LSB Industries Inc (LXU) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the LSB Industries second-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 a conference over to Ms. [Lynn Moore]. Please go ahead, ma'am.

Welcome to the LSB Industries Inc. second-quarter 2009 conference call. Today LSB managements participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; 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 recorded on this call today speaks only as of today, August 6, 2009, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay.

After the Q&A I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We suggest that you stay on the call long enough to hear them.

Now I will turn the conference call over to Mr. Jack Golsen.

Thank you, Lynn. Thanks for joining our second-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 reviews we will be available to answer your questions.

Today we issued a press release announcing our results for the second quarter and filed our 10-Q for the second quarter and six months, both of which you can access over the Internet. Our Chemical Business reported a decrease in sales for the second quarter of 2009. This was primarily due to lower cost commodity and raw materials that resulted in lower unit selling prices and reduced volume of our industrial and mining products. Our Climate Control Business also reported lower sales principally of our hydronic fan coil products.

We reported a decrease in earnings over last year's second quarter. Income from continuing operations, net income applicable to common stock, and fully diluted earnings per share were less than last year's second quarter. Earnings per share were $0.38 fully diluted compared to $0.75 last year. Tony will give you more details on these results. For the first six months fully diluted earnings per share this year were $0.89 compared to last year's $1.21.

Looking at the general economic situation we are still uncertain about the recovery of the economy as it relates to our businesses. Money and credit are still scarce for potential customers who will need credit for projects that use our climate control products. Despite the present economic situation, we continue to be enthusiastic about our geothermal heating and cooling products and are putting heavy emphasis on this part of our business. We have not yet seen effects from the tax benefit provision for geothermal heat pumps, which are part of the federal economic stimulus package.

In our Chemical Business the level of activity on a national basis of our large industrial customers who purchased our chemical products is substantially lower than last year. Also in our Chemical Business, we are in the process of starting an anhydrous ammonia plant at Pryor, Oklahoma. We expect to shortly start up the nitric acid plant at Pryor soon to be followed by the start of the urea plant. These products are the ingredients of the UAN fertilizer product we will produce at our Pryor, Oklahoma, facility.

Under our recently concluded sales agreement coke nitrogen company already has presold approximately 50,000 tons of UAN to be produced at our Pryor, Oklahoma, plant. We expect to sell 325,000 tons of UAN per year from this facility. The prices we are receiving for UAN are well below last year's market prices, but at this point we do not believe the market is reflective of pricing for the 2010 spring season.

We have maintained the liquidity and available credit we need for our immediate needs and our planned long-term growth. At June 30 we had $63 million in cash on hand plus our working capital line of approximately $49.5 million which is unused. The immediate future economic climate is challenging for us as it is for many companies, but we are optimistic about our prospects for long-term growth and profitability.

Before I close my part of the presentation I would like to say that there has been a recent development that I would like to mention. This past Monday we reported that there was a fire on July 30 at an agricultural products distribution center located in Bryan, Texas, which is operated by LSB's El Dorado Chemical Co. subsidiary.

Bryan, Texas, distribution center stores agricultural products as one of 14 El Dorado distribution centers. When the fire broke out the Bryan, Texas, fire department was called to the scene. As a precaution the local authorities evacuated an area around Bryan and nearby College Station. Of course the safety of the residents, first responders, and our employees was our foremost concern and we immediately responded to the fire by dispatching a team of safety and remediation experts to the site.

The Company believes it maintains adequate insurance coverage for the currently foreseeable losses and claims arising from the fire, subject to applicable deductibles of $350,000.

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

Thank you, Jack, and good afternoon. We have made our earnings announcement shortly after the market closed this afternoon and the financial results for the second quarter of 2009 compared to the second quarter of 2008 included sales of $138.6 compared to $198.1 million. Operating income of $14.5 million compared to $29.3 million. Net income of $8.7 million compared to $17.9 million, and I will give you a complete analysis of that shortly after I get through the numbers.

Diluted earnings per share were $0.38 versus $0.75. Consolidated EBITDA was $19.2 million compared to $33.1 million. The year-to-date results through June 30, 2009, compared to the same period of 2008 included sales of $288.8 million compared to $358.5 million. Operating income was $34 million compared to $48.7 million. Net income was $20.5 million compared to $28.8 million.

