Chart Industries' CEO Presents at Barclays CEO Energy-Power Conference (Transcript)

Sep. 6.12 | About: Chart Industries, (GTLS)

Chart Industries, Inc. (NASDAQ:GTLS)

Barclays CEO Energy-Power Conference Call

September 6, 2012 11:45 am ET


Samuel F. Thomas – Chairman, President and Chief Executive Officer

Michael F. Biehl – Executive Vice President, Chief Financial Officer and Treasurer


James West – Barclays Capital

James West – Barclays Capital

Good afternoon everyone and we’re going to move right along. Next we’re going to hear from Chart Industries, one of the most unique equipment suppliers we cover, and we think an excellent way to invest in the unfolding energy infrastructure build out cycle and in particular, the growth in LNG.

Speaking for the company this afternoon or I guess this morning or lunch time will be Sam Thomas, Chart’s Chairman, President and CEO. Sam joined Chart in 2003. He immediately restructured the business. Sam was responsible for moving most of manufacturing operations to China, Eastern Europe, lowering the CapEx requirements of the business and refocusing the company at that time on the hydrocarbon markets. This strategy paid off last cycle in a big way. We think it’s clearly going to payoff this cycle.

Order rates have improved, backlog is rising. It’s also been a busy few quarters for Chart. The company has secured the major contract wins in Middle East and Southeast Asia and recently completed the acquisition of AirSep, which we believe was highly accretive.

Please welcome back to the CEO of Energy Conference, Sam Thomas.

Samuel F. Thomas

Thank you, James. I’m not sure whether it’s good morning or good afternoon. At this point, but I hope you all enjoyed your lunches, they were provided by us. I would like to remind everyone that this presentation does include forward-looking statements and encourage you to refer to our 10-K or other SEC disclosures. Chart is a manufacturer engineering equipment, primarily cryogenic related equipment that we are active in upstream, midstream and downstream, natural gas markets, as well as industrial gases, and BioMedical markets.

Our Energy and Chemicals business is most rapid growing part of our business, but we’re also seeing significant growth in our Distribution and Storage business. You can see in the center slide or the center pie chart that in 2011, approximately 48% of our business was energy-related and this of course is the fastest growing part of our business and we expect it will become a larger part of our business going forward.

In terms of geographic distribution, our business over the past eight years has been migrating outside the U.S. has that were significantly higher growth opportunities outside the U.S., but recently with the tremendous growth in natural gas markets both in terms of natural gas liquids processing, which we participate actively in and also the development of LNG as a diesel fuel replacement. We expect to see strong growth in North America, so that this 42% leasehold, if not increase as a percentage of our total turnover.

We’re organized in three operating division, Energy and Chemicals, Distribution and Storage, and BioMedical. Our Energy and Chemicals business, the primary product are brazed aluminum heat exchangers, which are used in subzero temperatures, typically for taking gases and liquefying them, so that they can be purified by distillation.

We also fabricate cold boxes, which are assemblies of our brazed aluminum heat exchangers are packaged with piping and pressure vessels to accomplish complete processes. Those include natural gas processing particularly for deep ethane and propane extraction. LNG liquefaction, a number of petrochemical processes particularly for the production of ethylene from ethane and propylene from propane, PDH plants.

And finally we produced air cooled heat exchangers, which are used primarily for gas compression at the wellhead or at pipeline entry points to take gas of the pipeline pressures. We’re seeing significant growth in this business both for gas processing, which continues strong with the midstream players, tremendous opportunities both in baseload LNG growth, as well as mid and small scale LNG growth for diesel fuel replacement applications. And finally, we’re seeing lots of interest in ethylene and propylene plants as natural gas liquids are brought to market and producing the opportunity for the U.S. to be a clear leader in the production of these basic petrochemicals going forward.

Our second operating division Distribution and Storage has traditionally been an industrial gas supplier, providing the full range of equipment to take industrial gases from air separation plants, all the way through the value chain to on-site storage of the industrial gases as cryogenic liquid. An important part of this business, however, our LNG related applications for distribution of LNG where we’ve taken the same equipment and adapted it and developed it for use of LNG as a diesel fuel replacement and I’ll talk more about that going forward.

This business similarly most of our growth has been outside the U.S. over the past nine years, particularly in China, but also in Central and Eastern Europe. We’re seeing resurgence because of LNG in the U.S., so I expect again the potential for our U.S. percentage business to grow slightly in the future in respect of our overall geographic distribution.

Our third operating segment is BioMedical. This uses the same technologies has our Distribution and Storage business, but had specialized sales and marketing capabilities, as well as product development for tailoring products to specific BioMedical services particularly for patients with COPD or emphysema, and also for a very cold storage, long-term storage of biological materials. I’ll talk a bit about the acquisition we made later in the presentation for this segment and the reasons behind that.

