Chart Industries Inc (GTLS) 2011 Q3 法說會逐字稿

Good morning and welcome to the Chart Industries Inc's 2011 third quarter conference call. (Operator Instructions). 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 Friday, November the 11th. 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 statements. 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 and forward-looking statements. 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, Maureen. Good morning, everyone. I'd like to thank you all for joining us today. I will begin by giving you a brief overview of our third quarter results. Then Sam Thomas, our Chairman, President and CEO, will comment on current market and order trends we see in each of our business segments. Then I will finish up by commenting on our outlook for 2011.

Reported third quarter net income of $17.5 millionor, $0.59 per diluted share. This compares to third quarter 2010 net income of $6.6 million or, $0.23 per diluted share. Third quarter net income included restructuring costs of $1.2 million or, $0.03 per diluted share, largely associated with the SeQual and GOFA acquisitions.

Earnings per share for the third quarter of 2011 would have been $0.62 per diluted share, excluding the $0.03 per share of restructuring costs. Weighted average diluted shares outstanding for the quarter were $30 million compared to $29.2 millionin the prior year. The third quarter of 2010 also including acquisition related restructuring costs of $1.5 million or, $0.04 per

diluted share. Bails for the quarter were $211.3 million, which represented an increase of 52%, and a new quarterly record, compared to net sales of $139.2 million a year ago. Our gross profit for the quarter was $66.6 million or, 31.5% of sales, compared with $42.8 million or, 30.8% of sales as year ago.

We continued to see margin improvements primarily associated with improved capacity utilization. With respect to the E&C business, sales increased 51% to $57.8 millionin the third quarter, due to improved volume in all product lines, in addition to, starting to ramp up production on several large projects in our systems business. Gross margin improved to 33.1% in the third quarter, compared to 23.4% in the same quarter of last year. Increased capacity utilization was the primary driver for the improvement.

Margin also improved approximately 3%, due to the sale of equipment that was previously written off. We had taken a write off, in 2009, for some equipment that was manufactured for a customer in a system's business that wasn't paid for, but also wasn't shipped. We have the resale of this equipment in the current quarter, to offset our prior year loss.

In D&S,sales increased 55% to $100.9 million in the third quarter, largely due to increased demand for L&G equipment applications, mobile equipment and standard bulk tanks. The acquisition of GOFA, which closed in August, accounted for approximately $2.4 million of the improvement.

Gross margins for D&S declined somewhat to 28.2%, compared to 30.2% a year ago. The decline is primarily due to product mix, including LNG business in China, higher material costs and higher employer related costs as the Company addresses capacity expansion due to increased order flow. For example, we expanded our welder trainer program in anticipation of this capacity expansion, which added costs in the quarter, in which we believe we will see benefit from later on.

In our BioMedical business, sales improved 46% to $52.6 million in the third quarter, primarily due to the fourth quarter 2010 SeQual acquisition, which accounted for approximately $8.9 million of the $16.6 million increase. SG&A expenses for the quarter were $34.1 million up $7.9 million from the same quarter a year ago. Increase was largely due to the SeQual and GOFA acquisitions as well as higher marketing.

Net interest expense was $6.4 million for the third quarter and included $1.4 million of non cash interest accretion expense, associated with the new 2%, seven-year convertible senior subordinated notes issued in August. Interest expense was also higher in the quarter by $2.4 million or, $0.06 per share. Since the convertible notes and the now repaid 9.8% senior subordinated notes were both outstanding for approximately two months during the quarter.

By delaying the call date until October 17th, for the old notes, the reduction in the call premium, which more than offset the additional interests of holding both debt issues outstanding for a couple months. I'll briefly outline the GAAP accounting treatment for the convertible notes. At settlement, any excess due over par value the notes may be paid in stock or cash at the Company's option. Therefore, the $250 million principal payment of the convertible notes, had to be bifurcated between debt and equity. As a result, the Company record interest expense for these notes at 7.9%, which is the theoretical interest rate the Company would have had to pay if it had issued nonconvertible debt.

