior secured notes due 2019. The use of proceeds includes the prepayment of $66.6 million existing term loan and general corporate purposes including among other things the planned capital expenditures we just discussed.

Pending application of proceeds in accordance with the above, the net proceeds will be invested in short-term investments with highly rated money market funds, US government securities, treasury bills, certificates of deposit and/or short-term commercial paper.

During the period of construction and prior to completion of construction, interest will be capitalized on cumulative costs consistent with GAAP, generally accepted accounting principles. We have addressed our results of operations and financial commitments in greater detail in our 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 of our business segments.

Thanks, Tony. Since Tony covered the financial results I am going to focus on our sales activity, order levels, product backlogs, where pertinent, and market drivers as we see them. I will also give you an update on progress with the major capital projects, primarily at our El Dorado Facility.

To start, please turn to page 10 which shows our 2013 second quarter to date sales mix by the markets we serve. This is a change from historical mix due to the downtime at certain chemical operations and not typical.

On page 11, we have 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 12. Although we have included data about our second quarter and year to date sales on this and the next two pages, comparisons to 2012 for the most part are not meaningful because the Cherokee and Pryor Facilities were not fully operating during a large part of the first half of 2013.

Having said that, total sales for the Chemical Business in the second quarter were $121 million, down 12% from the second quarter of 2012. Total sales in the first half of 2013 were $199 million down 24% from a year ago. With the exception of sales of natural gas which are new this year and industrial assets during the second quarter of 2013, all major product categories listed were down, relative to the second quarter and first half of 2012.

Please turn to page 13 for sales of our key agricultural products. During the second quarter and first half of 2013, sales of all fertilizers were lower than during the same periods last year. Sales of UAN and ammonia were down as a result of downtime in our Cherokee and Pryor facilities while sales of agricultural grade ammonium nitrate produced at our El Dorado Facility were down due to market conditions, primarily more imports than a year ago.

El Dorado uses ammonia purchased from the pipeline as a feedstock so it is not always competitive with imports at this time. This is one of the primary reasons for the planned ammonia plant in El Dorado and I will come back to that later in the presentation.

Turning to our industrial and mining products on page 14, for the second quarter both sales dollars and tons shipped of the nitric acid and sulfuric acid were above the second-quarter 2012 levels. Nitric acid sales were up from our Baytown Facility due to increased acid consumption for polyurethane intermediates and new opportunities that arose during a permanent close -- that arose due to a permanent closure of a competitor's nitric acid plant in the Baytown area.

Sulfuric acid sales were up because 2012 sales were impacted adversely by the plant outage at El Dorado which occurred in May 2012. Industrial AN sales were lower as a result of downtime at Cherokee.

On page 15 are some price trends for both the feedstock we use and the key ag products we sell. The cost of natural gas has recently decreased and continues to be relatively low currently about $3.24 per MMBTU plus transportation costs. This benefits production costs at our Cherokee and Pryor Facilities which use natural gas as their primary feedstock but puts our El Dorado Facility at a competitive disadvantage to plants that are using natural gas as a feedstock.

The cost of anhydrous ammonia, the feedstock we use at El Dorado and Arkansas and the Baytown, Texas Facility has declined. In July it was $525 per ton compared to $690 per ton a year earlier. Currently, ammonia is priced at approximately $470 per ton metric -- per metric ton at Tampa. Our El Dorado and Baytown facilities use ammonia as feedstock.

Most of the products we produce at Baytown and most of the industrial and mining products produced at El Dorado are sold on a cost-plus basis. So changes in ammonia cost don't impact our profitability on those sales. However ag grade AN also produced at El Dorado is sold at spot market prices.

Turning to other ag products, prices for UAN have fluctuated over the past year and are 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 $335 per ton in July 2012 to $315 per ton in July 2013.

Based on market indicators, we believe the current UAN pricing is approximately $265 to $310 per ton depending on distribution point locations.

UAN prices have been impacted by low-cost urea imports. Looking forward, we have presold substantially all of the UAN production from our Cherokee Facility for the balance of the year at an average price of approximately $260 per ton. We have also taken advantage of the recent drop in natural gas prices and locked in gas prices for the presold UAN at Cherokee.

In July, 2013, Southern Plains prices for high density of ammonia nitrate or HDAN that is ag grade were $380 per ton compared to $465 per ton 12 months earlier. Current pricing is approximately $335 per ton.

Currently Southern Plains ammonia is trading at about $55 per ton lower than a year ago, approximately $460 per ton.

