LSB Industries Inc (LXU) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the LSB Industries third quarter 2007 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 Carol Oden. Please go ahead, Miss Oden.

Thank you. Good morning and welcome to the LSB Industries Inc. conference call. 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 this 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 hailed. Instructions for asking questions will be provided at that time. Information reported on this call speaks only as of today November 5, 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 the strategy of our climate control to develop and introduce products but use EarthPure, non-ozone-depleting refrigerants, that we do expect to increase our market share because of growing demand for our climate control products; increased output at ClimateMaster; historical shipping of the planet control backlog returning; developing product lines within our climate control; exposure of our climate control that have downturned in the single-family residential market is not (inaudible); impact of certain legislation on the climate control geothermal market; our climate control is on track for the continued long-term growth, near-term growth curve of our business flattening; our products are necessary for the future of our country; our facilities can handle substantial increases; we expect to continue to perform well compared to other companies in our industry; we have concluded that it is more likely than not that our NOL will be used in 2008; we estimate that our turnaround costs for our chemical business will be approximately $2.4 million in the fourth quarter 2007; and improvement in our balance sheet and capital structure will continue to be a management strategy.

The term EBITDA as used in this presentation is net income plus interest expense, depreciation and 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 fact are forwardlooking as more fully discussed in our 2006 10-K as amended by our recent amendment No. 1 to our 10-K and our 10-Q for the quarter ended September 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 No. 1 to our 10-K, and our 10-Q for the quarter ended September 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.

Thank you Carol. Good morning, everybody, and welcome to LSB's third quarter conference call. On the call with me today are Barry Golsen, LSB's President; and Tony Shelby, our CFO. After we update you about the Company we will be available to answer your questions about the business.

We have noted that in the vast majority -- of the vast majority of persons on our conference calls have been on several previous calls. So we are going to minimize the background information and assume that you know what our Company does.

We hope this satisfies those of you who have commented that our previous calls were too long. If any call participants have questions about the nature of our businesses we will be happy to send you information upon request.

You'll hear today that our third quarter results for sales and earnings were the best in recent history. We released third quarter and year-to-date numbers to the public this morning and the 10-Q was also filed this morning. Consolidated sales year-to-date were $451.7 million, up 22.6% over last year's $368.2 million. Net income to [common] shares this year was over six times at $18.1 million from the $3 million in last year's third quarter.

In the third quarter fully diluted earnings were $0.77 per current share compared to $0.18 last year and year-to-date earnings were $1.67, compared to $0.65 in 2006.

Overall, our core businesses have been very strong this year. So far neither the climate control business nor the chemical business has been affected by the slowing U.S. economy which we all see taking place. Although each day more experts are forecasting an economic slowdown, we are not forecasting the future in our business which has been on a very steep rising trajectory. But we expect to see the near-term growth curve flatten.

As we have said many times in the past our decisions are made for the long term and for the long haul. We believe that we are in the right spot because of our energy savings and green products and the country's question for energy independence. Products of both of our businesses are a necessity for the future of our country, and we expect the segments of this specific market that we are in to continue to grow. Our market share of key products has continued to increase and we continue to dominate the niche markets that we serve.

Our facilities are in place to handle substantial volume increase in the future if they materialize. On the subject of facilities, please keep in mind that our major plant turnarounds will occur in the fourth quarter this year under the new accounting rules (inaudible) for turnarounds will be expensed as incurred.

You may be interested to know that our El Dorado, Arkansas facility -- El Dorado Chemical -- was recently awarded the 2007 Diamond Award for its efficient quality improvement program based on its overall impact and the benefits of the environment and the example that has set for the community.

On Wednesday of this week, November 7, Barry and Tony will address Pacific Growth Equity's Clean Technology and Industrial Growth Conference in San Francisco where they will also conduct one-on-one institutional meetings on both Wednesday and Thursday. The webcast of their presentation will be posted on our website.

We are also very pleased to report that [Dan Mennis] of Avondale Partners initiated research coverage on us last month showing [Rick Nelson] of [Jay Geodonna] Securities.

