Chart Industries Inc (GTLS) 2014 Q1 法說會逐字稿

Good morning, and welcome to the Chart Industries Inc. 2014 first-quarter conference call.

(Operator Instructions)

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.

A telephone replay of today's broadcast will be available following the conclusion of the call until Tuesday, May 6. The replay information is contained in the Company's earnings release.

Before we begin, the Company would like to remind you that statements made during this call that are not historical in fact are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statements.

For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the Company's earnings release and latest filings with the SEC.

These filings are available through the investor relations section of the Company's website or through the SEC website, www.sec.gov. The Company undertakes no obligation to update publicly or revise any forward-looking statements.

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

Thank you, Shannon. Good morning, everyone. I'd like to thank you all for joining us today.

Begin by giving you a brief overview of our first-quarter results, and Sam Thomas will provide comments on current market and order trends we see in each of our business segments. I'll finish up by commenting on our outlook for the remainder of 2014.

Reported net income for the first quarter of 2014 of $12 million, or $0.38 per diluted share. This included acquisition-related costs of approximately $800,000, or $0.02 per diluted share. This quarter also includes a $0.01 per diluted share impact associated with additional shares taken into account from our convertible notes.

Excluding these items, earnings per share for the quarter would have been $0.41 per diluted share. This compares to the first-quarter 2013 net income of $15.5 million, or $0.51 per diluted share. The prior-year quarter earnings would have been $0.54 per diluted share, excluding $1.2 million of acquisition-related costs.

Sales for the quarter were $266 million, and represented a decrease of 3% compared to net sales of $274 million a year ago. The decline was largely due to continued weakness in our BioMedical segment and weather that impacted our US-based operations.

For example, our Canton, Georgia BioMedical and Distribution and Storage facilities were shut down for six days during the snow and ice storms that impacted the South in January and February. Weather also impacted other sites, as well, and we estimate the weather-related revenue impact at approximately $8 million in the quarter, or $0.06 per share.

Our gross profit for the quarter was $77.5 million, or 29.1% of sales, compared with $79.5 million, or 29% of sales, a year ago. Overall margin dollars were down due to volume in our BioMedical segment, while the gross margin percentage increased due to project mix and better execution in our E&C segment.

With respect to the E&C business, sales increased 7% to $86 million, in the first quarter, led by improvement in our air-cooled heat exchanger segment. Gross margins were 28.7%, compared to 25.9% in the prior-year quarter. Improvement was due to a shift in project mix and better execution.

In D&S, first-quarter sales increased 1% year over year to $130 million, as improved volume in LNG truck-mounted fueling systems in the US offset a slowdown in industrial bulk activity due to adverse weather. Gross margins for DNS declined slightly to 28.1%, compared with 28.4% a year ago, due to changes in product mix.

In our BioMedical business, sales declined 21% to $51 million in the first quarter of 2014, compared with $64 million for the same quarter in the prior-year. The decrease was due to lower sales of respiratory therapy equipment in the US, as a consequence of the continued market restructuring driven by Medicare competitive bidding.

Additionally, BioMed was also impacted by adverse weather that closed our facilities for the six days I mentioned during the quarter. BioMedical gross profit margin declined to 32.6% in the quarter, compared with 34.4% for the same period in 2013, due to lower volume and higher warranty costs associated with respiratory therapy products.

SG&A expenses for the quarter were $50.9 million, up $3.7 million from the same quarter a year ago. The increase was due to acceleration of share-based compensation expense associated with retirement-eligible participants and an increase in employee-related costs, as we addressed the growing LNG space. SG&A as a percent of those sales was 19.1%, compared with 17.2% in the prior-year quarter.

Net interest expense was $4.1 million for the first quarter, which included $2.6 million of non-cash accretion expense associated with the Company's convertible notes. Cash interest for the first quarter was just $1.5 million.

Income tax expense was $5.2 million for the first quarter, and represented an effective tax rate of 29.7%, compared to an effective tax rate of 29% in the first quarter in the prior year. The increase in the effective tax rate was primarily due to the expiration of the R&D credit at the end of last December. And I'll turn the call over to Sam Thomas.

Thank you, Michael, and good morning everyone. Overall, while we're disappointed with the slow start to 2014, particularly in our BioMedical business, we are confident in the long-term growth through [operators] in the markets we serve.

As mentioned, weather had a significant impact on our US business during the quarter with respect to both lost production and customer installation delays. It turned the corner in March when order intake in our packaged gas business was better than anticipated. That increase in activity has continued in April.

Sequential orders were down in the first quarter of 2014 from fourth quarter of 2013, which is similar to what we've seen in previous years. However, our backlog remains strong at $722 million, up 23% from a year ago.

I'm pleased that our LNG business continues to grow. In China we had sequential LNG order growth during the quarter. And the recent announcement from the Chinese government regarding NS4 emission enforcement will help offset the impact of last year's natural gas price increase. This is for over-the-road trucks. The NS4 emission standards will increase the cost of diesel trucks and encourage more LNG conversion.

In addition, the Chinese government will also recently implement subsidies for the construction of LNG-powered ships. These two recent moves are the real drivers for continued LNG growth in China.

