Chart Industries Inc (GTLS) 2010 Q3 法說會逐字稿

Good morning and welcome to the Chart Industries Incorporated 2010 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 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-imd.com. A telephone replay of today's broadcast will be available following the conclusion of the call until November 10th. 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, CFO and Treasurer. You may begin your conference.

Thank you, Kristen. Good morning everyone. I would like to thank you all for joining us today. I will begin by giving you a brief overview of our third quarter results and an update on our 2010 earnings guidance and Sam Thomas our Chairman, President and CEO will provide highlights of market and order trends as well as opportunities we see in each of our business segments.

Third quarter results did exceed our expectations somewhat with reported net income of $6.6 million or $0.23 per diluted share. This compares to third quarter 2009 at an income of $8.2 million or $0.28 per diluted share. I would like to point out that the third quarter included restructuring and related acquisition costs of $1.5 million or $0.04 per diluted share largely associated with one, the shutdown of the Plainfield, Indiana facility acquired in the Covidien acquisition during the fourth quarter of 2009, two, the write up of acquired inventory to fair value in the acquisition of Covidien's Japanese assets that were acquired during the second quarter of 2010 and three, the write up of acquired inventory to fair value in the acquisition of Cryotech that occurred during the third quarter 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 for the third quarter would have been $0.27 per diluted share excluding the $0.04 per share of restructuring and acquisition related costs.

Sales for the quarter were $139 million and represent an increase of 8% compared to net sales of $129 million a year ago. Increase in sales is largely due to the Covidien acquisition and our biomedical business as well as additional volume in our distribution and storage or a D&S business, due to continued improvement in global markets and the acquisition of Cryotech during the quarter. This was partially offset by lower sales and our energy and chemicals or our E&C business which as we expected continued to experience lower volume due to the completion of several large projects during 2009. Our gross profit for the quarter was $43 million or 31% of sales compared with $39 million or 31% of sales a year ago. Margins were about the same between periods as the higher margin biomedical business is now a much larger share of our overall business as a result of the Covidien acquisition which offset the expected lower margins in our E&C business at this time.

With respect to the D&S business, sales increased 14% to $65 million due to improved volume in China, package gas systems in the US and the Cryotech acquisition. Margins improved due to higher volume and improved product mix. In our biomedical business, sales improved 64% to $36 million due to the Covidien acquisition. Margins declined slightly due to a stronger Euro in the 2009 period. We had restructuring costs that impacted biomedical gross margins in both the 2010 and 2009 periods of about 2% relating to the shutdown of the Plainfield, Indiana facility in 2010 and the shutdown of the Denver, Colorado facility in 2009.

In our E&C business, sales declined 23% to $38 million as we completed several larger projects during the 2009 period. Lack of strength in the economic recovery continues to have an effect on large capital projects that impact order flow in our E&C systems business. As a result, margins declined in comparison to the prior year quarter. But I would like to point out that the margins did improve over a first half of 2010 levels due to several expedited or quick ship orders in Brazed Aluminum Heat Exchanger product line which improved margins about 4% during the quarter and we continue to exsiccate well as we ramp up production on several products in our systems product line. We are also seeing orders and quote opportunities continuing to improve in this business.

SG&A expenses for the quarter were $26 million up $5.4 million from the same quarter a year ago. This is primarily due to the Covidien acquisition that was completed during the fourth quarter of 2009 and the Cryotech acquisition completed in the third quarter of this year. In addition, with improving business conditions, we have seen an increase in sales commissions and travel related costs as we ramp up to take advantage of these opportunities in the market. Income tax expense was $2.3 million for the third quarter and represented in the effective tax rate of 25.4% compared with $3.5 million or an effective tax rate of 30% in the year ago quarter. Decline in the third quarter effective tax rate was primarily due to a higher mix of foreign earnings which are taxed at lower rate compared to domestic earnings.

