Chart Industries Inc (GTLS) 2015 Q2 法說會逐字稿

Good morning. And welcome to the Chart Industries, Inc. 2015 second 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.chartindustries.com. A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, August 6th.

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 exclude 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 under takes no obligation to update publicly or revise any forward-looking statements. I would now like to turn the conference call over to Michael Biehl, Chart Industries' Executive Vice President and CFO. You may begin your conference.

Thank you. Good morning everyone. I would like to thank you all for joining us today. Begin by giving you briefer overview of our second quarter results then Sam Thomas will provide comments on current market and order trends we see in each of our business segments. I will then finish up by commenting on our outlook for the remainder of 2015. Net income for the second quarter of 2015 was $17.2 million, or $0.56 per diluted share. This included the Owatana, Minnesota facility shut down another severance costs recorded in the quarter of approximately $1.7 million, or $0.04 per diluted share. Excluding these items second quarter 2015 earnings would have been $0.60 per diluted share.

This compares with net income of $20.1 million or $0.65 per diluted share for the second quarter of 2014. Second quarter of 2014 earnings would have been $0.70 per share excluding the $0.05 per diluted share impact of acquisition-related costs and dilution impact associated with the Chart's convertible notes during that period. We also had a foreign currency transaction gain of $3.1 million for the second quarter of 2015 or $0.07 per diluted share given the volatility of currency rates. This effectively offset the $0.07 per diluted share loss we had in the first quarter of 2015.

Sales for the quarter were $270.3 million, a 12% decline from the prior-year quarter. This was largely due to a decline in LNG sales in our D&S Business particularly in China but currency translation had an unfavorable impact as well. Translation effect from the strong dollar reduced consolidated sales about $9 million and gross profit by about $2.3 million in the second quarter of 2015 on a constant currency basis. Our gross profit for the quarter was $74.9 million or 27.7% of sales compared with $92.2 million or 30% of sales a year-ago. Overall, gross profit was down due to lower sales volume and higher restructuring related costs at our D&S business.

This is partially offset by previously announced cost reductions in addition to proof, project mix and execution in our E&C business. Orders received in the second quarter totalled $231.1 million and were up sequentially from first quarter 2015. Net orders and backlog were, however, reduced in the second quarter 2015 by $47.6 million to address adjustments in the D&S Asia backlog for exhaust in China that are not able to confirm on previously committed orders primarily due to the impact of lower oil prices and the overall economic slowdown in China.

As a result reported orders for the second quarter of 2015 were $183.35 million net of the $47.6 million backlog adjustment in China. In the E&C business sales decreased 1.7% to $91.3 million for the second quarter of 2015. The decline was due to lower sales volume in brazed aluminum heat exchangers which was partially offset by approved project mix in processed systems. Gross margins were 30.3% in the quarter compared with 26.5% in the prior-year quarter. The negative margin impact of lower brazed aluminum heat exchanger volume was more than offset by improved product mix and execution in addition to the absence of start up costs related to La Crosse expansion and Wuxi acquisition in the prior-year quarter. In our D&S business second quarter sales decreased 18.3% year-over-year to $121.8 million.

The impact of lower global oil prices and a week economic environment in China is negatively impacting our D&S Asia business. Sales volumes are down 35% in the current quarter over the prior-year quarter in China. In addition, the currency translation impact in our D&S European business reduced sales by approximately $6 million on a constant currency basis. D&S gross margins were 23.4% compared with 30.6% in the prior-year quarter. Lower LNG volume restructuring costs associated with the Owatonna shut down and other cost reductions initiatives as well as product mix led to the decline.

In addition, the prior-year quarter included the favorable resolution of a partial contract cancellation from a major oil company customer which privileged D&S margins about 1.5%. In Biomedical sales decreased 11.8% year-over-year to $57.1 million. The decline is primarily due to lower respiratory sales volume in Europe due to delays in the tendering process and currency impact due to the strength of the US Dollar. The currency translation impact in our Biomedical business reduced sales by approximately $3 million on a constant currency basis.

