LSB Industries Inc (LXU) 2014 Q3 法說會逐字稿

Greetings and welcome to the LSB Industries third-quarter 2014 conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Carol Oden. Thank you Ms. Oden. You may now begin.

I thank you. Welcome to the LSB Industries, Inc. third-quarter 2014 conference call. Today LSB's management participants are Jack Golsen, the 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 November 7, 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.

Good morning. Thank you for joining our conference call today which will cover a discussion of our third-quarter 2014 results. We released our results in a press release this morning. Let me start by providing some highlights from the third quarter. Please turn to page 3 of the presentation.

You will see that sales were $171 million for the third quarter of 2014, down $6.4 million compared to the third quarter of 2013. And we had a net loss of $3.8 million for the quarter compared to our net income of $10.3 million for the third quarter of 2013. Clearly, from a profit standpoint this was not a good quarter.

Third-quarter chemical business results were impacted by a planned extended turnaround at our Cherokee facility that lasted 42 days. As a result of completing the necessary work to the facility, we are not planning a turnaround for this facility until 2016. That should translate to higher overall on-stream production rates and profitability in the future.

Our climate control business continued to make progress during the third quarter. Sales in that business increased approximately 5% or $3.6 million which reflects improved order levels. In fact, bookings are up 12% this year versus last year. Also pointing to the improvement in the business is the fact that we have the highest backlog that we have had since 2008. We are continuing to see the trends in commercial and institutional construction improving, although the business is not yet where we want it to be from an earning standpoint.

Later in this call Tony and Barry will give you details about the financial performance and operations of our two businesses. Barry will discuss the continued progress that we are making on our expansion projects at El Dorado later on this call. We are continuing to put a high priority on making sure that we stay on track with these projects as the benefits are significant.

Looking forward, we expect the fourth quarter of this year to be much improved as we have no turnarounds planned for any of our chemical facilities during the quarter, meaning all of our plants will be producing. And in our climate control business, it continues to build momentum as the trends for this business continue to improve.

We have discussed on previous calls the steps that we are taking to improve the long-term reliability and performance of our chemical facilities and we are seeing progress. For example, we expect that the ammonia production at our Pryor facility for the full year of 2014 will be doubled over 2013, and we also expect production to increase again in 2015.

Summing up, we see good momentum in each of our businesses and anticipate delivering improving results in the fourth quarter of 2014 and for 2015.

Now, I will turn this call over to Tony and Barry who will go into more details about our financial and operation performance of quarter three. Thank you.

Thanks, Jack. As Jack indicated, our climate control business continued to make progress and reported increased sales orders and backlog for the third quarter. On the other hand our chemical business third-quarter results were neither a reflection of market conditions nor an indication of our expectation for results in subsequent periods given the extensive maintenance activities during the quarter. We expect the planned maintenance to result in significant improvement in on-stream production in the fourth quarter and in 2015. During this financial review we will discuss these and other factors that affected results for the third quarter 2014 and the variances between quarters.

Consolidated net sales were $171 million, a decrease of $6.4 million. The decrease included $9.4 million in the chemical business partially offset by an increase of $3.6 million in the climate control business. The quarter resulted in an operating loss of $1.2 million compared to an operating income of $23 million in the prior-year period. The decrease in operating income of $24 million was due to planned downtime in the chemical business as we performed extensive maintenance at the Cherokee facility and to a lesser extent at the Pryor facility. Interest expense for the quarter was $5.1 million net of $3.9 million of capitalized interest compared to $5.4 million net of $1.2 million capitalized interest in the prior-year quarter.

After a provision for income taxes of approximately 39% the net loss was $3.8 million, or $0.17 per share, compared to net income of $10.3 million, or $0.43 per share last year. In concluding, on page 4, EBITDA for the quarter is $8 million compared to $29 million for last year's third quarter. For the trailing 12 months ended September 30, 2014, EBITDA was $154 million compared to $79 million.

On page 5 is a brief summary of our capital structure at September 30 compared to year-end 2013. Cash and investments at September 30 totaled $311 million or $124 million lower than at year-end 2013. Total capitalization was $892 million and debt to capital was 52%. Although roughly double the leverage prior to the initiation of the expansion projects, the addition of leverage is consistent with our long-term growth plan and we expect to delever once the expansion projects are complete.

As noted on the chart, the trailing 12-month EBITDA to interest coverage of 4.3 times is significantly below our historical coverage primarily due to the debt incurred to complete the El Dorado expansion project. The interest coverage is based upon total interest including capitalized interest. Again, the coverage ratio will remain low until after the expansion projects are complete. Concluding discussion of our financial position, our $100 million working capital revolver remains on drawn with approximately $74 million of availability at 9/30.

On page 6 is an analysis of cash flow for the nine months ended September 30. As just noted on page 5, total cash investments were $311 million at September 30 or $124 million lower than at year-end 2013. As noted on this page, the $124 million reduction in total cast investments included net cash provided by operations of $57 million, capital expenditures of $164 million, other net cash of $3.8 million, and payments of long-term -- current and long-term debt of $20 million.

The reduction in cash investments is attributable to the planned capital spending. The total cash investments will continue to decline until 2014 and 2015 as we complete construction of the El Dorado expansion projects.

Moving to page 7, this page is a summary of our estimated capital expenditures for the remainder of 2014 and 2015. Total capital expenditures during this period will be between $388 million and $458 million, include capital expenditures for the El Dorado expansion projects of between $280 million and $315 million. Also included are upgrades to our plants to maintain compliance with environmental requirements and guidelines as well as other anticipated renewal and improvement projects.

