LSB Industries, Inc. (LXU) Q4 2012 Earnings Report, Transcript and Summary

Good evening and welcome to the LSB Industries Fourth Quarter 2012 Conference Call. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions]. It is now my pleasure to introduce your host, Carol Oden, Executive Secretary for LSB Industries. Thank you. Ms. Oden, you may begin.

Thank you. Again, we would like to say welcome to the LSB Industries, Inc. 2012 fourth 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 and the webcast will be available shortly after the call on our website at www.lsbindustries.com. After comments by management, a question-and-answer session will be held. Instructions for asking questions will be provided at that time. Information reported on this call speaks only as of today, February 28, 2013, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay. After the question-and-answer session, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We encourage you to view the PowerPoint PDF that is posted on our website at www.lsbindustries.com in the Webcast and Presentations section of the Investors tab. Please note that the presentation starts on page three of the PowerPoint. And now, I will turn the call over to Mr. Jack Golsen.

Thank you, Carol. Thank you for participating in our 2012 final results conference call. For those of you who follow our company, I’m going to spend my part of this call primarily discussing our Chemical business and what we are planning for the future of the company. Barry and Tony will go into details about the year and current market conditions. 2012 year was the second best year in our history, but it was disappointing to us because of operating problems in our Chemical business. I will explain to you what happened in our chemical business and what we have done and are doing to avoid a repetition of the problems that we experienced during 2012. We believe that many of these initiatives will help us take our Chemical business to a new level of reliability and over profitability. First, it is important to review the scope of our Chemical business and how it is organized. At LSB, we operate four chemical manufacturing facilities, with each one independent of the other chemical plant complexes. These are located in El Dorado, Arkansas; Cherokee, Alabama; Baytown, Texas; and Pryor, Oklahoma. Each facility has its own general manager, plant manager and full operating and compliance staff to run as an independent business. The operation of one of these plants has no direct connection to the other plants. A chemical business management group oversees these operations and provides services to them. Each of our chemical facilities are relatively complex with multiple specialized individual units of plants working together which are dependent on each other to produce our products. When one of the units is down for maintenance, it can interrupt the whole process leading to our finished product. Exceptions to this are in hydrous ammonia plants since ammonia can be upgraded to other nitrogen…

Thanks, Jack. As Jack indicated in his comments, during 2012 our Chemical business incurred a number of significant issues resulting in lost production and adverse effect on our 2012 sales, operating income and cash flow. However, before addressing the 2012 results, a word too about 2013. Until those facilities return to normal at various points in 2013, production sales and operating income will continue to be lower than otherwise would be expected. Based on current market conditions, we estimate the monthly adverse effect to our 2013 operating income to be $1 million to $2 million per month at El Dorado until May 2015 when the new Weatherly nitric acid plant and concentrator are placed in production; $8 million to $9 million per month at the Cherokee facility until the repairs are completed in April or early May; and $8 million per month at the Pryor facility until the ammonium plant is restarted in March and in production. We do, however, that we'll receive additional business interruption insurance proceeds in future quarters to recover a substantial portion of El Dorado and Cherokee losses related to these incidents. Regarding 2012, results for the fourth quarter are summarized on page four on the PowerPoint presentation. The fourth quarter consolidated results were significantly less than expected due to the unplanned downtime at our chemical facilities. We estimate the adverse effect from the downtime in the fourth quarter was a reduction of operating income of approximately $29 million, offset by $7.3 million for business interruption insurance. For the quarter, consolidated sales were $177 million compared to $215 million, an 18% decline. Net income declined 59% to $11.6 million versus $28 million last year. Fully diluted earnings per share were $0.49 compared to $1.19 last year. Earnings for the quarter were down percentage-wise disproportionate to the…

Thanks, Tony. I’m going to focus on our sales activity, product backlogs where pertinent, and market drivers as we see them. I’ll also review upcoming key initiatives and our strategies for each business. To start, please turn to page nine in the presentation which shows our 2012 sales mix by the markets we serve. The overall mix was approximately the same as 2011. Chemical products were a higher percentage of total sales than in the years before 2011 due primarily to increased volume and sales prices of our products in our Chemical business and the addition of meaningful revenues from Pryor. A higher percentage of the Chemical business sales were derived from agricultural products than in the years before 2011 as well, the result of the addition of sales from the Pryor facility and higher prices for ag products. But for the downtime at our chemical plants that we have discussed, the mix would have been even more heavily weighted toward the Chemical business. We expect that will be the case in 2013. Focusing first on the Chemical business, please go to page 10. Total sales in the fourth quarter were $105 million compared to $142 million in the 2011 quarter. Sales in both our ag and mining products were dramatically lower than 2011 due to plant downtime and, as a result, comparison from period to period is not really meaningful. Industrial acid sales were up slightly because most of those sales are related to production at the Baytown, Texas facility which was not impacted by downtime during the quarter. Turn to page 11 for sales of our key ag products. Again, comparison of sales from the fourth quarter of ’11 to the fourth quarter of ’12 is not particularly meaningful due to downtime at our plants in 2012. Turning…

Thank you. [Operator Instructions]. Our first question is from Dan Mannes of Avondale Partners. Please go ahead. Dan Mannes – Avondale Partners: Hey. Good afternoon, everyone.

