LSB Industries Inc (LXU) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the LSB Industries, Incorporated, fourth-quarter 2006 conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. I will now turn the call over to Ms. Carol Oden. Please go ahead, ma'am.

Good morning and welcome to the LSB Industries, Inc., conference call. On today's call are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President; and Tony Shelby, Chief Financial Officer; and also, Larry [Holley], President of the Chemicals Business.

This conference call is being broadcast live over the Internet. An archive of the webcast will be available shortly after the call on our website at www.lsb-okc.com and will be accessible for one month. 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, March 21, 2007. Therefore you are advised that time-sensitive information may no be longer be accurate as of the time of any replay. We will not make any projections as to the future results as to revenues, income, or earnings per share of the Company during this conference call. However, comments today may contain certain forward-looking statements, including, but not limited to, our overall operational goals to reduce interest and dividend expense, including arrearages; increased cash flow to support expected growth and improve net worth and enhance our financial ratios; refinancing our credit lines under more advantageous terms; expectations for continued growth; expanding our Climate Control Business's manufacturing operations and personnel to increase output, reduce manufacturing cost, and improve efficiency; increase ClimateMaster's manufacturing capacity; increase in raw material prices to impact gross margins into 2007; improvement in gross margin; sales increases in certain segments of our Climate Control Business [on track] toward the continued long-term profitable growth of the Climate Control Business; market demand for our chemical products; our Chemical Business's continued focus on growing our nonseasonal industrial customer base with an emphasis on customers that accept the risk of raw material cost increases; and continuous operations of our plants.

All statements other than statements of historical fact are forward-looking statements. A comprehensive listing of risk factors, which could cause results to vary from the forward-looking statements made during this conference call, are included in our Form 10-Q for our quarter ended September 30, 2006, and our 2006 Form 10-K, when filed, under Special Notes Regarding Forward-looking statements.

When we refer to EBITDA, we mean net income plus interest expense, income taxes, depreciation, amortization, and certain non-cash charges unless otherwise described. EBITDA should not be considered as an alternative to GAAP measurements. We will post on our website a reconciliation to GAAP of any EBITDA numbers discussed to during this conference call. Now, I will turn the conference call over to Mr. Jack Golsen.

Thanks, Carol. Good morning. I'm Jack Golsen, CEO of LSB Industries. Also on the call this morning with me is Barry Golsen, LSB's President as well as President of our Climate Control Business; Tony Shelby, our CFO, who will discuss our financial details and the Chemical Business; and Larry Holley, President of our Chemical Business, who will answer your questions about the Chemical Business. Thank you for your participation on our year-end conference call.

On this morning's conference call, in addition to the fourth-quarter and year-end financial overview, we will review recent events and activities and the present outlook for our two core businesses. We will also bring listeners up-to-date on the balance sheet initiatives that we have undertaken to improve our capital structure and strengthen our financial position.

2006 was a good year for LSB for both sales and profits. Looking back over the year, I think it is fair to say that we successfully executed our long-standing and stated objectives of profitably growing our business, improving our debt to equity ratio, increasing our market dominance in certain high-margin Climate Control products, and growing the industrial side of our Chemical Business so that we are less and less dependent on seasonal business.

Now, first about the fourth quarter. In terms of financial performance, the fourth-quarter results capped one of the better years in LSB's history. As compared to 2005 fourth quarter, consolidated sales were $123.7 million, up 30%. Diluted earnings per share rose to $0.14 per share from a loss per share of $0.05 in 2005.

Comparing the entire year of 2006 to the entire year 2005, consolidated sales were $492 million, up 24%. Diluted earnings per share rose to $0.78 per share from $0.19.

As you will hear from both Barry and Tony, both our businesses turned in stellar operating results. Our Climate Control Business, led by its largest subsidiary, ClimateMaster, which produces geothermal and water source heat pumps, had record high sales and profits. The Climate Control Group year-end backlog continued to increase, even though 2006 shipments were at an all-time high.

Our Chemical Business saw strong growth as well. As longtime LSB investors know, approximately 65% of our chemical sales volume is tied to term sales agreements; and 35% of our chemical sales are tied to seasonal spot market agricultural sales. Despite the fact that a serious drought impacted our primary agricultural markets much of the year, the overall Chemical Business had an improved year as well in 2006.

At this time, the outlook for both of our businesses appears to be bullish. Commercial construction is forecast to be slightly up in the markets we serve, and there is increasing demand for green products like our environmentally responsible geothermal systems. Also this year, market conditions for the agricultural sector of our Chemical Business appear more favorable.

Based upon our expectations for continued growth, we are expanding our manufacturing operations to increase output, particularly in our Climate Control Business. At the same time, our quest to reduce manufacturing cost and improve efficiency continued in '06 and will continue in '07. You will hear more from Barry on this subject.

With regard to our balance sheet and financial condition, good progress was made in '06 and year-to-date '07. Our overall operational goals are to reduce interest and preferred dividend expense, including arrearages; also to increase cash flow to support expected growth and improve net worth; and in doing so enhance the financial ratios like debt to equity and debt to capitalization and also increase our EBITDA.

In 2006, we had an overall EBITDA of $41 million, compared to $28.8 million and 2005, $23.6 million in 2004, and $20.2 million in 2003. So we have doubled our EBITDA in the last three years.

On March 12 of this year, we completed an exchange offer of Series C preferred stock in which 305,000 of the 309,000 preferred shares that were eligible for exchange into common stock did so. Series C preferred holders of the exchanged shares waived all rights to accrued and unpaid dividends on tendered shares, which at December 31, '06, was approximately $7.3 million. At this time, there remain approximately 190,000 preferred C shares still outstanding.

We're also looking to refinance our credit lines under more advantageous terms. We will report on that when and if it happens. Before passing this call off to Tony and Barry I would like to remind you that when we take questions later in the call, if we are not entirely forthcoming in answering your question, it is probably because the response could constitute a disclosure of information that has not been made known to the public, or because it might provide useful information to our competitors. If you have questions that would require a long explanation, we would welcome your calls off line at a later time.

