LSB Industries Inc (LXU) 2007 Q4 法說會逐字稿

Good day, everyone and welcome to the LSB Industries' fourth-quarter 2007 conference call. At this time, I would like to inform you that this conference call 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.

Thank you. Today, LSB's management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Tony Shelby, Chief Financial Officer. Information reported on this call speaks only as of today, March 12, 2008 and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

Comments today may contain certain forward-looking statements. All statements other than statements of historical fact are forward-looking statements. Statements that include the words expect, intends, plans, believes, project, anticipate, estimate and similar statements of a future or forward-looking nature identify forward-looking statements, including, but not limited to, long-term growth prospects, economic climate and outlook, expect specific markets we are in to continue to grow, startup of the Pryor, Oklahoma chemical plant, utilization of our NOL, higher selling prices, increased output of our Chemical business, margins within our Chemical business, raw material price increases, backlog within our Climate Control business, first-quarter shipments and earnings of our Climate Control business, outlook for the commercial and residential construction end markets, outlook for our geothermal products and affect of governmental legislation on our 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 measurement. Please refer to our 2007 10-K 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.

Good morning. This is Jack Golsen. Welcome to LSB's fourth-quarter and year-end 2007 conference call. Carol had a lot of coffee to drink this morning, so you could -- so she speeded up her intro.

On this call with me today, Barry Golsen, LSB's President and Tony Shelby, our CFO. After we update you on our fourth-quarter and full-year results, we will be available to answer your questions about the business. For more detailed information about the Company, we refer you to our 10-K. If any call participants have questions about the nature of our businesses, we would be happy to send you information upon request.

2007 results for sales and earnings exceeded our expectations and both set an all-time record. We also made a major improvement to our balance sheet and net worth. Consolidated sales in 2007 were $586 million, up 19.2% over 2006 sales of $492 million. Net income to common shares in 2007 was 320% at $41.3 million of 2006 $12.9 million.

For the year 2007, fully diluted earnings were $1.84 per common share compared to $0.76 in 2006. Please keep in mind, there were some special items in quarter three and to a lesser extent in quarter four, which Tony will cover. Even without these special items, earnings were dramatically better than in 2006.

In the fourth quarter of 2007, sales increased 8.8% over 2006 and those numbers were $134.7 million compared to $123.7 million and our net income was $4.5 million compared to $2.7 million in 2006. After deducting preferred stock dividends in 2006, net income to common stock was $4.5 million for 2007 compared to $1.8 million in 2006. Tony will also go into more detail about these numbers later in this conference call.

Overall, our core businesses were very strong in 2007. In our Climate Control business we saw new incoming orders lag in the fourth quarter, but they have rebounded strongly so far in the first quarter of 2008. We remain optimistic about our long-term growth prospects. We have bucked many past economic downturns by intensifying find our sales and marketing efforts and focusing on renovation and promoting our energy-efficient products.

At this time, we believe that we are in the right spot with our energy savings and green products, which are part of the solution in the country's quest for energy independence. We continue to dominate the niche markets we serve as our marketshare of key products continues growing. Over the long term, we expect specific markets that we are in to continue to grow and we expect to grow with them.

Recently, we contracted to acquire additional acreage for future expansions of both our geothermal and fan coil manufacturing facilities and as we have said many times in the past, these decisions that we have made are for the long-term benefit of our shareholders. Barry will update you on Climate Control later in this call.

The outlook for our Chemical business is strong based on the world supply/demand fundamentals regarding grain stocks driving demand for fertilizers. In recent months, we were able to take advantage of excellent spot pricing in the ag sector of our business. Because of this, we are applying for permits to start up our Pryor, Oklahoma plant; although we have not made a final decision to start this plant yet. To go ahead with this project, lead time for startup is approximately 12 to 15 months.

Yesterday, as an additional item, yesterday, our Board of Directors authorized the Company to buy back shares and we will be making a press release regarding this in the immediate future. Now, I will turn this call over to Barry and Tony who will go over our financial condition in more specific numbers and details about our businesses. Thank you.

