LSB Industries Inc (LXU) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to the LSB Industries Incorporated second quarter 2010 conference call. At this time, I would like to inform you that this conference call is being recorded and that all participants are currently in a listen-only mode. I will now turn the conference call over to Ms. Carol Oden. Please go ahead, madam.

Thank you. Again, we would like to welcome you to the lsb industries inc. Second order 2010 conference call. Today LSB's management participants are Jack Golsen, our Chairman, 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 the time. Information reported on this call speaks only as of today, August 6, 2010, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay. After the question-and-answer session, I will have some important comments on 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 Carol. Welcome to today's call and thanks for joining us. Today we released the results of our second quarter. We're happy to report that the second quarter results are somewhat better than the first quarter 2010 and indicators are trending upward. Although we have not yet achieved what we believe to be the full potentials of our businesses, we are continuing to add the building blocks that will allow us to achieve these potentials when the market improves. When Barry discusses order rates and backlog in our Climate Control business and the upturn in our Chemical Business, I think you will agree that we are moving in the right direction. Economic activity in some of our businesses during the first half of this year has not yet fully recovered due to the factors that we have discussed with you in past conference calls.

Commercial construction in the markets we serve are substantially lower than its peak. Residential construction, although expected to increase this year, will also be significantly lower than prior years. In the face of lower residential and commercial construction markets, we have increased our market share of geothermal products over the past years. And new orders of our geothermal heat pumps have increased dramatically this year over last year. We are encouraged by this and we believe that if it is an early indicator of the potential for our geothermal businesses in our recovery market, our future is bright.

Our chemical operations in Baytown, Texas, El Dorado, Arkansas, and Cherokee, Alabama, are performing well at this time. Product demand and pricing have been relatively good. We are frequently asked about Pryor, Oklahoma plant production. There's some of you who follow us will know, in June the operations at our Pryor plant were interrupted by a pipe failure and resulting fire, which substantially destroyed the primary reformer and the ammonia plant. This prevented our ramping up to full production as scheduled. The reformer repairs should be completed later in the third quarter. In the near future, the restart of Pryor should add rather than detract from our overall chemical results.

We're also asked about our progress on the potential acquisition that we were considering in China. That situation is as follows -- at the last conference call we disclosed that we were proceeding with due diligence of a potential acquisition of a heating and air-conditioning business in China. What we found while doing our due diligence was not what we expected to find. Since we have been unable to agree to a revised deal with the owner, we have decided not to proceed with the acquisition at this time.

We have some late news, which I'd like to give you. Last week, we agreed to a three-year labor contract with the union at our El Dorado, Arkansas plant. Labor negotiation were concluded within our expectations and are now subject to a definitive written agreement. This is a formality that we always go through with the unions. Before closing, I would like to convey to you that we are optimistic about the long-term future of our Company. We remain cautious about the second half of 2010 since there are mixed opinions about the economic recovery of our markets this year. We believe our Company is undervalued and we are working to make these values more visible and realizable to our shareholders. Finally, as some of you may have already know, LSB Industries was added to the S&P SmallCap 600 Index in the spring of 2010. Now for the details about our second quarter. I will turn this conference call over to Tony Shelby.

Thanks Jack and good afternoon. As reported in our earnings announcement this morning, the financial results for the second quarter for 2010 compared to the second quarter of 2009 included sales of $168.4 million compared to a $138.6 million, operating income of $12.8 million compared to $14.5 million, net income was $6 million compared to $8.7 million, diluted earnings per share of $0.27 compared to $0.38. And EBITDA, all of these are in millions, Chemical $12.7 million versus $9 million, Climate Control $7.9 million versus $13.1 million, and consolidated $17.6 million versus $19.2 million. For the trailing 12 months at June 30, 2010, consolidated EBITDA was $41.7 million.

The following comments are all related to the second quarter. Sales. Climate Control sales were $59.8 million or 10.7% below 2009. Although Climate Control's order levels for the quarter was higher than in 2009, the sales declined due to a soft commercial construction market and a lower beginning order backlog that at the beginning of the second quarter of 2009. Chemical sales, including $5.7 million for Pryor, was $106.4 million, or 52.7% higher than in 2009. The increase was primarily as a result of improved customer demand for our agricultural, industrial and mining products and an increase of selling prices, partially driven by higher raw material input costs.

Operating income. As mentioned, the consolidated operating income for the second quarter decreased from $14.5 million in 2009 to $12.8 million in 2010 on a sales increase of $29.8 million. The decline in operating income was attributable to our Climate Control business. Climate Control to operating income for the quarter increased to $7 million or 12% of the sales compared to $12.2 million or 18% of the sales in 2009. The decline in operating margin on Climate Control sales is primarily due to increases in raw material cost, inefficiencies related to unabsorption of fixed costs due to lower production volume, and increased spending on sales and marketing programs. Chemicals operating income for the quarter increased to $9.2 million or 8.6% of sales, compared to $6.2 million or 8.9% of the sales in 2009.

