LSB Industries, Inc. Q1 2008 Earnings Call Transcript

May.23.08 | About: LSB Industries, (LXU)

LSB Industries, Inc. (NYSE:LXU)

Q1 2008 Earnings Call Transcript

May 6, 2008 5:15 pm ET

Executives

Carol Oden – IR

Jack Golsen – Chairman and CEO

Tony Shelby – EVP of Finance and CFO

Barry Golsen – Vice Chairman, President and President of Climate Control Business

Analysts

Dan Mannes – Avondale Partners

Michael Coleman – Sterne, Agee

Robert Clayson – Wachovia Securities

Ali Motamed – Boston Partners

Richard Nelson – Jesup & Lamont

Cliff Borden [ph] – CIBC

Charles Hansel – Jayjoe Securities [ph]

Operator

Good day, everyone, and welcome to the LSB Industries first quarter 2008 conference call. At this time, I would like to inform you that this conference 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. Ms. Oden, you may begin your conference.

Carol Oden

Thank you. Welcome to the LSB Industries conference call. Today, LSB's management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President; and Tony Shelby, 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 web site at www.lsb-okc.com and will be accessible for one month. 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 6, 2008, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay.

Comments today may 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, the effect of the economic downturn on our Climate Control business; long-range growth potential for our Climate Control products; the effects of pending legislation on certain of our Climate Control products; market demand for our agricultural products; start-up costs and production estimates and timing of the Pryor, Oklahoma chemical plant; strategy as to emphasizing cost reductions; develop product mixes to operate our plants at full rate at reduced cost; utilization of our NOL; higher selling prices; increased output of our Chemical business; margins within our Chemical business.

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 the GAAP measurement. You should to 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.

These factors include, but are not limited to, decline in general economic conditions; interest rate changes; competitive pressures; costs to activate the Pryor plant; changes in working capital; price of our common stock; and the risk and uncertainties discussed under the heading Special Note Regarding Forward-Looking Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, the Form 10-Q for the quarter ended March 31, 2008, and the reports we file from time to time with the Securities and Exchange Commission. We do not intend to and undertake no duty to update the information contained in this press release. We'll post on our web site a reconciliation to GAAP of any EBITDA numbers discussed during this conference call.

Now, I will turn the conference call over to Mr. Jack Golsen, the company's Board Chairman.

Jack Golsen

Thank you. Good afternoon. Thanks for joining our conference call today. Today, we are going to change our previous format to streamline our first quarter 2008 conference call presentation, and eliminate duplication of some of the information that we have been presenting to you in the previous calls.

First, Tony Shelby, our Executive Vice President and Chief Financial Officer, will go over our overall results and the pertinent numbers of our Climate Control and Chemical businesses. Then Barry Golsen, our President and Chief Operating Officer, will discuss both the Climate Control and Chemical company's operations. When they have completed their statements, Tony, Barry, and I will be available to answer any questions that you have.

For my part, I would like to congratulate the entire LSB team for their efforts, which resulted in record first quarter diluted earnings per share of $0.46, up approximately 64% over the first quarter of last year. Both our Chemical and Climate Control businesses contributed to this result, but the standout performer in the first quarter was Chemical, increasing its operating profit by 57% over the first quarter last year.

Barry and Tony will discuss these results, along with other developments in detail. We would like to hear from you about whether or not you prefer this new presentation approach compared to our previous conferences or whether you have any additional suggestions. You can contact us by e-mail at a special e-mail, info@lsb-okc.com. One other item of interest to you, we have been solicited by the New York Stock Exchange and the NASDAQ to move our listing from the AMEX. If we do nothing, we will end up on the New York Exchange when the acquisition of the AMEX is completed. You may want to communicate your preferences about this to us.

Now, here's Tony.

Tony Shelby

Thanks, Jack, and good afternoon. We made our earnings announcement approximately one hour ago, reporting diluted earnings per share of $0.46 versus $0.28 in the 2007 first quarter. The details for the first quarter 2008, compared to the first quarter 2007 were, sales rose 9% to $160.5 million. Operating income was $19.3 million, compared to $13.5 million, 43% increase.

Operating income was $5.8 million higher in 2008. However, due to increased provisions for income taxes in 2008, net income was only slightly higher at $10.9 million, compared to $10.8 million. The provisions for income taxes in 2008 were $6.7 million or 38% of operating income, compared to only $344,000 or 3% in 2007. The much smaller provision in 2007 was due to availability of certain net operating loss carry forwards.

We began 2007 with approximately $49 million in federal NOL carry forwards. As a result of our earnings in 2007, only approximately $2.9 million of the $49 million net operating loss carry forward remained at year-end 2007. And except for marginal carry forward benefits in 2008, we will accrue and pay income taxes at regular rates. The income taxes are more fully explained in our 10-K and are also addressed in our 10-Q, which is being filed as we speak.

Net income applicable to common stock was $10.6 million compared to $5.6 million last year, an increase of $5 million or 88%. Dividends of preferred stocks were $306,000 in 2008, compared to $5.2 million in the 2007 quarter.

Through a series of exchanges, conversions, and redemptions in 2007, we eliminated the Series 2 Class C preferred stock and all future dividends on that stock. The $5.2 million dividend in '07 included a stock dividend related to a tender offer that we completed on March 13 of 2007. Diluted earnings per share were $0.46, up 64% from $0.28 last year.

