Chart Industries, Inc. (GTLS) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Chart Industries Incorporated 2015 Second Quarter 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 access it by visiting Chart's web site at www.chartindustries.com. A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, August 6. 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 web site or through the SEC web site, 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 Michael Biehl, Chart Industries' Executive Vice President and CFO. You may begin your conference. Michael F. Biehl - Executive Vice President & Chief Financial Officer: Thank you, Kath. Good morning, everyone. I'd like to thank you all for joining us today. Begin by giving you a brief overview of our second quarter results, and then Sam Thomas will provide comments on current market and order trends we see in each of our business segments. I'll then finish up by commenting on our outlook for the remainder of 2015. Net income for the second quarter of 2015 was $17.2 million or $0.56 per diluted share. This include the Owatonna, Minnesota facility shutdown and other severance costs recorded in the quarter of approximately $1.7 million or $0.04 per diluted share. Excluding these items, second quarter 2015 earnings would have been $0.60 per diluted share. This compares with net income of $20.1 million or $0.65 per diluted share for the second quarter of 2014. Second quarter 2014 earnings would have been $0.70 per share excluding the $0.05 per diluted share impact of the acquisition-related costs and dilution impact associated with the Chart's convertible notes during that period. We also had a foreign currency transaction gain of $3.1 million for the second quarter of 2015, or $0.07 per diluted share, given the volatility in currency rates. This effectively offset the $0.07 per diluted share loss we had in the first quarter of 2015. Sales for the quarter were $270.3 million, a 12% decline from the prior year quarter. This was largely due to decline in LNG sales in our D&S business, particularly in China. But currency translation had an unfavorable impact as well. Translation effect from the strong dollar reduced consolidated sales about $9 million and gross profit by about $2.3 million in the second quarter of 2015 on a constant currency basis. Our gross profit for the quarter was $74.9 million or 27.7% of sales, compared with $92.2 million or 30% of sales a year ago. Overall, gross profit was down due to lower sales volume and higher restructuring related costs in our D&S business. This was partially offset by previously announced cost reductions, in addition to improved project mix and execution in our E&C business. Orders received in the second quarter totaled $231.1 million and were up sequentially from first quarter 2015. Net orders and backlogs were however reduced in the second quarter 2015 by $47.6 million to address adjustments in the D&S Asia backlog for customers in China that are not able to confirm delivery and previously committed orders, primarily due to the impact of lower oil prices and the overall economic slowdown in China. As a result, reported orders for the second quarter of 2015 were $183.5 million, net of the $47.6 million backlog adjustment in China. In the E&C business, sales decreased 1.7% to $91.3 million for second quarter of 2015. The decline was due to lower sales volume in brazed aluminum heat exchangers, which was partially offset by improved project mix in process systems. Gross margins were 30.3% in the quarter, compared with 26.5% in the prior year quarter. The negative margin impact of lower brazed aluminum heat exchanger volume was more than offset by improved project mix and execution, in addition to the absence of start-up costs related to the La Crosse expansion and Wuxi acquisition in the prior year quarter. In our D&S business, second quarter sales decreased 18.3% year-over-year to $121.8 million. The impact of lower global oil prices and a weak economic environment in China is negatively impacting our D&S Asia business. Sales volumes are down 35% in the current quarter over the prior year quarter in China. In addition, the currency translation impact in our D&S European business reduced sales by approximately $6 million on a constant currency basis. D&S gross margins were 23.4% compared with 30.6% in the prior year quarter. Lower LNG volume, restructuring and costs associated with the Owatonna shutdown, and other cost reduction initiatives, as well as product mix led to decline. In addition, the prior year quarter included the favorable resolution of a partial contract cancellation from a major oil company customer, which improved D&S margins about 1.5%. In BioMedical, sales decreased 11.8% year-over-year to $57.1 million. The decline is primarily due to lower respiratory sales volume in Europe due to delays in the tendering process and currency impact due to the strength of the U.S. dollar. The currency translation impacting in our BioMedical business reduced sales by approximately $3 million on a constant currency basis. BioMedical gross profit margin declined to 32.8% in the quarter compared with 33.8% for the same period of 2014, due to lower volume and product mix. SG&A expense for the quarter was $45.6 million, down $8 million compared with the same quarter a year ago. The decrease was largely due to lower variable base incentive compensation based on current performance, lower bad debt expense due to improved collections on some old outstanding balances, and favorable impact from cost reductions initiated in the fourth quarter of last year. Income tax expense was $6.9 million for the second quarter and represented an effective tax rate of 28.7% compared with $8.8 million for the prior year's second quarter, which was an effective tax rate of 30.2%. The decrease in the effective tax rate was primarily due to the effect of income earned by certain of the company's foreign entities, which are taxed at lower rates. I'll now turn the call over to Sam Thomas. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Thank you, Michael, and good morning everyone. Our second quarter results again reflect solid performance across many of our businesses despite the uncertainty in global oil pricing, which continues to cause customers in the energy space to defer investment decisions. We continue to focus on our core business with disciplined execution, strong management involvement and aggressive cost cutting. While remaining circumspect with regard to the impact of uncertainty in oil pricing, we're encouraged by the growing interest and activity in North American LNG export facilities, and specifically the move towards multi-train mid-scale liquefaction. The pending order we included in the earnings release today for brazed aluminum heat exchangers, Core-in-Kettle exchangers, and Cold boxes for the four-train Magnolia LNG project, which will incorporate Magnolia's OSMR technology is one of a number of projects we have been pursuing in this space. We expect a staged release of Magnolia commencing in the third quarter with a commitment for all four trains by the end of 2015. The total order value is expected to be in excess of $80 million. Venture Global LNG and Parallax Energy's Live Oak LNG and Mississippi LNG projects, which I've mentioned on previous calls and which we are currently performing advanced engineering for, fall into the same multi-train mid-scale category. However, these projects will employ Chart's own IPSMR liquefaction process and would be significantly larger in scope for Chart. Low oil prices and significant economic malaise in China remain one of our largest challenges. We do expect demand to recover as the government continues to support its pollution control goals, however, we do not expect a significant 2015 improvement. We've had disappointing sales, orders and order prospects, despite the optimism within China and our customer base the recovery is just around the corner. We are aggressively addressing that disconnect with appropriate cost reductions. Overall, as I commented last quarter, 2000 (sic) [2015] is proving to be a challenging year. Earlier optimism regarding recovery of oil prices and China activity in the second half of 2015 now appear unfounded. We still expect to see growth in our D&S packaged gas and BioMedical markets, but we face a continued deterioration in prospects in D&S LNG applications based on diesel fuel replacement, especially in China. We also faced similar challenges within E&C for petrochemical, natural gas processing and industrial gas prospects as the energy industry has pulled back on capital spending. Global competition continues to put pressure on pricing. In response, we continue to focus on our cost reduction initiatives as evidenced by our performance this quarter. Since we began our cost cutting efforts in the fourth quarter of 2014, our head count reduction now stands at 12% of our global workforce. These head count reductions and other actions equate to annualized savings in excess of $40 million. I would again like to emphasize that despite the current headwinds we're facing, we remain confident that our focus on meeting and exceeding customer needs and the long-term fundamental drivers of growth, including rising industrial production and increased global demand for energy, natural gas in particular, and the growing need for respiratory healthcare, particularly in developing countries, will deliver results. We are continuing to invest for future growth, including pursuing potential acquisition candidates. The acquisition of vaporizer manufacturer, Thermax, which we completed in July, is validation of our growth intentions. Let me now comment on specific highlights for each of our businesses. Within Energy and Chemicals, we booked $23 million in orders during the second quarter. This is down sequentially from first quarter 2015 orders of $43 million. As I alluded to earlier, while we are certainly experiencing deteriorating short-term prospects and pricing pressure, most notably for brazed aluminum heat exchangers, the timing of project awards is historically lumpy in the E&C segment and always a challenge to forecast. As I mentioned earlier, we are encouraged by the continued interest in quoting activity for mid-scale multi-train liquefaction for LNG export facilities here in North America, which is to be largely unaffected by current oil prices. The Magnolia LNG project is a good example of this and we are cautiously optimistic that equipment orders will be forthcoming for other LNG export projects over the next year, some of which could be much larger than that currently announced. Within Distribution & Storage, we booked orders of $149.6 million in the second quarter, an increase of 21% from our first quarter 2015 orders of $124 million, led by particularly strong orders in the U.S. The adjustments Michael mentioned in our China backlog reduced reported quarterly orders, of course, as we report them on a net basis. Global industrial gas activity remains in line with expectations, despite reduced volumes reported by many of our large customers, and is still expected to grow marginally in 2015, based on rising industrial production and major customer forecasts. Our D&S U.S. orders were the strongest since the first quarter of 2012 and included a broad range of orders for both industrial gas and LNG related opportunities. Although LNG orders within D&S remain weak globally, opportunities still exist. We did see LNG orders in the U.S. related to LNG vehicle tanks with Scania and an LNG Storage and Regasification system for a mine project in Canada. We continue to quote significant opportunities for LNG distribution equipment; that could result in orders later this year or 2016. This includes ISO containers for transport on railcars and ships, in addition to other equipment used in the LNG virtual pipeline. Moving on to BioMedical, orders of $59 million were up 11% compared to the first quarter of 2015. Order intake for both life sciences and respiratory healthcare was up from the prior quarter. Orders for commercial oxygen systems were down marginally from the prior quarter and somewhat lower than expected due to project timing, which again is historically lumpy for the second quarter. Second quarter 2015 performance substantiated our belief that respiratory healthcare has stabilized and it is now more predictable. As we reported last quarter, we still expect to see modest growth in the respiratory healthcare business in the second half of 2015. Finally, we remain confident that our life sciences and commercial oxygen system businesses will both show growth as we move through 2015. Michael will now provide our outlook for the remainder of 2015. Michael F. Biehl - Executive Vice President & Chief Financial Officer: Thanks, Sam. The pending Magnolia LNG order will not have a major impact on 2015 operating results, given the long lead time nature of the project. Given the first half and forecasted order trends, factored in backlog reductions, the continued decline in the economic environment, particularly in China, in addition to the recent decline in oil prices, we are lowering our 2015 guidance range. We expect sales for 2015 to now be in the range of $1.0 billion to $1.1 billion, diluted earnings per share to be in the range of $1.40 to $1.60 per diluted share on approximately 30.7 million weighted shares outstanding. This excludes the impact of any restructuring related costs from our cost reduction initiatives. We do expect at least another $3 million in restructuring related cost at this time in the second half of this year, which includes approximately $2 million for lease termination costs with the Owatonna, Minnesota facility and $1 million for additional severance associated with our cost reduction initiatives which is not reflected in our revised earnings forecast. I'd now like to open it up for questions. Kath, please provide instructions to the participants to be able to ask questions.