With respect to the table reflecting El Dorado expansion projects, the planned spending is presented as a range to provide for variable material costs, unplanned delays in construction, and other contingencies. We've made certain changes to the total planned expenditures since the second quarter. As the engineering, design, and bidding process has progressed and project construction proceeds, the estimated range of costs has been narrowed and in certain cases have been revised. At this point approximately 76% of our anticipated costs are committed. I would point out that the top of the estimated cost has been increased from $500 million to $520 million to reflect the inclusion of the natural gas pipeline to supply the ammonia plant.

We originally planned for the pipeline to be owned and operated by a third party. However, after further evaluation of the return on capital employed the economics of holding the pipelines are considerably more favorable.

The capital spending for the expansion is being funded by our cash and investments, both current and noncurrent. Initially, generated cash flow and third-party financing were approximately $50 million -- excuse me -- internally generated cash flow and third-party financing were approximately $50 million, finance several discrete pieces of equipment. Additionally we have the availability under the working capital revolver.

Turning to page 8, for a review of chemicals third-quarter 2014 results compared to third-quarter 2013 sales were $95 million, a decrease of [$9.4 million], or 9%. The sales decrease was due to lower production as a result of the planned turnaround at our Cherokee facility that lasted 42 days during the quarter and the maintenance work performed at the Pryor facility that was originally planned for the fourth quarter.

As Jack indicated in the overview and as we mentioned in our second quarter conference call, beginning the third week of July we began an extended major turnaround at Cherokee which included include increased inspection repairs in order to transition from an annual turnaround cycle to a biannual cycle. At Pryor, a maintenance projects previously planned for the fourth quarter was moved forward into the third quarter and performed while certain repairs were made to the urea plant.

For the third quarter the chemical business, reported an operating loss of $5.6 million compared to an operating income of $17.7 million, a difference of $23 million. On page 9 is detail on some of the items that caused the variance between the two quarters. The primary difference between Q3 2014 and Q3 2013 was the result of the maintenance activities at Cherokee and Pryor facilities during the third quarter.

Cherokee produced at a consistent level in the third quarter of 2013 without a turnaround. However, as a result of lost production during the turnaround in the third quarter of 2014, Cherokee reported $11.9 million lower operating income which includes $6.9 million for lost margins and fixed overhead absorption on tons not produced during the 42 days and $5 million for maintenance costs. The Pryor results were impacted by approximately $5.4 million due to the maintenance downtime during the quarter, although operating income was only $1.2 million below the 2013 third quarter.

Excluding the impact from precious metals and insurance recoveries recognized in the third quarter of 2013 of $4.5 million and $4.2 million, the remaining $1.5 million difference between the two quarters is due to maintenance costs incurred at the El Dorado facility to repair the sulfuric acid plant and to a significant increase in the cost of purchased ammonia. Unlike the Cherokee and Pryor plants, El Dorado purchases ammonia as a feedstock at a cost disadvantage. This disadvantage will continue until construction of the ammonia plant is completed.

On page 10, the bar chart compares total chemical sales by quarter for 2013 and 2014. The first and second quarters of 2014 were well ahead of the same quarters in 2013, but due to the extended maintenance activity in the third quarter that I discussed previously the third quarter of 2014 sales were lower than the same quarter last year. The lower half of the page compares the sales mix for the quarter with the year to date and reflects the impact of lower agricultural sales due to the turnarounds in maintenance in the quarter.

Turning to page 11, Cherokee and Pryor both missed potential agricultural UAN sales during the maintenance activity. As a result, agricultural sales were down disproportionately to total sales. Agricultural sales were down 27%. Industrial acids sales increased 10% and mining sales were down 12% primarily due to lower demand.

Turning to page 12, although it's noted on the previous page total agricultural sales for the third quarter were down 27%, UAN sales decreased 59% due to lower UAN production at Pryor and Cherokee. Partially offsetting the lower UAN volume, agricultural grade ammonium nitrate sales in tons and dollars increased 22% and 15%, respectively, and ammonia sold in agricultural markets increased 10%.

Industrial and mining sales are reported on page 13. Nitric acid sales were up 5% in dollars but 3% lower tons due to higher ammonia costs pass-through pursuant to contractual pricing arrangement with customers. Industrial ammonium nitrate is a product for the mining sector and reflects a significant decrease in tons due to lower demand from coal during the quarter. The sales and dollars reflect less of a decrease than the volume decline due to tons not taken but paid for pursuant to the terms of the agreement with Orica.

Now turning to page 14 for a review of climate control results for the third quarter of 2014 compared to 2013. Climate control reported net sales of $74 million compared to $70 million, a 5.2% increase. The sales increase reflected improved order bookings in most product lines during the second and third quarter. Gross profit and gross profit margins were $24 million and 32.5% compared to $23 million and 33.2% last year.

Operating income was $8.5 million in both quarters, but operating income as a percent of sales at 11.5% was lower down than the 12.2% last year due primarily to a different product and customer mix. Third quarter EBITDA was $9.7 million compared to $9.3 million.

On page 15 is a summary of climate control sales by market sector for the third quarter. In both the quarter and year to date, commercial institutional sales were 84% of total sales and single-family residential, which is all geothermal, was 16%.

Going to page 16, third-quarter sales by product line compared to 2013 reflect very little change in the major heat pump and fan coil product lines with the growth in sales occurring in the other categories which include custom air handlers, modular chillers, and our engineering and construction services business. Barry will discuss market drivers and the outlook for both our climate control businesses and chemical later in the call.

That concludes the financial review. Thank you for your time, and I will now turn it over to Barry to discuss operations and our 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 that we are focused on.