Consolidated EBITDA was $23.2 million, compared to $16.9 million in 2007, 37% increase. LSB's trailing 12-month's EBITDA at 3/31/08 was $80 million, compared to $49 million for the trailing 12 months at March 31 of '07. The results one note, the results for the first quarter 2008 did not include the judgment against Ingersoll-Rand Company. As we previously disclosed, we will recognize the jury award when and if the judgment is paid.

Turning to our balance sheet, over the past two years, we have substantially improved our balance sheet and liquidity. Our liquidity and capital resources reflect a sound financial position. At March 31 of 2008, our long-term debt was $122 million and stockholders' equity was $103 million. Long-term debt to stockholders' equity was 1.19 to 1. At March 31 of 2008, we had cash on hand of $42 million plus borrowing availability under our working capital revolver of $50 million.

We are in a very strong position to finance ongoing operations, as well as fund growth opportunities available to the company. During the quarter, net cash used by operations of $7.2 million that include increases in receivables and inventory at $12.4 million and $5.7 million, respectively, due to sales increases and seasonal inventory requirements.

In addition to net cash used in operations, capital expenditures were $5.1 million, and $3.4 million was expended for the acquisition of LSB common stock. While funding operations and growth is our top priority for cash, in the first quarter of 2008, our Board of Directors did authorize management to repurchase LSB shares. Whether or not we repurchase shares depends on the share price, alternate use of funds for other needs, such as business growth, capital investment, credit market, general economic outlook, and other relevant factors. 200,000 shares were repurchased before we entered the blackout period that begins 15 days before the end of each quarter, where insiders, including the company cannot complete transactions of the stock.

For the time being, we will likely defer additional purchases until a decision is reached about activating a portion of our now-idle ammonia and urea chemical plant in Pryor, Oklahoma, which Barry will discuss later. Both Climate Control and Chemical performed well in the 2008 first quarter, reporting improved operating income and cash flow.

Although Climate Control sales of $66.3 million were 7% lower, operating income increased to $9.3 million, an increase of 9.6%, and EBITDA increased to $10 million, compared to $9.2 million in last year's first quarter. Barry will discuss the increased operating income for our Climate Control in more detail in the operational review.

Chemical reported sales of $91.3 million, compared to $73.7 million, a 24% increase. Chemical's operating income increased 57% to $12.1 million, and EBITDA increased 44% to $14.4 million. Capital expenditures for the quarter include $1.5 million for Climate Control and $3.6 million for Chemical. Our current commitment for the remainder of 2008 is $12.2 million, including $3.6 million for production equipment in Climate Control and $8.6 million for process improvements in chemical.

In addition, we are considering other expenditures for expansion opportunities in Chemical, including, but not limited to the activation of the Pryor, Oklahoma facility. Since we made a public release about it, we have been asked several times to elaborate on the Wells Notice we received from the SEC. At this time, we cannot comment on it beyond the facts in our press release. The notice relates to a previously disclosed informal inquiry by the SEC of one of our subsidiaries change in accounting for inventory from LIFO to FIFO prior to 2005.

The accounting change involves approximately 500,000 and resulted in the restatement of certain of our annual and quarterly financial statements. We filed the amended 2004 10-K and 2005 Forms 10-Q before December 31, 2005. On a final note, relative to our status is an accelerated filer and in compliance with Sarbanes-Oxley Rule 404, Ernst & Young audited our internal control over financial reporting as of December 31, 2007 in accordance with the standards of the Public Company Accounting Oversight Board and expressed an unqualified opinion. Everyone worked diligently to achieve this result. Management and the Board of Directors continue to take this responsibility very seriously. Barry, that wraps up the financial review, so you can now cover the operational highlights of the first quarter and the outlook for the company.

Barry Golsen

Thanks, Tony. But, first, let's discuss the Climate Control business. As Tony mentioned, our Climate Control business sales during the first quarter were lower than the same period last year by 7%. Heat pump sales were down 9.3%, fan coil sales were down 3.7%, and other sales were down 4.3%. As discussed on the last conference call, bookings during the fourth quarter of 2007 were lower than expected, and this contributed to lower shipments during the first quarter of this year. Also during the first quarter of 2007, our shipments were unusually high because we were working down the excessive backlogs we had at that time, particularly in our heat pump operation.

Bookings during the first quarter were $70.1 million, a 24% year-over-year increase and substantially higher than the $53.9 million booked during the fourth quarter of 2007. We ended the quarter with a backlog of product orders of $62.1 million, up from $54.5 million at year-end 2007. I'm glad to report to you that as of the end of the first quarter, we continue to lead the market with market shares of approximately 41% for both geothermal and water source heat pumps and hydronic fan coils, based on numbers released by the Air Conditioning and Refrigeration Institute.

Our gross profit during the first quarter was 32.5%, as contrasted to 29% for the same period last year. The increase in GP was due to the fact that price increases we had implemented last year had taken effect during the first quarter of this year, and we realized $2.4 million gain on copper futures, offset by lower sales. With regard to raw materials, primarily copper, steel, and aluminum, since our last conference call, we have seen the largest increases in many years, and we expect more to follow.

