Chart Industries Inc (GTLS) 2013 Q1 法說會逐字稿

Good morning. And welcome to Chart Industries Incorporated' s 2013 first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. As a reminder today's call is being recorded. You should have already received the Company's earnings release that was issued earlier this morning. If you have not received the release you may access it by visiting Chart's website at www.ChartIndustries.com. Telephone replay of today's broadcast will be available following the conclusion of the call until Friday, May 3. The replay information is contained in the Company's earnings release.

Before we begin, the Company would like me 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 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, 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 over to Mr. Michael Biehl, Chart Industries Executive Vice President, CFO, and Treasurer. You may begin your conference.

Thank you Huey. Good morning everyone. I would like to thank you all for joining us today. I will begin by giving you a brief overview of our first quarter results, then Sam Thomas will provide comments on current market trends that we see in each of our business segments. I will finish up by commenting on our outlook for the remainder of 2013.

Reported net income for the first quarter of 2013 of $15.5 million, or $0.51 per diluted share. This included restructuring costs of $1.2 million, or $0.03 per diluted share, largely associated with the Company's acquisition of AirSep in our biomedical segment. Earnings per share for the first quarter of 2013 would have been $0.54 per diluted share excluding these items. This compares to first quarter 2012 net income of $14.1 million, or $0.47 per diluted share. The prior year quarter earnings would have been $0.48 per share, excluding $500,000 of acquisition related earn out adjustments.

Sales for the quarter were $274 million, and represent an increase of 27% compared to net sales of $216 million a year ago. The improvement is associated with strong end market trends in our Energy & Chemicals, or E&C, and Distribution & Storage, or D&S segments. Which continues with the order award we announced today. AirSep contributed approximately $27 million in sales in the first quarter. Our gross profit for the quarter was $79.5 million, or 29% of sales, compared with $67.6 million, or 31.3% of sales a year ago. Overall margins were down due to execution issues on two projects, one in E&C and another in D&S, resulting in higher than forecasted costs of $4.3 million, or $0.10 per diluted share.

With respect to the E&C business sales increased 17% to $80.9 million in the first quarter, due to increased revenue on significant systems and brazed aluminum heat exchanger projects coming out of backlog. Gross margins were 25.9% compared to 31.5% in the prior year quarter. Gross margins were lower due to project mix and some higher costs on one project due to labor inefficiencies and project scope changes, which impacted E&C margins about 4% in the quarter. We were working on a very compressed schedule which resulted in higher overtime and labor inefficiencies to meet customer delivery requirements. This project was shipped last week and no further unfavorable impact is expected in the second quarter. However, there is a possibility to recover some of the costs associated with the project scope changes on this project.

The opposite happened last year during the first quarter of 2012 where margins improved about 3.5% due to completion of projects including favorable reversal of unused project reserves. In D&S first quarter sales increased 23% year-over-year to $128.7 million, driven by continued growth in LGE equipment shipments especially in Asia. Gross margin for D&S improved to 28.4% compared with 28% a year ago to improve product mix and volume. Relative to our forecast, though, margins were lower than expected due to higher costs associated with one project at D&S.

This project had a number of scope changes due to customer design changes, and regulatory standards that were being developed at the time the shipment was being manufactured. This resulted this about $1.2 million of higher costs than we had estimated in our initial forecast for 2013. This project is nearing completion and is not expected to impact second quarter margins. In our BioMedical business, sales increased 52% to $64 million in the first quarter of 2013, compared with $42 million for the same quarter in the prior year.

The increase is due to AirSep which added $27 million in revenue to the quarter. Additional revenue from AirSep offset lower overall sales in respiratory therapy, as a result of the continued weakness in Europe, and the delay in the Medicare competitive bidding process in the US. BioMedical gross profit margin decreased to 34.4% in the quarter, compared with 38.9% in the same period in 2012. The decrease is primarily due to changes in product mix, with lower margin oxygen concentrators representing a much larger share of sales following the AirSep acquisition.

SG&A expenses for the quarter were $47.2 million, up $6.6 million from the same quarter a year ago. The increase is largely due to the AirSep acquisition, in addition to an increase in employee related costs, and external commissions as we pursue LNG-related growth opportunities both in the US and in Asia. Also included in SG&A was the $1.2 million of restructuring costs associated with the acquisition of AirSep in our BioMedical segment. SG&A as a percentage of sales continued to decline to 17.2%, compared to 18.8% in the prior year quarter, and is expected to continue to decline as a percent of sales in 2013. Net interest expense was $4 million for the first quarter, which included $2.4 million of noncash accretion expense associated with the Company's 2% seven year convertible notes. Therefore, cash interest expense for the first quarter was just $1.6 million.

Net cash interest expense in the first quarter of 2012 was $1.8 million. Income tax expense was $6.6 million for the first quarter, and represented an effective tax rate of 29%, which was the same as in the prior year quarter. I will now turn the call over to Sam Thomas.

