LSB Industries Inc (LXU) 2007 Q2 法說會逐字稿

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

Good morning, ladies and gentlemen. Today, LSB's management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President; and Tony Shelby, Chief Financial Officer. This conference call is being broadcast live over the Internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.LSB-OKC.com 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, August 8, 2007. And therefore, you are advised that time-sensitive information may no 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 that we do expect to increase our market share because of growing demand for our climate control green products; increased output at ClimateMaster; expect to reduce interest costs; reduce preferred dividends and paid dividend arrearages in the near future; liquidity appears to be sufficient to fund foreseeable growth and to meet all current commitments; capital structure of our consolidated balance will improve; manage cash flow and liquidity carefully; encouraged by the market demand for our chemical business's products and the performance of our production facility; the chemical business's markets continue to show solid performance; focus of our chemical business on growing its non-seasonal industrial customer base with an emphasis on customers that accept the risk inherent with raw material costs and maintaining a strong presence in the agricultural sector; strategy to reduce and continue to operate plants at full rates, thereby lowering the fixed cost of each unit; backlog of our climate control business; plant-wide reconfiguration at ClimateMaster and assembly area at International Environmental; goal of doubling our total air-conditioning production and bringing all heat pump coil production in-house; implementation of sales price increases within our climate control business and recouping material cost increases; developing new product lines with our climate control business; market for our residential geothermal products; prospects for long-term growth in the geothermal sector is good; strategy to provide most comprehensive product line in [AGAC] industry; commercial construction market outlook is healthy; high expectation for balance of 2007 for the climate control business. Investments by our climate control business should continue to achieve desired results and on track for continued long-term profitable growth of the climate control business.

The term EBITDA as used in this presentation is net income plus interest expense, depreciation, amortization, income taxes and certain non-cash charges unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurements.

All statements other than statements of historical facts are forward-looking as more fully discussed in our 2006 10-K as amended by our recent Amendment 1 to our 10-K and our 10-Q for the quarter ended June 30, 2007 under special notes regarding forward-looking statements. A more comprehensive listing of risk factors, which could cause results to vary from any forward-looking statements made during this conference call, is also included in our 2006 10-K, as amended by our recent Amendment 1 to our 10-K and our 10-Q for the quarter ended June 30, 2007 under Special Notes Regarding Forward-Looking Statements. We will post on our website a reconciliation to GAAP of any EBITDA numbers discussed during this conference call.

Now, I will turn the conference call over to Mr. Jack Golsen, the Company's Board Chairman.

I always have to swallow after I hear that caveat. It kind of takes my breath away. But anyway, welcome to LSB's second-quarter conference call. I am Jack Golsen, CEO of LSB. Also on the call with me this morning is Barry Golsen, LSB's President, who will discuss our climate control business. Barry is calling in from -- he's on the road and he's calling in from Boston on this call. So, I hope we don't lose him during the call. And Tony Shelby, our CFO, who will review our financial details and the chemical business. We will all be available to answer your questions about our businesses.

On this conference call, we will review second-quarter and first six-month results and the present state of our two core businesses. We will also report the changes that have taken place in our balance sheet and our capital structure since year-end 2006.

The second quarter 2007 produced favorable results for both sales and profits. We continue to profitably grow our business and improve our debt to equity ratio. We increased our market position in certain high margin climate control products and also grew our chemical business thanks to stronger margins in agricultural sales which occurred in spite of excess rainfall in some of our markets.

Now, let's focus on the second quarter and first six months. These are just a few highlights that I'm going to give you. The second-quarter results were the best in LSB's recent history. Compared to 2006's second quarter, the following -- consolidated sales were 156.8 million, up 18.4% over last year's 132.4 million. Net income more than doubled to 13.2 million from 6.3 million in last year's second quarter. Diluted earnings per common share for the quarter were $0.58 per share compared to $0.32 in 2006. Diluted earnings per share for the first six months were $0.87. As we reported yesterday, both of our businesses turned in good operating results. Barry and Tony will go into more detail about them during this conference call.

ClimateMaster, the largest subsidiary of our climate control business which produces geothermal and water source heat pumps, continued to increase its market share. International Environmental, our fan coil company, also increased sales and market share in the first half. Our chemical business also saw strong bottom-line growth.

During the second quarter, we completed a 60 million, 5.5% subordinated convertible debenture offering. In July, we gave notice of redemption for all of our Class C, Series 2 preferred stock which remained outstanding. The Class C, Series 2 preferred can be converted into common stock before August 17. After which, it will be redeemed for cash on or before August 27 if not converted.

Shareholders may be interested to know that as a result of our first convertible debenture offering of 18 million, which we did last year which has been 100% converted and the new 60 million debentures recently offered, we have placed the common stock and debentures into strong institutional hands. And we have attracted more institutional interest in our common stock. This is reflected in the increased volume of trading in our common stock.

Through the first half of 2007, we generated net income of 24 million, which far exceeded the first half of 2006 which had net income of 9.2 million. Please note that the first half has traditionally been our strongest part of the year.

We expect to continue to increase our market share because of the growing demand for our climate control business's green products like our environmentally-responsible efficient geothermal systems. This demand is further stimulated by high energy costs. We have substantially completed expanding the space available to our manufacturing operations, and this will allow increased output at our climate control business.

The market conditions for the agricultural sector of our chemical business's products continues to be favorable. Of course, this is contingent on the weather cooperating -- being cooperative, I guess. Trade publications are predicting that the demand will be strong for the next five years. This demand is stimulated by the goal for energy independence utilizing agricultural products as feedstock to produce fuels and also a better balance between supply and demand for nitrogen fertilizer.

With regard to our balance sheet and financial condition, good progress was made year-to-date in 2007. We expect to further reduce interest cost, reduce preferred dividends and pay dividend arrearages in the near future.

In the second quarter of 2007, EBITDA was 18.5 million compared to 12.5 million in the second quarter of 2006. Through the first half of 2007, EBITDA was 35.4 million compared to 21.2 million in the same period of 2006. You may be interested to know that EBITDA for the entire year of 2006 was 40 million.

Before closing, I would like to inform you that LSB has in recent months received two notable distinctions. We were named to BusinessWeek's annual list of 100 hot growth companies. And our Company was added to the Russell 3000 and Russell 2000 indexes.

We think some of you will want to know that we've been invited to speak at the Pacific Growth Equities Clean Technology and Industrial Growth Conference, which takes place on November 7 and 8 in San Francisco. Tony and Barry look forward to seeing some of you at this conference, which we also plan to webcast.

After Tony and Barry complete their report, we will open the conference to questions. In order to give all callers a chance to ask questions, we ask that each caller limit discussion of questions to a maximum of three minutes.

Thanks for your participation in this call. I will now turn this call over to Tony who will review our financials with you.

Yesterday, August 7, we issued an earnings release. And today at approximately 9:30 Central Time, we filed a 10-Q for the second quarter of 2007. And both of these documents either are or will be available on our website.

