May 16, 2008
Executives
Michael Biehl - EVP, CFO and Treasurer Sam Thomas - Chairman, CEO and President
Analysts
James West - Lehman Brothers Jeff Spittel - Natixis Bleichroeder Chris Agnew - Goldman Sachs David Anderson - UBS Mike Kuchler - ING Shawn Boyd - Westcliff Capital Management
Operator
Good morning and welcome to the Chart Industries, Inc. 2008 first quarter conference call.
(Operator Instructions). 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 May 15.
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 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, 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 Chief Financial Officer.
You may begin your conference.
Michael Biehl
Thanks, Brandy. Good morning everyone.
I'd like to thank all of you for joining us today. Begin by giving you an overview of our first quarter results.
Sam Thomas, our Chairman, President, and Chief Executive Officer, will provide highlights of the operating results for each of our business segments, and then I will finish up by giving our revised outlook for 2008. We are pleased with our reported net income of $14.6 million or $0.51 per diluted share for the quarter, which represented an increase of 104% compared with $7.2 million or $0.28 per diluted share a year ago.
Sales for the quarter were $170 million and represented an increase of 12%, compared to net sales of $152 million a year ago. (inaudible).
$18 million was led by our Energy & Chemicals segment. Our gross profit for the quarter was $52 million compared with $40 million a year ago.
The solid gross profit performance was primarily due to improved project mix and improvements in project execution in the Energy & Chemicals segment. In addition, our BioMedical segment also contributed to the gross profit increase with higher volume and improved product mix in biological storage systems.
With the strengthening of the Euro, Czech Koruna, and Chinese RMB against the US Dollar, we had favorable impact from currency changes when comparing first quarter 2008 against the same quarter in 2007. This benefited our Distribution and Storage segment, with their operations in the Czech Republic and China, which sell in those currencies.
It also impacted our BioMedical segment because its biological storage systems sales are largely transacted in euros. For the quarter, the benefit from these currency changes increased sales by approximately $5.4 million and gross profit by approximately $1.3 million.
Selling, general, and administrative, or SG&A expenses were $23 million or 14% of sales for the quarter, compared with $20 million or 13% of sales a year ago. This increase in SG&A expenses was mostly due to higher employee related and infrastructure spending to support our business growth, and an additional $800,000 or 0.5% of sales for stock-based compensation expense related to the timing of long-term incentive awards.
Prior year long-term incentive awards were made in the third quarter, which was the initial year of the plan. We expect SG&A for the full year of 2008 to be approximately 12% of sales, which is a 200 basis point improvement over the full year for 2007.
Amortization expense for the quarter was $2.7 million or 1.6% of sales. This compares to amortization expense of $3 million or 2% of sales for the same period a year ago.
The decrease was due to certain intangible assets being fully amortized by the end of 2007. Net interest expense and amortization of financing costs for the quarter was $5.2 million compared to $6.8 million a year ago.
This $1.6 million decrease reflects longer term debt outstanding as a result of a $40 million voluntary principal prepayment in the second quarter of 2007 using proceeds from our secondary stock offering, as well as lower interest rates. The decrease also reflects greater interest income earned due to higher cash balances during the first quarter of 2008.
Income tax expense was $6.6 million for the quarter and represented an effective tax rate of 31%. This compares with $3.7 million of income tax expense a year ago, which represented an effective tax rate of 34.1%.
The decline in the effective tax rate is mainly due to increased and expected foreign investment tax credits and lower enacted foreign tax and an effective domestic state tax rates. Cash provided by operating activities for the quarter was $14 million compared with $1 million a year ago.
Change in cash provided by operations in the quarter was primarily due to increased net income and a decrease in net unbilled contract revenue due to the timing of progress payments under existing contracts with customers. These factors were partially offset by increased inventory to support business growth.
Cash used in investing activities was $4.3 million for the quarter compared with $6.6 million a year ago. Capital expenditures for the quarter were $3.7 million and represented continued maintenance, expansion, and automation of existing facilities to support business growth.
