Chart Industries Inc (GTLS) 2012 Q3 法說會逐字稿

Good morning, and welcome to the Chart Industries Inc. 2012 third quarter earnings 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 the Char'ts website at www.chartindustries.com A telephone replay of today's broadcast will be available following the conclusion of the call until Friday, November 9. 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 fact, are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ -- cause actual events or results to differ materially from those expressed or implied in the forward-looking statement. 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, the latest filings with the SEC. These filings are available through the Investor Relations section of the Company's website, or through the SEC website at www.sec.gov. The Company undertakes to obligation to update publicly or revise any forward-looking statement.

I would now like to turn the conference over to Mr. Michael Biehl, Chart Industries Executive Vice President, CFO, and Treasurer. You may begin your conference.

Thank you, Pete. Good morning everyone. I would like to thank you all for joining us today. As I always do, I will begin by giving you a brief overview of our third quarter results and Sam Thomas, our Chairman, President, and CEO will provide highlights of the third quarter and comments on current market and order trends we see in each of the business segments. I'll finish up by commenting on our outlook for the remainder of 2012.

Reported net income for the third quarter of 2012 $18.5 million or $0.61 per diluted share. Third quarter earnings would have been $0.66 per diluted share, excluding $2 million of biomedical acquisition related costs, primarily related to the AirSep acquisition. This compares to third quarter 2011, net income of $17.5 million for $0.59 per diluted share. Third quarter of 2011 earnings would have been $0.62 per share, excluding $1.2 million of restructuring costs associated with acquisitions. Sales for the quarter were $254 million, to represent the new quarterly record and an increase of 20% compared to net sales of $211 million a year ago.

Despite slower growth in the global economy in the first nine months of 2012, versus the first nine months of 2011, Chart has been able to maintain a strong order backlog and capitalize on it. And we expect to continue to profitably push record volumes through our facilities.

Our gross profit for the quarter was $78 million, or 30.7% of sales, compared with $66.6 million for 31.5% sales a year ago. The slight decline is due to changes in product and project mix, as well as currency effects. With respect to energy and chemicals, or the E&C business, sales increased 44% to $83 million in the third quarter. We are making steady progress on several large base load LNG projects. Gross margins declined to 29.2% in the third quarter, compared with 33.1% in the same quarter of last year. But it is important to note that in the third quarter of 2011, we sold some equipment that was previously written off. This favorably impacted margins by about 3% in the prior year quarter. Excluding this item, margins were down only about 1%, due to project mix.

In distribution and storage, or the D&S business, sales increased 17%, year over year to $117.8 million in the third quarter. The increase is attributed to higher shipments across a variety of product lines, especially LNG applications. Gross margins for D&S improved to 30.3%, compared to 28.2% a year ago. Improved capacity utilization driven by higher volumes and a slight shift to higher margin product sales drove this improvement, which was partially offset by higher than normal employee training costs as we continue to ramp up several capacity expansion projects in D &S.

In our BioMedical business, sales improved slightly to $53.5 million in the third quarter of 2012, compared with $52.6 million for the same quarter in 2011. One month of activity from the AirSep acquisition, which closed in August, added $8.6 million of sales. Respiratory product sales, excluding AirSep, were weak in the quarter, which can be attributed to very soft sales in Europe, a weak euro and a negative impact from the phase-in of Medicare competitive bidding process in the US. BioMedical gross margins also declined for the year-ago period from 36.2% down to 33.8%. Lower volume, currency effects, payroll, mix and respiratory products due to increase concentrator sales, as well as AirSep related restructuring charges contributed to the weakness. We expect some AirSep acquisition related restructuring charges in the fourth quarter as well.

SG&A expenses for the quarter were $42.2 million, up $8 million from the same quarter a year ago. The increase is primarily due to the AirSep and GOFA acquisitions. It also includes higher employee related expenses in our organic operations to support growing demand. SG &A as percentage of sales is 16.6%, compared to 16.2% in the prior-year quarter.

