LSB Industries, Inc. (LXU) Q3 2013 Earnings Report, Transcript and Summary

Greetings and welcome to the LSB Industries Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Kristy Carver. Please go ahead.

Thank you. Good morning. Welcome to the LSB Industries Inc. third quarter 2013 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, Executive Vice President and Chief Financial Officer. This conference call is being broadcast live over the Internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.lsbindusstries.com. After comments by management, a question-and-answer session will be held. Instructions for asking questions will be provided at that time. Information reported on this call, speaks only as of today, November 06, 2013, 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 power point PDF that is posted on our website at, www.lsbindustries.com in the webcast and presentation section of the Investors tab. Please note that the presentation starts on page three of the power point. And now, I will turn the call over to Mr. Jack Golsen.

Thank you Kristy. Thanks for joining our third quarter 2013 conference call today. In the third quarter, while improving in some areas, we fell short of the expectations we held going into the quarter for a combination of reasons. We share our fellow shareholders frustration with the most recent disruption at our Pryor facility which had been operating at close to design capacity through much of the third quarter, but experienced periodic production issues as the quarter progressed. From a positive perspective the diagnostic system that we installed at Pryor earlier this year served their purpose, enabling us to curtail production gradually and preventing further comps. [Technical Difficulty] For the purpose of those that joined the call late and for the fact that we were interrupted by a disconnect, I am going to start my summary introduction over. In the third quarter while improving in some areas, we fell short of the expectations that we had going into the quarter for a combination of reasons. We share our fellow shareholders frustration with the most recent disruption at our Pryor facility which had been operating at close to design capacity through much of the third quarter, but experienced periodic production issues as the quarter progressed. From a positive perspective, the diagnostic systems that we installed at Pryor earlier this year served their purpose, enabling us to curtail production gradually, preventing further complications. We expect to have the facility back in operation during November. While the performance of Pryor has been erratic, over the past year we made progress towards the goal of sustained production levels through the upgrade of equipment and systems, the strengthening of our facilities management team, the implementation of new processes and procedures with the help of outside industry experts to supplement our internal engineering staff. All of…

Thank you, Jack. Before reviewing the 2013 financial results in detail, a few comments about the third quarter. Although below our expectations during the quarter our consolidated operating income of $23 million was better than the third quarter of 2012. The improvement was primarily due to the Pryor and Cherokee facilities returning to production during the latter part of the second quarter, partially offset by much lower selling prices for nitrogen fertilizers and higher natural gas prices. Also included in the quarter, [indiscernible] metals recoveries of approximately $9 million. Below the operating line was the cost of the early extinguishment of debt and higher interest expense reflecting the senior secured note financing that we closed in August 7th to fairly extensive expansion underway within our Chemical business. For review of the comparative third quarter consolidated results, please turn to page 4 of the PowerPoint presentation. Net sales were $177 million or 3% below 2012. Operating income was $23 million, compared to $12 million. Interest expense was $5.4 million, compared to $1.5 million. The increase include interest on $425 million senior notes sold on August 7th. More about this later. After cost early extinguishment debt and provision for income taxes report net income of $10 million or $0.43 per share, compared to net income of $7 million or $0.28. EBITDA was $29 million versus $17 million. Continuing on Page 4, for the first nine months of 2013 compared to the first nine months of ’12, net sales were $530 million or 9% below, operating income was $35 million compared to $77 million. After interest expense and taxes, net income was $18 million or $0.75 per diluted share, compared to $47 million or $2 per diluted share. EBITDA was $54 million compared to $93 million. The significant decline in consolidated operating income…

