Chart Industries Inc (GTLS) 2007 Q4 法說會逐字稿

Good morning and welcome to Chart Industries, Inc. 2007 fourth-quarter and year-end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. As a reminder, today's call is being recorded. You should have already received the Company's earnings release that was issued earlier this morning.

If you have not received this release you may retrieve it by visiting Chart's website at www.Chart-IND.com. A telephone replay of today's broadcast will be available following the conclusion of the call until March 13th. The replay information is contained in the Company's earnings release.

Before we began the Company would like to remind you to that statements made during this call are not historical in fact are forward-looking statements. Forward-looking statements involved risks and uncertainties that could cause actually events or results to differ materially from those expressed or implied in the forward-looking statement.

For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the Company's earnings release and latest filings with the SEC. These filings are available through the Investor Relations section of the Company's website or through the SEC website, www.SEC.gov.

The Company undertakes no obligation to update publicly or revise any forward-looking statements. I would now like to turn the conference over to Mr. Michael Biehl, Chart Industries' Executive Vice President and Chief Financial Officer. You may begin your conference.

Good morning, everyone. We'd like to thank all of you for joining us today. I'll begin by giving you an overview of our fourth-quarter and year-end results. Sam Thomas, our Chairman, President and Chief Executive Officer, will provide highlights of the operating results for each of our business segments; then I'll finish up by giving our outlook for 2008.

We're pleased to report that our net sales for the fourth quarter of 2007 were $183 million and represented an increase of 26% compared to net sales of $144 million in the fourth quarter of 2006. The sales growth of over $38 million was led by our energy and chemicals and biomedical segments.

For the year our net sales rose 24% to $666 million compared to $538 million for 2006 with all of our segments contributing to the significant growth. Our gross profit for the fourth quarter of 2007 was $53 million compared with $42 million for the fourth quarter of 2006. The solid 2007 fourth-quarter gross profit was primarily due to volume increases and a favorable project mix in energy and chemicals. Our biomedical segment also contributed to the fourth-quarter 2007 gross profit increased with higher sales volume.

Selling, general and administrative, or SG&A, expenses were $24 million or 13% of sales for the fourth quarter of 2007 compared with $19 million or 13% of sales for the same quarter in 2006. This increase in SG&A expenses was mostly due to higher employee-related and infrastructure spending to support our business growth and variable compensation-related expenses due to improved operating performance. Overall our SG&A expenses for the year were $93 million or 14% of sales compared with $72 million or 13% of sales for the year ended 2006.

The 2007 SG&A expenses included $7.9 billion of non-cash stock-based compensation expense and operating expenses related to our secondary stock offering completed in the second quarter of the year. Excluding these expenses our 2007 SG&A expenses would have been $85 million or 13% of sales.

Also our 2006 SG&A expenses included $2.2 million of net operating income received for the settlement of a Hurricane Rita insurance claim related to losses incurred at our energy and chemicals New Iberia, Louisiana manufacturing facility -- excluding this nonrecurring income, the 2006 annual SG&A expenses would have been $74 million or 14% of sales.

Amortization expense for the fourth quarter of 2007 was $2.6 million or 1.4% of sales; this compares to amortization expense of $4.1 million or 2.8% of sales for the same period a year ago. For the year amortization expense declined almost $5 million compared to 2006 due to certain intangible assets being fully amortized during 2007.

Net interest expense and amortization of financing cost for the fourth quarter of 2007 was $5.2 million and for the fourth quarter of 2006 was $6.6 million. This decrease of $1.4 million reflects lower long-term debt outstanding as a result of $40 million of voluntary principal prepayments in the second quarter of 2007 largely funded by our secondary offering proceeds. The decrease also reflects greater interest income earned due to more cash on hand during the fourth quarter of 2007.

Overall for 2007 net interest expense and amortization of financing costs was $24 million versus $27 million for 2006. This decline of $3 million was primarily due to a lower net debt balance in 2007.

Income tax expense was $5 million for the fourth quarter of 2007 and represented an effective tax rate of 23.3% for the quarter. This compares with $4 million of income tax expense for the fourth quarter of 2006 which represented an effective tax rate of 31.8% for the quarter. The full year effective tax rate for 2007 was 28.2% compared with 32.3% for 2006. This decline in the fourth quarter in the annual effective tax rate was mainly due to an increase in foreign investment tax credits and lower foreign tax domestic state tax rates.