Thank you. Our first question comes from the line of Martin Malloy with Johnson Rice. Your line is open. Martin W. Malloy - Johnson Rice & Co. LLC: Good morning. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Good morning, Marty. Martin W. Malloy - Johnson Rice & Co. LLC: I want to ask a little bit more about the mid-scale LNG project opportunities that you see out there. And outside of Magnolia, Venture Global, Parallax, can you talk a little bit about the timing of those projects when you might expect to get additional orders there? And I know they are multiple trains each, would you expect them to issue orders for certain amount of trains at a time? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Yes. We're quoting on projects which equate to nominally 30 million tons per annum, perhaps slightly higher than that. Project timings are very difficult to predict, because it is based on customers signing offtake agreements with those project developers in many cases. But orders are forecast and we're working on timeline that would result in orders for roughly half of that capacity -- potentially, roughly half of that total capacity over the next 12 months to 18 months and going out a couple of years for that full 30 million to 40 million ton opportunity. Martin W. Malloy - Johnson Rice & Co. LLC: Okay. Samuel F. Thomas - Chairman, President & Chief Executive Officer: But I'd emphasize that at this point, it's very difficult to predict closely the timing of those orders. Martin W. Malloy - Johnson Rice & Co. LLC: Okay. And then on the enquiries and opportunities that you're seeing on the D&S LNG containers, could you talk a little bit more about the end-markets there and the uses? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Yes. I think the largest opportunity is replacement of coal or more likely oil or diesel fired power generation on island nations, either in the Caribbean, Hawaii and there is also additional opportunities in Indonesia and the Philippines, where those island nations believe they can both improve air quality as well as reduce their cost by using LNG imports and either using tankers and storage tanks onsite or ISO containers to transport them. And these can be everything from running gensets for resort hotels up through base load power gen plants as large as 150 megawatts and potentially higher than that. Martin W. Malloy - Johnson Rice & Co. LLC: Thank you.

