Chart Industries Inc (GTLS) 2013 Q2 法說會逐字稿

Good morning and welcome to the Chart Industries Inc. 2013 second 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 this 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 Friday, August 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 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 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 call over to Michael Biehl, Chart Industries' Executive Vice President, CFO, and Treasurer. You may begin your conference.

Thank you Charlotte. 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 of our second quarter results, then Sam Thomas will provide comments on current market and order trends 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 second quarter of 2013 of $20 million or $0.64 per diluted share. This included cost of $4.8 million or $0.11 per diluted share, largely associated with the Company's acquisition of AirSep in our biomedical business and flood damage at our distribution and storage, or D&S, operations, in the Czech Republic. This quarter also includes a $0.02 per diluted share impact associated with additional shares take into account for our convertible notes. Therefore earnings per share for the second quarter of 2013 would have been $0.70 per diluted share excluding this additional dilution and the cost that I mentioned above. This compares to second quarter 2012 net income of $17.9 million, or $0.59 per diluted share. The prior year quarter earnings would have been $0.57 per diluted share excluding $1.1 million of favorable acquisition-related earn-out adjustments, partially offset by impairment charges and the write-off of deferred financing fees.

I'm going to now briefly explain the dilution impact from our convertible notes. The refinancing actions the Company underwent in the third quarter of 2011 allowed us to refinance our former 9.8% senior subordinated notes due in 2015 with a 2% convertible notes due in 2018. This refinancing has provided us with cash interest savings of $10 million annually which has improved our liquidity and ability to invest in growth opportunities. We believe this has contributed to our success as evidenced by the strong growth performance across our businesses.

With that said, an additional 864,000 shares must be considered dilutive for the second quarter under Generally Accepted Accounting Principles, or GAAP, because our average market price in the second quarter exceeded the notes' conversion price of $69.03 and our warrant strike price of $84.96. We purchased a hedge to offset some of this dilution but it cannot be considered in our GAAP calculation of diluted earnings per share. This hedge allows the Company to receive Chart's shares of the notes conversion price of $69.03 if the conversion occurs, effectively offsetting the additional shares owed to the note holders.

In the second quarter, the average common stock price was $87.43 per share, which result in the convertible notes converting into approximately 760,000 additional shares. Our purchase hedge would have mostly offset this dilution if conversion occurred. However, as I mentioned previously, under GAAP the hedge is considered anti-dilutive and therefore cannot be considered when computing earnings per share. It is also important to understand that to offset the cost of this hedge the Company sold warrants at the same time with a strike price of $84.96. This limits the bond hedge counterparties' exposure in the event that Chart's start price exceeds $84.96 per share. These actions effectively enable us to increase the price at which real economic dilution occurs when the notes are converted from $69.03 to $84.96.

To summarize, approximately 864,000 shares are included in the diluted EPS calculations in the quarter, but approximately 755,000 of these shares are covered by the hedge that we purchased. The difference between the 864,000 and 762,000 shares represents the impact from the warrants sold as part of this financing transaction when our stock price exceeded the warrant strike price.

Beginning July 1 the notes became convertible at the option of the holders, since Chart's stock price traded above $89.74 per share for at least 20 trading days in the last 30 trading days in the second quarter; therefore, the long-term portion of the notes was reclassified as a current liability and a portion of notes included in equity was reclassified as temporary equity in our consolidated balance sheet at June 30. However, we don't expect note holders to convert early as they would give up their 2% interest coupon if they did.

Sales for the quarter were $298 million and represented an increase of 24% compared to net sales of $240 million a year ago. The improvement is associated with strong end market trends in LNG-related applications, especially at our D&S business in Asia. AirSep was closed in the third quarter of last year and contributed approximately $30 million in sales in the second quarter. Our gross profit for the quarter was $89.8 million, or 30.1% of sales, compared with $74.1 million or 30.9% of sales a year ago.

Overall margins were down year over year, primarily due to the higher acquisition-related costs from AirSep and some changes in product and project mix across our businesses. With respect to the E&C business, sales increased 2% to $79 million in the second quarter and gross margins were 29% compared to 30.2% in the prior year quarter. Gross margins were slightly lower, due primarily to a shift in project mix to a large baseload LNG project falling out of backlog into revenues in the current quarter.

As mentioned last quarter, some higher costs on one project due to labor inefficiencies and project scope changes have negatively impacted margins in the first quarter. In the second quarter, we were able to recover some of these costs through a change order with the customer and we were able to push several short leadtime orders through our facilities which in total positively affected margins by about 2%.

In D&S, second quarter sales increased 30% year-over-year to $147 million, driven by improved volume, particularly in LNG equipment shipments. Gross margins for D&S improved to 28.4% compared with 27.2% a year ago due to improved throughput and mix. Margins were also negatively impacted by about 1% due to flooding that occurred in Central Europe in early June. Our operations in the Czech Republic incurred inventory damage, for which we filed an insurance claim. The impact therefore represents the cost of our insurance deductible, with any losses in excess of the deductible expected to be covered.