Historically, we have been able to pass through material price increases, although sometimes there's been a delay in realizing these increases on the bottom line due to committed backlogs in place at the time price increases are announced. A very important part of our company culture is the constant search for ways to reduce our cost and improve efficiencies. This is particularly important in times like these with increasing raw material costs and competitive market conditions.

We have aggressive, ongoing cost-reduction programs in place throughout our Climate Control business. A key question, probably the most important question, that some of you have is how will LSB's Climate Control business be affected by the slowdown that our economy is undergoing? Specifically, what's the outlook for construction, both commercial and residential? Here's our take at this time.

As you know, the vast majority of our Climate Control business sales are to commercial and institutional, new construction, renovation, and replacement. In 2007, commercial and institutional sales accounted for approximately 89% of total Climate Control business sales. About 83% of those commercial and institutional sales or 74% of our total Climate Control business sales were used in these type buildings, offices, hotels, educational facilities, healthcare and retirement facilities, manufacturing and process plants, apartments, and condominiums.

McGraw-Hill's current outlook, as reported in the summer edition of their Construction Market Forecasting Service, which was just released last week, is that contract awards for these building types in the aggregate will decrease by 7.3% in 2008 and will increase in 2009 through 2011 by 0.4%, 9.4%, and 11.7%, a total of approximately 23%. These numbers represent a downward revision since the last conference call, reflecting the general economic outlook.

If you'll recall, at that time, the total decline in 2008 was projected to be approximately 4%. Turning to single-family residential construction, it is stating the obvious to describe the dismal situation that this market's in. The current McGraw-Hill forecast is for a 28.4% decline in 2008, and that's following a cumulative decline of almost 40% over 2006 and 2007. It's important to focus on the fact that in 2007, single-family residential represented only 11% of our total Climate Control business sales and only 5.4% of total LSB sales, so we do not have a huge exposure in this market.

In the last conference call, I reported that whereas we have managed to outpace the conventional residential HVAC market for the past eight quarters, the depth of the current market slump has impacted our rate of growth. The decline of this market had become so severe that it is now adversely impacted our residential geothermal sales. Year to date through 3/31, our residential sales were down 12% from the level in the first quarter of 2007, although some of that decline is due to the high shipments last year, when we were reducing our backlogs and lead time.

Whereas we believe that our geothermal products are an important part of the solution to environmental and energy issues facing our country, we cannot predict at this time what the exact effect of the drastic downturn in residential construction we are experiencing will have. We do remain very optimistic about the long-range growth potential for these great products.

Regarding legislation that could be beneficial to our geothermal business, during 2007, the Energy Independence and Security Act was enacted. Although this bill did not have direct tax incentives for geothermal, it did have several favorable provisions. During February of 2008, the U.S. House of Representatives also passed the Renewable Energy and Energy Conservation Tax Act, which allows $2,000 tax credit for consumers who install geothermal systems.

This bill must now go to the U.S. Senate for approval. There are also two other bills that would provide business and consumer tax credits for the installation of geothermal heat pumps. With a broad understanding within Congress that important energy technologies that have been overlooked in current law and with wide support for the pending bills, we are optimistic about the prospects for the ultimate passage of an energy tax bill and obtaining geothermal installation incentives.

Turning to our Chemical business, as both Jack and Tony reported, this business got off to a great start in the first quarter. During the first quarter, sales of our chemical products were up over the first quarter of 2007. Industrial acids were up 60.6%, agricultural products were up 11.3%, and mining products were up 1%, only a slight increase. The improved performance in quarterly results was driven by substantially higher sales prices for our fertilizer products, increased UAN tons shipped, and slightly better pricing for our mining products and industrial assets.

Gross profit margins and operating income were also significantly higher. As has been well documented by numerous trade publications and the national press, global grain stocks, including corn and wheat, are at low levels and are driving the demand for nitrogen fertilizers. These favorable supply/demand fundamentals were the catalyst for significantly higher selling prices and better margins in 2007, and this trend has continued into 2008. The dramatic improvement in profits in the first quarter over last year's first quarter results was driven primarily by the high demand for agricultural products, primarily UAN.

During the first quarter, our shipped tonnage of UAN was 22% higher than the first quarter of 2007, while our revenues from these sales increased a 109%. The average published sales price per ton during the first quarter of 2008 was $361, up from $228 a year ago, a 58% increase. At the same time, the cost of natural gas, the primary feedstock for producing UAN at our Cherokee facility, increased from a range of $5.30 to $10.59 per MMBtu in the first quarter of last year to a range of $7.04 to $9.80 this year.

Currently, the spot market natural gas price is approximately $11, and the 12-month strip, which changes daily, was quoted today in the $11.5 range. All of the supply/demand fundamentals were in our favor during the first quarter. However, there was a delayed start to the agricultural season caused by cool and wet weather conditions. This depressed early demand for fertilizer, primarily ammonium nitrate produced at our El Dorado facility.

During the first quarter of 2008, we sold 35% fewer tons of ammonium nitrate than the first quarter of 2007. However, our revenues for this product were down only 21%, reflecting the increase in sales price per ton. The price of Anheuser's ammonia, the raw material feedstock for our El Dorado facility, has escalated significantly since the beginning of the year after being relatively stable during 2007.

