Lsb Industries Inc. (LXU)

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LSB Industries Inc. (LXU)

Q1 2010 Earnings Call

May 6, 2010 5:15 PM ET

Executives

Carol Oden – Investor Relations

Jack Golsen – Chairman and CEO

Barry Golsen – President and COO

Tony Shelby – Chief Financial Officer

Analysts

Michael Coleman – Sterne, Agee

Brian Kremer – Roth Capital

Dan Mannes – Avondale Partners

Ryan Wright – Northland Securities

Joe Mondillo – Sidoti & Company

David Kaizer – Robotti & Company

Presentation

Operator

Good day, everyone. And welcome to LSB Industries First Quarter 2010 Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode.

I will now turn the conference over to Ms. Carol Oden. Ma’am, please go ahead.

Carol Oden

Thank you, Joe. Again, we would like to welcome you to the LSB Industries, Inc. First Quarter 2010 Conference Call. Today LSB’s management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, our Chief Financial Officer.

This conference call is being broadcast live over the internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.lsb-okc.com. After comments by management a question-and-answer session will be held. Instructions for asking questions will be provided at that time.

Information reported on this call speaks only as of today, May 6, 2010, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

After the question-and-answer time, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We suggest that you stay on the call long enough to hear them.

Now I turn the conference call over to Mr. Jack Golsen.

Jack Golsen

Thank you for joining our conference call today. Results for the first quarter 2010 were disappointing but were not unexpected. Our core companies achieved modest results in the face of very difficult market conditions.

However, as we have pointed out in our news release today, the delays in ramping up production at our reactivated Pryor, Oklahoma plant resulted in $6 million of expenses and costs further exacerbating the drop in profits that occurred.

The numbers speak for themselves and further into this conference call, Tony Shelby, our CFO; and Barry Golsen, our President, will give you the details about both our Climate Control and Chemical businesses.

Fortunately, I can tell you that in April of this year, which has just passed, new order intake in our Climate Control business has picked up and our geothermal heat pump business is beginning to grow again in the face of the current market. The growth is predominantly in the residential market.

Also, the Chemical businesses agricultural business, which was delayed in the first quarter because of unusual weather is strong. And going forward, the Pryor plant is producing enough anhydrous ammonia and UAN substantially reduce its losses. Although it is not yet producing at targeted levels, the Pryor plant represents a significant growth opportunity for our Chemical business.

Now for some news that you may have missed during the first quarter. Our El Dorado Chemical company signed two significant agreements. One was an agreement with Koch Nitrogen to supply anhydrous ammonia to our El Dorado plant for the year 2012.

The second agreement was for El Dorado to supply 250,000 tons per year of low-density ammonium nitrate for five years to Orica. This was an increase from 210,000 tons per year in the previous agreement with Orica.

At this time, despite early signs of a general economic recovery, we remain cautious about the outlook in our markets for the remainder of 2010.

Before closing, we’d like to point you to the Letter of Intent Disclosure in the Management Discussion of our 10-Q. We have entered into a Letter of Intent in connection with the possible acquisition by us of an air conditioning and heating manufacturer located in China.

The acquisition is subject to among other things, the completion of our due diligence and execution of definitive agreements. The dimensions of the proposed deal are discussed in the Form 10-Q. If we acquire the company, our objective is to establish a platform to grow in the China market, which is now large and is expected to be huge in the future.

Now for the details on the first quarter. I’ll turn this meeting over to Tony Shelby.

Tony Shelby

Thank you, Jack, and good afternoon. As shown in our earnings announcement made shortly after the market closed this afternoon, the financial results for the first quarter of 2010, compared to the first quarter of 2009 included. Sales $130 million, compared to $150 million, operating income $4.4 million, compared to $19.4 million after Pryor facility costs of $6 million in 2010 and $2 million in 2009.

Net income $1.7 million, compared to $11.7 million, diluted earnings per share $0.07, compared to $0.51, consolidated EBITDA, $8.8 million, compared to $24.8 million. Consolidated EBITDA for the trailing 12 months at March 31, 2010 was $43.3 million.

Sales, Climate Control sales were $53.7 million or 26% lower than 2009, primarily due to lower demand in our key markets for heat pumps and fan coils. Chemical sales were $74.9 million or approximately the same as 2009, although the sales mix by product was significantly different.

Agricultural and mining sales, in terms of tons shipped were lower and industrial tons shipped were higher. Although mining tons shipped were lower, the actual dollars were higher as a result of billings to our largest mining customer for tons not taken on the taker pay commitments.

Operating income, as mentioned, consolidated operating income for the first quarter decreased to $19.4 million in ‘09 to $4.4 million in 2010. The obvious question is why did our operating income decline $15 million or $20 million decline in sales. This disproportionate decline in operating income versus sales is for the most part attributable to our Chemical business.

Chemical segment income was $10.8 million lower than the same period last year due to a number of identifiable differences and variances as follows. $3.4 million lower gross profit as a result of lower sales of agricultural ammonium nitrate due to a late start of the fertilizer season and much higher anhydrous ammonia raw material feedstock costs in 2010. $2.1 million lower gains this year from the recovery of precious metals used in our production process.

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