LSB Industries Inc (LXU) 2015 Q1 法說會逐字稿

Greetings and welcome to the LSB Industries' First Quarter 2015 Earnings Conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Carol Oden. Please go ahead.

Thank you. Good morning and welcome to the LSB Industries' First Quarter 2015 Conference Call. Today, LSB's management participants are Barry Golsen, Chairman and Chief Executive Officer; and Tony Shelby, Executive Vice President and Chief Financial Officer; Jack Golsen, LSB's Executive Chairman; and Mark Behrman, LSB's Senior Vice President of Corporate Development and designated successor to Tony Shelby as CFO, will also join the Q&A session after the prepared comments.

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.

And now, I'll turn the call over to Mr. Barry Golsen. Please turn to page 3 of the presentation.

Good morning. Thank you for joining our conference call today. Let me start off by discussing some first quarter highlights. We're pleased to report to you that our first quarter result showed solid year-over-year improvement, excluding the benefit of insurance recoveries in the first quarter of 2014. This primarily reflects the progress we are making toward two of our key initiatives. An overall improvement in the on-stream rates at our chemical facilities and a particularly significant improvement at our Pryor facility. Later, Tony will go into more details on these.

Sales grew 8.6% for the quarter compared to the first quarter of 2014. Adjusted operating income increased $16.3 million to $14.2 million and adjusted EPS increased $0.54 to $0.28 per share. This reflects the reliability initiatives we've been implementing over the past 18 months at our chemical facilities that are resulting in increased overall production with Pryor leading the way. Pryor's on-stream rate and ammonia production volume increased for the quarter to 92% into approximately 52,000 tons respectively, versus 39% and 21,000 tons in the first quarter of 2014.

First quarter sales and bookings for our climate control business were strong growing 8% and 5% respectively compared to the prior year period, despite the previously disclosed expiration of our sales agreement with Carrier for heat pumps in the second quarter of 2014. Excluding Carrier heat pump business during the first quarter of 2014, Q1 2015 sales and bookings increased 20% and 18% respectively. We expect to continue to capitalize on the strengthening demand environment, which given the operating leverage inherent in our climate control business should lead to margin expansion.

Turning to page 4. I'd like to discuss the market outlook for our chemical business. Focusing on the general outlook for the agricultural markets we serve, indicators for our agricultural products are generally positive. While grain stock to use ratios both worldwide and in the US are currently at or above 10-year averages planning levels are expected to remain generally high although slightly lower than the recent past due to record crop harvests over the last two years. Industry expectations are that approximately 88 million to 89 million acres of corn will be planted in the upcoming season. About 2% less than the previous season, while weather impacted parts of the country, ammonia application has been strong with strong UAN application season expected to follow.

In addition, natural gas prices remain at relatively low levels, partially offsetting some selling price compression. Current market prices for corn and wheat are slightly lower than a year ago, but yields per acre have increased over the last several years, all indications are that growers will continue to use nitrogen products to maximize yield. The good news is that North American nitrogen fertilizer producers including our chemical business currently have the lowest delivered cost to North America relative to foreign producers. Therefore, we believe that if there is less demand for nitrogen fertilizers in the upcoming season, it will affect importers before it affects domestic users. At this time, while certain parts of the Western United States are in extreme drought conditions, the majority of the markets we serve appear to be in good planning condition. Finally, Chinese urea is subject to lower export tariffs and Chinese exports have increased. Prices for urea declined through the first quarter, but have rebounded in April as the spring application season started. Prices could resume a downward trajectory to the extent that the price of Chinese coal, a feedstock for Chinese urea drops, but this remains to be seen. The amount and price of imported Chinese urea could have an impact on pricing of all nitrogen fertilizer products as urea at some price level could be a substitute for other nitrogen products.

Overall, we continue to be optimistic about the market fundamentals for our agricultural business. As to the industrial markets we serve, most indicators are that if the economy remains healthy so will the demand for the products we provide to various industries. With respect to our mining products, the US Energy Information Administration is forecasting a 7% decline in coal production for 2015, given the expectation for continued low natural gas prices. This combined with the expiration of our agreement with Orica in early April is expected to result in lower sales and profits related to industrial grade ammonium nitrate for the current year. To date, we have replaced approximately 70% of the AN volume that had formerly been committed to Orica with new customer commitments, however, these new agreements will not go into full effect until 2016, when our El Dorado Facility is able to produce its own ammonia and our products become cost competitive.

