LSB Industries Inc (LXU) 2009 Q1 法說會逐字稿

Good day everyone and welcome to the LSB Industries, Incorporated First Quarter 2009 Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen only mode.

I will now turn the conference over to Carol Oden. Please go ahead, Miss Oden.

Thank you. Welcome to LSB Industries, Inc. first quarter 2009 conference call. Today LSB's Management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and COO 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. 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, May 11th, 2009, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replays. After the Q and A I will have the important comments about forward-looking statements and our references to EBITDA.

Now, I'll turn the call conference call over to Mr. Jack Golsen.

Thank you, Carol. Thanks for joining our first quarter 2009 conference call. Today Tony Shelby will review our financial results in detail and Barry Golsen will review our operations with you. After these presentations, we will all be available to answer your questions.

Today we're going to recite our forward-looking statement disclaimers at the end of this call, rather at the beginning. We suggest that you stay on the call long enough to hear them when we finish our Q and A session today. We're also attempting to eliminate duplication of some of the information we had previously disclosed in order to shorten the call.

Today we filed our first quarter 10-Q and our first quarter earnings report. You can access both of these reports over the Internet. First, I would like to make a few general comments.

Today we reported a decrease in sales for the first quarter of 2009. This decrease was primarily due to lower costs of commodity raw materials that resulted in lower unit selling prices of our chemical products. We also reported an increase in earnings over last year's first quarter. Income from continuing operations, net income applicable to common stock and fully diluted earnings per share exceeded last year's first quarter.

Earnings per share were $0.51 fully diluted compared to $0.46 last year. Considering the economic climate that we are operating in, this was a really good quarter for us, but please do not jump to the conclusion that we will replicate these results in the next three quarters. Tony will give you details on the first quarter numbers.

Relating to the state of the general economic situation, we are still cautious and uncertain about the recovery of the economy and specifically the availability of money to our potential customers who need credit to start and complete projects that use our climate control products. We are also concerned about the level of activity of our large industrial customers who purchase our chemical products since many of their products are used by the automotive and construction industries. A drop in their sales volumes could result in a drop in our sales to them. We do have some bottom-line protection on volume declines with several of our large customers who are subjected minimum purchase requirements.

For your information and despite the present economic situation, which we believe will eventually improve, we continue to prepare for the longer term growth of our two businesses. As we have previously indicated, we are expanding our geothermal heat pump capacities with the addition of 78,000 square feet for manufacturing space and we are also intensifying our marketing efforts in these products, which should benefit significantly from the provisions of the stimulus package. Also, we are close to starting up our Pryor Chemical Plant. Both of these efforts should have positive effects on our future growth, as the economy recovers.

During our last conference call, we advised you of our intent to restart the Pryor Plant, subject to securing a sales agreement with a strategic customer. We recently concluded an agreement with Koch Nitrogen Company and we expect the plant to begin production during the third quarter. We announced that agreement to the public last Friday.

We believe that we have the liquidity and available credit we need to continue with the investments required for our planned long-term growth. While the immediate future will be challenging for us, as for most companies, we are optimistic about our prospects for long-term growth and profitability.

I will now turn this over to Tony for the financial review.

Thanks, Jack, and good afternoon. We made our earnings announcement approximately two hour's ago and filed our 10-Q shortly after. The details for the first quarter 2009 compared to the first quarter 2008 were sales were $150.2 million compared to $160.5 million. Operating income was $19.4 million compared to $19.3 million. Net income was $11.7 million compared to $10.9 million. Diluted earnings per share were $0.51 versus $0.46. Consolidated EBITDA was $24.9 million compared to $23.2 million. LSB's consolidated EBITDA for the trading 12 months, as of March 31, was $82.5 million.

There are some significant items in the first quarter of both years, which require explanation for a full understanding of the results of operations. With respect to our Climate Control Business, 2009's first quarter results included gains of copper future contracts at $500,000 compared to gains of $2.6 million in the first quarter of 2008.

Turning to our Chemical Business, there were three items that affected the gross profit of our ongoing operations as follows. During 2008 prior to the steep decline in fertilizer and other commodity prices, we accepted orders for products at firm sales prices for future delivery. We've shipped some of those orders in the first quarter of 2009 and realized gross profit margins approximately $2.5 million higher than the prevailing market prices would otherwise allow.

In addition, we periodically perform procedures to recover precious metal catalysts, which accumulate over time in certain parts of our plants. During the first quarter of 2009, we recovered precious metals valued at $2.2 million that reduced the cost of sales. There were no recoveries at the same period last year. The recovery of precious metals is a normal part of our ongoing chemical business. We recover precious metals almost every year. However, the timing and the exact amount of the recovery varies from year to year.

