LSB Industries Inc (LXU) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the LSB Industries fourth quarter 2008 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, Ms. Oden.

Welcome to the LSB Industries fourth quarter 2008 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 the call on our website at www.lsb-okc.com and will be accessible for one month. After comments by management, a question-and-answer session will be held. Instructions for asking questions will be provided at that time.

Information reported on this call speaks only as of today March 12, 2009 and therefore, you are advised that at times, this information may no longer be accurate as of the time of any reply. 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, projects, anticipates, estimates and similar statements of a future or forward-looking nature identify forward-looking statements, including but not limited to start-up of Pryor Oklahoma chemical plant, an amount of capital expenditures to begin operations at the Pryor plant and other production at the Pryor plant, the effects of the current recession on our businesses in 2009. Our future depends on the return of some stability in the credit and capital markets, sales of our chemical products to power plants expected to increase, liquidity and available credit needed to continue with investments required for our planned long-term growth, minimized controllable or variable costs during downturns, initiatives we have begun that we will not curtail during the economic downturn, such as start-up of the Pryor chemical plant, and expansions of geothermal heat pumps as they represent long-term growth potential, borrowings, availability and our working capital revolver, amount of capital expenditures related to our chemical and climate control businesses, outlook for and assessment of commercial and residential construction reduced to the recession, the effective stimulus package when our geothermal heat pumps and certain other products produced by our climate control business. lower sales in 2009 and our chemical control business in 2008, sales of geothermal heat pumps, optimistic about long-range growth potential for our geothermal products, sales of products by our chemical business during 2009, prospects for growing our climate control business over the long-term and long-term outlook for our chemical business.

You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, a decline in general economic conditions, interest rate changes, competitive pressures, changes in working capital and the risks and uncertainties discussed under the heading Special Note Regarding Forward-looking Statements in our annual report Form 10-K for the fiscal year ended December 31, 2008, and reports we file from time to time with the Securities and Exchange Commission. We do not intend to and undertake no duty to update the information contained in this conference call.

The term EBITDA as used in this presentation is net income plus interest expense, depreciation, amortization, income taxes, and certain noncash charges, unless otherwise described. EBITDA is not a measure of financial performance under GAAP and should not be considered as an alternative to GAAP measurements. We will post on our website a reconciliation to GAAP and any EBITDA numbers discussed during this conference call. Now I'll turn the conference call over to Mr. Jack Golsen, the Company's Board Chairman.

Thank you, Carol. Good afternoon and welcome to LSB's fourth quarter and year-end 2008 conference call. Today our Chief Financial Officer and Executive Vice President, Tony Shelby, will review our overall financial results for the year. Then our President and Chief Operating Officer, Barry Golsen, will discuss both of our businesses. After these presentations, Tony, Barry and I will be available to answer your questions.

First, I would like to make a few general comments. We continuously get questions about the economy. We do not have any special knowledge about our economy, however, we can give you information on what we are experiencing in our markets at this time. Stating the obvious, future growth in some of our businesses depend on the return of some stability in the credit and capital markets.

However, there are some exceptions to this. In addition to our geothermal heat pump sales, our chemical company sales to power plants are products that used by them to abate objectionable emissions are expected to increase. Some of the chemicals we produce are helping to clean up the environment. This is a small but growing market segment for us, and is expanding beyond power plants into cleaning the exhausts from diesel engines.

All indications are the general level of future activity in the near term will be less than it has been in certain areas. At this time, we believe that the short-term general economy will be negative, but we also believe that we're doing the right things to position LSB to improve and grow as the current economy and markets allow, and just as importantly prepare for the business opportunities ahead once the economy turns around.

We also believe that we have the liquidity and available credit we need to continue with the investments required for our planned long-term growth. We reported our fourth quarter and year-end results in the news release this afternoon. I believe we have already filed our 10-K in the last few minutes, haven't we Tony?

We should momentarily.

Yes. If we haven't, it should be coming over the wire now. In previous years, there were tax benefits that reduced our income tax expense. In 2008, our earnings were taxed at regular corporate rates.

Hitting the high points, our sales for 2008 were $749 million with the highest pretax operating profit and EBITDA in Company history. Our diluted earnings per share were $1.58. Since we have used up our net operating loss carry forward, we are now a taxpayer so our earnings per share were lower than the $1.84 in 2007. Tony and Barry will fill you in on the details about the fourth quarter and the full year.

Chemicals operating income from 2008 was adversely affected by approximately $7.2 million, due mainly to unprecedented, volatile commodity markets during the year. Tony will also discuss this in more detail. We previously disclosed that we are considering activating a portion of the Pryor plant, subject to securing a sales agreement with a strategic customer to distribute the majority of the planned UAM production.

We have now received the necessary permits to operate the plant. We have hired key personnel to operate the facility and have positioned the additional necessary personnel to be hired at appropriate intervals during preparation for start-up. Barring unforeseen delays and subject to deciding on a sales and distribution arrangement that satisfies us, we expect production to be implemented in the third quarter of 2009.

This plant is expected to add 325,000 tons of UAN and 35,000 tons of anhydrous ammonia to our overall annual production. We can expect these numbers to fluctuate according to market conditions. Excuse me. We are also considering the addition of other industrial products to our production at this plant and are discussing this possibility with industrial users.

At this point, I would like to give you some insight into our planning. The initial reaction to times like these by many companies is to absolutely minimize all expenses in an effort to maximize current earnings, to the detriment of future growth and earnings. We will attempt to minimize most controllable or variable costs during the downturn.

However, we will stop short and will not adopt a slash and burn approach for the sake of increasing current earnings. We believe there are certain initiatives that we have undertaken that are strategically important for the long-term continued growth of LSB. And we will not curtain these programs in an effort to boost profits in the short-term. A couple of good examples of programs like these are the Pryor plant start-up and our continued expansion of our geothermal heat pump manufacturing facilities, and our more intensified geothermal heat pump sales and marketing efforts.

These initiatives represent significant medium and long-term growth potential for LSB, but also bear costs that could diminish short-term earnings. And of course, of course we will not interrupt our ongoing new product development efforts. There are numerous other initiatives that I will discuss at a later date at other conference calls.

At LSB, we have historically made our decisions based on a long-term perspective when we have been able to do so. We will continue to do what we believe is in the best long-term interest of our shareholders. I will now turn this conference over to Tony for our financial review.

Thanks, Jack, and good afternoon. We made our earnings announcement approximately one hour ago, reporting diluted earnings per share of $0.16 for the fourth quarter 2008 versus $0.20 in 2007 fourth quarter. The details of the fourth quarter 2008 compared to the fourth quarter 2007 were; sales rose to $179.5 million up from $134.7 million, operating income declined to $1.8 million from $11.2 million, net income applicable to common stock was $3.6 million compared to $4.5 million, diluted earnings per share were $0.16 versus $0.20 for the same quarter, consolidated EBITDA was $11.7 million compared to $15.3 million.