From a cash flow standpoint, we continue to generate positive cash flow with our cash balance over $208 million at September 30, 2010 up approximately $20 million from the June 30, 2010 balance. With respect to our outlook for the remainder of 2010, we continue to see an improving global market as our third quarter results indicate. We have seen five straight quarters of sequential order improvement in our D&S business. The acquisitions we made last year in our biomedical business are clearly making a positive impact in the level of the E&C quote activity has accelerated during the quarter.

Based on our current backlog order expectations and financial forecast we are raising our full year 2010 earnings guidance. Sales for 2010 are still expected to remain in the range provided in prior quarters but at the upper end of the range of $540 million to $555 million. Diluted earnings per share are now expected in a range of $0.60 to $0.70 per diluted share due to improving margins performance and expectations based on approximately 29.2 million weighted average shares outstanding.

This compares to our previous guidance of $0.40 to $0.60 per share. This revised guidance includes the impact of approximately $0.15 per diluted share of restructuring and acquisition costs associated with the recently completed acquisitions as well as the right off of deferred financing costs associated with the refinancing of our senior credit facility. Excluding these charges, 2010 full year earnings would be expected to fall in the range of $0.75 to $0.85 or share. I will now turn the call over to Sam Thomas.

Thank you Michael and good morning everyone. First is overall comments, our global markets continue to improve across all business segments as evidenced by our performance in the third quarter and revised earnings guidance for 2010 as Michael just covered. Our largest industrial gas customers are publicly reporting improved financial results, increase in volumes and capacity utilization and our forecasting significantly improved capital expenditures in 2011. In addition, LNG opportunities for us are broadly based geographically and with several new application areas.

We have had the strongest order level in two years at our distribution and storage European operation. Quoting activity across all businesses but particularly in E&C as Michael earlier mentioned are accelerating with several significant opportunities. I am pleased to report that we just received an order in excess of $20 million in E&C systems for a national gas liquids project in the Middle East which will be reflected in our fourth quarter earnings -- orders. This is the most significant systems order since 2008 and represents -- and representative of the type of project we have said presented good opportunity for us going forward.

We are excited about the Cryotech acquisition that was completed during the quarter. They design, manufacture and sell cryogenic injectors, vacuum insulated piping systems and manifolds. They also repair liquid cylinders. The acquisition added $2.4 million in sales in the quarter, their historical sales have ranged between $10 million and $15 million annually. Combining Cryotech's direct end-user sales and existing sales and service capability within Chart's distribution network will draw incremental sales volume. We also see significant growth potential in their products for nitrogen dosing and a variety of new food packaging applications.

Chart was named a participant in a recent US Department of Energy project award to help develop and test membrane reactors to separate hydrogen production from coal derived synthesis gas using our core Brazing competency plus our Heat and Transmit -- Heat and Mass Transfer process expertise. This technology has brought application potential to approve the efficiency and cost in the area of hydrogen production also in gas to liquid production to stranded natural gas monetization, petrochemical feedstock production particularly in the US, China and India and ultimately production of biofuels. We will continue to seek high growth opportunities including new product applications such as this as we continue to expand our business.

Now I will go into a bit more detail in each of our business segments. With energy and chemicals as we have said previously, quote activity has accelerated and we are encouraged about potential opportunities. Worldwide investment in ammonia infrastructure has increasing in quotation activity for ammonia purification systems and moving ahead. The execution of our existing ammonia purification project in India currently in our backlog is proceeding as planned. There are several ethylene production plants slated to go forward in the Middle East and Asia during 2011 which we believe we have a high likelihood of winning orders for.

Small to mid scale LNG projects continue to emerge in China. Orders for both Brazed Aluminum Heat Exchangers and coal boxes have been received during the first three quarters of 2010. This trend is expected to continue as China's demand for clean energy and natural gas vehicle fuel continues to grow. There are a number of mid scale LNG liquefaction projects in China as well that are proceeding through the project development phase. This could lead to 2011 order activity. In North America, natural gas processing and natural gas liquid recovery projects have shown continued signs of growth and strength since the second quarter of 2010. Orders for Brazed Aluminum Heat Exchangers for these opportunities are expected to continue into 2011. This activity is driven by a preferential shell gas production in liquid rich plays.

