Chart Industries Inc (GTLS) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Chart Industries, Inc. First Quarter 2018 Conference Call. (Operator Instructions) The company's earnings release 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, April 26.

The replay information is contained in the company's earning release.

Before we begin, the company would like to remind you the statements made during this call that are not historical facts, are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied, please refer to the information regarding forward-looking statements and the 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 call over to Jill Evanko, Chart Industries' CFO. You may begin your conference.

Thank you Kevin. Good morning, and thank you for joining us.

Today we will provide details of the first quarter results, market and order trends, full year outlook and further details around our continued review of our capital allocation strategy.

In order to facilitate the discussion on our first quarter of 2018 results, we have included, as an exhibit to this morning's press release, a supplemental deck, which I will reference throughout the call this morning.

The deck can be located on our website under Investor Relations.

Starting with our first quarter of 2018 results on Page 3 of the supplemental deck.

Sales of $279.7 million for the first quarter of 2018 increased 37% or 15.8%, excluding Hudson Products, over the first quarter of 2017.

All 3 segments sales increased over the prior year's quarter with BioMedical and D&S sales increasing 7% and 20%, respectively.

Sequentially to the fourth quarter of 2017, revenue was down 9%, driven by typical seasonality and an exceptionally strong fourth quarter of 2017. The growth in sales reflects the continued strength in orders across all 3 business segments throughout 2017 and the first quarter of 2018.

Sequentially and year-over-year, each segment's orders increased.

The first quarter of 2018 orders of $321.1 million, or $284 million excluding Hudson, is the highest organic order quarter since the third quarter of 2014.

Continued strength in natural gas demand is reflected in our E&C segment where orders were 25% higher than the fourth quarter of 2017.

This recent storage order growth continued even after a very strong fourth quarter with strength in U.S. Packaged Gas and LNG vehicle tank activity.

The first quarter of 2018 was the highest order quarter since the third quarter of 2013 for D&S.

BioMedical results will be discussed later during this call.

April order activity across the 3 segments has been strong month-to-date, and we expect that trend to continue through the second quarter and full year.

Backlog of $489 million is a $28 million increase over the end of 2017, and excluding Hudson, an increase of $34 million.

Similar to orders, backlog in each of the 3 segments increased sequentially this quarter as well as increasing substantially over the first quarter of 2017.

Gross profit for the first quarter of 2018 was $77.1 million or 27.6% of sales.

Gross profit for the fourth quarter of 2017 was $82.9 million or 27.1% of sales.

The sequential increase in gross margin as a percent of sales reflects the first full quarter for each of the 3 segments benefiting from the 2017 restructuring actions taken.

Although gross profit margin as a percent of sales in the first quarter of 2018 was higher than that of the prior quarter and that of the first quarter of 2017, it was negatively impacted by the completion of the D&S lower margin large project, which we discussed on our year-end conference call, as well as the onetime sale of aged inventory at low margin.

Additionally, our new portable oxygen concentrator was released in the first quarter with initial start-up costs pulling the margin down.

Excluding these impacts, normalized gross margin as a percent of sales would have been 28% for the first quarter of 2018.

We continue to expect each quarter of 2018 total Chart gross margin as a percent of sales to sequentially increase over the prior quarter and over the same quarter in the prior year.

Included in our expectation of increasing gross margin as a percent of sales is our anticipated impact from the recently announced Section 232 tariffs. There is minimal direct impact to Chart from the tariffs, primarily due to our specific contractual agreements with our customers as well as our project-based pricing in E&C.

North American metal prices have been increasing since November of 2017, and we have seen moderate increases to valves, fittings, pipes, tubes and filler wire.

Moving to Slide 4 of the supplemental presentation.

Net income for the first quarter of 2018 was $5.8 million or $0.18 per diluted share.

First quarter of 2018 earnings would have been $0.23 per diluted share, excluding $1.3 million of transaction-related costs and $900,000 of restructuring cost.

Additionally, the first quarter of 2018 includes a foreign currency loss of $1.6 million which, equates to earnings per share of negative $0.04.

While there was an EPS impact of just under $0.04 from the revenue recognition accounting standard change in the first quarter, we do not expect a material impact to our income statement for the balance of the year from revenue recognition.

The first quarter of 2018 result compares with a net loss for the first quarter of 2017 of $2.9 million or negative $0.09 per diluted share.

First quarter 2017 earnings would have been $0.01 per diluted share, excluding $4.6 million of restructuring and transaction-related cost, and included $300,000 of foreign currency loss.