Before proceeding to review the full-year results, there are some significant unusual items in the fourth quarter of both years, affecting the comparability of operating income and net income that requires [expiration]. As mentioned, GAAP operating income declined from $11 million to $1.8 million. However, included in the fourth quarter, 2008 were two loss items totaling $7.2 million that are due to the steep decline in commodity prices and the effects of the general economic slowdown. There were two loss items in the fourth quarter totally $7.2 million.

In 2008, unrealized losses on commodity contracts still held at year-end were $3.6 million. Chemical was -- the chemical commodity losses were $3 million and climate controlled copper hedges were $600,000. The second writedown was chemical inventories to lower cost to market and it was also $3.6 million. Those two items totaled about $7.2 million in our fourth quarter.

Additionally, in 2007 -- the fourth quarter of 2007 included a net $2.1 million resulting from a $2.3 million gain from a business interruption recovery. The $7.2 million in the fourth quarter of '08 writedown, plus the $2.1 million gain in the fourth quarter that was nonrecurring would be a total of $9.3 million of unusual nonrecurring items negatively affecting the copper build of the two quarters. Excluding the unusual items from the fourth quarter 2008 and from the fourth quarter 2007, the pro forma operating income for the 2008 quarter would be approximately the same as in 2007. We will discuss the sales and operating income relationship later in the call when we review the results of each business segment.

Pretax income for the fourth quarter of 2008 was $2.5 million, compared to $8.1 million or a decline of $5.6 million. The $2.5 million pretax income is after the unusual losses of $7.2 million, in addition to a $3 million loss on interest rate hedge positions which is included in interest expense, partially offset by a $5.5 million gain from the repurchase of a portion of the Company's subordinated debentures.

Comparability of the net income between the two quarters was also affected by income taxes. We recorded a tax benefit om income of $1.0 million in the 2008 quarter, whereas we had a tax provision or expense of $3.6 million in the 2007 quarter. The benefit in the fourth quarter of '08 consisted of a tax provision at statutory rates, offset by state tax credits, certain true-ups for the actual tax for 2007 after the returns were filed, and a $1.3 million deferred tax asset for state net operating loss carry forwards, not previously reflected. Income taxes are fully explained in our 10-K which I believe is being filed as we speak. Our Climate Control business performed well during the fourth quarter. $81.8 fully explained in our 10K which I believe is being filed as we speak.

Our climate control business performed well during the fourth quarter. Climate control sales of $81.81 million were 25% higher. Operating income increased 25% to $7.9 million. And EBITDA increased $8.7 million, compared to $7.1 million in 2007's fourth quarter. For the fourth quarter, chemical reported sales of $94.8 million, compared to $66.4 million. However, chemicals reported operating income decreased from $7.9 million to a loss of $3.1 million, and EBITDA decreased from $10.1 million to an approximate breakeven. Both decreases due to the unusual loss items mentioned earlier and certain other higher costs in 2008 for maintenance turnarounds in the quarter.

Turning to the full year 2008 as compared to 2007, sales were $729 million, up from $586 million. Operating income was $59.2 million or approximately the same as $59 million in the prior year. Net income applicable of common stock was $36.2 million, compared to $41.3 million, a decrease of $5.1 million. Provisions for income taxes in 2008 were $18.8 million as compared to only $2.5 million in 2007. During 2007, we were able to utilize net operating loss carry forwards, however, in 2008 we were taxed at full rates.

Diluted earnings per share were 1.58 versus $1.84 in 2007. Consolidated EBITDA was $80.8 million, compared to $73.7 million in in 2007. For the full year, our climate control business improved both its top and bottom line. Sales were up 9% to $311 million.

Segment operating income was up 14% to $38.9 million and EBITDA was up 13% to $42 million. The chemical business also had higher sales at $424 million for the full year, a 47% increase. However, both the segment operating profit and EBITDA were lower than 2007. Operating income was $31.3 million, a 10% reduction and EBITDA was $41.8 million, down 6% from 2007.

Moving to the balance sheet, we were able to repurchase 19.5 million (inaudible) amount of our subordinated debentures due 2012 for $13.2 million and recognize a gain for the extinguishment of debt of $5.5 million, net of $800,000 unamortized debt issuance costs associated with those subordinated debentures. Our current liquidity and capital resources reflect a sound management position. At December 31st, 2008, after the repurchase of the debentures, our long-term debt was $105 million and stockholder to equity is $130 million. The long-term debt to stockholder equity was approximately 0.8 to 1.

Cash on hand at December 31st was $46.2 million and is currently approximately the same amount. Our borrowing availability under our $50 million working capital revolver was and is $49.5 million. Based on our present national position and our business plan, we have adequate working capital to finance ongoing operations as well as organic growth opportunities. We do have or plan to finance certain of our planned expenditures.

For 2008, net cash provided by operating activity was $32 million after income taxes of $18.8 million, and after increases of $16.5 million of receivables and inventories. Cash used for capital expenditures was $32.6 million. We used cash of $13.2 million to repurchase the subordinated debentures and $4.8 million to purchase 400,000 shares of our common stock in 2008. Including those and other sources and uses of cash, net cash for 2008 was $12 million. The $32.6 million capital expenditures include $8.7 million for climate control and $23.6 million for chemical.

For 2009, we are -- we have planned capital expenditures for both our climate control and chemical business that would utilize a significant amount of our existing cash on hand if not separately financed. At this date, we have planned capital expenditures of $16 million in our chemical business for process and reliability improvements and $13 million in our climate control business, primarily for production equipment and facilities upgrades. If we restart Pryor, we'll spend another $6 million to $8 million on capital equipment. We will continue to monitor our business activity level and to the extent possible, adjust our capital spending appropriately.

In addition, as has been widely and frequently discussed, we are considering acquisition -- of the activation of the Pryor Oklahoma facility. At December 31, we had committed capital expenditures of $2.9 million for Pryor. If we proceed with the start-up, we anticipate spending another $13 million to $17 million to complete the start-up, including the $6 million to $8 million for capital expenditures and about $7 million to $9 million expenses as incurred.

If we do restart Pryor, the $7 million to $9 million that will be expensed before that business generates income, will affect our results from ongoing operations during the first three quarters of 2009 and until Pryor uses up the money. This year in quarterly reports and conference calls, we will keep you updated with this potential start-up. That concludes the financial review. Barry will now cover operational highlights and the outlook for the Company.

Thanks, Tony. Before I get started today, I wanted to say that this operational review is going to be a little longer than usual. Because of the volatility in the economy right now, we've spent more time discussing what's actually going on in the markets than we usually do. It will be a little more extensive in that area of the review.

First let's talk about the climate control business. As Tony mentioned, our climate control business sales during the fourth quarter were higher than the same period last year by about 25%. Total heat pump sales were up 45%, fan coil sales were down 13% and sales of other products and services were up 27%.

As discussed in prior conference calls, our shipments in the first half of 2007 were unusually high because we were in the process of working off excessively high backlogs. Despite these high sales levels in 2007, our 2008 sales were still higher than 2007 by 9%. For the full year, heat pump sales were up 16%, fan coil sales were down 3% and other sales were up 4%.

