Carol Oden - IR Jack Golsen - Chairman & CEO Tony Shelby - EVP & CFO Barry Golsen - President & COO.
Joe Mondillo - Sidoti & Company Dan Mannes - Avondale Keith Maher - Singular Research Brent Rystrom - Feltl and Company.
Greetings, and welcome to the LSB Industries Second Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Carol Oden.
Thank you. Ms. Oden, you may begin..
Thank you. Good morning, welcome to LSB Industries, Inc. second quarter 2014 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.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, August 8, 2014, 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 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 Webcasts and Presentations section of Investors tab. Please note that the presentation starts on page 3 of the PowerPoint. Now, I’ll turn the call over to Mr. Jack Golsen..
Thank you, Carol. Thank you for joining our conference call today, which will cover a discussion of our second quarter 2014 results. We released our results in a press release this morning. Sales for the second quarter 2014 were approximately $202 million, and remained relatively flat compared to the second quarter of 2013.
However, operating income increased to $23.8 million in the second quarter of 2014 from $12.2 million in the second quarter of 2013, representing a 95% increase.
Net income increased to $11.1 million or $0.47 per share in the second quarter of 2014, up from $7.4 million or $0.31 per share in the second quarter of 2013, representing a 50% increase in net income, and EBITDA increased to $32.6 million in the second quarter of ‘14 from $18.9 million in the second quarter of ‘13, representing a 72% increase.
These results reflect an increased profitability for the second quarter of 2014 compared to 2013, primarily resulting from improved results from our Chemical operations. Later in this call, Barry and Tony will give you details about our operations.
The good news during the second quarter is that our Pryor operation sustained its targeted daily production rate of approximately 650 tons of anhydrous ammonia per day, and other than planned turnarounds and routine maintenance, we would expect that to continue.
Although we expect the remainder of 2014 and 2015 to continue to be profitable, the previously announced expansion projects at El Dorado, which we believe will add significant incremental profits, will not have a significant impact until 2016 when the projects are complete and operational.
Until then, we will continue to carry overhead and interest costs on debt that is earmarked for the expansion, which will continue to burden our existing profitability and cash flow.
As a reminder, our expansion projects include the building of an ammonia plant that will allow us to replace our historical usage of 220,000 tons of ammonia per year that we are currently purchasing at Tampa prices with produced ammonia at a significant cost savings to us.
The new ammonia plant will also produce an additional approximately 155,000 tons per year of ammonia that we will be able to sell as ammonia or to upgrade into higher-margin products. Our goal is to secure customers for the additional production capacity by the time the expansion projects are operational.
So far, we have had a lot of good activity towards that goal. Barry will discuss this in more detail later in the call. At this time, the expansion projects at El Dorado are on time and on budget. We are continuing to put a high priority on making sure that we stay on track with these projects.
With respect to our Climate Control Business, results were below what we know we are capable achieving.
The decline in both sales and profits was reflective of lower order intake during late 2013 and early 2014, resulting in part due to the severe weather that affected business activity much across the U.S., as well as a slower increase in commercial and institutional construction than we previously anticipated.
However, second quarter Climate Control bookings and backlog rose significantly, reaching their highest levels since the third quarter of 2008, which points to higher Climate Control sales and profitability for the balance of the year, compared to the first half of the year.
Now, I will turn this call over to Tony and Barry who will go into more details about our financial and operational performance of the second quarter. Thank you..
Thanks, Jack. As Jack stated, our results for the second quarter 2014 reflect significant improvement as compared to the 2013 period due to the sustained production from our chemical facilities. During this financial review, we’ll discuss these and other factors that affected results for both quarters as well as variances between quarters.
For a comparison of second quarter 2014 results to 2013, please turn to page 4. Net sales for the second quarter were $202 million, essentially even with last year. Consolidated net sales for the quarter included an increase of $14 million in the Chemical Business and a decrease of approximately the same amount in the Climate Control Business.
Our consolidated operating income was $24 million, compared to $12 million. The net increase in operating income of $12 million included an increase of $17 million in our Chemical Business, offset by a decrease of $5 million in our Climate Control Business.
Our general corporate expenses increased $900,000 over the same period in 2013, primarily relating to personnel costs and professional and consulting fees. Interest expense for the quarter was $5.7 million, net of $3 million capitalized during the quarter, compared to $540,000, net of $600,000 capitalized in the prior period.
The increase in 2014 interest expense is attributable to the interest on the 7.75% senior secured notes that were issued in August of 2013. As previously discussed, the primary use of proceeds being to fund our chemical businesses’ planned capital expansion program.
