LSB Industries Inc (LXU) 2014 Q1 法說會逐字稿

Greetings, and welcome to the LSB Industries, Incorporated, first quarter 2014 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.

I would now like to turn the conference over to Carol Oden, Assistant to the Chairman and CEO of LSB Industries. Thank you. You may begin.

(Inaudible) first quarter 2014 conference call. Today, LSB's management participants are Jack Golsen, Chairman and Chief Executive Officer, Barry Gosen, 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, May the 8th, 2014, and, therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

After the question-and-answer session, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We encourage you to view the PowerPoint pdf that is posted on our website at www.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.

Thank you, Carol. Good morning, and thanks for listening to our 2014 first-quarter earnings call.

Last night, we released our 2014 first-quarter earnings results and filed our 10-Q. You will see that for the quarter, sales and earnings per share were $179 million and $0.49, respectively.

My statements in our press release of yesterday get you current on the overall status of our operations, and Barry and Tony will go into some detail on our financial and operational performance for the quarter.

I would like to convey to you this morning that our business is improving and we will continue to make improvements in our existing operations. A good change for us will come in 2016, when our nitric acid plant and nitric acid concentrator and ammonium plants are online, adding significant additional production capacity and captive anhydrous ammonia production replacing purchased ammonia.

Those two projects will be game changers for our company. The big news for the quarter is that by the end of the quarter, our Pryor plant achieved consistent production of ammonia at targeted levels, and, subsequent to the quarter, began producing urea and UAN.

Beginning in March and continuing in April and to date, our Pryor plant has broken its previous record for anhydrous ammonia production. There are still upgrades to be completed in this plant, as we finish the installation of anti-surge equipment, monitoring equipment, and automation controls, but they are not significant and will not impede production. They will further add to the reliability of the plant.

In addition, the expansion projects at our Ed Dorado facility are going well and remain on time and on budget to date. The completion of these projects is expected to have a major positive impact on our EBITDA.

To sum it up, we remain focused on our three-year capital and operating plan for both of our businesses, as we believe that this would create significant shareholder value.

Thanks. And I'm going to turn this over now to Tony Shelby.

Thanks, Jack. Our results for the first quarter 2014 and 2013, were not necessarily indicative of a normalized result for a number of reasons that require explanation, including operational issues and insurance recoveries in both quarters, and nonrecurring professional fees and expenses in the first quarter of 2014.

During this financial review, we will discuss (technical difficulty) that affected results for both quarters, as well as variances between quarters. For a comparison of first quarter 2014 results to 2013, please turn to page 4.

Net sales were $179 million, an increase of $28 million. Consolidated net sales include an increase of $38 million in the chemical business and a decrease of $10 million in the climate control business.

Although sales increased in the first quarter of 2014 versus last year, they continue to be impacted by downtime at the Pryor facility for most of the 2014 quarter. As Jack indicated, the facility is now in full production.

Consolidated operating income was $26 million, compared to operating loss of $237,000 in the 2013 quarter. The increase in operating income include an increase of $33 million in chemical, a decrease of $2 million in climate control, an increase to our general corporate expenses of $4.5 million over the same period of 2013.

This increase in corporate expense was due to fees (technical difficulty) $2 million, incurred in evaluating and analyzing proposals received from certain shareholders and negotiating a settlement with those shareholders.

Also, to be considered in the comparison of first-quarter operating results were unplanned downtime and insurance recoveries in the chemical business for both periods.

Interest expense was $6.7 million, net of $2.3 million capitalized during the development and/or construction of capital projects, compared to interest expense of $731,000 in 2013. (Technical difficulty) in interest expense this year is directly attributable to interest on the $425 million senior secured notes due in 2019, which use of proceeds were primarily to fund our chemical business capital expansion program.

Keep in mind that until the El Dorado expansion projects are completed and additional revenue is realized from the added capacity, earnings will continue to be affected by the burden of the interest cost on the debt of these projects.

After provision for income taxes of approximately 40%, net income was $11.6 million or $0.49 per share, compared to a net loss of $68,000 or $0.02 per share last year. EBITDA was $35 million, compared to $6.5 million last year.

Turning to page 5, on page 5 is a brief summary of our capital structure at March 31, 2014, compared to year-end 2013. As noted, cash at the end of March was $409 million, or $26 million lower than at year end. The net change in cash for the quarter of approximately $26 million, included capital expenditures of $45 million, scheduled debt payments $6 million, and other cash uses of $3 million, partially offset by $28 million of insurance proceeds.

In addition, our $100 million working capital revolver facility, loan facility, remains undrawn. The amount available to borrow was subject to the amount of eligible collateral, which is currently approximately $80 million.

At March 31, 2014, total interest bearing debt was $462 (technical difficulty) equity of $424 million. Our debt-to-equity ratio was 1.1-to-1, and our debt to capital was 52%.

EBITDA was $35 million for the quarter, and $161 million for the trailing 12 months ended March 31, 2014, including insurance recoveries for both periods of $28 million and $112 million, respectively.

At March 31, EBITDA to interest coverage for the trailing 12 months was 6.2 times. Interest in this calculation include all interest incurred, including the $2.3 million capitalized.

On page six, beginning with EBITDA, is a calculation of the free cash flow for the two quarters ended March 31, 2014 and 2013, reflecting a use of cash of $26.3 million and $29.6 million for the two quarters, respectively, driven primarily by capital expenditures pursuant to the capital expansion program.

We expect that we will continue to have negative cash flow until the Ed Dorado expansion projects are completed and producing.

Moving to (technical difficulty). Shown on this page is a summary of our first-quarter capital (technical difficulty), with planned capital spending for the remainder of 2014, and for 2015.

During and after the fourth-quarter conference call, we received a number of questions regarding the detail behind our planned capital spending. Based upon the nature of these questions, we added more clarity and detail to these disclosures.

Chemical spending for the first quarter was $43.4 million and included $28.5 million for the El Dorado expansion projects, $5 million for environmental compliance upgrades, $4 million for normal upkeep, and $3 million for the development of natural gas leaseholds.