It increased from an average of the mid-400s per metric ton in January to a current price of about $550 per metric ton. This current high cost of imported ammonia increases the cost of nitrogen products produced at our El Dorado plant. However, the majority of El Dorado sales are to customers who accept the cost of ammonia as a pass-through. We continue to be encouraged by the market demand for our agricultural products and the performance of our production facilities.

Market data indicates continued strong demand for nitrogen fertilizers due to the need for increased grain production. This has been spurred by lower grain inventories in general and the increased demand for forage crops. We also believe there will be steady demand for both our industrial assets and our industrial-grade ammonium nitrate used for surface mining. Our Chemical business will continue to focus on growing our non-seasonal industrial customer base with an emphasis on customers who accept the risk inherent with raw material cost fluctuations.

This is currently 60% to 65% of our Chemical sales. At the same time, we will maintain a strong presence in the seasonal agricultural sector, which is 35%to 40% of our sales. We have the ability to reallocate portions of our capacity to fertilizer when the markets indicate favorable volumes and margins. Other key parts of our strategy are to emphasize cost reductions while we develop a product and customer mix that will allow us to operate our plants at full rates, lowering the fixed cost of each unit of production.

During our last conference call, we advised you that we were evaluating the feasibility of activating part of our chemical plant in Pryor, Oklahoma. The plan under consideration calls for the production of 325,000 tons per year of UAN. The estimated cost to start the plant is $15 million to $20 million. Approximately half of that would be capitalized, and the other half would be expensed as incurred, and the start-up would take approximately 12 months, including permits and plan improvements. At this time, we have not made a final decision.

Many of you are probably wondering why it seems to be taking us so long to get to the answer on this project. Since the Ag business is a seasonal business and since the key to profitably operating any chemical plant is to keep the plant running continuously, we are evaluating a market with the objective of entering in to a long-term UAN off-tech relationship with a strong Ag industry partner, who would take our product on a year-round basis.

In the meantime, we have applied for permits to shortcut the process. Turning to general corporate matters, since our last conference call, both Sterne Agee & Leach and Jesup & Lamont have initiated coverage of LSB. Along with Avondale Partners, we now have three analysts covering the company.

On another note, since we are facing an uncertain economy, we feel it is very important to let you know our approach to dealing with the possibility of an economic downturn that could affect the markets we serve. We believe that we must resist the temptation that many companies fall victim to, to sacrifice the future for short-term gains. We have many initiatives in place, they are seeds we have planted for the future and that we believe should ultimately create growth and value.

We'll not try to maximize the profits in any one period at the expense of these initiatives. We will continue to have a long view in our decision-making process and not a short one. In past down cycles, we have redoubled our efforts, particularly in marketing and sales, and of course, we are always striving for reduced cost and increased operational efficiency.

Summing up, the first quarter Climate Control sales were off due to lower bookings in the fourth quarter of 2007, but Q1 bookings rebounded. The year-over-year bottom line improved despite lower sales. The current outlook for construction is lower than a quarter ago, and we will be challenged by increasing raw material costs. We are very excited about our prospects for growing all of LSB's Climate Control businesses and, particularly, our geothermal heat pumps over the long term.

Chemical sales and profits were up significantly as a result of a booming agricultural market. Despite a late Ag season start due to weather conditions, the outlook for a strong Ag market to continue for some time is good, according to the industry consensus. Our industrial chemical businesses remain steady and profitable, as well. We'll make a decision whether to proceed with the start-up of the Pryor plant when we complete our marketing evaluation, which should happen by the time we receive the required permits.

Thanks for your patience, and we'll now take questions (inaudible).

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Dan Mannes with Avondale Partners.

Dan Mannes – Avondale Partners

Been a great quarter, everybody.

Barry Golsen

Hi, Dan. How are you?

Dan Mannes – Avondale Partners

Doing great. Just a couple follow-up questions. I'll try not to do a whole laundry list here. Starting on the Climate business, we saw a nice pick up in order flow in Q1 relative to what we saw in year end. I know it's early, but is there any commentary on follow-through, especially given the expected weakness or can you talk at all about what's happened first quarter end?

Barry Golsen

The only disclosure that we have made is that following a really terrific order level in the first quarter, which incidentally was the highest quarter on record for bookings that we have ever had as a company in our Climate Control business. Our bookings in April were just by coincidence, almost the exact numerical average of what all of our bookings were for all of last year.

Dan Mannes – Avondale Partners

Okay.

Barry Golsen

Then actually the last five quarters, if you average them all together. So, although, we haven't seen a tick up in April, we also haven't seen a tick down. I would like to point this out since you asked the question. What we have always said is we have a lumpy business, and we don't get over excited when we see a terrific month or quarter, and we don't get overly alarmed when we see one that's slightly down. We look at the trend and the order level over a longer period of time because of the lumpiness of our business in terms of the size of projects and things that we book.

Dan Mannes – Avondale Partners

Fair point. On the backlog number at 62 million, is this about the right level for you to meet your customer needs or would you like to be a little bit lower than this?

Barry Golsen

The important thing is to have lead-times that are consistent with what the market wants, and what we think we need to have to service our customers. Right now, we have good lead times that are in the range for the most part, that are perfectly acceptable. But all of our lead times are acceptable, some are better than others, and it depends on the product and the specific plant that it's coming out of.