Biomedical gross profit margin declined to 32.8% in the quarter compared with 33.8% for the same period in 2014 due to lower volume and product mix. SG&A expense for the quarter was $45.6 million, down $8 million compared to the same quarter a year-ago. The decrease was largely due to lower variable based incentive exception based on current performance, lower bad debt expense due to improved collection on some old outstanding balances and favorable impact from cost reductions initiated in the fourth quarter of last year.

Income tax expense was $6.9 million for the second quarter and represented an effective tax rate of 28.7% compared with $8.8 million for the prior year second quarter which was an effective tax rate of 30.2%. The decrease in the effective tax rate was primarily due to the effect of income earned by certain of the Company's foreign entities which were taxed at lower rates. I will now turn the call over to Sam Thomas.

Thank you, Michael, and good morning everyone. Our second quarter results again reflect solid performance across many of our businesses despite the uncertainty in global oil pricing which continues to cause customers in the energy space to defer investment decisions. We continue to focus on our core business with disciplined execution, strong management involvement and aggressive cost cutting.

While our remaining circumspect with the regard to the impact of uncertainty in oil pricing, we are encouraged by the growing interest activity in North American LNG export facilities and specifically the move towards multi-train mid-scale liquefaction. The pending order we included in the earnings release today for braze aluminum heat exchangers and core and kettle exchangers and coal boxes for the four train Magnolia LNG project which will incorporate Magnolia's OSMR technology, is one of a number of projects we have been pursuing in this space.

We expect a staged release on Magnolia commencing in the third quarter with a commitment for all four trains by the end of 2015. Total order value is expected to be in excess of $80 million. Venture Global LNG and Parallax Energy's Live Oak LNG and Mississippi LNG projects which I had mentioned on previously calls and which we are currently performing advanced engineering for, fall into the same multi-train mid-scale category.

However, these projects will employ Chart's own IP SMR liquefaction process and will be significantly larger in scope for Chart. Oil well prices and significant economic malaise in China remain one of our largest challenges. We do expect to manage to recover as the government continues to support its pollution control goals. However, we do not expect a significant 2015 improvement. We have had disappointing sales orders and order prospects despite the optimism within China and our customer base that recovery is just around the corner. We are aggressively addressing that disconnect with appropriate cost reductions.

Overall, as I commented last quarter, 2015 is proving to be a challenging year. Earlier optimism regarding recovery of oil prices and China activity in the second half of 2015 now appear unfounded. We still expect to see growth in our D&S package gas and bio-medical markets but we face a continued deterioration in prospects in D&S LNG applications based on diesel fuel replacement, especially in China. We also face similar challenges within E&C for petrochemical, natural gas processing and industrial gas prospects as the energy industry has pulled back on capital spending.

Global competition continues to put pressure on pricing. In response we continue to focus on our cost reduction initiatives as evidenced by our performance this quarter. Since we began our cost cutting efforts in the fourth quarter of 2014, our headcount reduction now stands at 12% of our global workforce. These headcount reductions and other actions, equate to annualized savings in excess of $40 million.

I would again like to emphasize that despite the current head winds we are facing we remain confident that our focus on meeting and exceeding customer needs and the long-term fundamental drivers of growth including rising industrial production, and increased global demand for energy, natural gas in particular and a growing needs for respiratory healthcare particularly in developing countries, will deliver results.

We are continuing to invest for future growth including pursuing potential acquisition candidates. The acquisition of vaporizer manufacturer of Thermax which we completed in July is validation of our growth intentions. Let me now comment on specific highlights for each of our businesses. Within Energy & Chemicals we booked $23 million in orders during the second quarter. This is down sequentially from first quarter 2015 orders of $43 million.

As I alluded to earlier, while we are certainly experiencing deteriorating short-term prospects and pricing pressure most notably for brazed aluminum heat exchangers the timing of project awards is historically lumpy in the E&C segment and always a challenge to forecast. We are encouraged by the continuing interest in quoting activity for mid scale multi train liquefaction for LNG export facilities here in North America which could be largely unaffected by current oil prices.

