Chart Industries Inc (GTLS) 2002 Q3 法說會逐字稿

Good morning. My name is Princess and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Chart Industries Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you. Mr. Holmes, you may begin your conference.

Thank you, Princess. And, good morning to everyone. With me today are Michael Biehl, Chart’s CFO and Andy Gehrlein, Chart’s Controller. Yesterday the company issued a press release covering the results of its 2002 third quarter, and a second release relating to our listing on the New York Stock Exchange. If you have not seen these releases, please call our office and we’ll provide them for you.

I plan to make some summary comments regarding our consolidated third quarter and year-to-date performance and also give you an operating summary with highlights by business segment. Then I’ll ask Michael Biehl to provide you with some specific financial information for the period. And, following Michael’s remarks I’ll make some forward-looking comments and then the three of us will entertain any questions which you may wish to ask us.

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 for earnings and will apply to this conference call as well. For now let’s discuss our current results.

Overall, the third quarter consolidate operating results turned out to be pretty much as we anticipated. It represented a significantly stronger operating performance than for the last three quarters as expected. However, the mix of contributed business segments was somewhat different from our forecast and, once again, demonstrated the diversity of Chart’s product portfolio. While we’re not yet where we want to be in sales and earnings, I am pleased with the progress the company has made in rising up from the low-level of the past three quarters.

Despite lower sales, our operating performance for the third quarter of the year was significantly stronger than the second quarter of ’02. In fact, our EBITDAR the measurement we use against many bank covenants was up an impressive 19 percent from the second quarter of ’02. Our largest, most profitable segment, the applied technologies segment, turned in a good quarter. Overall, although sales were somewhat below plan, applied technologies contributed more operating profit than planned.

Applied technologies’ orders and sales were reasonably strong, but there was noticeably softness in demand for our products serving the restaurant, the electronics, stainless steel tubing and LNG fueling markets. We did have strong quarterly orders and sales volumes for our biomedical products. The average gross margin for applied technologies of 35.8 percent provided for a strong, above plan operating profit contribution.

Looking ahead, for the rest of 2002, we expect continued good demand for medical products. The stronger euro is expected to help our sales and profitability from the European demand for our U.S. made applied technologies products.

Our second largest segment, distribution and storage segment, was up slightly from the second quarter of the year in both sales and gross margin contribution. However, the distribution and storage business was below plan for these same metrics, and, particularly short of plan in order intake.

Capital spending reductions by our industrial gas customers and the general slow economic conditions in North America and Europe have reduced demand for our bulk tanks, engineered tanks and packaged gas products. The resulting low factory workload created under-absorption of fixed overhead and reduced our gross margins for some product lines.

Our distribution and storage order intake of 23.2 million for the third quarter was down 8 percent from the second quarter, a much further below our planned levels. We had anticipated accelerated recovery of this business, but actually experienced somewhat a reversal of demand instead. For the remainder of 2002, we’re anticipating some continued quarter-to-quarter modest improvement in distribution and storage orders, sales and gross margin contribution from what we achieved in the third quarter.

Our mobile tanks, particularly the ORCA line and packaged gas products are anticipated to lead these improvements. Continued slow demand, though, is anticipated for bulk tanks, engineered tanks and our tank rehabilitation services.

The process systems and equipment segment recorded a very strong order intake, led by the award of significant new work from Bectal for heat exchangers and cold boxes to equipped a very large LNG facility. This raises our process systems and equipment backlog to 41.8 million, which is the highest level we’ve had in this segment for two years. Although there’s still no appreciable improvement in demand for the industrial gas market for this business, which includes air separation projects, the bidding opportunities for hydrocarbon processing projects remain active around the world.

Our process systems and equipment businesses continue to actively bid natural gas, ethylene and other large hydrocarbon projects. Sales for the process systems and equipment business were below plans for the quarter due primarily to timing and mix of certain shipments.

The gross margin level was adversely depressed for the quarter as a result of some unusually inventory write-offs and low production volumes in the heat exchanger division.

On a consolidated basis, the company demonstrated expected operating profit considering our current market conditions. However, we did incur heavy restructuring expenses during the quarter as anticipated. These high costs were necessary to support our announced plans to eliminate excess manufacturing capacity and to lower our fixed overhead costs. These one-time charges totaled about 3.9 million in the quarter and has shown up as increased third quarter cost of sales and SG&A costs.