Offsetting these gross profit increases in the first quarter of 2009 were losses totaling $1.6 million on our natural gas and ammonia hedging contracts compared to gains of $600,000 during the first quarter of 2008. The effect of these three items was to add an additional $3.1 million of gross profit to Chemical's first quarter 2009. Included in Chemicals 2009 operating income below the gross profit line are expenses associated with the start-up of the Pryor facility of $2.0 million compared to $400,000 in the first quarter of 2008.

The cumulative pro forma effect of $3.1 million increase in Chemical's gross profits less the $2 million in Pryor expense would be to increase Chemical's operating income by $1.1 million. And finally, to arrive at pre-tax income, during the first quarter we acquired $5.7 million aggregate personal amount of the 2007 debentures for $4.2 million and recognized a gain on extinguishment of debt of $1.3 million. These various items that I just discussed are also described in our earnings announcement, the 10-Q and are included in the results that we will discuss today.

Our Climate Control business performed very well during the first quarter. Climate Control sales of $72 million were 8.6% higher. Operating income decreased from $9.3 million in 2008 to $9 million and EBITDA decreased to $9.8 million compared to $10 million. After eliminating the gains from copper contracts in both periods, the operating income in 2009 as a percent of sales was higher than the comparable period of 2008.

Our Chemical Business also performed well. Chemical reported much lower sales of $74.5 million compared to $91.3 million. Operating income increased to $12.6 million, or 17% of sales, compared to $12.1 million, or 13.3% of sales, in 2008, including the $1.1 million accumulative effect on Chemical's items that we just outlined.

Chemical's EBITDA was $15.4 million compared to $14.4 million last year. As we advised earlier, we expect the start-up costs of the Pryor plant to reduce earnings until the plant begins to ship product later this year. Our current expense level at Pryor is at approximately $1 million per month and we expect that the remaining start-per costs to be expensed after March 31st, 2009 will approximate $7 million to $9 million.

Regarding our liquidity and capital resources, during the first quarter we had positive cash flow from operations of $18.8 million. After cash capital expenditures of $7.2 million payments of $5.2 million on long-term debts and other expenditures of $300,000, the net positive cash flow was $6.1 million. The $5.2 million payments on long-term debts included the expenditure of $4.2 million to repurchase the subordinated debentures that are due in 2012.

Our current liquidity and capital resources reflect a sound financial position. At March 31st, 2009 our long-term debt, including the current portion, was $100.7 million and stockholders' equity was at $141.9 million. Long-term debt to stockholders' equity is approximately 0.71 to one.

Cash on hand at March 31st was $52.3 million. Our borrowing availability under our $50 working capital revolver was $49.5 million after a reduction of $500,000 to support outstanding letters of credit. Based upon our present financial position and our outlook we have adequate working capital finance ongoing operations, as well as organic growth opportunities. During the first quarter we had total capital expenditures, both cash and accrual, of $8.5 million, $1.5 million for our Climate Control Business and $6.8 million Chemical Business, including $1.5 million for the Pryor Plant.

For 2009 we are considering capital expenditures related to both our Chemical and Climate Control Business that's utilized a significant amount of our existing cash on hand, if not separately financed. At this date, excluding the Pryor facility, we have additional planned capital expenditures of approximately $14.7 million in our Chemical Business, primarily for process and reliability improvements and $10.2 million in our Climate Control Business, primarily for production, equipment and facilities upgrade. We will continue to monitor our business activity level and, to the extent possible, adjust our capital spending appropriately.

In addition to these capital expenditures, as of March 31st, we had total project to date capital expenditures of $1.5 million for Pryor. We anticipate spending another $5 million to $6 million for capital equipment to complete the start up. We plan to fund this project from our available cash on hand and working capital. However, the actual time frame to begin production, the amount of production and sales and the total remaining cost to activate the to activate the facility could be significantly different from our current estimates.

That concludes the financial review. Barry will cover operational highlights and the outlook for the Company.

Thanks, Tony. First, let's discuss the Climate Control Business. As Tony mentioned, our total Climate Control Business sales during the first quarter were higher than the same period last year by 8.6%. Total heat pump sales were up 37.3%. Fan coil sales were down 34.1% and sales of other products and services were down 10.9%.

New product orders during the first quarter were $54.9 million, a 22% quarter-over-quarter decrease, and 7.2% decline from the fourth quarter of 2008. We ended the quarter with a backlog of product orders of $56.8 million, down from $68.5 million at December 31st. I am glad to report that as of the end of the first quarter of 2009 we continue to maintain leading market shares for geothermal and water source heat pumps and for hydronic fan coils.

Our gross margin during the first quarter of 2009 was 31.1%, down from 32.5% for the same period in 2008. During 2008's first quarter we had gains from copper hedging of $2.1 million in excess of gains during 2009, as Tony related to you a few minutes ago. This accounted for all of the gross profit margin percentage decrease. In fact, if copper hedge gains are eliminated from both periods, the gross margin increased in the 2009 quarter.