The Magnolia LNG project is a good example of this and we are cautiously optimistic that equipment orders will be forth coming for other LNG export projects over the next year. Some of which could be much larger than that currently announced. Within Distribution & Storage we booked orders of $149.6 million in the second quarter an increase of 21% from our first quarter 2015 orders of $124 million led by a particularly strong orders in the US. The adjustments Michael mentioned in our China backlog reduce reported quarterly orders, of course, as we report them on a net basis.

Global industrial gas activity remains in line with expectations despite reduced volumes reported by many of our large customers and is still expected to grow marginally in 2015 based on rising industrial production and major customer forecasts. Our D&S US orders were the strongest since the first quarter of 2012 and included a broad range of orders for both industrial gas and LNG related opportunities. Although LNG orders within D&S remain week globally opportunities still exist.

We did see LNG orders in the US related to LNG vehicle (inaudible) and in LNG storage and regasification system for a mine project in Canada. We continue to quote significant opportunities for LNG distribution equipment that could result in orders later this year or in 2016. This includes (inaudible) containers for transport on rail-cars and ships in addition to other equipment used in the LNG virtual pipeline. Moving on to biomedical orders of $59 million were up 11% compared to the first quarter of 2015. Order intake for both life sciences and respiratory healthcare was up from the prior quarter.

Orders for commercial oxygen systems were down marginally from the prior quarter and somewhat lower than expected due to project timing which, again, is historically lumpy for this segment. Second quarter 2015 performance substantiated our belief that respiratory healthcare has stabilized and is now more predictable. As we reported last quarter, we still expect to see modest growth in the respiratory healthcare business in the second half of 2015. Finally, we remain confident that our life sciences and commercial oxygen system businesses will both show growth as we move through 2015. Michael will now provide our outlook for the remainder of 2015.

Thanks, Sam. The pending Magnolia LNG order will not have a major impact on 2015 operating results given the long lead time nature of the project. Given first half and forecasted order trends, factoring in backlog reductions the continued decline in the economic environment particularly in China, in addition to the recent decline in oil prices, we are lowering our 2015 guidance range. We expect sales for 2015 to now be in a range of $1 billion to $1.1 billion. Diluted earnings-per-share to be in a range of $1.40 to $1.60 per diluted share on approximately 30.7 million weighted shares outstanding.

This excludes the impact of any restructuring related costs from our cost reduction initiatives. We do expect at least another $3 million in restructuring related costs at this time in the second half of this year which includes approximately $2 million for lease termination costs for the Owatonna, Minnesota facility, and $1 million for additional severance associated with our cost reduction initiatives which is not reflected in our revised earnings forecast. I would now like to open it up for questions. Kat, please provide instructions to the participants to be able to ask questions.

Our first question comes from the line of Martin Malloy with Johnson Rice. Your line is now open.

I wanted to ask a little bit more about the mid-scale LNG project opportunities that you see out there and outside of Magnolia venture global, Parallax. Can you talk a little bit about the timing of those projects when you might expect to get additional orders there and I know there are multiple trains each. Would you expect them to issue orders for a certain amount of trains at a time?

Yes. We're quoting on projects which equate to nominally 30 million tons per atom, perhaps it might be higher than that. Project timings are very difficult to predict because it is based on customer assigning off-take agreements with those project developers in many cases. But orders are forecast and we're working on a timeline that would result in orders for roughly half of that capacity potentially roughly half of that total capacity over the next 12 to 18 months and going out a couple of years for that full 30 million to 40 million ton opportunity.

Okay.

I emphasize that at this point it's very difficult to predict closely the timing of those orders.

Okay. And then on the inquiries and opportunities that you are seeing on the D&S LNG containers could you talk a little bit more about the end markets there and the uses?

Yes. I think the largest opportunity is replacement of coal or more likely oil or diesel fired power generation on island nations either in the Caribbean, Hawaii and there's also additional opportunities in Indonesia and the Philippines where those island nations believe they can both improve air quality as well as reduce their cost by using LNG imports and either using tankers and storage tanks on-site or ISO containers to transport them. And these can be everything from running general gen-sets for resort hotels up through base load power gen plants as large as 150 mega watts and potentially higher than that.

Thank you.

