LSB Industries, Inc. (LXU) Q1 2012 Earnings Report, Transcript and Summary

Greetings and welcome to LSB Industries First Quarter 2012 Conference Call. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Ms. Carol Oden, PA for the Chief Executive Officer. Thank you. Ms. Oden, you may begin.

Thank you. Again we would like to say welcome to the LSB Industries Inc. 2012 first quarter conference call. Today LSB’s management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, our Chief Financial Officer. This conference call is being broadcast live over the internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.lsb-okc.com. After comments by management a question and answer session will be held. Instructions for asking questions will be provided at that time. Information reported on this call speaks only as of today May 9, 2012, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. After the Q&A I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We encourage you to view the PowerPoint PDF that is posted on our website at www.lsb-okc.com, in the webcasts section of the investor information tab. Please note that the presentation starts on Page 3 of the PowerPoint. And now I will turn the call over to Mr. Jack Golsen.

Thank you. Thank you for joining our conference call today. I assume you all have your PowerPoint’s open to Page 3. We released our 2012 first quarter earnings report today and we also filed our 10-Q for the quarter. For the first quarter our results were not as good as the same period last year. Net income was $14.3 million on sales of $190 million, or $0.61 per share compared to $0.90 per share for the first quarter 2011. As we previously informed you, our first quarter results were impacted by both planned and unplanned downtime at our Pryor, Oklahoma chemical facility. We are at the height of a very robust agricultural season and this downtime could not have come at a less opportune time. Repairs to the urea plant in Pryor are underway and expected to be completed before the end of June. The outlook for our agricultural business continues to be very good and we expect to see gradual growth in our industrial markets as the economy continues to improve, that’s if it improves. Our climate control business is operating in a very competitive market with lower margins than prior years. Considering all this, overall we believe that the outlook for LSB in total for the balance of 2012 is positive. We are continuing to manage LSB for the long-term benefit of our shareholders and believe that we have substantially more potential to develop the company. We are taking actions to grow and improve both of our businesses. A couple of examples of these actions are the additional capacity we are adding at Pryor and the introduction of our new ground breaking ultra-efficient Trilogy 40 geothermal heat pump line, both of which we will cover in more detail later in this call. Today, Tony will give you more details of these results and Barry will cover market conditions throughout our operations with a detailed outlook for both of our businesses for 2012. He will also give you a detailed update about Pryor. Now I will turn this call over to Tony Shelby, our CFO.

Thanks, Jack. Our results for the first quarter are summarized on Page 4 of the PowerPoint presentation. Comparing the first quarter 2012 to the first quarter of ’11, fully diluted earnings per share were $0.61 compared to $0.90, a decrease of 32%. Decrease, as we will explain later during this call, is due in large part to the approximately $0.33 per share impact of downtime at our Pryor, Oklahoma facility, offset by increases elsewhere. Consolidated sales were $190 million, an increase of $12.7 million or 7%. Operating income was $23 million, a decrease of $11 million or 32%. Chemical was down $8.8 million and climate control was down $2.6 million. After interest expense and an effective tax rate of 35%, net income was $14.3 million compared to $20.9 million. The effective tax rate was lower than the statutory rate due to the permanent differences for the allowable domestic manufacturing deductions in certain tax credits. Also noted on this page, cash flow from operations was $11 million, after-tax for capital expenditures of $16 million, payments on long-term and current long-term debt of $7 million and other items, net cash decreased $12 million for the quarter. The decrease in cash for the quarter is due to seasonal usage of working capital consistent with first quarter of 2011. At quarter end, cash and short-term investments were $123 million. EBITDA for the quarter was $28 million versus $38 million in 2011. Turning to Page 12 and comparing chemicals quarterly results to the year ago quarter. Sales for the quarter were $124 million versus $111 million, an increase of $13 million or 11%. Agricultural sales were $60 million compared to $51 million. The increase is attributable to the strong market fundamentals for ammonium nitrate, UAN and ammonia fertilizers. Although our UAN turns were lower due to the downtime of the Pryor facility, production and shipment of nitrogen fertilizer at our Arkansas and Alabama facilities reached record highs. Industrial product sales increased $3.5 million or 10% and mining product sales were approximately same as a year ago. Chemicals operating income for the quarter was $20 million versus $29 million a year ago, or $8.8 million lower as a result of the estimated $13 million impact of the downtime at the Pryor facility. The $13 million include $3 million embedded loss on firm sales commitments of UAN that could not be delivered, lost absorption in gross profit of $8 million and repair cost of $2 million. The Arkansas and Alabama facilities both reported increases in operating income for the 2012 quarter, benefiting from strong demand for nitrogen products and much lower natural gas prices. Reflected on the chart on Page 6 is the significant difference in Pryor’s operating income for the first quarter 2012 compared to 2011 as a result of lost production. The first quarter 2012 results are not indicative of the second quarter 2012 in that we don’t expect to lose 40-plus days of ammonia production, nor incur losses on firm sales commitments, both as occurred in the first quarter. We expect the Pryor facility to report positive results from the production and sale of anhydrous ammonia at very good margins into the fertilizer market, albeit not as profitable as if UAN was up and running. Continuing with the quarter-over-quarter comparison, please refer to Page 7. Climate control sales were $63 million, slightly lower than a year ago. Climate control’s gross profit as a percent of sales, decreased to 34% and 31%, and operating income was $5.8 million down from $8.4 million in the first quarter of ’11. In 2011 we began the first quarter with a backlog with fairly good margins. Conversely, we entered the first quarter 2012 with a backlog with much tighter margins. The lower margins were partially a result of the competitive environment resulting from continued lower construction activity, accompanied by increased raw material component cost. Barry will review the quarterly results and current market conditions in more exact detail and terms later. Capital expenditures. During the quarter, total capital expenditures were $13 million including $1 million from the climate control business and $9 million from the chemical business. We are currently considering future capital spending of approximately $48 million, including $35 million in chemical and $13 million in climate control. The planned capital spending includes committed expenditures of $17 million and planned spending as subject to change based on economic conditions and regulatory requirements as well as opportunity for profit improvement that might arise from time to time. Briefly reviewing our liquidity and capital resources, the summary on Page 8 reflects a continued strengthening of our liquidity and capital resources. Our balance sheet is in good shape with $47 million of cash in excess of total interest bearing debt. In April of 2012, we amended the $50 million working capital revolver agreement to extend the maturity to March of 2016 along with other changes that have the effect of providing us more flexibility and lower cost. Currently there are no outstanding borrowings against the line. The outstanding balance of the secured term loan is $71 million and long-term debt including current portion is $76 million. At quarter end 2012, stockholders equity was $318 million and the ratio of long-term debt to stockholders equity was approximately 0.25 to 1. Also as noted on the slide, EBITDA and interest coverage was 25x. We continue to believe it’s prudent to maintain a strong cash position to manage unexpected downturns in global economy and at the same time be prepared to take advantage of opportunities to grow the 2 business segments. Excuse me, I said $318 million for stockholders equity, it should be $308 million. We have addressed our results of operations for the quarter and comparisons to the 2011 quarter in greater detail in MD&A of the 10-Q which we filed earlier today and suggest you review these disclosures and discussions for additional analysis. Now I will turn the call over to Barry to discuss both businesses for the quarter and the outlook going forward.