In our biomedical business, sales increased 47% to $72 million in the second quarter of 2013, compared with $49 million for the same quarter in the prior year. The increase is due to the AirSep acquisition, which added $30 million in revenue in the quarter. Additional revenue from AirSep offset lower overall shipments of respiratory therapy equipment as a result of weakness in Europe and the continued uncertainty related to Medicare competitive bidding in the US.

Biomedical gross profit margin decreased to 34.7% in the quarter compared with 40.4% for the same period in 2012. The decrease is primarily due to additional acquisition charges related to AirSep, lower volume in respiratory, and changes in product mix, with lower margin oxygen concentrators representing a much larger share of sales following the AirSep acquisition. If the AirSep acquisition charges were stripped out, biomedical gross profit margins would have been 38% for the quarter.

SG&A expenses for the quarter were $51.9 million, up $17.2 million from the same quarter a year ago. The increase is largely due to added expense from 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. SG&A as a percentage of sales was 17.4% compared to 14.5% in the prior year quarter. Included in SG&A in the current quarter was $1.3 million of retention of severance cost associated with the AirSep acquisition. Second quarter 2012 SG&A included $4.4 million, or 1.8% of sales, in favorable net earn-out adjustments associated with prior acquisitions, which reduced SG&A expense in that quarter.

Net interest expense was $4 million for the second quarter, which included $2.4 million of non-cash accretion expense associated with the Company's convertible notes. Therefore, cash interest for the second quarter was just $1.6 million. Net cash interest expense in the second quarter of 2012 was $1.4 million.

Income tax expense was $8 million for the second quarter and represented an effective tax rate of 27.9% compared to an effective rate of 33% in the prior year quarter. The decrease is largely associated with an increase in foreign earnings and the recognition of foreign tax loss carry-forwards and other deferred tax assets given our strong performance in China.

I will now turn the call over to Sam Thomas.

Thank you Michael. Good morning everyone.

We're very pleased to announce another successful quarter. The growth of LNG infrastructure for liquefaction, transportation, and as a diesel fuel substitute continues to gain momentum driven by the spread between oil and natural gas prices. China has clearly taken the lead, where in addition to cost, environmental considerations are driving action by government officials at all levels.

Today we announced another order from PetroChina for self-contained LNG station modules. This is the third major award from PetroChina received in the last several quarters, and will be included in our third quarter orders and backlog. It's notable that this represents a sale to a Company within PetroChina operating in a different geographic region of China -- Shandong Province -- compared with the two earlier orders.

Our self-contained LNG station modules represent an innovative development -- a flexible LNG fueling station for a fast-growing and dynamic LNG market. We pioneered this solution in China and it represents the kind of opportunities that align Chart's culture of innovation, experience, and performance with growth prospects in the new LNG economy that is opening up around the world.

We also continue to provide heat exchangers and cold boxes for LNG small- and mid-scale liquefaction plant buildout in China. In North America, essential infrastructure is being built that puts North America on a similar trajectory to China in providing LNG as a diesel fuel substitute. We are providing heat exchangers and cold boxes for a number of small- and mid-scale liquefiers currently under construction in North America. We are able to provide a range of standard LNG plants designed fully in-house which will put our customers on a fast-track schedule for earlier commencement of LNG production. We believe these ordered wins across the Company are strong evidence of the market's recognition of Chart as the leader in LNG infrastructure and liquefaction equipment, and we are happy to announce a new record in quarter-end backlog of $664 million.

Let me now comment on some specific highlights from each of our business segments. Within Energy and Chemicals, our business booked $78 million of orders in the second quarter, up sequentially from $39 million in the first quarter. We are also delighted to announce today that Noble Energy has awarded Chart a contract to provide an LNG liquefaction facility to produce approximately 100,000 gallons of LNG per day, which they will use to service their own operations in Northern Colorado.

These standard plants are complete package solutions which minimize on-site construction time and scope. The primary benefits for customers choosing one of our standard plants designs is it allows a fast-track schedule to LNG production while being robust and flexible enough to use a wide range of feed and gas compositions. We anticipate that more small-scale LNG liquefaction opportunities will develop, and that our experience in LNG plant design will continue to provide us with a competitive advantage.

Also this quarter, Chart E&C has secured an order to provide equipment for an ethylene plant here in the US. With the growth of natural gas liquids feedstock, we expect more of these petrochemical opportunities to develop as global GDP growth improves.

In our air-cooled heat exchanger business, sales of gas compression market remain soft with reduced gas drilling activity; we have, however, substantially improved our sales for process-cooling applications for gas processing, liquefaction, and petrochemical applications, leading to the second quarter of 2013 as the best quarter for new orders since late 2011 -- an encouraging development.