Before discussing the markets we serve in our climate control business, it's important to understand costs and pricing trends for the feedstock we use and the products we sell. Please turn to page 17 to see these trends.

Summing up this page and reinforcing Tony's earlier financial review, over the past year prices of natural gas in anhydrous ammonia have increased while the selling prices of urea ammonium nitrate fertilizer have declined. Whereas ammonium nitrate fertilizer prices are about the same as a year ago, our cost to produce AN at El Dorado has risen due to higher purchased ammonia cost. All of this has resulted in significantly reduced margins per ton in the agricultural part of our business compared to the last several years.

Focusing on the general outlook for the agricultural markets we serve, page 18 lists several indicators for our agricultural products, many of which continue to be favorable. Planting levels are expected to remain generally high, although slightly lower than the recent past due to record crop harvest over the last two years.

Grain stock to use ratios both worldwide and in the US are currently at or approaching 10-year highs. Industry expectations are that approximately 86 million to 88 million acres of corn will be planted in the upcoming season, about 3% less than the previous season, and compared to 97 million acres in 2012, which was the all-time high in recent history. Market prices for corn and wheat are lower than a year ago, but yields per acre are up so planting continues to be profitable for farmers.

North America nitrogen fertilizer producers, including our chemical business, currently have the lowest delivered cost to North America relative to foreign producers, so we believe that there is less demand for nitrogen fertilizer in the upcoming season it will affect importers before it affects domestic producers.

Despite general industry drivers, weather does have a significant impact on the fertilizer segment of our business, and at this time the weather conditions are favorable for the next planting season with better moisture conditions than a year ago.

Finally, although Chinese urea export prices have stabilized at this time, China urea imports in North America could exert downward price pressure on all nitrogen fertilizer products. This is something that we are keeping a close eye on.

Overall, we continue to be optimistic about the fundamentals of our agricultural business.

Focusing on our industrial and mining products during the quarter third quarter of 2014, our product sales to these markets were 61% of our total chemical business. This is somewhat higher than usual due to decreased production at Cherokee. Page 19 contains some market indicators for these areas. Most of these indicators forecast growth for the next few years.

As we advised you previously, our contract with Orica ends on April 9, 2015. Our strategy is to commence selling industrial grade AN directly to the explosives market. So far, we are pleased to have made substantial progress. We have added senior staff to support this part of the business, and we have signed agreements to supply approximately half our historical average of industrial AN volume, beginning on April 10, 2015. We are currently in negotiations with other potential customers of industrial-grade AN for most of the balance of our historical average volume.

Page 20 is an update on the status of each of our chemical facilities. El Dorado continues to run well. Cherokee is operating at its historical rates of approximately 500 tons per day of ammonia. Pryor is operating at its targeted rate of approximately 650 tons per day of ammonia. And the Baytown operation is performing at targeted production levels.

With regard to planned maintenance at each of the facilities, as Tony mentioned earlier, the turnaround at Cherokee took 42 days to complete. The maintenance we performed during that turnaround will enable us to transition Cherokee to a two-year cycle for major turnarounds. The next major turnaround scheduled for Cherokee is in 2016.

At Pryor, we moved a planned maintenance activity originally scheduled for the fourth quarter of 2014 into the third quarter to coincide with other maintenance activities, which were completed successfully. We have a planned turnaround at Pryor scheduled for the second quarter of 2015.

Finally, at El Dorado we currently plan to pause production for approximately one week in December to allow for tie-ins of certain items that will service the new ammonia and acid plant under construction such as acid lines, steam pipes, boiler feed water, condensate lines, instrument, air, various water systems, and some electrical work.

Overall, we continue to take proactive steps that we believe will allow LSB to achieve enhanced operations from all of our chemical facilities.

During our 2013 fourth-quarter earnings call, we reviewed in 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 which are in the fourth-quarter earnings presentation located on our website. Today we will update you on the progress we have made so far.

Page 21 details the status of the El Dorado ammonia plant expansion project. As we have expressed in the past, this project will significantly reduce El Dorado's cost of ammonia as the cost spread between purchased and manufactured ammonia is substantial at this time. It will also produce additional ammonia that will be available for sale or which can be upgraded into other products for sale.

The El Dorado ammonia projects construction began in November 2013, immediately after the Arkansas air permit was issued. All of the required steel pilings have been installed as part of the foundations and over 95% of the concrete foundation caps are complete. The installation of underground piping is approximately 80% complete, and the erection of vertical structural steel is well underway. The setting of major equipment continues. The foundations for the cooling tower are complete and the ammonia storage tank pilings are all complete.

Turning to page 22, we show a 3-D CAD rendering of the ammonia plant on the top of the page and a current photo of the site below. You can see in the bottom picture that foundations and many large vessels have been put in place as well as progress on structural steel.

Please turn to page 23. In addition to the ammonia nitrate plant being constructed at El Dorado, 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.

At this time the building and equipment foundations for the nitric acid concentrator are complete and steel erection is nearly complete. Also setting up equipment for the nitric acid concentrator is nearing completion. Piping, electrical, and instrumentation installation will begin in the fourth quarter of the year. The equipment and building foundations for this 65% nitric acid plant are complete, and the steel fabrication and erection is approximately 85% complete. The majority of the equipment for this plant is on site with 60% set in place including the absorber columns. The cooling tower installation is complete. Piping insulation will start in the fourth quarter or in the first quarter of 2015.

Please turn to page 24 to see current photos of the acid project site.

