LSB Industries Inc (LXU) 2009 Q4 法說會逐字稿

Welcome to LSB Industries, Inc. fourth quarter 2009 conference call. At this time, I would like to inform you that this conference is being recorded and all participants are currently in a listen only mode.

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

Again, we would like to welcome you to the LSB Industries fourth quarter 2009 conference call. Today LSB's management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, our 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, March 8th, 2010 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. After the question and answer session, I will have 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 our Chairman, Jack Golsen.

Thanks, Carol. Thanks for joining our fourth quarter and full year 2009 conference call. Today, Tony Shelby, our CFO, will review our financial results in detail, and Barry Golsen, our President, 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 of the fourth quarter and calendar year and filed our 10-K. You can access both of these over the internet. We reported lower sales in both of our businesses for the fourth quarter. Our Chemical business reported a decrease in sales. This was primarily due to lower cost of commodity raw materials that resulted in lower unit selling prices and reduced volume of our mining products. Our Climate Control business also reported lower sales principally due to the general decline in commercial construction activity. Despite the very challenging economy, our Climate Control business was soundly in the black in the fourth quarter and if we exclude the startup costs at our Pryor plant incurred during the fourth quarter, so was our Chemical business. In the 2009 fourth quarter, despite incurring Pryor plant startup costs of $5 million, we reported an increase in operating income. However, after considering non operating items we reported a decrease in net income compared to the 2008 fourth quarter. Tony will explain this unusual occurrence in the financial overview segment of this conference call. Earnings per share for the quarter were less than $0.01 fully diluted compared to $0.16 in the prior year's fourth quarter.

Now, for the year's results, for the entire 2009 year, fully diluted earnings were $0.96 compared to $1.58 in 2008. The 2009 pretax results were after expensing $17.2 million start up costs for the Pryor plant. Had we not had this expense, pro forma earnings per share would have been $0.48 cents higher for the year. The Climate Control business is largely dependent upon construction activity and we are not yet seeing a rebound of new orders. Customers that use our products for building projects are finding that credit is still tight, causing the commercial construction sector to lag the rest of the economy. Despite the present economic situation, in the long-term we remain enthusiastic about the future growth of our Climate Control business, particularly our geothermal heating and cooling products. We have some initial positive effects from the tax benefit provisions for geothermal heat pumps which are part of the federal economic stimulus package. But these gains have so far been more than offset by the effects of the recession. We are continuously developing and introducing new green products and we are investing in programs that we expect will stimulate the growth of our Climate Control business.

In our Chemical business, on a national basis, the level of activity of our large industrial customers who purchase our products are now showing some signs of improving. In the agricultural sector, based on current information about the market, the outlook for nitrogen fertilizer demand appears to be favorable. However, first quarter activity has been impacted by the weather. As a result, the season for planting is starting late. The long-term outlook is good for grain and crop production and fertilizer required to support them including UAN, which is urea ammonium nitrate. Also, recent prices of UAN have moved up.

As most of you know, there have been delays and associated cost overruns in starting the chemical plant at Pryor, Oklahoma. As we announced earlier this year, we began producing anhydrous ammonia, although at reduced levels. We are working on increasing production, while we continue to ramp up the plan. When we are sustaining production of UAN at full rate, we expect Pryor will contribute to earnings.

Before I close, there are some other notes that I would like to mention to you about what has been going on. Recently we released some favorable news that you may have missed. On February 25th, our El Dorado subsidiary signed a three-year extension of our agreement to purchase anhydrous ammonia from Coke International. Also, on March 1st El Dorado signed a new, expanded long-term agreement to supply industrial grade ammonium nitrate to Orica International. In addition, in January 2010 we began production of DEF, diesel emission fluid, at our Cherokee nitrogen company subsidiary which is being sold under a long-term agreement with YARA North America. DEF is an exhaust system additive and scrubbing agent used to reduce nitrogen oxide emissions from diesel engines. DEF breaks the NOx down into harmless components of water vapor and nitrogen gas. The US Environmental Protection Agency has enacted emission standards which became effective January 1st, 2010 that require the reduction of NOx emissions from diesel engines. Our product is named EarthPure DEF. It meets the stringent quality requirements of the American Petroleum Institute and significantly reduces NOx emissions.

Now, I would like to turn this conference call over to Tony for a financial overview.

Thanks, Jack. As shown in our earnings announcement shortly after the market closed this afternoon, the financial results for the fourth quarter of 2009 compared to the fourth quarter of 2008 included sales, $115.3 million compared to $179.5 million. Operating income, $2.5 million compared to $1.8 million, after Pryor facility costs of $5 million in 2009 versus $1 million in 2008. Net income was $38,000 compared to $3.6 million. Diluted earnings per share less than $0.01 versus $0.16. Consolidated EBITDA $6.8 million compared to $11.7 million.

Before proceeding to review the sales and operating income for the fourth quarter of 2009, there are some unusual items affecting the comparability of net income for the two fourth quarters that require explanation. Operating income increased from $1.8 million to $2.5 million but net income declined from $3.6 million to $38,000. That unusual occurrence is a result of certain gains and losses below the operating line in 2008. Non operating income for the 2008 fourth quarter included a $5.5 million pretax gain from extinguishment of debt partially offset by a $3.1 million loss on interest rate hedge positions included in interest expense. In addition, income taxes for the fourth quarter of 2008 included benefit of $1 million which increased net income. The benefit resulted from, among other things, the utilization of state net operating loss carry forwards not previously reflected. On the other hand, the $38,000 net income for 2009 is after an income tax provision expense of $914,000. The $914,000 provision for the fourth quarter 2009 includes income tax at the statutory rate of 40% plus certain additional tax provisions including reconciling the financial income tax provision to the tax returns filed during the 2009 fourth quarter along with certain other adjustments.

