LSB Industries Inc (LXU) 2011 Q1 法說會逐字稿

Greetings and welcome to the LSB Industries' first-quarter conference call. At this time, all participants are in a listen-only mode. A 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. Please go ahead.

Again, we would like to welcome you to the LSB Industries Inc. 2011 first-quarter conference call. Today, LSB's management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, our Chief Financial Officer.

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 the Investor Information tab. This conference call is being broadcast live over the Internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.LSB-OKC.com. After comments by management, a question-and-answer session will be held. Instructions for asking questions will be provided at that time.

Information reported on this call speaks only as of today, May 5, 2011 and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. After the question-and-answer session, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. Mr. Golsen's presentation starts on page 3 of the PowerPoint and now I will turn the conference call over to Mr. Jack Golsen.

Thanks, Carol. Good afternoon. Thanks for joining our call today. I am going to try to give a very general overview before Tony and Barry give you more details.

Today, we released the results of our 2011 first quarter. This was the most profitable quarter in our history and follows a very strong fourth quarter and 2010. Over half of the earnings improvement this quarter was due to production at our Pryor, Oklahoma chemical plant. Pryor Chemical has and should continue to contribute to earnings in the future.

In addition to the contribution of Pryor, both the rest of our Chemical business and our Climate Control business had meaningful improvement in results compared to the first quarter of 2010.

At this time, the outlook for both of our business is positive -- businesses I should tell you is positive. We base this on new orders, backlog and market forecasts in the case of our Climate Control business and for our Chemical business, it is based on supply/demand factors for nitrogen fertilizer in the agricultural sector and favorable indicators for the industrial and mining markets we serve.

In the first quarter, Climate Control business new orders and backlogs were good and are improving. Commercial construction in our markets has recently shown more improvement than we anticipated. However, new residential construction is lower than anticipated. Overall, we expect to increase sales of our HVAC products both for new construction and replacement systems this year. Although there is still uncertainty about what is ahead for the economy, we are optimistic about the future of our Climate Control business as we continue to emphasize sale of green products. Our manufacturing facilities are equipped to handle a significant increase in volume.

Now for an update on our Chemical operations. Product demand and pricing have been good, agricultural sales got off to a slow start because of the extreme weather during the first quarter. Production by our Pryor Chemical plant, in addition to the increased activity at our other three chemical plants, is very positive. Because of this, we are exploring ways to increase production at all of our chemical facilities. This involves evaluating costs of modifications versus benefits at each one of the plants.

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 will open this conference call to questions.

Thanks, Jack. Our comparative consolidated results for the first quarter are summarized on page 4 of the PowerPoint presentation. In our earnings announcement for the first quarter of 2011, we reported fully diluted earnings per share of $0.90 compared to $0.07 for the first quarter last year on a sales increase of $47 million, or 36%. First-quarter net sales were $177 million. Climate Control increased $10 million and Chemical increased $37 million.

Consolidated operating income for the quarter increased to $34 million from $4 million in 2010, an increase of $30 million of which $27 million was attributable to the Chemical business and $3 million to the Climate Control business.

Focusing on sales and operating income by business segment, beginning on page five, climate control sales increased $10 million, or 19%. The gross profit and operating income were both up $3 million primarily due to the additional profit on the sales increase. The gross profit percent was approximately 34% for both periods.

Turning to page 6 of the PowerPoint, Chemical sales increased $37 million, or 49%. Sales increased across all three major markets -- agricultural, mining and industrial -- due to both increased pricing and volume. Sales from the Pryor facility, and incidentally any references in this financial overview to Pryor will be to our Pryor facility in Pryor, Oklahoma. Pryor sales were $19 million versus only $300,000 for the same quarter last year.

Chemical's agricultural sales increased $27 million. The increase was due to increased prices in agricultural products from our Cherokee and El Dorado facilities and the Pryor sales increase.

To recap the Pryor results, please turn to page 7. As we discussed in the fourth-quarter call, Pryor reached a sustained level of ammonia production in the fourth quarter of 2010. Market demand for ammonia was strong, supplies were tight and prices were rising, so Pryor sold mostly ammonia in the fourth quarter and reported strong earnings.