Diluted earnings per share were $0.89 versus $1.21. Consolidated EBITDA was $44 million compared to $56.3 million. LSB's consolidated EBITDA for the trailing 12 months ended June 30, 2009, was $68.5 million compared to $94.6 million at last year.

Focusing on the second quarter, on a consolidated basis sales were down from $198 million to $138 million. Climate control sales were $67 million or 17% lower primarily due to lower demand in our key markets for hydronic fan coils. Chemicals sales were $69.9 million or 38% lower due to reductions in our industrial and mining product tons shipped offset by a modest increase in agricultural product tons shipped and significantly lower sales prices of our products.

Operating income for the second quarter was $14.5 million compared to $29.3 million, a decrease of $14.8 million compared to the second quarter of 2008. Our Climate Control Business reported lower sales, but a marginal $400,000 improvement in operating income. The Chemical Business, on the other hand, reported operating income of $6.2 million compared to $20.5 million last year, a drop of $14.3 million.

Now there are certain items in the second-quarter results of both years that require explanation for a full understanding of Chemical's second-quarter results compared to the prior year. The second quarter of 2008, as we previously reported, included a one-time gain of $7.69 from a litigation judgment. The second quarter of 2009 as compared to 2008 included $3.1 million lower profit margins on UAN as a result of fewer tons sold and lower margins offset by $1.1 million of gross profit margins in excess of current market prices due to firm sales commitments made in 2008 when prices were higher.

Hedge losses of $300,000 on natural gas hedging contracts in 2009 compared to gains of $1.2 million in 2008 quarter, a swing of $1.5 million. Also, startup expenses of the Pryor facility were $3.2 million compared to $500,000 or an expense increase of $2.7 million.

Taking into account these four items of $13.8 million of the lower -- taking into account all of these items they account for $13.8 million of the lower Chemical Business operating profit. The balance is due to lower margins on lower sales volume of our industrial and mining markets offset partly by improved plant efficiencies at the El Dorado facility. These various items that we just discussed are also described in our earnings announcement that we recently filed in the 10-Q.

Returning to LSB's consolidated results during the second quarter of 2009 we acquired $3.5 million of the 2007 debentures for $2.9 million and recognized a gain on the extinguishment of debt of $421,000. During the second quarter we had positive cash flow from operations of $16.3 million.

Included in the operating cash flow were reductions of accounts receivable of $11.7 million, reductions of inventories and supplies of $5.2 million offset by reductions of accounts payable and accrued liabilities of $16.8 million, after cash expenditures and capital expenditures of $5.2 million, payments of $3.4 million on long-term debt, term borrowings of $2.6 million, and other items. The net positive cash flow for the quarter was $10.7 million.

Our current liquidity and capital resources reflect a sound financial position. At June 30 our long-term debt was $99 million and stockholders' equity was $152 million. Long-term debt to stockholders' equity was approximately 0.65 to 1. As Jack indicated, cash on hand at June 30 was $63 million. Our borrowing availability on our working capital revolver was $49.5 million. Based upon our present financial position and our outlook, we have adequate working capital to finance ongoing operations and organic growth opportunities.

During the second quarter we had total capital expenditures of $6.9 million including $5.9 million for our Chemical Business including $3.1 million for the Pryor plant. We have committed capital expenditures of $9.4 million, including $4.2 million in our Climate Control Business and $5.1 million in our Chemical Business. Included in the $5.1 million for Chemical is $4 million for the Pryor facility.

Actual year-to-date capital expenditures through June 30 plus currently committed capital expenditures totaled $23.4 million for 2009. In addition we are considering an additional $9.9 million of capital expenditures in our Chemical Business and $6.1 million in our Climate Control Business. As of June 30 we had total project to date capital expenditures of $6 million for Pryor.

We anticipate spending approximately another $4 million for our capital equipment to complete the start up. We expect the startup costs at the Pryor plant second-half earnings -- we expect that the startup costs at the Pryor plant to reduce second-half earnings by approximately $4 million until the plant reaches full UAN production sometime in late September, barring any delays.

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

Thanks, Tony. First, I will discuss the results of operations for our Climate Control Business.

As Tony mentioned, our Climate Control Business sales during the second quarter of 2009 were lower than the same period last year by 17%. Total heat pump sales were down 2.4%, fan coil sales were down 47%, and sales of other products and services were down 13%. New product orders during the second quarter were $54.7 million, a 27.6% decrease compared to the second quarter of 2008 but approximately the same dollar amount as the first quarter of 2009.