Thank you, Jack. Yesterday morning, we issued our earnings release for the fourth quarter and for the calendar year 2007 and we plan to file the 10-K tomorrow. For the fourth quarter ended 12/31/07 as compared to the fourth quarter of 2006, LSB's consolidated sales were $134.7 million compared to $123.7 million in 2006, an 8.8% increase. Operating income was $11.2 million compared to $5.9 million last year, an increase of 89%. Pretax income was $8.1 million compared to $3.2 million. Income tax provision was $3.6 million compared to $500,000. Net income was $4.5 million or $0.20 fully diluted compared to $2.7 million or $0.10 per diluted share and after allocated corporate costs, the fourth-quarter EBITDA was $15.3 million compared to $9.2 million last year, an increase of 66%.

Let me mention at this point that we -- regarding the federal income -- or the income tax provision on the financial statements. We began the year with a federal NOL tax carryforward that was, for the most part, consumed by earnings in 2007. We are carrying only $2.0 million of that NOL into 2008 and as a result, we fully tax affect our financial results in 2008. I will explain the fourth-quarter income tax provision of $3.7 million later in this presentation. It is somewhat confusing and it has generated a few questions, so I'll explain that in more detail later.

As a point of information and as disclosed in our press release yesterday, the fourth-quarter of 2007 earnings include $1.3 million of pretax income royalty to a business interruption insurance recovery of $2.3 million, which was included as a reduction of cost of sales and offset by a $1 million unamortized debt issuance cost, which is included in interest expense that was written off as a result of the early payoff of a $50 million term loan in November of 2007.

For the full year of 2007 as compared to 2006, LSB's sales were $586 million or 19% higher than $492 million last year. Operating income more than doubled to $59 million compared to $27 million. Pretax income was $49.4 million compared to $16.4 million in 2006. The provision for income tax was $2.5 million compared to $900,000 in '06. Net income was $46.9 million or $1.84 per diluted share compared to $15.5 million or $0.76 per diluted share last year. And after allocated corporate costs, EBITDA rose 85% to $74 million compared to $40 million last year, an increase of $34 million.

And consistent with what I just mentioned in the fourth quarter, as a point of information and as disclosed in our press release yesterday, the calendar year 2007 earnings include $6.1 million of pretax income, which is inclusive of the $1.3 million that we just talked about. The $6.1 million included a litigation settlement of $3.3 million that was included in other income. It included a business interruption insurance recovery of $3.8 million, which was included in Chemicals as a reduction of their cost of sales and as I just mentioned, offset by the $1 million unamortized debt issuance cost that is included in interest expense relative to the early payoff of the $50 million term loan.

Let's talk about the tax provision, which is fairly complicated and is explained in great detail in Footnote 12 of the 10-K that you'll be able to take a look at tomorrow. So I am going to try to summarize it in conversational terms as opposed to technical terms.

Our effective tax rate for the calendar year '07 was fairly insignificant due to the reversal during 2007 of evaluation allowances on the net operating loss carryforwards and other deferred tax assets available at the beginning of the year. The financial income tax provision of $3.6 million in the fourth quarter of 2007, which is higher than the amount for the full year, is complicated in view of the fact that we had NOLs come into the quarter.

The fourth-quarter provision includes a change in our estimated effective federal and state income tax rates for the calendar year of '07, the effect of which gets recorded in the fourth quarter. Plus, there is an adjustment, a fairly sizable adjustment, for uncertain state tax positions in accordance with FASB interpretation number 48, affectionately referred to as FIN 48, and this is a non-cash tax accrual. The elements of our annual provision for income taxes are more fully explained in Footnote 12 as I indicated in our 10-K that will be filed tomorrow.

We began the calendar year 2007 with a carryforward of $49.9 million. During 2007, our earnings were such that, at the end of 2007, there remained only approximately $2.9 million of federal net operating loss tax carryforwards into 2008. We anticipate fully utilizing the remaining NOL carryforwards and recognizing and paying federal income taxes at the regular rates in 2008.

We are in a very good liquidity position and based on everything you see about the credit markets right now, this is a good time to be very liquid, which we are. Our total debt at 12/31/07, interest-bearing debt was $122 million or an increase of $24 million compared to year-end 2006. Cash and cash equivalents at year-end 2007 was $58 million or an increase of $56 million compared to year-end 2006. The total long-term debt at 12/31/07 includes mortgages and equipment loans of $12 million, the 5.5% $60 million convertible debentures that are due in 2012 and ThermaClime's new $50 million secured term loan that is due in 2012. The $50 million secured term loan due in 2012 was entered into in November 2007 and replaced a previous loan of the same amount, but under far better terms and conditions, including less collateral and less interest and is priced at 90-day LIBOR plus 300 basis points.