During the first quarter of 2011, Pryor continued to build momentum, reached sustained production of UAN and again, produced strong earnings. Sales from Pryor to unrelated third-party customers were $19 million. Operating income from these third-party sales was $8.6 million. Additionally, we realized a $2.7 million benefit from the utilization by our other facilities of lower-cost ammonia produced by the Pryor plant.

By comparison, Pryor reported an operating loss of $6 million for the first quarter of last year, a turnaround in operating income of $17 million.

With that as background, Chemical's operating income increased $27 million due in large part to the $17 million improvement in Pryor's operating results, as well as increased margins on nitrogen fertilizer sales produced at our Cherokee and our El Dorado facilities and to a lesser extent increased margins in our industrial and mining products.

Our overall effective income tax provision for the quarter was at the rate of approximately 36%. We have addressed our results of operations for the first quarter of 2011 in comparison to the same period last year in greater detail in the 10-Q, which we filed earlier today and would suggest that you review those disclosures in discussions for additional analysis.

Before turning to our balance sheet, I would like to remind listeners that typically our planned major maintenance activities are scheduled during the summer months. We schedule these maintenance turnarounds when the seasonal fertilizer demand is the lowest. The current estimates are that, during the third quarter of this year, turnaround costs will approximate $4 million to $5 million, not including lost absorption when certain of the plants are off-line while that maintenance is underway.

Turning to the balance sheet, briefly reviewing our liquidity and capital resources, cash flow provided by operations was $16 million. After investing in financing activities, including capital expenditures and other items, but not including long-term borrowing and the sale of short-term investments, the positive cash flow for the quarter was $11 million.

During the first quarter of 2011, we had total capital expenditures of $5 million. We are planning capital expending in 2011 of $45 million, including $35 million by our Chemical business and $10 million by our Climate Control business. All capital spending is subject to a thorough justification process before the final investment decision is made.

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 and take advantage of any strategic acquisitions or expansions that might fit our two business segments.

At the close of the first quarter, our long-term debt was $82 million and stockholders' equity was $226 million. We continue to believe that we should maintain a strong cash position. Relative to the approximately $76 million of long-term debt that was to mature in 2012, we considered several refinancing options. We decided upon a direct loan and we engaged Banc of America Leasing and Capital to syndicate a term loan, which we closed on March 29 of 2011.

On that date, our ThermaClime subsidiary entered into an amended and restated term loan agreement, which amended its existing term loan agreement dated November of 2007 and increased the loan amount from $50 million to $60 million. The principal amount may be further increased by another $15 million pursuant to the agreed-upon terms in the syndication by Bank of America. We plan to exercise this option and the details are outlined in the 10-Q that we filed earlier today.

In addition, during 2011, March of this year, all but $2.5 million of the 2007 convertible debentures were converted into common stock pursuant to the provisions of the indenture. As a result of the conversion, we issued 888,160 shares of common stock and reduced long-term debt by $24.4 million. Now I will turn the call over to Barry to discuss the market drivers for both businesses, which account for the improved operating results for 2011 and our thoughts on the outlook for our business.

Thanks, Tony. Since Tony covered the financial results, I am going to focus on our sales activity, product backlogs where pertinent, market drivers as we see them. I will also review upcoming key initiatives and our strategy for each of these businesses.

To start, please turn to page 9 in the presentation, which shows our sales mix by the markets we serve for the first quarter of 2011. Chemical products were a higher percentage of our total sales than in the recent past. The factors that caused that shift were an increase in the sales price of all key products in our Chemical business and the addition of meaningful revenues from Pryor Chemical.

As we noted back in March during our 2010 year-end conference call, we expect that the overall mix will continue to tilt towards Chemical in 2011 with a full year of sales activity at Pryor and with continued higher sales prices for our Chemical products. Within our Chemical business, sales of ag products will continue to be a larger percentage than we have had in the past years as a result of Pryor Chemical's current concentration on ag product sales.

