LSB Industries, Inc. (LXU) Q4 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the LSB Industries Fourth Quarter 2011 Conference Call. [Operator instructions.] It is now my pleasure to introduce your host, Ms. Carol Oden, executive administrative assistant at LSB.

Thank you. Again, we would like to say welcome total LSB Industries Inc. 2011 Fourth Quarter Conference Call. Today, LSB’s management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, our Chief Financial Officer. This conference call is being broadcast live over the internet. It 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 the call speaks only as of today, February 28, 2012, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replays. 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 is posted on our website at www.lsb-okc.com in the webcast section of the investor information tab. Please note that the presentation starts on Page 3 of the PowerPoint. And now I will turn the call over to Mr. Jack Golsen.

Good afternoon. Thank you for joining our conference call today. We released our 2011 fourth quarter and full year earnings report today, and we also filed our 10-K for 2011. For the fourth quarter, our results rebounded as we had suggested on our third quarter 2011 conference call. Net income was $28 million on sales of $215.4 million, or $1.19 per fully diluted share for the fourth quarter, compared to our third quarter earnings per share of $0.27. This resulted in full year earnings per share of $3.58, up 171% from 2010, making 2011 the best year in our history from a sales and earnings perspective. We continue to manage LSB for the long term benefit of our shareholders, and believe we have substantially more potential to develop the company. In 2011 we generated significant free cash flow and have the liquidity and capital resources to invest in the growth of the business. Although there is still uncertainty in the global and U.S. economies, and despite the fact that there was some downward pressure on fertilizer prices during the winter months, we believe the outlook for 2012 is positive. Today, Tony will give you more details of these results and Barry will cover market conditions throughout our operations with a detailed outlook for both our major businesses for 2012. Please keep in mind that our planning is for the full year. Our experience suggests that quarter to quarter comparisons, although we are required to report them, are not indicative of our expected full year results. Now I’ll turn this call over to Tony Shelby, our CFO.

Thanks, Jack. Our results for the fourth quarter are summarized on Page 4 of the PowerPoint presentation. For the fourth quarter of 2011, we reported sales of $215 million compared to $172 million, a 25% increase. Net income rose 55% to $28 million compared to $18 million, and fully diluted earnings per share increased 51% to $1.19 compared to $0.79. Cash flow from operations for the quarter was $37 million. After capital expenditures of $13 million, and other items netting to $3 million, net cash increased $27 million. EBITDA for the quarter was $47 million compared to $35 million. Turning to Page 5, chemical sales for the fourth quarter increased 46% to $142 million. The increase was across all 3 of our major markets. Agricultural sales increased $27 million, or 65% due to strong demand for urea ammonium nitrate to support grain production and other crops requiring nitrogen fertilizer. Our mining sales increased $13 million, and industrial sales increased $5 million. Chemicals operating income increased from $19.6 million to $37.6 million. The increase was primarily due to the higher sales volumes and operating margins in the agricultural sector. Our UAN sales increase included an increase in both ton shift and selling process per ton. The average UAN selling price for the fourth quarter was $330 per ton versus $228 in 2010’s fourth quarter, and was accompanied by lower natural gas input costs. Moving to Page 6, climate control sales for the quarter were $69 million, or 5% lower than for the 2010 quarter. New orders totaling $61 million were approximately equal to the same quarter last year. Climate control operating income for the quarter was $6.4 million compared to $12.7 million in last year’s fourth quarter, a decline of 50%. In 2010, we began the fourth quarter with a large backlog of $55 million, with fairly good margins. Conversely, we entered the fourth quarter of 2011 with a backlog of only $48 million, with tighter margins. The lower margins were partially the result of the competitive environment, resulting from continued lower construction activity. Barry will review the fourth quarter results and current market conditions in more exact terms and greater detail. That concludes an overview of the fourth quarter. Turning to consolidated results for the full year, please go to Page 7. For the full year 2011, we reported diluted earnings per share of $3.58 compared to $1.32, an increase of $2.26. Consolidated sales were $805 million, an increase of $195 million, or 32%, compared to 2010. Operating income was $136.4 million, an increase of $80.5 million. The increase included an $84.6 million increase in chemical, partially offset by a $2.6 million decline in climate control and a $1.5 million increase in general corporate expense. After interest expense, and an effective tax rate of 35.5%, net income was $83.8 million, compared to $29.6 million. The effective tax rate was lower than the statutory rate due to permanent differences for the allowable domestic manufacturing deduction, among other reconciling items. Also noted on this page, cash flow from operations was $90 million, after capital expenditures of $44 million, cash provided by financing of $13 million, and other items, net cash increased $58 million. Year-end cash including short term investments was $135 million. EBITDA was $156 million versus $34 million $74 million in 2010. On Page 8, our Pryor Chemicals quarterly results for 2009, 2010, and 2011, reflecting the transition from a construction phase to a production phase. To review chemicals results for the full year, please turn back to Page 5. Chemical sales for the year were $512 million versus $351 million last year, an increase of $161 million, or 46%. Sales prices increased 30% and volume of tons increased 14%. Agricultural sales increased $96 million due to the strong market fundamentals for UAN and ammonia fertilizers and due to full year of production sales from the Pryor, Oklahoma facility. Industrial chemical product sales increased $35 million and mining product sales increased $30 million. Chemicals operating income for 2011 was $117 million versus $32 million last year. Continuing with the full year results, turn to Page 6 for a review of Climate Control, where sales were $292 million, or $31 million higher year over year. Geothermal and water source heat pump sales increased $12 million while hydronic fan coils and other products increased $19 million. Climate Control’s gross profit for the year increased to $88 million from $86 million, but as a percentage of sales, decreased from 34.5% to 31.3% in 2011. The decrease was generally due to cost increases for raw material and components as well as changes in product mix, which Barry will discuss. Capital expenditures during 2011 -- total capital expenditures were $48 million, including $6 million for the Climate Control business and $40 million for the Chemical business. We are currently considering future capital expending of approximately $55 million, including $41 million at Chemical and $13 million at Climate Control. The planned capital spending includes committed expenditures of $12 million. Planned spending is subject to change based upon economic conditions, regulatory requirements, and opportunity for profit improvement that arise from time to time. Briefly reviewing our liquidity and capital resources, the summary on Page 9 reflects the continued strengthening of our liquidity and capital resources. Our balance sheet is in good shape, with $55 million of cash in excess of total interest-bearing debt. Our $50 million working capital revolver agreement is undrawn, and we are in discussions with the lender to extend the maturity to 2017. During 2011, we extended the maturity of our secured term loan from 2012 to 2016, and converted the remaining 2007 debentures into common stock. At calendar year end, the outstanding balance of the secured term loan was $72 million, and total long term debt, including the current portion, was $80 million. Stockholder’s equity was $293 million, and the ratio of long-term debt to stockholder’s equity was approximately 0.27:1. As the U.S. economy continues to recover and moves into the next phase, we believe that we should maintain a strong cash position to guard against unexpected downturns in the global economy and at the same time be prepared to take advantage of opportunities to grow the 2 business segments. We have addressed our results of operations and the comparisons to 2010 in greater detail in the MD&A of the 10-K, which we filed earlier today and we suggest that you review those disclosures and discussions for additional analysis. Now I’ll turn the call over to Barry to discuss the market drivers for both businesses and accounting to improve operating results for 2011 and our thoughts on the outlook for the business.

