LSB Industries, Inc.
Q2 2010 Earnings Call Transcript

Published: 7 Aug 2010

[Operator:]

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

[Carol Oden:]

Thank you. Again, we would like to welcome you to the LSB Industries, Inc. second quarter 2010 conference call. Today LSB’s management participants are Jack Golsen, our Chairman, Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, our Chief Financial Officer. This conference call is being broadcast live over the Internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.lsb-okc.com. After comments by management a question-and-answer session will be held. Instructions for asking questions will be provided at that time. Information reported on this call speaks only as of today, August 6th, 2010, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. After the question-and-answer session, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We suggest that you stay on the call long enough to hear them. Now I will turn the conference call over to Mr. Jack Golsen.

[Jack Golsen:]

Thanks, Carol. Welcome to today’s call and thanks for joining us. Today we released the results of our second quarter. We are happy to report that the second quarter results are somewhat better than the first quarter 2010, an indicative trending upwards. Although we have not achieved what we believe to be the full potentials of our businesses, we are continuing to add the building blocks that will allow us to achieve these potentials when the market improves. When Barry discusses order rates and backlog in our Climate Control business and the upturn in our Chemical business, I think you will agree that we are moving in the right direction. Economic activity in some our businesses during the first half of this year has not yet fully recovered due to the factors that we have discussed with you in past conference calls. Commercial construction in the markets we serve are substantially lower in its peak. Residential construction, although expected to increase this year, will also be significantly lower than prior years. In the face or lower residential and commercial construction markets, we have increased our market share of geothermal products over the past years and new orders of our residential geothermal heat pumps have increased dramatically this year over last year. We are encouraged by this and we believe that if it is a nearly [ph] indicator of the potential for our geothermal businesses in our recovered market of future is bright. Our Chemical operations in Baytown, Texas, El Dorado, Arkansas, and Cherokee, Alabama are performing well at this time. Product demand and pricing have been relatively good. We are frequently asked about Pryor, Oklahoma plant production. As some of you who follow us will know, in June the operations in our Pryor plant were interrupted by a pipe failure and resulting fire, which substantially destroyed the primary reformer and the ammonia plant. This prevented our ramping up to full production as scheduled. Reformer repairs should be completed late in the third quarter. In the near future, the restart of Pryor should add rather than detract from our overall chemical results. We are also asked about our progress on the potential acquisition that we were considering in China. That situation is as follows At the last conference call, we disclosed that we were proceeding with due diligence of a potential acquisition of a heating and air conditioning business in China. What we found while doing our due diligence was not what we expected to find. Since we have been unable to agree to a revised deal with the owner, we have decided not to proceed with the acquisition at this time. We have some light news, which I would like to give you. Last week we agreed to a three-year labor contract with the Union at our El Dorado, Arkansas plant. Labor negotiations were concluded within our expectations and are now subject to a definitive written agreement. This is a formality that we always go through with the unions. Before closing, I would like to convey to you that we are optimistic about the long term future of our company. We remain cautious about the second half of 2010 since there are mixed opinions about the economic recovery of our markets this year. We believe that our company is undervalued and we are working to make these values more visible and realizable to our shareholders. Finally, as some of you may already know, LSB Industries was added to the S&P SmallCap 600 Index in the spring of 2010. Now for the details about the second quarter, I will turn this conference call over to Tony Shelby.

[Tony Shelby:]

Thanks, Jack, and good afternoon. As reported in our earnings announcement this morning, the financial results for the second quarter for 2010 compared to the second quarter of ’09 included sales $168.4 million compared to $138.6 million; operating income $12.8 million compared to $14.5 million; net income $6 million compared to $8.7 million; diluted earnings per share of $0.27 compared to $0.38; and EBITDA – all of these are millions – Chemical $12.7 million versus $9 million; Climate Control $7.9 million versus $13.1 million and consolidated $17.6 million, $19.2 million. For the trailing 12 months at June 30, 2010, consolidated EBITDA was $41.7 million. The following comments are all related to the second quarter. Sales

[Barry Golsen:]