Dan Mannes – Avondale Partners

Okay. And then on the cost side, obviously, everyone's dealing with the same cost pressures that you are. It sounds like you did a great job hedging for the first quarter, but can you talk at all about what may be hedged for the balance of the year, and to the extent that you're not fully hedged, I don't know what your – if you can talk at all about strategy for price increases?

Barry Golsen

Our strategy for price increases is to take as many price increases as the market will accept.

Dan Mannes – Avondale Partners

Okay.

Barry Golsen

We put it – anticipating that we might have cost increases like this. We put in a round of price increases during the first quarter in every one of our operations, and so those are out there, and we are taking orders under those new prices, and we are just going to take a while for them to take effect. And later in the year, depending on where raw materials actually go, we will try to take more increases, but it's a competitive environment, and we just have to see what the market allows.

Dan Mannes – Avondale Partners

But is that to say that the majority of the hedges you had previously put on were mostly used in Q1 or is there more remaining as well?

Barry Golsen

We are always in and out of the hedging market, depending on what's going on, but on the copper hedging, we used most of our hedging in the first quarter that we had in copper, although we have hedged against since then, as well.

Dan Mannes – Avondale Partners

Okay, great. Then just switching over the Chemical quickly, obviously, we have seen a decent amount of volatility on the pricing front, and it looked like you guys had done a decent amount of forward selling in the fourth quarter. Can you talk about where that stands maybe relative to last year, especially as we are entering – as we are in the middle of Q2, which would seem like the major Ag quarter?

Barry Golsen

You mean forward selling?

Dan Mannes – Avondale Partners

Right. Can you give me an idea of your forward selling relative to last year, both volume and price?

Barry Golsen

Do you know where we are in forward selling?

Jack Golsen

Yes, I know.

Barry Golsen

You've got that one?

Jack Golsen

Dan, this is Jack. How're you doing?

Dan Mannes – Avondale Partners

Doing great.

Jack Golsen

We don't do a lot of foreign selling –

Barry Golsen

Forward.

Jack Golsen

Forward selling, what we do is when we have anything sizable, we hedge it, and unless we price it at the expected delivery date, and we cover the requirement for gas by hedging it, so that we lock in the presumed profit on the transaction. Other than that, we don't go out hedging just to speculate, but a good part of our businesses has a built-in hedge because of the cost-plus aspect of it, and so it's not necessary for us to hedge more than 35% of our gas.

Tony Shelby

Dan, going into the second quarter on Ag, speaking of Ag only, we don't have a significant amount of forward sales either this quarter or one year ago.

Dan Mannes – Avondale Partners

Right.

Tony Shelby

We have a few barges pre-sold, but for the most part it's not a significant part of what we are doing at the end of the first quarter.

Dan Mannes – Avondale Partners

Great. Then last question on Chemical, given the slow plant [ph] conditions in the first quarter and what's been a fairly slow second quarter to date, any issues on the inventory front or are you still seeing good demand for your products in the quarter to date? How do you think about Q2 in what's sort of a weird year so far?

Jack Golsen

We think that UAN is going to keep us pretty much stocked out. If you look at all the competitors and the distribution system up north from our plants, they're all pretty much full, waiting to be taken down. For the UAN, which is very indicative, it's been a major part of our agricultural gross profit now. We don't have much inventory, but we will produce pretty much full-out in the second quarter. On the El Dorado side, the movement of ammonium nitrate is a little bit slower, and we have got a lot of inventory there, and we are expecting in May for the demand to take that up.

Dan Mannes – Avondale Partners

Great. Then just final question for you. You noted that you are actually suspending the buyback for now as you decide what you're doing with Pryor, but just can you talk a little bit more broadly? You're sitting on an excess of $40 million in cash. You've already bounded the range for Pryor at 15 to 20. Is this strategic? Is this defensive? Can you just give a little more color there?

Barry Golsen

Dan, I'll answer that. It sounds like a lot of money, but we are running a $650 million company, and we can't run it with our back to the wall. We have to have a certain reserve. We have continuing capital expenditures in addition to the Pryor thing, which will probably utilize a lot of that cash that's on hand, and we don't want to be in a position to get ourselves in a tight where we can't complete something that we start.

Dan Mannes – Avondale Partners

Okay, well, that's great. I appreciate the color, and thanks again, everybody.

Barry Golsen

Thank you.

Operator

(Operator instructions) Our next question comes from Michael Coleman with Stern, Agee.

Michael Coleman – Sterne, Agee

Good afternoon.

Barry Golsen

Hi, Michael.

Michael Coleman – Sterne, Agee

On your backlog, have you seen a shift in the composition of the backlog in the last six months with respect to the end markets you are going into?

Barry Golsen

No. The only shift that we have seen to a certain extent, is that the sector out there that seems to be hit the hardest is the condo market for construction of new condominiums, but we have been talking about that for a couple quarters, expecting that. That's not news to anyone. So, what we have seen is less sales into that area and more sales into all of our other areas.

Michael Coleman – Sterne, Agee

Okay, and that's reflected in your backlogs. So, is the institutional holding up, offsetting that to some extent in your current backlog given the increase relative to the fourth quarter?

Barry Golsen

Institutional, defined for purposes of this conversation as what?

Michael Coleman – Sterne, Agee

Hospitals, retirement homes, schools?