We're currently in negotiations with other potential customers of industrial grade ammonium nitrate for most of the balance of our production capacity that had previously been associated with Orica and expect to have most of that in place when we start up the ammonia plant at El Dorado in the first quarter of 2016.

Turning to our climate control business outlook on page 5. We ended the first quarter with a healthy backlog, a robust level of quote activity and a strong pipeline of identified projects, all of which we anticipate will result in higher sales for the balance of the year compared to 2014. The sectors that are performing the strongest for us at this time are multi-family, education and hospitality.

In addition, to the business activity we are experiencing Dodge Analytics Construction Market Forecasting Service predicts that there will be a 7% increase in construction starts during 2015 in the commercial and industrial and in institutional markets that comprise most of our business. And by 2017, will be at 28% increase over 2014 levels in these sectors. In addition, the architectural billings index has been positive most of last year, indicating growing non-residential construction 9 to 12 months out. Finally, the outlook for continued growth in green energy efficient construction continues to be good.

In summary, the general consensus of most economists and construction industry experts is that the construction recovery will continue, a positive indicator for our climate control business. We're optimistic about the prospects for growth and the operating leverage that we anticipate will accompany that growth.

Now I'll turn the call over to Tony, who'll go into more detail about our financial performance.

Thanks, Barry. As indicated, our first quarter 2015 results reflect significant improvement when compared to the first quarter last year as adjusted. As previously disclosed, the first quarter 2014 included the benefit of $28 million of insurance recoveries. During this review, I will discuss 2014 results as reported and as adjusted to exclude the benefit of insurance recoveries in the 2014 first quarter and highlight the quarter-over-quarter improvement.

Please turn to page 6 of the presentation for the first quarter 2015 results compared to 2014. Net sales increased 8.6% or $15 million, primarily driven by increase in chemical sales of $11.6 million and an increase in Climate Control $4.9 million. Operating income was $14.2 million compared to an adjusted operating loss of $2.1 million, an increase of $16.3 million reflecting the improved results in our chemical business.

EBITDA was $23.6 million compared to adjusted EBITDA of $6.7 million, an increase of $16.3 million again reflecting the significant improvement in our chemical business. Included in SG&A for both quarters where advisor fees related to certain shareholder proposals in the amount of $1.7 million in 2015 and $4.2 million in 2014. Earnings per share $0.28 per diluted common share for the quarter compared to approximate loss of $0.26 as adjusted for 2014.

Turning to page 7. The chemical business operating income for 2015 versus 2014 as adjusted increased $16 million. The increase in operating income includes certain favorable market conditions including sales price increases for ammonia and ag grade ammonium nitrate, offset by lower UAN process directly related to imports of urea from China, which tends to pull down ammonium nitrate and UAN prices. Higher costs at our El Dorado facility for purchased ammonia and an approximately $2.4 million negative effects of lower net prices received from natural gas sales from our working interest in the Marcellus. The primary driver of our sales and operating income growth in the quarter was a sustained on-stream production rate at Pryor's ammonia plant, which resulted in increased sales volume of our agricultural products compared to 2014, when the ammonia plant was down for the majority of that quarter. Partially offsetting the strong performance of Pryor was the El Dorado facility, which continue to be challenged by the high cost of purchased ammonia and lost approximately $4 million for the quarter. This trend will continue until the new ammonia plant is operational. The long-term take-or-pay agreement with work at [Terminado] April 9 of this year. As mentioned previously, we have contracted to replace approximately 70% of that volume. Due to current market conditions, some part of that volume likely won't develop, until we have gas based ammonia production and we are a cost competitive.

Turning to page 8. Net sales in our climate control business in the quarter were $65 million, an increase of $5 million or 8%. The sales increase was primarily driven by higher sales of our hydraulic fan coils and custom air handlers. Our sales of heat pumps decrease for the quarter. However, excluding Carrier heat pump sales included in the first quarter of 2014, heat pump sales increased 16% as compared to the first quarter of 2014. Additionally, when excluding Carrier heat pump sales commercial institutional product sales increased 20% and residential product sales increased 22%. These sales increases reflect the increased order levels we are experiencing and the increasing backlog. Gross margins were lower at 30.7% compared to 32% last year reflecting a shift in product mix that we discussed last quarter. We believe that as we continue to build heat pump sales the gross margins will improve to historical levels. While gross profit was up, operating income and EBITDA were flat with the prior year, reflecting a higher variable selling expenses due to distribution channel mix.