Cash flow for the calendar year 2007 was positive by $56 million. The positive cash flow included the net cash provided by operations of $46.8 million, which includes prepayments from ad customers of $6.6 million. It further includes the net proceeds of $57 million from the 5.5% convertible debentures and it includes reductions in interest-bearing debt of $34 million and capital expenditures of $14.8 million.

Briefly summarizing our liquidity and capital resources at December 31, 2007, as I indicated, cash was $58 million. There were no outstanding borrowings on the $50 million working capital revolver loan. Our total long-term debt to EBITDA for 2007 was approximately 1.65 times or less than one to one if we assume the cash to be applied. Through a series of exchanges, conversions and redemptions, the Series 2 Class C public preferred stock and all the accrued unpaid dividends have been eliminated. There currently are 21 million common shares outstanding and approximately 4.5 million additional common shares issuable upon the conversion or exercise of all other dilutive securities options and warrants. In fact, there are no warrants outstanding. Stockholders' equity has increased to $94 million from $43 million at prior year-end.

As you can see, during 2007, we made major improvements in our balance sheet and capital structure. Continuing that improvement is a key management strategy.

Jack, I believe that concludes a summary financial overview of our results of operations and our financial position. Barry will now review the Climate Control business.

Thanks, Tony. I am pleased to report to everyone on this conference call that our Climate Control business' overall 2007 results improved dramatically over 2006. I plan to elaborate on that later; however, for those of you who might be new to the call, the LSB companies in our Climate Control business design, manufacture and market a broad range of high-quality air conditioning, heating and heat pump products used in commercial, industrial and residential climate control systems. We are the US market leader for geothermal heat pumps, water source heat pumps and hydronic fan coils. In addition, we manufacture and market small air handlers, large custom air handling units, modular water chillers, coaxial heat exchangers and tube and fin exchangers. In addition, we complete large-scale geothermal installations throughout the United States. Our products are used in many different types of buildings for both new construction and renovation and replacement. Historically, our business has not been dependent upon the health or weakness of any single construction sector.

Moving on to fourth-quarter Climate Control financial highlights as compared to the fourth quarter of 2006, sales rose 7% to $64.9 million. Operating income was $6.3 million as compared to $6.9 million, a 9% quarter-over-quarter decline. EBITDA was $7.1 million compared to $7.7 million in 2006.

Looking closely at quarter-over-quarter results, our gross profit increased by 0.5% of sales, reflecting the impact of price increases implemented during the course of the year in response to material cost increases that we had incurred earlier.

Those of you who were on our Q4 '06 conference call will recall that we had, in that period, a nonrecurring gain of $1.2 million, which was due to the award and receipt of legal fees relating to an arbitration case. Subtracting this gain from our segment operating income in 2006, our period-over-period segment operating income actually improved by $600,000 in 2007. This is a 10% increase on 7% greater sales for the quarter.

For the full year 2007, sales rose 29% to $286.4 million. Operating income was $34.2 million compared to $25.4 million, a 35% year-over-year increase. EBITDA was $37.2 million, a 32% increase over $28.1 million in 2006.

The improvement in profitability for the year was primarily the result of higher sales volumes, principally in our heat pump and fan coil businesses. The overall gross profit for 2007 was 29.2%, slightly lower than 29.6% in 2006. This was primarily due to material price increases that we incurred early in the year. While we raised our selling prices accordingly due to the large backlogs we had at the time, it took several months to realize the full effect of those increases, but you can see by the results in the fourth quarter that, by the end of the year, those selling price increases had taken effect.

During 2007, we increased our industry-leading marketshare in geothermal heat pumps, water source heat pumps and fan coils. At year-end, our US marketshare for heat pump products and fan coils was approximately 42% and 41% respectively. This was up from 38% for heat pumps and 40% for fan coils in 2006. We are encouraged with this continued progress. We have been the market leader in fan coils and in total water source heat pumps and by that I mean combined commercial and single-family residential for some time. As to single-family residential geothermal sales, we believe that, during 2006 and 2007, we took the lead in this market as well.