In summary, our consolidated net income for the fourth quarter of 2007 was $16.4 million or $0.57 per diluted share and represented an increase of 91% compared with $8.6 million or $0.33 per diluted share in the fourth quarter of 2006. For the year net income was $44 million or $1.61 per diluted share compared with net income of $27 million in 2006.

As I mentioned previously, pretax income and net income included $7.9 million and $5.7 million or $0.20 per diluted share respectively of non-cash stock-based compensation expense and operating expenses related to our secondary stock offering. Our earnings per share for 2007 excluding these expenses would have been $1.81 per share.

Cash provided by operating activities for the fourth quarter of 2007 was $28 million compared with $3 million for the fourth quarter of 2006. Cash generated from net income and changes in working capital contributed significantly to our strong operating cash flow performance.

Capital expenditures for the fourth quarter of 2007 were $3 million compared with $9 million in the same period last year. Capital expenditures for both periods consisted primarily of continued strategic expansions at our primary manufacturing facilities. The fourth quarter of 2007 investing activity also included $2.1 million of proceeds from the sale of our Plaistow, New Hampshire facility that was closed in 2004. We are still in the process of trying to sell a parcel of land adjacent to the facility.

For the year cash provided by our operating activities was $83 million compared to $36 million for 2006. This increase of $47 million was primarily the result of increased net income and an improved working capital position. $74 million of the $83 million of cash provided by operating activities in 2007 was generated in the second half of the year.

For the year cash used in investing activities was $19 million versus $39 million in 2006. Capital expenditures for 2007 were $19 million and were just over $22 million for 2006. Also, 2006 included the acquisition of Cooler Service, our air cooled heat exchanger business, for $16 million.

Cash provided by financing activities was $7 million in 2007 and $9 million for 2006. Most of the activity in both periods consisted of proceeds generated from option warrant and stock offerings including our secondary offering in 2007 and our IPO in 2006 and we used most of these proceeds to pay down debt in a special dividend in 2006.

As a result of this activity we ended 2007 with $93 million of cash compared with $19 million at the end of 2006. Net debt decreased by $115 million or 42% to $157 million at December 31, 2007 versus $272 million at December 31, 2006. I will now turn the call over to Sam Thomas who will review our operating results and business segment highlights.

Thank you, Michael, and good morning, everyone. I'd like to begin by saying that 2007 was another successful year for our company and we are very pleased with our fourth-quarter operating results as we finished the year on a very strong note.

Overall we continue to see robust demand in all of our markets, particularly the liquefied natural gas, or LNG, and natural gas segments of the hydrocarbon processing market and the global industrial gas market, which has been on an upswing the last few years. In addition, we were able to further penetrate the international biomedical markets that we serve. As a result all of our operating segments contributed to our strong performance during 2007.

We successfully completed a secondary stock offering in the second quarter and, as Michael mentioned previously, we generated $83 million of cash flow from operating activities and ended 2007 with a net debt to total equity ratio of 32% versus 55% at the end of 2006.

On the other hand, we were also faced with some operating challenges in 2007 that we were able to effectively overcome. We reasonably maintained our gross profit margins in 2007 compared to 2006 in light of continued escalating raw material costs. We have substantially completed our work on the two large installation projects in our energy and chemicals segment that have hampered us for the last 18 months. The projects had a minimal impact on our fourth-quarter 2007 operating results.

Orders for the fourth quarter of 2007 were $233 million compared with $175 million for the third quarter of 2007, and for the year orders were an impressive $827 million compared with orders of $606 million for the full year of 2006. This represents an increase of 36%. At December 31, 2007 our backlog was $475 million, up 49% compared to the end of 2006.

While our order activity was strong across all of our operating segments in the fourth quarter, our energy and chemicals, or E&C, segment led the way with almost $119 million of orders. E&C's fourth-quarter orders included an award in excess of $25 million for an ethylene cold box destined for the Middle East and awards in excess of $20 million for large brazed aluminum heat exchangers for air separation plants in China and Southeast Asia.

For the year E&C orders were a record $408 million and year-end backlog was nearly $359 million which represents an increase of 73% compared to their backlog at December 31, 2006. The most significant contributor to their backlog increase in 2007 were orders received in excess of $130 million from Energy World in the second and third quarters for four medium scale LNG liquefaction trains in Southeast Asia.

In terms of trends EEC has seen growth in smaller scale LNG plant and global industrial gasket market order quotation activity which has offset the highly publicized delays in the large scale LNG plant awards. For example, E&C has seen a ramp up in the industrial gas market of clean coal technologies including Coal to Liquids, or CTL, and integrated gasification and combined cycle, or IGCC, power projects.