After provision for income taxes of approximately 39%, net income was $11 million or $0.47 per share, compared to net income of $7.4 million, or $0.31 per share, last year. EBITDA was $33 million in the 2014 second quarter, compared to $19 million. For the trailing 12 months ended June 30, EBITDA was $175 million.
On page 5 is a brief summary of our capital structure at June 30, 2014 compared to year-end 2013. Cash at June 30 was $389 million or $46 million lower than at year-end 2013.
In the chart on the upper right side of the page, you will note that debt to capital at June 30 of 51% is significantly higher than at June 30, 2013, reflecting the senior secured notes.
Although roughly double, the leverage, prior to the initiation of expansion projects and additional borrowing to fund the expansion, we feel the leverage is in line with our growth plan. The chart on the lower right of this page reflects EBITDA to interest coverage of 5.2 times.
This is below our normal operating target, but currently is at a low point during the construction period. This ratio will improve significantly when we meet our projected revenue and EBITDA growth beginning in 2016 after the expansion projects come online.
Concluding the discussion of cash flow and capital, our $100 million working capital revolver remained undrawn. The amount available to borrow is subject to the amount of eligible collateral, which is currently approximately $70 million. Moving to page 6, an analysis of cash flow.
Beginning with net income, adding back depreciation depletion and amortization, the change in working capital, net cash provided by operations were $56 million. After capital expenditures, free cash flow was a negative $32 million. After debt service, the change in cash and investments was a reduction of $45 million.
We expect that we will continue to have negative cash flow until the El Dorado expansion projects are completed and producing. Moving to page 7. Shown on this page is a summary of our capital expenditures to-date for the El Dorado expansion project along with planned capital spending for the remainder of ‘14 and ‘15.
Capital expenditures during the second quarter were $62 million, which included $59 million for the benefit of the Chemical Business, including expansion projects at our El Dorado Facility, various major renewal and improvement projects, and the development of natural gas leaseholds.
The planned expenditures ranging from $392 million to $515 million for the remainder of ‘14 and full year of ‘15 include capital expenditures that we anticipate spending for expansion and development projects, including the El Dorado expansion projects as set out separately in the tables, upgrades to our plants to satisfy environmental requirements, as well as other anticipated renewal and improvement projects.
The planned spending is presented as a range to provide for engineering estimates, the status of bidding, variable material costs, unplanned delays in construction, and other contingencies.
The capital spending will be funded by our cash and investments, internally generated cash flow, and if necessary, third-party financing and borrowings under the working capital revolver. Turning to page 8 for a review of Chemicals’ second quarter results.
Sales were $136 million, a net increase of $15 million or 12%, primarily in agricultural sales, which were 56% of Chemicals sales for the quarter. The sales increase was due to higher volumes as a result of improved production at our Cherokee and Pryor facilities that were out of production for a portion of the second quarter of 2013.
As Jack indicated in the overview, both plants operated at our current targeted daily production rate during the quarter and continue to do so.
It should be noted that beginning in the third week of July, we began a 30 to 35 day planned turnaround at the Cherokee Facility, which will result in lower production and sales from this facility in the third quarter, and which will impact our third quarter operating results due to lost contribution margin on the days of lost production.
Operating income was $24 million, compared to $6 million, including $3 million of insurance recoveries in 2013. Operating income was significantly improved compared to the 2013 quarter due to the improved production.
However, the operating margins per ton were lower due to lower market prices for agricultural products, and higher natural gas costs during the 2014 quarter as compared to the prior-year quarter. On page 9, the chart on the lower left hand side reflects a sales mix for the quarter of 56% ag, 28% industrial, and 14% mining products.
On page 10, sales of our product line for the quarter and the change from 2013 quarter, where ag was up 24%, industrial was down 8%, and mining was up 11%.
Page 11, agricultural sales by product line reflected significant increases in all products with the ton showing significantly higher increases than dollar increases, due to our lower selling prices in 2014 quarter than in ‘13.
The increase in tons sold of all agricultural products was due to the improved production and improved marketing conditions for ammonium nitrate. Industrial and mining sales are reported on page 12. Nitric acid sales were down 23% due to the planned turnaround at the Baytown Facility during the quarter.
Industrial ammonium nitrate is a product for the mining sector and reflects an increase in tonnage shipped of 23%. Now turning to page 13 for a review of Climate Control results. For the second quarter, Climate Control reported net sales of $63 million, compared to $77 million in the second quarter of ’13, a 19% decline.
The decline in sales was reflective of lower order intake during late 2013 and early ‘14, which Barry will discuss in more detail later in this call. Second quarter 2014 gross profit was $19 million, or 29.5% gross margin, compared to $25 million of sales -- $25 million gross profit, or 32.8% gross profit margin, last year.