Although the operating margin as a percentage of sales was very comparable to last year's second quarter, our gross margin as a percentage of sales actually decreased from $17.6 million to $14.7 million due to higher -- excuse, 17.6% to 14.7% due to higher [anhydrous ammonia] raw material costs included in ammonium nitrate fertilizer produced at our El Dorado facility. Offsetting the lower margins on Agricultural AN were higher margins on our urea ammonium nitrate fertilizer which is produced with natural gas and higher margins on our industrial and mining products. On the other hand, Chemicals SG&A expenses for 2010 for the quarter were approximately the same as 2009 resulted in Chemicals operating income, as a percentage of sales, of being approximately the same in both the second quarter 2010 and 2009.

Focusing on Pryor. During the second quarter, the Pryor facility intermittently produced anhydrous ammonia and UAN production rates lower than our targeted rates. The UAN producer was sold. The anhydrous ammonia was either sold to customers or consumed internally in the Company's other chemical facilities. The combined ammonia and UAN sales from the Pryor sales in the second quarter of 2010 were $5.7 million. Operating expenses at the Pryor facility for the second quarter were $6.2 million. The operating expenses during this period identifiable with production were included in cost of sales or capitalized inventory and the remaining unabsorbed $3.2 million of Pryor facility expenses were included in SG&A. Pryor's operating loss for the quarter of $2 million compared to start-up expenses of $3.2 million in the 2009 quarter.

Below the operating line, interest expense was $2 million for the second quarter of 2010 compared to $1 million for 2009. The difference of $1 million is attributable to the mark-to-market adjustments in 2010 and 2009 of our LIBOR interest rate slough, of a floating rate to a fixed rate that (inaudible) 2012. Our fixed rate slot fixes LIBOR at approximately 3.4% compared to current market rate of 0.3%. The tax provision for the second quarter was $5 million or 45.3% of pre-tax income compared to $5.5 million or 38.4% of pre-tax income for the second quarter of 2009. During 2010, we determined that certain non-deductible expenses that were not previously been identified as non-deductible in our 2007, 2008, and 2009 income tax provisions. As a result, we recorded an additional tax provision of approximately $800,000 during the second quarter and this additional provision results in a higher effective tax rate for the quarter.

Capital Expenditures. During the quarter we have total capital expenditures of $3.6 million, including $600,000 for our Climate Control business and $3 million for our Chemical Business including $1 million for the Pryor plant. At June 30, we had committed and planned capital expenditures of $15.2 million not including Pryor. The $15.2 million includes $9.7 million for Chemical and $5.5 million for Climate Control. Based on a thorough assessment, the Pryor capital -- the Pryor facility capital expenditures requirements for the remainder of 2010 are approximately $14 million, most of which will occur in the third quarter. The $14 million includes $8 million to rebuild and repair the damaged gas reformer and $6 million for other rebuilds and improvements. We expect that most of these costs to rebuild the gas reformer will be covered by a replacement cost insurance subject to $1 million deductible.

Focusing on liquidity and capital resources, the cash provided by operations for the second quarter 2010 was $20.8 million which includes net income of $6 million, depreciation of $4.6 million, and seasonal decrease in inventories of $14.3 million, offset by an increase in accounts receivable of $5.3 million. After investing and financing activities including capital expenditures, the repurchase of $2.5 million, or 5.5% debentures due in 2012, the purchase of 177,000 shares of LSB common shares were $2.4 million, and the sale of 10 million of short-term securities. The increase in tax for the quarter was $20 million. At June 30, our cash on hand totaled $65 million, our borrowing availability in our $50 million working capital revolver was $49 million. Our current liquidity and capital resources reflect the sound financial position. At June 30, 2010, our long-term debt including the current portion was $102 million. The stockholders' equity was $156 million. The ratio of long-term debt to stockholders' equity is approximately 0.65 to 1.

Based upon our present financial position and our outlook,y we have adequate working capital to finance ongoing operations as well as organic growth opportunities. During the last 18 to 24 months of uncertainty in the global economy, we've intentionally maintained a significant liquidity position. We're focused on our long-term debt maturities that are due in 2012 and develop a capital plan to consider these obligations as well as our growth opportunities. That concludes our financial review. Barry will cover operational highlights and the outlook for the Company.

Thanks Tony. First, I would like to discuss the results from our Climate Control business. As Tony mentioned, our total Climate Control business sales during the second quarter of 2010 were lower than the second quarter of last year by 10.7%. Sales to commercial and institutional customers were 75% of our total business during the second quarter and commercial sales were down 15% from the second quarter of last year. Sales of products used in single family residences, which are all geothermal heat pumps for us, were the remaining 25% of our second order sales and sales were up 7% from the same period last year. New orders for our residential products increased even more than this and I will discuss that in some detail later.

Focusing on major product lines, total heat pump sales were down 6%, fan coil sales were down 29% and sales of all of our other products and services were down 9%. Sales of our fan coil products have been the most severely impacted because of the decline in both the lodging and multi-family residential construction sectors, which traditionally accounted for a majority of our fan coil sales. Total new product orders during the second quarter were $71.7 million, a 31% increase compared to the first quarter of 2009. This was the highest level the new orders since the third quarter of 2008. New orders of products for commercial and institutional applications were up 26% compared to the same quarter last year, while new orders for our geothermal heat pumps that are used in single family residences were up 48% over the second quarter last year.

