Chart Industries Inc (GTLS) 2016 Q4 法說會逐字稿

Good morning, welcome to the Chart Industries Inc. 2016 fourth quarter and year end conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 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 2nd. 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 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 Ken Webster, Chart Industries Vice President and CFO. You may begin your conference.

Thank you Michelle. Good morning everyone. I would like to thank all of you for joining us today. I will being by giving you a brief overview of our fourth quarter results and outlook for 2017. Then Sam Thomas, Chairman and CEO, and Bill Johnson, President and COO, will provide comments on our facility consolidation efforts, as well as our current market and order trends we see in each of our business segments. Net income for the fourth quarter of 2016 was a loss of $3.3 million, or $0.11 per diluted share. This included severance costs and other one-time restructuring expenses from cost reduction initiatives in the quarter of approximately $4.7 million.

Excluding these items, fourth quarter 2016 earnings would have been breakeven. This compares with a net loss of $230.1 million, or $7.54 per diluted share for the fourth quarter of 2015. Fourth quarter 2015 earnings would have been $0.19 per share, excluding noncash impairment charges, as well as facility shutdown and severance costs recorded in the prior year quarter. Sales for the quarter were $214.4 million, a decrease of 17.8% from the prior-year quarter. This was largely due to the decline in energy related sales in our energy chemicals business, or E&C business, as customers continued to delay projects, and competitive pressures remain in this challenging market.

Our gross profit for the quarter was $57.1 million, or 26.6% of sales, compared with $72.8 million or 27.9% of sales in the prior year quarter. Overall gross profit was down slightly due to delayed customer capital spending in the energy markets and associated lower volumes. Orders received in the fourth quarter totaled $184 million, and were down 8.6% from third quarter 2016. We have seen an increase in the size of D&S project awards over the last several years, as we win more systems contracts, which has made order trends more variable quarter to quarter in this segment.

Backlog at the end of the fourth quarter was $342.6 million, which was down 10.9% from third quarter 2016, due to continued low order levels in E&C, and revenue recognized in the large D&S awards from earlier in the year. In the E&C business, sales decreased 57.5% to $34.1 million for the fourth quarter of 2016, compared with the fourth quarter of 2015. The decline was due to continued weakness in upstream natural gas processing, petrochemical and LNG markets. Gross margins were 18.3% in the quarter, compared with 32.1% in the same quarter of 2015. The decrease in margins is related to lower volume due to reduced customer capital spending.

In our D&S business, fourth quarter sales increased 1.8% compared to the fourth quarter of 2015 to $133.4 million. This increase was comparably driven by favorable revenues for engineered bulk tanks in systems related to the Aerospace industry, partially offset by currency given the strength of the dollar. D&S gross margins were down slightly at 25.7%, compared with 25.9% in the prior year quarter, as margin improvements in the US and Europe offset the weak performance in China. In Biomedical, sales decreased 11.3% year-over-year to $49.6 million, due to the timing of large shipments in revenue, which did not recur in our European and Latin American respiratory businesses, as well as competitive pressures. These decreases were partially offset by our Life Sciences product lines, which had a record revenue year.

BioMedical gross profit margin increased to 34.5% in the quarter compared with 27% for the same period in 2015. This increase is due to product mix and lower warranty expense. I should point out that biomedical warranty expense as a percent of sales was 2% in the current quarter, versus 6% in the prior year quarter, as we continue to make progress in addressing legacy respiratory concentrator issues. SG&A expense for the quarter was $52 million, down $1.9 million, or 3.6% compared with the same quarter a year ago. The current quarter included approximately $5 million of reserves recorded in China, and acquisition costs associated with the Hetsco acquisition.

The reserves in China related primarily to bad debt reserves, given the economic environment and collection challenges. A number of these are state-owned enterprises with extended payment cycles, which is not uncommon in China. Although we intend to still go after these from a collections perspective, reserves were recorded given the age of the receivables. In addition, the current quarter included $3.8 million of severance and other one-time restructuring costs due to facility consolidation efforts. The prior year quarter also included $3.5 million in severance related costs for restructuring efforts in that period. Excluding the China reserves, Hetsco acquisition costs, and restructuring costs in each period, SG&A declined due to lower personnel and discretionary spend as a result of cost reduction initiatives.