Net impact of these additional charges represented a total reduction of about 10 cents per share on Chart’s net earnings of negative 3 cents per share for the quarter. Therefore, without these non-operating items, our net earnings would have been a positive 7 cents per share.

Chart’s SG&A expense for the third quarter was 13.6 million versus 13.2 million for the same quarter last year, at 15 million for the second quarter of this year. Therefore, although we did exceed last year’s level, the company has progressively lowered its SG&A expenses in each successive quarter this year. These decreases reflect lower selling costs, lower administrative costs and generally the cost reduction initiatives, which we have implemented.

As a percentage of sales, SG&A expense increased to 18.3 percent from 16.4 for the 2002 third quarter, primarily as a result of the current low sales volume. Net interest expense in the quarter was 4.3 million versus 5.3 million in the third quarter of last year. These reflect the average borrowing for the period and the lower interest rates current prevailing.

As of the end of the quarter, we had about 262 million of borrowing on our credit facility and we’re in compliance with all of the covenants of the current credit agreement as amended earlier this year.

Chart management has been targeting the reduction of working capital in all our business areas to bring our capital down -- working capital down to reasonable levels consistent with current sales and historic [unintelligible]. We experienced positive cash flow for the quarter and for the first nine months.

[audio gap]

Michael Biehl will now highlight our financial activities during the period.

Thanks, Art. The company recorded a net loss for the third quarter of 722,000 or 3 cents per diluted share, as disclosed in the earnings released, compared with the net loss of a million 170 for the same quarter in the prior year. During the third quarter of 2002, the company recorded employees’ separation and plant closure costs of 2,175,000 and non-cash inventory write-offs of 600,000 were reported. These charges were primarily related to the previously announced plant consolidations in Columbus, Ohio, cost to make the California and Denver, Colorado, but they also included severance for staff reductions in the corporate office.

These charges result in a 2.8 million increase in the loss for the quarter, which is equivalent to 7 cents per diluted share. This compares to approximately 200,000 in similar type restructuring charges in the third quarter of 2001. Under the company’s amended credit agreement, earnings before interest, taxes, depreciation, amortization and restructuring charges, or EBITDAR, is used to calculate compliance with the financial covenants and is used as a measure of the company’s ability to service its outstanding debt. The EBITDAR measure allows the company to add back certain restructuring charges as defined under the company’s credit agreement and as a broader definition of these type of charges then under generally accepted accounting principles.

As was mentioned for the third quarter of 2002, the company had a 1.1 million in charges equivalent to 3 cents per diluted share, included in cost of sales and selling in general and administrative expense, in addition to the 2.8 million previously mentioned that qualified as restructuring charges under its credit agreement and EBITDAR measure. The total of these charges, 3.9 million, increased the company’s third quarter net loss in 2002 by 10 cents per diluted share as Art mentioned.

The company’s EBITDAR was 10.5 million for both the third quarter of 2002 and 2001. The third quarter EBITDAR level was an improvement over the EBITDAR levels achieved in the first quarter of 6.1 million and the second quarter of 8.8 million of 2002.

In spite of higher interest rates premiums, [unintelligible] amended credit agreement, interest expense was again lower in the third quarter of 2002 compared to the prior year’s quarter by approximately a million dollars as a result of the lower interest rates. Our all in average interest rate for the third quarter was approximately 6.4 percent for the company’s senior debt. Under the credit agreement, the company’s interest rate premium increased by a quarter percent on October 1 and could increase by another quarter percent on January 1 if certain minimum debt prepayments are not made by year-end.

Derivative contract evaluation expense for the third quarter of 2002 was approximately $700,000 compared to 1.6 million for the same quarter in 2001. The expense incurred was lower for the third quarter of 2002 due to the expiration of an interest column in the second quarter of this year, partially offset by a further decline in the forward interest rate yield curve for the company’s remaining collar. The company’s remaining interest rate collar expires in March 2006 and covers 30.8 million of the company’s debt. We do not anticipate significant charges related to this remaining collar in the fourth quarter this year, unless the forward yield curve continues to flatten out or invert.

The company’s third quarter total debt of 270.6 million declined by approximately $600,000 compared to the second quarter of 2002. Total debt includes 262.2 million of borrowings under the company’s credit agreement with its senior lenders. Met debt payments since the end of last year totaled 2.2 million, however, third quarter debt declined by 1.5 million from the end of 2001. The difference being in the overall decline in total debt and the payments is primarily related to a reevaluation of foreign debt held in the Czech Republic.