During the fourth quarter of 2007, bookings of product orders were lower than expected -- $53.9 million compared to $55.2 million during the same period in 2006. Whereas we were disappointed with lower incoming orders during the fourth quarter, I am happy to report to you that, so far in 2008, the order level seems to have rebounded. Year-to-date through February 29, just the first two months, our product orders have been $50.6 million compared to $36.7 million for the first two months of last year, a 38% increase. This is substantially higher than the rate of order intake during the fourth quarter of 2007 as well.

During the first two months, order intake almost equaled order intake for the full fourth quarter. We closed the year with a backlog of $54.5 million as compared to $80.4 million at December 31, 2006. Our backlog of product orders as of 2/29/08 was up to $64 million. In our business, working down backlog while growing sales is a good thing. We have worked hard to reduce our factory leadtimes and they have improved substantially.

Prior to 2006, our Climate Control business had been slightly seasonal, shipping more in the 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 did not follow this pattern due to the large backlogs we were carrying and extended factory leadtimes. Now that we have reduced our backlogs and leadtimes, I would expect to see our historical shipping seasonality return.

Following the significant capital expenditures we made in 2006 and 2007 to increase our manufacturing capacity, we recently entered into a contract to acquire 15 acres of land to accommodate future expansion.

Updating you on our core products, sales of ClimateMaster's water source heat pumps and geothermal heat pumps continued to improve during 2007. Total heat pump sales in 2007 were up 23% over 2006. Sales of our geothermal heat pump productline continued to increase as well. During 2007, our combined geothermal unit sales, both single family, residential and commercial, were up approximately 24% over 2006. This contrasts to total geothermal industry shipments, which increased 9.5% reflecting increased marketshare for our products.

During 2007, our sales of hydronic fan coil products manufactured by International Environmental were also up substantially, approximately 44% over 2006. This increase is primarily due to higher demand for our modular high-rise fan coil products sold to the hospitality and multifamily construction markets.

Turning now to the outlook for construction. From our understanding of the most recent data available from McGraw-Hill, here is our current view. As you know, the vast majority of our Climate Control business sales are to commercial and institutional construction -- renovation and replacement.

In 2007, commercial and institutional sales accounted for approximately 89% of our total Climate Control business sales. About 83% of those sales, or 74% of our total sales, were to these building types -- offices, hotels, educational facilities, healthcare and retirement facilities, manufacturing and process plants, apartments and condominiums.

McGraw-Hill's current outlook, as reported in the spring edition of their construction market forecasting service, is that the commercial and institutional segments that account for 74% of our Climate Control business sales, those building types that I just listed, will decrease by approximately 4% in 2008 and will increase in 2009 through 2011 by 2.9%, 7.5% and 5.6%, a total of approximately 17% compounded.

For all practical purposes, the updated numbers do not represent a meaningful change since the last conference call. The commercial and institutional construction sectors, which are important to LSB, are forecast to decline slightly in 2008 from recent record high levels and remain strong for the following three years.

Turning now to single-family residential, which accounted for approximately 11% of total Climate Control business sales in 2007, we are all aware of the sharp decline that has occurred in this market. According to McGraw-Hill, there was a 14% decline in contract awards in this sector in 2006 from 2005 and a 26% further decline in 2007. 2008 is forecast to decline another 8.4% followed by very robust increases of 20% in 2009 and 26% in 2010.

Focusing more specifically on the residential HVAC industry -- heating and air conditioning -- total unitary shipments of air conditioners and air source heat pumps, as reported by the Air Conditioning and Rrefrigeration Institute, were down 9% in 2007 from 2006. However, our single-family residential sales have so far bucked this trend.

During 2006, our residential geothermal sales increased 50% over 2005. In 2007, our residential geothermal business was up approximately 7.5% higher than 2006. Whereas we have managed to outpace the conventional residential HVAC market for the past eight quarters, the depth of the current market slump has definitely impacted our rate of growth.

We believe the market drivers for residential geothermal are somewhat different than the market at large. High energy prices, environmental concerns and energy security concerns drive the demand for these geothermal systems, which are a green form of renewable energy that reduce energy consumption and greenhouse gas emissions. Overall, the size of the residential market, approximately 6.4 million units per year in 2007, represents huge upside potential for our geothermal products.

