Chart Industries Inc (GTLS) 2008 Q3 法說會逐字稿

Good morning and welcome to the Chart Industries Inc. 2008 third quarter 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 received the company's earnings release that was issued earlier this morning. If you have not received the release, you may retrieve it by visiting chart's web site at www.chart-ind.com. A telephone replay of today's broadcast will be available following the conclusion of the call until November 14. The replay information is contained in the company's earnings release.

Before we begin, the company would like to remind you that statements made during this call are not historical in fact and are forward-looking statements. Forward-looking statements involve risks and uncertainties that can cause actual events or results to differ materially from those expressed or implied in the forward-looking statements. For further information, about important factors that can 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 investors relations section of the company's web site or through the SEC web site which is www.sec.gov. The company undertakes no obligation to update policies or revise any forward-looking statements.

I would now like to turn the conference call over to Mr. Michael Biehl, Chart Industries Executive President and Chief Financial Officer. You may begin your call.

Thanks, Sean. Good morning, everyone. I'd like to thank you all for joining us today. I'll begin by giving you a brief overview and highlights of our third quarter results. Sam Thomas, our Chairman, President and CEO, will provide highlights of the operating results for each of our business segments, and then I'll finish up by discussing our outlook for the balance of 2008. We're pleased with our third quarter results. Sales for the quarter were $188.8 million and represented an increase of 15%, compared to net sales of $163.7 million a year ago. The sales growth of over $25 million was led by our energy and chemicals segment, but we also had good sales growth in biomedical. Net income for the quarter rose to $20.4 million, or $0.70 per diluted share, a significant increase over the $12.1 million in net income, or $0.42 per diluted share reported a year ago. We should note the third quarter of 2008 included $0.5 million in none recurring costs or $0.01 per diluted share related to the repurchase and retirement of $6.8 million of the company's 9.1/8% senior subordinated notes. As a result of these purchases, it eliminated a portion of our high-cost debt and is expected to reduce net interest expense, by approximately $0.5 million, annually, going forward. Our gross profit for the quarter was $66.2 million, compared with $45.4 million a year ago. This increase was, again, led by our energy and chemicals segment, due to improved project mix and execution but also due to performance incentives and change orders earned during the quarter. In addition, our biomedical segment contributed to the margin expansion, due to high volume and improved pricing. SG&A expenses for the quarter were $26.8 million, or 14.2% of sales, compared with $20.9 million or 12.8% of sales for the same quarter a year ago. The increase was primarily the result of higher employee-related expenses, including variable incentive compensation, due to improved operating performance, particularly at ANC and higher marketing and sales costs to support our business growth. Amortization expense for the quarter was $2.8 million, or 1.5% of sales, compared to $2.6 million, or 1.6% of sales for the prior year quarter, reflecting additional amortizable and tangible assets from an acquisitions earlier this year. The quarter had a foreign currency loss of $2.1 million, compared with a foreign currency gain of $500,000 for the same quarter a year ago.

