Chart Industries Inc (GTLS) 2015 Q4 法說會逐字稿

Good morning and welcome to the Chart Industries 2015 fourth-quarter and year-end conference call.

(Operator Instructions)

As a reminder, today's call is being recorded. You should have already received the Company's earnings release that was issued earlier this morning. If you have not received the release, you may access it by visiting Chart's website at www.ChartIndustries.com.

A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, March 3. 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 risk 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 any forward-looking statements.

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

Thank you, Stephanie. Good morning, everyone. I would like to thank you all for joining us today.

We will begin by giving you a brief overview of our fourth-quarter and year-end results, and 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 2016.

Fourth-quarter 2015 adjusted net income was $0.19 per diluted share. This excludes the non-cash asset impairment charges of $253.4 million, or $7.68 per diluted share (sic -- see press release, "$258.1 million, or $7.73 per diluted share") that I will provide further detail on momentarily. This also excludes business restructuring acquisition-related costs of $4.7 million, or $0.05 per diluted share. This compares to fourth-quarter 2014 adjusted net income of $23 million or adjusted earnings of $0.74 per diluted share.

Net income on a GAAP basis for fourth-quarter 2015 was a loss of $230.1 million, or $7.54 per diluted share, which is net of all the charges that I just mentioned. This compares to 2014 fourth-quarter reported net income of $26.9 million, or $0.88 per diluted share. Excluding the assets impairment charges and restructuring costs during the year, adjusted earnings were up $1.25 for 2015.

Net income on a GAAP basis for all of 2015 was a loss of $203 million, or $6.66 per share. This compares to reported net income of $81.9 million, or $2.67 per diluted share for the year 2014.

The fourth quarter included non-cash asset impairment charges of $195.8 million for goodwill and $57.6 million for indefinite life intangibles and other asset write-offs. We undergo impairment testing annually or more frequently when circumstances dictate.

The drop in our market capitalization, along the impact of low energy prices, continued weakness in China, major project delays, and increased competition including in BioMedical's respiratory markets, led to reductions in our forecast, resulting in the non-cash impairment charges in the quarter. The long-term permanent impact of Medicare competitive bidding, including the reduction of reimbursement range in the subsequent consolidation of our BioMedical respiratory customers, has impacted our ability to meet our original forecast expectations for our BioMedical respiratory business.

Something worth noting is that approximately $237 million of the goodwill we had on our balance sheet prior to the impairment was associated with First Reserve's acquisition of Chart back in 2005. First Reserve, a private equity firm, acquired Chart in August 2005. At that time, under purchase accounting, the assets were adjusted to fair value, which resulted in $237 million of goodwill, $35 million of indefinite-lived intangibles, and $122 million of indefinite life intangible assets recorded on Chart's balance sheet.

Indefinite-lived intangible assets are amortized based on their useful life, but goodwill and indefinite-lived intangible assets totaling $272 million are not amortized, but instead tested for impairment annually. $67 million of the current impairment charges relate to goodwill recorded as part of the First Reserve's 2005 acquisition of Chart.

Sales for the quarter were $260.8 million, or a 20% decrease from the prior-year quarter. The majority of the decrease was due to lower LNG application sales in both our energy and chemicals or E&C, and distribution and storage, or D&S, segments, particularly in China. Sales were also reduced by $6.7 million on a constant-currency basis, due to the stronger US dollar compared to fourth-quarter 2014.

Our gross profit for the quarter was $72.8 million, or 27.9% of sales, compared with $96.9 million, or 29.7% of sales, a year ago. During the fourth quarter of 2014, we received an escrow settlement for the recovery of $5 million related to warranty costs for certain product lines from the AirSep acquisition. Excluding this recovery, gross margins for the quarter decreased approximately 0.3% compared to the same period in the prior year, as the higher margins in E&C and D&S were more than offset by a 2.1% negative currency impact due to the stronger US dollar.

