Chart Industries Inc (GTLS) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Chart Industries Inc. 2017 Second Quarter 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 this release, you may access it by visiting Chart's website at www.chartindustries.com.

A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, August 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 risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statement. For further information about the important factors that could cause actual results to differ materially from those expressed or implied in 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 statement.

I would now like to turn the conference over to Jill Evanko, Chart Industries' CFO. You may begin your conference.

Thank you, Charlotte. Good morning, everyone. Thank you for joining us today. I will begin by giving you a brief overview of our second quarter results, outlook for 2017 and supplemental information regarding the Hudson Products transaction, for which we signed a definitive agreement to acquire on June 30, 2017, and expect to close in the third quarter following regulatory approval clearance. Then Bill Johnson, President and CEO, will provide further comments on the Hudson deal as well as our current market and order trends across our 3 segments.

Net income for the second quarter of 2017 was $2.8 million or $0.09 per diluted share. Second quarter 2017 earnings would have been $0.21 per diluted share excluding $5 million of restructuring and $1 million of acquisition-related costs. This compares with a net loss of $2.9 million or negative $0.09 per diluted share for the first quarter of 2017 or $0.01 per diluted share on a comparable adjusted basis.

Second quarter 2016 net income was $21.2 million or $0.68 per diluted share. The second quarter of 2016 included several short lead-time replacement equipment sales and contract expiration fees related to projects in the Energy & Chemicals segment that totaled $31 million in gross profit.

Sales for the second quarter of 2017 increased to $238.2 million from $204.1 million in the first quarter of the year, with sequential increases in all 3 segments. Distribution & Storage sales increased over 21% sequentially, with 58% growth in Asia, an indicator that China is beginning to return to growth. BioMedical sales increased 19% over the first quarter of 2017, driven by 16% growth in respiratory and 24% growth in cryobiological products.

Our gross profit for the second quarter of 2017 was $63.2 million or 26.5% of sales, which was unfavorably impacted by $2 million of restructuring charges. Gross profit for the first quarter of 2017 was $55.7 million or 27.3% of sales, inclusive of $2.5 million of restructuring charges.

Order activity continues to increase year-to-date across the 3 segments, with $252 million in orders received in the quarter. Backlog increased to $367.1 million from $348.6 million at the end of the first quarter of 2017. E&C orders increased 70% over the first quarter of 2017, driven by natural gas processing, petrochemical and LNG export projects. Year-to-date, there have been 11 orders related to equipment for cryogenic gas processing plants compared to 0 in 2016.

In the second quarter, we received a significant systems order for a natural gas liquid chemical processing plant. Distribution & Storage orders increased 12% over the first quarter of 2017, driven by strength in Asia LNG applications for on-site power generation and LNG distribution. BioMedical orders were up 4.2% over the first quarter, with respiratory orders increasing 16%, driven by strength in the United States and Europe.

Energy & Chemicals segment sales of $40 million for the second quarter were flat to the first quarter of 2017 and decreased $21 million versus the same period in 2016. The second quarter of 2016 included the previously mentioned quick shifts and contract expiration fees.

Gross margin percent was 13.3% in the quarter compared to 21.1% in the first quarter of 2017. The primary drivers of the sequential change in margin percent were a short lead-time project in the first quarter that did not repeat in the second quarter and the recognition of a low-margin order in the second quarter.

Energy & Chemical SG&A of $7.4 million is down both sequentially from the first quarter of 2017 by $400,000 and from the second quarter of 2016 by $1.8 million. The reduction of SG&A reflects the completed cost-out activities taken in the first half of the year. We expect E&C SG&A to be lower in the second half of the year as the Wuxi, China facility consolidation is now complete.

On June 30, 2017, we announced that we signed a definitive agreement to acquire Hudson Products Corporation, a leading producer of air-cooled heat exchangers and axial flow cooling fans. We are excited about the addition of Hudson to our Energy & Chemicals segment. And later in the call, we'll walk through supplemental information regarding the deal.

Distribution & Storage sales increased $24.3 million to $137.5 million compared to the first quarter of 2017 and $7.9 million compared to the second quarter of 2016. D&S gross profit margin of 25.7% is down from the first quarter gross margin percent of 27.0% and flat to the second quarter of 2016. The sequential decrease in the second quarter 2017 gross margin percent was primarily driven by product mix, in particular, with Asia revenue up 58% over the first quarter of 2017.