Focusing on our Climate Control business, on page 10, you can see sales by the major product categories we report in our 10-K and 10-Qs. Total sales were $64 million in the first quarter, an increase of 19% in the first quarter of 2011 compared to the first quarter of 2010. Sales of all product categories were up.

Page 11 shows new product orders, sales and backlog by quarter for 2008 through 2010 and the first quarter of 2011. Looking at 2011 activity, total new orders were $72 million, up 32% compared to $54 million in the first quarter of 2010. Commercial and institutional orders were up 43% while residential orders were approximately the same as the first quarter of 2010.

I should also remind listeners that in last year's first quarter, there was a 30% increase in new orders for residential products, setting the bar much higher for that market in the current year. Also, last year's first-quarter new product orders for commercial products were down 8% from the previous first quarter, making the percentage improvement in the current first quarter an easier one, but no less welcome.

During the first quarter of 2011, sales of our commercial products were up 21% while sales of our residential products were up 10%. Our backlog of orders at March 31, 2011 was $58 million, approximately 62% higher than one year earlier.

As we pointed out during our last conference call, we believe that our commercial business bottomed out for new orders around the fourth quarter of 2009 and for shipments around the first quarter of 2010. Since then, we have seen steady improvement in these areas.

The next few pages of the PowerPoint deal with the market outlook for construction. Most of the specific data and forecasts shown in these pages comes from McGraw-Hill, which is considered to be one of the best construction forecasting services available.

On page 12, there is a graph that shows McGraw-Hill's most recent second-quarter 2011 forecasts for certain selected commercial and institutional building types. These are the sectors that are the most important to us. They comprise about 55% of our total Climate Control sales in 2010. As you can see from the graph, these sectors are all forecast to grow over the next five years.

In the aggregate, McGraw-Hill is forecasting that they will increase modestly in 2011 and will more than double over the next few years. This should benefit all of our commercial and institutional product sales. In 2008, before the recession impacted many of these sectors, these same building types comprised approximately 70% of our sales.

In addition to watching construction forecasts by sector, we also track the Architectural Billings Index. On page 13 is a graph of the ABI. Following a healthy upturn in the fourth quarter of 2010, the index was approximately level in the first quarter of this year, ending the quarter at 50.5 in March. An index score of 50 indicates that the ABI, the architectural billings were approximately the same as the previous month and any store above 50 indicates growth in billings from the prior month.

During 2010, 25% of our Climate Control business sales were geothermal heat pumps used in single-family residential applications. If you look at page 14, this shows McGraw-Hill's forecast for single-family residential construction starts. Although the forecast for 2011 is currently lower than it was a quarter ago, it still predicts modest growth this year.

Looking beyond 2011, McGraw-Hill forecasted housing starts will increase from about 450,000 in 2010 to over 1 million per year in 2013 and then remain at that level through the end of their 2015 forecast period. If this actually occurs, it bodes well for our residential geothermal business. We also expect to see continued positive impact from the 30% federal tax credit that extends through the end of 2016.

Another area that had and will continue to have a positive impact on our Climate Control business is the long-term trend toward green building construction. We discussed this at length during the last conference call. Although McGraw-Hill -- excuse me -- according to McGraw-Hill, the total green retrofit and renovation market is forecast to be 40% to 48% of all new residential construction in 2015 and could total $163 billion, including renovation and retrofit. Most of our products are particularly well-suited for green construction projects.

Turning to page 15, we have listed our Climate Control business's strategies and some key initiatives that are planned for 2011 and we discussed these in the fourth-quarter conference call, but for those of you that weren't onboard at that time, I am just going to repeat them now.

We will continue to be a group of niche companies. We will focus on green, we will continue our strong push in the geothermal market. We will continue to improve all areas of the business to maintain a high level of operational excellence. Finally, we will look for possible strategic acquisitions that could complement this business.

During 2011, we plan to continue to introduce new products, introduce new online systems to enhance the front end and customer interface of our businesses and we expect to start production in our dedicated chiller plant during the third quarter of this year.