Thanks, Tony. First, I will like to discuss the results from our Climate Control business. As Tony mentioned, our total Climate Control business sales during the second quarter of 2010 were lower than the second quarter last year by 10.7%. Sales to commercial and institutional customers were 75% of our total business during the second quarter and commercial sales were down 15% from the second quarter of last year. Sales of products used in single-family residences, which are all geothermal heat pumps for us, were the remaining 25% of our second quarter sales and sales were up 7% from the same period last year. New orders for our residential products increased even more than this and I will discuss that in some detail later. Focusing on major product lines, total heat pump sales were down 6%. Same quarter sales were down 29% and sales of all of our other products and services were down 9%. Sales of our fan coil products have been the most severely impacted because of the decline in both the lodging and multi-family residential construction sectors, which traditionally accounted for a majority of our fan coil sales. Total new product orders during the second quarter were $71.7 million, a 31% increase compared to the first quarter of 2009. This was the highest level of new orders since the third quarter of 2008. New orders of products for commercial and institutional applications were up 26% compared the same quarter last year, while new orders for our geothermal heat pumps that are used in single-family residences were up 48% over the second quarter of last year. At June 30th, we had a backlog of product orders of $48.2 million, up from $36 million at March 31st, and slightly down from $49.5 million at 06/30/09. July 2010 new product orders totaled $19.5 million, up 34% over July of 2009 and our backlog at the end of the month was $48.2 million as compared to $43.2 million at the same time a year ago. We are encouraged to see our overall new order bookings and backlog increase and are particularly pleased with our residential geothermal activity level. As of the end of the second quarter, we continue to maintain leading market shares for geothermal and water source heat pumps and for hydraulic fan coils. Year-to-date, through June, we have increased our market share for our geothermal products. Our gross profit during the second quarter of 2010 was $18.8 million or 31.5% of sales, down from 37.3% of sales for the same period in 2009. The reduction in gross profit was primarily a result of lower sales and increased material cost. We’ve discussed this with you on several other conference calls. And we stated that our gross profit during the second and third quarters of 2009 was unusually high in our opinion as a result of the large backlog we had entering 2008 going into 2009. This backlog was sold at market prices for our products based on higher material cost in 2008. As commodity prices fell during 2009, we were able to benefit from a higher spread between material cost and our sales prices. We are now experiencing both higher material prices and generally lower sales price levels for our commercial products. Our residential product sales prices had not been significantly impacted by the economic downturn, but again material prices have increased over 2009 levels. Our Climate Control segment operating profit during the second quarter of 2010 was $7 million compared to $12.2 million in the 2009 quarter, primarily as a result of the gross profit I just discussed plus the effect of fixed SG&A cost, coupled with increased marketing and advertising expenses, primarily related to our geothermal heat pumps. Looking to the future, what is the construction outlook? One source, the latest McGraw-Hill Construction Research and Analytics construction market forecasting service forecast that new contract awards in 2010 will be approximately 7% lower than 2009 awards for the specific commercial and institutional types that accounted for approximately 64% of our total Climate Control business sales in 2009. Those sectors for us are offices hotels, educational facilities, healthcare and retirement facilities, apartments, and condominiums. Note, that the most recent forecast for this year declined further from McGraw-Hill’s forecast a quarter ago, which was approximately a 3% decline at that time, reflecting the continuing softness in commercial construction. McGraw-Hill also forecasts that this will be followed by year-over-year increases of approximately 14%, 30%, and 30% again in 2011, 2012, and 2013, respectively, for these building types in the aggregate. Keep in mind that contract awards occur several months before we actually receive orders for – and ship the products that we produce. During 2009, construction contract awards for the commercial sectors we serve primarily the ones I just discussed, declined approximately 38%. Accordingly, we have expected and are experiencing the sales for commercial products for the full year 2010 will be lower than 2009. In addition to McGraw-Hill, we also look at the Architectural Buildings Index, which is an indicator of future commercial and institutional construction activity, nine to 12 months in the future. The ABI was 46% in June and continues to indicate declining demand for design services. Every time we meet with investors, I am asked what do you think will happen in the commercial construction area? And our answer is always the same. We believe we know what will happen; we just don’t know exactly when it will happen. Our belief is that there will be a gradual recovery in commercial construction and we intend to participate in that as it occurs. In the mean time, we are continuing to do those things that we believe will make us stronger and more competitive as the eventual recovery occurs. Moving onto residential geothermal heat pumps, or GHPs, on a more positive note, residential contract awards are forecast by McGraw-Hill to increase 22% this year, albeit from an incredibly low level. Also, in residential construction, the lead time between contract awards and shipments of our product is much shorter than in commercial construction. McGraw-Hill also forecast increases of 51% in 2010 and 50% in 2012. To meet this demand, we have significantly increased our GHP sales and marketing efforts. These projected increases seem phenomenal, I know, but it should be noted that even with these projected increases, the single family residential market will still not return to the 2005-2006 levels. As discussed earlier, our sales of residential GHPs were up approximately 7% in the second quarter of 2010 compared to the same quarter in 2009 while new orders were up 48% compared to last year’s second quarter. Year-to-date as of June our residential GHP new orders were up 40% over the same period in 2009. We believe that the combination of our intensified sales and marketing efforts, the30% federal income tax credit for GHP, increased home construction, although at a lower level than we expected and the trend toward more energy-efficient construction has had a very positive effect on GHP sales in new orders. We’ve also seen a recent trend towards more use of GHP system in the replacement market than we traditionally have seen. I would like to update you about a few operational initiatives that we are undertaking within the Climate Control business. We recently began production of tube and fans heat transfer coils for our large custom air handler at our ClimateCraft facility. This is a cost reduction project. Previously we were purchase those on the outside because they were much larger than the other coils that we produced and we had to install manufacturing capability to produce large coils. Also at ClimateCraft, last year we introduced a product line, which utilizes FanMatrix technology. We recently installed a specialized production cell to manufacture FanMatirxes in a much more efficient manner than we have previously been producing them. We plan in the near future to set up a dedicated manufacturing facility for our ClimaCool to produce highly energy efficient and green modular chillers and heat pumps. We are currently producing those at our ClimateMaster plant, but we believe we can produce them more efficiently in a dedicated facility. The new facility will also help with the introduction of other ClimaCool products that we have planned for the future. We will repurpose the building we already own and expect to initiate production during the first half of 2011. Returning to the total Climate Control business, despite the fact that our