Hi, Dan. Dan Mannes – Avondale Partners: A couple of questions, first on Chemical, as it relates to the potential expansion of El Dorado. First of all, can you remind us on the potential size? And two, can you explain maybe a little bit about if this has any impact on the current contract with the off-taker or does the contract already assume that? Is that based on you buying ammonia, sort of you extend, you produce it yourselves --

Let me ask those in -- answer those in the reverse order that you asked them. Dan Mannes – Avondale Partners: Sure.

Okay? Really the terms and conditions of our contracts with our customers is confidential and we really don't discuss that publicly. And in fact, going forward, this plant is not solely dependent on that. As to the capacity, the planned capacity of that plant is about 1,100 tons per day. That comes out to a practical capacity of about 377,000 tons per year, because you don’t run it 365 days a year. Dan Mannes – Avondale Partners: Okay. But going back to the initial question, I'm just wondering if you're going to have to share some of that incremental margin with your client.

Well, as I said, our sales price and our conditions of our contracts with our customers are confidential. But you can assume that in a contract like that, we're not selling at the full market spot price.

Dan, I think the other thing you have to keep in mind is that our off-take agreements have a life, in other words they're not in perpetuity, so when we renegotiate the agreements, that will be taken into consideration, ultimately for negotiation. Dan Mannes – Avondale Partners: Got it. Okay. And real quick, if we can put a finer point maybe on the timing for Pryor, Cherokee -- and I want to first thank you for all the color you gave us on that, but obviously we always want a little bit more. So, on Pryor, it sounds like maybe some point in March, and then on Cherokee, May directionally. Is it sort of, and I don’t mean to put too fine a point, but beginning, middle of May, or just not known depending on equipment delivery?

I think what we indicate was late April, early May. Dan Mannes – Avondale Partners: On Cherokee, okay.

But there again, you can't define that precisely, and that's the reason that we're trying to give a range.

The reason for the range is -- was dependent on outside suppliers. If they keep their promise, they're going to dilute the units, the special units that were awarded in April, early in April, but if they stretch it out, then we get stretched out. Dan Mannes – Avondale Partners: Sure. And then even after delivery, you still have an installation here, correct?

We have to install it -- have everything ready, and that goes relatively quickly.

That's probably a more finite range than depending on the outside vendors for our large --

Yes.

And the other thing to keep in mind, a lot of the delays we've had this year 2012 and early '13 has been vendor delays because in nitrogen expansion side of the business, a lot of these vendors were backed up and not quite as reliable as they used to be in terms of delivery dates. Dan Mannes – Avondale Partners: Sure. Two last quick ones then I'll turn this over. Given the status of Pryor, Cherokee, is it fair to assume you've done very little preselling for Q2 delivery?

That's true. We do have some firm sales commitments on UAN out of Pryor. We have some stock in inventory right now, but we're not being aggressive preselling. Dan Mannes – Avondale Partners: Got it. And then the last thing, the -- and again, thanks for the color on sort of the enhanced management plan at the chemical facilities. Can you maybe give us any color, will there be an incremental costs that relate to that that's material or is that sort of just part and parcel of everyday business?

Well, we think there will be some incremental costs, but we also think it's part and parcel -- our view is that in the long run the benefits will outweigh the costs. But there'll be some upfront costs.

Everyday of that time is a significant benefit to the bottom line. Dan Mannes – Avondale Partners: I think your shareholders would agree. Thanks. I may come back for some more questions.

Thank you. Our next question is from Joe Mondilo of Sidoti. Please go ahead. Joe Mondillo - Sidoti & Co.: Good afternoon, guys.

Hello, Joe.

Hi, Joe. Joe Mondillo - Sidoti & Co.: So, just to sort of continue on with the sort of Pryor and Cherokee, I was just wondering if you could give us maybe a clear understanding I guess the push-out of Pryor is largely due to vendors as well as what you talked about at Pryor or Cherokee?

Pryor? There is no push-out in Pryor. We -- Joe Mondillo - Sidoti & Co.: I'm just referring to the fact that we saw six-day weeks in mid-November, then in January you gave us a four-week update, and now, you know, I'm just wondering the timing here.

Let me explain what happened, why it is pushed out beyond our control. That unit that I told you was 700,000 pounds and it was 60 feet long, one piece, and it had to be moved in one piece. And to get rail cons that would move it and get cranes heavy enough to lift, they had to fly some special crane pipes in from Europe in order to have a crane in the United States that could lift it. So all that was not known when we set the original targeted timeframe, and every one of those things caused us delays that we couldn't help. There's nothing we could do. So your question was, will there be more delays? Is that what your question is? Joe Mondillo - Sidoti & Co.: Yeah, just trying to get an idea of that.

We're not anticipating any, but as far as Pryor is concerned, they're all booked up and ready to go, they're warming up the catalyst now. As far as Cherokee is concerned, I told you, it depends on the vendor. We pick the top vendor in the industry to supply us the heat exchanger, and they promised delivery in April. Joe Mondillo - Sidoti & Co.: Okay, great. Thanks for the color there. And then also, sticking on Pryor, I think you mentioned that there may be, in question, the 60,000 of additional ammonia that's in question now. Could you just clarify what you --

Let me clarify that. It's not in question, it's just -- it's deferred, because when, you know, the main game there is number one ammonia plant -- number four, but the primary ammonia plant that produces most of the ammonia, so, larger plant, is the way to characterize that. And when we started to develop these issues, all hands on deck focused on that, and they had to essentially set aside the progress that they were making. We have had some production output from those, but they have not finished what I kind of characterized earlier as a debugging process they're going to have to get -- that they're going to have to turn back to that and start working on that again this year. And that will be a 2013 project instead of a 2012 project. But the benefit could be gained from what they've been working on in the last few months far overshadows that, and so that -- and so that's why they've worked on that. Joe Mondillo - Sidoti & Co.: Okay. So, do you think we can see some of that capacity come on by midyear or what kind of timing are we talking about?