Turning to page 9 for liquidity and capital resources, for an overview of our capital structure at March 31, 2015. Total cash investments was $211 million and total debt was $456 million with a net leverage ratio of 3.1 times. Additional available working capital is provided by a $100 million undrawn working capital revolver facility. Current availability provided by this facility based on the underlying collateral is $76 million. As previously mentioned before the end of 2015, we expect to finance certain discrete pieces of equipment, including the El Dorado expansion project and including the natural gas pipeline facility and the ammonia storage tank for a combined total of approximately $55 million. We received financing on the natural gas pipeline in April of approximately $16 million.

Cash flow for the -- looking at cash flow for first quarter 2015, is summarized on page 10. After cash used for capital expenditures of $67 million, cash investments was increased by $62 million. Total cash will continue to decline through 2015. We continue to generate cash from operations, but given the current investments we're making at El Dorado, free cash flow will remain negative that will continue through the end of this year as we complete the build out of the El Dorado facilities expansion project.

Moving to page 11 for a summary of capital expenditures. As shown here the planned capital expenditures for the remainder of 2015 will be between $227 million and $276 million including between a $162 million and $187 million for the El Dorado expansion projects. Also included in the total are upgrades to our plants to maintain compliance with environmental regulations and guidelines and other renewals and improvement projects. As a reminder, we expect the spending to be funded by cash investments, internally generated cash flow and the third-party financings. As noted on the lower right hand corner of this page, the total estimated cost of the El Dorado expansion project is expected to be $495 million to $520 million, reflecting our continued status of on-time and on-budget. That concludes an overview of the current results of operations, liquidity and capital resources and financial conditions. Please see the quarterly report of 10-Q, reported 10-Q, available online this morning for more comprehensive analysis and disclosure.

I'll now turn it back to Barry to discuss the status for our plants and expansion projects.

Thanks, Tony. Page 12 updates the status of each of our chemical facilities. In a nutshell, all facilities are performing as expected. Cherokee and Pryor are currently operating at rates of approximately 500 and slightly over 650 tons per day of ammonia respectively. Cherokee does not have a turnaround plan this year as it's moved to a two-year major turnaround schedule and Pryor currently has a turnaround scheduled for July. El Dorado is producing at expected rates, however, it is producing less industrial grade ammonium nitrate, as a result of the lower demand for mining products. The Baytown operation is performing at targeted production levels and by the way recently celebrated its 10th year with no loss time injuries at that site.

Page 13, details the status of the El Dorado ammonia plant expansion project, which will provide ammonia for on-site upgraded products at a significant cost savings and have the capacity to produce additional ammonia for sale.

The engineering effort is now approximately 97% complete and the project timeline is now driven by executing the construction process. Piping installation is now underway and it is our main focus before installing controls and electrical equipment. In addition to the ammonia 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 capacity. The timeline for this part of the project is on page 14. At this time, the nitric acid concentrator is mechanically complete and control systems have been installed. Pre-commissioning work will be starting over the next few weeks.

On page 15, there's a recent photograph of the ammonia plant on the top of the page. You can see in the picture that foundation's concrete pads and many large vessels have been installed. Structural steel and the cooling tower are also effectively complete, as is the demineralized water tank. Work is progressing well on the primary former and we've installed all three of the major compressors. Below, you can see a recent photo of the 65% nitric acid plant and concentrator.

At this time, we expect the El Dorado expansion projects to be completed on-time and on-budget. We expect the acid plant and concentrator to be complete by mid-year and to begin production in the third quarter of 2015 and the ammonia plant construction and commissioning to be completed by the end of 2015, with ammonia production start-up and ramp-up during the first quarter of 2016.

On page 16, we outlined our second quarter 2015 chemical sales volume outlook. We anticipate another strong -- a quarter of strong sales volumes. Finally, I'd like to switch focus to the vision for LSB's future on page 17, page 18 and page 19. As we've described to you over the past several conference calls, we're focusing on value drivers, projects and initiatives that have a potential to be transformative to this Company. We expect all of these initiatives to drive improved operating performance, enhanced profitability and shareholder value creation. We've also included targeted business metrics and segment EBITDA for both of our businesses. Since we've reviewed all these with you before they are here for reference only, and I will not repeat them.