Now I'll turn the call over to Barry and Tony who'll go over our financial conditions and the specific numbers in details about our businesses. Tony, you take it.

Thank you Jack. Today we issued earnings release and filed the 10-Q for the third quarter of 2007. Both of these documents either are or will be available on our website.

Before we get into the numbers I'd like to comment that this was somewhat of an unusual quarter and that the consolidated results for operations include three separate income items that require explanations.

Chemicals operating income in EBITDA include two settlement gains totaling $4.8 million; and the consolidated income includes a significant credit related to net operating loss tax period.

Someone's got music playing. Got us on hold or (inaudible) music playing. Hello? Thank you.

All right. Thanks. These three items I just referred to will be explained more fully during this financial review and there will be more extensive explanations in 10-Q which we encourage you to read.

The financial results for the quarter ended September 30, 2007, third quarter results in other words. Sales, our two core businesses both had a good third quarter. Sales were $147.6 million, an increase of 19% over the third quarter of last year. Product control sales were up 24%; chemical sales were up 14% both as compared to last year.

Operating income, Climate Controls' operating income was $9.8 million compared to $6.9 million for the same quarter last year. Chemicals operating income was $11.5 million compared to $2.4 million last year. After allocation corporate costs the consolidated operating income for the third quarter of 2007 was $19.1 million compared to $6.8 million in last year's third quarter.

EBITDA. Climate Control's EBITDA increased by $2.9 million to $10.5 million and chemical increased by $9.2 million to $13.8 million. The consolidated EBITDA for the third quarter of '07 was $23.3 million. This was an increase of $13.2 million compared to the 2006 third quarter. As indicated above the operating income in EBITDA for the third quarter includes the two settlement gains totaling $4.8 million.

Net income for the third quarter was $18.3 million compared to $3.5 million from the third quarter of 2006. The diluted income for common shares for the third quarter 2007 was $0.77 versus $0.18 last year.

In the net income is the -- there's the item that I mentioned regarding the net operating loss carryforward. The third quarter of 2007 includes a provision for income tax of $1.1 million lay in feem alternative income tax and $500,000 for state income taxes. Those two are offset by a benefit of $3.2 million due to the expected utilization remaining net operating loss carryforward. Under GAAP an entity is not permitted to recognize the future tax benefit of NOLs and other temporary book tax differences unless it is more likely than not that the entity will be able to utilize those tax benefits.

In prior periods, we provided valuation allowances against those deferred tax assets including net operating loss carryforwards. But in the third quarter of this year, based upon the 2007 earnings to date and the earnings outlook, management has concluded that it is more likely than not that we will be able to utilize the NOLs in 2008.

Let me restate that. It is more likely than not that we will be able to utilize the NOLs in 2008 and realize the other net tax -- deferred tax assets. As a result we reversed $3.2 million of the valuation allowance and recognized income tax benefit of this same amount at September 30, 2007. This is explained in more detail in the footnotes to the 10-Q.

With respect to the [similar] gains that we mentioned earlier, as indicated, chemicals operating income EBITDA include two settlement of $4.8 million -- totaling $4.8 million and $0.19 per share as follows -- there is a $3.3 million gain from the settlement of (inaudible) litigation which was outlined previously in our previous filings. So the settlement of $1.5 million of the business interruption claim.

The settlement with (inaudible) is related to litigation for alleged price manipulation in the natural gas market affecting the price of Cherokee [which] was charged financial gas from 2000 to 2003. This gain is included in other operating income.

The $1.5 million is an advance payment for an insurance recovery on a business interruption claim for damages to the gas pipeline feeding this Cherokee facility, which damages were caused by Hurricane Katrina, resulting in curtailment and interruption of the delivery of natural gas to Cherokee. This recovery of 1.5 was recorded as a credit to chemicals cost of sales. Both of these settlements and income tax and county are explained in more detail in the 10-Q.

Now with respect to the year-to-date numbers at September 30, 2007 for nine months, the sales year-to-date were $451.8 million or a 23% increase. Operating income year-to-date was $47.8 million compared to $21.2 million last year. For the year-to-date EBITDA was $58.7 million compared to $31.3 million last year.