Capital expenditures for the same period in 2007 were $5 million and were used primarily for expansions at our Energy & Chemicals heat exchanger facility in Wisconsin and the Distribution & Storage segment facility in China. During the first quarter of 2008, we also contributed approximately $600,000 as our initial contribution for a 34% ownership interest to enter a joint venture in Saudi Arabia with two other companies to manufacture air cooled heat exchangers in a response to the high demand for equipment for the petrochemical market in that part of the world.
We expect to make another contribution of approximately $900,000 during the second quarter. Additionally, during the first quarter of 2007, $1.6 million of cash was used to purchase the remaining minority interest in the company's Czech Republic facility, Chart Ferox.
We ended this quarter with a strong cash position. I am pleased to say that our balance sheet continues to improve.
Indicative of this, last week, Standard & Poor's rating services raised its outlook on the company to positive from stable citing strong operating performance and a significant improvement in leverage. It also affirmed the B plus corporate credit rating on the company.
I'll now turn the call over to Sam Thomas to review our operating results and business segment highlights.
Sam Thomas
Thank you, Michael, and good morning everyone. We're very pleased with our first-quarter operating results which was led by our Energy & Chemicals segment.
Their strong overall performance is a reflection of a more favorable project mix and improvements in project execution. At Energy & Chemicals or E&C, sales grew by 41% to $73.9 million for the quarter compared to $52.3 million for the same quarter in the prior year.
E&C gross profit margin increased to 29% in the quarter, which compares to 11.5% for the same period in 2007. The improvement in project mix includes significant work on LNG liquefaction and petrochemical projects.
We also benefited from the absence of the complex onetime long-term installation project that had lower results during the first quarter of 2007, as well as other fixed-price contracts where we had incurred escalating raw material and labor costs. These factors, plus our improvement in project execution have contributed to the significant improvement in margin at E&C over the prior year quarter.
At our Distribution & Storage segment or D&S, sales declined slightly by $2.5 million to $74.3 million compared to $76.8 million for the first quarter of 2007. The decrease was attributable in large parts to previously reported lower US bulk tank shipments as a result of customer consolidations, including the Linde-BOC merger.
The decrease was partially offset by increased package gas systems sales from the continued growth in the global industrial gas market. D&S sales also benefited from the strengthening of the Euro and Czech koruna against the US dollar, as Michael mentioned.
Lower volume in bulk storage tank shipments and the timing of price increases versus material costs were the primary reasons for the decline in the 2008 first quarter gross profit margin to 29.5% compared with 33.5% a year ago. D&S order intake of $91.1 million for the quarter was particularly strong for longer lead time engineered tanks, which are expected to flow through sales over the remainder of 2008.
Our BioMedical segment's sales for the quarter decreased slightly to $22.1 million from $23.4 million for the same quarter in the prior year. This decrease was primarily attributable to lower volume in medical respiratory product sales, partially offset by biological storage systems, and to a lesser extent, foreign currency translation on the euro-denominated sales in the international market.
BioMedical gross profit margin increased to almost 39% in the quarter, which compares to 34.5% a year ago. The improvement in margin is due to product mix in biological storage system sales, where our products offer a clear value proposition and are in strong demand.
Backlog at March 31, 2008, was $469 million, 37% greater than the March 31, 2007, level of $342 million, but slightly lower as compared with the backlog of $475 million at December 31, 2007. Our prior-year expansion of the brazed aluminum heat exchanger facility in Wisconsin has increased throughput, contributing somewhat to the backlog decline.
I would like to emphasize that order flow is historically volatile in our E&C segment due to project slide, and it's not unusual to see order intake change significantly from quarter to quarter, which will also impact backlog. Orders at E&C during the quarter were $51 million compared to $118.8 million in the fourth quarter of 2007, which had included $25 million for an ethylene cold box destined for the Middle East and awards in excess of $20 million for large brazed aluminum heat exchangers for air separation plants in China and Southeast Asia.