Net interest expense was $4 million. This includes $2.3 million of non-cash accretion expense associated with the Company's convertible notes. Therefore, cash interest expense was $1.7 million for the current quarter. Interest expense was $2.4 million lower than the prior-year quarter, as a result of having our 2% convertible notes, and now the repaid 9.125% Senior Subordinated Notes outstanding concurrently, for two months of the third quarter of 2011. I will now turn the call over to Sam Thomas.

Thank you, Michael. And good morning everyone. First of all, overall comments, throughout 2012, we made it a top priority to successfully execute on the sizable order backlog we were able to build late last year and early this year. We are pleased to report record quarterly sales for the third quarter. Despite pushing record volumes of product through our facilities, we have maintained our focus on profitable growth and strong cash flow generation. We are constantly looking at smart ways to use our existing capacity to exploit high-growth, high-return opportunities by trying to keep lead times competitive. We also continue to progress with new capacity expansion projects related to natural gas, and its use for replacement for diesel fuel, that we feel is entering a multi-year growth cycle.

With that said, we are also well aware of the financial uncertainty, the lack of optimism, and flattening in economic growth projections for 2013. We have experienced some slowing in the rate of order growth, particularly in D&S and industrial gas and biomed respiratory product lines. For the third quarter of 2012, orders were $233.4 million, up slightly compared with second quarter of 2012 orders of $228 million. Order flow at E&C was flat sequentially, primarily due to our own capacity constraints. We expect our capacity expansion projects will allow us to reduce lead times and plan to add new brazed aluminium heat exchanger capacity, which I will speak to in more detail in a few moments.

At D&S, our LNG business continues to gain traction and grow. As you know, we're worldwide leader in LNG equipment and transportation and energy industries and the only company to address the entire LNG value chain, from liquefaction through distribution, storage, and then use. BioMedical orders improved from the second quarter, primarily due to the add-on of AirSep orders as well. Excluding AirSep, respiratory orders have continued to weaken due significant headwinds in Europe and a continued phase-in Medicare competitive business. Let me comment in a bit more detail about each of the business segments.

Our Energy and Chemicals business holds a backlog of nearly $400 million worth of firm orders. We remain committed to successfully and efficiently delivering those projects to our customers. We continue to expect multiple small and midscale LNG project orders the next few years. The compaction capacity will be especially important in North America and China to support vehicle fueling opportunities. Our ability to see across the LNG value-chain and our discussions with customers are validating these expectations.

Secondly, with low-cost methane and propane feedstock available for the long-term, we expect discussions for new world-scale ethylene plants and natural gas liquid plants to continue. Finally, large AirSep separation plants will need to be built in China and India to support steel production and coal gas supplier projects. As you may know, all of these projects well need brazed aluminium heat exchangers. Right now, global capacity for brazed aluminium heat exchangers is essentially fully utilized. We intend to expand our brazed aluminium heat exchanger production capacity in the US. The expansion will include the world's largest brazing furnace and is expected to increase our capacity by more than 40%. These heat exchangers are a core competency for Chart and expect additional capacity will continue to provide a significant competitive advantage.

With respect to Distribution and Storage, total orders of $120 million were essentially flat, compared to the second quarter, they were $121 million in the second quarter of 2012. We have seen some LNG order delays, as infrastructure projects are taking, what we feel, is a more realistic timeline. We still believe these long-term growth opportunities will grow. Our outlook in China is still very positive with respect to LNG opportunities and our capacity expansion projects in China will be fully operational by the end of 2012. North America LNG opportunities remain on track, although at a somewhat slower place that we saw in the first quarter of this year.

We are now seeing the railroad industry testing LNG fuel locomotives as an alternative to using diesel, which could become a significant opportunity for us in the future. Momentum is also gathering for other high-horsepower applications, particularly marine, off-road, and stationary PowerGen diesel replacement. European engine manufacturers are moving forward on LNG fueled engines across the full spectrum of heavy-duty trucks all the way up to the largest shipboard and stationary engines, utilizing LNG in place of diesel or bunker fuel. Industrial gas demand remains weak as industrial gas customers continue to work off inventory due to the decline -- the forecast decline in global growth rates. As a result, we remain cautious for the remainder of 2012 and early 2013, with respect to our industrial gas business.