Under the terms of the company’s amended credit agreement, payments on the company’s revolving credit facilities are deemed to be permanent pay-downs. Therefore, we essentially have used our cash balance as our line of credit during the second and third quarters of 2002 instead of voluntarily paying down our revolving credit. We do get credit for excess invested cash in our covenant calculations.

The company was in compliance with all covenants under its amended credit agreement for the third quarter as Art mentioned. Under the terms of the credit agreement, certain financial covenants adjusted automatically for the third quarter and will again become more restrictive for the fourth quarter of 2002, making compliance a challenge at year-end.

Shareholder’s equity increased by $700,000 for the second quarter representing the value of the warrants issued to the company’s lenders at the end of the second quarter. The increase was offset by the net loss for the third quarter.

Foreign currency gains, which primarily occurred last quarter, increased the company’s equity by almost 6 million since the end of 2001, resulting from our foreign operations transacting in their functional currency. This increase was partially offset by the company’s year to date net loss of $3.8 million.

Cash provided by operations for the first nine months of 2002 increased by approximately 8.[audio cut out] compared to the same period in 2001, primarily due to a 9.3 million tax refund received in the third quarter of 2002 related to the new tax law allowing for a five-year net operating loss carry-back.

Capital expenditures of 2.4 million for the first nine months of 2002 consisting primarily of maintenance capability, compared to the 5.7 million of capital expended for the same period in 2001. We continue to closely control our spending and expect cap ex to continue at a low level for the fourth quarter of 2002. For the remainder of this year we anticipate that cash generated from operations and the company’s current cash position will be sufficient to operate the company, service debt and carry out restructuring activities, including the next phase of our plan expected to be approved by the lenders during the fourth quarter.

We continued to actively pursue various financial restructuring ideas, which include a substantial equity investment in the company. We’re relatively far along in negotiations with one investor group in particular. We are also evaluating alternatives with our lenders regarding the restructuring of the company’s outstanding senior debt. We hope to have an agreement on the equity investments, debt restructuring or both prior to the end of this year.

We’ve also focused on the sale of non-core assets that are not part of the company’s restructuring efforts, which would be used to help reduce the company’s debt. We expect that the sale of certain assets will be completed by the end of this year. Under the company’s amended credit agreements, we’re required to issue warrants to our lenders at the end of the third quarter to purchase approximately 1.4 million of Chart common stock at a price of about 90 cents per share. The company has valued these warrants at 1.3 million. The value of these warrants, along with the value of the warrants issued at the end of the second quarter is required to be amortized under the remaining terms of the credit agreement, which would result in approximately $190,000 of additional expense.

Similar provisions are contained in the credit agreement required an issuance of additional warrants to the company’s lenders of certain minimum reductions of the debts do not occur prior to the end of the year. I would now turn the conference back to Art Holmes.

Thank you, Michael. Now let’s take a look at the future for Chart. Looking ahead, I expect the fourth quarter of ’02 to show a slight improvement in sales and gross margin contribution compared to the second quarter. The company has embarked on an aggressive manufacturing facility reduction plan designed to consolidate excess capacity and reduce overall operating costs across the company, but is concentrated to date on the distribution and storage business segment.

As Michael had outlined, the first step of this plan was the closure of our Denver East facility, which completed was completed in the second quarter of ’02. The second step of the plan was announced in July of this year included the closure of our Costa Mesa, Columbus, Ohio manufacturing facilities. The one-time expenses of closing these two facilities were incurred primarily last quarter, the third quarter, but also some carryover will occur in the fourth quarter of this year.

On the positive side, though, we anticipate annual savings of over $3 million from these closures and a recovery of our one-time cost in less than one year. For the third step of this plan, due to covenant considerations, we’ve requested bank approval to proceed with the closure of several additional facilities that will also involve the sale of significant assets. When approved, which we expect to happen this quarter, the implementation of this step of the plan will result in immediate further restructuring expenses and it may put some negative short-term pressure on sales from the effected facilities.

However, the payback of our restructuring expenses from these, yet to be approved, shutdowns are also expected to be recouped our cost in about one year. The combination of this three-step plan is anticipated to result in very dramatic reductions in our annual operating costs going forward with only modest sales reduction of a permanent nature.

In fact, we’re witnessing improvement in our costs currently in addition to these facility closings, we’re transforming Chart as we announced last quarter from its traditional holding company structure into an operating company model. Effective October 1 of this year we initiated this new organization. I expect to see some significant SG&A reductions to be forthcoming as we streamline our organization to reflect this new business approach. Beginning next quarter we will be reporting our financial performance on this new organizational basis, which will result in three different segment -- business segments being reported.