Thanks, Tony. Since Tony covered the financial results I am going to focus on our sales activity, product backlogs where pertinent and market drivers as we see them. I am also going to give you a special update today on activities at our Pryor facility and as a result of that this part of the conference call will be a little bit longer than it usually is. To start, please turn to Page 9 which shows our 2012 sales mix by the markets we serve. This is approximately the same as the mix for the full year 2011. 2/3 chemical and 1/3 climate control. In our chemical business about half of our sales were nitrogen-based agricultural fertilizers and associated products. The other half was industrial and mining products. In our chemical business, approximately 79% were sales of various heating, ventilation and air conditioning products to commercial and institutional markets. The balance was the sales of geothermal heat pumps for single-family residential applications. Focusing first on our chemical business, please turn to Page 10. Total sales in the first quarter were $124 million, up 11% over the first quarter of 2011. The largest increase was agricultural products with sales 18% higher than the 2011 level. Industrial sales were up 10% and mining sales were flat. Turn to Page 11 for sales of our key agricultural products. During the first quarter, tons shipped of UAN were 9% lower than during the 2011 first quarter, while net sales decreased only 6% reflecting higher sales prices per ton. The decrease in tons sold was a result of the planned and unplanned plant downtime at Pryor. UAN shipments from our Cherokee facility actually increased over the first quarter of 2011. Agricultural grade ammonium nitrate, or AN, tons shipped were 22% higher than the first quarter of 2011, and sales were 36% higher, again reflecting higher sales prices. Higher shipments of ag grade ammonium nitrate were driven by more acres of wheat planted than in previous years, a push by ranchers to rebuild depleted forage inventories, better weather conditions and lower than usual starting inventories at the dealer level. Our sales of ammonia to agricultural markets increased the most dramatically compared to 2011. This was caused by both higher sales prices per ton and more ammonia available to sell from our Pryor facility as a result of curtailed UAN production. As Tony mentioned, ammonia that would normally have been used to product to UAN was sold as fertilizer. Turning to our industrial and mining products on Page 12. Both sales dollars and tons shipped of nitric acid were above the first quarter 2011 levels, reflecting increased demand. Tons shipped of industrial grade AN were 2% lower than in the 2011 first quarter, primarily due to lower demand for coal as a result of the relatively warm winter and subsequent high inventories of coal. As a result of the contractual arrangements we have in place for the sale of this industrial grade AN, lower sales volumes did not impact our bottom line. On Page 13 are some price trends for both the feedstocks we use and the key ag products we sell. The cost of natural gas continues to be very low. This is benefitting production cost at our Cherokee and Pryor facilities which use natural gas as their primary feedstock. The conventional wisdom is that natural gas will remain low for some time. The cost of anhydrous ammonia, the feedstock we use at our El Dorado, Arkansas and Bay Town, Texas facilities, although slightly lower than in 2011, continues to be high compared to previous years. Our current read on the market is that ammonia is about $445 per metric ton. High ammonia prices have increased production costs at our facilities that use ammonia as a feedstock. Most of the products we produce at Bay Town and most of the industrial and mining products produced at El Dorado are sold on a cost plus basis, so high ammonia costs don’t impact our profitability on those sales. However, ag grade ammonium nitrate also produced at El Dorado is sold at spot market prices. We have been fortunate that selling prices of ag grade AN fertilizer are also relatively high, mitigating the impact of high ammonia cost. While we are on that subject, the chart on the lower right shows pricing for ag grade or high density ammonium nitrate. In April 2012, Southern Plains prices for AN were $445 per ton compared to $360 per ton 12 months earlier. Increased selling prices coupled with lower average ammonia feedstock cost during the first quarter resulted in higher margins on agricultural grade AN than during 2011. If you look at the chart on the lower left, you can see that the Southern Plains price of UAN was $410 per ton this April compared to $345 per ton in April of 2011. Based on current market indicators, we believe that the price is about $425 per ton. However, we are at the high point of the season and we expect prices to decline in the third quarter. The market for UAN is currently experiencing greater supply than a year ago, but the supply has been outpaced by demand. Other U.S. manufacturers have stepped up production to take advantage of good overall market conditions. Imports had increased earlier this year but have since leveled out. Focusing on the outlook for the chemical markets we serve, Page 14 lists several indicators for our agricultural products. All of these are favorable. Grain stock-to-use ratios, both worldwide and in the U.S. continue to be low. Planting levels are generally very high. Very high in the case of corn, which the USDA has predicted 96 million acres planted this season, a possible record. Market prices for corn and wheat remain high as well, so farmers are incentivized as to plant and sell more. All of this is creating strong continuing demand for fertilizers. Finally, low natural gas prices have reduced the cost to manufacture UAN and ammonia at our plants that use it as feedstock. Factoring in the total cost of production, flux rate and distribution, North America is a low cost producer of nitrogen fertilizers. The industry consensus is that the positive fundamentals for the ag business should continue. In addition to general industry drivers, weather can have a significant impact on fertilizer use, demand and prices. So far, weather conditions have been better this year than they were a year ago, but it’s too early to know how the season will turn out. Taking all these factors into consideration, we continue to be optimistic about our ag business. Please turn to Page 15. As you can see from the chart on this page, a very significant part of our business continues to be industrial and mining products. They are sold primarily to large customers and most are sold pursuant to contractual, cost plus and/or minimum take arrangements. Page 16 contains some market indicators for this area of the business. Most of these indicators forecast growth for the next few years. Before turning to the climate control business, I would like to take a few minutes to update you on our Pryor chemical operation. Please turn to Page 17. I am going to cover 6 areas in this part of the presentation, including a quick history to bring those new to LSB up to date. An overview of the Pryor facility process flow, which will put the rest of the discussion in context, a review of the plant improvement project we undertook during the first quarter, a detailed description of the current problem with the urea reactor, which is preventing the production of UAN at this time, a description of the fix we have