Net orders received for the fourth quarter for totaled $231.2 million, or down 9% sequentially, as the third quarter of 2015 included a mid-scale LNG project awarded in excess of $40 million in E&C. This decline was partially offset by a $23-million award in D&S during the fourth quarter, supply, and LNG storage loadout regas system in Jamaica for power generation.

In the E&C business, fourth-quarter sales decreased 33% to $73.8 million compared to the prior-year quarter. Brazed aluminum heat exchangers have seen the largest decline in sales related to air separation, petrochemical and LNG applications. Gross margins were 32.1% compared with 30.2% in the prior-year quarter. However, it should be noted that several emergency short lead-time projects contributed 7% to E&C's gross margin in the current quarter for 2015 and 2% in the prior year's quarter.

Revenues related to these emergency projects were higher than usual during the fourth quarter of this year. Excluding the short time-lead projects, gross margins were down due to lower volume and extremely competitive environment.

In our D&S business, fourth-quarter sales decreased 18% year-over-year to $131 million. The majority of the decline was seen in China LNG applications, in addition to the stronger US dollar that negatively impacted sales by $4.5 million during the period on a constant-currency basis. We did, however, see improved industrial gas and LNG application revenues in the US related to the Jamaica order I previously mentioned. Gross margins for D&S increased to 25.9% compared to 24.7% a year ago, driven by global sales and product mix differences.

Sales in our BioMedical business remained flat at $56 million compared to the prior-year quarter. The commercial oxygen-generation segment experienced increased revenues during the quarter, which were completely offset by a negative currency impact of $2.2 million on a constant=currency basis. BioMedical gross profit margin was 27% in the quarter compared with 43.1% for the same period in 2014.

As I mentioned earlier, we received an escrow settlement of $5 million related to excess warranty costs for AirSep oxygen concentrators in the prior-year quarter. We will continue to pursue additional recoveries and representation warranty insurance policies associated with that acquisition for higher-than-anticipated warranty expense and other matters, beyond the $5 million recovered in 2014 from the escrow. Excluding the escrow settlement, BioMedical margins in the prior-year quarter would have been 34.2%, which is higher than the current-year quarter due to product mix in the respiratory segment and higher warranty costs.

SG&A expense for the quarter was $53.9 million, up $2.1 million from the same quarter a year ago. The increase was due to $3.5 million in severance costs related to the restructuring in the fourth quarter. SG&A as a percentage of sales increased to 20.7% from 15.6% last [year] due to the revenue decline.

Income tax expense was negative $12.6 [million] for the fifth quarter. It reflects a tax benefit recorded on the intangible asset impairment charge, since those assess were amortized for book purposes but not for tax. Excluding the tax effect of the impairment charge, the effective tax rate would have been 42%, which increased over the prior-year quarter due to reserves taken against certain of our accumulated tax carry-forwards and net deferred tax assets for some of our Chinese operations -- excuse me, as well as an increased mix of domestic versus international earnings.

Significantly, we generated $47 million of operating cash flow during the fourth quarter, bringing our ending cash balance to $123.7 million, an increase of $41 million from September 30th. We currently have no outstanding borrowings on our revolving credit facility with current availability of $421 million. The non-cash asset impairment charges do not impact our debt covenants, and we remain in compliance with all of our covenants with (inaudible) and our leverage and interest coverage ratio's. Our balance sheet and capital structure remain strong with significant liquidity available.

I will now turn the call over to Sam Thomas.

Thank you, Michael, and good morning, everyone. As Michael mentioned, after non-cash impairment charges and restructuring costs, we exceeded our fourth-quarter expectations through solid project execution in E&C and continued strength in our D&S, US, and European businesses.

2016 is going to be another challenging year for Chart as we enter the year with reduced backlog. Uncertainties in the energy markets are resulting in customer deferrals and delays, while increased competition and customer consolidation are compressing margins. To address these challenges, we've implemented further cost-cutting measures Company-wide; over the past year-and-a-half we have initiated approximately $60 million in cost reductions on an annualized basis. Since the end of 2014, our global workforce has been reduced by 21%.