We are currently at the typical seasonal low price for all of our agricultural products.

Focused on the outlook for the chemical markets we serve, page 16 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 although projected high yields in the current planning season should increase these somewhat. Planting levels next spring are expected to be somewhat lower than this year, but still relatively high. Market prices for corn and wheat, although having recently declined remain favorable to growers, so farmers have an incentive to plant and sell more.

All of this should continue to create demand for nitrogen fertilizers. As previously mentioned, we have presold our Cherokee production for the balance of 2013.

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 for 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 was substantially delayed. Wet and cold conditions in northern markets delayed the season there while cold and dry conditions delayed the season in our Southwest markets. As a result of the late planting, ammonia usage was off.

However once the season began, weather conditions were generally good and industrywide-sales of UAN were good as well. Unfortunately, we missed this opportunity because our two UAN-producing facilities were out of production during most of this period.

Current weather conditions with abundant moisture have returned much of our market areas to normal, as opposed to the draught conditions prevalent in recent years and should lead to high fertilizer applications this fall. We continue to be optimistic about our agricultural business.

Please turn to page 17. Our industrial products are sold primarily to large customers pursuant to contractual cost less and/or minimum take arrangements. The two charts on this page indicate the shift that has occurred in our sales mix in 2013 from 2012 full year.

In reality, very little change occurred and the shift from agricultural products to industrial this year was primarily driven by plant downtime.

A very significant part of our business continues to the industrial and mining. Page 18 contains some of the market indicators for this area of the business. Most of these indicators forecast growth for the next few years. Coal production in the United States has declined as a result of low natural gas prices and environmental issues. However most of our mining business is pursuant to long-term agreements with minimum annual quantity requirements.

Please go to page 19 to view the current status of our various chemical production facilities. El Dorado's nitric acid capacity is approximately 80% of its pre-May 2012 levels and we will continue at that level until we complete construction of a new Weatherly 65% acid plant and concentrator during 2015.

Cherokee resumed production in May 2013 and is currently operating at its historical levels. Pryor resumed production during late April 2013 and although it encountered some close start-up mechanical issues, it is operating at near design production rates. The Baytown Facility is operating at optimum production levels.

To recap, all of our chemical facilities are operating at near design rates as required except El Dorado which will have less nitric acid capacity until 2015.

Moving on, page 20 lists our Chemical Business strategy and cover some of our key initiatives for 2013. Our primary focus is on plant safety, reliability and key capital projects.

Focusing on capital projects, please turn to page 21.

Earlier, Tony reviewed the capital budget with you. I will review some of the key projects in additional detail. As we previously mentioned, we plan to add a 375,000 ton per year ammonia plant to our El Dorado Facility which we refer to as EDC. Whereas our Cherokee and Pryor facilities use natural gas as their primary feedstock which they convert to ammonia, EDC currently purchases ammonia from the pipeline. EDC currently uses approximately 220,000 tons per year of ammonia to satisfy its current production needs for the other products it produces.

The planned ammonia plant will lower ED -- El Dorado's or EDC's cost of production and provide approximately 155,000 tons per year of ammonia capacity above EDC's current usage. Part of that additional ammonia will be used to convert to other products at EDC and part will be sold as ammonia via the pipeline that EDC currently purchases from.

The chart on this page shows the historical differential between purchasing and producing ammonia for the past three years. The current status of the ammonia per plant project is as follows -- we have applied for permits and the permitting process is well underway. 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 leadtime items. We will soon execute an agreement with an EPC firm to construct the ammonia plant. By the way, EPC stands for engineer procurement and construction.

As we have stated, we plan to have the ammonia plant constructed and in operation during 2015, probably the latter part of 2015. We also plan to replace the DSN direct strong nitric acid plant that was destroyed at EDC with a state-of-the-art Weatherly 65% acid plant and concentrator. Permits have been applied for. Engineering work is in process. Major equipment has been ordered and we expect the plant to be operational in 2015 as well.

We will also engage an EPC contractor to complete the construction of this project. The new nitric acid plant will have a capacity of approximately 370,000 tons per year as compared to 90,000 tons per year from the old DSN plant that it is replacing. This will increase EDC's nitric acid capacity by approximately 280,000 tons per year.

At Pryor we recently completed the installation of a natural gas to ammonia converter. We determined that the old converter was the bottleneck that was preventing Pryor from achieving its design production rates.

The new converter is working well and Pryor is operating at or near design production rates of ammonia.

In addition to these projects, we continue to place a very high emphasis on safety the environment and plant reliability.