I would like to emphasize again and it is important to focus on this fact that LSB's overall exposure to a downturn in the single-family residential market is not great. In 2007, only 5.4% of LSB's total sales were to this market.

Following up on discussions in earlier conference calls regarding legislation that could possibly be beneficial to our geothermal business, during 2007, the Energy Independence and Security Act was enacted. We review this in the last conference call. Although this bill did not have direct tax incentives for geothermal, it did have several favorable provisions.

During February 2008, the US House of Representatives passed the Renewable Energy and Energy Conservation Tax Act. This bill allows a $2000 tax credit for consumers who install geothermal systems. It must now go to the US Senate for approval and has bipartisan support.

I have sent e-mails to many of you asking you to support this legislation by sending letters to your Senators and contacting them personally if you can. We appreciate the support that we have received so far from many of you and if you haven't sent letters yet, I would like to encourage you to take a few minutes to do so. Senators actually keep track of these letters and they are extremely effective. If you haven't heard from us on this and would like suggested language for letters, please contact us at -- here is our e-mail address, info -- I-N-F-O -- @LSB-OKC.com. Let me repeat that. Info@LSB-OKC.com and we will be able to send you some suggested language for letters to send out to your Senators.

Summing up, 2007 was a record year for our Climate Control business. We have continued the trend of improved top and bottom-line results. The investments that 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 long-term results. We plan to push forward and not to alter our long-term strategies in reaction to short-term market conditions. We believe we are on the right track toward the continued long-term growth of this business segment.

While we have recently been challenged by lower bookings in the fourth quarter of 2007, I am very excited about the prospects for growing all of LSB's Climate Control businesses and particularly our geothermal heat pumps. We believe this is the right product for our times and an important part of the solution to the nation's energy and environmental concerns. Thanks for your attention. I will now turn the meeting over to Tony to discuss the details of the Chemical business.

Thank you, Barry. Before we get into the details and summary, our Chemical business sales for 2007 increased 11% and our operating income increased from $10 million in 2006 to $35 million in 2007, for the calendar year. We produce and market anhydrous ammonia, nitric and sulfuric acids, industrial-grade ammonium nitrate and nitrogen-based fertilizers, including ammonium nitrate and urea ammonium nitrate, UAM. These products are for the industrial, mining and agricultural markets. Approximately 60% of our [2000] sales were to industrial and mining customers pursuant to pricing arrangements that generally include the market costs of raw materials. The balance, or approximately 40% of our sales, were to the agricultural sector as spot market prices in effect at time of sale.

Our agricultural business, while seasonal and cyclical, has been a strong upturn this year as a result of increased crop production requiring nitrogen fertilizers. We are operating three production facilities in El Dorado, Arkansas; Cherokee, Alabama and in Baytown, Texas. The Baytown, Texas facility is a single train, rural scale nitric acid plant. Arkansas and Alabama are multiplant slots with multiple plants at those locations.

To review the fourth-quarter results, overall, our Chemical business performed extremely well. Sales were $66 million compared to $59 million in the fourth quarter of 2006, a 12% increase. Operating income was $7.9 million compared to $800,000 in the 2006 fourth quarter. EBITDA was $10 million, an increase of $7 million compared to last year. As indicated in our press release, the operating income and EBITDA increases of $7.9 million and $7.1 million respectively include an insurance recovery of $2.3 million. Excluding the insurance recovery, the profit margins were substantially higher in 2007 than in 2006.

Further to my opening comments, our results for the calendar year 2007 included net sales of $289 million versus $261 million, a $28 million increase or 11%. Operating income was $35 million versus approximately $10 million last year, a $25 million increase or a 2.5 time increase. EBITDA was $44.6 million compared to $18.6 million last year, a $36 million increase.

As I further indicated in our press release, the operating income for the full year of '07 included an insurance recovery of $3.8 million and a $3.3 million recovery due to a favorable litigation settlement. Both of those associated with the Cherokee, Alabama facility. Excluding these recoveries and settlements, the profit margins were substantially higher in 2007 than in 2006. This improved performance in quarterly and annual results were driven by substantially higher sales prices for our fertilizer products and somewhat better processing for our mining products and industrial assets. Gross profit margins and operating income were also significantly higher. These increases were primarily attributable to higher selling prices associated with agricultural sales and continued improved plant production performance.