[Essentially], but I don’t want to make a specific commitment at this time. And what I said also in my presentation was that, you know, we expect that the new ammonia converter will have much higher outputs than the old ones. And so whether or not we run the 60,000 tons per year on a continual basis along with the output of the new converter is going to depend on the market conditions and the demand at that time. It could be that we pick those plants up in town depending on what -- when there's market demand. So at this point in time, I don’t want to predict and I don’t want to give you the impression that with that new converter, that we will be running those 100% of the time even when they're finally fully online. Joe Mondillo - Sidoti & Co.: Okay. So, just to finalize, there's a lot of moving parts and it's, you know, sort of hard to sort of model with all these moving parts, so I'm just trying to get an idea what kind of total ammonia capacity per day that you see yourself running at, say, in the second quarter, midyear, or --

We can't give any guidance on that, but I think it's safe to say that we would expect, with the new converter, that the main ammonia plant will run close to its rate capacity of 700 tons a day, and we'll never figure in much more than 330 days a year. And we're not suggesting that we're going to bring the additional 60,000 tons up at any particular time. Joe Mondillo - Sidoti & Co.: Okay. Okay. And then just one last question, in terms of CapEx, you gave a pretty detailed explanation in the 10-K regarding CapEx, and I'm just wondering a couple of things. First off, the $110 million to $120 million associated with the new nitric acid plant at El Dorado, do you see that almost largely financed through the insurance recovery that you're expecting, or --

No. We originally thought that it would be, for the most part, financed by recovery, but there's a difference of opinion between we and the insurance company about whether the old plant is reparable. We thought it is not and plan to bring on a new. They took the position it's reparable and gave us less than the full -- we thought full replacement cost was. So probably long -- when the dust settles, we'll probably get about half of that. Joe Mondillo - Sidoti & Co.: Okay. And then also in that CapEx, you talked about $10 million to $15 million of CapEx related to other expansion projects. Wondering if you could just clarify what that's regarding.

Well, I don’t think we have a detail of those there. There are a lot of smaller projects. Do you have a list of all --

The big one is enhancement of the Cherokee ammonium plant.

That's right. Joe Mondillo - Sidoti & Co.: And that's that nitric acid at Cherokee?

Acid plant one.

There's acid plant one there, but there's also an ammonium plant expansion that we could do as the next step after we get the -- after we get the project underway at El Dorado. Joe Mondillo - Sidoti & Co.: And that would be additional capacity beyond what you originally were running at?

Yeah, but we're holding back on that until we got everything else worked out. Joe Mondillo - Sidoti & Co.: Okay. Okay, all right, thanks.

Is that all? Next questioner.

Joe?

I think Joe is off the line.

Let me go back to answer this question. The amount we gave back on the El Dorado plant is, one piece of it, we also had business interruption insurance on top of that and quite substantial.

Right.

Is anyone on the line?

Not on the line. The next question comes from Keith Maher of Singular. Please go ahead. Keith Maher – Singular Research: Good evening, gentlemen. Yeah, kind of touching on the business interruption insurance, you have $10.3 million this quarter. Where does that show up in the P&L? And also just want to understand how that kind of -- does that kind of flow in, I guess, the payments are kind of on a monthly or quarterly basis since it's business interruption insurance?

I wish I could tell you it comes in on monthly and quarterly basis. It comes in when you [reap it] and encourage the insurance companies to send it. And typically what we will do, if it's recovery of cost incurred for repair, we'll take it to other income. If it's reimbursement of losses due to business interruption type of coverage, it will go as a reduction of cost of sales. Keith Maher – Singular Research: Okay. And so, can you tell me then the amount that came in this quarter? Was that in -- was that offsetting cost of goods sold?

$7.3 million was in cost of sales. Keith Maher – Singular Research: Okay. So I guess I'm wondering, when would you anticipate getting -- starting to see some payments from --

Well, they have -- what we do is we prepare a claim with all the details in it and all the backup, and then they audit it. And if there's any discrepancy, disagreement, you discuss it and work it out, and then they pay. Keith Maher – Singular Research: Okay.

But that's a process that doesn’t happen quickly. Keith Maher – Singular Research: All right.

They take their sweet time about it.

The relationship is very good, just -- you have to just take your time to -- Keith Maher – Singular Research: Okay. Could you give us just a little bit more data on this, on the $7.3 million, could you tell us what time period that was for?

The what? Keith Maher – Singular Research: What time period was that for?

He's asking, restate your question, was the 7.3 business interruption that we received in the fourth quarter, what time period was that business interruption for? Is that what your question is? Keith Maher – Singular Research: Yes. I assume it came back in May, June, July, like how many months, what time period.

