LSB Industries Inc (LXU) 2010 Q4 法說會逐字稿

Greetings and welcome to the LSB Industries fourth-quarter 2010 conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. And now, I will turn the call over to Ms. Carol Oden. Thank you, you may begin.

Thank you. Again, we would like to welcome you to the LSB Industries Inc. 2010 fourth-quarter and year-end conference call. Today LSB's management participants are Jack Golsen, Chairman and Chief Executive Officer; Berry 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. And 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 3, 2011, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. After the Q&A I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA.

We encourage you to view the PowerPoint PDF that we have posted on our website at www.lsb-okc.com on the webcast section of investor information tab. Mr. Golsen's presentation starts on page 3 of that PowerPoint. Again, if you are interested in following along with today's presentation we encourage you to go to our website at www.lsb-okc.com on the webcast section of investor information.

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

Thanks, Carol. Good afternoon. Today we released the results of our 2010 fourth quarter and full year, and both were substantially better than the corresponding periods in 2009. In fact, 2010 fourth-quarter income exceeded the first three quarters combined. This improvement was primarily due to production at our Pryor, Oklahoma chemical plant. Pryor Chemical is now contributing to earnings and should do so in the future. At this time, the outlook for both of our businesses is positive, based on marketing feedback from both internal and external sources. In the case of our Climate Control business, new orders and backlog are good indicators of near-term prospects for that business. Barry will discuss the specifics of both of these later in this call, but I will provide color to some general trends and product updates.

In our Climate Control business, the commercial construction in our markets has recently shown some improvement. Although new residential construction remains lower than the peak years, we continue to increase sales of our residential geothermal products for both new construction and replacement systems. On our last conference call, we talked about geothermal modular chillers as our newest green product. The dedicated plant for this product is nearing completion. Our new facility, will manufacture both geothermal and intercooled modular chillers, and we expect to be shipping chillers from our new plant in the third quarter of 2011. We are optimistic about the future of our Climate Control business, as we continue to develop and emphasized the sale of more efficient in green products.

Now for the current big picture on our Chemical operations. Products demand and pricing have been good, especially in the agricultural markets we serve. The agricultural market is projected to be strong this year and we are expecting robust demand for fertilizer the spring. The ramp up in production at our Pryor chemical plant, in addition to the increased activity at our other three chemical plants, is very positive at this time. If you follow the trade journals you will have read that the US must produce more corn in 2011 but it did at its highest previous period just to maintain ending stalks of corn. This requirement assumes there is no increase in demand over past periods. A number of weather issues affected our Chemical business in this current year.

Through much of February, the severe weather temporarily slowed the transport of our chemical products to customers, but the weather and transportation issues have subsided and normal shipments of product have resumed. Also, the firing of the crossline for planting has been delayed by the unusual cold weather but it is now starting to warm up. In this conference call, Tony will discuss our recent financial results and balance sheet highlights in more detail, and Barry will discuss the Climate Control and Chemical businesses.

Now I will turn this call over to Tony Shelby. At the end of our review we'll open the conference call for questions. Tony?

Thanks, Jack. Our comparative consolidated results for the calendar year and the fourth quarter are summarized on page 4 of the PowerPoint presentation. In our earnings announcement for the fourth-quarter 2010, we reported fully-diluted earnings per share of $0.79 compared to less than $0.01 for the same quarter last year on a sales increase of $57 million, or 49%. Pryor Chemical Company's fourth-quarter results warrant special focus. As shown on page 5 of the PowerPoint, in the fourth quarter of 2010 Pryor Chemical's results turned positive and had a significant effect on our consolidated results for the quarter.

In order to put the quarter in perspective I will first summarize Pryor Chemical's results and then discuss the consolidated results. During the quarter, Pryor Chemical reached a sustained level of ammonia production close to our targeted rate. Market demand for ammonia was strong, supplies are tight and prices were rising. During the quarter Pryor Chemical itself of $17 million, primarily to the agriculture fertilizer markets, and achieved an operating income of $11 million, which included $3 million of other income from property insurance claims. That compares to a $5 million loss in the fourth quarter of last year, a swing of $16 million in operating income quarter over quarter.

With the Pryor disclosure as background we will continue with the review of the consolidated results for the quarter. The consolidated sales for the quarter were $172 million, an increase of $57 million. As shown on page 6 of the PowerPoint, Climate Control sales increased $13 million or 21%, and new sales orders received for the quarter totaled $61 million compared to $48 million for the same quarter last year. Chemical sales, not including Pryor Chemical, increased $26 million, or 49%. The increase was due to combination of increased demand, higher average selling prices and the impact of higher raw material costs across our three major markets; agricultural, mining and industrial. Our consolidated operating income for the quarter increased to $30.2 million from $2.5 million in 2009, an increase of $27.7 million. Climate Control increased $7 million and Chemical business increased $20 million, including the $16 million improvement in Pryor Chemical results.

The improvement in Climate Control operating income reflects an increase in gross profit due to higher sales and improved margins, coupled with a reduction of SG&A expense. Gross profit as a percent of sales increased from 34% in the fourth quarter of 2009 to 36% in the final quarter of 2010, generally due to more favorable sales mix of geothermal and water source heat pumps. The increase in Chemicals operating income was attributable to improved margins of agriculture and industrial products, generally higher sales volume for all products, and the turnaround of Pryor Chemical results. The increased margin on agricultural products is related to UA end sales, partially offset by lower margins on agricultural grade nitrate -- ammonium nitrate produced from purchased ammonia at the Pryor UAN site. Our overall effective income tax rate for the quarter was approximately 38%. That concludes an overview of the fourth quarter.