current commercial sales are soft, we are very optimistic about the future. Throughout this downturn, we’ve continued to do the things that we believe will build this business for the long term such as increasing our overall sales and marketing team, investing in new front-end systems to enhance customer service and sales support, introducing new products, increasing plant capacity, capital investment aimed at cost reductions to make us more vertically integrated and low cost manufacturer. And a very strong focus on green and highly energy-efficient products. We believe there is a long term toward construction and retrofitting green buildings and it is our intention to continue to take advantage of this in the years to come. We believe these will put us in a strong competitive position as the market rebounds. Turning to our Chemical business, for the second quarter of 2010, as Tony reported, sales, total sales of our Chemical products were $106.4 million compared to $69.9 million in 2009. Sales of our industrial and mining products were combined $55.4 million while sales of our ag products were $51 million. As most of you know, ag sales are typically a higher percentage of our total revenues during the second quarter than the full year because of agricultural seasonality. This was accentuated this year due to the late start of the ag season in the first quarter. Gross profit and operating income were both improved to the second quarter of 2009 for all the reasons that Tony pointed out earlier. Focusing on the ag part of our Chemical business, during the second quarter, total ag product sales were $51 million, 49% higher than the second quarter of 2009. Total ag products shipped were 45% higher than 2009. During the second quarter our shipped tonnage of UAN fertilizer from our Cherokee, Alabama plant was approximately 40% higher than the second quarter of 2009. Revenues from those sales, however, increased 79%, reflecting both increased tonnage volumes and increased sales prices per ton. We also shipped approximately 14,000 tons of UAN during the second quarter from our Pryor, Oklahoma plant, which began production on a limited basis this year. I will discuss prior in much more detail later. Turning to ag grade ammonium nitrate or AN, our second quarter 2010 revenues were higher than the second quarter of 2009 by 36%, partially as a result of a 20% increase in tons shipped. In addition, during the second quarter of 2010, the published sales prices for AN were approximately $30 per ton higher than the second quarter of 2009. The significant increase in our ag product sales volume in the second quarter was due to strong demand and as a result of a late start to the spring season caused by cold and wet weather conditions, which pushed some demand from the first quarter to the second quarter. Sales for the balance of the season will depend to a large degree on weather conditions and the extent to which dealers and distributors restock. However, at this time, as a result of very strong sales over the past few months, the entire distribution system is virtually emptied of its nitrogen products. Our plants are currently sold out and we are optimistic about the near term future. We also remain bullish about the long term demand for agricultural products we produce. The price of anhydrous ammonia, the raw material feedstock for our El Dorado facility as quoted at Tampa price point averaged $390 per metric ton during the second quarter compared to $261 in the second quarter of 2009. Today’s Tampa price is $380 per metric ton. Turning to our industrial chemical products, during the second quarter our industrial product sales were $32.8 million, up 53% quarter-over-quarter. However, tons shipped were only up 44%. The increase in revenue per ton was due to the pass-through of higher cost of anhydrous ammonia, the raw material for our – for the El Dorado and Baytown plants. We believe that in the long run, there will be steady requirements for our industrial acids, and we are seeing increased demand as the economy improves. During the second quarter, our mining product sales were $22.6 million, up 61% compared to 2009 second quarter. Tons shipped were up 33%. The disproportionate increase in sales dollars versus tons shipped was caused by higher raw material input cost on tons shipped plus billings to our largest mining customer for tons not taken. The billing for tons not taken was pursuant to our take-or-pay agreement with that customer. It’s unclear to us how these markets will respond for the remainder of 2010, but we anticipate modest increased demand from certain of our large industrial customers and from our mining customers. Most of our chemical businesses, industrial and mining sales are pursuant to cost plus pricing arrangements with our customers assuming the raw material cost fluctuation risk, eliminating much of our risk of a disconnect between raw material cost and the market prices of our products. During the first half of 2010, approximately 72% of our industrial and mining products were sold pursuant to agreements that have either minimum purchase requirements or a fixed total contract profit, irrespective of volume taken by our customers. To that extent we are somewhat insulated from a potential downturn in demand for our industrial products. Finance on the Pryor facility, we know that many of you are following this closely, so I will try to give you a very thorough update. During the second quarter, the Pryor facility produced anhydrous ammonia and UAN on a limited and intermittent basis at production rates lower than our targeted rates. The UAN produced was sold. The anhydrous ammonia was either sold to customers or consumed internally by the company’s other chemical facilities. Operating expenses at the Pryor facility for the second quarter was $6.2 million. Operating expenses during this period identifiable with production were included in cost of sales or capitalized inventory and the remaining $3.2 million below the gross profit line as expenses. Due to a fire in June, the damage to the ammonia plant’s primary reformer within the facility, the Pryor facility is unable to produce anhydrous ammonia or UAN at this time. Based on our current assessment, we anticipate repairs will be completed towards the end of September 2010. The primary reason for this delay is the lead time for replacement parts. All production at the Pryor facility is ceased for an estimated 90 days while repairs are being completed. During this rebuild and repair phase, in the third quarter, all operating expenses and losses will fall below the gross profit line. We continue to fund the Pryor facility from our available cash on hand, working capital, and insurance proceeds. Also, during the 90-day period, we are undertaking an extensive plant reassessment and upgrade process, which we believe will enhance production reliability when operations resume. Our primary rationale for reopening Pryor was the change in the nitrogen fertilizer industry in the United States over the past several years coupled with a long term favorable outlook for fertilizer products. Today, we believe those reasons are still valid and the long term outlook is even stronger. Even considering the delays in increased cost of Pryor, we anticipate completing Pryor for a fraction of the cost of a comparable new plant. We believe that Pryor is a valuable asset that will contribute to earnings for many years to come. We are enthusiastic about our relationship with Koch on this project, which should facilitate the growth of this business for LSB. On a further operational note about our Chemical business, at the Baytown facility, we recently implemented the first N2O or nitrous oxide emissions reduction project in the United States using the protocol developed by the climate action reserve. N2O is a normal co-product in the manufacture of nitric acid and is currently categorized as a greenhouse gas by the EPA. Our project, catalytically converts N2O to a harmless nitrogen gas. We expect to begin marketing the carbon credits generated by this project later this year. Summing up, Chemical plants in Arkansas, Alabama, and Texas are all experiencing good, steady demand and other than down time for plant maintenance are running at near optimal rates. The outlook for ag production, product demand rather is especially positive given the supply-demand fundamentals for global grain production. We are anxious to complete the repairs in the plant maintenance at our prior plant. We will now take any questions that you might have.