There are a number of large natural gas processing plants in execution currently one of which led to the $20 million plus fourth quarter I just mentioned to provide Brazed Aluminum Heat Exchangers, associated coal boxes and Core and Kettle React Exchangers for a natural gas liquid project in the Middle East. In addition we have completed a feed study and have been designated as the technology of proprietary equipment provider for a global scale integrated nitrogen rejection unit with integrated natural gas liquids recovery system in the Middle East. That project appears to be on track for a final investment decision and EPC contract award in the first quarter of 2011.

Gross margins have bottomed out in the first half of 2010. We remain disciplined in our quotation approach regarding looking forward capacity which gives us a unique opportunity to capitalize as the market improves. We are well-positioned to take advantage of the opportunities I have outlined as they occur. Within our distribution and storage business our merchant industrial gas customers have reported improved sequential results and increasing gas volumes worldwide. As Michael mentioned, distribution and storage posted their fifth straight sequential quarterly earnings increase lead by strong order entry in our D&S European operations. In particular package gas products have continued to improve across all regions and historically this has been the leading area within distribution and storage in an economic upturn.

Activity in China remains strong and backlog remains at historically high levels. Quotation activities for engineered tanks including rail cars for both industrial and hydrocarbon applications is growing activity here in the US. The LNG vehicle fueling and virtual pipeline opportunities continue to offer upside growth potential for distribution and storage and were significant drivers of third quarter performance. We provide products and solutions for the full LNG value chain from LNG terminal equipment and liquefiers to onboard fuel tanks.

There are numerous LNG vehicle fueling opportunities in China as government commitments and natural gas make this a significant opportunity for Chart. In the US the recent announcement by pilot Flying J the largest truck fueling center operator in the US to begin offering CNG and LNG fueling facilities is a very positive infrastructure development here in the US. We are excited about potential new LNG opportunities including Marine and mining applications to displace diesel for trucks and stationary equipment operating in those markets. Conversion of diesel to LNG provides a cleaner and cheaper alternative and represents another LNG growth opportunity for our products.

Overall bulk tank order trends still remain weak in the US and Europe but appear to have stabilized and are increasing slightly. Third quarter bulk tank orders were the best seen in the past six quarters. LNG applications still represent the leading edge. For our industrial gas customers -- our largest industrial gas customers are still caring significant inventory of tanks removed from service. However, customer owned inventory at Chart manufacture sites has been drawn down to very low levels, a good leading indicator of demand improvement in the future.

Within our biomedical division, the Covidien acquisition added $13 million in sales during the third quarter. We continue to make progress in our restructuring efforts and will consolidate the US options (inaudible) business in our Canton, Georgia facility. We began construction of a new facility there which is expected to be completed the in first quarter of '11. Margins have improved as expected as we have executed well in our Covidien integration effort. It has been almost a year since we closed on the Covidien acquisition and we are very pleased with the results to date.

The oxygen respiratory market continues to trend positively. Despite seeing some market shifts due to reimbursement caps in the US moving some of the market share to concentrators, we found that educating and training pulmonologists will draw out market share against alternative therapies in the US market.

Demand in Europe is growing as the economy recovers and government spending resumes particularly in southern Europe. Cryobiological business continues year on year growth as it recovers from the downturn, the one area of the biomedical business that the recession did have some impact on. Cord blood banking and large cell bank opportunities globally draw demand for our large freezers. The animal breeding sector orders continue to grow in comparison to 2009. I would now like to open it up for questions. Kristen, please provide instructions to the participants to be able to ask questions.

(Operator Instructions)

Our first question comes from the line of Rob Brown with Craig-Hallum. Please proceed with your question, your line is now live.

Good morning. I am just wondering if you could give a little color on the utilization -- where you are at in terms of utilization in the E&C business and where you see margins trending from here?