Finally, in order to give all callers a chance to ask questions, we request that each caller limit discussion of questions to a maximum of three minutes. Now, I will turn the call over to Tony Shelby, who will review our financials with you. Thank you.

Thank you, Jack. We issued a press release yesterday, March 20, to disclose our results for the fourth-quarter 2006 and for the calendar year 2006. We plan to file the 10-K this Friday, tomorrow, March 23, if everyone including our auditors have signed off. Both of these documents will be available on our website.

For the final quarter of 2006, sales were $124 million, an increase of 30%. Climate Control sales were up 54%, Chemical sales were up 10%, both as compared to the same period last year. Both of the two core businesses had good fourth quarters.

Climate Control's operating income was $6.9 million compared to $3.8 million last year. Chemical's operating income was $1.4 million compared to $778,000 last year. We will discuss Climate Control and Chemical in much more detail later in the conference call.

After allocation of corporate costs of $1.8 million, the consolidated operating income for the fourth quarter was $6.6 million, compared to $2.7 million last year, an increase of $3.9 million. Consolidated net income before preferred stock dividends for the quarter was $3.4 million, compared to essentially a breakeven for 2005.

From an EBITDA standpoint, beginning with the pretax income, consolidated EBITDA, as defined, for the fourth quarter was $9.9 million. This was an increase of $3.8 million compared to EBITDA for the 2005 fourth quarter. As compared to the fourth-quarter 2005, Climate Control's EBITDA increased by $3.3 million to $7.7 million. Chemical's EBITDA increased by $600,000 to $3.7 million.

The unallocated corporate costs and other items that are added back net were approximately the same in both periods.

During the fourth quarter, consolidated SG&A expenses were $17.4 million as compared to $13.7 million last year, an increase of $3.7 million or 27%. The increase in selling expenses included commissions, shipping and handling, freight, and other variable costs related to higher sales levels and increases in staffing at Climate Control for increased sales and marketing efforts.

The administrative cost increases included increased staffing and professional fees related to preparation for SOX 404 and legal costs related to certain issues such as the antidumping issue that we are pursuing with the U.S. Department of Commerce.

For the 2006 results, as Jack indicated, our calendar year sales increased by 24% to $492 million. Net income before preferred stock dividends was $15.9 million compared to $5.1 million last year.

After preferred stock dividend requirements and diluted common equivalents, earnings per share was $0.78 versus $0.19 for 2005. Included in the fourth-quarter earnings per share calculation was a deduction from net income of $450,000 that affected the earnings per share calculations and related to the exchange of Series 2 Preferred shares for common that was completed in October 2006.

EBITDA for the year 2006 was $41 million compared to $28.8 million last year. At December 31, 2006, the Company's total interest-bearing debt was $97.7 million compared to $112 million at December 31, 2005. The $97.7 million included the $50 million Senior secured note due in 2009; the Senior working capital borrowings of $26 million; various mortgage and equipment loans of approximately $17.7 million; and convertible subordinated notes due in 2011 of $4 million.

Presently, we're negotiating with certain lenders to refinance the $50 million Senior secured note. Our objective is to extend the maturity and reduce the interest rate, which is currently fixed at 11%. We believe that based upon our current capital structure and results of operations, accompanied by the currently favorable market conditions, we think we can improve the interest rate on this component of our debt capitalization.

The interest rate for borrowings under our working capital revolver is 200 basis points over LIBOR. We have an interest rate cap contract, $30 million of working capital borrowing, that caps LIBOR at 4.59% through April of '09. Currently, the 30-day LIBOR rate is 5.32%.

From a cash flow perspective, we typically don't carry cash on the balance sheet. We began the fourth quarter with $500,000 cash; we ended the quarter with $2.3 million cash, for a net increase of $1.8 million.

The cash flow for the quarter consisted of the cash provided and cash used as follows. Cash provided includes $13.8 million net cash provided by operations; $8.2 million of long-term borrowings primarily to finance capital expenditures, and we will discuss that in a little detail later; and $2.5 million of short-term financing and insurance premiums.

Cash used included $6.7 million from capital expenditures -- this is all fourth quarter -- including $3.9 million at Climate Control and $2.8 million at Chemical; $4.7 million of payments on long-term debt including refinancings; and $3.1 million held in escrow at year-end awaiting construction draws.

That all adds up to a positive cash flow of $10 million, of which we applied $8.3 million to pay down the working capital revolver, resulting in the $1.7 million increase in cash on the balance sheet.

At March 21, the amount of availability under the Company's working capital revolver for additional borrowings is approximately $18.4 million. The current borrowing under the working capital revolver is approximately $30.5 million. In addition to the $18.4 million available under the $50 million line, we have approximately $17.5 million of additional borrowing availability in excess of the $50 million working capital cap. Currently we don't have plans to request an increase on the $50 million line to access this; but it is available if we decide that we want to increase the size of the line.

During 2006, we have undertaken several steps to improve our leverage and capital structure. In March of '06, we issued $18 million of 7% convertible debentures. Net proceeds were primarily used to repurchase and redeem the remaining $13.3 million of 10.75% interest Senior notes due in 2007 and to reduce other interest-bearing debt.

During 2006, subsequent to the issuance of these debentures -- I am going to round the numbers here -- $14 million of the debentures were converted into approximately 2 million shares of our common stock. In the first quarter of 2007 another $3 million of debentures were converted into 723,000 shares of common stock, leaving only $1 million of those debentures outstanding to date. In summary, the result of the conversion is that long-term debt was reduced $17 million; stockholders equity increased $17 million; and annual interest costs were reduced by approximately $1.2 million.

Since the end of the third-quarter 2006, a significant percentage of our oustanding Class C Series 2 preferred convertible stock has converted to common. At the end of 2005, there are approximately 605,000 shares issued and outstanding of this Series to dividends in arrears of $21.25 per share.