I’m very optimistic that most of our products and the markets we serve will show an increase in demand going forward in the fourth quarter and in the new year after accounting for normal holiday slowdowns. We’re very pleased with the recent increase in orders in the hydrocarbon related bidding activity in our process systems and equipment segment. And I’m cautiously optimistic that this trend will continue because of the high bidding activity.

We continue to focus our management and financial resources on growth markets and products. Belt tightening and cost reductions that have been initiated will improve our performance in 2003 and beyond. And we’re identifying further opportunity for improvement. Our order intake each quarter going forward is expected to fluctuate broadly around our projected sales level. Any given quarter could have a large order spike as we experienced in the third quarter representing one or more significant process systems and equipment orders or some special engineered equipment in either the distribution and storage or the applied technologies segments.

Regarding interest rates, as Michael indicated, our average rate was 6.4 percent for the third quarter and could go up by 25 basis points in the fourth quarter based on our rate increases built into the current bank agreement. However, that might be offset by any subsequent reduction in the rates by the fed.

In summary, Chart is adjusting its operations to the relatively soft market conditions, which we’ve been facing. Our challenge is to continue to improve operating performance, continue key new product commercialization while reducing and servicing our debt. We have been and we are taking decisive action to reduce costs and improve liquidity. I believe we are positioned to accomplish these goals and with the return of our markets, achieve enhanced shareholder value going forward.

On that note, we will now entertain any questions, which you may want to ask.

At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. And we’ll pause for a moment to compile the Q&A roster.

Your first question comes from Allen [Gustow] [phonetic word].

Good morning, gentlemen.

Good morning, Allen.

I have a great deal of trouble hearing that young lady, she doesn’t come through loudly at all. There was a story in the paper a month or two ago about Air Products, one of your customers, buying a company called American Homecare. My question is is American Homecare a customer of CoolTel [phonetic word].

American Homecare is a customer of Chart’s medical products. But, at the present time, I don’t believe they have embraced the CoolTel product on a commercial basis. I’m not sure if they’ve been involved in some testing. We’ve gone to a number of our customers to offer some [unintelligible] testing in order to show them the capability of that technology. But, they are not a full-fledged customer yet.

Okay. Also, in the paper a month or two ago, there was a story about Venezuela wants to develop their -- or wants to -- let’s see, plans call for the diversification and development of a liquefied natural gas plant to compete with nearby Trinidad in supplying markets in the U.S. east coast. Europe and Brazil. Does Chart have any -- is Chart involved in this at all?

Well, we have...

Or is it premature about this?

Yes. We have bidding involvement in many such projects around the world. It depends primarily on which technology the site owner chooses to liquefy the gas. If they choose a technology that uses Chart products, such as the Trinidad project has, then we have very good prospects to potentially be part of that project.

Okay.

So, I think that that particular project is even premature to bidding at this point.

Yes, yes.

It’s really in the conceptual stage. But, there could be an opportunity there as it develops.

Right. Okay. Now, you mentioned at the onset there is something about a couple of -- you know, your earnings release, plus something about a New York Stock Exchange listing.

Yes, we...

Are you going to be delisted?

Well, we had a notification about a week ago that we, in the last 30-day period, failed to meet one of the listing requirements of the Exchange, which is to maintain above a $1 per share price for a 30-day period. We evidently fell below that because some of our shareholders were selling. It’s all in your hands to buy it up and buy this good bargain that we have out there.

But, on the serious side, they did notice us up and we acknowledged that. We told them that we had a number of plans in motion that we felt would restore our stock price to well above a dollar a share going forward. But, if that did not happen within the time period required that we would consider making a reverse split.

Reverse split, yes...

But, we were hopeful that that would not be necessary.

Well, [inaudible] my share, you know...

Good.

... and trying to prop the price up, but it keeps going down.

Well, I think it certainly helps when the overall economy begins to show some positive signs and the overall market shows some positive signs. But, certainly during the period September and October, it was a pretty rocky road on...

Yes, I think I bought some of that 75 cents. I think I bought some at 70 and 75. I couldn’t, you know, I couldn’t believe it. But, anyhow.

Well, I think you got a good buy.

Yes, I hope so. I’m concerned about this debt. I thought by this time you would have an equity infusion. You know, so far it hasn’t happened. I just wonder if it’s going to happen?

