Chart Industries Inc (GTLS) 2016 Q1 法說會逐字稿

Good morning and welcome to the Chart Industries, Incorporated 2016 first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers there will be a question-and-answer session. As a reminder today's calling 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, May 5, 2016. The replay information is contained in the Company's earnings release.

Before we begin the Company would like to reminder you that statements made during today's call are not historical and in fact are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statement.

For furthermore 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 includes in the Company's earnings release and latest filing with the SEC.

These are available through the Investor Relations section of the Company's website or through the SEC website www.sec.gove. The Company undertakes no obligation to update publicly or revise any forward-looking statements.

I would now like to turn conference call over to Ken Webster, Chart Industries Vice President and CFO. You may begin your conference.

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

I will begin by giving a brief overview of our first quarter results and outlook for the remainder of 2016. Then Sam Thomas will provide comments on current market around order friends we see in each of our business segments.

Net income for the first quarter of 2016 was a loss of $4.7 million or $0.15 per diluted share. This included severance and other restructuring costs and cost reduction initiatives and acquisition-related costs recorded in the quarter of approximately $4.3 million. During the quarter we also finalized and insurance settlement related to flood damages incurred at one of our European operations in 2013 which favorably impacted gross margins by approximately $1 million.

Excluding these items first quarter 2016 earnings would have been a loss of $0.8 diluted share. This compares with net income of $5.2 million dollars or $0.17 per diluted share for the first quarter of 2015. First quarter of 2015 earnings would have been $0.19 per diluted share excluding the $0.2 impact of restructuring and acquisition-related costs including facility shut down costs in the prior-year period.

Sales for the quarter were $193.8 million, a decrease of 20.9% from the prior year quarter. This was largely due to a decline in energy-related sales in our energy chemicals or E&C business as customers continued to delay or defer projects due to uncertainties around oil prices. Our gross profit for the quarter was $52.7 million or 27.2% of sales compared with $72.5 million or 29.6% of sales a year-ago.

Overall our gross profit was down due to lower sales volume and higher restructuring related costs. Orders received in the first quarter totaled $199.3 million and were down sequentially from fourth quarter 2015 primarily due to weak E&C order trends, which were partially offset by favorable order trends within our Distribution & Storage or D&S segment. Backlog at the end of the first quarter was $382.4 million, which is up 2.1% from the fourth quarter of 2015.

In the E&C business sales decreased 56.6% to $38 million from the first quarter of 2016. The decline was due to weak order trends over the past year across all product lines in E&C. The prior year also included a number of large projects that were completed in the prior year such as Wheat Stone LNG. Gross margins were 14.4% in the quarter compared with 28.4% in the same quarter of 2015. Decreased throughput and competitive market forces negatively impacted margins.

In the D&S business first quarter sales increased 2.3% year-over-year to $107.5 million. Sales in the US alone increased 15% due to revenue recognized on projects related to both LNG and industrial gas applications. This is partially offset by continued weakness in Asia revenues related to LNG products. In addition, the fluctuation of the Chinese (inaudible) and euro negatively impacted our foreign revenues by $1.1 million on a constant currency basis. D&S gross margins were 27.2% compared with 28.6% in the prior-year quarter.

The margin decline is due to severance costs of $1.8 million in the current year, which were partially offset by a favorable insurance claim I mentioned earlier. Excluding these one-time costs adjustments gross margins would have been 28.1%. In BioMedical sales dipped 8.1% year-over-year to $48.3 million, the decrease is primarily due to lower respiratory sales volumes in North America and Europe, which we expect is related to timing.

This is partially offset by strong sales volume in our life sciences business. BioMedical gross profit margin increased to 36.9% in the quarter compared with 33.5% for the same period in 2015 due to product mix and lower warranty expense. SG&A expense for the quarter was $49.5 million, down 6.8% compared with the same quarter a year-ago.

The first quarter of 2016 included $1.9 million in severance costs and other restructuring related charges. This compares to $800,000 of similar expenses in the prior-year period. Excluding these restructuring costs SG&A was lower by 9% in the quarter primarily due to the favorable impact from our cost reduction initiatives.

Just a reminder our share-based compensation expense in the first quarter is higher than subsequent periods during the year due to the acceleration of expense for participants who are retirement eligible. During the first quarter of 2016 total share-based compensation expense was $5.5 million, which is roughly half of the expected expense for the current year.