Normalized adjusted EPS on a comparable basis as seen in the last row on the table on Slide 4, is $0.27, an increase of $0.26 from the first quarter of 2017.

Moving to our outlook for the full year of 2018 on Page 5 of the slide deck.

Guidance includes the impact from the revenue recognition accounting standard change, which was adopted effective January 1, 2018, and which we expect to be immaterial on a full year basis.

Sales guidance is expected to be in the range of $1.15 billion to $1.2 billion for the full year of 2018 and it's unchanged from our prior guidance.

We expect full year adjusted earnings per diluted share to be in the range of $1.75 to $2 per share on approximately 31.7 million weighted average shares outstanding.

This excludes any restructuring costs and transaction-related costs and does not incorporate any impact from the strategic evaluation of our oxygen-related products, which we will discuss momentarily.

Prior EPS guidance was $1.65 to $1.90 per share. We expect our effective tax rate, inclusive of benefits from the Tax Cuts and Jobs Act, to be 27% as compared to our prior guidance range of 27% to 29%.

As mentioned on our year-end 2017 conference call, we expect effective tax rate to further decrease to 22% after our Chinese business runs profitably for a period of time.

The first quarter of 2018 was the first quarter of breakeven operating income since 2014 for China and completes a full year of EBITDA-positive results for that region. This is expected to continue throughout 2018, and therefore, will have a positive impact on our 2019 tax rate.

We expect our capital expenditures for 2018 will be in the range of $35 million to $45 million.

We have nearly completed the capacity expansion of our LNG vehicle tank line in Canton, Georgia, as of the end of first quarter and expect our capacity expansion in our brazed aluminum heat exchanger facility in La Crosse, Wisconsin, to be complete as of the third quarter of this year.

As mentioned on our last earnings call, net leverage is continuing to decline from our strong cash flow generation. And as of March 31, it's 2.96.

In this morning's press release, we announced the strategic review of our oxygen-related businesses within our BioMedical segment, inclusive of a possible divestiture of the businesses. This announcement does not change our capital deployment strategy as previously described.

We will remain focused on deploying capital to support internal investments for growth and productivity, making targeted strategic acquisitions that fit our core cryogenic engineering and manufacturing competencies and paydown of debt.

I will now turn the call over to Bill Johnson to provide further information on the strategic review of the oxygen-related assets as well as an update on our end markets and segment trends.

Thank you, Jill, and good morning, everyone.

As Jill mentioned, we are conducting a strategic review of the oxygen-related product lines within our BioMedical segment, including an evaluation of a possible divestiture of the businesses. We are excluding from the review these portions of the BioMedical segment to utilize and align with our cryogenic engineering expertise, which is our crybiological product lines within the BioMedical segment.

We will not disclose further developments during this process until our Board of Directors has approved a specific action or the company has determined that further disclosure is appropriate.

Now, I will provide an update on the BioMedical segment and related market trends.

First quarter of 2018 BioMedical revenue increased 7.3% over the first quarter of 2017 with growth in all product lines within the segment. First quarter BioMedical sales of $54.7 million decreased from the fourth quarter of 2017 sales of $56.6 million, driven primarily by the timing of specific shipments in the fourth quarter related to military applications and specific large Chinese crybiological order.

End market activity and applications continue to be a tailwind for revenue growth in the BioMedical segment, with the end users increasingly buying oxygen concentrators for in-home use to address growing chronic respiratory issues.

Given the market strength in our growing direct-to-consumer channel, we expect sequential revenue growth in each quarter for the remainder of 2018, which is different than the segment's typical lower fourth quarter seasonality.

BioMedical gross margin as a percent of sales of 36.9% increased from 35.9% in the fourth quarter of 2017 and from 32.7% in the first quarter of 2017, which included $2.1 million of restructuring cost.

As Jill mentioned, we've released our new portable oxygen concentrator in the first quarter, with over 1,700 units sold to a large DME that we expect significant additional orders throughout 2018 from.

There are certain specific start-up costs associated with the release of the new product, which negatively impacted gross margin by over 100 basis points in the quarter.

BioMedical SG&A of $10.1 million in the first quarter of 2018 is down $700,000 compared to the first quarter of 2017, driven by the reduction of force actions taken in 2017.

Compared to the fourth quarter of 2017, sequentially, SG&A is up $1.6 million, driven by a legal settlement that we received in the fourth quarter that will not repeat.