Turning now to our Climate Control Business on page 22, you can see sales by the major product categories we report in our quarterly filings. Total sales for the second quarter were $77 million, an increase of 15% over the second quarter of 2012 with increases in each product segment.

Compared to the 2012 second quarter, sales of heat pumps were up 15%, fan coils were up 23% and sales of other products were up 2%.

Total sales for the first six months were approximately $148 million, an increase of 13% over the same period in 2012, again, with increases in each product category. Compared to 2012 year-to-date sales for heat pumps were up 12%, fan coils up 23% and sales of other products up 8%.

On page 23, you can see that the second-quarter sales of products used in commercial and institutional buildings were up 16% and sales of our residential products were up 8% compared to last year's second quarter. On a year-to-date basis, sales of products used in commercial and institutional buildings were up 17% whereas sales of our residential products were down 5%.

Total bookings during the second quarter of 2013 were 2% below the 2012 second quarter, with both commercial bookings and residential bookings down the same percentage. Year-to-date, our orders were up 3% over 2012 with commercial bookings up 2% and residential bookings up 4%.

The backlog of product orders at June 30, 2013, was $48.9 million, 3% lower than reported a year ago and 12% off the backlog at year end. Total new orders in July were $20.9 million and our backlog of product orders at July 31 was also $48.9 million.

As mentioned in previous conference calls, the commercial recovery has been slower than previously anticipated. And the market for our residential products continues to be somewhat soft. However, we continue to maintain our leading market shares for geothermal and water source heat pumps and for hydraulic fan coils.

The next few pages of the PowerPoint deal with the market outlook for construction. On page 24, there is a graph that shows McGraw-Hill's most recent construction forecast for certain commercial and institutional building types. These are the building types that are the most important to us as they comprise 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 six years.

In the aggregate, they are expected to grow by just over 5% during 2013 and 66% for 2017. Three months ago, the same McGraw-Hill forecast indicated that in the aggregate, these markets were expected to increase by 9% in 2013 and 67% through 2017. Clearly the indications are for growth, but how much and exact -- and when it will materialize exactly is difficult to pin down.

In addition to monitoring construction forecast by sector, we also track the architectural building index which is considered to be an indicator for nonresidential construction spending nine to 12 months in the future.

So if you turn to page 25, there is a graph of the ABI. June's score of 51.6 makes 10 out of the last 11 months above 50, which indicates an expansion in billings. This is a very positive sign that the construction market is stabilizing.

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, approximately 70% of Climate Control Business sales, renovation and retrofit of existing buildings have been and will continue to be an important market for us.

Fortunately all of our Climate Control Business are well-suited for this part of the market as well as new construction.

During 2012, 18% of our Climate Control Business sales were geothermal heat pumps used in single-family residential applications.

Page 26 shows McGraw-Hill's forecast for single-family residential construction starts. McGraw-Hill forecasts that housing starts will increase from about 516,000 in 2012 to 640,000 in 2013, a 24% increase, although in absolute numbers not tremendously high, and to over 1.1 million per year in 2015 through 2017.

If this occurs it should benefit our residential geothermal business. However, we do believe that low and relatively stable energy prices continue to dampen the consumer enthusiasm for energy savings alternatives.

An encouraging positive trend is the increase in green construction that has occurred in the past few years and is expected to continue. Now I showed you this in the last conference call, but for people that are new to the call this year, I included this again.

On page 27 there is a graph that depicts the Dodge 2013 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 sale of our highly energy-efficient products which includes our geothermal products and many of our other products as well.

Turning to page 28, we have listed our Climate Control Business strategy and some key initiatives. Our primary initiatives for 2013 are the introduction of several new products and a heavy focus on lean operational excellence projects intended to reduce costs, eliminate waste, streamline processes and improve quality.

One accomplishment that we are very proud of is that our innovative and ultra energy-efficient trilogy geothermal heat pump series recently received the R&D 100 Award from RNC magazine. Now this is widely recognized as the Oscars of innovation. The R&D 100 Awards identify top technology products of the year and since 1963 they have recognized revolutionary technologies newly introduced to the market. Many of those have become household names to you including things like the flash cube, automated teller machines, the halogen lamp, the fax machine, liquid crystal displays, photo CDs, the Nicoderm anti-smoking patch, anticancer drugs and HDTV.

Recent [M] winners have included next generation MRI machines, laser metalforming tools, and building blocks for fusion experiments. So we are extremely proud of that award for this great technology that we have developed in the last couple of years.