Thank you, Michael. And good morning everyone. On an overall basis we struggled with the execution on a few projects that Michael mentioned this quarter. We believe these project issues are behind us, and we remain very optimistic about our opportunities going forward. The order from PetroChina we announced that it continues to validate our status as an integrated supplier of mission critical equipment for the liquefaction, distribution, storage and end use of LNG. The PetroChina order in excess of $45 million follows another order for $40 million that was included in fourth quarter 2012 orders. We expect to see continual acceleration of LNG infrastructure buildout in China. The recent North American LNG liquefaction announcements made by several companies, including Noble Energy, Stabilus and Shell, further support the LNG infrastructure buildout that is underway.

We believe the availability of LNG is one of the key determinants in the conversion as using LNG as a fuel. This market will move aggressively when there are liquefiers operating, and merchant liquid more broadly available for distribution. For example, in particular the Shell announcement with the Great Lakes and the Gulf Coast will be significant sized additions, and increase dramatically the availability of LNG. The recent announcement from UPS accelerating the growth of its alternative vehicle fleet with plans to purchase approximately 700 LNG vehicles, and to build four refueling stations by the end of 2014 adds additional support to the LNG buildout. Shell and Travel Centers of America have finalized their agreement to develop a US nationwide network of LNG fueling centers for heavy duty road transport customers, providing another example of the commitment to LNG infrastructure.

Let me comment now on the order levels in the first quarter and highlights from each of our business segments. Our Energy & Chemical business booked $39 million of orders in the first quarter, down sequentially but our quoting activity for LNG liquefiers and petrochemical applications remains strong, with a number of those projects expected to go forward over the next couple of quarters.

I would also remind everyone that the timing of orders in our E&C business is historically volatile due to project size, and it is not unusual to see order intake change significantly quarter to quarter. As I indicated, there were a number of recent LNG liquefier announcements, which represent potential future order opportunities for E&C. For example, Stabilus announced their plan to build five North American LNG liquefaction facilities to serve the high horsepower oil field marine and rail fuel markets. They have contracted with us to perform a field study, which ultimately could take advantage of Chart's new range of standard LNG plant offerings for small-scale gas monetization. We have continued to see softness in the gas compression market in the US, which has impacted our air cooled heat exchanger business. There are signs early in the second quarter that gas compression is coming back.

We continue to make progress on large projects already in backlog which continues to drive revenue growth. Our brazed aluminum heat exchanger capacity expansion project is on schedule, and we expect a first quarter of 2014 rampup. We started to book orders against this new capacity in the second quarter. With respect to D&S if you exclude the large $40 million PetroChina order included in the fourth quarter of 2012, first quarter orders of $133 million represent 20% sequential growth over adjusted orders for the fourth quarter of 2012. Orders remain especially strong in Asia, and our European orders were encouraging and the strongest we have seen in quite some time, including engineered tanks, mobile equipment and LNG applications. The new PetroChina order announced today is in excess of $45 million, and will be included in the Company's second quarter 2013 orders and backlog. These awards highlight the continued rapid LNG infrastructure buildout that has been occurring in China. The PetroChina award includes fixed stations, transportable self-contained fuel stations, storage tanks, and trailers for LNG service.

PetroChina has been extremely aggressive in developing the LNG market and infrastructure buildout in China continues to ramp up, as more engine choices are in full production and LNG liquefaction capacity comes online. We believe our success in capturing large orders is due to our experience in delivering quality solutions with available capacity across the entire value chain.

In North America, investments in LNG related applications should benefit from the recent liquefier announcement, and the Cummins 12 liter LNG powered truck engine recently put in production and scheduled for a full production launch in August. The pure economics of switching to LNG as a cleaner cheaper and domestic energy source will continue to encourage market development. Our recent capacity additions and our plans for further expansion in 2013 will ensure that Chart remains well positioned to deliver on these opportunities. The long-term secular growth story for LNG remains intact. Heavy duty truck fueling and oil and gas applications are the near term opportunity for Chart.

We would also expect strong demand within the next several years for LNG storage and end use equipment in marine, rail and industrial applications. We are creating infrastructure today to support that future growth, and are getting requests to participate in a number of current marine and rail LNG applications. Demonstrating that Chart continues to be recognized as an industry leader. We expect to remain that leader and invest appropriately.

In our BioMedical segment orders of $72 million in the first quarter represent 11% sequential growth. Orders for commercial onsite oxygen generation for industrial applications acquired in the AirSep acquisition led the increase, and represent an exciting growth opportunity for Chart. Orders for cryo biological equipment were also strong, particularly in Asia. Macro economic concerns in Europe, and delays in the Medicare competitive bidding continue to impact our BioMedical respiratory business. We do expect this business to begin to recover late in 2013, as the underlying needs for our equipment has not diminished. We continue to integrate the AirSep acquisition, and focus on improving operations and exploring cost reduction opportunities.

We were encouraged by the margin improvement we had in their business in the first quarter compared to the fourth quarter of 2012, and will continue to improve our operating performance. Michael will now provide you with our outlook for 2013.