We have a global manufacturing and distribution platform from being a U.S. focused manufacturing business, our great greatest growth in manufacturing up until this past year has been in China and Central Europe, and the Czech Republic. We have been making capacity additions in China over the past year and will continue to supply both LNG liquefier growth in China, air separation growth, petrochemical growth, but also the very strong market of diesel fuel replacement with LNG. We have also this past year begun expanding our U.S. based manufacturing to handle the requirements for LNG as a diesel fuel replacement.

Looking at the broad growth opportunities for our business within Energy and Chemicals, global baseload LNG projects; we’ve seen a number of projects awarded, given us a significant backlog, which will be working off for the next 18 months to two years. While we think the prospects for additional global baseload are very strong. We will anticipate a slowdown in orders in terms of new awards over the next year or it’s perhaps two years as the industry digests the large number of awards that are currently in process. We as well as the industry in total, the other equipment suppliers in EPCs are fairly, heavily loaded.

We’ve seen significant growth in natural gas processing. The tremendous spread between natural gas liquids and gas or between oil and gas as meant to the value of natural gas liquids is up and despite the fact that we’ve seen tremendous growth in gas processing capacity in the U.S. and softening of NGL prices. All indications are at this growth and output is going to continue. And that new utilization of that ethane and propane will grow to just underlie and support those prices. There are a number of emerging market opportunities [weird], not only do we see the growth of mid and small scale LNG liquefiers in North America, particularly the U.S. and China. But in other parts of the world where there are smaller gas reserves.

Within our Distribution and Storage business, the big growth driver is the global LNG opportunity happening most rapidly in China followed closely by the United States with many other areas of the world being strongly committed and interested in growing that.

We have strong relationships with our entire industrial gas base worldwide and we expect to see demand for industrial gas to grow at a percent per year rate going forward. We think that the tremendous opportunities provided by Shell Gas in North America and oil shale will lead to a significant resurgence of U.S. manufacturing. The industrial gas industry benefits as a bellwether, it will grow at several times industrial production growth. So, we believe there is a bright future for industrial gas and our supply to that industry.

And final our biomedical business, benefits from ageing demographics and a growing GDP per head, because how the GDP per head goes up, we’re all willing to devote a larger portion of our income to healthcare. Slight negative on that is that healthcare costs are growing so rapidly that governments are paying a lot of attention to how they reduce those costs. In addition, there is increasing biological research, a large portion of the new pharmaceuticals are expected to come from stem cell related research. Our equipment is essential to doing that research.

Talking in a bit more detail, many of you are familiar with this slide. It shows on the red bars that natural gas as a percentage of total energy supply will grow faster than any other means of energy supply, whether it’s a hydrocarbon or nuclear or the fast growth of wind solar, biofuels or hydro, geothermal. They’re starting from such a low base, what we’ve seen over the past few years is clear affirmation that natural gas is a very attractive fuel. Included in that dramatic growth of natural gas is a larger portion of that natural gas will be delivered to market has LNG. And this is the critical underlying growth driver for Chart. We provide products across the potential LNG value chain. Our Energy and Chemicals business provides heat exchangers and cold boxes, as well as total process capability for liquefaction of natural gas.

Our Distribution and Storage business provides the transportation equipment and storage equipment both as the liquefier and through the value chain to get it to market. We’ve developed and have provided the LNG fueling equipment, whether it’s to fuel trucks, buses, railroads, or large ships. We have the equipment and the mechanism to do that whether its swap bodies or swapping out full for MT in terms of trucks for marine applications or permanently mounted tanks on those vehicles.

The LNG storage distribution and transportation is very much like the diesel supply chain. The largest difference is that typically at the station we used aboveground storage for the LNG as opposed to book below ground storage, otherwise the supply chain dynamics are the same, and as a significant reason why the growth has been so rapid in China, with China seeing a very rapidly developing heavy duty truck business and rapid expansion. China doesn’t have the infrastructure required for the growth of diesel engines. So, they’ve made the choice to focus a significant part of their infrastructure growth on LNG distribution and fueling. So we’re participating in that and anticipate tremendous growth in LNG has a diesel fuel replacement in China.

We’ve also seen an acceleration of interest and commitment in the U.S. in this diesel fuel replacement over the past year with several of the energy majors making announcement notably Shell, but also Chesapeake and Encana. There are other energy majors that are also progressing with making commitments to provide liquefiers in LNG. We’ve had on the back of that commitment, engine manufacturers commit to bringing heavy duty engines to market that will run on natural gas and we’re in the process of building outstations and distribution equipment in order to meet that need.