Thanks Tony. I’m going to focus on sales activity, order levels, product backlogs that were pertinent, and market drivers as we see them at this time. I’ll also give you an update on progress with the major capital projects at our El Dorado facility which we referred to as EDC. To start, please turn to Page 9, which shows you our 2013 year-to-date sales mix by the markets we serve. This is a change from historical sales mix due to the downtime at certain operations that we’ve discussed with you many times. On Page 10, we’ve also included the sales mix for the full year of ’12, which is probably more typical of our sales mix with normalized chemical operations. Focusing first on our chemical business, please go to Page 11. Although we have included down about our third quarter and year-to-date sales on this in the next two pages, comparisons to 2012 for the most part are not meaningful because of all facilities were not fully operating during a large part of the first half of 2013 and a portion of the third quarter. Having said that, total sales for the chemical business during the third quarter were $104 million, down 5% from the third quarter of ’12. During the third quarter of ’13, agricultural product sales were higher than the same quarter a year ago. Natural gas sales are new this year so there is no relevant basis of comparison. All other major product category sales were down relative to the third quarter of ’12. Total sales during the first nine months of 2013 were $303 million, down 19% from a year ago. All year-to-date product sales were down compared to the first nine months of 2012. Now please turn to page 12 for sales of our key…

and:

Thank you. We will now be conducting the question and answer session. (Operator Instructions). And our first question comes from the line of Dan Mannes with Avondale. Please proceed with your question.

A couple of questions obviously centered around the Chemical business. First if we can start out on the downtime incurred both in the third quarter and then into the fourth, can you maybe give us a little bit of a better understanding what actually occurred at Pryor; number one did this relate to maybe some of the equipment you had recently replaced or previously replaced or was this downstream or impacted, just a little more color on what actually caused the intermittent output and then was ultimately your decision to take the plant down? That would be helpful? Avondale: A couple of questions obviously centered around the Chemical business. First if we can start out on the downtime incurred both in the third quarter and then into the fourth, can you maybe give us a little bit of a better understanding what actually occurred at Pryor; number one did this relate to maybe some of the equipment you had recently replaced or previously replaced or was this downstream or impacted, just a little more color on what actually caused the intermittent output and then was ultimately your decision to take the plant down? That would be helpful?

I think that is a good question and I’m going to try to answer it as concisely as I can Dan. Just to remind those that may be weren’t listening before or that aren’t quite as focused on this as you are, we installed a new ammonia convertor and we had the plant down from I believe November to April for that ammonia convertor installation. And the primary reason was to increase the production rate because we had determined that was a bottleneck in the plant. Since returning to operation after the -- and let me also remind you that during that period we installed some new diagnostics, monitoring equipment, vibration monitoring equipment and diagnostic software to help us control the plant better and to get earlier warnings when things were getting out of tolerance at the plant. Since we returned to operation, after installing the new ammonia converter our synthesis gas compressor had experienced a vibration in its second stage rotor bundle. There are three stages in that synthesis gas compressor. We were constantly monitoring that vibration. It was detected by our newly installed vibration and monitoring software and diagnostic software. And as a result of those diagnostics, we knew that we were going to probably have to replace that second stage rotor bundle and we ordered a new one and we got it in and we had it online and the plan was just keep it as a spare or to change it out fairly quickly and it is normal to have these on hand for this type of equipment. Our original intension was to have a relatively short outage around the arrival date of that spare rotor bundle, to install it while continuing to monitor the ongoing vibration until that time to ensure that it didn’t reach…

Okay, if I can just make three quick clarifications. Number one, it sounds like all of the stuff that you’re ultimately replacing were unrelated to the major replacement that you did last year or that you started in late ’12 on the non-commuter? This is a completely separate set of equipment? Number one. Number two… Avondale: Okay, if I can just make three quick clarifications. Number one, it sounds like all of the stuff that you’re ultimately replacing were unrelated to the major replacement that you did last year or that you started in late ’12 on the non-commuter? This is a completely separate set of equipment? Number one. Number two…

That’s true.

Number two, the second clarification was where these issues that you subsequently replaced, were those the reasons for the intermittency during the third quarter? Avondale: Number two, the second clarification was where these issues that you subsequently replaced, were those the reasons for the intermittency during the third quarter?

Well, to some extent it turned out yes because we had some, what we call electrical trips that subsequently we think were probably related to some of the deterioration in the motor that we discovered when we took the motor apart.

Okay, and the third clarification on this is, at the time when you did PR that you were going to take the plant down from at some point in October until November, was there a reason why at that point you didn’t disclose the intermittency that occurred during the third quarter? Avondale: Okay, and the third clarification on this is, at the time when you did PR that you were going to take the plant down from at some point in October until November, was there a reason why at that point you didn’t disclose the intermittency that occurred during the third quarter?