Well, that’s a good question. We’ve been working very hard for about a year to try to raise some equity investment for the company. To do that requires, you know, making a balance between the investors’ desires and needs, our shareholders’ desires to minimize dilution and achieve good value for the company. And, ultimately, our bank group as a third constituency, which has to agree with the terms of any infusion. And that’s been a delicate, three-way process, which to date, in order to maintain what we feel are the values that are appropriate for our shareholders have precluded us from reaching an agreement. Now, we’re still very actively pursuing an investment. And there’s one particular group that we are very close to an agreement in principle with, but to get an agreement both with them, and ultimately with the banks that we can all live with has proven to be somewhat allusive. So, it’s not for a lack of trying. But...

I’m sure it isn’t.

... we’re very hopeful that we can, before the end of this quarter, before the end of the year, achieve an approach that would be acceptable to all parties. But, there’s no guarantee that we will achieve that.

Also, I mean, have you approached any of your customers, such as General Electric for an infusion?

Not directly, no.

I own a stock called [Osmonic] [phonetic word]. It’s a water -- they make membranes for water filtration. And General Electric’s going to buy them up in this morning’s paper. You know, you do business with them and they know you, and maybe you ought to go to them and, you know, talk turkey. It’s always good to talk to your friends, you know.

Right. There are key customers that could and potentially might consider an investment but there are pros and cons of such a move as -- so, but they haven’t been overlooked.

Yes. Okay. Was there any storm damage to your new Iberia plant?

Yes, there was. That’s a good question. We’re still assessing what the level is that we’ll be absorbing. But, fortunately, the storm lessened in severity as it came on shore.

Right.

So, that the damage was not nearly what could have been. But, there was some damage and it’s below our deductible, so there will be some cost in the fourth quarter that we’ll accrue because of that storm.

Okay. All right, well thank you very much for your time and good luck to everybody.

Thank you for your support.

In order to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from David [Fector] [phonetic word].

Hi, gentlemen.

Hi, David.

Can you talk a little more about what’s holding up the bank approval of the restructuring?

Well, basically we submitted our restructuring plan in the mid to late summer and there was some reluctance on the part of the banks to give us an immediate approval. I think they wanted to see some potential movement with regard to bringing in some equity investment. But, they have given us assurance in recent days that they know that delaying approval is harmful to the company and they’ve indicated that we could anticipate getting an approval here in the near-term.

Okay. And, then, I mean obviously everyone’s very concerned about how long it’s taking to try to get an equity investment. And I guess you’ve indicated, you know, that without one it’s going to be challenging to covenant by the end of the year. Can you talk about exactly which covenants are adjusting and what it is that’s going to be hard to meet and also, you know, just talk more about what your alternative plan is if you don’t put together this equity infusion?

David, this is Michael Biehl. The covenants that adjust are our interest coverage ratio or our leverage ratio and our fixed coverage ratio. And they’ve become tighter. Obviously, if we, you know, go forward with an equity investment, the agreement would be renegotiated and the covenants would be redone. The banks are also, though, very conscious of where, you know, our forecast is and, you know, the fact is that the covenants get more stringent and, you know, if an investment isn’t done by the end of the year, in order to continue things going forward, would work with us to adjust those levels I believe. And we’d look at a potential restructuring of our debt.

Would that probably mean additional increases in interest rates?

Quite possibly. Quite possibly. I mean with, you know, where the market is in terms of companies such as Chart it could result in a further increase in interest rate. Although, all end, you know, with the quarter percent increase, you know, we’re probably not far off market right now.

So, if you -- I guess I’m just trying to understand the strategy because we’ve been negotiating for a long time, obviously, for an equity infusion. And I understand we want to try to minimize the dilution. But, I mean is the strategy going forward here sort of predicated on a turnaround in the business happening or, you know, so far it sort of seems like the pressure has just been increasing on the company. So, I guess I want to understand more your vision of how we get from where we are to relieving, you know, the pressure on the balance sheet. And is there some alternative to this equity investment or, you know, eventually are we just going to have to reach some kind of agreement?

Well, first of all, the credit agreement that we’re operating under was designed to pressurize the company to try to bring in equity and it has encouraged us to do that. And we’ve been working diligently to do that. And our desire is that under satisfactory conditions that we would bring in equity and fix our balance sheet for the long haul. But, there’s a limit to what we feel is appropriate in terms of dilution and valuation for the shareholders. And if we’re not able to strike an arrangement that gives us at least that minimum level, if not more, then our alternative is to go back and work with the bank group to restructure the debt in a more long-term favorable condition. Those are the primary options. Obviously, as we improve our operating performance with the restructuring initiatives, both those that have been done and those that are planned, we do expect a dramatically improved performance, which will help us in terms of meeting covenant requirements and ultimately paying down the debt. And, of course, improved business market conditions can dramatically change the situation as well.