Non cash interest accretion expense, which will approximate $3.6 million for 2011, is recorded to account for the difference between the Company's actual interest expense and it's convertible notes which is 2%, and the 7.9% theoretical straight debt rate. We'll continue to highlight the non cash component of interest expense, as we think it will improve the transparency of our results. Also you should note on October 17th, 2011, a portion of the proceeds from our new convertible notes were used to redeem the company's 98% senior subordinated notes, which will save approximately $10 million of cash interest expense annually. I'll now turn the call over to Sam Thomas.

Thank you, Michael, and good morning, everyone. We had another strong quarterly order intake, with third quarter orders of $227.4 million. Year to date, we have booked $804 million of orders on track, to set an annual record. Excluding the two large E&C project awards, totaling approximately $138 million the first half of 2011, E&C orders sequentially improved again during the third quarter. We continue to see robust quoting activity for large project awards in our systems business.

We are also seeing strong demand for LNG infrastructure equipment, in our D&S business worldwide, but particularly China and North America. Our D&S business held a record order backlog in September 30th, nearly $160 million, due to strong orders in global equipment and standard bulk tax. Acquisitions continued to drive the improvement in BioMedical order intake year-over-year.

Last quarter we announced expansion plans for our Louisiana and China facilities to address several large orders and our E&C backlog, and a significant growth in distribution and storage LNG product opportunities in China. Similarly, earlier this month, we announced further capacity expansion plans in the United States. The recent announcements of new investments in domestic LNG infrastructure, by major natural gas producers and equipment providers, has provided traction for increased LNG demand here in North America.

We believe we are entering a multi year secular growth cycle driven by the expanded use of natural gas globally, and now in North America, are confirmed by these recent announcements. To meet customer orders and expectations, we plan to begin in the fourth quarter of 2011, a first day as investment of approximately $4 million, at a site to be located in the upper Midwest, as announced earlier this month.

We also completed the GOFA acquisition during the third quarter. As you recall, GOFA designs, manufactures, sells and services cryogenic and noncryogenic global equipment. We have begun the integration process and look forward to leveragingGOFA's portfolio of mobile equipment to improve our cryogenic solutions worldwide. Particularly the significant global demand for LNG equipment. Let me now comment on each of our business segments.

We are pleased with the current order trends and base demand for our major customers,which continues to add quality backlog to our business. We are at a ramp up phase, the large global LNG, petrochemical and air separation projects, continue to make progress leading to what we believe will be new orders. However, as you are well aware, project timing can be difficult to forecast. We continue to expect some major investment decisions to become finalized over the course of the next six months.

As previously mentioned, E&C has already booked two large systems projects this year, totaling $138 million. Both of these projects are progressing on schedule. It is important to note, that when excluding these orders, the E&C orders sequentially improved. We set a quarterly record with air cool heat exchangers, within our energy and chemicals business, as demand for equipment used in natural gas compression, as well as other domestic gas processing applications and power industry applications.

With respect to distribution storage, order backlog reached a new level in the third quarter. For the Group, average monthly orders in the trailing 12 months, are now more than 50% higher year-over-year. We see strong demand for our products in North America and Asia, and to lesser extent Europe. Despite the weakness in the EURO zone,average monthly orders in our facility in the Czech republic are still up 30%, compared to last year.

Globally, orders from equipment and standard bulk tanks especially related to LNG applications, continue to be a major growth driver. E&S is also experiencing strong demand from our major industrial gas customers, for both large engineered bulk tanks and smaller packaged gas products. This is in line with the positive comments, from the industrial gas producers over the last month and as recently as this morning, with Airgas and Praxair releasing results.

We knew this trend is a strong indicator of continued economic recovery. At BioMedical, recent strategic acquisitions continue to drive performance. The business remains focused on satisfying strong customer demand for quality products and service, while integrating acquisitions and continuing to ramp up production at our recently completed facility in Canton, Georgia. We expect BioMedical restructuring costs to wind down by the end of this year, and will begin to see some valued creation as we develop and release new products in the coming here. Mike will now provide you with our outlook for 2011.