Although E&C's orders were softer in the first quarter of 2008, we don't believe this to be a trend. As E&C's weekly order intake for April this year was up almost 40% compared to the 2008 first quarter weekly order rate, and our overall bid activity is robust.
Orders in D&S in the quarter were slightly higher at $91.1 million compared to $90.4 million in the fourth quarter of 2007. The backlog has grown to $124 million at the end of March, an increase of $17 million over the backlog at year end.
While order intake is down for US bulk storage tanks, we have seen improvements in the rest of the world. BioMedical orders in the quarter were $22.7 million, slightly down from the $23.9 million of orders during the first quarter of 2007.
We continue to penetrate international markets for both respiratory therapy and biological storage products. But medical respiratory orders were down in the first quarter of 2008, particularly in Italy, one of our largest markets, as our customers were concerned about recent elections and the potential impact on the regulatory environment with respect to medical respiratory products.
Now that the elections are over, our April order activity has rebounded in Italy. Michael will now provide you with our updated outlook for 2008.
Michael Biehl
Thanks, Sam. As you know, we acquired Flow Instruments & Engineering GmbH on April 1, 2008, for approximately EUR12 million.
Flow manufactures cryogenic flow meter systems for industrial gases and liquefied petroleum gas; distribution equipment for transport of CO2 and other gases; and provides calibration services. It will be included as part of our D&S segment as we move forward.
It will be immediately accretive to earnings. Based on the Flow acquisition, our first quarter results, and current market conditions, we're revising our 2008 guidance.
Our net sales outlook for 2008 is expected to be in a range of $745 million to $780 million, which compares to the previous guidance of $730 million to $765 million. Our diluted earnings per share are expected to be in a range of $2.33 to $2.45 per diluted share, which compares to previous guidance of $2.28 to $2.40 per diluted share, based on an effective tax rate remaining at 31% for the year and an estimated 29 million fully diluted weighted average shares outstanding.
Thank you for participating in our conference call. This concludes our remarks.
Brandy, please open up the lines for questions and provide the participants with instructions for doing so.
Operator
(Operator Instructions) Your first question comes from the line of James West with Lehman Brothers.
James West - Lehman Brothers
Hey, good morning guys.
Sam Thomas
Good morning, James.
James West - Lehman Brothers
Sam, so it sounds like on the E&C segment that the decline in orders in the first quarter was more of a timing issue. It's a lumpy business.
April has really picked up significantly. I wonder if you could characterize a little further which product lines, what areas that have already seen the most demand as you look out through the last month and the rest of the year?
Sam Thomas
Within E&C, we really see strong project activity, bid activity, and attempts to try and bring orders forward across all of our products within E&C. There are very late stage negotiations going on for natural gas processing plants, for both medium scale, well, small, medium, and large scale LNG liquefaction.
Petrochemical projects continue to move forward, particularly in the Middle East and in Southeast Asia, and coal gasification projects, particularly in China with large air separation plants for them, continue to be a main feature. Just to remind you, a single order on many of these projects would swing us from recording a decrease in orders to in fact reporting an increase in orders.
So we're not overly concerned that we can't predict the quarterly order intake of E&C.
James West - Lehman Brothers
Okay. So if we assume that the orders start to ramp up here throughout the year, how do you feel about your capacity in the E&C side of the business to, let's say backlog does build significantly for rest of the year to deliver those products?
Sam Thomas
We believe we're really well positioned with the capacity additions we've made. We have really positioned the business to be able to handle higher output.
We'll continue to look at additional incremental capacity adds, potentially in the late 2009, 2010 timeframe, and in fact, we're discussing with a number of customers their believed need for that additional capacity. But in terms of looking at 2008 and 2009, we feel we are very well prepared.
James West - Lehman Brothers
Okay. What impact will the recent moves in steel prices have on your business?
Are you able to push through surcharges and higher pricing to offset those costs?
Sam Thomas
Yes, all of the material price increases, or the vast majority of them, we actually have surcharge mechanisms to put them through. There may, depending on product lines, be a one or two month lag, but generally, we're very well positioned to handle that, particularly in the stainless and nickel-based alloys market.