But, we are working diligently to not just rely on the restructuring and improved markets to be our way out.

Who are you further apart from right now in these negotiations? Is it the investor group? Or is it the banks that are keeping things held up?

I don’t think it would be appropriate to try to characterize that right now.

Okay. All right. I guess that’s it for me for now. Thank you.

Your next question comes from Robert Manning.

I assume that the [Bectal] [phonetic word] orders are for train four in Trinidad and I’m wondering if there are more orders from train four and what the status is on train five and six?

You are correct. We were precluded from making a direct statement about that. But, that’s where these are going. There are other awards that have been made related to some of the earlier trains at Trinidad and those are included in the bookings that were received. There are discussions going on for lines five and six. I don’t think that the timing for those has been set in stone yet. So, for that particular site there is more work down the road potentially, but not in the short-term. We do have significant other opportunities that we are bidding with -- for [Bectal] [phonetic word] around the world. And some of those could happen early in the new year. But, not at the Trinidad site.

There was an article in the Oil and Gas Journal projecting the heavy duty vehicle deployment in California over the next few years to be 10,000 in three year; 25,000 in five year; and 100,000 in 10 years. Can you give us an idea of what those might mean for the number of refueling stations and the opportunity for Chart?

Well, you know, it depends on the data and how they were put together. There’s been lots of different projections and most of them haven’t happened, frankly, in the past as advertised. But, I think there’s no question that ultimately in the next 10 years there’s going to be significant new fleets coming on. The number of fueling stations really depends on the nature of the user, you know, the fueling stations we build for these municipal [audio break] up there usually have several 100 busses related to them. So, you can do the math on those. And [audio break] fleets in the commercial side like food companies and waste management, people like that, are probably smaller fleets. So, the number of fueling stations will be significant. And, then, of course, the number of fuel tanks that we also sell, there’s usually at least two vehicle tanks for each vehicle that is involved. So, those are very important parts of our sales and profit potential as well.

Is the facility in Beijing, what stage is that at and what’s the prospect for future business there?

We think that’s got great prospect. You know, this is a test facility so they can prove out the concept and then order a lot more to get ready for the Olympics. It’s in the start-up mode right now. In fact, as we speak, I believe, we have some engineering people over there assisting with that. We expect to have a good performance there and would expect that in the next few years that they’ll be starting to really ramp up and I watched them put in, not only quite a number of fueling stations, but about 50 vehicles as well. And we do have a facility that’s standing there ready to be employed if needed to build the fueling -- fuel tanks potentially in China itself.

Thanks.

You’re welcome

Your next question comes from David Smith.

Hi, gentlemen. I’ve been a shareholder for quite a few years and, unfortunately, we’ve had a couple difficult years the past few years, particularly since the MV expedition [phonetic word]. You made a sort of humorous reference to, you know, the stock being good value. You know, as an investor I look at it with the covenant and the covenant issue at hand, weak sales and equity warrant dilution potential. You know, why is it -- why is Chart a good investment and other than, you know, obviously, future improvement in the economy, why is Chart a good potential investment right now in your mind?

Well, I think a number of reasons. First of all, we are in virtually every product area that we offer, we’re number one in our market, you know, the leader in the market. Unfortunately, a number of the markets are depressed right now. But, they haven’t gone away and the basic drivers for future demand are still there and we’ve demonstrated in the past that those markets are at their normal state that the company can be very profitable. So, I think, you know, the basis premise of what Chart makes and the blue-chip companies that come to us for those products hasn’t changed. Unfortunately, in the industrial gas sector, which is one of our big building block markets across all of the Chart, major customers traditionally have, because of both consolidation in their businesses and market conditions for them have curtailed a lot of their capital plans. And, until that returns, we’re not going to fully return to the profitable levels that we have enjoyed in the past. But, we follow them very closely and they’re all indicating that these normal trends will resume in the future. But, they seem to be deferring them out several more quarters each time.