During the fourth quarter and early 2016, we have taken additional actions. We've eliminated certain senior-level management positions, closed satellite sales and engineering offices, and established an early retirement program in the US in our D&S business. This recent round of actions will result in approximately $20 million of annualized savings and is included in the $60 million I previously referenced.

SG&A savings represent about 15% of the $60-million savings to date. These savings were partially realized in 2015 and evident in our SG&A cost, which are down by $5 million when restructuring costs are excluded compared to the prior year.

We continue to focus on lean initiatives and progress improvements to further improve our cost structure, especially in a down cycle. One current example is the consolidation and reconfiguration of our air-cooled heat-exchange facilities in Tulsa, Oklahoma, which will result in annual savings in excess of $1 million. As 2016 progresses, we will closely monitor near-term expectations and continue to take appropriate actions as necessary.

Despite the negative macro-economic factors around energy markets today, we continue to win orders such as Klaipedos nafta and Jamaican LNG projects, and have continued to see bidding activity related to other LNG projects. Customers continue to pursue LNG as an energy option. For power generation, transportation fuel, and marine applications, this reconfirmed the long-term fundamental growth drivers where conversions still exist.

Let me remind you that although many investors focus heavily on the energy portion of our business, it is now less than half of our business in total. We have a diversified product portfolio that continues to generate strong free cash flow, as evidenced in the current quarter. We have a solid balance sheet with significant liquidity, and we will continue to pursue profitable investments, including acquisitions, to add to long-term value.

Let me now comment on specific highlights for each of our businesses. Energy and chemicals booked $45 million in orders during the fourth quarter, which is down from third-quarter orders of $77 million. As a reminder, third-quarter orders in E&C included a previously announced mid-scale LNG order of [40,000.]

Order levels remain weak in E&C with customers continuing to delay projects due to deteriorating and uncertain market conditions. As a result, our E&C backlog has declined 48% year-over-year. These factors have caused us to bring down our forecast, which is one of the drivers for the non-cash impairment charges taken in the fourth quarter.

We have limited opportunities but are seeing significant pricing pressures from competition and decreased throughput, which has negatively impacted E&C margins. Roughly half of the cost-reduction savings mentioned earlier are a result of E&C initiatives; most of these relate to direct labor savings, as approximately half of the direct labor has been reduced since 2014. But more aggressive actions were taken during the fourth quarter and early 2016 to address salaried labor costs.

Despite the weak near-term outlook for E&C, we see continued interest in quoting activity for mid-scale LNG liquefaction for LNG export facilities here in North America. We continue to have large potential opportunities in this area, where our equipment and process technology efficiencies give us an advantage.

Current natural gas market conditions, significant new LNG supply, and reduced demand forecast have delayed end-user long-term contract commitments. It is worth remembering that these decision are based on expected pricing in the 2020 to 2030 time frame, as opposed to the current market conditions.

Within D&S, we received orders of $131 million in the fourth quarter. This is up 5% sequentially, largely due to the LNG storage load-out and re-gas project in Jamaica, which Michael mentioned earlier.

We're pleased to announce today our D&S European operation, Chart Ferox, along with our EPC partner PPS Pipeline Systems, secured a $30 million combined contract for an LNG reloading station for Klaipedos nafta in Lithuania. Chart will provide all LNG equipment, including the storage tanks, loading areas for trucks, and ship bunkering. The contract value to Chart is approximately $15 million; we're currently involved in quoting a few other similar projects around the globe.

During the fourth quarter, one of our privately held competitors filed for bankruptcy. The assets of this company were acquired, but many previously established contracts were not honored, leaving customers stranded. This has opened up a number of opportunities for us, both in the industrial gas and the LNG segments.

During 2015, we experienced significant growth in our food and beverage applications in North America. This is an example of how our business benefits from the diversity of our end market. From an LNG perspective in D&S, quarter levels within the US and Europe have remained rather steady, although China remains extremely weak with an uncertain near-term outlook. Fundamental growth drivers and influence from the Chinese government for better air quality will drive LNG growth in the long run, in our opinion.