New product orders during the fourth quarter were $59.1 million, a 10% year-over-year increase and a 42% decline from the third quarter. For all of 2008, our order intake was $305.9 million, up 27% over 2007. However, as discussed earlier, there was a drop-off from Q3 to Q4.

The fourth quarter is unusually weak for new orders in our climate control business, however, we feel is usually weak for new orders in our climate control business. However, we feel that in 2008, the expected lower fourth quarter bookings were further reduced by the general weak economic condition. I will discuss this in more detail later.

We ended the year with a backlog of product orders of $68.5 million, down from$85.8 at the end of the third quarter and up from $54.5 million at 12/31/07. I'm glad to report that as of the end of 2008, we continued to maintain leading market shares for geothermal heat pump and for hydraulic fan coils. Our gross margin during the fourth quarter of 2008 was 30%, up from 28.6% for the same period in 2007. For the full year 2008, our gross margin was 31%, up from 29.2% in 2007. During 2008, we had gains from copper hedging of $1.3 million in excess of gains during 2007, and this accounted for approximately 25% of the gross margin percentage improvements.

With regard to raw materials, copper, steel and aluminum, since our last conference call, we have seen considerable downward movement. Market prices declined through the fourth quarter; this continued into the beginning of 2009. We will not realize the full impact of these cost increases during 2009 because during 2008, we bought ahead to a certain extent, as we usually do, to ensure a supply of materials for our operations. In addition, the market is extremely competitive at this time and again, this could adversely affect our selling prices and offset savings made from lower raw material costs. We continue to watch commodities very closely and to hedge when we believe it's appropriate.

During the fourth quarter, our operating profit improved substantially over the fourth quarter of 2007. It increased 25 %, the same rate of growth of the sales during the period. For the full-year 2008, our operating profit increased 14% over 2007 to $38.9 million. The primary cause for improvement during 2008 was increased sales and profits in our heat pump business.

A key question that we are asked frequently is what is the outlook for construction, both commercial and residential. Due to the trauma caused by the worst financial crisis in decades, which is still unresolved at this time, the availability of credit to our customers going forward is still in question. With the assumption that credit availability will stabilize at some point, and investor confidence will also improve at some point, I will attempt to discuss the current outlook. McGraw Hill Construction Research Analytics, a construction market forecasting service, released its spring construction outlook in late January.

To quote some highlights from the McGraw Hill report; and I quote, the dire state of the economy, continued and (inaudible) and credit markets, an inability of housing markets to find bottom has combined to downgrade the outlook for construction. Continue to quote, the American Recovery and Reinvestment Act of 2009 will have a positive impact on construction starts during 2009, but will not come early enough or be broad enough to bring the market into positive territory. On a positive side, the housing market is expected to reach a trough by the end of 2009. Finally, the economic recession and credit market crisis will pull down this year's nonresidential construction starts. Much of the decline will come from commercial building. Institutional building starts will also pull back in 2009, but by a more modest amount than either commercial or industrial construction, thanks to the stimulus packages, initiatives for education and dorms, as well as transportation and public buildings. That's the end of the quote.

At LSB, we believe that there are certain provisions of the stimulus package that could have a direct effect on the sales of geothermal heat pumps and other products that could be used for education, dorms, public housing, military bases and other government buildings. I will discuss this in more detail later.

The vast majority of our climate control business sales are to commercial and institutional, new construction, renovation and replacement. For 2008, commercial and institutional sales accounted for approximately 81% of total climate control business sales. 52% of our total climate control business sales were used in offices, hotels, educational facilities, health care, retirement facilities, manufacturing, process plants, apartments and condominiums. In the same report that I was discussing before, in McGraw Hill's current outlook as reported in the spring edition said that for those specific buildings types just listed in the aggregate, there'll be a decrease of 17.5% in 2009, followed by increases of 4.6% and 12.8% in 2010 and 2011. That's a decrease of new contract awards.

These numbers represent a significant downward revision since the last conference call. The reduction from the prior year is approximately twice as much as they were looking at a quarter ago. In addition to the McGraw Hill forecast, we also looked at the Architectural Billings Index which in an indicator of future construction activities nine to 12 months in the future. For the past few months, ABI, as referred to, has been at an all time low since the inception of the index in 1995.

In addition to looking at outside surveys and indexes, we also of course, consider direct input from our salesforce. Right now, the reading we're getting from the salesforce is that there is a pipeline of construction activity at various planning and design phases, but that certain markets have been hit very hard. In addition, there is a hesitancy by developers to proceed with new projects and some projects have been put on hold or cancelled. Importantly, our order level for the first two months in 2009 has been very low, averaging $16.2 million per month. Considering all of these inputs, we believe that sales in 2009 will be lower than 2008, but we can't actively forecast to what extent at this time. The level of commercial construction, the primary driver of new orders for our climate control business, will largely be determined by what happens in the credit markets and the competence level of builders and developers.

Because it is an area of importance to many of you, I would like to discuss our residential geothermal sales. Stating the obvious to describe the dismal situation in the single family residential construction market, according to McGraw Hill, there was a 29% decline in 2008 following a cumulative decline of almost 40% during 2006 and 2007. McGraw Hill's forecasting another decline of 18% in 2009.

It's important to focus on the fact that in 2008, our sales into the single family residential market, which for us is all geothermal heat pumps, represented only 19% of climate control business sales, which up substantially from 11% in 2007. Despite the lagging residential market that I just described, our fourth quarter residential geothermal sales increased 157% over the fourth quarter of 2007. For the full year, residential geothermal sales were up 82%.

Even more encouraging, were bookings for these products. During the fourth quarter, they were up 138% over the same period last year. For all of 2008, our residential geothermal bookings were up 147%. To put it another way, our single family residential geothermal new order level during 2008 was up approximately 2.5 times over the 2007 levels, all in the face of a US housing market that has been decimated.

Here are some other interesting metrics about the geothermal market. In 2005, the total geothermal market in the United States was approximately 40,000 units per year, about two-thirds of that, residential and one-third, commercial and institutional. The market doubled to about 80,000 units in 2008. During that same timeframe, the total US shipments for conventional [unitary] air conditioners and air source heat pumps declined 32% from 8.5 million to 5.8 million units per year, according the the Air Conditioning, Heating and Refrigeration Institute. The two key takeaway points from this are, first, so far geothermal heat pump sales have busted the downward trend in both construction and conventional unit sales. And second, the size of the potential market for this product is huge.

As I reported during the last conference call, the Economic Stability Act of 2008, also known as the $700 million bailout package that was enacted in late October, included certain tax incentives designed to encourage the purchase of residential and nonresidential geothermal heat pumps. The residential credit capped $2,000 for installation and federal tax credits for businesses equal to 10% of the total system costs for nonresidential systems. These were enacted very late in the year and at a time when construction is at a seasonal low level during the winter weather. There was very little discernible impact during December for the first two months of 2009.