Finally, to update you on our brazed aluminum heat exchanger capacity expansion project, we are still on schedule for a first quarter 2014 ramp-up, and as previously mentioned, we have begun to take orders on this capacity. With respect to distribution and storage, we booked record orders of $222 million in the second quarter. This includes the PetroChina award we announced in April, but does not include the order announced today, which we will include in the third quarter.

D&S orders are up 67% sequentially compared with $133 million of orders in the first quarter. We booked record orders in Asia due to the ramping LNG infrastructure buildout occurring in China. The PetroChina award announced today, in excess of $50 million, is for self-contained LNG station modules. This is in addition to the PetroChina orders we announced in April for $45 million, and in the fourth quarter of last year for $40 million.

In addition, we are seeing increased quotation activity for LNG infrastructure in Southeast Asia. This quarter we purchased an 80% equity interest in managing Xinye Electrical Engineering based in Nanjing, China. This will provide us with key localized dispensing and control technology to improve our LNG product offerings in the Asia region.

D&S also had a good quarter in Europe and the US. The US, regionally, saw its best order intake in over a year due to increased activity for LNG bulk storage as more and more liquefaction opportunities emerge. In Europe, we utilized our capacity to supplement our capacity in Asia and the US, as well as seeing increasing activity for LNG infrastructure build in Europe, particularly for marine applications. Strategically, we remain committed to being a major catalyst in the LNG market because we understand that liquefaction will lead to storage orders and increased end-user LNG equipment, including heavy duty trucking, rail, and marine applications.

Capacity addition plans continue to progress nicely throughout the business, and we will continue to evaluate opportunities to expand capacity further to ensure that we are positioned to deliver on these opportunities and meet our customer demands.

In our biomedical segment, orders of $70 million were down slightly compared to $72 million in the first quarter. Orders for respiratory equipment in the second quarter have continued to recover. We are encouraged by positive order trends we have recently seen in our respiratory business. However, uncertainty around the Medicare competitive bidding wars is still causing concern in the market as providers struggle with the financial implications of changes and the impact on their business.

We continue to position ourselves for when the industry recovers by partnering with our customers and providing them a broad range of respiratory product offerings. We are particularly encouraged over the long term about opportunities emerging markets such as China as population, age, and wealth levels rise. We're laying the foundation now to meet what we expect to be significant for future demand.

Orders for cryo-biological cold storage equipment remain strong, with particular growth in Asia for cancer research and cord blood storage. We expect on-site gas generation will be a strong growth driver for bio-med. However, these orders are likely to be loftier, similar to our systems businesses in E&C and D&S.

Michael will now provide you with our outlook for 2013.

Thanks Sam.

Our second quarter results were solid and we remain optimistic about continued growth through the rest of this year. Therefore, based on year-to-date results for order backlog and business expectations, the Company is reaffirming its previously announced sales guidance but tightening the range of its earnings guidance.

Sales for 2013 are still expected to be in the range of $1.2 billion to $1.3 billion, but diluted earnings per share are now expected to be in the range of $3.10 to $3.40 per diluted share on approximately 30.6 million weighted-average shares outstanding. This excludes the impact of $0.15 per diluted share in anticipated AirSep acquisition cost and any dilution impact resulting from the convertible notes. This compares with previous earnings guidance of $3.00 to $3.40 per diluted share, which excluded $0.10 per diluted share in anticipated AirSep acquisition costs and any dilution impact resulting from our convertible notes.

We would now like to open it up for questions. Charlotte, please provide instructions to the participants to be able to ask questions.

Certainly. (Operator Instructions)

Our first question comes from the line of Colin Rusch from Northland Capital.

Thanks so much. Can you walk us through the decision-making process for potential capacity expansions? What do you need to see from your customers to get comfortable adding capacity?

Orders are the best thing. However, that often times does not provide enough time to put capacity in place if it requires bricks and mortar. So what we look for is the level of quotation activity with customers. What they have to say about their future needs. And it frequently involves going upstream and looking at what their customers are saying, or understanding what the availability of financing is for that customer, to give us confidence to make those choices. Obviously it is easier when you have multiple customers that are pursuing the same opportunities or pursuing parallel opportunities so that we are able to sell to multiple customers. It is, however, a challenging time, because we frequently run into situations where customers are more optimistic about the timing of their increased needs than actually pans out. Our benefit there is we have a management team who are fairly well experienced to try and gauge those trade-offs.

And as you look at the petrochemical opportunities related to this ethylene plant, how deep and sustainable can that opportunity be for the Company, do you think?