Net income year-to-date through nine months was $42.3 million compared to $12.8 million last year. Diluted earnings year-to-date was $1.67 versus $0.65 last year.

A comment or two about the fourth quarter of 2007. As we've previously disclosed, we changed our method of accounting for planned major major maintenance activities in our chemical business which we will refer to in this conference call as plant turnarounds. We have planned certain of those turnarounds in the fourth quarter of '07 when the seasonal agricultural demand is normally at the lowest level.

We estimate that we will incur approximately $2.4 million in the fourth quarter for turnaround costs which will be expensed (inaudible) incurred. The addition to cash costs for the turnarounds will be cost of the [eventual] fixed overhead while the plants are down for the turnaround. This is a normal occurrence when you are doing a turnaround.

In addition we will expense approximately $960,000 in the fourth quarter of deferred cost related to a $50 million term loan that we anticipate prepaying this week. And I will provide more details in just a minute on that refinancing that we are referring to.

With respect to the balance sheet, except September 30, 2007, the Company's total interest [brain] debt was $122.4 million compared to $124.5 million at June 30, 2007. The total long-term debt included various mortgages and equipment loans of $12.4 million. It includes a five-year, 5.5% $60 million convertible debenture due 2012 and ThermaClime's $50 million senior secured loan due 2009.

The $50 million senior secured loan due 2009 bears interest at 11% and is secured by a first lien on the majority of the chemical plant assets in Arkansas and Alabama, certain equipment of the climate control business and the stock of ThermaClime and certain ThermaClime subsidiaries and secondly on assets securing working capital revolver loan.

We have negotiated a new five-year, $50 million term loan with a major USA money-centered bank with funding not to occur until certain conditions precede and are satisfied which we anticipate will occur on or before Thursday of this week. If the loan is closed as scheduled, the proceeds will be used to prepay the senior secured loans due 2009. The new loan will be secured by only the chemical plants in Arkansas and Alabama, will accrue interest at LIBOR plus 300 basis points with principal payable at maturity. So it's a significant improvement in that $50 million term loan.

Cash flow for the third quarter of 2007 was a positive $10.4 million and included the following components. The net cash provided by operations opf $18.5 million, we useed $1.4 million investing; $1.3 million to redeem this Series 2 preferred stock; $2.9 million to pay dividends on preferred stocks to bring everything current; and $2.6 million for net reductions long-term debt and other items for a net increase of $10.4 million.

In summary, regarding our financial statements, our stockholders' equity has increased to $87 million from $44 million at year-end 2006. There's no outstanding borrowings on the $50 million working capital revolver loan and cash on hand was $41 million. Our total long-term debt to trailing 12-month EBITDA, these are all numbers at September 30.

Our total long-term debt to trailing 12-month EBITDA was approximately 1.8 times through a series of exchanges, conversions and redemptions of a Series 2 preferred stock and all accrued unpaid dividends have been eliminated. There are 20.6 million common shares outstanding and approximately 4.9 million additional common shares issuable upon the conversion and/or exercise of all diluted securities, options and warrants.

Earnings per share reflected significant increase quarter versus quarter and year versus year. The improvement in our balance sheet and capital structure will continue to be a management strategy.

That concludes the financial overview of our results of operations financial position. Barry will now review the climate control business.

Thanks Tony. I'm pleased to report that for both the third quarter and first nine months of 2007, our climate control business's overall results improved dramatically over the same period as last year. I plan to elaborate on that later.

However for those are you who are new to LSB, here is some basic information about our climate control business albeit somewhat abbreviated from past conference calls. The companies in our climate control business design, manufacture, and market a broad range of high-quality air-conditioned, heating and heat pump products using commercial, industrial and residential climate control systems. We are the U.S. market leader in our core products which are geothermal heat pumps, water sourcing pumps and hydronic fan coils. We also manufacture and market small air handlers, large custom air handling units, modular watre trailers, coaxial heat exchangers and tube and fan heat exchangers.

In addition we complete large sale -- scaled 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. Historically our business has not been dependent on the health or weakness of any single construction sector.