Operating income was $4.6 million or 7% of sales, compared to $9.5 million or 12%.
The decrease in operating income was directly attributable to the lower sales volume and associated decreases in labor efficiencies and overhead absorption, partially offset by lower operating expenses, primarily variable selling costs related to the lower sales volume and other administrative costs.
Second quarter EBITDA was $5.8 million, compared to $10.3 million, a decline of $4.5 million. On page 14 is a summary of Climate Control sales by market sector for the second quarter. Commercial and institutional sales were 85% of total sales and single-family residential, which is all geothermal, was 15%.
Turning to page 15, second quarter sales by product line compared to 2013 reflect decreases across all our product lines, in heat pump, sales of 11%; fan coil sales of 32%; and other products of 29%. Barry will discuss the market drivers and outlook for both our Chemical and Climate Control businesses during his part of the call.
That concludes our prepared remarks for the financial review. We’ve addressed our results of operation and capital resources in greater detail in the 10-Q filed this morning, and I suggest that you review the document for more detail and analysis. Thanks for your time, and I’ll now turn it over to Barry to discuss operations and our key initiatives..
Thanks, Tony. Today, I will cover what’s going on in the markets we serve, update you on major initiatives underway, and review the key value drivers that we’re focused on. Before discussing the markets we serve in our Chemical Business, it’s important to understand cost and pricing trends for the feedstock we use and the products we sell.
Please turn to page 16 where you can see charts that illustrate these.
Summing up this page and reinforcing Tony’s earlier financial review, over the past year, prices of natural gas have increased and the selling prices of our primary fertilizer products have generally declined, resulting in significantly reduced margins per ton in this part of our business compared to the last several years.
Focusing on the general outlook for the agricultural markets we serve, page 17 lists several indicators for our agricultural products, most of which continue to be favorable. Planting levels are expected to be generally high although slightly lower than the past few years, due to record crop harvest the last couple of years.
Industry expectations are that approximately 90 million acres of corn will be planted in the upcoming season. Market prices for corn and wheat are lower than a year ago, but continue to be profitable to growers, so farmers have an incentive to plant.
Grain stock-to-use ratios, both worldwide and in the U.S., although higher than in the recent past, are at historic levels.
We believe all of this should continue the strong demand for fertilizers in the United States, benefiting North American nitrogen fertilizer producers who currently have the lowest delivered cost, including our Chemical business.
Despite general industry drivers, weather can have a significant impact on the fertilizer part of our business, and at this time the weather conditions are favorable for the next planting season, which will be winter wheat.
Finally, although Chinese urea export prices have stabilized at this time, China urea imports to North America could exert downward pressure on all nitrogen fertilizer products. This is something that we are keeping a close eye on. Overall, we continue to be optimistic about the fundamentals of our agricultural business.
Focusing on our industrial and mining products during the second quarter of 2014, our product sales to these markets were 42% of our total Chemical business. Page 18 contains some market indicators for these areas. Most of these indicators forecast growth for the next few years.
Since we are discussing our industrial and mining business, as we advised you during the Q1 earnings call in March, our contract with the Orica ends on April 9, 2015. Our strategy is to commence selling industrial-grade ammonium nitrate directly to the explosives market.
This is a market which we have participated in previously and have many years of experience. Since that call, we have made substantial progress. We have signed agreements to supply a portion of our anticipated industrial and production beginning on April 10, 2015.
We are currently in negotiations with other potential customers of industrial grade AN, and we are also adding senior staff to support this part of our business. We are optimistic about our ability to secure customers to purchase our anticipated industrial AN production. Page 19 is an update on the status of each of our chemical facilities.
El Dorado continues to run well with the exception of the capacity lost in May 2012. Cherokee also is operating well. Pryor has continued to operate at its targeted rate of approximately 650 tons per day of ammonia. The Baytown operation is performing at optimum levels.
As discussed during our first quarter earnings call, we scheduled the planned turnaround at Cherokee during the third quarter.
As Tony mentioned earlier, this turnaround will take up to 35 days to complete, and will be about 10 days longer than a typical annual turnaround due to the replacement of certain end-of-life equipment that are not part of a typical annual turnaround.
During our 2013 fourth quarter earnings call, we reviewed in great detail our plans for the major expansion projects we have underway at our El Dorado Facility. If you missed that call, you can view those plans which are in the fourth quarter earnings presentation located on our website.
Today, we will update you on the progress we have made on these projects. Page 20 details the status of the El Dorado ammonia plant expansion project. As we have expressed in the past, this project will significantly reduce El Dorado’s cost of ammonia as the cost spread between purchased and manufactured ammonia is substantial.