Now moving to the full year, the fourth -- as we did in the fourth quarter review, before commenting on the consolidated results for the calendar year, first we'll address Pryor Chemical's operating results and the effect on the culpability of the consolidated results for the two years. For the full-year 2009, Pryor Chemical's operating loss was $17 million and was primarily classified as SG&A expense. For the full-year 2010, Pryor Chemical's operating income, including insurance gains and $5.7 million, was approximate break-even or a $17 million swing between years.

As shown on page 4, with this as background, from page 4 you can review our consolidated results. We reported fully-diluted earnings per share of $1.32 compared to $0.96 for 2009, an increase of $0.36. Consolidated sales for 2010 were $610 million, or $78 million higher than last year. Climate Control sales were down $16 million year over year, although it should be noted that for the second half of 2010 the sales increased 21% over the second half of 2009. Chemical sales increased $93 million, or 36%, including $25 million sales for Pryor Chemical.

Consolidated operating income for 2010 was $56 million, or $15 million higher than last year. This increase was primarily attribute to the $17 million improvement in the Pryor Chemical results, as shown on page 7, the Chemical business not including Pryor, was about the same as 2009 while the Climate Control business was $2 million lower.For the second half of 2010 Climate Control's operating income was $23 million compared to $13 million for the first half of 2010.

Moving to the balance sheet, during 2010 we had total capital expenditures of $37 million, including $7 million for Climate Control and $29 million for the Chemical business, which included $15 million for the Pryor Chemical plant. We are considering future capital expenditures -- capital spending of $46 million, including $26 million for our Chemical business and $18 million by our Climate Control business. The capital spending being considered will be subject to a thorough justification process before a decision is made to make the investment. Briefly reviewing our liquidity and capital resources, cash flow provided by operations for 2010 was $44 million, which included net income of $29.6 million and depreciation of $17 million.After investing and financing activities, including capital expenditures, acquisition of the 2007 debentures, the receipt of insurance proceeds, along with other items, the net positive cash flow for the year was $5 million.

As summarized on page 8, considering our cash on hand, short-term investments and borrowing availability we have significant liquidity available to grow the business. Our long-term debt, including the current portion, was $95 million and stockholder's equity was $179 million. The ratio of long-term debt to stockholder equity was approximately 0.53 to 1. As the economy continues to recover from the 2008 financial crisis and moves into the next phase, we continue to believe that we should maintain a strong cash position.

Looking ahead to the approximate $76 million of long-term debt maturing in 2012, we considered several refinancing options, including a convertible debenture. We decided upon a direct loan without an equity feature and have engaged Bank of America leasing to syndicate a term loan of $75 million. We plan to use the proceeds to payoff the $50 million term loan and to purchase or retire the remaining 2007 convertible debentures. We've addressed our result to operations and the comparisons to 2009 in greater detail in the MD&A and of the 10-K, which we filed earlier today, and suggest that you view those disclosures and discussions for additional analysis.

Now we'll turn the call to Barry to discuss the market drivers for both businesses, accounting for the improved operating results of 2010 and our thoughts on the outlook for both of our businesses.

Thanks, Tony. Since Tony covered the financial results so comprehensively I'm not going to repeat what he said. Rather, I'm going to focus on our sales activity, our product backlogs, we're pertinent -- our market drivers as we see them, and upcoming key initiatives that we have planned, as well as our fundamental strategy for each of the businesses.

To start please turn to page 9 in the presentation and this shows you our sales mix by the markets we served for 2010. The first observation that many of you who follow LSB will probably make is that in 2010, a higher percentage of our total sales was Chemical and there were three factors that contributed to this. First, there was a decline in our Climate Control sales. Second, there was an increase in the sales price of all the key products in our Chemical business. And then finally, as Tony discussed before, Pryor came on board -- on line in the fourth quarter and so all of those things added up to a stronger sales mix for Chemical. We expect that the overall mix will further tilt toward Chemical in 2011 with a full-year sales activity at Pryor and with hopefully continued higher sales prices for our chemical products. And also, within the Chemical business, sales of Ag products will also become a larger percentage than we've had over the last several years as a result of Pryor's concentration on Ag product sales.

Focusing on our Climate Control business, on page 10 you can see by the -- you can see sales by major product categories and these are the same categories we report in our 10-Ks and our 10-Qs. Total sales declined 6% in 2010. Sales for our heat pump and fan coil products were down; however, within those numbers, sales of our residential geothermal products were up. Sales of our other products, custom air handlers and modular chillers, including geothermal chillers were up. And sales for contracting business was down. Since we reported to you in earlier calls that our new order level had increase over 2009 you're probably wondering right now why our total sales were lower in 2010; lower than in 2009, that is.

I think you'll find the answer on page 11, because if you look at page 11 this shows new product order sales in backlog by quarter for 2008, 2009 and 2010. Despite higher in coming orders for all products in 2010 -- higher than 2009 that is -- sales were impacted by lower starting backlog at the beginning of the year. We started 2010 with a very low $32.2 million backlog compared to a $68.5 million starting backlog in January of 2009.So, looking at 2010 activity -- still on page 11 -- new orders were up for both our commercial and residential businesses, in total 23%. Sales of our commercial products were down 9% while sales of our residential products were up 6%.

Our backlog of orders at year-end 2010 was $47.6 million, approximately 50% higher than a year earlier. We currently believe that the commercial business bottomed out for new orders in about the fourth quarter of 2009 and for shipments in the first quarter of 2010. Since then, we've seen a steady improvement in this business. We did have lower incoming orders in the fourth quarter than in the second and third quarter of 2010. This is not unusual for us. The last quarter is usually slow for new business in the HVAC industry because holidays and winter weather are not the time where people are placing orders for new HVAC equipment. Typically, our business is slightly seasonal with the second and third quarters being higher than the first and the fourth quarters.