At June 30, we had a backlog of product orders of $48.2 million up from $36 million at March 31 and slightly down from $49.5 million at June 30, 2009. July 2010 new product orders totaled $19.5 million, up 34% over July 2009 and our backlog at the end of the month was $48.2 million as compared to $43.2 million at the same time a year ago. We are encouraged to see our overall new order bookings and backlog increase and are particularly pleased with our residential geothermal activity level. As of the end of the second quarter, we continued to maintain leading markets shares for geothermal and water source heat pumps and for hydronic fan coils. Year-to-date through June, we have increased our market share for our geothermal products.

Our gross profit during the second quarter 2010 was $18.8 million or 31.5% of sales, down from 37.3% of sales for the same period in 2009. The reduction in gross profit was primarily a result of lower sales and increased material costs. We've discussed this with you on several other conference calls. And we've stated that our gross profit during the second and third quarters of 2009 was unusually high in our opinion as a result of the large backlog we had at year-end 2008 going into 2009. This backlog was so that market prices for our products based on higher material costs in 2008. As commodity prices fell during 2009 we were able to benefit from a higher spread between material costs and our sales prices.

We're now experiencing both higher material prices and generally lower sale price levels for our commercial products. Our residential product sales prices have not been significantly impacted by the economic downturn but began, material prices have increased over 2009 levels. Our Climate Control segment operating profit during the second quarter 2010 was $7 million compared to $12.2 million in the 2009 quarter, primarily as a result of the lower gross profit I just discussed plus the effect of fixed SG&A costs, coupled with increased marketing and advertising expenses primarily related to our geothermal heat pumps.

Looking to the future, what is the construction outlook? One source, the latest McGraw-Hill Construction Research and Analytics Construction Market Forecasting Service forecast that new contract awards in 2010 will be approximately 7% lower than 2009 awards for the specific commercial and institutional building types that accounted for approximately 64% of our total Climate Control business sales in 2009. Those sectors for us are offices, hotels, educational facilities, healthcare, and retirement facilities, apartments and condominiums. Note that the most recent forecast for this year declined further from McGraw-Hill's forecast a quarter ago, which was approximately a 3% decline at that time.

Reflecting the continuing softness in commercial construction, McGraw-Hill also forecast that this will be followed by year-over-year increases of approximately 14%, 30%, and 30% again in 2011, 2012 and 2013, respectively for these building types in the aggregate. Keep in mind that contract awards occur several months before we actually receive orders for and ship the products that we produce. During 2009, construction contract awards for the commercial sectors we serve, primarily the ones that I just discussed, declined approximately 38%. Accordingly, we have expected and are experiencing that sales for commercial products for the full year 2010 will be lower than 2009.

In addition to McGraw-Hill, we also look at the Architectural Billings Index, which is a indicator of future commercial and institutional construction activity nine to 12 months in the future. The ABI was 46% in June and continues to indicate decline in demand for design services. Every time we meet with investors, I am asked what do you think will happen in the commercial construction area? Our answer is always the same. We believe we know what will happen. We just don't know exactly when it will happen. Our belief is that there will be a gradual recovery in commercial construction and we intend to participate in that as it occurs. In the meantime, we're continuing to do those things that we believe will make us stronger and more competitive as the eventual recovery occurs.

Moving onto residential geothermal heat pumps or GHPs. On a more positive note, residential contract awards are forecast by McGraw-Hill to increase 22% this year albeit from an incredibly low level. Also in residential construction, the lead time between contract awards and shipments of our products is much shorter than in commercial construction. McGraw-Hill also forecast increases of 51% in 2010 and 50% in 2012 . To meet this demand, we have significantly increased our GHP sales and marketing efforts. These projected increases seem phenomenal, I know, but it should be noted that even with these projected increases, the single family residential market will still not return to the 2005 to 2006 levels.

As discussed earlier, our sales of residential GHPs were up approximately 7% in the second quarter 2010 compared to the same quarter 2009 while new orders were up 48% compared to last year's second quarter. Year-to-date as of June, our residential GHP new orders were up 40% over the same period in 2009. We believe that a combination of our intensified sales and marketing efforts, the 30% federal income tax credit for GHPs, increased home construction, although at a lower level than we expected, and the trend towards more energy-efficient construction has had a very positive effect on GHP sales of the new orders. We've also seen a recent trends towards more use of GHP systems in the replacement market than we traditionally have seen.

I would like to update you about a few operational initiatives that we're undertaking within the Climate Control business. We recently began production of tube and fin heat transfer coils for our large custom air handlers at our ClimateCraft facility. This is a cost reduction project. Previously, we were purchasing those on the outside because they were much larger than the other coils that we produced and we had to install manufacturing capability to produce large coils. Also at the ClimateCraft , last year we introduced a product line which utilizes fan matrix technology. We recently installed a specialized production cell to manufacture fan matrices in a much more efficient manner than we had briefly been producing them.

We plan in the near future to set up a dedicated manufacturing facility for our ClimaCool to produce highly energy efficient and green modular chillers and heat pumps. We're currently producing those are ClimateMaster plant but we believe we can produce them more efficiently in a dedicated facility. The new facility will also help with the introduction of other clinical products that we have planned for the future. We will repurpose the building that we already own and expect to initiate production during the first half of 2011. Returning to the total Climate Control business. Despite the fact that our current commercial sales are soft, we're very optimistic about the future.