Moving to the sales and operating income for the fourth quarter, Climate Control sales were $59.7 million or 26% lower than 2008 primarily due to lower demand in our key markets for water source heat pumps and hydronic fan coils. Chemical sales were $53.7 million or 43% lower than 2008 due primarily to selling price declines in all of our product lines. The decline was caused by weaker economic conditions and the effect on most commodities including our natural gas and anhydrous ammonia raw materials, as well as the nitrogen products we sell. A decline in sales volume of our mining products was partially offset by sales volume gains in agricultural products and industrial assets.

Operating income. As mentioned consolidated operating income for the fourth quarter 2009 increased to $2.5 million from $1.8 million. Climate Control's operating income declined 30% to $5.6 million on a 26% decline in sales. Our Chemical business reported an operating loss for the 2009 fourth quarter of $369,000, compared to an operating loss of $3.1 million in 2008. However, Chemical's fourth quarter 2009 includes $5 million of the startup expenses for the Pryor facility compared to expenses of $1 million in the same period during 2008. Without the Pryor expenses in both periods, Chemical would have reported a $6.7 million increase in fourth quarter operating income compared to 2008. In addition to the effect of the startup costs at Pryor, there were a number of other variances that are explained in our earnings announcement and in the 10-K.

That concludes the fourth quarter overview. So now let's take a look at the calendar year numbers 2009 versus 2008. Sales, $531.8 million compared to $749 million. Operating income $40.7 million compared to $59.2 million. And also the operating income of $40.7 million is after Pryor facility costs of $17.2 million in 2009 and $2.4 million in 2008.

Net income $21.6 million compared to $36.5 million. Diluted earnings per share $0.96 versus $1.58. Consolidated EBITDA $59.5 million compared to $80.8 million. The sales decrease of approximately $217 million includes a decrease of $45 million in our Climate Control business, a decrease of $166 million in our Chemical business. As Jack indicated, the Climate Control business decrease was due primarily to lower customer product orders as a result of the economic downturn. The Chemical business decrease was primarily due to steep declines in our raw material costs resulting in lower selling prices. This decline was also due to a reduction in volume at the Baytown facility and a reduction in volume of mining product shift. Both had minimal impact on our operating results due to fixed cost pass through provisions in the Bear agreement and in the Orica agreement.

Consolidated operating income for the year was $40.7 million compared to $59.2 million in 2008. The decrease in our operating income of $18.5 million was primarily the result of startup expenses associated with the Pryor facility of $17.2 million compared to $2.4 million for 2008. In addition, during 2008 we recognized other operating income of $7.6 million from a litigation judgment. On a pro forma basis eliminating those two factors, our consolidated operating income would be $57.9 million for 2009 compared to $54 million in 200 .

Below the operating line our interest expense was $6.7 million for 2009 compared to $11.4 million for 2008 . The $4.7 million reduction is due to a decrease in losses of $2.0 million on interest rate contracts, a decrease of $1.6 million as a result of acquisitions of the 2007 debentures, and a decrease of $1.1 million due to the decline in the LIBOR interest rate associated with the secured term loan. Also in 2009 we recognized a gain on extinguishment of debt of $1.8 million compared to $5.5 million in 2008. Our overall effective income tax income rate for 2009 was 40.7% compared to 33.9% in 2008. The lower rate in 2008 resulted from adjustments to deferred taxes, as explained in the 10-K.

As we announced earlier this year, two of the Company's subsidiaries, ClimateMaster and ClimaCool were awarded advanced manufacturing energy tax credits in the amount of $8.9 million and $700,000, respectively. The award is based upon anticipated capital expenditures from February of 2009 through February of 2013 that would be used to produce water source and geothermal heat pumps and green modular chillers. The tax credits are subject to executing definitive agreements with the Internal Revenue Services.

Focusing on liquidity and capital resources, 2009 cash flow from operations was $57.7 million. After investing in financing activities including capital expenditures of $28.9 million, acquisitions of our 5.5% debentures $8.9 million, purchasing of treasury stock of $3.2 million, investment in CDs of $10.1 million and proceeds from debt financing of $8.6 million along with other items, the net positive cash flow for the year was $15.5 million. At December 31st, our cash on hand totaled $78.1 million which included the short-term CDs of $10.1 million. Our borrowing availability under our $50 million working capital revolver was $49.2 million. Our current liquidity and capital resources reflect a sound financial position. At December 31, 2009 our long-term debt including the current portion was $101.8 million and stockholder's equity was $150.6 million. The ratio of long term debt to stockholders' equity was approximately 0.68 to 1. Based upon our present financial position and our outlook we have adequate working capital to finance ongoing operations as well as organic growth activities.

Year to date through December 31st, we had total capital expenditures of $31 million including $6.4 million for our Climate Control business and $24.6 million for our Chemical business which included $8.8 million for the Pryor plant. At December 31st we had committed capital expenditures of $7.9 million, including $1.3 million in Climate Control and $6.6 million in Chemical which includes $1.7 million for the Pryor facility. Currently the Pryor facility's fixed operating startup costs before reaching sustained production of UAN at our targeted rates are approximately $1.6 million per month in addition to variable costs such as natural gas electricity. When we are sustaining production of UAN at the targeted production rate we will issue an announcement.