Moving onto our outlook for the remainder of the year, we expect sales for 2017 to be in the range of $875 million to $925 million. And adjusted diluted earnings per share to be in the range of $0.60 to $1.00, on approximately 31.1 million weighted average shares outstanding. This excludes the impact from any restructuring costs, and assumes and annual effective tax rate of 33%. We also estimate our capital expenditures for 2017 to be in the range of $35 million to $45 million. I will now turn the call over to Sam Thomas.

Thank you Ken. Good morning everyone. As you've seen on our 8-K announcement last night, we have announced a number of succession changes. Bill Johnson will succeed me as CEO, effective with the Annual Meeting in May. I will remain as Executive Chairman through May 2018, and then retire from Chart. As part of our continuing productivity initiatives, we have also decided to relocate our corporate headquarters from Cleveland down to our Canton facility in Georgia. As a result, Ken Webster decided not to relocate, and will remain in Cleveland to pursue other opportunities. I would like to thank Ken for his significant contributions to Chart over the past ten years. We have hired Jillian Evanko to succeed Ken as CFO effective March 1st of this year. We have a new strong team in place to lead Chart to an exciting future.

During the month of January, we were pleased to announce the Hetsco acquisition to complement our Lifecycle aftermarket service business within E&C. This addition supplements our current Lifecycle offering, but will also add fabrication construction and project management to our portfolio. Over the years, we have worked very closely with Hetsco on a number of plant installations, and emergency repairs, so we're excited to now have their skilled workforce and capabilities as part of Chart.

At the end of the year, our cash balance was $282 million, led by record operating cash flow generation during 2016. With no borrowings on our $450 million revolving credit facility and available cash, we intend to invest in the business through acquisitions, and believe there will be more favorable opportunities for buyers. Let me now turn the call over to Bill Johnson.

Thank you Sam. Good morning everyone. As you know, over the past few years, we have taken a hard look at ways to reduce overhead costs through a number of planned facility consolidations. As announced in November, our new respiratory Center of Excellence will be based in Canton, Georgia, where all US respiratory manufacturing, engineering, sales and marketing will be centralized to deliver industry-leading products. The corporate office currently based in Cleveland, will be relocated to the Canton, Georgia facility as well. This will create a number of synergies in back-office functions across the business, as we leverage resources and adopt a more comprehensive shared services model.

We also believe that having the teams together will lead to quicker decision making and faster execution, to further drive improvements across Chart. We are in the process of consolidating our D&S and E&C China facilities into the newly built greenfield facility in Chengdu, China. This move will consolidate three of our locations into one. Which will create further efficiencies, and allow us to leverage support functions across the business. We will continue to have additional capacity and capability on hand, in order to support the anticipated LNG growth in Asia.

As a result of these facility consolidations, which should be completed by the end of 2017, we estimate that they will drive annualized savings of approximately $10 million going forward. Approximately $4 million of those savings will be recognized during 2017, primarily from the BioMedical consolidation that began in the fourth quarter of last year, and will be complete by second quarter of this year.

Looking at our SG&A run rate, coming out of the fourth quarter, after excluding China reserve costs, our annual SG&A rate is running in the $175 million to $180 million range. This is $20 million below the average of 2014 and 2015 timeframe. Our SG&A head count is currently down 14% from 2014 levels. These additional facility consolidation efforts will drive further improvements, as $6.5 million of the $10 million in annualized savings will be SG&A oriented.

Moving on to segment highlights. During the fourth quarter, our E&C business booked $20.5 million in orders, which is down from third quarter 2016 orders of $27.9 million. The decreased quarter-over-quarter was seen in natural gas processing and LNG related awards, as a result of continued weak energy market conditions. Backlog at the end of the year was $99.8 million, which is down 12% compared to the prior quarter. Despite the low orders seen during the fourth quarter, the resurgence that started in the second half of 2016 for cryogenic gas plant inquiries continued with a variety of shale basins.