During the first quarter our operating profit, as reported, declined 3.7% from the first quarter of 2008. Again, this period-over-period decline was due to the higher hedging gains reported in 2008. However, without those gains last year's 2009 first quarter operating profit would have improved.

With regard to raw materials, since our last conference call prices have remained relatively stable with the exception of copper. Copper prices hit a low point during the early part of the quarter and have increased somewhat since then. Current copper prices are still substantially lower than the high levels during 2008. In general, market prices for raw materials had previously declined through the fourth quarter of 2008 and this continued into the beginning of 2009. We will not realize the full impact of those decreases, however, during 2009 because during 2008 we purchased 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 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 think appropriate.

A key question that we're asked frequently is what's the outlook for construction, both for commercial and residential? One independent source that we use, McGraw Hill's Construction Research Analytics Construction Market Forecasting Service, released its summer construction outlook two week's ago. As expected, this report forecasted further deterioration in both the commercial and residential construction markets since the report published a quarter ago. McGraw Hill's current outlook, as reported, is that contract awards for the specific commercial building types that accounted for 62% of our Climate Control Business sales during 2008 in the aggregate will decrease by 23.2% in 2009, followed by year-over-year increases of 0.4% and 15.8% in 2010 and 2011 respectively.

In addition to the McGraw Hill forecast, we also look at the Architectural Buildings Index, which is an indicator of future construction activity nine to 12 months in the future. For the past several months the ABI has been declining and reached an all-time low since the inception of the Index in 1995. However, the March report indicated a possible deceleration of the decline in this Index.

Direct input from our sales force is that there is a pipeline of construction activity in various planning and design phases but that there is also hesitancy by developers to proceed with new projects and some projects have been put on hold or even cancelled. Considering all of these inputs, we believe that sales in 2009 will be lower than 2008 but we cannot accurately forecast the 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 in the confidence level of builders and developers.

Despite the generally gloomy economic news, one particular area of short-term potential is the American Recovery and Reinvestment Act, also known as the Economic Stimulus. This contains many billions of dollars of spending to modernize federally owned and operated buildings, military installations, public housing and hospitals, with a focus on energy efficiency. Since the biggest user of energy in most buildings is the heating air conditioning system, many of these buildings will require new systems that are more energy efficient and environmentally friendly. Our products are particularly well suited for this.

Because this is an area of interest for many of you, I would like to discuss our residential geothermal sales. According to McGraw Hill, there was a 39% decline in single-family residential construction during 2008 following accumulative decline of almost 40% during 2006 and 2007. McGraw Hill is forecasting yet another decline of 31% in 2009 for residential construction.

During 2008 our sales into the single-family residential market, which for us is all geothermal heat pumps, represented 19% of our total Climate Control Business sales and that sector increased 82% over 2007. Despite the lagging residential market in general, our first quarter residential geothermal sales increased 84% over the first quarter of 2008. New order bookings for these products during the first quarter were up 15% over the same period last year.

Whereas we believe the recently enacted 30% Federal tax credit and other incentives will have a positive effect on this business, we have not yet seen a significant impact. Shipments of residential geothermal heat pumps continue to buck the downward trend of conventional systems, which were down 27% this year through February according to the HHRI. We believe, however, that the general economic recession is having a dampening effect on growth in this market.

Despite the current slowdown, we strongly believe in the potential growth of geothermal sales into the huge residential heating and cooling market. There were approximately 5.8 million heating and cooling systems shipped in the US in 2008. To that end, we have substantially intensified our sales and marketing programs for geothermal products and will continue to do so.

We are also preparing our manufacturing facilities to handle any increased volume that may result from these efforts. In the past two years we have doubled our heat pump manufacturing force base and added production equipment and we are progressing on another significant plant addition of 78,000 square feet. We expect that construction will take approximately six months.

Turning now to our Chemical business, as Tony reported, this business got off to a good start the first quarter. Sales of our Chemical products were down 18% from the first quarter of 2008 but earnings increased slightly. The decreased sales were driven by substantially lower commodity prices. However, lower selling prices of our products, coupled with lower raw material feed stock cost, translated into a higher total gross profit and increased gross margin as a percent of sales.

Gross profit increased from $15.4 million or 16.8% of sales, in the first quarter of 2008 to $17.1 million, or 23% of sales, in 2009 including the items discussed in the financial review. Operating income of $12.6 million was approximately 4% higher than in the 2008 quarter, despite lower revenues.

Focusing on the agricultural part of our Chemical Business, during the first quarter ag product sales were $32.8 million, 5% lower than the first quarter of 2008. Urea ammonium nitrate sales were down and ammonium nitrate sales were up. I will explain what happened with each of these products separately. Keep in mind that the published market prices I will refer to in the explanation are indicators of the regional market pricing for our products but are not necessarily our net back sales prices.

