Chart Industries Inc (GTLS) 2001 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Chart Industries fourth quarter 2001 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Arthur Holmes, Chairman and CEO of Chart Industries. Mr. Holmes, you may begin your conference.

Thank you, , and good morning everyone. With me today are Jim Sadowski, Chief Operating Officer of Chart, Michael Biehl, Chart CFO and John Romain, Chart's Chief Accounting Officer and Controller.

Last week the company issued a press release covering the results of its 2001 fourth quarter and full year. If you haven't seen this release, please call our office, and we'll provide it for you. As in the past, I plan to make some summary comments regarding our consolidated fourth quarter and full year results. Then Jim Sadowski will give you a more detailed operating summary and some highlights by business segment. And following Jim's remarks, I'll make some forward-looking comments. And then the four of us will entertain any questions you may wish to ask us.

Again, as in the past, since we plan to make some forward-looking statements, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in our statements. A full disclaimer is included in our press release and will apply to this conference call as well.

Now let's discuss our current results. The fourth quarter - it turned out to be much weaker than we anticipated. It was a very difficult and frustrating period for Chart. The company experienced weak sales for our products in all business segments during the quarter, largely a result of the low order intake in the third quarter.

We started the quarter with a very uncertain business climate in North America following the September 11 terrorist attacks on our country. However, demand for our applied technologies products and our process systems and equipment products firmed up nicely as the quarter progressed. That was a very positive development.

The lower sales volumes in all our business segments, however, caused a significant decline in our gross margin performance for the fourth quarter.

In addition to some of our higher margin products, suffering sales declines, lower factory throughput caused overhead expenses to be under-absorbed in many areas.

A $1.9 million non-cash inventory evaluation charge was also included in our cost of sales to cover the write-down of inventory related to the sale of the DryWash business in December.

These factors combined to produce a gross profit of only $16.6 million for the fourth quarter, compared to $25.7 million for that same quarter in the year 2000.

For the fourth quarter our net loss was $4 million compared with net income of $1.2 million in the corresponding quarter of 2000. That fourth quarter net loss included $1.2 million, or 5 cents per share, as the result of the non-cash DryWash inventory charge.

In addition, $400,000, or 2 cents per diluted share, of employee separation and plant closure costs were expensed in the quarter. These costs reflect changes that we've made to reduce our operating costs going forward into 2002.

We're continuing to study alternatives to lower further our operating costs, and we expect to identify additional initiatives in the next several quarters.

Although our sales for the full year of 2001 increased slightly to $328 million from $326 million in 2000, our net loss was $5.1 million, or 21 cents per share, compared to a net income of $2.2 million, or 9 cents per share in the prior year.

Lower interest charges for 2001 were somewhat offset by non-cash derivative contract valuation expenses of $2.9 million for the year.

In fact, our full year results include three significant non-operating items. One is employee separation and plant closure costs; two, a gain on sale of assets; and three, the non-cash derivative contracts charges.

Collectively, these items had an unfavorable impact on the company's results for the year of $4.7 million on a pretax basis, or 11 cents per share after tax. Our applied technologies segment - our largest and most profitable segment - continued to perform well during the fourth quarter. Although sales decreased 6 percent from the third quarter, applied technologies experienced its best quarter ever of order intake.

Considering the current business climate, this segment demonstrated notable strength, particularly in the liquefied natural gas products produced by our NexGen fueling division. And also our biomedical products. Most margins for this business did slip, however, to about 32.5 percent as a result of the particular product mix during the quarter.

In the fourth quarter, Chart's distribution and storage segment experienced its lowest level of quarterly sales and gross margin in the past two years. Distribution and storage order intake in the fourth quarter was similar to that in the third quarter, but both of them were down significantly from prior quarters and the fourth quarter of 2000.

This business has been adversely affected by the current economic recession in the United States, which has resulted in reduced orders from our industrial gas customers. The low order bookings in the fourth quarter of last year resulted in reduced backlog at December 31, and this will adversely impact our early 2002 performance for this segment.

The low sales levels resulted in under-absorption of factory overhead and poor gross margin performance in the fourth quarter. In the process systems and equipment segment, I'm quite encouraged by the welcome surge in orders for those products in the fourth quarter compared to prior quarters of the year, and also the fourth quarter of 2000.

These businesses continue to actively bid many natural gas, ethylene and other large hydrocarbon projects worldwide. We have a very active bid backlog currently. The strong fourth quarter order inflow has provided a large backlog for this business going into 2002 - much better than we've experienced all - earlier in the year.

However, the industrial gas market for these products continues to experience depressed demand and sales volume and gross margins. Meaningful recovery in the industrial gas market is not anticipated until late in this year at the earliest.

As a result of the improved backlog, I anticipate improved sales and gross margins for the process systems and equipment segment as we progress in 2002.

For the fourth quarter our SG&A expense was $15.4 million versus $15.9 million for the same quarter in the year 2000. This decrease reflected lower selling costs, some reductions in administrative costs, and lower incentive compensation expense.

As a percentage of sales, SG&A expense increased to 20.9 percent versus 17.7 percent in 2000 as a result of the current low sales volume.

Net interest expense in the quarter, excluding the charge related to our interest rate collars was $4.1 million, compared to $7 million for the fourth quarter of 2000. These figures reflect the average borrowing for the period, and the very favorable lower interest rates currently prevailing.