[Operator:]

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

[Eric Stine:]

Hi, everyone, congrats on the quarter.

[Jack Golsen:]

Thanks.

[Eric Stine:]

Just wondering if we could touch on Pryor quickly. You just said in your prepared remarks that the 90-day timetable is due to long lead time items. I know those long lead time items has caused delays of a number of months. Are these – I mean are these items that you would say are shorter lead times than those others and give you confidence I mean is that – ?

[Jack Golsen:]

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

[Eric Stine:]

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

[Jack Golsen:]

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

[Eric Stine:]

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

[Jack Golsen:]

Eric, I think the direction we tried to give you in the disclosures and the 10-Q and this conference call is that in the first quarter we expensed all – over $5 million worth or expenses and we included SG&A in the third quarter – operating income – SG&A include $3.2 million second quarter cost –

[Tony Shelby:]

Second quarter.

[Jack Golsen:]

– in the second quarter. Now, in the third quarter, as we indicated, we are going to have $6.2 million of expenses with (inaudible) little of any production, so we’re targeting the end of September, which is roughly 90 days. So you could probably expect to see something more comparable to the first quarter.

[Eric Stine:]

Okay. That’s helpful. Thank you. And then just on the agricultural side, so it sounds like second quarter was skewed a little bit by maybe bad weather in the first. Can you just help us – I mean how should we – we should balance that versus that the channel is empty and may be what we should think about for the third quarter directionally versus the second?