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

Thanks, Tony. First, let's discuss the results of the Climate Control business during the quarter and the year. As Tony mentioned, our Climate Control business sales during the fourth quarter of 2009 were lower than the same period last year by 26%. Heat pump sales were down 21%, fan coil sales were down 56%, and sales of other products and services were up 2%. Sales of our fan coil products have been the most severely impacted by the recession because of the decline in construction in both lodging and multi-family residential sectors, which historically have been a very important part of fan coil sales. In 2008 , for example, those two sectors accounted for 62% of the sales of our fan coil products.

New product orders during the fourth quarter were $48.5 million, an 18% decrease compared to the fourth quarter of 2008. This was approximately the same order level as the third quarter of 2009 and approximately 12% lower than both the first and second quarters of 2009. The quarter-over-quarter decrease was caused primarily by the generally weak economy's impact on the commercial construction activity. At December 31st we had a backlog of product orders of $32.2 million, down from $68.5 million at 12-31-2008. An update on that, during January and February of this year, our new product orders totaled $32.5 million, approximately the same as the first two months of 2009.

As of the end of 2009 we continued to maintain leading market shares for geothermal and water source heat pumps and for hydronic fan coils. Our gross profit during the fourth quarter of 2009 was $20.2 million, or 33.9% of sales. This was down from $24.3 million or 30% of sales for the same period in 2008. The increase in gross profit margin percent was due primarily to improved gross profit in our heat pump products. This was caused by favorable product mix resulting in lower material costs relatively to sales prices, partially offset by lower factory overhead absorption as a result of lower unit sales volume. In addition, we had efficiency improvements in our coil manufacturing operation and our engineering and construction services business. Finally, in the fourth quarter of 2009 we had a gain of approximately $372,000 on copper future contracts compared to a loss of $637,000 in the fourth quarter of 2008. While we benefited from higher selling prices and lower raw material costs in most of 2009, competitive pressures are very strong now and raw material costs have risen.

Our segment operating profit during the fourth quarter of 2009 was $5.6 million compared to $7.9 million in the 2008 quarter, reflecting the lower gross profit I just discussed. For the full year 2009 our Climate Control sales were $266 million compared to $311 million in 2008 , a 15% decline. Heat pump sales declined 6%, fan coil sales declined 44% while sales of other products and services increased 8%. For the full year 2009 our gross margin was 34.7% compared to 31% in 2008. Finally for the full year 2009 our segment operating income was $37.7 million compared to $38.9 million in 2008.

In a nutshell this is what happened in 2009 in the Climate Control business. Sales were lower due to the economic recession, principally its dramatic impact on commercial construction. Lower sales resulted in lower gross profit dollars offset somewhat by lower material costs and favorable sales mix. We had lower overall operating expenses due to lower volume sensitive variable selling costs such as commission, freight and warranty charges. However, this was offset by higher fixed sales expenses associated with increased sales and marketing efforts principally for our residential geothermal program.

At this point the big question is what does the future hold? We wish we had a definitive answer but we do not. However, we can discuss some of the indicators and things we see going on in the market. One independent source that we refer to is McGraw Hill's Construction, Research and Analytics Construction Market Forecasting Service which is published quarterly. Its first quarter sneak peak published in early February forecasts that the new contract awards in 2010 will be approximately flat for the specific commercial building types that accounted for approximately 64% of our Climate Control business sales in 2009. Those sectors are offices, hotels, educational facilities, healthcare and retirement facilities, apartments and condominiums. And that this would be followed by year-over-year increases of 18%, 27% and 26% in 2011, 2012 and 2013, respectively, in the aggregate for those sectors I just listed.

I would caution that these McGraw Hill numbers are for contract awards which occur several months before we receive orders for and ship the products we produce. During 2009 contract awards for those sectors I just listed in the aggregate declined 38%. As a result of lower contract awards last year, we expect our commercial new orders and sales to be impacted in 2010. We expect this lag effect to cause lower commercial sales for at least the first six months of 2010 compared to the first half of 2009 before we see any improvement. On a more positive note, residential contract awards are forecast by McGraw Hill to increase 29% this year. Further, in residential construction, the lead time between contract award and shipments of our products is much shorter.

In addition to the McGraw Hill forecast we also look at the Architectural Billings Index which is an indicator of future commercial and institutional construction activity nine to 12 months in the future. In February of last year, 2009 the ABI reached an all time low since the inception of the index which started in 1995. That low was an index number of 33.3. Since that time the index has bounced around and in January 2010 it was 42.5. It has now been 24 months since the Architectural Billings Index has reported a score above 50, which indicates growth.

Direct input from our sales force is that there is a pipeline of commercial and institutional construction activity in various stages of planning and design phases. But that there is also a hesitance by developers to proceed with new projects and some projects have been put on hold or cancelled. Availability of credit is still an issue, as well.

Previously we reported on the American Recovery and Reinvestment Act. The rate at which federal projects funded by the stimulus have progressed has been much slower than we originally anticipated. Contributing factors have been lack of shovel-ready projects, inability of government agencies to implement rapidly and delays at the state level. Although we are now seeing many of these projects move forward, it is not possible to predict the speed of which these projects will actually progress. We do expect more stimulus activity in 2010 than 2009 but at this time it is difficult to forecast the impact on our business.

Because it is an area of interest for many of you, I would like to discuss our residential geothermal heat pump sales program. As you are probably aware, there have been steep declines in residential construction for the past four years. According to my McGraw Hill's published reports there has been a cumulative 70% decline since the peak in 2005. Through the second quarter of 2009 both new orders and sales of our geothermal heat pumps to the single family residential market buck this trend, improving over the prior year, as was the case throughout 2007 and 2008. However, during the third quarter 2009 both bookings and shipments were lower than during the same period of 2008. It is important to point out that during the third quarter of 2008 we had unusually high new orders because many of our distributors ordered products for stock in order to compensate for long factory lead times which we have since reduced. During the fourth quarter of 2009, our new orders for residential heat pumps were approximately the same as 2008. However, our shipments were down 25% from the prior year. Don't forget that in the fourth quarter of 2008 we were shipping those stocking orders we received in the prior quarter.