The planned expenditures, ranging from $461 million to $572 million for the remainder of [2014] and the full-year 2015, include the El Dorado expansion projects as set out separately in the tables, upgrades to our plants to satisfy environmental requirements as well as other anticipated renewal and improvement projects.

The ranges of spending are purposely wide to provide for contingencies. These projects are subject to a change as new information is obtained or circumstances change. The capital spending will be funded by current cash and investments, internally generated cash flow, third-party financing, and, if necessary, borrowing under the working capital revolver loan facility.

Turning to page 8 for review of chemical's first-quarter results, sales were $115 million, or 49% higher than the first quarter of 2013. Operating income was $29 million, including $28 million of insurance recovery, compared to a loss of $3.8 million, including $10.8 million of insurance in 2013.

The results are significantly below what we would otherwise expect, due (technical difficulty) facility being out of operation for most of the 2014 quarter, and the Pryor and Cherokee facilities both out of operation in the 2013 quarter.

The summary in the lower left of this page adjusts operating income as reported, to reflect the impact of the downtime and insurance recoveries to arrive at a non-GAAP normalized number, as though neither were included in either period. The various and normalized operating income in 2014, is due to lower selling prices for agriculture ammonia and UAN in the 2014 quarter, and to a lesser degree higher natural (technical difficulty) quarter as compared to last year.

The specific operational issues resulting in downtime and lost production are disclosed in detail in our current 10Q and previous quarterly filings.

It should be noted that since the repairs were completed in the second quarter of 2013, Cherokee has operated efficiently and at normal rates of production, and, as we recently announced, the ammonia plant Pryor facility assumed production in late February of 2014, and has consistently been producing since that time.

Chemical sales by product line are shown on page 9. Agricultural sales for the 2014 quarter were $60 million, compared to $33 million, an increase of 83%, industrial acids increased 30%, and mining products were flat. Sales on this chart are in dollars, not in tons.

For a review of agricultural products, please turn to page 10. Agricultural sales by product as shown on this page reflected significant increases in all products with the tons showing significantly higher increases than dollar increases, due to lower selling prices in the 2014 quarter compared to 2013.

The increase in tons sold of all agricultural products was due to the Cherokee facility returning to production, the resumption of ammonia production at the Pryor facility in late February of 2014, and improved [market] conditions for ammonium nitrate.

Industrial and mining sales results are on page 11. The same conditions as in the agricultural [sector] (technical difficulty), i.e., tons sold, were significantly higher quarter versus quarter, while sales in dollars reflect most different results. The sales price per ton is lower in the current quarter as a result of lower feedstock cost pursuant to cost-plus pricing arrangements.

Now turn to page 12 for a review of climate control results. For the first quarter, climate control reported net sales of $60 million, compared to $70 million in the first quarter of 2013, a 14% decline. Commercial and institutional sales accounted for 84% of net sales, and single-family residential, which is all geothermal water-source heat pumps, accounted for the remaining 16%. So you had 84% commercial and 16% residential.

Gross margin was 31.9%, compared to 31.3% last year. Operating income and EBITDA were lower by $2.1 million and $1.7 million, respectively.

On page 13 is a summary of climate control's sales by product line for two quarters. Geothermal and water-source heat pumps were $38 million, or 13% lower than 2013. Fan coil sales were $15 million, an increase of 6%, and other product sales were $7 million, or 44% lower than 2013.

Barry will discuss the market drivers and outlook for both our chemical and climate control businesses later in the call.

That concludes our prepared remarks for the financial review. We've addressed our results from operation and capital resources in greater detail in the 10-Q, which we filed last evening, and suggest that you review that document for more detail and analysis.

Thank you for your time. I'll now turn it over to Barry to discuss operations and key initiatives.

Thanks, Tony. Today I'll cover what's going on in the markets we serve, update you on major initiatives underway, and review the key value drivers we're focused on.

Before discussing the markets we serve in our chemical business, it's important to understand cost and pricing trends for the feedstock we use and the products we sell. Please turn to page 14.

Cost of natural gas continues to be relatively low on a historical basis, but has been exceptionally volatile, caused by the extreme cold weather this past winter. The Tennessee 500 pricing point first-of-month index for April 2014, was $4.55 per mmBtu, about $0.57 above April of 2013.

However, as you can see on the top left chart, during the first quarter of 2014, the first-of-month prices spiked as high as $5.57. The May 2014 index price is $0.20 over April, at $4.75. Natural gas prices affect production cost at our Cherokee and Pryor facilities, which use natural gas as their primary feedstock to produce ammonia. The conventional wisdom is that with the exception of extreme seasonal weather spikes, continuously increasing shale gas production will not allow natural gas prices to increase substantially for some time.

The current spot price for natural gas is $4.70 per mmBtu, and NYMEX gas price futures for the remainder of 2014, are in the $4.75 range.

The cost of anhydrous ammonia, the feedstock we use at our El Dorado and Baytown facilities declined steadily during 2013 and into the first quarter of 2014, but rose significantly in March and continued that trend into April. April 2013 and 2014, Tampa prices were $597 per metric ton and $580 per metric ton, respectively. Currently, ammonia is still $580 per metric ton at Tampa.

The recent increase raised production cost at our facilities that use ammonia as a feedstock, although most of the products we produce at Baytown and most of the industrial mining products produced at El Dorado, are sold on cost-plus bases. So ammonia cost fluctuations do not impact our profitability on those sales. However, agricultural grade ammonium nitrate, or AN, produced at El Dorado, is sold at spot market prices, so higher ammonia cost impact margins for AN.

We believe that increased ammonia prices during the end of the first quarter were caused by a combination of temporarily tightened import supplies at the same time the ammonia application season was starting. As the ammonia application season ends and the world market supply stabilizes, prices should decline.

Turning to ag products we sell, southern Plains prices for urea ammonium nitrate, or UAN, fluctuated over the past year and are lower than a year ago. If you look at the chart on the lower left, you can see that the Green Markets price of UAN decreased from $380 per ton in April of 2013, to $315 per ton in April 2014, but have been as low as $270 per ton.