However, in February, the President signed into law, the huge economic stimulus package, formally known as the American Recovery and Reinvestment Act. This law extended the tax incentives for businesses that were in the earlier law, eliminated the $2,000 cap for residential geothermal systems, bringing the individual tax credit up to 30% of the total installed system costs. And it also included provisions for several billion dollars of federal spending on construction with an emphasis on energy efficiency upgrades to existing buildings.

Some highlights are tax credits, both personal and business, will stay in effect for eight years. These tax credits can offset both regular and alternative minimum tax liabilities. The Bill also includes 50% first year bonus depreciation for businesses. The Bill also provides -- property which is described as energy property, including geothermal heat pumps as depreciable over five years. Small businesses can write off up to $250,000 of capital expenditures in the year the money is spend. And finally, over $75 billion of direct spending or programs related to building construction or renovation, many focusing on energy efficiency upgrades. In addition, many states have incentives at this time and we are hopeful that spurred by the new federal legislation, others will get on board and states that currently have incentives will increase them.

We believe our geothermal products are an important part of the solution to the environmental and energy issues facing the country. We remain very optimistic about the long-range growth potential for these products. Whereas our historic business model hasn't been predicated on any tax incentives, we certainly plan to take advantage of these to the extent possible and promote sales of these products.

To that end, we have substantially intensified our sales and marketing programs for geothermal products and will continue to do so. We also are preparing our manufacturing facilities to handle any increased volume that may result from these efforts. In the last two years, we have doubled our heat pump manufacturing floor space, and added production equipment and we are in the planning stages for another significant plant addition of 78,000 square feet. We have also doubled the capacity of our air coil manufacturing facility and are planning another expansion to that facility to allow for additional growth and increase in operation efficiencies of that operation.

Turning to our chemical business. As Tony reported, this business got off to a great start in the first half of the year, but hit road bumps in the third quarter. It was severely impacted by the worldwide economic crisis in the fourth quarter. The volatility in commodity prices and generally low confidence levels both impacted this business sector.

During the fourth quarter, total sales of our chemical products were up 43% over the fourth quarter of 2007. The increased sales were driven by substantially higher raw material costs that translated into higher sales prices. However, gross profit and operating income were down.

Gross profit decreased from $11 million in the fourth quarter of 2007 to $800,000 in 2008. And operating income decreased from $7.9 million in 2007 to a loss of $3.1 million in the fourth quarter. Backing out the $6.6 million impact of the unusual loss items Tony discussed in detail, operating income from the 2008 quarter would have been $3.5 million.

During the fourth quarter, we were in a very volatile market as the following information will indicate. During the fourth quarter, our shipped tonnage of UAN fertilizer, urea ammonium nitrate, was 17% and our revenues from these sales increased 103%. The published sales price per ton as quoted in green markets for the southern plains during the fourth quarter ranged from $260 to $485 per ton. This compared to a range of $270 to $$365 a year ago. The average sales price per ton for was slightly higher than two years ago and natural gas prices were approximately the same, resulting in improved margins for UAN. Currently, the published prices for UAN are $230 to $250 per ton while the nine [inch spot market] natural gas price is approximately $4 per MMBtu.

Our revenues for ammonia nitrate fertilizer were lower than the fourth quarter of 2007 by 10%, reflecting increased sales price per ton, but lower tons shipped in 2008. During 2007, the green market southern plains range of public prices for AN was $315 to $365 per ton, compared to $275 to $570 in 2008. The price of [am nit ammonia] to raw material beef stock for our El Dorado facility, which manufactures this AN, escalated significantly during the first nine months of the year after being relatively stable during 2007. Published prices at the Tampa price point increased from an average of the mid-$400s per metric ton in January to a range of $585 to $931 per metric ton during the third quarter.

Since that time, ammonia has tumbled. And during the fourth quarter, the published price declined from $931 to $135 per ton. Today's price is $275 per metric ton. Remember that the majority of El Dorado sales are to customers who accept the cost of ammonia as a pass through.

The global grain stock to demand ratio, including corn and wheat, are still at very low levels and are driving the demand for nitrogen fertilizers. These favorable supply demand fundamentals wer the catalysts for significantly higher fertilizer selling prices and better margins in 2007, which continued into the first part of 2008. However, during the third and fourth quarters, there was a sudden price drop for most global commodities and the price of fertilizer in the market also declined. Fortunately, the price of both the feed stocks we use, anhydrous ammonia at El Dorado and natural gas at Cherokee, have also declined and we're able to produce our fertilizer products at profitable levels at current market prices.

Summarizing what has happened in the ag market for products in 2008 and current outlook, this is our perspective. This is a complicated scenario that occurs this year. We're taking extra time to try to explain it to you in great detail.

At the beginning of the third quarter, prices for UAN which we produced at Cherokee Alabama plant climbed to record high levels, approaching $500 per ton. This was driven by the perception in a market that worldwide demand exceeded supply for urea and that grain prices would remain high. As urea prices rose, this had the effect in the market of driving up the other nitrogen product prices, including UAN. During this period, the distribution chain, distributors and dealers, loaded up with very high levels and high priced inventory.

At the time urea and UAN prices were increasing, the costs of other fertilizer nutrients also increased dramatically. Prices of fertilizers became so high that farmers and ranchers reduced or curtailed fertilizer applications. During September and October, prices of nitrogen fertilizer began to fall at a very rapid rate as grain prices also began to decrease. Going into the fourth quarter, the distribution chain was loaded with inventory it had purchased at very high prices and which was losing value quickly.

The decline in fertilizer selling prices and inventory value continued throughout the fourth quarter. By the end of the year, UAN published prices were $230 to $250 per ton. Our tons shipped were actually up in the fourth quarter over the same period in 2007, but this was driven primarily by prepurchases made in the third quarter for delivery in the fourth quarter. Generally in the industry at large, fourth quarter was not a good quarter for forward UAN sales. In fact, several of our competitors reduced or curtailed production during that period.

Going into 2009, this is our current view of the situation for UAN. UAN prices seemed to have bottomed out and stabilized. Currently the price is $230 to $250 per ton. There'll be slightly less acreage planted in 2009 than 2008.

According to recently published USDA forecast, corn will be the same as 2008, 86 million acres. Wheat will be down 8% from 63 million acres to 58 million. Cotton will be down 11% from 9.5 million to 8.5 million. The total combined acres planted for these crops will be down 3.8% from 158.5 million to 152.5 million acres -- 152.5 million acres.

Preplant nitrogen applications in the fall of 2008 were lower than usual so more nitrogen will be required during the growing season. This could compensate to a certain extent for lower acreage planted. We expect during the spring fertilizer sales season, we'll get off to a late start until the pipeline of our inventory is depleted. We expect that after the late start, the demand will be strong, given reasonable weather conditions. At current market prices for UAN and costs for natural gas, beef stock to make the UAN, we can operate our UAN plant profitably at a reasonably full rate of output.

Turning to ag grade ammonia nitrate, which we produce at our El Dorado plant, in 2008 there was an excess of imported AN relative to market demand. As a result in the spring planting season, there was too much AN available. This year, there are fewer imports so the market supply and demand fundamentals are much more favorable for US producers of AN.