Well, we knew we had the conference call coming up and we felt that rather than give a cursory explanation, that we were going to go into it in much detail in this conference call. So we left it for the call.

And then my second question, that was all one question. My second question relates actually to the chemical performance during the third quarter and I appreciate Tony’s attempt at maybe walking us through a year-over-year bridge which is helpful. But I wanted to maybe delve into that a little deeper. At a high level, when we look at the numbers, if you back out the precious metal gains and the insurance, it look like you up may be $1 million or so year-over-year in spite of much stronger production. So I’m wondering if you start from those points, I guess 8 million last year versus give or take 9 million this year excluding insurance and precious metals, can you sort of walk between the difference in those two numbers? Because it sounds like maybe maintenance cost and D&A and things like that were kind of bigger items this year than maybe we realized. Avondale: And then my second question, that was all one question. My second question relates actually to the chemical performance during the third quarter and I appreciate Tony’s attempt at maybe walking us through a year-over-year bridge which is helpful. But I wanted to maybe delve into that a little deeper. At a high level, when we look at the numbers, if you back out the precious metal gains and the insurance, it look like you up may be $1 million or so year-over-year in spite of much stronger production. So I’m wondering if you start from those points, I guess 8 million last year versus give or take 9 million this year excluding insurance and precious metals, can you sort of walk between the difference in those two numbers? Because it sounds like maybe maintenance cost and D&A and things like that were kind of bigger items this year than maybe we realized.

Well, we had, Dan we had, as I indicated much lower selling prices, only product that we produce in sale. We had a higher natural gas cost. SG&A costs were higher. Due to the downtime we had the higher maintenance repair cost. So what we tried to do is equalize the effect of the downtime and then account for that difference. So if you add back the estimate of the negative impact of the downtime in both the years, you’ve effectively accounted for the fact that you’ve equalized the production level in both years. So although 2013 third quarter was disappointing, even after that adjustment we guessed market conditions here that everybody is aware of is driven by of the fact that, you’re in the third quarter, you’re in the offseason you’ve got the USDA forecasting major and pretty much in the stock used ratio. So people for the most part are reluctant to commit to a price. Sellers are reluctant to commit and buyers are reluctant to commit. Our marketing department thinks this should break loose pretty soon but the growth [indiscernible] significant restocking gets started, that we elected to go ahead and move the product and keep in mind last year in the third quarter we had almost $14 million of firm sales commitments going into the quarter this year because the downtime in the first half year. We didn’t have much in the way of firm sales commitments. So there are lot of market conditions here that we don’t believe are true indicators of the long term view on the spread between our cost and the selling prices.

But Tony could you went through kind of quickly in your prepared comments. Can you walk back through that math again real quick, just so I make sure I have it in terms of the comparison from Q3 to Q3? You went through kind of quickly originally? Avondale: But Tony could you went through kind of quickly in your prepared comments. Can you walk back through that math again real quick, just so I make sure I have it in terms of the comparison from Q3 to Q3? You went through kind of quickly originally?

What we did Dan, is we said okay operating income in the ’13 quarter was $17.17 million, call it $18 million $7.5 million last year, call it $18 million versus $8 million for a $10 million difference. If you add back the $23 million to 2012 and the $7 million to ’13 you basically have $25 million versus $30 million adjusted for downtime. That’s a $5 million difference. So the difference was result of a number of things which tended offset to let down to 5 million. You have $7 million in lower selling process for nitrogen, primarily UAN and ammonia into the fertilizer markets. You had higher nitric gas cost, which costs affected the operating income by about $3 million. Then you had the other miscellaneous higher maintenance repair and higher SG&A and by the way the higher SG&A is a result of all the outside engineering expertise that we brought into help us get these diagnostics in and to scheduling and preventing maintenance. So we have spent a lot of money that’s not necessarily going to be recurring cost in the future, but they were in this third quarter and probably some in fourth quarter also. So if you add the 7, 3, 1, 2 that basically offsets the $8 million to $9 million that we had favorable and therefore the interest recovery of $4 million and catalyst recovery about $5 million, as you recall from time to time, we had to those catalyst recoveries and [indiscernible] and adjustment of the burn off of previous years of catalyst.