Throughout this downturn, we've continued to do the things that we believe will build this business this for the long term, such as increasing our overall sales and marketing team, investing in new front-end systems to enhance customer service and sales support, introducing new products, increasing plant capacity, capital investment aims at cost reductions to make us more vertically integrated and a low-cost manufacturer, and a very strong focus on green and highly energy efficient products. We believe there is a long-term trend towards construction and retrofitting green buildings and it is our intention to continue to take advantage of this in the years to come. We believe these will put us in a strong competitive position as the market rebounds.

Turning to our chemical business. For the second quarter 2010, as Tony reported, sales, total sales of our chemical products were a $106.4 million compared to $69.9 million in 2009. Sales of our industrial and mining products were combined $55.4 million while sales of our Ag products were $51 million. As most of you know, as sales are typically higher percentage of our total revenues during the second quarter than the full year because of agricultural seasonality. This was accentuated this year due to the late start of the Ag season in the first quarter. Gross profit and operating income were both improved as compared to second quarter 2009 for all reasons that Tony pointed out earlier.

Focusing on the Ag part of our Chemical Business. During the second quarter, total Ag product sales were $51 million, 48% higher than the second quarter 2009. Total Ag products shipped were 45% higher than 2009. During the second quarter, our shipped tonnage of UAN fertilizer from our Cherokee, Alabama plant was approximately 40% higher than second quarter 2009. Revenues from the sales, however increased 79% reflecting both increased tonnage volumes and increase sales prices per ton. We also shipped approximately 14,000 tons of UAN during the second quarter from our Pryor, Oklahoma plant which began production on a limited basis this year. I'll discuss Pryor in much more detail later.

Turning to Ag grade ammonium nitrate, or AN, our second quarter 2010 revenues were higher than the second quarter 2009 by 36%, partially as a result of a 20% increase in ton shipped. In addition, during the second quarter 2010, the published sales prices for AN were approximately $30 per ton higher than the second quarter of 2009. The significant increase in our Ag product sales volume in the second quarter was due to strong demand and as a result of a late start of the spring season caused by cold and wet weather conditions, which pushed some demand in the first quarter to the second quarter.

Sales for the balance of the season will depend to a large degree on conditions -- weather conditions and the extent to which dealers and distributors restock. However at this time as a result of very strong sales over the past few months, the entire distribution system is virtually emptied of its nitrogen products. Our plants are currently sold out and we're optimistic about the near-term future. We also remain bullish about the long term demand for agricultural products we produce. The price of anhydrous ammonia, the raw material feedstock for our El Dorado facility as quoted at [tamper] price point averaged $390 per metric ton during the second quarter compared to $261 in the second quarter 2009. Today's [tamper] price point is $380 per metric ton.

Turning to our Industrial Chemical Products. During the second quarter our industrial product sales were $32.8 million, up to 53% quarter-over-quarter. However, tons shipped were only up 44% -- excuse me, the increase in revenue per ton was due to the pass through of higher cost of anhydrous ammonia, the raw material for the El Dorado and Baytown plants. We believe that in the long run, there will be steady requirements for our industrial assets and we're seeing increased demand as the economy improves.

During the second quarter our Mining Product sales were $22.6 million, up 61% compared to 2009 second quarter. Tons shipped were up 33%. The disproportion in increase in sales dollars versus tons shipped was caused by higher raw material input costs on tons shipped plus Billings to our largest mining customers for tons not taken. The billing for tons not taken was pursuant to or take-or-pay agreement with that customer. It's unclear to us how these markets will respond for the remainder of 2010 but we anticipate modest increased demand from certain of our large industrial customers and from our mining customers.

Most of our chemical businesses in industrial and mining sales our pursuant to costs plus pricing arrangements with our customers, assuming the raw material cost fluctuation risks, eliminating much of our risk of a disconnect between raw material costs and the market prices of our products. During the first half of 2010, approximately 72% 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.

Focusing on the Pryor facility. We know that many of you are following this closely so I'll try to give you a very thorough update. During the second quarter, the Pryor facility produced in anhydrous ammonia and UAN on a limited and intermittent basis at production rates lower than our targeted rates. The UAN produced was sold, the anhydrous ammonia was either sold to customers or consumed internally by the Company's other chemical facilities. Operating expenses of the Pryor facility for the second quarter were $6.2 million. Operating expenses during this period identifiable with production were included in cost of sales or capitalized inventory and the remaining $3.2 million below the gross profit line as expenses.

Due to a fire in June that damaged the ammonia plant's primary reformer within the facility, the Pryor facility is unable to produce anhydrous ammonia or UAN at this time. Based on our current assessment, we anticipate repairs will be completed towards the end of September 2010. The primary reason for this delay as the lead time for replacement parts. All production at the Pryor facility has ceased for an estimated 90 days while repairs are being completed. In the third quarter of operating expenses and losses will fall below the gross profit line. During this rebuild and repair phase in the third quarter, all operating expenses and losses will fall below the gross profit line. We continue to fund Pryor facility from our available cash on hand, working capital, and insurance proceeds.

Also during the 90 day delay period, we're undertaking an extensive plant reassessment and upgrade process, which we believe will enhance production reliability when operations resume. Our primary rationale for re-opening Pryor was the change in the nitrogen fertilizer industry in the United States over the past several years coupled with the long-term favorable outlook for fertilizer products. Today, we believe those reasons are still valid and the long-term outlook is even stronger. Even considering the delays and increased costs at Pryor, we anticipate completing Pryor for a fraction of the cost of a comparable new plant. We believe that Pryor is a valuable asset that will contribute to earnings for many years to come. We're enthusiastic about our relationship with Koch on this project which should facilitate the growth of this business for LSB.