Sales for both of our two core businesses had a good second quarter. For the second quarter of 2007, sales were 156.8 million, an increase of 18% over the second quarter of 2006. Climate control sales were up 44% and chemical sales were up 1.6%, both as compared to the same period last year. Year-to-date sales of 304 million were 24% higher than last year.

From an operating income standpoint, climate control's operating income was 9.6 million compared to 6 million for the same quarter last year. Chemicals' operating income was 7.9 million compared to 4.8 million last year.

After allocation of corporate costs of 2.4 million, the consolidated operating income for the second quarter 2007 was 15.2 million compared to 8.7 million last year. Year-to-date, 2007 consolidated operating income was 28.7 million compared to 14.4 last year.

Net income for the second quarter was 13.2 or approximately double the 6.3 for the second quarter of 2006. Year-to-date net income at $24 million compared to 9.2 million last year. For the 2007 -- from a per-share standpoint, the 2007 second-quarter basic income per common share was $0.66 versus $0.41. After giving effect to common shares issuable upon exercise or conversion, diluted income per common share was $0.58 in the second quarter 2007 compared to $0.32 in 2006.

For the six months, basic income per share for the first six months of 2007 was $1 compared to $0.59 last year. And diluted net income per common share for the first six months of 2007 was $0.87 versus $0.46 last year. And remember the six-month diluted earnings were affected by the onetime stock dividend resulting from the exchange.

EBITDA. Climate control's EBITDA increased by 3.6 million to 10.3 million and chemical increased by 3.1 million to 10.3 million. After giving effect to unallocated corporate costs of 2.1 million, consolidated EBITDA for the second quarter was $18.5 million. This was an increase of 6 million compared to the 2006 second quarter. Consolidated EBITDA for the trailing 12 months ended June 30, 2007 was $54 million compared to $34 million from the trailing 12 months at June 30, 2006.

Consolidated SG&A expenses for the second quarter were 18.7 million as compared to 15.6 million last year, an increase of 3.1 million or 20% as compared to the sales increase of 18.4%. The increase in selling expenses and administrative expenses included variable costs related to higher sales levels and increased personnel cost at climate control for expanded sales and marketing effort.

Higher administrative costs were attributable to increased staffing and professional fees related to our preparation for SOX 404 compliance as an accelerated filer. Legal costs related to certain matters such as antidumping issue that we're pursuing with the US government in fact has been resolved and increases in health-care related costs. Those were all issues that caused our SG&A expense to increase slightly higher as a percentage than our sales increase.

As we previously discussed, we had a change in accounting for planned maintenance activities, commonly referred to as plant turnarounds. Prior to 2007, we accrued these expected costs in advance of expenditure. The new guidance disallows this method and we changed our method to expenses incurred, which we understand is the preferred method. In accordance with the guidance, we gave retroactive effect of this and have restated all 2006 numbers. And we will continue to report -- all periods prior to 2007 will be restated to comply with the new accounting guidance and the change in accounting.

Based upon our current plan for 2007 -- and this all relates to chemical -- we estimate that we will incur a turnaround cost of $1 million in the third quarter of 2007 and $2.5 million in the fourth quarter of 2007, which will be expensed when and as incurred. Under the previous method of accounting, we would have accrued these costs on a monthly basis during 2006 and 2007 in advance of the expenditures.

As Jack indicated, on June 28, 2007, we completed a private placement, pursuant to which we sold $16 million in principal amount of our five-year convertible senior subordinated debentures to qualified institutional buyers. The net proceeds after costs were $57 million. The debentures are effectively subordinated to all present future liabilities. The debentures pay interest at 5.5% semi-annually, are convertible into LSB common stock at $27.47 per share and are due in full on June 28, 2012.

At June 30, 2007, 28 million of the net proceeds had been used to pay down the working capital revolver and one equipment loan for about $3 million. The balance of the net proceeds or $29 million was invested in money market overnights earning approximately 5.2%. This remaining $29 million includes approximately 14.7 million, which we have earmarked to fund the redemption of the remaining shares of our outstanding Series 2 preferred stock including the cumulative unpaid dividends, 2.1 million to pay accrued and unpaid dividends on our Series B and Series D preferred shares with the remainder to be used for repayment of certain mortgages and equipment loans to fund certain capital expenditures and for general working capital purposes.

Back to -- further on the redemption. We mailed the notice of redemption on the Series 2 preferred on July 12. There are 193,295 shares outstanding. The redemption date is August 27 and the redemption price is $50 per share plus $26.25 per share in accrued and unpaid dividends pro rata to the date of the redemption or approximately 14.7 million, which when paid will be charged to stockholders' equity.

In lieu of redemption, the holders of the Series 2 preferred have the right to convert each share into 4.329 shares of our common stock. The right to convert terminates 10 days prior to the redemption date. If all of the outstanding shares of Series 2 preferred were to be converted, 836,000 shares of our common stock would be issuable.

Long-term debt. At June 30, 2007, the Company's total interest-bearing debt was $124 million compared to $103 million at March 31, 2007. Cash on-hand including the money markets was $30.5 million including the $29 million from the private placement. The 124 million of total long-term debt included the $50 million senior secured loan due in 2009, various mortgages and equipment loans of approximately 14 million and the new $60 million convertible senior subordinated debentures due in 2012.

The $50 million working capital revolver was paid down to $21,000 at June 30, 2007 and is available to fund the business growth of our two core businesses when and as needed. The underlying agreement for the working capital revolver is for a term through April 2009. The interest rate for borrowings under our working capital revolver is 200 basis points over LIBOR. In connection with the revolver, we have an interest rate cap contract of $30 million which fixes LIBOR -- 30-day LIBOR at 4.59%. And currently the 30-day LIBOR I believe is in the 5.36 range.

We plan to refinance ThermaClime's $50 million senior secured loans as due in 2009 before year-end 2007 at a lower interest rate and with fewer placed assets securing the new loan. This loan currently bears interest at 11% and is secured by first lien on substantially all of the chemical plant assets in El Dorado, Arkansas and all of those in Cherokee, Alabama as well as certain equipment of the climate control business, the stock of ThermaClime's subsidiaries and secondly on the asset security and working capital revolver.

In contemplation of refinancing this loan and in anticipation of a floating rate, we purchased a $50 million interest rate cap contract capping 30-day LIBOR at 5.35%. But, due to the current turmoil in the credit markets, there's no assurance that we would be able to successfully conclude this transaction this year.

From a cash flow standpoint, we began the second quarter with $800,000 in cash. We ended the quarter with 30.5 million in cash and equivalents, including the $29 million. The cash flow for the quarter consisted of net cash provided by operations of 16.2 million in the second quarter. Net cash used by investing, including capital expenditures of 4.6 million, was 5.2. We had a net paydown of our working capital revolvers of $10.3 million for a net increase in cash of approximately $700,000.

So, to recap, excluding the proceeds -- excluding the private placement of $60 million, we had 16.2 provided by operations. We invested 5.2 primarily in CapEx. And we took the balance to pay down the revolvers. So, excluding the private placement, that was the use of our cash. And of course, we took 28 million from the private placement and paid off the revolver down to approximately 0.