Starting with UAN, during the first, quarter our shipped tonnage of UAN fertilizer, or urea ammonium nitrate, which we produce at our Cherokee, Alabama facility, was 39% lower than the first quarter of 2008 and our revenues from these sales decreased 49%. The published sales price per ton, as quoted in green markets for the southern plains during the first quarter of 2009 range from $225 to $260 per ton, as compared to a range of $352 to $372 a year ago.

Reduced shipped tonnage of UAN during the first quarter was principally caused by these five factors. First, during the fourth quarter of 2008 there were a very high industry wide sales of UAN at high prices, which resulted in high inventory levels retained in the distribution chain at year-end. Second, after loading up on this high priced product last fall, which subsequently dropped significantly in value as commodity prices fell during the latter part of 2008, the distribution chain is reluctant to add to its inventory at this time.

Third, due to the high fertilizer costs and lower predicted crop prices, there were fewer acres of wheat planted in our freight logical sales area. Fourth, during the spring planting season we did not have optimal weather conditions. The markets we serve directly, for the most part, had delayed planting due to wet conditions. And fifth and finally, during the past year total imports and domestic production were approximately 1.5 million tons too high for the total market. Currently the published prices of UAN are approximately [$215] per ton, while the NYMEX natural gas price for delivery in June is approximately $4.27 per MMBtu.

For the balance of 2009 this is our view of the situation for UAN. There will be slightly less acreage planted in 2009 than 2008. To give you some of the details, the USDA Prospective Plantings Report released on May 31st indicates that there will be 85 million acres of corn planted this spring, a slight drop from last year's 86 million acres. Wheat will be down 7% from 63 million acres to 59 million acres. Cotton will also be down 7% from 9.5 million acres to 8.7 million acres. Adding these all together, total combined acres planted for these crops will be down approximately 3.7% from 158.5 million acres to 152.5 million acres.

The spring fertilizer sales season got off to a late start and a pipeline of over inventory is still affecting sales. We expect that after the late start the demand will be strong, given reasonable weather conditions.

Turning to ag grade ammonium nitrate, or AEN, which we produce at our Eldorado, Arkansas plant, our revenue were higher than the first quarter of 2008 by 36.4% reflecting higher tons shipped but lower sales prices per ton in 2009. Tons shipped were up 80.1% over the first quarter of 2008. During the first quarter of 2009 the green market southern plains range for published prices for AEN was $250 to $300 per ton compared to $360 to $380 per ton in the same quarter of 2008.

The price of anhydrous ammonia, the raw material feedstock for our Eldorado facility, escalated significantly during the first nine months of 2008, increasing from $400 per metric ton in January to a high of $931 per metric ton during the third quarter. Since that time ammonia has tumbled and during the first quarter of 2009 the published price ranged from $125 to $318 per metric ton. Today's price is approximately $267 per metric ton. Remember that approximately one-half of Eldorado's sales are to customers who accept the cost of ammonia as a pass through as part of their selling arrangement.

This year there were fewer imports of ammonium nitrate, so the market supply/demand fundamentals are much more favorable for US producers. Based on the current outlook and, again, assuming acceptable weather conditions, we expect to run at full capacity of ag grade AEN through the spring season. Current pricing for AEN is approximately $250 per ton, FOB production point.

Fortunately, the price of both the feed stocks we use, anhydrous ammonia at Eldorado and natural gas at Cherokee, have declined along with the selling prices of our products and we're able to produce our fertilizer products at profitable levels at current market prices if we're able to maintain reasonable rates of production. Also, the industry consensus regarding the long-term global demand for grain in general and corn and wheat specifically is favorable.

Focusing on our industrial chemical products, during the first quarter our industrial sales were $25.2 million, down 32% quarter-over-quarter. We're experiencing the softening in demand we predicted during the last conference call, as well as lower sales prices per ton. This is due to the general slowdown in the construction and industrial markets our products are used in. However, we believe that in the long run there will be steady demand for both our industrial assets and our industrial grade ammonium nitrate used for surface mining.

In the meantime, most of our Chemical Business is industrial and mining sales, which were 63% of our total chemical sales during 2008, are pursuant to cost plus pricing arrangements with our customers assuming the feedstock cost fluctuation risk. 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 the volume taken by our customer. To that extent we are somewhat insulated from a potential downturn in demand for our industrial products.

Now turning to a unique growth opportunity, on Friday we announced that we reached an agreement with Koch Nitrogen Company to purchase substantially all of our initial production of UAN at market prices and are proceeding to reactivate our plant in Pryor, Oklahoma. We have now received the necessary operating permits and we have hired key personnel to operate the facility. Additional personnel will be hired at appropriate intervals during the preparation for start up. Barring unforeseen delays, we expect production to be implemented in the third quarter of 2009.