If you look at the announcements of ethylene capacity expansions and propane dehydrogenation or propylene expansions, we have the opportunity to quote on and win a significant percentage of those, well over 50%. The challenge is, will they all go ahead? And in particular, in the case of ethylene, each new ethylene plant does represent a significant global capacity expansion. And therefore the speed that those go forward is constrained by the outlook for future growth of global GDP, which typically ethylene demand worldwide will be driven by. The economics are very favorable for these ethane-based ethylene plants, particularly in the US where you have low-cost natural gas liquid feedstocks. The constraint is you cannot build too many new plants if demand has fallen or is stable. That is the challenge of predicting the speed that the plants will go forward; we believe with current economics and current forecasts for GDP growth and indirectly ethylene demand growth that we will see another one to three plants moving forward within the next 12 months. Again, perhaps seven or eight announced.

Okay. And then quick housekeeping -- the Noble Energy award, was that in the Q2 bookings or would that be considered Q3 booking?

That is a third quarter booking. No, a second quarter booking, I apologize.

Perfect. Thanks a lot guys.

Eric Stine from Craig-Hallum.

Great quarter.

Thank you.

Wonder if we could just start with China. There's been a lot of talk of slowing growth environment there; is it fair to say that you are not seeing that and don't expect to see that?

In our GDP growth or industrial production related growth, portions of our business in China, particularly the industrial gas industry, we definitely have seen a moderation of demand in China. However, that is significantly overshadowed by the secular growth of LNG, as a transportation fuel. And we think that it is largely going to be unaffected by the forecast for GDP growth rate in China because it is doing two things; first, as the consumer economy grows in China and is fully encouraged by the Chinese government, it means that sales of automobiles and sales of trucks to fuel this consumer marketplace are going to continue to grow. China is the largest truck market in the world and is becoming-- is also the largest car market in the world. With that being a favorite development as opposed to the export economy of China, I don't see a moderation there. And secondly, the continued spread of oil and natural gas prices means that China gets a big win in its balance of payments and the expenditures necessary to meet their growing energy demands for transportation fuel by using LNG as opposed to diesel, which is refined from oil. And finally, and perhaps the strongest driver within China, is the air pollution issue and pollution in general. Where it's become a focus, or perhaps the most important focus, of the Chinese government, and it is transmitted through all levels from the central government down to small cities, that improving air quality is a priority. And one of the best ways to do that is using LNG as a transportation fuel, as opposed to relatively high-sulfur diesel with minimal pollution control equipment on existing vehicles. I think that it is fair to say that the demand for our products in China is going to be unaffected by variations in industrial production growth or GDP growth.

Understood. Sticking with China, the dynamic of large orders there is fairly recent. Just wondering, now that you are into a different operating segment of PetroChina in a different geography, visibility into more orders with PetroChina but also other companies, similar companies in China?

Yes. The significant-sized order we have announced, we have been doing business with that, with cooling energy, for a little over a year with smaller orders, exploratory orders, and developing our relationship. We're at that same point now with a number of additional regions within PetroChina or operating companies within PetroChina, and also with several of the other -- or in particular, CNOC, where we are providing equipment on smaller orders and developing a relationship with them. We are optimistic that we will continue to be able to expand those relationships and the size of orders with multiple companies.

Got it. Maybe one last one for me. LNG fueling infrastructure in the US, I know in late 2012, there was a bit of a pause. Just wondering if you have seen that pick up, and how you see that playing out going forward. Thanks a lot.

The interest levels are still high. I would say that we are experiencing much of what we experienced in China -- of wondering why there weren't more orders when there was so much quotation activity. But I'm very confident that it is moving forward positively, and that as additional LNG liquid or liquefaction capacity comes online and we start to see more of the 12-liter Cummins engines on Class-8 trucks that it will move progressively at an accelerating pace in the US, much the way we have experienced in China.

Okay, thank you.

Brian Uhlmer from Global Hunter.

Thank you, great quarter. Good morning gentlemen.

Good morning.

I had a couple of quick ones I wanted to walk through; real quick on the Noble award -- it sounded like you said that it was for internal uses. A second ago. Is that accurate?

Yes, their plan and their justification, from what they conveyed to us, was primarily to use it for drill rigs and supporting fracking spreads as well as using it for their own or associates' transportation vehicles going to and from the gas fields.

Okay. Great. Seems like you have been tightlipped on the magnitude of that award. Is that for competitive reasons, or can you help us out a little bit in terms of the magnitude of that?

It is competitively sensitive. There is a lot of activity in this area now.

Fair enough. And that's a nice segue into my next question. With that shift by the E&P companies to use bi-fuel or natural gas rigs, what does the environment look like right now in terms of active bids out there? Could we see two to three more of these or double-digit in the next 12 months or so?

I would say that in the next 12 months or so it would be at the lower end of your speculation. Ultimately, it will be, I believe, at the higher end.