Barry Golsen

Yes. I wouldn't say it's taking up the slack, but I think all of our sectors that we sell to are taking up the slack.

Michael Coleman – Sterne, Agee

Okay.

Barry Golsen

I can't point to any specific one as outstanding above the others.

Michael Coleman – Sterne, Agee

Are the lead times with respect to the end market – different end markets you selling to different?

Barry Golsen

Let me think about that. The larger the project, usually the longer the lead times because in a very large project, if they got all of the units at one time, they couldn't install them. So, they typically want to spread the delivery out over several months, and that's not really industry or in-use specific. That's size of project specific. There’s one end market that tends to be very specific with deliveries, and that is educational, specifically K through 12, because typically they schedule all of their – they try to schedule all their upgrades and renovations during the summer months. But other than that – and that, by the way, causes us to have a slight bit of seasonality because typically we will see more of that business on top of the other business, which is less seasonal during the summer months. But, really, other than the size of projects, there's not a meaningful difference.

Michael Coleman – Sterne, Agee

Okay. On the previous line of questioning, you referenced the acceptable lead time in the marketplace. What is that lead time that is acceptable?

Barry Golsen

We have several lead times depending on the product. I would say – and we also have some expedited lead times program to take up the slack where customers have short needs that they didn't forecast or replacement needs. For example, starting at the lowest, we have in both our fan coil and heat pump operations, we have ship from stock programs and quick-ship programs where we can ship the next day or within a week, so some of our sales are on those quick-ship programs. But when you are talking about built for production, our lead times will, on standard product will range from six weeks to eight weeks or nine weeks, depending on the type product. And then for a more customized product, you will see it eight weeks to 12 weeks. It just depends on the product.

Michael Coleman – Sterne, Agee

Okay. On the quick-ship sales, do you have a rough estimate of how that – what the composition of that is?

Barry Golsen

We do, but I can't tell you off the top of my head what that is.

Michael Coleman – Sterne, Agee

Okay. In terms of you talked about the – over the last five quarters, the average April is in line over the last five quarters, but where do you see April relative to the first quarter in terms of the orders?

Barry Golsen

Slightly lower.

Michael Coleman – Sterne, Agee

Okay. I know we have talked about this before, but what do you see in terms of – last year, you had a large increase in your export to the Middle East. Do you see that as a continuing portion of your business with opportunities to grow it or is that more of the – would it be more lumpy or a non-recurring portion of your business?

Barry Golsen

I think it will be a continuing portion of our business, but –

Jack Golsen

It always has been.

Barry Golsen

– and it has been for – yes, as Jack just mentioned, for years it has been. But it is lumpy to the extent that we don't necessarily see an even flow on a quarter-by-quarter basis, and projects come in and ship out. Sometimes we will have low quarters, and sometimes we will have higher quarters.

Michael Coleman – Sterne, Agee

Okay. Just if I could get a little clarification on the hedging gains, if you look at the gross margin performance and the benefit from the hedging gains, is that expected to occur in the second quarter as well?

Barry Golsen

No.

Michael Coleman – Sterne, Agee

Okay. Thanks.

Jack Golsen

Thank you.

Operator

Your next question comes from Robert Clayson with Wachovia Securities.

Jack Golsen

Hi, Robert.

Robert Clayson – Wachovia Securities

Hello, there. Can you hear me all right?

Jack Golsen

Yes, you're fine.

Robert Clayson – Wachovia Securities

I just wanted to ask you whether or not now that you have completed paying off the arrearages [ph] on the preferred stock that you'll begin to consider a dividend policy with respect to the common stock?

Jack Golsen

This is Jack. I'll take that one. We are always considering a position of whether we can pay a dividend or not, and as long as we have a better use for the funds for the benefit of the shareholders’ in long term. We have up to now passed on any dividends. Of course, there were years when we couldn't have paid a dividend if we wanted to. But we have such heavy capital expenditures coming up, we don't want to get in the position where we start paying a dividend and then we have to discontinue it, and we don't want to pay dividends out of borrowed funds. So, I would say that if it becomes clear that we have no better use for the funds with no greater return than we would like to achieve, then we will consider dividends, but until then, I don't think that we are in a position to pay dividends yet.

Robert Clayson – Wachovia Securities

Thank you very much.

Barry Golsen

Thank you.

Operator

Our next question comes from Ali Motamed of Boston Partners.

Ali Motamed – Boston Partners

– clear with the $2.4 million gain on copper futures in the quarter, and I was wondering if you could maybe give us that same level of detail for other commodity input costs that you may have hedged in the quarter?

Barry Golsen

There was nothing else material. We had some ups and some downs, but net gain, net loss was negligible.

Ali Motamed – Boston Partners

So, aside from that, you would say they pretty much washed each other out?

Barry Golsen

Yes, I would say that.

Tony Shelby

(inaudible) balanced out.

Ali Motamed – Boston Partners

Perfect. Then you assume – you probably should be able to pass along price increases to recover. If we were to look at the quarter on the basis of sort of backing that out, you should be able to consistently get price increases to recover and put you back into that position to make that sort of a stable base. Is that fair?