planned for the urea reactor, and finally update you on the status of the additional capacity we are in the process of bringing online following the receipt of permits. So first let's talk about history. The Pryor facility was originally constructed in 1966. The previous owner made major upgrades to it in 1997 before shutting the facility down in 1999. LSB purchased the plant at a bargain price in 2001 when the previous owner became insolvent. When we bought the plant it was in a shutdown condition and we did not operate it. At that time there was an oversupply of capacity in the United States and natural gas prices were relatively high. So we kept the plant shut down until 2008. By that time, the supply-demand fundamentals for ammonia and UAN in the U.S. had completely changed and the cost of natural gas had come down. Beginning in 2008 we repaired, staffed and restarted the plant. We achieved the same production of ammonia during the fourth quarter of 2010 followed by sustained production of UAN in the first quarter of 2011. Despite the fact that we did not operate Pryor to its full capacity throughout 2011, it was very profitable, generating an operating profit of $52 million and recouping our investment in the facility. Before we turn the page, the photos on the right hand side of this page show the entire facility, the nitric acid plant, the urea plant and the ammonia reformer. The last 2 we will discuss next. Now on Page 18 there is a simplified process flow chart of the Pryor facility. It receives natural gas from the pipeline. The natural gas is processed in a plant which produces anhydrous ammonia, referred to as NH3 on the chart. At this point the ammonia can be sold as an end product or further upgraded. Normally, part of the ammonia is upgraded to nitric acid then to ammonia nitrate solution, which is then mixed with urea to produce urea ammonium nitrate, or UAN. Meanwhile, another part of the ammonia is further processed in a special reactor to create urea. That urea is what is blended with the ammonium nitrate solution to create the UAN. This is a very simplified version of what happens at the Pryor plant, which also creates and uses CO2 during the process and for sale as an end product. The important thing to know about the Pryor plant is that even when the whole plant is operating as it should, it is urea limited. In other words it has the capacity to produce more ammonia than is required to mix with all of the urea it can produce to make UAN. That’s why we originally said that our production target was 325,000 tons per year of UAN plus 60,000 to 90,000 tons of additional ammonia. The extra ammonia can be sold for either industrial or agricultural uses, but at this time most of the ammonia sold from Pryor is being used as fertilizer. Continuing on Page 18. The target production level for ammonia at the Pryor facility is 700 tons per day before an additional 60,000 tons per year we planned to add and to produce after that addition. However, due to production limitations caused by restrictions in the flow of processed gas to heat exchangers and other mechanical restriction, during 2011 the ammonia plant was unable to sustain production above 500 tons per day. Between January 3 and February 3 of 2012, a planned improvement project was performed at the Pryor facility to correct most of the restrictions and increase in anhydrous ammonia production levels. Of course, during that 31-day period, the facility was not in production but was gradually restarted after the project was completed. The current production rate of ammonia is approximately 600 tons per day. Our plan is to eventually make other improvements at Pryor to boost ammonia production and reach our target production rate of 700 tons per day. And again this is before the additional 60,000 tons per year capacity. However, at this time we cannot predict when we will achieve that rate. By now you can see why the urea reactor is critical for the production of UAN. Please turn to Page 19 of the diagram -- for a diagram of that reactor. The urea reactor is a large high-pressure vessel, which is approximately 63.5 feet tall with an outside diameter of about 5 feet and an inside diameter of 4 feet. Ammonia, CO2 and a substance called carbamate enter the reactor and are blended and turbulated inside the reactor at temperatures of 380 degrees Fahrenheit and a pressure of 3200 pounds per square inch. The pressure is so high that the wall of the reactor is almost 7 inches thick. The outer 6.44 inches is comprised of 4 layers of high-strength carbon steel to provide the strength to the vessel. Because the chemical reaction inside is so corrosive, the reactor has a half-inch thick stainless steel liner. Normal operating pressures are so high in the reactor that the stainless liner actually expands like a balloon against the inner side of the structural steel wall when the plant is operating and contracts when the plant is turned off. This expansion and contraction is stressful. From time to time the stainless steel liner can leak for a number of reasons. So the reactor is equipped with leak detection ports in the carbon steel plates, commonly called weep holes, to indicate when this occurs. They are supposed to indicate the approximate location of the leak so that a visual inspection can be made to determine the exact location and ultimately repair the leak. Of course, it’s unsafe to operate the reactor with a leak due to the extremely high temperature and pressure and the high corrosion potential of urea to carbon steel. Three weeks after the planned improvement project on the ammonia plant was completed, during a routine visual inspection, fluid was observed coming out of weep holes near the bottom of the reactor. We immediately ceased production and attempted to locate the leak. This took 3 weeks utilizing specialized contractors and inspectors to look for the leak and to make repairs. After completing that, what we believed was a good repair, and restarting the reactor, fluid continued to emit from the weep holes, indicating that the true cause of the leak had not been found. This procedure was repeated many times and the reactor was subject to several pressure tests of different types. Several different methodologies were employed to try to determine where the leak was. But we were not able to locate the leak. Although we do not know the cause of the leak at this time, we suspect that the liner might have microscopic cracks that only open up under extreme pressure. After many failed attempts to locate the source of the leak, on April 25 we decided to replace the entire stainless steel liner. This is a very involved project. And again, we are using outside contractors specialized in this kind of work. To begin, the entire reactor vessel must be removed from the urea plant using a 240-ton crane, which must be assembled on site. Now put this in perspective. The reactor is about 6 stories tall. It has to be lifted up by a crane, the entire 6 story tall assembly, and taken out of the plant. After removal it’s placed horizontally in special cradles fabricated just for this purpose and then it’s opened up. Before repair, the internal components will be removed. Then the old liner will be removed. Before the new liner can be installed, the inside of the carbon steel outer wall must be reconditioned to accept the new liner. This process is very tedious and labor intensive and by itself can take up to 2 weeks depending on the condition of the