As of December 31, 2001, Chart had total debt of $272 million. The company is currently in compliance with the covenants of the credit facility as a result both of the amendments made in the fourth quarter and recently in March of 2002.

I'm very pleased that we were able to finalize these amendments, which provide us with the flexibility to move forward with our 2002 operating plan.

It was a long, difficult process, and a very expensive process, but these amendments now give us time to continue to explore options to reduce our leverage.

The company is pursuing potential sources of additional capital to reduce our bank debt and to provide for a long-term, stable capital structure.

We experienced good positive cash flow, about $12.8 million during the fourth quarter. This was primarily created by decreasing working capital levels during that period.

Chart management is targeting the reduction of working capital in all areas to bring our capital down to levels consistent with current sales and historic best practices.

With that I'll now ask Jim Sadowski to highlight our active - our operating activities during this period.

Thank you, Art, and good morning, everyone.

I'd like to just offer some year-over-year perspectives to help you understand the activities going on in our various businesses. No question - as Art mentioned, it was a very turbulent year. Many things were moving in different directions, and we'll try and put that in perspective for you.

Most - of most influence was order intake, which on an annual basis was down 17 percent over the year 2000. It happened in a very mixed format, though. Our process systems group, as Art mentioned, suffered order drought for the first three quarters - very low intake. Orders were either at 10 million or less per quarter. And it wasn't until the fourth quarter that we had a welcome surge of about 19 million.

On the other hand, our tank businesses, largely in the D&S segment, did fairly well in the first half, but fell off dramatically in the third quarter and the fourth quarter. Those two quarters combined added up to about a $20 million shortfall in what you would say their steady performance levels would be.

That , on the other hand, after a tough third quarter, bounced back to have their strongest quarter ever, which bodes well for us going into 2002.

They all intersected in the third quarter, which was extremely tough. But I think you can appreciate how the different businesses are moving throughout the year 2001.

Art mentioned sales were about flat for the year 2001 over 2000 - over the year 2000 - maybe up less than 1 percent. Well, we were down 17 percent orders, and we did have about a flat sales. And what that means is we did dip into our backlog. Our backlog went down from the end of last year from 89 million down to where it started at the beginning of this year - 65 million. So the bad news there is we lost some backlog.

The good news, though, however, is the remaining backlog, helped by the fourth quarter, did occur in our PS&E segment. And as all of you know, their performance is very directly tied to backlog strength going into the new year. These changes put a lot of pressure on the operations to make adjustments.

We had a lot of cutbacks in manpower, particularly in the fourth quarter, a lot of pressure to change facilities, which I'll outline for you later, and continuing pressure on cost reductions in many areas. Gross margins fell off about three points year-over-year, and all segments were affected.

Let me discuss briefly what's going on in the various segments.

I'll talk about applied technologies first. It's the strongest segment.

If you refer to that table that we supply in the press release, which gives you the quarterly performance on orders, sales, backlog and gross margins, a lot of the trend data that I'm discussing is taken from there.

In applied technologies, they contributed 46 percent of our sales in the fourth quarter. However, they contributed gross margin 66 percent.

There's no question about the strength of the technology products and what they contribute to Chart's overall performance. As Art said, they perform very well, and particularly during these - during the fourth quarter.

The biomedical area, which is a very strong product area for applied technologies, continued to get stronger throughout the year, both in the U.S., as well as Europe. Our introduction of new products, starting in May, shortly, will again help bolster that particular product line.

If we look at quarter-over-quarter, just this fourth quarter over last fourth quarter, we're up about 37 percent in orders.

LNG also was active for us. As we did in a variety of press releases, we told you about our China station, a prototype station we announced in November, shipped to China for evaluation for their LNG program.

In January, we announced the City of Phoenix station, a $2.5 million contract for fueling station and associated tank equipment. In February we announced the Santa Monica fueling station.

On a quarter-over-quarter basis, fourth quarter this year over fourth quarter last year, orders are up about 70 percent.

Further in the applied technologies area, there was some softness in the other businesses. Restaurant was steady. Our beverage products were steady, down maybe a bit.

Our MRI products were steady. Our systems were bumpy, although we expect good second half pickup going into next year.

In January we also announced the introduction of our telemetry business. We launched the product. We announced two major customers for medical applications of telemetry.

This is an event that we have been long waiting for. We're currently involved in rental contracts with these customers - contract durations of about three years.

The major portion of our first quarter and second quarter work now will be working startup problems and startup developments that have been identified and continue to try to accelerate our growth rate.

Overall, as you can see, AT is good backbone for Chart. It's got great growth opportunities, and as you saw in the fourth quarter, was a very good strong stabilizing effect for us.

A few comments on distribution and storage, which is really our tank business. It's separated into the large, bulk tanks and the smaller package gas tanks. Sales were about 39 percent of the fourth quarter for us. Their gross margin contribution was 27 percent of out total gross margin. Sales were off the 33 to $34 million pace that our table shows you. We're running around 29 million, as well as weak order intake throughout the third and fourth quarter.

This particular segment started out relatively strong and did have - and did finally witness some problems in the third quarter and fourth quarter with respect to demand. This is a very leveraged segment. It has a lot of manufacturing facility and equipment connected with the production of these large and small tanks.

It's, therefore, very sensitive to volume changes. And our gross margins, as the tables would show, fell down to around 15 percent. It has its impact on Chart's performance.

