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Good morning and welcome to the Chart Industries Inc. First Quarter 2018 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. The company's earnings release was issued earlier this morning. If you have not received the release, you may access it by visiting Chart's website at www.chartindustries.com. A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, April 26. The replay information is contained in the company's earnings release.
Before we begin, the company would like to remind you that statements made during this call that are not historical in fact, are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statements.
For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the company's earnings release and latest filings with the SEC. These filings are available through the Investor Relations section of the company's website or through the SEC website, 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 Jill Evanko, Chart Industries' CFO. You may begin your conference.
Thank you, Kevin. Good morning and thank you for joining us. Today, we'll provide details of the first quarter results market and order trends, full year outlook and further details around our continued of our capital allocation strategy.
In order to facilitate the discussion on our first quarter of 2018 results, we have included as an exhibit to this morning's press release a supplemental deck which I'll reference throughout the call this morning. The deck can be located on our website under Investor Relations.
Starting with our first quarter of 2018 results on Page 3 of the supplemental deck. Sales of $279.7 million for the first quarter of 2018 increased 37% or 15.8% excluding Hudson products over the first quarter of 2017. All three segment sales increased over the prior year's quarter with BioMedical and D&S sales increasing 7% and 20% respectively. Sequentially to the fourth quarter of 2017 revenue was down 9% driven by typical seasonality and an exceptionally strong fourth quarter of 2017.
The growth in sales reflects the continued strength in orders across all three business segment throughout 2017 and the first quarter of 2018. Sequentially and year-over-year each segments orders increased. The first quarter 2018 orders of $321.1 million or $284 million excluding Hudson is the highest organic order quarter since the third quarter of 2014. Continued strength in natural gas demand is reflected in our E&C segment where orders were 25% higher than the fourth quarter of 2017.
Distribution and Storage order growth continued even after very strong fourth quarter with strength in US packaged gas and LNG vehicle tank equity. The first quarter of 2018 was the highest order quarter since the third quarter of 2013 for D&S. BioMedical results will be discussed later during this call. April order activity across three segments has been strong month-to-date and we expect that trend to continue through the second quarter and full year. Backlog of $489 million is a $28 million increase over the end of 2017 and excluding Hudson, an increase of $34 million. Similar to orders, backlog in each of the three segments increased sequentially this quarter as well as increasing substantially over the first quarter of 2017.
Gross profit for the first quarter of 2018 was $77.1 million or 27.6% of sales. Gross profit for the fourth quarter of 2017 was $82.9 million or 27.1% in sales. The sequential increase in gross margin as a percent of sales reflects the first full quarter for each of the three segments benefitting from the 2017 restructuring actions taken. Although gross profit margin as a percent of sales in the first quarter of 2018 was higher than that of the prior quarter and that of the first quarter of 2017. It was negatively impacted by the completion of the D&S lower margin large project which we discussed on our year end conference call as well as a one-time sale of aged inventory at low [ph] margin.
Additionally, our new portable oxygen concentrator was released in the first quarter with initial startup cost pulling the margin down. Excluding these impacts normalized gross margin as a percent of sales would have been 28% for the first quarter of 2018. We continue to expect each quarter of 2018 total Chart gross margin as a percent of sales to sequentially increase over the prior quarter and over the same quarter in the prior year. Included in our expectations of increasing gross margin as a percent of sales is our anticipated impact from the recently announced Section 232 tariffs. There is minimal direct impact to Chart from the tariffs primarily due to the specific contractual agreements with our customers as well as our project based pricing in E&C.
North American metal prices have been increasing since November 2017 and we've seen moderate increases to valves, fittings, pipes, tubes and filler [ph] wire. Moving to Slide 4 of the supplemental presentation net income for the first quarter of 2018 was $5.8 million or $0.18 per diluted share. First quarter 2018 earnings would have been $0.23 per diluted share excluding $1.3 million of transaction related cost and $900,000 of restructuring cost. Additionally the first quarter of 2018 includes a foreign currency loss of $1.6 million which equates to earnings per share of negative $0.04. While there was an EPS impact of just under $0.04 from the revenue recognition accounting standard change in the first quarter, we do not expect a material impact to our income statements for the balance of the year from revenue recognition.