Thanks, Tony. Since Tony covered the financial results, I’m going to focus on sales activity, product backlogs where pertinent, and market drivers as we see them. I’ll also review upcoming key initiatives and our strategy for each business. To start, please turn to Page 10 in the presentation, which shows our 2011 sales mix by the markets we serve. Chemical products were a higher percentage of total sales than in past years, due primarily to increased volume and sales prices of products in our chemical business and the addition of meaningful revenues from Pryor Chemical. A higher percentage of the chemical business’s sales were derived from agricultural products and in past years, the result of the addition of sales from the Pryor facility and higher prices for ag products. Focusing first on our chemical business, please go to Page 11. Total sales in the fourth quarter were $142 million. As you can see, sales were up in all markets we serve, and totaled 46% over the fourth quarter of 2010. The largest increase was agricultural products, with sales 65% higher than the 2010 level. Turn to Page 12 for sales of our key agricultural products. During the fourth quarter, tons shipped of UAN were 172% higher than during the 2010 fourth quarter, while net sales increased 295% as a result of higher sales prices per ton. The increase in tons sold was primarily a result of production at Pryor. Agricultural grade AN ammonium nitrate tons shipped were 4% higher than the fourth quarter of 2010. However, due to increased market prices, sales were 45% higher than 2010, fourth quarter. Our sales of ammonia decreased as compared to 2010, because most ammonia we produced was used for upgraded products. Turning to our industrial and mining products on Page 13, both sales dollars and tons shipped of industrial grade ammonium nitrate were above the fourth quarter 2010 levels, reflecting both increased demand and higher selling prices for our mining products. Tons shipped of nitric acid were 12% lower than in the 2010 fourth quarter, primarily as a result of inventory corrections during the quarter by 2 of our major customers who supply polyurethane intermediates. Sales were 7% higher as a result of higher selling prices, driven by higher raw material costs. Before turning to market trends, I’d like to update you on our recent plant turnarounds. During the last conference call, we advised you that our El Dorado facility was in the middle of a turnaround on its third regular nitric acid plant. That turnaround was completed on schedule during the fourth week of November. During the last 3 conference calls, we also discussed bringing online additional capacity at Pryor. At this time, we’ve completed repairs we’re allowed to make before actually receiving the final permit, and we recently received approval to undertake component testing without actually producing ammonia. When we will obtain the required permit, we’ll complete the final repairs and bring online the additional 2 plants. The expected additional production and capacity will be approximately 60,000 tons per year of ammonia. On Page 14 are some price trends for both the feedstocks we use and the key ag products we sell. The cost of natural gas continues to be low. This is benefiting production costs at our Cherokee, Alabama and Pryor, Oklahoma facilities, which use natural gas as their primary feedstock. The conventional wisdom is that natural gas will remain low for some time. The cost of anhydrous ammonia, the feedstock we use at our El Dorado, Arkansas and Baytown, Texas facilities, although lower than it was a year ago, continues to be high compared to past years. February 2011 Tampa prices were $515 per metric ton, and our current read on the market is that ammonia is about $400 per metric ton. This compares to prices in 2009 that ranged from $125 per ton to $325 per ton, and has impacted production costs at our facilities that use ammonia as feedstock. Most of the products we produce at Baytown, and most of the industrial and mining products produced at El Dorado are sold on a cost plus basis, so high ammonia costs do not impact our profitability on those sales. However, agricultural grade AN produced at El Dorado is sold at spot market prices. However, we’ve been fortunate that selling prices of AN are also relatively high, mitigating the impact of high ammonia costs. Turning to ag products, prices for UAN had increased over the prior year due to strong market fundamentals, but recently declined, and at this time are lower than they were a year ago. If you look at the chart in the lower left, you can see that the Southern Plains price of UAN decreased from $345 per ton in February 2011 to $335 per ton in February 2012. Based on current market indicators, we believe that the pricing has softened somewhat, and that prices this season could be as much as $30-40 per ton lower than last year. However, having said that, during the past week, urea prices have increased $70-80 per ton, and this should positively impact UAN pricing if the market sustains these levels. It’s important to note that we have approximately 42,000 tons of UAN scheduled for shipment during the first quarter that were pre-sold at prices higher than the current market, and that natural gas feedstock prices remain low. In February 2012, Southern Plains prices for AN were $395 per ton compared to $360 per ton 12 months earlier. Our outlook for AN this season is that selling prices will be higher than last year. That, coupled with lower ammonia feedstock prices, should yield higher margins in 2012 than 2011. Focusing on the outlook for the chemical markets we serve, Page 15 lists several indicators for our agricultural products, most favorable. Grain stock to use ratios, both worldwide and in the U.S., continue to be low. As a result, planting levels are