Based on current market indicators, we believe that prices will range from $295 to $325 per ton, and will remain at this level during the current planting season. This compares to a range of $345 to $380 a year ago.

In April 2014, Green Market prices for high-density AN, or HDAN (technical difficulty) dollars per ton, compared to $390 per ton 12 months earlier. AN is currently still approximately $405 per ton, and our outlook for AN this season is, more or less, the same as UAN.

At this time, the demand for all our fertilizer products is strong. Summing up this page and reinforcing Tony's earlier financial review, over the past year, prices of natural gas have increased (technical difficulty) prices of our gas-based UAN fertilizer products have declined, resulting in significantly reduced margins per ton for this product.

Focusing on the general outlook for the agricultural markets we serve, page 15 lists several indicators for our agricultural products, most of which continue to be favorable. Planting levels are generally high, although slightly lower than the past few years. Market prices for corn and wheat remain favorable to growers, so farmers have an incentive to plant.

Grain stock-to-use ratios, both worldwide and in the US, although higher than the past few years, are at or below historic levels. We believe all of this is creating strong continuing demand for fertilizers, while North American-produced nitrogen fertilizers currently have the lowest delivered cost.

The industry consensus is that the positive fundamentals of the ag business should (technical difficulty) to mid-term.

Despite general industry drivers, weather can have a significant impact on the fertilizer part of our business. Although the moisture level in the corn belt has generally improved, recent weather conditions have delayed this year's planting season for corn. The most recent USDA crop progress reports published Monday for acres planted as of May 4th, indicate 29% of corn was planted compared to the last five-year average of 42% for the same point in the year. There should still be enough time for all intended acres to be planted.

The western half of the wheat belt has extreme drought conditions, however, this will not affect our current outlook, as we are past the fertilizer application for winter wheat. The spring wheat season, primarily in northern areas, has also had a late start with only 26% planted, compared to the five-year average of 41% at this time.

Finally, China urea imports in North America could continue to exert downward price pressure on all nitrogen fertilizer products. Overall, we continue to be optimistic about our ag business.

During 2013 and the first quarter of 2014, our industrial and mining product sales were 56% and 48%, respectively, of our total chemical business sales. Our industrial and mining products are sold primarily to large customers, pursuant to contractual cost-plus and/or minimum take arrangements.

Page 16, contains some market indicators for these areas of our chemical business, and most of these indicators forecast growth for the next few years. One thing of note that occurred during the quarter was that on March 31st, we sent the required one-year advance notice to our industrial AN customer, Orica, that we will not be renewing the exclusive ammonium nitrate supply agreement after the term ends on April 9th, 2015.

As previously disclosed, our strategy was to proactively notify Orica of our intent to let our agreement expire, and, beginning in the second quarter of 2015, to commence selling industrial grade ammonium nitrate directly to the explosives market. This is a market in which we have participated previously and have many years of experience.

On page 17, we discuss the status of (technical difficulty) facilities. Ed Dorado continues to run well, with the exception of the capacity lost in May 2012, that will be replaced later with the expansion projects.

Cherokee is also operating well. The Baytown operation is performing at optimum levels. During the last conference call on February 27th, we updated you on the many measures we have taken to improve Pryor's reliability and performance, and advise you that our Pryor facility was in a startup mode at that time, although producing ammonia at lower-than-targeted rates.

As recently disclosed, during March, the ammonia plan was [gradual] (technical difficulty) targeted rate of approximately 650 tons per day, and it averaged that rate for the entire month of April, and so far in May.

This week, we also resumed production of urea and UAN at Pryor. We have made substantial progress at Pryor. We believe we are now on a path of consistent production at that facility.

Base on our current plans for the balance of (technical difficulty), we have scheduled plant turnarounds at Cherokee during July, which will last approximately 30 days, and intermittent maintenance at El Dorado's acid plants during the second half of the year. We have three plants there - they'll each be down approximately 7 to 10 days at staggered times, so the overall plant will not be shut down during those maintenance periods.

We also plan to install the balance of the synthesis gas compressor anti-surge equipment at Pryor during the third quarter, which should take approximately one week. This additional anti-surge equipment was not available earlier due to vendor lead times, as we notified you on the last call.

Last quarter we reviewed in great detail our plans for the major expansion projects we have underway at our El Dorado facility. If you missed that call, you can view those plans on the PowerPoint, which is located on our website. Today, we will update you on the progress we have made on those projects.

Please turn to page 18, which details the ammonia plan project. As we have expressed in the past, this project will increase El Dorado's capacity and should lower its production cost significantly, since the cost spread between purchased and manufactured ammonia is substantial.

El Dorado currently purchases the ammonia that it requires at a much higher cost than the estimated cost of production with an ammonia plant. We expect that we will use a substantial amount of the new ammonia that we produced to satisfy our agricultural, industrial, and mining customers, and we'll also sell some via the pipeline that's connected to El Dorado.

The El Dorado ammonia project construction began in November of 2013, after the Arkansas air permit was issued. The project is currently on schedule. Over 800 steel pilings have been installed as part of the foundations. Concrete caps and bases are over 50% complete. Underground piping and vertical structural steel will start, as planned, in the second quarter of this year. Setting of equipment is planned for the third quarter, and the initial installation of mechanical piping is planned for the fourth quarter.

The table on this page shows the major phases and milestones for the project, with the current status of each. On the bottom left of the page is a 3D CAD drawing of the planned ammonia plant, and on the right is a panoramic photo of the project taken earlier this week.

Please turn to page 19. In addition to the ammonia plant, we are adding a 65% Weatherly nitric acid plant and concentrator to replace the direct strong nitric acid plant that was destroyed in 2012, while also adding additional capacity.

Construction for the acid projects also began in November 2013. Both building and equipment foundations for the nitric acid concentrator are complete and steel erection is underway. Setting of equipment should begin in July of this year, followed by piping, electrical, and instrumentation in the third and fourth quarters of this year.