On a further operational note about our Chemical Business, at the Baytown facility, we recently implemented the first N2O, or nitrous oxide emissions reductions project in the United States using the protocol developed by the Climate Action Reserve. N2O is a normal co-product in the manufacture of nitric acid and is currently categorized as a greenhouse gas by the EPA. Our project catalytically converts N2O to a harmless nitrogen gas. We expect to begin marketing the carbon credits generated by this project later this year.

Summing up, chemical plants in Arkansas, Alabama, and Texas, are all experiencing good steady demand and other than downtime for plant maintenance, are running at near optimal rates. The outlook for Ag production -- our product demand, rather, is especially positive given the supply demand fundamentals for global grain production. We are anxious to complete the repairs in the plant maintenance at our Pryor plant. We'll now take any questions that you might have.

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

Hi everyone. Congrats on a good quarter. I was just wondering if we could touch on Pryor quickly, you just said in your prepared remarks that the 90 day timetable is due to long lead time items. I know those long lead time items have caused delays of a number of months. Are these items that you would say are shorter lead times than those others and give you confidence? I mean, is that where the increase happens --

Let me clarify, the delay is caused as a result of the fire that we had and the equipment that was damaged severely or destroyed during the fire. And the lead time to replace or repair those things is long and is causing the 90 day from the time we originally announced -- from the time of the fire delay and repairing the plant. Does that answer your question?

It does. I just know that long lead time items has been one of the reasons why things have been delayed for a number of months. And so I'm just wondering if these parts are a little bit different and give you that confidence that 90 days is the timetable we should think about?

We're confident in that timetable and these are different parts than parts we were dealing with previously because these are parts that specifically relate to the damage caused by the fire.

Perfect. That's what I was asking. That's great. Maybe we could just turn to SG&A and just to clarify, so you'll have obviously no expenses in COGs in the third quarter, so we should see SG&A return to the levels that we've seen over the last few. But then once full production comes online, it would seem that second quarter is a pretty good indication of where things could go and likely could go lower.

Eric, I think the direction we try to give you in these disclosures of the 10-Q in these conference call is that in the first quarter, we expensed off over $5 million worth of expenses and we included SG&A. In the third quarter, operating income SG&A included $3.2 million of (inaudible) costs in the second quarter. Now in the third quarter, as we indicated, we're going to have $6.2 million of expenses with very little if any production since we're targeting the end of September which is roughly 90 days. So you could probably expect to see something more comparable to the first quarter.

Okay. That's helpful, thank you. And then just on the Agricultural side. So it sounds like second quarter was skewed a little bit by maybe bad weather in the first. Can you just help us -- I mean how we should balance that versus that the channels empty and maybe what we should think about for the third quarter directionally versus the second.

Well, we have -- as you know, the second quarter is a heavy application period. In the third quarter, you're looking more at a restocking from your distribution system. So the third quarter Ag production is probably going to be stronger than it would have been last year because the distribution system is pretty much destocked right now. And there's an awful lot of excitement about where agriculture is going in the second half of this year and next year because of the grain marketing considerations. You've got shortages of grain. So you may see stronger demand for Ag products -- nitrogen and Ag products in third quarter than we have seen historically.

Okay. But still along the norm that the third quarter is usually down from the second?

Yes. It's normally less than the second.

There's only one other factor that we ought to throw in. And that's because of the price fluctuations in the market, the people who stock the product are waiting until the last minute to order because they're anticipating -- they don't want to pay a higher price and have the price drop out from under them. So they need the product, they'll get the product but they wait until the last minute to buy the product. And to the extent that, that influences the volume is anybody's guess.

Okay understood on that.

The chance they take is that there will be no more product if they wait too long.

Right, right. Okay. Last question and I'll jump back in line. Just on bookkeeping. So tax rate we should see that return to more of the high 30%?

The tax rate? Yes, that's correct.

Okay. Thanks a lot guys. Congrats again.

Thanks Eric.

Our next question comes from the line of Eric Glover with Canaccord Genuity.

Hi. Good afternoon.

Hi Eric. How are you?

Fine, thanks. I-- maybe I missed this. I was just wondering if you could go over the operating margin in Climate Control in the second quarter was up despite the fact that gross margins were down. I'm talking about the first quarter 2010 so could you explain that?

Eric, we lost the tail end of your question. Would you mind repeating the question?

I'm interested in the operating margin in Climate Control for the second quarter which was up on a sequential basis even though gross margins were down on a sequential basis and I was wondering if you could help me understand that?

Well to begin with on a sequential basis . I'm not sure I'm understanding the gist of your question.

Okay. Well, I'll follow-up with you offline then.

No, that's okay. Go ahead and ask the question. Maybe we can cover it here.

Well, I'm looking at Q2 versus Q1 of this year in Climate Control. And gross margins were down in the second quarter versus the first quarter, however operating margins appear to have increased.