Great. And just one question here, just a clarification and then a comment. How much of the increase and cost was D&A? I was just looking through it and it looked D&A for the segment crept up $2 million year-over-year. How much does that play into these numbers? Avondale: Great. And just one question here, just a clarification and then a comment. How much of the increase and cost was D&A? I was just looking through it and it looked D&A for the segment crept up $2 million year-over-year. How much does that play into these numbers?

Depreciation?

Yes, D&A looks like was a deal higher year-over-year. Avondale: Yes, D&A looks like was a deal higher year-over-year.

That has an impact. Obviously we’re spending, now the construction projects will not be depreciated until we turnkey the projects, but we have invested over $70 million in this plant since we began three years ago. So that depreciation does have some impact.

You’re talking about Pryor? Avondale: You’re talking about Pryor?

Talking about Pryor.

Well just the whole Chemical segment showed about $2 million up year-over-year in terms of D&A. Avondale: Well just the whole Chemical segment showed about $2 million up year-over-year in terms of D&A.

And so D&A will continue to increase as we go.

Right, so just one comment and again thanks for walking through that. Going forward this might be really helpful for me and other investors, if you could provide to us sales volumes by ton and production volumes by tons of your major project products as well as average realized pricing, I think that will make it a lot easier for us to kind of reconcile results from period to period and I know that’s kind of best practice for a lot of other chemical companies? Thanks

I have noticed that a lot of the larger companies do that. We have an issue with disclosing average process on our contractual business because that’s confidential. We could consider that for agricultural in future.

In other words to kind of - let me restate what he just said. We have very specific individual contracts with customers that have confidentiality clauses that preclude us from disclosing specifics of those contracts, including the pricing of the products that are sold. Also from a competitive standpoint and a marketing standpoint, it doesn’t make a sense for us to publish to the world the pricing that we have on a very specific contracts that we have in place, that are not at market price necessarily, okay. And so on the Ag side of the business, it’s sold its spot market, everybody knows what’s spot market is. There is no big mysteries there. But on half of our business it’s difficult for us to disclose that information because of the nature of the business and the relationships behind it.

Unless you want to tell your competitors what you’re doing.

Yes. So we will take under advisement what you’ve suggested on the Ag side, but we have that issue that we have to deal with; just so you understand.

Our next question comes from the line of the Joe Mondillo with Sidoti & Company. Please proceed with your question. Joe Mondillo - Sidoti & Company: I think in terms of Dan was saying in the Ag volume, that alone would be extremely helpful. So I’d also relay that. But my question has to do with in terms of - I’m just trying to figure out exactly what happened in the quarter at Pryor and it seemed like the production that you disclosed in terms of ammonia production was pretty good actually in terms of expectation and utilization rates. So my question is, how much of that translated into sales versus I guess quarter end inventory and so I guess if you could just talk about sort of the operating performance of the plant outside of initial production of ammonia, that would be helpful?

Well, we talked in the 10-Q about the production level of 45,000 tons. Part of that gets converted into other products at Pryor and part of it gets sold as ammonia. So as I indicated, going into Q3, we didn’t have much in the way of inventory and we didn’t have much in way of sales commitments, but from a production standpoint inventories increased about 8000 tons but not much. So we pushed a lot of the product into the market at lower prices. So we had an increase of about 7,000 tons of UAM inventory during the quarter. Joe Mondillo - Sidoti & Company: What about inventory of ammonia? I guess what I’m getting at is the 45,000 tons of ammonia, regardless of the lower prices and maybe the slightly higher prices in that asset, it seemed like the plant should have been more profitable and should have boosted the earnings and I think that maybe is why maybe people's expectations were a little higher. So I am just trying to reconcile that.

Essentially you get down to the other items that we talked about and that's lower pricing and higher natural has costs and SG&A and….

I mean I am just looking here at a chart that's showing some comparing year-over-year cost of the key things that impact it and for example ammonia, which we sell out of that plant compared to '12.'13 was over 200, market -- the general reported market numbers are about $220 a ton less for ammonia.

Nitrogen prices are down 30% from last time.