At this time we expect the El Dorado expansion projects to complete on time and on budget given the addition of the pipeline costs, which Tony discussed. Although completion of projects of this magnitude are dependent on many suppliers and contractors as well as weather conditions, we are currently not aware of anything that will prevent on-time completion or cause cost overruns. Also at this time we have committed costs on approximately 76% of the expansion project's total estimated cost.

We expect the acid plant and concentrator to complete and ready for start up 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. As we have relayed in the past, LSB is making these investments in our chemical facilities to drive growth and value creation and better position LSB to capitalize on favorable market dynamics.

Turning to page 25 and now switching to our climate control business, there is a graph showing orders, sales, and backlog. As we pointed out on previous earnings calls, our fourth-quarter 2013 and first-quarter 2014 bookings were soft, although we also indicated that the trend was improving. This impacted sales and profits during the first half of 2014. However, second-quarter 2014 bookings were up 27% versus the same period in 2013, the highest level since the third quarter of 2008. And this trend continued into the third quarter. Third-quarter new bookings were $74 million, 15% higher than the third quarter of 2013, and our backlog increased to $74 million at the end of the third quarter, the highest level since 2008.

Year to date, orders through September were $220 million, 12% higher than the same period in 2013. It's important to note that our agreement to provide geothermal and water source heat pumps to Carrier ended in May 2014, so year-to-date and third-quarter comparisons are really not apples to apples. Year to date, adjusting for Carrier heat pump orders in both years, our total bookings were up 19% through September 2014 over the same period in 2013, and up 28% for the third quarter alone. October new orders were $24 million with backlog increasing to $76 million at 10/31/14.

We continue to maintain leading market shares for our water source and geothermal heat pumps and hydronic fan coil products. Demand for our climate control business products is primarily driven by new construction, as that represents approximately 70% of our business.

On page 26, our indicators related to commercial and institutional construction. McGraw-Hill's most recent thinking is that the key markets we serve are expected to grow by approximately 52% through 2018. Also on page 26 is the most recent release of the Architectural Billing Index by the American Institute of Architects. The ABI is a leading economic indicator for nonresidential construction nine to 12 months in the future. The September ABI was 55.2, which is the second highest level since 2007 and the fifth consecutive month of overall positive billings growth.

The two most relevant takeaways for our business are that the trend for increasing demand in commercial and institutional sectors and that long-stalled the projects are coming back to life, an indication of credit easing and increased confidence in the overall economy.

Page 27 shows McGraw-Hill's forecast for single-family residential construction starts on the left. Year to date through September, residential products accounted for about 16% of our climate control business sales. McGraw-Hill is currently forecasting that housing starts will grow by 64% from 2013 until 2017, a trend which should benefit our residential geothermal business. However, remember that our residential sales are impacted by energy prices, availability of financing, and tax incentives. Another positive trend is the increase in green construction that has occurred the past few years and is expected to continue. This is shown on the chart at the right. This should positively impact sales of many of our highly energy efficient products.

In summary, the general consensus of most economists and construction industry experts, as well as specific forecasts, is that commercial and institutional construction recovery seems to be underway. We believe these forecasts are directionally correct, although the time is by no means certain or easily determined.

During our last few calls, we covered in detail the key value drivers that we are focused on and which we expect we will increase LSB's value in the near- and mid-term. They are recapped on page 28. We are comprehensively upgrading our chemical business's reliability systems, equipment, and personnel to improve safety, plant uptime, and minimize unplanned interruptions. A good example of this is the steps we have taken during the recent turnaround at Cherokee, which should move that facility to a two-year major turnaround cycle, increasing aggregate on-stream time for that facility.

We have made significant investments to improve Pryor, and we have made important progress that has already yielded improved results. As a result of the investments we have made at Pryor and the effectiveness of its new management team, Pryor's ammonia production during 2014 should be nearly double that in 2013, and we expect continued improvement as we go forward.

We have major capital projects underway at El Dorado that will improve its profitability substantially. At this time -- at this point we are on time and on budget with these projects.

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. Our plant capacity will support that growth with very little capital investment. And we are striving to increase efficiency and reduce operating costs in our climate control business through LEAN operational excellence initiatives. We believe that over the next three to four years our various OpEx initiatives will be able to improve the margins in our climate control business by approximately 250 to 300 basis points.

Overall, we expect that all of these initiatives to drive improved performance and shareholder value creation.

Summing up some of the key points we have discussed today, our plan is to operate Cherokee and Pryor facilities at or near our targeted production rates during the fourth quarter of 2014 and 2015 with the exception of a turnaround at the Pryor facility, planned to be performed in the second quarter of 2014 -- 2015 as the agricultural season winds down. We believe both these facilities will generate improved results for the fourth quarter of 2014 and for 2015.

Although we believe this is only a temporary market condition, the El Dorado facility cost to produce agricultural grade ammonium nitrate for purchased ammonia at current market prices exceeds our current selling prices. However, the El Dorado facility has the option to source a portion of its ammonia requirements from our Pryor facility, which cost significantly less than current market prices. Unlike our Cherokee and Pryor facilities, the El Dorado facility purchases ammonia as feedstock at a cost disadvantage as compared to producing ammonia from natural gas. Once our new ammonia production plant commences production in 2016, we believe it should eliminate this cost disadvantage, increase production capacity, improve operating efficiencies, and substantially lower production costs at El Dorado.

In addition, EDC's intention is to commence sales of industrial grade AN to the commercial explosives market with deliveries beginning after the expiration of the Orica agreement on April 9, 2015. We've already signed agreements to supply approximately half of the annual 240,000 tons previously committed to Orica. We expect to develop additional supply commitments based on our continued marketing efforts.