As has been highly publicized, global grain stocks, including corn and wheat, are at low levels and are driving the demand for nitrogen fertilizers. These favorable supply/demand fundamentals were the catalyst for significantly higher selling prices and better margins in 2007.

On a product-by-product basis in the fertilizer area, selling prices for fertilizer-grade ammonium nitrate in our market areas were approximately 27% higher in the fourth quarter of 2007 than the same period in 2006. Raw material feedstocks of anhydrous ammonia was also relatively stable during the fourth quarter of 2007. The anhydrous ammonia published price of [Tampa] averaged approximately $340 per metric ton in the fourth quarter compared to approximately $322 in the fourth quarter of 2006.

However, anhydrous ammonia prices, as posted at Tampa, have escalated significantly since the beginning of the year, increasing from an average of the mid $400s per metric ton in January to an average of roughly mid-$500s in February and a current price of $635 per metric ton. This current high cost of imported ammonia increases the cost of nitrogen products produced in our El Dorado, Arkansas plant. However, the majority of these sales are to customers who accept the cost of ammonia as a pass-through.

Published selling prices for urea ammonium nitrate fertilizer, UAN, in our market areas were approximately 75% higher in the fourth quarter of 2007 than in the fourth quarter of 2006. The UAN natural gas feedstock costs consumed by our Cherokee, Alabama plant were relatively stable, experiencing and very low little volatility throughout the 2007 fourth quarter. Spot natural gas prices, excluding transportation during the fourth quarter of '07, averaged about $7.35 compared to $6.79 in the fourth quarter of last year. Currently, the spot market natural gas price is approximately $10 per MMBtu in the 12-month strip, which changes daily, is quoted a little bit north of $10.

In addition to the strong economics in the agricultural sector, our 2007 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. High demand across all productlines resulted in production efficiencies associated with improved plant run rates.

From a forward-looking outlook, we continue to be encouraged by the market demand for the agricultural products and performance for our production facilities. Market data indicates that the continued strong demand for nitrogen fertilizer due to increased grain production spurred by lower grain inventories, basically globally, lowered grain inventories in general, as well as increased demand for forage crops.

Our Chemical business will continue to focus on growing our nonseasonal 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. We have the ability to reallocate portions of our capacity to nitrogen-based fertilizers when the markets indicate favorable volumes and margins. Our strategy is to emphasize cost reduction and develop a product and customer mix that will allow us to operate our plants at full rates thereby lowering the fixed costs of each unit of production.

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

Thanks, Barry and Tony. Okay, we have gone over our fourth-quarter and our year results and we are ready to answer any questions that you might have to the best of our ability. Please keep in mind that we do not make -- we do not give guidance and we do not make forward-looking statements.

(OPERATOR INSTRUCTIONS). Dan Mannes, Avondale Partners.

A couple of questions, actually. Starting out on the Climate segment --.

Could you speak up, Dan, please?

Dan, we can't hear you.

Can you hear me now?

That's better. A little bit louder.

Okay. First of all on the Climate segment -- first of all, thanks for the overview. Obviously, it was very detailed, but did have a follow-up question. On the commercial side, given the presumed slowdown, how much visibility do you have in terms of your ability to sell? I mean given the fact that it is your distributor bidding for projects, I mean how far can you look ahead or see ahead in that kind of market?

That's a good question and it's a very difficult question to answer because we can see out -- it depends on the size and the size of the project really because typically larger projects have much longer lifecycles from the initial concept of the project to the ultimate installation, which can be several years. Whereas other projects that are smaller and of a different nature can be much shorter. And so we are always looking at a huge pipeline of potential projects out there. I've never really tried to quantify as to a specific timeframe, but for example -- I will just give you an example. When someone is planning -- let's just take a good example -- a large hotel project in Vegas, we have done a lot of business and we have discussed that before. They could start talking about a project now and it could be four years before that finally ends up going and gets installed.

Now a lot of things could happen. If the economy holds up and the economy is very good, that pipeline stays in tact and if things start to go south, I don't want to be negative, but if things start to go south, you could see that pipeline change where products get pushed out and moved around.