Bulk tank orders - the large tanks - they fell off progressively throughout the year. Package gases - the small tanks - also fell off. On a queue-over-queue basis, we're about 35 percent down from where we were a year ago. We do see expected recovery, however, in the second half. It should be associated with the evidence of improved economic activity and the fact that our customer inventories have finally dwindled down to ordering levels.

A few comments on process systems and equipment, or PS&E. This is our large equipment business - largely heat exchangers and cold boxes. Fourth quarter intake, as you saw on the charts, was greater than the previous four quarters. We did offer a press release in November highlighting a surge of orders, highlighted with hydrocarbon processing equipment orders.

These were all international orders. We announced orders for Saudi Arabia, orders for projects in China, orders for products in Tunisia, to give you a flavor for that business.

The industrial gas segment remains depressed. We're now looking for really an early third quarter recovery in that business.

The hydrocarbon processing part, though, which I alluded to, should exceed 2001 order intake significantly. Our forecast was strengthened with that fourth quarter surge, and our outlook is optimistic.

Most importantly is some of the larger projects that really form the backbone of this business continue to firm up, and are moving into position for releases. We expect large program releases in third and fourth quarter, possibly some early engineering releases in the second quarter.

As you also see in this segment, gross margins were down. This business is also sensitive to volume, and hopefully with increased backlog and increased order intake we can start approaching the gross margins are accustomed for - that we are accustomed for this particular business.

I alluded to cost reductions and the need for adjustments that we had to make throughout the year. We dealt with manpower reductions all year long, but particularly heavy in Q4 and Q1 of this year.

We reorganized to put a better attack on our purchasing program. It's a large part of the cost side of our business, and we are now working on global and Chart-wide opportunities to further reduce purchasing costs.

We employed a variety of HR initiatives, wage controls, hours reductions and benefits contractions, all in an effort to tighten our cost structure in those particular areas.

I mentioned facilities. We closed our Singapore sales office to economize in an area that was at this time rather risky to continue to support. We significantly closed down our Australian manufacturing operations, and reduced it to a small center of distribution for biomedical.

We are now in the process of closing our Denver East facility. It's the facility that was dedicated to mobile products for Chart over the past few years.

We will continue to support mobile products; however, they will be absorbed into our other existing and under-utilized facilities.

As Art mentioned, we're continuing to look at additional opportunities as our - as we go through the current situation.

We did put out a press release quickly addressing the steel tariffs. And I'll just comment on that quickly to bring you up to date.

We put the announcement out on March 8, which was just shortly after the surcharge was announced as President Bush's response to the Section 201 investigations.

The - we indicated that our price increases would be - would apply to North American-supplied bulk tanks. And we indicated that it was driven by 9 percent nickel, which is a special alloy used in our large, bulk tanks. We indicated also our surcharge would be somewhere between 8 percent and 18 percent, and that's based on the material content of the special alloys in those various tanks.

It's not possible for Chart to absorb these risks - excuse me - these costs. We've been working hard to lower costs in these product areas. We've built a very competitive and cost-sensitive landscape in this particular area. And we must try hard to pass these costs along to our customers.

I really can't go into a lot of details. There's still a lot of uncertainty on implementing the program. The implementation deals - for example, customs, which is the enforcer of the tariffs, is still not organized acceptably to implement the program.

We do buy product, and we do buy this particular steel in Europe. We find ourselves with only one supposedly qualified supplier in the U.S. And the process of exploring the possibility of shifting our buys internally will take some time.

We're also continuing to work with the trade organization to achieve an exclusion for this particular product. I would say that we would have much more insight as to how this particular program, pricing, and effect on our business will happen over the next month - over the next quarter.

Just looking ahead, very quickly, we're again positioned fairly well for 2002. We expect, as I mentioned, stronger order intake in the second half. Our gross margins should start to improve, and our backlog is improving.

I'll now talk - I'll now turn the program back to Art Holmes, who will identify for you what some of our projections look like.

Thank you, Jim. Let's now take a look at the future for Chart industries.

First, I want to talk a little bit more about our amended bank credit agreement. The current amendment provides for covenant relief through the end of March 2003. It results in an interest rate increase for Chart of one-quarter percent. It results also in scheduled reductions in our revolving credit line during the year, and it results in deferring $25.7 million of term amortization payments from the year 2002, when they were previously scheduled to 2005 and 2006.

It also provides for the issuance by Chart of warrants for the purchase of up to 10 percent of Chart's common stock, and for future interest rate increases, if certain de-leveraging events don't occur by specified dates.

During the fourth quarter, the approximate average interest rate for all of Chart's debt was six percent. We estimate the effective interest rate for the company to be about 6.5 percent going forward in the first quarter of 2002.

During this next quarter we'll be pursuing ways to reduce our total debt. We're exploring various sources of capital, including various forms of equity investments and subordinated debt possibilities.

Our goal is to reduce the senior bank debt and, if possible, avoid the potential shareholder dilution from the issuance of warrants to the banks. We also want to obtain improved liquidities.

Sales of certain operating assets are also being considered.

Our project fast cash has been rigorously pursued these last several quarters, and we're continuing to pursue those, to reduce our working capital needs, and thereby lower our debt requirements. We saw good evidence of these efforts in the third and fourth quarters with excellent positive cash flow.

Now I'd like to give some guidance as to our probable operating performance in the short term.