It will also add additional ammonia available for sale or to upgrade to other products for sale. The El Dorado ammonia project construction began in November 2013 after the Arkansas air permit was issued. All the required steel pilings have been installed as part of the foundations, and over 85% of the concrete caps are complete.
Additionally, the installation of underground piping and the erection of vertical structural steel has started, and the setting of major equipment has begun. Turning to page 21, we show a 3D CAD rendering of the ammonia plant on the top of the page and a current of photo of the site below.
You can see in the bottom picture that foundations and many large vessels have been put in place. Please turn to page 22.
In addition to the ammonia plant being constructed at El Dorado, we are adding a 65% Weatherly nitric acid plant and concentrator to replace the direct strong nitric acid plant that was destroyed in 2012 while also adding additional capacity. Construction for the acid projects also began in November 2013.
At this time, the building and equipment foundations for the nitric acid concentrator are complete and steel erection is underway. Also, setting of equipment for the nitric acid concentrator began last month. Piping, electrical, and instrumentation installation will begin in the third and fourth quarters of this year.
The equipment and building foundations for the 65% nitric acid plant are nearing completion, and the steel fabrication and erection is 75% to 80% complete. The majority of the equipment for this plant is on-site with the absorber columns already set in place, and the cooling tower basin has also been installed.
Most of the equipment will be set in the third quarter of this year, followed by piping installation to start late in the third quarter or sometime in the fourth quarter of this year. The table outlines major phases and milestones and the current status of each. Please turn to page 23 to see current photos of the acid project site.
At this time, we expect the El Dorado expansion projects to be completed on time and on budget. Although completion of projects of this magnitude are dependent on many suppliers and contractors, we are currently not aware of anything that will prevent on-time completion or cause cost overruns.
We expect the acid plant and concentrator to be complete and ready for start-up in mid-2015, and the ammonia plant concentrator to be complete by the end of 2015 with ammonia production ramp up during the first quarter of 2016. Turning to page 24, and switching to our Climate Control business, there is a graph showing order sales and backlog.
As we’ve pointed out in our last earnings call, our fourth quarter 2013 and first quarter 2014 bookings were soft, although we also indicated that the trend was improving. And as Tony pointed out, this impacted sales and profits during both the first quarter and second quarter of 2014.
However, second quarter 2014 bookings were $83 million, 27% above bookings during the same quarter in 2013 and were at the highest levels since the third quarter of 2008. Additionally, our backlog increased to $68 million at the end of the second quarter of 2014, again the highest level since 2008.
July new orders have continued that trend at $28 million with the backlog increasing to $75 million at 07/31/14. We continue to maintain leading market shares for our water source and geothermal heat pumps and hydronic fan coils.
Demand for our Climate Control Business products is primarily driven by new construction as that represents approximately 70% of our business. On page 25, our indicators related to commercial and institutional construction. McGraw-Hill’s most recent thinking is that the key markets we serve are expected to grow by approximately 48% through 2018.
Also on page 25, is the most recent release of the Architectural Billings Index published by the American Institute of Architects. The ABI is a leading economic indicator for non-residential construction nine to 12 months in the future. The June ABI was 53.5, which is an indicator of the improving conditions.
Both McGraw-Hill forecast and the ABI point towards a recovery in commercial and institutional construction. Page 26 shows McGraw-Hill’s forecast for single-family residential construction starts on the left. Residential products recently accounted for about 15% of our Climate Control sales.
McGraw-Hill is currently forecasting that the housing starts will grow by 64% from 2013 to 2016, which should benefit our residential geothermal business. However, remember that residential sales are approximately only 5% of LSB total sales and are impacted by energy prices, availability of financing and tax incentives.
Another positive trend is the increase in green construction that has occurred in the past few years and is expected to continue. This is shown in the chart on the right. McGraw-Hill’s 2013 green construction outlook forecast that the green construction market will continue to grow dramatically.
This should positively impact sales of many of our highly energy efficient products. In summary, the general consensus of most economists and construction industry experts is that a commercial and institutional construction recovery will be forthcoming.
We believe this is directionally correct although the timing is, by no means, certain, or easily determined. During our last few calls, we covered in detail the key value drivers that we are focused on at LSB and which we expect will increase LSB’s value in the near and mid-term. They are recapped on page 27.
We are comprehensively upgrading our Chemical businesses’ reliability systems, equipment and personnel to improve safety, plant uptime, and minimize unplanned interruptions. We have made significant investments to improve Pryor, and we have made important progress that has already yielded improved results.