In an effort to be more transparent about our expectations for the chemical business, we have included a chart on page 29 which contains a range of anticipated chemical product volumes for the fourth quarter of 2014. We also expect our client climate control business sales to increase in the fourth quarter of 2014 compared to the same period in 2013 despite the loss of Carrier heat pump sales. We expect this trend to continue into 2015 driven primarily by growth in new construction as well as the introduction of new products.

On a final note before we open it up to questions, I'd like to mention that we will be presenting at the Bank of America High-Yield Conference in Boca Raton, Florida on September 2. We hope to see some of you there.

Before opening this up for questions, I'd like to thank you for listening today. 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 Instructions)

Joe Mondillo, Sidoti.

It appears we've lost Joe. We're moving on to our next question.

David Deterding.

Good morning, guys appeared. I just wanted to get kind of an outlook for ammonia. It looks like obviously ammonia prices have been moved markedly higher during the quarter yet UAN prices have kind of stalled and look to be down a little bit. Can you just talk about what's driving that and what you kind of see going forward over the next couple of quarters?

David, what we are hearing from our marketing area is that there is a suppression of production globally right now and there are plants that are shut down. There's problems in the Ukraine area, so there's a shortage of production but there is also in terms of UAN we are in a quiet period. So our marketing people think that this is $655 Tampa price is going to come down big time -- probably $100, $150 in the next few months.

Okay. Great. And then on the 240,000 tons that you guys were selling to Orica -- congratulations, it seems like you have get half of that already under a cost-plus agreement and it sounds like you are working to get the rest of it under agreement. Would you expect those new agreements to have better cost-plus margins than did the old Orica agreements? Or about the same?

At this time we really don't want to prognosticate on what exactly those agreements will constitute. But certainly our target is to shoot for at better prices.

Okay. And then looking at your capital expenditure chart from last quarter to this quarter it looks like spending at El Dorado was $430 million to $500 million on the project for total and now it's $485 million to $520 million, yet total capital spending on the piece above that went from -- went to $388 million to $458 million from $392 million to $515 million. I guess I'm trying to reconcile how the El Dorado project went up but total capital spending went down?

A lot of it is just timing, David. We have -- we have narrowed the ranges. The progress of the construction project in El Dorado is pretty much on time, but the spending is lagging a bit. But the timing of the spending and the completion of project is somewhat separated right now, so the construction project is from a progression standpoint is on time. The spending on the other projects will fluctuate from time to time as we move things in and out, but on the El Dorado expansion project everything is on target and spending is as we have shown it there.

I guess, would you expect any of that to roll over into 2016 potentially since the ramp up of spending is a little longer than expected?

No, we still expect completion of construction in 2015 and the commissioning of the plant in 2016. So spending will be complete by 2015.

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

Dan Mannes, Avondale.

Thanks, good morning. A couple quick ones -- first, on the turnaround activity during the quarter, first, can you remind us how many days of downtime you had in the prior-year quarter at Cherokee and Pryor? And second, can you talk maybe about how extensive not the unabsorbed overhead was but the incremental -- the non-normal costs during the turnaround, because that seemed to be a lot bigger than we thought?

Well in the prior year, in the previous year, 2013 we did not have a turnaround in the third quarter at Cherokee and Tony pointed that out -- you might've missed it -- he pointed that out in the script and that's one of the reasons for the significant difference. We had some downtime earlier in the year of 2013 at Cherokee, and we did maintenance during that period. So there was no third-quarter turnaround. The second part of your question which was how much downtime was there at Pryor in the third quarter of last year. I do not recall as I'm sitting here. Do you remember?

As you know we had extensive downtime in 2013 at Pryor so there was no -- from a downtime standpoint, in the third quarter of last year there was not necessarily a turnaround but there was some downtime which we would be comparable to the downtime this quarter.

Okay. And then not the unabsorbed overhead or lost sales, the kind of, I guess, the professional services contractors, et cetera, during the turnaround -- how much more extensive was that than what we term a normal turnaround at Cherokee, because it seems like a pretty big number?

Are you talking about the 42 days?

No, not the amount of unabsorbed overhead, but I think you said there was $11 million of year-over-year costs. The $5 million, the expense incurred for the turnaround -- those I assume are professional services, contractors, et cetera. That just seems much more extensive than what you normally incur during a normal turnaround.

It was much more extensive because, as we've outlined in the conference call, this was a transition from a single-year turnaround to a two-year turnaround in the future and you get much further into the equipment. You have much more extensive review and analysis than you would on an annual turnaround, so we think that the benefits will be significant, but $5 million for the out-of-pocket maintenance costs was pretty much within our expectation. Now occasionally when you get into these turnarounds, especially extensive ones like this, you find things you don't know until you get inside the equipment. So from a standpoint of expectation versus success, I think it was a success -- very successful turnaround.

Okay. Real quick, on El Dorado you mentioned some margin compression given ammonia prices. Are upside down on margins just based on the ammonia cost versus the nitrate price or are you upside down when you include your overhead and costs? I guess I'm trying to understand argue almost to the point where you are better off not running the things or if you can just give us a little color there?

No, we are much better to run it. This is a temporary situation. We are covering all the ammonia costs. Some of the variable costs at $655 ammonia it gets very close, so we made the disclosure in our Q that the cost to produce from purchased ammonia exceed the selling price. Very minimally -- very minimal difference, and it's temporary, and we are hanging in this business because is going to be a big part of our going forward after the end of 2015.