During October of 2006, we entered into exchange agreements with certain holders to exchange 104,000 -- and I am rounding -- shares of the Series 2 for approximately 773,000 shares of our common stock and the waiver by the Series 2 shareholders of all rights to accrued unpaid dividends of $2.4 million. At December 31, 2006, there remained 499,000 shares of the Series 2 outstanding, with $23.97 of dividends per share in arrears or approximately $12 million.

Subsequent to year-end, on March 12 we completed a tender offer to exchange 305,807 of 499,000 that were outstanding at year-end into approximately 2.3 million shares of our common stock and a waiver by the Series 2 holders of all rights to accrued and unpaid dividends of $7.3 million.

One forward-looking note here, and the accounting for this is not tied down absolutely yet. But the first-quarter 2007 earnings per share calculation will include a significant deduction in arriving at earnings per share of the market value of the 7.4 common shares versus the $50 stated value plus the accrued dividends of $23. Said the difference between the market value of the shares issued and the $50-plus in accrued dividends will be a deduction from net income to arrive at income to the common. Just a forward-looking note there.

Today, after the 2007 conversions and exchanges, there are 19.4 million common shares outstanding and 193,295 shares of the Series 2 outstanding. The accrued unpaid dividends on the Series 2 preferred shares, including the March 15 of 2007 dividend requirement, is $24.78 per share.

In summary, we believe that as a result of the $15.9 million net income for 2006, the infusion of $17 million of new capital, the early termination of $13.3 million of high interest debt that was due in 2007, and the exchange of preferred for common and the elimination of a significant portion of accrued dividend, that our capital structure and leverage are substantially improved.

Total stockholders equity increased from $13.5 million at the beginning of '06 to $42.6 million at the end of 2006. Our total debt to EBITDA at December 31, 2006, was substantially reduced to 2.4 times compared to almost 4 times at December 31, 2005. That includes a summary financial overview of our results of operations and financial position. Barry will now review the Climate Control Business.

Thanks, Tony. For those of you who are new to LSB, here is some basic information about our Climate Control Business. The companies in this business design, manufacture, and market a broad range of high-quality air-conditioning, heating, and heat pump products that are used in commercial, industrial, and residential climate control systems.

Our core products, which last year comprised about 87% of Climate Control's sales, are geothermal heat pumps, water source heat pumps, and hydronic fan coils. Based on figures that are reported by the Air-Conditioning and Refrigeration Institute, we are the U.S. market leader for both of these products. For 2006, our market share for heat pumps and hydronic fan coils was approximately 38% and 40%, respectively.

We also manufacture end market small air handlers, large custom air handling units, modular water chillers, coaxial heat exchangers, and tube and fin heat exchangers. Additionally, we complete large-scale geothermal installations throughout the United States.

Our products are used in many different types of buildings for new construction, renovation, and replacement. We believe that our business is not dependent on the health or weakness of any single construction sector. We have an installed base of millions of units in thousands of buildings and homes throughout the United States and around the world. Our units are installed in some of the most prestigious structures.

We currently have five manufacturing facilities, all located in Oklahoma City, totaling over 600,000 square feet. We're currently adding another 100,000 square foot distribution facility.

Moving on to fourth-quarter financial highlights for the Climate Control Business, as compared to 2005, sales rose 54% to $60.9 million versus $39.6 million in 2005. Operating income was $6.9 million as compared to $3.8 million, an 82% quarter-over-quarter increase. EBITDA was $7.7 million or 72% ahead of $4.4 million last year. Consistent with the first three quarters of the year, the fourth-quarter improvement was primarily the result of higher sales volumes, principally in our heat pump business.

Now for a year-over-year summary of the Climate Control Business. 2006 sales were $221.2 million versus $156.9 million, a 41% increase over 2005. Operating income increased 80% to $25.4 million from $14.1 million in the prior year. EBITDA was $28.1 million, up 69% as compared to $16.6 million ^and 2005.

During the fourth quarter, bookings of new orders continued to be strong in nearly all areas of the Climate Control Business. We closed the quarter with a record year-end backlog of $80.4 million, an increase of 43% or $24.2 million over the 2005 year-end backlog. As you know, backlogs are a leading indicator of future sales.

For 2006, our income order level exceeded the growth in the construction markets we serve by a factor of 2. Our incoming order level was up approximately 34% over 2005, in contrast to 2006 total U.S. nonresidential construction award growth of 16%, which is estimated by McGraw-Hill's Construction Market Forecasting Service.

I would like to review now with you a few issues we have discussed in past conference calls and update you on some recent developments. As I mentioned during our last two conference calls, one of our biggest challenges in 2006 and continuing into 2007 is to increase our product output to keep up with the demand for our products, primarily at ClimateMaster and ClimateCraft.

ClimateCraft, our large custom air handler business, has doubled its production floor space and added fabrication equipment, substantially increasing its capacity. At ClimateMaster, we have added fabrication equipment and increased the capacity of our assembly lines and of our paint facility.

At both of these operations, we have added and are in the process of adding more production personnel to increase output. In 2006, we hired nearly 300 new employees, including contract employees, at these operations and over 400 in total for the entire Climate Control Business. That 300 is included within that 400 number. We expect to add more during 2007.

During the fourth quarter, we purchased a 46,000 square foot building next door to the ClimateMaster facility. We are currently in the process of renovating a 150,000 square foot building that we own and converting approximately 100,000 square feet into a new distribution center for our heat pump products. This project should be operational during the second quarter.

We estimate that by adding these two facilities, reconfiguring the ClimateMaster facility, installing additional fabrication equipment, and modifications to the assembly line that are already underway, we will substantially increase ClimateMaster's immediate capacity. We will be able to further increase ClimateMaster's capacity as we go forward with additional fabrication equipment when bottlenecks occur and additional personnel as required.

During the past two conference calls, I pointed out that we had received material price increases that in many cases were more than those we incurred during 2004 and 2005, and that we had also seen these material price increases trickle down to purchased components such as motors and compressors. We estimate that our total material cost increased approximately 8 to 9% from the beginning of 2006 to year-end.