Based on the current outlook, and again assuming acceptable weather conditions, we expect to run at full capacity through the spring season. Current pricing for AN is $260 per ton FLB production point. Again, at current market prices for AN, and in costs for anhydrous ammonia, we can operate our AN plant profitably at a reasonably full rate of output.

Okay, we're almost done. Focusing on our industrial chemical products, based on the general economic conditions, we're anticipating softening in demand. We believe that many of our customers are in a wait-and-see mode with regard to their production levels. However, we believe that in the long run, there will be steady demand for both our industrial acids and our industrial grade ammonia nitrate used for surface mining.

In the meantime, most of our chemical businesses, industrial and mining sales, which were 63% of total chemical sales during 2008, are pursuant to cost plus arrangements with our customers assuming the feedstock cost fluctuation risks. This eliminates much of the risk of a disconnect between raw material costs and the market prices for our products. Approximately 85% of the industrial and mining business is sold pursuant to agreements that have either minimum purchase requirements or a fixed total contract profit, irrespective of volume taken by our customer. To that extent, we're insulated from a potential downturn in demand for our industrial chemical products.

Summing up, both fourth quarter and full year climate control business sales and income were up. New orders were very strong through the third quarter, declining in the fourth quarter. Generally, indicators are negative for commercial construction. The future of credit availability, coupled with the level of uncertainty about the future, the future could adversely affect our commercial business.

As in most soft markets, the competitive environment in our commercial business is intense. We are particularly glad to see strong shipments in new orders for our geothermal products which have so far bucked the trend. We believe the recently enacted federal incentives will help our geothermal sales and that planned government spending to modernize buildings could benefit many of our products. Whereas the short-term outlook is hard to predict, we're very excited about our prospects for growing all of LSB's climate control businesses and particularly our geothermal heat pumps over the long-term.

Turning to chemical, 2008 sales were up, but profits were down, primarily as a result of the unusual items we discussed. The ag market was very volatile in the second half the year, but seems to have stabilized. We believe the long-term outlook for our ag market is good because of the continuing demand for corn crops we believe will be strong. At this time, both sales prices for ag products and feed stock costs are lower than in the first half of 2008, however, the current sales price results in positive cash margin.

Our industrial chemical business demand has declined due to general economic conditions, however, we're insulated from this due to the reasons I just discussed. This business should remain profitable as long as we run our plants at economic levels. Finally, we should make a -- we should make a decision about whether to proceed with the start-up of Pryor very soon.

That's really the conclusion of the operational review. But before we take your questions, Jack, Tony and I and the rest of LSB senior management would like to acknowledge and thank the nearly 1900 employees we have who make up the LSB team for their contribution in making 2008 the success that it was. With that, we will open up the call to questions.

(Operator Instructions). Our first question comes from the line of Steve Denault with Northland Securities.

Hi, Steve.

How are you? First question. Did I hear you correctly, you said geothermal revenues were 19% of the fourth quarter --

They were 19% for the full year. Climate control business, that's the residential geothermal only. It does not include the commercial geothermal part.

Which is another what?

I don't have that number exactly in front of me. Probably about another 5%.

Okay. And you made two comments (multiple speakers) Okay.

Two-thirds, one-third, usually.

Okay. The comments about Pryor, are you incurring expenses in the first quarter here as a result of the start-up or plant start-up?

Yes, we are.

What did you say? What it a couple million dollars that you --

For the fourth quarter?

For the first quarter.

We're -- probably a little bit $400,000, $500,000 a month.

From a hedging standpoint, both natural gas and [confirming] -- being that we're almost finished with the first quarter, what do you think the net impact will be there?

For the first quarter?

Yes.

We can't really comment on that, Steve.

Okay.

As Barry indicated, we have a natural hedge of about 63% of our chemical business. Copper prices have moderated. We can't comment on what our first quarter numbers look like.

How well hedged are you on natural gas?

We're not hedged on natural gas.

Okay. Good.

We have a natural hedge. Because this 60-odd percent of our product passes through the price of gas, then that's a hedge that we don't have to put on. We're only concerned about the balances -- say 35%. And to that extent right now, we're not hedged.

On the Ag side, as I mentioned, on derivatives that we hold at year end, we took a $3.6 million writedown -- adjustment and mark to market. Those are primarily for customers that have -- we have locked in margins based on those hedges. Primarily utility companies that cause regulatory issues don't do their own hedging, so we do on this end. But they are done, as we indicated, to lock in margin on subsequent orders to be shipped.

Okay. And if I just -- if I switch back to climate control again, you've got obviously a nice secular trend here on the geothermal side. Do you continue to believe that can be a $100 million business next year?

I don't think I said it would be a $100 million business last year -- this year -- next year. We've never made any forecast as to the size of the business because that's our long standing policy, not to make any forward-looking statements or forecasts about the future business level of the business.

I was just referencing your comments or question on the last conference call that was asked.

Steve, as you know, we can't provide guidance and we don't.

Okay. We can make some assumptions about what we think geothermal will do next year. You're still adding capacity in the hydronic fan coils?

No, I didn't say that. I said we added capacity for our coil operation which makes air coils for both our hydraulic fan coil business and our geothermal business and our regular water source heat pump business.

Okay.

We have one plant that supplies all three of those businesses.

Okay. Do you think it's safe to assume, although you have energy efficient offerings on the non-res side that you would follow expectations -- McGraw Hill expectations for nonresidential starts next year?

I think everyone is going to be subject to what happens in the market. But as to whether we're going to follow them at exactly -- really depends on a lot of factors. As you said, there is this secular trend toward more energy efficient products. We have extremely energy efficient products.

We believe that in the era that we're in now, that gives us a leg up, relative to other system types that are not as energy efficient. It is possible and I'm not forecasting this, but it's possible to see that the market share of those products could increase relative to other types of products for the business level that's out there. Historically, we've seen that to be the case, but I'm not forecasting that will happen. I'm just saying that we are not necessarily bound into a direct relationship with what goes on with construction starts. We view those McGraw Hill numbers as an opportunity. The question is, how much of the opportunity can our people grab onto.

Okay. We you make reference to the expansion of the geothermal facility, I think it's some 70,000 square foot expansion.

78,000.

What does that translate into in terms of total capacity expansion from a through put standpoint?

I don't have that number. We're not looking at it exactly that way. It's to facilitate future expansion when we need it. It will have to be -- do a little reconfiguring in the operation. It gives us the ability to further expand that operation as we go beyond the current expansion capability. The answer is, I can't give you a direct answer. I do not have a direct percentage answer to your question. Steve, we have to have the facility available to grow into as the business moves up. Yes. Another way of looking at this is, that as you're operating this business, there are things we can react very quickly to. We can add assembly lines, we can add fabrication equipment on very short notice as we watch the business level. The one thing that's out there that has a significantly long lead time for growth is real estate -- is square footage. We're put ting it in place to enhance and facilitate efficient operation at our current volume and to give us the room to grow into as we go.

Okay. Fair enough. Thank you.