Good deal. Switching gears but staying in the same realm. You have an update on the conversion away from bunker fuel and the marine transport market and any types of green shoots out there in regards to that market?

There is a lot of activity and interest. We did see a proposed pushback of the enforcement of the lower emission regulations, but we view that more as a pragmatic assessment of how quickly the industry can actually change, as opposed to any of the players in the industry breathing a sigh of relief and backing off on their plans. We think that the use of LNG for marine applications is going to be significant. It is a -- historically has been a relatively slow-changing marketplace in terms of the time it takes to see significant changeovers or ships. But we believe that they are -- based on the interest and the active development by the marine engine manufacturers in providing natural gas engines and the level of activity going on amongst the Naval architects in doing the design work for new LNG ships, and the level of activity going on in establishing bunkering stations -- to provide those both in Europe, China, and the US is such that this is a movement that is going to take several years to play out but is moving along very, very well.

Great, thank you. Speaking a third one, off those topics, at the low end of your guidance, in the revenue forecast, would suggest that your margins declined slightly from current levels, while the high and would suggest they were up. What are some of the key elements that would make a $3.10 number versus a $3.40 number and what are we doing to try and end up at the higher end of that range?

The upside always comes from executing better. And so we have lots of activity to try and do just that. And as you might guess, there is plenty of pressure throughout the organization to improve our execution. The thing that tempers that is that the market opportunities we see are significant, and we believe, very real. And therefore we are oftentimes making decisions to add engineering depth, to add sales and marketing depth, to make sure we that maximize this opportunity for the future. Even if the actual orders or completion of projects is delayed because there are bottlenecks either within Chart or more often throughout our customer base and their customers. So it is something that the demand growth is very real, we see it very clearly. The near-term is very challenging for us to predict how exactly how quickly things happen.

Absolutely. Really appreciate all the help, thanks gentlemen.

Thank you.

Rob Brown from Lake Street Capital.

Good morning.

Hi Rob.

Good morning Rob.

In your E&C business you had a nice uptick in orders and I know you said you're taking additional orders now with capacity but what is the market demand there? Is that still holding in solid and where are you seeing demand coming from in that segment?

As we have talked about, the biggest near-term potential is small or mid-scale LNG for growth. Gas processing continues, equipment for gas processing continues at a good pace. Although we believe it will take some completion of some of the petrochemical plants to increase demand on ethane, and completion of some more propane export capacity from the US, to drive demand for natural gas liquids and to come back to the peak we saw in 2010/2011 of natural gas processing demand. We have seen some good orders for Air Separation equipment, particularly in China. And we believe that going forward that will continue as economic activity ticks up, will continue. For global-scale LNG, we think that we will see additional opportunities long-term over the next 10 years with additional awards to Chart possible, say, in the second half of 2014/2015.

On petrochemicals, there are a lot of active projects, as I mentioned, for ethylene and propane dehydrogenation or propylene production. We have seen one plan go forward; there are at least two additional plans that are close to going forward. We think within the next 12 months. The speed that those go forward is going to be dependent somewhat on the macroeconomic environment of GDP growth rates. Because as I talked about earlier, when growth forecast are lowered, it decreases the ability to sell new capacity into that market unless you see that forward growth, so clarity in global GDP growth rates will accelerate the number of ethylene plants and petrochemical plants that go forward. And the economics for producing those petrochemicals from natural gas liquids at US prices are very compelling. But it doesn't do you much good if there is too much idle capacity globally.

So basically, all of our markets look very positive; we are a little fuzzy on the timing of how big each one gets over the next 18 months. But there's enough positives that we can continue to grow based on that.

Okay great, thanks for the color there. I think you also mentioned in your D&S business that you are seeing increased quoting in Southeast Asia. Can you give us some color there? Are you seeing what China is doing, expanding to other Asian countries, and so what is the dynamic there and what is the opportunity for you?

What we're seeing is a number of opportunities for LNG liquefaction or LNG receiving terminals that are smaller/midscale, which would utilize our storage equipment. We are seeing increased interest in using natural gas or LNG as a diesel fuel replacement. And the quality and pace of those inquiries, and progress locally in terms of permitting, leads us to believe that we will see this as a good growth potential. We have added some resources in Southeast Asia on the sales and marketing side and engineering back up side because we see it as a very attractive development market. Those discussions have included projects in Indonesia, Singapore, Vietnam, and Thailand.

Okay, thank you very much. I will turn it over.

Greg McKinley from Dougherty & Company.

Yes thank you. I am wondering if you could talk a little bit about the acquisition environment. Are there - and for competitive reasons I doubt you'll get too specific -- but when you look at your equipment capabilities today, are there any holes in your offering that you feel would give you an opportunity to fill out your offering to customers, and is that still significant opportunity for Chart?