Thank you. Our next question comes from the line of Alex Potter with Piper Jaffray. Your line is now open. Please go ahead.

Hi, guys. Thanks. I was wondering right now if you could look at the D&S backlog how much of that is China and then within that China number in the D&S backlog how much of the remainder, or how much of that number, I guess, is PetroChina?

About half of the D&S backlog is China and about roughly 80 million range is for PetroChina that still remains. We did the reduction backlog reduction we did take about 8 million of PetroChina out of that.

Okay. And what is it if you were to look at the remainder of PetroChina, or I guess China D&S orders more broadly, I know the same question was asked last quarter, maybe if you could comment qualitative on why you wouldn't bring it down further, what it is that gives you confidence that the remainder of that backlog is actually going to be delivered?

We discuss with the customers on a regular basis, weekly, if not monthly, or monthly if not weekly, I should say, what they intend to take delivery of, what they have customer commitments that enable them to put things into service. The fact that we've had rolling cancellations is a reflection that there is a fundamental optimism in China generally and amongst our customers that projects are going forward and it's only with reduced oil prices or the well prices taking another leg down, or the tightening of credit which means they can't get financing, that leads them to say no, we can't take these projects. These projects are not going to go forward as we had expected. So it's a challenge for us. We're trying to be as proactive and give an accurate picture both for our own internal purposes as well as for the market as to what the most realistic picture is at any one time.

Okay. Yes. Understood. I can appreciate it's not an easy thing to do. I guess maybe one last question. The E&C gross margin was pretty high in the quarter. And you mentioned there was some execution and also some mix contributing there. Presumably we're looking for that to be coming down pretty substantially in the back half. Is that an accurate way to think about things and what is the margin higher than what you had originally thought?

Yes. Exactly. We would inspect the margins to come down in the second half, third, fourth quarter, probably in the low 20% range based upon current orders and backlog. That could change, again, by better project execution than we have forecasted in addition to what we refer to as quick chip orders which are typically very high margin orders that we always get. Hard to forecast, hard to determine when they come in, but we continue to work on a number of those. You just don't know when and if they're going to come in actually.

Okay. Got it. Thank you.

Thank you. Our next question comes from the line of Rob Brown with Lake Street Capital Markets. Your line is now open. Please go ahead.

Similar question on your D&S margins. They were down this quarter. Is this sort of the new run-rate given the lower volumes or how should they trend?

The expectation is that they would be in the, you know, 26%, 27% range over the remainder of the year. I mean keep in mind that there was a small amount of a restructuring in there. But our expectation is that we should be an improvement, you know, in the third and fourth quarter. Now, with that said some of it is where the volume in China goes, too.

Okay. Okay. And then on your CapEx expectations for the year could you give us an update on where you're at there and where you're at facility expansion thinking?

We continue to move forward slowly with the facility expansion and we actually will be putting part of it into service later this year. Right now in terms of CapEx we're looking in the probably the mid 50's, 50 to 55 range in terms of our spend for the year, but we also continue to look at as projects come up, of deferring those, you know, which we have the ability to do until next year. But we do, in terms of the expansion, we will have a large part of that coming through in the second half.

Okay. Great. Thank you. I'll turn it over.

Thank you. Our next question comes from the line of Eric Stine with Craig-Hallum. Your line is now open. Please go ahead.

I know off you have talked about that I guess through last quarter the cancellations that you had seen you weren't expecting them to get a whole lot larger and now the cancellations are higher than you have seen in the previous cycle. I mean do you feel kind of the worst is behind you there? It an on going process? How should we think about that?

I think it's an ongoing process and let me make a clarification. They aren't cancellation, really. What we did is look at the backlog and look at whether the customers were going to take the orders or not. I mean it wasn't a formal cancellation that we received from the customers. It was more we made the decision that, you know, unlikely that the order, the original commitment was going to be delivered in China and decided to scrub it out of backlog. So I want to make that clarification, but it's an ongoing process. As Sam mentioned, we continue to have dialogue with the customers including PetroChina as to what they believe their take will be so I can't guarantee that we won't have further reductions over there.