I would expect relatively flat top-line sales for the first quarter of 2002, relative to the fourth quarter of 2001.

Our gross margin performance in the first quarter should be similar or slightly improved over the fourth quarter. Our SG&A expenses should approximate the fourth quarter level.

Additionally, however, the elimination of goodwill amortization in 2002 will significantly improve our quarterly pretax profit performance by about $1.25 million per quarter.

Therefore, our first quarter operating performance should be improved from the fourth quarter performance. However, expenses for additional employee separation and plant closure costs, bank fees and other professional services related to the March credit amendments will increase our projected first quarter loss.

At this point, we have not determined the level of these nonrecurring expenses, which will be expensed in the first quarter.

Following the first quarter, I anticipate improvements in sales and gross margins and in net income in each successive quarter as the year 2002 progresses. For the full year, I anticipate sales growth over 2001 of between five and 10 percent.

Average gross margin should come out between 26 and 27 percent. And recurring SG&A expense should be approximately comparable to what we - what we experienced in 2001.

Achieving these projected results should provide a substantial net income improvement over 2001 and would enable the company to comply with its debt covenants. I am optimistic that most of our products, and the markets we serve, will show an increase in demand in the second half of the year.

As I mentioned before, we're pleased with the recent increase in orders in the PS&E segment, and we're cautiously optimistic that this trend will continue into 2002, particularly with some of the large hydrocarbon jobs that Jim mentioned that are firming up for the second half of the year.

We continue to focus our resources primarily on our growth markets and products. The belt-tightening and the cost reductions that were initiated in 2001 will improve our performance in 2002, and we expect to not stop but to identify further opportunities for improvement going forward.

Order intake each quarter going forward is expected to fluctuate broadly around our projected sales levels. Any given quarter could have a large order spike representing one or more significant, large orders; either in the PS&E segment or for special-engineered equipment and other segments.

Now a little bit more on our two high-growth initiatives which we've been developing. As Jim mentioned, we've been, for several years, working on our division called CoolTel, which in the last quarter of the year finally went commercial.

This division basically employs cryogenic sensors, state-of-the-art telemetry, and Internet communications to permit our customers to make substantial reductions in their distribution costs for cryogenic liquid products.

This new Chart business has great potential for us. Has the potential to connect hundreds of thousands of end users, particularly in the home health care area, and in the restaurant beverage area, to CoolTel's national operating center.

That will then produce product demand information to our distributor customers via the Internet.

Last year we completed the beta testing, and we started commercial introduction of this concept to our customer base.

No profit contribution from this business is anticipated for the next year. In fact, we expect to continue to absorb operating losses, and expect them to total approximately $2 million in 2002.

However, positive cash flow and profit contribution is expected to occur in 2003. And we anticipate this business to have very rapid market penetration and growth starting in the second quarter of this year.

The second initiative is, as we mentioned before, the NexGen fueling division, which is accelerating the growth of our dominate position in the use of natural gas in liquid form as an alternative fuel for vehicles and for stationary engine users.

As the leading supplier of vehicle-fueling systems and onboard fuel tanks for LNG vessels, NexGen has a unique position, which is enabling us to capture the dominate share of the current and also the expected future growth of this market.

Our customers now are beginning to believe that LNG is viable on its own merits economically, and not just for improvement of air quality. Further product improvements will accelerate its usage.

We believe ultimately LNG could be used as a fuel cell fuel source when that fuel cell technology is ready for wide-scale commercial use, and also when an LNG fuel infrastructure is in place.

This business has already demonstrated rapid growth last year, and we expect its sales for 2002 to grow approximately 70 percent over the 2001 level.

As Jim mentioned, we've experienced excellent order bookings in the fourth quarter and, currently, in the first quarter, and we're seeing continued strong bidding activity. We expect that this NexGen fueling division will result in a modest profit contribution to the company in 2002.

The last several quarters I've described are corporate strategic plans, which have four major thrusts. I just want to reiterate those, or reacquaint you with them again, as they form a good summary of our actions going forward.

First and foremost, Jim and his operating team are working to lower our operating costs and improve our productivity and our working capital utilization in every business segment and every product line. This is fundamental to our financial health, to servicing our debt and to increasing shareholder value.

We expect to continue to identify improvements and reduce operating costs going forward in 2002.

Second, we're continuing to shift our corporate emphasis toward the exciting, growing markets served by the applied technologies and some of our distribution and storage businesses. While we believe in the long-term beneficial attributes of the PS&E business, the cyclicality of it has been negative. And we're taking steps to minimize the negative impacts on these cycles going forward.

Third, we're funding the development of our best growth prospects - NexGen and CoolTel. These are emerging products and services which serve large high value-added markets and end-user applications. We're very excited about the prospects for them.

And fourth, as I mentioned, we're pursuing avenues for bank debt reduction and balance sheet strengthening. We're certainly amply with our new amendment to accomplish these goals in 2002.

In summary, Chart is adjusting its operations to the disappointing conditions, which we've been facing in the fourth quarter and early in the year 2002. Our challenge is to improve operating performance, continue our new product commercialization, while reducing and servicing our debt. We're taking decisive actions to do this and to improve our liquidity.

I believe we're positioned to accomplish these goals, and with the anticipated return of our markets this year, achieve enhanced shareholder value going forward.

On that note, we'll now open up to entertain any questions which you may want to ask.

Thank you, sir.

Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone.