[Jack Golsen:]

Well, we have, as you know, the second quarter is a heavy application period. In the third quarter you are looking more at a restocking from your distribution system. So, the third quarter ag production is probably going to be stronger than it would have been last year because the distribution system is pretty much destocked right now. And there is an awful lot of excitement about where agricultural is going in the second half this year and next year because the grain marketing considerations, you got storages of grain. So you might see stronger demand for ag product (inaudible) ag products in third quarter than we’ve seen historically.

[Eric Stine:]

Okay, but still along the norm that the third quarter is usually down from the second.

[Jack Golsen:]

Yes. It is less; it is normally less than your second quarter.

[Barry Golsen:]

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

[Eric Stine:]

Okay. Understood on that. And then last one and then I will –

[Barry Golsen:]

The chance they take is that there will be product if they wait too long.

[Eric Stine:]

Right, right, okay. last question then I will jump back in line, just a book keeping, so tax rate we should see that return to more of the high 30s.

[Jack Golsen:]

The tax rate, yes, that’s correct.

[Eric Stine:]

Okay. Thanks a lot guys. Congrats again.

[Jack Golsen:]

Thanks, Eric.

[Operator:]

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

[Eric Glover:]

Hi, good afternoon.

[Jack Golsen:]

Hi, Eric, how are you?

[Eric Glover:]

Fine, thanks. May be I missed this. I am just wondering if you could go over. The operating margin in Climate Control in the second quarter was up despite the fact that gross margins were down. I am taking about relative to the first quarter of 2010. So could you explain that please?

[Jack Golsen:]

Your – we kind of lost the tail end of your question. Would you mind repeating the question?

[Eric Glover:]

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

[Tony Shelby:]

Well, to begin with on a sequential basis – I am not sure I am understanding the gist of your question really.

[Eric Glover:]

Okay. Well, I will follow up with you offline.

[Tony Shelby:]

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

[Eric Glover:]

Well, I am looking at Q2 versus Q1 of this year in Climate Control.

[Tony Shelby:]

Okay.

[Eric Glover:]

And gross margins were down in the second quarter versus the first quarter; however operating margins appear to have increased.

[Tony Shelby:]

Well, sales was up – were up substantially. I mean in the first quarter, sales were $130 million. In the second quarter sales were $168 million I believe, is that the number? Excuse me, I am looking at –

[Jack Golsen:]

You are looking for the whole company, he is looking –

[Tony Shelby:]

Well I am sorry I am looking – sorry, I just grabbed the wrong page that I was looking at. in the first quarter, we were at $53 million, in the second quarter we were at $59 million. So we had a slight increase in sales, okay. We also had a very slight increase in gross profit. It went from 18.4 to 18.8, so we were at 34% in the first quarter, we were at 31% in the second quarter. I think what we have been telling you for several quarters is that we expected to see the margin decrease somewhat as a result of several factors. One is as material prices increased and also as price pressure out there in the market affected the commercial side of our business, so I think you are seeing definitely some effect from that in the second quarter as compared to the first quarter, alright.

[Jack Golsen:]

But also you have a carryover of what is at a higher price in the first quarter.

[Tony Shelby:]

That’s right.

[Jack Golsen:]

– that you don’t have in the second quarter.

[Tony Shelby:]

That’s correct, that’s correct. Does that answer your question or do you want me to drill down even more details – ?

[Eric Glover:]

That’s good enough, thanks.

[Tony Shelby:]

Okay.

[Eric Glover:]

Then on mining products specifically it’s been going up pretty nicely over the past several quarters. I am wondering if you think that sales there continue to increase over the balance of this year or have we hit somewhat of a plateau.

[Jack Golsen:]

I think, Eric, we are seeing the effect of the new contractor. We need to – effective – the new agreement with our largest customer is effective 01/01/2010 and that contract has step up in take or pay volume from 210,000 tons a year to 250,000 and that’s part of what’s driving that higher demand this year – the higher tons this year versus last year.

[Eric Glover:]

Okay. So you would expect that to continue.

[Jack Golsen:]

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

[Eric Glover:]

Okay, great, thank you.

[Operator:]

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

[Dan Mannes:]

Good afternoon.

[Jack Golsen:]

Hi, Dan.

[Dan Mannes:]

A couple of quick follow-up questions. First, geothermal, clearly great order in terms – great quarter in terms of orders. You mentioned may be a bit of a trend towards more retrofit activity rather than new construction. Can you give us some color – ?

[Jack Golsen:]

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

[Dan Mannes:]

Okay. And given the thrust level of new homes starts, that probably makes sense as well because it’s hard to see the growth rate you are getting when new homes are as low as they are.

[Jack Golsen:]

Right.