We're excited that we have now commissioned the largest brazing furnace in the world at our La Crosse, Wisconsin brazed aluminum heat exchanger facility, which brings capacity and lead time improvement. The detailed planning for our $80 million capacity expansion in China is underway, and we're happy to announce we'll be holding a ground-breaking ceremony in May.

Let me comment now on specific highlights for each of our business segments. Our Energy and Chemicals business booked $65 million in orders in the first quarter. Although this is down sequentially from $85 million in the fourth quarter, it's consistent with the seasonality we've seen in prior years.

Equipment for ethylene production is one of our E&C petrochemical product offerings, and we continued to see signs of growth in that market, as we received an $11 million award during the quarter for an ethylene cold box, and also received an $8 million ammonia cold box award in the quarter, pointing to petrochemical demand growth.

We continue to see upstream opportunities in the natural gas processing space. LNG opportunities continue to unfold for small to midscale applications. We are currently working on feed studies for a liquefaction plant in Utah and Louisiana. The Louisiana plant is a 2 million ton per annum liquefaction plant, consisting of four LNG production trains. This larger proposed plant will be used for LNG export and marine bunkering in North America.

We plan to close our E&C acquisition in Wuxi, China during the second quarter. As a reminder, this acquisition will add manufacturing capacity for brazed aluminum heat exchangers and cold boxes for the air separation and LNG liquefaction markets in Asia.

It also will enable our current E&C cold box fabrication, which supplies the natural gas market, to move out of our DNS Asia facility in Changzhou, increasing capacity for DNS LNG products. We see additional opportunities to provide a full spectrum of solutions to the air separation space in Asia, as well.

We continue to see momentum the shale gas development is having in North America, with continuing infrastructure investment in natural gas processing; LNG; NGL liquid, both domestic and export facilities; and finally, petrochemical investment with natural gas and NGLs as a feedstock.

Execution on our projects and backlog has improved, along with receipt of change orders outstanding, and is reflected in the improved gross margin. One of our two major LNG base-load plants in backlog is now complete and shipped in April.

Moving on to Distribution and Storage, we booked orders of $143 million in the first quarter, which is down 2% from our fourth-quarter orders of $146 million. Sequentially for LNG-related orders, China had better-than-anticipated order growth of 11%. In the US, we experienced 104% growth in a rebound from a weak fourth quarter.

We continue to believe in our decision to move forward with the previously announced China expansion. We are seeing LNG order activity come for more regional and entrepreneurial players that have joined the market.

As a reminder, in late February we announced an $80 million Greenfield expansion in Changzhou, China that will significantly increase our capacity for all the DNS products we serve in China. As I mentioned earlier, the expansion will commence during the second quarter, and we expect it to support continued revenue growth in 2015 and beyond. Ultimately, this expansion is expected to more than double our current capacity in Changzhou.

As mentioned earlier, our industrial business was impacted by weather during the quarter. And it's especially impacted our US bulk tank, business where revenue was down 15% from prior-year quarter, as customer installations were delayed.

After the weather turned in March, we saw positive signs as revenue, and our industrial package gas business grew 9% from prior-year quarter results. This has historically been a leading indicator of confidence in industrial market growth going forward.

In addition, we saw bulk shipments improve in March, and that continued in April. Finally, our LNG fuel tank business continues its growth trend, as sequential orders increased 68%.

In general, our industrial gas customers reported significant weather-related impacts December through February, with improvements in March continuing into April. Many are optimistic regarding improving North American industrial activity.

With respect to LNG in North America, we are encouraged by the increase in entrepreneurial activity in the LNG sector. For example, we just received a $7 million order in April for LNG global re-gassification units for oil and gas production applications from a new participant in the LNG space. We believe that there is potential for a number of service providers to move into the LNG space and be successful, similar to how new players have entered the drilling markets successfully in the Marcellus, Fayetteville, and Eagle Ford shale fields, as the benefits of fracking have improved.

In Europe, industrial demand is improving, and we're seeing several opportunities along the LNG supply chain. We recently teamed with a customer, Groupo Sousa, to implement an LNG virtual pipeline from Madeira Island off the coast of Portugal. We supply 40-foot ISO containers to store LNG to deliver the island's power needs.

We're also working with Shell in Europe to build three LNG fueling stations for heavy-duty trucks in the Netherlands. We anticipate the first station to open in the third quarter of 2014.

In our BioMedical segment, orders of $55 million were down 2%, compared to $56 million in the fourth quarter. As Michael mentioned earlier, sales for respiratory equipment in the first quarter remained weak, as market restructuring and consolidation amongst our customers in the US due to the Medicare competitive bidding impacted our order intake, along with the latest in expected European government tender market demand.

Our cryobiological cold storage orders were down slightly from the fourth quarter of 2013, due to normal seasonality with respect to government spending programs. We see continued focus on stem cell R&D in Asia as a key indicator of demand moving forward.

On-site gas generation orders for the quarter were flat compared to the fourth quarter of 2013, as project award timing impacted the quarter. We anticipate growth in on-site generation demand, driven particularly by the environmental benefits of our waste water processing technology, and have dedicated more resources to grow this space.