We currently have five manufacturing facilities and a distribution facility all totaling over 700,000 square feet and all located in Oklahoma City.

Moving on to third quarter climate control financial highlights, as compared to the third quarter of last year, sales were up 24% to $75.6 million and operating income was $9.8 million as compared to $6.9 million, a 41% quarter-over-quarter increase. For the nine months, our sales were up 38% to $221.5 million and operating income was $27.9 million compared to $18.5 million last year, a 51% period-over-period increase.

The improvement in profitability was primarily the result of higher sales volumes, principally in our heat pump and fan coil businesses. This merit increases in 2006 and the first half of 2007. Additionally, sales price increases we implemented earlier took effect in the third quarter, resulting in a gross margin of 29.7%, up from 29.2% in last year's third quarter and up slightly from the second quarter gross profit of 29.4%.

Year-to-date through September our U.S. market share for heat pump products and fan coils was approximately 43% and 41%, respectively. Up from 38% for heat pumps and 40% for fan coils in the same period last year.

During the third quarter of 2007, bookings of product orders reached an all-time quarterly record of $65.8 million. This was up 8% over the same period last year.

We closed the quarter with a backlog of $61.6 million as compared to $66.3 million at June 30 and $80.4 million at December 31st, 2006. In our business, working down backlogs while growing sales in new bookings is a good thing. And as some of you know our backlogs have increased substantially during 2006 to levels that we considered to be too high and as our leadtimes had pushed out beyond what we considered to be optimum for good customer service. We have worked hard to reduce our factory lead times and they have improved substantially.

Prior to 2006, our climate control business had been slightly seasonal, shipping more in the second quarter -- second and third quarters than the first and fourth quarters. Corresponding to the seasonality of the construction industry that we serve. For the past two years our shipments didn't follow this pattern due to the large backlogs we were carrying in extended factory lead times. Now that we have reduced our backlogs and lead times, I would expect to see our historical shipping seasonality return.

With regard to manufacturing capacity, we've substantially completed an expansion in plantwide reconfiguration at ClimateMaster and a reconfiguration of the assembly area at International Environmental. We also continue to make good progress toward our goal of doubling our total air coil production volume and bringing all heat pump coil productions in-house.

In previous calls we discussed that material price increases during 2006 were in many cases more than those incurred during 2004 and 2005. Although we implemented across the board, sales price increases last year, due to the large backlogs we were carrying, the full impact of these price increases was delayed. While we are trying to recoup all of the material cost increases, we are operating in a very price-competitive environment and a 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 but that raw material prices were continuing to fluctuate. At this time raw material costs have stabilized somewhat albeit at a high level. Based on current information we expect overall unit material cost for 2008 to be approximately the same as 2007. However, we have seen that these can change rapidly and we continue to monitor material costs very closely.

As many of you know, we have a number of developing product lines and activities that have not yet achieved sustained profitability but which we believe are investments in the future growth of the business. Within this group are [Trisen] Construction, which specializes in large-scale geothermal installations and ClimateCraft, which manufactures large custom air handlers. During the first nine months of this year combined sales of these operations increased and are -- and correspondingly these operations improved slightly over the same period last year.

On a very positive note I am pleased to report that ClimateCraft recently entered into an agreement with Kaiser Permanente, one of the nation's largest health care providers, to supply Kaiser with large custom air handlers for its facilities. ClimateCraft is one of only two companies on our proved provider list and Kaiser medical facilities may now have the option of using our air handler products. In addition to the incremental business for ClimateCraft, this indicates the high level of acceptance these products have achieved in the marketplace.

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 third quarter were up 21% over the same period in 2006, and heat pump sales for the first nine months were up 30% over last year. Sales of our geothermal heat pump product line continued to increase as well. During the first nine months of 2007, our total geothermal unit shipments were up 26% over the first nine months of 2006.

ClimateMaster continues to develop and introduce water source heat pumps 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 third quarter of 2007, our sales of hydronic fan coil product manufactured by International Environmental were up substantially, approximately 44% over the third quarter of last year. Year-to-date through September, our hydronic fan coil sales were up 51% over the first nine months of 2006. This increase is primarily due to higher demand for our modular highrise fan coil products.