This compares to $5.8 million of share-based compensation expense in the prior-year period. Income tax expense was $88 million for the first quarter of 2016 and represented an effective tax rate of negative 1.9% compared with $2.4 million in the prior-year quarter or an effective tax rate of 31%. The effective tax rate for the quarter is lower than prior year as a result of a higher mix of earnings in certain foreign entities. This was offset by tax losses in China from which no tax benefit is recorded, which resulted in the negative tax rate in the quarter.

With respect to our outlook for the remainder of the year, as we anticipated earnings in the first half of the year will be down compared to the second half. Given current business expectations we are reaffirming our previously-announced sales and earnings guidance.

We continue to expect sales to be in the range of $900 million to $1 billion and diluted earning per share range of $0.50 to $1.00 on approximately 30.9 million weighted average shares outstanding. This of course excludes the impact from any restructuring costs and assumes an annual tax rate of 29%.

I will now turn the call over to Sam Thomas.

Thank you, Ken, and good morning, everyone.

We entered the quarter with approximately $160 million of cash from strong operating cash flow in the quarter due to timing of project payments and collections. We continue to demonstrate our ability to generate solid cash flow despite weak energy markets which highlights the diversity of our business given our industrial, life science and respiratory offerings. In addition, our global footprint highlights our geographic diversity.

The D&S business in the US and Europe had a great quarter despite the restructuring efforts, which help offset the continued weakness in China. We also saw strong revenues in our life science product within our BioMedical segment across all regions. The macro-environment in China remains challenging. However, the new Management Team we put in place at D&S China late last year has done a great job at right-sizing the business and making necessary changes to focus on operational improvements.

As mentioned on the last call, we've implemented a number of additional cost reduction actions during the first quarter. This includes the closing of satellite sales offices and headcount reductions targeted at SG&A, including executive. We continue to restructure our business to improve efficiencies and reduce costs and we'll take further actions as necessary. At the a same time we're retaining key employees for when market conditions improve, particularly around our engineering and project execution capabilities with E&C.

We continue to see for large project opportunities in E&C where Chart is very well-positioned to benefit when the market turns and we are committed to the long-term despite the current energy downturn. We remain confident in our long-term fundamental drivers of growth. Our industry and regional diversification gives us the ability to withstand the current energy downcycle and return even stronger.

Let me now comment on specific highlights for each of our businesses. Our Energy & Chemicals business booked $8.8 million in orders during the first quarter. This is down significantly from fourth quarter 2015 orders of $45.4 million as customers there a projects and extensive pressures increase in this challenging marketing environment.

I would like to remind everyone that we experienced similar dismal orders trends within E&C during past down cycles followed by dramatic order recovery early in the up-cycle. Although the near term prospects are challenging some potential opportunities exist within the industrial, gas, petrochemical and LNG markets but project timing is extremely difficult to call at this juncture. We're heavily focused on improving our cost structure and allocating resources appropriately.

As mentioned, we intend to retain key engineering and project execution talent throughout the cycle to ensure we can address opportunities as markets improve. As a result you will see more volatility in margins between quarters in our E&C business, but it's extremely important that we don't compromise our capabilities going forward.

During this time we're actively addressing a number of our strategic goals. We are continuing to look for opportunities to capitalize on our install base of equipment and complement our project oriented business by providing after market service to customers. During the quarter we formed a new after market service business called Chart Lifecycle.

Services provided will encompass all stages of the product lifecycle including equipment installation, training, plants optimization, data analytics, predictive maintenance and extended warranty plans. Already we have seen significant interest from customers for a number of different service plans and expect orders in the near future. We continue to focus lean initiatives and we are in the process of completing a plant consolidation at our close location near heat exchanger business.

We currently manufacture at several locations in Tulsa. This project will consolidate manufacturing operations in one location going forward. It should be completed during the second quarter and provide additional cost reduction opportunities. In our Distribution and Storage business we booked orders of $139.4 million in the first quarter, up 6.7% from our fourth quarter 2015 orders of $130.6 million.

This previously-announced first quarter orders concluded an LNG reloading station in Lithuania and a portion of the LNG import terminal in India. As a result ending backlog during the quarter increased 16 4.2% to $240 million. Despite current low oil prices and excess global LNG, LNG downstream opportunities remain for our D&S business. While the current over supply of LNG has cast a pall on new liquefaction projects it has systemed infrastructure investment downstream to utilize the LNG, particularly in the US and Europe.