The weakening of the Euro and Czech Koruna against the dollar during the latter part of the quarter, impacted transactions denominated in those currencies. Income tax expense was $8.8 million for the quarter and represented an effective tax rate of 30%, compared with $4.3 million for the prior year quarter, representing an effective tax rate of 26.3%. The lower tax rate in the third quarter of last year was primarily the result of an adjustment to decrease the full year 2007 annual effective tax rate to 31% from 34%, which resulted in an unusually low tax rate during the third quarter of 2007. From a cash flow standpoint, we continue to generate strong cash flow from operations, through the third quarter with our cash balance at $149 million at the end of the quarter, and that's after paying $6.8 million to repurchase the portion of our senior subordinated notes during the quarter. Cash provided by operations for the quarter was $59.6 million, compared with cash provided by operations of $45.8 million for the prior year quarter. The increase was primarily due to higher net income, and customer advances due to timing and progress billing under existing contracts. Cash used in investing activities for the quarter was $2.9 million compared with $4.9 million for the same period of 2007. Capital expenditures for the quarter were $2.9 million, compared with $5 million a year ago. Capital expenditures during both quarters were primarily used for continued facility automation, and improvement to lower costs and support our backlog. For the quarter, cash used in the financing activities was $6.3 million, which included the $6.8 million senior subordinated note repurchases. This compared with cash provided by financing activities of $5.7 million for the same period in 2007. The company's strong balance sheet financial performance resulted in a credit rating upgrade by Standard and Poor's during the quarter. S&P has raised our credit rating, including our overall corporate rating, bank debt and senior subordinated notes which validates our operating financial achievements to date. Given our overall strong cash position of $149 million at then of the quarter, availability of over $76 million on the revolver portion of our senior credit facility and continued focus on the operating improvements, we are well positioned to fund our working capital requirements and support future growth in this uncertain market environment. We have no principal payments due in our long-term debt until the fourth quarter of 2012, with more than adequate coverage on our debt covenants and our revolving credit facility extends until the fourth quarter of 2010. 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. We're pleased with our third quarter operating results which, again, were led by our energy and chemical segment. At energy and chemicals, or E&C, sales grew by 35, to $78.9 million for the quarter, compared with $58.4 million for the same quarter in the prior year. E&C gross profit margin increased to 39.2% in the quarter, compared to 22.4% for the same period in 2007. You'll recall that the results in 2007 period were impacted by some complex one-time long-term installation projects, as well as other fixed price contracts where we incurred escalating raw material and labor costs. Conversely, the 2008 quarter benefited from a project mix that includes significant work on LNG liquefaction and petrochemical projects. In addition, performance incentives and change orders were earned on several projects, improving margins by about 2%. These performance incentives for early project completion or validation of improvements in project execution, which have contributed to the significant improvements in margin at E&C over the last several quarters. We also had improvements in margins in brazed aluminum heat exchangers during the quarter due to increased throughput and several quick ship emergency orders.

At our distribution and storage segment or D&S, sales were about the same, $85.0 million, compared to $85.1 million for the third quarter of 2007. Lower volume in bulk tanks was largely offset by increases in packaged gas, favorable currency translation and a small acquisition in Germany which closed in April 2008. D&S gross profit margin increased slightly to 30.9 % compared with 30.8% a year ago.

Our biomedical segment sales for the quarter increased to $24.9 million from $20.2 million for the same quarter in the prior year. All product lines contributed to the sales increase. Both medical, respiratory and biological storage systems product sales increased due to higher volume, particularly in biological storage systems, where we were seeing strong growth in both domestic and international markets. In addition, price increases in medical respiratory also contributed to the improvement. Biomedical gross profit margin increased to 36.1% in the quarter, compared with 30.2% a year ago. The improvement in margin was due to higher volume and continued shift to higher volume -- higher value, added customer solutions for biological storage system sales, as well as price increases in the medical respiratory product line.

Backlog at September 30, 2008 was $461.8 million. 8% greater than the year ago period, but down 7% from the June 30, 2008 level of $498.1 million. Orders in E&C during the quarter were $46.3 million, compared with $85 million in the second quarter and $51.1 million in the first quarter of 2008. You should all know by now that E&C orders can be affected by the timing of large projects and it's not unusual to see order intake vary significantly from quarter-to-quarter. We believe the current global credit crisis will impact the timing of some projects, but the fundamental demand drivers remain in place. Orders to D&S in the quarter were $93.8 million, compared to a very strong second quarter $115.4 million and $91.1 million for the first quarter of 2008. If you recall, the second quarter was one of the strongest quarters for order intake in recent history for D&S and included several large engineered tank orders. The orders during the third quarter of 2008 were still very strong compared with earlier quarters. D&S backlog is $144.2 million, at the end of the September, just slightly down from the $146.5 million backlog at June 30, 2008. The strong industrial gas business, particularly in the developing industrial economies provide the strong, underlying gross demand driver for D&S. Biomedical orders in the quarter were $23.7 million, compared to $26.7 million in the second quarter, and $22.7 million in the first quarter of 2008. Orders have returned to more normal levels here in the third quarter, after an unusually strong second quarter for medical respiratory orders in Europe.