Finally, on a housekeeping note, Tony and I will be participating in the Global Hunter Securities Industrial Top Idea Conference in Chicago on September 5 and we hope to see some of you there.

That concludes the prepared portion of the call. I would like to turn -- 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). Joe Mondillo, Sidoti & Company.

Good morning. First question. I was wondering if you could -- it involves the El Dorado expansion and we have had a lot of volatility with commodity prices and I know there's a lot of variables involved, but I am wondering if you could give us any idea, talk about a little color on the sensitivity of the $370 a ton of savings that you guided to in the presentation that you put out a couple of weeks ago.

What we -- in previous conference calls when we have been asked the question about what we expected the savings to be in El Dorado now what it would look like today and what it might look like on a going forward basis, I think we have been pretty consistent in responding that the market condition -- there's a lot of moving parts to the answer to that question. There's the market price of the products, there's the price of ammonia. All the inputs are subject to change.

And I think we have said consistently that they do change and we expect them to change. And as a result of that, that we have run numerous scenarios at various levels. Jack mentioned today that we shocked our projections with some downside scenarios.

It is obvious that if ammonia prices are lower now than they were a year ago or three years ago then the spread is lower. We expect that spread to change over time. Sometimes it will get bigger, sometimes it will get smaller. The price of ammonia in the last year has varied between what it is today and $700 per ton.

So we expect that over the long haul that this is going to be a very profitable addition. It will save us significant money and it is going to be accretive to earnings and have a relatively short payback for a project of this magnitude.

But as to specifically addressing differential in savings, you can try to do the math yourself because everyone in the industry knows the computation to figure out what the cost of producing it. So I don't know if that answers your question or not.

Yes, that was good enough. Thanks. Second question related to the Pryor plant, I was just wondering I think we had possible expectation that additional 60,000 may be up and running by the year end or early 2014. I was wondering if you could give us an update on that capacity.

Again, in the previous conference call I think we stated, we did state that we were -- although not back burnering that project we were giving it a much lower priority than focusing on the major [planet] Pryor for obvious reasons and we are still in that posture.

So I would expect that that is pushed out and it will push out in -- for sure push out into 2014. As to an exact timing, we don't have that available to give you because we quite honestly don't know ourselves.

And lastly, expectations on turnarounds in the third quarter. (technical difficulty). I was wondering if you could give an update on that.

That's correct, Joe. We don't have any significant turnarounds planned for the second half.

Great. Thanks. I'll hop back in queue.

Dan Mannes, Avondale Partners.

A couple of follow-up questions first starting on the El Dorado ammonia expansion. Number one, you seem to have pretty good visibility on the capital cost, $250 million to $300 million. I was wondering how close are you to being able to sign the EPCs and how much of that cost is already either locked in or [known] versus how much is there still some wiggle room on?

Well, some of that cost is locked in and some of that cost is subject to change as we get into the project. And I don't have in front of me a breakdown to be able to give you quantify specifically how much that is. Unfortunately I just don't have that information in front of me. Tony, would you like to comment?

Well the -- Dan, the other thing to this, I think the very mission that we negotiated agreement with EPC, it will be -- it won't be a turnkey cost, it will be time and materials but it's been highly engineered and highly negotiated. So we have a -- we feel certain it will come in within that range and I think we put on the schedule $270 million. But we don't expect significant overruns over and above what we forecast.

I will just add to what Tony said. The reason some of it we can lock in on is because some of the parts to the plant we've purchased direct. And some of the parts of the plant will be provided by the EPC and so on. Much of the part that we've purchased direct we have been able to lock the price. And (multiple speakers) the hardware.

That -- those major components we have been able to lock it or come within a very narrow range of expectations of variation. The part that is subject to change gets into the construction part itself. And that is still in engineering.

So as the engineering changes, there are some variations and that will be the engineering will continue for a few more months until we break ground on it.

Okay. The next question, El Dorado, and I think in your -- in the presentation related to your debt you noted an expectation of maybe a 20% return on capital which we estimated then to be in the ballpark of $50 million to maybe $60 million of annual EBITDA.

Can you talk about what might be baked into that assumption? And how much of that is already -- I don't want to say locked in, but highly visible given the fact that this stuff is already going into contracted production at El Dorado?

Well, when you say contracted production, we have, as I said before, we have -- we are currently using about 220,000 tons per year of ammonia at El Dorado. And so the first 220,000 tons of production will go to satisfy our current needs. That leaves us about 155,000 tons of additional ammonia. And that additional ammonia, we have several optional things we can do with it. I mean, we might be able to upgrade it into other product and sell it and we have, we are talking to various customers about the potential of doing that. But I really don't want to get specific or talk about any specific contracts at this time. It is inappropriate to do that until they are a done deal.