In our biomedical business, we are experiencing much lower than expected demand for respiratory products, particularly liquid oxygen therapy products, which is Chart's historical area of focus. When you remove effects of AirSep, orders of liquid oxygen therapy devices and concentrators were weaker in the third quarter compared to the previous quarter. AirSep contributed about $9.3 million of new respiratory orders in the quarter and $2.2 million in commercial on-site oxygen generation. The underlying weakness in respiratory is primarily attributed to soft demand in Europe, especially southern Europe, where inventory overhang has been an issue. This among the home healthcare providers.

Our business continues to be impacted by the ongoing phase-in of Medicare competitive bidding for respiratory products in the US. The customers pulling back, awaiting announcements of the winners on competitive bidding. In addition, some customer consolidation and the weak euro have had an impact. We do not believe this is a long-term systemic issue, as medical device demand will ultimately be driven by aging populations globally and the increasing need for long-term oxygen therapy products. Also with AirSep, an industry leader in both portable oxygen and stationary concentrators, we are less exposed to European weakness and strategically positioned as demand begins to recover. Michael will now provide you with our outlook for 2012.

Thanks, Sam. Significant growth in LNG and other energy related business has offset continued weakest in our biomedical respiratory business, and our D&S industrial gas business. While we expected strong growth in energy related applications, the last couple months have shown that we were somewhat optimistic regarding the second half 2012 recovery and weakening respiratory industrial gas markets. Therefore, based on current order backlog and business expectations for the fourth quarter, the Company is lowering its earnings guidance for 2012. We are tightening our 2012 sales guidance range to $980 million to $1 billion, which is within the range previously forecasted.

Full-year earnings per share for 2012 are now expected to be in the range of $2.35 to $2.45 per diluted share on approximately 30 million weighted shares outstanding. Included in our 2012 earnings estimates, are the additional business from AirSep and approximately $0.10 per diluted share of anticipated restructuring charges for recent acquisitions. Excluding these charges, earnings would expected to be -- fall in a range of $2.45 to $2.55 per share. We still expected full-year effective tax rate in the 30% to 32% range. I would now like to open it up for questions.

Because of the recent storm, Sandy, Sam and I are in different locations today, so bear with us as we answer your questions. With that said, Keith, please provide instructions to the participants to be able to ask questions.

Yes, thank you. (Operator Instructions) The first question comes from Eric Stine with Craig-Hallum.

Hi Sam, hi Michael, thanks for taking the questions.

Morning, Eric.

I wondered if we could start on China. This has kind of been a theme for the entire year and talk of a slowing growth environment. Just hoping for an update on what you see there, it sounds like you continue to be pretty positive. But you still feel that is in ramp-up mode?

Absolutely. We clearly have seen a weakness and more conservatism, or lack of optimism in ordering in the industrial gas space. With the exception of our micro-bulk product range, but our LNG related activities continue unabated. If anything, we see customers starting to accelerate their plans and working hard to get more LNG vehicles out or LNG liquifiers and continue to invest in the infrastructure. So we continue to see it as being several years in advance of the US opportunity, and we are forecasting -- or we are looking forward to significant growth in China for LNG.

And just to clarify, did you say that your D&S -- the expansion in China in D&S, that will be done by the end of 2012?

Yes. The current expansion projects which we have announced we'll be completed and fully in production the end of this year, 2012. We continue to look at whether additional expansions are required.

Okay. That is helpful. I'm wondering if we could turn to North America and just on the liquefaction side, we're getting some indications of what Shell is planning. Just maybe some thoughts of what they are doing and what we could see from some other industry participants?

Yes, what we have seen in existing equipment supply, that we have for the publicly announced Shell activity, particularly in Canada -- lead times -- or should be expected startup dates have pushed out slightly. So that we were initially struggling to meet the delivery dates for their startup. We are now comfortable that we can meet all of their expectations based on other factors in their ramp up. They have -- as again they have said publicly, they are hoping to make announcements within the next few months regarding additional investments in LNG liquifiers. So our sense is that their interest and the interest of several other major energy companies is unabated and moving forward. What is clear is that, as everyone focuses on ensuring that these are brought up into production safely and reliably, that the entire supply base is challenged to meet some of the early expectations that were set.