Clean coal processes, whether to produce synthesis gas for petrochemical feedstock or power generation, use large quantities of oxygen produced by air separation plants that use Chart's equipment. E&C sales jumped 61% in the fourth quarter to almost $85 million versus just under $53 million for the same period in 2006 while their gross profit margin increased to 27% in the 2007 quarter compared with 22% in 2006.

The significant margin increase was mostly due to increased sales volume for brazed aluminum heat exchangers, cold boxes and process systems, particularly the pull through of the larger projects such as Energy World and a favorable shift in project mix.

As I mentioned previously, the wind down of the two large installation projects in the fourth quarter of 2007 contributed significantly to the gross margin improvement when compared to the same quarter of 2006. On one of the projects we received a $1 million bonus payment in the fourth quarter of 2007 for completed work on schedule.

Orders for our distribution and storage, or D&S, segment in the fourth quarter were approximately $90 million compared with about $82 million for the fourth quarter of 2006. Order activity remains strong in the bulk storage system's international markets and for the U.S. domestic packaged gas systems, but has slowed down, as expected, for U.S. bulk storage systems due to recent consolidations in the industrial gas business.

D&S sales were up slightly in the fourth quarter of 2007 to $74 million compared with 2006. Volume increases in most productlines, price increases and favorable foreign currency translation were the primary contributors to the growth, offset largely by lower U.S. bulk storage systems volume. Higher raw material costs and unfavorable product mix changes within bulk storage systems were the primary reason for the decline in the 2007 fourth-quarter gross profit margin to just under 29% compared with 33% in the same period of 2006.

We expect continued order and sales growth in our D&S international markets, but at the same time expect a slowdown in the U.S. bulk storage systems orders to continue in the first half of 2008. We do, however, currently anticipate a decline in raw material cost in 2008 compared to the fourth quarter of 2007.

Biomedical segment orders in the fourth quarter of 2007 were approximately $24 million, up about 10% compared to the third quarter of 2007. For the year biomedical orders finished at $94 million compared with just over $79 million for 2006, a jump of almost 19%. Biomedical sales for the fourth quarter of 2007 were $24 million, an increase of 30% compared to the third quarter in 2006 -- excuse me, the same quarter in 2006.

The increase in orders and sales were primarily due to continued penetration of international markets for both biological storage systems and medical respiratory products. Biomedical's gross profit margin in the fourth quarter finished strong at almost 37% compared with about 34.5% in the same period in 2006. This improvement was driven mostly by increased volume and improved manufacturing productivity.

In 2008 we expect biomedical to continue to penetrate the growing international medical respiratory and biological storage markets. We have also recently announced product price increases to support raw material costs that we absorbed throughout much of 2007. However, we do not expect any significant changes in U.S. government reimbursement rates for liquid oxygen therapy systems. Michael will now provide you with our outlook for 2008.

Thanks, Sam. Based on current market trends, the strength of the backlog and the anticipated timing of how our backlog will roll out, the Company is establishing guidance for 2008 as follows -- our net sales outlook for 2008 is expected in a range of $730 million to $765 million; our diluted earnings per share is expected to be in a range of $2.28 to $2.40 per share based on approximately 29 million weighted average shares outstanding.

Also, we do expect our 2008 results to be stronger in the last three quarters of the year which is similar to our historical trends. And finally, our estimated effective tax rate for 2008 is expected to be around 31%.

Thank you for participating in our conference call. This concludes our remarks. Operator, please open up the lines for questions and provide the participants with instructions for doing so.

(OPERATOR INSTRUCTIONS). James West, Lehman Brothers.

Good morning, guys. Sam, you made some interesting comments earlier about your exposure to the clean coal technology. How big is that a piece of your business currently and how big I guess is the market and what kind of growth do you expect there?

I would estimate that in 2007 our sales to those market were in the $20 million to $30 million range. The size of the market, depending in 2008-2009, should be at that level to roughly double that level. The potential market is really very much dependent on carbon capture legislation, both U.S., Europe and potentially China, going forward. If there is in fact legislation related to carbon capture the market could be many times that size.

Okay, that's good color there. On the E&C side of the business, or really the LNG business; we've talked about some of the smaller orders coming through this year. As we look out into 2008, could you possibly handicap your expectations for some of the more high-profile contracts being awarded?

For smaller scale or very large-scale LNG?

For the large-scale.