Our utilization levels are low probably depending on the operation at less than 50%. There is still strong competitive bidding on all projects although I feel pretty strongly that we've come off the bottom.

In terms of margins, Rob, I would expect as we move forward they will trend up a little bit from where they were this quarter even -- slightly (inaudible).

Okay that is great to hear. And then you mentioned also the LNG fueling opportunities. Can you just review for us again maybe per station or per LNG facility how your revenue can flow from that and what you see China doing in the next two to three years here?

Our revenue content on an LNG or combined LNG - CNG terminal or vehicle fueling terminal is in the $750,000 to as much as $8 million depending on the size of that facility. It is difficult to call the number of stations that are in the planning phase, in China numbers in the hundreds, in the US in the 20 to 100 stations over the next couple of years.

Okay, great, thank you.

Thank you our next question comes from the line of Tom Hayes with Piper Jaffray. Please proceed with your question, your mic is now live.

Thank you, congratulations on the quarter, guys.

Thank you, Tom.

Thank you, Tom.

I was just wondering if maybe you could provide a little bit of color are a couple things. One, you had called out some of the Euro exposure that maybe hit the margins on the biomedical side. How much of that segment of business is exposed to the Euro?

In terms of -- if you look at our overall business it is probably -- including the European operations distribution and storage it is about $100 million but that has a natural hedge in place, a lot of their costs are in Euros so when you look at biomed it is somewhere in the $30 million to $35 million range in terms of sales.

Okay.

But they have been pretty effective in terms of being able to recover their exposure with pricing increases or keeping prices at a level that will cover it. If you look from this quarter to last quarter of this year because of the higher Euro that was last year it had about a $2.3 million impact on sales meaning sales were $2.3 million lower because of the translation effect which is pretty nominal in terms of operating income somewhere $200,000 to $250,000.

Okay I guess then also from a modeling point of view, do we have anymore restructuring costs coming over in the next quarter?

Yes we will have -- it will be nominal, have very nominal impact in the fourth quarter there may be some in the first quarter of next year as we wrap up the building of the facility for the oxygen therapy down in Georgia. But it should be less than $1 million maybe even less than $500,000 as we move forward.

Okay just lastly it sounds like a great opportunity on the Department of Energy opportunity, is that something that probably wouldn't be material until well into next year, as far as the results?

Material in the near term. Commercial application of that revenue -- revenues for research or pilot scale facilities will be in 2011 but it won't have a meaningful impact on our results in 2011, 2012 timeframe.

Great thank you.

Thank you our next question comes from the line of Roger Read with Natixis Bleichroeder. Please proceed with your question, your line is now live.

Good morning guys.

Good morning Roger.

Good morning Roger.

I guess kind of following up with the last question there, utilization and the impact on the margins and then kind of adding on to that, do we need to see large scale projects of whatever type coming back into the market in terms of you winning them and order -- in order to get utilization up? Or Sam would you say that especially at least in the D&S segment given the strength in China and sort of broadening out into the other markets that really is more of a broad-based improvement that is going to allow you to get utilization back up and then margins improve ultimately some pricing as well.

Utilization within the D&S business is moving up ahead of our E&C business. And I think as we get in to 2011 assuming the continued trend of improving activities particularly in the industrial gas area will see some firming up of margins, somewhat dependent on overall levels of activity and commodity pricing. I think it is generally going to be a positive trend. Within the energy and chemicals business, there has been enough increase in activity that I feel pretty confident about margins having gone through their trough and they will progressively improve. The rate of increase will be driven by overall industry capacity utilization as well as the levels of global activity which will be reflected in commodity prices. In other words, as commodity prices particularly stay in one and aluminum go up -- indicative of significant levels of activity, broad-based activity, which should give us more operating leverage.

All right well you took my follow up there, I was going to ask you about what was going on with raw materials costs because I remember a few years ago that seemed to be one of the ways if nothing else that revenues were getting pushed that you were putting through surcharges. We are not I assume at the surcharge level just yet?