It is. It is difficult to be more specific than that. I would say that we see significant organic growth opportunities for our business. And that has taken more of our focus and attention at the moment. But there are also a number of areas that we think are attractive growth opportunities that either with bolt-on acquisitions or even making slightly larger acquisitions in adjacent spaces, could be attractive. The timing of that is even more challenging to call than when customers orders will go forward.

Yes, okay. How are you feeling about capacity right now? It seems that just as soon as you complete a capacity expansion, with the momentum in your business, it is always difficult to get out in front of where we think demand is coming from. How do you think you will feel you will be positioned more from a D&S standpoint over the next year or so?

It is a challenge but it's a good problem to have. I think that in general in the US and Europe we are very well-positioned, although there are some areas, some pieces of equipment where we are operating at fairly high levels of capacity utilization. Particularly on very large storage tanks that are typically used for LNG liquefaction plants or LNG receiving stations. And we have some current projects that we are working on that would expand that. In China, we are currently capacity-strapped because it has been a full 12 months since we completed our last capacity expansion. We're looking at significant capacity expansion in China within the next 12 months.

Thank you. And then what are your thoughts on the opportunity for Europe to emerge as a market where LNG transport fuel activity starts picking up? Or do you see that being dwarfed in the near-term by what is going on in North America?

I would say yes to both questions. I think that the marine market in Europe, because of the strong technology leader in Europe has traditionally had in shipping, we see that moving forward very actively. And probably being a market whose size develops on pace with North America, perhaps ahead of North America. And comparable to China, although the sheer size of China means it is hard for anybody -- any other region of the world to be comparable to China, when it really gets down to doing things. So for the marine market I see Europe as being a very attractive opportunity over the next few years. We are seeing progress in the heavy-duty trucking market, with each of the engine manufacturers putting more effort into developing comprehensive solutions and having comprehensive offerings. Ultimately that will come. We are also working on a number of fuel station applications in Europe that I think will continue to grow. So that is -- for heavy-duty transportation the infrastructure buildout is still a couple of years behind the US. But they will have the capability to catch up fairly quickly.

Okay and thank you and last question, we talked about small scale LNG liquefiers domestically as well as in China. Can you share any thoughts on how significant those two regions will be compared to each other in terms of your business opportunities over the next 12 to 36 months, or are we seeing the US ramp so quickly that it could become meaningful in relation to what you have been doing in China the last couple of years, or how would you guide us to think about that?

I think that the pace of orders and the pace of market growth in China will continue to outstrip the US. For the next probably18 months to two years. US activity levels well ramp up quickly from late 2014. But while I think we will get, after 2014, I think you will see the market share of LNG as opposed to diesel grow rapidly in North America. You have to keep in mind the Chinese market for diesel fuel when you get out to 2015/2016, is going to be four to five times the size of the US market. With that as a caveat, it is tough for the US to actually catch up to China in terms of sheer numbers.

Okay. Thank you, nice quarter.

Thank you.

Robert Norfleet BB&T Capital Markets.

Hi guys this is John Allison on for Rob. Congratulations on a good quarter.

Thanks John.

First off, just to add, off the bat to the capacity question; I want to know would you consider outsourcing work to third parties to gain some additional flexibility there?

We both consider it and do it, but we limit the amount of outsourcing on critical bits of knowledge or skills from the standpoint of not wanting to encourage more competition than necessary.

Right. Okay. In regards to pricing, with capacity as tight as it is in E&C, could you discuss your strategy on raising prices on new orders going forward?

Our strategy is to maximize the profit generated over the medium term. And that means that this is a very fluid and dynamic situation which is competitively sensitive. But Chart is in the position of being a -- of having a very sound balance sheet, with very big future prospects. So there is oftentimes a conscious decision made to not push price as hard as you might for the short-term, to have a better market position in the future.

Got you. When we look at the potential margin expansion in E&C over the next several years, while a portion of this is from new capacity leading to higher utilization rates and fixed price absorption, are you basically saying that price is a factor but not necessarily the largest one?

Correct. In the markets we are selling to and at this stage of market development, ability to deliver product quickly is very important. And ability to assure our customers that they will have no untoward surprises in placing orders with us is what we think are the most important criteria for winning orders and growing. It's also worthwhile to point out that historically in our business, one of the drivers, the largest driver for us raising prices is associated with commodity pricing of the raw materials we use. Because they are a significant part of our total sale price. And currently while we are in a strong growth position, generally the markets for our chief raw materials are fairly soft. So that our material prices --there is very little upward pressure on those. So that tends to create a stable price environment on the sale prices of our products.

Okay great. Thank you so much.

Thank you.

Tom Hayes from Thompson Research Group.

Thank you, good morning gentlemen.

Good morning, Tom.

Michael, this question is for you. Last quarter you indicated on the SG&A line you felt comfortable in the $195 million to $200 million range for the full year; is that still a working assumption?