We have major capital projects underway at El Dorado that will improve its profitability substantially. At this time, we are on time and on budget with these projects. We will support the growth of our Climate Control Business as the construction markets it serves grow over the coming years, and expect to achieve operating leverage as that occurs.
Our plant capacity will support that growth with very little capital investment. And we are striving to increase efficiency and reduce operating costs in our Climate Control Business through lean operational excellence initiatives.
On a final note, I’d like to mention that we will be presenting at the KeyBanc Basic Materials Conference in Boston on September 9 and the Imperial Capital Global Opportunities Conference in New York City on September 18. We hope to some of you at these events.
Before opening this up for questions, I would like to thank you for listening today and I would like to request that each of you please limit yourself to three questions so that others will have a chance to ask some questions as well. If you have more questions, you can get back in the queue and ask them later on during the session.
Okay, operator, please open up for questions..
Thank you. (Operator Instructions) Our first question today is coming from Joe Mondillo from Sidoti & Company. Please proceed with your question..
First question related to the chemicals side of the business, so I was a little surprised to see gross profits were only up a couple of percentage points compared to the first quarter, given the improvement that you made in terms of operations at Pryor, and also pricing was a little higher.
I know there was a product mix issue when you look at the first quarter compared to the second quarter, which offset that a little bit, but I was wondering if you could give just a little bit of your thoughts on that, and sort of update us on how you thought about the profitability in chemical related to Pryor and the inventory that you had on hand going into the second quarter and the operations, how efficient they’re running, costs, anything like that?.
Well, Joe, typically we’re comparing - you were talking about sequential comparisons, first quarter versus second?.
Yeah.
The only reason I compare first to second is just because last year Pryor was a whole mess in terms of shutdowns, and so given the sequential improvement that you made in Pryor, first quarter to two second quarter this year, also the seasonal planting period, also pricing being up, I would have thought gross profit would have been up significant first quarter to second quarter this year and that’s the only reason why I make that comparison..
I think it really has to do with product mix and what we shipped in the first quarter out of inventory versus what we had available coming into the second quarter.
And from a production standpoint, we had the plants running, and natural gas began higher, currently it’s lower than it was in the second quarter, but by and large, the prices and availability was -- in the first quarter, did you take into consideration, the insurance recovery at Cherokee?.
That doesn’t hit on the gross profit line, or does it?.
Well, part of it does. I think there is $5 million in the gross profit line..
Okay. Well, that would explain a lot if that’s the case. So, in terms of Pryor, for the second quarter because we haven’t really gotten a real great look at what kind of profitability Pryor can really produce, given the hiccups that we’ve seen over the last two years.
Looking at the second quarter Chemical profits, and in particular sort of Pryor, do we still have a lot of upside given the fact that you didn’t enter 2Q with a lot of inventory at UAN probably? There still maybe some costs that are inflated that may decline throughout the next two years.
Give us a little idea and what -- the profits that you realized in 2Q, barring no changes in chemical prices or natural gas prices, how you think about those profits in the profit margins that you saw in the second quarter?.
I think your statement there is absolutely right. I don’t think we’ve seen the full ability to produce gross profit and profitability at Pryor yet. We still have some carryover maintenance costs and things like that we were incurring in the second quarter. You get into 2015, assuming the same prices, you’re going to see a lot more efficiencies..
Okay. And then, just a follow-up and I’ll hop back in queue.
So in terms of the third quarter and the back half of the year, could you remind us -- I’m pretty sure Cherokee did not see any downtime in the third quarter of last year because it just got up and running in May or so, is that correct?.
That’s correct..
And then, Pryor, what’s the plan for the rest of the year on Pryor? I think you might have mentioned a fourth quarter possible turnaround, but update us on what the expectations are, operations at Pryor in terms of any turnarounds or downtimes?.
We’re going to have some maintenance activity going at Pryor in the third quarter, and as you know, it’s the off-season in terms of - depending on whether people stock up or not, and at this point, I think the second quarter, Pryor will have some maintenance activity, but the ammonia plant is growing very well, we’re very satisfied with the way the ammonia plant is running, and Q4, we should -- do you ask about fourth quarter?.
No, I think he meant the third quarter..
Third quarter..
I think you might have mentioned earlier in the year that maybe fourth quarter, you may do something at Pryor?.
We’re going to push that into the third quarter..
Okay. So compared to last year, you did not see any downtime at Pryor last year, did not see any downtime at Cherokee last year, because of the timing of bringing those plants up.
This year, we should see some downtime at both plans in the third quarter, is that correct?.
That’s correct..