The equipment and building foundations for the 65% nitric acid plant are nearing completion. Steel fabrication is underway and erection will start toward the end of this month. The majority of equipment is onsite with the absorber columns already set in place. Most of the equipment will be set in the third quarter of this year, followed by piping installation to start in the late third quarter or fourth quarter of this year.

Again, the table gives major phases, milestones, and current status of each. From left to right, the photos are the 65% acid absorption columns which are 12 feet in diameter and 127 feet tall, approximately 13 stories, foundations, and structural steel supports for the nitric acid concentrator.

At this time, we expect the El Dorado expansion projects to be completed on time and on budget. Although completion of projects of this magnitude is dependent on many suppliers and contractors, today we do not know of anything that will prevent on-time completion.

Again, please keep in mind that there's always a ramp-up of production during the commissioning phase when a plant is brought online. We expect the acid plant and concentrator to be complete and ready for startup in mid-2015, and the ammonia plant construction to be completed by the end of 2015, with ammonia production ramp-up during the first quarter of 2016. We will keep you advised of the status of these projects on future calls.

Turning to page 20, and switching to our climate control business, there's a graph showing order sales and backlog. As we pointed out on our last earnings call, our fourth quarter 2013 bookings were soft. First quarter 2014 bookings were $63 million, which improved over the 2013 fourth quarter, but were slightly lower than the first quarter of 2013.

Both the fourth quarter of 2013 and first quarter of 2014, were impacted by extremely harsh weather conditions, particularly in the northeast, which is typically a very strong market for our climate control products. As the weather improved, we saw the (technical difficulty) new orders rebounded to $33 million for the month, bringing our year-to-date new orders to $96 million at the end of April, 4% higher than the same period in 2013.

Considering orders in house and being processed that are not actually counted as backlog yet, we are actually about 7% ahead of last year. Our backlog at April 30th, was $59 million, compared to $40 million at December 31st, 2013, indicating improving trends in our core markets.

We continue to maintain leading market shares for our geothermal and water-source heat pumps and hydronic fan coils.

Demand for our climate control business products is primarily driven by new construction. On page 21 are indicators relating to commercial and institutional constructions. McGraw-Hill expects construction starts in 2014, will increase 11% over 2013, in the major vertical markets we serve, and double-digit growth in both 2015 and 2016, in those markets.

Their most recent thinking is, is that the key markets we serve are expected to grow by 46% through 2018. Keep in mind that there is a lag between construction starts and the delivery of the HVAC products that we sell.

Also, on page 21 is the most recent release of the Architectural Billings Index by the American Institute of Architects, which is the leading economic indicator for non-residential construction spending expected in the next 9 to 21 months. The March ABI was 48.8, indicating a decline. This index has fluctuated greatly over the past year with eight months indicating growth and four months indicating decline, not necessarily in that order, but it's going back and forth throughout the year.

Kermit Baker, the AIA's chief economist, commented on the March index, and he said, quote, hopefully, some of this can be attributed to severe weather conditions over the past winter. We will have a better sense if there is a reason for more serious concern over the next couple months, close quote.

Page 22 shows McGraw-Hill's forecast for single-family residential construction starts. Residential products generally account for approximately 16% to 18% of our climate control sales. McGraw-Hill's currently forecasting that housing starts will grow 76% from 2013 to 2016, which should benefit our residential geothermal business.

Another positive trend is the increase in green construction that has occurred the past few years and is expected to continue, also shown on page 22. We've shown you this graph before, but it's worth reminding you again. This is a summary of the 2013 Green Construction Outlook, which is also published by McGraw-Hill. It forecast that the green construction market will grow substantially from approximately $85 billion in 2012, to between $204 billion and $248 billion in 2016.

We believe that this should benefit the sale of our highly energy-efficient products, including our (technical difficulty).

In summary, the general consensus of most (technical difficulty) industry experts, is that a construction recovery will be forthcoming, although the timing is, by no means, certain or easily determined. At this time, single-family residential construction seems to be rebounding faster than commercial and institutional, however, we believe there will be a strengthening in most of the major sectors we serve.

Page 23 addresses our climate control businesses operational excellence, or OpEx strategy. Operational excellence is a long-term journey that focuses on understanding the needs of our customers and integrating quality and speed into our customer interfaces in our manufacturing processes. We do this through identifying barriers to quality and speed that exist in our company, developing skills and abilities in our employees to engage them in eliminating those barriers through continuous improvement and improved operating efficiencies.

During 2013, we primarily focused on training our organization in the disciplines and skills required to implement OpEx. During 2014, we have several specific initiatives planned, which should result in improvements. This page lists, just for your reference, some of the basic elements of OpEx.

During our last call, we covered in detail the key value drivers that we are focused on and which we expect will increase LSB's value in the near and mid-term. They're recapped on page 24.

We are comprehensively upgrading our chemical business' reliability systems, equipment, and personnel, to improve safety, plant uptime, and minimizes unplanned interruption. We have made significant investments to improve Pryor, and we believe we have made important progress.

We have major capital projects underway at El Dorado that will improve its profitability substantially. We will support the growth of our climate control business as the construction markets it serves grow over the coming years and expect to achieve operating leverage as that occurs. And, we are striving to increase efficiency and reduce operating costs in our climate control business through operational excellence initiatives, including lean manufacturing techniques.

Before opening this up for questions, I'd like to thank you for listening today, and I'd like to request that each of you please limit yourself to three questions, so that others will have a chance to ask some questions as well. If you have more questions, you can get back in the queue and ask them later on during the session.

Operator, please open it up for questions.

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Dan Mannes, Avondale Partners.

Well, first, congrats on getting Pryor back up and running. It sounds like your tone on it is that this feels much more sustainable than maybe what we've heard over the last couple quarters.

Well, we certainly hope so and we worked hard there and we made a lot of improvements. So we believe that we've made substantial progress.

Got it. Let me just ask a couple questions. One of the things that I guess I'm struggling a little bit to reconcile with is, I guess the profitability of the chemical business in the first quarter, when you do all the puts and takes and you remove the insurance and you add back the $14.5 million estimate, the number just doesn't seem as compelling as maybe we had hoped. And I realize the chemical -- the pricing environment isn't, perhaps, as robust as it was last year.