During of the quarter, the Lifecycle aftermarket service business completed nine field service projects, including three for our D&S group. With addition of Hetsco, we will have experienced workforce available to complete more projects going forward. In addition to facility consolidation, we have altered how we go to market, and reorganized our sales team within E&C and D&S, to focus on market channels instead of business or product lines. This will further enhance our business and customer relationships in our energy and industrial gas markets, as we sell global solutions that encompass all of Chart's products and services. We believe this will provide an enhanced experience for our customers, and drive competitive advantage, growth, and productivity opportunities.

In our D&S business, we booked orders of $114.6 million in the fourth quarter, down 5.3% from our third quarter 2016 orders of $121 million. The decline in orders represents a timing issue, as our businesses in both the US and Europe remain very strong. In addition, we're seeing signs of improvement in China. Backlog for the quarter decreased 11.4% to $218.2 million, as revenue was recognized on large projects during the quarter. Backlog in our D&S European business continues to remain strong.

During the quarter, we received orders for several downstream LNG applications. Execution of backlog is still a major focal point in Europe, as quoting activity in the region remains strong. Within D&S Asia, we see orders and inquiries improving for industrial and LNG products, during the fourth quarter, we saw an increase in our microbulk systems product lines, for both industrial gas and LNG applications. With increased volumes and the plant consolidations later this year, we expect to see margin levels improve in Asia. In D&S within the US industrial gas consolidation efforts may create a short-term impact, as Air Liquide and Air Gas rationalize inventory levels. However, our relationship with both remains strong, as we support them in their integration efforts. Despite this risk we are seeing very favorable orders so far in 2017, particularly for CO-2 and hydrogen applications.

Moving to BioMedical, fourth quarter orders of $48.9 million were down from $52.3 million in the third quarter 2016, due to timing of European respiratory tender orders, and competition in the US respiratory market. Within North American respiratory, we expect the centralized focus stemming from the Center of Excellence consolidation project, in addition to the new management hired last year, to reenergize the business. We have a defined objective with a number of initiatives in order to redirect our presence in the marketplace. We expect the Asian respiratory business to grow in 2017, as we have increased the exposure of our products, including the launch of our online store in China. Our Life Science business continues to see strong order volumes, despite the soft market in artificial insemination due to low milk prices. We expect overall growth to continue into 2017. With that, I will turn the call back to Sam for market outlook.

Thanks Bill. The low energy markets remain challenging, stabilization and oil pricing and improved LNG export demand forecasts, have led to an improved outlook and project pipeline. Current forecasts by customers projections for standard cryogenic gas processing plants up by 5 to 10 more units than prior forecasts. These plants are focused on associated gas, in locations where current gas processes is either limited or non-existent. We have seen an increase in orders for our air-cooled heat exchangers as a result in early 2017. In addition, LNG for export continues global development for both onshore and offshore applications. A number of planned projects continue to move forward, trending toward multi-trained mid-scale LNG plants centered on our large core brazed aluminum technology. We're investing organically in the business, as Ken alluded to earlier, with increased capital expenditure guides this year.

Approximately 50% of our CapEx investment during 2017 will be at E&C, largely to add capacity at our brazed aluminum heat exchanger facility in La Crosse. This will capitalize on the competitive advantage we have achieved, and be prepared for the wave of LNG export facilities that are currently being planned. This will continue to position Chart as the global technology leader, and is a reflection of our confidence in the long-term opportunity here. Stable oil prices also support an increase in development of nitrogen rejection unit, or NRU application, tied to associated gas or gas fields with high nitrogen content. As higher oil prices, the associated gas fields can be cost effective, to produce and offset the capital costs of an NRU installation.

In addition, as propylene margins recover, based on higher oil prices, we're seeing PDH quotation opportunities. In D&S, we continue to see activity in downstream LNG and industrial related applications, from railcars to bunkering and fuel delivery systems over the past months. This includes an $8 million order received this year to convert asphalt plants to LNG, and then $8.7 million Argon Railcar award, which will be reflected in first quarter 2017 orders. As Ken pointed out, we have seen an increase in size of D&S project awards over the last several years, which has made order trends more variable quarter to quarter in the segment.