Moving on to BioMedical, orders of $55 million were up slightly, as both respiratory and life sciences improved over the third quarter, while commercial oxygen system orders were down, as environmental application program timing is lumpy. In respiratory, we are investing in new product development, as well as rebuilding our sales and marketing channels to combat the increased competitive environment.

As with our respiratory segment, we intend to see moderate growth in our life sciences segment, specifically in emerging markets like Latin America, India, and China. To achieve this growth in 2016, we are investing in product development and marketing efforts.

Within the commercial oxygen generation segment, we expect growth in our smaller standard products for ozone and water treatment systems. We continue to pursue a number of large oxygen plants, but again, timing of these projects is difficult to predict.

Finally, the overall business model of BioMedical allows us to generate significant cash flows with modest capital requirements. This position does well to be well diversified to help offset our energy exposure in the near term.

Michael will now provide our outlook for 2016.

Thanks, Sam. As we enter 2016 with a lower backlog and continued macro-economic concerns with low oil prices, 2016 will be another challenging year.

Outside of the energy segments we serve, we still anticipate flat to moderate growth in the industrial gas, healthcare and environmental industries. However, highly competitive markets in the natural gas, processing, petrochemical, and healthcare segments could impact our margins. Nonetheless, we expect to generate robust operating cash flows and continue to have significant liquidity available.

Based on these factors, we expect sales for 2015 to be in a range of $900 million to $1 billion and diluted earnings per share are expected to be in the range of $0.50 to $1 per diluted share on approximately 30.7 million weighted average shares outstanding. In addition, our earnings will be more weighted toward the second half, as they have been historically. This excludes the impact of any restructuring costs.

We currently estimate our capital expenditures for 2016 to be between $20 million and $25 million. This is primarily to maintain our facilities with no major projects planned. Additionally, we are estimating our income tax rate of 34% for 2016.

I would now like you to open it up for questions. Stephanie, please provide instructions to the participants to be able to ask questions.

(Operator Instructions)

Eric Stine, Craig-Hallum.

Hi Sam, hi Michael.

Good morning.

Good morning.

So first wanted to touch on the Jamaica D&S award that you announced. Curious, is that part of the American LNG project? And secondary to that, if it is, maybe an update on the liquefaction and ISO container portion of that project.

It's not -- when you say American LNG, are you referring to --

The fortress.

I'm sorry, Eric.

The fortress project.

It is, for that, the current plan is to deliver LNG to that terminal primarily by ship, as opposed to by LNG ISO containers. There are plans underway to distribute from that terminal by ISO container, but limited order placements to date. But that order is primarily for the infrastructure for the bunkering facility. (inaudible).

Got it. Maybe just turning to E&C, on margins, ex the quick turn business, it looks like margins were in that 25% to 26% range. So first, maybe E&C margin view for the year But then also an outlook on the quick turn business, what you're seeing, obviously a strong fourth quarter, but what you are seeing, given the current market environment. And just to confirm, I assume that is not in your guidance at all.

It's correct. The two big areas of expected variability in our results for 2016 relate to the lack of clarity in energy and chemicals globally, and to distribution storage in China. Those are the markets that are currently soft; both have significant potential disorders, but the near-term macroeconomic issues are ugly.

So when you talk about E&C quick ship orders, there is very little visibility. The only plus factor is that as people cut back on their budgets and maintenance, the chances of getting into problems with their plant and needing emergency replacements go up.

We do see some good potential in our life-cycle business offerings, and have had a number of very positive conversations with significant customers of providing them or services that do provide quick-ship opportunities in the future. So there's lots of good stuff going on against an ugly economic environment.

Okay. And then just on margins there, I know that you have been talking about margin pressure. And given the backlog, I would expect that to continue. How should we think about margins in E&C in 2016?

Probably high teens to low 20s for 2016 and D&S would be in the high 20s, consistent with how they've been and BioMed in the low 30s.

Could you repeat the D&S again? I missed that. Did you say high 20s?

High 20s, yes.