Total debt to EBITDA -- our total debt of $124 million compared to the trailing 12 months EBITDA at June 30 of $54.4 million was approximately 2.25 times. At June 30, 2007, after the debt conversions and preferred stock exchanges, there are 19.8 million common shares outstanding and 193,295 shares of the Series 2 preferred outstanding. There are approximately 5.4 million additional common shares issuable upon the conversion and/or exercise of all dilutive securities.

As a result of the $24 million net income from the first six months of 2007 and the $60 million private placement completed on June 28, liquidity appears to be sufficient to fund foreseeable growth and meet all current commitments. Including the use of net proceeds from the 2007 private placement, the planned redemption in our conversion of the Series 2 preferred and the elimination of all accrued and unpaid dividends, the capital structure of our consolidated balance sheet will reflect significant improvement. The improvement in our balance sheet and capital structure will continue to be a primary management strategy. We will continue to manage cash flow and liquidity very carefully.

That concludes a summary, financial overview of our results of operations and financial position. And Barry will now review the climate control business.

Barry, are you on the line?

I'm here.

Why don't you review chemical for us?

You mean climate control!

I mean climate control; excuse me.

I'm glad to report to everyone that for both the second quarter and the first half, our climate control business's results improved dramatically over the same period last year. I will elaborate on that later. But 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 using commercial, industrial and residential climate control systems. We're the US market leader with our core products, geothermal heat pumps and water source heat pumps produced by ClimateMaster and hydronic fan coils produced by International Environmental Corporation.

For 2006, our US market share for heat pump products and fan coils was approximately 38% and 40% respectively. And during the first half of 2007, this increased to approximately 43% for heat pumps and 42% for fan coils. We also manufacture and market small air handlers, large custom air handling units, modular water chillers, coaxial heat exchangers. And two have been fin heat exchangers.

In addition, we complete large-scale geothermal installations throughout the United States. We have an installed base of millions of units and 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 currently have five manufacturing facilities and a distribution facility totaling over 700,000 square feet, all located in Oklahoma City.

Moving on to second-quarter climate control financial highlights, as compared to the second quarter of last year, sales rose 44% to 74.5 million versus 51.7 million in 2006. Operating income was 9.6 million compared to 6 million last year, a 60% quarter-over-quarter increase. EBITDA was 10.3 million or 54% ahead of 6.7 million last year.

For the first half of 2007, climate control sales rose 47% to 145.8 million versus 99 million in the first half of 2006. Operating income was 18.1 million as compared to 11.6 million, a 57% period over period increase. And finally, EBITDA was 19.6 million or 52% ahead of 12.9 million last year.

Back to second-quarter operations, the improvement in profits was primarily the result of higher sales volumes, principally in our heat pump and fan coil businesses, mirroring increases in 2006 and the first quarter of 2007. During the second quarter of 2007, bookings of product orders were at an all-time quarterly record of 65.2 million and were strong in nearly all areas of the climate control business.

We closed the quarter with a backlog of 66.3 million as compared to 70.7 million at March 31, 2007 and 80.4 million at December 31, 2006. Our ability to reduce backlogs while processing record sales and record bookings means shorter lead-times and happier customers. Happy customers are generally repeat customers.

For those of you who have been on prior conference calls, you will recall that our backlogs had increased substantially during 2006 and our lead-times had pushed out beyond what we considered to be optimum for good customer service. We worked very hard to reduce our factory lead-times and they have improved substantially. As this process continues and we increase production capacity, look for continuing declining backlogs.

To that end, I'm pleased to report that we're in the final stages of a plant-wide reconfiguration at ClimateMaster and in the assembly area at International Environmental. Our goal of doubling our total air coil production volume and bringing all heat pump coil production in-house is now within our reach. At all of our operations, we've added production personnel. Since the start of 2006 to now, our total factory workforce has grown from approximately 890 to 1400.

In previous calls, we have discussed that material price increases during 2006 were in many cases more than those incurred during 2004 and 2005. We estimate that our total material cost increased approximately 8% to 9% from the beginning of 2006 to year-end. As expected, these increases impacted our gross margin during the second half of 2006 and into 2007.

Although we implemented across the board sales price increases last year due to the large backlogs we were carrying, the full impact of our price increases was delayed. While we're trying to recoup all of the material cost increases, we cannot be sure that we will be successful and if we are what the timing will be. We are operating in a very price-competitive environment and the majority of our business is subject to a competitive bid process.

During the last conference call, I reported that we had seen some softening in the price of copper and steel. At this time, raw material costs continue to fluctuate and we continue to monitor these very closely. Steel prices have softened slightly from last year's average. Copper prices at this point are still about 15% above the 2006 average, and aluminum has settled back to the average price from last year. Nickel and other alloying metals are still well above last year's prices but there have been some recent declines. And stainless steel continues to climb.

As discussed in earlier conference calls, we have a number of developing product lines and activities that have not yet achieved sustained profitability but which we believe our investments in the future growth of the business. Within this group of developing operations is Trison Construction, which specializes in large-scale geothermal installations, and ClimateCraft, which manufactures large-scale custom air handlers. During the second quarter and for the first half of the year, these operations improved over the same periods last year.

Departing from these developing products and activities and returning to our core products, sales of ClimateMaster's water source and geothermal heat pumps continues to be strong. Total heat pump sales during the second quarter were up 32% over the same period in 2006 and heat pump sales for the first half were up 36% over last year. Sales of our geothermal heat pump product line continue to increase as well. During the first half of 2007, our residential geothermal unit shipments were up 43% over the first half of 2006.

Geothermal heat pumps are a green form of renewable energy that reduce energy consumption and greenhouse gas emissions. We attributable the growth and 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.

We are regularly asked by prospective investors about the impact residential construction plays in our geothermal business, especially in light of the 2006 decline in residential construction that has continued into this year. To put this in perspective, during 2006, our residential geothermal sales were approximately 15% of our total climate control business revenues. And also during last year, they were not -- they did not seem to be affected by the overall residential construction decline.

As a matter-of-fact, our geothermal business increased by 44% in 2006 over 2005, while overall US factory shipments for HVAC products that are sold to the residential sector declined 18% -- this according to Air-Conditioning and Refrigeration Institute reported sales.

This trend continued through the first half of 2007. Year-to-date, according to ARI -- that's the Air-Conditioning and Refrigeration Institute -- US factory shipments of all residential HVAC equipment has declined 17% from the same period last year, while our residential geothermal sales have increased 43%.

I don't want to leave the listeners of this conference call with the impression that our residential geothermal business is immune from residential construction trends because that is not so. But, so far, it has shown notable resiliency. We believe that the market drivers for our residential geothermal products are somewhat different than the market at large. High energy prices and environmental concerns drive the demand for geothermal systems as opposed to the market size being the primary driver for the air conditioning market at large. It is possible that a prolonged residential market slump could have the effect of slowing growth of residential geothermal systems sales, even though this has not happened so far.