LNG adoption in Europe is moving forward, with a strong backlog for our D&S European operation. A number of projects are under evaluation and the project pipeline is promising. LNG orders in China during the fourth quarter were the strongest since the second quarter of 2015, with the majority for oil or soft coal fired oil and replacement applications. We're encouraged about the outlook of LNG globally. With that, I now open it up for questions. Michelle, please provide instructions for the participants to be able to ask questions.

(Operator Instructions). Our first question comes from Eric Stein of Craig-Hallum. Your line is open.

Good morning everyone, I'm wondering if we could talk about the guidance first, and maybe some of the puts and takes, the backlog is the level, I guess the coverage of the forward guide, it hasn't been at this level since the 2010-2011 timeframe, so just some details in confidence that you are going to see year-over-year growth? And it sounds like from your commentary, really the majority of this is DNF. Because given the length of the project timelines, E&C, that would take a while to flow-through?

That is correct, Eric. Perhaps hitting the most promising market is, Distribution & Storage in North America and Europe are seeing good orders, and good order pipelines. And they have a fair backlog going into the year. So that the vast majority of that will be executed during the current year. And comments from customers are positive. We are seeing good activity for the BioMedical business, particularly in the Life Sciences. Within E&C, we're at a low point of order intake, but we're starting to see obviously more promise in LNG projects going forward. But also, we're making steady progress with the Lifecycle business. And we expect the Hetsco acquisition to contribute to that.

Got it, and just staying within E&C, with you mentioned expanding capacity in La Crosse. Just to clarify, did you give a number of what that does to your capacity? What that expansion is? And do you foresee how far out do you think that you might need to think to start thinking about a fifth furnace for La Crosse?

Well, this expansion does add a furnace. We see that there is a significant opportunity in LNG export related projects going forward worldwide, from the 2018 through 2024 time period. And this is intended to give us the capacity to not give up any work based on constraints.

Got it. And then maybe the last one for me, just on Magnolia, I know that you had anticipated that would start up in mid-2017, so just, I mean how does Magnolia, number one, what is your outlook on Magnolia, and then how does that factor into the guidance as you have it right now?

Magnolia has publicly announced that they extended their contracts with their EPC supplier through the end of the year. Through the end of 2017 on a fixed price basis. They have had some activity and announcements around an off-take agreement with their supplier, with an off-taker in India, which would underpin a train, or more than one train. So it is positive, but it is still shifting to the right in terms of time scale.

Okay, I mean, is that something that you have factored, I mean, do you have Magnolia in your guidance right now?

No. Not for 2017 revenue.

Okay, so you are thinking about 2017, I mean given that E&C is going to be quite challenging, you are overall revenue growth, that is your view for the year. I mean that really is potentially significant strength in D&S in back half?

Yes. And also a contribution from E&C with respect to gas processing. And some of the NRU, which would be for gas production, and PDH, petrochemical applications.

Hetsco, Hetsco acquisition.

Okay. Thanks a lot.

Thank you.

Our next question comes from Rob Norfleet of Alembic Global Advisors, your line is open.

Thank you for taking our questions this morning. This is Nick Chen for Rob Norfleet, a few questions. I was hoping that you could give a little more color into margins in the E&C segment? Do you see them getting back in the mid-20%-plus range in the next year? With better fixed cost absorption?

Well, we have taken a lot of cost out of E&C over the last two years. And we continue to see improving margins in the E&C business. I'm not sure that we see this year getting back to 20%. But certainly, with the consolidation of the Wuxi facility into the Chengdu facility in 2017, that will help the overall margins in E&C.

A significant improvement back to historical averages for E&C will be nominally six months behind a lift in their backlog, which we're not forecasting until late in 2017.

Okay, got it. That sounds like more of a 2018 event. And then just digging a little bit deeper into the margin question. Can you discuss margins in your current backlog, especially surrounding recent awards, are they higher than the legacy business, or is price competition hurting margins at the moment?