We expected those material price increases to impact our gross margin during the second half of 2006 and into early 2007. These material price increases did impact our gross margin, which was 28.1% in the fourth quarter of 2006 as compared to 30.9% during the fourth quarter of 2005. In the past few months, we have seen some softening in the price of copper and steel. However, costs for these commodities continue to fluctuate and aluminum remains high.

As I advised last quarter, we announced across-the-board price increases for our products. However, due to the large backlogs we were carrying at the time we received the material cost increases, the full impact of those increases has not yet fully taken effect. Our plan is to try to recoup all of the material cost increases; but we cannot predict the exact timing, or if the market will accept the price increases we have announced. We are operating in a very price-competitive environment, and many of our sales are subject to the competitive bid process.

As previously discussed, we have a number of developing product lines and activities that have not yet achieved profitability, but which we believe are investments in the future growth of the business. In 2006, the net operating profitability of these lines did not improve significantly; however, we expect to see these operations improve going forward.

One of those newer product lines is our large custom air handler produced by ClimateCraft. ClimateCraft had a substantial increase in its sales during 2006, up 65% over 2005. Despite the 65% increase in year-over-year sales, shipments were actually lower than our forecast. This, coupled with the material price increases discussed earlier, resulted in less of an improvement in the bottom line than we expected.

The increase of production output at ClimateCraft has been impeded by the very tight labor market in Oklahoma City that exists at this time. ClimateCraft has a strong backlog, and we expect to continue to increase production and shipments during 2007. As with other companies, and subject to any other material price increases we might incur, its gross margin should improve as the price increases it has implemented translate into product shipments and as production levels continue to increase.

Also within this group of developing operations is Trison Construction, which specializes in large-scale geothermal installations. At this time, Trison has unfulfilled contracts totaling $10 million, up significantly from last year at this time. We expect to see its sales increase during 2007.

Departing from these developing products and activities, sales of ClimateMaster's geothermal heat pump product line continues to increase. During 2006, our residential geothermal sales revenues were up approximately 55% over 2005. This growth is in sharp contrast to the 18% decline in overall U.S. factory unit shipments for conventional residential air conditioners and air source heat pumps during the same period. Those numbers are as reported by the Air-Conditioning and Refrigeration Institute.

We estimate that the total geothermal unit shipments for the United States market, both residential and commercial, were up approximately 29% during 2006 as compared to 2005. Our geothermal shipments outpaced the overall geothermal market and were up approximately 52% during 2006, indicating that we are gaining market share in geothermal.

We attribute the growth in the market size of geothermal products to high energy prices and environmental concerns, and the growth in our market share to the success of our Tranquility products, the breadth and quality of our overall product offering, and our stepped-up sales and marketing efforts.

During 2006, ClimateMaster launched several new water source heat pump and geothermal models which use our trademark EarthPure non-ozone-depleting refrigerants. This is a continuation of our strategy to provide the most comprehensive, leading-edge, environmentally responsible product line in the HVAC industry.

On another note, we recently began in-house production of part of ClimateMaster's air coil requirements, which we were purchasing from the outside. We expect to increase production throughout 2007. This is an important cost-reduction initiative.

Since our last conference call, we have shipped thousands of units to hundreds of projects. I can't list them all, but here are a few interesting projects of note. We shipped units to the Atlantis Residences; that is part of the Atlantis complex in Paradise Island. City Center in Las Vegas, which is a huge development that is being undertaken in Vegas at this time. The Foxwood Casinos (sic) in Connecticut. The Wynn Encore, which is the addition to the Wynn Resorts in Las Vegas. The University of Washington in Harborview, Seattle. The Greystone Hospital in Moorestown, New Jersey. Fort Bliss in El Paso, Texas, which is a very large installation of geothermal heat pump systems for military housing. Fort Gordon in Augusta, Georgia, which is also military housing, and several other projects.

Coming up, 2006 was a terrific year for LSB's Climate Control Business. Bookings, backlogs, sales and profits were all at record levels. Almost all of the measures we have taken in product innovation, sales and marketing, and on the production side of our business that have been designed to enable us to profitably grow the business achieved the desired result in 2006. We believe we are on the right track towards the continued long-term profitable growth of this business.

Thanks for your attention and I will now turn the meeting over to Tony, who will talk about the Chemical Business.

Thank you, Barry. To supplement the overview comments that Jack made regarding the Chemical Business in his opening comments, I will review the results for the fourth-quarter 2006 for our Chemical Business. Larry Holley, President of Chemical, is also available for the Q&A session which follows.

In our Chemical Business, sort of a background summary of our Chemical Business, we are a producer and marketer of chemical products for the industrial, mining, and agricultural markets and hold a leading position in the manufacturing and marketing of nitric gasses. Approximately two-thirds of our business is industrial and mining; and the majority of its products are sold pursuant to sales agreements and pricing arrangements that provide for the pass-through of raw material costs. The balance of our production is primarily nitrogen fertilizer sold at the market price in effect at time of sale.

We have three production facilities. The Baytown, Texas, facility is a single [rule of] scale nitric acid plant. The El Dorado and Cherokee facilities are multiplant sites producing industry acids, nitrogen fertilizers, and industrial grade ammonium nitrate to the mining and construction industries.

Overall, our Chemical Business performed well in the fourth-quarter 2006, especially considering the extended planned maintenance downtime at the Cherokee facility. Production volume and sales from all three production facilities exceeded the prior-year fourth quarter due to strong demand and improved plant production rates.

Fourth-quarter sales were $59.2 million compared to $53.7 million in 2005, an increase of 10%. Agricultural Products sales accounted for the majority of the improvement over the fourth-quarter '05 due to an improving farm economy outlook and more favorable weather conditions in our market area, as opposed to the detrimental effects of the 2005 hurricanes. In addition, demand for industrial acids showed significant improvement.

While sales and volumes from all three production facilities were higher in the fourth quarter of 2006 than in 2005, the unit selling prices were generally lower due to lower cost of the raw material inputs, natural gas and ammonia.