On the positive side, the most recent McGraw-Hill Construction Market Forecasting Service report, the fall of 2007 edition which was just out last week, predicts that single-family residential building contract activity will begin to rebound in 2008. McGraw-Hill currently forecasts a 6% gain in 2008, a 14.7% gain in 2009 and a 9.9% gain in 2010. These are following -- these gains are following the 13.7% decline in 2006 and the forecasted 16.8% decline this year 2007.

So, summing all this up, what does it mean as far as residential sales? We believe that if high energy prices are here to stay and if environmental concerns and energy independence remain important national imperatives and that if the residential construction market returns to a normal growth mode, the prospect for continued long-term growth in the geothermal sector is good. Bear in mind that at this time, total geothermal residential shipments represent less than 0.5% of total industry shipments into the single-family residential market.

ClimateMaster continues to introduce water source heat pump and geothermal products which use 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.

During the second half -- the second quarter of 2007, our sales of hydronic fan coil products were up approximately 59% over the second quarter of last year. Year-to-date through June, our fan coil sales were up 56% over the first half of 2006. This is primarily due to higher demand for our modular high-rise fan coil products driven by strong commercial construction.

As a note about commercial construction, in 2006, approximately 85% of our climate control business revenues were in the commercial construction and renovation sector. Approximately 73% of our total sales were to these building types -- offices, lodging, education, dormitories, health facilities, multi-family, residential and manufacturing. In 2005 and 2006, building contract activity for these sectors achieved all-time historic high levels of 172 billion and 203 billion respectively. According to the most recent McGraw-Hill Construction Market Forecast Service report, same one I was referencing a minute ago, these record levels are expected to continue or slightly increase for the next five years. Overall, the commercial construction market outlook is healthy.

Summing up, the year began with a running start for our climate control business and we have high expectations for the second half, tempered by the historical seasonality of our business. The investments we have made in product innovation, sales and marketing, and on the production side of our business have achieved and should continue to achieve the desired result. Whereas we do have challenges particularly continued high material costs and softening residential markets, we believe we are on track towards the continued long-term profitable growth of this business.

Thanks for your attention. This took a little longer than I thought it would. I am sorry. That means a lot of information there. I will now turn the meeting back over to Tony to discuss the chemical business.

To supplement the overview comments that Jack made regarding the chemical business in his opening comments, we will review the results for the second quarter of our chemical business in a little more detail. Keep in mind as we explained in the financial review that all of the 2006 numbers that we're going to be talking about today have been restated for the change in accounting for plant maintenance, i.e. turnaround costs.

A brief 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 acids. On an historical annual basis, approximately two-thirds of our business is industrial and mining and the majority of the products -- those 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 fertilizers sold at the market price and effect at the time of sale. For the second quarter of 2007, due to strong seasonal demand, 43% of the chemical business sales were fertilizer products. The fertilizer business is seasonal and cyclical and is presently in a very strong upcycle in 2007, driven by low grain inventories and increased crop production requiring nitrogen fertilizers.

The chemical business has three production facilities. The Baytown, Texas facility is a single world-scale nitric acid plant. The El Dorado and Cherokee facilities are multi-plant sites producing industrial acids, nitrogen fertilizers, and industrial-grade ammonium nitrate. Cherokee consumes natural gas as a raw material feedstock. El Dorado and Baytown both consume anhydrous ammonia which is delivered by pipeline.

Summary of our financial results, overall, the chemical business performed well in the second quarter of 2007. Production volumes and sales from all three production facilities were approximately the same as for the prior year second quarter. However, gross profit margins and operating income were significantly higher as a result of strong fertilizer demand and continued improved plant production rates resulting in higher sales prices relative to the cost of anhydrous ammonia and natural gas.

The second-quarter 2007 sales were 79.4 million compared to 78.2 million in 2006, a modest increase of less than 2%. However, operating income was up from 4.8 million to 7.9 million, an increase of 65%. Sales prices were up significantly for our nitrogen fertilizer products and slightly up for mining products and industrial acids. Agricultural products accounted for the improvement in operating profit over second quarter 2006 due to the strong outlook for the farming economy.

In contrast to the first quarter 2007, weather conditions were not as favorable in our agriculture market area due to abnormally high amounts of rainfall throughout 2007 second quarter in the mid-South. Coupled with drought conditions Southeast, sales volumes were well below what our estimates had previously been of the potential for fertilizer volumes. However, higher prices and better margins allowed for significantly improved results when compared to last year.

The 65% improvement in chemical operating income was also facilitated by the steady demand for our industrial products and continued production efficiencies at the higher operating levels of the El Dorado, Arkansas plant and the consistent efficient Baytown operations. In addition, during the second quarter 2007, total turnaround costs were $900,000 lower and precious metals expense net of recoveries were $600,000 lower.

Chemicals' EBITDA was 10.3 million in the second quarter of 2007 compared to 7.2 million in 2006. The second-quarter results by plant locations are as follows. Baytown continued to generate consistent positive results and turn in another good quarter. Volumes and operating profits were slightly lower in the second quarter compared to 2006, primarily due to fewer spot sales opportunities of nitric acid to competitors and due to planned plant maintenance downtime in 2007.

Offsetting the positive improvements in the rest of our chemical business, Cherokee's operating income for the second quarter 2007 was lower by 1.7 million compared to last year. Cherokee experienced a significant increase in demand for urea ammonium nitrate fertilizer, or UAN. Although sales were up, Cherokee was unable to fully capitalize upon the increased demand and resulting higher prices as a result of unplanned maintenance downtime. Margins were further impacted by high maintenance costs as well as certain other spending increases.

Natural gas prices were relatively stable, experiencing very little volatility throughout the second quarter 2007. Spot natural gas prices excluding transportation during the second quarter of 2007 averaged about $7.60. During the second quarter of 2007, approximately 72% of Cherokee sales were priced to include the cost of natural gas. Currently, the spot market natural gas price is around $6.60 and the 12-month strip is currently quoted in the $7.75 range.

El Dorado, Arkansas's operating income for the second quarter 2007 improved by $5.8 million compared to last year directly related to strong agricultural product demand, continued efficient plant performance and favorable sales prices relative to the cost of anhydrous ammonia, all resulting in improved margins. Looking forward, we continue to be encouraged by the market demand for our products and the performance of our production facilities. The Cherokee second-quarter results aside, we expect to see improved performance for our production facilities.

Our products are sold into markets that are affected by the general strength of the global industrial economies, the North American mining sector and nitrogen fertilizers, all of which continue to show solid performance. Market publications indicate that nitrogen fertilizers should continue to see a strong demand due to ethanol-driven corn production and lower grain inventories in general as well as to the increased demand for forage crops.

The first and second calendar quarters are generally our strongest quarters in our chemical business due to the seasonality of the agricultural markets. Although, the outlook for the fall planting season is very strong right now. As indicated in the financial review, there are planned maintenance turnarounds in the third and fourth quarters of $1 million and $2.5 million respectively, which will be expensed and will result in nonproductive plant downtime.