Also during the third quarter, International introduced its new [Umad] fan coils product line. This is a product very similar to the [Mod] or vertical high-rise product International has been so successful with in markets all over the US. It is an integrated system including the basic fan coil unit plus valves, controls, thermostats, discharge air ducts, supplier grills, return air grills and water piping, all factory installed eliminating the need to install these items on the job site and reducing contractors total install cost. Umads are also designed to minimize factory lead times and to facilitate steel's configuration as required.

Looking forward I am sure that a question most of you have is what's the outlook for construction -- both commercial and residential -- and what are the implications for future sales? From our understanding of the most recent data available, here is our current view. As you know, the vast majority of our climate control business sales are to commercial and institutional construction and renovation. In 2006, commercial and institutional sales accounted for approximately 80% of total climate control business sales. And over 90% of these sales were 73% of our total climate control business sales were to these building types. Offices, hotels, educational facilities, health care and retirement facilities, manufacturing plants, apartments and condos.

So that's the group of construction sectors that we've focused on since most of our sales are to those sectors. During the last conference call I reported that, according to McGraw-Hill, these construction sectors in the aggregate were at all-time highs in 2006 and were expected to continue at that level or slightly increase for the next five years. The current McGraw-Hill construction market forecast service report the winter 2007 -- 8 edition which was just released last week has actually upgraded the forecast very slightly for 2007 for these sectors, and downgraded the forecast slightly for 2008.

McGraw-Hill is forecasting that building contract activity for these combined segments will decrease by 3% in 2008 and increase 4% 7% and 5% respectively in 2009, '10 and '11.

For all practical purposes the updated numbers do not represent a meaningful change. The commercial and institutional construction sectors which are important to LSB are forecast to remain strong for the foreseeable future.

Turning to single-family residential, we are all aware of the sharp decline that has occurred in the market at large. According to McGraw-Hill there was a 14% decline in 2006 from 2005 and a 25% decline forecast for 2007. 2008 is forecast to decline another 3%, followed by very robust increases of 20% and 19% in 2009 and 2010, respectively.

Focusing more specifically on the HVAC industry, total unitary equipment shipment of air conditioners and air source heat pumps as reported by the Air-conditioning and Refrigeration Institute were down 18% in 2006 from 2005; and year-to-date through August, shipments were down 12% from the same period last year. Industrywide August shipments were actually 19% lower this year than August of 2006.

However, fortunately, our residential sales have so far bucked these trends. During 2006, our residential geothermal sales increased approximately 50% over 2005. Year-to-date through September, our residential business was approximately 5% higher than the same period in 2006.

Whereas we have managed to outpace the residential HVAC market for the past seven quarters, the depth of the current market slump has impacted our rate of growth. As you know geothermal heat pumps are a green form of renewable energy that reduces energy consumption and greenhouse gas emissions. And by the way I am focusing on that because all of our single-family residential sales are geothermal heat pumps.

So let me repeat that. The geothermal heat pumps are a green form of renewable energy and reduce energy consumption and greenhouse gas emissions. We believe that the market drivers for our residential geothermal products are somewhat different than the market at large. High energy prices, environmental issues, energy security concerns drive the demand for geothermal systems. The overall size of the residential market approximately 6 million units per year even in its reduced state after the reductions that I mentioned before, also represents huge upside potential for geothermal products.

And this is a point that I would like to focus on. I would like to emphasize that it is important to note that LSB's overall exposure to a downturn in single-family residential market is not great. In 2006, only 6% of Ellis these total sales were to this market. Year-to-date through September 2007, single-family residential sales were only 5% of LSB's total revenue.

One final comment about geothermal while we are on the subject. Recently, Canada enacted legislation which, when implemented, will provide a Federal grant of $3500 for the installation of geothermal heat pumps in existing homes. This has been matched by several Canadian provinces -- including Ontario, the largest -- bringing the total incentive package up to $7000. Due to the development of implementation procedures by the government, we have not yet felt the effect of this incentive but we are optimistic about its impact. Also at this time there are several pieces of legislation pending in the United States which could also benefit geothermal sales if enacted. Some of these have bipartisan sponsorship and support.