inside of the outer wall. Once the reactor is ready, the new liner will be installed in multiple pieces, which are welded together, then the reactor is pressure tested at close to operating pressures. If it passes, the internal components are returned and then the entire reactor is reinstalled in the plant, again using the crane. The entire process can take up to 6 weeks. It’s extremely unfortunate that we experienced this failure at the height of the season for UAN. However, when you are dealing with high-pressure vessels, high temperatures and corrosive materials, you cannot take any chances. Safety and soundness dictate the course of action. On a more positive note, on May 2 we received the permit to product an additional 60,000 tons per year of ammonia at Pryor. As we discussed in earlier calls, we have already completed repairs to the additional ammonia plants that were allowed before receiving the permit. They are listed on Page 20. In the next few days we will begin trial operation and the debugging process. We expect to be in production before the end of the year. When we have achieved sustained production we will make an announcement. For clarity, we have also included a chart of Pryor’s current capacities, planned capacities after the 60,000 -- the new 60,000 tons per year is brought on line and our target capacities. Moving on, on Page 21 we have listed our chemical business strategies and some key initiatives for 2012. We reviewed these with you on our last conference call. This page is here for you to reference or for those who were not on the last call. Turning now to our climate control business, please go to Page 22. And you can see that sales on this page by major product categories which we report in our quarterly filings. Total sales were approximately $63 million, a decrease of about 1% compared to the first quarter of 2011. Compared to that first quarter of 2011 sales of heat pumps were down 4%, fan coils were up 6% and sales of other products were also slightly up. On Page 23, you can see the sales of products sold for use in commercial and institutional buildings were up 1% while sales of our residential products were down 9% compared to last year’s first quarter. Total bookings during the first quarter were 12% lower than the 2011 first quarter. Commercial bookings were 10% lower and bookings of residential products were off by 21%. Our backlog of product orders at March 31, 2012 was $47.4 million, approximately 19% lower than one year earlier. However, slightly higher than the $44.5 million backlog at 12/31/11. During April, new orders were $20 million and our backlog of product orders at the end of April was approximately $47.6 million. Although our total bookings during the first quarter were slightly higher than the fourth quarter of 2011, the market continues to be soft. The commercial recovery has been slower than previously anticipated and the market for residential products has been severely impacted by the lowest level of new home construction in decades coupled with very low levels of investment in existing homes. As a reference point, through February, U.S. shipments of residential air source heat pumps were down 24% from the same period in 2011 according to the Air-conditioning, Heating and Refrigeration Institute. Despite the current low level of orders we have maintained our leading market shares for geothermal and water source heat pumps and fan coils. I will discuss the construction outlook in a few minutes. Tony mentioned that the gross margin for the climate control business had declined. We have historically experienced lags between the time we receive material cost increases and when we have been able to pass them through to our customers. As we said in our last conference call, the market remains extremely competitive and we are not able to predict when we will be able to increase prices to offset recent material price increases. The next few pages of the PowerPoint deal with the market outlook for construction. On Page 24 there is a graph that shows McGraw-Hill’s most recent construction market forecast report, construction forecast for certain commercial and institutional building types. These are the sectors that are the most important to us. They comprised 61% of our total climate control business sales in 2011. As you can see from the graph, these sectors are all forecasted to grow over the next few years. McGraw-Hill is forecasting that in the aggregate they will increase by approximately 3% in 2012 and 87% through 2016. If this materializes this should benefit all of our commercial and institutional product sales. In addition to watching construction forecast by sector, we also track the Architectural Billings Index which is considered to be an indicator for non-residential construction spending, 9 to 12 months in the future. On Page 25 is a graph of the ABI. An index score of 50 indicates that the architectural billings were approximately the same as the previous month. Any score above 50 indicates growth in billings while any score below 50 indicates a decline in billings. After indicating struggling business conditions for most of 2011, the ABI finally reached positive territory for the last 5 months in a row, landing in a score of 50.4 for January 2012. Taking all this into consideration, we believe that the general consensus of most economists and construction industry experts is that the recovery in commercial and institutional new construction is finally here, but it will be at a slower rate than previously forecasted. While new construction remains sluggish, renovation and retrofit of existing buildings has been and will continue to be an important market for us. Fortunately, all of our climate control products are well suited for this. During 2011 and continuing into the first quarter of 2012, 21% of our climate control business sales were geothermal heat pumps used in single family residential applications. Page 26 shows McGraw-Hill’s forecast for single family residential construction starts. McGraw-Hill forecasts that housing starts will increase from about 435,000 in 2011 to 446,000 in 2012, less than a 3% increase. However, to over a million per year in 2015 and 2016. If this occurs, it should benefit our residential geothermal business. Turning to Page 27, we have listed our climate control business strategies and some key initiatives. Again, these are repeated from our last call and I will not review them again now. However, I would like to discuss one important new product. We recently announced the launch of our new ultra-efficient Trilogy 40 geothermal series heat pumps, with energy efficiency ratios of 40 and ground [air] conditions and 60 at ground-water conditions. These are truly breakthrough products, with efficiencies that far surpass any other heating and air-conditioning product commercially available today. They also include the most advanced array of state of the art features on the market. With the introduction of the Trilogy 40 series, we continue our tradition of technological and market leadership in our climate control business. Before opening it up for questions, I would like to mention that Tony and I will be at the BMO Farm to Market Conference in New York City on May 15. We hope to see some of you at this event. And I would like, before I turn this, open it for questions, to request that you limit yourself to 3 questions and then if you have more we can recycle through at the end. Thank you very much.