Thank you. Our next question comes from the line of Alex Potter with Piper Jaffray. Your line is open. Please go ahead. Alexander E. Potter - Piper Jaffray & Co (Broker): Hi, guys. Thanks. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Hi, Alex. Alexander E. Potter - Piper Jaffray & Co (Broker): I was wondering, right now, if you could look at the D&S backlog, how much of that is China? And then, within that China number in the D&S backlog, how much of the remainder or how much of that number I guess is PetroChina? Samuel F. Thomas - Chairman, President & Chief Executive Officer: About half of the D&S backlog is China, and about roughly $80 million range is for PetroChina, that still remains. We did this reduction, backlog reduction, we did take about $8 million of PetroChina out of that. Alexander E. Potter - Piper Jaffray & Co (Broker): Okay. And what is it, if you were to look at the remainder of PetroChina or I guess China D&S orders more broadly, I know the same question was asked last quarter, maybe if you can comment qualitatively on why you wouldn't bring it down further? What is it that gives you confidence that that remainder of the backlog is actually going to be delivered? Samuel F. Thomas - Chairman, President & Chief Executive Officer: We discuss with the customers on a regular basis weekly, if not monthly or monthly, if not weekly, I should say, what they intend to take delivery of what they have customer commitments and enable to put things into service. The fact that we've had rolling cancellations is a reflection that there is a fundamental optimism in China generally, and amongst our customers that projects are going forward. And it's only with reduced oil prices or the oil prices taking another leg down or the tightening of credit, which means they can't get financing that leads them to say, no, we can't take these – these projects are not going to go forward as we had expected. So, it's a challenge for us. We're trying to be as proactive and give an accurate picture both for our own internal purposes, as well as where the market as to what the most realistic picture is at any one time. Alexander E. Potter - Piper Jaffray & Co (Broker): Okay. Yes, understood. I can appreciate it, not an easy thing to do. I guess maybe one last question, the E&C gross margin was pretty high in the quarter, presumably – and you mentioned there was some execution and also some mix contributing there. Presumably, we're looking for that to be coming down pretty substantially in the back half. Is that an accurate way to think about things and was the margin for the quarter higher than what you had originally thought? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Yes, exactly. We would expect the margins to come down in the second half, third and fourth quarter, probably in the low 20% range. Based upon current orders of backlog, that could change again by better project execution than we have forecasted, in addition to what we refer to as, quick ship (25:15) orders, which are typically high, very high marginal orders that we always get for hard to forecast, hard to determine, when they come in. But we continue to work on a number of those. You just don't know when and if they're going to come in actually. Alexander E. Potter - Piper Jaffray & Co (Broker): Okay, got it. Thank you.