The first quarter of 2018 results compares with the net loss for the first quarter of 2017 of $2.9 million or negative $0.09 per diluted share. First quarter 2017 earnings would have been $0.01 per diluted share excluding $4.6 million of restructuring and transaction related cost and included $300,000 of foreign currency loss. Normalized adjusted EPS on a comparable basis as seen in the last row on the table on Slide 4 is $0.27, an increase of $0.26 from the first quarter of 2017.
Moving to our outlook for the full year of 2018 on Page 5 of the slide deck. Guidance includes the impact from the revenue recognition accounting standard change which was adopted effective January 1, 2018 and which we expect to immaterial on a full year basis. Sales guidance is expected to be in the range of $1.15 billion to $1.2 billion for the full year of 2018 and is unchanged from our prior guidance. We expect full year adjusted earnings per diluted share to be in the range of $1.75 to $2 per share on approximately $31.7 million weighted average shares outstanding. This excludes any restructuring cost and transaction related cost and does not incorporate any impact from the strategic evaluation of our oxygen related products which we will discuss momentarily. Prior EPS guidance was $1.65 to $1.90 per share. We expect our effective tax rate inclusive of benefits from the Tax Cuts and Jobs Act to be 27% as compared to our prior guidance range 27% to 29%. As mentioned in our year end 2017 conference call, we expect effective tax rate to further decrease to 22% after our Chinese business runs profitably for a period of time.
The first quarter of 2018 was the first quarter of breakeven operating income since 2014 for China and completes a full year of EBITDA positive results for that region. This is expected to continue throughout 2018 and therefore it will have a positive impact on our 2019 tax rate. We expect our capital expenditures for 2018 will be in the range of $35 million to $45 million. We have nearly completed the capacity expansion of our LNG vehicle tank line in Canton, Georgia as of the end of the first quarter and expect our capacity expansion in our Brazed Aluminum Heat Exchanger facility in La Crosse, Wisconsin to be complete as of the third quarter of this year.
As mentioned in our last earnings call, net leverage is continuing to decline from our strong cash flow generation and as of March 31, it's 2.96. In this morning's press release we announced the strategic review of the our oxygen-related businesses within our BioMedical segment inclusive of a possible divestiture of the businesses. This announcement does not change our capital deployment strategy as previously described. We will remain focused on deploying capital to support internal investments for growth and productivity making targeted strategic acquisitions that fit our core cryogenic engineering and manufacturing competencies and pay down of debt.
I will now turn the call over to Bill Johnson to provide further information on the strategic review of the oxygen-related assets. As well as an update on our end markets and segment trends.
Thank you Jill and good morning, everyone. As Jill mentioned we're conducting a strategic review of the oxygen-related product lines within our BioMedical segment including an evaluation of a possible divestiture of the businesses. We're excluding from the review these portion of the BioMedical segment that utilize and align with our cryogenic engineering expertise, which is our cryobiological product lines within the BioMedical segment. We will not disclose further developments during this process until our Board of Directors has approved a specific where the company has determined, a further disclosure is appropriate.
Now I will provide an update on the BioMedical segment and related market trends. First quarter 2018 BioMedical revenue increased 7.3% over the first quarter of 2017 with growth in all product lines within the segment. First quarter BioMedical sales of $54.7 million decreased from the fourth quarter of 2017 sales of $56.6 million driven primarily by the timing of specific shipments in the fourth quarter related to military applications and a specific large Chinese cryobiological order.
End market activity and applications continue to be a tailwind for revenue growth in the BioMedical segment. But the end users increasingly buying oxygen concentrators for in-home use to address growing chronic respiratory issues. Given the market strength in our growing direct consumer channel, we expect sequential revenue growth in each quarter for the remainder of 2018, which is different than the segments typical lower fourth quarter seasonality. BioMedical gross margin as a percent of sales of 36.9% increased from 35.9% in the fourth quarter of 2017 and from 32.7% in the first quarter of 2017, which includes $2.1 million of restructuring cost.
As Jill mentioned, we released our new portable oxygen concentrator in the first quarter with over 1,700 units sold to a large DME that we expect significant additional orders throughout 2018 from. There are certain specific startup cost associated with the release of the new product which negatively impacted gross margin by over 100 basis points in the quarter. BioMedical SG&A of $10.1 million in the first quarter of 2018 is down $700,000 compared to the first quarter of 2017, driven by the reduction of forced actions taken in 2017. Compared to the fourth quarter 2017 sequentially SG&A is up $1.6 million driven by a legal settlement that we received in the fourth quarter that will not repeat.