If your question has been answered, or if you wish to remove yourself from the queue, please press the pound key.

Our first question comes from . Your question please.

Art, when you talk about being able to be in compliance with your debt covenants if operations go the way you're expecting this year, I assume that means only through next March 31, and beyond that it'll have to be renegotiated. Am I correct in that?

Yes. There is the outside possibility, if we did really well, that we could have a seamless compliance past March of next year, but the likely prospects in our current forecast would indicate that there would still need to be some changes made at that point in time.

Can you talk at all about the likely routes to get the $75 million that you need for the September 30 prepayment? I appreciate that with ongoing negotiations, you can't tell us too much.

But, curious as to whether, you know, what the likely upside would be on the ultimate dilution of the stock.

Yes. Well, first of all - that's a good question, and we appreciate that.

As we've mentioned in the past, we've had some significant discussions and a quite intense level of due diligence activity with one particular investor group, which we're very encouraged about.

We, by mutual agreement, put that on hold early in March when it became obvious that we weren't going to get to a point of inclusion in time to impact the credit agreement. And so we held off on those discussions while we concluded those credit amendments in March.

And now we're scheduling to reactive our discussions with this investor group, and hope to have an early indication of whether we can get together with them in the near term.

In the meantime, a number of other sources of equity infusion have been identified. And we're prepared to pursue those in the event that this development with the investor group that I just mentioned cannot reach an early conclusion.

And, of course, we've been looking at, all last year, different forms of subordinated debt, which could be applied in either case. So, we have a number of very active and possible avenues that we could pursue for either - through equity infusion and, also, restructuring of the debt with some subordinate debt types coming in.

And then, thirdly, we have been actively looking hard at possible asset sale candidates. We've identified a number of these and are reaching a point of making some decisions on those in the near future.

So, all of these combined could very handily meet the requirements that are set into our agreement to avoid any dilution by issuance of warrants. Whether or not we'll achieve them, though, depends on how quickly we can make them happen.

Thanks.

You're welcome.

Our next question comes from . Your question, please.

Hi. I'm going to continue on the same avenue here, but I just want to make clear from the - what you released about the amendments to the credit agreement. If you make the prepayments by the end of September, does that mean no warrants would be issued?

Well, there are three dates that are key with regard to warrants in the agreement, . The first is June 30, and there's a 2 percent warrant issue required there, unless we would do something that would turn the bank's heads, like bringing in significant equity that could allow us to negotiate that away.

The next event is in September - September 30. And if we bring in 50 million of equity and - or a combination of equity and asset sales that total 75 million, then it's possible to avoid the 5 percent maximum dilution that's specified at that point in time. And possibly you can claw back a little of the earlier 2 percent.

Then there's final date, which is December of this year, where there's an additional potential 3 percent warrants in the event that we haven't already satisfied the precondition. And in the same manner as in the September date, we can avoid that if we achieve those levels by then.

Thank you.

You're welcome.

Our next question comes from Saul Ludwig. Your question, please.

Hey, Art. This is Saul.

Yes, hi Saul.

Hey, I had to hop off for about five minutes, and I apologize if this was already asked, but what's the conversion price on the warrants?

They're market at the time of the issuance.

Which was?

Well, they'll be issued on those three dates, depending on whether we have to issue them or not.

Oh, and ...

They're future dates.

Oh, I got you. And when's that first date?

June 30.

OK. And that would be for a third of them?

No, for 2 percent.

Oh, 2 out of the 10 percent.

That's correct.

Got you. OK.

Secondly, you mentioned that the first quarter gross margins would be comparable to the fourth quarter. But the fourth quarter includes that inventory adjustment...

Yes, from an operating point of view, they'll be comparable, but we'll avoid that one-time adjustment. So we'll have an improvement at least...

Oh, OK.

... we would just...

So we should add that back in?

Yes.

Got you. The next question I had was, what about this issue of goodwill impairment? Have you looked at that yet? And might there be any?

Michael?

Saul, this is Michael Biehl.

Right now we're still in the process of evaluating it. We have up until the end of the second quarter to determine that.

Right now we haven't identified any that would require write-off, but until we make the final evaluation, we really won't know.

We do have some goodwill associated with our foreign entities, Marston in England, that, you know, we would have to evaluate closely. But right now we don't have an answer to that question.

If you were going to sort of look at a worst case, that of course, you know, the only way that it hits you is that it affects your equity account.

Right.

It's not a cash item at all. So, it...

That's correct. And it won't affect our debt covenants because, you know, changes in generally accepted accounting principles are not required to be factored into the covenants.

I got you. So, would you - what would be the worst case you could conceive of? Is this a $10 million item? Is it a $20 million item? I mean, under the harshest conditions...

It could be $12 to $15 million in worst case.

OK.

And it would shown as sort of a below-the-line adjustment, accumulative effect adjustment, would not be in normal earnings.

It would be pushed back to the beginning of the year...

OK.

... when we are ultimately required to report it.

The - back on that inventory hit in the fourth quarter - when you reported your gross margins by segment, that would be in the applied technologies segment?

That's correct.

OK. And you mentioned that SG&A would be the same this year as last year. I guess, though, when I heard about all the steps you've taken to reduce expenses - and I had to hop off right when you said that was sort of your number one strategic priority here - why would SG&A be maintained at that high level - at the same level and not a reduced level?