They are probably comparable to historic margins, particularly in the D&S business. Based on low activity levels, the E&C are probably a bit lower than historic margins. And within BioMed I would say that they're on par to slightly better.

Okay, great. And just a final question surrounding the Hetsco acquisition, can you talk about that melds with the existing Lifecycle business, and what synergies and cross-selling opportunities you expect to see?

Sure, coming out of the blocks, we were able to consolidate some of the existing management structure to get the immediate cost savings. The benefit we get with Hetsco is an extremely talented workforce, in aluminum welding and brazed aluminum heat exchangers. It really gives us a lot more opportunities to go out and get more of that business in the future. And I would say going forward, we continue to look for opportunities to expand our service across all of Chart, not just in the Energy & Chemical, but how we can utilize that workforce in our Distribution & Storage business, and the industrial gas application as well.

Thank you very much, that's helpful.

Perhaps as an example, we have expanded our business in Distribution & Storage to provide small scale/mid scale bunkering facilities and re-gas facilities. So we actually have an established offering now, and can provide complete installations and maintenance services for those types of facilities.

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

Good morning. Thank you for taking my call.

Hi Rob.

Under European LNG businesses, could you put some color around what markets are adopting the downstream LNG use?

It goes across three. First, Marine, the implementation of the IMO standards has significant both North Sea and river barge adaptation. And that's both for transport, general cargo, ferries, and also ships in harbor, power generation. So cruise ships, when they're in the harbor, using LNG to reduce their emissions while they're in harbor. As the examples. Beyond that, we're seeing propane, or fuel oil replacement applications with LNG, and we're also seeing growth in over the road trucking, with truck leads adopting LNG. Several new offerings in particular, by Iveco with LNG powered engines and tractors, with a number of countries, both including France, Spain, and the Benelux participating.

Great, thank you. And just to get the E&C order pipeline kind of timeline, how, it's sort of dead now, from the LNG export projects, maybe give us a sense of how you see that developing as that market, projects start to kick off? Is that a case that you get orders some time yet this year, and then start to get revenue next year, or is it more orders next year, and then revenue thereafter?

Tough to call. I would say that over the past six months, there have been more published reports, including from potent partners and a Morgan Stanley publication, and just last week, a shale LNG outlook, that seems to be more bullish on demand growth occurring this past year, 2017 and 2018. So the balance in terms of requiring more capacity is pointing towards late 2020, 2021, 2022, as opposed to forecasts that put it out that 2023 or 2024, earlier in the year. And that leads to potential for orders, late 2017, early 2018. But we don't see enough offtake or contracts being let, to be able to call it closer than that. And obviously, to go out into 2018. But generally, the people that we're working on projects for, are ramping up their spending and feas studies. And working as if the projects are ready to launch.

Okay, that's good color. Thank you..

Our next question comes from Matthew Trusz of Gabelli & Company. Your line is open.

Good morning. Thank you for taking my question. I was wondering if you could just talk about, what made you and the Board decide that now is the right time for the leadership transition, and should we anticipate any shifts in strategy going forward as a result?

Besides me getting old?

I suppose so. Yes.

(laughter) Obviously the Board and I have been discussing it for a number of years. We are very fortunate to get Bill Johnson aboard, and very pleased with the progress he has made in that time period. And based on that, this appears to be the right time for an effective transition. We are obviously coming through a significant downturn, and preparing the Company for a significant lift in business. and there is enormous benefit in our business, to be able to respond quickly and ramp up our capacity quickly with a lift in orders. And we wanted to have a new team in place to accomplish that effectively.

Our next question comes from Walter Liptak of Seaport Global. Your line is open.

Good morning, and thank you for taking my question. I wanted to ask a follow-on to the D&S orders, just looking at the way that the orders trended in 2016, first half a little bit stronger, like about $150 million per quarter. And then the second half, about $120 million. I wonder if you could just address the normalcies, and if there's any more in D&S, and what you're thinking about for that D&S order pipeline for the first half or second half a little bit?