We ended the quarter with a backlog of product orders of $49.5 million, down from $56.8 million at March 31, 2009. I am glad to report that as of the end of the second quarter of 2009 we continued to maintain leading market shares for geothermal and water source heat pumps and hydronic fan coils. Our gross margin during the second quarter of 2009 was 37.3%, up from 32.2% for the same period in 2008.

The increase in gross margin was due primarily to products mix changes and lower costs of raw materials. While we benefited from lower raw material costs in the second quarter, competitive pressures are strong, some raw material costs have recently risen, and we do not believe we will be able to sustain the same margin in the near-term future. During the second quarter our Climate Control Business's operating profit increased 3.1% from the second quarter of 2008.

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 first quarter and have increased somewhat since then. Current copper prices are still substantially lower than the high levels during 2008. We continue to watch commodities very closely and to hedge when we think appropriate.

I am sure that many of you are interested in the outlook for construction, both commercial and residential. So what I am going to do now is I am going to list several areas that we watch and indicators that give us an idea of what we think might happen in the construction markets we serve. One independent source that we use is McGraw-Hill's Construction Research & Analytics construction market forecasting service which is published quarterly.

Its third-quarter sneak peak, which was just published last week, forecasts further deterioration in both the commercial and residential construction markets since the report published a quarter ago. McGraw-Hill's outlook is that contract awards for the specific commercial building sites that accounted for approximately 70% of our total Climate Control Business sales in 2008 in the aggregate will decrease by approximately 32% in 2009 followed by year-over-year increases of 1.6%, 18.1%, and 25.9% in 2010, '11, and '12, respectively.

For your information those building types that comprised 70% of our sales are offices, hotels, educational facilities, healthcare and retirement facilities, manufacturing and process plants, apartments and condominiums.

In addition to the McGraw-Hill forecast we also look at the Architectural Billings Index, which is an indicator of future construction activity nine to 12 months in the future. In February the Architectural Billing Index reached an all-time low since the inception of the index in 1995. The March report indicated a possible deceleration of the decline and that index held steady through May. However, in June the score was 37.7% and fell to the lowest level since February indicating that the downturn may be more deeply entrenched than we anticipated.

It has now been 18 months since the index has reported a score above 50 and scores above 50 are scores that indicate growth. On the other hand, the index of inquiries into new projects had a score of 53.8 in June, the fourth consecutive month that inquiry growth has been reported. Direct input from our salesforce is that there is a pipeline of commercial and institutional 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 canceled.

Taking all this into consideration, we are experiencing the lowest level of commercial construction activity in recent history. Despite the generally gloomy economic news, one particular area of future potential is the American Recovery and Reinvestment Act, in other words, also known as the economic stimulus. As you know, this contains many billions of dollars of spending to modernize federally-owned and operated buildings, military installations, public housing, hospitals with a focus on energy efficiency.

Since the biggest user of energy in most buildings is the heating and 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. However, so far the rate at which federal projects funded by the stimulus have progressed is much slower than we had previously anticipated and at this time it's not possible to predict the speed that these projects will actually move forward.

As we have advised you, our overall level of new order bookings has been substantially lower than the same period last year. Year-to-date it is running 25% behind the same period in 2008 and we do not know of anything that will change this in the near-term future. The backlogs we are carrying are substantially lower than in the recent past. Our backlog as of July 30 was $43.2 million compared to $68.3 million a year ago on July 31.

Considering all of these inputs, we believe that sales in the second half of 2009 will be lower than the second half of 2008 for our Climate Control Business. The level of commercial construction, the primary driver of new orders for our Climate Control Business, will largely be determined in the near-term by what happens in the credit markets, the confidence level of builders and developers, and the rate we recover from the current recession.

Because it is an area of interest to many of you, I would like to discuss our residential geothermal sales program. Following steep declines in residential construction for the past three years, McGraw-Hill is forecasting another decline of 31% in overall residential construction during 2009. Despite the lagging residential market in general, our second-quarter residential geothermal sales increased 32.5% over the second quarter of 2008. And year-to-date our sales for these products are running 57% ahead of the same period last year.