Barry Golsen

I don't know if – I will say this. I'm not – I can't make a forecast about what will happen in the future, but what I can talk about is what's happened historically, consistently historically, and that is historically, we have always been able to recover material cost increases eventually with some lag sometimes between when we get the material price increases and when we were able to put them into effect. So, that's what we will try to do, and whether we are successful or how long the lag will be, if there is a lag, will depend on how competitive the market is at the time.

Ali Motamed – Boston Partners

Thank you.

Operator

Our next question comes from Richard Nelson with Jesup & Lamont.

Richard Nelson – Jesup & Lamont

Barry, if I recall, you mentioned that industrial chemicals were up a considerable amount year over year. Is there a special dynamic working here with some of your major contracts that for example, (inaudible) U.S.A? Are they actually shifting more of their business to you?

Jack Golsen

Rick, the primary reason for that significant increase of 60% in the Chemicals, in the acid side is we have a very, very large contract customer that renegotiated their raw material input costs, and that is a pass through. So margin wise, the margin on the total volume of products shipped and acid was not substantially higher. It was just price passed through on costs.

Richard Nelson – Jesup & Lamont

Okay. Okay.

Jack Golsen

And the real growth in our Chemical business, as Barry said, is the Ag side. Everything else was pretty steady.

Richard Nelson – Jesup & Lamont

Okay. Just one small technical matter, but with the $2 million plus in the hedging benefit that you received on the copper futures, did you, Tony, did you post that as part of top line revenues, or did you – what was the benefit to your cost of goods?

Tony Shelby

That flows through the cost of sales.

Richard Nelson – Jesup & Lamont

Okay. Very good.

Jack Golsen

Rick?

Richard Nelson – Jesup & Lamont

Yes?

Jack Golsen

I would say in all the years that we have been hedging copper, we have always had profits during the year.

Richard Nelson – Jesup & Lamont

Interesting. All right, all my other questions have been answered. So, it looks like a solid quarter, and hopefully, you will be able to weather this economic meltdown [ph] going forward, and thank you very much.

Jack Golsen

Thanks for your comments, Rick.

Richard Nelson – Jesup & Lamont

You're welcome.

Operator

Your next question comes from Cliff Borden [ph] with CIBC.

Cliff Borden – CIBC

Couple questions, start on the Ag side first. Is there a do or die date on this Pryor decision?

Barry Golsen

I think we stated what our position was. There is no due or die date. We are going to receive permits, and we believe we will probably have completed our marketing analysis by the time we get those permits.

Jack Golsen

Is it clear?

Cliff Borden – CIBC

Yes?

Jack Golsen

It's more than marketing analysis. We want to be sure that we can sell out the plant.

Cliff Borden – CIBC

Okay.

Tony Shelby

And as you recall, various indications, we are looking for a strong Ag off take partner that's got upstream distributions, which make it pretty much a put as opposed to being out trying to solicit small sales.

Cliff Borden – CIBC

Okay. In terms of like your regions that you are dealing in, in terms of the weather so far, is it more favorable for UAN right now or the AN product?

Jack Golsen

UAN.

Tony Shelby

It’s favorable for UAN in certain crops, and it's more favorable for AN in other crops.

Cliff Borden – CIBC

Okay.

Barry Golsen

But I think relating to the weather, though, we are seeing more movement in UAN (inaudible).

Tony Shelby

Yes, and if you look at green markets and some of the other trade publications, AN is getting off to a pretty slow start compared to UAN.

Cliff Borden – CIBC

Okay. In terms of the international, last year, international HVAC, I think it was 11% of sales. In the first quarter, was it higher or lower than 11% of sales?

Barry Golsen

It was lower than that in the first quarter.

Cliff Borden – CIBC

It was lower than that in the first quarter? You are seeing any movement in Canada in terms of the geothermal?

Barry Golsen

Yes. I really – actually, when you look at Canada, it was higher. Canada was higher.

Jack Golsen

We call that (inaudible) –

Barry Golsen

We typically view that as domestic, and I wasn't thinking of it as export when you asked the question.

Cliff Borden – CIBC

Okay. So, overall, it would be higher?

Barry Golsen

I'm saying Canada was higher, but our other export was lower.

Cliff Borden – CIBC

Okay. Any idea how Canada's shaping up for this year?

Barry Golsen

It’s hard to tell because we are only about a quarter into the year.

Cliff Borden – CIBC

Right.

Barry Golsen

They seem to be going strong.

Cliff Borden – CIBC

Okay. In terms of Trison, last year, I think the backlog on Trison at this point was $8.4 million, how is Trison doing?

Barry Golsen

Trison has a nice pipeline of business that they are working on.

Cliff Borden – CIBC

Backlog, or is it part of the backlog that you have announced? Or is it separate from that?

Barry Golsen

No. The pipeline of business, which are projects pending that they are working on.

Cliff Borden – CIBC

Okay, but that's not included in the –?

Barry Golsen

We don't call it backlog unless we actually have a contract in hand that's signed.

Cliff Borden – CIBC

Okay. Just one other question, in terms of the heating oil markets, which right now, the geothermal is extremely attractive as their replacement product, which obviously, heating oil is more in the Northeast, are you opening up any new dealers up there or are you making any specific effort to get into those heating oil markets?