I wasn't asking you about divesting the business, but just wondering if it might make sense to take it down for a little bit. Last question relates to the CapEx cost for the new gas pipeline. Is that roughly $20 million? And can you give us some scope of what benefit you are going to get from owning the pipeline rather than, I guess, getting capacity from someone else?

It's in the range of $20 million, and the benefit is very significant from the standpoint that we are going to be purchasing a lot of gas when we start the ammonia plant at El Dorado, and the markup from a leasing standpoint is significantly higher than if we buy the gas directly and on the pipeline. And we've done a very extensive return on average capital employed and we think is well justified to own it versus lease it.

Okay. Thank you very much.

Joe Mondillo, Sidoti & Company.

Hi, guys. Try this a second time. Not sure what happened there. Can you hear me?

Yes.

So my first question, just in terms of Pryor, was there any downtime in third quarter? I missed your prepared remarks regarding downtime at Pryor in the third quarter.

Of 2014?

Yes.

Yes, we mentioned several times in there that we pulled in some maintenance on the ammonia plant into the third quarter from the fourth quarter while we were doing some repairs on the urea plant. So, yes, there was fairly significant amount of downtime in the third quarter of 2014.

Okay. And then you mentioned that there was going to be the next turnaround could be in the second quarter of next year? Is that correct?

Yes.

My question regarding that is why does it have to be in the second quarter? Just because we know that the seasonal strength usually is in the second quarter. And also, how long or how big of a turnaround is that going to be?

Well it's going to be at the tail end of the second quarter and depending on the strength of the season and the condition of the plant at the time, it's possible that that could push into the first part of the third quarter. The primary reason for having that turnaround is that, as we mentioned, we have some additional reliability equipment that we have on we've have on order for a long time that needs to be installed, and so we are planning to install it during that period of time, with other maintenance that needs to be -- that will be done while that's down for that installation.

Okay. And then is there anything else? Is that going to be -- at this point in time is that the only planned turnaround at Pryor for 2015?

Yes.

Okay. And in terms of El Dorado, is there any more of an indication or can you be a little more clear on what the operating losses were at that plant in the third quarter?

Well, we don't disclose the operating income or loss by plant, but I think we gave a little guidance there in that we spent $1.5 million repair on the sulfuric acid plant, and the profitability on the agricultural grade ammonium nitrate is very marginal. And as you know, the industrial side of the business is cost plus.

Okay. In terms of the ammonia prices rising this high, I know you guys are very flexible in terms of shifting production to a UAN standpoint or to an ammonia standpoint given how pricing is trending. With pricing rising this much with ammonia I imagine you are shifting -- especially here in the fall -- I imagine you are shifting end-user production to more focus towards ammonia. In that case, is it more of a positive that ammonia prices are rising this much as Pryor and charity benefit from Cherokee benefit with a partial offset of El Dorado? Or are the El Dorado losses -- do they overtake over power the benefit that you get at Pryor and Cherokee?

Well, at Cherokee we are not a net ammonia seller. We use all the ammonia that we produce to create upgraded product. Many of those products we have commitments for with customers which is going on the industrial side. So, we are not transferring or changing the production. At Pryor there is some optionality that occurs from time to time, depending on the seasonality and the demand for UAN and the cost of ammonia.

And we take advantage of that.

We take advantage from time to time.

So at this price of ammonia are you net net -- is it a net net benefit for your Company with ammonia prices this high? Or is it a net negative, given the losses that you are seeing at El Dorado?

It's a net negative. We use more ammonia than we sell.

Okay. All right. Thank you. That's all I had for now.

Keith Maher, Singular Research.

Good morning. I don't think you touched on this, but with regard to the pull forward of the maintenance at El Dorado, what was the nature of that? I don't think you also mentioned El Dorado planned maintenance for the next year. If you could share that, that would be great.

There was primarily just some repair of the sulfuric acid plant which is not a major part of our -- sulfuric acid is an important part of the business because it exports steam, but from a sales top line standpoint it's not real significant. So there was repair on the sulfuric acid plant for about $1.5 million.

And what's the planned turnaround for El Dorado next year?

They do partials. They take an acid plant -- they've got four acid plants there. They take acid plants down from time to time, but not concurrently.

Okay. Great.

There won't be a major turnaround with whole plant. There hasn't been for years. They take a section at a time.

Okay. That's helpful. With regard to the strength you are seeing just in the climate control business -- it obviously looks like it's on the commercial side. Is there any area in particular or is it across the Board?

Right now it's generally across-the-board in all the vertical markets that we serve. I can't say that it's concentrated in any one particular part of the business, although if you'll notice in the presentation, we did discuss on page 26 of the presentation what's going on -- the general trends. And I would say that what our salesforce is seeing pretty much mirrors the general trends that are reported in the industry. So, we are seeing an uptick in multifamily. We are seeing uptick in education, which is a big sector for us; in office, less of an uptick -- although we are seeing it but it's a smaller sector for us. And of the sectors that we follow, the one that is -- we are also seeing an uptick in lodging, but it is a smaller sector. And the ones on this page that are probably the least important to us is manufacturing, and we are not really seeing an uptick there too much right now.

Okay. And just one other one on climate control business question -- the gross margin, I think you said it was negatively impacted a little bit in the quarter just due to product and customer mix. Could you give any more color there?

Well, if you'll notice that our sales of our other -- in what we call other was up higher than in what we consider to be our core products which are fan coils and heat pumps. Typically that carries a lower margin than the fan coil and heat pump products. Also, as a result of having a lower OEM mix, we have higher costs that are -- variable selling costs that are typically attached to non-OEM business but is not attached to OEM business.