The next few pages deal with a market outlook for construction. All of the specific data and forecasts shown on these pages comes from McGraw-Hill. McGraw-Hill is considered one of the best construction forecasting services available. On page 12, there is a graph that shows McGraw-Hill's forecast for certain commercial and institutional buildings. These are the sectors shown this graph that are the most important to us. These particular sectors comprised about 55% of our total Climate Control business sales in 2010. As you can see from the graph, the sectors are all forecast to grow over the next four years. In the aggregate McGraw-Hill is forecasting that they will more than double. That should benefit all of our commercial and institutional product sales. For your information, in 2008, before the recession impacted many of the sectors -- or I should say all of the sectors, these same building types comprised approximately 70% of our Climate Control business sales.

In addition to watching construction forecast by sector, we also track the architectural building index. On page 13 is a graph of the ABI. Following a healthy upturn in the fourth quarter the index was level at 50 in January. And by the way, 50 indicates that the architectural buildings in January were the same as they were in December.

Page 14 shows McGraw-Hill's forecast for single-family residential starts. They believe that housing starts will increase from about 450,000 last year in 2010 to over 1 million per year in 2013 and 2014, which is still way below the peak a few years ago. If this actually occurred it bodes very well for our residential geothermal business. We also expect to see continual positive impact from the 30% federal tax credit that extends to the end of 2016.

Another area that has had and will continue to have an a positive impact on our Climate Control business is the long-term trend toward green building construction. And again on page 15, there's a graph that shows expected growth in green construction between 2010 in 2015. This shows, on this graph, both new construction and the largest retrofit and renovation projects. This only shows the largest renovation and retrofit projects because retrofit and renovation projects for small and medium projects are usually not tracked by McGraw-Hill or any other reporting service. According to McGraw-Hill, the total green retrofit renovation market could be 2-to-3 times the amount shown here. In total, green construction is forecast to be 40% to 48% for all new, non-residential construction in 2015 and could total $160 billion, including renovation and retrofit. This sector, by the way, has been growing at a faster pace than originally forecast a years ago.

As I discussed before, but I'll repeat again now, in case there is a new people on board listening to this call, our products are particularly well suited for green construction. Water heat pumps and hydronic fan coils are highly energy efficient and our geothermal heat pumps are ultra energy efficient.In addition to our geothermal heat pumps we introduced a line of geothermal modular chillers last year that are suitable for both new construction and are particularly well-suited for renovation and retrofit applications. Our large custom air handlers are also configured with features that make them suitable for green projects, as well.

In addition to the green construction market I've been discussing, there's also a market for energy efficiency. Green is generally defined as projects that have multiple aspects of green whereas straight up energy efficiency is just what it says. Since energy costs are usually the largest single operating cost for most buildings, even if an owner's not concerned with green issues it just makes good business sense to reduce energy costs. We believe that the market for energy efficiency could be substantially larger than the green building market.

Turning to page 16, I'm going to focus on some key initiatives that were completed our started in 2010 and some that are planned for 2011. I'm actually not going to cover the ones that were -- we did last year, I'm going to look forward to what we plan to do in 2011. We will be introducing new online systems to enhance the front-end customer interface of our businesses. We plan to continue to introduce new products across the board in all product categories. We expect to start production in our dedicated chiller plant during the third quarter. And in addition, we have several other proposed capital projects but we've not finalized which ones will be initiated or completed in 2011.

On page 17, this details the key business strategies for our Climate Control business. Going forward we'll continue to be a group of niche companies. We'll focus on green. We will, of course, continue our strong push in the geothermal market. We'll continue to improve all areas of the business to maintain a high level of customer excellence. And finally, we'll look for possible strategic acquisitions that could complement this business.

Turning now to our chemical business, on page 18 we show sales for the fourth quarter and the full year for both 2009 and 2010 for all major markets we serve. For both the fourth quarter and the full year, all sales were up over 2009. For the fourth quarter, total sales increased 81% and for the full-year sales increased 36%.

Turning to page 19 for sales of our key agriculture products, during the fourth quarter tons shipped of UAN were slightly lower than the same quarter in 2009; however, dollar sales were up 49% as a result of higher sales prices per ton. Even though we actually produced more UA -- more product in 2010 quarter than the 2009 quarter, tonnage shipped was lower as a result of certain orders pushing from the end of 2010 into early 2011. As for higher sales prices, in 2010 UAN sales prices increase dramatically. I will cover that more detail later further on in the presentation. For the full year of 2010, both tons shipped in dollar sales of UAN were up, driven by strong markets and higher prices. Ammonium AN tons -- ammonium nitrate tons shipped in dollar sales were both up in the fourth quarter compared to 2009. For the full year tons shipped were down but sales were about the same. Lower tons shipped were primarily caused by higher sales mix of industrial products and the higher sales prices were due to improved market conditions.

Turning to our industrial products on page 20, all industrial products sales in both dollars and tons shipped were up in both the fourth-quarter and the full-year 2010 over the same comparable period in 2009. This is reflective of the beginning of the economic recovery we saw throughout the year and its impact on industrial markets.

On page 21 I've shown some price trends for both our feed -- the feedstocks we use in key Ag products we sell. The cost of natural gas is significantly lower than it was a year ago. This is benefiting production cost at Cherokee, Alabama and our Pryor, Oklahoma facility. Both of these facilities use natural gas as their primary feedstock. The conventional wisdom is that natural gas will remain low for some time. On the other hand, the cost of anhydrous ammonia, the feedstock we use at our El Dorado and Baytown Texas facilities is much higher than it was a year ago. This has increased production costs at those facilities. All of the products we produce at Baytown and many of the products we produce El Dorado are sold on cost plus basis, so increased ammonia cost don't impact our profitability on those sales. Ag products produced at El Dorado are sold at spot market prices so we have been fortunate that the selling prices of those Ag products have also increased. Turning to the products we sell on the same page, all prices for key products have increased over the past year due to strong market fundamentals.