Well stainless steel has certainly -- and carbon steel have certainly recovered significantly from the first half 2009 trough. They are currently at the sort of levels of base price and surcharge that we saw in the marketplace in 2004, 2005 timeframe. In the third quarter and forecast in the fourth quarter, both of those commodities were forecast -- saw price strength and forecast where they would continue to go up forecasts for 2011 are up although the general view is that through the fourth quarter, first quarter they will probably be reasonably flat, that perhaps the aluminum producers and stainless steel producers got out a little ahead of themselves in pushing pricing.

Okay and final question for me is a lot of acquisitions obviously over the last -- well pretty continuously but certainly you've had a pretty active situation over the last 18 months or so. As you look over the next 18 months and I recognize it is difficult to predict if a transaction will close or not but based on the deals you are looking at -- how does the acquisition front look over let's say through this time next year?

We think it is positive. We are putting -- we put more resource into that area because we think there are good opportunities and will continue to be good opportunities.

And that is all I'm going to get?

Yes, stay tuned.

All right thank you.

Thank you our next question comes from the line of Jeff Spittel with Madison Williams. Please proceed with your question, your line is now live.

Good morning Sam, good morning, Michael.

Good morning.

Good morning.

I guess looking at E&C margins with respect to product that you are shipping now and kind of working off the lower price or lower margin stuff from the downturn, how far along are we in that process and I guess can you walk us through the implications for margins in the next few quarters?

Obviously it is coming out of backlog and some of it is that we are executing better in terms of some of these projects. They are -- initially we are at lower margins we are executing better and able to capture and drive higher margins as we move forward. We are seeing margins improve and orders that are coming in and orders that we are quoting, so we would expect their margins to continue to ramp up not a hockey stick type ramp up but -- would expect them as we move into next year to sort of be in that mid 20% range could possibly as we move towards the end of the year get into a higher range but right now we -- our expectations would be mid 20s.

Okay so it sounds like the six or seven thinning may be in that process with some of the stuff that is turning from the backlog from the orders in 2008.

Yes. We still see -- towards the end of next year is where we start to see more significant ramp up.

Okay. Switching over to the US land market -- would imagine Air Cooled Heat Exchangers, those orders still looking good. Could you give us a sense of the climate there in terms of pricing and capacity utilization?

Pricing is -- while that segment of the Air Cooled Heat Exchanger market has been very good the overall market for some of our competitors means there was excess capacity so margins have again come off the trough, are improving but I don't see a big jump in margins in that segment of our business over the next few quarters because of that. It is good healthy activity but it is not frenzied activity.

Okay and then finally with regard to inner oil and energy world -- talked about modular GE facility in Papua New Guinea. Can you give us an update I guess on where you stand with regard to potential timing with an award on that on front if there is one forthcoming?

No.

I saw that one coming I had to try. Okay, well that is good for me thank you very much, great quarter guys.

Thank you.

Thank you our next question comes from the line of Greg McKinley with Dougherty & Company. Please proceed with your question, your line is now live.

Thank you. In terms of the duration over which the order book and E&C is going to be falling through your PNL. I wonder if you can comment if that has changed it seems in the September quarter you indicated you had seen some requirements to produce equipment quickly and had a nice margin benefit from that. Is that how we should expect that order book to continue to behave here in the short term or maybe some shorter cycle more rapidly delivered product? And is that also coinciding with the higher margin viewed over the next couple quarters?

No Greg I mean it is tough to predict those expedited orders I think that is what you are referring to.

Yes.

They are very good margins but no, we typically don't forecast those and that is not part of our margin improvement as we see it going forward. Obviously if we had those it could even enhance the margins more. But we don't try to predict them because they are lumpy as is the overall business when they do come in but we are certainly happy to accommodate our customers to deliver them.

So please correct me if I'm wrong but it sounds to me like utilization is going to be improving such that we can maintain similar margins in E&C in the near to mid term without the benefit of those expedited orders, we can still stay in that level?