Here's the situation. We get advances and we have to make allocations with that, so it's not a precise insurance recovery on a precise period. So it would have covered the first, the most early period, and then subsequent amounts that we receive will cover the more recent periods. It's not specifically identified with any particular quarter because the advance is not -- they don't direct it as exactly what they're paying. Keith Maher – Singular Research: Okay. All right. That's, I think that comes up pretty well. I'm going to ask a question about the Climate Control business.

Sure. Keith Maher – Singular Research: Obviously the low gas price is bad for that business, good for your Chemical business. But it seems like they're going to be here, I mean, for the foreseeable future, I mean low gas prices that is. So, is there anything you can do? I mean, obviously your product is more expensive, it's geared into higher --

Well, I think -- let me answer that question. What you really -- you got to remember that the whole Climate Control business is not geothermal. Keith Maher – Singular Research: Sure.

Natural gas prices affect the geothermal part of that business. Okay? And they don’t affect the standard -- the hydronic, they don't affect hydronic fan coils, they don't affect air handlers, they don't affect our chillers, and they don't affect water-source heat pumps that are not geothermal heat pumps. Okay? So it's a small part of the overall business. But addressing that part of the business, this is -- it's a complex question because there are really several factors that affect the geothermal business. First, you have new construction, which traditionally has been the primary market for residential geothermal products. Even though the residential construction was up last year, it was about 517,000 starts, but it was up from an all-time low of about 400. But it was down from 1.7 million a few years. So this is a really big factor in the geo business because that's been the primary market historically for geo. So we hope that as residential construction increases, it gets over a million, which is what it's forecast to get to in the next few years, that this will really benefit the geo business. As for natural gas prices, although they're near an all-time low, we believe that in the medium and long term there will be some rise and that could benefit the business. The current low gas prices have also really led us to adopt a more focused approach, in other words, focused on markets where natural gas is not primarily the heating -- used for heating. So you've got about 40% of the country where you've got either electric or propane or some other -- fuel oil or some other type of heating source. You've also got parts of the market where even though natural gas is the heating -- is used for heating, they're really not heating dominant markets. So you get more savings in the summertime from cooling than in the wintertime and natural gas is less of a factor. But the bottom line is it's forced us to be more focused in the way we approach the market with geothermal. And there's one more thing that affects that business and that is the fact that, on the commercial side of geothermal, the low natural gas prices have not had necessarily as much of a negative effect, because typically when they're doing an engineering analysis for a commercial building, the horizon is much longer, homeowners looking at, he wants a really fast payback, the next few years, because he doesn’t know how long he's going to be living in that house necessarily. But building owners are typically -- that are investing in this type of projects, are typically long-time owners and they're looking at total lifecycle costs over a long period of time. Does that answer your question? Keith Maher – Singular Research: No, that was great, I appreciate it. Thanks a lot. That was all I had.

Okay.

Thank you. The next question is from Bruce Zessar of Advisory Research. Please go ahead. Bruce Zessar – Advisory Research: Yes, thank you. I wanted to focus on business interruption insurance and the adverse effects on operating income from the different events. Do you need me to pick up, is there -- can you hear me?

We can hear you fine. Bruce Zessar – Advisory Research: Okay, great. So you said in the press release that there was $83 million adverse to operating income from the event at the three chemical plants and you said $7.3 million of that was offset by insurance. Do you have any estimate of the remaining $76 million, how much will be recoverable in insurance?

No, I don’t. Part of that $83 million was due to the earlier cost where Pryor was underperforming before we put the new converter in. And so there's a number there, but just we haven't disclosed that. Bruce Zessar – Advisory Research: Okay. And then if I look at the paragraph on page seven that talks about the monthly adverse effect from each of the plants in 2013, it looks like if you add those up, it could be anywhere from roughly $68 million to maybe $90 million adverse this year. Am I --

Are you referring to the 10-K? Bruce Zessar – Advisory Research: No, no, I'm referring to page seven of the press release, in Note 3.

The press release. Bruce Zessar – Advisory Research: So if you add up $1 million to $2 million a month at El Dorado, that's $12 million to $24 million for the year, and then you add up $8 million to $9 million for Cherokee over four to five months and $8 million for Pryor over let's call it two to three months, you could come up roughly in the same range as the $83 million adverse to 2012. Am I -- is that the way you see it as well?

Would you repeat that question again? I'm sorry, the -- Bruce Zessar – Advisory Research: Okay, the question is, you had $83 million adverse hit to operating income from the incident at El Dorado, Cherokee and Pryor in 2012. If you look at your paragraph in Note 3 on page seven, you disclosed monthly negative effects to operating income at each plant. And what I'm trying to say is, if you add those up for the whole year, you'll have a -- you're saying $1 million to $2 million a month at El Dorado, that equals $12 million to $24 million for a whole year, and then you say $8 million to $9 million at Cherokee, and so that will go four to five months until Cherokee is back in May, and then you got $8 million a month at Pryor, so that's two or three months until Pryor is back on in March. When I add these all up, I'm coming up with somewhere between let's just call $68 million and $89 million as potential adverse effect on operating income in 2013.

You're close. Bruce Zessar – Advisory Research: Does that sound about right to you?

Yes.

Well, yes, that's one way to look at it, but I wouldn't want to represent to you that that will be the amount because we still have to go through and look at the terms of the insurance policy and make sure that we can justify their claims. Bruce Zessar – Advisory Research: No, I understand that. I'm just giving that as a gross number, I'm not -- insurance is going to be my second question.