Now focusing on the outlook for the Chemical business -- for the markets we serve in the chemical business, that is, page 22 the focus is on Ag and lists several indicators for agriculture products, and all of these indicators are favorable at this time. Grain stock to use ratios, both worldwide and in the US, are very low compared to the recent past. As a result, planning levels are generally high. Market prices for corn and wheat have increased over the past year so farmers have a high incentive to plant and sell more. Ethanol production is up, which simulates corn production.

All of this is creating a high demand for fertilizer and the increased market prices we just discussed. Finally, low natural gas prices have reduced the cost to manufacture many of our Ag products. The industry consensus is that there's nothing on the horizon that will change the basic fundamentals of the Ag business in the near or mid term. We're optimistic about our Ag business and believe it's a very good time to be in the fertilizer business and for Pryor to be online.

Please turn to page 23. Our industrial business is primarily sold to large customers pursuant to contractual cost plus and/or minimum take arrangements. Most of our customers have indicated to us that they expect industrial demand to increase as the economy continues to improve. These types of contractual arrangements that we have are a basis for a very stable industrial business, which allows us to keep our plants loaded up and produce at as close to full rates as we can most of the time.

On page 24 we've listed some of our key initiatives for 2010 and 2011 for the Chemical business. This year we pla -- looking forward we plan to boost the ammonia production capacity of Pryor Chemical. We also plan to consider expansion of nitric acid and ammonia production at Pryor. We'll also consider expansion of DEF production and we have several capital projects on the drawing board. Finally, on page 25 we detail the Chemical business strategies, just to briefly run over them. In addition to operational excellence, safety and environmental responsibility, we will continue to expand our industrial business by adding new customers and perhaps new products. We will also continue to enhance our agricultural distribution channel.

Before opening it up for questions I'd like to mention that Tony and I will be presenting at two conferences this month. We will be at the Roth Capital Partners growth conference on March 15th in the sid -- that's in California in Laguna Niguel, and the Sidoti annual earnings and emer -- annual emerging growth research conference on May 23rd in New York City. We hope to see some of you at the conferences.

Operator, you can open it up for questions at this time.

Thank you. (Operator Instructions). Our first question comes from line of Eric Glover with Canaccord. Please go ahead.

Hi.I was just wondering about operating margins in the Climate Control business, over the last couple of quarters they've been nicely above 35%. Is it reasonable to assume that if sales levels continue to hold where we are that you could maintain a margin like that?

Well, I feel a little funny because I've been asking this question -- been getting asked this question every quarter for the last year, at least, and I'm always had the same answer, which was I think at times we should think of this more of a 31% business and unfortunately I've been wrong -- or fortunately I've been wrong. We've watched our expenses very tightly and we continue to do so. We're always very conscious of not putting the cart before the horse in terms of how we spend money so we've been fortunate that even in the downturn, even with the lower sales, we've been able to improve that margin.

There are some things that are going on that run counter to that. Copper prices are very high. They went up last year and they're up again this year. Historically, what we try to do is pass those through. Sometimes there's a lag but typically, we've always been able to pass those through. I still think -- I'm going to say this again, I still think 35% is a little strong and if I was modeling the business I wouldn't go that strong.

Okay, very good. And then on the Chemical business can you talk about what you expect in terms of Pryor's capacity currently for producing UAN and where you expect that to go over the course of this year?

Well, initially, what we said was that our targeted production rate was 325,000 tons per year of UAN and 35,000 tons per year of ammonia, in addition to the UAN. I mentioned that one of our initiatives was to increase the output of the capacity of the part of the plant that we've already updated. We think -- what we're shooting for is an additional 30,000 to 55,000 tons above and beyond that 35,000. Bringing up to a total of somewhere between 60,000 and 90,000 tons of ammonia as opposed to the 35,000 tons that we originally planned on.

So, that's what we're working on very -- first -- that's our first priority and that can be done with the facility as it sits now with maybe a few little tweaks, but basically with the facility as it sits now. In addition to that, we've mentioned -- we've been asked and we've mentioned that we did not activate the full plant and there are other parts of the plant that we -- are sitting there in the same condition, more or less as they were when we acquired it, that will require some updating. We're looking at activating part of that plant. We're considering it, we're doing economic -- we're doing engineering studies, we're doing feasibility studies.The part that we would be looking to activate next, if we activate it, could produce up to 60,000 tons of anhydrous ammonia and approximately 66,000 tons per year of nitric acid.

Now I want to throw caveat out there. First of all, those are independent decisions. We could turn one on without the other. Second of all, these are subject to certain things. They're subject to permitting and, of course, they are subject to a financial justification that we have to -- we put everything through before we make a decision. So at this point, it's under consideration. We haven't made any decisions and if we make some decisions we'll let you know.

Are you playing by the end of year to be producing 325,000 tons of UAN?

That's what the target is, yes.

So, you have another 60,000 to 90,000 tons potentially of ammonia, and then in addition to that you may be adding 60,000 tons of anhydrous ammonia and 66,000 tons of nitric acid?

Yes.

Okay.

I'd like to -- excuse me. Eric, I'd like to add to what Barry said just a little bit to clarify. The 325,000 tons of UAN was our starting target, but that doesn't mean that we would want to produce 325,000 tons or more than that. We have to look at the options of where the profit is and where the market is. It may be more profitable to maintain just 325,000 UAN and have all your increase in the sale of ammonia because that's where the market is. Or it may be that the market for UAN drops and we have more ammonia to sell but the market for ammonia is higher then, we'll take that extra money. So the question -- you started out with a plan but then you have to steer down the road based on what the market is doing.

And we also have to take into consideration our contractual obligations with our customers, which we always do.

Right.

Okay?

Thank you very much.