It's probably worth saying, Eric, if you can tell me what oil prices are going to be and China's industrial production growth I can tell you what our order cancellations will be.

Right. Understood. Recognizing it's tough. So, only just to clarify $8 million of this is PetroChina so you still, it sounds like, have a fair degree of confidence that they still plan to move forward on significant business. Just the timing is the uncertainty?

That's correct. We're trying to make the most balanced judgments we can that accurately reflect what we believe we're going to deliver.

Okay. Got it. Well, then make turning to orders I know X the adjustments that you made the orders were up sequentially and I know earlier this year you weren't certain if you had seen the worst or not and actually thought second quarter might be down sequentially so, I mean, any thoughts on what you're seeing early here in the third quarter? Are you seeing order trends start to improve or is that uncertain as well?

Very good prospects with respect to LNG exports in E&C. D&S continues in North America to see orders like we saw in the second quarter so they're related both to LNG projects and also to industrial gas activity where our customers are upgrading their distribution equipment to provide lower cost of service. That continues to be a bright spot. Europe is flat with mixed signals and China is soft.

Okay.

I think that our experience early in the third quarter is reflected in our earnings docs.

Okay. Understood. Maybe just the last thing on Magnolia LNG (inaudible) order pending. I mean is this, just to clarify, is this something, I mean, are there additional steps that Magnolia needs to take in terms of financing and off-take agreements or is that beyond that? I mean what's your level of confidence that this pending order becomes an actual order?

There's two parts to that. The customer is sent a purchase order, the contract is in the process of being (inaudible) so while the end customer has sent us a purchase order we don't have that purchase order fully bedded down that we would report it as backlog. We have a high level of confidence that at least half of that order will be booked within the next couple weeks. And a commitment subject to additional customer off-take agreements that the balance of the order would be placed during 2015.

Okay. Thank you.

Thank you. Our next question comes from the line of Rob Norfleet with Alembic Global Advisers. Your line is now open. Please go ahead.

Just quickly on D&S and E&C the segments. Clearly we're seeing the lack of fixed cost absorption due to the lower volumes. Can you discuss currently the overall operating capacity rate and any additional things or initiatives that you're looking to undertake to potentially help that? Meaning are you looking to possibly idle any additional capacity or facilities?

Our operating rates are decreasing as we burn through backlog as you would expect, number one. So a nice way of saying that is we are open for business and happy to accept orders. We don't see any capacity constraints on the horizon. And in terms of we continue to look at opportunities as backlog decreases. We don't have immediate order prospects which would rebuild that backlog. We will continue to take out expenses. That's part of being in a capital goods cyclic business. It's what we do every day.

Okay. That's helpful. And, secondly, in terms of the mid-scale LNG orders that you discussed, Magnolia, Parallax, and others, first of all can you kind of discuss what the margin profile in this work looks like? Is it more traditional E&C margins kind of in that upper 20% low 30% range? Secondly, which manufacturing facilities would most of this work be performed in? Likely La Crosse?

In terms of the margin profile there is a wide range, but it's fair to say that you can expect historic E&C margins for those projects. In terms of the facilities that benefit the most from those orders it would be our La Crosse facility, our new Liberia, Louisiana facility for cold box fabrications and our engineering facility or engineering offices in the Woodlands. There's additional work for those projects that would be done in our D&S facilities in the Czech Republic and in New Prague, Minnesota as well as contributions to our Tulsa (inaudible) exchange facility.

Okay. Great. And lastly, I just wanted a general question on competition. I know you all noted earlier in the call that competition in the braze market and others remains fairly intense with Japanese and other European companies competing. Can you just kind of discuss what you are seeing from a competitive landscape situation and obviously has anything changed over the last three to six months as to how these companies are bidding on projects in the type of work that they're looking at which maybe they weren't traditionally focused on before?

Yes. The industrial gas air separation market, which is a large market for heat exchangers, has been a global market for a number of years and pricing levels vary with industry capacity, not unlike the steel industry profile. There is some additional pressure on us compared to the period from 2006 to 2012 with a stronger dollar than we had and our competitors are either Yen or Euro based or Renminbi based. Certainly when the dollar is strong it cuts into our margins to compete head-to-head with Japanese or European competitors.