But I was wondering if you can talk to anything maybe in terms of the remaining cost structure either at Pryor or Cherokee or any ongoing cost you're going to continue to incur there as you improve operations, because I guess we had just expected it would look a little bit better.

Well, Dan, are you primarily comparing the first quarter this year versus last year or are you just talking about the quarter standalone? The quarter standalone is below what we would anticipate significantly because Pryor was down, we had a lot of extra costs there. And instead of last -- in the prior period, we were producing a lot of ammonia at a high price, and we were bringing this plant up slowly and not pushing it at all. We got a lot of extra overhead cost there for the time being as we bring -- as Barry indicated, that we're spending time and money to make sure that this plant can sustain the production. So we took it very easy.

And I think that, going forward in the second quarter and subsequent quarters, we're going to continue to have very reliable results. But in the first quarter, we had to tweak that plant numerous times during March. It was down all of January and February. We were pouring a lot of additional overhead cost in there in terms of engineering and analysis work. They're not necessarily downtime costs.

And we (technical difficulty) also had -- we had commitments that we made to customers that we couldn't provide -- that we couldn't ship because of lack of production. So there were a number of things in there that we didn't add to the reconciliation, because we're really just trying to show you what the effect of pulling insurance out and adding back downtime.

But if we did a more aggressive calculation on the downtime, assuming full production and high cost, we would have gotten a different number. But when you look at the comparison to the prior quarter, in the prior quarter, the downtime calculation we made was a significant amount of ammonia sold at a very high price, versus this year, the ammonia sales price was much lower.

So there were a number of mechanical things there in terms of financial engineering that could make it look differently. But we tried to give you the picture of what it looked like without those two elements in there.

Sure.

We have a little more clarity in the 10-Q regarding some of those other items.

Sounds good. I'll definitely take a look through that before I follow up. The next question really is a little bit on the second quarter. Given that Pryor's now operating consistently, did you build any inventory in anticipation of Q2 sales? Do you have any presales? And can you just give us an idea of what normal sales volumes look like in the second quarter versus the first, because it's been a while since we've kind of seen a clean second quarter.

Well, we did build some UN inventory -- excuse me -- some ammonia inventory at Pryor. So we built some inventory that would get shipped in the second quarter, so it gives us a running start. And we decided not to start producing UAN until early part of May.

So we won't have a lot of UN to ship, although, we do have some forward sales on UAN at a lower price than today's market, because you have to do -- in order to capture the volume, you have to start doing some forward selling. So we got some fairly significant sales at the end of March 31, firm sales commitments, a bit below the current price because nitrogen's fertilizer prices have increased fairly significantly the last three, four, five weeks.

Got it. I'll ask one last question before I drop back in the queue. On the climate business, obviously, a little bit softer in the first quarter. You guys talked about maybe some of the pull-forward into the fourth. This may be a stretch. But any impact to the pending separation of carrier on the heat pump sales or is that completely unrelated?

It really has not impacted our sales in the first quarter in any meaningful way.

Got it. That's something we'll see maybe more in subsequent quarters.

It was a de minimis impact.

Sounds good. Thanks a lot.

Joe Mondillo, Sidoti and Company.

Couple questions that I have regarding some of the capacity. So at Pryor, congrats on getting that initial capacity finally up and running. And it sounds like you'll feel a lot better with that.

I was just wondering, with the additional 60K of ammonia that we still have there, that I know you sort of put to the back burner while trying to get all this other capacity up and running, are there any sort of thoughts now how to go about with that if you're trying to eventually try to start that up? Or how are you thinking about that?

Well, I think we're still thinking about that exactly the way we said we were thinking about it on the last two calls. And that is that we are focusing on the primary larger part of the production at that facility, and we have put those on the back -- that on the back burner. And we do not have a definite schedule at this time for taking it off the back burner and getting them going.

And when we feel comfortable with the rest of the plant on a sustained basis, we will turn our efforts to that. Now, the same resources that are used to deal with the plant, the part of the plant that's running now, which is most of the plant, would be the resources that we would need to use to work on getting those other smaller ammonia plants going.

And so we really don't want to take those resources and divert them at this time.

Okay. Understandable. Would it take 6 months or 12 months of sustainability at the original capacity? Or what sort of timetable would you think?

[There's no specific] timetable. It's just an all facts and circumstances evaluation by the management onsite of when they're ready to go. And so I really don't want to put a specific timetable on that.

Okay. Good enough. In terms of all these additional costs that you're sort of taking on to try to get this thing up and going and -- it sounds like over time a significant amount of costs will fall off. Is that fair to say? And if so, is there any way to sort of quantify sort of this sort of maybe temporary cost that are associated with making sure that everything's going well and getting it up and running?

Well, we believe that we have, during these outages, experienced some one-time costs. Or let's call them nonrecurring costs that we've had to expense off and not capitalized to deal with some of the issues, and that those will become less and less as time goes on. However, we will -- we have increased our engineering staff and our maintenance support staff at those operations.

But we do think that, as you said, that some of the higher bumps in cost that we've seen will go down. I just can't -- I'm not in a position to quantify that specifically at this time.

Okay. And then in terms of the El Dorado expansion, so you stated that the nitric acid capacity should be online sometime second quarter of 2015. And as I understand it, a lot of that capacity, or some of that capacity, is going to be used to support the additional ammonia capacity that's coming online by the end of the year.

So if that's the case, that additional nitric acid capacity, how is that going to work? Are you going to be able to sell that by the end of the -- in the meantime, before the ammonia capacity comes online or --?

Joe, first of all, it's not going to be ready to come on in the second quarter. It's going to come on in the second half of the year. And, yes, we do have a -- we are [considering] --

The nitric acid?

Nitric acid's going to be beginning at the -- full production in the second -- after the end of the second quarter, not during the second quarter. And --

Okay. But the -- so the ammonia is coming online at the end of the year, though, right?