Thank you our next question is from the line of Joe Mondillo with Sidoti & Co. Please go ahead.

Good afternoon, gentlemen.

Hi, Joe.

First question and I just thought I'd -- just to stay on the Pryor plant, could you tell me what the tonnage and the price of ammonia that you got in the fourth quarter?

Well, we -- we publish that?

We've already published the tonnage

I'm sorry, yes, it's 41,000. So what was the price that you got on it? I guess I could do the easy math on 17 --

I don't think that you could necessarily do that because it was really up during the quarter so it would have been --

I would say it's probably $500 but don't hold me on that. That's pretty close and we don't -- I don't have the figures in front of me.

Joe, the price gets moved up -- or reported weekly in the different FNB and (inaudible) and in Fertilizer Week and right now it just went up an additional $40.

Okay. And what price of UAN are you realizing right now?

I think that's proprietary.

But the market right now is about $11, which is $11 times 32, which is --

You said UAN

Yes, $320. In the $300-plus range where the market is and we expect to hit markets.

Okay. And could you talk --

It varies from week to week and as they start to fill the storage. It's still early for the spring application so you're talking about storage fill down additionally to move to application so the price probably will continue to inch up.

Okay. And your existing business trends slightly stronger in the first quarter, your best quarter the second then it's down and third and then maybe slightly up in the fourth. Could you talk about the difference between UAN, how that's demanded throughout the year, and ammonia and what sort of trend quarter to quarter you expect?

Well, you've got

Go ahead.

You got to keep mind that we're in a very unusual situation here. If you read the all the large fertilizer companies are saying, the storage system is pretty overdrawn right now. And so you're going to have a lot of pressure on restocking after the spring fertilizer season is over. So it should be -- there are indications that the demand will be less seasonal this year than it has been traditionally.

You said life seasonal?

Less seasonal.

Okay.

Because of the fact that you have increased demand, you're going to have -- the outlook for 92 million acres and more application and you're -- then you're going to have to restock.

Okay. And is a true UAN is more demanded in the spring and ammonia more demanded in the fall?

That's typically what you see because the fall -- the anhydrous ammonia goes into storage and application in the fa -- early spring and then the UAN follows that in March and April.

Okay. And I'm not sure if I caught Barry's comments on -- the tonnage was down year over year, what was the explanation?

The reason --

Of UAN?

UAN?

Yes.

What happened was at the end of the year, in the fourth quarter, we actually produced -- we produced more tonnage in the fourth quarter and some of that UAN -- some of that goes of the storage, some of it gets shipped right out to customers. In this particular case we were filling up a barge and didn't have it completely filled up at year end, the shipment didn't go out until after year end, so we booked it in the first quarter and it -- so it made the quarter look a little lower as far shipments.

Okay. And can you talk about the --

The timing on revenue recognition is essentially what it is.

Okay, and then -- so accounting for that and accounting for the comments that you made on the delays in terms of deliveries due to weather, how should we think about the first quarter here in terms of the Ag sales?

I would say they're not -- in the end they're not affected because we're able to make up what the shipment and delay of the delayed shipments.

Okay. And usually you see a seasonal uptick from fourth quarter to first quarter, correct, just due to the crop season and everything -- or the fertilizer season?

Could you ask that question again?

Usually from the first -- fourth quarter to the first quarter you see a seasonal uptick. First quarter is usually stronger than the fourth and then the second's stronger just due to the seasonality, is that correct?

I think so, but, I haven't --

More or less. Industry wide I'd say that's probably --

When we're talking about tonnage I haven't really focused on that.

Okay. I guess the next question I just had it was on the HVAC business, could you give some more color in terms of what you think that new chiller facility could contribute? How significant is that going to be?

Well, it's our long-standing policy and so I'm really, at this point, not going to -- really don't think it's within our parameters to put a number on it.

Wouldn't put a number on it, but you have a good expectation.

Yes, this is a business that we started a few years ago --

Could you talk about maybe the margin and maybe how big that market is then?

Well, the total chiller market, before you start parsing it down, can be in a good year a billion dollar market. But then you have to start parsing it down between large chillers, small chillers, small tonnage chillers, median tonnage chillers, got chillers for different kind of applications. This isn't -- and the niche was in the chiller business, but it's a niche that we're very optimistic about because we're selling these into var -- many different kinds of applications. Initially, when we got into this business there's a large population of old chillers out there with old refrigerants that have to be replaced.

So think about a large building with a chiller either in the basement or up on the roof, and when they have to take it out to put a new one in they have to deconstruct walls and they have to -- or deconstruct the unit and they have to sometimes use a crane or even a helicopter in a city like New York to take the old one out, put the new one in. We designed a so that you could take these individual modules, let's say 30, 50, 70, 90-ton modules that all interlock. They go together to create a larger capacity unit but these modules will fit in a regular, standard elevator and go through a standard door. So initially, when we introduced these things we were thinking about this niche for these replacement market to substantially lower the disruption and the cost of replacing the chillers and then when we actually got out there and marketed it we found there were several other applications for these things.

One thing is redundancy. Let's say you've got an application where you have to have redundancy, the chiller can never go down. So if you've got a 200-ton or a 310-ton chiller installed and it can never go down you have to have another 200 or 300 chiller -- ton chiller sitting right next to it. It's very costly, takes up a lot of space. With our situation, since these modules are independent of each other you can just add one extra module, so if one module goes down you kick an extra module in. So we're selling a lot of these in applications where they need 100% redundancy.

There's other applications, as well, that are -- where these have been very good, particularly our new geothermal model, which has what we call our simultaneous heating and cooling model, where part of the chiller -- the rack of chiller modules can heat and parts can cool simultaneously. They can be hooked to a geothermal loop, they're highly efficient. So we think that they're -- we're very optimistic about this business. We think, in addition to being a good stand-alone business, it's synergistic with other parts of our business. Every fan coil system has to have a chiller. And so, I'm not going to turn numbers out there, but it's something that we're investing and we think it's got a good future for us.