Great. That's helpful. Thank you.

Thank you. Our next question comes from the line of Chase Jacobson with William Blair. Your line is now open. Please go ahead.

So as it relates to the guidance, just as we look at the current guidance versus the guidance you gave last quarter, the EPS is down about 20%, the revenue is down about 7%, you had a foreign currency gain and a lower tax rate in the second quarter. So what got worse over the last three months on the profitability side and how much of that is in E&C versus D&S because it seems like bio-med is reasonably in line with your expectations.

Your comments about bio-med are correct. The primary deterioration for D&S is China although there's some deterioration in Europe. The currency issue that you mentioned was sort of an aberration of the way the reducer traded against the dollar during the quarter.

We have now settled out we're currently at $1.10 (inaudible) so I don't see both of that positive benefit coming in the rest of the year based on the forward forecast. Within E&C it's a reflection of the order profile soft order intake so that we won't get the benefit of orders later in the year to boost up the E&C's results. So it's spread between the two and for those reasons. Soft order intake in both. We perhaps had optimism when we reported our first quarter results that order intake based on the general economy and oil prices improvement was going to give us a lift in the back half of the year which we don't forecast at this point.

And keep in mind that the $3 $3.1 million foreign currency gain in the second quarter essentially wiped out the first quarter $3 million foreign currency loss so, you know, we're at about zero impact for foreign currency other than translation.

Okay. I mean so is there a mix issue also? Because it just seems like the decremental on the 7% revenue reduction is pretty sizable. You know, I was under the impression that China revenue was a relatively lower margin compared to the other parts of D&S.

Welcome to the capital goods industry (inaudible) downturn.

Okay. Okay. Fair enough. The other thing is looking at E&C and I know earlier we're early in the year here, but even with Magnolia likely to come in over the next two quarters, you know, it looks like the backlog is going to be down pretty sharply from 2014. Is there a structural difference in your business now versus historically that's going to allow revenue to continue to outpace backlog in that business?

There is no structural change in our business in terms of lead time except to the extent that the LNG projects mid-scale LNG projects will have 10 to 14 month lead times as opposed to 18 to 26 month lead times for the large base load projects. So there is that opportunity that orders will flow-through the ENC business with roughly half the historic backlog or the lead time that they had. Aside from that, no, there's not a structural difference in the business.

Okay. And then just one last detail. I noticed there was an $11 million payment for land use rights. What was that related to?

That's really related to the China decline expansion over there you can't own the land so you essentially it's almost like a lease of the land that we would classify as an intangible and amortize it over a very long period.

Got it. Thank you.

Thank you from the line of Noah Kaye with Northland Capital Markets. Your line is now open. Please go ahead.

You have continued to reduce headcount I think quarter-over-quarter the annualized cost savings associated with that have increased I guess in the last couple quarters from $20 million to $40 million. As you see these greater savings going forward how much do you think you can take out operating expenses in the back half the year? Can we just sort of talk about that as a starting point?

Well, we have stated the calculation on an annualized basis of what it was in comparison to where we are. We continue to work on it and we'll continue to right-size our expenditures and head counts to the work available being careful that we maintain the capability to ramp-up quickly and effectively at the start of the cyclic upturn because just as this business is ugly in a cyclic downturn the opportunity for established credible players like Chart to grow very quickly and very profitably in the early stages of cyclic upturn are significant. We intend to maintain that capability.

I guess just turning to the LNG outlook you have talked about the challenge of contracting off-takers. Any view on where the regulatory landscape stands, change, better, worse with respect to green lighting projects at this juncture?

First we don't have enormous insights into the issues with our customers' project developers getting committed off-take contracts. It's something that's confidential that we don't have enormous insight into. I can only report what they tell us, which is they're making good progress and they feel confident that they'll move forward with the commitment. With respect to the regulatory landscape, there are time periods for getting DOE and other approvals which seem to be well understood by them and the comments we get is that the regulatory landscape is positive in terms of significant plentiful supply of natural gas in the US. So no political need to restrict the amount of gas which gets approved for export. And then it comes down to local site environmental issues whether there are any protests and you will note that the majority of these projects are on the Gulf Coast, lower Mississippi area which also tended to be tolerant of hydro-carbon projects.