But also, this is on the pipeline and we are currently buying from the pipeline and we have also -- we can inject into the pipeline and we plan any excess ammonia that we have that we can't cover either by with our current requirements or new requirements that we develop with customers, we can sell into the pipeline. And that is what the plan is. The ex -- the overage will go into the pipeline.

But and to the initial question though, the $50 million to $60 million based on a 20% return. Can you give us some indication of what that is based on from the pricing perspective?

The return on capital is going to be a direct result of the market process for ammonia UAN -- excuse me, ammonia and ammonium nitrate solution and the cost of natural gas. So that is going to move up and down with the average cost during the quarter and the year.

Right, we understand that, but you clearly made some assumptions to come up with that return. So I was wondering if you could tell us what they were.

Well, we are not going to give you the specifics of our internal projections. We typically don't do that, as you know. But I will discuss it generally. In the general sense that the five-year return was not based on the current conditions. It was based on a more conservative look at the market indicators at some point in time in the future that included lower ammonia costs and higher natural gas costs.

But as to the specifics, we don't think it is appropriate to put those out there at this time.

Understood. Last question as it relates to El Dorado (multiple speakers).

It also included the assumption that some of the product would probably be sold to the industrial sector on a negotiated basis. So we wouldn't necessarily get full retail price. So when you are looking and thinking about the savings that we can get with an ammonia plant, it would be inappropriate to think that, well, just the full differential between the cost to produce and the current cost of ammonia will automatically drop to our bottom line.

So there will be some that will be incorporated into contracts that will go back to customers to enhance the competitive nature of the business and to help negotiate longer term contracts and bidder contracts.

Right and so while you may be foregoing some of the potential peak profitability on the market, you are taking some of the risk off of the table and locking in maybe a more visible margin on it.

Right and that is consistent with our business plan what it has been historically. To take a certain amount of our business and be conservative and lock in.

Understood. The last question as it relates to the El Dorado expansion, the debt financing you put in place. I don't know if you filed the indenture for it, but this was a secured piece of debt when I think you originally went out for unsecured.

Can you talk about any constraints you may have in terms of whether asset sales moving assets around et cetera, given that it is going to be secured?

Well, living assets around I don't think is anything that would be something we would be considering. But in terms of the building, managing business I think we are in perfect shape in terms with this additional funding. The security is not something we expected go in, but the market tightened up on us as we got through. And but if, in terms of managing the business, I don't think it is going to have an impact on our plan.

I was really more talking about strategically whether down the road you were looking to potentially separate the business as we have obviously talked with NLPs before, et cetera. I was just wondering if that might constrain you in any way on any strategic opportunities?

Well, obviously you have to deal with collateral positions if you are going to do something with an asset. But at this point, our longer-term plan right now consists of completing the construction and increasing the capacity to these plants and we don't have any short-term -- and keep in mind this is a six-year note. These bonds are six years maturity.

Got it. And my final question you mentioned you had also -- that you had done some pre-selling of UAN. I think you specifically highlighted Cherokee at [260] for the balance of the year. I didn't catch did you also presell at Pryor and if so can you maybe walk us through the pricing on it?

Well we basically have a de facto presale situation at Pryor. Because by virtue of our distribution arrangement that we have, that we have discussed in the past, our offtake partner is required to take all the production that we can produce. Now it is not at a fixed price, it is at whatever at the market price is at the time. So from the volume standpoint we are great for the balance of year and from a locked in spread standpoint we are locked in a Cherokee, but we are not locked in at Pryor.

Perfect. Thanks a lot.

Keith Maher, Singular Research.

Good morning. My first couple of questions had to deal with insurance recovery. First question just on the El Dorado damage at the acid plant. And I know your insurance carrier was saying it was repairable so you were not going to get quite as much money as you had hoped.

Do you have an idea as to how much you are going to get and did -- and you are going to get that before the end of the year? I think that was in the prepared remarks.

Yes we disclosed that in the initial remarks. We have yet to receive $75 million to $100 million. Included in there is the negotiate what we -- within that range is what we think the range is for the recovery of the claim on the DSN plant.

Okay, now (multiple speakers). Because I thought, some of that money I thought the $75 million to $100 million was related to business interruption insurance money.

It is. But recovery on the DSN plant.

Okay, so you -- are you saying (multiple speakers)?