It will be up a little bit. Between $210 million range, a couple reasons. One is related to our continued LNG build. As Sam mentioned we are -- we continue to add people and infrastructure for future opportunities to position ourselves well to take advantage of those opportunities as they come forward and they are not going to generate revenues likely this year. That is the primary reason. I also -- we have some stock compensation expense in there. With the rise of our share price, that increases that expense and that is captured in the SG&A line.

Okay, great. And then kind of a two part question, I guess for you Sam. On the D&S -- on the growth on the D&S order side. I'm assuming that most of that is coming from LNG applications versus industrial gas applications. Could you just confirm that? And then as far as the growth in the market, or the growth in your order business, is that coming from new applications coming online or are you guys taking share or a combination of both?

First with respect to LNG versus industrial gas applications. I think that our order intake for industrial gas applications is nominally flat on last year. And fairly well mirrors the comments that you have seen from the industrial gas majors as a reported over the last couple of weeks of flat to slightly down on volumes. So the more traditional industrial gas applications we are seeing down. We are seeing some increase in demand for some of our end-market solutions or differentiated solutions, so for instance, the sales of bulk tanks is relatively soft. The sale of micro-bulk which affords producers and distributors a lower-cost method of distribution are up slightly.

Okay.

The second part of your question, as to new applications versus taking market share in industrial gas; the growth is in newer products, newer applications. There are new competitors coming into the business. Most of that attention is focused on LNG. I think that we are holding our own or doing a bit better than the market overall in winning our fair share of LNG-related orders. We find that is happening both with new customers coming into the market and also more established customers who come back to Chart or give us orders because of our overall value proposition.

Great, thank you.

Pavel Molchanova from Raymond James.

Thanks. Most of my questions have been answered, but a conceptual one for you. So there is now something like 30 pending or under some sort of permitting process LNG projects between the US and Canada, and I'm just curious what outreach or marketing efforts you guys are engaging in with respect to all of those potential project developers domestically?

We have got a group that spends all their time calling on all those potential customers. We exhibit at all of the major trade shows. We talk daily, weekly, monthly with most of those companies. Either the project developers, the energy companies who are the end users; proposing to go forward with those and the EPMC contractors who are hoping to build those plants.

This may be a little bit academic I suppose, but any sense of when the next permits might be handed out by the DOE above and beyond Sabine Pass?

No, I have talked at length about my forecasting capabilities being limited. When it comes to predicting DOE or government action I claim no capability whatsoever.

I understand. I appreciate it, guys.

Chase Jacobson from William Blair.

Hi, good morning, thanks for taking my call. I don't want to be a party pooper here at the end of the call, but you mentioned that you are strapped for capacity in China and that you are going to be looking for significant capacity expansions in the next 12 months. Once you decide on that, how long do those capacity expansions take to build and what does this mean for revenue and order growth as we look here in the medium term over the next several quarters?

We have demonstrated over the last couple of years that we have the capability to grow our business in China between 50% and 100% a year. I don't think we have lost that capability.

Okay. That is pretty straightforward. And I think a similar question on the E&C business, the revenue growth came down quite a bit this quarter. Is that because of the lull in awards in the second part of 2012 or is that because of capacity? How long do they -- when we think about the ethylene orders, or the order that you had this quarter, should we think about the timing of that as similar to the large LNG orders you have had in the past?

That is more timing in this quarter, Chase. Right now we have the large-scale LNG projects coming through out of backlog into revenue this year. A lot of it is timing when the customer is -- depending upon their schedule and when we can move it out of revenue into backlog and move it forward. That is what is rolling through now. It is always hard to predict when it is going to come through and we try and do that but we are not always on target. So it can go up or down each quarter this year in particular. Because some of those large-scale projects are rolling through for Wheatstone and Pacific AP LNG that we are currently in the process of building out. And some of the smaller scale orders move certainly throughout a backlog and into revenue much quicker.

Okay. That is helpful. Thanks.

Jeff Osborne from Stifel Nicolaus.

Great, good morning. Most everything has been answered but just two quick ones here on PetroChina; obviously a nice string of orders here. Is the plan from them to give you a rolling six-month forecast as you have now had three or four quarters in a row of consistent orders? What would be the rationale of not doing some kind of broader framework agreement and having a longer-term deal in place?

Lots of possibilities under discussion. I would view it as; there are 13 operating oil-fields or operating divisions within PetroChina. We have had large awards from, or significant sales to, three of those operating divisions. We're doing our best to become a favored supplier as the other operating divisions commence their rollout of LNG infrastructure.

Okay. I assume of PetroChina, no issue in terms of credit availability for them? Are you seeing a broader credit impact in China with either PetroChina or any other potential customers?