Turning to our Chemical business on page 16, we show sales for the first quarters of both 2010 and 2011 for all major markets we serve. Total sales were $111 million. As you can see, sales were up in all markets we serve, in total 49% over the first quarter of 2010. The largest increase was agricultural products with sales more than double the 2010 level.

Turn to page 17 for sales of our key agricultural products. During the first quarter, tons shipped of UAN were about double that of the 2010 first quarter. And net sales increased even more as a result of higher sales prices per ton. The increase in tons sold was primarily a result of increased production at Pryor. As for higher selling prices, since the beginning of 2010, UAN prices have increased dramatically. I will cover that in more detail later.

[AN] tons shipped were slightly lower than the first quarter of 2010, primarily a result of very dry conditions in Texas and Oklahoma early in the planting season. However, increased market prices for AN positively impacted our sales, which were 30% higher than 2010.

Turning to our industrial products on page 18, dollar sales for all products were above 2010 levels. However, tons shipped for both nitric acid and sulfuric acid were lower than the first quarter of last year. Lower nitric acid tons were due to our primary customers manufacturing product balance requirements. Keep in mind that our agreement with Bayer provides for stable profits regardless of tons shipped.

On page 19 are some price trends for both of the feedstocks we use and the key ag products we sell. The cost of natural gas continues to be low. This is benefiting production costs at our Cherokee, Alabama and Pryor facilities. 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 to these facilities. Most of the products we produce at Baytown and most of the industrial products and mining products produced at El Dorado are sold on a cost-plus basis, so increased ammonia costs do not impact our profitability on those sales. Ag products produced at El Dorado are sold at spot market prices, but we have again been fortunate that selling prices for those products have also increased.

Turning to the products we sell, prices for these key products have increased over the past year due to strong market fundamentals. Focusing on the outlook for the chemical markets we serve, page 20 lists several indicators that are for our agricultural products. All of these are favorable.

Grain stock to use ratios both worldwide and in the US are very low compared to the recent past. As a result, planting levels are generally high, other than certain dislocations due to weather that we will discuss later in the presentation. Market prices for corn and wheat have increased over the past year, so farmers have had a high incentive to plant and sell more. Ethanol production is up, which stimulates corn production. All of this is creating high demand for fertilizers 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 is nothing on the horizon that will change the basic fundamentals of the ag business in the near or midterm. We are optimistic about our ag business.

As we have always advised you, despite general industry drivers, weather can have a significant impact on the fertilizer part of our business. While weather has certainly taken a turn for the worse in certain parts of the country, particularly along the Mississippi and Ohio River valleys, we still believe that we will be in a sold-out position for all nitrogen produced through the spring season, along with strong demand for fall fill tons.

There is little doubt corn planting has fallen behind schedule, 13% planted versus a five-year average of 40% as of May 1, but with more favorable weather in the forecast, this gap can close in a hurry. Because the window for applications of ammonia is narrowing, we will more than likely see an increased demand for UAN and urea the remainder of this planting season.

Now please turn to page 21. 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.

The two pie charts on this page indicate the shift that has occurred in our sales mix from the full-year 2010 to the first quarter of 2011. A very significant part of our business continues to be industrial and mining products.

Page 22 contains some market indicators for this area of the business. All of these indicators forecast growth for the next few years. Even though about 69% of our industrial sales during 2010 were pursuant to cost-plus or minimum take type agreements, in the long run, it is certainly better for us when our customers' businesses are growing and prospering.

On page 23, we have listed our Chemical business's strategies and some of our key initiatives for 2011. 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.

This year, we plan to boost the ammonia production of Pryor Chemical. We will also expand nitric acid and ammonia production at Pryor. We also have several capital projects on the drawing boards.

Before opening up for questions, I would like to mention that I will be presenting at the BMO Farm to Market conference on May 17 in New York City and I hope to see some of you at this event. Operator, you can now poll the listeners for questions.

(Operator Instructions). Joe Mondillo, Sidoti & Co.