Okay. All right. And maybe the last one from me. Just along those lines, in your capacity -- I am just wondering, right now, and I know your taking steps to address this in La Crosse, but what is your ability right now, if any, to handle some of the quick-term projects? Or is that something we should not think about here in the near-term until more of your expansions come online?

No, we are continuing to ramp capacity at our La Crosse facility within our existing building and within the existing major pieces of equipment. We are still debottlenecking and adding personnel. And we expect output to continue to improve into the first quarter, irrespective of significant capacity expansion. Though, opportunities will open up for quick-ship opportunities, as we get into 2013. But we feel pretty good about it. In terms of our other sites, the measured slowdown in orders for LNG equipment, as the current orders are digested by the entire supplier base, DPCs, and end users, is allowing us to get caught up in an efficient manner, reduce our lead times, and give us more flexibility.

In addition, looking at the D&S business, the relative softness of industrial gas demand is -- has meant we've been able to put more resources into our LNG efforts and ramp up our capacity and reduce lead times. So that we feel that we are very well positioned both now to meet customer expectations, and for customer demand in LNG, as it ramps up and industrial gas demand, as it comes back.

Okay. Thank you very much.

The next question comes from Tom Hayes with -- group.

Good morning, gentlemen.

Good morning, Tom.

Quick question, Sam. As you were going through some of the details you indicated, at least on the E&C side, with your flat order rate and running at full capacity, did you pass on any business opportunities over this last quarter?

As we had indicated on the previous conference call, Cheniere and Bechtel did go forward with orders to Bechtel for the LNG project in Louisiana. We were not the successful bidder on that, largely because we could not meet the -- or certainly, a major factor was the fact that we could not meet the delivery schedule required by the customer and Bechtel.

Okay, great. Thank you. Secondly, there's been a lot of news -- really all this here just kind heated up this quarter, on some of the larger companies like GE getting into the LNG, CNG vehicle fueling station business. I was just wondering if you could maybe provide an update on that portion of the business and really your outlook?

Sure. It's moving forward. We are working with a number of the major energy companies, as well as most if not all, of the players providing equipment or building LNG fueling stations. As an example, with General Electric, we are a potential supplier and have cooperation agreements with them, both with respect to small and midsized liquefier equipment supply, for station and distribution equipment supply, as well as an announced development project funded by the DLE we -- to develop a solution filling natural gas vehicles at the home.

Okay. And then just one real quick follow-up. Sam, in your prepared remarks on the biomed section, you give us to sales figures for the AirSep. I wondered if you could repeat that, please?

I wonder if I could ask Michael to give you those?

In orders for -- on the LNG side, Tom?

Yes, I think Sam mentioned there was one on the respiratory -- or respiratory side, I think you mentioned something on the PSA side of the business as well.

I apologize, Tom, what I said was AirSep contributed about $9.3 million of new respiratory orders in the quarter and $2.2 million in commercial on-site oxygen generation orders.

Okay, great. Thank you.

$11.5 million overall, for AirSep.

Okay.

Thank you. The next question comes from Rob Brown with Lake Street Capital Markets.

Good morning.

Hi, Rob.

You talked about the rail trials that you're sort of looking at. Can you give a sense of how that business could expand and what that opportunity could be?

Yes. Bear with me just a minute. What we have been looking at, is the supply of LNG for locomotives. Nominally, there are something like 500 to 1,000 new locomotives built a year and 50 to 100 locomotives rebuilt, with full engine rebuilds per year. Typically, the designs that have -- that we have had in operation, historically, and our now back doing trials have been a large tender car, roughly 30,000 gallon vehicle that supplies a diesel locomotive on other side of it -- or a natural gas engine, I should say, on either side of it. So there would be, roughly one tender car available to each natural gas locomotive -- for every two natural gas locomotives.

The total fleet of locomotives is in the 25,000 units range, but they are long-lived assets, so you have this something under 1,000 or roughly 6%, 7% replacement rate for them. If the conversion is made, it will be significant, because typically, if they put the infrastructure in to provide LNG on a given rail line, there will be a desire to run as many of the vehicles as possible on natural gas. The savings are significant. The improvement in emissions are significant. Everyone seems to believe, and when I talk about -- when I say everyone, both the railroad operators and owners of locomotives, as well as the supply chain, seems to think that this is a very high likelihood of going forward. But you have to temper that with the fact that you are talking about a multiple year lead time, probably on the order of three to five years minimum to get significant penetration and to ramp-up.