I think if you look in the balance sheet of PetroChina and the PRC there is not a lot to worry about.

That was my expectation. Last question for you, how do we think about the margin trajectory in 2014 in particular as the La Crosse capacity comes on with the E&C division in particular? Any teething pains we should consider in the first half of the year or throughout the year?

Those are always an issue that we worry about a lot internally. I think from the 20,000-foot level it may cause some small variance in the gross margin. But we have done this before. I think we've got a very good plan for ramping that capacity up. I feel confident we will do a good job.

Great to hear, congratulations again on the results.

Thank you.

Martin Malloy from Johnson Rice.

Good morning.

Good morning Marty.

Could you talk a little bit maybe about the product lines that you have that you feel most confident about in terms of your competitive position whether from a technology standpoint or relationships with customers?

I think that we put extraordinary effort across all of our product lines into continuing to differentiate them. And for what anyone who has followed Chart, you will see that the current product in favor or market in favor changes fairly dynamically over time. And I think that the focus of everyone here at Chart is continuing to improve our product offering, our service to customers, across the full range of our products. And the reason we have been able to grow the business successfully is that when the opportunities come up, Chart gets the call and Chart wins the order because we are continually doing that. So I don't think there are any products in particular which I would single out as being the ones that drive our results. I think we have been working across a broad front and when we see a market that we think is going to be attractive, we work very hard to have lots of product variants that can service the needs of that market.

Thank you.

[Chat Mending] from JPMorgan.

Great, thank you for taking my call. I have a couple of questions. First is to chat on the China growth outlook. You mentioned that you expected to do 50% to 100% growth in China revenue. May I confirm, is it for 2013 target or is it a medium-term target? That is the first question. The second question is regarding the capacity in China. May I know your LNG within-station capacity as well as LNG trucks fuel tanks capacity -- manufacturing capacity in China right now? And the follow-up question is on your capacity addition plans in China. Thank you.

In terms of that forecast, whether it was 2013 or medium-term, it is certainly what we will experience in 2013. And it is also what I would expect to achieve in the medium-term. In terms of what we are going to add in the way of capacity, those plans are still under discussion. They have not been announced but I would anticipate us moving forward to effectively double our capacity or increase our capacity by at least 100% in China. In terms of specific capacity for products, virtually all of our products aimed at the LNG market are undergoing, while slightly different in terms of timing, undergoing capacity expansions that enable us to meet that forecast of 50% to 100% growth per year over the medium-term. And I think we have demonstrated that we can do that.

Okay, great, thank you very much.

(Operator Instructions)

Tom Novak from Advent Capital.

Good morning; Tom Novak at Advent. Just regarding LNG into the drilling and fracking market, can you share a little bit more about what you are seeing and how big this market to be? Specifically is there a capacity constraint right now in terms of available rigs and frack spreads that can actually utilize LNG? Is that what the bottleneck is?

I don't know that I would term it a bottleneck. There has been equipment certainly for drilling -- there has been equipment converted and there is opportunities to convert more. That market has seen lots of change going on so it's a matter of where do they allocate their resources to make the changes. That is challenging for us to forecast exactly the pace at which that goes forward. In the case of fracking rigs, there is higher consumption associated with fracking and there is some equipment development going on, both on our part and on the part of the E&P companies and the service providers, to come up with the most effective and reliable means of making all that fuel available.

Is a competing against field gas -- is that part of the issue?

There is a trade-off with field gas, yes, some understanding, and it is not clear to everyone, us included, what percentage you run rigs and frack spreads on field gas as opposed to LNG. The range of estimates that I have seen have talked about field gas being anywhere from 25% of the market to 70% of the market with the balance taken up by LNG. It is going to be very much field-specific as to whether you can use field gas or field gas economics versus LNG. Also going to be determined by the availability of liquids.

Okay. It sounds like the industry is still trying to figure out both the technology and economics, is that fair?

Yes. And I would say in terms of technology, it is the normal trial and error process that gets used in this, as to what works most effectively.

Right. Are the frack spreads and rigs that can utilize LNG -- are they somewhat first-generation or are they basically being modified existing rigs?

Both.

Okay. All right. Thank you very much for the color.

Thank you.

At this time I'm not showing any further questions. Now I would like to turn the call back over to Sam Thomas.

Thanks very much everybody. As you can sense from the questions and the responses to the questions, we've got a pretty exciting growth opportunity as we see acceleration of LNG infrastructure opportunities in Asia followed closely by North America and increasingly other areas of the world. We are also benefiting from increased use of natural gas and natural gas liquids in every step of the value chain on a global basis. We will continue to invest in our people, organization, and physical capacity to be well positioned to execute on what we consider to be an exceptional opportunity. Chart has a bright future and we are all excited to be part of building the Company that will deliver on that future. Thank you very much for listening today. Goodbye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.