Chemical's segment operating income for the fourth quarter of 2006 was $1.4 million compared to $778,000 for the same quarter last year. The increase was primarily due to margin and volume improvement in the Agricultural Products, with the additional contribution from industrial acids. In addition, as noted earlier, in 2005 hurricanes negatively impacted Cherokee's performance.

EBITDA, as defined, was $3.7 million in the fourth-quarter 2006 compared to $3.1 million in 2005. For the calendar-year 2006, Chemical's sales for the calendar year were $261 million, an increase of $27 million or 11.6%.

The Chemical segment's operating income for 2006 was $10.2 million compared to $7.7 million for 2005. The increase was due to the combined impact of improved sales of industrial acids and agricultural chemicals, with enhanced plant production performance.

To mitigate the impact of the drought in our traditional markets in 2006, we expanded our agricultural market and reached into freight and logical areas that had been vacated by our competitors.

Also affecting 2006 was a significant improvement to Cherokee facility. Although Cherokee's operating results were negative for 2006 due to high natural gas costs in the first quarter that we were not able to pass along, the 2006 operating loss was significantly reduced from 2005.

For the year 2006 EBITDA was $19 million as compared to $16 million for 2005. Following are summary fourth-quarter results by plant location.

Baytown continued to generate consistent, positive results and turn in another good quarter, reporting higher sales and operating income in the fourth-quarter 2006 compared to the same period in '05. Cherokee's operating income from the fourth-quarter 2006 improved by $2.4 million compared to last year as a result of strong product demand and more reasonable natural gas prices, although natural gas prices continue to be unpredictable. Monthly average spot price per MMBtu, excluding transportation during the fourth quarter of '06, ranged from a high of $8.23 to a low of $3.54.

During fourth quarter of 2006, approximately 70% of Cherokee's sales were priced to include the cost of natural gas. Currently, the market natural gas price is $6.90. The 12-month spread, which changes daily, is quoted at approximately $8.

El Dorado, EDC's operating income was lower in the fourth quarter 2006 due to certain nonrecurring income items that were included in the 2005 results. Excluding these nonrecurring items, the 2006 and 2005 fourth quarters were very much alike. However, the improved farm economy outlook in El Dorado's primary markets resulted in production increases for Agricultural Products in anticipation of spring demand. El Dorado's production performance and plant reliability continue to reflect significant efficiency gains.

The outlook as we look at the balance of 2007, we continue to be encouraged by the market demand for our products and the performance of our production facilities. The majority of our products are sold into markets that are affected by the general strength of the global industrial and North American mining economies, which continue to show strength.

Additionally, a lesser but significant portion of our production is sold in the agricultural markets, which promise a strong spring planting season due to ethanol-driven corn production and lower grain inventories in general.

Our Chemical Business will continue to focus on growing our nonseasonal industrial customer base, with an emphasis on customers who will accept the risk inherent with raw material costs while maintaining a strong presence in the seasonal agricultural sector. This strategy emphasizes continuous operation of plants at full rates, thereby lowering the fixed cost of each unit of production.

This concludes our prepared remarks. I will now turn the call over to Jack to begin the Q&A segment of the call.

Thanks, Tony, and thanks, Barry. We have tried to give you a lot of information, maybe too much today for you to swallow, but we're happy to take any questions that you might have. Please identify yourself when you ask the question and the company that you are with.

(OPERATOR INSTRUCTIONS) Brian Gilmore with Tejas Securities.

I have two questions. One is, what was the NOL at 12/31/06? Also, in terms of the expansion of your Climate Control Business on a percentage of square feet, how much of an increase in square feet is that versus your current operations?

Well, Tony, the NOL is approximately what?

Approximately $40 million.

Okay.

We had -- in the Climate Control Business, we will end up with about 700. We just added approximately 150. So we went from 550 to 700; so what is that as a percentage? Calculate that.

About 20, 25.

27%.

But I think the more pertinent comparison is that all of that addition was to our geothermal and water source heat pump facility. It virtually came close to doubling the floor space for them.

Okay, so when you take that division, it is doubling that?

If you just look at our water source heat pump and geothermal fabrication assembly operation, it came close to doubling their space; yes.

What kind of capacity had you been running at in that business? How many shifts?

Before, we were running it basically full. Our business increased so much last year that we were really running at beyond full capacity, in that we were running massive amounts of overtime all year to keep up with the demand.

But by the addition of the assembly lines, and lengthening the assembly lines and fab equipment, we will be able to ratchet it back down to a more normal and economical and efficient level of production.

Okay, that answers my question. Thank you.

[Clifford Bordon] with CIBC.

I got a couple of quick questions. Geothermal sales for '06, what was the total sales volume?

Well, approximately $50 million.

Approximately $50 million? Okay. How much of that was commercial and how much was residential if you broke it out?

I don't have the breakout in front of me now. It was predominantly residential.

Predominantly residential?

Probably 80%, 85% residential. I hate to throw that number out. I have to look at the numbers; I don't have it with me right now.

But is it on the higher side, basically?

That's mostly residential.

Okay, mostly residential. In terms of the backlog, which I guess you went down by $5 million the last three months, what is a comfortable backlog in a business like this? If there is such a thing, what is it?

Well, it is relative to your -- what is really important is you like to have as much backlog as possible, because that is always comfortable. But yet at the same time, what we want to do is have reasonable lead time.

Last year in the middle of the year, for example, in our heat pump operation, our lead times were out for our basic standard product as high as 18 to 20 weeks, which is not good. At this time, we have gotten our lead times down for standard products in the range of 12 weeks. We will probably continue to try to bring those down.

Also, you have to look at the fact that when you look at our backlog, part of our backlog is released for production and immediate shipment; and other is released for shipment at a later time when the customer wants it. So what we are really trying to do is to have as healthy a backlog as we can and yet keep the customer satisfied with a reasonably short lead time.