Thank you. Our next question comes from the line of Rob Brown with Lake Street Capital Markets. Your line is open. Please go ahead.

Good morning. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Hi, Rob.

Kind of a similar question on your D&S margins, they were down this quarter, is this sort of the new run rate, given the lower volumes or how should they trend? Michael F. Biehl - Executive Vice President & Chief Financial Officer: The expectation is that they would be in 26%, 27% range over the remainder of the year. I mean, keep in mind that, there was a small amount of restructuring in there. But our expectation is that it should be an improvement in the third and fourth quarter. Now with that said, some of it is, where the volume in China goes to.

Okay, good. And then, on your CapEx expectations for the year, could you give us some update on where you are out there and where you are out on facility expansion thinking? Samuel F. Thomas - Chairman, President & Chief Executive Officer: We continue to move forward slowly with the facility expansion and we actually will be putting part of the – part of it in the service later this year, right now in terms of CapEx, we're looking in the probably the mid 50s, 50 to 55 range in terms of our spend for the year. But, we also are continuing to look at as projects come up of deferring those, which we have the ability to do until next year. But we do, in terms of the expansion, will have a large part of that coming through in the second half.

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

Thank you. Our next question comes from the line of Eric Stine with Craig-Hallum. Your line is open. Please go ahead.

Good morning, everyone. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Good morning, Eric.

I know you've talked about that I guess through last quarter, the cancellations that you had seen, you weren't expecting them to get a whole lot larger. And now, the cancellations are higher than you've seen in the previous cycle. I mean do you feel kind of the worst is behind you there, is it an ongoing process, how should we think about that? Michael F. Biehl - Executive Vice President & Chief Financial Officer: I think it's an ongoing process, and let me make a clarification. They aren't cancellations really, there – what we did is look at the backlog and look at whether the customers were going to take the orders are not. I mean it wasn't a formal cancellation that we received from the customers. It was more – we made the decision that unlikely that the order, the original commitment was going to be delivered in China and decided to scrub it out of backlog. So, I want to make that clarification. But, it's an ongoing process. And as Sam mentioned, we have continued our dialog with the customers, including PetroChina, as to what they believe their take will be. So, I can't guarantee you that we won't have further reductions over there. Samuel F. Thomas - Chairman, President & Chief Executive Officer: It's probably worth saying, Eric, if you can tell me what oil prices are going to be and China's industrial production growth, I can tell you what our order cancellations will be.

Right, understood. Recognizing it's tough. But, so only just to clarify, $8 million of this is PetroChina. So, I mean you still sound like you have a fair degree of confidence that they still plan to move forward on significant business, just the timing is the uncertainty? Samuel F. Thomas - Chairman, President & Chief Executive Officer: That's correct. We're trying to make the most balanced judgments we can that accurately reflect what we believe we're going to deliver. Alexander E. Potter - Piper Jaffray & Co (Broker): Okay. Got it. Well, then maybe turning to orders, I know ex the adjustments that you made, the orders were up sequentially and I know earlier this year, you weren't certain if you'd seen the worst or not, and actually thought second quarter might be down sequentially. So, I mean any thoughts on what you're seeing early here in the third quarter? I mean are you seeing order trends start to improve, or is that uncertain as well? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Very good prospects with respect to LNG exports in E&C. D&S continues in North America to see orders like we saw in the second quarter. So they are related both to LNG projects and also to industrial gas activity where our customers are upgrading their distribution equipment to provide lower cost of service. That continues to be a bright spot. Europe is flat with mixed signals and China is soft. Alexander E. Potter - Piper Jaffray & Co (Broker): Okay. Samuel F. Thomas - Chairman, President & Chief Executive Officer: I think that our experience early in the third quarter is reflected in our earnings guidance. Alexander E. Potter - Piper Jaffray & Co (Broker): Okay, understood. Maybe just a last thing on the LNG order pending. I mean is this – just to clarify, is this something, I mean are there additional steps that Magnolia needs to take in terms of financing in off-take agreements or is it beyond that? And – I mean what's your level of confidence that this pending order becomes an actual order? Samuel F. Thomas - Chairman, President & Chief Executive Officer: There's two parts to that. A customer sent a purchase order, the contract is in the process of being novated. So while the end customer has sent us a purchase order, we don't have that purchase order fully bedded down, that we would report it as backlog. We have a high level of confidence that at least half of that order will be booked within the next couple weeks. And a commitment subject to additional customer off-take agreements that the balance of the order would be placed during 2015. Alexander E. Potter - Piper Jaffray & Co (Broker): Okay. Thank you.