The recent rapid run-up of carbon steel prices was significantly higher than expected, and so we got hit with some, we will see a late first quarter, early second quarter, some impact from that, but it's not significant.
James West - Lehman Brothers
Okay, that's all I had. Thanks, Sam.
Sam Thomas
Thank you.
Operator
Your next question comes from the line of Jeff Spittel with Natixis Bleichroeder.
Jeff Spittel - Natixis Bleichroeder
Morning, gentlemen.
Michael Biehl
Hi Jeff.
Sam Thomas
Good morning, Jeff.
Jeff Spittel - Natixis Bleichroeder
If I could, I wanted to ask a little bit about -- you talked about the product mix in E&C in the first quarter. Could you give us some color, going forward in 2008, how that mix might shift around and what the implications could be for margins there?
Sam Thomas
We think that the mix in backlog is favorable, and as we've guided earlier, we believe that the gross margins in E&C will be in this high 20:42 [29], high 20s range, around 29% gross margin, with some opportunity for it to go into the low 30s.
Jeff Spittel - Natixis Bleichroeder
Okay. Switching over to the balance sheet and the acquisition front, could you characterize what you're seeing out there in terms of asking prices, and then how you evaluate that versus potentially looking at a share repurchase program or other ways to redeploy that cash?
Sam Thomas
We're very encouraged with the discussions we've had for potential acquisitions. As is normally the case, sellers' expectations tend to be higher than our aspiration to pay.
We think that over the next six to 12 months, that that gap should narrow, and that there will be more opportunities for us.
Jeff Spittel - Natixis Bleichroeder
Okay. Thanks, gentlemen.
I'll turn it over.
Sam Thomas
Thanks you.
Operator
Your next question comes from the line of Chris Agnew with Goldman Sachs.
Chris Agnew - Goldman Sachs
Thank you very much. Good morning.
Sam Thomas
Hi Chris.
Chris Agnew - Goldman Sachs
Perhaps a follow-up to that last question, just thinking about it, as you continue to generate cash flow, and you're sitting on this quite large cash balance, with opportunities potentially over the next six to 12 months, is that the sort of timeframe we should think that perhaps you're going to still continue to sit on a large cash balance?
Sam Thomas
At the moment, yes. As you well know, it's difficult to call the timing of acquisitions.
Having said that, the uncertainty in the credit market in terms of potential debt financing leads us to be conservative in terms of using our cash to pay down debt, simply because of the uncertainty to the availability of a new debt package and its cost, so I think at the moment, I would say we are comfortable with having the cash balance to give us the ability to make acquisitions. But we will continue to review it as the credit markets improve.
Chris Agnew - Goldman Sachs
Okay, thanks. Regarding your joint venture in the Middle East, what other countries or regions would a similar venture make sense, if you're thinking about that?
Is the joint venture announced a template for this type of structure? Then finally, over time, is this something you'd look to increase your stake or potentially buy or is it just the nature of this joint venture, sort of, would be set against that?
Sam Thomas
I think I would say that that's the specific nature of this joint venture, to operate in the Middle East. That we would have a preference generally for wholly-owned ventures, going into strong, established, growing manufacturing economies.
There is sufficient uncertainty in the Middle East that we thought it was prudent to take a more measured approach.
Chris Agnew - Goldman Sachs
Are there any other particular geographies that you think are going through joint venture or potentially the acquisition route, or areas you'd particularly look to target?
Sam Thomas
Yes. We will continue to invest in China because of its industrial growth.
We are looking closely at the other BRIC countries because we believe there are above-average opportunities in them.
Chris Agnew - Goldman Sachs
And I would take it. That means with that it would be fair to say Russia, Brazil, and India, perhaps.
Sam Thomas
Correct.
Chris Agnew - Goldman Sachs
Okay. Then a final question.