High 20s, okay. Maybe just sticking with your guidance, your backlog is at a level in terms of coverage of that forward guidance. Is it safe to assume, given that China, as you've said, D&S in China is pretty tough. Is that a good portion of that, or confidence in that would be given the industrial gas trends that you are seeing?

I think we're concerned about economic activity in China. It's always difficult to forecast the year based on the first quarter in China because of the dramatic effect of Chinese New Year coming late January, early February and preparations for it. But our view of China, general activity, LNG activity is very muted. There's not a lot of optimism in China from the oil companies or from the industrial customers. From a distance, it appears to be a negative growth associated with industrial production.

In contrast to that, there's a lot of positive stuff where, because of our sales efforts of selling more complete packages and systems in both Europe and the US, that we have very positive dynamics and an upside to offset that.

In the case of E&C, while we still have very good prospects for these mid-scale, multiple train LNG export terminals, there's no question that, as the developers try to push these projects across the finish line, they are having trouble getting long-term off-take contracts signed, because of the pressure of US pricing mechanism of Henry Hub plus a tolling charge versus Asian and Middle East, or Australia and Middle East oil-linked pricing, which makes it competitive with the US offering at sub $30 price level, oil price levels.

But it's -- you have to balance that with the fact that the off-takers, the potential customers are making their decisions based on 2020 to 2030 expected price levels, which means we don't know when the contracts get signed. We do think they will go ahead.

Okay. But just on guidance, safe to say that you're discounting China, for instance, pretty heavily as part of that guidance.

Correct.

Okay, thanks a lot, guys.

Ole Slorer, Morgan Stanley.

Thanks a lot, and thanks for some good color there. It's still not quite clear to me, Sam, how the guidance for flat revenues with backlog down 40% year over year is coming together. You're clearly seeing something that makes you confident in saying that. But I think you also highlighted another troubled year in E&C and a steady BioMedical. So could you just help us bridge the gap in terms of what it is that you can see that makes you confident in making this prediction?

Ole, the high-end of our range, assumes reasonable results in China better than fourth-quarter and first-quarter order intake as it moves along and there's more clarity in China. And it also assumes that at least one of these LNG export projects goes forward into 2016, along with fairly robust results in US distribution and storage in Europe. The downside of our range discounts the first two items to lower activity in China and that we don't get a US export facility until 2017 or later.

Okay, that's very helpful. So, if any of the West African FLNG projects that you're on reach FID, that will be an important stepping stone for you, I resume. Or any thing more along the line --

That would be a positive toward the upper end, yes.

Let's hope that will go through then, thanks a lot.

Sure.

Rob Norfleet, Alembic.

Hi, good morning. Thanks for taking my question.

I had just quick question relative to capital allocation. You obviously did a great job of generating cash in the quarter and maintaining a solid balance sheet. Can you talk a little bit about priorities? Clearly, on and M&A front, I would assume that there are a number of players that maybe aren't quite at distress levels, but at levels that might offer an interesting entrance point for you. Maybe you could update us a little bit on what you're seeing on M&A and what your appetite is.

And then secondly, just obviously given the performance of the stock, I wanted to see if buyback has become something that you, at a Board level, are looking at a little bit more seriously.

First, we continue to look at buybacks. The continued uncertainty of oil pricing and how our share price is linked to that makes us reluctant to get very excited that the buybacks are the best approach for us, but we will continue to look at that.

In terms of capital allocation, you can see that we are throttling back significantly on capital expenditure. There's a possibility to go deeper. We have a very good modern fiscal plant around the world with significant capacity. So there is the ability to pull capital expenditures down.

On the acquisition front, we continue to look for good, quality assets that will let us get closer to end customers and within all of our markets. I'd say that recently, the potential deals we have been looking at, the pricing levels have been becoming more attractive or more reasonable. We will approach them with caution, but we won't stretch our balance sheet or liquidity at this point in the cycle, because we look forward that this could be an extended down period of two or three year's duration. And we intend to be able to live and fight another day, regardless of how brutal it is.