Now moving to our Energy and Chemical segments. E&C segment sales of $89.9 million, $46.6 million excluding Hudson organically down 1.5% compared to the fourth quarter of 2017 and up organically 16.7% versus the first quarter of 2017. During the first quarter total E&C orders were $93.7 million including $37 million from Hudson. The sequential revenue decrease was driven by timing of large orders in the fourth quarter of 2017. We continue to see strength in US natural gas end markets with continued demand for our air cooled heat exchangers. First quarter Chart Legacy air cooled heat exchangers orders were $25 million up 81% sequentially over the fourth quarter and up 74% over the first quarter of 2017.
Hudson contributed $43.3 million in sales and $4.2 million of operating income in the quarter. Hudson orders of $37 million in the quarter were sequentially up 35% compared to the fourth quarter of 2017 driven by demand in gas compression and gas processing end markets for new coolers. Continued sequential order growth is expected in the second quarter driven by continued strength in gas processing and compression as well as increased activity in LNG, midstream and refining.
Our view on the timing of the balancing of the global supply and demand for LNG which will drive LNG export facility orders remains unchanged. We still are forecasting additional LNG will be needed in the 2022, 2023 time period. As a result, we believe we'll start to see large LNG liquefaction project orders in 2018 at the earliest and in the first half of 2019. We do not include any large LNG liquefaction [indiscernible] for year 2018 forecast.
Our IPSMR technology continues to generate a high-level of interest in a number of mid-scale applications. A few specific updates on certain projects; a number of large IOCs are or have reviewed our technology to-date and are actively working with us. As previously mentioned IPSMR has been selected for future mid-scale applications for Cheniere. Chart's Technology was chosen for the Commonwealth project, point [ph] LNG has selected Chart Technology are in a capital raise period. For the purposes of its FERC filing for the Jacksonville, LNG Export Project. Eagle LNG utilizes Chart's IPSMR technology. The Formula Award is anticipated in 2018.
Moving to our Distribution and Storage segment. D&S sales decreased $14.1 million to $136.1 million compared to the fourth quarter of 2017 and increased $22.9 million compared to the first quarter of 2017. Year-over-year increases are driven by strength in the United States packaged gas, China LNG trailers and vaporization stations, European standard tanks and LNG tanks. In our D&S business we booked orders of $170.4 million in the first quarter making this is the fifth consecutive quarter of sequential order growth in this segment. The strong D&S order intake was driven by LNG vehicle fueling and industrial CO2 activity driving increased volumes of bulk and MicroBulk products in the United States.
Additionally, we continue to expect small-scale LNG terminal activity in Europe to provide opportunity in the second half of 2018. April order activity has continued the strong year-to-date trend and we expect that trend to continue through the quarter. We're seeing global demand growth in LNG fueled heavy duty trucks driven by carbon emission regulations in some markets and economics of LNG to diesel price delta in other markets. As Jill mentioned our expansion of capacity in our Georgia facilities to meet this growing demand for LNG vehicle tanks is nearly complete and doubles our prior capacity. We have backlog to utilize the full capacity this line in 2018.
Gross margin as a percent of sales of 27.6% increased from 26.6% in the fourth quarter of 2017 and 27% in the first quarter of 2017 reflecting continued improvement in our Chinese business as well as productivity efforts in the European and US manufacturing locations. Gross margin as a percent of sales would have been almost 200 basis points higher when normalizing for the one-time impacts Jill mentioned earlier on the call. For the past four quarters, DNS China has shown signs of recovery and this trend continued to the first quarter of the year. DNS China orders were up 60% versus the first quarter of 2017 and up 12% sequentially.
LNG vaporization stations continue to drive much of the order intake increases, we anticipate 10% revenue growth in our China business for the full year of 2018 and a positive operating income year. The first quarter was at breakeven operating income as Jill mentioned. We continue to be pleased with the marginally creative [indiscernible] results from our recent repair and service acquisitions. Skaff Cryogenics and VCT Vogel and will continue to build out our aftermarket repair and service geographic footprint in the United States and Europe both organically and inorganically.
I will now open it up for questions. Kevin please provide instructions to the participants to be able to ask questions.
[Operator Instructions]
Our first question comes from Walter Liptak with Seaport Global.
I wanted to ask about the concerned with BioMed divestiture and just to get a little bit more detail about maybe geographically, what might get invested and maybe if you could talk a little bit about the timing because it seems to me from the financials that you just started getting some momentum going with the direct to consumer and the profitability picking up and maybe with the channel in China as well. So wonder if we could just get a little bit more color on why basically?