Yes, sounds [high]. In terms of the -- with all this new capacity you put on the geothermal, you doubled the floor space. Does that mean you could do $100 million out of here, roughly?

Does that mean I could do what?

$100 million in sales, for instance, out of the present floor space?

Well, we did last year in that operation $135 million sales before doubling the floor space.

Okay, so does doubling the floor space mean you double the dollar capacity or (multiple speakers)?

Well, we didn't -- there's two parts to -- there's really three parts to the capacity. One is the floor space itself, so you have room to move material around and set up your equipment in your assembly lines.

The other is your assembly line capacity and length. Those are geared -- we have set or are setting up our assembly lines to handle more unit per day production. The only thing that is required is to add operators to take that rate up or down.

But the third segment is the fabrication of sheet metal which has to support those lines. We have not taken our sheet metal capacity at this time up to a position to double it; but we could do that with a relatively, reasonably low investment. We will add sheet metal capacity as we need to, to keep up with the line requirements.

Okay, so you can bring -- okay. I guess CapEx for '07, what would you expect that to be in the Climate business?

Well, we are going to have a relatively large year this year because we are in the process of all these gear-ups. It is probably going to be somewhere between 7 and $8 million in total.

7, $8 million in total? Okay, in terms of the Chemical --.

That doesn't include real estate, does it?

There is some real estate that's (multiple speakers)--

Yes, some real estate.

Some real estate included in there.

Okay. On the Chemical side, they plant corn and they plant these crops I assume relatively soon down in your area. Like, so when do you see those? Is that a first-quarter sales event, a second-quarter sales event? When is that?

Usually in second quarter. Excuse me; go ahead, you take that, Larry.

This is Larry Holley. Yes, that planting is shaping up now, and input products like fertilizer are moving out to locations so that they can be prepared for that. USDA is projecting some 8 million acres of increased planting. That is over about something on the order of 78 million acres last year. We will see that application of fertilizers peak toward the end of the first quarter and trail off starting into the second quarter.

So you are selling the stuff now, basically?

Oh, yes. We are selling it and moving it out to locations to have it ready. In some places, the application begins a little early. Further north you go, the later it is.

Right, right. In terms of I guess the Ag side on the Chemical Business, how much more? You know, I mean, you did $260 million in sales out of that business; 35%, I guess, came from Ag, roughly, you know, give or take. You know, is that dollar volume going to go up? Or is the margins going to go up? Or how does it work? Or is it both? Assuming a good planting season, obviously. Do you follow what I mean? In other words, is it going to go to 45% from 35%?

You know, we are not -- as Carol stated at the beginning, we don't make forward-looking statements about our sales volumes.

Okay, one last quick question, Trison Construction, what are the sales in that business?

Pardon?

Trison, the geothermal installer.

That is a relatively small business. It will probably this year do in the neighborhood of about $10 million in sales. But it is also, in addition to its own contract activity, it usually sells with every project water source heat pumps that are manufactured in our ClimateMaster (inaudible). Geothermal heat pumps.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Rick Nelson with J Giordano Securities.

I have got a couple of questions, more clarifications. One, could you round out what the CapEx was on the Chemical side? I know gentlemen before me asked about the Climate side.

For last year or for this year?

For this, for '06. If you have a budget for this year, that would be helpful.

What would you say?

$6.5 million.

$6.5 million for '06 on the chemical side? Okay. I noticed also, Tony, preferred stock dividend requirements for the fourth quarter were a little bit higher than the regular requirement for the previous three quarters on average. Is there anything special there?

I think I mentioned that there was an additional $500,000 in there that was related to the exchange of preferred to common shares.

Okay, that is where it came in. Okay.

That's where it came from. Then of course, I also mentioned that we're going to see a similar, but much larger, effect in the first quarter, which has nothing to do with earnings but has to do with earnings per share, because of the dividend that we have.

Okay, very good.

Rick, in other words, we are paying the dividend in shares, but it still counts as a payment.

I see. Okay, I was just curious about that. That certainly explains it. Also, on other expense, other income, the December quarter seemed a bit high, although it also seems to be a category that shifts up and around quite a bit. Anything special in that number?

In other income, I believe we had the litigation recovery of $1.2 million.

Okay. Maybe this is something that we could discuss off-line, I just found that the number of diluted shares you used seemed to be somewhat lower than I had expected. Did the Company buy back any shares during the quarter?

No, I think that is just due to averaging of the outstanding. As I indicated before, subsequent to year-end, the outstanding shares have increased to $19 million; so in the first quarter you will see what you probably expect to be a more reasonable number of shares.

Okay, very good. Well, thank you very much. Most everyone else asked questions that I had in mind, and you had a very good quarter, excellent year. Thank you for your time.

Mark Fleischhauer with Jayhawk Capital.

Great quarter, great year. Congratulations. Just a couple. Once again, I think a lot of my questions have been answered. But Barry, if you could walk through maybe the McGraw-Hill numbers, what you are seeing for commercial construction for '07, or whether or not (multiple speakers)?

I don't have all of the detailed numbers in front of me. I will be glad to send you a copy of them. But basically here is what is going on.

In the residential side, overall residential was forecast to be down. I think -- I don't remember the exact amount that it is down; I am thinking it is in the neighborhood of about 8% or so. That is after a significant decline this year.

However, what we saw last year was -- and I am not forecasting anything here -- but what we saw last year was that the sales of our geothermal products, which is -- all of our single-family residential sales are geothermal products -- didn't follow the trends. Because they don't seem to be driven by the general construction market. They seem to be driven by other things such as environmental concerns and high energy prices. That is a small part of our sales anyway.

On the commercial side, which is the bulk of our sales, if you look at the aggregate of all the markets that we serve, the general outlook is flat as far as new construction awards, new contract awards. But you have to understand that -- two things. One is, it is at a very high level, so it's sustaining a high level in terms of contract awards.

The other thing is that there is a lag time between contract awards and when it actually trickles down into business activity on the street that we benefit from by getting an order. So some of the contract awards that increased last year will actually translate into orders that we would get this year or ship this year. So what you are looking at is that lag effect. It is kind of a bubble that moves through of activity. So that is the general picture.