Barry Golsen

We are really aggressively adding distributors and dealers to go with those distributors constantly all over the country, and we put a big push in this area. We have as a matter of fact, I'm jumping the gun a little bit on a comment that we will make in our letter to shareholders’ that will be coming out, but over the last half of last year, we’ve really completely reorganized our geothermal sales program to give it extra emphasis and extra personnel. And part of that will be aggressively and already is adding distributors. As to a market-by-market tick-off of where we've done that, I can't really reel that off the top of my head. I have to give you – get input from our sales guys that are doing that on a – it changes, actually, on a monthly basis.

Cliff Borden – CIBC

Right. Actually, just one other thing, in terms of the – I know you guys have a hard time proving [ph] this, but obviously, the new construction market is down, obviously. In terms of retrofits and renovations, are you sensing a pick up on that side or is that down as well? Or can you add some color to that?

Barry Golsen

I really can't add any color to it. I mean so far, we are not seeing a meaningful shift.

Cliff Borden – CIBC

Okay. Thanks.

Jack Golsen

Thanks, Cliff.

Operator

Your next question –

Jack Golsen

How's the (inaudible) Montreal?

Operator

Your next question is a follow-up from the line of Dan Mannes with Avondale Partners.

Dan Mannes – Avondale Partners

I didn't enough questions off the first time.

Jack Golsen

You've already used your questions up, Dan.

Dan Mannes – Avondale Partners

I guess I'll call offline.

Barry Golsen

What's your question, Dan?

Dan Mannes – Avondale Partners

Just briefly, we had picked up that in the state of Maryland, they had actually added in a geothermal –

Jack Golsen

Yes.

Dan Mannes – Avondale Partners

– (inaudible) program. I think it was about 2,000 per home. Obviously, I can't talk about a pick-up in business there because it doesn't kick in till July, but I was wondering if you are seeing any more programs like that and if there was anything you could do to either accelerate that or how you are participating in those kind of programs?

Barry Golsen

We have been very active in the coal lobbying effort in Washington, and I would say that a substantial amount of the progress that we have made in the bills that have been passed then due to our efforts with some help from other people in the industry, but primarily, we spearheaded that effort. And, Dan, we believe that there are states that are taking the lead and getting out there first, like Maryland and others, but that it sets a standard, and it's a leadoff position for a federal incentive, and hopefully, other states will get onboard. But we are very active federally and then on a state-by-state basis, we have worked there in Texas, and we worked in Oklahoma, and there's different states, depending on what's going on in those states from time to time, where we'll get involved.

Dan Mannes – Avondale Partners

The other state I was going to bring up and this may be a small sample size maybe just due to the size of the state is. I think Delaware has a $3,000 rebate program. I wasn't sure if you had seen any real penetration there if the sample size is too small to really comment on?

Tony Shelby

I can't comment on it at this time.

Dan Mannes – Avondale Partners

Okay. Great. Thanks.

Tony Shelby

Sure, Dan.

Operator

Your next question comes from Charles Hansel with Jayjoe Securities [ph].

Jack Golsen

Hello.

Charles Hansel – Jayjoe Securities

Thanks. How are you? Barry, in your – in the previous question regarding –

Jack Golsen

Speak up. We are having trouble hearing you.

Charles Hansel – Jayjoe Securities

I beg your pardon. In your previous question regarding distributors and adding personnel to the geothermal distributors, I guess that was the line of discussion. Can you talk about where you are going with that maybe internationally, specifically, let's say, Europe?

Barry Golsen

One of the things we have done in the last six months is we have had added new field management from our factory to put more attention on that particular market. We have added several distributors in countries in both Eastern and Western Europe, and we are focusing on that. And those in the last year, we have introduced some new product that's specifically geared – they have different product requirements in Europe. It's very difficult, as a matter of fact, it's virtually impossible to just take the U.S. branded product and sell it in Europe. First, you've got the 50-hertz and 60-hertz thing. So, with a piece of electrical equipment, you've got to design it to work on 50-hertz, otherwise, the efficiency will degrade; the ratings capacity will degrade. So we've got a line of 50-hertz equipment we have come out with. And, also, some of the other characteristics of equipment in Europe are slightly different, the configurations that they want there, they use. The customs are different in terms of how they integrate into the buildings. So we have added new products. We have added new personnel. We have added new distributors in countries in Europe, and we will be focusing on that area.

Jack Golsen

I think there's one other thing. Europe tends to focus on different features than we focus on in the United States.

Barry Golsen

That's correct.

Jack Golsen

And our new products meet those requirements.

Barry Golsen

One thing, this is getting detailed, but they have very – they're much more sensitive to sound in Europe, although it's getting that way in the United States. A typical American product is not sellable in Europe because it's too noisy, makes too much air noise. So, what we've done in anticipation of getting into this market and to get our products ready for that is we added a reverberant sound room. It was a $350,000 to $400,000 special test lab that we added a couple years ago that as far as I know, we're the only one in the heat pump, water source heat pump business or geothermal business that has one of these in-house, and we use this to design very, very quiet equipment for our market and for the European market. So, there's a lot to getting in the European market. It's not just taking your U.S. product and selling it over there.

Charles Hansel – Jayjoe Securities

Thanks. That's a good point. Thank you very much.

Barry Golsen

Okay.

Operator

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

Barry Golsen

Thanks for tuning in. We'll talk to you next quarter.

Operator

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

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