Chart Industries, Inc. (GTLS) Q4 2008 Earnings Report, Transcript and Summary

Good morning and welcome to the Chart Industries Inc. 2008 Fourth Quarter and Year-End Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 earlier this morning. If you have not received the release, you may retrieve it by visiting Chart's website at www.chart-ind.com. A telephone replay of today's broadcast will be available following the conclusion of the call until February 28th. 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 cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the company's earnings release and latest filings with the SEC. These filings are available through the Investor Relations section of the company's website or through the SEC website at 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 Mr. Michael Biehl, Chart Industries' Executive Vice President and CFO. You may begin your conference.

Thanks Sarah. Good morning everyone. I would like to thank you all for joining us today. I'll begin by giving you a brief overview and highlights of our fourth quarter and year-end results. Sam Thomas, our Chairman, President and CEO will provide highlights for the operating results for each of our business segments and I will then finish up by commenting on our outlook for 2009. 2008 was a record year for Chart in terms of sales and profits. Sales for the year rose 12% to $744 million from $666 million in 2007 with all segments contributing to the increase. Sales for the fourth quarter were $188 million and represented an increase of 3% compared to net sales of $183 million a year ago. For the year, net income was $78.9 million or $2.72 per diluted share compared with net income of $44.2 million or $1.61 per diluted share in 2007. Net income from the quarter rose to $21.7 million or $0.75 per diluted share, a 32% increase over the $16.4 million in net income or $0.57 per diluted share reported a year ago. I would like to point out that the fourth quarter of 2008 included several unusual items that on a net basis favorably impacted net income by $3.1 million or $0.11 per diluted share. That (ph) included a $6.5 million benefit as a result of reversing contingent liabilities that were established in 2003 for potential secondary employee benefit obligations of an insolvent former subsidiary. These contingent liabilities under law (ph) are considered probable reversed income as a result of events that occurred during 2008. The income resulting from this reversal was reduced by $4.9 million of unusual costs in our Energy & Chemicals business. These costs included settlement of disputed expenditures not covered by the customers insurance…

Thank you Michael and good morning everyone. We are pleased with our record sales and profits for the year as well as our strong fourth quarter operating performance. Our current backlog has helped insulate us from the current economic environment, driving continued strong operating performance during the quarter. Although order intake has weakened in the fourth quarter, several bright spots exist in addition to our backlog. Our Air Cooled Heat Exchanger business continued to grow as demand from the U.S. domestic natural gas compression segment as well as new applications in the power industry kept orders strong during the quarter. Our engineered tank backlog was strong in Distribution & Storage, particularly in our Czech Republic operation. Our BioMedical segment has historically been less cyclic than our other business segments and we intend to grow that business primarily in international markets where we continue to see strong opportunities, particularly in China. However, our order trend declined in the fourth quarter and hasn't yet shown signs of improvement in the first quarter, consistent with demand reported by our major customers. Large global LNG, petrochemical and air separation projects are delayed or on hold. Project timing has been delayed due to lack of project financing and dropping commodity prices. We have also seen some order cancellations in our E&C segment. As a result, we have implemented several cost reduction initiatives during the fourth quarter, including reductions in head count, travel and entertainment expenses and other costs. We are also reducing our selling, marketing and outside service expenses to ensure that we appropriately align our cost structure with anticipated market conditions. We will implement further cost reduction initiatives throughout the remainder of 2009 at each of our businesses as conditions warrant. Our plans include additional actions that will be taken based primarily on hitting…

Thanks Sam. Although our backlog provides good visibility for the first half of 2009, the uncertain economic conditions provide a challenge in forecasting the second half of the year, which should be considered when evaluating the company's guidance for 2009. Based on our current backlog, order expectations and cost reduction initiatives, 2009 net sales are expected to be in a range of $600 million to $660 million and diluted earnings per share are anticipated to be in a range of $1.15 to $1.65 per share based on approximately 29 million weighted average shares outstanding. It's very difficult to predict sales and earnings levels in the current market environment. With this uncertainty and being early in the year, we have provided a wide range in our guidance. If we do see orders resume to more modest levels and some capital spending in the energy industry resume as many of our largest customers have forecast, we expect to be in the mid to upper range of our guidance. Thank you for participating in our conference call. This concludes our prepared remarks. Sarah, please open up the lines for questions and provide the participants with the instructions for doing so.

(Operator Instructions) Your first question comes from the line of Jeff Spittel from Natixis Bleichroeder. Your line is now open.

First question regarding large scale LNG. I appreciate the color, talking about project delays. As you look out there, are you expecting at this point any final investment decisions before 2009 at this point?

Before 2010, Jeff?

Yes, I am sorry, Sam, thanks.

Yes, our customers have indicated that they expect a second half of 2009 final investment decision on several of the Australian, Papa New Guinea projects.

Okay.

So in the Pacific regions, there are engineering projects going forward, trying to reach final investment decisions targeted for 2009.