Okay, great. Thank you. And the second question, you could just give us the cost of your heat exchanger expansion project -- I guess capital cost.

Yes, it will be about -- in the high $40s million, including the land and furnace and everything like that. So, approaching $50 million. What should be in operation by the beginning of 2014.

Okay, thank you.

Thank you and the next question comes from Jagadish Iyer with Piper Jaffray.

Thanks for taking my question. Two questions. First, on -- Michael, can you give us some idea of how we should be thinking about the biomed margins going forward in fourth quarter and in the first half '13 now that the AirSep is closed. And then I have a follow-up.

Okay. Biomed margins in the fourth quarter should be -- now there will be restructuring charges in there. We're going to have roughly about $0.08 per share of restructuring charges that we expect in the fourth quarter, related to this acquisition. So that will damper it a little bit and that's roughly $3.4 million. But in terms of their gross margin in the fourth quarter, would expect them to be somewhat similar to what they were at actual rate in this last quarter.

Okay.

Going forward, would expect that, as we clear out some of those restructuring charges, would expect them to be sort of in the mid-30% range. The concentrators do carry a lower gross margin than our other biomedical products, we would expect them to be sort of that the mid- 30% range going forward.

Okay. That's really helpful. Sam, I had a big picture question. If you look out into '13, what are the broader things that we should be looking for in terms of projects that are big picture things, one or two kind of -- get a whole look at the growth profile for you guys? Thanks.

We see small and midscale LNG to be very positive. We are working on a lot of potential both in China, North America, and increasingly several of the energy majors are looking at global expansion, including Europe, Africa, the rest of Asia. So that, say, an area where we are devoting a lot of our marketing and quotation activity.

Second area is for olefins production, both ethylene purification plants or cold boxes, primarily in North America with at least four plants in the planning stages, with a couple of them quite likely to go forward in 2013. There are also a significant number of propane dehydrogenation plants for the production of propylene, both in China and North America. That uses propane as a feedstock. So we don't expect this sort of headline $100 million or $50 million orders from LNG liquefaction projects. Certainly not in the first half of 2013 or potentially not in 2013 at all, because there is a large backlog of plants being constructed at the moment. And a global supplier capacity and EPC capacity is fairly strict. The two areas that I have mentioned, small and midscale LNG, lots of prospects, olefin productions, lots of prospects. And finally, natural gas processing or NGL liquid plants continue to be strong with plenty of them on the drawing board.

That's very helpful. Just one quick housekeeping question, Michael. Did you call out how much the AirSep revenue contribution in the quarter, please in Q3?

It was, I believe, $8.9 million.

Okay, thank you so much.

$8.6 million, I'm sorry.

Okay. No problem. Thank you so much.

Thank you. The next question from Chase Jacobson with William Blair.

Good morning.

Good morning.

Sam you actually addressed some of my question in the last answer you gave. But just trying to get a sense on maybe the timing of the next pickup in backlog growth in the E&C business. You mentioned we probably should not expect any of the large $100 million awards in the near-term. It sounds like a lot of what is going to be going into the new brazing unit may be -- may not be related to large LNG but more on the petrochemical side. When we look at these petrochemical projects and we see them move into the EPC phase, what is the lag and timing, from when it goes to EPC to when we should be expecting awards for chart?

The lead time for -- of those projects is typically driven by the construction of a high-temperature furnace, which we don't participate in. So that is the gating item for EPC's releasing orders for these plants, but I would expect within three to six months time period, following EPC announcements to see orders.

Okay. And I guess given that where the lead times are in your business now, is it safe to assume that this new unit will have work as soon as it is up and running?

That is certainly our fervent desire.

Okay.

And that we are -- we are moving forward. Because we still are confident of the growth in demand, because of energy markets. Even if there is no satisfactory resolution of the fiscal cliff issues and 2013 were to end up in decline, we would still move forward because we are very confident in the medium-term, the two to five-year timeframe with respect to demand for brazed aluminium heat exchangers, and want to be positioned to supply the customer base.