Please keep in mind we have already dealt with the net book value of that cost. So those costs will all be beyond the netbook cost -- net book value that we have already written off.

Okay. That's helpful. Just to understand, you are saying you are going to get about $75 million to $100 million in insurance proceeds between now and the end of the year. Is that --?

Yes and I also qualified it, however there is no assurance. Because with these insurance companies you have to move at their pace. We will receive that, and we expect it in 2013, although there are actually no assurances. (multiple speakers)

But it wouldn't be any more money than that? It just may -- some of it may come 2014. Is that what you are saying?

Anything is possible. We expect it in 2013, but it could some of it could leak over into 2014.

Okay and the second question about the expansion at El Dorado. Any chance we could get some more details as to when in 2015 we would see -- obviously there is that nitric acid plant, there's the ammonia plant. I guess they will probably come online at slightly different times. Could we get a little bit more color as to maybe when in 2015, what quarter you might see that happen?

We are too far off to be able to pin that down exactly. But primarily we don't have our permits yet and that will affect the start date, when we can break ground. Because you are not allowed to break ground until you get those permits.

But what we have been saying is, I think we need to be thinking about the back half of 2015 not the front half of 2015. And as this progresses and we get the permits, and we get farther into it, and as we get closer to it, we will be able to nail that down a little better. But it is premature to try to nail it down to a month or even a very specific quarter at this point until we get those permits.

Okay. And the permits -- you mentioned the state of Arkansas. Are there some federal permits involved as well from the EPA?

Well, the way it works is we work with the Arkansas Departmental -- Department of Environmental Quality. They have been very cooperative. They are also very cautious. So once we get them to issue the -- draft the permit the EPA will overlook it and agree to it.

Okay and a final question. On your tax rate I don't know if you can give any guidance going forward, but can we assume a tax rate where it has been here up in the high 30s going forward?

State and federal combined, yes.

(multiple speakers). It is a little bit lower than that in certain periods depending on tax credits. But 37 I think is a good rule of thumb.

Great, thanks. That's all I had.

[David Deterding], Wells Fargo.

Good morning.

We didn't hear the name.

It is David Deterding at Wells Fargo.

I saw a nice step up in the Climate Control Business this quarter. $9.5 million. It looks like the backlog decreased a little bit there, but the sales were up. Are we starting to see a sea change and we have kind of gone through that trough in the Climate Control Business and we are coming out of that now? Are we really just working down the backlog here as we go forward?

Well, I think it is maybe somewhere in between. I think a sea change implies major significant bump up in this context. And I think what we've said was and what we're seeing here is that if you look at the charts that I gave you on McGraw-Hill, that there is the expectation that over the next three to five years there's going to be some really significant growth in all the important markets that we serve. But we are not exactly sure of the timing.

The other thing you have to understand about this particular business is that it a lumpy business as far as order impact. So you can see timing on a few large orders really impact bookings in a given quarter or a given month. So, we tend to look at it over the long haul.

What we are seeing out there is that -- all positive indicators, but not exactly sure of the pace that it is going to increase. And that is -- and so we are seeing activity levels up. We are seeing the ABI up. We are looking at these projections for McGraw-Hill and others that are up.

But we are not going to be able to necessarily every single quarter see an increase in bookings. And therefore, the backlog fluctuates. And sometimes the backlog fluctuates because we are catering to customer demand as to when they need specific projects. So we need to ship them when they want them.

I hope that answer your question.

Absolutely. And, Tony, just on the insurance side of it, I know you -- just following up I know you said $75 million to $100 million is what you expect to receive going forward. And you received $65 million to date. I just want to clarify, not all that $65 million has run through either in cost of sales if it is BI or the cash flow statement if it were -- I'm sorry if it were asset recovery. Some of that is still sitting in a current liability account. Is that correct?

Yes that is correct. Deferred.

Okay. So that (multiple speakers) so there's some deferred that is still to hit the statements yet that's in that $65 million that you said you have already received.

I think there is $21 million deferred at this point, David.

Perfect. And can you talk about -- I know you were talking about some balancing issues at Pryor that may have gone a little longer. It sounds like we are up to that 700 tons per day in July where we -- sorry in August now where we sit. Did any of that bleed over where we were running full? Should we think about some impact at Pryor in Q3 as far as not being up to that run rate?

Well, keeping in mind that we came up during the period there was a progression up to near design rates. So we may not be right at 700 but close to it. Maybe 650, 660 and going to 700.

Okay.

It depends on the weather.