Okay. And then, in the press release, I believe, and I can’t remember if you stated in your prepared commentary that you expect profits out of Chemical in the back half of the year should be greater than the back half of the year in 2013.
Given the downtime that we’re going to expect to see in the third quarter, pricing being sought of flattish it looks like, are you expecting a lot of that improvement to happen in the fourth quarter then? I would expect..
Fourth quarter should be pretty much full out..
Okay. All right. I’ll hop back in the queue. Thanks a lot..
Thank you. Our next question today is coming from Dan Mannes from Avondale. Please proceed with your question..
First of all, I’m going to actually take the opposite approach. I’m actually pretty pleased with what we saw out of the Chemical business. Congrats on at least showing us at the front end what a clean quarter can look like. So we’re glad to see it, and I’m hoping to see it looks even better in the coming quarters.
Following up with a couple of questions on that topic though, one thing that did surprise a little bit is the realized pricing in the quarter, particularly for ammonia, but even for UAM, it’s a little bit lower than we would have anticipated and certainly lower than maybe some of your peers have reported, where you guys constrained at all because you were selling all spot with no pre-sales, or are there any logistics issues that maybe impact realized pricing?.
We had very little in the way of pre-sales coming into the quarter, and you know at the Pryor area, we have -- we got off to a slow start there from a forward sales standpoint, and in the Pryor plant versus the Cherokee plant, we have the distribution fee on the off-take agreement.
For the most part, I think we were competitive, we were below some, but we didn’t have - we didn’t actually shipped in terms of ammonia, we didn’t ship that many tons of ammonia..
It just looked like the realized price looked a little bit lower than we would have anticipated on what you did shift?.
We were at $470. But if you compare us to CF, for instance, I don’t think the CF price is a netback to factory, I think that’s a netback to their distribution point. So you get a different pricing point in terms of comparing our average sales price to theirs..
You didn’t price much above Tampa, and you’re sitting a good deal north..
I’m sorry, we didn’t price off of Tampa?.
No, what was Tampa average in the quarter? It was well over 500.
So even if you go from metric to short, it looks like you didn’t price much above Tampa and given the locational difference, I would have thought you would have priced better?.
A lot of it has to do with the timing. If you look at the quarter in 2013 and the quarter in 2014, you can see that ammonia started out high in one quarter and declined, and in the second quarter this year, you had the opposition situation.
It really depends on when you ship the product versus because currently at $520 on Tampa and it started out higher than that. So on average, it really depends on when you ship and we don’t have a lot of free ammonia to ship..
Not in the second quarter, but I assume you will in the third and fourth, correct?.
Yes..
Okay.
And then, switching real quick to the Climate business, obviously a little bit distorting in terms of the financial performance in the quarter, I’m just wondering can you maybe amplify your comments a little bit as it relates to shipping or to shipments? Even with incoming backlog, the revenue numbers looked pretty light, can you talk at all about maybe any deferrals or delays in shipments and maybe the risk of that continuing to occur and also maybe any rationale for it?.
I think that what we saw perhaps, and this is anecdotal coming from our sales force, is in terms of delays in shipment, we had this very harsh winter and construction projects got generally behind, and so it was a domino effect in terms of shipment delays into the -- even into the second quarter.
Now, I think that - but you can see that incoming orders have significantly picked up. So I would expect to see that domino effect either gone or trailing off in the future..
So you almost may have kind of a piling up issue where it sort of backs up into the third quarter, or hopefully that’s the case, where you have both the regular way business that you booked during the second quarter plus, anything that shipped delay gets pushed into the quarter as well?.
Yeah, but then you’ve your plant capacity and your ability to gear up fast enough to handle it. So we have, in general, plenty of plant capacity to handle this level of business or an increased level of business. But you’ve got -- you typically flex your labor force up and down, and so that takes awhile to do.
It’s not like a light switch that you turn on and off. But generally speaking, I would expect to see an increased level of shipments in the third quarter as a result of the increased level of order input in the second quarter..
That makes sense. The last thing on Climate before I turn this over would be the agreement with Carrier ended during the second quarter I believe.
It looked like orders picked up pretty nicely, and I know it’s early, but any changes or anything you’ve noticed in the competitive environment now that you are competing against them versus producing for them?.
No..
That was quick. Thanks, Barry..
Next question, please..
Our next question today is coming from Keith Maher from Singular Research. Please proceed with your question..
Maybe if you could expand upon, I know you touched on this on one of the earlier questions. Just so I can understand the turnaround at Pryor in Q3, it sounds like it's going to be fairly short.
And also are there any planned turnarounds for El Dorado for the balance of the year?.