Thanks, Sam. As we have seen in prior years our first quarter is usually our slowest on sales and earnings, and we expect this year will follow a similar pattern of growth in the remaining quarters. In addition, order and shipment trends are progressing as expected in 2013 with significant growth in LNG opportunities.

We are reiterating our 2013 guidance with sales expected to be in the range of $1.2 billion to $1.3 billion. Full year earnings per share for 2013 are still expected to be in the range of $2.90 to $3.30 per diluted share, on approximately 30.5 million weighted average shares outstanding. Our weighted average shares projection excludes any potential future dilution impact associated with the Company's convertible notes and related derivative securities. Included in our 2013 earnings are approximately $0.10 per diluted share for anticipated restructuring charges associated with the AirSep acquisition. Excluding these charges earnings would be expected to fall in the range of $3.00 to $3.40 per share.

Let me briefly summarize the accounting impact of the Company's convertible notes and the associated hedges and warrants on our earnings per share calculation. Our convertible notes have a dilutive effect on earnings per share when the average market price of our common stock during the period exceeds the convertible notes conversion price of $69.03. The convertible note hedges were purchased to reduce the potential dilution upon conversion.

However, for accounting purposes the effect of the hedges are excluded from the computation of diluted earnings per share or essentially ignored, as their effect is anti dilutive prior to conversion. If the convertible notes were actually converted, the note hedges would completely offset the shares issued such that the net shares outstanding would not increase up to an $0.84 and $0.96 price per share when the protection of our net hedge ends. Our average common stock market price was $71.13 in the first quarter, thus we were required to include 107,000 additional shares related to the notes in our diluted earnings per share calculation, which had less than $0.01 per share impact this quarter.

But if our stock trades higher we will start to see more of an impact on diluted earnings per share. For example, at an $80 average share price, we would see about 500,000 additional shares included in the diluted share count. However, in reality at an $80 share price there would be no dilution at the time of actual conversion as a result of the hedges we have in place. We would now like to open it up for questions. Huey, please provide instructions to the participants to be able to ask questions.

Yes sir. (Operator Instructions). Our first question comes from the line of Eric Stine with Craig Hallum. Please go ahead. Your line is now open.

Hi, Sam. Hi, Michael. Thanks for taking the questions.

Good morning, Eric.

Good morning.

Just want to touch on or start with the PetroChina order. Congratulations on that. Just wondering how we should think about timing? I guess that and also the $40 million order from the fourth quarter. Is this going to be weighted towards 2013, or is it into 2014 as well?

Fourth quarter $40 million order will be fully delivered by July of this year. The new order, a large part of it will be delivered in 2013 with some spillover until I think into February of next year. But essentially they are on fairly short lead times. And we expect to see additional orders in the future.

Got it. I guess that leads to my next question. We know China is still very much in rampup mode, but maybe just specifically to what you are seeing from PetroChina. Would you put them in the same camp as that? Is this something, seeing large orders of this magnitude in D&S, is this something that could become more the norm?

Well, in China the estimate is that there will be 1,500 LNG stations built in 2013. Now that was a PetroChina estimate for the whole market. They are forecasting 2014 will be 3,000 stations. And continuing growth into 2015. We will have built in 2013 approximately between 250 and 300 of those stations, so roughly 20% market share. I think there is the opportunity for us to increase our market share going forward. But it is competitive.

As far as those projects, I mean just talk about the competitive environment in terms of pricing, but also kind of what gives you, or what just makes you competitive in that market? Is it safety, anything along those lines?

Yes, our differentiators have been quality, safety, reliability. And the professionalism of the installations. We have developed a pretty impressive team in China, whether it is shop built stations that can be delivered and set up in two or three days, or fixed stations which going forward a larger and larger percentage will be fixed stations, the stations we have built are basically the showpieces for PetroChina, which the competitors are benchmarking off of and trying to duplicate the quality of our installations and their reliability.

Got it. That is very helpful. Maybe if I could just sneak in one more, can you just talk about the opportunity you are seeing in marine and rail? I know versus maybe a year ago those have noticeably accelerated, so just thoughts on what you are seeing, and potential timing when it starts to impact you? Thanks.

The interest and commitment on both rail, well, let's talk about them separately. On rail virtually all of the major railroads are actively studying or embarking on pilot projects and we know that in 2013-2014 there will be a number of locomotives running with LNG tanker cars. Whether 2014 sees five or 30 of those in operation is as yet unknown. Occasionally the time schedules and ambitions of some of the players involved are more aggressive than their actual ability to move forward. But as we see heavy duty trucking make a significant move to LNG, the rails have very little opportunity to avoid also moving to LNG, because the rail's cost advantage over trucking is that this they have less flexibility but they have lower fuel costs. If you significantly lower truck transportation fuel costs, you threaten a significant amount of rail freight. So my own view is that rail will go forward strongly.