Additionally, within the US we're seeing hydrogen opportunities for rocket launch and hydrogen fuel cell supply. With respect to the rocket launch application the new opportunity for Chart with customers such as SpaceX, Blue Origin and United Launch Alliance. The Thermax acquisition completed in July of last year is also providing opportunities, particularly in the LNG space.

The LNG impart terminal in India, an order in excess of $10 million, demonstrate the synergistic value of the acquisition. About half of this order was included is Q1 orders with the remainder to come in Q2. Within Europe the LNG ship fueling market is developing and we continue to see opportunities.

We've also received a number of orders for ISO transportation tanks for virtual pipeline application. A good sign that marine fueling is gaining traction in the region. Our backlog for these applications in Europe is growing. The industrial gas business remains solid across North America and Europe.

We are currently seeing some increased activity for standard products with the major gas producers in the industry. We continue to see good quoting activity around the restaurant and beverage applications. Interestingly, particularly for micro brew beer applications. We attribute this to our reputation of high-quality products and it's another example of breadth of end-markets outside energy that drive good business results for Chart.

Moving to BioMedical, first quarter orders of $51.1 million were down from $55.1 million in the fourth quarter of 2015 and in this business the first quarter is typically weakest. The prior quarter also included record orders for our cryo BioMedical or Life Sciences business which are reflected in our current quarter he revenues. Although we typically see cyclical low seasonality in our requirement therapy business in the first quarter, the near-term outlook is difficult to predict.

In North America we're restructuring our sales team and business model to combat the competitive pressures we have seen over the past year. We continue to invest in Asia as growth opportunities remain from aging populations looking for high-quality products. Significant opportunities in Europe also exist, particularly around liquid oxygen supply. In the past few years our respiratory therapy business suffered as legacy products acquired had a number of warranty issues that we believe are now resolved.

As these products cycle through their warranty periods, we're seeing lower warranty claims in the ongoing product line and we hope to re-energize the brands with Chart's high-quality offering. Within our life sciences business we're participating in research projects involved in developing genetic prescription therapies. Our products monitor and ensure the pharmaceuticals are kept in cryogenic temperatures from production all the way to patient.

We've also seen great success with new products introduced in the market and benefit, at least in the short-term, from a competitor filing bankruptcy. Further growth opportunities are also available as we enter new emerging markets particularly Latin America and India.

For the commercial business we see long-term growth opportunities through expansion into ozone applications within Asia. These would be primarily for water treatment or odor reduction. Currently our commercial business in Asia is primarily hospital and clinic oxygen supply.

With that I would now like to open up for questions. Eric, please provide instructions to the participants to be able to ask questions.

(Operator Instructions). And our first question comes from Eric Stine from Craig-Hallum. Your line is now open.

Hi, Sam. Hi, Ken.

Good morning, Eric.

Good morning. Maybe we could just start on E&C and I know you talked about it that this is pretty similar at that what you have seen in past down cycles but this is the lowest order quarter, I think, since early 2009. So maybe just some commentary on what you're seeing here in Q2.

I mean is this something where at least as you sit here today you think that this kind of level continues for a while or could change and then along with that I mean have your conversations started to change with customers with this rebound in oil over the last months or so?

Yes. It's -- I don't expect a significant improvement in second quarter order intake. We have seen, as oil has rebounded a change of sentiment particularly around the LNG space. I think over the past four months up until roughly 45 days ago the sentiment was becoming increasingly negative and forecasts of when the current LNG oversupply from the new LNG export facility would be fully absorbed by the market were tending to move out from what had been forecast 18 months ago or even 12 months ago of needing more capacity in the 2018, 2019 time frame they had moved out by February, early March to forecast being primarily of that excess supply not being absorbed until 2022 or 2023 and we have seen a general consensus starting to emerge, more recently in the last 45 days, that perhaps that excess will be absorbed by 2020, 2021. So it's -- I hope that's not clutching at straws, but in terms of forward sentiment we seem to have gone from an increasingly negative bias to a more positive bias.

I don't expect that to create immediate results, but it does mean that I'm encouraged to continue to maintain our capability and we certainly are having more active discussions with both -- with all steps in the value chain.