Summing up our efforts over the past several years to strengthen the reliability of our chemical operations are already yielding substantial improvement in on-stream rates, production volume, sales and profits. We're on track with our chemical expansion projects at El Dorado, however, El Dorado will continue to operate at a loss, until the projects are completed and the new plants are operational. Bookings and backlogs are strong in our climate control business and we expect that this will translate into a higher sales volumes with improved margins through operating leverage. The first quarter 2015, while still far from what we know our company is capable of achieving, represents a positive step towards delivering sustainable profitable revenue growth in both of our businesses. We remain confident in our prospects for continued performance improvement for the balance of 2015 and expect a material expansion of profitability, beginning in 2016, when our new capacity at El Dorado was up and running. We believe that the strategic improvements we're making to bolster returns in both our chemical and climate control businesses will allow us to capitalize on improving market conditions and drive enhanced value for all of our shareholders.

On a final note, I'd like to mention that we will be presenting at the BMO Farm to Market Conference on May 20 in New York City and the Avondale Partners Industrial Conference on June 3 also in New York City. We hope to see some of you there. There is one other thing that I'd like to address. As we've previously announced effective at our annual meeting, there will be a significant management change. Tony Shelby will transition out of the role of CFO and that assignment will be assumed by Mark Behrman, who many of you know. Tony plans to continue to be a key part of the management team in LSB until he retires at the end of the year. So, this will probably be Tony's last conference call as CFO, although he might participate in future conference calls. I would like to take a moment, at this time to personally thank Tony for his many years of hard work, dedication, commitment and loyalty. Tony joined LSB in 1968 and helped Jack take the company public in 1969. Over the years, Tony has effectively manage the LSB financial organization, has been a key player in every financing we have done and has also been directly involved in many aspects of our operations, including all acquisitions. Tony and I have also worked together closely over the past several years on Investor Relations initiatives. For many years, Tony was also an active member of our Board of Directors. To sum it up, Tony has been part of the core management team that has built LSB from $13 million of revenue in 1969 to the company we are today, positioned for more growth over the next few years. There are really no words that I can say to adequately express our gratitude to Tony for his contributions. So I'll simply say, thank you, Tony.

Thank you.

With that, I will turn it over to the moderator to open up for questions.

Thank you. (Operator Instructions) Dan Mannes from Avondale Partners. Please proceed with your question.

First of all, Tony, I didn't realize this was your last call, hopefully you'll be on for the next. I've really enjoyed working with you over the last couple of years. So hopefully, you'll enjoy your retirement at the end of the year.

Thanks, Dan. You've done an excellent job also and been very perspective in terms of issues.

You got it. So a couple of quick questions here. And I want to preface this by saying we were pretty pleased with the progress you're making and we're seeing a lot less volatility in the numbers now, it's getting a little easier to model. But with that said, as I look at your volume guidance for Q2, it looks fairly similar to what you actually did for Q1. I guess, we expected a little bit more seasonality. Is this a function maybe of where your inventory levels are or demand or could you maybe give us a little bit more color on the Q2 outlook on chemical volumes?

Hi, Dan. How are you. So if you look at -- you're right. I mean, it was pretty similar to Q1 volumes, but also if you look at Q2 last year, I think pretty similar to those volumes as well. If you remember last year, Pryor was down for most of the first quarter, but came back up in the second quarter, so Pryor and Cherokee ran at pretty good rates. When we kind of look at the volumes, we think that they were pretty in line with what we would have expected based on last quarter and same quarter last year.

But if you think about this, if you're running cleanly over the course of a full year, would you anticipate kind of building volume in an effort to sell more in the second quarter? Or would you assume that in a normal year, you'd generally see similar levels Q1 and Q2?

I think you'd probably see similar levels. You may have different product mix, but I think that's some of the issue. Remember, from a storage standpoint, we're a little bit different than everyone else, right. I mean, we don't have substantial storage, so generally, what we're producing, we're selling.

Got it. One other quick one. On El Dorado, I appreciate the color in terms of the losses in the quarter and we certainly understand the challenges you're facing as you're buying ammonia, but given the loss of the Orica contract. Should we assume not only you're going to incur similar situations you did in Q1? Should we assume things probably get worse for the next couple of quarters before they remediate next year?