Well sales were up substantially. I mean, in the first quarter sales were a $130 million in the second quarter sales were a $168 million, I believe. Is that the number? Excuse me, I'm looking at -- I'm sorry, I just grabbed the wrong page that I was looking at. In the first quarter, we were at $53 million and in the second quarter we were up $59 million so we had a slight increase in sales, okay? But we also had a very slight increase in gross profit. It went from $18.4 million to $18.8 million, so we were at 34% in the first quarter. We were at 31% in the second quarter. I think what we've been telling you for several quarters is that we expected to see the margins decreased somewhat as a result of several factors. One is, as material prices increased and also as price pressure ramped there in the market affected the commercial side of our business. So I think you're seeing definitely some effect from that in the second quarter as compared to the first quarter.

But also you have a carryover of what is a higher price increase (inaudible) that you don't have in the second quarter.

That's correct. Does that answer your question? Do you want me to drill down even more detail?

That's all right. That's good enough, thanks. Then on mining products specifically, it's been going up pretty nicely over the past several quarters. I'm wondering if you think that sales there can continue to increase over the balance of this year or have we hit somewhat of a plateau?

I think, Eric, we're seeing the effect of the new contract that we entered into effective -- the new agreement with our largest customer was effective January 1, 2010. And that contract had a step up in take-or-pay volume from 210,000 tons a year to 25,000 tons a year and that's part of what's driving the higher demand -- higher tons this year versus last year.

Okay so you would expect that to continue?

We would expect the shipment level on mining to continue pretty much at the same level of progression for the year.

Okay great thank you.

Our next question comes from the line of Dan Mannes from Avondale Partners.

Good afternoon.

Hi Dan.

A couple of quick follow-up questions. First, geothermal, clearly great order in terms -- great quarter in terms of orders. Can -- you mentioned maybe a bit of a trend towards more retrofit activity rather than new construction. Can you --

That's a good observation.

What's that?

Historically when asked this question, and say up until, say, last year, we've always felt that we were probably about three-quarters new construction for geothermal and one-quarter replacement of both geothermal systems and of conventional systems. We've seen that strong trend towards replacement and we don't -- I do not have a detailed report but anecdotally, from our people in our sales force, they're telling me that they believe it's at least 50% of our business right now -- on the residential side.

Okay. And given the depressed level of new home starts, that would probably make sense as well. Because it's hard to see the growth rate you're getting when new homes are as low as they are.

Right.

Got it. Briefly back on Pryor and I'm going to belabor this as well. Assuming that the lead time items come in as expected and the restart begins at the end of September, how long, assuming everything goes smoothly, how many months or weeks would it take since you have to sequentially restart the units before you can even potentially be running at full output again. Are we talking mid-fourth quarter? End of fourth quarter? Just so we can think through how to model this out --

First of all, Dan, we've never disclosed that we're running full out. We -- as a matter of fact, we qualified as running intermittently up and down so we've never really run full out. But when we get this rebuild done, we should be in a position to run at our targeted rates assuming that the operations, after the anhydrous ammonia plant is up running properly. We feel very confident that they will but we're going to stick with the position that we've taken all along that as soon as we're there we'll make an announcement.

Understood. I'm just trying to understand from the time you decide to restart the unit, even the ammonia unit first, it doesn't come online immediately, there's a ramp up period and there's a ramp up then on the following units of nitric acid and the UAN, meaning best case scenario, how long would it take from beginning to end --

Look, if you had a plant -- let's just say you finished a normal turnaround and you are turning on a plant and you had no problems with it and it wasn't a new plant and by that, a new plant I mean new for us in that we're reactivating the plant. As Jack just stated, it would take two or three or four days to get it up into full operation. Now, we are not sure at this time what the operational people in the plant will decide in terms of their protocol for bringing it up back up afterwards. It might not be three days, it might be over a period of a few weeks. They might do it at a pace that's different than they normally would. So at this time, what we hate to do is give you something specific and we'll know later and when it happens, it will happen. But you're looking at days or a couple of weeks, you're not looking at months and months.

Got it. That's what I was looking was that color. Thanks so much.

(Operator Instructions) Our next question is from the line up Brian Kremer with ROTH Capital Partners.

Hi guys.

Hi Brian.

Let's see. A couple of questions here. Why don't we stick on Pryor. Two questions there. You mentioned some additional work, you may be looking at the plant with this downtime that you've seen. Can you comment on that a little bit more?

What we did is a full turnaround. We're taking advantage of this downtime to work on the entire facility.

Okay. But obviously that's in the cost that you've provided in the opex expenses, something that you mentioned earlier. Okay. And then can you tell us how will the insurance work in terms of the capital cost versus labor those -- that piece of it.

The insurance will cover the cost of any repairs that are caused by the fire minus $1 million which is our deductible and in addition there will be a component for lost profits from non-operating or producing which starts 30 days after the plant went down and that is being calculated now and is not yet determinable but it should be significant. The property coverage -- casualty coverage is at replacement costs so we have replacement cost coverage on that approximately $8 million that we talked in the rebuild. The insurance company may or may not agree with the $8 million but all are part of the $8 million will be covered subject to the $1 deductible.

I think it will be more than that.

That's what we disclosed on the 10-Q, so --

Okay. The on the Climate side and it obviously the economic recovery is probably a little slower than you folks might have expected, however last year was a pretty tough year and yet sales were down 25% in the first quarter, only 10%, 11% in the second quarter. Do you guys think that this is trending towards where year-over-year you're going to -- you're at breakeven, let's call it, you're flat year-over-year by third quarter or fourth quarter, is it -- how do you look at that?