generally high, very high in the case of corn. Market prices for corn and wheat remain high, so farmers have an incentive to plant and sell more. All of this is creating strong continuing demand for fertilizers. Finally, as I just mentioned, low natural gas prices have reduced the cost to manufacture many of our ag products. North American produced nitrogen fertilizers are currently the lowest cost, factoring in the total cost of production, freight, and distribution. The industry consensus is that the positive fundamentals of the ag business should continue in the near- to mid-term. The market for UAN is currently experiencing greater supply than a year ago. Like us, other manufacturers have stepped up production to take advantage of the good overall market conditions. Imports have also increased. In addition, distributors have been delaying purchasing inventory as long as possible, in hope of better pricing. As a result, UAN is currently experiencing some price softness compared to the recent past. Despite general industry drivers, weather can have a significant impact on the fertilizer part of our business. Weather conditions are better than they were a year ago, particularly in our Texas market, which is receiving plenty of rain. Several counties have already been removed from the drought list. All in all, we continue to be optimistic about our ag business. Now, please turn to Page 16 for a focus on our industrial products. Our industrial products are sold primarily to large customers pursuant to contractual cost-plus and/or minimum take arrangements. The 2 charts on this page indicate the shift that has occurred in our sales mix from 2010 to 2011, primarily as a result of production at Pryor. Despite that shift, a very significant part of our business continues to be industrial and mining. Page 17 contains some market indicators for this area of the business. Most of these indicators forecast growth for the next few years. Most of our industrial sales during 2011 were pursuant to cost-plus and/or minimum take type of agreements. Before turning to our chemical business strategies, I’d like to comment on our first quarter 2012 planned improvement project at Pryor. As we have advised you before, the permitted production level of ammonia at the Pryor facility is 700 tons per day. This is before the planned 60,000 tons per year addition that we discussed earlier. However, due to production limitations caused by restrictions in the flow of processed gas through heat exchangers and other mechanical restrictions, the ammonia plant was unable to sustain production above 500 tons per day during 2011. Beginning on January 3, a planned improvement project was performed at the Pryor facility to increase anhydrous ammonia production levels, during which time the facility was not in production. The primary purpose of the improvement project was to correct those restrictions. The plant was gradually brought back into production starting on February 3. The current production rate is approximately 600 tons per day. During the period the plant was down, $1.6 million of maintenance costs for the project and approximately $2.1 million of operating costs were expensed as incurred. We believe that [indiscernible] lost during the improvement project should be more than offset during the balance of 2012. On Page 18, we’ve listed our Chemical business’s strategies and some of our key initiatives for 2011. In addition to operational excellence, safety, and environmental responsibility, we will continue to expand our industrial business by adding new customers and perhaps new products. We will also continue to enhance our agricultural distribution channel. We will work on several projects aimed at optimizing production rates at all of our plants that are currently online. We should complete the increase of ammonia production capacity at Pryor during 2012, if we receive the permit in a reasonable timeframe. We also have several other capital projects on the drawing board, including, among others, NOx abatement at both Cherokee and El Dorado and control system upgrades at various locations. Turning now to our Chemical business, please turn to Page 19. On Page 19, you can see that sales by the major product categories we've reported in our quarterly filings -- excuse me, for our Climate Control business. Turning to Page 19, we are now changing our focus to the Climate Control business. So you can see that on this page, we have sales by major product categories. Total sales were $69 million, which was a decrease of 5% compared to the fourth quarter of 2010. Page 20 shows new product order sales and backlog by quarter, for 2008 through 2011. Looking at the 2011 fourth quarter activity, total new product orders were about the same as the fourth quarter of 2010. Commercial and institutional orders were approximately the same as the fourth quarter of 2010, while residential orders were down about 3%, reflecting continued softness in the single-family residential market. Our total new orders for 2011 were $262 million, up 3% over 2010. Having said that, we’re disappointed with bookings during the second half of the year, which we believe reflect slower recovery in the commercial sector than previously anticipated. Although our residential geothermal new orders during the second half of 2011 rebounded from the low second quarter level, we ended up the year with residential bookings 10% below 2010. Residential sales continued to face economic and construction headwinds. I will discuss the market outlook later. Total new orders in January were approximately 5% lower than January of 2011, although our view is that any one month’s orders are not particularly meaningful. Back to the fourth quarter. Sales of our commercial products were down 3%, while sales of our residential products were down 