You're absolutely right, Dan. There's going to be some incremental increase over what we did in the first quarter, but keep in mind, we're also expensing preparatory costs for the ammonia plant, so there's going to be some additionals there. But a lot of us going to depend on the production level at El Dorado, you'll see some fall-off in absorption because of the lack of pick-or-pay going forward. So there will be, but you'll also see some stronger, you'll probably see some stronger volumes in ag grade ammonium nitrate, will offset part of that in the second quarter.

Got it. And then my last question. This call is actually kind of timely, since you guys have said, once El Dorado is up and running you're certainly going to look hard at the MLP option. I wanted to ask given the recent IRS proposal what you read was on that understanding it's just a proposal and not final and what if anything or what if any impacts that has on your thought process?

Well. This is Barry. I think you just said it, it's just a proposal, and it's not definitive at this time. So we're in a wait and see mode to determine where the IRS ultimately comes down. When it comes to where (inaudible) are thinking this really is a Board of Directors question for LSB and we're not going to get ahead of the Board of Directors on making a decision about what the decision will ultimately be when we reconsider the possibility of an MLP.

But to that point, given the fact that it's a proposal, you're not willing to weighing on, if you have the flexibility in your operations to continue to pursue, you're going to leave that for a later date?

Yes. I'm going to leave that for a later date for the experts and for the Board of Directors.

Understood. I was going to say, I know you have a legal background, Barry. Maybe just not a -- maybe not a tax and legal background?

Well. This happens to be an area of specialty even within the legal world, so we'll leave it to the experts when the time's right, when the IRS ultimately comes down with their final ruling.

Understood. Thanks for all the color, guys.

Thanks, Dan.

Joe Mondello, Sidoti & Company.

I was wondering, aside from pricing both on the chemical side as well as on the natural gas side, if you push sort of the dynamics of how that business, I'm wondering how you look at the gross margin that you posted in the first quarter. In other words, I'm just trying to figure out how you're looking at, sort of how efficient these plants are running on a production basis as well as on a cost structure basis?

At our two plants that are using natural gas today or actually we have Pryor and we have Cherokee, we're pretty happy with the margins. Actually with Cherokee, we talked to you last quarter about the downtime that we had and really how that might affect the first quarter, because we're going into the quarter with some lower inventories. So you had sales numbers that were where we expected them to be. But we had sales commitments that we had to cover. So there was in one instance, a case where we had a barge that we bought and that obviously had some effect on margin and both margin, gross margin and actual margin dollars.

So with the two plants that we have today that are natural gas space, we're happy with the margins. Clearly, we talked and pointed out about the struggle that we're having at El Dorado, so that's having a big weighing on our margins.

And I think what Mark's referring to you also is that, we're happy with the margins because their on-stream rate was very high during the quarter for both of those plants, which drives the margin, then you have to deal with the Pryor sources of cost of gas for the rest of it.

Okay. So in regard to El Dorado then, obviously that's a focal point of -- not concern, but certainly some improvement upside and you certainly going to see that when you see the capacity expansion come online. You guys have had the sort of $90 million EBITDA projection of benefits once you get that expansion online. However, it seems like over the last 12 months, 18 months as -- a couple of dynamics. As you lost the mining production with the Orica deal where you had to transfer over some of the production over to, I guess it's, what is it, high density AN and as pricing unfavorably shifted the losses increased with that plant. So I'm wondering if that dynamic can ever sort of reverse, how it's occurred over the last 18 months. And it seems like you've maintained that $90 million EBITDA benefit at El Dorado over this entire time period. So if it does sort of -- if that dynamic does sort of reverse, could we see a lot more upside on the benefit, once the capacity comes online?

Joe, if you'll notice on page 18, I think Mark's done a pretty good job of indicating where we're growing based upon using that $90 million, but it's based upon 2014 actuals. So to the extent that El Dorado has been impacted by high ammonia purchase cost this year. Your starting point may be lower, so the $90 million could be higher. But if you look at page 18, I think you have pretty good indication of how we get to the 2017 target of $200 million. Do you agree Mark?

Yes. Joe, just by point of reference, I think historically we've referenced the spread between produced and purchased ammonia for about $400 and you can see in our earnings release, we stated that the spread would have been $290 in the first quarter, so approximating to $300. So I think the assumptions that we have still hold true.