[Operator Instructions] Our first question is from the line of Eric Stine with Northland Capital Markets.

Just wanted to start, if you could just give us your thoughts on the different dynamics between the UAN and anhydrous ammonia markets and is it fair to say that you anticipate selling all that you produce in the second quarter?

Yes. We expect to sell all the ammonia that we are producing in the second quarter, till such time during the second quarter that UAN comes up. As Barry indicated, initially we decided to replace the liner. We indicated it would be roughly 60 days, so we expect this thing to be back in production before the end of the second quarter. In the meantime, the economics of producing anhydrous ammonia are very good right now with $2.20 gas, roughly 31 MMBtu of gas in a ton of ammonia. And the selling price, as Barry indicated, the Tampa metric is in the $545 range, of course that’s a metric. So the net back on that is pretty strong right now.

Okay. That’s good to hear. Any chance of the downtime, what you are doing at Pryor that, that eliminates or lessens the need for the typical turnaround that you do in the third quarter?

It will certainly reduce any type of turnaround we might do on the urea plant but we are really not forecasting that right now. We are going to still do the turnaround in the third quarter. If it’s easier than otherwise it would have been that will be a plus.

Okay. Fair enough. Last one from me. Just curious about initial market acceptance over the new Trilogy product and when you think that might begin to impact results? Thank you.

We are in limited production now. And we will be in full production towards the back half of the year. And it takes a while for us to get it in production, get it out at the distribution level. Remember we have 2 step distribution. So our distributors have to stock it and then after they stock it they have to offer it to their dealers. So I would not really expect to see any serious impact until either the very end of this year beginning of next year.

[Operator Instructions] The next question comes from the line of Joe Mondillo with Sidoti & Company.

First question has to do with, first off I was wondering what the sales were in the quarter at Pryor? And then also if you could address the $8 million of lost gross profit absorption? How do you come to that estimate?

Well, we essentially just took the lost production -- if you want to know what Pryor sold in the first quarter we can give it to you in tons. Pryor sold about 26,000 tons of UAN versus 46,000 tons last year. And they sold about, I think about 14,000 tons of ammonia.

Okay. So you estimate what your capacity at the plant and how much profits you would have earned?

Joe, I think the big thing you got to focus on in the first quarter is far as that $13 million, the $8.2 million you mentioned is that ammonia was down over 42 days. So that was what had the biggest impact. UAN was down most of the quarter but ammonia was down for over 42 days. We were down all of January and then again in March. So that had the biggest impact on that $8 million you are talking about. We don’t expect -- obviously don’t expect that to reoccur in the second quarter.

Right. And what was your sales at Pryor? Just value wise?