Year-to-date through June 30 our residential geothermal sales were 21% of the total Climate Control Business sales. However, bookings for these products during the second quarter were down 3.4% from the same period last year. Year-to-date through June of 2009 bookings were up approximately 3.9% over the first half of 2008. While we believe the recently enacted 30% federal tax credit and other incentives will have a positive effect on this business eventually, we have not seen a significant impact so far.

Shipments of residential geothermal heat pumps continued to buck the downward trend of conventional heating and cooling systems, which were down 18.1% through May according to AHRI, the Air-Conditioning, Heating, and Refrigeration Institute. Even though residential geothermal heat pump sales have not been impacted to the same degree as conventional heating and cooling systems, we believe 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 standard heating and cooling systems shipped in the United States in 2008. To that end we have substantially intensified our sales and marketing programs for geothermal products and will continue to do so.

We have prepared 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 floor space and added production equipment, and we are progressing on another significant plant addition of 78,000 square feet at this time. We expect that construction will be complete sometime during the fourth quarter of this year.

Turning to our Chemical Business. As Tony reported, sales of our chemical products were down 38% from the second quarter of 2008. The reduction in sales was caused by the combination of lower shipments of our industrial and mining customers and more significantly, the steep decline in commodity prices which resulted in much lower cost and selling prices for our products. Gross profit decreased from $16.5 million or 14.5% of sales in the second quarter of 2008 to $12.3 million or 17.6% in 2009. Operating income decreased from $20.5 million in the 2008 quarter to $6.2 million and included those items Tony discussed in the financial review.

Focusing on the agricultural part of our Chemical Business, during the second quarter ag product sales were $34.3 million or 20.5% lower than the second quarter of 2008. Urea ammonium nitrate, UAN, sales were down and ammonium nitrate, AN, sales were up.

I will explained what happened with each of these products separately, but first I want to make a comment that the published market prices I will refer to during the explanation are indicators of the regional market pricing at the Southern Plains price point for our products, but are not necessarily our net back sales price. Also, prices I refer to are approximate and not exact.

During the second quarter lower demand for UAN resulted in lower tons shipped and lower margins. Our shipped tonnage of UAN fertilizer, which we produce at our Cherokee, Alabama, facility, was 40% lower than the second quarter of 2008 and our revenues from these sales decreased 68%. The published sales price per ton during the second quarter of 2009 averaged $180 per ton compared to $415 a year ago.

Reduced shipped tonnage of UAN during the second quarter was principally caused by a number of factors which have been well publicized, including weather and a reluctance by our customers to commit to purchases following the sudden collapse of pricing of UAN and other commodities in 2008. Currently, the published prices for UAN at Southern Plains are approximately $139 per ton while the NYMEX natural gas price for delivery in August is approximately $3.38 per MMBTU.

Looking forward we expect that the pricing and margins for UAN will be weak in the third and fourth quarters compared to last year and that there will be a resurgence of demand in spring 2010, which should result in better margins.

Turning to ag-grade ammonium nitrate, or AN, produced at our El Dorado, Arkansas, plant our second-quarter 2009 revenues were higher than the second quarter of 2008 by 8.5%, reflecting higher tons shipped but lower sales prices per ton in 2009. Tons shipped were up 57% over the second quarter of 2008. During the second quarter of 2009 the published sales price for AN averaged $260 per ton compared to $380 in the same quarter of 2008. Current published prices are $250 to $255 per ton.

The price of anhydrous ammonium, the raw material feedstock for our El Dorado facility which is used to produce the products I was just discussing, as quoted at the Tampa price point escalated significantly during the first nine months of 2008 increasing from the mid-$400s per metric ton in January to a high of $931 per metric ton during the third quarter. However, since that time ammonia has tumbled and during the second quarter of 2009 the published price averaged $318 per metric ton. Today's Tampa price is $260 per metric ton.

Fortunately, the price of both the feedstocks we use, anhydrous ammonia at El Dorado and natural gas at Cherokee, have declined along with the selling prices of our products. We are able to produce our fertilizer products at profitable levels at current market prices if we are able to maintain reasonable rates of production. Also, remember that approximately one half of our Chemical Business's sales are to customers who accept a cost of ammonia as a pass-through as part of their selling arrangement.

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 second quarter our industrial asset sales were $21.5 million, down 49% quarter-over-quarter. We are 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 in which those products are used.

We believe that in the long run there will be steady demand for our industrial assets, but until the general economy begins to rebound our industrial chemical volume will probably remain at current levels.