9% compared to last year’s fourth quarter. Our backlog of product orders at December 31, 2011 was $45 million, approximately 7% lower than one year earlier. Tony mentioned that the gross margin of the Climate Control business had declined. It was 29.7% in the recent fourth quarter, compared to 36.1% in the 2010 fourth quarter. If you’ve been on previous earning calls, you’ll remember that we predicted this would probably happen. The primary factors which caused the reduction in gross margin during the fourth quarter were increased material costs, coupled with a very competitive market and change in product mix in favor of commercial and institutional product sales, which have lower gross margins than our residential geothermal products. With regard to the first factor, we have historically experienced lags between the time we receive material cost increases and when we have been able to pass them through to our customers. At this time, the market’s extremely tight, and we’re not able to predict when we’ll be able to increase prices for our products enough to completely offset recent material price increases. The Climate Control business operating income was also lower in the fourth quarter than the same period in 2010, due to lower margins just discussed, coupled with increased healthcare costs and increased spending on sales and marketing staff to support several initiatives that we believe will benefit LSB in the future. The same factors that cause margins and operating income to decline in the fourth quarter also impacted turning the full year, but to a lesser degree. The next few pages of the PowerPoint deal with the market outlook for construction. Most of the specific data and forecasts shown on these pages come from McGraw Hill, which is considered to be one of the best construction forecasting services available. On Page 21, there’s a graph that shows McGraw Hill’s most recent construction forecast for certain commercial and institutional building types. These are the sectors that are most important to us. They comprise 61% of our total Climate Control business sales in 2011. As you can see from the graph, these sectors are all forecasted to grow over the next 5 years. McGraw Hill is forecasting that in the aggregate, they will increase by approximately 91% through 2016. This is shown on Page 22. If this materializes, it should benefit all of our commercial and institutional product sales. In addition to watching construction forecasts by sector, we also track the architectural billings index, which is considered to be an indicator for non-residential construction spending 9-12 months in the future. On page 23 is a graph of the ABI. After indicating struggling business conditions for most of 2011, the ABI finally reached positive trend for the last 3 months in a row, landing at a score of 50.9 for January 2012. An index score of 50 indicates that architectural billings were approximately the same as the previous month. Any score above 50 indicates growth in billings while any score below 50 indicates a decline in billings. We believe that the general consensus of most economists and construction industry experts is that the recovery in commercial and institutional new construction will be slower than previously forecast. So while new construction remains sluggish, renovation and retrofit of existing buildings has been, and will continue to be, an important market for us. Fortunately, all of our climate control products are particularly well-suited for renovation and replacement applications. During 2011, 21% of our Climate Control business’s sales were geothermal heat pumps used in single-family residential applications. Page 24 shows McGraw Hill’s forecast for single-family residential construction starts. McGraw Hill forecasts that housing starts will increase from about 414,000 in 2011 to over 1 million per year in 2015 and 2016. If this occurs, it bodes well for our residential geothermal business. One trend we’ve seen develop during 2010 and 2011 is increased sales of residential geothermal as retrofit units, or replacement units. Prior to the recession, the majority of our residential geothermal sales were for new construction. However, we’ve seen this shift with retrofit units comprising up to 60% of our residential sales. One area that should continue to have a positive impact on our Climate Control business is the long term trend toward green building construction. Many of our products are particularly well-suited for green construction projects. We also expect to see continued positive impact from the 30% federal tax credit that extends through the end of 2016 for geothermal products. Turning to Page 25, we’ve listed our Climate Control business’s strategies and some key initiatives. We will continue to be a group of niche companies. We’ll focus on green products. We will continue our strong push in the geothermal market. We will continue to improve all areas of the business to maintain a high level of operational excellence. And finally, we will look for possible strategic acquisitions that could complement this business. In 2012, we plan to introduce several new products in all product categories. Our emphasis will be on improved energy efficiencies, new and improved digital control systems for our products, and expansion of our current product offerings. We will also launch a packaged system offering that combines our hydronic fan coils and modular chillers. During 2012 we will also increase the size of our air coil manufacturing facility. Before opening it up for questions, I’d like to mention that Tony and I will be presenting at the Sidoti 16th Annual Emerging Growth Institutional Forum in New York City on Monday, March 19. We hope to see some of you at this event. Okay, operator, would you please poll the listeners for questions?