Okay.

Joe. This is Barry. So this has got three part answer. If you'll go back and look at the fourth quarter conference call. We also included a sensitivity analysis, which we did not put in the appendix on this one, since you've seen it before where we basically try to matrix the changes, potential changes in selling prices of our products and we used ammonia as a proxy for that and the different prices of natural gas. So you could see the effects of those changes.

Okay. I guess my last question and I'll hop back in queue. Related to I guess I'll focus on the climate control business. The margin, there certainly was quite weak under what I was looking for. Could you just talk about how you're thinking about margin in the near-term. I know you put out the 2017 goals and where you can see yourself going over the next several years. But looking at this year I guess how are you thinking about the margin that you put up in the first quarter and what you're looking at sort of for the rest of the year?

Well. The primary driver of the lower margin in the first quarter had to do with mix. And we looked at a projection for the balance of the year from the various operations. And we think that as the year progresses and I think Tony might have mentioned this in his -- in the scripted part of the conversation that as the year progresses, we expect the mix to normalize to more or less previous levels and expect to see that margin increase.

I think, Joe. One of the things that we're dealing with a little bit is, in the two of our product lines, they're a bit more established and a bit larger, right, and our heat pump business and our chemical business. So based on sales volume and capacity utilization they're absorbing all of their fixed overhead with smaller product lines as they're growing, they're going to grow into similar margins, but they are not quite there yet. So I think we'll see that throughout the balance of the year.

Keith Maher, Singular Research.

Good morning. I didn't want to [labor] the point, but in the chemical business, just in terms of the gross margin pressure and I understand a lot of it is pricing issue between the purchased ammonia at El Dorado. But do you see anything in the near-term that might help with that any -- I know you [project] for gas prices, but do you think this is something that we could see any improvement this year or do we just have to wait for the plant expansion?

I think the only thing you could really point to Keith, would be that the pressure is going to be off of ammonia pretty soon I think and you could see some weakness in the ammonia price, which could impact that.

Okay. And I think you mentioned there were some start-up costs that are hitting the chemical business. Could you quantify that?

Keith, we're capitalizing costs that are specific to the building of a plant, but we're expensing off all of the people that we got on board training for the start-up the ammonia plant, the acid plant. So if we're training people that are not producing, but simply training, we're expensing that. And I think the number is close -- is in the range of $500,000 a month, $500,000 to $600,000 a month. I mean, -- excuse me, per quarter.

All right. That's helpful. Is there any -- could you give us any update on the job search, for the new hire at the chemical business or that might be coming along or when you might be interested in hiring someone?

It's coming along. We're still in relatively early stages of that, but as it progresses, we'll -- when we ultimately make a selection, we'll certainly let you know.

Okay. And then maybe one final question. With regards to SG&A, obviously your fees for the -- related to some of these -- actually for shareholder issues seem to be going away, should we expect those to go away completely this quarter or if there is any other guidance you can give on the SG&A?

I think the way to look at that is that we have a settlement agreement. So the major impact is behind us. There will be some continuing costs because they're still a strategic committee, but it's not going to be nearly as significant as it has been in the past, but you may see a similar amount in the second quarter that you saw in the first quarter as we finalize all of the costs related to that.

Okay. Well. Thanks a lot, guys. I will hop back in queue.

Thank you. (Operator Instructions) Brent Rystrom from Feltl.

Good morning, Brent.

Good morning. Can you hear me now?

Yes.

All right. Can you give us a quick sense of how you're thinking about as we ramp-up the nitric acid plant and the ammonia plant, how the depreciation and certain expenses and then what the process might look like to the first quarter (inaudible)?

We got trouble hearing the last part of your question, would you mind -- it's garbled due to the transmission, would you repeat it please.

Sure. Could you give us a sense of how the depreciation expenses might be for the two expansions as they come online and then also, I'm expecting they would operate at a loss from a cash perspective at least the first quarter they're opened, could you give us a little sense on that as well?

Let me address the depreciation issue first and Mark will discuss rest of it. I think what you're going see Brent is that during the third and fourth quarters, you will see some of these projects been turnkeyed and we immediately begin to depreciate projects once their turnkeyed and in production. And you'd also see less and less interest being capitalized as these plants -- as these projects are turnkeyed because we under GAAP we're capitalizing interest base for the fact that they're in construction, but once they are out we stop capitalizing interest and begin depreciation. As far as the loss, of the cash loss in the first quarter I would assume that that's a correct assumption. And as we've said earlier, we're going to start-up the ammonia plant in the first quarter and we would -- we ourselves anticipate not generating a lot of production in that first quarter and then heading into the second quarter at an acceptable level of production.