Whereas our results today in our business model going forward do not rely on governmental incentives, if the current pending legislation is enacted it could impact the growth of the geothermal market positively. However to what extent is speculative.

Summing up, 2007 has thus far been a record year for our climate control business. We have continued the trend of improved top and bottom line results. 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 continue to have challenges, we believe we are on the track towards the continued long-term growth of this business segment.

Tony, I will turn it over to you to discuss chemical.

Thanks Barry.

Our chemical business produces and markets chemical products with industrial mining and agricultural markets. And holds a leading position in the manufacturing and marketing of nitric acids. On a historical annual basis approximately two-thirds of our business is industrial and mining, and one-third is agricultural.

The majority of industrial mining products are sold pursuant to sales agreements and price arrangements that provide either direct or indirectly pass-through of raw material costs. The agricultural products are sold at the market price in effect at the time of the sale. And this agricultural business is seasonal and cyclical and is currently a strong up cycle driven by long grain inventories and increased crop production requiring nitrogen fertilizers. We have the ability to increase our fertilizer sector sales above one-third when these margins are favorable.

There are three production facilities. The Baytown, Texas facility, a single train (inaudible) nitric acid plant. The (inaudible) to Arkansas and Cherokee, Alabama facilities which are all multiplant sites producing industrial assets, industrial grade ammonium nitrate and nitrogen-based fertilizers including ammonium nitrate, UAN or urea-ammonium nitrate. Cherokee consumes natural gases and raw material feedstock, El Dorado and Baytown both consume (inaudible) which is delivered by a pipeline.

Summary of the financial results for the third quarter, overall our chemical business performed extremely well in third quarter of 2007. As indicated in the financial review, the operating income was $11.5 million including the two [serving] gains totaling $4.8 million. The operating income excluding $4.8 million was $6.7 million compared to $2.4 million in the 2006 third quarter.

Sales prices were up significantly for agricultural fertilizer and slightly up for mining products and industrial assets. Gross profit margins and operating income, including the [settlement] gains were significantly higher as a result of strong fertilizer demand, resulting in higher sales prices relative to the raw material cost and continued improvement plant production rates.

Agricultural products accounted for most of their improvement and operating profit over the third quarter 2006 due to the strong performance and outlook for the farming economy. As has been highly publicized, global grain stocks including corn and wheat are at low levels and are driving the demand for fertilizer products. Due to abnormally high amounts of rainfall in '07, MidSouth -- coupled with drought conditions in the Southeast -- sales volumes were well below our estimates of the potential for fertilizer volumes.

However higher prices and better margins allowed for significant improved results when compared to last year.

In addition to the higher gross margins in the nitrogen fertilizer sector, margins were also favorably affected by the steady demand for our assets for industrial applications and our industrial grade ammonium nitrate for surface mining consumption. The strong demand for all products resulted in production efficiencies associated with the higher operating levels of the plant.

The Baytown facility continued to generate consistent quality results and turn in another good quarter. Cherokee's operating income for the third quarter 2007 benefited from the two settlement gains and for the strong demand in the expanding margins for urea-ammonium nitrate. Published UAN prices in our market areas were approximately 65% higher in the third quarter 2007 than in the third quarter of 2006.

Cherokee's natural gas feedstocks were relatively stable, experiencing very little volatility throughout the 2007 third quarter.

Stock and natural gas prices, excluding transportation, during the third quarter of 2007 averaged about $6.18 or approximately the same as third quarter last year. This morning the spot natural gas price is approximately $6.50 and the 12-month [strip] is quoted in the $8 range but both of these markets change daily. [Total] rail, Arkansas benefited from strong agricultural product demand, continued efficient plant performance and favorable sales prices relative to the cost in (inaudible) ammonia. All of these reported in resulting improved margins.