Okay. And then in terms of margin, is that going to be -- are those type products going to be higher than -- higher or lower than average?

That's not anything we've disclosed. I don't -- I think it'll be fairly consistent with our other products.

Okay. And you said that that shipment -- or production starts in the first quarter here?

Well, let me clarify that. We have been producing and shipping these chillers for a few years, but when we started the business we couldn't justify a separate facility, and at that time we had some capacity in one of our other plants to do the initial production. So it's been produced in one of our other plants. But as that business has grown and as the business of the other plant has grown we've reached the time where it's time to have a separate stand-alone efficiency. Also, in the other facility, which wasn't really originally designed for these type chillers it's not optimum from an efficiency standpoint. So, we're going to have a stand-alone, we're going to gradually, over the second half of the year, phase production out where it is originally been produced and into the new facility and we're also at the same time going to be introducing a slew of new products for that company.

Okay, last question. I just was just wondering if you could comment on your capacity utilization among your four chemical plants and how big is this DEF opportunity?

Let's take that in reverse order. Who wants to talk about DEF?

I'll talk about DEF. Well, DEF, when it first was introduced we were very conservative about it and we still are. The potential for DEF is large, but, the problem that developed after the law was changed requiring it was it didn't apply to any trucks that were on -- already on the road, it only applies to new trucks starting in 2010. So, as the old trucks come off the road and the new trucks come on the road they'll all have to be using DEF, with the exception of one manufacturer and I think even they have to use -- I don't know what they use. There are six manufacturers and one uses a different system where they run their exhaust back through their engine a second time. It's more costly, it's not as economical from a mileage standpoint and it's not been adopted by most of the truck manufacturers.

Excuse me for interjecting. Only one of the major OEMs is not using SER technology.

That that's what I said.

Yes, only one.

The other was catalytic then. So, what we're looking at is a ramp up in this business based on the number of new trucks that hit the road and so far it's doing about we thought. It started out with a base load. The first year we hit the target, second year we think it's doubling, and the third year -- I'll -- we can't -- you can project all day long, but if it's keep going that way it's going to keep going into all the tracks are using it. And it's up -- the whole market is going to be approximately 2% of what the diesel fuel market is; in other words, in gallons.

Let me just throw something in. If you're interested in some specifics on it there's a firm up there called Integer Research, which has kind of become the authority of this. They've done a lot of studies, they have seminars, they have meetings on it, and their estimate is that eventually, when this gets fully phased in, is going to be over 1 billion gallons a year of DEF that are sold.

Joe --,

The question is how long is it going to really long it take to get some data.

Joe, we need to move on.Regarding your question about capacity that's in our 10-K, but generally we have different levels of capacity, different phases of production, but these four plants our objective is running them as close to full capacity as possible in 2011.

Okay, great. Thanks a lot.

Thanks, Joe.

Our next question is from the line of Michael Coleman with Sterne, Agee. Please go ahead.

Good afternoon.

Hi, Mike.

[I'll guess] that this is in your 10-K, haven't had a chance to run it. Aside from the $3 million gain in the Chemical business, were there any other gains or charges, either in the Chemical or the Climate Control?

Well, the -- if you'll notice in the footnotes when you get around looking at the footnotes, we had about $7.2 million total insurance days from insurance claims, which would be basically your fair value of the replacement cost.

And those were partially out --you had a $4 million charge then? Is that --?

We had a $7.2 million gain in the Chemical business in 2010 from insurance claims.

Okay, but just in the fourth quarter, there was a $3 million gain in the fourth quarter.

Right.

Aside from that $3 million gain --

No, there weren't others.

There was nothing else?

That's right.

Okay.

That was just very smaller one.

Right. That's good, that's all I had. Thank you.

Thanks Mike.

Thanks Mike.

Think you. Our next question is from Dan Mannes with Avondale Partners. Please go ahead.

Good afternoon everybody.

Hi Dan.

Congratulations and thanks for the presentation, I think it really helps explain things. Just a couple of quick follow ups, first on Pryor. Just to confirm, it is currently running at capacity since the end of the quarter on an annual basis, the 325,000 and 30,000 of UAN ammonia, or has there been --?

Well, Dan, let me give you the specifics. We're running at a sustained rate of our target rate on ammonia and we're continuing to ramp up on UAN, but we're producing a significant amount of UAN. I think we're averaging in November, December, January 500 tons a day and that's getting pretty close. So we're -- we don't have any fundamental issues, we're continuing to wrap up and it's increasing daily and we're averaging for the last two months 500 tons day, which is below our target but getting -- we're moving that direction.

Great. So 500 -- okay.

So we'll be at the rate of 325,000 shortly.

We're satisfying all our orders, though.

Okay. The second question is on Chemical and this goes for Pryor and to lesser extent on Cherokee. Given how strong the market is how active are you in preselling for delivery in Q2 and three?

Preselling -- would you by speaking up, we're for having a little trouble hearing you.

Sure. How active are you in preselling material right now?

We're not doing a lot of firm sales commitments right now because we think the prices are going to continue. At the end of February, in the three different plants we had about $20 million committed for forward selling. So we're not actively pushing that right now because the demand's going to be strong and we think the price will be higher later.

Okay. And real briefly for 2011, can you tell us what your schedule is for expected turnarounds? I know -- you think you did turnarounds on both Cherokee and Pryor in the third quarter --?

I've got that information, I don't have it with us, Dan, but it'll be --

There'll be a turnaround in Pryor in July and probably in August at Cherokee, probably, but that's not finalized yet.