So, that’s basically the situation. In the meantime, we have developed some significant product offerings in high growth markets that have not been affected by the economic downturn. One of those areas is the biomedical area, which is actually setting records virtually every quarter. And I expect it to continue on in the foreseeable next few years. And, we have developed the LNG fueling, which currently is in a little bit of a timing funk with some of the projects. But, as you’ve heard, both domestically and overseas, has tremendous potential for us. And we’re the head top leader in that market. And we’ve been working hard on the CoolTel system to augment sales and profitability for that area down the road.

So, I think we have, not only the potential for the tide to come back and raise the whole level of the company in the industrial gas traditional market, but some very exciting new areas that we’ve been successfully jumping into that have excellent prospects of their own to add to the portfolio.

Okay. And, I appreciate you answering the question. But, I guess my concern is, you know, effectively we already have 10 percent dilution with the warrants.

Well, we have 10 percent dilution if the warrants are exercised in the next three years, that’s correct.

Right. And, you know, obviously, it’s either something good happen and then won’t get exercised. But, you know, if we have an equity investor as well. I mean, you guys have the benefit of knowledge of how much dilution potential we’re looking at. But, obviously, it’s at 87 cents, you know, it’s probably going to be significant dilution.

You can kind of get a figure of that by just saying whatever the value is of Chart at the time to bring in 50 to 75 million of equity, it’s going to be significant.

Right.

And we think that there is a fair level of dilution that would help solve our problem and move us all on more quickly to a better future. But, we don’t want to go more than that level.

Right. And, again, I think I would just mirror the comments of a prior caller that, you know, it sounds like rather than sort of get it diluted, it might be best to sort of go to one of your bigger customers and ask them, like [Legagi] [phonetic word] or whomever it might be to pony up some money, obviously, if they’re going to want you as a supplier, it helps to have you in business.

I guess one other quick question before I let you go, your competitors, are they equally suffering? Are they struggling financially or is it just because of the debt load, you’re sort of the exception to the rule?

Well, all our competitors for the products that have been suffering bad market conditions are suffering as well. You have to go case by case to say whether they have the same kind of [unintelligible] that we have. We have the debt situation, which has been our birth to carry. Some of them do and some of them don’t.

Okay. Well, thank you very much.

You’re welcome

Your next question comes from Glenn Mathews.

Good morning. Similar to a couple of the other callers, I’m also a long-term shareholder and I was very attracted to Chart initially because of its technology. I can echo all the other comments of these other investors by saying that I’m concerned that the dilution from the banks is getting to be almost as unpalatable as the potential dilution from a potential investor. And, also I’m wondering if you think the banks would be more immedicable when you go back to them in December or whether you’ll have more dilution from the banks waiting for, you know, a more substantial investment.

I think there is potential for additional dilution if we work out something with the banks. Just as there is very significant potential dilution if we bring in equity at this time. So, it’s a just a matter of...

But, it seems to me...

... weighing the alternatives.

... it seems to me that they’re just kind of nickel and diming us to death here with the dilution of a million shares every quarter or every half a year or something of that nature. And when you add it all up, after a couple of years or so it starts to be real shares.

You’re right.

So, I think the bank’s strategy, obviously, is to force you into making a reasonable financial structure, and encouraging you actually. And that’s sounds like it’s a good idea for everybody’s concern.

That’s right, under the right circumstances, it is.

Right. And, you know, not to be critical, but I have to commend you actually on the restructuring you’ve done, you know, I think that’s been, you know, very, very worthwhile. But, I think you’re a little bit late on that. I mean, I’ve been a shareholder for two or three years and in the last six months or so we’ve made the restructuring. So, I’m happy about that, but I’m wondering why it wasn’t done two or three years ago. And, secondly, is it also possible that we’ll for the same reasons, whatever it be, you know, [unintelligible] or stubbornness or something, we’re not going for the right investment at this time as well.

Time will tell.

Right. Well, that’s just the problem. Time’s usually our enemy in this case, both on the restructuring and also on the dilution.

Well, in answer to your question about the restructuring, the areas that are being restructured are those that are suffering from a downturn in business and where we have, not only within Chart, but within the industry at large, including our competitors, a lot of excess capacity. So, you obviously do that kind of thing and look hard at that when you’re in these conditions. Several years ago, when we had significantly higher manufacturing volumes going through these plants there weren’t the same opportunities as apparent as they are currently.

Okay. And, as far as the equity investment is concerned, I mean do we have to have equity or can we not have subordinated debt or something of that nature, which would be palatable to the banks and also palatable from a dilution point of view.