[Operator instructions.] Our first question is from the line of Eric Stine with Northland Capital Markets. Please go ahead.

I was wondering if we could just touch on your hedging strategy for natural gas. I know you’ve done it in the past some. Any thoughts on hedging gas here at your 10-year lows so you’re okay even if UAN prices soften?

Eric, as you know, the majority of our gas other than the UAN is pass-through to our large industrial customers, our mining customers. We currently -- and it’s included in our 10-K -- have a fairly significant amount of gas for the first quarter hedged at $3.75, just on our exposed gas. And about 27% of our second quarter gas is hedged at 27%, at $3.34. And so we’re really just enjoying the balance of the exposure at the lower process and we really believe at this point we’re going to continue to stay at these levels without any additional hedging. Because the further out you go, of course, the higher the gas cost is, so we’re pretty much full right now in terms of any hedging that we’re going to do on our exposure.

And maybe we can just quickly touch on the 2 segments. Just curious, looking at -- starting at Chemical, just looking at industrial and mining, it looks like industrial, a bit of a stair step down sequentially. In mining, a bit of a stair step up. So just wondering if you could provide some color as to why and how we should think about those segments in fiscal year ’12.

Which slide are you on?

I think he said sequentially.

Yes, sequentially. Just industrial, in the chemical segment, is kind of in the low 40s, and it dropped down to 30s, just under $38 million. Wondering if that’s just quarter to quarter volatility or something else going on here.

It’s quarter to quarter plus a little bit of seasonality, but most of that industrial business is customers that have either a full pass-through for the plant or minimum quantity, so it’s really not impacting on the year as a whole, for the full year.

Right, and should we -- So more seasonality, and think of that kind of recovering to where it was in the middle of the year, in ’11, when you get into fiscal year’12?

I think so. I don’t think you’ll see significant step down sequentially in the coming quarters.

Okay, and then the same thing for mining. Kind of the opposite. It took a pretty healthy jump up. Curious what was going on there, and if that changes your view, making it more positive for ’12.

No, I think we said we expected in general our industrial and our mining to see some moderate increases, some slight increases on a going forward basis, some improvement. And I think that any particular sequential change that you’ve seen from the third to fourth quarter is not indicative of a trend. It’s indicative of just a shift in those particular quarters.

Let’s put it this way. We haven’t lost any customers and they still take everything that they require from us.

Fair enough. Just wanted to confirm some of your comments. You said in the first quarter related to the maintenance at Pryor, you said $1.6 million and $2.1 million that will be expensed?

Yes, those were specific costs. Now what those do not include is lost gross profit or absorption from tons that weren’t sold during that period.

Understood. Does what you did in January, does that change your need to take Pryor down as you have the last years in the third quarter?

We said that we took it down to remove those restrictions and do a couple of other items, so it’s possible that it could shorten the third quarter turnaround, but we [indiscernible] think that at this point.

At this point in time, we just want you to take away that we still have a third quarter turnaround planned at this time.

Your next question comes from the line of Joe Mondillo with Sidoti & Company.

Since you mentioned the turnaround, I think in the K you said that you’re expecting $9.5-$10.5 million of turnaround cost. I was wondering how does that compare to last year?

Don’t have that number in front of us, but it would be comparable. The thing that we can’t predict is whether the days required for turnaround will be more or less.

And you mentioned in the slides that Pryor generated about $17 million of operating income in the fourth quarter. What kind of sales does that plant generate?

Don't have that exact number -- let me get that, hold on.

We’re getting away from specific plant volume numbers. As you’ll notice in the 10-K we’re more focused on product, volume of products.

So in the fourth quarter alone, looking -- and this is an approximate number, about $31 million.

And also, I missed your comments on the additional capacity for Pryor, the 60,000 of ammonia. What’s the outlook there? You’re still waiting for the licenses?

Yes, we were promised this last October, and then we were promised it in November, then we were promised it in December. We’re dealing with the government here.

So hopefully maybe by year end?

We’ll shoot ourselves if its year end. It’s got to be in the next few months for sure.

And once you get the licenses, it will be a couple months after that to sort of get things…

The process is -- just for your information -- they will issue a draft permit and that permit then will have to be posted for public comment. And then if they don’t get any substantive comments that are -- that convince them that their position was wrong, then they’ll grant the permits to us. And so we have to go through that process of having it posted for public comment.

Okay. And then I’ll ask one more question, then I’ll get back in queue. Your cash flow is improving tremendously, and your cash balance is growing quarter to quarter. Just wondering what sort of your use of cash is aside from the Capex that you’re planning in 2012, and maybe even beyond, how you’re looking at that.

Well, we’ve stated that we’re looking for ways to grow these businesses. We’re looking at possible ways to enhance our Chemical business in the plants that we currently have. We’ve also stated that we’re looking for the right kind of strategic acquisitions. Primarily looking at the Climate Control side for strategic acquisitions, because we think that there are potentially some businesses that are of a size that are more digestible in that sector than in chemical, where the companies tend to be very large. So we’re looking at that. We don’t have a pipeline now. We don’t have anything specific in mind, but we’re continuing to look for the right type of situations.

Our next question is from the line of Dan Mannes with Avondale Partners.