I gave you the tons and approximately what the sales price is, Barry went over that.

Okay. All right, no problem. And then just I guess in terms of the climate control business, it seems like residential orders were down 30% I believe. It seems like...

They were down 21%.

It seems like that continues to worsen. Could you just talk about directionally how that business looks and....?

It’s a little kind of a confused quarter to really understand why bookings were down. I didn’t really want to go over this before but there are some things that have affected the comparison, it’s a little bit complicated. But first of all in the -- in the first quarter of 2011, we had announced a price increase that was going to take effect towards the beginning of the second quarter. So we had a big rush of orders, which increased the normal order level we would have probably had to some degree in the first quarter of 2011. Conversely, we announced another price increase in the fourth quarter of 2011, and we were getting some orders in under the wire at the end of the year, which kind of took those orders away what we think otherwise would have come in, in the first quarter of this year. So it’s not really an apples to apples comparison quarter to quarter. We also announced that we were coming out with this new line of heat pumps. We believe, and this is anecdotal and we can't really quantify it to a great degree specifically, that some of our distributors are holding back and depleting their inventory to some degree, waiting for the new products to come out. What they want to do is they want to run down their old products before they start stocking up with new products. So we have a little bit of a confused situation going on in the first quarter. Having said all that, the market is very soft in residential as indicated by what I cited from the Air-Conditioning and Refrigeration Institute numbers for conventional heat pumps, air source heat pumps. And so that’s just a very soft market that we are in right now.

Okay. Great. And then last question, in terms of the sort of the capacity guidance that you give specifically for Pryor. How should we think about that on a quarter-to-quarter basis? In other words, if your annual capacity is 325,000 tons of UAN, seasonally the second quarter is always the strongest. So is that 325 if you were running at max capacity every single quarter or is that estimated that the second quarter is going to be well above the third quarter. How should we think about that type of capacity that you are giving?

We have uptake agreements on UAN. So we try to run UAN pretty much 24/7, so that we don’t have to turn down the plant. We do have 40,000 tons of storage at the location so we try to run in the most optimum way by running pretty much during the year except for planned downtime. And then we have an uptake agreement that requires our uptake partner there to move the product during the off season as well as during the season. But you are right, the better margins are earned during the spring and fall seasons.

So what you are saying is, ideally, excluding the unplanned downtime, ideally Pryor UAN production should be running at the same exact production every single quarter, expect obviously the third quarter?

More or less.

Okay. What about ammonia then, I guess, then, I really should’ve, I really...?

The best economics are if you run full out on ammonia.

So you think you could sell the same amount of ammonia in the first quarter, second quarter and fourth quarter?

Yes. Right now there is a shortage -- there is a very tight supply of ammonia, how long that will last we can't predict.

Okay.

Joe, we would love to take some more questions, but we would like to give some of these other guys a chance too, if you don’t mind. Do you want to get back in the line and we will get you in a few minutes?

Sure. No problem, thanks.

Thank you. Our next question is from the line of Dan Mannes with Avondale Partners.

A couple of questions on a different topic. You talked about CapEx for the year, I think Tony you said a $48 million ballpark, $35 million in chemical and $13 million in climate. Can you talk about how much of that either relates to the restart of those idled ammonia units versus maybe other growth initiatives you have at chemical? If you can sort of help us out with what this spending is going towards?

The answer to your first question, I don’t have that in front of me as far as how much of the 2012 spending would be on Pryor. But it’s not as significant as you might otherwise think. We are bringing in about $6 million of spare parts in those numbers. We had $2 million in maintenance expense that we expensed off in the first quarter, so most of that got expensed off. So going forward, Dan, I don’t think that’s a major part of what's in here. In the CapEx for chemical looking forward, we got about $9 million of regulatory spending that we are doing to bring our plants all into compliance with these new, more stringent air emission and water requirements. So we are continuing to spend quite a bit of money there to continue to keep these plants in compliance. We have got about -- including that $6 million of spare parts at Pryor we also have got about $3 million of spare parts at the other locations and about $15 million in maintenance CapEx. And then we have got about $10 million, $11 million of process improvements where we expect to improve the process, get better efficiency, do a little debottlenecking and potentially do some -- pick up some additional business.

Okay. Real quick on the restart of those 2 idled units. I know when you restarted the primary unit at Pryor you had a bit of a drag from an operating perspective. Do you anticipate any incremental startup costs with those or because you already have people on site it will be more, it will be much smaller this time?

You hit the nail on the head. Before we had to completely staff the plant up to almost 100 people and we had all those people on board before we were able to sustain production. So we had all those overhead costs. And the basic core of the plant in terms of staffing is there and we have some incremental staff that’s been added for these plants but most of the staff is already there in the plant.

Okay. And then the last topic as it relates to cash use. You had a couple of lines at the trailing part of your press release and you talked about opportunities to invest in growth across the business. Can you give us a little bit of a better idea of what you are talking about and by that I mean are you considering mergers and acquisitions or is there primarily looking at reinvesting in your own. And then the last piece is also, do you consider buying back stock as being attractive?