For the full year 2009, our new orders for residential geothermal heat pumps were down 17% from 2008. Shipments were up 4%. This compares to industry wide shipments for standard air-conditioners and heat pumps which were down approximately 12% during 2009. For your information, during 2009 residential geothermal heat pump sales were 23% of our total Climate Control business sales. While we believe the 30% federal tax credit and other incentives enacted in 2009 will have a positive effect on our geothermal business, so far this impact seems to have been offset by the recession. As I mentioned before, there is the expectation of a rebound in residential new construction in 2010. McGraw Hill's forecasting a 29% increase in residential contract awards in 2010 followed by increases of 51% and 44% in 2011 and 2012. We hope that this increase in residential construction, coupled with federal and state incentives, will positively impact our geothermal heat pump sales. So far through February of this year, 2010, new orders for residential heat pumps have been 34% above the first two months of 2009 but shipments during January and February were 12% below last year.

Looking beyond the current slowdown, we are confident in the growth potential of geothermal sales into the huge residential heating and cooling market. There were approximately 5.8 million standard central air-conditioners and air source heat pumps shipped in the United States in 2008 and 5.2 million shipped in 2009 at the very bottom of a construction trough according to the Air Conditioning, Heating and Refrigeration Institute. As you can see, there is tremendous potential for geothermal heat pump sales to grow as the residential recovery occurs and the trend towards green sustainable construction continues.

Turning to our Chemical business, for the fourth quarter of 2009, as Tony reported, sales for our Chemical products were down 43% from the fourth quarter of 2008. The reduction in sales was caused by a combination of lower shipments to our mining customers and, more significantly, the steep decline in commodity prices which resulted in much lower costs and selling prices for our products. Gross profit for the fourth quarter of 2009 was $7.3 million or 13.6% of sales compared to gross profit of $810,000 in the prior year's fourth quarter, an increase of $6.5 million. The increased gross profit included a number of favorable variances including the timing of planned major maintenance, reduced losses on hedge contracts, improved plant efficiencies. These items partially offset by lower margins on agricultural products.

Operating income improved from an operating loss of $3.1 million in 2008 to an operating loss of $369,000 in 2008. As Tony discussed earlier, this was primarily a result of the improvement in gross profit of $6.5 million partially offset by the Pryor plant startup costs of $5 million in 2009 compared to $1 million in 2008.

Focusing on the agricultural part of our Chemical business, during the fourth quarter ag product sales were $16.8 million, 48% lower than the fourth quarter of 2008. I'll explain what happened with both urea ammonium nitrate, or UAN, and ammonium nitrate, or AN, separately. But first, the published market prices I'll refer to are indicators of the regional market pricing at the Southern Plains price point for our products, but are not necessarily our net back sales prices. During the fourth quarter, higher demand for UAN resulted in higher tons shipped. However, much lower market prices per ton resulted in lower sales and lower margins. Our ship tonnage of UAN fertilizer, which we produce at our Cherokee, Alabama facility, was 35% higher than the fourth quarter of 2008. However, our revenues from these sales decreased 55%. Currently the published prices for UAN at Southern Plains are approximately $238 per ton while the NYMEX natural gas price for delivery in April is approximately $473 per MMBTU. Looking forward, we expect that the pricing for UAN will be comparable to the first quarter of last year and we have recently seen a resurgence of demand.

Turning to ag grade ammonium nitrate, or AN, produced at our El Dorado, Arkansas facility, our fourth quarter 2009 revenues were lower than the fourth quarter of 2008 by 41%, reflecting 11% higher ton shipped, but lower sales prices per ton in 2009. During the fourth quarter of 2009 the published sales prices for AN averaged $255 per ton compared to $500 per ton in the same quarter of 2008. Current published prices are approximately $275 per ton. Sales volume in the first quarter and early spring will depend, to some degree, on weather conditions which have been excessively wet so far this year causing a late start to the spring ag season for AN. The price of anhydrous ammonia, the raw material feedstock for our El Dorado facility, as quoted at the Tampa price point, averaged $340 per metric ton during the first quarter. Today's Tampa price is $450 per metric ton. The industry consensus regarding the long term global demand for grain in general, and corn and wheat specifically, is favorable.

Turning to our industrial chemical products, during the fourth quarter, our industrial asset sales were $22.9 million, down 37% quarter-over-quarter. However, tons shipped were up 15%. We believe that in the long run, there will be steady requirements for our industrial assets and we are beginning to see increased demand as the economy improves. During the fourth quarter our mining product sales were $14 million, down 47% compared to 2008's fourth quarter. Tons shipped were down 65%. The disproportionate reduction of sales dollars versus tons was due primarily to reduced sales volume with one customer sold pursuant to a multi year take-or-pay supply contract. Pursuant to the terms of that contracted, the customer was invoiced and paid for certain fixed costs and profits on the minimum volume not taken in 2009.

Most of our chemical businesses, industrial and mining sales are pursuant to cost plus pricing arrangements with our customers, with our customers assuming the raw material cost fluctuation risks. This eliminates much of the risk of disconnect between raw material costs and the market prices for our products. During 2009 approximately 75% 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 customer. To that extent, we are somewhat insulated from a potential downturn in demand for our industrial products.

Jack and Tony have both discussed the results to date for the Pryor operation so I will not repeat them at this time.