The credit crisis is creating a lot of uncertainty around demand and project timing. We recognized that these are challenging economic times requiring the ability to identify challenges and opportunities early and respond quickly. We've taken appropriate action to date, and will continue to do so. We continue to have a strong competitive position in our markets and we have proven that we are resourceful at finding new applications for our products, such as natural gas fueling tanks, clean coal applications, among others. Our experienced management team has managed in difficult business cycles as well as periods of significant growth. Although these are challenging times based on our flexible experienced work force, good relationships with our customers and suppliers, we are well prepared and confident that we will come through these uncertain times with an even stronger and more successful business. Michael will now provide you with an updated outlook for 2008.

Thanks, Sam. Based on year-to-date results, current order backlog and fourth quarter expectations, we are reaffirming our previously announced earnings per share guidance but adjusting our sales forecast. Our net sales are now expected to be slightly lower in the range of $750 to $770 million, compared with previous guidance of $770 to $800 million. Our full year diluted earnings per share is still expected to be in the range of $2.55 to $2.65 per diluted share, which is based on an effective tax rate of 30% and approximately 29.1 million weighted average shares outstanding. Although projected revenue will be lower, we believe the reduction will be offset by continued strong operating performance. We have good liquidity and strong cash generation and we are uniquely positioned to successfully handle a wide range of talent as an opportunities. Thank you for participating in our conference call. This concludes our prepared remarks. Shawn, please open up the lines for questions and provide the participants with instructions for doing so.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of James West from Barclays Capital. Your line is open.

Hey, good morning Sam and Michael.

Good morning, James.

Good morning, James.

Sam, last quarter during the Q&A we talked a little bit about two of your major customers -- they had recently either announced plans for new projects. This would be Energy Role Corporation and then I believe Bechtel had recently won an award in Australia. So, I wondered if perhaps we could just start by talking about those two customers, and, you know, in light of the current economic situation, if those programs are going forward, if there's been delays, any changes at all there?

The Bechtel projects are unchanged. They are large projects, so there's some time period involved for them to go through the feed studies. But both Bechtel and their customer, primarily Conoco Phillip, seem to be saying that these projects will go forward and that they have the cash to do them. So, at this point, those are still very positive. In the case of energy world, they are similarly positive that the economics are still very attractive. What's unknown is in the credit environment, is project financing. And what that means on how quickly projects will move forward. There has been a fair amount of general press about the Cole Bay methane projects in Queensland and I think the view is still very positive, that the projects make economic sense. But certainly with the credit issue, there's that question of, you know, will we go forward with final investment decisions right now as opposed to a few months down the road when credit markets open up again.

Okay. Understood. And then, Sam, on the D&S business, it seems at least in my mind this could be the most impacted by recessionary environment. In a environment where we see significant economic weakness, you know, given your exposure to some of these more emerging economies, how do you think that that business would perform?

I think it will continue to perform very well. You have seen in distribution and storage, there has been shifts in mix. We've been selling quite a few tanks for large projects, as these emerging economies build out infrastructure. But overall, the view is very positive. Again, when you have the credit environment, and the macro news releases, the tendency is for people to -- for our customers to pull back on capital expenditure, but as things settle down, for them to move forward because fundamentally, these projects are economically sound. So, we remain confident that activity is not going to stop, that the growth of these industrial economies will continue, and that we continue to be very well positioned. Similarly in the United States, there's plenty of uncertainty about US industrial economic activity levels, but our customers continue to say -- the industrial gas companies -- that their gas volumes are rising, they're bringing new production online. That will drive new tank sales.

Okay. An then just one last follow-up, if I may. Given -- in light of this credit environment, I know that at one point or at least over the last several couple of quarters, as you looked at acquisitions, pricing on acquisitions they've still been fairly high. Have you seen that come in, at least at this point now? And if so, would you be willing to step in and make a couple of acquisitions?