I think you talked about previous conference calls US bulk storage systems had been through kind of 10% decline maybe in the first half of the year due to consolidation. Is it fair for us to think about that that situation is improving in the second half of the year?
Are you still continuing to see double-digit growth in Western Europe and 20% plus growth in China? Any change in the magnitude of those growth rates?
Thanks a lot.
Sam Thomas
No change from what we've previously reported. We believe that the results are consistent with what we've indicated, and continue to see that pattern continuing.
In terms of bulk tank sales, one of the two customers most affected has depleted their inventories that came as a result of that transaction, and has resumed buying at a higher pace. So we do expect it to improve in the second half.
Chris Agnew - Goldman Sachs
Great, thank you.
Operator
(Operator Instructions) Your next question comes from David Anderson with UBS.
David Anderson - UBS
Hey Sam, obviously, the market is pretty fixated on inbound orders. It seemed not only in reaction to your stock price today, but also another chemical company yesterday.
Can you just kind of talk us through recognizing that inbound orders can be very lumpy, particularly for a company of your size, should we have the confidence that you're going to have your inbound orders this year will be higher than last year in Energy & Chemicals?
Sam Thomas
We certainly anticipate they're the best at this point, yes. The order activity and customer sentiment remain very strong.
David Anderson - UBS
Along those same lines, should we expect backlog in Energy & Chemicals to increase over last year's number?
Sam Thomas
We are certainly planning on that basis. But I have to put the usual caution that with these large projects, timing is difficult to call.
I don't have the ability to predict whether we get a fourth-quarter project award or whether it's first quarter next year. But we remain confident that the customer sentiment and the progress of moving from an initial bid through into a purchase order with that activity pipeline is strong.
David Anderson - UBS
Okay, now I just want to make sure I understood you correctly. You said that April orders were 40% higher than the quarterly run rate in the first quarter.
Is that right?
Sam Thomas
Within E&C, yes.
David Anderson - UBS
Within E&C. Okay.
Is that to say -- do you kind of -- once again, I don't mean to be holding you to kind of when your orders are going to be. But is that kind of a similar level you are expecting to see for the rest of this quarter?
Sam Thomas
I don't know that. Bear with me just a moment.
Let me check to see what we are forecasting for the quarter. Yeah, it's consistent with our forecast.
But again, please remember my caveat that it is tough to call the timing; and some of these awards at the $20 million to $40 million or larger range can swing the needle quite a bit when you're talking about total quarterly intake on the order of $70 million to $100 million.
David Anderson - UBS
I certainly appreciate that, Sam. In terms of LNG out there, a number of delays out there.
Any kind of big awards we should be keeping our eye on? I know Brass River has been talked about for -- it's probably been delayed about 10 years by now.
But I mean, what's your anticipation? Do you think that one could come through this year?
Are there any other kind of things that we should be keeping our eye on, on the market, in terms of the LNG side?
Sam Thomas
We have the dilemma that as these projects get closer to award, our visibility actually decreases because you get to the point of radio silence.
David Anderson - UBS
Okay.
Sam Thomas
Having said that, the recent unrest in Nigeria would make me question depending on Brass going forward this year. However, the sentiment regarding Equatorial Guinea has been positive.
David Anderson - UBS
Okay, a little bit offsetting there. I guess, just a last question in terms of your backlog.
Can you just help us out? How far does that roll through right now?
If you look at -- specifically talking about the E&C side. So if you have backlog of about $335 million, how much of that kind of rolls through in the next three quarters and how much of that is going to be in '09?
Michael Biehl
Roughly about 85% of E&C would roll through in the next three quarters. So overall, if you look at our total backlog, about 90% of that will roll through for the year.
David Anderson - UBS
Now it sounds like that's increased with your recent expansion of the brazed aluminum. Is that true?
Did I read that correctly?
Michael Biehl
Yes, that's correct.
David Anderson - UBS
So maybe it was like four quarters before, now it's more like three quarters?
Michael Biehl
I don't know if it's quite down a whole quarter, but it is clearly more rapid.
David Anderson - UBS
More rapid? Okay, great.