Thanks, Saul - Sadowski speaking. A large - when we forecast our SG&A, we were still - we were still involved in some support programs on NexGen and CoolTel, which are contributors to that. We are still looking for upkicks in business in the second half throughout all of the segments. We still have an active SG&A activity going on, and in the pursuit of PS&E business, proposal activity's still intense.

So when it comes to the marketing and selling side of the equation - the commission side associated with new business - that's going to remain fairly even with what we did last year, and might even come down a little bit.

We have been experiencing on the administrative side, though, increases in service costs and medical costs. So those are actually counter balancing and taking away a little bit of some of the reductions we've done. So we're kind of reducing it on the operating side, but we're getting hit with increased service costs and medical costs to either hold them even and, in some cases, move it up a little bit.

Now what about the issues of pension and insurance costs in 2002 versus 2001?

Pension and insurance costs.

Most companies were talking about, you know, to the extent that they have any sort of pension plans where they ...

Yes, I think there - I mean, I your numbers SG&A, that is one of the items that have offsetting - some of those decreases. "Cause we will see some pension increases. They're not material though. We're smoothing it over the drop in returns and stuff like that, and interest rates are being spread over a little bit of a period of time. So they don't immediately impact you for the full amount.

OK. And, Art, did you comment - you mentioned that CoolTel, you know you expect to have a loss in, you know, 2002 from that. How much, if any, were their revenues in 2001, and what would you expect their revenues in 2002?

Well, their revenues were essentially zero in 2001.

Yes, I - Saul?

Yes?

These programs are - they're introduced now. Our customers are installing CoolTel units at all different sites. They've been doing that through the latter half of the fourth quarter and the first part of this quarter.

We're working with them on installations.

As soon as all the hook-ups are complete - and a lot of the start-up conditions that we've agreed to with these early customers are completed, we'll start churning revenue.

I wouldn't expect, though, with the installation schedules that we have, that the revenue in this business will start to show in probably the first and second quarter, and still be small throughout the year 2002. I hate to put a number on it, but it'll probably be significantly below $5 million.

Well, in the context of projecting a $2 million loss for 2002, there would have to be a revenue number at the other end of that $2 million loss. And, do you think you're going to take in $1 million and have expenses of three? Or do you think you're going to take in four and have expenses of six?

In other words, how do we get to the $2 million loss that had to be connected with a guesstimate on the revenue side?

for revenue projections ...

about $3 million.

... yes.

And is that - is that - does that - does revenue in this come in in the form of monthly service fees? Or is it...

Yes.

... a product sale?

Yes. It comes in as a monthly service fee, sort of like your cable service, on a monthly fee per installation.

And the real cost part of it is that we have to put in our communication box, and the expense of the installation up front. And then we have this annuity that lasts at least three years.

And I just ask this, you know, all this concern about accounting in the cable TV industry. What's revenues? What are expenses? Do you present value the future stream of revenues? Or is it strictly the monthly rental fee that you ...

Strictly a cash basis the way we're accounting.

And on the expenses, you'll expense 100 percent of everything up front?

Well, we'll be taking some amortization on the communications box.

On the equipment.

But that, but that's what loads up the current costs and gets paid off over time.

And I just finally, what was the reason why the interest expense in the fourth quarter was so much less than the third quarter?

You were running $6 million or thereabouts in interest expense ...

Well, just when different drop down into lower levels. But the $4 million number was net - it didn't include any of the collar cost that we previously had.

Oh, got you. And then, in the first quarter, did you think that net of everything - that you would lose more than the 16 cents that you'd lost in the fourth quarter?

No. No that's - our operating performance should be significantly improved. What we're not sure of at this point is what special charges will hit us in the first quarter. But I would be surprised if they total up to the same loss that we have in the fourth quarter.

Even with all in, you expect a loss, but not as bad as the fourth quarter.

That's right.

Got you. OK. Thanks.

You're welcome.

Our next question is a follow-up question from . Your question, please.

On these CoolTel service revenues, could you give us an idea of what they - the gross margin is on this kind of continuing revenue stream? holmes: The gross margins really are very high, because we're essentially sinking our costs in up-front with these communication boxes. And then we have very low per installation operating costs through our national operating center. So the actual margin that you'd calculate would be extremely high, but as to pay off these up-front capital charges.

The development costs, which have been sunk into the business, for developing the national operating center and all the center technologies and what have you, prior to commercialization, really necessitate that these be high-margin returns. So once the sales are accomplished, and we do build these rental revenue streams, they will be gross margin-wise - they'll be fairly good.

Presumably there's some, you know, one-time charges the first year, but when you get to a steady state, it sounds like the first year model is $3 million revenues, $2 million loss. At what point do we get to even, and how much of this move to break even is the inherent economics of the revenues going up? And how much of it is the one-time startup charges being behind us?

I'll take a crack at that, Bob, and - see the - you're absolutely right that, because these things are a cascading growth curve, as you keep signing up customer - and hopefully the three-year lease programs are renewed, renewed, renewed. You constantly have an ever-increasing revenue stream.

Right now, we've estimated our expenses in the year 2002, as Art mentioned, to be about a net of $2 million, net investment, in to the business.

I would say somewhere in 2003, we should hopefully cross the line on the program.

We still have additional development costs in certain areas, in the beverage market. And we have certain other new ideas that are being implemented that we're learning as we're putting the business online.

So I see us working hard and increasing our number of installations throughout 2002, and hopefully completing developments this year and a little bit of next year.