Good afternoon, guys. First question just has to do with -- you mentioned that you are going to go ahead with the expansion of nitric acid and the anhydrous ammonia. What kind of costs do you think this will take and how long of a project will this be to get this up and running?

We disclosed in our 10-Q, which I know no one has had an opportunity to read yet because it just was published an hour or so ago, that we'd committed $9.4 million to the expansion of the Pryor facility, which consists of two smaller ammonia plants with a rated capacity of 60,000 tons per year and a nitric acid plant with a rated capacity of 66,000 tons per year.

And I want to emphasize that even though we have listed this as a committed capital expenditure, it is not an irrevocable commitment. But it includes decisions that have to be made at various points in the process to proceed at different intervals. The expenditure will be phased-in beginning with an engineering evaluation of the plants that is actually underway now to determine exactly what the production capabilities will be.

If the evaluation is positive, we will continue to move forward and the decision at that time will be subject to our ability to obtain permits and subject to completion of an updated cost benefit analysis based on our continued market surveillance and evaluation of the situation.

Okay, so the $9.4 million, what is that related to and was that in the quarter that you just reported.

No, that is a disclosure we made in the 10-Q regarding our planned capital spending.

Planned.

Is that what you expect for the whole entire project or just the engineering and evaluation part of it?

That would be the whole entire project.

Okay, and then what kind of timeline do you see possibly?

Well, we are not putting a timeline on it at this point. It's too preliminary to do that and we are going to take it as it goes and we will keep you advised of progress.

We are going to move very methodically on this. We are not going to get out in front of ourselves and we are going to do the engineering first and we are not going to probably give the street a lot of notice on where we are at any particular time, but we do plan to finish it up this year.

Okay. And then I guess turning to the Pryor plant, I was wondering if you could give some detail on where you are in terms of full production or where you are in terms of production and what kind of production you had with UAN and ammonia in the quarter.

Joe, we put quite a bit of detail in the 10-Q, which you haven't had a chance to look at, so I will just give you a real thumbnail. During the first quarter, we averaged, for ammonia, 540 tons per day of ammonia versus our original target of 525, which comes out to roughly 190,000 tons per year and our current target of 700 tons per day. So we are somewhere between the 550 and the 700 ton revised target.

On UAN, we produced an average of 550 tons per day of UAN versus our current plan target of 1000 tons per day. However, in March and April, we averaged closed to 800 tons per day so we are -- we have momentum and we are moving towards this and we expect to hit our targets.

Now if we add 140,000 -- at 325,000 tons of UAN that we have talked about, we would have, at 550 tons a day, 190,000 tons of ammonia produced and 140,000 required to do the 325,000, so that would leave us an extra 50,000 or 60,000 tons of ammonia to sell. If we get up to our 700 ton per day target, that will leave closer to 90,000 tons a year to sell of ammonia.

Okay, great. That is very helpful. Also, could you tell me how much ammonia and UAN you have sold in the quarter?

We don't have that in front of us. It may be in the Q; you might have to look in there.

Okay. I guess turning to just the Climate Control, could you give a little more color in terms of what you saw in margin and going forward what you are expecting?

I think we disclosed the margin in the quarter.

Margin was slightly less than 34%.

Yes, it was 33 --.

33.8%.

33.8% versus --.

Do you expect that to continue to sort of trend slightly down? I know that was a cautious point in the last call.

I am still going to issue that caution. We expected to see some pretty significant material price increases this year and we were tentative about the level of price increases that the market would still accept during the recovery period. So in an abundance of caution, we predicted that our margin was probably going to see some slight deterioration. We like to underpromise and overdeliver, so that is the way we are approaching this thing.

I am gratified to see so far that we see some backing off in the raw material costs in the last month or so. Copper is down a little bit. It is not continuing to go up as high as we thought it might go and we are starting to see a little softening in steel. So we don't really know where those raw material costs are going to go and we don't really know how receptive the market is going to be to further price increases. We are going to do our best to keep that margin up, but there could be some deterioration.

Historically, I will also point out, we have always historically been able to eventually pass through increases and we think that if there is a delay this year, it will be a delay more than anything else and that eventually, we will able to pass them through probably.