Yes, the weather. Hot weather will have one impact and cooler weather another, but for the most part we are very optimistic that this 700 will be a run rate.

Great. That's all I had. Thank you.

Gregg Hillman, First Wilshire Securities.

Good morning. I would like to continue along the prior questioner's question about Pryor. Historically your [last and last] 10 years where did the Pryor eke out on a quarterly basis or an annual basis in terms of the ammonia production?

Did you say over the last 10 years? Is that what you said?

Yes. What was the year peak or the quarterly peak?

Let me just read -- go back and do a little catch-up on history with Pryor. We acquired Pryor about 14 years ago and when we acquired it, it was in a shutdown condition. We acquired it out of a bankruptcy. And it set, it wasn't maintained for 10 years or more in a shutdown condition. (technical difficulty) mothballed condition. [Not] completely mothballed. We did certain things that preserve it so that if we wanted to turn it on that we would be able to turn it on.

And then we started in about 2008 to -- in 2009 to somewhat recondition the plant and get it ready to start up. And we finally achieved production or sustained reduction in the fourth quarter of 2010.

So for the first three quarters of 2010 there was no production and it lost money. It lost about $17 million I think in that first three quarters. And then in the fourth quarter we turned it on and it made all that money back. So it ended up breaking even for 2010 but it only ran for one quarter.

For 2011, it ran most of the year. And in 2011, my recollection was that it made operating income of about $42 million-ish and that was net of some insurance recovery. So we actually recorded more income, but if you take out the insurance recoveries it was something like $42 million-ish. And I will also remind you that during 2011 we were still having problems with that bottleneck. So we were never able to get to full production. Our targeted production, let's put it that way. So even at less than full production, we had a pretty profitable year for that operation in 2011.

Now in 2012, we had issues during part of the year with a urea vessel in the first part of the year and then in the back part of the year we decided to take it down to make a major plant upgrade.

So in the back part of the year, in the fourth quarter it was down because we realized that we needed to debottleneck it. And so we made the discretionary decision to take it down to make a major upgrade to the plant.

So that is the history on Pryor. So we haven't really owned it long enough and operated it long enough to have a really long-term view of trends with this plant. Relatively short-term. But that is the history as it has been for us since we turned the plant on.

, Okay. And going forward, in terms of the capacity, I think you said 750, but I believe in past calls you talked about additional 60,000 working on production --

Excuse me. We said that our targeted production rate is 700. Today design -- today -- we hit 700 on some days, some days it is less, but we are in that range approaching design rate. And then in addition to that, that we have another 60,000 tons per year from some ancillary or other ammonia plants that are currently not in operation that we plan to bring on probably sometime during 2014. It was originally planned for 2013, but we pushed it out.

Yes. One thing that you could note is the year we made [42 million] the plant never ran holding 500 tons a day.

Yes, that's a good observation.

Thanks very much for the insight there.

So in other words we haven't really run it at today's configuration historically. So going forward it will be the [mid] configuration with the new converter.

(Operator Instructions). Rob Longnecker, Jovetree Capital.

Thanks for the increased disclosure on the insurance, that was really helpful. Can you talk about what happened with the interruption insurance on Pryor and why that was rejected?

Well, we didn't [file] the insurance claim on the downtime in 2013. That was in 2012 we took it down, I realized there was a prior claim but we -- in 2012 and 2013 we didn't have an insurance claim. That was a shutdown to change out the converter. The claim that you are referring to before was rejected because the insurance company took a position that they could not identify the exact cause of the crack in the retainer.

Got you. And what are the -- it sounds like there are still some ongoing problems at Pryor early in this quarter. What were those? What was the issue there?

We made a very major process upgrade in the fourth quarter and into the first quarter. We replaced the ammonia converter. The part of the ammonia plant that converts natural gas into ammonia, that was the bottleneck that was keeping us below 500 a day.

And when you make a major -- we took the plant down for a few months. We made the change-out and there are two things that affected us after we brought it up. One thing is it is typical after a major plant outage as you are bringing it up that that is the time when a plant is stressed the most. It is stressed least when it is operating at a steady-state. But it is stressed the most when you are bringing it up.

And we had a few mechanical issues that occurred on bringing it up. One was a bearing and the other was -- what was the other one? I don't recall what the other one is right now. There was a coupling. Okay. We took the plant down and fixed those and got them up and that was fine.

But then what we found was that with the new higher rate of production that there needed to be some downstream balancing that went on. And so we had been tweaking the balancing downstream in certain parts of the plant to allow for the higher flow rate. And that is what occurred. And that is the explanation.