We will. We think that the uncertainty created by this environment, particularly if there is tightness in credit, positions Chart very effectively. We remain very close to our customers and markets and have a strong watch list of companies that we are interested in acquiring and we'll continue to solicit more opportunities to add companies that can increase our value proposition. We think that this is going to be a good environment as to whether we'll make acquisitions in the next three months or over the next 18 months, I'm not prepared to call the timing.

Okay. Thanks, Sam.

Thank you.

Your next question comes from the line of Jeff Spittel with Natixis Bleichroeder. Your line is open.

Good morning guys.

Good morning, Jeff.

If we could drill down a little bit on the distribution and the storage segment. If you look back at prior periods of softness economically in the global environment, can you talk a little bit about how that business performed in that environment, and then I guess what's changed? Obviously, you have more backlog and visibility there, but how do we, I guess, weigh those different forces, as we look at 2009?

Several significant differences. Going into the previous downturn in the late '98, '99 time frame, we had quite a bit more customer-owned inventory on the ground and thinner backlogs. We were also very much solely a US-based manufacturer, probably at that time over 85% of our sales were in the US for distribution and storage. And the US downturn, or capital spending downturn from the industrial gas companies, was severe. Because, they had been spending at a fairly high level of capital expenditures, as a percentage of sales. Throughout the more recent expansion period, we've seen far more tempered spending and far better inventory control by all of the gas majors. In fact, as we talked about the acquisition earlier of -- of BOC by Linde and the subsequent sale of the package gas operation of Linde to Air gas, that we've actually gone through and inventory reduction period during 2008. So, we actually see the underlying volumes better in the US because of less of a cyclic swing. There is new capacity coming on, a (inaudible) separation plan from the US. Our growth has been driven far more by our emerging market growth, particularly China and Central Europe. We continue to believe that that will be strong and moving forward. We're far more globally focused than we were. And finally, at that time, going into the previous recession, Chart had just made a large acquisition and had redundant manufacturing facilities. So, it had to go through a redundancy program and a consolidation of facilities. So, we really feel we're a much better positioned business now. We've also added quite a few newer, higher margin products. We have a fairly broad product offering that enables our customers and their end customers to actually save on distribution costs. Finally, the -- our raw materials position going into the previous recession, our raw materials, particularly non-nickel and stainless steel were at fairly high levels and increasing in price. As you know, we've had a fairly significant correction in nickel and other metals commodity prices. So, we're well positioned there as well.

I appreciate the color there. Shifting to the large scale LNG market, the BG proposed deal for Queensland that we saw earlier in the week. Is this a, I guess, the beginning of a potential trend there, where this is what the catalyst is, where the larger players in that market with the largest balance sheets can come in, make acquisitions, maybe even scale up some of these development plans and is that potentially a catalyst for moving things along on a little bit, you know, of a shorter time frame over the next few years?

Quite possibly. The -- certainly the global energy companies have the cash and balance sheets to go forward without significant outside project financing. These projects still make very strong economic sense. But in addition to the very large scale projects, there's also potentially with -- potential with some reasonable credit availability, that smaller scale projects can go forward, that would be very economically attractive. I think, you know, we continue to believe that the development of a global natural gas industry with LNG is a very large part of it, will develop both on the large scale, medium, and small scale fronts.

Okay. Thanks very much. I appreciate it.

Thank you.

Your next question comes from the line of Chris Agnew from Goldman Sachs. Your line is open.

Thank you very much. Good morning. Touching on FX, you mentioned comments about what happened in the quarter, but given the volatility, how should we think about -- how FX is impacting both revenues and profitability going forward? If you could maybe frame how we should think about it. Thanks.

We have -- looking at primarily the Euro versus the Dollar, where the biggest impact has been. We've roughly a 20%, 25% correction. Our business in the Czech Republic is currently running at roughly $100 million sales rate, and earning EBIT margins in the, I believe its about 11% range. It's going to be impacted by -- by the translation of the currencies. You know, I remind you that we're -- that we're fairly effectively naturally hedged on many of these issues, but it will impact us. We'll have lower US dollar earnings, as a result of that. We've come back to, you know, what I consider to be more or less purchasing power parody for the industrial markets, when you are in the 120 to 130 range of dollar versus Euro. It will have an impact but we're well positioned to adjust to it.