El Dorado purchased approximately 220,000 tons per year of ammonia at a formula price tied to the public's Tampa market price. (inaudible) published price at Tampa averaged approximately $300 per metric ton in the third quarter, compared to approximately $280 in the third quarter of 2006. Published selling prices for fertilizer grade ammonium nitrate in our market were approximately 28% higher in the third quarter 2007 than in the third quarter 2006.

Looking forward with our chemical business, we continue to be encouraged by the market demand for our products and the performance of our production facilities. Our products were sold in markets that are affected by the general strength of the global industrial (inaudible) north American mining sector and agricultural markets, all of which continue to show solid performance. Market publications indicate that nitric fertilizer should continue to see a strong demand due to ethanol driven form production and lower grain inventories in general as well as 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. As indicated in the financial review their planned maintenance turnarounds in the fourth quarter of 2007 cost them approximately $2.4 million which will be expensed and as incurred will also result in non productive plant downtime.

The objective is to complete these turnarounds in the fourth quarter as efficiently as possible, to minimize these costs including the cost of lost absorption. Our chemical business will continue to focus on growing our nonseasonal industrial customer base with an emphasis on customers except the risk inherent with raw material costs, while maintaining a strong presence in the agricultural sector.

In the meantime we have the ability to allocate significantly more of our capacity to fertilizer when market gives us the kind of margins that we are now seeing. Our strategy emphasizes cost reduction and continuous operations of plants at floor rates, thereby lowering the fixed cost of each year in the production.

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

Thanks, Tony. Thanks, Barry. Okay, folks, we are now ready to take calls from any of the people out there that have questions.

(OPERATOR INSTRUCTIONS) Dan Mannes. Avondale Partners.

Couple of questions for you. Just to start quickly on the chemicals business. You mentioned turnarounds. Do we think that is plural or more than one of your plants to taking turnarounds in the fourth quarter or am I misreading?

As indicated the plant sites have multiple plants at each location. For instance, you have four nitric acid plants at El Dorado, Arkansas. As well as (inaudible) plants and so forth. So yes, you have multiple turnarounds. But those are scheduled so that they don't all occur in the same quarter.

Let me indicate (multiple speakers)

They have the turnaround turnarounds take place in fourth quarter this year. That won't always be that way because sometimes the extent of the turnaround depends on the condition of the facility.

Understood. Two follow-up questions to that. The first one would be any indication on the number of days in turnaround or is it because you are spreading it over multiple plants at the site so it's hard to really adjust? And then the second issue there is, were you still experiencing some of the bottlenecking issues I believe or some of the production issues at Cherokee? And are those expected to maybe be fixed through this turnaround?

Yes I can tell you that. Yes. We have just completed our -- in the process of completing a turnaround at Cherokee and you don't know until you get the plant really revved up real high how successful a turnaround has been, but preliminarily, it looks like that is going to be a successful turnaround. And we will be able to get production up higher than it was prior to the turnaround.

What was the other part of your question?

The other one was if you can address how long (multiple speakers).

Well we don't know. They usually do them as quickly as possible because not only do we have the price of turnaround as Tony said, but we have no production taking place during the turnaround. So you have unabsorbed taking place. So I think -- .

I think you could use a rule of 14 to 21 days for a turnaround. They vary significantly by the -- what you encounter when you open up the plants.

Makes sense to me. Switching gears real quick and talking about the climate business. You mentioned Canada briefly. I guess you historically noted that the majority of your (inaudible) domestic maybe as much as 95%. Will you guys need to bulk up the distribution candidates to take advantage of this (multiple speakers)?

We actually would -- (multiple speakers) when we report our sales we actually consider Canada to be domestic.

Okay. Can you get any historical idea of the relative size of the Canadian market relative to the US? And have you (multiple speakers)

I would really rather not divulge proprietary data as to what our sales is in any particular territory. I just don't think it's good from a competitive standpoint. However I will say it's one of our bigger markets and we have a really strong distributor.

Lastly, just on the general commercial market you noted with McGraw-Hill's numbers that they weren't dramatically different than what you had seen before. But if you look across your portfolio of different products that you sell, I mean the one that seems to stick out to me is one that's been surprisingly strong the last year or so has been the fan coils, the International Environmental business. So I mean when you look at the product portfolio and without giving specific guidance, is it reasonable to assume that while some of the other products may be better able to buck any slowdown is that one that may be has a little bit more risk around? Is that something we should be aware of?