All right. That's very helpful. Thank you. I'm curious if you have thoughts on (inaudible) comments yesterday about ammonia productions in Donaldsonville, hitting from [marketing sale] to going into the new UAN production facility that's been added there? With the implications there's going to be less ammonia in the market in the third and fourth quarter of this year. Clearly (inaudible) does that present a cost issue for you, by having less ammonia available in the market and possibly raising prices in the back half of the year. And then also have an offset opportunity for you with ammonia from Cherokee and Pryor, being able to go into those markets?

First of all, in Cherokee we're a net ammonia buyer because we're about 40,000 tons per year short. In Pryor, we're a net ammonia seller of somewhere between 80,000 and 90,000 tons per year when it's operating at full rate. As far as El Dorado, we're a buyer ammonia. But I think that --

Brent, I think the more important point there is that, you're exactly right the more UAN urea is produced and UAN the better the free ammonia. So when we come on board in 2016 with the ammonia it is going to be a benefit.

You're right, it could have an impact on fourth quarter ammonia cost, but that's a little bit far from our radar screen right now.

I guess, it would also depend on, what offsetting imports there are of ammonia. I mean, ammonia is more a global supply and demand product than any of the ag products are. So will just depend on what else around the globe has outages or was down or was being diverted as to what will happen with the price.

Fair enough. And final question. When you talk about the climate control growth opportunity that the out site sources you were referencing earlier both for 2015 and then through 2017. How do you view your climate control growth opportunity relative to those expectations. Do you think you'll hold here or do you think you'll gain here? Thank you.

Our objective is to gain share. And whether we achieve that is yet to be seen. But we certainly have put a lot of initiatives in place with the aim at gaining share.

Thank you, guys.

Let me add a little color to that. We have a couple -- our core business, which is about, more or less about 75% to 80% of that business. We have significant leading market shares already. So gaining share in those sectors is somewhat more difficult than gaining shares in the category that we call other, which are smaller businesses and which inherently have less total market share, so there is more to gain there. But we do believe that it's possible to gain share across the board, it's a matter of degree.

So, reasonable worst case would be -- hold your market share and you should be able to grow your business relative to the (inaudible)?

That's right.

Joe Mondillo, Sidoti & Company.

Hi, guys. Just a couple of clarification, a couple of questions, follow-ups. So I'm wondering is the -- are you anticipating the El Dorado losses or profitability, however, you want to phrase it, this year to be -- are you expecting the losses to be larger this year than last year?

Yes.

Okay. And the $90 million plus guidance on the EBITDA for the expansion project is based on the 2014 financials. Is that correct?

The $90 million guidance is based on $500 ammonia prices and $5 natural gas prices. But it also

But the streamline chart that you have shown -- so, it's not compared to 2014, it's just an additional $90 million when it comes online?

Exactly. Yes.

Yes.

Isn't there a dynamic though given the fact that, I guess what I'm trying to get at is isn't there a dynamic that the losses are getting larger last year to this year because of the prices of ammonia and what you're selling it at. But then, the whole dynamic of the plant changes overnight starting next year, where the higher price of the ammonia you're going to benefit from because you're going to be selling at that price. And you'll be producing your own ammonia, so I'm just trying to understand how that dynamic, I guess works?

Well. I mean it's pretty simple, you go from an unprofitable plant to an extremely profitable plant, right. I mean, you're going from a plant that has to purchase ammonia and has had a cost disadvantage to, as you said immediately the dynamics change when that comes on and we've got, as we've said 220,000 tons or so of ammonia that we're purchasing today that we can save approximately $300 a ton on, plus, we've got another 155,000 tons of ammonia that we'll produce that we can sell. So the dynamics of the plant do a complete 180.

So, wouldn't the benefit of the plant be much larger compared to 2015 than compared to 2014?

Well, not that much larger, but it's going to be somewhat larger. Yes.

Yes. That chart's pretty clear there, Joe, that the $90 million is based on 2014, $54 million that's the starting point.