Got it. Okay. Thanks for that. And just sticking with E&C I know you talked about some of the large opportunities those continue to move forward. I guess Magnolia would be the most timely right now. I mean, first to confirm, is it still safe to say that -- in your guidance range at the low end you're assuming that you get no revenue in the year from Magnolia? I guess that would be the first question.

Yes. That situation as we described it in the last conference call.

Okay. Got it. I guess I'll leave it at that. Then maybe just one last one just to clarify. It looks like, given where E&C margins are, it looks like you had a little quick ship business. Is that correct? And then anything you can share on potentially a mix of that business in Q2?

You are correct. There's some contribution from the Lifecycle business, minor. And the only caution I would have regarding E&C margins is that they're going to bounce around quite a bit over the next four to six quarters.

Okay. I mean given where your guidance is, though, is it safe to assume that given minimal impact from the Lifecycle business not much quick ship that we can view this as potentially a low point as it bounces around over the next four to six quarters?

That's a reasonable assumption. I say the margins are going to bounce around because I have little confidence in our forecasting ability to call out quarterly results.

Got it. Okay. Thank you.

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

Hi. Good morning.

Good morning, Rob.

And I know this is a little hard to predict, but where would you say you're at in sort of the cyclical downturn? Are you sort of feeling like you're getting to the middle of it or based on history are you still sort of feeling you're way through it or where are you at in sort of the timeline on that and historically what is that timeline?

Well, I guess the best characterization is I put the razor blade back in the cabinet. We have come off a period of significant investment in our key markets and there's plenty of new capacity around in many of our end-markets so that I don't expect an instantaneous recovery. I would say that I expect the duration of this cycle to be longer than the 2008/2009 downturn and to be more like previous cycles particularly 1998 to 2003 or perhaps worse than that going back to 1981.

Having said that, we are very well-positioned with respect to LNG opportunities and while, with any significant capital investment, with the growth of LNG and world trade, which I believe is now firmly established, it's going to be challenging to predict what you will see down cycles followed by dramatic up-cycles. That I think will come back earlier than the more generalized petrochemical markets or US natural gas processing or industrial air separation business.

So if the -- I don't think there's much opportunity for trying to be precise on calling the bottom or predicting when a significant up-cycle will happen. What we do is size the business appropriately, make sure we have the capability to respond to opportunities as they occur, and focus on our ability to rapidly scale-up or scale down as required or redeploy assets and I feel good about the -- where we are in relation to that and the opportunities we see.

Okay. Great. Thanks far that overview. And then your in Lifecycle business, I know it's just getting started, but what sort of a typical order size or contract size in that business and, sort of, strategically how do you see that kind of growing? Is this a -- is becoming kind of I don't know what percent of revenue I guess is the question. Thank you.

Too early to say. It's a business that's been under development for a little over two years and we're gaining traction. The size of opportunities goes everywhere from $50,000 projects to $5 million projects and durations of 30 days to execute to multi-year contracts. The it's a fascinating space.

We've been very encouraged by customer reactions as we have come off a period of lots of investments and not a huge operational focus by many of our customers we're finding them welcoming the ability to make their capital plans more effective and more reliable and safer.

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

Thank you. Our neck question comes from the line of Nicholas Chen from Alembic Global. Your line is now open.

Hi. Thanks for taking my questions this morning.

Morning.

Morning.

I was hoping that we could just get an update on, sort of, your forecast for cash flow conversion. It seems like it will be in excess of net income for 2016. Do you envision anything tempering that thesis as of now. Can you just sort of walk us through how working Capital Management is trending?

Yes. I think obviously we had very strong operating cash flow performance in the first quarter. Driven by good collections and timing of project cash flow there. So that was generally the key driver in the first quarter. I would expect that we could continue to deliver positive operating cash flow for each quarter here through the balance of the year with working capital being, certainly, a component of that. So I would not expect that, I think what you saw in the first quarter is probably going to be similar what you can see over the balance of the year.

That's great. And then just finally on cost cutting initiatives and restructuring do you see any additional facility closings, and what's the current run-rate of savings that you expect to achieve by the end of 2016?

You know, we quoted a number at the -- back in February when we came out with our fourth quarter earnings year-ends announcement but annualized cost savings of $60 million. That took into account first quarter actions that we were contemplating taking so that number still stands.