Yes, that makes sense. But wouldn't you -- I understand the additional cost, but I guess you would be getting a better margin, I would think, because you are not selling it through an OEM at a better price.

But that would affect the margin and I was really addressing variable costs which are carried below the margin line, when I talked about that.

Okay. All right. Thanks.

(Operator Instructions)

David Fondrie, Heartland.

I was curious -- volumes were certainly down on the agricultural sector side, and yet as I look at the balance sheet, finished goods inventories increased for the quarter ended September 30 over the June 30 numbers. Can you help us understand why you couldn't have sold more volume? I'm not sure what that finished goods inventory is, but it would seem that it would be a good time to deplete some inventory at a time you have lower production.

Sorry -- would you repeat the --?

Why are inventories up at the end of September versus June since we were down so long and sales volume were down? We had an increase in cost of inventory at the end of September, although sales were down. A lot of that has to do with timing of your purchase and work in process in terms of where the sales are and building some inventory coming into the period and coming out of the period. There's no real -- there's really no trend there in our past history, but that's a good question. I'll take a look at that and see if there's a specific buildup.

Okay. Appreciate that. And then you talked about perhaps moving some ammonia from Pryor to Cherokee to mitigate the cost of the high-priced Cherokee ammonia. Can you talk about how you do -- do you take that by truck? And is it really economical and can you actually move that kind of volume across there.

I think, more specifically, the ammonia is moving from Pryor to El Dorado to offset the high cost of purchased ammonia at a Tampa price -- Tampa index purchase price. So the majority of the ammonia that we transported from Pryor went to El Dorado and that offset -- that gave us a better opportunity to sell the agricultural grade ammonium nitrate at a margin. And it moved by truck. And it moves by truck, [as well].

Thank you very much.

Gregg Hillman, First Wilshire.

Good morning, gentlemen. Barry, first could you talk about the contribution margin from the incremental sales and climate control at this point? What do you think it would be?

Well, we don't really disclose that as a specific number and it varies by business. It varies by product line, actually. So it's hard to throw that -- an accurate number out that's across the board for the entire business.

You can say that your absorbing overhead -- more overhead -- and plus the margin.

What percentage of the cost associated with climate control are fixed, and what percentage are variable?

We typically think that about 65% to 70% of the costs are variable in that business.

Okay. Okay, thanks. And then also in terms of the pricing -- on page 29 of the slide deck you showed the sales volume outlook, but on I think it was on page 17, your pricing, I don't think you gave pricing for industrial mining and other -- like for nitric acid, what's the price of nitric acid for example? For the other items for slide 29, what's the current price for the industrial mining and other ones currently?

All of our industrial products are sold by specific contract, and they are different for each contract. And those contracts are all confidential, and we have nondisclosure agreements with most of our customers relating to the prices that we sell at. So, we don't disclose.

But I would say to you that low density ammonium nitrate for the mining sector is essentially the same as high density ammonium nitrate for the ag sector, so there is somewhat comparability there in terms of selling price.

Okay. And when the Orica contract gets extinguished, will you be just selling kind of on the market for some of the chemicals that would go into explosives?

What we are trying to do now and what we've done so far is line up other long-term -- medium to long-term contracts with other customers to replace that business, but instead of having one large customer we will have multiple smaller customers.

Okay. And just another question on pricing -- maybe you could refresh my memory. But that gas you are buying from Northwestern Pennsylvania, what's your contracted price there?

There is no contracted price. It's market -- from time to time whatever the market will give you the right now the market price is lower than Henry Hub because of constraints on the pipeline.

So it's really just a guaranteed supply, not necessarily a guaranteed price?

We are just selling the gas above our costs as a hedge against our cost of gas at the other locations, but there is no relationship between the gas that is produced there and what we actually take off the pipe at the other locations.

For clarification, if you don't mind me jumping in here, were you asking about what our cost was or what our selling price was?

I guess I was thinking that that would affect you. It's really just a hedge. I was thinking that you could just like trade gas that sold in Pennsylvania for gas that you buy in Texas and get a lower price -- something like that.

Well, that's true but, as Tony mentioned, we do not always get full Henry Hub price for what is sold out of the Marcellus shale, primarily due to distribution constraints in that area, which we anticipate over time will be alleviated.

And the best way to look at that is the spread between our cost and the selling price we get for the gas is basically a reduction of our gas costs at the two ammonia plants.

Okay. And then finally, Barry, you made some comments about China and the urea situation there. What percentage of -- how much urea is China exporting right now or the last quarter versus quarter prior? Do you have any particular outlook? And how can one get information about that?

We don't really sell urea -- that's not a product that we sell. So I'm not as plugged in to the total urea sales as we are with our other products. We mentioned that because since it is a nitrogen product it does have an effect on the overall nitrogen market, so I don't have the answer to your question in front of me. I can get that information -- it's public. But I just don't have it in front of me right now.

Okay. Thanks. And just one other thing -- on page 17 where you gave the prices, is there a seasonality to the prices, for UAN, ammonia, anhydrous -- is October a seasonally high price? Or where would that be relative to seasonality of the price of the various fertilizers, for example?

Everything you read indicates that there is usually a fall season on ammonia and ammonia price demand is up and prices are up, and then subsequently later on in the spring it converts to UAN. Right now what we're seeing is that there has been a delayed application of ammonia, and we'll see when and if that picks up. If ammonia, for some reason they put out less ammonia, it will be just be transferred to UAN later in the season.

Okay. And how does the ammonia thing affect the UAN prices right now?