No. What we said was, to clarify, is that we would have the nitric acid and concentrator done during the first half of the year and then start to ramp up, and that we would have the ammonia plant done by the end of the year and start the commissioning and ramp-up at the beginning of 2016.

Okay.

Now back to your question, Joe. We have more than -- we'll have one more -- more than one acid plant there. So some of the older plants, in order to accommodate the production of the new plant in the first half of 2015, we'll probably turn those plants down and run this one almost full out. So we'll be able to run this plant at a very optimum level. And we have the flexibility of pulling the other ones up and we have more ammonia.

Okay. So there won't be sort of any additional temporary revenue in the second half of 2015, regarding that nitric acid?

I would not indicate that at this point.

Okay. Just lastly, the climate control business, it sounds like you're doing a lot there. You've highlighted several different bullets that you're sort of trying to improve efficiencies. Is there any way to quantify any sort of the efficiency benefits on a cost-savings perspective?

We have some internal estimates of what we think we'll be able to do over, say a two- to five-year period because this is a, as I said, a continuing process. But we're not prepared at this time to give any financial guidance on that.

Okay. All right. Thanks a lot.

Roger Spitz, Bank of America.

What is the minimum cash and/or liquidity that you require to run your business?

Roger, this is Tony. Can you give me a little bit more color on that question? In other words, we have internal cash flow that, up to this point, has allowed us to keep our revolver undrawn. And so our internal cash flow, starting with EBITDA, excluding capital expenditures, is sufficient to fund our working capital.

Now, on the capital expenditures, on the expansion program, we have the cash, say on the balance sheet, and, as I indicated in the financial review, we expect once we start to get the benefit of this, that we'll continue to have internal cash flow. But in the meantime, we feel like that our cash that we put on the balance sheet at this point is sufficient to carry us through on capital expenditures. And there may be some pieces of this capital expansion program that we might finance with a third-party lease or finance. But did that answer your question?

Well, it helped. What I'm trying to think about is this. You've got the big CapEx plans, you need a certain amount to operate your business. And so let's say that's -- you've got $80 million available now on your working capital revolver, maybe you feel you need -- I don't know what the answer is. But maybe you say, well, I need another $40 million of cash and I need $125 million, or something like that.

So what I would do is say, okay, this is how much CapEx. You have a lot of cash and investments and liquidity. But I would say, look, I would take $125 million, or whatever the right number, that's the number I'm looking for, off of that, and say, that's the delta of the hole that needs to be filled either with cash flow from operations going forward or tapping the capital markets. That's the genesis of the question.

It's just saying -- or another way to say it is, once everything is done and online, the ammonia, nitric acid plants, are all online in mid-2016, what would you say would be the liquidity you would like to simply run your business?

We've said in the past that our objective is to keep $100 million in cash available and keep our working capital revolver undrawn, except for seasonal needs.

That's a perfect answer I was looking for. And on chemicals, in terms of thinking about this on raw material margins, perhaps, adjusted for all the downtime insurance, is the right way to look at this from a 20,000 foot basis, as margins were down sequentially and year on year, because of higher natural gas prices and lower ammonia and UAN prices?

Yes.

Perfect. You're in the process of starting up Pryor UAN and urea, would it be fair to say that if all goes to plan, that Q3 might be a fully clean quarter to look at Pryor? Or would some of these start-up, ramp-up operations sort of carry over into Q3?

Well, actually, at this time, we're in full production of urea and UAN there, so we're past the start-up point on that. That the plant continues to operate for the balance of the quarter, that's a true statement what you just said.

And the other thing, Roger, to keep in mind is that we're getting a late start to the UAN part of the season. So it's a little difficult now to determine whether we're going to be running full out on the UAN in the third quarter, because usually that's the softer quarter before they start building up stock for the fall season.

But, yes, I think we'll be third quarter in terms of production capacity and capabilities will be a good clean quarter. Question is, what will the demand be for fertilizer?

Excuse me for jumping in here. But I think he was asking about the second quarter.

No, he asked third.

Was it third?

No, no, no. The answer was perfect. That's exactly what I was looking for. And I thank you, Tony, for recognizing that there's a demand side of it, too. But you're right, I was referring to the operations. So thank you very much for your help.

There's another factor I'd like to add to that, and that's we have a very large storage capacity for (technical difficulty). I think we have 60,000 tons and two large tanks. Even if the season is off, we'll be able to build up -- I mean, we'll be able to build up when the season is off, push sales when the season is on.

So I don't think we'll be shutting down the plant, slowing them down this year anyway.

This year, the off-take agreement.

Yes. Yes. And we have an off-take agreement for all that we can make. So I don't think that we're going to be in that position this year. Now, year to year, things change.

Perfect. Thank you very much.

David Deterding, Wells Fargo.

Just have a couple of quick ones. On the volumes that you're going to replace out of ORKA, are those, I guess are you confident that you'll be able to replace all those into the explosives market?

We feel confident, yes, that we'll probably be able to place all or most into the explosives market.

Okay. And can you just talk about those contracts? Are they annual or they cost-sell-side contracts? Are they very similar to what you're selling to Orica? Or just kind of the nature of those contracts?

The contracts are usually multiyear contracts, from three to five years. And you have to catch the cycle. That was one of the motivations of us giving Orica notice, because we want to be able to, when the contracts come up in 2015, we want to be able to pick some of those contracts up.

So if we had let it go for another year and then Orica you know signed a contract with CF, that they had stopped taking, we would have been -- we wouldn't have any place to go to sell it, to sell to big customers. So I think that these new contracts will be multiyear contracts.

There may be a few one-year contracts, but I don't think that that would be the big picture.

And are those cost-plus contracts similar to the way you were selling to Orica?

Probably. You know we'll be producing ammonia to El Dorado. And so, likely, there'll be gas-plus contracts.

Okay. And then my second question is, I noticed you said you have new senior management at Pryor. Can you just anecdotally talk about has there been a change? I mean, obviously, (inaudible) April and May record production. Has there anecdotally been a change in philosophy there with new management coming in?

Yes, there's been a significant change in philosophy, which was the reason for the change in the management. I would say, to characterize the change in philosophy, the new management is taking a more holistic view of the plant and the end net output as opposed to trying to push the plant to its maximum output on any given day.