During the second quarter our mining product sales were $14.1 million, down 50% quarter-over-quarter. Tons shipped were down 37%. The disproportionate reduction of sales dollars versus tons was due primarily to lower cost of natural gas and anhydrous ammonia, which are pass-through costs for our mining product customers. There was a decline of 22,000 tons of industrial-grade ammonium nitrate, all of which is sold under a multi-year supply agreement.

The agreement provides for minimum volumes. During the second quarter sales included certain unrecovered cost on tons not taken under this agreement.

Most of our Chemical Business's industrial and mining sales 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.

Also, during the first six months of 2009 approximately 77% of our industrial and mining products were sold pursuant to agreements that have either minimum purchase requirements or a fixed total contract profit irrespective of volume taken by our customers. To that extent we are somewhat insulated from a potential downturn in demand for our industrial products.

Turning to our Pryor, Oklahoma, plant we have almost completed its reactivation. This project is substantially on schedule. We are currently in the process of starting production of anhydrous ammonia. Barring unforeseen delays, we expect full production of UAN to begin in the next several weeks.

We expect to incur approximately $4 million of expenses and start up losses during the third quarter at Pryor. This plant is expected to add 325,000 tons per year of ammonium nitrate and 335,000 tons of anhydrous ammonia to our overall annual production.

As we mentioned before about Pryor, we are also considering the addition of other industrial products to our production at this plant and we are discussing this possibility with industrial users.

Summing up, first looking at our Climate Control Business, sales and incoming orders were down as compared to the second quarter of 2008 but income was slightly up. Generally, indicators are negative for commercial and residential construction. Strong shipments of our residential geothermal products have so far bucked the downward trend of both general residential construction and the market slide for conventional residential heating and cooling systems. However, new orders for these products during the second quarter were slightly lower than the second quarter of last year.

Sales driven by geothermal incentives seem to be dampened by the recession at present and the rate of stimulus spending is much lower than expected to date. We believe our prospects for growing all of LSB's Climate Control Business and particularly our geothermal heat pumps over the long term are very good.

Turning again to Chemicals. Second-quarter sales and profits were both down. Much of the market volatility we experienced last year seems to have stabilized for the time being, but market prices of all of our products are much lower than they were a year ago.

We believe the long-term outlook for our ag market is good, because the continuing demand for farm crops should be strong. At this time, although both sales prices for our ag products and feedstock costs are lower than in the first half of 2008, the current sales price results in a positive gross margin although lower than during 2008.

The demand for our industrial chemical 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 agreements. We believe our Chemical Business's sales and margins will be down due to the decline in business activity.

Finally, the Pryor plant is expected to start up soon, but until the plant is producing product the startup expenses will reduce the Chemical Business's earnings.

That was long and we appreciate you hanging in there. Now we will turn the conversation over to you for questions and answers.

(Operator Instructions) Eric Glover, Canaccord Adams.

I was wondering if you could first talk about the mix shift that apparently took place in the Climate Control Business in the second quarter.

The what?

The mix shift.

Well, it was a number of factors. I mean, you know that our residential product continues to do very well and in fact was up. Whereas our commercial products in general were down and specifically down more than others were our hydronic fan coils. So that is generally looking at the mix shift.

The reason that hydronic fan coils were impacted more than any of our other commercial products is because the two areas that our fans coil business happens to be exceptionally strong and it has historically had very dominant market shares have been in the hospitality and the multi-family residential sector, apartments and condos. And if you look at the reported McGraw-Hill numbers or any of the other segment reporting that is out there, you will notice that those two sectors are the ones that have been hit the hardest of any of the construction markets.

Okay. So from this I can assume that residential geothermal is a pretty high margin segment within the climate control compared to, say, hydronic fan coils?

That is a reasonable assumption.

Okay. And then second question is I happened to notice today that Johnson Controls is in the geothermal heat pump business, or they call it water source heat pumps. I am wondering if they are a new entrant or someone you have seen before.

We have seen them before.

How would you characterize them as a competitor, relative to some of your other competitors?

Well, that is a pretty qualitative question so my answer is going to be fully qualitative and not quantitative. We see them out there -- I think if you look at the market shares of the various companies out there, and typically in our presentations that we give we kind of estimate what those are, you don't see them as one of the major players in the business.