Okay. And a question for Michael, you mentioned in your prepared remarks that there was a favorable mix in the D&S business, I think, over the last few quarters that business has actually had unfavorable mix. Can you just give a little color of what was better this quarter in D&S and if we should expect it to stay that way?

It's primarily on the LNG side, in terms of the products, especially in the US. Not in China, because those are always typically lower margin than our LNG orders in the US, but we had a lot more production of LNG going through the plants in this quarter. And would expect that to be comparable in the fourth quarter.

okay. So then LNG --

Going forward.

Okay, so is that LNG tanks or vehicle -- or LNG vehicle fuel systems?

It would be more tanks -- station tanks and mobile equipment. Not necessarily be the truck tanks, but the mobiles and the station tanks and things like that on the LNG side.

As we ramp up, our efficiencies our improving on those products, and we look to be able to continue to improve efficiencies and enhance gross margin at both -- three relocations, US, China, and Europe. Based on continuous improvement activities.

The other thing is, too, that as Sam has indicated, as we ramp up Owatonna -- the lease facility that we entered into in prior years is pretty close to fully operational now. So we are get efficiencies out of there. And that is dedicated to LNG -- LNG equipment.

Okay. I appreciate it. Thanks.

Thank you. The next question comes from Martin Malloy with Johnson Rice.

Good morning.

Good morning.

I wanted to ask a question about the expansion projects. You've got a number of projects that have been completed recently or are expected to be completed recently. I'm trying to get a better idea of how much these projects would add in terms of annual revenue capacity. When we look at Lake Charles, Owatonna, Minnesota, and the China, D&S project -- or expansion project?

Yes, in total it probably represents -- it supports growth rates of our total revenues in the 20% to 30% range, and takes us out to being able to support that with additional potential in 2014 of expansions through 2014.

Okay. And then you mentioned --

Typically in individual product lines, the capacity additions have been in the 30% to 50% range, but for Chart overall, it looks like they will support revenue growth in the 20% to 30% per year.

Okay. And then, on the brazed aluminum heat exchangers side, you mentioned that the industry capacity was very tight right now. Could you talk about pricing trends there and what that might mean for the E&C segment gross profit margins over the next 12 months?

Marty, as the capacity -- with the capacity being filled up, and as the market continues to grow, E&C margins are sort of in the average, around 30% this year. And we would expect that to move up slightly next year, sort of the low 30s. One of the things that will be going through our plants next year are the large-scale LNG projects, which tend to have lower margins. So that will dampen some of the margins growth on E&C.

Now the smaller projects that we have going through, could be coming through at higher margins that are currently in backlog. So you will have an offset by those larger ones, but overall should have a sort of low 30s, and as we move up into the future, we should continue to see that margin grow, but not to the same level that -- in the prior cycle. I think we got up to 42% in the prior cycle when we had a large, midscale project in there. We don't think it will get up that high. Ultimately, when we work through some of these bigger projects through backlog, depending on what the mix is, as we go forward, we could get into the mid-30s or possibly high 30s. But that is hard to call right now based upon what products are in the backlog and coming through the plant.

Okay. Thank you.

Thank you. The next question comes from Greg McKinley with Dougherty & Company.

Yes, thank you. Could you comment on the level of energy or LNG related backlog within your D&S segment now, so we can get a sense between industrial and energy related revenue mix there?

We typically do not break that out, Greg, but it is consistently growing and probably represents something on the order of $60 million at the moment.

Okay. Okay.

I would say $60 million to $65 million is about right, based upon orders with we pulled in the backlog the last two quarters, LNG orders.

Okay. Thank you. And then I guess, one thing I'm sort of trying to better understand is as the North American LNG fueling infrastructure market builds out -- course the fueling station developers that people talk a lot about are Shell and clean energy. Are there enough signs occurring in the industry where you expect another energy major or two to throw its hat in the ring and the put some assets to work for fueling station.

We're certainly working with several companies who are going down the path of providing LNG liquefiers.

Okay.