At El Dorado, we do not have a major turnaround planned, but what we do have are some minor maintenance events that will not stop the production of the entire plant. The events are primarily on acid plants, and as you know, we have multiple acid plants there.
So, they can continue production at other plants while they are doing maintenance on one plant, and so we do have some activity that will go on during the quarter, but you won’t see the entire plant stop as a result of those..
Okay, thanks. And just a general question on the agricultural business, in terms of, we're seeing obviously corn prices down a bit.
What would that mean? And I guess this wouldn't really affect probably until the spring planting season, but if there is less corn planted, there's more wheat or more soybeans, what does that mean for your business? And I guess what I'm getting at is, are certain crops are more fertilizer intensive than others?.
The corn price is under quite a bit of pressure right now, but there is still a significant spread on their per acre for the growers, so we expect that we’re going to continue to see in the range of 90 million acres of corn planted, which takes a lot of nitrogen, so there may be somewhat reduction in the demand for ammonia, but I think we’re well positioned to run our plans at full out at 90 million acres.
And then there is also a lot of discussion about increased exports of corn, so the domestic consumption plus the potential for additional exports, I think, will continue to provide significant demand for the product, and I think we’ll be able to run our plants full-out based on 90 million acres..
Okay. That was helpful. And just, I guess, one more question before I get back in queue.
In the Climate Control business, can you talk about where the strength of orders is coming from? I’m assuming that’s mainly on the commercial side, but more color on particular sectors or particular products that you sell?.
It’s across the board. It’s just generally across the board. So it’s not in any one specific area..
But it is in more commercial than residential I assume?.
That’s true. I was referring to the commercial side of the business..
(Operator Instructions) Our next question --..
I would like to make a comment on a previous question that might have been answered a little more distinctly. On the sequential comparison of the second quarter of ‘14 to the first quarter, we had $23 million of insurance recoveries in the first quarter gross profit..
Of last year..
First quarter, first quarter this year, so there was a question about the sequential comparison, this year’s gross profit -- the second quarter gross profit versus the first and I failed to point that out..
Thank you. Our next question today is coming from Brent Rystrom from Feltl and Company. Please proceed with your question..
Quick statement, I just want to see if you agree with this before my questions. I would assume one reason you're pretty comfortable with full uptake of your nitrogen production on 90 million acres is since 44% of the nitrogen is imported, you've got a lot of cushion if the acres go down a little bit.
Is that a fair statement?.
Yes..
All right, a couple of quick things then. You've hit most of the stuff I had. Can you give us a sense when you think about the loss of the Carrier business. I would assume you're going direct to a lot of the same people who would have been buying that product through Carrier, now they're buying it through you.
You'll obviously lose the sales you would have had to Carrier, you're going to gain the sales in some degree that you will get direct. I would assume there's a revenue and a margin bump on each unit sold versus Carrier.
Can you give us a sense of how that might look?.
Actually, in general, you can say looking across the aggregate business that we were selling to Carrier, we would typically sell at a higher gross margin because it’s a non-OEM business. An OEM business is typically sold at a lower price, so the OEM customer has room for a mark-up. However, in our particular case, we had two arrangements in place.
One was residential where we were selling more or less market price and paying Carrier a royalty, and the other was a traditional OEM arrangement on the commercial side of the business where we were selling them at a pretty deep OEM discount, and they were marking it up. So it’s going to depend on which sector of the business the incremental impact..
Can you give us a sense of what the mix was, commercial versus residential?.
We have not really ever disclosed that, and I don’t have that number in front of me. But I would expect that, generally speaking, more of the business -- for sure more of the business was commercial than residential..
Thinking long term about what might improve the corn market, you have given the discussion about relatively cheap corn prices. When you look at the recent report out saying that Argentina is going to decrease its plantings by about 15%, the crop is going to be maybe 100 some million bushels smaller.
Ukraine now talking about down plantings for next year. They're looking at several million acres lower.
Those two being the other major exporters in the world, I would assume if that comes into play and then you look at the demand building from ethanol, livestock, industrial uses here, we're not far from an event that would actually start to firm corn a little bit.
Do you have any particular thoughts on that?.
In discussing it with our -- those issues with our sales group, they, of course, believe that if all those things were to come to play, they would be positive, but we have no assurance as to those things will happen, and it’s speculative to some degree..
Final question.
I don't know to what degree you may be able to answer this or at least give some insight, but can you give us a sense of how much ammonia you produced internally in the quarter, how much ammonia was used in all of your operations, and how much ammonia was used in El Dorado?.
Well, I don’t have the exact tonnage of production in front of me, but you know that we have 175,000 tons of capacity of ammonia at Cherokee; Cherokee ran pretty much full out. I’m talking about annual capacity, and 250,000; 225,000 to 250,000 on Pryor..