Well, let me kind of go in reverse order. Right now we don’t have any plans to buy back stock. We are not concluding that we might buy back stock but we don’t have an active program underway at this time. To get to your other question, there is multiple things we are looking at to grow and improve the business. I mean as we just went through the CapEx, I mean for the chemical business we have, in addition to that, we have various things we are doing in the climate control business. We are adding on to one of our plants this year that produces heat exchangers for all the other plants, produces air coils. We are increasing our research and development facilities, test labs which is for products for the future. We have other things that we are doing within that. We just started this last year a new plant for our chillers and we plan to add another assembly line in that plant later this year for some new products that we are bringing on board. So we continue from organic growth standpoint we have substantial amount of investments that we can make and things that we are looking at doing or are underway in the various operations. Above and beyond that, we have discussed this before on conference calls, we are looking for the right type of acquisitions that might be right for us. We don’t have anything to announce to you at this time. But it’s always something that we are doing. It’s an ongoing process.

Thank you. [Operator Instructions] And the next question comes from the line of Liz Noble [ph] with Set Sail Investment [ph].

I wondered if you might elaborate a little bit more on some of the environmental regulations that you are needing to address?

Would you mind repeating your name and company. We could not hear.

It’s Liz Noble and Set Sail Investments.

Okay. Thank you, Liz.

I will tell you what we are doing. All of our asset plants were installing -- we have a program to install NOx abatement equipment. That’s one thing we are doing. In our El Dorado plant we are setting up a pipeline for water which is to dispose processed water and treat it before we release it. In our concentrated nitric acid plant we are installing abatement equipment. All together we have, I think 12 plants that are going to get NOx abatement equipment over a period of several years. We are also upgrading our electrical switchgear. Relocating it, so that it’s not susceptible to contamination. And we have a whole list of projects which we are always working on. So as soon as we finish these I am sure there will be some more. But what happens is we get new regulations coming out every few months from the EPA, and we have to do things to comply with those. And so that’s why I think if they continue doing that we will continue spending. And also if we see something that we think we should do for our own safety or environmental improvement, we will do that.

And the approximate capital expenditure for that is about how much?

What we said for this year we have about $9.5 million planned. Okay. But the entire NOx abatement project that Jack was referring to over several years, it’s not completely included in that number.

No, over the next 5 years we will spend about $20 million-$25 million in addition to this. We are primarily talking about our nitric acid plants.

Right.

Okay.

That’s today's dollars.

Thank you. Our next question is a follow up from the line of Joe Mondillo.

I got a few follow-up questions. First off, just going back to my last question. I am just trying to, in terms of the capacity that you put out there in terms of ammonia. It’s 190,000 tons when you are not creating UAN. Do you just divide that by 4 and essentially 47,500 is your max capacity of ammonia per quarter?

Joe, I don’t understand the question. Are we looking at Page 20?

Yes. So if you are not producing UAN, you do a 190,000 tons per year.

Right. At this time.

So quarterly, is the max capacity 47,500?

Well, that’s a good way of looking at it on a quarterly basis. Now it is not an exact number of days in every quarter but more or less that’s it.

Okay. All right. I just wanted to confirm. And then...

We run these plants 24/7, Joe.

Great. And then...

The other thing that you have to remember is that traditionally we do have the turnaround in the third quarter.

Sure.

Right. And so the way we look at these plants is we factor a certain number of planned days which are usually the days in the third quarter that we have the turnaround. And then we factor for ourselves another number of days per month that are unplanned and it’s not even because of those turnarounds in the third quarter.

Okay. So the second quarter could be higher than the third quarter?

It usually is.

Okay.

In terms of ammonia production. During the turnaround last -- during that quarter.

The next question I have, it seems like your ag sales ex-Pryor were up -- if I am doing the calculation right, upwards of over 40% year-over-year?

Mostly we had -- Cherokee was up from 50,000 tons to 60,000 tons, El Dorado was up from 45,000 tons to 55,000 tons. So yes, you had some pretty good increases in the other 2 [indiscernible].

Okay. So I guess my question was, I thought I was under the assumption that sort of those plants were sort of running at near max capacity last year given the favorable fundamentals in the ag and the demand and everything. I guess that’s not that case, so I was wondering sort of how much more capacity do we have above where we are at right now?

I think what you are seeing in the first quarter this year was very strong demand and very good uptime, these other 2 locations.

So it’s more so sort of a more efficient production on your side?

I don’t understand your question. I would like to answer it, but you want to state it again?

Yes, sure, sure.

You thought we were at full capacity, right?

Yes.

How we can get out more production if we are full capacity.

Correct.

We were not at full capacity of ammonium nitrate. We had a much better demand season this year than we had last year. And the Cherokee plant had better uptime this year than it did last year first quarter. So we just the stars were kind of aligned this quarter.

And to refresh your memory, last year we had a real severe drought that really affected the whole -- the primary markets for AN were impacted last year.

Okay. All right. And then I guess the third question is on the additional 60,000 of ammonia capacity. Now that you have the permits, what sort of timing you guys think that it will take to get that up and running?

Well, what we said was that we weren’t going to say. What we said was that after the experience of not hitting it right on Pryor and paying the consequences for that, we just decided that – we’ve got to trial and error process here. What actually has to happen is they turn the plant on and they run, they do -- you’re only allowed to do certain things before you get the permits. So you can't actually turn the plant on and run it until you get the permits. You can't load it up with....

Okay.

Okay. So now that they actually can run it, they are going to find things that they couldn’t find just from visual inspections and the kind of things they did before they ran it. So they are going to...

Most likely.

They most likely will. So they are going to turn it on. They are going to run it. They are going to find a problem, they are going to turn it off. They are going to fix that problem, they are going to run it again till they find another problem, and so on until they think they have been through the whole plant and it runs. And at this time we really can't predict exactly how long it takes. We feel pretty safe in saying it will happen before the end of the year but we don’t have an exact internal schedule because we don’t know.