Yes. Well, last year all during 2001 we basically were approaching a subordinated debt package that would have solved our problem. And we were very close to consummating that leading up to 9/11. And immediately following the 9/11 event that disappeared, both because the investors and the lenders became skittish about investing in anything at that point, as well as our prospects changed dramatically as well. So, that was our approach. And then after that it’s been clear that some equity infusion is going to be required in today’s financial markets in order to fix our balance sheet.

Right. I’ve been a party to a number of those transactions, professionally and also as an investor. And, there are hundreds of companies around that are looking for good investments.

You’re right.

And, if we’re only, you know, if we’re at -- you know, if we’re negotiating with one person at this point, versus even many more, then I think we’re losing some flexibility and also some benefits of substantial competition with investors. I mean, can we approach a number of different other companies in addition to just this one solid one that we have on the line here.

We have. What we’ve done is we’ve had several over the last year that have popped up as being a company’s opinion, positive prospects that we’ve zeroed in on. But, there have been many, many that have been looked at, both ways, they’ve looked at us, we’ve looked at them and decided not to pursue that.

Right.

A point well taken. But, we’re not -- we have not just limited our activities to a particular group.

Okie-dokey. And, like the caller earlier, I’m also a shareholder in [Osmonics] [phonetic word]. And, I think there’s a lot of ways to maximize value here. So, I realize that the -- there maybe a longer term and a short term advantage, but the shorter term is certainly more secure than the longer-term I think. So, and I encourage you to look at all these opportunities and to keep us in mind. And to try to maximize the value here for us.

That’s what we’re trying to do.

Okay. I appreciate it. And look forward to seeing how you make out.

Thanks for your comment.

Your next question comes from David Fector.

Hi, guys. Can you just expand on exactly what the timing issues are for LNG that you were talking about? And, you know, are you seeing any short-term or intermediate term change in that business or is it truly just timing from one quarter to another?

Well, the timing is basically that we have quite a list of projects that are primarily currently on the west coast. And then primarily municipalities that have been approved to go. But, when you’re dealing with those situations they take a long time to go from an announced go project to when contracts are actually awarded. And this is because there’s so many different approvals required, both from the ultimate municipality, as well as all the regulatory bodies that get involved like environmental and so on. So, it’s primarily just the fact that these things have been announced. They’ve stated a timeframe in which they would be awarded and it’s like a lot of other large capital projects, they quite often don’t happen as advertised time wise.

Are you facing any bonding issues like the one that you had previously?

Well, we could. What we’ve done to avoid that is to reposition ourselves so that we’re not in quite the same contractual position where bonds are required, i.e. getting out of being more of a prime supplier and being more just an equipment and design supplier to other folks that do more of the heavy lifting.

And, are you seeing any change in the pipeline of LNG products that you’re bidding on? I mean, is there any sense that there’s softening in that market or not?

I don’t think there’s softening, but there’s no question that because of our financial condition and our success in that market that, you know, other people are popping up to want to try to compete. And, so, you know, there will be competition in the future that will approach itself and we won’t be enjoying the 90-plus percent market shares that we’ve had to date.

Okay. And then on the biomedical products, which obviously did very well in the third quarter, do you see that as -- I mean in the past we’ve had these spikes in orders and then, you know, they’ve built inventory and we don’t have that much next quarter. I mean is this something you see as sustainable strength or is it just sort of lumpiness?

No, this we believe is very sustainable based on the fact that the populations in both Europe and North America are aging. There’s a shift we’ve been successful in educating our customers to the merits of shifting from high-pressure gas to liquid source of oxygen for medical purposes. And, so, the combination of the demographics growing and the shift from what used to be the dominant approach of high-pressured gas to a liquid makes our growth stellar in this area.

Okay. Thanks a lot.

Thank you.

Your next question -- there are not further questions at this time.

Thank you. In closing I’ll just say then that -- reiterate that our operating performance for the third quarter was not up to par where we really want to be and where we’ve been in the best, but reasonably improved from the last several quarters considering current market conditions as we had expected. We have been and are still taking steps to improve our operating profit levels even at the current market conditions. And, as we’ve discussed, we’ve been aggressively pursuing our options for reducing debt and restructuring our debt. So, as CEO of Chart, but also as a major shareholder, I’m impatient that we’re still in this situation with weak markets in some areas and the high debt load that we must bear. But, I am confident that we will break through to increase shareholder value in the foreseeable future. And that we will restructure our balance sheet to be more satisfactory for the long haul.

Thank you for your participation and have a good day.

This concludes today’s conference call. You may now disconnect.