Thanks, Steve. Thanks Steve

Our next question comes from Eric Prouty with Canaccord. Please state your question.

Just -- the question on the backlog number was -- in climate control, was that $68.5 million? I'm wondering is there any geothermal backlog or -- ?

We do have a geothermal backlog, but we do not break it out and disclose it for public consumption.

Could you say just generally whether it was up or down?

I think it was -- I'd have to go check my numbers, but when you look at the order input level -- look at the order input level. But we're not going to disclose the specific level. That's information our competition would love to have.

Okay. Fair enough. Second question is, I was wondering if you could comment then on the trends in the geothermal heat pump business so far in the first quarter. particularly in the commercial retro fit market.

In the commercial retro fit market. I don't have a specific breakout number for commercial retro fit available to me as we sit here.

I'm not looking for a specific number, just any trends you're seeing.

The trend is down. The general market, the general market is down. If you look at the -- as Jack said, but -- to give you a subset on that particular subset that you asked for, I just don't have that information.

The market that we expect the stimulus plan to have --

Typically on the breakout between retro fit and new construction, we don't really track that on a monthly basis because it's not meaningful on a monthly basis. We typically don't look at that until the end of the quarter. That's why I don't have that information. Because the way the orders happen to flow is very lumpy from a month to month basis.

Okay. Fair enough. Thanks a lot .

Thanks, Eric. Thanks, Eric

Our next question comes from of Rick Hoss from Roth Capital Partners.

Good. Good afternoon, gentlemen. On the new retro fit breakout, I think you had mentioned two-thirds, one-third and that's new construction versus -- I'm sorry, that is residential versus commercial, correct?

In the past, what we've said is that, generally, for the commercial business, that what we've seen in the last few years has been that about 70% of the new business has been for new construction and about 30% has been for retro fit. But we've also said that historically in past down economic cycles, when construction wasn't as robust as it has been in the last three years, we've seen that percentage much higher, approaching 50% of the business. That's for commercial. Does that answer your question?

I think so. That would be -- is that due to a function of new coming down that much or retro fit going up?

It's actually a combination of both. What happens typically, there'll be an increase of renovation and retro fit activity during a down cycle. Historically, that's the way it has been. I don't know if that's what will happen in this cycle. Historically that's what's happened. It's a combination of the two things.

Okay. What about the lagging effect of the incentives? We saw -- in Canada we saw, incentives of similar magnitude and it seems like there was maybe six to nine months before it really picked up steam. Do you see the US market as demonstrating a similar lag?

There will definitely be some kind of lag. It's hard to draw a direct parallel between the US and Canada. It's for this reason. Canada there was a tremendous amount of red tape involved. First of all, the installer had to be certified to be qualified -- to be eligible to get the credit you had to have it done by an installer with a certain certification. Then in addition to that, the red tape from a tax standpoint and form of all this, I understand was substantial.

In the United States, there is no stipulation as to the installer, having any special certification other than the normal -- normally we train our installer very well, et cetera. Also, there is just one tax form. It is a special form. They had published it for last year and I don't know if it's published yet for this year.

You could download it off the internet from the IRS website and fill it out. It's very simple and get your tax credit. I would expect there to be some lag, not as much as Canada, But that is just a speculation on my part because of the circumstances I just described. Rick, I think the biggest lag will be in everyone learning about it. Not everybody's focused on it. As analysts have focused on it, people in the industry have focused on it, but users are not all focused on it yet.

And that's always been the challenge with geothermal, correct -- ?

Yes. Yes.

What about -- on the chemical side of business -- this would be for Tony. Pryor, you had talked about previously funded with a combination of debt, cash on hand. I think earlier you may have mentioned it will be all cash on hand. Is that correct?

Yes. Probably will be all cash. Most of it.

I think if I remember correctly in the last conference call, you talked about some of the fertilizer inventories I think out of Cherokee hadn't shipped. And there was still this latent inventory that you were expecting it to still ship out in the fourth quarter. Is that all gone?

Yes.

Okay.

We had some slow barges that have since gone out.

On the assumption of lower feed stock prices throughout 2009, factoring in a lower demand from your industrial customers, is it safe to assume that your gross margin and your operator margins on a chemical side of things, all else being equal, should show improvement?

Would you repeat that?

Margin percentage -- you're saying -- let me make sure we understand. You're saying that since we have cost plus arrangements and with the feed stock cost down, the selling price will be down. But since the margin is on a per ton basis, not as a percent, we would see the percentage of gross profit increase relative to sales. Is that what you're asking?

Yes. Yes. Or even just operating income as another way to filter down further with a gross dollar profit factored into 65% of the chemical business. The assumption is your operating margins will be up.

There's a couple things that really affect that. The primary thing is selling the processed plants out as practical capacity as opposed to running the turn down rate. If we're able to keep the plants running at what we would consider a practical capacity level, and if the mix of ag and industrial remain about the same, 63/37%, we should see and if raw material inputs stay down, we should see percentage improvement. We're not forecasting that, but logically that follows.

And last question. I don't have an order volume for climate control for the fourth quarter to compare -- fourth quarter '07 to compare to fourth quarter '08.

I have that. I said what it was. It was -- I think if I look back at my numbers, I believe it was $54 million in '07. Just give me a second.

Okay. I have a backlog of $54.5 million.

By -- it was normal. Those two numbers -- by coincidence are the same. The bookings end up fourth quarter of '07 were $53.9 million and change, as opposed to the backlog which was $54.5 million.

Perfect. Thanks a lot, gentlemen.

Your next question is from Dan Mannes of Avondale Partners.

Hi Dan. How are you?

Good afternoon, everybody. A couple quick follow-up questions. The first one, just on Cherokee, given the issue at the metric acid plant, can you give us any update on where that's standing and if the repairs have been completed.

The one (multiple speakers). That was a fire in the number one acid plant. That is not been repaired yet. They're still trying to determine what the cause was. It had to be sent out to the experts to be analyzed. It's not affecting us because that acid plant was really a back-up for the main acid plant. And the main acid plant is able to produce all we need. We haven't been able to get that back-up plant in operation. However, we went the last two years without that back-up plant in operation before we had it rebuilt -- it was rebuilt before we had this fire. We've gotten along without that plant for a couple years. We had hoped to have it for some extra volume, but we're not going to have it for awhile.

Couple other points, too, is that we have the capability to ship acid from other plants.

We're shipping from our other plant if we need to.

And Dan, keep in mind that the business interruption and extra expense kicks in after the first 30 days.

Got it.

A lot of the delay is because we're seeing very costly and carefully with the insurance companies so that we optimize our outcome.

Okay. Second question on Cherokee. This relates to Q4, if memory serves, you guys took a fairly sizeable maintenance outage in the fourth quarter of '08 as well as in the fourth quarter '07. Can you give any indication on the relative increase in cost year over year in the quarter?

You mean due to the maintenance outage?

Exactly. How much more expensive was the '08 maintenance outage versus '07 in the fourth quarter?

Maintenance outage? You mean turnaround? Are you talking about in October?

Turnaround. Sorry, different lingo, same question.