At this point we have no additional facility plants closures at this time, but obviously depending on market conditions and order trends we obviously will have to re assess that, but at this point no additional acts contemplated there.

Okay. And if you don't mind, I just wanted to actually get in one more final question in terms of your M&A outlook. Are you guys closely reviewing any transactions at this moment? And in terms of pricing are you seeing any sort of distressed assets out there that would be worth looking at just given the low valuations?

Yes. There are opportunities. We are actively looking at them. As you would expect the are distressed assets we evaluate carefully. I would also temper there by saying, there you also seeing enough private equity capital available that more desirable assets are not transacting at full prices.

That's very helpful. Thanks so much, guys. I'll jump back into the queue.

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

Hi. Good morning.

Morning.

Hello, Chase.

So, Sam, I wanted to ask kind of a bigger picture a strategic question as it relates to E&C. You know, it's a business that requires a good amount of capacity if you want to be successful when things are good, but at the same time you're talking about maybe an extended downcycle.

So, I guess, longer-term is there a scenario where you look to kind of keep winding down the capacity here and maybe just license out your technology where you can make a pretty good margin and pretty good cash flow off that and have somebody else manufacture it presumably at a lower cost?

We always evaluate those options and we work to develop flexible capacity which may not be wholly-owned by us with partners or subcontractors to give ourselves more flexibility. Often times the manufacturing costs that we elect to build equipment or to attempt to go to a lower cost country is not a simple decision either because of shipping costs, logistics or because of end user preferences.

As an example while air separation plants for the global industrial gas industry have gravitated to being manufactured in China there are many parts of the natural gas or hydrocarbon industry where large projects -- the end use customers are not yet prepared to take the risk of producing in China or what they perceive to be a risk of producing in China.

So it's not a simple answer, but I would say that we will always have, within E&C, a balance of in-house capability as well as outsourced capability. I don't see us going to a model of simply you have offering technology licenses, although I'm not saying that's impossible.

Okay. And, I guess, a more near-term question, you know, looking at the guidance you maintain the revenue, you maintain the EPS but you lower the tax rate. It's not a big difference, but I think it assumes maybe 4% or 5% lower EBIT. What changed in there versus the guidance last quarter?

Well, I think the other thing you have to factor in there, Chase, is the impact of the impairment charge, lowering our go forward amortization expense. It is certainly going down about $3.5 million to $4 million a year from where it was. I think that is something -- probably one item there.

That was in the guidance though?

At the time we put our guidance together that came together late, yes, that was d that was technically in our guidance, but I would venture to say that a number of analysts had not included is that your guidance.

Okay.

So I think when you look at our forecast and you look at what we have in backlog and where we expect the business to be and what we know today, we're comfortable with that guidance range, where we're at and we did expect a very weak first quarter in our own internal forecast and in fact did somewhat better than where we were projecting in the first quarter.

So first quarter is seasonally a very weak quarter for us. You look back in time that's the way it always runs and we tend to improve second, third and fourth quarters so I mean that's typically the way it is and so we're very comfortable with that forecast range and guidance at this point.

Okay. And then just one more if I could. When you look at -- you made the comment about how you're benefiting now from the work that you did in the past, right? More of the work now, know in D&S seems to be on the import terminal side or the regasification or vaporization. Does that type of -- does the equipment that you sell to those projects have a different margin profile than the equipment that you sell on the liquefaction side?

It's -- there's a wide mix and I would say in general that if you look at the range of E&C margins through the cycle and the range of D&S margins through the cycle, that what we're seeing on LNG downstream equipment or regasification and Distribution & Storage versus LNG liquefaction the overall gross margins of those two businesses through the cycle are indicative of the margins in the various parts of the LNG business.

So there -- okay. Okay. Thank you.

Thank you. Our next question comes from the line of Martin Malloy from Johnson Rice. Your line is now open.

Good morning.

Morning, Martin.

In terms of the US demand on the down stream LNG side, could you talk a little bit more about the types of projects that you're seeing there and with backlog having declined from third quarter 2014 until this most recent quarter do you think backlog for the Company has troughed around these levels?

I'm sorry. What was the first part of the question? I got distracted.

The downstream LNG opportunity that you're seeing in the US I think you spoke about in Europe it's marine oriented. Can you talk about the type munch multiple.