Yeah, okay. Bruce Zessar – Advisory Research: All right. So then the question is, supposing you have let's just say somewhere between $68 million and $89 million in this adverse effect on operating income this year, do you have any estimate, even if it's a range, of what percent of that will be recoverable from the business interruption insurance?

I would prefer not to make an estimate on that, except I can tell you that the numbers that we have in this footnote are pretty close to what we actually calculate the downtime cost is. Bruce Zessar – Advisory Research: And so then that's what you're going to claim from the insurance policy?

We don't have insurance coverage at Pryor because that was an event that took down because of a maintenance issue, and then we -- to put in the converter. Bruce Zessar – Advisory Research: Okay. So, forget Pryor, but Cherokee and El Dorado, your monthly estimates here are in the ballpark of what you're going to try to submit for business interruption?

That's what we're going to try to submit. And I would also caution you that the $1 million to $2 million at El Dorado is indeterminate number because we have to agree with the insurance company on how long that coverage will be in place since we have to base it on the repair of the old plant timeline versus the timeline to [purchase a new one]. Bruce Zessar – Advisory Research: Okay. Okay, so then coming back, a question on 2012's results, the net effect after insurance is $76 million roughly, $83 million minus the $7 million from the insurance, is that right?

That is what we say is the effect of the issues that we encountered, various maintenance issues we encountered, plus the downtime. Bruce Zessar – Advisory Research: Okay. So if I take that $76 million and I tax-effect it at 35% or 36% and divide by your shares outstanding, that's about $2 hit per share in earnings per share, is that what you would calculate it as?

What did you use as a tax rate? Bruce Zessar – Advisory Research: Thirty-five, 36%.

I mean you could calculate it a number of different ways. I wouldn't want to comment on the exact calculation, but the theory is that -- Bruce Zessar – Advisory Research: My theory is that if you didn't have these problems and didn't have this 83 -- this net $76 million adverse effect, you would have had $76 million more in operating income, right?

Correct. Bruce Zessar – Advisory Research: Okay. And so then if you take $76 million after tax and divide it by your shares outstanding, that would be some amount you could add and say this is what we could have had in earnings per share in addition to what we actually reported, is that fair --

Well, that's one way of looking at it. That's more or less what -- that's more or less the message that was in there. Bruce Zessar – Advisory Research: All right. I just want to make sure I'm on the page with you.

That's the message, and originally before we had all these problems, we were looking for a better year in 2012 than we had in 2011. And you can see in 2011 we had 3.5 -- 3.59 or something like that. Bruce Zessar – Advisory Research: Okay.

So. Bruce Zessar – Advisory Research: Okay.

We just have to be careful that we don't comment on theoretical pro forma calculations.

Yeah. Bruce Zessar – Advisory Research: Okay. And then when do you think you're going to make the go or no-go decision on the ammonia plant at El Dorado?

As soon as our Board approves it. Bruce Zessar – Advisory Research: Okay. And then what do you envision, what type of debt financing are you going to get even past the public markets, private --

We have not finalized exactly what kind of financing. We're in the process of doing that at this time.

That's one of the conditions.

But I will say to you that the public markets are very good now, and we don't have the intention to issue any equity or any debt with equity features at this point. Bruce Zessar – Advisory Research: Okay. No intention to issue equity. All right. And then the other question I had would be, is there some like maximum amount of debt that you would take on? I mean, just to have some sense to how far in the debt you'd go for this.

Right now what we're doing is we're looking at various models of potentially how to structure our balance sheet with combinations of different types of debt that might be available out there. And we're also looking at other options in addition to debt. But we're, at this point in time, we haven't really firmed up on that, but we can tell you this, that probably within the next month to two we'll make that decision, and when we do, what we'll do is we'll notify the shareholders.

Right. I think you're asking us what our debt-to-equity ratio is, and I don’t think we're prepared to comment on that, but we are doing some very significant modeling on a five-year basis to determine what we're going to do. Bruce Zessar – Advisory Research: All right. Then I guess the short-term and the long-term question, as you take the debt out and you have debt divided by equity at that point, but then lookie now, as you construct that new plan, assuming you go forward with it, and you're out five years, would it be your intent to pay that debt down pretty rapidly? What would you intend to do with the debt?

We haven't got to that point about what our intent would be. It depends on what else is on the horizon.

Our operating model right now requires us to carry something close to $100 million in liquidity, in cash at all times, so. Bruce Zessar – Advisory Research: And then how much capacity do you have on your current borrowing agreements?

On our working capital revolver, $50 million. Bruce Zessar – Advisory Research: Do you have any others or is that the only thing that you have?

We have a current one. Bruce Zessar – Advisory Research: How much do you have on the term loan?

We have about $70 million in a term loan. And it's being amortized now. No additional capacity. Bruce Zessar – Advisory Research: No additional capacity on the term loan, you're saying.

We don't have capacity because you have to pay for it, and we can have all the capacity we want if we're willing to make commitments.

Yeah. Bruce Zessar – Advisory Research: Okay. All right. That's everything I had. I really appreciate it, and hope to see you guys at the Sidoti conference.

Okay, good. We're looking forward to it.

Thanks, Bruce. Bruce Zessar – Advisory Research: Thank you.

Thank you. The next question is from David Keiser of Robotti & Company. Please go ahead.

Hello, David.