The level of rampup once you get out past all of the test and trial periods which is apt to be through 2014, perhaps into 2015, the rate of conversion will be determined to a certain extent by whether you run dual fuel engines or strictly 100% natural gas engines, and what the pricing comes in at, at doing conversions from existing diesel powered locomotives to natural gas, whether it is engine rebuilds or engine replacements which is still up in the air. But I am fairly confident that it is going to happen, a period three to four years out in terms of how rapidly that transformation takes place is a bit fuzzy right now, but it appears to have a very likely, a high likelihood of happening.

In the marine market we are seeing acceleration of interest. We have delivered the first US-built ATS Coast Guard certified refuel tank for a work boat. There will be more in the coming months. We see the interest level from marine operators to be very high, and because of the air pollution or emissions requirements, LNG appears to be the most cost-effective and attractive solution. Again, over the next three to four years it is difficult to project how fast things will ramp up. Partially because of this engine replacement, engine refurbishment issue. But it looks extremely promising, and we see the marine market accelerating, and getting a lot more interest in China, and getting fairly dramatic levels of interest in Europe.

Thank you. Our next question will come from the line of James West with Barclays. Please go ahead. Your line is now open.

Good morning, Sam, good morning, Michael.

Good morning, James.

Sam, what market do you think over the next 12 to 24 months grows the fastest from here, China or your North American business?

Well, from a sales perspective, China, because the orders are in hand, and basically we have got that market growing quite rapidly. I talked about 1,500 fuel stations in 2013. 3,000 forecast in 2014. In terms of LNG vehicle tanks or newly constructed buses and trucks, the estimates for China this year are on the order of 150,000 to 200,000 vehicles, and next year double that. We are seeing in addition to marine, we are seeing LNG vehicle, or LNG fuel systems being incorporated inside construction equipment, mining equipment. Probably the most telling aspect with respect to China is that air quality has moved to the forefront of concerns of the Chinese people and the Chinese government.

Right.

And LNG is seen as the most effective way for them to address motor transportation, as well as using natural gas for power gen. The folks from PetroChina explained this past week that they don't expect to see new coal-fired power plants built in any of the coastal cities. They don't expect to see significant new coal gasification projects allowed anywhere that will affect the air quality of the coastal cities. It is really full blast ahead on LNG and natural gas power plants.

How big is China of your sales today?

They will be about $165 million this year. Now some of that is industrial gas.

Right.

But the growth is coming from LNG because the industrial gas is flat.

Of course. Okay. And then one last question for me. I was in D.C. just not that long ago, maybe a few weeks ago and met with DOE and the State and FERC and the White House, et cetera, and there seems to be a lot of push for actually moving forward with LNG exports, despite some of the negative press that you have seen it seems that the Administration at least is for some amount of LNG exports from the US. How are you guys thinking about that opportunity, and are you actively, as I know we have some 20 or so permits waiting for some form of approval, are you guys actively engaged with the potential builders of facilities on design and equipment sales, et cetera?

A number of them, yes. We are quite happy to see and believe we will participate in a number of export facilities, but are also confident that the supplies of natural gas are sufficient, that it won't be an inhibitor to the development of LNG vehicle transportation.

Right. Okay. Got it. Thanks, Sam. Thanks, Michael.

Thank you.

Thanks.

Thank you, sir. Our next question comes from the line of Tom Hayes with Thompson Research Group. Please go ahead, your line is open.

Good morning, gentlemen.

Good morning, Tom.

Sam and Michael, just wondering if you could maybe give a little bit of outlook what you are seeing on the industrial gas side of the business, especially here in North America?

I think that the recent, well, a few weeks ago, Air Gas and Praxair's conference call earlier this week are indicative. The business has been fairly flat, with reluctance on the part of our major customers, the industrial gas producers and distributors to invest too much in capital. Having said that, they all are anticipating that activity levels will be improving.

Okay. I guess as a second question, maybe provide some commentary on the pricing you are seeing in the market? Is it remaining rational, and are there opportunities for increases this year?

Pricing is remaining rational. I don't see a lot of upward opportunity on pricing. Primarily from the standpoint that our pricing ability has typically been related to commodity costs or capacity utilization, and we see very little commodity cost pressure going forward this year, and there is capacity available in our industry.

Okay. And I guess just lastly, you mentioned in the BioMedical segment some good activity in the pressure swing absorption, that small on site business that you acquired. Maybe just provide a little more color on that, and where you can see that growing over the next two years or so?

Sure. Two areas. Anywhere in the world where you don't have established industrial gas producers and distribution of liquid or high pressure cylinder gases. So around the world and particularly in less developed parts of the world, another application that is getting interesting penetration is the use of on-site generating plants for ozone, producing oxygen for ozone for either wastewater treatment or drinking water treatment, where historically those plants were liquid oxygen storage tanks to feed the ozone generators. The new economics work out that on-site pressure swing absorption plants are more cost-effective.

Alright. Thank you.

Thank you, Tom.

Thank you, sir. Our next question comes from Rob Brown with Lake Street Capital. Please go ahead. Your line is now open.