Now moving to our Energy & Chemicals segments. E&C segment sales of $89.9 million, $46.6 million excluding Hudson, organically down 1.5% compared to the fourth quarter of 2017 and up organically 16.7% versus the first quarter of 2017.

During the first quarter, total E&C orders were $93.7 million, including $37 million from Hudson. The sequential revenue decrease was driven by timing of large orders in the fourth quarter of 2017.

We continue to see strength in U.S. natural gas end markets with continued demand for our air cooled heat exchangers.

First quarter Chart legacy air cooled heat exchanger orders were $25 million, up 81% sequentially over the fourth quarter and up 74% over the first quarter of 2017.

Hudson contributed $43.3 million in sales and $4.2 million of operating income in the quarter.

Hudson orders of $37 million in the quarter were sequentially up 35% compared to the fourth quarter of 2017, driven by demand in gas compression and gas processing end markets for new coolers.

Continued sequential order growth is expected in the second quarter, driven by continued strength in gas processing and compression as well as increased activity in LNG, midstream and refining.

Our view on the timing of the balancing of the global supply and demand for LNG, which will drive LNG export facility orders, remains unchanged.

We still are forecasting additional LNG will be needed in the 2022, 2023 time period. As a result, we believe we will start to see large LNG liquefaction project orders in late 2018 at the earliest and in the first half of 2019.

We do not include any large LNG liquefaction orders in our full year 2018 forecast.

Our IPSMR technology continues to generate a high level of interest in a number of mid-scale applications. A few specific updates on certain projects.

A number of large IOCs are or have reviewed our technology to date and are actively working with us.

As previously mentioned, IPSMR has been selected for future mid-scale applications for Cheniere.

Chart's technology was chosen for the Commonwealth project. Point LNG has selected Chart technology and are in a capital raise period. For the purposes of its FERC filing for the Jacksonville LNG export project, Eagle LNG utilizes Chart's IPSMR technology.

The formal award is anticipated in 2018.

Moving to our Distribution & Storage segment.

D&S sales decreased $14.1 million to $136.1 million compared to the fourth quarter of 2017, and increased $22.9 million compared to the first quarter of 2017.

Year-over-year increases are driven by strength in the United States Packaged Gas, China LNG trailers and vaporization stations, European standard tanks and LNG tanks.

And in our D&S business, we booked orders of $170.4 million in the first quarter, making this the 5th consecutive quarter of sequential order growth in the segment.

A strong D&S order intake was driven by LNG vehicle fueling and industrial CO2 activity driving increased volumes of Bulk and MicroBulk product in the United States.

Additionally, we continue to expect small-scale LNG terminal activity in Europe to provide opportunity in the second half of 2018.

April order activity has continued the strong year-to-date trend, and we expect that trend to continue through the quarter.

We are seeing global demand growth in LNG-fueled heavy-duty trucks, driven by carbon emission regulations in some markets and economics of LNG to diesel price delta in other markets.

As Jill mentioned, our expansion of capacity in our Georgia facilities to meet this growing demand for LNG vehicle tanks is nearly complete and doubles our prior capacity.

We have backlog to utilize the full capacity of this line in 2018.

Gross margin as a percent of sales of 27.6% increased from 26.6% in the fourth quarter of 2017 and 27% in the first quarter of 2017, reflecting continued improvement in our Chinese business as well as productivity efforts in the European and U.S. manufacturing locations.

Gross margin as a percent of sales would've been almost 200 basis points higher when normalizing for the onetime impact as Jill mentioned earlier on the call.

For the past 4 quarters, D&S China has shown signs of recovery, and this trend continued through the first quarter of the year.

D&S China orders were up 60% versus the first quarter of 2017 and up 12% sequentially.

LNG vaporization stations continue to drive much of the order intake increases. We anticipate 10% revenue growth in our China business for the full year of 2018, and a positive operating income year.

The first quarter was at breakeven operating income, as Jill mentioned.

We continue to be pleased with the margin accretive results from our recent repair and service acquisitions, Skaff Cryogenics, and VCT Vogel, and we'll continue to build out our aftermarket repair and service geographic footprint in the United States and Europe, both organically and inorganically.

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

(Operator Instructions) Our first question comes from Walter Liptak with Seaport Global.

I want to ask about the -- to start off with the Biomed divestiture. And just to get a little bit more detail about, maybe geographically, what might get divested? And maybe, if you can talk a little bit about the timing, because it seems to me from the financials that you just started getting some momentum going with the direct-to-consumer and the profitability picking up, and maybe, with the channel into China as well. So wonder if we could just get a little bit more color on why basically.