So for example, at 650 per day, if you sustain production every single day of the month, you end up producing a lot more than if you try to push it to seven or slightly over seven, but pushes the machinery to its limits and you have breakdowns.

So the management philosophy is to try to optimize total production over the long haul. In addition to that, they're much more focused on preventive and predictive maintenance on a more focused best practices approach to running the business and in general reliability. The high focus is reliability.

Great. Thank you, guys.

Does that answer --

Yes, that's perfect. Thank you so much.

Keith Maher; Singular Research.

When I first saw that the growing season had been delayed a bit because of the weather, I thought that might benefit you. But it sounds like with just now getting UAN production up at Pryor, that's probably not been the case, would you say?

What'd he say? I didn't understand it. Would you repeat the question?

Yes, sure. I was just wondering, with the delay in the growing season, the planting season because of the weather, I thought that may benefit you with Pryor being down. But it sounds like you still just recently brought the UAN production up at Pryor. So perhaps you've kind of missed a sweet spot here in the spring?

We might have from a volume standpoint. But prices have improved and we have the off-take agreement. So as Jack indicated earlier, Pryor will continue to produce UAN, and the part that they're able to ship immediately will be a benefit from the higher cost. And we can either store it up to a point, but we have an off-take agreement for all we can produce. So we'll be able to run -- and as you know, the economics of a process, manufacturing like this is most of your costs are fixed.

So we'll be in a position to be able to run the plant pretty much at an optimal level since we have the off-take agreement and we have the storage capabilities.

Okay. That was helpful. And on just OpEx, I mean, you did call out the $4.2 million in the quarter related just to dealing with the [actions] of shareholders. So I'm kind of assuming that that is going away. And I didn't know if there's any of some of the other kind of one-time investment you've made just in third-party consultants for safety and reliability reasons over the past year. Some of that also potentially going away?

Yes. We spent somewhere, I don't recall the exact number now. But we probably spent between $1.5 million and $2 million on consultants last year. Actually, now that I think about it, we probably spent between $2 million and $2.5 million on consultants last year. And although we will continue to have some consulting, additional outside consulting fees on an as-needed basis, they'll be nothing near that on a going-forward basis.

Okay. Thanks. And a question for Tony, just on the tax rate. I know it's been a little bit higher the last few quarters. I'm not sure what's causing that. And what should we think about the tax rate going forward?

What was the question?

The tax rate.

The --

Just the tax rate, yes.

The accrual? Well, we've had some, in the first three quarters of last year, we took some benefit for some credits that are being delayed at this point until we get Pryor back up and have better results. So it's really dependent upon some of the manufacturing tax credits and other things that we'll sort of have to wait and see. But for the most part, 40% is a good provision.

Okay. All right. Thanks. That's all I had.

David Kaiser, Robotti and Company.

I just wanted to talk about the climate control business for a minute. First of all, I want to make sure that I understand slide 20. When you say bookings year to date, April, were $96 million, 4% higher than 2013, are you referring to Q1 of 2013, or again December 31st, as you are in the next slide?

No. I'm talking about comparing it to the same period last year.

Okay. Thank you.

And then I also made the comment, did not put it on the slide. But we have order -- what we call backlog is when we have the purchase order in hand and all the internal processing is completely finished. And then at that point we officially enter it in backlog.

So this number here refers to the official backlog. But in addition to what's officially in the backlog, we always have over at our climate and master operation, because of the mechanics of the operation, we have a queue of orders that are in-house and in-process, and about 98% of those always enter the backlog. And that is actually running higher this year, substantially about double what it was last year.

So if you take into consideration the orders in process that are in house that will eventually be backlog, we're running about 7% ahead of last year.

Okay. I appreciate that color. And then the other question is, with the drivers for green construction certainly being favorable, is there concern of added competition, other people coming into the market? Are you seeing anything like that?

No, we see the same players, basically, at this time in the business.

So you say it's not a concern, that you're comfortable with --

Well, I mean --

-- (multiple speakers)?

-- competitors are always a concern. And that's why we try to have the best technology and we're continuing to invest in our marketing and the sales side of our business. But we haven't seen any significant new technology or significant new players in the market.

Okay. Thank you, guys. I appreciate that. And have a good day.

(Operator Instructions) Joe Mondillo, Sidoti.

I just have a quick couple follow-up questions. First off, profitability, obviously a chemical is one of the biggest uncertainties, just given the inconsistencies with the production. Was wondering if there's any way you can -- and I don't know if you have this number on hand. If you take out Pryor, what kind of operating margins would you have seen in the first quarter at chemical?

Well, you know we have the Baytown plant, which is a captive plant at the location there. But as far as the El Dorado plant, they are in a position right now where it's very difficult for them to create a very strong margin because they're buying the ammonia off the pipeline. So you got Pryor and Cherokee that produce from natural gas, and Cherokee's margins and production were very good during the quarter. As we talk about Pryor, they were down for the biggest part of the quarter.

But we don't have a specific number that we can give you.

Okay. And then also, I've gone back in the history of your company. And working capital cash needs has been quite low. But obviously, with Pryor ramping up and everything, it's sort of uncertain. So I was just -- any guidance you can give sort of what your cash needs are on an annual basis for working capital?

Yes, we showed you in our PowerPoint presentation what it looked like in the first quarter. And we have, from an EBITDA standpoint, you have depreciation and -- so our internal cash flow for the most part, recently, has covered our internal cash flow. We haven't had to use our asset-based revolver. You have --

So in the first quarter, you saw an inflow of $5 million, is that correct? $5 million working capital.

Page, what was it?

Page 6, I think.

That's correct.

So, I mean, when we get production up and running and everything, are you going to see an outflow or --?

The only time we'll see a significant outflow would be is when we ramp sales up substantially. But at this point, you have seasonality where you build up inventory one part of the year and you say, I'll let you build up receivables. And so it tends to, from an internal cash flow standpoint, to be covered that way.