Okay. I imagine some additional costs are going to come online then just due to that?

It’s possible but...

They should not be major. We went through this process many years ago in Cherokee. And today that’s a plant that runs full out. It’s probably on line -- it’s probably our best plant.

Okay.

It’s [indiscernible] time online.

Yes.

Okay. And then also in terms of -- and I don’t know if this was asked earlier but ammonia, prices haven’t bounced back as much as UAN prices have. They are still under where they were a year ago. I imagine that maybe is due to natural gas prices being so low. But could you talk about the process of ammonia versus I guess the....

Ammonia in the last month or so has jumped up....

Jumped up in May from $470 metric at Tampa to $545.

Yes.

What are the profits of ammonia like compared to a year ago? Given where natural gas is.

We don’t really disclose profits per ton. But you can do that math. What the content is per ton of gas was and you just have to look at what it was exactly a year ago and look at what the price was and you can more or less get it in picture.

All right. Could you tell me if it was above or below, or evened out directionally?

You got to keep in mind that gas is $2.25 now and last year it was over $3 or something. So you got a little bit of improvement there and the Tampa price right now is as high as it was last year. So the economics are as good or better.

You probably have $1 per thousand difference in your gas price.

From 31.

From last year.

So that’s only about $31 or $32. So the big impact I think is the fact that there is a tight supply and the Tampa price right now is as high or higher than it was last year.

Okay. And then just lastly if you could talk about the gross margin on the climate control side. I think it was 31% for the quarter. How do you feel about that given raw material prices, do you guys see any price increases in the near future? How are you feeling about that gross margins?

Well what we said in the conference call, and I know we threw a lot of stuff at you so maybe you didn’t hear it, was that we really couldn’t predict when we were going to be able to take enough price increases to overcome the material cost increases. We are doing – it’s not one unified structure. I mentioned that we had taken some price increases on the residential products. But it’s a small part of our overall business, it’s only about 20%. It’s different competitive situation with that than when you are bidding large commercial projects. We are trying to put through price increases as we feel the market will take them but it’s really hard to predict when that process is going to -- when we are going to be able to get through that process or if we will be able to.

Thank you. Our next question is from the line of Matthew Dodson with Edmunds White Partners.

It’s Jon Evans with Edmunds White Partners. Could you just talk a little bit about, I guess your thoughts on your customer’s resell. So once you get past the spring season here as you go into the fall season, if corn comes down are you worried about the resell or not at all?

We think that corn at $6 is pretty high. If it drops to $5, we don’t expect the economics to change for our business.

It can go down as low as $4 and we are still in good shape.

The real question I think is once we are through this spring season, the general consensus is that the [indiscernible] and the planning is well ahead of where it traditionally is. So we would expect to see some decline in pricing beginning maybe in the middle of June or after June, as distributors begin to restock. And typically what happened in the first part of this year is that the restocking was slow because the buyers were waiting for lower prices and sellers were waiting for higher prices, so you had sort of an impasse for a while and then when they started buying prices spiked up. So that could reoccur. A lot of it depends on when people make the buying decision. The fact is they have to buy at some point.

Right. Because I mean you can't skip UAN or ammonia, right? If you’re planting corn, is that right?

Not the grain, that’s right.

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

Okay. Thanks for listening in today. We appreciate it. And we would like to turn the meeting over now to Carol Oden, who will cover some forward-looking statements about the content of the presentation today. Carol?

Thank you again for listening in today. The comments today contain certain forward-looking statements. All statements other than statements of historical fact are forward-looking statements. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate and similar statements of a future or forward-looking statements of that nature identify forward-looking statements, including, but not limited to, all statements about or any references to the Architectural Billings Index or any McGraw-Hill forecast including those pertaining to commercial, institutional and residential buildings increases or industry growth and McGraw-Hill forecasts regarding the total green retrofit/renovation market and energy efficiency market. The forward-looking statements include but are not limited to the following statements: Repairs to the urea plant at Pryor are expected to be completed before the end of June; we expect to see gradual growth in our industrial markets; we believe the outlook for LSB in total for the balance of 2012 is positive; we are taking actions to grow and improve both of our businesses; we don’t expect to lose 39 days of ammonia production as we did in the first quarter; the Pryor facility should report positive results from the production and sale of anhydrous ammonia into the fertilizer market; currently considering future capital spending of approximately $48 million; the cost of natural gas will remain low for some time; expect the price level of UAN to decline in the third quarter; the positive fundamentals of the Ag business should continue; we continue to be optimistic about our Ag business; we plan to produce an additional 60,000 tons per year of ammonia at Pryor; our plan is to eventually make other improvements at Pryor to boost ammonia production; we expect the additional ammonia plants at Pryor to be in production before the end of the year; we believe that the recovery in commercial and institutional new construction is finally here, but it will be slower than previously forecast; statements regarding Trilogy 40 series geothermal heat pumps. 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 heading "special note regarding forward-looking statements" in our Annual Report, Form 10-K for the fiscal year ended December 31, 2011 and Form 10-Q for the period ending March 31, 2012. We undertake no duty to update the information contained in this conference call. The term EBITDA as used in this presentation is net income plus interest expense, depreciation, amortization, income taxes and certain non-cash charges, unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurements. We will include on Page 28 of this presentation and will post on our website reconciliation to GAAP of any EBITDA numbers discussed during this conference call. Thank you and that ends our conference call.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.