We have a historical and traditional practice of not giving guidance as to where we're going. And what were trying -- we've stated that we believe our commercial business will be lower. We've also stated that we have a tremendous -- we do have a slight uptick in orders in the commercial side, significant not just slight. And we've got an even bigger uptick in the residential side but at this point in time, I would not want to prognosticate about what we're going to see overall for the year. I just wouldn't want to do it. We're very optimistic about what we see going on out there given the activity level but I just don't want to put a stake in the ground on the balance of the year.

Right now, with the -- in years past where we had a huge backlog, even bigger than we probably should have had because it was affecting our lead times, it would have been possible for me at this point in the year to pretty definitively state what the second half was going to look like if I wanted to. Right now, given that we have lower lead times, we're basically shipping out of that current backlog, we're shipping in the next few months what orders we get. And so since we can't -- we don't have a crystal ball about exactly what the order levels are going to be for the balance of the year. I really can't give you that number.

But Is it fair to say that the trend of the declining year-over-year. The trends are positive, aside from maybe the commercial side but as you said, there's even a slight uptick maybe in what you're seeing in terms of orders there.

I agree with you. That's my view of it. What's going to happen in the future, we're not sure but we're very optimistic now and we're like in the trend that we see right now.

Okay. I apologize if you guys mentioned this. I don't remember hearing it or maybe I missed it. We heard material calls were going up on the Climate side, to maybe grow market share or obviously to sell into a tougher market, can you comment on pricing?

Well, you have to segment our business into its various parts to talk about pricing. It's really impossible to talk about pricing globally because each segment is different. So on our residential business which is 25% of our sales, we sell pursuant to price sheets. There is no discounting that goes on, on job to job basis. We haven't seen any real price pressure at this point in that segment. In the commercial side of our business, the other three-quarters of the business, part of that businesses is sold on an OEM basis and there again, most of that is sold on a fixed agreed price. So there's no any day-to-day price pressure. There's overall price pressure to not increase prices but in the day-to-day price of basis, there's not significant price pressure.

There is part of our commercial business that's relatively small volume jobs and there again, we see some price pressure but not incredible. On the other hand, when you start to get in this environment, when you're getting into a whole industry that is running at substantially below their factory capacities and the low level of commercial construction activity that's out there, it's very, very competitive. And so, what I've been saying for several quarters is that you can expect on that side of the business to see some price pressure and to see it affect our margins and I think we're seeing that to a certain degree.

Great that's it. Thanks.

Our next question comes from the line of David Keiser with Northcoast Research.

Hi guys. How are you doing?

Hi Dave.

Just wanted to touch on the geothermal heat pumps a little bit. You mentioned you grew market share. Can you disclose to what extent or what your current market share is?

Well, I could. I'm a little reluctant to do that because my view -- I will do it with a caveat, okay? And the reason I'll do it with the caveat is because we -- I don't believe and we don't believe that the market share -- how we calculate market share is we look at what we have shipped. And we compare it to industry reported numbers, which are reported monthly and quarterly by Air Conditioning, Heating, and Refrigeration Institute. So we know -- we can believe those numbers. We know what our market share is. We don't know exactly what our competitors' market share is. We estimate what they are. My problem with giving those -- typically what I do is I disclose those numbers as of the end of the year because there are reporting anomalies that occur throughout the year from the reporting companies.

Some companies don't report exactly when they're supposed to, or they make mistakes when they report and they catch it during the year. And they net it out from future reports. We typically find that by the year-end, all of those things have washed through and I feel much better about those numbers. Also shipping trends, some companies ship differently than others. For example, we ship in the distribution that stocks up and resells whereas our largest competitor on the geothermal side, which is water furnace, they ship directly to dealers. So I can give you a number but it's basically year-to-date our market share for geothermal based on AHRI reports is a solid 40%.

Okay. So you've had a noticeable increase, I guess that's what I was looking for -- is you're still moving in the right direction there. You're not losing market share --

No, we're gaining market share. The overall industry for geothermal year-to-date in terms of shipments is down approximately 8%. We were up in shipments of approximately 7% and our new order intake was up 50% in the second quarter and 40% year-to-date through the end of the second quarter.

Okay and sticking with the geothermal, two follow-ups. One is, in terms of capacity, how big -- 48% increase in new orders is substantial and I'm curious, at what point do you really have to start spending CapEx to --

We're not concerned about that anytime in the near future, because as you'll recall, when the commercial market was really heated up a couple of years ago, we were running out of capacity. We were by the bumping capacity and we made some substantial increases in square footage in equipment and assembly lines to our heat pump facilities. Well, with the reduced commercial business now and even if -- we never were really able to grow into that increased capacity, because of what happened in the economy. So we have plenty of capacity out there to use, I mean I can't give you a -- I will not quantify it for you exactly now but we're not concerned for the next few years at all. When we do need to increase our capacity, initially it will be de-bottlenecking and fine-tuning and it won't be significant measure of capital investment.

Okay. And then the final question is you had touched on education in the industry and how on previous calls and how installers were being educated and consumers were being educated, I know you're doing some advertising. I saw a ClimateMaster ad in, I think, Time magazine or Newsweek, I don't recall. But how is that going? How is awareness -- is that still the biggest hurdle because it seems once you understand what geothermal does, it's not such a difficult decision. So I'm curious if how education awareness is going and if that's really what's penetrating and growing the market for you?