So we are optimistic. It is a challenge to accurately reflect the timing of fuel stations going into service, because there is both the lead times and permitting issues to install the station. You don't want to start up stations if you don't have a fleet of vehicles that are available to utilize that station. And you also have to have LNG available to provide the fuel. So there are inevitable fits and starts as we ramp up all three of those aspects.

Thank you. And then I just want to better understand distribution channel within your respiratory biomedical business. I mean, I think we all understand who the end customer is, it is the individual with chronic respiratory disease, but as you're manufacturing these tanks or concentrators, they're going into inventory supply for like home healthcare provider, and then a doctor prescribes it and there is reimbursed for the cost and then it goes to the patient? Can you help us understand the flow of the product and where you are seeing the disruption in demand for it, because I'm guessing it isn't disrupted at all in terms of the consumer need for it.

Correct. The consumer need is constant and growing. But there is turnover of existing assets, which are owned by the home healthcare companies. The home healthcare companies are, by the way, our customers, and they are the providers to the individual patients, as well as the ones who are invoicing the federal government to receive payment on a monthly basis.

Okay.

And as players change hands, and in the US as an example, there is some 500-600 home healthcare providers, although the top three probably represents something like 40% to 50% of the total demand, or the total patient base. As we get into competitive bidding in 90 regions, or metropolitan service areas, that are currently being competitively bid, there is uncertainty amongst those home healthcare providers as to who will be the winner. And the same situation exists in Southern Europe.

And therefore, there is a concerted effort by the home healthcare providers to avoid purchasing inventory and to increase the turns of their inventory, so that as units come back from a deceased patient, they are refurbished and sent out to newer patients. So that they are trying to improve the efficiency of the use of their assets, at this time, until they know whether they are successful bidders and tend to make significant purchases, or unsuccessful bidders who don't need additional product.

Yes, and as these processes sort of play out in the US, Italy, and Southern Europe, as you said, do you envision that your customer base in terms of the number of direct customers consolidates? So you are doing business with a small number of very large customers?

That is the stated objective of Medicare. To consolidate the number of home healthcare providers by reducing reimbursement, and what we believe will be a natural consequence of consolidation. There will be fewer and larger customer base for us. And a major reason for the acquisitions we have made in the home healthcare field is to be -- is to become the clear preferred supplier to this smaller number of more powerful home healthcare providers.

Yes. Okay. Thank you.

The next question comes from Bill Priebe with Geneva Capital Management. Please go ahead, sir, your line is active.

Sorry, I had it on mute. Could you give us an update on perhaps additional capacity coming in from in that heat exchanger area in the US from a company like Lindy? If there is any. I heard there was some plans to bring in some competitors into the US to add to the capacity.

There is always discussion. I am not aware of any publicly announced plans to do so. Lindy does manufacturer in Germany and in China.

Okay.

Air Products is expanding down in Florida but they make a spiral round heat exchanger.

Which you don't market.

That's correct.

Okay. Thank you.

(Operator Instructions). All right, there are no more questions at the present time. So I'd like to turn the call back to Sam Thomas for any closing remarks.

Yes. We are very pleased with our strong sales growth in the quarter, and the continued prospects for significant growth in our LNG and diesel fuel replacement markets. The fiscal cliff for uncertainty has impacted us more than we had anticipated just this past August. And we continue to see that, as many other industrial companies have been reporting. It's quite clear to us that capital investment decisions, which our equipment is, are based on optimism of the near future and the ability to utilize that equipment. So we believe that the fiscal cliff issues and the lack of optimism and concern to wait and see what happens, is affecting us. However, the availability of credit is a real positive for the North American market. So I think it is fair to say, that we believe the Fed is doing its job, but we do need our elected officials to resolve the fiscal cliff issues so that there is more uncertainty and hence the potential for competence going forward.

Aside from that, we see this breathing room as an opportunity for Chart to significantly improve its lead time and continue an orderly ramp up, to have the capacity available for both the natural gas opportunities and our base industrial businesses, as we go forward. I continue to be very optimistic about a long-term resurgence of US manufacturing economy, and of that having very positive benefits for Chart in the medium-term. With that, thank you very much. We look forward to speaking to you at the end of the next quarter.

Thank you. This concludes the teleconference. You may now disconnect your phone lines. Thank you for participating and have a nice day.