And of course gas was up $1. That translates to about $13 a ton. At the UAN level, and UAN selling prices compared to a year ago were down about $65. So you go about an $80 spread differential on UAN. I’m just roughing it out here, not doing an exact calculation. Over $200 selling price reduction in ammonia. So you have got an increase in gas costs. On ammonia it's not $13 a ton, it's more like $26 or it's more like $31 a ton differential in cost due to the increased gas cost. So you had a lot of fundamental shifts around on us that had the effect of compressing the potential margin on these products. Joe Mondillo - Sidoti & Company: And you also mentioned the 8,000 tons of UAN was stored in inventory. So that's essentially, roughly 16,000 tons of ammonia of the 45. So essentially all the 45 wasn't really translated into sales per say.

Well, the increased inventory I had talked about was on UAN. So there is about 42 tons and ammonia and a ton of UAN. So we have been about half of that as far as the ammonia content of the UAN. Joe Mondillo - Sidoti & Company: Okay. Second question I just had was the $160 million of other CapEx related to maintenance and other things. I was wondering how much of that has been spent already and if it's significant amount left over in the future, what is that sort of being budgeted for?

Joe, we didn't disclose what our exact spending was. What we talked about is the fact that these plants are for the most part, as previously announced, as far as what we're going to spend, and the spending is consistent with the percentage of completion, very mission that we’re running and permitting. So what we're doing is monitoring the spending, keeping it in line with our projected cost and our total cost over the three year period. So I think probably the best way to address that is that we're right on target as far as our spending versus our plan. We can't get too far ahead here. We can't move certain expenditures until we have a permit. So I don't think the amount we spent today is as meaningful as the fact that we're on target and the spinning is consistent with the percentage of completion.

We did cover our FX in each period in the cash flow segment.

And if you notice in the current cash and the non-current investments, we have significant amount of cash and capabilities there to complete the plans. Joe Mondillo - Sidoti & Company: I guess the point that I am sort of trying to get at is the $160 million, it looked like it had a lot to do with maintenance and revamping the plants and I guess my question of how much of that $160 million we have spent already. I am trying to get an idea of where we are in terms you're budgeting for revamping prior and updating it and putting in these diagnostics and I was just trying to get at how much of that $168 million you have spent already to date? Or where we are in terms of -- just where we are I guess.

I think we’re probably going to have to get back to you on that Joe, because I don't think we have a work paper on front of us and I just hate to wing it. Just look at our queues and see that, but we'll be glad to do that.

And our next question comes from the line of Keith Maher with Singular Research. Please proceed with your question.

Question and this is specifically about insurance recoveries in Q4. I’m just trying to understand how much of that is going to flow through the income statement and where that’s going to show up.

As we indicated we’ve got additional $53 million to receive and we deferred $24 million, and [indiscernible] $24 million differed. So the $24 million and the $53 million will flow through when we receive the cash in fourth quarter as agreed.

I know it summarize [ph] what reduction of cost of goods sold, where else would it show up?

Other income -- there another. That's as relates to the recent settlement on the issues at El Dorado. Now, if we come to a conclusion in the fourth quarter for the Cherokee claim, there will be some additional impact. But when Tony is talking about that, that’s what we know of today based on the actual settlement. But we also have the additional potential if we resolve the Cherokee claim and we’ll have additional settlement agreement on the Cherokee claim. We’ve already paid 15 million of which we differed to at the September balance sheet date. I don’t believe we disclosed what we anticipate on that at this point.

So basically, El Dorado will be taking care of this quarter, then Cherokee could potentially see some effect going.

It could very potentially happen before year end. It could also push out to the first quarter because we’re not in total control of the timing on these things.

Then I had a question about just SG&A. I mean you’ve mentioned obviously you’ve had some other expenses this year, just with all of the extra work that’s had to have been done. Next year, could you give us just some guidance on where you think the SG&A levels could be? Could they kind of drop back to where they were say in 2012?

Let me say this. I’m not prepared at this point to give you total SG&A guidance, but with regard to the things that have to do with beefed up reliability at these plants and programs that we’ve implemented and personnel that we’ve either hired to planned to hire, you could see on an ongoing basis that somewhere in the neighborhood of north of $2 million a year increased costs on a going forward basis. We had initially more than that the first year because we had some one time consulting services that won’t repeat, but they will reduce on a going forward basis, that based on the personnel that we either have currently -- when we started the program to beef up the programs between the personnel and some ongoing outside services that will be required, some inspection services and some consulting services is probably going to be north of $2 million a year.