Our chemical business will continue to focus on growing our non-seasonal industrial customer base with an emphasis on customers that accept the risk inherent with raw material costs, while maintaining a strong presence in the seasonal agricultural sector. In the meantime, we have the ability to allocate more of our capacity to nitrogen fertilizer when the markets give us the kind of margins we're now seeing in nitrogen fertilizers. Our strategy emphasizes cost reduction and continuous operation of plants at full rates, thereby lowering the fixed costs of each unit of production.

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

Thank you. I think we've covered everything that we thought you might want to hear today about what's going on. Now, we will be happy to take the calls from any of the participants in this conference.

(Operator Instructions).

We would appreciate if you would identify yourself when you call in.

(Operator Instructions). Mark Fleischhauer, Jayhawk Capital Management.

Great quarter. Great job here. I guess just one question in each segment. Barry, given I guess the Mark McGraw-Hill data and geothermal penetration, I guess two questions here. One, given that geothermal is still such a small percentage, where could that be in the near-term? And second part on HVAC, what if anything in the near-term do you worry about in HVAC? Just because it seems to be that you are hitting on all cylinders there.

And then on the chemical side of the business, Tony, you had I believe mentioned something about volumes in the quarter ended June. And I'm curious as to how much that had to do with the range or whatnot. And then, does that mean that you are carrying some agricultural nitrogen inventory that may be sold in Q3? And how should we look at that versus obviously with prices and margins being very high there, how should we look at that for potential impact on Q3 this year? But if you could answer those, I would appreciate it and congratulations once again.

Barry, you want to take the first half?

Yes, the first question regarding geothermal market, it's our policy not to try to forecast or give guidance as to where we think sales growth is going to go going forward, on top or bottom line. So, we have some internal thoughts about that. But I'm really not at liberty to discuss that.

I can say this. We are -- to reiterate what you said, the total industry for geothermal is about 0.5% of the normal residential market for heating and air conditioning. And when I say normal, I mean because it's down somewhat this year and last year.

But, typically, we think of that market as about a 7 million unit market per year -- the total market that is a potential market to sell geothermal heat pumps into. And last year by our estimation, there were probably 40,000 or so, maybe in the low 40s that were sold into that market.

So, that just gives you some idea of the potential upside. But I can't really predict where sales will go with this product, either industry wide or for us.

I would like to add something to that, Mark. I don't know if you've been following what's going on in the government, but there are all kinds of bills passing through Congress right now. I understand that yesterday, the Congress -- the House passed a bill which mandated the use of the most efficient kind of air conditioning system that would be available or else in all government installations and then (multiple speakers) --

Well, these are pending.

Yes, these bills are still pending. They are still going to have to go to conference. But there seems -- and there was also a bill in the Senate to mandate the use of geothermal or give the reasons why -- justify why it's not being used in any particular installation. These bills are not final yet. The House and the Senate have to get together on them. But I think we're going to see some of this kind of -- they are finally going to come up with something which is going to be helpful to our business.

The second part of the question was, I believe, what are we worried about? Well, you know I think we're worried about the same things that anyone in business in general is and that would be an overall general business downturn that could affect the overall economy. And other than that, you know we're watching the statistics very closely. And as I said in my prepared presentation, right now, the commercial construction sector is forecast to continue to hang in there and be very strong for the next few years and that's where most of our sales come from. So, I hope that answers your question.

What about the other question?

Mark, on the chemical side, volumes in the second quarter were suppressed due to the heavy rains. We could've done considerably more had we had the wet, abnormally high rainfall in the mid South and upper North been normal. Rainfall was more than double normal.

So, volumes were suppressed. Although we had significant results, we could've done better had the weather cooperated. We don't carry -- we're not carrying any significant fertilizer inventories into the third and fourth quarters. But we do think we've got the capacity to react to the demand. And from what market intelligence we have, the overall market fundamentals for nitrogen products remain strong. And also, the relationship of the selling price versus the cost of the input which is anhydrous ammonia appears to continue to be strong.

I will add a little bit to that. We're running bills off the spigot. That's what the industry calls it. In other words, it comes out of the process and goes right into the rail car or truck to be delivered. We are debottling -- in the process of working out debottling on certain parts of our plant so that we can increase production if the demand remains. And so, there is that potential but we are not realizing it yet.

I'm ready for the next question.

[Edward Trafford], Northern Trust Global Investment.

Fantastic quarter. I have a few questions. If I could start in the geothermal or climate control segment, you guys indicated you are gaining market share. When I look at your financials though, obviously, we're seeing some gross margin compression over the last three quarters on a year-over-year basis. Can you provide some color as to how you are capturing share, whether it's because you guys are pricing better than your competitors or whether maybe you guys have the better widget out there?

I can comment on that. We believe that in both our product lines, our heat pump products including our geothermal and our fan coil products that we have the most comprehensive overall product offering that is available and the product line that we think is best suited for the market overall.

We have not captured market share through discounting. The market -- the compression in gross profit which is very slight -- for example in 2005, we had an overall market [GP] of 30.7%. 2006, it was 29.6. So we saw about 1% down. And for the first half, it was 29.2 another four-tenths.

It's primarily due to two things. First of all, we've had these increases in material prices and it takes time for us to pass through the material price increases to the field in the form of selling price increases, particularly when we have large backlogs at the time we get material price increases. So, there's this lag period. It takes time for that to normalize and get it through. I mentioned that before.

The other thing is, due to the fact that our sales have increased so much, this huge increase and influx of new factory workers, we're operating less efficiently than we normally would. And it takes a while to get those -- first of all, you have a higher turnover with new factory workers until that kind of settles down. And then you have to go through training periods. They just don't operate as efficiently as your experienced staff that's been there a while. When you go through a gear-up mode, you always typically in manufacturing have a period where you are less efficient. And then as time goes on and the workforce gets trained, that settles down and you get back to your levels. So, those are two things that have been -- primary affected slight margin compression.

If I were to kind of take what you just said, it would kind of suggest to me that over time we should at the very least see that margin stabilize and probably more likely tick up?

I'm not going to forecast margins. There are all kinds of things that happen out there and there's many moving parts. But we do expect to see over time, our -- we're trying to capture as much of those material price increases as we can and we certainly hope to get more efficient in the factory.

I will add to that to illuminate the subject a little bit. If you could tell us if everything else in the world was going to be stable, the answer is yes. But there are a lot of moving parts, as Barry said, we have no control over. And so, we can't really project.

Did you guys make an effort to try to lock in your costs somehow when you guys take in orders, as in when you kind of take in orders, you somehow source the materials in advance or hedge to some extent? Or is that not--?

Yes, what we do -- we have a hedging department. And we do not speculate on our hedging. But we do do what you have described if we take an order for advanced where it is possible. Now, for example, you can't do that with steel. If you are selling products that have a lot of steel in them, the steel -- even if you have contracts, the steel companies in the last few years, they breached their contracts and there's nothing you can do about it.