[Dan Mannes:]

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

[Jack Golsen:]

Well, first of all, Dan, we never disclose that we are ready to pullout. As a matter of fact, we qualify as really intermittently up and down, so we’ve never really run full out. But when we get this rebuild done, we should be in a position to run at our targeted rates assuming that the operations after the anhydrous ammonia plant is up run properly. And we feel very confident that they will, but we are going to stick with the position we’ve take all along that – sure we are there, we’ll make an announcement.

[Dan Mannes:]

Understood. I am just trying to understand from sort of the time you decide to restart the unit, even the ammonia first, it doesn’t sort of come online immediately. There is a ramp up period and then what you told us, there is a ramp up then on the following years for natural gas and the UAN, meaning best case scenario, how long would it take from beginning to end – ?

[Barry Golsen:]

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

[Dan Mannes:]

Got it. That’s kind of what I was looking for is that color. Thanks much.

[Barry Golsen:]

Thanks.

[Operator:]

(Operator instructions) Our next question comes from the line of Brian Kremer with Roth Capital Partners.

[Brian Kremer:]

Hi, guys.

[Jack Golsen:]

Hi, Brian.

[Brian Kremer:]

Let’s see, a couple of questions here while we stick on Pryor. Two questions there. You mentioned some additional work. I guess you may be looking at the plant with this down time that you have seen, can you comment on that a little more?

[Tony Shelby:]

What we did is a full turnaround.

[Jack Golsen:]

We are taking advantage of this down time to work on all – the entire facility.

[Brian Kremer:]

Okay. And then – so that – but obviously that’s in the extra cost that you’ve provided and the OpEx expenses, Tony, that you mentioned earlier.

[Tony Shelby:]

Yes.

[Brian Kremer:]

Okay. And then can you tell us how will the insurance work in terms of the capital cost versus labor and those sorts of – that piece of it.

[Tony Shelby:]

The insurance will cover the cost of any repairs that were caused by the fire. And minus a million dollars, which is our deductible. In addition, there will be a component for loss profits from non-operating producing, which starts 30 days after the plant went down. And that is being calculated now and it’s not yet determinable. But it should be significant.

[Jack Golsen:]

The property coverage, casualty coverage is at replacement cost, so we’ll have replacement cost coverage on that approximately $8 million that we talked about in the rebuild. The insurance company may or may not agree with the $8 million, but all or part of the $8 million will be covered subject to the million dollar deductible.

[Tony Shelby:]

I think it will be more than $8 million but we are saying –

[Jack Golsen:]

We are just – that’s what we disclosed in the 10-Q, so –

[Brian Kremer:]

Okay.

[Tony Shelby:]

It could be more.

[Brian Kremer:]

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

[Barry Golsen:]

Well, you know, we have a long historical and traditional practice of not giving guidance as to where we are going. I mean what we are trying – we stated that we believe our commercial business will be lower. We’ve also stated that we have a tremendous, we do have a slight uptick in orders on the commercial side and significant not just slight, and we’ve got an even bigger uptick in the residential side. But at this point in time I would not want to prognosticate about what we are going to see overall for the year. I just wouldn’t want to do it. I mean we are very optimistic about what we see going on out there given the activity level, but I just don’t want to put a stake in the ground on the balance of the year. I mean right now with the – in years past where we had a huge backlog, even bigger than we probably should have had because it was affecting our lead times, it would have been possible for me at this point in the year to pretty definitely state what the second half was going to look like if I wanted to. Right now, given that we have lower lead times, we are basically shifting out of that current backlog; we are shipping in the next few months orders we get. And so since we can't – we don’t have a crystal ball about exactly what the order level is going to be for the balance of the year, I really can't give you that number.

[Brian Kremer:]

Okay. But, is it fair to say that trend of the declining year-over-year – the trends are positive aside from may be commercial side, but as you said there is even the slight uptick may be in what you are seeing in terms of orders there.

[Barry Golsen:]

Yes, I agree with you. That’s my view of it.

[Brian Kremer:]

Okay.

[Barry Golsen:]

You know, what’s going to happen in the future, we are not sure, but we are very optimistic now and we are liking the trend that we see right now.

[Brian Kremer:]

Okay. And apologize if you guys mentioned this, I don’t remember hearing it, and maybe I missed it, we heard material costs are going up on the Climate side. To maybe grow market share or obviously to sell into a tougher market, can you comment on pricing?