Having said that, if we can make acquisitions that we are confident will be cash generative and accretive, we will jump into them with excitement

Great, I appreciate that. Secondly, I just wanted to ask a little bit, obviously you have done a lot to reduce the cost structure, mostly through headcount, but there have obviously been some shuttering of capacity. Can you discuss what other options are available? And what I'm really getting to here is at what point do we start cutting into the bone, to some extent, as it relates to continuing to scale down the cost structure to accommodate, obviously, a lower volume environment?

We're experienced at running this playbook. And we will, we work very hard at cutting expenses that won't prevent us from reacting quickly to an uptake. Because it's been our experience that while it's hard to call when upturns come, when opportunities present themselves, there is an enormous benefit to being prepared and being able to react quickly. So we continue to spend our time working on just those things.

What expenses are nice to have, but aren't going to give us the opportunity to react quickly to customer opportunities? And we will preserve that capability throughout, while continuing to look to cut non-value-added activity. We spend a lot of our time doing just that.

Okay, great. My last question, I'll get back into the queue, is just quickly you have, over the last several quarters, there have been, obviously, a couple of alliances forged, obviously with the Cheniere projects, the Parallax, and the Louisiana LNG project looking to use some of the small scale liquefaction. And then recently, obviously the [Tell Year End] investments entity that [Sharif] helped start was also -- had looked to choose using your liquefaction capabilities. I know -- and you made comments about the North American market, the issues involved with getting off-takes being prohibited.

One question I wanted to ask you is some of these large projects that were originally going to use some of the cascading larger-scale cold box technology, given the cost environment and the need for people to bring costs down, is there an opportunity for you to maybe sneak in and look to potentially retrofit some of these existing projects that may want to scale back and use a smaller scale technology, which clearly would reduce the cost of the program aside from just the greenfield opportunities that are out there?

We continue to put a lot of effort into this, because we think in the future, it will pay off. And we continue to work at how to cost-optimize our offering to make it even more attractive in this environment. There are, in addition to the projects you mentioned of mid-scale multi-train, there are conversations with several of the existing base-load facilities that, in view of them chasing smaller off-take agreements, less than the 4.5 million or 5 million ton of adding another train, there are several of these facilities that we're having discussions with putting a 0.5 million or 1 million or 1.5 million ton of capacity onto those sites, but those are preliminary discussions.

Great, thanks for your time I appreciate it.

Rob Brown, Lake Street Capital.

Good morning, thanks for taking my question. I just wanted to understand the margins in the BioMedical. Is this you're guiding for margins stepping up from the Q4 level? What's structurally going on there in terms of the buyback business to get back to that low 30s margin?

It's really, the challenge there is predicting mix. Particularly within the respiratory segment, there's significant differences in the gross margin between stationary concentrators, portable concentrators, and liquid oxygen therapy. There is a general trend toward more stationary concentrators and more portable oxygen concentrators away from liquid oxygen on a global basis. But there are still government tenders that come in, particularly in Europe, for liquid oxygen, and so the variation in gross margins is associated with changing sales quarter on quarter.

In general, there is downward pressure because the sales that are growing are in lower margin products. But we expect to see a transition of being able to grow portable oxygen concentrator sales, which have more attractive margins. Which all goes to say that we have a hard time predicting exactly where we're going to be.

Okay, great. Thank you for the color. In your backlog, what is the current amount of China revenue dollars in your backlog?

Bear with us just a moment.

Bear with us while we -- It'd be roughly 23% of the D&S backlog right now, Rob.

And you're comfortable you've pulled out the weak parts of that or?

Yes, we are.

Okay good, I'll turn it over. Thank you.

Chase Jacobson, William Blair.

Hi, good morning. I just wanted to ask about the cost savings again. Because throughout the year, you've talked about continuing to look for cost savings and you've increased your cost savings target quite a bit, which I think is good in this environment. But looking at this 2016, with what's not that much of a revenue decline in your guidance, you have pretty big decrementals. I understand the pricing, but how quickly can you act on incremental cost savings to stop that decremental from being such a factor as we look out beyond 2016 if the awards don't pick up?