So well, first of all, it's a strategically evaluation of those businesses. So we have not specifically landed on a divestiture of the business. There is no timing that we can share at this point in time. What we can share is that, the product is under review. Our respiratory and on-site generation systems, which total approximately 65% of the revenue of the BioMedical business.

Okay, all right. Fair enough. And in the prepared remarks, you called out the D&S Business Packaged Gas. And I wonder if you can talk a little bit about how that trended versus your expectations. Is that market stronger than you expected? And if you talk about material cost pass through specifically for that market.

Yes, sure. The -- we look at the Packaged Gas business as kind of a leading indicator for us, in terms of just a health of the general economy and kind of things to come. And we look at the Packaged Gas business from an order standpoint. It's grown sequentially. And also year-over-year, it's grown. We were about a 60 -- over 60% growth in orders from last year to this year in the first quarter.

And then, well with respect to material pass-through. So in our industrial gas customer base, generally, we have contracts with those customers. And there's some form of material escalation and banding on those contracts to both directions. So from a pass-through standpoint, the contracts are set to be fair to both directions.

And then, we also -- if there is a larger projects, we quote those and we have a very discrete time periods so the quotes are active. So that we can adjust the prices on materials as needed if we get into a little bit larger order -- quoting activity with somebody.

Okay, fair enough. And then just one last one the heavy-duty expansion down at Atlanta. And you commented that there is a backlog that's growing. Is there a backlog that you have got a work down in the second and third quarter? So should we see a bump in revenue as that capacity ramps?

Yes, there is. So we have backlog on that -- for that line for the full year at the new capacity level. So you will see a bump in revenue in Q2 and Q3.

Our next question comes from Martin Malloy with Johnson Rice.

I had a question on the Energy & Chemicals segment and the operating income there. Looks like it was $2.8 million during the quarter. And then, in the notes, it looks like Hudson contributed $4.2 million. Can you talk about what was going on in the organic business?

So in the organic business, we did have an operating loss on that side. And that was primarily driven by under absorption given the volume levels in the legacy E&C business. Other than that, there were 2 specific items that were onetime items that totaled about $800,000 of hurt to the operating income line.

Okay. And the under absorption, is it just a timing thing that impacted 1Q or is this going to impact 2Q as well?

It's a timing for the first quarter, and we anticipate the remaining 3 quarters of the year in the E&C legacy business to be operating profit -- profitable.

Okay, good. And then I was wondering if I could ask a question on D&S side and the storage tanks and customer inquiries regarding IMO 2020 and the lower sulphur for marine. Are you seeing those trend up or how do you expect that to play out over the next couple of years?

Yes, I think it certainly is something that we're watching closely. I think, as I said in the prior calls, and I think the enforcement of the regulation is really going to drive what -- how fast things get adopted. We certainly are seeing more activity on the bunkering side of things. I think we'll continue to see that in Europe. But it's slow and -- but it is coming. But I think it's going to be really determined by the enforcement side of things. And then how quickly -- when the people do their calculations on their return on investment, they'll make their decisions based on that.

Our next question comes from Rob Brown with Lake Street Capital.

First on the gross margins. You mentioned a couple of reasons why they were depressed in the quarter. But what -- could you give some color on how that alleviates? Does that alleviate pretty quickly in Q2 or does it take sort of throughout the year for those items to alleviate?

So those were specific one-off items in the first quarter. And we anticipate that each quarter and the second quarter will be back at the normalized gross margin levels that we just shared on the call and that will continue to increase in the third quarter as well. So we anticipate that those issues are behind us as of the end of the first quarter.

Okay, good. And then kind of back to the LNG vehicle tank strength the capacity adds. What markets are you seeing the strength in? And is that recent strength or is that really a follow through from some of the activity late last year?

Yes, no. It's -- we began to see it last year. and we -- which is why we added -- knew we needed to add capacity this year. Almost all of the strength is coming in Europe in terms of our volume that coming out of the Georgia facility is being shipped to Europe. But we also see vehicle tanks in China growing. That market for both vaporization stations and vehicle tanks is really what's driving some of the strength and our returns on the Chinese -- in our Chinese businesses. And we see that continuing. I don't see that abating anytime soon.

Our next question comes from Eric Stine with Craig-Hallum.

First, just wanted to start with China. I mean you gave some good color there. But I know the last few quarters, you've kind of been cautiously optimistic. I mean, should we take your commentary or are your thoughts that you've kind of turned the corner there a little bit? And if not, I mean what are some of the risks that you see that kind of keep you in that cautious category?