Right now, we are seeing a strong pipeline of business and we are not -- and this is, to a certain degree, anecdotal from our salesforce, but in addition to the Dodge or the McGraw-Hill, rather, forecast that I have outlined to you, what we are hearing is a strong pipeline of business from our salesforce.

Okay. A second question on Climate, we have seen a tick-up in copper prices this quarter. It looks fairly significant so far. Can you talk at all about either hedging activity there or is that another scenario where you would look to maybe improve increased pricing later in the year to recover?

A little of both. We try to hedge commodities from time to time when we can and we have an ongoing active department that does that and we review that and we focus on that, but we try to -- to the extent that the market will allow us, considering that it is a competitive market and a large part of our business is subject to bids, we try to pass those material costs through whether or not we are hedging and it is what the market will bear. But we attack it from both ends.

Okay. And the last question on the Climate segment and this is really both for residential and commercial, are you seeing any change in behavior between sort of newbuild and retrofit? I mean probably more visible on the residential side given the slowdown in new construction, but are you feeling a change there or has that been fairly steady over time?

Well, I think if you look at the ratio -- you are asking the question about construction and I am going to answer it a little different than you asked it. Relating it specifically on residential first -- focusing on residential, what you are seeing is the ratio of replacement and retrofit go up dramatically in residential in the industry at large because new construction is down so much. Okay? And so there is a fairly rapid ratio and the way you look at that -- I can't really give you the exact numbers because I haven't calculated that -- the way to calculate that ratio is to look at the Air Conditioning and Refrigeration Institute reports of total sales, total unitary sales, which most of that is to single-family residential and that was $6.4 million last year and then look at the reported new house construction and take those two as a ratio of each other. So you see a fairly quick change there, more toward renovation and replacement, mostly replacement in that business.

In commercial, in commercial, what we have seen historically is that when new construction gets softer and is down that replacement picks up and as a percentage of the total market, that is available to us that it picks up. It is a more gradual shift. We haven't seen a significant shift there yet.

Okay. Actually, I'm sorry, last question on Climate. Have you seen any pick up in activity in Canada relative to the fairly strong subsidy program there or is that -- (multiple speakers)?

Well, it's a really strong market for us and we have done well in that market and continue to do well in that market. But we really haven't seen a big impact from the subsidies yet and the reason for that is because of the bureaucratic delay in installing and implementing a way to administer the rebates that were enacted into law. And so they have been -- the legislature typically will say the end result that they want. We are going to give a rebate of X, but then they throw it out to the various agencies who have to develop a way to administer it for people to apply and qualify, etc. and that takes some time when you are dealing with governmental agencies. So in fact, it really kind of missed the season for this last year. We suspect to see some impact next year.

Okay, and if I have enough time, I have a couple quick questions on Chemical. Just given the increase in gas prices and nat gas, are you guys doing anything actively for hedging gas needs for Cherokee?

Yes, we have built-in hedges on our pass-through business where it is cost plus and then we do hedge our usage. In other words, we don't go out and hedge speculatively beyond what we are going to use in the period. We do that on a monthly basis.

Okay. And then in terms of the pricing, Tony noted pricing for agricultural products in the fourth quarter was up I think 75% year-over-year. Obviously, your revenue -- that is only 40% of your revenue, but clearly it doesn't look like you were as levered to that price increase as possible. I am wondering was there a lot of presold activity?

The 75% was on the urea ammonium nitrate. You have got 27% on the ammonium nitrate, two different products come out of two different plants.

Okay, got you. And then the last thing would be on Pryor. You noted in your opening comments that you're undertaking, at least looking at the permitting activities. Can you give us a little more detail about what the opportunity is for restarting this plant, understanding it is at a preliminary stage?

Yes, with the caveat that we haven't made the final decision yet and that will depend on several factors. We do not intend at this time, if we do start it up, to start up the complete plant. Only starting up about four or five of the units because that is a big facility. If we do start it up, our preliminary plan is to produce about 325,000 tons of UAN, plus some ammonia and potentially some industrial products. What was the question?

Just trying to understand what the opportunity is and I think --.

The opportunity is to enhance our Chemical business by a substantial number. Just ballparking if we use today's prices, we would be in the -- the startup would be in the $100 million range.

Of revenue?

Pardon?

Of revenue?

Of revenue, yes.