That is correct.

Okay fair enough thank you. And just book keeping real quickly, given the shift in revenue domestic and international how should we be thinking about your tax rate over the next ...

For this year it should continue to be in that 26%, 25.5% to 26% range.

In Q4?

In Q4 -- next year would expect it probably to go up a little bit may be 26%, 27%.

Okay so we are seeing it -- we are seeing a meaningful reduction there from where we have been -- I guess it jumps around a bit but we had been in the low 30% range or upper 20s for a while and it seems like we are shifting a couple base points lower.

We see a shift back obviously it's more domestic earnings that would drive the rate up.

Yes thank you.

All right you're welcome.

Thank you.

(Operator Instructions)

Our next question comes from the line of Eric Stine with Northland Capital Markets. Please proceed with your question, your line is now live.

Hi Sam. Hi Michael. Congratulations on the quarter.

Thank you.

I was wondering if we could just talk about the $22 million NGL project out in the Middle East. Just maybe some color on how long you have been working on that project, did you have the feed study on that and was it a competitive bid situation?

It was. We were not involved in a feed study it was an award from a major EPC. We had been in discussions on that project for roughly a year and yes it was a competitive bid.

And it sounds like just from your outlook on margins going forward that the margin profile or the bidding on that was a little bit more rational than maybe we have seen in some of the really large projects in Australia.

That is a fair assessment.

Okay that is helpful. Maybe just turning to SG&A, just kind of refresh thinking there, should we still think about minimal increases as we get into next year -- that you can ramp revenues a pretty fair amount as these segments come back without adding much SG&A?

When you say minimal, less than 10%, yes. We will see a ramp up for the business unit on the corporate side we think it will remain pretty fairly level without any really any significant costs but as the business units ramp up and perform better we will see things like sales commissions go up that are in SG&A and things like that -- would expect to see a ramp up overall of SG&A next year. Less than 10% but -- in that could be 7%, 8% range next year.

Okay thank you a lot on that.

And that is pretty preliminary at this point. We really have not put together our plan for next year. That is sort of a gut feeling there.

Understood on that. And then just lastly on the acquisition may be just a follow up to a previous question, given the reimbursement trends you talked about -- an oxygen concentrator adding that the product lines is that a possibility going forward?

That is a possibility.

Okay I guess we will just leave it at that. To be continued. Thanks.

Thank you.

Thank you our next question comes from the line of [Matthew Prince] with King Street capital. Please proceed with your question your, line is now live.

Hello congratulations on the quarter. I wanted to follow up with the question about the biomedical segment. So it looks like in the quarter you did a gross margin of about 39.5% and you mentioned in the press release it was adversely impacted by the Euro and you mentioned in the comments that there was also still some acquisition accounting that was depressing it. So I guess my question what do you view as the normalized margin for that segment?

Would expect it to be in the 40% range.

Okay so those impacts were not too significant?

No.

Okay that's all thank you very much.

You are welcome.

Thank you.

(Operator instructions)

Our next question comes from the line of Gary Farber with CL King. Please proceed with your question, your line is now live.

Okay thank you. Can you talk about market share? Do you think you're taking market share in any of your segments today in a meaningful way? Is that helping the results and do you see opportunities heading into next year in any particular segment? Do you think there is market share opportunities?

We don't really have any good insight into that. We are we are committed to the markets we are in and our customers and we work hard at providing the highest possible service levels. As a result of that, we believe will continue to be successful and will grow at a pace above that of the market as a whole.

Okay all right, thanks.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Thomas for any closing comments you may have.

Thank you Kristen. In conclusion, our solid third quarter results were very positive, clearly an indication of improving markets that we are seeing. Our balance sheet and liquidity positions us well to continue to pursue a creative growth opportunity both organically and through acquisitions which will add value to the Company and for our shareholders. We continue to be optimistic about the Company's future and moving forward on executing our strategic growth plan. Thank you to everyone for listening today. Goodbye.