Chart Industries Inc (GTLS) 2010 Q1 法說會逐字稿

Good morning, and welcome to the Chart Industries, Incorporated 2010 first quarter conference call. (Operator instructions.) 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 the release, you may access 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 May 5th. 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 that are not historical in fact are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual 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 statement.

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

Thank you, Everett. Good morning, everyone. I'd like to thank you, all, for joining us today. I'll begin by giving you a brief overview of our first quarter results, including a reaffirmation of our outlook for 2010. And Sam Thomas, our Chairman, President and CEO, will provide highlights of market and order trends, as well as growth opportunities for each of our business segments.

First quarter results were in line with our expectations with reported net income of $1.4 million or $0.05 per diluted share, which compares to first quarter 2009 net income of $19.5 million or $0.68 per diluted share.

I'd like to point out that the first quarter included acquisition related costs of $1.5 million or $0.04 per diluted share for higher than normal cost of sales due to the write-up of acquired inventory to fair value in the 2009 Covidien acquisition, which will not reoccur over the remainder of 2010.

Accounting rules dictate that Chart, the acquiring Company, should not generate a profit on the ultimate disposition of the acquired inventory based on value added in the manufacturing process before it was acquired. This required accounting treatment often drives cost of sales up and margins down during the first several months of an acquisition, as was the case here.

Earnings per share excluding these noncash acquisition costs would have been $0.09 per diluted share.

Sales for the quarter were $117 million and represented a decrease of 35% compared to net sales of $180 million a year ago. Reduction in sales is largely due to our Energy and Chemicals, or E&C segment, which experienced lower volume in both brazed aluminum heat exchangers and process systems due to the completion of several large projects during 2009. In addition, reduced orders as a result of the global economic downturn also contributed to the sales decline. In this business orders and backlog take a longer time to be converted to revenue due to the customized nature and longer project lead-times.

Our gross profit for the quarter was $34 million or 29% of sales compared with $63 million or 35% of sales a year ago. As expected, the consolidated margin percentage was down about 5% from the prior year quarter. The margin decline was largely due to lower volume and the slower recovery as expected in our E&C segment. We started the year at a lower backlog level with lower margin projects. In addition, underutilized industry capacity will continue to create a more competitive market environment in the near term.

With respect to Distribution and Storage, or our D&S segment, margins were impacted about 1% due to the startup of our new Nevada repair facility during the quarter. In our BioMedical segment margins declined due to the previously discussed noncash acquisition costs.

SG&A expenses for the quarter were $24 million, down almost $2 million from the same quarter a year ago. Decline was due to cost reduction initiatives implemented during 2009, in addition to lower variable compensation costs related to reduced sales volume and lower operating profit. This is partially offset by an increase in SG&A costs associated with recently completed acquisitions, particularly Covidien's liquid oxygen therapy business.

Income tax expense was $600,000 for the first quarter, and represented an effective tax rate of 28% compared with $9.6 million or an effective tax rate of 33% in the year-ago quarter. The decline in the first quarter effective tax rate was primarily due to a higher mix of foreign earnings taxed at a lower rate.

From a cash flow standpoint we continued to generate cash despite the lower results in the quarter with our cash balance over $213 million at March 31st, 2010, up over $2 million from the December 31, 2009 balance.

With respect to our outlook for the remainder of 2010, we continue to see improving global markets in all of our business segments as evidenced by our continued order improvement. As expected, 2010 will be a transition year for Chart as we rebuild our backlog during the continued recovery of the economy and our markets.

Based on our current backlog, order expectations, and financial forecasts we are reaffirming our previously announced sales and earnings guidance with 2010 net sales expected to be in a range of $530 million to $560 million. Diluted earnings per share for 2010 are expected to be in a range of $0.40 to $0.60 per share based on approximately 29.2 million weighted average shares outstanding.

Included in our 2010 earnings estimates are approximately $0.20 per diluted share for anticipated restructuring and acquisition costs associated with recently completed acquisition, as well as the write-off of deferred financing costs associated with the planned refinancing of our senior credit facility. Excluding these charges, earnings would be expected to fall in a range of $0.60 to $0.80 per share.

As I mentioned, we plan to take advantage of the present favorable credit market conditions to refinance our senior credit facility before our current revolving credit facility expires in October of this year. This will ensure that we continue to have good liquidity to meet our strategic needs. We expect to close on a new senior credit facility during the second quarter.

I'll turn the call over to Sam Thomas, who will review market and order trends, as well as growth opportunities in each of our business segments.

Thank you, Michael. And good morning, everyone.