Second quarter BioMedical sales increased from the first quarter by $9.7 million to $60.7 million. BioMedical gross profit margin of 37.2% in the quarter included $500,000 of restructuring costs primarily related to the sale of the Qdrive product line. The sequential increase in BioMedical gross margin percent from the first quarter of 2017, which included $2.1 million of restructuring charges, primarily was the result of the first full quarter of savings from the consolidation of the Buffalo, New York respiratory manufacturing into Canton, Georgia.

Our total company SG&A expense for the quarter was $50.2 million, a sequential decrease of $2.2 million from the first quarter of 2017. Included in the second quarter SG&A was $3 million of restructuring charges compared to $2.2 million of costs in the first quarter. We expect to see a continued sequential quarterly reduction to our SG&A in the second half of the year.

We anticipate our previously announced restructuring activities to cost $12.6 million in 2017 and result in $10 million of annual run rate savings for the first full year in 2018. Year-to-date through the second quarter, we have spent $9.7 million of the anticipated $12.6 million of restructuring costs.

An update on the 4 key restructurings. First, the BioMedical respiratory consolidation was completed on schedule as of March 31, 2017. Second, the Energy & Chemical Wuxi, China consolidation, as previously mentioned on the call, was completed on schedule as of June 30, 3017. Third, the Distribution & Storage China facility consolidation is on track for completion by the end of 2017. And last, our corporate headquarters move from Cleveland, Ohio to Canton, Georgia is substantially complete, with finance, IT and HR established in Canton. The remainder of the transition is expected to finalize in the third quarter, and our lease commitment ends December 31, 2017.

Moving to our outlook for the remainder of the year. Our guidance does not include any impact from the acquisition of Hudson Products. We continue to expect sales for 2017 to be in the range of $875 million to $925 million. We are updating our EPS guidance and expect full year adjusted earnings per diluted share to be in the range of $0.65 to $0.80 on approximately 31.3 million weighted average shares outstanding. This excludes the impact from any restructuring and acquisition-related costs and assumes a full year 2017 tax rate of 31%. We 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 Bill Johnson to discuss the strategic value of the combination of Hudson and Chart as well as our segment trend.

Thank you, Jill, and good morning, everyone. We have included a supplemental presentation regarding the Hudson Products transaction on our web page under Investor Relations. The following commentary references that presentation. Page 1 of the presentation summarizes the key aspects of the transaction and financial information. Full year 2017 projections for the Hudson business are estimated at $205 million in revenue and just over 20% in EBITDA margins on a stand-alone basis.

Going forward, we see meaningful cost synergies that exceed $7 million of run rate savings that can be executed within the first 18 months of our ownership. The deal is expected to be EPS-accretive in 2018, inclusive of acquisition accounting and cost to achieve synergies. We will purchase the business for $410 million on a cash-free, debt-free basis. The funding for the deal will come from our U.S. dollar cash on hand and approximately $250 million from our existing revolver. After funding this deal, we have remaining liquidity and continue to assess our deal pipeline for bolt-on acquisition opportunities in targeted spaces.

Moving to Slide 2 of the supplemental deck. Hudson is highly synergistic to Chart. Specifically, the addition of Hudson's Cofimco fans business, coupled with nearly 40% aftermarket split, provides an offset to our traditional E&C LNG cyclicality. The addition of Hudson expands our end market mix and, as seen on Slide 3 of the deck, diversifies the E&C end market mix from our current industrial gas, natural gas and LNG spaces to include power generation, refining, HVAC and petrochemical. Through this acquisition, we are building upon our strategic area of focus, and we also are pleased with the additional opportunity and large LNG project content that Hudson brings.

Now turning back to our 3 business segment trends. During the second quarter, our Energy & Chemicals business booked $64.6 million in orders, which is up from first quarter 2017 orders of $38 million. E&C backlog increased approximately $25 million from the end of the first quarter of 2017, bringing backlog to $122.7 million, the highest since the fourth quarter of 2015.