They don't tell you that they won't ship to you but they tell you you're at the bottom of the pile and you won't get your order on time. And that's a technique they use. And they did that with the automotive companies and everybody that uses steel. So, to the extent that you can rely on them, you can lock in but you can't always rely on them.

But, you can hedge copper and aluminum.

Yes. We do hedge copper and we do hedge aluminum. And we do hedge natural gas to cover the cost of the raw material when we're making a spot sale. And then, we have a natural hedge on a lot of our business because of the pass-through of the cost of raw material.

And all of our hedging policy, we don't go out on all of our uncovered gas, copper and aluminum because you don't know which way the market is. So we try to be as conservative as possible, not to go out too far on everything.

I figured I would ask one more question, I think when you guys were speaking before when you spoke to residential, I think you quoted a number about 15%. Going through your presentation, I see end market single family as 15% but you also have a grouping called multi-family at 27% which I assume is either apartments or condos. Would it be fair to aggregate those two numbers together to come up with kind of a more meaningful representation of residential or am I reading that incorrectly?

I think you are -- we don't look at it quite that way for a couple of reasons. They don't tend to cycle together historically and there's different factors that are affecting them. And the sales channel is completely different. The reason we don't aggregate -- one of the reasons we don't aggregate multi-family and with single-family is because it's sold through the commercial sales channel. It's -- typically they're built by commercial builders and commercial contractors and they are sold through the commercial channel of manufacturers' representatives, whereas single-family residential construction is sold through in our case through -- we sell to stocking distributors who resell to installing contractor dealers.

Rick Nelson, [JG Ordonno Securities].

Most of my questions have been answered but not to dwell too much on a point but getting back to geothermal, Barry, I am curious because you've obviously been doing well with this product area. And I had also always thought that geothermal installations were primarily for new construction primarily in the residential area. Yet, you're doing quite well. Are you getting a lot of business from replacement installations?

Well, we get some business from replacement installations. But historically, most of our business is from new construction. And the simple reason for that is that in a geothermal installation where it requires that ground lifts be put in. In an existing installation where it's already landscaped and there's fences and swimming pools and all kinds of things, it's harder to go in and do the installation without messing up what's there. So, it has tended to be more of a new construction product so far.

I thought that dynamic might have been changing a little bit but evidently not. All right, well thank you very much, a very good quarter.

[Howe Getch], [Alador Capital].

Given your really small market share overall in your geothermal area and seeing your remarkable growth of 43% with general construction and residential down 17 as you mentioned on the call, clearly you are penetrating new -- are you penetrating deeper into current territories? Are you selling into new areas?

Both.

Is your sales force bigger and are there just -- a lot of people out there just don't even know about this product. That's why it's taking such share from other forms of heating and cooling. Because like I never really heard of it until about a few months ago and it's very intriguing. And clearly, it's been out there for a while and that's my first question.

My next question is, what is -- do you have any international sales to speak of in this area? And my third question would be, what do you think if you were a very well-run organization with your new hires being trained up and doing well, what sort of normalized margin do you think you could attain in this area?

Well, let me take those in reverse order. We would certainly -- our goal would be and our target would be to at least as far as the labor input percentage of our sales or percentage of our costs would be to return that to the level it was a year to 1.5 years ago before we increased -- we had this increase in sales -- this huge increase in sales. The second question was -- what was the second question?

Do you have any international sales?

Oh, about 5% of our total sales last year were international -- total climate control business sales.

Even with this weak dollar, you're not really still a small part, not really growing new customers internationally with the weak dollar then really?

No, not really. We do have certain markets where we're pretty active but you've got all kinds of logistics involved in selling this kind of product overseas, including extended lead-times for shipping overseas and so on and so forth. Also, freight is costly for these types of products because they are rather bulky. So basically, it's a small component of our overall sales at this time. And the first question was -- I'm having trouble remembering.

Are you selling more into the same markets? Are you expanding -- what areas of the country you are selling to or--?

It's some of both. We're gaining market share in the existing markets that we've been in and we're also selling into new areas, setting up new distribution in those areas.

(multiple speakers) Two follow-ups, one is, is the typical home that is buying this usually a luxury home potentially?

Historically, you've seen these in the higher-end homes. You don't see these in the starter homes or the second home. You are -- because it is a premium product, it's more costly to install this product. So someone has to have the foresight to decide they want to spend more money in exchange for the payout which is pretty dramatic or -- and then, typically in those lower-end homes, in the starter homes or the second homes, the primary consideration of the homebuilder and the marketer is, can the buyer qualify for the loan? So they are trying to squeeze every dime out of costs that they can.

If I could ask --

You hit on a point though, and the point is that a lot about job and selling is to educate the market about these systems that we have. And a lot of people didn't pay any attention to them when we first started. But when you look at the economics and when you look at the environmental motivations and when you look at the increasing cost of other energy forms, they started to look at these.

And we have the attention of a lot of the states, our state legislatures and the federal government. And so, people have suddenly become -- not suddenly but have become more aware that this is the premium system if we're going to economize on energy in this country.

If I could ask one last question, I fully understand like when you have a long backlog and a long lead-time in a rising material price environment, you don't price your goods properly, right? Is that what you were trying to say in your call?

No! I didn't say that!

But I mean, the goal is to shrink your backlog such that you know -- what is the goal of shrinking the backlog then? In other words, (multiple speakers)?

The goal of shrinking the backlog is because when your lead-times are out farther than you want them to be, your backlog gets bigger and factory lead-times I'm talking about. And what happened was, starting -- really our sales grew so much through 2006 and continuing into this year that it caught us a little bit offguard and we weren't expecting the degree of sales growth last year that we got.

So, during that period of time, orders were coming in but we couldn't ship out at the same rate. It took us a while to ramp up our production capacity. So, while that was going on, our backlog was building. And that affects two things. As I said, one is effect is lead-times and you want to keep your lead-times down to a level that is an acceptable level for good customer service.

(multiple speakers) and the other thing is that when you have big backlogs that you've taken and your price is locked on those. And we've gone and we've taken the orders. We have a contract. So if you get material price increase that is -- let's say you are working with a backlog that --

That was my point. It's like if (multiple speakers) --

-- there's a three or four months backlog but your price increase hits you in 1.5 months, you've got a period in there where you are going to have higher prices than you anticipated at the time that you took the orders.

That was my point. The longer your backlog stretches in a rising commodity environment --

That's correct.

-- you know, prices change on you while you've already locked in your price with your sales contracts.

That's correct.

And now you are catching up with that and that's great. That's good.

That's correct.

Dave Covas, Oberweis.

Just a quick question. You gave the bookings number for climate control. Can you give me how that compares to last quarter and year ago?

Yes, just a second. Just a minute. Okay, our bookings during the second quarter were 65.2 million. The last quarter was 58.7 million. And a year-ago second quarter was 62.6 million.

All my other questions have been answered. Good job on a good quarter.