Okay. That's very helpful color. Thank you.

Thank you. Our next question comes from the line of Greg McKinley with Dougherty. Your line is now open. Please go ahead.

Okay. Thank you. Could you talk about the order reversal? How much of your guidance change was attributable to that?

A significant part, not directly correlated but a large part of that order cancellation were orders that we had anticipated shipping in the second quarter and the review slowed that was unlikely to happen. So I would say that that's a large contributor, but a second large contributor was also the soft orders in the first and second quarter for the E&C business.

So as I responded to an earlier question, the degradation of expected earnings is roughly evenly split between those two.

Okay. If we could maybe talk about your expectations for China as it's implied in your guidance right now. I think you indicated in Q2 Asian orders in D&S were down about 35% or so. Can you remind us of what Asia D&S was in 2014 and how the current environment is impacting? What do you there I it will be in 2015 and is your view for 2015, is that reflective of the current status of order flow or is it anticipate any recovery or any color on that, please?

Our forecast does not anticipate significant, any, recovery in the third quarter and very marginal, if any, recovery in the fourth quarter.

Okay.

There has been a history in recent years in China that the fourth quarter is stronger because of government influence or state owned enterprise influence spending. But even if there is an uplift we're anticipating that the fourth quarter the second half of 2015 will be below the second half of 2014.

Okay. Can you remind us real quickly how big was China D&S?

About a hundred last year. And we expect them to be about 35% down.

It was about 115, Michael?

Probably closer to the $100 million range or $90 million to $100 million range this year depending upon what happens in the second half.

Yes. If it was $115 million, you think it will be $90 million or $100 million this year. Okay. In terms of gross margins in that business, those historically haven't moved around as much with volume as we have seen in E&C. You're expecting a sequential bounceback in March and in Q3. Can you remind us how much of the charge in the quarter impact? I think you said something like 1.5 points, but I want to make sure I understood that comment. What was the 1.5 point comment for D&S margins and how much of that charge was in D&S margins?

1.5 points was last year.

Okay.

The improvement because of the Shell, or you know, cancellation last year.

Okay.

So, you know, if you take at that out of last year's margin you would see a more apples to apples comparison other than that there was some restructuring in the margin.

Yes. That's what I am very curious about is if we take that restructuring charge out of the margin, was Q2 at 26% to 27% range as you're expecting in the second half?

Yes. It would probably, if you took about 1.5% in the current year, too. Yes. So it would be closer to 25% in terms of the gross margin this year, but, again, as we go forward we would expect some improvement as we continue to takeout costs in the business.

Okay. So you think margins could move up on an adjusted basis sequentially?

Yes.

And that's headcount?

Restructuring. Yes. Right. After alloying for restructuring.

Yes. And that assumes a relatively stable pricing environment or competition environment from what you experienced in Q2?

Lots of moving parts in all directions, Greg.

Okay.

The answer is yes. I mean obviously the competition gets stiffer, you know, it could affect pricing.

Yes.

Hard to call.

Yes. Okay. And then just tell us real quickly, please, the revenues from Thermax, how significant is that business going to be, was it for you in the second quarter and will be in the second half?

Nothing in the second quarter because it closed July 1st. So expectation it probably in the $10 million to $12 million range in the second half.

Okay. Alright. Very good. Thank you.

Thank you, Greg.

Thank you. Our next question comes from the line of Jeff Osbourne with Cowen and Company. Your line is now open. Please go ahead.

Good morning. I just had two quick ones. One, Michael I was wondering if you could update us on what the tax rate assumption would be for the year? And then, Sam, I didn't know if given the pricing environment is there's a rule of thumb on pricing per million tonnes for some of those mid-scale facilities that you're talking about? Just how do we kind of handicap what the size potential is there, the (inaudible) that you're going after?

I would expect in the 30% range for the tax rate is a good rule of thumb to use.

Alright.