Okay. And you have started to issue price increases?

Yes, we have issued a round of price increases in the first quarter of the year.

And how much about?

We have multiple companies with multiple products in multiple distribution channels and so there were a lot of different price increases and I don't want to give one blanket number because I might not hit it right.

Okay, fair enough. In terms of the residential orders, which are primarily or all geothermal, could you comment on seeing flat -- I know it was a tough comp. How was it compared to the fourth quarter I guess sequentially?

It's always a tough comp and we had a lot of bad weather back at the beginning of the quarter. So I think -- I don't really know what is going to happen as we go forward this year, but we are plugging away and we are very optimistic about this sector and we continue to put a lot of investment and a lot of energy into this area.

How have the orders trended from, I guess, April compared to the January, February, March?

Well, we really haven't disclosed that. We are not disclosing that at this point.

Okay. All right. Last question, in terms of the industrial and mining chemicals, I know the ag, at least toward the existing business ex-Pryor, is running at close to full capacity. Where is the industrial and the mining chemicals businesses running at in terms of capacity?

Well, there is really no separation of capacity. We produce ammonia at Pryor and Cherokee and then you increase it to nitric acid and then you increase it to other products. So every step of the upgrade of the product is a savable end item and there is no -- there are limitations on anhydrous ammonia because that is the limiting factor at Cherokee, but you really don't break it down. It is more based on market demand.

We have the ability to shift -- if the demand is in ag and industrial is down, we can convert our end product to ag and vice versa.

Plus we have certain commitments, volume commitments to certain large customers, which we have to fulfill and then the rest of it is a matter of product balancing.

Okay, so you look at -- so the Chemical business is basically one entity and you can fluctuate between ag, industrial and mining. So the overall entity on a capacity standpoint, would you say it is close, 90% or higher?

We can't really comment on that. We try to run these at a very efficient level because that gives you the best result. So we are always trying to run it as close to capacity as possible.

One thing you should keep in mind, Joe, and we have got to move on is that each one of these different facilities in different states have their own capacities. You can't necessarily look at the plant, the company as interchangeable, but for the most part, we are producing all the same products.

Okay. All right, great.

Thanks for your great questions, Joe.

All right, thanks a lot.

Dan Mannes, Avondale Partners.

Good afternoon, everybody. I have a couple questions primarily on the Chemical side. The first thing, I just want to make sure I understand the seasonality. Historically, with Cherokee, it looked like you sold more volume in the second quarter than in the first or in any other quarter. Looking at Pryor, and given it sounds like you are mostly sold out, is there any inventory to sell more in the second quarter or should we assume more of a flattish sales trend, excluding the uptick in UAN?

Dan, Pryor is not sold out. We obviously have significant commitments with our offtake partner at Pryor, but the capacity there, as I indicated, is moving up pretty much on a monthly basis. The first-quarter average of ammonia was 550 a day. We average closed to 800 tons a day -- I mean, excuse me, on UAN, we averaged close to 800 tons a day in March and April. So we are moving up towards that 1000 ton per day level and we've got plenty of capacity for the rest of the year.

Got it. So what I meant by sold out, meaning you were selling everything you produced. You weren't inventorying to fill the second quarter. So to the extent you sell more in the second quarter, it is because you are producing more UAN as you ramp the UAN plant?

Well, we obviously built some inventory during the quarter because you have a mismatch as far as the ammonia capacity versus the UAN, so we did build some inventory.

Okay, great. The second thing I noticed, I did get a chance to read a tiny bit of the Q. It looked like you prepurchased about 2.5 million MMbtus of gas. Can I assume -- historically, when you pre-buy gas, you also have commitments for UAN or whatever your finished product is. Have you already locked in some price for the balance of the year?

Yes, at Pryor, we have got about 40% of our gas hedged for June, July, August and September and at Cherokee, we have a natural hedge there, but of the gas that we don't have a natural hedge on, which is about 60%, we have got about 40% of that hedged for those same months.

And that is not just the gas, you have also -- you have hedged out the other side too?