Up until very recently I would say that the outlook for award of orders in 2008 was uncertain. There have been some recent press releases last week and this week which adds some hope for receipt of orders in 2008. There was a press release from Equatorial Guinea that they were going to proceed with the second and potentially the third train in terms of an agreement with Conoco Phillips. And then just late last night there was a press release that Conoco Phillips and Bechtel had been awarded at least one and potentially two trains in Papua New Guinea.

Okay, that's helpful. And then a quick question for Michael. As we think about the earnings guidance for 2008, obviously the first quarter will be down, but what kind of a sequential decline, rough ballpark, would you expect first quarter versus the fourth quarter?

Well, first quarter is typically -- historically has been our lower quarter and roughly about 19% to 20% of our operating income. And I think the analysts have -- the group I think currently has a range of 43% to 49% out there. So starting in that range is not really out of the ballpark and then we would build from there. And really the second quarter would ratchet up quite a bit and then really our strongest quarters would be the third and the fourth quarters.

But not any of them in particular -- really the third and the fourth quarter are typically the two highest and will continue to be that way. And the second quarter will ratchet up quite a bit from the first quarter. Which again, if you look at our historical trends and play it out to where our range currently is, it isn't going to be that much different than the current year.

Okay, that makes sense. Great quarter. Thanks, guys.

Kevin Wink, [Polonius] Capital.

The $1 million bonus payment, was that the -- well, there was also another comment that there was a favorable mix change in E&C in Q4. But I would imagine the $1 million bonus payment completely flowed through to gross profit. But what other favorable mix change was there in Q4?

The $1 million bonus did flow through -- through the gross margin line in its entirety, that's correct. The other positive mix changes were higher sales volumes in our brazed aluminum heat exchangers, number one, and better execution in our process systems division.

Okay. Implied in the EPS guidance for '08 is that you'll continue to see improvements. You haven't broken out cost of goods sold or SG&A and all that, but margins go up to get to your EPS guidance, is that correct?

Correct. And Kevin, it's similar to what we've talked about in prior quarters. If you were to carve out those two installations projects in the fourth quarter out of energy and chemicals, our gross margin at the 27.3% would have been 27.7%. So even with that $1 million bonus that's in there our overall gross margin would have been more favorable for the quarter. And for the year it would have been 27.8% versus the 22.9% that we did for the year for energy and chemicals.

Thank you, that's helpful. One follow-up on biomedical. I feel implied in your comments there that there could be future gross margin improvements on top of what you've already experienced. Is that correct or am I reading into that too much?

No, I think that that is correct. We would expect biomedical to continue to -- overall for going into next year we would expect their gross margins compared to the year, biomed was at 34.1% for the year and we would expect that to ratchet up 1 or 2% next year.

Okay. And what would be a rough CapEx budget for '08 at this point?

about $18 million to $20 million for next year.

And then the cash flow that you generated this year, particularly ending the year with over $90 million in cash, very impressive. But just on an operating basis for operating the business, what kind of cash balance do you feel you need?

From an operating standpoint, if we were -- say we were to use and go and pay down debt we would probably maintain a balance in the $10 million to $15 million range for working capital swings.

Because what begs the question is if you don't pay down any debt in '08 you'll end the year with probably $150 million in cash, well above what you need on an operating basis. And so you obviously can't announce acquisitions before you announce them, but from a business development standpoint, are there attractive candidates out there to potentially use the cash for?

We believe so. We are actively growing our business development effort and search for the acquisitions. There are number of attractive candidates. The price aspirations have been fairly steep, although the current credit crunch and slowdown of activity from the private equity side we believe as we go through the year will start to moderate some of those price aspirations.

Okay. Thanks for your help and congratulations on a great year.

Thank you.

Jeff Spittel, Natixis Bleichroeder.

If I could I wanted to see if we could drill down a little bit in the E&C segment. Looking at your operating margins in Q4, given that those two projects are pretty much off your plate at this point, is that a reasonable assumption of a normalized run rate for operating margins in the 19 to 20% range for 2008?

Yes, it is.

Okay. And I guess moving over to the clean coal market, can you give us some additional color in terms of what the timing would be for awards and potential deliveries? And then I guess what sort of scale of projects are looking at here? Are they pilot scale? Are you starting to get into more commercial development?

The orders that we're seeing in 2007, early 2008 are balanced between coal synthesis or syngas from coal plants in China and in the U.S. as well as anticipated in 2008 some petroleum coke synthesis applications in the U.S., potentially elsewhere in the world. Those are commercial scale projects. Our orders for each project are in the $2 million to $7 million range.