First, some generalized comments. Overall, our orders have increased sequentially for the third straight quarter, a positive sign. Our global markets on a macro basis improve across all of our business segments.

We see especially strong growth in China where, as you know, the first quarter GDP growth was at 11.7%, but also leading indicators, industrial production, durable goods orders, and capacity utilization continue to improve faster in Asia, Middle East, and Americas than in Europe.

We're continuing to see recovery in the steel and chemical segments, which effectively stopped during the credit crunch, and quoting activity has been very strong.

Moving on to the individual business segments. Energy and Chemicals saw the strongest quarterly order intake since the third quarter of '08. We're seeing increased petrochemical activity, evidenced by an order for ammonia plant in India, and participation in these cryogenic processes within ammonia plants is a new market opportunity for Chart.

We've been active in bidding ethylene plants in Asia, and our [Sori] air-cooled heat exchanger joint venture has been awarded its first project direct with a major Middle East national oil company for petrochemical application. [Whole] gasification for petrochemical feedstocks in China and steel production in both China and India are expected to move forward with air separation plant equipment orders this year.

One of the highlights for this business is natural gas processing projects. We see them coming forward in the second half of 2010 and continuing into '11 and '12. There seems to be very good growth potential in achieving higher levels of natural gas liquids recovery, translating into orders for our equipment, both domestically and in the Middle East.

Small to midscale LNG projects in China, for both transportation and virtual pipeline applications, have resulted in multiple orders for us in the past two quarters, and we're quoting on a number of additional opportunities. These small scale LNG liquefiers are also being actively bid in a number of areas around the world, both for transportation and virtual pipeline activities.

Grid activity remains active for base load LNG projects, particularly in Australia and Southeast Asia. And orders have been particularly strong for air-cooled heat exchangers led by gas processing and gas compression projects, both for North American shale plays, but also for a number of international projects.

Margins have been lower in the E&C business than recent historical levels, impacted by underutilized industry capacity in the aftermath of the credit crunch. And we're taking a disciplined approach in our quotations regarding booking forward capacity as a result of that. We think there are -- there's sufficient improvement in order prospects that there is no need for us to dive too low in terms of winning new business.

Within our Distribution and Storage business inquiry rates have picked up significantly in the U.S. and Europe, especially activity around engineered tanks, the largest projects for Distribution and Storage. We've seen improved orders in the packaged gas products globally, particularly in China, but renewed activity both in North America and Europe, and this has typically been the leading indicator where orders picked up first in an industrial recovery.

In China we've seen increased product demands or to be increased demand across all of our product lines. A particular strength has been LNG vehicle fueling and virtual pipeline opportunities for D&S. Natural gas is increasing its penetration as a viable transportation fuel with high energy density, lower cost, and low emissions. LNG vehicle fueling quoting activity is increasing across all geographic markets, as well as improved order intake.

We are providing a full range of products and solutions for the full LNG value chain from LNG terminal equipment and liquefiers, to onboard fuel tanks. We have a fairly strong portfolio, multiple patents for LNG vehicle applications. We think that will cover us very well in the coming years and give us a good up side potential.

Looking to the bulk tank order trends, within D&S it's still weak in the U.S. and Europe, with the exception of LNG station orders and across the board in China. And we continue to look for opportunities to offer our customers and end users improved value.

In the BioMedical segment, the Covidien acquisition added $13 million in sales during the first quarter, and it's expected to provide substantial margin contribution towards the end of 2010. We announced in April the shut-down of the Plainfield, Indiana Facility we acquired from Covidien. We're consolidating that business in our Canton, Georgia Facility.

We closed on the purchase of the Covidien respiratory oxygen therapy business in Japan on April 1st. It was delayed due to regulatory approval there, but will enable us to be fully engaged in the Japanese market by the third quarter.

The oxygen respiratory market continues to trend positively. We've been particularly effective in a direct to pulmonologist marketing approach, driving share gains against the alternative therapies.

The cryobiology business continues year-on-year growth as it recovers from the credit crunch. The one part of the biomedical business that was impacted by the recession. There are multiple [cored] blood banks and research opportunities globally that will drive demand for the large stainless steel freezers. We're continuing our new product introductions, which will provide growth opportunities later this year and in 2011.

I'd now like to open it up for questions. Everett, please provide instructions to the participants to be able to ask questions?

Thank you, sir. (Operator instructions.)

The first question today comes from the line of Roger Read with Natixis Bleichroeder. Please proceed with your question.

Yes, good morning.

Good morning, Roger.

Good morning, Roger.