Order strength has been driven by orders for natural gas processing plant equipment; continued growth in the Lifecycle business, which includes Hetsco; and strengthened our air-cooled heat exchanger product line. We are seeing global activity in Distribution & Storage equipment related to power and marine activities, which will, in turn, drive the need for process plants using Chart's liquefaction solutions.

While we continue to anticipate that the forecasted supply-demand balance will be reached in 2022, 2023, thereby driving LNG export facility orders in late 2018 and early 2019, our IPSMR technology is generating a high level of interest in a number of mid-scale applications.

As mentioned in our first quarter conference call, we continue to progress on our $24 million capital investment in additional furnace capacity of our brazed aluminum heat exchangers in La Crosse, Wisconsin. We expect that it will be completed in the third quarter of 2018, and the 2017 capital spend associated with the project is estimated to be $17 million.

In our D&S business, we booked orders of $134 million in the second quarter, up from $120 million in the first quarter of the year. All regions are seeing order strength in packaged gas and in LNG vehicle tanks, with Asia-Pacific D&S orders up nearly 78% sequentially. Additional areas of order strength include LNG vaporization stations in China and small-scale LNG terminals in Europe. Quotation activity has increased for LNG fueling stations in Europe and both LNG and CO2 systems in North America.

Revenue increased from the first quarter of 2017 by $24.3 million to $137.5 million. The increase was driven by LNG vaporization stations and ISO containers in China and Argon railcars and packaged gas products in the U.S. Packaged gas performance was driven by the beverage CO2 and MicroBulk product lines.

As mentioned in the E&C comments, growth for downstream in power and marine markets remains strong in Europe, the Caribbean, Latin America and Southeast Asia. The virtual pipeline is supported by regulatory bodies, in particular, in Europe. The EU-approved Clean Power for Transport package requires the deployment of alternative fuel infrastructure through development of LNG bunkering facilities at inland ports and LNG fueling stations for heavy-duty vehicles by 2025 and 2030, respectively.

As discussed on our first quarter earnings call, increased volumes, coupled with our restructuring efforts, have resulted in margin improvements in Asia. We expect to see continued margin improvement in our D&S Asia business as we finalize the facility consolidation before year-end.

Moving to BioMedical. Second quarter orders of $53.9 million were up from $57.1 million in the first quarter of the year. Sequential order increase was driven by respiratory orders, which increased 16% over the first quarter of 2017. BioMedical revenue of $60.7 million was a 19% increase over the first quarter. The increase was driven by strength in both our respiratory and cryobiological product lines. Cryobio sales were up 24%, [Stainless Steel] Freezers, driving 31% growth in Asia, 16% growth in the U.S. and 28% growth in Europe.

We continue to see order and quotation activity increase in all product categories of BioMedical, driven by the macro trends of aging population in the United States and demand for quality cryogenic storage for medical applications.

I will now open it up for questions. Charlotte, please provide instructions to the participants to be able to ask questions.

(Operator Instructions) Our first question comes from the line of Martin Malloy from Johnson Rice.

I was wondering if maybe you could talk a little bit more about the Hudson acquisition in terms of maybe some of the revenue synergies we should think about and maybe if you could also touch on the aftermarket. How stable is that business for Hudson? Or is it growing?

Sure. We talked a little bit about the cost synergies, but there are revenue synergies with the Hudson deal as well. Hudson has had a history of -- in the LNG space of supplying export terminals -- the export facilities. So as that business comes back, there will be opportunities for us there on the revenue side. On the aftermarket, the stability of it, I think it's about...

It's very stable.

It's about 40% of their sales, and it's been pretty consistent through the time periods that we've looked at.

Okay. And then on the mid-scale LNG opportunities, compared to a few years ago, with the technology that you have now, it seems like your scope has really changed in that area. Can you talk maybe a little bit more about the scope that you're able to sell into some of these mid-scale LNG opportunities while in the Gulf Coast?

Sure. So we have the brazed aluminum heat exchangers, the cold boxes, and we've had that capability. The addition of Hudson brings brazed aluminum heat exchangers, in particular, in the petrochemical space and refining space that we haven't had in the past. We continue to have our whole D&S suite of products, storage products, vacuum insulated piping, trucks for moving the LNG, storage. So it's -- I would say we are much broader than we were a few years ago.