So first of all, it's a strategically evaluation of those businesses, so we have not specifically landed on divestiture of the business. There is no timing that we can share at this point in time. What we can share is that, the products under review are respiratory and on-site generation system which totaled approximately 65% of the revenue of the BioMedical business.
Okay, all right. Fair enough. And in the prepared remarks you called out the DNS business packaged gas. Wonder if you could talk a little bit about how that trended versus your expectation, is that market stronger than expected and if you can talk about material cost pass through specifically for that market?
Sure, we look at the packaged gas business is kind of a leading indicator for us, in terms of just the health of the general economy and kind of things to come and if we look at the packaged gas business from an order standpoint, it's grown sequentially and also year-over-year it's grown. We were about 60% growth in orders from last year to this year in the first quarter.
With respect to material pass through, so in our industrial gas customer base generally we have contracts with those customers and there's some form of material escalation and banding on those contracts those directions so from a pass through standpoint, the contracts are said to be fair to both directions.
If there is larger projects we quote those and we have very discrete time periods of the quotes are active, so that we can adjust the prices on materials as needed, if we get into a little bit larger order - quoting activity with somebody.
Okay, fair enough and then just one last one on the heavy duty expansion down Atlanta. And you commented that there is a backlog that's growing. Is there a backlog that you've had a work down in the second and third quarter, should we see a bump in revenue as that capacity ramps?
Yes there is. So we have backlog on that, for that line for the full year at the new capacity level. So you'll see a bump in revenue in Q2 and Q3.
Okay, great. Thank you.
Our next question comes from Martin Malloy with Johnson Rice.
I had a question on the energy and chemical segment and the operating income there. It looks like it was $2.8 million during the quarter and in the notes it looks like Hudson contributed $4.2 million. Can you talk about, what was going on in the organic business?
So in the organic business, we did have an operating loss on that side and that was primarily driven by under absorption given the volume levels in the Legacy E&C business. Other than that there were two specific items that were one-time items that totaled about $800,000 of [indiscernible] operating income line.
Okay and the under absorption, is it just a timing thing that impacted 1Q or is this going to impact 2Q as well?
To timing for the first quarter and we anticipate the remaining three quarters of year in the E&C legacy business to be operating profitable.
Okay. And then I was wondering if I could ask a question on the D&S side in the storage tanks and customer inquiries regarding IMO 2020 - lower sulfur for Marine. Are you seeing those trend up or how do you expect that to play out over the next couple of years?
I think, it's certainly is something that we're watching closely. I think as I've said in the prior calls, I think the enforcement of the regulation is really going to drive how fast things get adopted, we certainly are seeing more activity on the bunkering side of things. I think we'll continue to see in Europe, but it's slow, but it is coming but I think it's going to be really determined by the enforcement side of things and then how quickly when the people do their calculations on their returning on investment, will make decisions based on that.
Great. Thank you. I'll get back in queue.
Our next question comes from Rob Brown with Lake Street Capital.
First on the gross margins. You mentioned a couple of reasons why they were depressed in the quarter, but can you give some color on how that alleviate pretty quickly in Q2 or does it take sort of [indiscernible] for those items to alleviate?
So those were specific one-off items in the first quarter and we anticipate that, each quarter and the second quarter will be back at the normalized gross margin levels that we just shared on the call and that will continue to increase in the third quarter as well, so we anticipate that those issues are behind us as of the end of the first quarter.
Okay good and then [indiscernible] LNG vehicle tank, the strength and capacity [indiscernible]. What markets are you seeing the strength and is that recent strength or is that really follow through from some of the activity late last year?
Yes, I know it's - we began to see it last year and which is why we added newly added at capacity this year. Almost all of the strength is coming in Europe in terms of our volume that coming out of the Georgia facility is being shipped to Europe, but we also see vehicle tanks in China growing that market for both vaporization stations and vehicle tanks is really what's driving some of the strength in our returns on the Chinese businesses and we see that continuing, I don't see that abating any time soon.
Okay, thank you. I'll turn it over.
Our next question comes from Eric Stine with Craig-Hallum.
First just wanted to start with China. I mean you gave some good color there, but I know the last few quarters you've kind of been cautiously optimistic, should we take your commentary or are your thoughts that you've kind of turned the corner there a little bit and if not, I mean what are some of the risks that you see that kind of keep you in that cautious category.