Thank you, Sam. We remain positive despite the concerns over macro-economic slow down. Our order trends remain strong, and we are reaffirming our previously announced sales and earnings guidance. While we are not seeing softness coming in our markets, some broader economic indicators are pointing to that way, and potentially signaling greater uncertainty. As a result, we are leaving the range of our outlook unchanged. We are, however, revising our restructure related costs in tactas a result of the redemption of the Company's 9.8% senior subordinated notes.

Sales for 2011 are still expected to be in the range of $780 million to $820 million. Full-year earnings per share for 2011,are expected to be in the range of $1.57 to $1.70 per diluted share, based on outstanding weighted average shares of approximately $30 million. Previous guidance included approximately $0.15 per diluted share, for anticipated restructuring and acquisitions costs. This is now revised to include an additional $0.18 per dilutedshare, for the call premium and write off of deferred financing costs, due to the redemption of the senior subordinated notes completed in October.

As a result, included in our 2011 earnings estimates are approximately $0.33 per diluted share, for anticipated restructuring, acquisition and refinancing costs. Excluding these charges, full-year 2011 earnings are still expected to fall in a range of $1.90 to $2.10 per share.

I'd also like to point out, that our outlook also now includes absorption of the additional interest expense incurred in the quarter of $2.4 million or, $0.06 per share, for having both the new convertible notes and the old senior subordinated notes outstanding during the third quarter. I would now like to open it up for questions, Maureen, please provide instructions to the participants to be able to ask questions.

Thank you. (Operator Instructions). Our first question is from Rob Brown, Craig-Hallum.

Good morning. Just wanted to get a little more color on your margin trends. I guess the question is really when you add capacity, will you see some margin degradation from that and in general, what's your margin outlook for the different segments going into 2012? Do you expect that to continue to increase? Thank you.

Rob, in when we look at energy and chemicals we should continue to see an improvement there, as we go forward into 2012. With working out some of the older backlog, lower margin and continuing to get orders in at better margins than as we ramp up capacity, we'll see improvements there. In distribution and storage, we will continue to be sort of in that 30% range as we move forward into 2012. On BioMedical we should see an improvement there as we get the acquisitions integrated into BioMed fully, and see some slight improvement there. We would anticipate margins to be in sort of the 40% to low 40% range, as we move forward.

Okay, good. Just quickly moving to kind of the order intake, you talked sort of positively about the trends in the space. You are adding capacity, but this quarter's numbers sort of stepped down sequentially, and then you kept guidance flat, just wanted to reconcile all those things. I guess your commentary is pretty positive, does that mean we should expect 2012 to continue to see a step up in backlog of orders? Just give us some color on what you think it looks like in the next year? Thank you.

We anticipate it will. We have talked about the large orders and their impact on our backlog, but also the difficulty in calling the timing of receipt of those orders. A number of projects are moving forward and we are very optimistic that will be successful in winning them. Both within the energy and chemical space and our distribution and storage business. So if you -- and that's why we pointed out that if you backed out the large projects, it's sequential order intake was improving.

In energy and chemicals, order intake on the smaller base load orders has continued. As we are into October, and in both BioMedical and distribution and storage, order intake in October has continued to be strong. Though we remain confident in the outlook.

Rob, the other thing that is hard to estimate is when we have these big projects and how the revenues and profits are recognized on them, because some of it is dictated by customer releases or customer approvals, vendors and things like that. So it's often difficult to, for example, the large project that we with got in the first quarter for cutter, we try and estimate that, but sometimes it is difficult to pin it right exactly when it is going to fall into a quarter.

Okay, great. I understand, thank you.

Your next question is from Greg McKinley, from Dougherty, please go ahead.