Good morning. Sam, you talked about quoting activity picking up in E&C. Could you give us a little more sense on how those orders could start to hit in the back half of the year, and what kind of sizes of orders you are quoting on?

Well, you are in fuzzy territory there. We see a lot of interest in LNG liquefier applications. We have had good order flow from China, on a number of projects that we expect to see awarded over the next six months. We have a significant number of liquefier projects here in the US, where we would be providing the full plant. We also have a much broader range of applications where we would be providing the heat exchangers and cold boxes for those.

The next strong market currently is petrochemical, with both PDH and ethylene plants expected to go forward. PDH plants are both US and Asian-based. The ethylene plants are all US-based. And we expect to see several ethylene plants, at least two, potentially three in 2013 or early 2014. In addition, while there was some slowdown in awards for new natural gas processing applications at the end of 2012, that activity seems to be coming back up again.

Okay but in general you feel your order rate should, Q1 should be your lowest order rate for the year, is that fair to say?.

I believe so.

Yes. Correct.

Oh great, great. Great. Thank you very much.

Thank you, sir. Our next question comes from Martin Malloy with Johnson Rice. Please go ahead. Your line is now open.

Good morning.

Good morning.

Good morning.

Could you talk about the timing of when some of the larger cold boxes are going to be shipped, and perhaps if you are willing to talk about an exit rate or range for the gross profit margin for the E&C segment, as these lower margin larger projects move out?

Yes, we shipped the boxes for the Qatar project for Exxon Mobil RasGas project that went last week, so that is gone. We have currently still four boxes in backlog that we are working on. Two for the Wheatstone project, two for Pacific APLNG in Queensland. We would expect, I believe, two of the boxes to go this year. Certainly one of the Queensland Curtis boxes, Pacific APLNG later in the year. And then as we get into 2014, the other two, one for Wheatstone and the last one for APLNG will go, and then I believe the last one for Wheatstone goes in the beginning of 2015 but it could go before that. It is hard to predict where they will come out at the end. As you are aware, we do put on sort of contingencies and project reserves as we go forward. Sometimes we use them up and sometimes we don't. It is really hard to predict. We usually call those out in the quarter, as we did last year when we do ship a project and have good execution on it. And as you saw in this quarter, we had some higher costs on the project, and as I said that project shipped but we have the potential in the second quarter for some change orders, and I can't really give a number because we are in the process of negotiating that. But that would come back and recoup some of those costs, but under the accounting principles we had to take the costs at the time they were realized, and until you get a change order signed you can't recognize it.

Okay. And then on the LNG liquefier side, if you are providing the whole facility can you give us a range that would help us with the size of that?

Yes, our standard plant sizes are 100,000 gallons per day. 250,000 and 450,000 gallons per day. The lower end of those plants is roughly $15 million to $17 million worth of our equipment. The 250,000 plant is a bit more than double that in terms of our equipment content. And I apologize, I don't have the numbers at hand for the 450,000 gallon per day plant.

And the gallons per day, is that diesel equivalent, or is that LNG?

That is LNG.

Okay. Thank you.

Thank you, sir. Our next question comes from the line of Collin Rusch with Northland Capital Markets. Please go ahead. Your line is open.

Thanks so much. And can you talk a little bit about lead teams as you go forward into the second half, and are you expecting to see an acceleration in orders as you start to see the 12 liter come on, and what the magnitude of that would be on the impact of your guidance?

Well, as 12 liter engines become available what that will drive for us is LNG vehicle tank sale. The lead times for those are relatively short. They are probably in the eight week timeframe. We have significant capacity available, and are able to add capacity in significant rampups of capacity in sort of three to six months' time. So I think we have the availability to meet market demands with little problem as that rampup occurs. I think that there will be some limits as to how quickly we see that demand build up for vehicles based on LNG availability in the 2014 timeframe. Once you get beyond 2014, I think there will be a significant amount of LNG available.

And outside of the 12 liter opportunities? I mean are you seeing lead times shortened at all, or orders accelerate in any of the segments?

Well, we are generally reducing lead times with our capacity additions on all product lines and in all regions. So I think that our ability to address the ramp-up of the market is very, very strong, and you can see we are continuing to grow our SG&A, particularly in the D&S business because we are very confident in the growth opportunities of this market.

Great. And just speaking of SG&A, can you talk a little bit about how we should think about that by segment? You mentioned that it is going to decline as a percentage of sales, but how should we think about the progression on an absolute basis as we go through the year?

On a dollar basis it will go up, so, because of the addition of AirSep in there and then the ramp-up in LNG bases, building out that infrastructure. So we are going be probably around the $49 million range in total per quarter, maybe a little bit higher than that. So we will end the year I would say between $195 million and $200 million. So somewhere between 16% to 16.5% of sales.

That is great. Thanks a lot, guys.

Thank you, sir. Our next question comes from the line of Greg McKinley with Dougherty. Please go ahead, your line is open.

Yes, good morning. Thank you.

Good morning, Greg.