Fourth quarter. For the chemical business as a whole, not just for Cherokee, but for the chemical business as a whole we expense our turn-arounds as they're incurred. We believe that the turnaround costs were close to $6 million this year versus about $3 million last year in the fourth quarter. I think that's in our 10-K results of operations.

It is. Tony, you might want to explain to some of the listeners as to why there's a variance from year to year in the turnaround.

Well, you don't do a turnaround at exactly the same time every year, and sometimes will you run 16 or 18 months versus 12 months, sometimes 24, so it is really timing, and you try to do the turnaround at the most optimal time, and sometimes it's just -- it's due to your scheduling. So it's not automatically in the same quarters each year.

And if I remember right, actually Cherokee started early. That started in Q3 this year.

That's right. Because the down time we had in the third quarter, that's correct.

You are right, Dan.

Got it. One last question on chemical, then a quick question on climate. As it relates to Pryor, you guys are now spending, by tone anyway's estimate, about 500,000 a month. How long can you wait before you make the decision? I know you said it would be quite soon. And what is the impetus on the people maybe you are negotiating with for the contract that would sort of require them to make a decision soon? There the risk is dragged out for a couple quarters.

First of all, we have more than one company that has said that they would like to do a deal with us.

Okay.

And we are negotiating with these companies. We're always looking at that versus other options that we have, and we want to get an agreement that is satisfactory to us that we feel comfortable with. We have to have something in place in the next 45 days.

Okay.

And the reason Jack says that is because we need to start preselling for the fall. Any long lead time equipment you need to order? Is that another constraint? Everything that's needed has been ordered.

Really. Oh, that's the three million that is already committed of capital?

Yes.

Perfect. Then just one last question on climate. Focusing on the residential geothermal side, since you guys use a good number of distributors, do you have any -- do you have any visibility into what the inventory levels were of the distributors, i.e., with some of the order level you've seen over the last quarter or two stocking, or is this a fairly normal level of inventory of the distributors that sort of equals --

I don't believe at this time that any of the -- I have to qualify that and say that a significant number of any of the orders that we receive were due to increasing their inventory levels. Of course, we have a fairly close read on that, but we don't get 100% read from each one of our distributors.

I guess the question isn't so much -- not so much that they're building up inventory but more maybe they're restocking, if the majority of the sales occurred in Q3 or Q4, are they just refilling, then if sales are slow at the end will that sort of back things up, I guess where I'm going.

That has the potential. If sales to end users slow down, then eventually it backs up to the factory. Hey, Dan, you struck a point that's -- that's been tension between manufacturers and distributors forever. Manufacturers like to know exactly what's in distributors' inventory, and distributors don't want to tell them.

Okay. Great. Well, thank you very much.

But we kind of watch this very closely to the extent that we can, and we interface back and forth to try to get a sense of what the distributors are going to be doing.

Okay, makes sense.

Dan, thanks a lot.

Our next question comes from Steve Burn with Merrill Lynch.

Yes, Steve.

Can you tell me what's the logic behind needing a strategic partner for distributing the UAN out of Pryor versus setting yourself?

That's a good question. The logic is that we wanted to assure ourselves that we had full sales -- we wanted someone that was going to take or pay for a certain -- for the whole quantity, and we did not want to go to the -- go to the point of having to set up the sales organization, which we have in place, but would need expansion if we were going to do it ourselves. But it's something -- we'd have to get the railcars ourselves, but all of that is possible. And if we couldn't get a satisfactory agreement, that would be our option.

And so how do you set price with this partner, and for what duration?

Well, you set it at market price. It changes all the time. No one is going to be able to sell it above market price. You have to go by market price.

And so how far forward would you sell to them? I mean, you need to make decisions on when to buy gas and --

Let me explain to you how it works. I'll just take a minute. If I'm a customer and I want to buy today, for a shipment four months from now, I want to take it four months from now, I put a deposit down, and I say, fix the price to me today, and I price it to you at what I can fix the cost of my raw material at today, which is gas, and that's called a hedge. And I will hedge the amount of gas needed for your order four months out. Four months out, I'm expecting gas is going to be $5. I will fix, and if that's what they're quoting in the gas market, for four-month out gas, I will fix the price at $5 at my cost and price the product to you today at that price. But I will have to hedge it. In other words, I will have to fix the price of gas. Now, that hedge might turn out to be a winner or a loser, but I don't care, because if it's a loser, I have fixed the price, and I make up a bigger profit when I sell it than I do -- than I plan on making to make up for the hedge. I don't know if I'm explaining myself right.

No, no, I certainly understand. It's a forward pricing program, and --

So I can fix the price any month I want as long as a customer is willing to pay my quoted price, based on what I say my cost is. Is that your question, Steve?

Well, it does help, because it sounds to me like you make the decision as to whether to lock in the sale forward.

That's right.

Whereas I thought you were implying that your partner here had to agree to take the product, and thus they were going to buy it from you. So it sounds like more they just simply distribute it for you.

When we --

He hit the nail on the head. Go ahead, Tony.

When we reach an agreement we'll give more details, but right now we can't speculate too much beyond what Jack has already done. I think Jack has described it adequately.

And can you -- given that you would have to beef up your selling organization, does this sound like a business that might be more valuable in -- to somebody else than to you?

No, we are in the business now. We sell UAN now. We make it in Cherokee. This is just more production. So it's not new to us. This is just --

A different reason.

Pardon?

It's just a different reason.

Well, yes, but that ships all over the country. I mean, it would just be more for -- more business for our sales force to handle, okay. If this would be a valuable business for us this Welcome back a valuable business for somebody else, more valuable or less valuable is a relative statement, and I guess it's in the eye of the beholder.

Certainly plenty of M&A activity going on in the space right now. That's why I asked.

Most of it unsolicited.

Yes.

Okay, thank you.

Sure.

Thanks, Steve.

(Operator Instructions). Our next question comes from [Drake Fulman with First Wilshire Securities].

Good afternoon. Could you talk about -- in one of your slide decks, there's a slide that shows the adoption in various countries in Europe, how it's kind of elongated S-shaped curve. I was wondering what was the -- what were the precipitating events that caused the adoption rate to really start to ramp up in some of those countries. Was it government incentives, or was it a celebrity, your using one, or what was your interpretation?

Well, in Europe, first of all, I can't definitively answer that question. I'm not familiar enough with it to be able to give you a -- too much of a nuanced answer, but I can say that if you have a different kind of market that you have in the United States, in that in the United States you have a relatively homogeneous, and there are some regional differences, but it is a relatively monolithic kind of distribution structure, and there are fewer manufacturers, and they are larger, relative to the overall market size. In Europe, because you have a lot of countries, you get different things going on in each country, different distribution chains, different governmental incentives, and so from one country to another you have a different situation. Generally speaking, where the adoption in Europe has occurred the fastest is in the northern Europe, Scandinavian areas, and in that -- they have just traditionally been very far thinking when it comes to forward thinking when it comes to the environment and energy usage, and so they've just tended to be way out in front of the United States on all those kind of issues.