I mean look it's China. Right? They're always cautious about everything in terms of because it can change very quickly with government policies and regulations. The reason we're optimistic is that, we've consolidated our manufacturing locations into our one site. So we're pleased with that, we've completed that at the end of December. So we know we've taken our cost down and lowered our footprint, our fixed cost which helps. There is activity in China both on the ICOs [ph] container side of things, vaporization station and then the vehicle tanks. With - if you look at how much LNG has being imported growth year-over-year in China and you look at the forecast that's going to continue China needs more LNG. So from that perspective we're optimistic look it's China and there's tough to make money there, but we think we're in a better position than we were 12 months ago.
Got it. Thanks for that. And maybe, just turning to E&C and I know you mentioned increased [indiscernible] activities for some of the LNG projects out there. To just to clarify, I mean how would you break that down between new projects or advancing just more work with existing contracts well whether it's Cheniere, Tellurium, then be helpful I mean when we do think about this increased activity. We should still think about this as IPSMR modular where you would have more content.
Yes, I think we certainly are seeing there's two answers to that. Right? So I don't think there is any new projects on the large scale export stuff, those projects are pretty well defined and out there, but there are some smaller small scale liquefiers out there that people are looking at and there's a whole list of those and occasionally there's something new that pops up there, but again that's a pretty defined list of things that we're working on. But all of them revolve around IPSMR which we're certainly trying to get that technology in all of that application and it fits really well in the small scale stuff as well as the exports.
Yes, okay. Thanks so much.
Our next question comes from Pavel Molchanov with Raymond James.
Back in 2015 as I recall, Venture [ph] Global and Magnolia, we're both highlighted as pre-development LNG opportunities for you. Are both of those relationships still intact?
Yes. Matter of fact, we have Magnolia in our backlog still. Magnolia, you can read the press releases, but I think they're working their way through I think it's about 8 million tons of liquid and they're working their way through getting off takers for that. So you can read the press releases from them and then Venture [ph] Global same thing, I think there's been some recent press releases on some off take for them. We also have cold boxes that we would selling to them, in event that project goes forward.
And a similar question about Chevron given that you were the coal cold supplier to the Wheatstone LNG project in Australia, now Chevron is indicating that the Gorgon LNG project will be expanded, is that plausible opportunity for you or do you think they will go with their former supplier for Gorgon.
I don't know, I really don't want to comment on any specific one order like that.
Okay, fair enough. Appreciated guys.
Our next question comes from Matt Trusz, Gabelli & Company.
Have you seen the US - China trade tensions impacting the LNG project FID [ph] environment?
No, I don't - I can't point anything that says that there's a link there.
Okay, another question on energy. If the outlook for oil prices stays high, can you walk us through the biggest impacts of the business? I guess three dimensions could be LNG project timelines, the volume of vehicle tanks and fuel infrastructure you sell and then the associated gas business. Are there key thresholds like $80 that you're watching?
Yes, I mean we've talked about in this past. Where we say look if we can maintain some, if there's some arbitrage between diesel and gas prices, it makes sense for the LNG trucking business to turn back on in the US. I think that's probably around $80, you might - then the economics start to make sense for LNG heavy duty trucking in the US. But I think there's so much volatility that you have to have some certainty around the $80 price to say that's going to become a reality. It also effects the petrochemical market, so the higher oil prices drive the petrochemical market to the feedstock being more ethane, which is helpful to us in terms of petrochemical sales. So I would say those are some of the linkages that we look at.
Great. Thank you.
And I'm not showing any further questions at this time. I'll turn the call back to Bill Johnson.
As a reminder our Investor Day is scheduled to take place June 7, 2018 at the JW Marriott Essex Hotel in New York City. Details can be found on our website under Investor Relations or by contacting Jill Evanko. Our first quarter 2018 results reflect strengthening markets across all of our segments as well as margin benefits from the execution of last year's restructuring efforts which we expect to return to $15 million in 2018. The strong start to the year is reflected in our increased full year EPS guidance of $1.75 to $2 per diluted share. Our ongoing capital allocation review, strategic evaluation of the oxygen-related product lines in our business and our strong balance sheet will continue to allow us to focus on our cryogenic expertise and pursue strategic inorganic and organic opportunities. Thank you everyone for joining us today. Goodbye.
Ladies and gentlemen that concludes today's presentation. You may now disconnect and have a wonderful day.