Thank you. Our next question comes from the line of Rob Norfleet with Alembic Global Advisors. Your line is open. Please go ahead.

Hi good morning. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Good morning. Michael F. Biehl - Executive Vice President & Chief Financial Officer: Hello, Rob.

Just quickly on D&S and the E&C in both those segments, clearly, we're seeing the lack of fixed cost absorption due to the lower volumes. Can you discuss currently the overall operating capacity rates and any additional things or initiatives that you're looking to undertake to potentially help that, meaning are you looking to possibly idle any additional capacity or facilities? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Our operating rates are decreasing as we burn through backlog, as you would expect, number one. So, a nice way of saying that is, we are open for business and happy to accept orders. We don't see any capacity constraints on the horizon. And in terms of we continue to look at opportunities as backlog decreases, if we don't have immediate order prospects, which would rebuild that backlog, we will continue to take out expenses. That's part of being in a capital goods cyclic business it's what we do every day.

Okay. That's helpful. And secondly, in terms of the mid-scale LNG orders that you discussed, Magnolia, Parallax and others, first of all – can you kind of discuss what the margin profile on this work looks like? Is it more traditional E&C margins kind of in that upper 20%, low 30% range? And secondly, which manufacturing facilities would most of this work be performed in likely La Crosse? Samuel F. Thomas - Chairman, President & Chief Executive Officer: In terms of the margin profile, there is a wide range, but it's fair to say that you can expect historic E&C margins for those projects. In terms of the facilities that benefit the most from those orders, it would be our La Crosse facility and our New Iberia, Louisiana facility for cold box fabrications and our engineering facility, our engineering offices in The Woodlands. If there's additional work for those projects that would be done in our D&S facilities in the Czech Republic, and in New Prague, Minnesota, as well as contributions to our Tulsa air cooled heat exchanger facility.

Okay, great. And lastly I just wanted to – a general question on competition. I know you all had noted earlier in the call that competition in the brazed market and others remains fairly intense, with Japanese and other European companies competing. Can you just kind of discuss what you're seeing from a competitive landscape situation and obviously has anything changed over the last three to six months as to have how these companies are bidding on projects and the type of work that they are looking at, which maybe they weren't traditionally focused on before? Samuel F. Thomas - Chairman, President & Chief Executive Officer: The industrial gas air separation market, which is a large market for heat exchangers has been a global market for a number of years, and pricing levels vary with industry capacity, not unlike the steel industry profile. There is some additional pressure on us compared to the period from 2006 to 2012, with a stronger dollar than we had and our competitors are either yen or euro based or renminbi based. But certainly, when the dollar is strong, it cuts into our margins to compete head-to-head with Japanese or European competitors.

Great, that's helpful. Thank you.

Thank you. Our next question comes from the line of Chase Jacobson with William Blair. Your line is open. Please go ahead. Chase A. Jacobson - William Blair & Co. LLC: Hi. Good morning. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Good morning. Chase A. Jacobson - William Blair & Co. LLC: So, as it relates to the guidance, just as we look at the current guidance versus the guidance you gave last quarter, the EPS is down about 20%, the revenue is down about 7%. You had a foreign currency gain and a lower tax rate in the second quarter. So, what got worse over the last three months on the profitability side, and how much of that is in E&C versus D&S, because it seems like BioMed is reasonably in line with your expectations? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Your comments about BioMed are correct. The primary deterioration for D&S is China, although there is some deterioration in Europe. The currency issue was, as you mentioned, was sort of an aberration of the way the euro traded against the dollar during the quarter. We've now settled out over currently at $1.10 euro to dollar. So I don't see both that positive benefit coming in the rest of the year based on lower forecasts. Within E&C, it's a reflection of the order profile, soft order intakes so that we won't get the benefit of orders later in the year to boost up E&C's results. So, it's spread between the two, and for those reasons. Soft order intake in both, we perhaps had optimism when we reported our first quarter results that order intake based on the general economy and oil prices improvement was going to give us a lift in the back half of the year, which we don't forecast at this point. Michael F. Biehl - Executive Vice President & Chief Financial Officer: And keep in mind that the $3 million, $3.1 million foreign currency gain in the second quarter essentially wiped out the first quarter $3 million foreign currency loss. So, we're at about zero impact for foreign currency other than translation. Chase A. Jacobson - William Blair & Co. LLC: Okay, I mean, so is there a mix issue also, because it just seems like the decremental on the 7% revenue reduction is pretty sizable. And I was under the impression that the China revenue was at relatively lower margin compared to the other parts of D&S? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Welcome to the capital goods industry classic downturn. Chase A. Jacobson - William Blair & Co. LLC: Okay, fair enough. The other thing is looking at E&C, and I know we're earlier in the year here, but even with Magnolia likely to come in over the next two quarters, it looks like the backlog is going to be down pretty sharply from 2014. Is there a structural difference in your business now versus historically that's going to allow revenue to continue to outpace backlog in that business? Samuel F. Thomas - Chairman, President & Chief Executive Officer: There is no structural change in our business in terms of lead time, except to the extent that the LNG projects, midscale LNG projects, will have 10 to 14 month lead times as opposed to 18 to 26 month lead times for the large baseload projects. So, there is that opportunity that orders will flow through the E&C business, with roughly half the historic backlog or the lead times that they had. Aside from that, no there is not a structural difference in the business. Chase A. Jacobson - William Blair & Co. LLC: Okay. And then just one last detail, I know there is $11 million payment for land use rights, what was that related to? Michael F. Biehl - Executive Vice President & Chief Financial Officer: It's really related to the China expansion. Over there, you can't own the land, so it's almost like a lease of the land that we would classify as an intangible and amortize it over and over a very long period. Chase A. Jacobson - William Blair & Co. LLC: Got it. Thank you. Michael F. Biehl - Executive Vice President & Chief Financial Officer: Thank you.