Our next question comes from the line of Eric Stine from Craig-Hallum.

I was wondering if we can just dig into the orders a little bit. In your prepared remarks, you mentioned the 1 large project, but it seems like it's pretty broad-based. I mean, is it -- anything you can provide about 3Q, whether the trends that you saw in the second quarter, whether those have sustained in the third quarter. And then maybe -- you touched on the natural gas processing, that it's basically gone from 0, and now I believe you said you've received 11 orders to-date. Maybe just what your view is of 2018 for that business.

Sure. So I'll take the second question first. We look at the natural gas processing plant equipment orders as kind of a normal year being between 15 to 20 plants, and we anticipate that we'll see that level continue for the next 2 to 3 years. So our thinking for 2018 is in that 15 to 20 plant level for our equipment. If you look at the order trends, sort of your first question, you are correct. We are seeing broad-based order improvement and quotation activity improvement. On the E&C side, the significant systems order that we referenced was just over $15 million, for perspective. Across the business, the start to the third quarter has continued to see the sequential increases over the last couple of months.

Got it, okay. And then maybe just turning to industrial gas. I mean, I know you've talked about it and something you've been watching in terms of consolidation and what impact that might have on your orders. I mean, we're ways into it. Is it something where you feel like -- is there a point where you can kind of sound the all clear on that? Or should we still view that as it's kind of still a wait-and-see as that process plays out?

Yes -- no, I think it's still kind of a wait-and-see for us. We do see little bits and pieces of things happening, but I think it's going to be more slow and kind of spread out over quarters. I'm not even sure how -- that there will be a big change. I think it's going to be small incremental adjustments throughout the quarter as these guys look at their inventory levels.

Okay, got it. Maybe just last one for me. Just turning to Hudson. I guess I would love to hear feedback you've gotten from some of your existing customers on this. And then also, I mean, I know you're working towards close. Is there anything that you have been doing or can do in advance of that, so you kind of hit the ground running? Or is it something you just need to -- you need to close, and then you can get things started from there?

We're in the middle of -- we have filings in, and there's very limited things you can do during this period. I mean, certainly, we're preparing on our side, the integration and our integration teams. But in terms of working with Hudson, we're in a pretty much closed period, so we have to wait for the regulators to get back to us.

Our next question comes from the line of Rob Brown from Lake Street Capital.

Maybe just give some further color on China. You've noted a couple of periods where that's increased in terms of the activity levels there. How sustainable is that? How is the visibility there? And maybe what's driving it?

Yes. So I think we saw China kind of relax the price of LNG to diesel, and that has driven the heavy-duty truck business -- market for LNG heavy-duty trucks up. And we've certainly seen that through -- started in probably March time period, March-April time period and has continued to progress. And so once you get the trucks in the vehicle tank -- LNG tanks in the trucks, then you have to have the fueling stations, and we're starting to see more and more of that type of activity. And it's continuing on through end of the third quarter. But it is China, after all, so...

We anticipate sequential growth on the order and sales side for the next 2 quarters in China.

Okay, good. And then come back to the E&C business. You talked a little bit about the LNG plant ordering cycle. I guess what's your latest thinking on when order flow can start there and sort of the visibility in the overall E&C backlog? Is it -- I guess how would you characterize it at this point?

Yes. I mean, well, we all know we have Magnolia in the backlog, right, and that's moved a little bit in the 2018, '19 time period. And I would say the same with all these projects. I think they have moved a little bit to the -- out a little bit further than maybe another 6 to 12 months from what we were thinking. But it all really depends, Rob, on the supply-demand. And when that happens, when those 2 things are going to cross, they'll back it up and start getting the new capacity lined up.

Our next question comes from the line of Matthew Trusz from Gabelli & Company.

Bill, Jill, would you say that your overall business confidence and sense of the industrial world has improved, stayed the same or gotten worse compared to what you were thinking at the end of the first quarter? And if it's changed, why?

I would say that it's -- our businesses have improved. We've certainly seen the order rate uptick, and sequentially, it's improving. So I would say that from that perspective, we're optimistic. And certainly, China coming through in the second quarter the way they did was a very, very positive surprise and nice thing to have happened. So I would say those 2 things -- we see continued strength in the industrial gas, the market. And then the natural gas processing plants has been a big contributor to the performance this year. So I would say those are the 3 areas that I would say are improving.