In the US the attempts to be marine oriented majority of the applications for transport schemes to the Caribbean Islands or to South America displacing diesel fuel primarily for power gen that's a bit weaker more recently as LNG spot market prices in Europe have, even from relatively, to small quantities have come down do $4.00 per million Btus it makes it difficult to get people excited about investing in the US currently.

Your second question as to whether we think we're at the trough of backlog I think that we're probably reasonably confident we're on the bottom within the D&S business. The E&C business can still come down further, but with a few orders would be on the upswing. It's just -- there's not much upside for accuracy in calling the bottom or following the timing of an upturn.

Okay. And if I could ask one more question just on the Lifecycle business. What do you think the addressable market is there in terms of annual potential revenue?

Huge. Too early to tell. It looks to be very interesting. If you look at the press and comments that are being made by some of the -- the very large industrial players like GE and Xiamen focusing on their data (inaudible) and connected businesses you can view us as fast followers who are doing this in smaller chunks and with more personalized attention to our customers. So I think we're just exploring something that we think can be equal in size to our equipment manufacturing business but we frankly don't have any idea of how quickly that develops. I would say that's not a short-term prospect. It's something that we view as being a attractive growth opportunity over the next five to ten years.

Great. Thank you very much.

And our next question comes from the line of Pavel Molchanov from Raymond James. Your line is now open.

Thanks for taking the question, guys. If you look over the last let's say two years, which is when the energy market really began to tank, in aggregate how much lower is your headcount today versus two years ago and how much lower is your production capacity versus two years ago?

Headcount we're down about 23% of where we were by the end of 2014 versus where we are today in the end of March. Capacity wise.

Capacity wise in terms of bricks and mortar and production equipment we have significantly greater capacity than we had at that time. Subject to bringing people back on, which we're capable of doing, we would have greater production capacity than we had he two years ago. Currently with our (inaudible) it's lower.

Right. So when you put those two things together, the higher -- more physical plant but obviously much reduced personnel, what level of revenue can you support, and annualized revenue, before you would have to -- let's say before you run into a labor availability constraints?

Right now we can probably support $1.3 to $1.5 billion of revenue within a six month time frame, which is kind of the time that's required for us to respond to orders booked. Remember if we take significant orders in E&C those projects are executed over 12 months to 24 months. And so the labor ramp-up is -- can be for the -- can be going on through half of that project.

So I'm not really very concerned about our ability to ramp-up quickly. In most parts of the world -- at this point in the cycle labors relatively available and I would anticipate that that situation would continue into a -- well into a recovery. Simply because in most industries particularly around the energy industry deployment is still coming down..

Right. Appreciate the color, guys. Thank you.

Thank you. (Operator Instructions). And our next question comes from the line of Jeff Osborne with Cowen and Company.

Yes, good morning, guys. I just had two quick ones. One, Ken, is there any contracts that you signed over the last 18 months that had deposits on them on the E&C side that would flow through if, you know, they were not to proceed? I know you mentioned that margins would be erratic over the next four to six quarters, I'm just trying to get a sense if that's one of the variables here.

Well, we certainly have deposits on contracts that were signed, that's a fact, I can't sit there and say, you know, -- it was your question, will those flow through if they were canceled?

I wasn't sure if they actually had drop dead dates if something didn't proceed by, you know, July of 2016. Then, let's say for arguments sake, your $5 million deposit would flow through in terms of revenue on the P&L and, you know, that would be 100% margin.

I would classify that as competitively sensitive.

Okay. Got it. Perfect. And then the follow up question I had is just on the D&S side. Just given the challenges in the LNG space I imagine many of your competitors are focused on beverages and industrial gas. Can you just touch on, you know, what you're seeing in terms of, you know, margin over the next couple of quarters relative to where it might have been 12, 18 months ago?

Generally solid, flat to up slightly on the basis that we have some very good products that tend to perform significantly better than competitors and we also have a very strong market presence as well as good alignment both with our customers and their end users in those markets. We've done a lot of development work of tailoring products specifically to those applications and we have an attractive position.

Got it. Thanks a lot. Appreciate it, guys.

And our next question comes from the line of Anjali Voria from Thompson Research. Your line is now open.