Okay. Is this Barry talking?

Yes, it is.

Okay. In terms of just increasing -- this increased demand in the United States, I was just wondering, I know you go through distributors, but could you talk about how you are helping your distributors to do their Internet marketing better, in particular, like search engine optimization, banner ads, affiliate marketing?

All of those items -- you're just kind of running down a punch list of what basically you do in the age of Internet marketing. Every single one of those -- everything that you can do to either -- to facilitate that is either currently being done or is in the planning stages. A lot of it is being added and changed as you go along. Okay.

Improved.

I don't know if that answers your question. I'm not going to sit here and tick down every single advertising sales and promotion strategy we have, because our competitors tune into every single conference call we have.

Right.

And -- I'd rather let them see when it it comes out.

Oh, Barry. Just another thing about installers. I think it was on the cover -- it was either the New York Times or the Los Angeles Times a couple weeks ago on the cover about trying to train enough installers to install solar panels, and I was wondering, even though you might have adequate capacity, if demand starts to take off, do your distributors, will they have enough installers to install the stuff, and how are you going to help them to get -- to train and certify enough installers?

That's a very good question, and that's really the most important question to ramping up the mark, because we believe we can certainly, from a manufacturing standpoint, we can keep up with any reasonable growth that the market gets.

Yes.

But the way the distribution chain works is, just to clarify for those people that are listening for the first time, we sell this product to stocking distributors, and those stocking distributors resell the product to installing contractor dealers, and those installing contractors dealers on a residential market are the same kind of contractors who do maintenance on individual homes and do installation when that unit wears out and they have to replace it, and also do installation in new construction. And those are typically small businesses, and whenever they get a new product line, that they haven't installed before, or they haven't used before, they're used to going into the distributors and getting training.

So what we have is we have, first of all, at our factory we have training schools and sessions that we're giving all the time. We bring distributors in, and we even bring dealers in, but usually distributors. In addition to that, we go out in the field, and we have our training personnel go out and give seminars out in the field where dealers are, so when a dealer signs up on geothermal, he knows that every two months we're going to be having in his region a training session or every month, whatever it happens to be, and the interesting part of this is that when you look at the installation of a geothermal system, other than the loop in the ground, it is very, very similar to a traditional or conventional unit. So if a contractor can handle a conventional system, he already knows about 95% of what he needs to know to install a geothermal system. So the bottleneck becomes really not the -- that contractor. It's the person that's putting the heat exchange loop in the ground. And to train those people what we're doing is we're working in conjunction with water well drillers and drilling associations around the country. We're training those people specifically as well, and then what happens in the field is that contractors and distributors develop alliances with those people, and some of them that do enough volume in geothermal will even do their own drilling. So the potential bottleneck is probably more with drilling than any other thing in the whole chain of installation.

Do you have to have a backhoe to install a he geothermal heat pump?

Well, they do -- there are two kinds of -- there's about four ways you can install these. But about 95% of them are either installed horizontally or vertically. Now, in a vertical installation, what they will do is they will dig trenches with a backhoe, or a trencher, or a trenching device, like a large Ditch Witch, kind of like the device you put a sprinkler system in, then they'll fill it over. So, yes, in that application. And then there's a small part of the -- of the vertical installation they also need some kind of trencher, but it doesn't necessarily have to be a backhoe.

Would it make sense for LSB to lend people money to buy some of that equipment or to rent the equipment?

I think that usually equipment manufacturers, they're selling that equipment, have financing programs available.

Okay. Thanks a lot, Barry.

Our next question comes from Michael Coleman with Sterne Agee.

I just want to clarify, you mentioned 19% on the geothermal mix for the year do you have a mix number for the fourth quarter?

No, I don't have it. Well, let me think. Do I have that? I don't think I have that with me.

Okay. I could --

That's the full year we've got.

That was 19% for residential geothermal.

For the full year.

For the full year. That did not -- we said before that did not include the commercial portion of geothermal.

Okay. I mean, do you have a feeling for the fourth quarter on the geothermal? Was it 25%? Was it meaningfully more?

I just don't have that number right in front of me, I'm sorry.

That's okay.

I can get back to you with that.

Okay, fine. Wanted to -- three things I want to do. Tryson, but before tryson, you talked about training schools and so forth. How many of these dealers did you have to train in 2008, and what are you targeting for the growth in the number of dealers trained in 2009?

That's information we can't give out. Well, first of all, I don't have that information available. I can't give you that.

Go on to the next one. If you don't want to, that's fine. On Tryson, you knowe what are you seeing in terms of that business seemed to me would be appropriate for the retrofit of federal buildings and so forth. So what are you seeing in either the pipeline or the activity for your contracting business?

Well, that is a business where it's a very long lead time business, and they went into this year really fully booked for the whole year as far as what their forecast was. In other words, their budget was equivalent to their backlog, and so they were -- they pretty much were booked up for the first three quarters, with a little opening in the back quarter to add some additional business, but there's quite a lot of activity in that area, even before the stimulus package, and we believe that the stimulus package is just going to increase it. And they are focusing in that area. They should be a natural for that, Michael.

Right. Okay. And you are adding people to that division? --

That division functions as a contractor, as a general contractor. So as we -- we gear it up or scale it down, depending on the number of projects that we have, and we try to keep the home office staff as lean as we can, but adequate to handle what kind of business level we see out there.

Okay. Sounds good. On the tax credit, the 30% no limit, could you put that into the context of what that means for the consumer on a dollar basis?

Well, yes, first of all, we all know that the cost of construction varies all over the country. So you have to pick something that's kind of typical or average, so what we have lately been referring to is kind of the typical house is a 2500 square foot house located in St. Louis, Missouri. Okay. And a 2500-foot house in St. Louis, Missouri is typically going to need about four tons of air conditioning, and a geothermal heat pump system without an incentive is probably going to run about $17,500, in that range. So if you look at the incentive, what is that, about $5,100 would come off of that bill with the credit. Now, if you look, after the credit, that brings you down to about $12,000. Now, a conventional system in St. Louis is probably going to run around eight or nine. That means you are $3,000 higher. That means probably you are going to have about a two-year pay back after the incentive. Those are very rough numbers. Did I answer your question?

You did, thank you, appreciate it. I've got one more.

You're wearing us out, Michael.

You increased your heat pump capacity, I think back in '06. Given the trajectory of this residential geothermal business, you are not concerned that you've got capacity limitations here in the next year or year and a half before you get this new capacity up and running? I guess it's --

No, we're not.

Just wanted to make sure. Second, when do you expect the new capacity for the geothermal -- approximately what quarter do you think that would actually come on?

When we break ground, it will probably be about five to six months before we have use of that. As I said, between now and then, we don't believe we need that capacity.

Right.

We don't even know if we will need that capacity this year.

Okay. But it would be available this time next year?

We will have the capacity this year.

You will have it this year.

Yes.

Okay. Thanks a lot. Have a good night.

Sure.

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

Who was that? Hello?

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

Thank you very much. Thanks, everybody. That ends our conference call.

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