A couple quick follow up questions. First, as it relates to the prior turnaround, I know the goal was to get to 700 tons per day. You’re at 600 now. Will you need to do another turnaround? Is this just working it out to get there? How do we think about the delta between where you are now and where you hope to get on the existing unit?

A slow, over time increase. And the reason for that is -- specifically, if you want to know what really we’re dealing with. We’re dealing with what we thought was defective catalyst. It disintegrated. And it went into the lines. And we’ve plumbed the lines out, but you can’t get it all out. Only the passage of time will move that stuff all the way out. We’ve taken everything out that we know about, and now we’re running testing on the lines to see if we can locate any more. If we don’t do anything, over a period of time it will increase by itself. But we’d like to accelerate that.

Okay, so we shouldn’t expect another turnaround to get it out. Hopefully it will just work out on its own. Got it.

Well, we’ll get some of it out in the turnaround, but you won’t get all of it.

Dan, that’s on the checklist of the next turnaround, is to do diagnostics and see if we can locate areas where we can make some further improvements.

Next topic, real quick. You did mention you had the majority of your natural gas position for the first quarter and about a quarter of your natural gas position for the second quarter locked in, and I think you said you had about 40,000 tons of UAN already pre-sold for Q1. Can you talk at all about your pre-sell position into Q2 on UAN?

Well, we exited 2011 with about $18-19 million in forward sales commitments, and Barry mentioned about $14 million of those were in the first quarter, so some of that will spill over into the second quarter. However, when the price started to soften, we quit selling forward. So we have a fairly significant amount of forward sales commitments at a mid-300s going into the second quarter, but we’re waiting for prices to bounce back up at this point.

Usually you won’t get pre-pays when you’re in the season. And the season’s about to start.

And just to amplify on that, the natural gas position, I think your 10-K says 3 million MMBtus. Is that approximately tied to the volume, or are you maybe even a little overhedged on gas?

As I said before, the first quarter, not including the gas that we have pushed through to our customers on cost-plus basis, we have about 75% of our gas for the first quarter and about 27% for the second quarter.

Got it. And I was just trying to track that to the 40-some thousand tons of UAN, which I assume is not that far from what you’ll produce at Pryor in the first quarter. We’ll see. Real quick, on another topic, on pricing -- and this is probably a good time to discuss this -- you did show the chart showing what pricing has done, and obviously the Gulf prices have dropped a good deal more dramatically than maybe what you’ve seen in the Midwest. You’re a buyer of ammonia in the Gulf. You’re a seller of it effectively in the mid-Plains. Can you talk at all about the differentials in pricing and what you can actually realize on sales at places like Pryor relative to maybe some of the posted prices we’re seeing for Gulf transactions?

I’ll give you just a rough idea. To produce ammonia, let me show you just a minute. Ammonia costs, there’s about 31 Mcf of gas in a ton of ammonia produced at Pryor at Cherokee. So if you’ve got to get $4 of gas, we’re talking something south of $3 right now, but at $4 gas you’re talking about $120 of gas cost, and maybe $85-90 of conversion cost. So you’re in the low to mid $200s on cost, and selling price is north of $400.

I guess maybe let me ask the question a little differently. You put the chart on there that ammonia at Tampa is about $400, and that’s about what we’ve seen on pricing.

That’s metric.

That’s for metric, got it. But in the Midwest, is that the same type of price level that you’d be seeing? Or is there a substantial differential between what people are buying at either Tampa or the Gulf versus what you could sell it at. The basis difference, the spread.

The substantial differential involves the cost of transportation, and of course there’s always a markup. But it’s very expensive to transport it from the ports to the Midwest.

Right, but that’s what I’m sort of getting to, that Pryor is sitting there up in the Midwest, so you’re talking about a $400 per metric ton price, but how does that contrast with the type of pricing…

What you’re trying to do is basically get to what we could sell our ammonia for in the Midwest.

Well, yes, because we’ve seen posted prices, and they’re such a wide difference from what we see in the Gulf. We’re trying to figure out if the posted prices for the Midwest are real, and if you guys are actually able to realize them.

We can’t really tell you what we’re going to sell the product for going forward. But the current selling price in short ton is in the $480 range further north, and the $400 Tampa price is a metric price, so you can kind of go use that as a rule of thumb.

Got it. And does UAN have a similar spread? You were talking about $335 in the Midwest, and we’re seeing $240 in the Gulf. Is that a similar situation for you?

Yes.

Got it. And then the last thing, and I’ll follow up. On Joe’s point, on the balance sheet, you’ve made great strides here in the couple years since we’ve covered you, and obviously in the longer term even more. Any thought process here in terms of dividends or in terms of other structures given how strong your balance sheet’s gotten?

At this point in time, we don’t have any plans to initiate a dividend policy. We’re not precluding that we might do that in the future, but we just don’t have that in the plans right now. We believe that right now, given the uncertainty in the world, given that we don’t feel that we’re completely past the possibility of some type of financial event, that we are better off to keep a lot of cash, as much as we can, and keep our powder dry. In addition to that, we’ve talked about investments that we might make, and so at this point in time, we don’t have any plans to pay a dividend.

[Operator instructions.] Our next question is from Gregg Hillman with First Wilshire Securities.