This plant is expected to produce 325,000 tons of UAN and 35,000 tons of anhydrous ammonia to our overall annual production. I am sure that many listeners would like us to forecast the revenue from the Pryor plant. Unfortunately this is difficult to do because there are so many factors that can have an impact.

A few are the fluctuating market price of the products we will manufacture at Pryor, the cost of freight to the various markets we serve and the exact tonnage we produce and ship. At current market prices we estimate an average net sales price per ton of UAN to range from approximately $175 per ton to $185 per ton. Remember, this will definitely change over time, as market conditions change.

On a final note about Pryor, we are also considering the addition of other industrial products to our production at this plant and are discussing this possibility with industrial users.

Thanks for bearing with me. I realize that took quite a while and I'll sum up right now. Relating to our Climate Control Business, sales were up and income, as reported, was down compared to the first quarter of 2008, which had unusually high gain from copper hedging activities. New orders were lower quarter-over-quarter.

Generally indicators are negative for commercial and residential construction. We're glad to see strong shipments and continued growth in our new orders of our residential geothermal products, which have so far bucked the trend of both general residential construction and the market slide for conventional residential heating and cooling systems. We believe the recently enacted federal tax incentives will help our geothermal sales and that planned government spending to modernize buildings could benefit sales of many of our products. We're excited about our prospects for growing all of LSB's Climate Control Businesses and particularly our geothermal heat pumps over the long-term.

Turning back to Chemical, first quarter sales were down but profits held steady, actually increasing if the start-up costs for Pryor are added back. Much of the market volatility we experienced last year seems to have stabilized for the time being. We believe the long-term outlook for our ag market is good because a continuing demand for farm crops should be strong. At this time both sales prices of our ag products and feed stock costs are lower than in the first half of 2008 and the current sales price results in a positive gross margin.

The demand for our industrial chemical business products has declined due to the general economic conditions. However, we are insulated from this downturn to a certain extent because of the nature of our cost plus and minimum take or fixed profit sales arrangements. The Chemical Business should remain profitable, as long as we run our plants at economic levels.

Finally, we have made the decision to proceed with the start up of the Pryor plant and we expect production to begin in the third quarter.

We will now take your questions.

(Operator Instructions). Your first question comes from the line of Eric Stein with Northland Securities.

Hi, guys, nice quarter. I was wondering if you could just provide a breakdown of the geothermal, what percent that was of the Climate Control Business in this quarter?

In this quarter it was 21%.

Okay and is that just residential or does that --?

That's just residential only. That does not include the commercial portion of geothermal.

Okay do you have that breakdown as well?

No I don't have that handy.

Okay but what -- is it fair to think about that? I know on your last call you indicated it was about 5% for the year. Is that kind of a fair assumption?

I just don't have that breakdown handy with me. It's lower than the residential portion but I just don't have that with me right now.

Okay fair enough. Just turning to margins, can you just give me an idea -- I mean the firm sales agreements that you signed in '08, is there kind of a time frame when those stop having a beneficial impact? Should I think about those for the next few quarters?

Are you referencing our Climate Control business? What are you -- are you talking about the Chemical Business?

Yes Chemical Business where you had a pretty nice impact, the $2.5 million in this quarter.

Oh you're talking about the sales commitments made in 2008.

That's what he's talking about.

We don't, haven't disclosed that number but we're not going to consider it to be real significant. We do have some additional sales commitments out there but we're not absolutely sure that they will ship and when they'll ship so we're not disclosing that.

Okay, then this is just talking about input costs, natural gas, I know you had some hedges on and indicated that you would likely -- you know, you would not see the impact of lower prices here in the short term. Do you talk about when you put those hedges on and when we could think about you seeing an impact?

We didn't have any significant hedges on them. The only thing we hedged, Tony, the only thing we hedged was the forward sales.

Eric, your question goes to the amount, the level of natural gas hedges that we have on at the end of March 31st?

Yes just in your commentary you were just discussing that maybe the full impact of prices where they are or where they were the fourth quarter to first quarter and now that, you know, you may not be seeing that full effect.

I think he was referring to copper at that point. That was more in the Climate Control we were talking about the fact that we may not see the impact on the copper as quickly.

Yes well I was referring to the raw materials in general. We have certain vendors that in order to lock in on having material available to us we ordered at the end of last year before prices started to go down. Now I am not sure if 100% of that has flushed through the system or not.

This is Climate Control.

In Climate Control, but what I was trying to explain was -- maybe I didn't do a good job of explaining it -- was that don't expect to see the full impact of the price reduction hit the climate control for the full 12 months this year because we had some product coming in at higher prices that were ordered last year.

Okay. No that was probably me misunderstanding your commentary so I appreciate it and I will jump back in the line.

Rick Hoss with Roth Capital Partners.