And that’s basically engineering people.

Yes, engineering resources, reliability resources, some maintenance resources focused on reliability throughout the plants. Basically, it was about 14 headcount total increase by the time we’re done and it came out to about a 1.5 million a year in total on headcount and then you’ve got other consulting services and outside services and that could range from 0.5 million to a 1 million a year for a while. So that’s why I’m saying it’s going to be north of 2 million in totals. But I’m not sure of exactly what the numbers will be and then in addition to that you get to phase in of these and timing of these various.

That assumes there are no more government regulations that require more.

And just one question on the Climate Control business. You touched in particular on the residential side and you touched on this in the prepared remarks, but it does seem like there is starting to see a bit of rebound in the mid to higher end housing, which is obviously more of a target for your geothermal products. Do you think you’re starting to see that? Obviously the residential orders have done a little bit better I guess so far this year?

Well, we’re seeing a lot of activity but I always hate to talk about activity before it materializes, and to actual results but we are seeing definitely more activity in that area.

And our next question comes from the line of David Deterding with Wells Fargo. Please proceed with your question.

Just had a quick question on the CapEx spending a little bit, just to delve in, it looks like year-to-date you spent about $114 million. You’ve laid out about $650 million here. Assuming we get the permits in the fourth quarter, which is I think you guys, as the assumption is, how do you think about capital spending in 2014? How much of this $650 million would be spent in 2014 and then obviously the fourth quarter this year? I’m just trying to get the capital budget kind of the laid out of the next couple of years?

Well, the ammonia plant, we aren’t sure as to when that’s going to be completed, then we can really accelerate the spending. But that aside, the majority of it would be spent in ’14. The majority of what we are spending on the nitric acid plant and the concentrator, the RSBO will be spent in ’14. Some of the spending on the chemical plant, excuse me, ammonia plant will probably push out into ’15.

So we can think about most of this as being pretty heavily for 2014 weighted?

I think so.

And then can you…

On the permitting.

Right. And then can we just talk about mining a little bit? I mean you talked about some minimum take or pay arrangements. Does mining still have another leg down here? Are we kind of at a low point volume wise that you guys think that you will continue and we will see a pick up or kind of how are you thinking about the mining segment going forward?

The majority of our business is concentrated in circus [ph] coal. Everything you read is that coal production is down in all areas of the country. Demand is starting to pick up a bit. As Barry indicated an overview that we have -- most of our business is based upon a minimum quantities but there is an effect, that doesn’t help us on the top line because you certain fixed cost and profits paid for irrespective, they take or not but we believe that demand in 2013 is going to continue to be relatively low.

The only area that is really doing well is out west.

If you look, I’m going to refer you back to Page 17 in the presentation in the PowerPoint presentation that we put out on the website. Now I’m going to start off with the disclaimer and that these are not our numbers and we don’t take responsibility for these numbers. But they are published numbers. So the Department of Energy, the Energy Information Agency, every year they publish an outlook for various types of fuels and energy and coal is one of them and in the upper left hand corner of that page, you can see what the long term outlook is for coal. And they have subdivided it into Aplasia, the west in total. So they are projecting kind of a bottoming out here around say 16 it looks like. And then some pickup in the west that they are showing Aplasia as kind of declining and then leveling out but the west picking up, in total picking up and that is where most of our market is. So I don’t know if this will come to pass. This is a changing fluid situation but I will just point those statistics out to you.

Our line of the western coal is exported.

Yes.

And then just lastly, we are hearing about some dumping of urea from the Chinese on to the U.S. market. Are you seeing any impact on your business from the urea flowing into the U.S.?

Yes, we mentioned that in the call, we kind of went over it quickly but it is a nitrogen product although not the same nitrogen products as the one that we typically sell. We produce it but we don’t sell it as an end product at this time and it has definitely had the effect of depressing the price of other nitrogen products, including UAN. Okay. And to some extent AN. So that has definitely had an impact.