I'm really not going to comment on any future sales projection. I'm sorry. I just can't do it. Since we decided we are not going to do that.

I guess more broadly, maybe can we talk about the lodging market and the strength we have seen in that. Is it reasonable to assume given the number and given the outlook that you've seen (inaudible) segments it's more likely to slow or maybe the other ones are stronger?

Well I mean there is a bubble working its way through the lodging market right now. How long it lasts we are not so sure but, usually, it takes a couple to three years for that bubble to work its way through because of the gestation period for projects. But we are not concentrated in that sector if you -- as you know from our prior discussions we have pretty evenly distributed sales among many different sectors. And so typically and historically, what we have been able to do is when one sector is down we focus on other sectors and that is what we plan to do going forward.

There's no guarantees that these sectors will be totally countercyclical but we have attempted to work that angle in the past. And that is what we will do in the future.

Understood. Then just one final question. As I look at the backlog it seems that you have done a pretty good job of bringing that down. Can you talk at all about the make of the backlog between your different products or is that another area you're --?

No, I had rather not do that. We don't publish that information.

Well, thanks for the call and good quarter, guys.

(OPERATOR INSTRUCTIONS). Rick Nelson with Jay [Giordono] Securities.

Good morning, everyone.

Rick, I hope -- we are going to send you a bill for the publicity we are giving you today.

I appreciate it. But again it's very, very nicely done this quarter. I just had a couple questions because your review was quite comprehensive. This one goes to Tony first. Your interest expense of about $3.5 million seems a little bit high given the amount of debt you have on the books. Are their extra charges in there? Was there an actual higher average debt level during the quarter? Or is this the sort of number we can get -- except forth the fact that you are refinancing $50 million, is there anything unusual about that?

No. There's nothing unusual.

It just seems a little bit high to me. But I'll go back over my numbers.

And Barry. I've got a question --

One thing I might mention to you is back in the past we have disclosed that we have interest rate caps and with the turbulence in the credit markets, rates are down and our interest rate cap which we previously marked up to market we marked down to market in the third quarter. And that's a -- so that would be an interest expense.

So the interest rate which is a fixed number is -- for what we paid is what we paid but if you have to mark it up and mark it down to market as rates go up and down so that would there was a mark down in the market so that we expect would have affected the interest rate in the third quarter. Very good question.

Barry, I had a question and it's a follow-on to dance comments on the Canadian incentive program. You mentioned that new legislation quotes for about $3500 in new incentives which might make a total of $7000. Without divulging obviously what your margins might be and so forth, what would the cost of a conversion be for an existing home?

It's really hard to generalize. I mean there are so many facts and circumstances that relate. Every individual, every job is different depending on the age of the house, conditions that are there, what part of the system as to be replaced, what kind of conditions there are for putting [blips] in the ground. So I mean it's -- I can't really answer that in a general sense.

But it does sound like a fairly heft of incentives.

Yes, it's up to $7000. So we expect, we would expect to see an impact from that, but as I mentioned we are still in the process of -- denote the way governments work. First they pass a law and then they have to think on how they're going to implement the law and then there's a bureaucracy they have to get in gear to actually execute the implementation and that's where they're at right now. So we haven't really seen any impacts from that yet.

Do you fellows see anything afoot in our country as far as incentive programs?

Well, right now I mentioned that there's quite a bit of legislation that's pending in Congress right now and it's kind of a laundry list of things that are going on. And if you would like I can -- it's pretty lengthy to discuss. It would take up really too much time for this conference call, but there's some bipartisan support for several different bills that are out there. And if some or all of those are passed it could have a positive impact.

But also as I said we are not counting on that in terms and of our business model. If it occurs it's a plus and we will welcome it and we think it would be beneficial for the country to incentivize people to use this kind of technology for obvious reasons. But if it doesn't happen, we are not counting on it for our business model.

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

Thank you for participating, everybody. 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.