Okay. And I guess a follow up on the LNG market for Energy World Corp., I am assuming that in your guidance, you aren't assuming that you get any incremental orders for their expansion plans that I guess they've deferred for now?

There is anticipation. We expect no sales or operating income benefit, Energy World orders during 2009.

Okay. And then I guess finally, on the air cooled heat exchanger market, as the natural gas rig count in America... in North America has come down pretty substantially, are you starting to see some of the pain there in terms of order flow year-to-date in 2009 versus the fourth quarter?

It appears to be coming down, but slowly because the on-drilling that's already been accomplished or is underway, there are still completion and compression stations to get it into the pipeline being let (ph).

Sure.

Our customer base there seems to feel that that will continue in 2009, although I would expect to see it tapering off.

Okay. Thanks guys, I appreciate it.

Thank you, Jeff. Operator: Your next question comes from the line of Greg McKinley from Dougherty. Your line is now open. Gregory McKinley - Dougherty & Company: Guys, I am wondering if could talk a little bit more about your operating expense flexibility. What specific actions have been taken to date? And given the actions that you've taken, what type of sort of quarterly run rate do you believe you are on right now for G&A?

Well we've... and Greg, this is Michael Biehl. In the fourth quarter, we did have a reduction of about 600,000 related to G&A spending. We continue to think that run rate, it will be somewhere about 300,000 per month. Gregory McKinley - Dougherty & Company: Okay.

And as we move forward, we had about a 2.5% reduction of workforce from the third to fourth quarter. We have taken some more head count out in January, which will bring the overall reduction rate to about 4%. Looking sort of forward, we've put plans in place to include head count reductions of up to a certain percentage. It depends upon certain triggers that we hit during the year and based upon various times during the year, so. But really can't comment on those percentages or the dollar amount at this point in time. Gregory McKinley - Dougherty & Company: But it's fair to say that the $24.6 million of SG&A in Q4 probably is a high watermark if anything that we could expect to emerge quarterly in '09?

Yes. Gregory McKinley - Dougherty & Company: Okay. Could you talk a little bit about your CapEx views for the year and where you feel you are seeing attractive areas to make new investments and where you are choosing to pull back a little bit?

Yes, we expect our CapEx in 2009 to be somewhere between $16 million and $19 million. Gregory McKinley - Dougherty & Company: Okay.

As we move forward, we are looking at trying to expand in our sort of aftermarket business, repair business in D&S and then following E&C, looking at expanding into China as we have expressed during the year and in prior years. So those are the areas that we think strategically make sense as we move forward. Gregory McKinley - Dougherty & Company: Okay. And then I'm wondering if you could give us just a little bit of a framework. What... at the low end of your earnings outlook range, what type of order trends occur to deliver that $1.15? Is it a continuation of similar order activity that we experienced in Q4? Does it allow for some further deterioration, or just maybe help us have a little context for what are the moving parts that get you to the low end versus the high end of your view?

The low end is really based on what we see as late December, January, very early February order rates, which are significant clampdown. Gregory McKinley - Dougherty & Company: Yes.

So it really assumes very low levels of order intake through the year. And so it effectively would discount what most customers have suggested is that there is a destocking phenomenon going on in December and in the first quarter of 2009. But that will be at more modest levels, the customer order rates will resume later in the year. Gregory McKinley - Dougherty & Company: Right. And your low end, the $1.15 assumes that that sort of destocking level of order activity were to sustain for the year?

Correct. Gregory McKinley - Dougherty & Company: Okay. Alright, thank you guys

Thank you.

Your next question comes from the line of from CCG. Your line is now open.

Hi guys. Thanks for the color. Two questions. One was just with regard to current cash balance. How much of that cash resides onshore and how much of it resides offshore?

Roughly $120 million is onshore.

And in terms of your free cash flow generation for this year, you discussed a little bit about your capital, your CapEx budget for this year. At the $1.15 or $1.25 level, what would you anticipate free cash flow might be?

We would expect it could range anywhere from an increase in cash of $25 million at the low end to $35 million, sort of in that range for the low end.

And about $10 million more at the high end?

Yes, that's probably a good assumption.

And then the last question just is are you seeing any bifurcation in customer demand internationally versus domestically?

Not clear cut. The economic crisis is clearly global. There are different levels of demand slowdown. For instance, we expect China to be better than the rest of Europe. Japan, Taiwan, Korea are significantly impacted similar to conditions in the U.S. South America has been stronger going into this crisis, but I would anticipate South America slowing down significantly. We have seen Central Europe where we do quite a bit of business with national oil companies or nationalized businesses staying stronger going in. But the macroeconomic issues would tend to indicate that conditions will become more difficult there. Although with currency, our Czech Republic manufacturing operation is actually advantaged. So it clearly is a global crisis. There are areas of the world that projects seem to make more sense and we think there are better opportunities for them to go forward. I mentioned earlier that LNG projects in the Pacific Basin still seem to be moving forward and being funded.