But since you were talking about Pryor specifically, with Pryor, we expect to see less seasonality than in our other ag products, even though it is an ag plant, or primarily an ag plant. And the reason is because we have that off-take agreement and our customer has a lot of storage capability. So we don't expect it to be quite as seasonal as you would see in the other plant, in Cherokee, for example.

Okay.

(Multiple speakers)

I guess I'm just trying to look at it on a normal year, working capital cash needs. And it sounds like the cash outflow for working capital is not too significant for the whole entire company. Is that fair to say?

Joe, if you look back at our statement of cash flows, you can see the cash flow from operations each quarter and sometimes it's a positive, sometimes it's negative. But it tends -- considering the seasonality, the change in working capital tends to balance itself out.

Okay. Good enough. And then just lastly, that off-take agreement, was wondering if you could update us on when the expiration on that is.

Which one are you referring to?

The Coke.

Oh, the Coke agreement.

Coke is a 15-year agreement.

Oh, 15? Okay. 2015, or 15 years?

Fifteen years, but it has outs from both parties under certain circumstances.

Okay. Thanks a lot, guys.

Keith Maher, Singular Research.

Was I wrong on that?

I really appreciate all the details you've given on the El Dorado expansion. Just wondering, and it does look like everything's on schedule, but is there anything right now that you're kind of concerned about that may delay you guys needing those dates you had laid out for 2015?

No.

Okay. Thanks.

Gregg Hillman, First Wilshire Securities Management.

Barry, could you talk a little bit more about China, what's going on there with urea exports and the regulations there and whether producers there are able to circumvent the regulations and export more to the United States?

Well, I'm not -- I can't speak intelligently about circumvention in China. But I do know that they tend to regulate the export on a seasonal basis. Do you recall what the season is where they cut off exports or they --

It has to do with the --

-- [take] duties on?

I don't recall exactly. It's pretty well documented, though. But China really drove down the cost of urea this last year, and they'll continue to do that. But there is, like Barry indicated, there is a cutoff date when their export tariff kicks in.

Yes. And so essentially --

Does anybody know what that is?

Essentially, I mean, our ag folks are focused on that because they deal with that when it occurs. I just don't recall the dates. But --

We'll get that information and send it to you.

Okay, that'd be great. And just one other question. When you did the [Bond] Road Show, I think you said the earnings power of the company was $200 million in EBITDA. I think that's without the additional capacities that you're adding right now. And I was wondering, in the documents, do they give all the assumptions for that in terms of pricing for fertilizer and natural gas prices in the SEC filings? Is that out there somewhere, what all the assumptions are for that?

Say that again, please. I'm sorry.

Just the assumptions for Bond Road Show, I think you said you could do $200 million normalized for EBITDA. And I was wondering, the assumptions behind that in terms of natural gas prices and fertilizer prices, are they laid out clearly in the SEC filings somewhere?

I don't recall what we have specifically laid out in those presentations that we made, which would have been filed within 8-Ks, I believe. Weren't they? Weren't those presentations filed? I believe --

I think they're out there.

Yes, they're out there. But let me just recall how we created that bridge at the time, okay. If you'll recall, what we did was there were two parts of the bridge. Part of the bridge, we took our actual earnings and we took the effective downtime. And this was back in 2012, 2013. And we added back the income that would have been generated at the time of the downtime, with the market conditions that existed at that time, which were more favorable than they are today with a much bigger spread per ton.

In addition to that, we did include the effect in that $200 million of the additional capacity that we were bringing online that was included in there. And so if you were going to go back and re-do that today, the question really would be, what would that bridge look like with today's market conditions. And so it would look somewhat different. It would be somewhat less than that, and I don't have the exact number at hand as we speak here. But it would be less than it was at that time as a result of the changing market conditions.

I think the -- but to answer your question, Gregg, I think the assumptions were there.

Okay.

Most everything we had in that presentation was based upon a certain set of market conditions and assumptions. And so you could look back at that and see what they were at the time.

Okay. But that didn't include the additional 60,000 tons at Pryor, I believe, did it?

I'd have to look back.

Yes, okay. Well, I'll go check it.

I think at that point, we were still, I think at that point, we were still at the point that we didn't want to commit on those (inaudible) packs, when and if.

Okay. Thanks. But that included all the additional asset production, because that included -- and did the Bond Road Show, that included the additional asset capacity you're bringing on, so (technical difficulty) than you did before, too. And that included that, two?

Yes.

That correct?

Yes. I think if you had a specific question, we need to pull out the presentation and review it and get back to you.

Okay. Okay. That'd be great. Thank you.

This does conclude the Q&A portion of the conference, and I'd now like to turn it back to Carol Oden.

Thank you again. Right now I'd like to go over forward-looking statements.

Information reported on this call speaks only as of today, May the 8th, 2014, and, therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay.

The comments today and the information contained in the presentation materials contain certain forward-looking statements. All these 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 are forward-looking statement nature identify forward-looking statements, including but not limited to all statements about or in references [to the Architectural] Building Index or any McGraw-Hill forecast, any references to natural gas costs, ammonia costs, and fundamentals of the chemical or climate control business.

The forward-looking statements include, but are not limited to the following statements. We will continue to have negative cash flow until the Ed Dorado expansion projects are completed and producing, planned capital expenditures at El Dorado, funding of capital expenditures, ammonia prices, strong, continuing demand for fertilizer, optimistic about our ad business, consistent production at the Pryor facility, plant turnaround, installation of equipment at Pryor, (inaudible) El Dorado expansion, ammonia capacity and cost of ammonia, timing of completion and budget for the El Dorado expansion project, completion dates and startup dates for acid plant and concentrator and ammonia plant, climate control business 2014 operation excellence initiative value drivers.

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, 2013, and form 10-Q for the period ending March 31st, 2014.

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 non-cash charges, unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and it should not be considered as an alternative to GAAP measurements. The reconciliation of GAAP and any EBITDA numbers discussed during this conference call are included on the Q1 2014 conference call presentation, which is posted on our website.

Thank you. That ends our conference call.

Ladies and gentlemen, thank you for your participation.