I guess let's talk about the margin aspects of things. I mean it's clear, obviously, we see orders come down, backlog come down, net revenue come down. But as you look at how you're bidding, the projects you're bidding on today, the competitive landscape, timing, et cetera, what is your expectation on I guess the pricing side impact on margins? I mean we can kind of look back historically and guesstimate a revenue number and think about what margins ought to be from just throughput, but what is the actual pricing impact out there? Let me say it, specifically the E&C segment?

Roger, this is Michael. In terms of E&C, you know, because of the time that it takes to work the orders through the backlog, you know, we're seeing orders at lower margins and because of the underutilization of capacity across not only our business but really the market, they are coming in at lower margins.

We're very careful that we're not going to accept too low of a margin, but it's something we'll continue to look at. We would expect as it moves into the second half of the year we'll start to see that to turn. But again because of how long it takes some of those projects to turn out of backlog into revenues we won't expect to see a benefit of that until probably later in the year. So if we look at that business, overall, would expect their margins to sort of be low 20s possibly for the year, maybe climbing into the higher 20s as we move forward in the year.

The other two businesses we think will be good, D&S, which was about 30% gross margin in the quarter should be comparable for throughout the year and then possibly a little bit of up side. And then BioMed we expect that to go up a little bit as we continue to integrate the Covidien acquisition, which is really dampering the margins in that business right now as we transition it into sort of our growth model.

Right, actually, BioMed was much better than what we were kind of expecting. Is -- did the margins there trend higher from here, or are there a couple more quarters where maybe we bounce around before you kind of get the full integration benefits?

Yes, I mean it will bounce around. Second quarter is when most of those restructuring costs we expect would come through right now. So we'd expect the margins probably to be a little bit down in the -- further in the second quarter and then start to climb back up as we move through the year.

Okay, and then two things on I guess sort of the heat exchanger side. Obviously, we're all watching some of the big LNG projects out of Australia. Just a quick question there, has there been any change in timing or are things pretty much as you expect on that front?

It's as we've talked about previously, it's just close-in, difficult to call.

Okay, and then I believe you mentioned it a little bit, it might have been in the press release in the D&S segment, but I'm just curious with all of the moves towards trying to drill these more NGL rich prospects within the shale plays in the U.S. or just NGL prospects in general, are you seeing any benefits in your order trends into those type of cryogenic plants or anything? Or is that something that you've historically participated in, at all?

We've historically participated. We're seeing, we've seen several orders for heat exchangers for NGL recovery plants, coming from both brazed aluminum heat exchangers and also for air-cooled heat exchanger opportunities. As a result of that, we think that's an area that's going to see good activity, above average activity, higher activity levels than we've seen in the past five or six years.

And in terms of the magnitude of impact to you, I mean what's sort of the average size of a product or average size of one of those projects to you in terms of your product line?

They're in the $1 million to $3 million range.

Okay.

For a very large gas processing plant it gets quite a bit larger than that, and we're seeing those kinds of opportunities in the Middle East.

Middle East, as well as North America, then?

Yes.

Okay. All right. Thank you.

Thank you.

Thank you. Our next question comes from the line of Eric Stine with Northland Securities. Please proceed with your question.

good morning. Thanks for taking the questions.

Good morning, Eric.

Good morning, Eric.

Wonder if we could just go back to the largest scale LNG plants and specifically the Queensland Curtis Project. Anything you can share? I understand that there's been talks around a Japanese buyer for the supply there with the BG Group, and that that could potentially expand to [three trains]?

Yes, I can't comment on anything beyond that. I mean I don't know anything beyond that.

Okay, and if you could just comment, I mean it sounds like Queensland Curtis remains kind of the first in the queue, but beyond that should we think about Santos, Gladstone and Wheatstone being the next potential projects for you?

Those are the ones that we understand are most likely to go forward and that we've been working on most actively, yes.

Okay, maybe we could just touch, just on the D&S side of it first, could you just give us the Chart next gen revenues in the quarter?

Eric, I mean it typically runs about somewhere in the neighborhood of 10% of D&S revenues. I don't have the exact number here, but that's typically how it runs. It's a little bit higher this year. In fact, last year was the highest year that we've had, and related to that type of business, and but would expect that to continue to grow as we move through the year.

We haven't typically broken out the next gen revenues separately within D&S, so the revenues are contained within each of the regions' sales.

Okay, but fair to say that your outlook there is -- continues to be positive going forward?

Absolutely, yes.

Okay. Okay. And I'm wondering if you could just touch on the order levels in the D&S, a little bit of a sequential downtick there. Any color or was that just project timing?