No, this is not matched up with sales. We do have some firm sales -- fairly significant firm sales commitments, but these are just hedging part of the risk against gas increases.

Okay. And then briefly, it looked like you have a fairly sizable capital spend and I know it goes beyond just the potential upgrade activity at Pryor. It looks like some environmental stuff. How much flexibility do you have there? It looks like -- I mean I think it was almost $40 million or $35 million in spend at Chemical. I guess I am just trying to understand how much is economically driven versus how much is environmentally driven?

Most of it is economically driven.

So it would result in --.

I think we disclosed that breakdown -- I have to turn to it -- but the majority of it is based upon expansion opportunities and economically driven versus environmentally.

Okay, so we should expect higher efficiency, more output, some benefit from a lot of this spending?

We certainly hope so.

Got it. That's great, thanks again.

Thanks, Dan.

Eric Stine, Northland Capital Markets.

Yes, hi, guys. Thanks for taking my questions. I guess my first question is can you talk about sort of the impact of weather on ag sales thus far in 2Q and kind of how you guys feel about that throughout the remainder --?

We don't really feel that it has had a significant impact on our sales.

Okay. My second question is can you -- anyway you can disclose of the planned timing of plant turnarounds at Pryor and Cherokee this year?

Well, I think Tony addressed that. He might have been talking fast. Do you want to review that real quick?

We typically have most of it in the off-season, which is generally the third quarter. We have -- during the seasonally -- lower seasonal demand.

That is what is going to happen this year. That is where you will see most of our turnarounds will be in the third quarter.

Okay. That is all I have. Thanks, guys. I will jump back out.

Elie Mishaan, Corsair Capital Management.

Hey, guys, it is Jay Petschek.

Hi, Jay. How are you doing?

Good, good thanks. Great quarter, needless to say here. A lot of questions were asked. I just have one on the DF market, which I note -- I think it is back on one of your pages you say you are planning to expand that. Can you give us a little more flavor of what is going on there and is the fact that you are evaluating expansion --?

Well, we are looking at expansion. Up until the recent pending proposed legislation to do away with diesel vehicles, it was looking like that was going to be a tremendously rapidly expanding market over say the next 10 years or so. And I think that conventional wisdom that it was going to be up over $1 billion gallons a year. Of course, that is all in question with this pending legislation.

So at this point, we are continuing to watch the political environment and if it makes sense for us to expand that, if the economics work out, it is something that we will consider doing and if it is something that it turns out we shouldn't do, then we won't.

All right. And in the first quarter, as far as the initial demand for this type of product, did you see any to the extent the new rigs don't go through?

We have said this before that, although we have tiptoed into this market and we have developed the capability to produce it, it is a very small part of our sales and we think as far as this year or next year, it is not going to be any kind of a needle mover for us, even with the status quo environment, even if they don't pass this legislation.

Although sales have increased.

That is true.

To answer your question.

Okay, so we will be watching the legislation.

Right, exactly.

Great, thanks.

Eric Glover, Canaccord.

Good afternoon, guys. I was wondering on the Climate Control business, the bookings were up pretty substantially on a sequential basis. Can you talk about whether that was mainly due to seasonality or whether you are seeing a real pickup in that part of your business?

It was probably due to both. The fourth quarter and the first quarter are not our best quarters for shipments or for bookings. It starts to -- January is kind of a low month for bookings traditionally for us. So I would say considering that January is not a good month typically, the first quarter -- it starts to pick up after the -- sequentially, I would say generally the first quarter is somewhat better than the fourth quarter, but we are seeing this momentum that has been building all through last year.

How much of that momentum is attributable to federal government incentives?

It's really hard to quantify. It is very difficult to quantify that. Since most -- since all the increase was in the commercial side, it is very difficult to nail down which commercial projects are government incentives and which aren't.

Okay, and then turning to Chemicals, knowing what you know today, is there any reason to think that margins would be significantly different going forward than they were in the first quarter?

Gas is still in the $4 range and UAN is still north of $300. At this point, we can't make any predictions, can't forecast, but there is no reason to believe that margins would compress.

