Lsb Industries Inc. (LXU)

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LSB Industries Inc. (LXU)

Q3 2012 Results Earnings Call

November 6, 2012 5:15 PM ET

Executives

Carol Oden - Executive Assistant

Jack Golsen - Chairman and CEO

Barry Golsen - President and COO

Tony Shelby - Chief Financial Officer

Analysts

Joe Mondillo - Sidoti & Company

Dan Mannes - Avondale Partners

Keith Maher - Singular Research

Wayne Archambo - Monarch Partners

Gregg Hillman - First Wilshire Securities

Presentation

Operator

Greetings. And welcome to the LSB Industries Incorporated Third Quarter 2012 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, Ms. Carol Oden, Executive Assistant. Thank you, Ms. Oden. You may begin.

Carol Oden

Thank you. Again, we would like to say welcome to the LSB Industries, Inc. 2012 third quarter conference call. Today LSB’s management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, our Chief Financial Officer.

This conference call is being broadcast live over the Internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.lsb-okc.com.

After comments by management a question-and-answer session will be held. Instructions for asking questions will be provided at that time. Information reported on this call speaks only as of today, November 6, 2012 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. After the Q&A I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA.

We encourage you to view the PowerPoint PDF that is posted on our website at www.lsb-okc.com in the Webcast section of Investor Information 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.

Jack Golsen

Thanks, Carol. Good afternoon. Before starting our call today, we want to -- we want our friends in the Northeast to know that you’ve been in our thoughts throughout the storm and its aftermath. I understand there is another storm heading your way and I hope it misses you, but that is yet to be determined.

Okay. Now I’m going to start the conference call. Thanks for joining our call today. This afternoon we released our 2012 nine months and third quarter earnings report, and we also filed our 10-Q for the quarter.

Net income for the first nine months was $47 million or $2 per diluted share on $582 million sales. Net income for the third quarter was $6.7 million or $0.28 per share on sales of $182 million. Third quarter net income per share were roughly in line with last year’s third quarter, although 2012 third quarter sales were slightly higher than 2011.

As previously reported, our third quarter 2012 results were impacted by lower ammonium production at our Pryor, Oklahoma chemical facility. We estimate this reduced our income by $14 million, that’s in the quarter.

At Pryor, we are installing a single large Kellogg ammonia converter to replace the six small converters at this plant. We believe the single large converter will allow us to significantly increase ammonia output in 2013.

Also, we estimate the severe damage to the 98% nitric acid plant also known as the DSN plant at the El Dorado Facility in El Dorado, Arkansas and the collateral damage to our acid plant at the El Dorado site caused by the explosion in mid-May have reduced our third quarter profits by an additional $9 million. Most of these lost profits are expected to be recovered by insurance proceeds in a future period.

The repairs of our El Dorado plant have been made in a remarkably short time. Most of the collateral damage has been repaired. Three of our nitric acid plants are up and running and the sulfuric acid plant should be operational later this quarter and probably, this month. The DSN plant, which produced about 20% of the nitric acid, manufactured at El Dorado will not be repaired. Instead, we are replacing that plant.

Excuse me, the feedstock for two our Chemical operations is natural gas. The price of natural gas has historically been volatile. For the companies like LSB that use large quantities of natural gas are always looking for ways to fix at a low price the future costs of natural gas. This is usually done by some kind of a hedge.

On October 31st, which was last month, a subsidiary of our Chemical business purchased an interest in the Marcellus gasfield has a hedge to fix the future cost of a meaningful portion of future gas purchases.

This acquisition includes potential gas reserves equal to approximately 20% of our current annual natural gas requirements over the next eight years at an estimated present value of approximately $2.30 per Mcf, including development and operating costs. The current price of gas is approximately $3.40 per Mcf and is expected to increase in the next few years as the country converts vehicles and power plants to natural gas.

Our Climate Control business has been impacted by the recovery in construction taking longer than previously anticipated. Right now, the market is still soft. We have capacity to respond to the market as it improves.

Meanwhile, we continue to develop new products which we believe will have a positive impact on future results. Barry will discuss the market situation and outlook in more detail.

The 2012 third quarter was not an indicative reporting period for us and we expect a much improved fourth quarter in 2012 and further improvement in 2013.

Before turning the call over to Tony, I’m proud to report that once again LSB was named as one of America’s 100 best small companies by Forbes magazine published on October 22, 2012. Forbes looks a return on equity and revenues and earnings growth over the past year and over five years among companies doing under $1 billion in revenues.

Finally, since this is our last conference call for the year, the entire LSB team wants to wish all of you very best for the holiday season in the coming month.

Now, I will turn this call over to Tony Shelby, our CFO. Thank you.

Tony Shelby

Thanks, Jack. Before I review the specifics of general comment, historically our third quarter is the lowest quarter in terms of sales and earnings since it is in between agricultural seasons with low demand for our fertilizer products.

We scheduled most plant turnaround maintenance during this slower demand period, in addition to this seasonally lower sales, gross profit, lower overhead absorption plus turnaround expenses for the quarter.

There were also certain other significant advances in the Chemical business that affected the level of earnings in the third quarter. I will describe these events in detail when I return to the business segment discussions.

Our results for the third quarter of nine months ended September 30th are summarized on page four of the PowerPoint presentation. Comparing the third quarter 2012 to the third quarter 2011, consolidated sales were $182 million, an increase of $5.6 million or 3%.

Fully diluted earnings per share were $0.28, compared to $0.27. Operating income was $12 million, a decrease of $600,000 or approximately same as last year, but for different reasons.

After interest expense and an effective tax rate of 36%, net income was $6.7 million, compared to $6.3 million. The effective tax rate was lower than the combined federal and state statutory rates due to Section 199 allowable domestic manufacturer’s deduction and other tax credits.

Read the rest of this transcript for free on seekingalpha.com