Well I think somebody mentioned there's a disconnect right now -- ammonia is significantly higher than the transfer of that cost into the UAN -- will give you a sales price from UAN. So UAN is not recovering that increase in ammonia right now, but there is also -- UAN season hasn't really hit its full stride.

Okay. Thank you.

Sanjay Ayer, Citi.

Hi. Just a couple of quick questions for me. When you eventually get the ammonia plant up and running, can you give us some sort of sense of how that will positively impact your gross margins, maybe like improvement in basis points or something like that?

I'm sorry -- could you repeat the question?

Just when you have the ammonia plant up and running, what kind of improvement in gross margin are you expecting just overall (multiple speakers)?

Currently, there's a very significant spread between purchased ammonia and the cost to produce ammonia. There's going to be a significant differential in terms of the gross margin on products coming out of El Dorado. I think previously we have indicated that we thought we could get incremental EBITDA of about $90 million and a 15% to 70% internal rate of return. But on this investment, time will tell in terms of what ammonia prices will do going forward given all the additional expansion coming on in about three years.

Okay. And can you give us an idea of how EBITDA was impacted for, I guess, the extra seven days that you didn't have the Cherokee running, just so we can see how much off that impacted versus the plan?

I guess if you took seven over 42 times the $6.9 million you would get something close to that. It's basically so much a day of downtime.

Okay. So basically if we just do slide nine that's pretty much the impacts that we saw, if we want to get back to the EBITDA?

Except for the maintenance costs, you have to -- I'm not sure if that would be transferable, but generally you are right.

Okay. And last question -- any sort of update on the strategic review drop-downs separating business? Anything?

Well you know that's being undertaken by a strategic committee and the strategic committee at some point will report to the Board. So, we're not going to get ahead of the strategic committee and try to -- they are working hard but we are not going to -- but we are not going to get ahead of that.

Okay. Thank you very much.

Thank you. At this time there are no additional questions. I would like to turn the floor back to management for closing comments.

Well, we would like to thank you for participating today, and I would like to turn the call at this point over to Carol Oden with some closing comments particularly relating to forward-looking statements.

The information reported on this call speaks only as of today November 7, 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 contains certain forward looking statements. All these statements other than statements of historical facts are forward-looking statements. Statements that include the words expects, intends, plans, believes, projects, anticipates, estimates, or similar expressions or statements of the future of forward-looking-statement nature identify forward-looking statements, including but not limited to all statements about or in reference to the Architectural [Building] Index or any McGraw-Hill forecast, any references to future natural gas costs and ammonia costs, and the outlook for the chemical or climate control business.

The forward-looking statements include but are not limited to the following statements: higher overall on-stream production rates and profitability in the future; improvement in the business; commercial and institutional construction improving. The fourth quarter of 2014 to be much improved; all of our plants will be producing; build momentum as the trends for this business continues to improve; ammonia production at our Pryor facility for the full year of 2014 will be doubled over 2013, and we expect production to increase beginning in 2015, improving results in the fourth quarter of 2014 and for 2015. Planned maintenance will result in significant improvement and on-stream production in the fourth quarter of 2014 and in 2015; expect to delever once the expansion projects are complete; the coverage ratio will remain low until after the expansion projects come online.

Total cash and investment will continue to decline during 2014 and 2015; total planned capital expenditures for this period; total estimated expansion projects capital spending will be funded by our cash and investments both current and noncurrent.

Industry expectations are approximately 86 million to 88 million acres of corn will be planted in the upcoming season. Less demand for nitrogen fertilizer weather conditions are favorable for the next planting season. China urea imports to North America; commence selling industrial grade AN directly to the explosives market; impact of scheduled turnarounds and the maintenance for various chemical plants; continue to take proactive steps to achieve enhanced operations through all of our facilities.

El Dorado ammonia plant expansion projects will significantly reduce El Dorado cost of ammonia; will also produce additional ammonia that will be available for sale or can be upgraded into other products for sale. El Dorado expansion project to be completed on time and on budget.

Expect that acid plants and concentrator to be complete and ready for start up in mid-2015 and ammonia plant construction to be complete by the end of 2015 with ammonia production ramp up during the first quarter of 2016. Indicators related to commercial and institutional construction; trend for increasing demand in the commercial and institutional sectors; housing starts will grow; increase in green construction should positively impact sales of many of our highly efficient energy products.

Improved profitability at El Dorado; growth of our climate control business, reduced operating costs in climate controlled business; shareholder value creation; operation of the Cherokee and Pryor facility during the fourth quarter of 2014 and 2015. Improved results in the fourth quarter of 2014 and for 2015. Benefits of new ammonia production plant sales and industrial grade ammonium nitrate to the commercial explosives market with deliveries beginning, upon the expiration of the Orica agreement after April 9, 2015. Anticipated chemical product values for the fourth quarter of 2014, climate controlled business sales in the fourth quarter 2014 and 2015.

You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. We incorporate the risks and uncertainties being discussed under the headings risk factors and a special note regarding forward-looking statements in our Form 10-K for the fiscal year ended December 31, 2013, and Forms 10-Q for the period ending March 31, 2014, June 30, 2014, and September 30, 2014, which contain a discussion of a variety of factors which could cause the future outcome to differ materially from the forward-looking statements discussed in this conference call.

We undertake no duty to update the information contained in this conference call.

The term EBITDA is used in this presentation is net income plus interest expense, depreciation, amortization, income taxes, and certain non-cash charges unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurement. The reconciliation of GAAP and any EBITDA numbers discussed during the conference call are included on the Q3 2014 conference call presentation which is posted on our website.

Thank you. And this ends our conference call.

You may now disconnect your lines at this time. We thank you for your participation.