Good morning. You talked about volatility in the E&C margin side and I wanted to get some regular clarity around that. Would it be fair to say that outside of Lifecycle Services and the Magnolia Project that the rest of margins within your backlog is around that low teens level or are there other factors that might be within those numbers? So, I guess, the question is really what does that margin look like in your backlog numbers outside of Lifecycle and Magnolia?

The challenge with any E&C is that historically our ability to predict margins, which has never been outstanding, is helped by having significant projects in backlog and that gives us -- and that might account for 70%, 80% of revenue and margin in the forward quarter or quarters. At a time when our backlog is low a greater percentage of our business is short cycle for emergency applications or things where the customer is willing to pay a premium because of outages or shutdowns. And so depending on the level of actual sales there can be better margins but because those lead times are short we don't have a view, even as soon as the next three months, as to what part of the mix that will be.

In terms of the margin in backlog, again, as you get towards the exhausting, the longer project lead time backlog, and you're in a competitive environment, it tends to be lower so the margin in backlog, currently in backlog is generally lower than the margin we reported in the most recent quarter but adding on higher margin, short lead time projects can significantly impact that.

Okay.

(Inaudible). We just don't know.

Okay. Okay. Fair enough. And then, just, you talked a lot about the Lifecycle after market business. I wanted to understand -- I assume this is a very high gross margin business but is it also high SG&A or do you assume that the operating margin's relatively similar to what E&C does?

That's good assumption. In the startup phases, with respect to margins, potential margins, there's not a lot of established competition. However, in the early phases it does require SG&A to develop that business. I think that we've got a great balance and a great team working on this and we're handling the startup issues by allocating resources from other parts of our business and, I have to say, it's been done pretty creatively so we're very pleased with the results to date and the prospects.

Okay. That's fair. Is this, I guess as a follow-up, is this a business that your customers did internally themselves and your providing a service that's much needed or is this something that some other party used to provide and you're taking their place given your competitive angle here as the manufacturer? Does that make sense?

Anjali, it's a bit of all of the above. Many of our customers who are operating plants that include our equipment have had retirements or cut backs in experienced personnel. In many cases they are reacting to current lien times by saying we have to improve up time and efficiency or we can't stand to have the accidents or outages we've lived with in the past because so much was going on we couldn't deal with it.

And so it's a sale, we're making the sale based on improving the effectiveness of their plants, improving the reliability of their plants. Or in the case of financial owners that have been brought about by LLC or (inaudible) limited liability partnerships where there has been less experienced people operating more plants we're finding there's a willingness to get involved in engaging our services for risk mitigation.

Okay. That's great. And then, lastly, on the D&S business, two separate questions I guess. First off, when you look at 2016 as a whole within D&S/LNG what type of decline are you expecting? I think last year you saw about a 45% drop and I just, kind of, wanted a very general idea of where you think the D&S/LNG's going in 2016?

And then, secondly, I was also curious if you are indeed seeing any benefit from the customer bankruptcy that you, excuse me, the competitor bankruptcy that, I think, you competed with in D&S and maybe even biomedical. Any, sort of, benefit from orders or anything like that that might be helping you out? And that's it for me. Thanks.

Yes, I guess to answer your first question around D&S/LNG, you know, basically last year, in 2015, D&S/LNG represented approximately 25% of orders and sales, would not anticipate that changing dramatically here in 2016 based on where we see opportunities and -- say for instance, again, the Clavados order in Lithuania was an LNG oriented order, the import terminal in India, that we announced, as well here. So, you know, again, those are LNG oriented revenues so don't expect that mix to change much in 2016 and, actually, that's been a good trend for us so I wouldn't see a major change there.

Okay. Thank you.

And I'm showing no further questions at this time. I would like to turn the call back to Sam Thomas for any closing remarks.

Thank you. We've certainly seen strong headwinds and talked about it for a long time. We're not unique in our upstream energy equipment business and we don't see a dramatic change in the near term. We do think we've reacted appropriately and our diverse bi-product portfolio will enable us to successfully navigate this downturn.

We expect to continue to generate positive operating cash flows through the year and we'll continue to focus on our cost structure without losing sight of our strategic goal of delivering long-term growth. And, I remind everyone, in our business when confidence returns and people start to invest we tend to see our sales, our backlogged sales and operating leverage increased dramatically and we're determined to keep ourselves in the position to do that, prudently.

So thank you very much for listening today. Goodbye.

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