We oftentimes, we scratch our heads ourselves to characterize seasonality. For the industrial gas world, I think it has fairly consistently been the second and third quarters have generally been the strongest for order intake, at the expense of the first and fourth quarters. With LNG related activity, those average orders tend to be larger, and there is no discernible seasonality to them at this point.

Okay. What are you thinking about for this year, you talk positively about the pipeline, jobs and orders, do you think they will hit in the first half or the second half?

I would say, Walt, that again, no seasonality impact. We do expect some modest growth in the D&S business in 2017. I think as Sam pointed out in his comments, we had a couple of nice sizeable orders here in the first quarter, that we have gotten to date, on for an asphalt plant about $8 million. And another one for an Argon railcar order for about $8.7 million. So we have got some pretty good projects coming in here in the first quarter, wouldn't expect any major trend changes in the order flows throughout 2017.

Okay, fair enough. And then I wonder if I could ask about SG&A. Your comments were that the run rate now was I think $175 million to $180 million. But I don't think that includes some of the cost reductions of that $6.5 million. What's a good number to use for 2017 for SG&A?

I would say that we expect, again of the cost savings that Bill mentioned was an annualized savings from these three consolidation efforts that we have underway to be about $10 million. And that again is going to be something we're going to be implementing throughout 2017, so those $10 million is going to be a savings, 2018 and beyond. We expect about $4 million of that $10 million to flow-through in 2017, largely due to the BioMedical consolidation, which got a head start, started earlier in this process. I would say from a go forward SG&A rate, with some of those savings, I think we're going to be in that $180 million to $185 million range.

Okay. Okay, great. And I wanted to ask about quickly, just about the Hetsco margins, is that a better margin business than the full segment, for your Lifecycle business?

Yes, the service-oriented work from Hetsco is certainly a richer margin than what you see on the average from E&C.

Great. All right, thank you.

(Operator Instructions). Our next question comes from Pavel Mochanov, Raymond James, your line is open.

Thanks for taking the question, guys. You clearly sound more open than maybe in the last couple of years in doing acquisition. You have the largest cash balance I think possibly ever. And I'm curious, are you only considering M&A opportunities in your three existing segments? Or would you be open to creating a brand-new segment outside of your existing ones?

I would say that a larger focus would be in adjacencies to our existing business. Particularly if you look at the next 6 to 12 months. However, Bill's experience, and a number of the people that have joined us recently have broader-based industrial experience. So I wouldn't rule out the potential for new segments, but they would be tied the Chart's core competencies, in terms of heat transfer, metal fabrication, welding, and capabilities, things where we believe we can add value.

Okay, understood. And then just a policy question. So we're obviously getting into the new Washington landscape here. Some new rules on methane emissions, probably some relevance to your business, as well as LNG permitting. Have you seen anything, any suggestions coming out of the White house or the DOE, that gives you any additional confidence perhaps in LNG project approvals, or anything along those lines?

Nothing substantive. I would say that we are well-positioned, number one, to benefit from more stringent emission standards around the whole value chain for delivering natural gas, from the well head all of the way through in use applications. Our expertise is focused on that, we have a number of products and capabilities which handle that well. But we are also extremely well-positioned just for increased use of natural gas. So I would say that our business will benefit from increased use of natural gas, and we're prepared to accomplish that in ways that significantly reduce methane emissions. But I would say there is no clear picture of where we're headed as a result of the new administration.

All right, appreciate the color on that. Thanks guys.

Our next question is a followup from Matthew Trusz from Gabelli and Company. Your line is open. If your telephone is muted, please unmute. There are no further questions, and I would like to turn the call back over to Sam Thomas for any closing remarks.

Thank you Michelle. We made a significant number of changes, including putting the next generation leadership team in place over the past year. That team represents a blend of long-term employees and new blood, with broad industrial and energy experience. This is to position ourselves for long-term success, maximized growth and profit, through the next business cycle. Our strong cash balance will also allow us to invest in the business, both organically and inorganically, to provide long-term value. Thank you everyone for listening today. Good bye.

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