Hi, Dave. David Keiser – Robotti & Co.: Hi, good afternoon, guys. How are you doing?

Good. How are you? David Keiser – Robotti & Co.: Good. I have a couple of questions on the Climate Control that I think are pretty brief. Before that, I just want to clarify one thing with Tony. When you said $200 million in --

Would you speak up please? We're having trouble hearing you. David Keiser – Robotti & Co.: Yeah, hold on one sec. Is that better?

Yeah, much better. David Keiser – Robotti & Co.: Okay, sorry. I was on a hands-free kit, sometimes it's not great.

Okay. David Keiser – Robotti & Co.: So, Tony, with the $200 million you said in CapEx for '13 and '14, is that an aggregate for '13 and '14 or is that an average for both, for each?

That is the total amount that we have committed to date. It's not everything that we might plan to do, but we have committed $200 million right now. And the majority of that is the weatherly 65% acid plant that we talked about, along with the -- David Keiser – Robotti & Co.: Right. Okay, I just wanted to make sure we weren't talking $400 million over the time period initially. Okay, that's fine. No, I just wanted to clarify.

Right. David Keiser – Robotti & Co.: The other thing was we've talked in the past on the geothermal heat pumps and that ratio of retrofit to new construction, and I was wondering if you could comment on that.

Well, before the recession, I kind of have to give you a little bit of history, before the recession, generally we looked at that business as being about 70-30, 70% new construction and 30% replacement and retrofit. And by the way, that was generally the case across our entire Climate Control business, the commercial side and the non-geothermal as well as the geothermal, okay? During the recession, we saw that, in general, we saw that change, and it got to be more like 50-50 for the commercial business for a few years there because there weren't a lot of large projects and it dragged the average down. What we saw was a bubble that occurred in '10, and really '09 and -- started in '09 and happened in '10 and '11 to a certain degree, where we saw a huge increase in the replacement side of the geothermal business. And that got up to a much larger part of the business. I can't give you an exact number because since we go to market three-step, we don't exactly know where all of our products go, whether they go to new construction. So, some of that's anecdotal. But the percentage got much higher for a couple of years there on retrofit and replacement of geothermal. David Keiser – Robotti & Co.: I -- I'm sorry.

What happened this year was we saw it more or less revert back to its traditional percentage, primarily focused on new construction, something like 70-30 or something in that range. David Keiser – Robotti & Co.: So when you look at the geothermal --

When I say this year, I mean '12. David Keiser – Robotti & Co.: No, I understand, thank you. So when you talk about that ratio in the geothermal heat pumps and then the commercial, are you thinking that that 70-30 range roughly is a healthier range for growth, that that's more indicative that -- I'm trying to figure out what that kind of means to the business and the growth potential and what that says about the market. Maybe I'm doing it in reverse, but that's what I'm getting at. Because if it seems that when things were very bad, you were more 50-50 and they're starting to return, that would seem to me to potentially indicate a growth base.

Well, I think there's two answers to your question. First of all, I think they're really separate considerations, that we wish that the market for replacement was bigger than it was. Because if you look in the United States at across the board, at all air-conditioning and heating that's sold, most of it's sold for replacement. Okay? The vast majority of all the air-conditioning that's sold is replacement units. So they're the big market out there to tap into. But it comes to growth from where we are now going forward, historically, because of the nature of geothermal, it's done better in new construction. So as we see, new construction starts of houses encourage -- we should see that benefit to the business going forward. David Keiser – Robotti & Co.: Okay. And then my last question is, you talked about expanding on product offerings kind of across the board. I was wondering if there's one area you're particular focused on, whether it be commercial or if you could break it down by fan coils, modulators, that kind of thing. What are you looking at in terms of expansion?

Well, I think I covered some of the products. I mean we're -- the answer is we're expanding all of those areas of the business. We've got new products coming out in the future in every one of those areas. We have a very comprehensive list. I don’t -- I really, in talking about new products, really I can't talk about them until they're announced and released to the market, because it's not really good for us to give our competitors a heads-up. David Keiser – Robotti & Co.: Sure.

-- exactly what our product plans are. I think that doesn’t help us any in the market. David Keiser – Robotti & Co.: No, I understand. I guess what I'm trying to understand is a lot of focus is on the geothermal heat pumps, and actually the company as a whole, there's a huge focus now on the chemical side. And it seems to me there's a lot of room for growth and expansion in the Climate Control business, especially on the non-geothermal heat pumps. So I'm just trying to understand kind of how you're looking at --

Right now we're looking at it. We think that, you know, the Climate Control business, we've been in that business since 1960, it's a core business for LSB, we have leading market positions for our key products. We continue to develop new and innovative products. Before the recession, it had quite a bit of growth. That growth was stifled during the recession. But we consider that business to be very well-positioned for recovery as construction comes back. So what we've done during the recession, in stead of cutting it to the bone to maximize the bottom line and perhaps stunting future growth, we've continued to invest in developing the products, the marketing side of the business which is integral to getting that growth when the market is there, and in certain cases, for example, we know that in future years, even though that many of our plants are operating at lower than full capacity, we know that in certain selected areas we're going to need more capacity in the future. That's why we just added on to our air coil manufacturing facility. So we have continued to invest in this business, albeit the investments in this business pale by comparison to the investments in the Chemical business. David Keiser – Robotti & Co.: Right. No, and I --

It's just the nature of the business. David Keiser – Robotti & Co.: Right. No, I appreciate that color and I appreciate that you take a longer-term perspective with that business. And thank --

Before you go, let me make sure -- let me clarify it. The $200 million that we're talking about is not all the spending that we'll see in '13 and '14, it's only what we have firm commitments to spend as of the end of 2012. David Keiser – Robotti & Co.: No, I understood that, but I do appreciate the clarification. And thank you guys for the time, and look forward to speaking with you soon.