[Paul Dinby], Private Investor.

One question, Tony, can you put the total debt picture into perspective now since we refinanced equity with the convertible debentures and the refinanced (technical difficulty) --

Paul, you are cutting off. Hello?

Paul, are you there? He asked if we could put the debt picture in perspective. I think --

I don't think we have him on the line.

One moment, sir. I will reopen up Paul's line. Paul, your line is open. Please proceed.

Can you hear me, guys?

Yes, would you start over, Paul?

Yes, I was wondering if you could just put the total debt picture back into perspective for me. Since we've just done the convertible with the 60 million -- actually the 57 million net and the refinancing of -- in other words, if the preferred is also tendered in the next 1.5 weeks, can you put all the total debt picture out for everybody? In other words, obviously we've (multiple speakers)?

Okay, let me go back through it and see if this is what you are asking. At June 30, we've got $124 million of long-term debt. We've got $50 million senior subordinated -- senior loan out there that we're trying to refinance. It is due in 2009. We're in the process of trying to refinance that.

We've got a $60 million convertible out there that converts that pays 5.5% that is a five year due in 2012. That's 110 million. We've got about $14 million of mortgages and equipment loans. That's our total outstanding interest-bearing debt right now. We have a $50 million revolver that is unused at this point, which is sort of unusual for us because we've never been in that position. But it is available for growth of the two core businesses. And we also have $29 million sitting in overnights that we expect to use to pay down the 15 million in the event that the redemption works out on the Series 2 preferred. That will take $15 million of the cash and the rest (multiple speakers) --

What would you do with that cash then if it's obviously -- if the preferred is not redeemed and is converted?

Well, it will just go into the --

Working capital.

Working capital for the general working capital of the Company. And we have -- instead of financing capital expenditures going forward, we will use the cash. And we will have -- we will continue to see -- to fund the growth of the Company. We'll continue to see higher receivables, higher inventories and CapEx.

And what would you say the percentage rate was on this 57 million on the preferred -- I'm sorry on the convertible preferred as to what it used to be? You paid off -- obviously, you raised 57 million and you paid off older debt. And obviously, we know this is at 5.5%. What would you say the old rate was generally?

Well, the working capital revolver we were paying for let's see -- 7% -- around 7% a little over (multiple speakers) --

We were paying LIBOR plus 2.

6.59, 7%. And on most of the equipment financed, you're usually paying 8 to 10%. We will pay most of that off going forward. There is some prepayment penalties right now that we're kind of waiting out. Then we will refinance that $50 million term loan that once we get that done, that should bring our costs down significantly.

Paul, included in this news release, there's a balance sheet and the balance sheet will -- it shows our liabilities.

My point is it's definitely a much better -- you all have really refinanced this at a much better interest rate going forward and for a longer period of time and with less restrictions, correct?

Right.

I mean it's just a tremendously-improved financial picture for you all in addition with sales being great. And all we've got to do is get the weather to cooperate and we'll have a good fall season in ag too.

Yes.

That was the only question I had. I appreciate your help.

[Clifford Bordin], CIBC.

First off, great quarter. Second off, Barry, thanks for the extra color and information on the geothermal side. A couple of questions. Cherokee, we know the weather affected the quarter and it seemed that Cherokee was down a little bit more than you had expected. If Cherokee had been running, how much more in sales could you have driven out of that plant? Like in other words, what did it cost us for the quarter because Cherokee had an unplanned maintenance I guess?

As I indicated, their results were 1.7 million less than the year ago quarter so that impacted our quarter. If they had been up and running, the could have probably done better than last quarter.

Yes, they would have done better because price are better. Mainly, they have problems with the urea unit where they could only run it at 50% and so they couldn't get the product out. But they had plenty of sales for the product.

Right, so in other words, it cost 2, 3, 4?

We've called in all kinds of experts who are trying to get that fixed.

Trying to get that -- so it's still not fixed?

It's still -- I cannot say it's not fixed because I haven't checked it the last few days. But it was one of those oddball things that required -- we had about six experts in looking at what is -- what the bottleneck is in the urea compressor.

Cliff, we mentioned that there's going to be some turnarounds in the fourth quarter. Cherokee is going to get a complete turnaround. And the market demand is very strong for UAN right now which is what they produce -- fertilizer they produce.

These are the kind of problems you have when you are running these kind of plants.

Fair enough. But the foregoing opportunity is at least 2 to 3 million or so, right, or certainly more than 1.7 of last year?

Yes, that's correct.

That was one question. The second question is to Barry. The backlog did exist, Barry. Is that mostly in the hydronic fan coils? Like what product line is that? Hello?

Barry?

I bet he got lost.

I guess we lost him.

Okay, Barry.

I can give you an idea. Backlog is mostly in heat pumps. Let's see, what did we say the backlog was total?

66 I think or something like that.

About 40-odd million is heat pumps.

The geothermal and water source, right?

Yes.

The other question I had --

Don't hold me on that number but it's not --

But it's around that, right?

It's a range.

Yes, exactly. In terms of the geothermal side, have you guys seen any pickup in commercial or institutional business in terms of like hospitals or schools, that kind of side of it?

We're seeing a lot of interests because these schools and institutions are under pressure to reduce their operating costs. And they usually follow the federal government. That's why I mentioned that the Congress has a big influence on it because when they mandate that they have to use the most efficient kind of air conditioning that's available or justify why they're not, they usually mention that geothermal is the one that they're talking about. So that takes time before everybody goes along with the mandate.

The reason I ask is, I know of two hospital projects that are going ahead with geothermal, one actually where I live. The other question was, have you seen any sell-side analysts lately?

We've been in a quiet period for quite some time and haven't been available. We expect to be more available going forward.

Right. Have you heard any incremental interest -- people calling that you haven't heard from before so to speak?

There appears to be some interest.

Appears to be some interest.

Cliff, we've had two back-to-back quiet periods. One of them was the tender offer followed by the 60 million convertible debenture and so we had to be quiet. Now that the second-quarter results are issued, we will have a higher profile.

Kent McCarthy, Jayhawk Capital.

Jack, Barry, Tony, great quarter, great job. A couple -- one comment -- or two comments and then a question. One is, great job cleaning up the balance sheet. I think that will help things going forward. And you probably know this but the convert guys, there's a fair amount of short interest building up in this stock which is potentially good.

Secondly is, Tony, since we've been charting ag prices for six or seven years, are we roughly correct in that the margins are certainly the best they have been in six or seven years? But are they also higher than they were during the last peak period -- '92, '93, or something like that -- ammonium nitrate in particular?

Right now, Kent, the ammonia costs are kind of amazingly low. Tampa is at 295 I think and fertilizer prices are very high. So I don't remember specifically back in the last cycle. But right now, it's the strongest it's been -- you're right -- in the last five or six years.

Kent, I think the pricing is stronger than we've ever seen it. But we have to go back and compare it to the days when ammonia was $130, $140. And then you had --

Per short ton.