What about El Dorado? It'll just help us for modeling that turnarounds all during the year because they have so many different (inaudible) alliance, yes?

Don't really have the specifics in front of us, Dan, that particular question.

Okay. And then briefly on the Climate segment --

On the what?

On the climate segment. Year-over-year increase in the quarter for fan coils and for the other, was there anything unique that happened in the quarter? It look like just realization was substantially stronger than we would have thought, or as part of that because it was a such a low level import quarter last year?

Well, it was a low level of the fourth quarter of last year but there was nothing special that happened in the quarter. It was just a normal quarter.

One thing I wanted to bring up is normally the fourth quarter is softer than the third and it was just surprising that you were up sequentially in both of those. That's why I was asking if there's anything unique.

Well, first of all we've had -- we have had bookings continually increasing all year long of -- the second and third quarter increased, okay, so we were building the backlog. So sometimes you're -- although generally speaking we were a little bit seasonal in that the two quarters -- center quarters are higher than the out quarters. Sometimes, based on your backlog and customers' ability to take, you might -- for example, what happened the quarter, which was incoming that the incoming order level was slightly lower than the third quarter, which is pretty typical but we were able to ship more, okay. And so it's -- you have to just look at the whole fact situation of your -- where you are with the backlog, where your -- what your customers need at the time and you're able to produce, that's a big factors, as well. So we were in a sweet spot in the fourth quarter, we pushed a lot out the door, but I would say it was a -- kind of a normal quarter.

Well, I'd like to make a statement just related to that. We're not the kind of Company that can quarter by quarter increase. We're the kind of Company that one quarter will be up because of what Barry just said, another quarter will be down for the same reason that he just told you. We don't look at a quarter as being indicative of what we're going to doing for the whole -- do for the whole year, so it's difficult to annualize any quarter. I would not look at our business and annualize any particular quarter. We just keep looking at the whole year and then we shoot for results for that year.

Completely understood. Thank you.

Anything else, Dan?

Nope, I'm good, I'm good.

Okay, good.

Thank you. Your next question is from David Keiser with [Sidoti & Co.] Please go ahead.

Hi, how are you doing?

Fine, Dave.

I'm doing well, thank you. Most of my questions were asked already I just had a couple of things I wanted to touch on briefly. Did you disclose a retrofit versus new home sales and geothermal heat pumps?

No, but I can throw a number out. It's anecdotal, it's not exact.

Okay.

I would say last year, looking back in 2010, we had a much higher mix of retrofit than we've ever seen before in geothermal, and the number that my sales force is throwing around, is 70% retro versus 30% new home construction, that's in the residential sector.

And I guess what I'm getting at is, it seems like if you give -- if you're able to increase the business and retrofits have increased also, it seems inevitable that the new home sales will mean more geothermal heat pump sales, but is it that you're getting more retrofit, more indicative that knowledge is building, people are building interest, more aware of the product? And I think the time you talked on -- touched on a few quarters ago about educating the public on what options they have, and also, the installers.

I think that those are true things. Don't forget, we have a tax credit that was out there this year that wasn't there in prior years. In addition to that we've got very aggressive in terms of trying to create some pull-through with our national ad campaign.

Okay.

So there are a lot of factors that they all ended up with -- I think a big function is the fact that there were so few homes built last year, as well. But I think we have proved, the industry has proved that this can be a really viable retrofit market for us, as well as the new home construction market for us, because typically people think of as new home construction and it's kind of a misconception. I think this year bears that out.

And regarding capital expenditures, if you could just repeat what you said you were expecting for the year and how much of that was Climate Control and what capacity you're at, or rel --?

Well, we didn't through out an annual member. What we said was that we were considering certain capital expenditures and some of those would be this year and some of those would overlap into next year.

Okay, I'm glad you clarified that, thank you. And are -- how -- capacity with geothermal heat pumps and the other segments, there's still a lot of room to grow. It just seems like it's not incredibly capital intensive at the moment?

We have extra capacity.

Okay. And the other question is on the other HVAC, are there any products that overlap with some of existing products that would like replacement, or most of them new product lines?

And answer your question -- ask your question another way, I'm not sure that the question.

Sure, no problem. So I'm just wondering if there's any overlap between the other HVAC and some of the products that you have now where someone would choose one over the other , or is --?

Oh, you mean are they competitive?

Yes, from a competitive standpoint.

Well -- think about that a second. Not really with what we classify as other. Now, let me elaborate. When someone's going to build a building they have to make a decision of kind of HVAC system that they use and there's a whole host of different kind of systems that are available out there. Water source heat pumps are one, geothermal heat pumps are another, hydronic fan coils are another, and there's several others, as well. I'm not going to advertise for the competition right now. So they have to make a decision. So, in fact, these product lines actually do compete against each other already. Sometimes it gets down to, do I want to use a fan coil system, or do I want to use a heat pump system?

Now the other -- the products that we call other, which are the geotherm -- which are, the chillers including geothermal and the large custom air handlers. Large custom air handlers can be used in systems that compete with fan coils and heat pump sometimes, not always. And chillers are not competitive with fan coils. As a matter of they're complementary with fan coils. Where they use those fan coils they do tend to be competitive with individual unitary water source heat pumps because typically if you're using the water source heat pump system you don't need the chiller. Hope that answered your question.

No, it does and I appreciate that and thank you very much and have a great day.

Thanks David.

Thanks.

Thank you. Our next question is from the line of Eric Stine with Northland Capital Markets. Please go ahead.

Yes, hi. This is Thomas DeMinico filling in for Eric Stine.Most of my questions have been answered, I just had one quick question. Can you provide an update on the distribution agreement with Rheem, specifically any revenue in the quarter, if it's been rolled out nationally, what's the potential contribution in 2011?

We don't break that out and pursuant our contract with them any business we do with them is confidential, so I really not at liberty to disclose anything on that.