Today’s paper said that the Chinese shut it off again. They shut off their export.

Yes. And they tend to do that. There is some sort of a tear out that’s invoked or not invoked and that impacts their export versus their internal usage. But from our standpoint it’s hard for us to predict what they are going to do going forward with that.

And the next question comes from the line of [indiscernible]. Please proceed with your question.

Just in terms of Pryor, obviously a lot is going on in the last year. I wonder if you could just take a step back and give us kind of a big picture overview of what has been fully replaced, if there is anything major left that hasn’t been fully replaced and just kind of help us understand where we stand on I guess affectively like a full read through over that plant?

Well when we first started putting the plant together, we basically replaced the reformer. Then we ultimately replaced the liner of the urea plant which was essentially, that was like complete rebuild. So essentially it’s like your new urea plant because the liner is what’s critical in that plant. Should we call, we had that. We then replaced last year the ammonia convertor, which was replaced. We’ve added a lot of instrumentation. We’ve added, there is a lot of small things throughout the plants that are not major vessels but that are valves and various things throughout the plant that have been replaced. What am I not thinking about, Jack?

Give them the background of that. That’s important, because we’re replacing all the stuff.

Yes, so gradually what we’ve done is we work through the plant and where we’ve had issues we’ve replaced these various - we’ve either upgraded or refurbed or replaced these various components. We have plans going forward to continue to upgrade the automation of that plant and this is a process that you can’t do overnight, it takes a while to convert it. But this plant had old instrumentation and we’re upgrading it with new state of the art digital instrumentation and sensors. We added the GE manufactured Bentley Nevada vibration systems and information gathering that tells you several of the large pieces of equipment, that give you an heads up as to vibration that is either within or without the normal vibration range at the operation. So we’ve been and we’re always doing things, like for example we put this brand new 14,000 horsepower motor in. That happens just in the life of a plant. As things get to the end of their life, you replace them with new parts. Typically with a plant that over -- it's kind of an airplane that you fly in, you’re getting on 50 and 60 year old airplanes and flying them all the time, which probably doesn’t give you much comfort but they’ve been in for maintenance and the whole thing’s been, the engines have been replaced several times, the instrumentation has been replaced several times, et cetera. And that’s the way these chemical plants are. Over time you end up replacing and refurbing pretty much the whole plant.

I think you got to go back to the fact that when we bought this plant it was shut down and we had to re-staff it and we had to start it up

I know little bit about the history. But I guess is there major stuff that’s still kind of done that you guys are expecting to do in the next couple of years or at this point do you feel like the major stuff has been replaced and is done?

We think that the major pieces of equipment have been replaced or brought up to speed. There are things that we can further do to enhance reliability that we will continue to do but they aren’t replacing major pieces of equipment, that we know at this time.

We have the ability to diagnose what needs to be done and get it done during the turnarounds hopefully going forward.

I think, I mean this raises an issue that I think is kind of the elephant in the room about Pryor, which is we’ve had a lot of these trials and tribulations with Pryor and everyone’s wondering, are we ever going to get Pryor up to speed? Everyone’s wondering is it ever going be reliable? Everyone’s very frustrated and there is no one more frustrated than we are here. Well, by the way, one other thing that we’ve done is we’ve really invested heavily in increasing the capital spares at Pryor, so that when we do have an issue, we can deal with it quickly, much more than it had before. But coming back to the elephant in the room, or the big picture of Pryor; I think that with the benefit of hindsight and with knowing now, what we knew then and recognizing that Pryor was a different case than any of our other plants, when we acquired El Dorado, it was an up and running plant. It had its issues and we improved it overtime but it was up and running and fundamentally sound and it had been running for many years. The same situation with Cherokee. The plant in Baytown was a brand new state of the art plant when we put it in. But Pryor was a plant that history wise was out of commission for 10 years and we I think underestimated what it would take to get it up and running. If I had to do this thing all over again and it was three years ago and a shareholder was asking me, while we were having a conference call about what the expectations are for Pryor. What I would have said was we’ve got a great diamond in the rough here, a terrific value with the lot of potential. We’re going to need to upgrade it as we go and it’s going to be difficult to predict exactly how long that’s going to take. And it’s going to be bumpy until we get it finally up to speed. And that’s kind of where we are but I think we’ve pretty much been through most of the plant at this time.