We can act quickly and we can take lots of costs out. There are issues of executing on existing backlog, and also the desire to maintain capability for potential orders, if they come through, that can be quite transformative. So it's a continued balance.

I think if you go back to our last quarter comments, as the environment deteriorated in the fourth quarter, we've taken bigger cost cuts than we had indicated we were going to. We continue to address that on a week-by-week basis.

Okay. From a strategic standpoint, not just for Chart, but across the industrial landscape, growth has been difficult. I'm just curious, as you look at your business, outside of the end market and outside of just reducing costs, what can Chart do to drive growth internally? Whether it's something like adding more service or working up the value chain to put your customers in a position where they are calling on Chart as a better option, even if you don't have the lowest price? Essentially, what can you do to gain a share?

Well, I think we're doing that very effectively. The relatively low decrements of sales in relation to profit decrement is an indicator that we're taking market share in this downturn. And we're doing that in E&C as an example, with higher level service offerings and offering extended warranty, service plans, analysis of existing plans so that our customers can operate more effectively. It's giving us a lot more end market or end-user contact with customers, which not only get us business in these tough times, but also gives us the opportunity as things start to improve for significant orders at better margins.

Within D&S we are continually redeploying our sales force and project engineering assets towards specialized end-user application, and then replicating those successes around the world by taking those product offerings to others. So we are significantly improving our ability to sell not just individual products but complete systems. And you'll see that the systems-related sales from D&S continue to grow.

And it's those two things that get us closest to end users with better understanding of their markets, and opens up bigger opportunities for growth as markets normalize and people become more confident. Remember we sell capital goods, and so we are caught not just in the downturn caused by the energy markets, but in a broader capital spending decline. But a feature of that is if you strengthen your position in the downturns, you get a dramatic pop as the cycles -- very early in the upturn cycle. So that is what we are positioning ourselves to do.

Okay, that's helpful. And then one last question. As it relates to Magnolia, is there any impact on your shipping -- on your productions schedule due to the push out of the financial close on that project? And what's accounted for on your guidance?

The guidance range covers a most optimistic June and July time frame for being given a go-ahead. And the down side says that that release doesn't happen in 2016.

Okay, got it, thank you.

Greg McKinley, Dougherty and Company.

Thank you. A little bit of a follow-up on the prior question. In terms of guidance, maybe could you help us understand the range of order intake that is assumed between $900 million and $1 billion of revenue? What type of order intake is needed to achieve that? And my sense is, you had indicated it might be a little more -- or it is back-end loaded. I don't know if that's more so than normal, or maybe some color around that would be helpful.

It's not a direct correlation between order intake and what sales are achieved in 2016, based on the timing of the order intake. Clearly, we need order intake in the first three quarters in order to achieve the upper end of the full-year sales. The fact that our backlog is weak means that essentially that our sales and profitability are backend-loaded.

Okay. Michael, for the guidance that you gave for 2016, could you talk to us a little bit. What kind of operating cash flow and free cash flow do you think gets generated, both at the high-end and the low end of that range, or maybe just free cash flow would be helpful?

I would say on the high end of the range, it's between $100 million and $120 million of operating cash flow. And then if you -- we have very little in terms of debt payments in there; there is some China debt we would pay down, roughly $1.5 million to $2 million and then the CapEx that we forecasted between $20 million and $25 million. So pretty strong in terms of -- so the upper range could be in the -- still in the $100 million range of free cash flow. And the lower is probably about $20 million, maybe $30 million below that.

Okay. So you would actually foresee a fair amount of cash flow coming from working capital then, in addition to just, okay. And then, in terms of gross margins again, we -- even if we adjust out your, call it, short-term emergency response type of projects, your gross margins were quite healthy in E&C in Q4. Your comment that they would likely be in the upper teen to low 20% range in 2016 is a fair amount lower than that adjusted margin we just saw in the fourth quarter.