Okay.

Sorry.

That's okay, thanks for taking my call.

Okay.

Give Eric our regards.

Thank you. Our next question is from the line of Jon Evans with Edmunds White Partners. Please go ahead.

John?

Hello?

We might've dropped [the line]. Hello? Operator, are you there?

Yes, I'm here.Our next question -- I'm sorry, go ahead.Our next question's from the line of Michael Coleman with Sterne, Agee. Please go ahead.

Hi, just a quick follow up. Can you review your hedging policy for natural gas for your fertilizer business, just your fertilizer? Whether it's consistent or opportunistic or maybe talk a little bit about that?

Yes, we --

Go ahead.

We don't consider it opportunistic. We're looking for something in the -- if we're going on we're looking for something at around below $4. And you know we have a natural hedge on a lot of our natural gas on the Cherokee plant and we have taken a fairly conservative amount of futures on gas on the Pryor plant.

Explain the natural hedge.

The natural hedge is -- as Barry indicated on the Chemical review, we have these large cust -- industrial customers that take product based on the [capacity] form that passes through the cost of natural gas, so you don't have to hedge that.

Right, right.

Then on some of the fertilizer side we do go long, but we're not opportunistic and we look for spots where we think that we can average down our cost.

We do sometimes if -- and usually if we sell ahead and we know what the selling prices and we think it makes sense we'll lock in on the price.

That's a good point. We normally will lock in a margin on (inaudible).

So in general, in terms of just -- again, the fertilizer these other, in terms of the 2011 requirements, what percent of your purchases are you approximately hedged in and at what level today?

Well, as far as our agricultural side of the business, that's the part that we really need to hedge, we -- I don't think we disclosed that percentage in our public filings. But we do go along to average in our costs. We think the gas is going to continue to be down so we're no -- we're trying to be very conservative and not get out there too far.

Okay. Thank you.

Sure, Mike.

(Operator Instructions) And our next question is from the line of Dan Mazur with Harvest Capital. Please go ahead.

Good afternoon and congratulations on a good quarter.

Thanks, Dan.

Just a couple quick ones on -- I was pleasantly surprised with the near 50% margin that Pryor after insurance gained and just implies really efficient conversion costs and just wanted to see if there's anything unusual there, or if that is just what the cost structure Pryor will look like when you're running at full steam?

Dan, you're pretty tune in to the Ag side and basically it's just the fact that you've got ammonia going up and natural gas has been very economical, so you've got a good spread between your gas cost and your selling cost of ammonia. So there's nothing usually there.

Okay, and thanks for the detail on the potential expansion at Pryor. I know you've mentioned -- you said next up with the ammonia or nitric acid plant expansion, is that everything at Pryor? I know it's a 58-acre plus facility, is there even more plants there?

Well, there are some additional facilities there that we really didn't address today, but I would say at this point they are -- it's speculative at best as whether we would do anything with those plants or when we would do them. And so, I don't think it's in the short or medium term really.

Okay. No, that's fair. And I don't want to get in front of ourselves, but is there a timeline on a decision for the additional ammonia and nitric acid plant for this decision? And if the end markets a strong as they are today does that look like it may make (inaudible) sense?

Well, we don't have a very specific timeline, but I would say in all likelihood we will decide this year, sometime during the year.

Okay, great. Well, congratulations again.

Thanks.

We have no further questions in queue at this time. I'd like to turn the call back over to management for closing comments.

Okay, we'd like you to stay tuned for your Safe Harbor language.

So, here is Carol Oden to deliver that important message to you. [Go ahead, Carol.]

Thanks, again, for listening in today. The comments today contained certain forward-looking statements. All statements other than statements of historical fact are forward-looking statements. Statements that include the words expect, intent, plan, anticipate, believe, project, anticipate, estimate and similar statements of a future and forward-looking statement nature identify forward-looking statements, including but not limited to all statements about or any references to any the McGraw-Hill forecasts, including those pertaining to commercial, institutional and residential building increases or industry growth, and McGraw-Hill forecasts regarding the total green retrofit, renovation market and the energy efficiency markets.

Pryor Chemical is now contributing to earnings and should do so in the future. The outlook for both of our businesses is positive. New orders and backlogs are good indicators of near-term profit. We will continue to increase sales of our residential geothermal product. Our new facility will manufacture both geothermal and air cooled modular chillers and we expect to be shipping the chillers from our new plant in the third quarter of 2011. The agricultural market is projected to be strong this year. We are expecting robust demand for fertilizer this spring. Planned use of proceeds from the proposed $75 million term loan is to pay off the $50 million term loan dues November 2012, and to purchase or retire the remaining 2007 convertible debentures due July 1, 2012.

We expect that the overall sales mix will further tilt toward Chemical in 2011. Sales of Ag products will also become a larger percentage than we have had the past several years as a result of Pryor's concentration of Ag product sales. Customers expect industrial demand to increase as economy continues to improve. Green building construction will continue to have a positive impact on our Climate Control business. We plan to continue to introduce new products.

We will be introducing new online systems to enhance the front end of our fan coils and air handler businesses. We expect to start production in our dedicated chiller plant during the second quarter. We will continue to be a niche company. We will focus on green. We will continue our strong push in the geothermal market, continue to improve all areas of the business, look for positive -- possible strategic acquisitions. Nothing on the horizon that will change the basic fundamentals of the Ag business in the near or medium term. We are optimistic about our Ag business, plan to boost the capacity of Pryor in considered expansions, expansion of DES production, continue to expand our industrial business by adding new customers and craft new products.

You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. We incorporate the risks and uncertainties being discussing under the heading, special note regarding forward-looking statements, in our and report Form 10-K for the fiscal-year ended December 31, 2010. 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 and 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 alternate (inaudible) 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.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.