That's one of many factors. But it is a key factor and so that's what we've tried to address in many different ways, starting with the advertising, starting with a very informative website that the advertising leads them to, dealing with training seminars that we give all around the country, not only training installers but in training distributors, in training -- bringing people in from utilities and training them. Because our utilities tend to promote and encourage use of certain products and of course, directly with customers so it is a key emphasis of ours and something that we're focused on.

Okay thank you very much guys. I really appreciate it.

(Operator Instructions) Our next question comes from the line up Michael Coleman was Sterne, Agee & Leach, Inc.

Good afternoon Jack, Barry, Tony.

Hi Mike.

I'm not going to ask you about Pryor.

Michael? Thank you.

I want to start off -- I heard something that I thought might have been new. Maybe you've talked about it before but the marketing of carbon credits? Could you maybe just go over that again? Where that project is starting from?

We have this operation in Baytown, Texas on the [Bayer] facility? It's a guest plant. We produce nitric acid for them. And that installation is occuring at that plant.

And timeframe or what -- in terms of tons of carbon on an annual basis might you save?

Michael, it's not to be a big bottom line item for that specific plant because the credits are delivered to the customers and some come to us. So it's not something that we're suggesting is going to be a real significant item but as time goes on. And we get a better definition we'll have a better idea of how much we save.

Okay, okay. On the Climate Control, what are you seeing or what are your sales rep telling you in terms of the non-commercial, the institutional market, municipal education, University, hospitals, what are you seeing or what are you hearing in terms of that market with respect to activity?

A lot of municipalities and states,particularly state governments have also been severely impacted by this recession. I mean, it's pretty much in the press everyday. That all the states are broke, the cities that are broke. So you've got that on the one hand, affect it adversely. On the other hand, we're now starting to see stimulus dollars come through to these projects and we're seeing more stimulus dollars come through than we saw last year. So that's the two edged sword that we're seeing out there in that sector.

Given the long-term ownership of that sector, are you seeing interest in the geothermal application and within the institutional market?

Yes, we've seen that in the institutional markets, particularly in the education markets that they always tend to be earlier adopters and they're very interested in green. Business tends to be interested in green also but I think more for -- it's much for financial reasons as environmental reasons. But I think from an institutional standpoint, they tend to have a very strong (inaudible) environmental. So we see a lot of those projects across the country and particularly in the education side, we do -- we have a significant amount of our business on our commercial geothermal is actually sold to schools.

Okay. On your Contracting business the business of not included in your backlog, what level of activity is that business experiencing, either year-to-year or --

It tends to be a very lumpy business and it's very small and it's really not material to our overall business.

Right. But given the potential within the institutional markets, do you see growth opportunities for that contract in business.

Well, we do see growth opportunities. We do.

Okay. Just one last thing. You may not have this but you've consistently broken out the residential piece of your business, which is all geothermal, but if you have what the geothermal is in your commercial, so a total geothermal mix versus --

I really don't have the information available in front of me right now.

Maybe if you could get it, we'll talk later. Thanks.

Thanks Mike.

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

Thanks for listening today and I would encourage you to stay on the line and listen to Carol Oden, who has some very engaging forward-looking statements that she'd like to make for you.

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 expect, intend, plan, believe, project, anticipate, estimate, and similar statements of a future or forward-looking nature identify as forward-looking statements. Including but not limited to all statements about or any forecast or pertaining to indicators are turning upward, we have not yet achieved, what we believe to be the full potentials of our business, we are continuing to add the building blocks that will allow us to achieve our full potential when the market allows, we're moving in the right correction.

We are optimistic about the long-term future of our Company that turning cautious about the second half of 2010, we believe that our Company is undervalued and are working to make these valuable, more visible and reliable to our shareholders, we have adequate working capital to finance ongoing operations as well as organic growth opportunities, residential constructions is all expected to increase this year will be significantly lower than its high points.

We have expected sales for commercial products for 2010 to be lower than 2009. There will be an gradual recovery and commercial construction and we will participate and be stronger and more competitive, recent trends towards use of GHP systems. We plan to set up a dedicated manufacturing facility to produce green modular chillers and heat pumps. We will repurpose a building to initiate production. We build this business for the long-term, we intend to take advantage of the long-term trends in green buildings.

We will be in a strong competitive position when market rebounds. Repairs at the Pryor facility should add to results in the future. Pryor facility capital expenditure requirements most of which will occur in the third quarter, sales for balance of season will depend on weather conditions and restocking, we are optimistic and remain bullish about long term agricultural products. We anticipate modest demand from Industrial and mining customers. Pryor facility prepares to become completed towards the end of September 2010.

Pryor facility will enhance production long term outlook is even stronger. We believe Pryor is a valuable asset which should facilitate growth and contribute to earnings. Outlook for agricultural demand is positive. 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 heading Special Note regarding forward-looking statements in our annual report Form 10-K for the fiscal year ended December 31,2009, and our quarterly report From 10-Q for the three months ended March 31, 2010, 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 is used in this presentation is net income plus interest expense, depreciation, amortization, income taxes and certain non-cash charges unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurement. We will post on our website reconciliation to GAAP of any EBITDA numbers discussed during this conference call. Thank you and that ends our conference call.