[Barry Golsen:]

Well, yes, you have to segment our business into its various parts. To talk about pricing is really impossible to talk about pricing globally because each segment is different. So, on the part of our – on a residential business, which is 25% of our sales, we sell pursuant to price sheets, there is no discounting that goes on at job to job basis. We haven’t seen any real price pressure at this point in that segment. In the commercial side of our business, the other three quarters of the business, a part of that business is sold on an OEM basis and there again most of that is sold on a fixed agreed price, so there is not day to ay price pressure. There is overall price pressure to not increase prices but then the day to day price basis there is not significant price pressure. There is part of our commercial business that’s relatively small volume jobs and there again we see some price pressure, but not incredible. On the other hand, when you start to get in this kind of environment, when you are getting into a whole industry that is running at substantially below the factory capacities, and the low level of commercial construction activity that’s out there, it’s very, very competitive. And so what I have been saying for several quarters that you can expect on that side of the business to see some price pressure and to see it affect our margins and I think we are seeing that to a certain degree.

[Brian Kremer:]

Okay, great. That’s it. Thanks.

[Jack Golsen:]

Thank you.

[Operator:]

Our next question comes from the line of David Kaizer with Robotti & Company.

[David Kaizer:]

Hi, guys, how are you doing?

[Barry Golsen:]

Hi, Dave.

[David Kaizer:]

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

[Jack Golsen:]

Well, you know what I could. I am a real reluctant to do that because my view, I will do it with a caveat, okay?

[David Kaizer:]

Okay.

[Jack Golsen:]

And the reason I will do it with a caveat is because – we – I don’t believe and we don’t believe that the market share – we calculate market share is we look at what we have shipped and we compare it to industry reported numbers, which are reported monthly and quarterly by The Air-Conditioning, Heating, and Refrigeration Institute. So we know – we can believe those numbers. We know what our market share is. We don’t know exactly what competitors’ market share is. We estimate what they are. My problem with giving those – typically what I do is, I disclose those numbers as of the end of the year because there are reporting anomalies that occur throughout the year from the reporting companies. Some companies don’t report exactly when they are supposed to or they make mistakes when they report and they catch it during the year and then they net it out from future reports. We typically find that by the year end all of those things have washed through and I feel much better about those numbers. Also, shipping trends. Some companies ship differently than other. For example, we ship into distribution that stocks up and resells, whereas our largest competitor on the geothermal side, which is WaterFurnace, they ship directly to dealers. So, I mean I can give you a number, but it’s basically year-to-date out market share for geothermal based on AHRI report is a sold 40%.

[David Kaizer:]

Okay. So you had a noticeable increase. I mean I guess – that’s what I was looking for is – you are still moving in the right direction there. You are not losing market share. The market is growing –

[Jack Golsen:]

We are gaining market share. The overall industry for geothermal year-to-date in terms of shipments is down approximately 8%. We were up in shipments approximately 7% and our new order intake is up 50% in the second quarter and 40% year-to-date till the end of the second quarter.

[David Kaizer:]

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

[Jack Golsen:]

We don’t – we are not concerned about that any time in the near future because as you will recall, when the commercial market was really heated up a couple of years ago, we were running out of capacity, we were bumping capacity, and we made some substantial increases in square footage and equipment and assembly lines to our heat pump facilities. Well, with a reduced commercial business now and even – we never really were able to grow into that increased capacity because of what happened in the economy. So, we have plenty of capacity out there to use. I mean I can't give you – I will not quantify it for you exactly now, but we are not concerned for the next few years at all.

[David Kaizer:]

All right.

[Jack Golsen:]

When we do need to increase our capacity, initially it will be debottlenecking and fine-tuning and it won't be significant major capital investment.

[David Kaizer:]

Okay, and then the final question is you touched on education in the industry and how – on previous calls – and how installers were being educated and consumers are being educated. I know you are doing some advertising. I saw a ClimateMaster ad I think Time magazine, or Newsweek, I don’t recall but how is that going – how is the awareness. Is that still kind of the biggest hurdle, because it seems once you understand what geothermal does, it’s not such a difficult decision. So, I am curious if how education awareness is going and if that’s really what’s penetrating and growing the market for you.

[Jack Golsen:]

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

[David Kaizer:]

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

[Jack Golsen:]

Thanks.

[Operator:]

(Operator instructions) Our next question comes from the line of Michael Coleman with Sterne, Agee.

[Michael Coleman:]

Good afternoon, Jack, Barry, Tony.

[Jack Golsen:]

Hey, Mike.

[Michael Coleman:]

And I am not going to ask you about Pryor.

[Barry Golsen:]

Michael?

[Michael Coleman:]

Yes.

[Barry Golsen:]

Thank you.

[Michael Coleman:]

Okay. I want to start off – I heard something that I thought might have been new maybe you have talked about it before. But the marketing carbon credits, could you may be just go over that again where that project is starting from –

[Jack Golsen:]

Well you know we have this operation in Baytown, Texas on the bear [ph] facility. It’s a gas plant. We produce nitric acid for them. And that installation is occurring at that plant.