A couple of quick ones for you here -- first, did the mining products have a full three months of shipping? It looks like compared to last year, the first quarter last year, we had had month in March didn't ship. The numbers look similar taking out the considerations for decreased pricing.

We had a full three months in '09 of shipments.

Okay fair enough. Now, as far as booking trends go, Barry, I know you have the last couple calls you've given us an update based on the most recent months. Can you give us an appreciation if the contraction in bookings have continued or if you're seeing somewhat of an arrest in the contraction trends right now?

We haven't updated past the end of the first quarter. Just a minute. Do you have the bookings for April available? I don't think I have that number with me right now but I can certainly get back to you with that number.

Okay and then just if you can remind me the backlog was 56.8 --

Pardon?

The backlog you reported was $56.8 million for the first quarter and typically that predicts out the next quarter or so. Can you describe that to me again?

Well, it doesn't always correlate. Now we're not going to forecast how we're going to ship this quarter but there's not -- it doesn't necessarily correlate. Sometimes we have a backlog and we burn off backlog and other times we ship less than we book but you can't draw a direct correlation.

It depends on how the order is spaced out, right?

Right.

Right okay.

And also it depends on the product. Some products have a long gestation period because of the larger units.

That's right.

Right, so in this case the commercial units would have the longer gestation period versus residential --

Just typically that's true because in residential I would say on the whole most of residential product when they order them they want them as soon as you can build them and ship them, so typically you're either shipping them out stock or, more commonly, you're shipping them in whatever you're lead time happens to be, so working on an eight-week lead time or a seven-week lead time or a nine-week, that's when they get it.

Whereas with commercial orders they are much bigger than your typical average residential order and sometimes projects are designed to be constructed over several months and they want it in phases, so that you're right. There's a typically a longer lead time for commercial product than there is for residential.

And then I may have missed it, did you -- I think maybe the prior caller asked the question. Are all the higher priced fertilizer contracts, have they been shipped in the first quarter or you still have some that could be shipped in the second, thus inflating gross margin in the second?

I think it's safe to say that the larger ones were shipped. We still have some but we're not disclosing the amount because it's unclear to us when and if those orders will ship.

Okay that does it for me. Thanks for taking my question.

Dan Mannes with Avondale.

A couple of follow-up questions for you -- I want to focus a bit on Pryor. With the contract with Koch if you can just give us a little color? Is this a fixed-price agreement, like a toll, like you have on the other two or is this really more of a distribution agreement with fixed volume, if you could just sort of clarify that a little?

Yes I can clarify it. This is a contract for a fixed volume at market price.

Okay and it's for --?

And it's a take or pay.

It's take or pay but it's pay market price?

It's take or pay, right, at the market price.

Got it and okay -- and the next question you mentioned what the net back price was or around the ballpark currently. Can you give us an idea of the conversion here, i.e. how much natural gas you would need per ton and just give us some idea on what operating costs would be?

I don't have that in front of me. The question is how much, what the gas converts to. It's 14.2, 14 point --

In [MMBtu].

It's [14.2 M], that I know but the second part of his question complicates the first part, the second part of your question.

Oh that was just the -- and on top of that if you can think through the average operating cost per ton, on a normalized basis.

I don't have it in front of me.

That's fine.

We wouldn't want to disclose it anyway because everyone would want to buy it at least at our cost or lower.

Understood. If we could just talk for a second on the climate segment, you know we've still seen sales being pretty strong there in the quarter. Were you noting any discounting happening in the quarter or were you guys discounting at all?

Well, I will say that there is more price pressure in the market now than there was 12 month's ago, which is natural and to be expected in this kind of climate.

Okay.

And, you know, I think that has affected our selling price, yes, on the part of our business that's negotiated. Now, let me just clarify that, okay. A very large part of our business is not negotiated. The residential sales, which are you know 21% of our sales, are not negotiated. And the commercial -- our export sales are typically not negotiated. It's small part of our sales, but usually sold off of a price list.

And getting to the commercial side of our sales, there's a large part of the business, which is not negotiated. Either it's small orders or preset and agreed to prices with our OEM customers. So when you eliminate all that, then you get down to the part where we're selling directly to the commercial large projects and medium projects and that's the part of the business that's negotiated and that's where the price pressure is.

And then just the last question, sorry, back to chemical. You noted I think it was $2 million of SG&A in the quarter for start-up and potentially as much as $1 million a month until it does get rolling. Once it gets rolling what's really going be -- what, if any, incremental SG&A will there be to run this facility or will all of the costs really be on the COGS side?

On the what side?

Meaning are there going to be incremental SG&A costs for running Pryor and, if so, can you just give us a frame of reference there?

The SG&A costs, I can give it to you, will be the costs of commissions we pay for the sale of the product. I think those will be classified as SG&A. I'm not sure of that from an accounting standpoint which of the SG&A costs for Pryor once it's up and running. Won't those be classified as--?