That's all for me. Thanks, guys.
Sam Thomas
Thank you.
Operator
(Operator Instructions) Your next question comes from Mike Kuchler with ING.
Mike Kuchler - ING
I was wondering if you could just give us an update on your EWC contract?
Sam Thomas
Sure. It's progressing well, on or ahead of schedule.
The relationships with EWC have been very positive, and they seem bullish that there will be additional opportunities to continue the expansion of both the facility in Indonesia as well as potential sites elsewhere in the world.
Mike Kuchler - ING
Are you getting calls from other people, seeing what you're doing with them with the smaller trains, expressing interest in doing something similar? Or is this something you can only do with EWC?
Sam Thomas
We do have a cooperation agreement with EWC related to the specific design that we would do with them. But we also are able to undertake similar LNG liquefaction projects with others, and we have a number of discussions regarding that.
We're also a significant supplier of brazed aluminum heat exchangers to other suppliers of LNG liquefiers for small-scale plants.
Mike Kuchler - ING
But do you anticipate seeing an increase in small-scale plants' growth over the next 12 months or so, while these larger projects get delayed? How would you think that would flow through in your orders and stuff?
Sam Thomas
We certainly anticipate more small-scale, medium-scale LNG liquefiers to be built. There is fairly robust activity, bid activity, and late-stage sort of beyond feed projects activity, so that I'm bullish on it.
Mike Kuchler - ING
You think we will sort of be able to see announcements this year or is it something that is not going to happen until next year?
Sam Thomas
I would expect there to be additional medium and small-scale LNG trains built this year. But again, it's difficult to call the exact timing.
Mike Kuchler - ING
Okay. Thank you.
Operator
Your next question comes from the line of Shawn Boyd with Westcliff Capital Management.
Shawn Boyd - Westcliff Capital Management
Hi, I'd just like to go back to the Distribution & Storage if we could. Within your full-year revenue guidance of $745 million to $780 million, how much of that is Distribution & Storage?
Sam Thomas
Roughly $340 million.
Shawn Boyd - Westcliff Capital Management
Right, $340 million. As a follow-up to that earlier question regarding the timing here, and related to the consolidation among the customers, you mentioned that one of the customers has depleted their inventories, has resumed buying.
You expect improvement in the second half. Should we expect improvement on a year-over-year basis in Q2 this quarter?
Michael Biehl
In terms of sales?
Shawn Boyd - Westcliff Capital Management
Correct.
Michael Biehl
Yes, we would expect an improvement in sales in D&S second quarter versus second quarter last year.
Shawn Boyd - Westcliff Capital Management
Got it.
Michael Biehl
We would also expect their margins to moderate up slightly into -- over the year, to hit about a 30% range, their gross margins.
Shawn Boyd - Westcliff Capital Management
For the whole D&S line or that particular customer?
Michael Biehl
Correct, it's for the whole D&S line.
Shawn Boyd - Westcliff Capital Management
Okay. Is that kind of a longer -- I remember thinking about this as sort of a 32% gross margin target longer-term.
Is that still in the works or am I off on that?
Michael Biehl
For the year, they could be. I mean, I would expect them to be in the 30% to 31.5% range, 32% range, in terms of gross margin.
Shawn Boyd - Westcliff Capital Management
Got it. So 30% is on the quarter?
Michael Biehl
Yes.
Shawn Boyd - Westcliff Capital Management
Got it. That's very helpful.
Thank you.
Operator
(Operator Instructions) At this time, there are no further questions. I will turn the call back over to Mr.
Thomas for any closing remarks.
Sam Thomas
I'd just like to thank everyone for joining the call and reiterate that we remain very bullish on the prospects of our business. We think that the steps we've taken to improve our operating capabilities and capacities position us very well to continue to be a key supplier to the customers in markets we serve, and are very encouraged with the level of activity and prospects for our business.
Thank you once again.
Operator
This concludes today's Chart Industries, Inc. 2008 first quarter conference call.
You may now disconnect.