Brent, how about instead of throwing out some numbers that are off-the-cuff, how about if we follow up with you later..
We’ve got the capacities in our PowerPoint..
And then the only number I would be missing then would be how much ammonia you used in the quarter relative to that capacity?.
I think we’re going to ask to get back to you on that one, because we have to pull it together, it’s in two or three different places..
Our next question today is a follow up from Joe Mondillo from Sidoti & Company. Please proceed with your question..
Hi guys. Just a couple of follow-up questions.
First, in terms of pricing at Climate Control, has that been fairly stable or what has pricing been like this year?.
It’s still very competitive construction market out there, so it’s been very competitive, but it’s always competitive, and it really depends on a product-by-product basis, but generally, I would say it’s comparable to prior years..
Okay.
So to drive the backlog of the orders that you saw in the second quarter, nothing -- you are not sort of under-pricing or anything like that, right?.
Not on a general -- as a general rule, no..
Okay. And then also in terms of your outlook for the back half of the year at Chemical on the ag side, it sounds like given the late harvest last year, the fall application season is going to be quite strong. And also it sounds like inventories at retailers are historically low.
Is that sort of what you are hearing as well? And so, the fall actually could be a pretty strong demand..
There is a waiting game right now to restock. There is always - they are waiting for a better price and the sellers are waiting for a better price also.
So I think probably with some of the downtime from our standpoint, I think from the standpoint of turnaround and maintenance activities that we’ve got going on that the third quarter will be -- production will be down there, but for the industry as a whole, I think, is going to be -- the pricing is going to be at least as good or better than it is through the second quarter..
Okay, and then just lastly. Tony, the interest expense has been falling. It fell for the second straight quarter since you hit that $7 million plus number in the fourth quarter.
Is the $5.5 million range, is that -- first off, why has that been falling sequentially? And is this sort of a more of a normalized interest expense that you should expect going forward, the $5.5 million?.
No, the interest rate is 7.75%. It’s going to be steady throughout. It’s really being affected by how much we are capitalizing, which is part of the GAAP requirements, and it will continue to be a capitalized portion, it will continue to go up as construction progress increases and we complete the projects.
So you will see a lower interest, total interest dollar amount on a quarter-over-quarter basis as we go forward until we complete the project..
Okay, so through 2015 it should fall, theoretically?.
From a dollar amount, I reported net interest expense will continue to decline as we capitalize more and more interest as construction progress increases quarter-over-quarter..
Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments..
We like to thank everyone for participating today, and we like to turn the session over to Carol Oden who have some important information about forward-looking statements..
Information reported on this call speaks only as of today, August 8, 2014, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay. The comments today and the information contained in the presentation materials contain certain forward-looking statements.
All these statements, other than statements of historical facts, are forward-looking statements.
Statements that include the words expect, intend, plan, believe, project, anticipate, estimate and similar statements of the future or forward-looking statement nature are identified as forward-looking statements, including, but not limited to, all statements about or in references to the Architectural Building Index or any McGraw-Hill forecast, any references to natural gas costs, ammonia costs and fundamentals of the Chemical or Climate Control Business.
The forward-looking statements include, but are not limited to, the following statements; we expect the remainder of 2014 and 2015 to be profitable; El Dorado expansion will add significant incremental profits; El Dorado expansion project completion date, budget and output; ratio will improve significantly when we meet our projected revenue and EBITDA growth; we will continue to have negative cash flow until the El Dorado expansion projects are completed and producing; capital expenditures and planned spending; lower production and sales in the third quarter; funding of capital spending; planned turnarounds and equipment installation; ammonia prices; gas prices; start-up dates for acid plant and concentrator and ammonia plant; outlook for architectural markets, agricultural markets; import price impact, ability to secure customers to purchase our industrial AN production; Climate Control Business, 2014 operational excellence initiatives; value drivers; recovery in construction; and growth in green market construction.
You should not rely on the forward-looking statements, because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors.
We incorporate the risks and uncertainties being discussed under the heading Special Note Regarding Forward-Looking Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and Form 10-Qs for the period ending March 31, 2014 and June 30, 2014.
We undertake no duty to update the information contained in this conference call. The term EBITDA, as used in this presentation, is net income plus interest expense, depreciation, amortization, income taxes and certain non-cash charges unless otherwise described.
EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurement. The reconciliation of GAAP and any EBITDA numbers discussed during this conference call are included on the Q2 2014 conference call presentation, which is posted on our website.
Thank you and this ends our conference call..
Thank you, and that does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today..