And then if we turn to BioMed, the 16% growth in the respiratory business seems pretty significant. Can you provide some color on how that's trending in the U.S. versus internationally? And do you have any update on the progress driving commercial changes in the U.S. side?

Yes. So in the U.S., the respiratory is growing. So if you look at the first quarter from a sequential growth standpoint, you would have seen the respiratory sequential growth over the fourth quarter being mostly in Europe and Asia. And in the second quarter, sequential growth was mainly in the U.S. and Europe. So we're seeing the trend move toward the U.S. increases. And we think that that's certainly the result of some of the efforts that we've done ourselves to penetrate the U.S. market, working on our direct-to-consumer channel for the respiratory products in the U.S. So we anticipate that, that will continue going forward.

Our next question will be coming from the line of Nick Chen from Alembic Global.

Just digging a little bit deeper into the China question. Could you give us any sort of breakdown on what percentage of backlog currently is from China?

I don't know if we have that number at our hand here.

Okay. Moving on then...

We'll have to get back to you on that, sorry.

Okay, no problem. On the chemical side, are you guys seeing any sort of activity in the ethylene world? And what's your outlook there?

Yes. I mean, we certainly are seeing activity and quotes for orders. And we're pretty optimistic that the chemical world will have more business in the second half and continue to see improvement in the petrochemical space.

Nick, just under $50 million of our backlog is in China.

(Operator Instructions) Our next question comes from the line of Jeff Osborne from Cowen and Company.

Just a couple of questions on my end. I was wondering if you could give us an update on the -- you touched on Magnolia, but can you just give us an update on where we are with Venture Global and Driftwood, some of the other projects that you mentioned in the past?

Yes. I mean, Driftwood is -- it's in for FERC approval right now, and I think they're anticipating getting that done in the first quarter of next year sometime. You can read the press releases, just like we can, in terms of they're aggressively trying to get offtakes for that project. And I would say Venture Global is in the same kind of category. They're trying to get the offtake agreements.

Got it. And your conversations with them, are people getting more creative and having some success in that process or no?

I think it's still a pretty tough market for them with the spot price of LNG and the capacity coming on. But I -- they certainly are getting creative. We'll see how successful they are.

Perfect. Just some other real quick ones. You highlighted the kind of sudden strength in China. Are you hearing of any discussions of possibly having a PetroChina framework agreement, similar to what was in place a few years ago? Or is this more just continued spot orders that you expect?

Yes. I think it's just more spot orders that we're seeing.

Got it. And then maybe for Jill, is there a way you can quantify what the OpEx savings is with the Wuxi consolidation that we should be thinking about in the second half of the year?

Yes. So the Wuxi savings is about $1.5 million.

On an annualized basis or just for the second half?

That's annualized. Keep in mind that when we say the China restructuring, there's the Wuxi piece, which is in E&C, and then there's the D&S facility consolidation as well. So if you add the D&S piece in there, on a run rate basis, total China is $4 million.

So there's $2.5 million in D&S and $1.5 million in E&C?

You got it.

Right.

Okay. And then the last one. You touched on trucking globally LNG. Can you just give us any comments, U.S., Europe? I think you hit China enough.

China was -- we talked about that. I would say Europe is also an area of strength there, and we had -- Europe's been pretty strong for the last couple of years, and it continues on. I would say that hasn't taken a pause at all. The U.S. is still lagging, of course.

And at this time, I'm not showing any further questions and would like to turn the call back to Bill Johnson for any closing remarks.

We are pleased with our second quarter and first half of the year results and the improving order activity. Our full year outlook is supported by the quarter's growth in orders and revenue across all business units and the progress on our restructuring activities from margin expansion. Additional profitable growth from the strategic use of our balance sheet to acquire Hudson, coupled with strong cost synergies in the deal, will expand Chart's value chain and be accretive in 2018. We continue to improve productivity across Chart in both operations and administration to provide a better customer experience while maintaining scalability. Thank you, everyone, for listening today. Goodbye.

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.