Thank you. Our next question comes from the line of Noah Kaye with Northland Capital Markets. Your line is open. Please go ahead.

Thank you. Good morning. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Good Morning.

You have continued to reduce head count, I think quarter-over-quarter, the annualized cost savings associated with that have increased I guess in the last couple of quarters from $20 million to $40 million. As you see these greater savings, going forward how much do you think you can take out – operating expenses in the back half of the year? Can we just sort of talk about that as a starting point? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Well, we've stated the calculation on an annualized basis of what it was in comparison to where we are. We continue to work on it, and we'll continue to right-size our expenditures and headcounts to the work available, being careful that we maintain the capability to ramp up quickly and effectively at the start of the cyclic upturn. Because, just as this business is ugly in a cyclic downturn, the opportunity for established credible players like Chart to grow very quickly and very profitably in the early stages of cyclic upturn are significant. We intend to maintain that capability.

I guess just turning to the LNG outlook, you talked about the challenge of contracting off-takers. Any view on where the regulatory landscape stands, change to better or worse with respect to greenlighting projects at this juncture? Samuel F. Thomas - Chairman, President & Chief Executive Officer: First, we don't have enormous insight into the issues with our customers, project developers getting committed off-take contracts. It's – that's something that is confidential as we don't have enormous insight into. I can only report what they tell us which is, they're making good progress and they feel confident that they'll move forward their commitments. With respect to the regulatory landscape, there are time periods for getting DOE and other approvals, which seem to be well understood by them. And the comments we get is that the regulatory landscape is positive in terms of significant plentiful supply of natural gas in the U.S., so political need to restrict the amount of gas which gets approved for export. And then it comes down to local site environmental issues, whether there are any protests. And you will note that the majority of these projects are on the Gulf Coast Lower Mississippi area, which has tended to be tolerant of hydrocarbon projects.

Okay that's very helpful color, thank you.