And given the time, you mentioned 12 to 15 months, is that including permitting and would there be any -- would there be any benefit during the startup or would that be sort of like a cliff, it all -- (multiple speakers)?

No, what there would be -- the permitting has already been started as far as applications, etc. The permitting will come before the startup -- substantially before the startup. The startup will be in phases and I am talking about a complete startup of everything that we intend to start. There will be some units like the ammonia plant, which would start up -- won't take that long. However, there is the urea plant and the UAN facility, which would take longer. So before we would really benefit from the entire operation of that plant, we are saying 12 to 15 months.

One point. The fact that permitting has begun should not be a signal that we have made a decision. Jack made it very clear the whole thing is if we decide to go forward.

Here is what we are going to look at. This is a changing market and we want to be sure, to the extent that we can be sure, we can never be positive, that the business plan makes sense and that the costs to start up the plant are in line with our expectations and that the payback is there without a long-term risk. So all these things are being worked on now. We have engineers working on it, got our financial people working on it, got our environmental people working on it and we expect to make a decision in the not-too-distant future.

Great. Thanks for all the color, guys.

(OPERATOR INSTRUCTIONS). [Cliff Gordon], CIBC.

Hi, guys. A couple of questions. In 2008, what is your CapEx on the chemical plants and geothermal? Any plans there?

What is our what?

CapEx?

Yes.

We haven't disclosed that. We have commitments I think of about $10 million in Chemical and we have commitments -- as Barry indicated, we are buying some land. We have commitments of about $4 million in Climate Control, which we have disclosed or will disclose in the 10-K tomorrow, but beyond that, Cliff, we haven't made any --.

And that does not include the Pryor, plant.

That does not include the Pryor plant.

In terms of the chemical plant, is there any major turnarounds needed in 2008?

Yes, there are major turnarounds every year.

As we disclosed in previous conference calls, we spent about $2.5 million in the fourth quarter of 2008, which was not significantly higher than we did in 2000 -- excuse me -- fourth quarter of 2007, which was not significantly higher than 2006. So we have turnarounds in almost every quarter because we try to stagger those so that we don't -- for instance, the El Dorado, Arkansas plant doesn't turn around all their plants at the same time. The $2.5 million in the fourth quarter of '07 obviously is a big turnaround in the quarter versus smaller turnaround quarters.

But there is no big turnaround quarters coming up in this year that you know of yet?

Just the normal pattern.

Okay. In terms of Pryor, what would be the cost of starting up that plant approximately in your guesstimation?

We don't know yet. That is what we are trying -- we're trying to get bids on it all. We're talking somewhere between $15 million and $20 million.

$15 million to $20 million for $100 million of revenue, approximately, guessing, okay. Just one other question. In terms of natural gas, when you say hedging, basically natural gas let's say today is at $10 and you are doing production next month let's say in April. So you are buying gas now for April production, is that correct? You are not really going out any farther than that?

No, we are buying gas now for March.

Okay. So you are buying in the spot market for spot production on the ag side.

The reason we are doing that is we think that this jump is temporary. It does it every year during this period and we expect to see it go -- settle out at a lower number, but we are not sure of that. We don't have a crystal ball, but that he is our best knowledge -- best thinking that we have.

I want to add something here just to remind the other listeners who aren't as familiar as you are, cliff, because I know you know this and that is that only one of our plants uses natural gas as a primary feedstock. That would be Cherokee and El Dorado and Baytown use ammonia.

Right. Okay. Dan asked my other questions. So thanks a lot.

Thank you.

[Rivas Lewis], Private Investor.

Who?

Would you repeat the name please?

Rivas Lewis.

Do you have any legal problems that you haven't mentioned and if Wall Street was (inaudible), which is an oxymoron, what would be a fair price for the stock?

I can't hear you. I am really sorry, but I we can't --.

Do we have any legal problems we haven't talked about and what do we think a fair price for the stock is, is that right?

Thank you.

All of our legal issues that we think are material are disclosed in the 10-K.

You will have that tomorrow.

You will have that tomorrow.

They haven't changed materially from the third quarter.

What do you think a fair price of the stock would be?

As to the value of the stock, we have to leave that up to the market, but, of course, we think our stock is significantly undervalued.

I agree.

Especially the last couple of days.

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

Thanks, everybody.

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