Yeah, good morning. Sam, you talked about expecting some major investment decisions for large projects to move forward over the next six months or so. Just give office sense for how many of those -- what's the size of population of those projects, so we can understand what the opportunity is? Are these three or four projects you are competing on or are there a larger number?

Well, of the projects in size, in the 50 to 100 or 100 plus range, there are five or six of them, and I think that two to four of them could be moving forward within six months.

Okay. And then looking at the E&Cmargins, even if we remove the margin impact of the sale of written-off equipment, it still looks like operating margins there were quite strong. Largely due to maybe lower operating expenses in that segment ismy guess, can you talk about what happened there? Is that a sustainable sort of operating expense run rate in that division?

The operating expense run rate is sustainable as long as you understand if we are -- that we are ramping up production. We had some very attractive mix changes, particularly favoring Brazed Aluminum Heat Exchangers, going into gas processing applications in the quarter. I would believe it's sustainable andwe're optimistic going forward.

Great, and then just last question. We've got about two months left in the fiscal year at this point. Why is wide of a revenue view at this point? What are the variables that are still, in your mind warrant, I guess what is it a $40 million potential range, that revenues could come in?What are the factors that determine whether that will be towards the high end or the low end of the range?

There's two primary drivers. Within our distribution and storage, a significant part of our order intake, has been on large engineered tanks or small systems projects where we are providing complete packaging to customers. And while those projects are on schedule in terms of completion in our shop, we don't recognize revenue on them until they are, in fact, shipped to typically our customer's customer's site.

Okay.

It's a challenge to, because they are going into larger size projects, difficulties the customer has for schedule setbacks effect our ability to ship from our yard and recognize revenue. That portion of our business is larger than it has been historically. As we ramp up for these larger projects and it's also feature that is effecting us in all three regions of the world, in North America, China, and Europe. So it adds more uncertainty as to whether revenue gets recognized, primarily in December or January for us.

Okay, very helpful.

[Inaudible] is within our energy and chemical business, as you know we received two large orders in the first half of the year. Those projects are both in ramp-up phase, and often times our ability to start recognizing revenue on a percentage of completion basis, is effected by customer approvals, of either quality plans or our suppliers, in order to issue purchase orders, receive materials, and ramp-up. While there's no problems with project execution timelines, it's difficult to call, exactly the month that those ramp-ups occur completely. Again, that results in a December/January issue for us.

Perfect. Thank you.

(Operator Instructions). The next question is from Eric Stine, Northland Capital Markets. Please go ahead.

Hi, everyone, thanks for taking the questions.

Sure.

Just a follow up on that. In this third quarter, there was no or very little revenue, I guess specific to the order that you got in the first quarter?

Well, on the one that we got in the first quarter, there was about $7 million of revenue, but on the other projects relatively none.

Okay. Understood. Maybe just turning to North America, in what you are seeing both LNG infrastructure and natural gas liquids if you can just discuss, clearly you are very bullish there, just discuss maybe how that has changed over the last, call it six to nine months?

With respect to natural gas processing, what has been a robust market for the past year to 18 months, continues strong. In fact, if you look at the movement of rigs drilling for dry gas versus liquids-rich gas, you get the -- you can see that the demand for new natural gas processing plants is continuing to increase. That has not seen significant change, other than a continuing trend and what we see as robust orders from that market.

On the natural gas infrastructure and usage of LNG for transportation, over the past six to nine months, we have moved from -- we have had public announcements from three significant gas producers, Chesapeake, Encana and Shell. As well as, increased activity from a number of the other significant E&P companies producing gas orliquid fridge gas. Making commitments to LNG vehicle transportation and diesel fuel replacement for heavy duty applications.

Those commitments, really are underpinning and are commitments to a multi-year build out of LNGinfrastructure for diesel replacement. That market has continued to brighten and strengthen. The orders don't always come as quickly as our customers initially indicate to us early in the discussions, but the commitment expressed by them in their public announcements and their discussions with us, continues to become more positive.

The economics of utilizing LNG as a diesel replacement, in North America and globally, continues to look very attractive and are sufficient to drive that change absent government incentives to do so.