So they are one of the -- I would say, so far at least, they are what you would call maybe a third-tier player in the business; smaller share. Now as a general rule, Johnson is a very good competitor out there, but we just haven't seen them as much of a factor in this business so far.

All right. Thanks a lot.

Dan Mannes, Avondale Partners.

A couple follow-up questions. First, you mentioned where geothermal was year-to-date as a percentage of total climate. What was it in the quarter given the faster growth rate?

In the quarter -- did we put that number in the Q before I give him, release --

I will look and see real quick.

Sorry, I haven't had a chance to read the Q yet. I think it popped --

I know, I am just wondering whether we gave that. Year-to-date, let's see. You asked for the quarter?

Yes.

It was in that same area, but I don't really have that number in front of me right now.

But low 20s is the right ballpark?

I can calculate that in a second. Hold on.

The follow one question there, and this goes to the prior question, is you noticed hydronic fan coils, which appear to be a lower margin product, down; geothermal, which appears to be a higher margin product, up. Does that sort of indicate that the mix shift and maybe the better margin for mix could hang around, all other things being equal? I am not saying at 37% gross margin, but --?

You know, I would hate to speculate on what the mix might be going forward. But I think there is a general consensus in the industry that some of the sectors that will be the slowest to recover are the hotel industry and multi-family because they are overbuilt and there is a lot of extra capacity. That is well documented out there.

Yes.

That is one factor. However, there are other things that are impacting margins out there as we discussed. There is lot of very fierce, competitive price pressure and things like that, so I wouldn't make any assumptions about what our gross profit might be going forward.

Okay. And then mentioning -- especially since you just mentioned competitive pressures, are there specific product lines were you are seeing that more than others and are you seeing that all on the geothermal front?

Repeat your question, please. I want to make sure I understand it.

You just mentioned competitive pressures and I assume that is aggressive pricing by competitors. Is that affecting you across all product lines and specifically is that impacting geothermal at all?

It's impacting us more in our commercial part of the business that is the bid part of our business where we are bidding competitively. When you look at our total business, about 40% of our business including our residential geothermal sales is not bid tied business. It's either sold pursuant to a price list or sold to OEMs on a fixed price schedule or it's low quantity sales that are sold right off of our price list without any negotiation.

And about 60% of it is negotiated. All that negotiated business is commercial business and that is where we are seeing the competitive price pressures at this time.

Dan, on page 41 of our 10-Q we do mention that the percent of geothermal is approximately the same as it was for the six months.

Got it. That is helpful. Then the last question again, and sorry to harp on geothermal again, as you had mentioned you are not releasing an impact yet of order flow related to the tax credit. Is that based on the shipment? Is that based on the order data that you have gotten and could there potentially be a lag between the order at the distributor level versus when you are actually seeing [ramping]?

Well, let me clarify because maybe I wasn't as explicit as I ought to be. We are going to take the stimulus and we are going to divide it into two areas -- one is the tax credit and the other is direct spending on the government.

Yes.

What we said is order flow due to direct spending from the government is very slow and we haven't seen much of it yet.

Yes, got that.

Okay. Now talking about the tax credit, what I meant to say, what I meant to get across was we have seen some impact from it. In other words some of our customers and some of our distributors -- some of our distributors and some of our dealers are reporting that, yes, it's motivating some customers or they are mentioning it or it's some kind of a factor. However, we believe that it's not a huge factory yet.

And, furthermore, we believe that the general economy is offsetting that to a certain degree and that is why we saw in the second quarter that our new orders didn't grow like they have in the last few quarters in that sector.

Got it. That is a good clarification. Appreciate it.

Brian Kremer, Roth Capital Partners.

Hi, guys. Wanted to clarify something right at the end of the prepared statement about chemical sales and margins down and it would be reduced in part by the prior startup cost. Is that meaning the back half of the year versus the front half of the year or year-over-year?

Well, the first half of the year we spent $5 million -- we expensed $5 million in startup costs and we think that our startup cost expenses in the third quarter will approximate $4 million.

Okay.

Approximately.

Got you. And then just maybe a quick one to follow up on the Climate Control side. Are you using or are you seeing others using any incentives, price reductions, have you guys -- I know the price mix, it varies. The average selling price varies in terms of the size of the systems. So has there been any changes related to the average selling prices or have you had to do anything to try to simulate that or have you not gone that route?