So I'm going to guess that we would be crossing the line somewhere about mid to end of '03.

The amortization of the start-up charges, is that over the three-year lease, with the implication that once you get beyond three years and sign somebody up, you should have a big boost in the margins?

I think, yes. That is - for the equipment that goes on for each customer, those start-up costs are amortized over the three years.

And so then, if somebody signs up again for the, you know, for another three-year period, you're going to have much lower costs.

Yes.

Yes.

Are they likely to get lower rates as a ...

I think there's a, you know, we're moving ahead and understanding this marketplace, you know. I don't want to claim it's like cell phones or something, but you do realize that there will be, there will be customer pressure to recognize the kind of points that you bring up.

So we're hoping and believing that the service and the benefits will be strong enough that we will not have price concessions like you're alluding to.

Now, forgetting the amortization, is this a, you know, a 50 percent operating margin kind of business? Or...

Yes, it's ...

... 15 percent or...

... I mean, you can't tell us exactly, but what range are we talking about?

We're talking strong numbers. Like we've said, I'd like to refrain from answering that definitively at this moment, Bob.

Is the - is 20 percent operating margin strong?

That would be a, that would be considerably strong.

OK. Good.

And then the other thing, there seemed to be a little bit of a difference in emphasis in talking about the industrial gas business. Art, you sort of implied that late '03 at the earliest, would that come back?

And, Jim, if I didn't misunderstand you, I thought you said that, you know, maybe by Q3 that business would be improving. You...

Yes, I think it's a case right now, we're still getting - the order intake, which is the most solid indicator to look at, continues to be weak. And when we look at the opportunities on the books and the amount of bidding, it also supports that it's weak.

There are some projects that are visible, and they may occur in Q3, Q4. We would expect some activity to start.

We definitely know that, what I would say true margin improvement, because prices are going to be suppressed for some time in this business, even after attempts to start up. So we're already, you know, at the end of Q1; and I'd have to say, you know, late this year would be very - would be wonderful, but the prospects are dimming that that's going to happen.

Most of our customers - they're talking about it, but I think they're pushing it out another quarter or so.

We have top look at - we serve several aspects of the industrial gas market. I was referring to the process systems and equipment segment, which is dealing with large, new production facilities for the industrial gas people. And this, for sure, is a late-this-year-at-the-earliest kind of event.

But we also serve in our distribution and storage segment, a lot of these same folks. They're harnessed more toward the economic climate of the nation, and we would expect that's going to show earlier pickup. And that's the area that's in a slump currently, as we're starting a new year.

Yes, I think, Bob, Art - to just add to Art's point. We see the D&S business pick up - the tank business pick up - turning around in the third quarter, fourth quarter. We're saying that the PS&E pickup, which is the large heavy equipment construction, is sliding out to next year.

All right. OK, thanks. One last thing - you mentioned fuel cells as ultimately being a potentially large market for the LNG. I assume we're looking at at least five years before that's significant in terms of revenues. Could I be wrong in that?

Yes, I think that's probably early for fuel cells, but there's so much interest in that. I just want people to be aware that fuel cells require fuel. And the most logical fuel for them, in our opinion, is natural gas. And so to the extent that we are successful in developing a natural gas infrastructure for vehicles across the nation, we'll be in a position to take advantage of any cell fuel activity that happens down the road.

Thank you.

Our next question is a follow-up question from . Your question, please.

Hi. Could you just comment on whether you see any changes in the competitive landscape across your various businesses right now or your market share position?

Yes, I'll take a crack at that. In the process systems area, driven largely by the heat exchanger business, as you know, there's a handful of competitors throughout the world. Chart, of course, is the dominant player. We've got two other suppliers in Europe and two in Japan.

And we know, just through our marketing and our conversations with customers, that all five competitors are at very low operating levels. They're all distressed. And they're all struggling to keep their head just above water, now and then gulping a little bit.

There's not indicator at this point that anyone is choosing to pack it up, so to speak. They all seem to be hanging tight.

I think there's some realization that there will be some turnaround.

So at this point, we're still seeing a competitive landscape. When jobs come up, unless Chart has a special advantage in either delivery or technology, the bidding is very, very fierce.

Similarly, in the D&S business, we have one large competitor. And it only takes two people to make a real horse race. And both suppliers have been working hard to maintain their market share.

So at this point in time we see the landscape just steady, competitively steady.

In the AT segments, that's an area where really our higher margin products benefit from the fact that we have good value-added products. And there we can continuously sell against the competition, the competitive advantage that we have.

And we've been holding very well with respect to pricing. In fact, I would say Chart, in most of the AT products does very well on price.

Art mentioned that we had some fall-off recently. And it was basically a mix problem. As the margins change on mix, we do get fluctuations on gross margin. But it's fairly strong with respect to its ability to hold price.

OK. Could you also just talk specifically about competition in the newer businesses, in telemetry or also in the NexGen businesses?

The - well, let me cover telemetry. At this point, Chart is trying to secure a position in a very niche part of telemetry. And it happens to be the area where telemetry is applied to the small package, gas-type tanks.

We're largely talking about medical tanks, the ones that are in home usage, and beverage tanks, the kinds that are used in restaurants.

At this point, there's a lot of telemetry that exists in the country and in the world today. But it's very high-end telemetry, a very expensive telemetry. It's used on the large bulk systems where they can pay substantial amounts of money for sensors and communication devices.