Tony, could you talk about operating leverage on the Climate Control side? I noticed here for the December quarter your sales went down like $3 million, but the operating income went down by $6 million or something like that.

Well, I think there are a lot of moving parts here. First of all, you’ve got, starting at the sales level, you've got a very competitive sales situation out there. You’ve got, in general, an industry that’s operating at significantly less than full capacity. And there’s a lot of competitive pressure. So that’s one moving part, is what price level do products get sold at. Then in addition to that, you’ve of course got your leverage just on volume. But in addition to that, when you get below the volume, and more or less absorption in the factory level, we’ve had increased material prices, offset by some increase in selling prices, but not enough overcome those material prices. So there’s a lot of moving parts here that impact ultimately the bottom line in this business, and it’s just not a matter of straight operating leverage factored against volume, given everything else being equal, because everything else is not equal.

What was your utilization of the plants used in Climate Control in the quarter, or how many shifts you were running, or some sort of measure like that?

I don’t remember exactly what the utilization rate is, but we are operating at substantially less than full capacity.

Gregg, I think you’ll find that number in the 10-K. I can’t recite it on this call, but I think it’s in there someplace.

But I can say this. Based on the current configurations of our facilities, we have the ability, as the economy increases -- improves, and as the business level increases, to increase our business without huge capital expenditures. There are a few places throughout our system of climate control business factories that we need to tweak, or that we’ve got a specific bottleneck, but generally speaking, we have a lot of excess capacity, which will bear us in good stead as we need to increase our volume over the next few years.

So if construction starts increasing again, then your contribution margin could be maybe as high as 40% or some good percentage for [indiscernible].

We’ll take some good percentage.

And Jack, I wanted to ask you a question about capacity in the ammonia business. I understand 40% of the capacity was taken out since 2007. What happened to all that stuff? And can you buy it at a fire sale price? [indiscernible] to do that.

I’m sorry, I didn’t understand your question. 40% of what? The plant that shut down you’re talking about?

Well, no. I was talking about the entire industry in the United States.

What happened? What happened is when the market recovered, they went to imports, and out of 20 million tons of use a year here, more or less, 12 million were -- 8 million were imported.

He’s talking about UAN now.

Are you talking about UAN? Or ammonia?

Oh no, I was talking about ammonia, the ammonia plant.

Did your question go to what happened to the equipment that was shut in?

Yes, what happened to all that equipment for all those 40% of the ammonia plants that were shut down?

It was shipped to China, most of it.

Various things. Some was shipped overseas. Some was scrapped and torn down. There was some that was left in place and it’s been reactivated, but for the most part, it’s gone.

And how hard would it be to create more capacity in the ammonia business in the United States?

Well, there’s several factors. One is that, first of all, you have to get permits. And permits are -- as you know, you’ve heard in our case even -- a long and arduous, and sometimes unobtainable effort. So the permitting is a key issue. The second thing is that you’ve got to plan a project and considering the magnitude and cost of these projects that we’ll get into in a minute, in many cases the detailed planning doesn’t occur until after the permits, because the planning itself can be very expensive. So you’ve got a permitting process that can take a year to 2 years. You can have a planning process that takes more than a year. And then beyond that, you’ve got the cost, which is in many cases, some cases, not justifiable at new plant costs, which is many multiples of an older and existing plant, like the one that we restarted at Pryor. So all those factors -- and then you’ve got the time to build either a greenfield out or to maybe relocate a used plant. So you’re looking at, altogether, something that can be maybe, on the short side, maybe 4 years, and on the high side, maybe 6 years for a project.

Well, there’s recently been a rumor about -- it’s more than a rumor -- a proposal for a facility that will produce UAN about comparable to what we produce at Pryor. And the cost of it greenfield was quoted as $1.5 billion. That was in Green Markets a couple issues ago.

Is that the Orascom deal?

That’s Orascom, yes. So when you put the numbers, $1.5 billion, you can’t economically justify it.

Okay.

Also, there have been a number of announcements over the last year and a half of de-bottlenecking CF and PCS and all the big guys are talking about doing a lot of de-bottlenecking. That’s more likely than a greenfield.

Because we’re doing that continuously, yes.

Does this answer your question and kind of put it in perspective for you?

Yes. That’s very helpful. It sounds like you’re going to have a cash cow on your hands for a while.

I want to get back to the question on capacity. Was that your question, the Climate Control business capacity?

Yes, it was.

Well, if you look on Page 20 in our 10-K, there’s a section about our properties, and we address the capacity of the plants. And we don’t really establish an overall Climate Control business capacity utilization. We look at it plant by plant. If you’d like, I can read it out of the K now, but there are so many numbers in here. So I think I’m just pointing this to where you are. But to pick our larger couple plants, our fan coil manufacturing business for 2011, we calculated was operating at about 52% of capacity. And our water source heat pumps, and geothermal heat pumps, we calculated were operating at about 64% of capacity. And those are the 2 largest facilities.

Our next question is from the line of Joe Mondillo with Sidoti.

Guys, I just had a couple quick random questions for you. First off, the tax rate seemed abnormally low. Why was that? And what are you looking at sort of toward 2012?