Right. And that's a sort of what I'm sort of trying to get at, if the losses are much larger this year would that $90 million benefit theoretically be larger than what you're showing?

Assuming that all the market conditions are exactly as predicted in the model the answer would be that it would be somewhat greater. Okay? But there are a lot of variables here as we know, including the selling prices of our products, the price on the market, the price of natural gas, etc. So this was a guideline based on a set of assumptions that Mark mentioned before $5 and $500 for natural gas and ammonia respectively and so, you have to look at that grid that we gave you and you have to -- on the sensitivity and consider that when you're trying to calculate where you think we're going to be.

And this space running the high density and low density ammonia nitrate fall out not at a lower rate, which is what we're experienced in 2015. So once you start replacing all that volume you'll get back to the initial assumptions that are in that -- in that $90 million number.

Okay. In terms of the $4 million loss that you saw in the first quarter, it sounds like the second quarter could be a bit smaller. But in terms of seasonality, should we anticipate -- you mentioned if ammonia prices start to fall, which they seemingly have that could be a benefit, but then you also have the seasonality aspect where volume probably will be lower in the back half of the year. So how do you look at the back half of the year regarding that $4 million that you saw of losses in the first quarter?

I think Dan Mannes asked the question earlier about, could we see more of a quarterly losses above the $4 million that we've outlined for this quarter. And the answer was, yes.

Okay. I missed that. Sorry about that. And then just lastly on the liquidity, your liquidity right now, how are you looking at that, are you anticipating potentially having to tap your revolver in the back half of the year. I'm just wondering if you could talk about liquidity?

I think we talked about it, but essentially the $100 million working capital revolver is there to fund increase or decrease in working capital requirements not in long-term investment, so we don't anticipate using that.

Okay. So the liquidity you have on hand right now, you feel like it's going to be enough?

Yes. We do.

Okay. All right. Thanks.

Thank you. We have reached end of our question-and-answer session. I'll turn the floor back over to management for any further or closing comments.

Okay. So I'd like to thank you again for participating today and I'd like at this time to turn the call over to Carol Oden with some closing comments, particularly relating to forward-looking statements. Carol?

Thank you. Information reported on this call speaks only as of today, May 8, 2015. You're 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 facts, are forward-looking statements. Statements include the words expects, intends, plans, believes, project, anticipate, estimate or similar expressions or statements of the future forward-looking statement nature identified forward-looking statements, including, but not limited to, any referencing 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, continue to capitalize on the strengthening demand environment, margin expansion, market outlook of our Chemical Business, planting levels, UAN applications season. Growers will continues to use nitrogen products, demand for nitrogen fertilizer, impact of Chinese urea, market fundamentals for our agricultural business, sales and profits related to industrial grade ammonium nitrate for the current year, potential customers of industrial grade ammonium nitrate, climate control business outlook, prospects for growth, operating leverage expect to El Dorado expansion project to be completed on time and on budget, expect the acid plant and concentrator to be complete and to begin production in the third quarter 2015, and ammonia plant construction and commissioning to be completed by the end of 2015, with ammonia productions start-up and ramp up during the first quarter of 2016. Chemical sales, volume outlook, value drivers, projects and initiatives and improved performance, enhanced profitability and shareholder value creation, targeted business metrics and segment EBITDA, El Dorado will continue to operate at a loss until the projects are completed and the new plants are operational. Higher sales with improved margins, prospects for continued performance, improvement, material expansion of profitability beginning in 2016.

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 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, 2014, and our Form10-Q for the quarter ended March 31, 2015, 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 presentation. We undertake no duty to update the information contained in this conference call or the conference call presentation. The term EBITDA as used in this presentation is net income plus interest expense, depreciation, amortization and 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 company believes that certain investors consider EBITDA a useful means of measuring our ability to meet our debt service obligations and evaluating our financial performance. EBITDA has limitations as it does not reflect all items of income or cash flows that affect the Company's financial performance under GAAP and should not be considered in isolation or as a substitute for net income, operating income, cash flow from operations or other consolidated cash flow [that appeared] in accordance with GAAP. The reconciliation of GAAP and any EBITDA numbers as of the three months ended March 31, 2015 and March 31, 2014 and trailing 12 months ended March 31, 2015 and March 31, 2014 discussed in this conference call presentation are included in the appendix of this presentation. And that ends our conference call.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.