Sam, you started off your comments by talking about domestic liquefier capacity trends. You mentioned that Chart has been engaged in some early feed contracts. So we see all of this news all of the time, I wonder if you could maybe highlight for us what are some of the more significant liquefier capacity trends that are occurring in North America? And is there a way to quantify where we were 6 to 12 months ago in terms of that capacity versus where we are, or where are you think we might be in the near to mid term? Any simple way of setting that out for us?

Well, of the public announcements, Shell is the most prominent, and I would refer you to their press releases.

Okay.

The construction times have most of the capacity coming available late 2014, early 2015. of the plants that are currently under construction, or currently have been announced and are in the process of going forward.

Okay.

There is not enormous new capacity coming forward online producing LNG in 2013. There have been some announcements of capacity additions to existing LNG plants. One in particular last week was [Alt] announcing an addition to their facilities. In terms of how you has it progressed over the last six months there is significantly more activity. A significantly larger number of companies who are in their approval process to move forward with LNG's liquefiers.

Okay. Sam, you had mentioned that Chart was involved in some feed contracts up front. What was the customer you identified with that?

Stabilus Energy.

Stabilus, okay. Michael, where is CapEx likely to be for the year as you guys build out your capabilities?

A little bit lower than we had anticipated in the first quarter just because of timing, but I would expect it to be in between the $80 million and $85 million range for the year. As we go forward we should see it ramp up because of the project and expansion in La Crosse, and we will start to see more spending there. And we are still on target to have that completed by the end of the first quarter to take on production. As Sam indicated, we are already taking orders on it.

Yes.

The new production expansion. But right now, everything is on target. The expansion that we are doing in New Prague, Minnesota because of weather is a little bit behind, would expect it to be completed in the third quarter versus at the end of the second quarter. But as the year goes on you will see that CapEx accelerate.

Okay. And then just moving to Biomed for a moment, if we can. How much did AirSep contribute to Q1? And then can you maybe talk about what are some of the breakpoints you are looking for, either with this domestic Medicare competitive bidding, or I know the Italian reimbursement issues? What are the one or two things that will be a breakpoint for this business to loosen up for you guys a little bit?

Well, they added $27 million in the sales for the first quarter, and we are making I think very good progress there with that business, still we consider it a very strategic acquisition for our respiratory business. On the Medicare competitive bidding process our understanding is that the suppliers were notified sometime in the last few months. They didn't make it public, but they are supposed to go in effect July 1 with the second phase, and we would expect built into our forecast is sort of a recovery in Biomed on the order side, but late in the third quarter.

Okay.

The only thing I would add to that, Greg would be the European market, particularly southern Europe is that normally we see increased order activity when the weather gets hot, because people have a harder time breathing. So it is the July, August, September timeframe that we would anticipate seeing improved order activity from Europe.

Okay.

And the demand is there, Greg. I mean they need the equipment.

So it is ultimately going to go forward.

And then maybe just one last one. Why did margins there biomed recover so sharply sequentially despite, not much volume change sequentially?

It changes and a lot of it is changes in the AirSep business that we are making. Putting in more margin discipline is how I will describe it.

Okay.

You will see probably sales be lower than expected over the year for biomed, but margins improving because we are walking away from some low margin business.

Okay.

And we think we will continue to make good progress there. We also had a favorable cryo bio sales in the first quarter that added to that and those had pretty decent margins.

Thank you.

Okay.

Thank you, sir. Our next question comes from the line of Bill Priebe with Geneva Capital Management. Please go ahead. Your line is now open. Pardon me, Bill, your line is open, please check your mute button.

Congratulations on the momentum you are getting in building capacity and addressing this exploding market. I am getting a little nit picky here, but originally the Consensus was for a quarter quite a bit higher, and you didn't really address it. Obviously this is such a lumpy business. I am looking at the Consensus number was $0.67.

Right.

On 285. You really didn't address that. What happened?

Well, a couple of things, Bill. We don't forecast our quarters. We only forecast the year. So often it may be off. First quarter is typically our lowest quarter. If you look back historically it has been like that so this is no different. Second thing is that we did have a few execution issues in the quarter. One on the E&C project and one on a distribution and storage project where we incurred higher costs. That cost us about $0.10 a share in terms of where we thought we would be. But nonetheless we reiterated our forecast for the year and are confident in that. And there is an opportunity to recoup some of those costs on the Energy & Chemical side but again under the accounting principles you have to recognize the costs in this quarter until you get a signed change order, agreed upon change order you can't recognize that revenue and additional profit. Likelihood is that we will see some recoup of that in the second quarter on the Energy & Chemicals project.

Okay. I want to just follow-up on that. Obviously your reputation deservedly so is for a very well run Company. Is there anything you learned from that? Are you taking steps to try to make sure that doesn't happen again, or in your business is it unavoidable I guess the two options are--?

We talked about two projects where we had for us disappointments in the execution. In one project the E&C project our primary relationship is with the end customer, and we were not going to let a dispute with the EPC contractor affect our delivery performance and our reputation with the end user. So as a matter of our long-term business strategy, you put your head down and deliver the product on time. And then you fight afterwards to be compensated for it appropriately.