And ammonia is at $5.65, which is inching up about $10 a ton every couple weeks.

I didn't catch that. What was up $10 a ton?

Every couple of weeks it seems to have gone up.

Anhydrous ammonia.

We sell quite a bit of anhydrous ammonia out of the Pryor plant.

Okay, thank you very much.

(Operator Instructions). [David Keiser], [Raboti & Co.]

Hi, guys, how are you doing? Are you surprised by the hydronic tank oil growth? It seemed pretty substantial.

No, I am not surprised. That was a part of our business that was hit the hardest by the recession. And the reason it was hit the hardest by the recession is because, if you look -- if we were to break out the sales distribution by vertical market in that business versus the rest of our businesses, you would see a much higher concentration of hotels and multifamily, being particularly condominiums and high-rise apartments, which traditionally have been very big markets for the fan coil business.

So it was hit the hardest, so we kind of expected it to bounce back and it is bouncing back. And I think if you look at the statistics that are out there, they are expecting to see, both in lodging and both in multifamily this year, those will be some of the sectors that are making the biggest gains. So it is really not surprising to us.

And it seems like there is a lot of focus on the geothermal heat pumps, which I am going to get to, so I'm going to contradict myself a little bit. But you have to be very optimistic about the growth in the commercial sector and how that is equating to higher earnings and sales (inaudible).

What is the question?

I am just making a statement.

Oh, okay.

Sorry. So regarding the geothermal heat pumps, retrofit versus new construction? I tend to ask this every quarter, but I am still curious. Anything you can disclose on that?

Well, no. I mean I think we've discussed this before, but just to kind of as a review, leading up into the recession, historically, we were probably at about a 70% new, 30% retrofit and we have seen last year a significant shift where probably about half of our business was retrofit and half was new construction as far as residential geothermal heat pumps.

All right. And in terms of competitive landscape, competition, marketshare? I am not asking for anything specific, just any trends you are noticing.

No, no new trends.

Okay, thank you guys very much. Congratulations on the good quarter.

We have no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay, at this point, we want to thank you all for listening and if you will stay on the line, Carol Oden has some very important information about the statements made today that I am sure you all are very interested in. So I will turn it back over to Carol.

Thank you 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 expects, intends, plans, believes, projects, anticipates, estimates and similar statements of the future or forward-looking statement nature identify forward-looking statements, including but not limited to all statements about or any references to the Architectural Billings Index or any McGraw-Hill forecasts. Pryor Chemicals should continue to contribute to earnings in the future. Outlook for both of our businesses is positive. The Climate Control business's new orders and backlogs are improving. We are optimistic about the future of our Climate Control business.

During the third quarter, turnaround costs will approximate $4 million to $5 million. We have significant liquidity to grow the business and take advantage of any specific acquisitions or expansions. We plan to exercise the option to increase our Bank of America leasing term loan by another $15 million. We expect that the overall sales mix will continue to tilt towards Chemical in 2011. Sales of ag products will continue to be a larger percentage than in the past several years. We expect to see continued positive impacts from the 30% federal tax credit. The long-term trend toward green building introduction will continue to have a positive impact on our Climate Control business.

We will continue to be a group of niche companies focused on green, continue our strong push in the geothermal market, continue to improve all areas of the business and maintain a high level of operational excellence. We will look for possible strategic acquisitions that could complement this business.

During 2011, we plan to continue to produce new products, introduce new online systems to enhance the front-end customer interface. We expect to start production in our dedicated chiller plant in the third quarter. We are optimistic about our ag business. We believe we will be in a sold-out position for all nitrogen produced through the spring season, along with strong demand for fall filled tons.

We will continue to enhance our agricultural distribution channel. We plan to boost ammonia production capacity of our Pryor Chemical plant and we can also expand nitric acid and ammonia production at Pryor. 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 number of important factors.

We incorporate the risks and uncertainties being discussed under the heading Special Note Regarding Forward-Looking Statements in our Annual 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 alternative to GAAP measurement. We will post 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 does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.