In terms of cost per tonne our customers have discussed all-in costs for these facilities in the $500 to $600 per tonne level. However, that is not necessarily the best guide for Chart's content because that includes all of the civil works and construction of tanks. And there's also, so we're only part of that and our content varies. In addition, there's significant difference for green field versus brown field development, which is included in these projects.

Is it safe to say that you're in the 20% to 40% range? It's what I was thinking but I just wasn't sure how meaningful how meaningful pricing is down.

That's probably reasonable.

Alright. Thanks much.

Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Your line is now open. Please go ahead.

Thanks for the question. Most of them have been asked. Just one more on the Magnolia if I may. You talked before about $40 million to $50 million per train of addressable cold box revenue. I think for Magnolia that you said it's $80 million for four trains. So where is the disconnect?

Trains vary in size significantly. Where we have talked historically we were talking about base load trains which were nominally 4.5 million tonnes per train. In the case of Magnolia these are significantly smaller trains. I believe they're 1 million tonnes, 2 million tonnes per train.

Okay. Understood. That's clear enough. Anything new on the Parallax front?

Nothing beyond the public announcements that have been made by Parallax and (inaudible).

Okay. Fair enough. Thank you.

Thank you.

Thank you. Our next question comes from the line of Anjali Voria with Thompson Research Group. Your line is now open please go ahead.

Thank you. I was wondering if I could ask a question.

You're very faint.

Oh, is this better? Can you hear me now? Is this better?

Yes.

Oh, great. Okay. My apologies. I had a question about SG&A. I know you touched on the decrease this year was due to lower variable comp, bad debt expense, cost reduction initiatives. First of all I was wondering if you could perhaps provide some color on that if you could maybe quantify how much each of those represented and then, secondly, on the same subject, is it fair to say that the favorable Q2 SG&A levels don't really extrapolate based on where you have put your guidance and, if so, could you address why that's the case? Is there some accrual adjustments in Q2? If you could just sort of go through those items, I would appreciate it.

I think we're struggling to answer your question.

No, there weren't any accrual adjustments in SG&A expenses. It really is a combination of lower incentive as we have said based upon performance. There is some reductions in I guess you could call it an accrual in terms of bad debt expense that we have previously accrued that we received collections on. But that was really nominal piece of it. And, you know, cost savings. So if you look at as we go forward over the year we would expect in terms of SG&A to average in the $50 million range, you know, which is lower than the first quarter but a little bit higher than where we are in the second quarter. And, again, that continued to be based upon our incentive performance. Which is varied.

Okay. And then in terms of your, of course, timing is the name of the game here but we heard some announcements that Golar LNG where they are now talking about moving forward with (inaudible) which is the two SLNG vessels after the (inaudible) that you all were involved with. Do you know what is your optimism on that front or do you have any idea of what that is looking like for you over the next several months or going into 2016 or something like that?

They are potential orders for us. We have done engineering work on those projects. The actual timing as to when the orders will be released is a little fuzzy.

Okay. Fair enough. And I guess lastly does your does the Cheniere-Parallax announcement, does that change your position or the timeline or scope of that project or is it still largely the same for both of those LNG export terminals (inaudible)?

I think it's a positive announcement that Cheniere who has quite a bit of credibility and large potential capacity has said that they would use their muscle and credibility to move those projects forward, but the timing has not changed and the estimates its really driven by proceeding with construction after FERC and DOE permits are achieved. So, there's been no changes in the projected project timing.

Okay. Thank you very much.

Anjali, one thing I would like to clarify on the SG&A run-rate is that keep in mind that Thermax came in, in the third quarter and fourth quarter so would drive our SG&A run-rate up. The other thing that is in there is the Owatonna lease shut down built into there, which is about $2.5 million. I just wanted to give you a little bit more clarity on that.

I appreciate that. Thank you.

Thank you and at this time I am showing no further questions. I would like to turn the call back over to Sam Thomas for any closing remarks.

Thank you. We remain committed to long-term growth of shareholder value by understanding our customer needs and providing them with superior products and value. We're taking appropriate cost control measures to deal with the current head winds while retaining the ability to respond quickly to improved demand and customer needs as markets come back. Thank you very much for listening to our call. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.