Okay. That makes a great deal of sense. Thank you very much. Thank you for clearing that up.

My pleasure.

Thank you, sir. Our next question comes from the line of Jeff Osborne with Stifel Nicolaus. Please go ahead. Your line is open.

Good morning. Thanks for all of the details on the Q&A here. A couple from my end. Sam, I was wondering if you could talk about what you are seeing in the M&A pipeline that you folks have built up over the last couple of quarters?

Continued opportunities. A number of areas that we continue to explore and find interesting, but very difficult to comment on them until we act.

I understand. And then just two quick ones for Michael. On the tax rate, what should we be assuming for the year? Also, I just wanted to understand in better detail, you mentioned the Qatar project and Australia, but the larger project that you folks have had on the E&C side I think in the past were about one-third of the mix. I just want to understand how we should think about that over the next couple quarters, if that third of the E&C revenue was roughly similar this quarter as well?

Yes, in terms of the tax rate I would still continue to look at a 30% rate even though it was lower in the first quarter. 30% for the year. On the large projects a lot of the revenue that is coming through this year for Energy & Chemicals is related to those large projects as they roll out of backlog. I don't have the exact numbers, but I think it is higher than a third this year. It is weighted a lot towards those projects, and keep in mind that they were taken a year, maybe two years ago and they were at lower margins at the time. So it will neutralize some of the E&C margin on an average basis that we see rolling through this year. But as we move through the year, as we get more towards the end of the year, we should see a little improvement in our E&C margins, and as we go forward we should see some improvement.

Understand that. I assume it is safe to assume that the E&C issue that you have with the EPC customer was not associated with one of these larger projects?

Yes, it was, as a matter of fact.

It was, okay.

It was with the Qatar project that we shipped.

If there is a reclaim, or you are able to reverse the costs of that, would that just flow through as 100% profit as an adjustment?

Yes, it would. And that would likelihood is in the second quarter, but again we can't comment on the size of it because we are still negotiating it, but down to the accounting rules that is exactly how it would happen.

Thanks much for the detail. I appreciate it.

Thank you, sir. Our next question comes from Randy Bhatia with Capital One Southcoast. Please go ahead your line is now you open.

Hi, guys. Thanks for taking my questions. If you could just switching back to China quickly. Can you comment a little bit on how competition is unfolding in that market? I think you talked about in the past that absolute profit dollars on projects in China are a little lower than they are elsewhere, just given the rapid development of competitors. Are you seeing that? Is there any degradation that we can assume in as bid margins for the D&S projects that you are booking today?

Our margins are generally improving as our volumes go up, and we move down the learning curve on production. As well as we are successfully reducing our costs by sourcing more and more components locally. In terms of the overall market for the distribution and storage equipment we provide, there are two significant competitors, and then there are lots of new entries coming in on a monthly basis.

Sounds like those new entries aren't yet impacting how you are bidding, and what margins are looking like on projects you are winning today?

No, that is correct. We are intent on continuing to be a major player and winning market share, but at the same time improving our profitability. And we believe we can accomplish that.

Great. Just one more. If you could comment a little on the labor inefficiencies that you referenced in that 400 basis point margin impact in the E&C segment? Can you talk about where you saw that? Do you feel like it was specific to a particular project? Is it something that is specific to a particular location, and how you are you kind of dealing with it?

It was one project, one location. And it was making up work where design changes had occurred, requiring re-layout of pump skids and redesign of pump skids where we had to live with labor inefficiencies by having more people than should have been working on the project working on it, in order to meet the end customers' requirements.

So it was a direct result of the scope changes that you saw in that project?

It was in addition to meet their delivery schedule which we thought was important, because in that project over there is a potential for another four large baseball boxes that may come through, and this once they get it up and running, potential for possibly two more next year. So we wanted to make sure the first two that we delivered that we did meet the delivery schedule.

Great. Thanks, guys. I appreciate it.

Thank you, sir. Our next question comes from the line of Alex Otter with Piper Jaffray. Please go ahead. Your line is now open.

Hi, thanks, guys. I just have one really quick one here. It is kind of an academic question. It is easy to understand why LNG demand should be ramping in the US, because you have got incredibly cheap shale gas reserve and gas is just so cheap. In China, gas isn't that cheap. It is at the retail level because you basically have government intervention in the pricing of natural gas, but you have the importers now of natural gas losing a lot of money on that, and pressuring the government to increase natural gas pricing. So what I want to ask is whether or not you guys think of this as a potential risk, the upward pressure on natural gas pricing or not? Thank you.

Not at all. The issues you discussed regarding pricing of natural gas and the losses that the state-owned enterprises like PetroChina CNPC are incurring in their imports of LNG are based on the fact that it is a government entity that is contracting under long-term contracts to import LNG, at whatever the contract price is whether it is $7 to $10, or even $15 per MMTBU, and the government also for pipeline grid applications either for power generation or domestic usage, effectively paying the sale price of natural gas at slightly over coal prices. That is one pocket of the government deciding what the other pocket of the government is going to do. Quite separate from that is the fact that LNG is not competing in that, and natural gas as LNG or vehicle transportation fuel is not sold at those artificially low prices.