[Michael Coleman:]

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

[Tony Shelby:]

Yes, Michael, it’s not going to be a big bottom line item on that particular plant because the credits partially go to the customers and some come to us. so, it’s not something that we are suggesting it’s going to be a real significant item. But as time goes on and we get a better definition, we’ll have a better idea of how much it might be.

[Michael Coleman:]

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

[Jack Golsen:]

Well you know municipalities and states, particularly state governments have been of those severely impacted by the recession. I mean it’s pretty much in the press every day that all those states that are broke, cities that are broke. So, you’ve got that on the one hand affecting it adversely. On the other hand, we are now starting to see stimulus dollars come through to these kinds of project and we are seeing more stimulus come through than we saw last year. So, that’s kind of the two-edged sword that we are seeing out there in that sector.

[Michael Coleman:]

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

[Jack Golsen:]

Yes, we’ve seen – yes, in the institutional market, particularly in the education market that they always tend to be early adopters and they are very interested in green. Business tends to be interested in green also, but I think more – as much for financial reasons as environmental reasons. But I think from an institutional standpoint they tend to have a very strong emphasis toward the environmental. So you see a lot of those projects across the country. And particularly in the education side we do – we have a significant amount of our business commercial geothermal is actually sold to school.

[Michael Coleman:]

Okay. On you contracting business, the business that’s not included in your backlog, what kind of level of activity is that business experiencing either year to year or –

[Jack Golsen:]

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

[Michael Coleman:]

Right. But given the potential of within the institution market, do you see growth opportunities for that contracting business?

[Jack Golsen:]

Well we do see growth opportunities, we do.

[Michael Coleman:]

Okay. Just one last thing. You may not have it, but you’ve consistently broken out the residential piece of your business, which is all geothermal. But if you have what the geothermal was in your commercial, so I guess a total geothermal mix versus –

[Jack Golsen:]

I believe we don’t have that information available in front of me right now.

[Michael Coleman:]

No, that’s fine. May be if you can get it we’ll talk later.

[Tony Shelby:]

Thank you.

[Michael Coleman:]

Thanks

[Jack Golsen:]

Thanks, Mike.

[Operator:]

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

[Jack Golsen:]

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

[Carol Oden:]

Thanks again for listening in today. The comments today contain certain forward-looking statements. All statements other than statements of historical fact are forward-looking statements. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate and similar statements of a future or forward-looking nature identify forward-looking statements, including, but not limited to, all statements about or any forecast pertaining to indicators are trending upward. We have not yet achieved what we believe to be the full potentials of our business. We are continuing to add the building blocks that will last to achieve our full potential when the market allows. We are moving in the right direction. We are optimistic about the long term future of our company but remain cautious about the second half of 2010. We believe that our company is undervalued and are working to make these valuable, more visible, and reliable to our shareholder. We had adequate working capital to finance ongoing operations as well as organic growth opportunities. Residential constructions though expected to increase this year will be significantly lower than its high point. We have expected sales for commercial products for 2010 to be lower than 2009. There will be a gradual recovery in commercial construction and we will participate and be stronger and well competitive. Recent trends toward more use of GHP system. We plan to set up a dedicated manufacturing facility to produce screen modular chillers and heat pumps. We will repurpose our building to initiate production. We will build this business for the long term. We intend to take advantage of the long term trend in green buildings. we will be in a strong competitive position when markets rebound. Repairs of the Pryor facility should add to results in future. Pryor facility capital expenditure requirements most of which will occur in the third quarter. Sales rebound of season will depend on weather conditions and restocking. We are optimistic and remain bullish about long term demand for agriculture products. We anticipate modest demand from industrial and mining customer. Pryor facility repairs to be completed towards the end of September 2010. Pryor facility will enhance production. Long term outlook is even stronger. We believe Pryor is a valuable asset, which should facilitate growth and contribute to earnings. Outlook for agriculture demand positive. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. We incorporate the risks and uncertainties discussed under the headings Special Note Regarding Forward-Looking Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and our quarterly report on Form 10-Q for the three months ended March 31st, 2010, and the reports we file from time to time with the Securities and Exchange Commission. We undertake no duty to update the information contained in this conference call. The term EBITDA, as used in this presentation, is net income plus interest expense, depreciation, amortization, income taxes and certain non-cash charges, unless otherwise described. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to GAAP measurement. We will post on our website a reconciliation to GAAP of any EBITDA numbers discussed during this conference call. Thank you. And that ends our conference call.

[Operator:]

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