We had a couple things. Our [indiscernible] our manufacturing and production deduction -- there’s a specific deduction for U.S. manufacturers, and that pulled our rate down considerably from the 40% statutory level. We’re at 35.5%. That plus a few other areas where you have deferrals, and permit differences, and temporary differences.

What do you is think a good effective tax rate to use on a going forward basis?

We usually 38%, don’t we?

I think we were at 40% last year, but we had -- you never really know what the final number is until you file your return 9 months later, so from year-to-year you’ll have adjustments one way or the other. But for the most part, it’s the statutory rate minus the manufacturing production deductions.

Okay, so 38% is a fair guess?

You’ve got state taxes in there too, so it’s 38-40%.

Also, the inventory dropped by about $15 million from the third quarter. What’s going on exactly there? Why was that?

You take a big sales month, a big sales quarter.

It didn’t seem like an abnormal compared to past quarters.

Nothing at all going on there. You time your purchases based on what you think your input costs are, and you have seasonal aspects in there, so there’s nothing at all about that that’s unusual.

Nothing, such as inventory -- that we should be worried about the first quarter because your inventory came down too much?

That’s correct.

And then in terms of -- what was your geothermal order growth year over year in the fourth quarter? Did you say that? I missed it, I think.

Well, we talked about -- we didn’t give you our total geothermal, because we don’t break that out. But we did give you our residential geothermal, and just to make sure I give you the correct number here, for the full year, our single -- our residential new orders were down 10%, and for the fourth quarter, our new orders were down 3% from the fourth quarter of the prior year.

And then just lastly, in terms of that Climate Control business, compared to the fourth quarter, and just seeing what you’ve seen over the first 6, 7 weeks of the first quarter here, sort of sequentially, how are you sort of looking at that? Are we expecting sort of a stabilization and hopefully things stable, so compared to the fourth quarter, maybe things will be a little flat and then hopefully we get…

We’re not making a call on the first quarter. We’re going to stick with our tradition of not giving guidance.

Not even directional or anything like that?

No, we’re not even going to give you directional.

Okay. Just one more thing. What was your average price of UAN and ammonia in the fourth quarter?

That’s a good question. We don’t typically give our exact prices, but what we do give is we point you to what the market pricing was. And if you look on page…

You’re getting into things we don’t want to disclose for our competition.

But if you look on Page 14, you can see the pricing on UAN and ammonia.

Thank you. We have no further questions in queue at this time. I’ll turn the call back over to management for any closing remarks.

Well, I just want to thank everyone for listening today. And as usual, Carol Oden will be talking to you about some forward-looking statements that we might have made during the day. So Carol, why don’t you take it away?

Thank you. Thanks again for listening in today. The comments today contain certain forward looking statements. All statements other than statements of historical fact are forward looking statements. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate, and similar statements of a future or forward looking statement nature identify forward looking statements, including, but not limited to all statements about or any references to the architectural billing index or any McGraw Hill forecasts, including those pertaining to commercial, institutional, and residential building increases or industry growth and the McGraw Hill forecast regarding the whole green retrofit renovation market and energy efficiency market. The forward looking statements included, but are not limited to, the following statements: We have substantially more potential to develop the company. The outlook for 2012 is positive. Future capital spending of approximately $65 million in 2012. Continued strengthening of our liquidity and capital resources. Maintained a strong cash position to guard against unexpected downturns in the global economy, and to take advantage of opportunities to grow the 2 business segments. We should complete the increase of ammonia production capacity at Pryor during 2012. Additional production capacity at Pryor will be approximately 60,000 tons per year of ammonia. The cost of natural gas will continue to be low. UAN prices this season could be $30 to $40 per ton, lower than a year ago. Higher urea prices should positively impact UAN pricing. AN sales pricing will be higher than last year. Higher AN markets in 2012 and 2011. The positive fundamentals of the ag business should continue in the near to midterm. We continue to be optimistic about our ag business. Market indicators for industrial mining products forecast growth for the next few years. Production loss during the improvement projects should be more than offset during the balance of 2012. We will continue to extend our industrial business by adding new customers and perhaps new products. We will continue to enhance our agricultural distribution channels. We will work on several projects aimed at optimizing production rights. Continued softness in the single-family residential market. Slower recovery in the commercial sector than previously anticipated. McGraw Hill forecasts that growth should benefit all of our commercial and institutional product sales. The recovery in commercial and institutional new construction should be lower than previously forecast. Renovation and retrofit of existing buildings will continue to be an important market for us. There will be a positive impact on our climate control business from long term trends toward green building construction. Continued positive impact from the 30% federal tax credit. We will continue to be a group of niche companies. We will focus on green products. Strong push in the geothermal market. Improve all areas of the business to maintain a high level of operational excellence. Possible strategic acquisitions in our climate control business. Planned new product introductions including approved energy efficiencies. New and improved digital control systems. Expansion of our current product offerings and a packaged system offering that combines our hydronic fan coils and modular chillers. During 2012 we will increase the size of our air coil manufacturing facility. You should not rely on 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, Form 10-K for the fiscal year ended December 31, 2011. 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 noncash charges unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurements. We will post on our website reconciliation to GAAP of any EBITDA numbers discussed during this conference call. Thank you, and that ends our conference call today.

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