Sure. Okay, great.

Thank you. The next question is from Gregg Hillman of First Wilshere Securities. Please go ahead.

Hello, Gregg. Gregg Hillman – First Wilshire Securities: Yeah. Yeah, hi, good afternoon. Hey, can you talk about the ammonium industry just a little bit in general? In particular, permitting, capacity in the industry, how you see that changing over time --

Would you repeat the last part of that? It was a little -- it came through a little garbled on this end. Gregg Hillman – First Wilshire Securities: Sure. Yeah, I wanted to ask you about the ammonium industry, I guess in the United States and world. Do you have any handle on capacity that's being added in the United States in terms of permitting for new ammonia plant?

We do have a handle on that, and this is a question that we've looked at carefully and we -- and, you know, generally in the United States, is it something like 20 million -- consumed tons per year. And historically, about half of that's been imported.

No, about 8 million.

Well, slightly less than half, 40% of that's been imported. What's happening is, as you probably know, there's a rush due to the low natural gas prices to get into ammonia production. So there are a lot of -- there've been a lot of announced plants. All of the announced plants will not necessarily actually get built. Some are announced at early stages and will not materialize. I think there's a general consensus that based on the announced new capacity, that what will happen is that it'll pretty much push the imports out of the market. That's the general market dynamic. In our particular case, we're unique in that our ammonia addition gives, for a plant that is currently buying ammonia off the pipeline, so we're not building a plant and hoping that someone comes and buys the ammonia for us. We're building a plant that primarily will be used, the ammonia, to feed the production that we already have with longstanding customers that we already have. And there will be some excess capacity but the vast majority of the capacity will be for existing business that we already have. And it will reduce the cost of operating that plant.

And we also, based on what Barry said about the backing out the imports, we expect the economics, in other words, the spread between the cost of gas and selling price of nitrogen products to stand up.

Yeah.

It's hard to say how strong that spread will be, but there is no reason to believe that the industry will over-expand to the point that the margins will shrink substantially.

But what we have done, and I can tell you this, is in looking at the long-term justification for the plant, we have not necessarily assumed the extremely favorable conditions that we've got today. So what we have done is we [shocked] our pro formas going forward, pulling down ammonia, taking up gas, to make sure that even if we see the dynamics in the market change somewhat, that we'll have the kind of payback on the investments that we're looking for. Gregg Hillman – First Wilshire Securities: Okay, that's good. And just one follow-up, Barry. Any chance for you to invest in more transportation infrastructure such as tank cars or something so you can get the ammonia somewhere else, or fertilizer?

We have tank cars now and we have some tank cars on order because there's a long lead time. But I think we have an adequate number of cars to handle our production going forward. And as we need them, we can add them. Gregg Hillman – First Wilshire Securities: Okay. And do you think there'll be an export market for your fertilizer products going forward, yeah, outside the United States?

That's the thought I've had. We had it many, many years ago, in the '80s, but I don’t know if that will return or not. I just -- I'm not that smart. There are geniuses out there that can tell you the answer to that. Gregg Hillman – First Wilshire Securities: Okay. Thanks very much, guys.

Sure.

Thank you. The next question is from [Robert Longnecker] of [Joe Street]. Please go ahead. [Robert Longnecker] – [Joe Street]: [Joe Street]? Thanks for the color on the facilities. I had a question, what's the capacity or what's the production you guys are expecting out of Cherokee once it's back online?

Well, the -- we have ammonia capacity there that, and urea capacity, that pretty much sets the upper limit of what we can produce out of Cherokee. They produce about -- they have capacity for roughly 190,000 tons a year of ammonia.

Don't forget that one of that gets upgraded to other products, so we don't -- most of it does. So we don't sell it as ammonia per se. It gets upgraded.

You can make a little over 2 tons of UAN from 1 ton of ammonia. We have, of course you make urea from -- as you're making ammonia, you're using the CO2 to make the urea. So we have a capacity for urea -- let's see, what is that capacity? I think you have to really just focus on the ammonia capacity because that's what drives the other products. You have the option of selling those ammonia or producing urea and UAN.

You do what's most profitable. [Robert Longnecker] – [Joe Street]: So, how come, you know, you guys are talking about the Cherokee and Pryor both maybe $8 million a month in operating income, how come -- Cherokee more profitable as a plant because that has much capacity, but you guys are saying it doesn’t earn as much or more than Pryor?

You're going to have to repeat. For some reason, that didn't come through. [Robert Longnecker] – [Joe Street]: All right. So you talked about Cherokee doing $8 million to $9 million a month and Pryor doing $8 million a month. But Pryor is actually bigger than Cherokee in terms of capacity. So I'm wondering like why Cherokee seems to be more profitable?

We have approximate -- I mean there's a little bit more ammonia capacity at Pryor than there is at Cherokee, but they are both somewhat comparable in terms of the overhead costs in their ammonia capacity. [Robert Longnecker] – [Joe Street]: Right. So if Pryor is 20% bigger, how come you guys, in the number you're talking about, have Cherokee actually potentially earning as much or more than Pryor?