Yes, I mean that's pretty consistent if you look over the years, you know, in terms of a downturn, when you have it in terms of their recovery. And we would expect as we move into the second half of the year, you know, we would expect to see their orders continuing to head the other direction.

I mean if you looked at all the industrial gas companies out there, and you see that what the predictions are, you know, we would expect as we move -- and when we trail that typically we would expect in the second half of the year to start to see those orders ticking back up. I mean they were higher than they were in the first quarter of 2009 in terms of their order levels, so we're continuing to see that tick back up.

Okay, and then just as far as overall order levels, we should still see order improvement sequentially, is that a fair expectation?

Yes, right. I mean and the thing that we have to keep in mind is that the first quarter is typically our weakest quarter, you know, it has a little bit of cyclicality in it if you look at it historically, and then the second and the third quarter are the two strongest. They sequentially should be.

So, yes, we're pretty optimistic, we're pretty enthused about our first quarter orders considering it's the lowest quarter and we still had a sequential increase, so we would expect that to ramp back, continue to ramp-up in the second and third quarters of this year as we move forward.

Okay, and then a last question, if you could just touch on, give a few more details on the air-cooled heat exchanger activity in the Middle East that were in your prepared comments?

Yes, we won an order directly from one of the national oil companies, which is a first, after having been approved and sold through a number of EPCs. So we're very positive with that because it gets us on the active and approved bidders list and let's us move forward on to larger and larger projects, which we are bidding larger projects from that business. Production is successfully ramping up.

A couple of the other highlights for the air-cooled heat exchanger business is they're seeing improved gas compression packaging orders, improved orders for natural gas liquids plants, and then also in the alternate energy fields we're seeing orders and a number of inquiries for both geothermal applications and some of the thermal solar applications.

Okay, and the activity there is a direct result of having a facility in the Middle East?

Middle East activity is certainly, yes.

Okay. Thanks a lot.

Thank you.

Thank you. (Operator instructions.)

Our next question comes from the line of Greg McKinley with Dougherty. Please proceed with your question.

Yes, thank you.

Good morning.

Good morning. Could you guys talk a little bit about your decision making process around this notion of making sure we have enough margin dollars available to us when we bid-out a contract, such that we're not locking ourselves into lower margin utilization in the event that more attractive projects become available down the road? How you sort of balance that with the fact that margins right now, particularly in E&C are light, the capacity is underutilized? And so or how do you balance sort of the desire to get any business that you can versus what you think might become available three, six, nine months down the road at better profit levels?

It's a challenge, but an advantage we have is we have a better variable cost structure, lower fixed cost structure than most of our competitors. And, therefore, we don't have the costs at the low part of the market to oversee to try and cover and make us bid work at any cost or at no margin.

And that's particularly true when we look at how large a project is and how long it's going to be in our shop, because this industry does -- is cyclic, and at the top of the market, when we get mid cycle and further forward we tend to be capacity constrained and there are good margin opportunities there. So it's a challenge, but we think it's one of our competitive strengths.

So how does that sort of factor into your approach for some of these more base load LNG projects, which obviously you guys have talked about competitive pressures as a lot of excess capacity in a market that is skating after the same project opportunities? Is Chart in a situation where your lower fixed costs allow you to be profitable, more profitable on those projects at lower price points than your competitors, or are you suggesting that you may choose to have, you know, make sure you have the capacity to move after higher margin, smaller modular projects?

I think we have both of those facilities, but there may well be situations where we decide to keep our powder dry and reserve our capabilities for higher margin products where we can deliver more value, or the customer perception is we're delivering more value. But it's competitively sensitive.

Yes. Can you talk a little bit about -- just help us understand to the degree that there's any concentration risk in your order or revenue view? In other words, is the view predicated on a small number of large wins or is it simply we're seeing day-to-day cadence of order and bid activity improve across business lines, and as we see that mature that gives us confidence in our current year view?

I think it's very strongly the latter.

Okay. Thank you.

Thank you, Greg.

Thank you, Greg.

Thank you. Ladies and gentlemen, we have no further questions at this time. I'd like to turn the call back to Management.

All right. Thanks very much.

Just in conclusion, I'd like to say, remind you that results came in as we expected, without surprises. We're seeing a positive order trend, and lots of other signs, both macro and in our bidding activity, that our business is recovering. There are up side opportunities that are dependent on the speed of economic recovery and the return of some of the large energy projects, but the signs look positive for that. Seeing strong industrial growth in China and a resumption of confidence in North America are particularly attractive opportunities for us and I think positive signs.

And we continue to look for accretive growth opportunities that add value to the Company and our shareholders.

So, with that, I'd like to thank everyone for listening today, and sign-off.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.