The government has also said that LNG as vehicle transportation fuel will be sold at 70% of the price of diesel. And from the Chinese perspective LNG obviously that represents a significant savings to the guy operating a truck, but on a BTU basis it is far less expensive for the Chinese government to use LNG at that price level than it is to buy oil, refine it, to produce diesel and consume it. In addition to that, the Chinese, they have got a rapidly expanding truck population, well full vehicle population, so they have to add additional infrastructure. That would mean additional oil imports, additional refineries, and very high cost refineries because most of the refineries in China do not produce low sulfur diesel, so if they continue to use diesel rather than LNG there is going to be a significant pollution penalty from that. By using LNG they actually avoid building a number of $10 billion or $20 billion refineries, so it is a very economically compelling argument for China as well.

Okay. Thanks very much.

Thank you.

Thank you, sir. Our next question comes from the line of [Rick Holland with Herman]. Please go ahead, your line is now open.

Hi, thanks. Just had two quick questions. One was could you talk just a little bit about some of the cash flow and working capital dynamics and whether there is anything different than what normally happens seasonally, or how you would expect it to be this year? And then lastly just wanted to hear a little more color on the gas air compression market. You mentioned earlier how there was a bit of softness here, but that there was some early signs of pickup, and just wanted to get a little more color on whether you expect that to pick up sequentially, or whether you expect it to be more flattish for a couple of quarters? What does that really depend on? Is it the natural gas rig count?

On the cash flow side, first quarter is usually our biggest use, and as we go through the year it will become less and we could become pretty cash generative in the third and fourth quarters. But with the rapid growth that we are undergoing working capital certainly the build there will continue to be a major element. One difference that we are seeing this year in China which we have, the last two to three years we have funded them from the US, they look like terms of projections we have now it will be self-sufficient in terms of cash flow which is great. And would expect as they continue to grow that will continue to be the story. But right now we will be fairly cash generative we expect for the year. We do have a significant amount of it going to CapEx but even beyond that we think, we will have fairly significant free cash flow generation this year.

Addressing your question on the air cooled heat exchanger market and compression, I think for compression the number of gas rigs is indicative, but with fracking as horsepower requirements go up and larger horizontal spreads that also drives, so it is more directly related to total horsepower in operation, because that is what drives air cooled heat exchangers. We also see lots of potential opportunities for air cooled heat exchangers, and process designs where you are not using water cooling. So generally after a weak fourth quarter and weak first quarter, we are more hopeful that we will see continued improvement in that market.

Great. Thank you.

Thank you sir. (Operator Instructions). Our next question in queue comes from the line of Rob Norfleet with BB&T. Please go ahead. Your line is now open.

Good morning. Most of my questions have been answered but just a couple. As you talked about the North American LNG market it looks like there is several projects outside of saving pass that could be awarded by the end of this year beginning of next year. I just wanted to understand assuming a sponsor makes a final investment decision and awards the EPC contract what would be the timing of when you all would get that order?

Generally, the longest lead time items at this point are the compression equipment. And so that is typically awarded very quickly after a final investment decision to proceed. And the heat exchanger cold boxes come within a couple months of that award.

Okay, great. My second question just deals with floating LNG. Obviously there has been a lot of discussion at some operators especially in Australia due to cost inflation who are looking to move away from onshore liquefaction to floating LNG. There are a few obviously projects that are currently underway. What is your thought on FLNG? Is it a risk or threat to Chart, or is it actually an opportunity for you all?

Well, our equipment is being utilized on a number of FLNG projects. We feel that brazed aluminum heat exchangers are very well suited to the application, and so feel confident that it is a good opportunity just as land-based LNG is for us.

Can you just quickly like for example, a project like Prelude what would be the amount of content you would have on a vessel?

I think Prelude is, forgive me, is that the Shell project or the Exxon project?

The Shell.

Shell is utilizing to the best of my knowledge air products, spiral wound heat exchangers on that.

Okay.

And I believe was a total of about 5 million tons per annum. If that were done with brazed aluminum heat exchangers, it would likely be something on the order of $100 million worth of equipment.

Great. That is very helpful. Thank you.

Thank you, sir. At this time I am showing no additional questioners in the queue. I would like to turn the program back over to Sam Thomas for any additional or closing remarks.

Thank you, Huey. Just as concluding remarks I would like to reiterate that LNG infrastructure buildout is accelerating, and we are particularly excited about the recent announcements here in North America. This quarter's strength and quoting activity validate our capacity expansion projects, and that we continue to be recognized as an industry leader, as evidenced by the order awards and demand for our technical expertise. Thank you everyone for listening today. Good bye.

Thank you, presenters, and again thank you ladies and gentlemen for your participation. This does conclude today's conference. You may now you all disconnect. And have a wonderful day.