Well, I would like to add something to that. We look at all those national figures, but we don't accept that we have to go with the flow. In other words, we are such a small part of the total $14 billion, or whatever it is today, business that we feel that we can get a bigger share of whatever market is out there.

So, we go against the flow and have been going against the flow by increasing our market share. So that is what we base our internal planning on. Although you have to consider what is going on out there, we still don't think that we have to accept it. Let's put it that way.

I think that we have shown that we can take market share away from other people in the industry. That is what we hope to continue to do.

Great, great. On the Ag side or on the Chemical side, specifically on Ag, can you give us a sense as to just an order of magnitude in terms of two areas? One, in the Ag, if you get without the drought last year what potentially that could mean in terms of margins, to the extent you will answer that?

But also on the industrial side, given that so much of that is sold on a cost-plus contract basis, as demand on the industrial side improves, can you capture any of that incremental revenue dollar, revenue or margin?

Can you repeat that question again?

In other words -- Mark, let me ask you, are you asking --? One of the benefits of the cost-plus business is that you limit your downside, but you to a certain extent limit your upside. Are you asking if we can benefit from the (multiple speakers)?

That's exactly it. That is exactly the question. Yes.

I'll tell you, that is one of the questions I don't think that we want to answer on a telephone. I think there is a competitive disadvantage to us discussing that in public or making public comments about that.

Obviously, if there is a higher demand for our product and the market price is up, our prices will be up. If we can run our plants at a higher rate, then we absorb more overhead. So, the answer is yes; but we won't go on and discuss the number over this telephone call.

Understood, understood.

Do you agree with that, Larry?

Absolutely, yes.

In addition to that --

I think you answered the question, so --.

To be repetitive, we usually don't, and we will continue not to make specific forecasts of what financial results might be or sales results might be going forward. We're not making forward-looking statements.

I think what you can say -- and Larry, you might see if you agree -- is what this will allow us to do to capture what might otherwise be downtime, which will significantly improve the efficiency of the operation.

That's true. In any process plant, the real key there is to keep those facilities online and running at full rates, spreading your fixed cost and thereby increasing your margins. So that is a point of concentration and focus for us.

Great. I guess my just last quick question is, given EBITDA going in the right direction and we saw the free cash flow start to be generated in the fourth quarter, obviously you're ramping up capacity on the Climate Control side. What are -- do you have any other specific plans, continuing to beef up the balance sheet other than that? In terms of are there M&A possibilities or any other areas where you would look to spend that cash?

We are a net borrower, so -- Tony, do you want to address that?

No, I agree with it. We are a net borrower, so for the short term we would continue to reduce debt and improve our debt to equity ratio. We don't have anything that we could comment on in terms of opportunities for expansion at this point.

Great, thanks.

Kent McCarthy with Jayhawk Capital.

Must be two in the morning for Mark over there in Hong Kong, so I have a couple of different questions, and one is pretty simple. Tony, at today's prices or last week's prices, where is ammonia nitrate and where is ammonia? Roughly at those prices, what would that translate into margins for the Ag side this season?

A second question on Ag is, as we sit here today, are the weather patterns roughly okay? I missed the planting comment, I missed the numbers, but I think it sounded pretty good.

Then second is more of a conceptual question for Barry. We're kind of in the perfect storm. It's been a great year and business is great and whatever anybody wants to extrapolate from these backlog numbers. But we've got interest rates low. We have got real estate, which has been in a huge boom, although it is tapering off fast in some parts. We got oil at $60.

Barry, can you make some qualitative comments on what happens if we are in a recession led by real estate, and oil is at $40? Is there a danger (technical difficulty) at the wrong time? Or you know, (multiple speakers).

Let me just comment on that first. You always have to take a -- it's always a risk when you expand. But to use an expression that is very applicable here, you have to play to win. That is what we are doing.

But on the other hand, we have expanded in a way that we consider to be prudent and careful. In other words, instead of taking our heat -- the biggest expansion in square footage in our heat pump operations, instead of taking our operation, which is a 200,000 square foot plus facility, and doubling that facility, we acquired a facility next door, which we are linking up to it through a causeway. But if we had to scale back, we could always scale back out of that building.

And we have a separate stand-alone distribution center. If we had to scale back and back out of that distribution center, back into our core facility, we could there. So we have done in a way that makes our business very scalable, you know, if we have to.

As far as adding equipment, all the equipment that we are adding is typically fairly standard types of sheet metal fabrication equipment and [scissors] that can be utilized in other operations. Or if it was surplus and we wanted to dispose of it, it is easily disposable.

So there is a risk in expansion, but you've got to play to win, and we're trying to do it smart so we can scale back if we need to.

Barry, that sounds great. It is fundamentally a much, much easier business (inaudible) scale back on than on the chemical side. You can control some of this if a disaster scenario plays out.

If there were a disaster, we could scale it back. It is difficult to scale back Chemical operations because you have a plant there, you have fixed overhead, you have certain minimum staffing that you have to have to meet safety and environmental concerns.

So what you are asking is much more pertinent as far as Chemicals is concerned. But we're relatively small in the Chemical Business. Once again, I think that we are geographically located where a lot of our customers are -- nobody, but a lot of our customers are -- nobody is locked in, but a lot of our customers have an advantage by buying from us. So unless they stop buying altogether, and then the whole country is gone, you know?

Yes.

What was the first question for Tony?

The first question was just current pricing on ammonia nitrate and ammonia; and how that current pricing translates into margin if that pricing holds through the farm season?

Yes. (inaudible) Larry?

I will address that. First of all, you spoke also to the climate conditions. The important thing to us is ground moisture in our market area. Compared to last year, we are in much better shape than where we were last year in the middle of the drought. Right now we have got pretty good ground moisture conditions existing, and fertilizer application is proceeding at a fairly vigorous rate.