This diagram shows that LNG fueling station layout on this side, where we provide mobile equipment to deliver LNG to the station, stored as a LNG, pumps as a cryogenic pump and through that weights and measures dispenser and then the on vehicle equipment, which is a vacuum insulated storage tanks and heat exchanger to deliver natural gas as a vapor to a natural gas engine.

We also provide to the systems for fast filling CNG vehicles, which have been the largest in terms of numbers of vehicles. There are more operating on CNGs and LNG, but there is a problem in using CNG and being able to fast fill vehicles because of heat of compression. And we provide a solution to that by having an LNG storage tank, a pump to pump it out the pressure and then a vaporizer, so that you can deliver cold gas directly into the vehicle tanks and fill them quickly.

Moving on to our financial track record, we were able to very successfully grow this business quickly in the last energy up cycle, 2004 through 2008. We were also able to very quickly scale back the business with the collapse of the credit markets and operate generating cash and profitably through the recession and we’re now firmly back in a significant growth cycle.

On the right-hand side, you can see how our order intake has grown, particularly when you had in the yellow bars, which have been large contract orders for rather integrated natural gas processing units and nitrogen rejection units or for LNG baseload facilities. Historically, looking at our orders, you can see that that the steady progression of growth of order intake and backlog and how the large project orders, while lumpy have contributed to a steady backlog growth.

We recently announced the acquisition of AirSep into our biomedical business. What this provided us with was two elements of the total supply of equipment for patients with COPD, who require respiratory therapy. We had liquid oxygen, which is the best form of therapy and required for patients at later stages and also provides the highest quality for patients who are ambulatory, and one lead active lives.

What we have with AirSep was one of the leading manufacturers of home concentrators, plugged into the wall, but the lowest cost therapy. And then also very light five pound battery operating concentrators suitable for patients at the early stages of the disease, and this gives us a full portfolio across that spectrum of the disease progression and also for patients with different lifestyles. And we think this is important that as the industry consolidates and as the home healthcare industry consolidates in order to meet the growing cutbacks and reimbursements by having the full package spectrum will be the preferred supplier to those home healthcare providers and to the patients.

In addition, roughly 30 million of the sales of this business are an on-site oxygen generation, which we think and we have watched for some time and think as a number of applications going forward that will grow in areas that world where it just doesn’t make sense to deliver other compressed gases or gases as a cryogenic liquid.

Finally as an overall summary, the business is positioned for significant growth. We’ve demonstrated in the past, we can grow the business rapidly. We have a strong balance sheet to fund all of our organic acquisition opportunities as well as to make tuck in acquisition, which can enhance our product portfolio enable us to grow the business faster. We’ve got a very stable business model with a flexible low-cost capital structure.

So with that, I’m happy to answer any questions either myself or Michael Biehl, our CFO.

Question-and-Answer Session

Unidentified Company Representative

It’s time for questions for (inaudible).

James West – Barclays Capital

Sam, could you maybe touch on some of the larger scale LNG opportunities that may still be out there like Cheniere for example. And then what you see or at least where the conversations maybe for or could be evolving opportunities in East Africa, the Eastern Mediterranean and of course mid-scale opportunities in Southeast Asia?

Samuel F. Thomas

As I said that I expect from – because Chart is full and capacity constraints. But the entire industry is somewhat capacity constraints. I think there will be limits to how many new orders for baseload plants are placed in the near-term. Cheniere has announced a final investment decision to go forward. We will not participate in that, because we were not able to meet the delivery schedule that they and back to or requesting. I don’t know what the status is of going forward as we’ve been involved in the discussions for the last month. But I would anticipate that many others in the industry, other component suppliers, as well as our competitors would similarly have problems meeting the delivery timetable that Cheniere has been acting on.

In terms of other opportunities, I think that in the five-year horizon, there will be a number of additional baseload on LNG plants going forward. We think it’s very good opportunity, whether it’s additional trains in Papua New Guinea, both Western Australia and in Queensland Australia, and the new gas fields in East Africa. The West African plants and consideration of them are perpetually there, but there doesn’t seem to be any diminution of the political risks associated with it.

James West – Barclays Capital

To your point earlier about the kind of industry capacity being mostly sold out, could you comment on, I guess two things. One is, what has that done to pricing for new equipment? And then number two, what are lead-times now for, I guess heat exchangers, and what were they, when you call it six months ago?

Samuel F. Thomas

They’ve evolved over the past six months from the 40-week, 45-week timeframe to 60-weeks, 65-weeks, so they’ve gone out significantly. As you would anticipate, pricing is improving significantly as a result of that. We were still able to increase our output within our physical plant envelope, and will be doing that through the rest of this year to mitigate that somewhat, and are also close to making a decision to make a significant capacity expansion because we expect that this situation will continue for some time.