Okay, thanks guys.

Thanks Keith.

(Operator Instructions)

And it looks like we have no further questions. I am sorry. Yes, there is a follow-up question.

Your next question will come from the line of Greg McKinley from Dougherty. Your line is now open.

Got in there right before the end of the call here. So could you give us a sense for looking at your backlog levels at the end of the year, we know backlog life tends to cycle much more rapidly through the D&S segment than it does in the E&C segment. Are those backlogs still going to support some modest level of revenue growth year-over-year in D&S maybe in the first or second quarter with that relatively short backlog life? And the backlog in E&C is starting to show some year-over-year declines a little bit are getting there. And would we reasonably expect that to start showing softening revenues to start out the year? Am I thinking about that correctly, how those backlog sort of tees up for Q1 revenue recognition?

We expect... because of the backlog, we expect the first quarter to be reasonably robust in comparison to the rest of the year. So there will be tailing off as we go into the third and fourth quarter. Gregory McKinley - Dougherty & Company: Yes, okay.

But at the moment, our expectation is that the first quarter would be down a bit on the fourth quarter, but not dramatically so. Gregory McKinley - Dougherty & Company: And is your current... is the current currency situation one that would likely result in a similar type of... or what are you seeing I guess with the Czech currencies and the Chinese currencies in terms of how we should think about any foreign exchange loss relative to where we are in Q4?

Our assumptions are that the Chinese renminbi will stay fairly stable. Gregory McKinley - Dougherty & Company: Okay.

Against the dollar. With respect to the euro, similarly relatively stable in the 1.25 to 1.30 range, which, through my experience is reasonably purchasing power parity. The Czech crown, forecasts are that the Czech crown will continue to weaken. Gregory McKinley - Dougherty & Company: Okay.

And that's generally beneficial to us over the long term, although there may be short-term anomalies with respect to that, but nothing dramatic. Gregory McKinley - Dougherty & Company: Okay. Great. And then just one final, Michael, what's your tax rate outlook for 2009?

We would expect to be in the 30% to 32% range in 2009 at the first blush. Our mix of domestic taxable income is a little bit -- or at least we are projecting a little bit higher and some foreign tax credits that we utilize in the current year have reduced as we move forward in addition to the reduction in state tax rates. But it will be somewhere in between 30% and 32% we would project. Gregory McKinley - Dougherty & Company: Okay.

Reversal the contingent liability because it had no tax impact, really dropped the effective tax rate by a little over 2% in the... for the year. Gregory McKinley - Dougherty & Company: All right, thank you.

Your next question comes from the line of Bill Dunken who is an individual investor. Your line is now open.

Thank you. I've a quick... well two questions really. One on the debt situation, I know you mentioned the repurchase of the 9-1/8% senior subordinated notes. Is there more of that outstanding? I mean what is cost of I guess... what do we have rolling over in '09, in '10 and hopefully it's going to cost less than 9-1/8%? Second question would be addressing the goodwill and intangibles on the books, which seems substantial. Is it justifiable given the current environment?

Yes, on the debt question, our rates continue to drop. On our term debt of $80 million, we are at LIBOR+ 2%. So we are roughly in the 3% to 3.5% range. The bonds at 9-1/8%, we'll continue to evaluate throughout the year and we do this quarterly to look to see whether it's attractive to try and buy those bonds back. But right now, we don't have current plans to do so and those bonds are trading somewhere in between 85% and 90% on a dollar right now. We have no principal payments required because we have made so many prepayments in prior years on either the term debt that's not due until 2012 and the bonds are not payable until 2015. And we have more then adequate room on our coverage... or our debt covenants as we move through this year and solid liquidity. On the goodwill, right now in terms of the required test that we have performed, we had no impairment. The forecast for our business and discounted cash flows justify that there was no step two required to be taken and look at impairment. But that's something we are going to have to, as all companies are, there has been a number of goodwill write-offs this year. I would expect to probably get even (ph) more in 2009. We'll have to continue to evaluate that as we move forward because the fact that our market value is below our book value is the factor that the SEC has been focusing on as we move into 2009, not just for us, but for all companies in the market. That's an issue that I think a lot of companies are going to face as they move forward.

Thank you. Is any of that debt convertible?

No, it is not.

Thank you.

Okay, with no further questions, I would like bring the call to a close. I want to thank everyone. It is obviously a challenging economic time, but I feel very good that Chart has been able to enter this economic crisis in a very firm position and a strong competitive position. I believe we have a lot of options going forward. We have a very good variable cost base, so we are able to drop our costs very effectively and respond to reduced demand. We also have the ability to respond very quickly as we have demonstrated over the past five years to opportunities and grow the business successfully. So I remain very confident that Chart's an excellent investment and that we have a bright future. Thank you very much.

This concludes today's conference call. You may now disconnect.