Yes, I mean, look, it's China, right? So there -- you're always cautiously -- cautious about everything, in terms of, because it can change very quickly on you with government policies and regulations. But the reason we're optimistic is that we've consolidated our manufacturing locations into our one site. So we're pleased with that. We've completed that at the end of December. So we know we've taken our cost down and lowered our footprint, our fixed cost, which helps.

There is activity in China, both on the ISO container side of things, the vaporization station and then the vehicle tanks. And with the -- if you look at how much LNG is being -- has been imported, growth year-over-year in China and you look at the forecast, that's going to continue. China needs more LNG. So from that perspective, we're optimistic. Now -- look it's China and there's -- it's tough to make money there. But we think we're in a better position than we were 12 months ago.

Got it. And maybe just turning to E&C. And I know you mentioned the increased engineering activities for some of the LNG projects out there. Just to clarify, how would you break that down between new projects or advancing just more work with existing contracts well at -- whether it's Cheniere, Tellurian. That'd be helpful. And then when we do think about this increased activity, we should still think about this is IPSMR modular, where you'd have more content?

Yes, I think what -- we certainly are seeing -- there's 2 answers to that, right? So I don't think there's any new projects on the large-scale export stuff. Those projects are pretty well defined in out there. But there are some smaller small-scale liquefiers out there that people are looking at. And there's a whole list of those. And occasionally, there is something new that pops up there. But again, that's a pretty defined list of things that we're working on. And -- but all of them are -- revolve around IPSMR. We're certainly trying to get that technology in all of the applications. And it fits really well on the small-scale stuff as well as the exports.

Our next question comes from Pavel Molchanov with Raymond James.

Back in 2015, as I recall, Venture Global and Magnolia were both highlighted as predevelopment LNG opportunities for you. Are both of those relationships still intact?

Yes. As a matter of fact, we have Magnolia in our backlog still. And Magnolia, you can read the press releases. But I think they're working their way through, I think it's about 8 million tons of liquid. And they're working their way through getting off takers for that. So you can read the press releases from them. And then Venture Global, the same thing. I think there has been some recent press releases on some offtake for them. We also have cold boxes that we would be selling to them when that project goes forward.

Okay. And a similar question about Chevron. So given that you were the cold box supplier to the Wheatstone LNG project in Australia. And now Chevron is indicating that the Gorgon LNG project will be expanded. Is that a plausible opportunity for you? Or do you think they will go with their former supplier for Gorgon?

I don't know. I really don't want to comment on any specific one order like that.

Our next question comes from Matt Trusz with Gabelli & Company.

Have you seen the U.S. China trade tensions impacting the LNG project FID environment?

No. I don't -- I can't point to anything that says that, that there's a link there.

Okay, another question on energy. If the outlook for oil prices stays high, can you walk us through the biggest impacts of the business. I guess 3 dimensions, could be LNG product timelines, the volume of vehicle tanks and fueling infrastructure you sell. And then the associative gas business. Are there are key thresholds, like $80 or something, that you're watching?

Yes, I mean we've talked about this in the past where we say look, if we can maintain some -- if there's some arbitrage between diesel and gas prices, it makes sense to for the LNG trucking business to turn back on in the U.S. I think that's probably around $80 and you might -- then and economics start to make sense for LNG heavy-duty trucking in the U.S. But I think there's so much volatility that you have to have some certainty around the $80 price to say that, that's going to become a reality. It also affects the petrochemical market. So the higher oil prices drive the petrochemical market to the feedstock being more ethane, which is helpful to us in terms of petrochemical sales. So I would say, those are some of the linkages that we look at.

And I'm not showing any further question at this time. I'd like to turn the call back to Bill Johnson.

As a reminder, our Investor Day is scheduled to take place June 7, 2018 at the JW Marriott Essex Hotel in New York City. Details can be found on our website under Investor Relations or by contacting Jill Evanko. Our first quarter 2018 results reflect strengthening markets across all of our segments. As well as margin benefits from the execution of last year's restructuring efforts, which we expect to return $15 million in 2018. A strong start of the year as reflected in our increase full year EPS guidance of $1.75 to $2 per diluted share.

Our ongoing capital allocation view, strategic evaluation of the oxygen-related product lines in our business and our strong balance sheet will continue to allow us to focus on our cryogenic expertise and pursue strategic inorganic and organic opportunities. Thank you, everyone, for joining us today. Goodbye.

Ladies and gentlemen, that does conclude today's presentation. You may now disconnect, and have a wonderful day.