We are in a position where we are ready for another rain. I don't know that us guys in the Ag business are ever satisfied with the weather. But another rain would come along just nice at this time.

Pricing? We are seeing pricing continuing to escalate as we move toward the peak application months, which will be primarily centered around April. So pricing is continuing to get stronger as we approach the maximum consumption months.

The market price on nitrate, you always ask that question. It is published by the various journals.

[Green] markets.

Green markets. It is about $280 a tonne more or less, and it will vary from that. Let's see, your question was?

Ammonia.

Yes, ammonia, about $370 a tonne, so you can do your own calculation. You know all the formulas.

Okay, so those prices are firming over the last few weeks, ammonia nitrate, but also your cost as well (multiple speakers).

Well, I would say it has gradually gone up from -- they started to go up in February, the second week in February, and they have been slowly going up. I don't know if they have peaked out or not.

The real key here is that the strong demand allows you to run your plant very efficiently; and so pricing and that sort of thing are pretty good right now because demand is strong.

Okay. My phone cut out; could you just repeat what you said, something about the planting was up year-over-year, during the text of your conference call?

Kent, that was a comment I made earlier concerning USDA projections for this planting season, for corn in particular. Because corn is the primary driver of the fertilizer business in the U.S., taking about 40% of all fertilizer application. USDA is projecting something on the order of 8 million new acres planted in corn this time, primarily driven by all the activity we see in the ethanol sector and worldwide grain inventories being below target levels.

That is an increase of what, Larry?

It's about 10%, because we typically see somewhere in the 78 million acres of corn planted. Those lap over to things like wheat, too. I think my memory says about 3 million additional acres of wheat are expected to be planted this time. Those are USDA numbers.

Okay, thank you.

[Brad Shoup] with [Armstrong] Equity Partners.

Do you have at your fingertips the same prices, AN and ammonia, what your prices were in '06, either for the fourth quarter or the whole year; or the second quarter; any of those average?

Say that again; we didn't get it clear here.

You said the current market for AN was around $280 and ammonia was around $370. Do you have any historical numbers for your own sales prices for '06?

What happens is during the year they will vary considerably. Off season --

Average. Yes, I was asking --.

You can't give it away, and then --.

Both of those numbers, I think, are -- I think probably both numbers are proportionately higher than they were last year. There may be some improvement in margins; but the real key here is the demand. (inaudible) in other words, having the strong demand should result --.

I don't think we have all those numbers in front of us. (multiple speakers) We could get back to you with them. We just don't have them.

But we don't (indiscernible) disclosure either. So basically I think it suffices to say that both our prices and ammonia prices are both up this year fairly proportionately.

Just average (multiple speakers)? If I go dig through your 10-K or 10-Qs, your average prices aren't in there?

What?

You haven't disclosed your average prices in the past in the 10-K or 10-Q?

No, we don't publish them (multiple speakers).

Okay. The second questions, you mentioned that you may be considering a debt refinancing for your Senior secured going forward, that you're considering that.

That is correct; we are testing the water.

Okay. I think in the past you have indicated that the debt structure or the corporate structure was a potential hindrance to any corporate transactions. In particular if you were to consider the sale of any of the Chemical assets in the future. If you refi the Senior secured, would that eliminate any type of constraint in that respect?

We're not going to discuss today any breakup of our businesses. We have said several times in the past that we have no plans in the works. Discussions along these lines are potentially very detrimental to employee morale and to our long-term customers, so we're just not going to discuss that.

We will do what is best for the shareholders in the long run. That has always been our strategy, and we continue to follow that strategy.

Okay, thanks.

Clifford Bordon with CIBC.

Two questions. Fully diluted shares outstanding after the preferred has been exchanged, what is the fully diluted shares outstanding as of today?

As of today, we have got 19.5 million shares issued outstanding; and we have other potential shares, including the Series B, the D, the Preferred 2, and so forth, of another 3.5 million shares that including (technical difficulty).

Hello?

Did you get that? Cliff, did you get that?

No, I didn't hear that, sorry.

We had 19.5 million shares outstanding. If you look at the other potentially dilutive items like the preferreds and the --

Options?

--remaining million dollars in the options and warrants, it's about another 3.5 million shares potential.

Okay. The second quick question was the debt as of today, roughly. What was the debt? I got the number at the year-end.

It would be higher than that, because we had seasonal buildups in our inventory. So the working capital revolver would be a little higher. I don't have the exact number.

Okay, but that would be the only change, right?

On various expansion, we have financed a couple loans. So maybe another couple million for CapEx financing and then whatever the working capital revolver borrowing is at the time.

So roughly $100 million more or less.

Maybe a little higher than that, because we always have seasonal buildup in inventories, as Larry mentioned. We were really high on the inventory right now in the Ag, which will work itself off in April, May, and June.

Fair enough. The last quick question. Barry, in the commercial business -- or, sorry, in the geothermal business, when you do, let's say, an army install like in these forts, whatever they are, Fort Polk or whatever it is, is that a commercial installation or a residential installation?

Well, it's a residential installation. Because what we are doing is typically most of these installations have been --. Here is what is going on in the country. You hear about BRAC, the Base Realignment and Closing Commission, where the general impression is that what is going on is that they are closing army bases and reducing. But that is really not the case. What is really happening is they are just shifting things around and consolidating.

So if they have, for example, a base that they are closing in one area, they are usually transferring the personnel somewhere else. A good example is Fort Bliss. Fort Bliss was a big, positive beneficiary of the last round of BRAC. So in order to accommodate all of the personnel coming in, they have to put in a lot of housing.

The housing, in some cases it is dorm-type housing or barracks. But in most cases, in the volunteer army it's different than it used to be. It's individual residences, just like houses. It looks just like a housing development. They are privatized, most of them. So it looks just like a typical suburban development, and so it is a residential type of development.

So you count that not as a commercial or institutional sale; you count it as a residential sale?

Right.

Okay, thank you.

There are no further questions. I will now turn the conference back to management.

Thank you very much for participating, everybody.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.