You'll have some distribution costs, which we normally classify as SG&A.

Yes that's what I said.

But, for instance, that $3 million that you're-- the million or month or so.

Tony, let me clarify.

No, no, no, no, no. Dan, the million a month is the cost of personnel to run production and run the plant.

Right.

Dan, let me clarify one thing. We said that currently the costs are running $1 million a month. Those will increase sometime as we go forward. And then we went further to say that the remaining cost per start-up, which is also the $1 million dollars a month, those costs expected to be about $7 million to $9 million through the start-up and we're defining start-up as when we're basically in full production.

Right, but at that point if that's personnel, I assume that'll then roll in and be COGS once it's up and running. That won't be SG&A any longer?

That's correct.

Well, it's not SG&A now.

It's just operating losses now, which are start-up costs.

Right, but it's not in COGS now, but it will be?

Yeah, most of it will be.

Got it. Okay, thank you, very much.

Eric Prouty, Canaccord Adams.

Good quarter, guys. First, just a housekeeping question, it looks like you had on the calculation of EPS maybe converted over some of the converts. Tony, do you have what the interest add back is kind of below the line to get to the $0.51 EPS number?

Well, there's no interest add back on those because we paid the interest to the date we bought the bonds, so that interest had already been expensed.

And then the share count going up, wasn't that a function of treating some of the outstanding convertibles as if converted?

Go to your next question. I'll flip to that in the 10-Q and come back to it?

Sure thing. And then on the geothermal side, you know obviously business is going great. You guys are expecting that to continue. Could you just discuss a little bit about the distribution channels and what you're doing to help grow and educate the distribution channels and then educate the end markets?

No it's pretty much block and tackling. It's things that I described in a prior conference call. You know it starts we go to market, we sell to distributors who resell to installing contractor dealers. So what we're constantly doing is recruiting new distributors in new territories and they're constantly recruiting new dealers. Then what goes along with that is a massive amount of training to train the new dealers and train the distributors and to try to -- we have a "Train the Trainer" program where we train the distributors to be able to bring the new dealers up to speed.

In addition to that what we've done in the last year is we have significantly increased the manpower that's focused on this effort at all levels in our organization. In addition to that we've added warehouse space and inventory to support the market. In addition to that, just quite a bit more promotion than we did before.

So there's just a -- we have programs working with utilities and with builders directly. So there's just a full range of different things that we do to get the word out there and to network and to market our products.

You seeing any increase in interest out of potential distributors where you're more getting inbound calls instead of going out and doing the missionary work?

I would say that there has been some level of increase for sure since the incentives.

Okay, great. Thanks guys.

I mean I can say that qualitatively. It's hard to quantify that with any kind of metric that's meaningful.

Sure thing. Nope, fair enough.

Back to your question on earnings per share calculation, the outstanding debentures are dilutive and that's the reason we include them in the calculation of the shares outstanding. As an add back of interest for the diluted effective of those, we add -- in the first quarter of last year we add back $602,000. This year we added back $349,000 and the share count added back for the convertibles last year, we added back 2,000,188 and this year we added back 1,000,270 and obviously the reason is because there are less debentures outstanding and so the total outstanding shares before the diluted securities, last year we had 21,000,056 outstanding. This year we only had 53,000 shares more, which is 21,109, so then you add back the fewer diluted shares and fewer stock options and you get fewer shares outstanding. On the diluted calculation it drops from 24,991 to 23,670. That's all on page 28 of the Q.

(Operator Instructions) Michael Coleman, Sterne Agee.

On your geothermal and water source heat pump, in the Q you broke down the components of the 37% increase in revenue. I think you said you had 22% increase in your average selling price, which included 5 points of price. Does that mean the mix was 17%, the mix benefit?

I'm not sure I'm understanding your question. Would you repeat the question, please?

What I want to understand is that you gave a number in the Q of 22% increase in the average selling price per unit, which included a 5% increase in the list price, so you had a pure 5% on price and the mix benefit was 17%?

That would compute to that, yes.

Okay, in what quarter did you put the price increase through?

Boy. I'm having trouble remembering specifically because we have so many different products at each of our different companies that we put price increases out at different times on different ones. And, as I'm sitting here today, I don't have a schedule in front of me, so I hate to just shoot from the hip.

Okay, was this price increase to offset the raw material in mid 2008?

That was part of it, yes.

Part of it.

Actually, that was all of it to try to overcome that.

Okay, so you had that price increase in the back half of '08 then?

That's correct.

Okay. On your--

What happens is, you know, the average size of a residential unit is much bigger than the average size of a commercial unit. That's counter intuitive to a lot of people, but the reason for that is because typically in a large building they break it down into smaller zones than in a house. So an average commercial heat pump will be a ton, ton and a half in capacity and an average residential might be four tons, four and a half tons, five tons something like that. So, as they get bigger, their average selling price goes up. So, as the mix shifts more toward residential, you get a higher average selling price.