Summing up the full year for our Chemical business, operating income from our Chemical business excluding the Pryor startup expenses were actually higher than 2008. Tons shipped for all products except ag grade ammonia nitrate were lower than 2008. There was low demand for our industrial acids and our mining products. Selling prices of all products were lower than 2008 primarily due to the reduction of commodity prices. Finally, we had delays in the startup of our Pryor facility and associated higher expenses than originally anticipated.

Before moving onto your questions, I want to mention that Tony and I will be addressing institutional investors at two conferences this month. On March 16th we are presenting at the Ross Capital Partners conference in Dana Point, California. This presentation will be webcast and the link will be posted on our website. We are also speaking in New York at the Sidoti Emerging Growth Forum on March 24th.

We will now take your questions.

(Operator Instructions). Your first question is from Eric Glover with Canaccord.

Good afternoon. I was wondering if you could speculate or talk about when you will be able to achieve the same production of UAN at Pryor.

We are not going to speculate on that, Eric. But when we feel like in our own judgment that we are sustaining production at our targeted rates we will make a press release.

Can you talk more qualitatively about where you are in the process.

As we indicated in January, we've begun the production of ammonia and the next step is to produce urea, so we are working through the process. If we see anything real significant that would indicate a fundamental problem, we would make a press release. Given that, you could assume that we don't have any fundamental problems, just delays primarily related to long lead times on equipment.

Would there be any penalties from Coke associated with the startup delays?

No. As you recall in our previous releases, we did book an embedded loss on some long-term firm sales commitments we made but only to that extent and I think that was in the previous quarters.

Thanks very much.

Your next question comes from Eric Stine from Northland Securities.

Thanks for taking the questions. I was wondering if we can do just a little bookkeeping. You ran down the specifics in the Chemical set. Can you do that in the Climate Control, the water source heat pumps, hydronic fan coils and the other HVAC?

What specific numbers are you looking for? I believe all that stuff -- what we do report is broken out in the K. Do you want me to repeat all those numbers?

No, that's all right. I see that that was just filed, so I apologize. I can get that. You may have said it but can you just give the percentage residential and also commercial in the quarter?

I don't have it for the quarter in front of me but for the full year it was 23% residential and it was 77% commercial. The commercial includes export.

What did you say?

I was just saying that geothermal, on the commercial side, I think in past quarters that has been 4% range.

No, I don't think we've said that.

We actually have not disclosed that, what percentage of our commercial sales were geothermal. That is not something we break out for disclosure.

Maybe I will move onto the distribution agreement you announced last quarter with Ream. Can you let us know how that has progressed and where things stand?

Things are progressing. This is a contract for the sale of geothermal heat pumps into the residential market and these things have a certain annual cycle that they follow. Typically, when there are distributor meetings, every company has one or a series of distributor meetings before the season starts and that's when they typically roll out new products. And in addition to rolling out new products at annual distributor meetings, there is a process of sales and training that goes on at the distributor level and even at the dealer level for customers. And so all those things are going on and progressing and we are starting to receive orders from that customer and that distribution channel.

This last question, in the past you've talked about some of the stimulus opportunities with the GSA, the DOD, and the Veteran's Administration. Any changes to how you view those overall opportunities or the timing?

I think I mentioned in the discussion earlier that we were very disappointed last year because everything seemed to be moving much slower, some areas not much at all. But what we have seen as the year has gone on is some of these projects picked up steam, particularly the areas that seemed to move the fastest were the military. We're starting to see VA projects around the country, several military projects. We are seeing projects that are occurring at a local level with HUD type of housing and energy upgrades for those. So we are starting to see this momentum build with these projects although they started late and they seem to be rolling out slower than we thought. But we are seeing this work.

What seems to be going the slowest is at the state level for us because at every state it is being administered on a different level. So that is very erratic as to what is going on in different parts of the country, but we are seeing much more activity. It is hard to quantify. For example, when you are looking at a military project that is coming down, sometimes you know it was a direct result of stimulus and sometimes you're not sure whether it was a stimulus funded project or just a military project that was in its due course. But we are seeing more activity.

That's helpful. Thanks a lot, I'll jump back in the line.

Your next question comes from Joe Mondillo with Sidoti & Company.

Good afternoon. I'm wondering if --

Hello?

The next question comes from Dan Mannes with Avondale.

Good afternoon. A couple of follow-up questions. First on the geothermal side It sounds like the first two months so far of this quarter, at least on a bookings perspective, have been pretty solid. It sounds like there is a big delta between your bookings and shipments this quarter. Is that weather related, is that just due to timing? Any color you can give us there.

I think that anything that has anything to do with any construction activity in this first quarter, particularly where you have to be digging around in the ground, was definitely impeded by this tremendous winter weather we had during the first quarter. That's the input we are getting back from our distribution network. To what degree exactly it is impacting orders and/or shipments it is hard to tell but we know it's definitely been a factor. We speculate that we would have had better activity in both bookings and shipments if we had not had the bad weather.

But I guess the positive is the quarter is not over yet and I know, at least where I am, the weather has cleared up so maybe some of those bookings will turn into shipments by the end of March. Quickly, also on geothermal, it sounded like you mentioned advertising is an increase. Can you talk a little bit about your advertising strategy and how to broaden an understanding of this business line, especially given your distribution network since you're a little bit far away from the end dealer?