Well, why are we projecting $8 million at both locations, is that what you're saying? [Robert Longnecker] – [Joe Street]: Yeah, exactly.

Well, you have different -- the ability at Cherokee to produce other products where your ammonia is down in terms of we've been purchasing ammonia and producing other products. So there are a lot of different variables in there. But it just happens to be approximately the same. [Robert Longnecker] – [Joe Street]: Okay. And then if I look at just putting Pryor aside for a second, I look at El Dorado and I look at Cherokee and the numbers you guys put, and it sounds like kind of on the low end those two facilities together can be doing kind of $9 million a month in operating income, which would be $27 million a quarter. And when I look back for the last couple of years, it doesn’t look to me like you guys have done any quarters, where we take Pryor out, you guys actually done any quarters where you did $27 million, excluding Pryor. So I'm wondering if you agree with that, if there's something that's changing going forward.

A lot of it depends on the economics month to month and the -- you got to keep in mind also that a lot of the numbers that we're talking about, as I mentioned in the presentation, part of this $8 million is fixed cost that continues while you're not producing products. So that's basically just cost that you're paying every month to stand there and keep your workforce together and depreciate the property. So it's not necessarily indicative of what you're going to earn, but it increases your loss above just your loss margins. You're paying to absorb that fixed cost, you're expensing that off month after month when you're not producing ammonia.

Another way, same what he said is, that the cost, what's costing us a month not to operate a plant is not the same as the profits that you're going to make when the plant is operating. And what we've given you are the costs that it's costing us when the plants are not operating.

That's correct. [Robert Longnecker] – [Joe Street]: So, wouldn't the profits be even higher? Now there's a big $8 million --

We have financial statements out there of our profitability in periods where we're producing and when we're not producing. And what we're telling you is that in the periods that these ammonia plants were down, we continue to expense off the fixed cost and we're unable to generate the sales that we would have otherwise generated in those particular markets in those particular months. So we're not asking you to try to recalculate what earnings are going to be going forward, and as I mentioned in the presentation, the effect of income is disproportionate to the lower sales because you've got those fixed costs that are going out. [Robert Longnecker] – [Joe Street]: So you're not paying, let's say going forward we have a quarter where all of those, let's say, Pryor is running, Cherokee is running, El Dorado is running, can we expect a quarter where that's call it eight, eight and one, so 17, that's a $51 million quarter, that's not what we should expect?

We're comparing it to what we did in 2012. We're talking about what we did in 2012 versus what we would have done if the plants had been running based on our estimates.

And we're not forecasting what's going to happen in the future. [Robert Longnecker] – [Joe Street]: Okay. And you guys, when you're talking about, on the new ammonia plant, you said you're buying ammonia at the pipeline. Do you know where that's coming from? Is that Trinidad ammonia?

The pipeline is fungible. Some people put it on, some people take it off. [Robert Longnecker] – [Joe Street]: Right.

We have contracts where certain suppliers put it on and we take it off. I mean it's basically like a gas pipeline. [Robert Longnecker] – [Joe Street]: Right. Okay, thank you.

Sure.

Thank you. The next question is from Dan Mannes of Avondale Partners. Please go ahead.

Hi, Dan. Dan Mannes – Avondale Partners: Hi, guys. One last follow-up question, and I think this is in response to -- this is a sort of follow-up to something Tony said. When asked about the financing on the prospective El Dorado ammonia expansion, you commented there wouldn’t be equity but you said debt or something else. And I guess I was wondering if you could sort of give us some color on what something else could be.

Well, I was talking about public debt versus maybe private debt. So you may have some public -- like a strip of public debt, and then maybe a Term A bank line in there in addition. So it'd be some combination. As Barry indicated, we're working with quite a few people to try to structure our debt capital going forward on the optimal basis. Dan Mannes – Avondale Partners: So it will be debt of some sort, just the flavor hasn't been decided yet?

That's right. Dan Mannes – Avondale Partners: Okay, got it. Thank you.

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

Okay. At this time, we will turn the meeting over to Carol Oden. Carol: Thanks again for listening in today. The comments today contained 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 statement nature identify forward-looking statements including but not limited to all statements about or any references to the Architectural Billing Index or any McGraw-Hill forecast including those pertaining to commercial, institutional, and residential building increases or industry growth and McGraw-Hill's forecast regarding the total green retrofit renovation market and energy-efficient market. The forward-looking statements include but are not limited to the following statements. We believe that many of these initiatives will help us take our Chemical business to a new level of reliability and overall profitability. We expect the construction of the new asset plant at the El Dorado facility will be completed in 2012. Industrial mining sales are expected to be a lower percentage until a new acid plant is rebuilt at El Dorado. The major heat exchanger is not expected to be delivered to the Cherokee plant site until April. We expect Cherokee to resume production in May. We expect Pryor to resume production during March. Implementation of these programs will contribute to improve reliability and more consistent operations of these facilities in the future. We should expect to have less unplanned downtime and improvement in our overall production out of these as these programs take effect. We anticipate improved results from the resumption of the growth pattern for the Chemical business. We plan to continue to invest in this business to increase capacity, improve its reliability, and reduce costs. Until the facilities return to normal at various points in…

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