Okay, but fair to say, you really haven't seen the true order impact from that as of yet?

We've actually started to see it, yes, we have.

Okay.

In the quarter.

Okay. That's good to hear. Then maybe lastly if we can just turn to China. Just wondering, clearly that's been a significant portion of your growth, especially in DNS. Just how should we view growth in China in LNG., in the context of what we have all been hearing about a slowing economic environment there?

I think that it's independent of a slowing economic environment. Remember, that the energy demands and the growth in energy requirements within China, whether it's a 10% GDP rate or a recessionary 8% growth rate,are dramatic.

The economic drivers for China to increase natural gas use, displacing particularly diesel, means that the LNG projects continue to have high visibility and high priorityfor both, the national oil companies in China and all of the smaller operators normally affiliated with those national oil companies.

Any thoughts on what, maybe what inning, you see things as far as growth in China?

I think we are still very much in the ramp up phase. We just earlier this month commissioned, more or less, a showcase LNG vehicle fuel station outside of Shanghai. We have several more under construction, in what is plans to be hundreds of stations over the next three years. So we are early innings, we expect the orders to continue to ramp up through 2012 and '13. But continued very strong orders, out into the 2015-16 timeframe, and potentially beyond that.

Okay, thank you.

Next we have a follow up question from Greg McKinley, Dougherty, please go ahead, sir.

Michael, I wonder if you can help me out with the accounting a little bit here. With everything that's gone on with interest expense. I guess number one, you are no longer incurring double interest expense, or are you?

That's correct. We paid the bonds off on October 17th, and those are now gone, so for roughly a half month we would have, but beyond that, no, no longer. That's overlay, but it was our view that was the right thing to do, because the redemption premium dropped by 1.5% by going on to that date and it has more than offset the additional interest.

Okay. In terms of an interest expense run rate going forward then, so we are just incurring costs on the convertible debt. What is that expense rate? How should we think of that in dollar terms?

Well, it's 7.9%on roughly -- and what has happens is that debt will increase as we go forward, because of the unusual accounting on it. As we go forward, the cash coupon interest, if you just look at it for example, 2012, the cash coupon would be roughly $5 million. Then there would be roughly another $9.1 million of non cash interest accretion expense on top of that.

Okay.

Which is still lower than our 9 1/8% coupon bonds,even on an all in basis,and a large part of it being non cash, which we want to make sure that everybody understood.

Okay, so total interest experience in '12 is something like $14miliion, $5 million of which is cash?

Correct.

Very good, thank you.

Okay.

Having no further questions this concludes our question and answer session. I would like to turn the conference back over to Sam Thomas for any closing remarks.

Thank you, Maureen. You are all well aware that there's a lot of economic uncertainty,but we are seeing strong demand across all of our industrial markets. It's not as robust in Europe, as it is in North Americaand Asia. It's still positive and we are seeing growth. I think many of the industrial companies reporting, in particularly the industrial gas companies, outline that relative strength compared to the forecast of GDP growth.

So clearly see that industrial production growth and manufacturing growth, are stronger than the total economy. We're well prepared for that growth. In addition, we have what we believed, is a very strong secular growth story, associated with natural gas. We're an integral supplier in a large number of natural gas infrastructure projects, as natural gas becomes a larger part of the overall energy pie, and is introduced and grows as a replacement for vehicle transportation fuels.

We have seen orders come. We've got a lot of quotation and development activity, with very strong national and global players. In addition, I should say, but we are also prepared to pull in our horns quickly, if necessary, based on a spreading crisis that travels around the world from Europe.

Obviously the news today is positive andthat seems to be receding somewhat as a concern. Our flexible balance sheet, liquidity, strong order backlog, our expansion plates, plans to meet increasing demand, continue to make us a strong and reliable partner for our customers, and a valuable opportunity for our investors. Thank you for listening today, goodbye.

The conference is now concluded thank you for attending today's presentation, you may now disconnect.