The clean coal or integrated gasification combined cycle plants are at the demonstration plant level or potentially generally in the 150 to 250 MW size range with likelihood of 2008 projects, perhaps something in the 600 MW range, which would take us from the sort of 2 million to 5 million orders currently being seen to perhaps $10 million to $15 million per project.

The best color in the expected timing of these orders and how large the market will go can be gleaned from the reports of our major customers for the sale of this equipment which would be Air Products, Air Liquide and Praxair.

Okay, great. Thanks very much. Appreciate it.

Chris Agnew, Goldman Sachs.

This is Pete Wahlstrom on behalf of Chris. In your view, taking a look at 2008, what really needs to happen, maybe from a global project perspective, for Chart to reach or potentially exceed the higher end of your 2008 guidance range?

It's largely for our -- as you might see from the backlog in our E&C business, it's an issue of successful execution as opposed to project awards for our 2008 performance.

Okay. And is the majority of your E&C backlog still expected to roll off in 2008 or is there a meaningful contribution yet that is still there in 2009?

Bear with me just a moment. It's roughly 85% of the current backlog will be expected to roll off in 2008.

Okay. Is that the total -- I'm assuming that's the total backlog and not just the E&C?

That was E&C I was referring to. For the Company as a whole it would be a higher percentage.

Okay.

It would be over 90% for the Company as a whole.

Okay, thanks. And as we think about the continued slowdown in the U.S. bulk storage system orders that's expected to continue at least through the first half of '08, can you talk about the magnitude of that softness that you're seeing in the market and how you're seeing the offset in China and Eastern Europe?

Yes. We see continued growth outside of the U.S. on the order of double-digit growth in Western Europe and from our Czech Republic plant and 20% plus growth in China moderated by perhaps a -- roughly a 10% decline in the bulk market U.S. which is roughly a $90 million market. So a decline of the $8 million to $10 million range in the U.S. offset by fairly substantial growth outside the U.S.

Okay. And last question for you -- on the gross margins and expectations for 2008 appears to be largely driven by the volume. Have you been able to -- and you mentioned price increases on the biomedical side -- have you been able to increase prices much on the E&C projects and orders that you're seeing?

Yes. The gross margin in backlog of the E&C business has been improving.

On the order of 5 to 10%, somewhere in the general inflation region or area?

High single- to low double-digit increases.

On average for the year the gross margin that energy and chemicals hit in the fourth quarter should be comparable going forward on an average basis.

Okay, thank you.

(OPERATOR INSTRUCTIONS). David Anderson, UBS.

Good morning, gentlemen. The industrial gas segment traditionally follows pretty closely aligned with worldwide GDP numbers -- some sort of multiple, whether it's two to three times that. I just wanted to know, within your guidance for 2008 what are you -- is that the way you look at it? Are you doing it from that standpoint or are you looking at it more from a project standpoint? What I'm getting at is obviously there's a lot of concern about a recession in the U.S.; I'm just wondering if you can kind of perhaps walk us through some sort of sensitivity analysis on how your business could be affected by such?

We are guided by that overall industrial production growth or GDP growth and being a multiple of it. In our forecasting we tend to segment by region of the world because in developing economies the multiple above GDP or industrial production growth typically is different. I think in forecasting 2008 we've taken a fairly conservative or pessimistic view of U.S. industrial activity and a very balanced view of the rest of the world.

And then when you look at the developing economies, can you kind of give us a sense as to when you look forward or you look in terms of your revenue opportunities is it more skewed towards those developing countries? It kind of feels like that?

Yes, it is. Although it's important to say that our order intake activity for the U.S. industrial business is holding firm absent the decline because of the [Lindy]/BLC combination. While we're taking a conservative view, we're certainly not as yet seeing a dramatic decline in order intake activity. So our order intake still looks strong in the U.S. There's no reason to pull the alarm bells for the U.S. economy.

While it's well publicized, the problems in the automotive industry, there are a number of segments that are heavy industrial gas users in the U.S. economy that are going very strong, particularly all of the energy markets, the heavy construction companies and agricultural equipment manufacturers are all going ahead strong and it's having a positive impact on the U.S. industrial gas business in total. But having said all that, we do expect our sales outside the U.S. to continue to grow.

Great, thank you very much, Sam.

(OPERATOR INSTRUCTIONS). There are no further questions at this time and we'd like to turn the call back over to Mr. Thomas for any closing remarks.

Thank you very much and thanks to everyone for participating in the call. I'd like stress that we're very pleased with the results and the continued growth of the Company in 2007 and its prospects in 2008. We're very excited about the prospects for Chart going forward. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.