There's also telemetry in non-cryogenic containers in other places. Telemetry is being used in machines in a variety of other areas to report status or quality of things. But at this point in time, there is no one actively pursuing telemetry - or let's say actively in the market - or commercialized telemetry - in the small, cryogenic tank area, which we're currently located.

And our entry into that area was the development of low-cost sensors and low-cost communication devices. So at this point in time, we currently have a good running start in that area.

OK - and then NexGen?

NexGen - there are - there are some competitors who are emerging, and they are recognizing the potentials of this business. And they are putting some investment into becoming players in the field. With respect to fueling stations, we believe there's only two competitors. We have been enjoying the lion's share of the business, but there is another competitor out there who can do some good work in fueling stations.

With respect to the fuel tanks that go on the vehicles, we're currently significant leader in that field. We probably put over 90 percent of all of the liquid LNG tanks on vehicles in the market today. However, there are several others who are now looking at these small, vehicle-mounted tanks and may start to show up in a competing way.

Thank you.

Once again, ladies and gentlemen, if you have a question, please press the one key on your touch-tone telephone.

Our next question comes from . Your question, please.

Good morning. I want to thank you folks for keeping the company afloat. You sound a little bit tired, but that's certainly understandable after the last four months.

My first comment here is on this accessing junior investment. I read in the paper a couple of months ago, that Warren Buffett of Berkshire Hathaway in Omaha, Nebraska, is looking for companies to invest in. Companies he can understand. I suggest you contact him.

My second question - my first question is: Is the annual meeting going to be held in May again this year at 270 Park Avenue? And if so, where is 270 Park Avenue? Is it midtown, or downtown or where?

No. The annual meeting - because we had to postpone our first quarter earnings finalization until we could get our credit agreements finalized, we missed the window of opportunity to get out our annual report in time for our normal May meeting.

And in any case, last year we made the decision to, at least for one year, come back to Cleveland...

OK.

... and because of the timing this year, our annual meeting is going to be held here in Cleveland on Thursday, June 6.

Oh, June 6. OK.

And we'll be putting out our proxy and our annual report here at the end of...

OK.

... April, that will give all of those details.

Very good.

My next question surrounds the question of safety. What happens when a 16-wheeler hits a bus fueled with LNG? What's the scenario there as far as safety goes?

OK, well, basically, LNG is a safer fuel than most combustion fuels used today, like gasoline or diesel, in that, while it's ignitable, obviously, it's not the explosive type of...

OK.

... situation that you would get with a ruptured fuel tank of those other fuels.

So there's danger there of fire, but not of the explosion kind of situation that...

OK.

... other fuels would present.

All right. I'm glad you explained that.

Now, I also read in the paper a while ago that Saudi Arabia is embarking on a multi-billion dollar spending program, spending splurge to reinvent themselves.

I know you had one order going out to Saudi Arabia, but do you see a lot of subsequent business going to Saudi Arabia?

Well, we, you know, we serve with our process systems and equipment segment, certain process needs that the Saudis will need from time to time. And that award that we had in the fourth quarter was one of those.

OK.

Most of what they're doing is not going to require Chart equipment. But any time any of those gas producing countries expands their natural gas usage, we usually do share in that growth by providing some equipment along the way.

Because most gas processing requires some cryogenic processing as part of it.

OK. My last question involves this fuel cell craze. Now, you mentioned Chart thinks that, you know, natural gas is the best fuel supplier for fuel cells. Why isn't Detroit going on the road of leaning toward hydrogen versus natural gas?

Well, hydrogen is the preferred fuel for fuel cells to, you know, have maximum simplicity and efficiency. But hydrogen doesn't exist by itself. It has to be produced from something. And natural gas is the preferred source of hydrogen in most cases.

OK.

So whether the natural gas is converted to hydrogen in a central fueling station scenario or even - some people are talking about converting it to hydrogen in the vehicle itself, which I don't personally subscribe to, but that's a personal opinion. Either way, you still need to have a source of hydrogen from somewhere.

And where a lot of the current proponents of fuel cells are, we think, missing the boat, is that they're not really looking downstream to how ultimately the fuel is going to be provided.

Well, even if they do go to hydrogen, Chart will still supply the containers, right?

Well, yes, if there's hydrogen that's a cryogenic liquid - if it's stored as a liquid. But we're saying that hydrogen is going to be produced, probably, from natural gas.

OK. OK. All right, thank you very much. I look forward to seeing you in June.

You're welcome.

Sir, at this time, it appears that we have no further questions. Please go ahead with any further remarks.

OK. Thank you.

In closing, I just would say that our operating performance for the current quarter was disappointing, but we think reasonable considering the current market conditions. We've outlined that we're taking a number of steps to improve our sales and our operating profit levels going forward. We're proceeding to make market introductions of our new CoolTel and NexGen fueling product lines. Each one, we believe, has exciting potential for Chart. We're investigating our options for reducing debt and restructuring our debt.

As the CEO of Chart, and as a major shareholder, I continue to be disappointed and impatient with our current operating performance and the high debt load that we're bearing, but I'm quite confident that we will break through to increase shareholder value in the future.

Thanks for your participation in today's call.

Good-bye.

Ladies and gentlemen, thank you for your participation in today's conference call.

This concludes the program, and you may disconnect. Have a great day.

Thank you, .