-- per short ton. And we haven't seen that in eight years. So, you have -- so the percentage of profit might be the same or a little higher now. But the dollars are a lot different.

This may or may not -- but China just announced big inflation numbers due to food and price. And I don't know if you know, we own two fertilizer companies over there. And pricing and demand is both very strong there too. And I don't know how that might play in.

But anyway, my question really was, great job cleaning up the balance sheet. And we kind of got the perfect storm going here. Your free cash flow looks to -- things continue on both sides of the business to be pretty high.

[Cara] is buying back stock. If you get in a tough stock market due to credit or something, would you consider buying stock if the stock was down 16, $17 something like that with this free cash flow? Or alternatively, is it better use for maybe some add-on acquisitions for Barry's business? I know I'm kind of hypothecating.

But it's our view that if people understood the fundamentals of the chemical -- I think people are understanding the climate control -- this stock could be in the 40s in a year off of 2008 numbers. That is our view, not your view obviously. But we would certainly encourage you to consider that if the stock market gave you an opportunity. So, anyway, your comments on CapEx --

Your comments are well taken and we will consider it. Hello?

Is there still some potential acquisitions, maybe add-on acquisitions for Barry's business?

Well we're going to -- we have to be real careful. One of the things that we have to consider is the distribution system. We have an existing distribution system. We want to be sure that an acquisition doesn't damage the existing distribution. And so, it's not just okay, acquire this company; it's a great company, keep it separate and go with it.

In order to benefit, we're going to have to have a certain amount of synergy. Prices right now -- recently have been out of range as far as we are concerned for companies. And so, I think there will come the day when there will be companies available that fit the bill and that we will be interested in. But we have none in sight right now. We're always looking just for your information.

Terrific, terrific quarter. Great. Thanks.

Edward Trafford, Northern Trust Global Investments.

I just think just one or two more quick questions. In terms of climate control, it sounded like you guys had done some kind of reorganization and expanded capacity there. Can you give us an idea of whatever you guys quote but maybe like a utilization rate or capacity utilization rate of where things are today?

Yes. We were bumping the limits of production capacity last year. And we realized this in the middle of the year that the backlog kept growing. If it gets stretched out too far, customers get upset because you don't want to order something and have it take four or five months to get it. So, you've got to bring it down to a range to be able to deliver something in a reasonable period of time. And if they know that they can come to you and get it when they need it, then they keep coming to you. And if they don't, they go someplace else.

So, we started to increase the capacity. And I would say that we have -- where we were running pretty well full out last year because we were running three shifts and we were running overtime, I would say that we are almost through with this expansion. We will have doubled the capacity that we did last year.

Can you talk to the impact that is going to have on your CapEx spend for full year 2007 versus 2006? I show CapEx for 2006 was 14.7 million. Where do you see that going for full year 2007 and then 2008?

Well, that was for both companies, for both businesses.

Yes.

It's going to be up some. But hopefully, everything we're doing will be justified financially. And at least when we do it, sometimes you can justify it and then circumstances change. And you find that you maybe shouldn't have done it as quickly as you did. But assuming that -- assuming that we're able to increase the -- realize the benefits of the CapEx that we're spending, I would say that we might spend $20 million versus 14 for example.

Maybe down to like 17.5 in 2008 or does it stay at that level?

No, it won't stay at that level. It should -- we should not have -- we've had unusual capital expenditures in climate control because we had to add real estate and we had to add buildings and equipment, etc. There is still some of that that we will do as we go along. But first, you have to have the space before you put the equipment in and we've done that. But we haven't filled those buildings to their full extent yet. And so, as the business keeps growing, we will make additions. But they won't be major.

Just my final question. Can you just speak to whether you guys are seeing any slowdown from North American coal production which is down about 4.5% year-over-year? I know you sell some chemicals into that market.

Our business in that market has been strong. We've got long-term contracts and we were successful in getting our largest customer to increase their commitment when we renewed the contract last year.

And they are presently putting pretty heavy demands on us from a volume standpoint.

If there's a problem in the country, it's transportation. It's with the rail lines that they don't have railcars that are sufficient to carry the loads that are out there.

[Reguga Rom], Private Investor.

It's a great quarter. I want to congratulate you and your entire team for -- this is exceptional call as well with full of information. I have a couple of quick questions. I appreciate if you could try to answer it without giving confidential information. The question first one is if you continue to see high demand in agriculture fertilizers, do you consider increasing capacity or do you have enough capacity for near-term? That is my first question.

I'm sorry; we couldn't (multiple speakers) --

-- side of the business.

Okay, I repeat my question. If you continue to see high demand for agricultural fertilizers like we see now --

For fertilizers?

Yes.

Yes?

Do you consider increasing the capacity you have now?

Well, the only increase that we foresee is debottlenecking some of our existing plants to make -- you know, you have a nameplate capacity on a plant the way it's configured. And if you can change the configuration sometimes you can increase capacities as much as 20%. And we would consider that. But we have to be assured that we have contracts to back up anything that we do in that regard because we're not going to speculate on the spot market.

That's right, yes. The second question I have is regarding the geothermal heat pumps. I have seen the news from Germany of very high growth rates, like as high as 100%. My question is, how do you plan on participating in this kind of high growth overseas without -- it's not specific to Germany. I am positive it will catch fire everywhere sooner or later because of the product quality.

How do you capitalize I am -- because this is an equipment you need to shipping from Oklahoma, is maybe cost to development is just [for us]? I'm always concerned about this, how you capitalize and take advantage of this high growth during the overseas markets.

Well, we have been shipping into Europe and into Germany and into the other countries of Europe. We have some representation there that we have been strengthening. And if it would be sufficient, [Marco] would be sufficient; we just opened perhaps distribution there. But we haven't planned to do that yet because we haven't seen the kind of demand that you are describing. We've seen some good demand and we've been able to fulfill it. But we haven't really taken a look at all of Europe to see how we would -- but you know that's one of the things that we will look at.

Again, I want to congratulate you and thank you for a great call. This is the best call I have ever attended. It's full of information and great discussion. Thank you.

Clifford Bordin, CIBC.

Just one quick question. I know there has been some interest in the Pryor plant from different people. Anything going on there in terms of doing something with it planned, selling it, shipping it overseas, anything?

Well, the overseas potential is dead as far as I'm concerned. We're looking at the possibility of utilizing it here in the United States -- of us utilizing it. Before we do that, we have to justify it. If we can -- we're talking to some people about the potential taking 100% of the production if we would start it up. But we're not close to any kind of a deal. And right now, it is speculative.

But we have done the work to get the numbers together on what would be involved from a financial standpoint. If it would look to be something that we could operate like we operate in Baytown, then I think we would definitely consider it. But we have to have a customer for 100% of the production on a long-term basis. I mean, that's the criteria we set.

As scrap, what is that plant worth just out of curiosity?

I don't have any idea. It's worth a lot more than it used to be. I'll tell you that.

I think so.

Stainless steel is really up there you know.

I know.

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

Thank you very much for everybody participating. See you next quarter.

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