Well, on the residential geothermal side of the business the answer is, no. On the commercial side of the business that is not negotiated, it's sold pursuant to price list, the answer is no. And on the negotiated business, the bid business, it's a job-by-job basis.

Okay. All right, thank you.

(Operator Instructions) Eric Stine, Northland Securities.

This is [Dale Swanson] pinch-hitting for Eric. He has got four calls going on at the same time here today. But anyways, I just was wondering you guys broke out climate control in the quarter as an overall portion of revenue. Did you break out what portion of the climate control was residential versus commercial or do you do that?

We said it was 21% of sales during the period. So you can calculate that.

Right. And the percentage of residential versus commercial of the 21%?

No, that 21% was exclusively residential geothermal and it did not include our commercial geothermal.

Okay, I got you. I got you. And then I kind of missed the Bryan facility kind of what -- you mentioned something on the impact there. What do you think is the overall impact there and --?

Well, what we said was that -- right now that we have a $350,000 insurance deductible on the property and on all exposure, property and environmental.

But you can express the impact in several ways. The financial impact should be somewhat limited by our deductible. The other impact is that we will have to undergo a rebuild of a financial center -- not a financial center, but an agricultural center, and we will have to deal with a lot of recordkeeping and so forth. So we are on top of that and devoting a lot of energy to it.

There is another potential impact and that would be to ongoing sales during the period. And as you know, this is one of several centers that we have so we feel that we can probably serve our customers.

It will potentially impact volume, but we will have to move quickly to replace that center.

Okay. And then UAN and AN pricing, you guys had mentioned where the prices are today. From an overall business view it looks like you think it will improve in the first half of 2010. So do you think it has bottomed here or do you think we tread along this level here in Q3 or Q4 or does it step down some more?

We think that UAN pricing is firming based on all the published reports we have read.

Okay.

There are no further questions in queue. I will turn the call back to management.

Thank you very much. We will now give you the -- we are going to now read the Safe Harbor language.

Thank you again for listening in today. Comments today contain certain forward-looking statements. All statements other than 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 startup of our Pryor, Oklahoma, chemical plant; the amount of capital expenditures to begin operations at the Pryor plant; amount of production at the Pryor plant; effective startup costs of the Pryor plant on earnings; long-term growth of our Climate Control products, particularly geothermal heat pumps; the effect of the economic stimulus legislation recently adopted on our Climate Control business; the effect of the current recession and economic recovery on our businesses; outlook of commercial and residential construction due to the recession and the outlook of such on our Climate Control Business; continued lower booking levels in the Climate Control Business; inability to sustain margins in the Climate Control Business in the near future; sales volumes for large industrial customers.

Our future depends on the return of stability in the credit and capital markets, optimism about long-term growth, and profitability. We have liquidity and available credit needed to continue with the investments required for our planned long-term growth; borrowing availability under our working capital revolver; adequate working capital; maintaining insurance coverage for the currently foreseeable losses arising from the fire at our Bryan, Texas, chemical distribution facility; amount of capital expenditures related to our Chemical and Climate Control Businesses; lower sales in 2009 in our Climate Control Business than 2008; sales of chemical products during 2009; prospects for growing our Climate Control Business over the long-term; completion of construction of additional manufacturing capacity by our Climate Control Business; UAN products for balance of 2009; prices and margins for our UAN products; demand for our [assets in] ammonium nitrate products; our industrial chemical volumes; raw material costs and sustaining margins; and long-term global demands for certain agricultural products.

You should not rely on forward-looking statements because actual events and 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 general economic conditions, interest rate changes, competitive pressure, changes in working capital, production rates, exclusions in our insurance policies, acceptance of our technology, legislative changes to the currently enacted stimulus package, federal and state deficits resulting in curtailment or reduction in federal and/or state spending or tax benefits for geothermal products, increasing foreign production of UAN products, passage of cap and trade legislation that would adversely affect our Chemical Business, and the risks and uncertainties discussed under the heading 'Special Note Regarding Forward-Looking Statements' in our annual report on Form 10'K for the fiscal year ended December 31, 2008, and our Form 10-Qs for the quarters ended March 31, 2009, and June 30, 2009, 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 non-cash charges unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurements. We will post on our website reconciliation to GAAP of any EBITDA numbers discussed during this conference call.

Thank you. 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.