Thank you. Our next question comes from the line of Greg McKinley with Dougherty. Your line is open. Please go ahead. Gregory J. McKinley - Dougherty & Co. LLC: Okay thank you. Could you talk about the order reversal, how much of your guidance change was attributable to that? Samuel F. Thomas - Chairman, President & Chief Executive Officer: A significant part, not directly correlated, but a large part of that order cancellation were orders that we'd anticipated shipping in the second quarter and the review show that was unlikely to happen. So, I would say that that's the – that's a large contributor. But a second large contributor was also the soft orders in the first and second quarter for the E&C business. So as I responded to an earlier question, the degradation of expected earnings is roughly evenly split between those two. Gregory J. McKinley - Dougherty & Co. LLC: Okay. If we could maybe talk about your expectations for China as it's implied in your guidance right now, I think you indicated in Q2, Asia orders in D&S were down about 35% or so. Can you remind us of what Asia D&S was in 2014 and how the current environment is impacting – what do you think it will be in 2015? And is that – is your view for 2015, is that reflective of the current status of order flow or does it anticipate any recovery or any color on that please? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Our forecast does not anticipate significant -- any recovery in the third quarter and growing marginal, if any recovery in the fourth quarter. Gregory J. McKinley - Dougherty & Co. LLC: Okay. Samuel F. Thomas - Chairman, President & Chief Executive Officer: There has been a history in recent years in China that the fourth quarter is stronger because of government influenced or state-owned enterprise influenced spending. But not, even if there is an uplift, we're anticipating that the fourth quarter -- the second half of 2015 will be below the second half of 2014. Gregory J. McKinley - Dougherty & Co. LLC: Okay. Can you remind us real quickly how big was China or Asia D&S? Michael F. Biehl - Executive Vice President & Chief Financial Officer: Last year? Gregory J. McKinley - Dougherty & Co. LLC: Yes. Michael F. Biehl - Executive Vice President & Chief Financial Officer: We expect them to be about 35% down. Gregory J. McKinley - Dougherty & Co. LLC: It's about $115 million, Michael? Michael F. Biehl - Executive Vice President & Chief Financial Officer: Probably closer to the $100 million range, or $90 million to $100 million range this year, depending upon what happens in the second half. Gregory J. McKinley - Dougherty & Co. LLC: Yes. And so, it was $115 million, you think it will be $90 million or $100 million this year, okay. In terms of gross margins in that business, so those historically haven't moved around as much with volume as we've seen in E&C, you're expecting a sequential bounceback in margins in Q3. Can you remind us how much of the charge in the quarter impact, I think you said something like 1.5 points, but I want to make sure I understood that comment, what was the 1.5 point comment for D&S margins and how much of that charge was in D&S margins? Michael F. Biehl - Executive Vice President & Chief Financial Officer: 1.5 points was last year. Gregory J. McKinley - Dougherty & Co. LLC: Okay. Michael F. Biehl - Executive Vice President & Chief Financial Officer: The improvement, because of the Shell cancellation last year, apart from that one. Gregory J. McKinley - Dougherty & Co. LLC: Okay. Michael F. Biehl - Executive Vice President & Chief Financial Officer: So, if you take that out of last year's margin, you would see a more apples-to-apples comparison other than that there was some restructuring in the margin. Gregory J. McKinley - Dougherty & Co. LLC: Yes. That what I'm sort of curious about is, if we take that restructuring charge out of the margin, was Q2 more in that 26% to 27% ranges you're expecting in the second half? Michael F. Biehl - Executive Vice President & Chief Financial Officer: Yes, it would probably – if we took – it's about 1.5% in the current year or two (51:47). Gregory J. McKinley - Dougherty & Co. LLC: Oh, it is. Okay. Michael F. Biehl - Executive Vice President & Chief Financial Officer: Yes. So, it would be closer to 25% in terms of the gross margin this year. But again, as we go forward, we would expect some improvement, as we continue to take out cost in the business. Gregory J. McKinley - Dougherty & Co. LLC: Okay. So, you think margins can move up on an adjusted basis sequentially? Michael F. Biehl - Executive Vice President & Chief Financial Officer: Yes. Gregory J. McKinley - Dougherty & Co. LLC: And that head count... Michael F. Biehl - Executive Vice President & Chief Financial Officer: You can't throw out restructuring. Yes, right after a long increase. Gregory J. McKinley - Dougherty & Co. LLC: Yes. And that assumes a relatively stable pricing environment or competition environment from what you experienced in Q2? Michael F. Biehl - Executive Vice President & Chief Financial Officer: Lots of moving parts in all directions, Greg. Gregory J. McKinley - Dougherty & Co. LLC: Okay. Michael F. Biehl - Executive Vice President & Chief Financial Officer: So the answer is, yes. I mean obviously as the competition gets stiffer, it could affect pricing. Gregory J. McKinley - Dougherty & Co. LLC: Yes. Michael F. Biehl - Executive Vice President & Chief Financial Officer: It's hard to call. Gregory J. McKinley - Dougherty & Co. LLC: Yes. Okay. And then, just tell us real quickly please, revenues from Thermax, how significant is that business going to be, was it for you in the second quarter and will it be in the second half? Michael F. Biehl - Executive Vice President & Chief Financial Officer: Nothing in the second quarter, because it closed July 1. And so, expectation is it's probably in the $10 million to $12 million range in the second half. Gregory J. McKinley - Dougherty & Co. LLC: Okay. All right, very good. Thank you. Michael F. Biehl - Executive Vice President & Chief Financial Officer: Thank you, Greg.

Thank you. Our next question comes from the line of Jeff Osborne with Cowen & Company. Your line is open. Please go ahead. Jeffrey Osborne - Cowen & Co. LLC: Yes, good morning. I just had two quick ones. One, Mike, I was wondering if you could just update us on what the tax rate assumption should be for the year? And then, Sam, I didn't know if given the pricing environment, if there is kind of a rule of thumb on pricing per million tons for some of those midstream – mid-scale facilities that you're talking about. Just how do we kind of handicap what the size potential is there, the TAM that you're going after? Michael F. Biehl - Executive Vice President & Chief Financial Officer: I would expect in the 30% range for the tax rate is a good rule of thumb to use. Jeffrey Osborne - Cowen & Co. LLC: All right. Samuel F. Thomas - Chairman, President & Chief Executive Officer: In terms of cost per ton, our customers have discussed all-in cost for these facilities in the $500, $600 per ton level. However, that's not necessarily the best guide for charged content, because that includes all of the civil works and construction of tanks. And there is also – so, we're only a part of that and our content varies. In addition, there is a significant difference for Greenfield versus Brownfield development, which is included in these projects. Jeffrey Osborne - Cowen & Co. LLC: Is it safe to say you're in that 20% to 40% range was what I was thinking, but I just wasn't sure how meaningful pricing is down? Samuel F. Thomas - Chairman, President & Chief Executive Officer: That's probably reasonable. Jeffrey Osborne - Cowen & Co. LLC: Great. Thanks much.

Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Your line is open. Please go ahead. Pavel S. Molchanov - Raymond James & Associates, Inc.: Thanks for the question. Most of them have been asked. Just one more on the Magnolia, if I may. You've talked before about $40 million to $50 million per train of addressable cold box revenue, and I think for Magnolia, you said its $80 million for four trains. So where is the disconnect? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Trains vary in size significantly. Where we've talked historically, we were talking about base load trains which were nominally 4.5 million tons per train. And in the case of Magnolia, these are significantly smaller trains. I believe each – they are 1 million tons -- 2 million tons per train. Pavel S. Molchanov - Raymond James & Associates, Inc.: Okay, that's clear enough. And anything new on the Parallax front? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Nothing beyond the public announcements that have been made by Parallax and auction here (56:57). Pavel S. Molchanov - Raymond James & Associates, Inc.: Okay, clear enough. Thank you. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Thank you.

Thank you. Our next question comes from the line of Anjali Voria with Thompson Research Group. Your line is open. Please go ahead.

Thank you. Good morning. I was wondering if I could ask a question. Samuel F. Thomas - Chairman, President & Chief Executive Officer: You're very faint.

Is this better? Can you hear me now? Is this better? Samuel F. Thomas - Chairman, President & Chief Executive Officer: Yes.

Great. Okay. Apologies. I had a question about SG&A. I know you touched on the decrease this year was due to lower variable cost, bad debt expense, cost reduction initiatives. First of all, I was wondering if you could perhaps provide some color on that, if you could maybe even quantify how much each of those represented. And then secondly, on the same subject, is it fair to say that these favorable Q2 SG&A levels don't really extrapolate based on where you've put your guidance, and if so, could you address why that's the case? Is there some accrual adjustments in Q2 or what the – if you could just sort of go through those items, I would appreciate it. Samuel F. Thomas - Chairman, President & Chief Executive Officer: I think we're struggling to answer your question. Michael F. Biehl - Executive Vice President & Chief Financial Officer: No, there weren't any accrual adjustments in SG&A expenses and it's really is a combination of lower incentive as we said. Based upon performance, there is some reductions in – I guess if you call it an accrual in terms of bad debt expense that we've previously accrued, that we received debts of them (58:47), that was really a nominal piece of it and cost savings. So, if you look at as we go forward, over the year, we would expect in terms of SG&A to average in the $50 million range, which is lower than the first quarter, but a little bit higher than where we were in the second quarter. And again that is based upon our incentive performance which is very...

Okay. And then in terms of your, I mean, of course now timing is the name of the game here, but we've heard some announcements out of Golar LNG where they are now talking about moving forward with Gimi and the Gandria, which is the two FLNG vessels outside -- after the hilly that you all were involved with, do you know -- what is your optimism on that front or do you have any idea of what that's looking like for you over the next several months or going into 2016 or something like that? Samuel F. Thomas - Chairman, President & Chief Executive Officer: They are potential orders for us. We have done engineering work on those projects. The actual timing as to when the orders will be released is a little fuzzy.

Okay. Fair enough. And I guess lastly, does your – does the Cheniere or Parallax announcement, does that change your position or the timeline or scope of that project, or is it still largely the same for both of those LNG export terminals (1:00:40). Samuel F. Thomas - Chairman, President & Chief Executive Officer: I think it's a positive announcement that Cheniere who has quite a bit of creditability and large potential capacity has said that they would use their muscle and credibility to move those projects forward. But the timing has not changed and the estimates is really driven by proceeding with construction after FERC and DOE permits are achieved. So, there's been no changes in the projected project timing.

Okay. Thank you very much. Michael F. Biehl - Executive Vice President & Chief Financial Officer: Anjali, one thing I'd like to clarify on the SG&A run rate is that, keep in mind that Thermax came in in the second or in the third quarter and fourth quarter. So, it would drive our SG&A run rate up. The other thing that is in there is the Owatonna lease shutdown built into there, which is about $2.5 million. So, just want to give you a little bit more clarity on that.

I appreciate that. Thank you.

Thank you. And at this time, I'm showing no further questions. I'd like to turn the call back over to Sam Thomas for any closing remarks. Samuel F. Thomas - Chairman, President & Chief Executive Officer: Thank you. We remain committed to long-term growth of shareholder value by understanding our customer needs and providing them with superior products and value. We're taking appropriate cost control measures to deal with the current headwinds, while retaining the ability to respond quickly to improve demand and customer needs as markets come back. Thank you very much for listening to our call. Have a good day.