And what we have is something with thrust.

Yes that’s right. We have a total investment in this plant now and somewhere I think in the mid-80s. If you net out from that, the retained earnings from the profits we’ve made we probably have a net investment in that thing in the mid-60s and based on that plants that are going in now and recently at quotes that we’ve gotten for plants that we’re working on including, all of the other ancillary equipment et cetera, you’re looking at a plant that if we had to replicate it, would be somewhere between $600 million and $700 million. And so we think that even though it has been unreliable so far and it hasn’t achieved our expectations yet or it’s potential, that when we get there, that it is going to be a very valuable asset.

So what inning do you guys think it’s in now if you had to guess? I mean, you have the three years of hindsight that you said, it’s going to be - whatever it’s going to take to get us to where it’s running smoothly and now you guys have done all this work. You think you’re at the seventh inning and it’s just kind of fine tuning from this point or is it still too early to tell?

Well, I am not much of a baseball fan but that.

Okay, me neither. You can use a percentage if you want.

It’s hard to exactly quantify but I can say this. Beside all the pieces of equipment that we replaced or referred, we’ve got now 3 years of operating history with the staff that we had to bring in. So that staff is much more well trained. We have run in not only - we have increased all the internal engineering staff and we brought in some outside experts, industry experts to help us improve and install systems that didn’t exist in the plant that we had before, that are key systems that are geared to reliability. For example, a computerized maintenance management system, which that plant did not have, our other plants do, but that one didn’t have it initially. So anyway, and the new ammonia convert, all the things that we’ve done that we’ve talked about, we’re significantly down the road and we’re much closer to being there. I hate to try to quantify it specifically based on history. I have learned one lesson through this process and that’s to not to try put an exact time fence on this process.

Well, it looks like you’re making - the diagnostic run is obviously helping.

Yes, that’s a big step forward because I think if that same situation had occurred two years ago before the diagnostics, the plant would have run until it crashed and it would have been a much longer outage and it would have cost much more.

Are you guys going to put out a release when it’s back up and running or is that just going to be something that we’re going to hear about in the next call?

I think if it’s - we haven’t’ really discussed that yet. If we do, it will be after we’ve sustained it and we’re are very comfortable with it. Because when you’re coming up you have ups and downs as you come up take few days.

From my perspective it would be nice if you guys get it up and running it back to normal, I’d appreciate a release because that’s probably how we learn about things so.

We understand and we appreciate that comment.

We have reached the end of the question-and-answer session. I would now like to turn the call back over for closing comments.

Okay, I’d like to turn the call. We’d like to thank everybody here for having an interest in LSB and your participation today and we appreciate that. If you will stay online, Kristy Carver will review certain very import information about the content of our presentation. So Kristy, would you please present that?

I will, thanks Barry. We’d like to thank everybody for listening today. The comments today contain certain forward-looking statements. All of the 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 nature identify forward-looking statements. These are 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 for investor growth and McGraw-Hill forecasts regarding the total green retrofit, renovation markets and energy efficiency markets, any references to coal production, polyurethane production capacity growth, U.S. pipe production or basic and organic chemical trends. The forward-looking statement include but are not limited to the following statements; our actions will ultimately this facility to deliver sustained production and substantial profitability. We expect to have the plant fully installed and operating by late 2015. Pryor is expected to be in production during November 2013. Projects will provide El Dorado with expanded capacity, improved efficiency, product mix flexibility and should result in a significant reduction of feedstock cost. We believe our actions will lead us to a significantly improved financial performance for 2014. Our capital spending plan, positive fundamentals and favorable indicators for the Ag business, effective lowering the ethanol mandate corn production, El Dorado's nitric acid capacity will continue at current level until we complete construction of a new Weatherly 65% acid plant and concentrator during 2015. We anticipate issuance of the permit in the near future. We plan to have ammonia plant constructed and in operation during the latter part of 2015. We plan to replace the DSN, Direct Strong Nitric acid plant in EDC level of industrial and mining sales, timing and or completion…

This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.