Our advertising strategy is to basically try to create pull through at the dealer level by getting customers to either go to our website and find a dealer or call one of our dealers up through a national call in line that we have. It is pretty simple, it's pretty straightforward, it's pretty classic. We are trying to create awareness that leads them to a dealer and provide tools that makes it easy for them to find out about our product. We launched a website last quarter. It is a very user friendly consumer based website. It has all kinds of neat features on it like savings calculators, so if someone wants to get a rough estimate of the savings they could get if they put a geothermal system in their house, they can do it by inputting a few pieces of data on that web site. It also has a dealer locator feature. It has information about the tax incentives and it's got just general information about the product. We are trying to get everything out there and available, create tha pull through and create a series of leads and hope that those leads turn into business, and to create a general awareness about the products and about ourselves as a leader in the industry.

It is fairly recent, you said, it's only in the last quarter. How do you measure the success so far? Can you tell us or give us any indication of the success level you've seen?

Too soon to tell.

Switching over really quickly to Chemical, first of all. on Pryor, given that you are producing some product in the first quarter, primarily ammonia, are any of those costs actually being inventoried along with the products or are you still going to be expensing basically all of the costs?

Would you repeat that, please?

You are producing some product in the first quarter, primarily ammonia. Are you going to be basically inventorying ammonia at a higher than, let's call it, normal level, or are you going to be expensing a lot of those fixed costs instead of putting them into the cost of goods sold effectively?

Through the first two months, for the most part we've expensed off the costs at the rate that we discussed in the press release. And when we start the UAN production we will get some impact from the ammonia production as far as capitalized overhead but we will get the real significant impact when we start producing the UAN at the sustained rate that we have been talking about.

So we shouldn't assume you will build up inventory just because you are allocating a lot of costs over fairly small production.

Not allocated to inventory, no.

And then last thing, you had a press release out in January discussing the delays in Pryor at that point. The equipment delays mentioned there, is that the same equipment delays on urea that you are talking about now or have you progressed to the next level and found out you need something new?

We have progressed. Some of it we knew, we got in and it works fine and some of it we are just getting it in now and it is being installed right now.

This is for the urea plant?

Yes.

Are there other long lead time items that you are still awaiting or do you have everything you think you need today barring running into something else?

As far as we know, unless something new develops, and with chemical plants you never know, we have everything we need right now.

Appreciate the color, thanks.

Your next question is from Brian Cramer from Roth Capital Partners.

Brian, do you have a bug in our office?

A bug? You've seen my numbers. I guess I was pretty close. No, just got lucky this quarter, I guess. A couple quick questions. One, could you talk a little more, I will stick on Pryor since that was just discussed, with Coke. And Tony, I think we talked about this previously but I would like to ask it again. It sounds like some of the volumes have been going up in agricultural. We have heard from others as well. But obviously the prices are down. This is a take or pay for the full output of this facility basically once it is up and running? Or what's your sense?

No, it is not take or pay. It is take at the market price, whatever that market price is, with a commission to them.

In other words, if we produce it, they take it.

They have to take it as long as we are willing to sell it at the price. But we don't have to sell it at a price that we feel is not reasonable.

Is there any sense at this time that you won't be able to run that at full capacity because of demand or is expectation, it sounds like things are trending much more positively now.

The expectation is we will be able to sell everything.

That's what I thought, thanks. The other question, on pricing, UAN, again I think you guys commented that I think you said $238 per ton right now?

$237 or $238 now.

But that you expect prices going forward will be more comparable to 1Q '08 which is a good bit higher. Again, I think this is consistent with what we are hearing. But if you could comment a little further on that.

We can't really forecast anything beyond what we are looking at today. But if you read most of the trade publications it is fairly optimistic in terms of where they see pricing going, but we can't go beyond that.

I think that's it, thank you.

Your next question comes from Michael Coleman with Sterne Agee.

Good evening. You talked about your geothermal residential orders were flat year-over-year for the quarter after dipping negative in the third quarter. You have seen a mix shift in your business over the last year and I think you said your bookings so far January and February were running flat at about $32.5 million. So given the mix shift, does this imply that your geothermal residential orders are positive in the first quarter and if not, why?

I think I said that -- didn't I say that our geothermal residential sales were up in the first few months of the quarter? I forget the exact percentage. I think it was 12% up. Maybe I just wasn't clear when I stated that but I meant to state that for the first two months they were up 12%.

Thank you.

Your next question comes from Dave Petrick with Corsair Capital.

Couple of questions. One has to do with the EarthPure DEF product. How much market share do you think you guys will end up supplying? Just order of magnitude of the players that are out there. I think at one time you thought Terra was going to get the bulk of the business. Are we hoping to get 5% or 10% of the market? Just trying to get my arms around that longer term opportunity.

We haven't been able to get around that. We know the market will eventually be humongous, tremendous. But we really don't know how much of the market we will be able to get.

Are you the only supplier to YARA and using their infrastructure?

No, we are not the only supplier to YARA, but they do have minimum quantities they have to take from us each year, increasing each year for five years. And we just don't know where it will really go.

Is it fair to say YARA doesn't want to concede the majority of the marketplace to Terra? They hope to get an equal share?

It is fair to say they think they will be the dominant player as far as what they say but who knows.

And you know that YARA is attempting to acquire Terra.

Yes. That was my next question. At least they were aiming high. Speaking of Terra, and the multi billions that CF and YARA are fighting over. Can you talk at a macro level of the value in theory of the plants? We know there is some short-term stuff going on, the start up Pryor, the chemical business, this or that, construction is weak. But at a macro level you guys are effectively pretty close to debt free, you've got a $350 million market cap. Do you have any top down viewpoints on how much in theory we are hopefully under valued on that type of manufacturing scale and capability scale? This gets to the split of the two companies which always comes up by somebody.

We feel we're under valued but we're not free to talk about what our plans are.