And then touching on your comments on the credit crisis, affecting demand and timing, is there any distinction between your different business segments, any differentiation by geography, in terms of the way your customers, it's affecting your customers' behavior and thinking?

I think in the short term, what we see is that when the -- when the news and the press is particularly negative, or strident, that smaller businesses react and will simply delay their purchases for a day or a week or a month. The underlying drivers remain strong, so we expect them to largely come back into the market. Then depending on the financial strength of our medium scale and large-scale customers, as to whether they're going out for financing, I suspect that will be the greatest determinant over the next three months of whether they delay projects for a few months, or go forward.

And is there any distinction in terms of Europe, versus Asia, versus US? Or is it -- it's more customer behavior?

I would say I see no really clear distinction globally. There are -- there's obviously more momentum in Asia going forward, but there's every bit the sensitivity and attention to the credit markets in Asia and western Europe that we see in the United States.

Okay. Thanks. And then final question on -- just on commodity costs, how much are you able to benefit as commodity costs or input costs are going down or have you got sort of automatic de-escalators, if you can help us sort of think through how that works. Thanks.

You know it varies by business and I think it's best to view them in terms of timing issues. So, that, for instance, within our distribution and storage business, roughly 40%, 50% of our sales are governed with surcharge formulas that are three month trailing averages. So, in times of decline, we would tend to have a three to five month pick-up, perhaps 1% at the gross margin line as a result of those changes. Our energy and chemicals business is primarily fixed price contracts, but we're typically fairly well hedged on the materials to minimize risk, so you don't see a great deal of change going through. And in our biomedical business, it's primarily fixed prices which tend to be changed on a six month or annual basis. And they are the benefit over the first half of the year would be -- would be picked up. I think the most important issue we have is that we have managed our inventories very effectively so that we -- we're able to get better pricing fairly quickly coming through, and we continue to manage it aggressively.

Excellent. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Greg McKinley from Dougherty. Your line is open.

Yes, good morning.

Good morning, Greg.

Hello, Greg.

Good morning, I'd like to maybe get your thoughts around how, if at all, you've changed your investment outlook in your business. Have you seen enough indication from your customers' capital expenditure plans and their anticipated order rates to the point that you are considering making changes in your capital expenditure and how are you thinking about managing sort of overall capacity on your end of it, as there's more uncertainty from your customers?

Well, we continue to view that on a daily or weekly basis. Based on the uncertainty, and any pullbacks from our customers or changes in outlook, we react very quickly. So, we've already acted to pull back on discretionary spending, on things like inter-company travel. And we pull back on capital expenditures, particularly those nice to have things as opposed to the productivity improvement ones. When we look at fundamental structural investments, we've talked previously about looking at additional capacity for a number of our businesses, based on demand, going out, meeting capacity in the late 2009, 2010 time frame. We would -- we pull back on those decisions until we have a clearer picture of what the timing is, whether it effectively means a three month, six month or 12 month delay in those projects. So, I feel very good that we're on top of making those decisions. We're not committed for any large capacity increases or large capital expenditures early in 2009 at the moment.

Thank you. And could you also talk a little bit about your backlog in terms of what are the -- what is the flexibility or possibility for customers to actually cancel some projects out of that backlog. Once that backlog is booked, how -- depending on the prevailing credit environment, how much could we see the project -- the project timing of some of those orders that already have been placed? How much could that move?

Both historically and on the basis of going through a careful review of our backlog and speaking to our customers, we think there's very low probability of any significant cancellations.

Thank you.

Thank you, Greg.

There are no further questions at this time. Do you have any closing remarks.

Yes, I'd just like to thank everyone for joining our call today. We appreciate your confidence, during these uncertain times in the market. We continue to see significant opportunity based on the strength of our business model, liquidity, cash generation capacity and the fundamental design drivers for our products. Thank you very much.

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