That's on average for the year, so it would start out in the teens, and then drive up as it goes through the year. That is the current expectation so that over the year it would average in the -- around the 20% on average.

Can you maybe just help me better understand that a little bit? Because if we go from Q4 at mid-20%s, what would cause us to take a 600 or 700 basis point sequential dip in gross margin rates and then the ability to rebuild, I'm guessing, would be if you got a large order that helped you leverage overhead in the plant later in the year. But what would cause such a short-term swing?

More gases based on the margin we have in backlog as a result of competitive bidding.

Okay.

In addition the timing of the orders too. When orders are expected to come in and start -- because they don't come in the revenue right away in energy and chemicals. They take a little bit longer to flow through revenues, so that would be the two factors primarily.

Okay, all right thank you.

Pavel Molchanov, Raymond Jones.

Hey guys, thanks for taking the question. Because I'm a little some a little bit late getting on the call, you might, have touched on this already. Last November you announced, I believe it was a $40 million order for -- associated with a Louisiana LNG export project. Does any of that revenue include, or is it included in your guidance for 2016?

Pavel, we had addressed that earlier in the call. The upper end of the guidance range assumes that we will be executing on that project in the second half of the year, the lower ends assumes (inaudible).

Got it. Appreciate you repeating that for me. And then second, your backlog as of December 31, does that include anything associated with PetroChina any longer?

It does. The total backlog, about $47 million of it relates to China.

Specifically PetroChina, the Company.

Yes, there are PetroChina orders in there; it's relatively minor, less than $10 million, and there were things that have scheduled deliveries this year.

Okay, understood. Thanks again.

David Cohen, Midwood Capital.

My questions been answered, thank you.

(Operator instructions)

Anjali Voria, Thompson Research Group.

Good morning. I was wondering if you could provide some clarity on the D&S backlog, as well as the orders that coming in terms of composition between industrial and LNG.

The industrial orders, with respect to North America and Europe, have been strong in both, although there's been a decline in US dollar terms from Europe. But in euro terms, their orders have been steady, with perhaps slight year-on-year increases. I think that's primarily reflective of increased market share and success in selling larger system projects.

With respect to LNG, they are down slightly, but still healthy in North America and in Europe. In the case of China, LNG has seen the biggest decline and is currently very soft. Industrial gas orders are off on the 10% to 15% range. So part of the decline is in LNG.

Sorry to interrupt, but is industrial backlogs still 80% of the total reported backlog, or is it higher than that at this juncture? I want to say last quarter in Q3, you mentioned industrial gas was about --

I would state that the composition is comparable, because while there has been less activity, there have been several significant size orders related to LNG. So the mix overall is comparable because of the adjustments we've taken in reducing particularly the LNG backlog in China, the quality is also better.

Okay, thanks, that's helpful.

Secondly, just to ask a question on your cost actions in a slightly different way. When you look at the range of your guidance, if you were at the low end of that range, would that require a further cost actions, further restructuring programs? Or you do think the level that you've done today would be enough to keep the business at an appropriate size?

There would likely be further cost reductions. The current plan for the upside of the range actually includes, with respect to E&C, increasing headcount to execute on LNG projects. If those don't go forward, then we wouldn't adding those. So relative to the guidance there would be, yes, there would be further reductions, or no adds or a combination of both, I should say.

Okay, thanks. And then the short lead time projects within E&C, what is the contribution from that on the revenue line?

$12 million.

Okay thank you very much.

I'm showing no further questions. I will now turn the call back over to Sam Thomas for closing remarks.

Thanks for much everyone for listening in on our call. As I'm sure you have heard, we're working in a challenging environment, so taking the position that we're a fundamentally strong Company that has the ability and the experience to handle a downturn like this and come out stronger in -- when optimism returns and the market starts to turn. At the same time, we continue to look for acquisitions that will fundamentally improve our position in the marketplace. So we look forward to the future with confidence. Thank you very much joining the call today.

Thank you, ladies and gentlemen, that does conclude today's conference. You may all disconnect, and everyone have a great day.