We are also not free to talk about what we might speculate the value to be. But there appears to be a premium on nitrogen production capacity in North America right now.

If one tries to backward calculate -- this is again trying a top down approach -- of what type of returns that things have to be priced at for many years to get a return on the $4.5 billion plus investment in Terra, and the other deals, that would imply some long-term very strong pricing in some of these products for everybody?

Right.

You are not going to give me too much in return. There's seemingly a very big disconnect.

There is a disconnect. I know what you are talking about because I have looked at that many times but we don't know what is in their head and how they calculate it because the way we look at it some of their returns are going to take longer than we're all going to live.

Last question, in Pryor, you have the ammonia and you've got the next thing, urea. Then the plant is up and running and hopefully covering costs and making some money. But that doesn't fill the plant's capacity or does it?

No, it does not. We have other projects that are coming behind it.

So when the urea and ammonia are up and running, does that take up half the capacity at Pryor? Or what order of magnitude are we talking about when it is up and running and making money but you still have room?

I don't want to speculate on that because we really haven't done any calculations. I don't think that is something --

No, we can't really go much beyond what we have already talked about. We will have excess ammonia capacity. Ammonia is a product that is in pretty strong demand right now. We will have at least 35,000 tons of ammonia to sell in addition to 325,000 tons of UAN. And there are other parts of the plant that could be restarted but we don't have any announced plans at this point.

I was just trying to get an understanding of was potentially behind it.

You mean what additional unit capacity?

Yes, because you talked about, I think the line in the press release was you are effectively creating capacity at a fraction of what it would otherwise cost to be. Hopefully the marketplace wants that increment capacity, and it looks like it does right now. I was just trying to get a flavor for how much more capacity is potentially there if, indeed, the marketplace wants it. I didn't know if it was 10% more or effectively doubling between what you have between ammonia and urea.

We really hate to speculate at this time on what we might or might not do with that plant. Because there are different options. As you know, these facilities have different plants within a facility and what we will have to do is consider all the facts and circumstances of the various things we can produce at that plant and make a determination. as time goes on, whether it makes sense to activate anymore of that plant.

As time goes by, if and when we have an idea we will restart some of the additional capacity, at that time we will discuss it and disclose it.

Thank you. I will assume rightly or wrongly it isn't just a 5% capacity increase. Otherwise, it is not worth talking about, so there is either the potential of doing something meaningful or it's not worth talking about. It doesn't mean you are going to do it. I just wanted to know if there is the potential of something meaningful.

Is there potential?

As opposed to starting from scratch with a new plant that has to be built.

The potential is this. Our main ammonia plant, which we call number 4, has a nameplate of 700 tons a day. We are producing or planning to produce 525 tons a day and that's going to give us 35,000 tons a year excess ammonia. If there is a market for it, we can kick that plant up to 700 tons a day. What the numbers are on that, I haven't calculated. In addition, we have two other ammonia plants sitting near the small plants that it would have to be economical for us to start them up and they produce 200 tons a day. So altogether we could produce 900 tons a day of ammonia, and there are many products we could make out of the ammonia in addition to UAN.

Just as an order of magnitude, that was very helpful. I just wanted to a flavor, just in case someone decides out there they want more capacity, it gives an idea, I they want to pay it for Terra, God only knows.

For us to do it, we have to see the economics.

Just as you did with the current announcements, the current production. Much appreciated.

Your next question comes from Joe Mondillo with Sidoti & Company.

Can you hear me this time? I just had a couple questions. Most things have been answered. On the Climate Control business, can you remind me how big of your business is driven by replacement and how that business is looking right now going forward?

Looking back the past three years before 2009, I have to say that we don't have an exact -- I want to qualify this by saying these are approximate. These are based on some knowledge that we have of many of the orders that we ship, understanding that some of those orders we don't exactly know whether they are new or replacement. Having said that, our rule of thumb has been for the last three years or so prior to '09 that it has been roughly about 70% new construction and 30% replacement. In prior years, in other down economic cycles, we have seen replacement much higher than that, even approaching 50% of our business. In '09 I don't have exact numbers on '09 at this point but our sense is that replacement was a bigger factor and is a bigger factor now than it has been the prior three years. But if you want to look at an order of magnitude, say 30%, maybe slightly higher now.

Is that driven by where a customer, where their units just automatically randomly needs to be repaired or is it driven by a customer knows or plans to replace that unit?

It is both. And you have to really look at both markets. Let's take the commercial side of the business since that is most of our business, close to 80% of our business. Typically, someone has a facility, it's got several units. One goes out, they decide they don't want to fix it and so they order a replacement. That's a small order, they order one or two or three. Or they are renovating a small area within a building so they order a few units. Sometimes they will renovate an entire building, and during the course of that renovation they will replace the units in the building and that will be a planned major order that is very similar to getting a new order, from our standpoint, but it is just targeted to renovation. You see both things going on in the commercial side.

On the residential side, you see both. Again, you see planned replacement where a unit is getting towards the end of its life, and they know it's going to conk out pretty soon and they don't want to be left in the middle of a summer on the July 4th weekend when they've got a company without a unit, so they plan it early and they replace the unit. In other cases it is where a unit just dies and they have to replace one quickly.

In terms of on the margins of that side of the business, where do you see that going, going forward? Do you see the margins bottoming here in the fourth quarter and with raw material prices increasing, how is that going to affect things?

Are you talking about the Climate Control business?

Yes, sorry.

We actually had quite strong margins in the Climate Control business in the fourth quarter, as far as our gross profit. Is that what you are referring to?

No, I'm referring to the operating profit.

We will not speculate on a going forward operating profit. As you know, we don't give guidance in that area.