Okay. And there was one of the other -- I think Dan was talking about the debt presentation you guys had out there. Is that somewhere on your IR site? Have you made that publicly available?

Yes, I think we filed an 8-K and we attached it -- most of it and can you find that on our website? That PowerPoint is on the website.

All right. Thank you. And last question you talk about some impact of low price urea. Can you talk about how urea works with the competing product and how switching that works towards and away from that product?

Urea is a worldwide product. It's a priced product for the most part. It is usually much more than UAN but it doesn't always set the price. It [volatilizes] on the ground much sooner and it is a lot less stable in terms of getting nitrogen to the plant. So the UAN in most of the corn-growing regions is the preferred product.

And urea just got so cheap that people decided to use the less good product?

I'm sorry, I didn't hear the question.

Sorry. So the impact of -- because urea became so cheap that people were happy to use an inferior product? Is that [the impact]?

It has pushed some price pressure on AN and UAN, yes. And it typically does. That is currently common. I think China is exporting a lot of urea now. (multiple speakers). Every year.

Thank you very much.

It seems we have no further questions at this time. I would like to turn the floor back over to management for any closing comments.

This is very again. I would like to thank everyone for listening in and having interest in LSB and participating today. And we appreciate that interest and your ongoing support.

If you will stay on the line, Carol Oden will now review certain important information about the content of our presentation today. Carol, would you take it please?

I will do that, Barry. 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, intent, plan, believe, project, anticipate estimate and similar statements of the future are forward-looking statements [made to] identify forward-looking statements including but not limited to all statements about or any references to the architectural Billings Index or any McGraw-Hill forecasts including those pertaining to commercial, institutional, and residential building for investor growth and McGraw-Hill forecast regarding the total green retrofit renovation markets and energy-efficient markets. The forward-looking statements included but are not limited to the following statements -- a new anhydrous ammonium plant will allow us to almost double our total ammonia productions testing. Permits in the Arkansas Department of Environmental Quality will be received. When we receive them we will break ground on the project. We expect a significant amount of this plant to be paid for with insurance proceeds.

(technical difficulty) We think that we will receive insurance payments before the end of 2013. We are in process of renewing, adding, expanding our long-term contracts to supply our customers with additional capacity that will be available from the future expanded El Dorado plant.

The extent of our Chemical Business has also improved significantly in the second half of the year compared to the first half. In our Climate Control Business we are well positioned to capitalize on the continued strengthening and demand in both the commercial institutional and residential sectors which should lead to further increases in product sales, orders and backlogs. We are looking forward to reporting improving results as we progress through the balance of 2013 and into 2014.

Big picture long-term outlook is strong for us. El Dorado facilities' nitric acid production capacity will continue to be limited to approximately 80% of normal capacity until 2015 when construction of the new nitric acid plant is scheduled to be completed. We anticipate that we will receive the remaining estimate insurance recovery of approximately $75 million to $100 million during the remainder of 2013. Although there are no assurances, planned capital spending, funding of planned capital spending, we plan to add a 370,000 ton per year ammonia plant to our El Dorado Facility. The planned ammonia plant will lower El Dorado's cost of production and provide approximately 150,000 tons per year of ammonia capacity.

We will soon execute an agreement with an EPC fund to construct an ammonia plant. We hope to have the ammonia plant constructed and in operation during 2015. We also plan to replace the DSN direct strong nitric acid plant that was destroyed by -- at EDC with a state-of-the-art Weatherly 65% acid plant and concentrator. We expect that plant to be operational in 2015. The new plant will increase EDC's nitric acid capacity by approximately 280,000 tons per year. Renovation and retrofit of existing buildings have been and will continue to be an important market for us.

Positive trend has increased in green construction that has occurred in the past two years and is expected to continue. Our primary initiatives for our Climate Control Business for 2013 are the introduction of several new products and the heavy forecast focused on lean operational excellence, projects intended to reduce cost, eliminate waste, streamline processes and improve quality.

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 first the ending March 31, 2013, and June 30, 2013. We undertake no duty to update the information that may be contained in this compass call.

The term EBITDA as used in this presentation is net income plus interest expense, depreciation, amortization, income taxes and certain non-cash charges unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurements. The reconciliation of GAAP and EBITDA numbers discussed during this conference call are included on the Q2 2013 conference presentation which is posted on our website.

Thank you again and this ends our conference call.

This does conclude today's conference call. You may disconnect your lines at this time and thank you for your participation.