James West – Barclays Capital

And maybe one last one from me, the industrial side of your business, obviously special numbers have been fairly weak in Europe, which is a sizable market for you. Could you maybe comment on how that’s been trending?

Samuel F. Thomas

Yeah, I think that as we talked about at the end of the second quarter, we saw a very robust first quarter for industrial gas demand particularly in North America, but also in China. But then a fairly significant softening in the second quarter, I think that going into the third quarter to-date, we’ve seen a continuation of the second quarter where Europe hasn’t gotten worse, but shows no sign of improvement. On the industrial gas side, we are seeing step-ups and improvement on the LNG side.

For North America, the jury is out for September as to whether people comeback from vacation and we’re doing a lot of product, but I think we’re looking at it is being a fairly flat year overall. China has definitely slowed down on an industrial gas side. Fortunately for us, this is all completely overshadowed by the growth of LNG in China and in States and in fact we’ve actually been able to use quite beneficially some of our capacity in the Czech Republic and supply product in the U.S. Going forward I don’t expect to see a dramatic weakening of the industrial gas business. But I don’t see prospects for resuming on the first quarter growth path when we had quite a bit of optimism.

James West – Barclays Capital

And thinking about the CNG opportunity in the United States, can you help quantify the revenue you might get from a million truck miles driven or a station like the one pictured, I mean conceptually understanding it could big, but how we quantify what it means to you?

Samuel F. Thomas

Okay. Well, on an LNG liquefier, the small scale liquefier to say 250,000 gallons per day, our opportunity is in the 5 million to 15 million range for liquefier and over a five to six year timeframe, we expect to see somewhere between 20 and 100 of those liquefiers built depending on the penetration. On transportation equipment, we provide the road trailers, which carry 10,000 gallons each, so each liquefier would need something like 50 of them in order to serve the markets. Those are roughly $200,000 opportunities for Chart.

Similarly at the stations, depending on our constant just storage tanks, if you are talking about a quarter million dollar opportunity roughly per dispenser. If we build the entire station, it might be on the order of 500,000 and 2 million and we would expect to see something like 1,000 stations build over the next three years perhaps as many as 2,000 or 3,000 stations.

On vehicles themselves, it’s an opportunity per truck of $5,000 to $15,000, and you would be talking about the low side estimates are that that will run perhaps within eight to 10 year time period, 10% of our heavy duty truck transportation will be LNG, and to some reason reports from the National Petroleum Council and ACC estimating that the total penetration going out to 2020, 2030. It could be in the 30% to 50% of the heavy duty truck transportation market.

So there are big opportunities. We are whereas the point where we are planning our capacity and having our capacity to our capacity with a view in our Distribution and Storage business that LNG related applications will go from one of those 12% of the total sales in that business in 2011 to 50% or greater going to LNG related applications. And we have flexible that would enable us to go quite a bit further than that, if the optimistic side is the truth or is the outcome.

James West – Barclays Capital

For the questions…

Unidentified Analyst

Coming back to the LNG fueling itself? Can I just check how do you see the trend between the CNG vehicles versus LNG vehicles because a lot new vehicles not as CNG retrofitted. But do you see a trend getting stronger than LNG and what’s the foreseeable future were like – could LNG be even stronger than CNG vehicles?

Samuel F. Thomas

I think in numbers, CNG vehicles will always be the largest percentage of total vehicles because for light trucks and passenger vehicles. CNG has a number of advantages in terms of costs, and ease of use and safety for long-term storage. For heavy duty vehicles, the driving force become space available to store it on fuel and LNG has the significant advantage.

In a market like China, where LNG is available, has been available and will be quite a bit more readily available both because of the import of LNG and the ability to distribute that as well as the construction of a large number of small and mid-scale liquefiers. LNG will make a greater penetration and I would expect to be something like 90% to 100% of everything larger than municipal buses and waste trucks, and clearly Class 8 level trucks would be 100% LNG.

In the U.S., we’ve seen the growth of CNG and what seems like natural LNG markets things like municipal buses and waste trucks. But also even on some Class 6 trucks. I think that has LNG liquid becomes available in U.S. with the construction of liquefiers and the distribution, availability of LNG. That LNG will have the majority of the Class 6 through 8, and I would expect to see greater penetration on municipal buses and waste trucks.

James West – Barclays Capital

Any (inaudible) Michael?

Michael F. Biehl

Okay. They will be available in the breakout session in Liberty 1.

James West – Barclays Capital

Thank you very much.

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