But most of it is down because of the volume you are seeing, correct?

We are seeing lower volume and what we have said in prior conference calls and it is still true is that we benefited last year, throughout the year, to lower material prices. In the first part of the year we were shipping product out of a backlog that was acquired in the end of '08, towards the end of '08 at higher selling prices. When we took the orders, material prices were higher. During the year material prices came down. We benefited during part of the year from that, which expanded our gross profit. As the year went on we started to see that tighten up somewhat. We have continued to see material prices increase with a very competitive situation out there. We said before and we expect that it will be difficult to maintain the same kind of gross profit level we have been maintaining for the last year or several quarters.

In terms of operating margin, is that down mostly due to the volume being down?

It is due to a couple of factors. It is due to volume being down and it is also due to the fact that if you are talking gross margin the answer is yes, volume, and then we are starting to see some of that compression going forward as the material prices come up in a very competitive market situation where it is difficult to pass them through. We believe in the long haul we will be able to pass any material price increases through. Historically we have. But in this market, the lag period might be longer than usual. As far as going to the total operating margin of the business, again, as we stated earlier, we have been making some heavy investment in certain areas of the business. We continue to do it despite the economy because we believe it is the right thing to do for the long-term growth and the health of the business, particularly this ramped up geothermal sales and marketing program. And there are some other areas around the country where we've increased our marketing and our sales effort. So that will have a short-term impact on operating margins until we achieve sales growth from those efforts.

Thanks a lot.

(Operator Instructions). Your next question comes from David Kaizer with Robotti & Company.

Good afternoon. Most of my questions were answered but I did want to touch on capital expenditures briefly, if we can. I don't know if you have touched on what you anticipate that will be in the coming year?

It is in our 10-K.

We did disclose what our current commitments are in the financial overview. Beyond that, we haven't.

But I would assume that as Pryor starts to ramp up production that capex would go down there as well?

I think we had $8.8 million capital investment last year? Yes and no. It should be pretty much bottomed out. We did disclose, I think, $1.7 million of current commitments. It should be less in '10 than it was in '09.

Chemical plants always have a certain amount of capital investment required to maintain them current as far as the effectiveness of the plan. And this will be like our other plant.

And then so it would be somewhat incremental then?

Yes.

I appreciate that. Thank you very much.

Your next question comes from Brian Cramer from Roth Capital Partners.

Just a real quick question on Climate Control. Average selling prices, what did those do over the quarter? Up, down, flat?

We have not really disclosed that information. I don't have that in front of me right now. I'm not sure we actually want to disclose that information.

We also have a very product offering, too.

It is difficult because we have seen a mix change. Typically commercial products on a unit per unit basis sell at a lower price per unit than residential. It is counter intuitive because you think of commercial projects as very large and residential projects as small. But in a house, the 3,000 square foot house, they will use one or two units. If they use a couple units then the average size it is probably 2.5 or 3.0 tons. And if they use one unit it might be a 5 or 6 ton unit. Whereas in a commercial job with our type of products, the average size unit might be 1 ton, 1.5 tons to 2 tons. So you see, as it skews towards residential somewhat you see the average selling price per unit going up. Also, the residential products tend to be more full featured and more efficient and that efficiency comes with a price. Typically that also skews it. Those are indicators as to what is going on. But as to a specific price, we haven't disclosed anything.

Thanks.

There are no further questions in the queue.

Thank you very much for listening in today. As we said before, Carol will now recite some safe harbor language, so please stay tuned.

Thanks again for listening today. The comments today contain certain forward looking statements. All statements other than statements of historical facts are forward looking statements. Statements that include the words, expects, intends, plans, believes, projects, anticipates, estimates and similar statements of a future or forward looking nature identify forward looking statements. Including but not limited to the Pryor facility will be a valuable assets after it is complete at a fraction of the cost to construct a plant with comparable capacity. When we are sustaining production of UAN at full rate, we expect Pryor will contribute to earnings. The long-term outlook for grain and crop production and fertilizer. Pricing and margins for UAN is good. The outlook for nitrogen fertilizer demand appear to be favorable. We expect the pricing for UAN will be comparable to the first quarter of last year. In the long run there will be steady requirements for our industrial assets, and we are beginning to see increased demand as the economy improves.

We believe we are somewhat insulated from a potential downturn in demand for our industrial products. We believe we have adequate working capital to finance ongoing operations and organic growth. We expect our commercial new orders and sales to be impacted in 2010. Lag affect expected to cause lower commercial sales for at least the first six months of 2010. Compared to the first half of 2009 before we see any improvement there is the expectation of a rebound in residential new construction during 2010. This coupled with state and federal incentives will positively impact our GHP business. We are confident in the growth potential of geothermal sales into the huge residential heating and cooling markets. In the long-term we remain enthusiastic about the future growth of our Climate Control business particularly our geothermal heating and cooling products. We are investing in programs that we expect will stimulate the growth of our Climate Control business. We believe the 30% federal tax credit and other incentives enacted in 2009 will have a positive affect on our geothermal business. There will be more stimulus projects in 2010. There is potential in geothermal heat pump sales to grow as the residential recovery occurs and the trend towards green sustainable construction continues.

You should not rely on forward looking statements because actual events or results may differ materially from those indicated by these forward looking statements as a result of a number of important factors. We incorporate the risks and uncertainties discussed under the headings Special Note Regarding Forward-Looking Statements in our annual report on Form 10-K for the fiscal year ended December 31, 2009. And the reports we file from time to time with the Securities and Exchange Commission. We 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 web site reconciliation to GAAP of any EBITDA numbers discussed during this conference call. Thank you very much. That ends our conference call.

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