Okay. You said that the residential geothermal was 21% of your revenues in the quarter of your climate revenues in the quarter. What does residential geothermal represent in the backlog?

You know I don't have that number in front of me and we don't disclose that anyway. That's not a number we disclose.

Okay, but is it less than 21%?

I don't have that number in front of me.

Okay. I guess one of the questions I have is that you're -- do you think the industry capacity for installation for both ClimateMaster and Waterfurnace Renewable, if this takes off in terms of installations this summer, do you think there are enough people out there that have the equipment and so forth that can actually fulfill the demand for these products?

The one phenomena that we're seeing that's occurring right now, and I guess it's maybe one of the only positive aspects of the current downturn in construction, is that with the less houses there are less wells being drilled. And so, we've seen that whereas a couple of years ago we were looking at this as a potential constraint to grow, we're not finding that there's a shortage of drillers out there now. We're finding that there are plenty of drillers available.

Also, with the tax incentives some drillers that previously were really looking at this as we'll we're not sure what kind of markets it's going to be, so maybe we won't take the trouble to learn how to be geothermal qualified are now looking at it more seriously and getting trained to do geothermal installations. So we're seeing those two factors increase availability, at least right now our in our current outlook for the immediate future.

Okay, good. About or have you released or talked about the number of distributors that you've added the last year?

No, we haven't released that.

Is it material; is it more than a 10% increase?

We haven't released that number, so I don't think we're going to talk about it today.

Okay. You mentioned earlier about the availability of credit and you've talked about your marketing plans. Have you looked at finding financing for the residential geothermal or incorporating that into your marketing plan?

We do have some financing programs that are available for that market. When I was talking about credit I was really referring more to the commercial markets. That's where we have concerns about credit availability.

Right. I think that's well placed concerns, although those concerns are somewhat backward looking, but in terms of credit availability if a consumer is looking at a residential system that can cost $25,000 to $30,000 and they may not have that tax break or that tax credit until April of 2010, is there programs in place today that would encourage them to actually install it now as opposed to waiting till the end of 2009?

Well, we have financing programs that are available for these potential customers. So what they could do is they could put it in place and then they could pay off the financing program later.

Okay, good. Thanks for your time.

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

Thank you. Those of you who are on the line, I'd appreciate it if you'd stay on for the Safe Harbor language. Carol will give that to you now and then we'll close the call. Thank you.

Ladies and gentlemen, that concludes our conference call for today.

Nope, not quite. No, it does not. We have to do this language, so we'll conclude after Carol's done.

Thanks, again, for listening in today. The comments today contained certain forward-looking statements. All statements, other then statements of historical fact, are forward-looking statements. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate and similar statements of a future or forward-looking nature identify forward-looking statements, including but not limited to start-up of our Pryor Oklahoma chemical plant and the amount of capital expenditures to begin operations at the Pryor plant, amount of production at the Pryor plant, the effects of the current recession on our businesses during 2009, sales volume to large industrial customers, our future dependence on the return of some stability in the credit and capital markets, sales of our chemical products, the power plants expected to increase.

We have liquidity and available credit that's needed to continue with investments required for our planned long-term growth, long-term growth and profitability, minimized controllable or variable costs during downturns, initiatives we have begun that we will not curtail during this economic downturn, such as start-up of the Pryor chemical plant and expansion of the geothermal heat pump, as they represent long-term growth potential, borrowing availability and our working capital revolver, adequate working capital, amount of capital expenditures related to our chemical and climate control businesses, outlook for and effects on the commercial and residential construction due to the recession, effective stimulus packages on our sales of geothermal heat pump and certain other products produced by our climate control business, lower sales in 2009 in our climate control business in 2008, growth of geothermal heat pump optimistic about long-range growth potential for our geothermal products and other products produced by our climate control business, sales of products by our chemical business during 2009, prospects for growing our climate control business over the long-term, positive effect of the stimulus package and new Pryor plant will have on future growth, UAN products for balance of 2009, UAN production and demand for our assets in ammonia nitrate products.

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 the number of important factors. These factors include, but are not limited to, general economic conditions, interest rate changes, competitive pressures, changes in working capital, production rates and the risks and uncertainties discussed under the headings special notes regarding forward-looking statements in our Annual Report on Form 10-K for the physical year ended December 31, 2008 and our Form 10-Q for the quarter ended March 31, 2009, and the 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 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. We will post on our website reconciliation to GAAP of any EBITDA numbers discussed during this conference call. During this presentation certain amounts have been referred to as pro forma. Pro forma presentations are not measurements of financial performance under GAAP and should not be considered as an alternatives to GAAP measurement. We will post on our website reconciliations to GAAP for any pro forma numbers discussed during this conference call.

Thank you and that ends our conference call.

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