Michael will now provide you with our outlook for the remainder of 2014.

Thanks, Sam. As Sam mentioned, we had a slow start to 2014 due to weather impacting our business, North American industrial activity, and BioMedical continuing to work through the effects of competitive bidding.

In addition, in early April, a major oil company customer curtailed and suspended certain North American LNG infrastructure projects for an order previously awarded to our DNS business during 2013. The result of this action will be reflected as a reduction in orders in the second quarter of approximately $10 million to $20 million, depending on the customer's final plans.

These events have caused us to reevaluate our anticipated results for the remainder of the year. And as such, we are changing our sales and earnings guidance.

Sales for 2014 now are expected to be in a range of $1.25 billion to $1.3 billion. And diluted earnings per share are expected to be in a range of $3 to $3.40 per diluted share on approximately 30.7 million weighted average shares outstanding. This excludes any dilution impact resulting from the notes or any acquisition-related costs.

This compares with previous sales guidance of $1.3 billion to $1.35 billion, and earnings guidance of $3.10 to $3.50 per diluted share, which also excluded any dilution impact resulting from notes or acquisition-related costs. As we stated last quarter, we anticipate stronger momentum in the back half of this year, as we expect the impact of competitive bidding will work through respiratory markets, and the LNG infrastructure build-out will continue.

I'd now like to open it up for questions. Shannon, please provide instructions to the participants to be able to ask questions.

(Operator Instructions)

Eric Stine, Craig-Hallum

Hi, Sam. Hi, Michael.

Hi, Eric.

Morning. To clarify, at the very beginning of the call, you called out $8 million and $0.06. I was just unclear. Was that for the BioMedical business alone, or was that for the overall business? And then based on that answer, maybe some of the other areas or help quantify the shortfall versus what you had been expecting previously.

That was for the overall business, Eric -- the $8 million and $0.06 per share. A lot of it was in Distribution and Storage.

Okay.

That though was a quarter that probably was -- fair to say, that was below what you would have expected a couple of months ago. It's DNS, but BioMedical was the margin impact of the shutdown. Is that something that caught you off guard? Or how should we square the $0.41 number versus what you would have anticipated outside of weather?

It was below our expectations. But our expectations, as you are aware, we don't publish quarterly numbers. We publish annual numbers.

Our expectation for the quarter was at the low end of the range compared to where the consensus was for the quarter.

Okay.

And that we normally disclose. So if you add in the weather-related impact, we weren't all that far off the low end. As we previously indicated, the back half is much stronger.

Now with the delays and curtailments in the orders from a major oil company, we've had to reflect that in. We've also reflected in some continued sluggishness in the BioMed market. (multiple speakers) -- going forward.

Right, understood. In terms of the major that is delaying that, is that liquefaction? Or should we think about that in terms of station infrastructure?

Right now, liquefaction. That's what we [audio break] tanks or storage for liquefaction.

Got it. And that's the one that's been out there for a while. Okay.

Turning to China, can you talk about the sequential growth -- or on the order side, LNG being better than anticipated.

Any clarity into is that tanks and station infrastructure? Is it liquefaction? Or is it both? And then, what does that do to your view for the remainder of the year -- timing and magnitude of the recovery in the second half?

There was growth in our vehicle tanks and mobile equipment to LNG tankers and also in fixed stations. It goes fairly much across the board for our LNG product range in China.

The forecasts are for continued growth of demand from the heavy-duty trucking sector. It looks fairly positive

Okay.

And you did mention you're starting to see the demand spread out beyond the majors to some regional players. Curious, what are you seeing on the liquefaction side, as well, in support of what you just talked about -- the tanks, mobile, and the stations?

We continue to win orders for cold boxes for liquefaction in China. There is significant quotation activity for additional liquefiers.

And just as we are seeing this move to smaller regional players and entrepreneurs on the Distribution and Storage equipment, that's also very much the case in orders we're receiving for liquefier cold boxes. But the major state-owned enterprises are also involved in quoting additional liquefiers.

Okay. Last question for me.

You touched on it; but in the past, you've mentioned that beyond PetroChina you're starting to see quoting activity from CNOOC and Sinopec. Any update there -- whether that's continued, has accelerated, or details would be great. Thanks a lot.

Yes, on both of the other energy majors in China, the quotation activity continues. Discussions are progressing. Watch this space, however, for orders.

Thank you.

Rob Brown, Lake Street Capital Markets.

Good morning.

Could you give us some more color on the truck tank shipments? How's that been increasing, and where do you stand in terms of capacity there?

We have significant capacity available and additional capacity readily added within the demand growth requirements in terms of the time it takes us to add capacity. So we're well-served there, and well able to handle the demand.

A major fleet has made announcements about increasing their use of LNG trucks, and we're delivering to them through this year.

Okay.

Do you continue to see order flow growing in that segment, or is it just the one fleet?

That's certainly the largest and most notable, but there are a number of fleets buying from 10 to 15 units.

Okay, good.

And then, you had said that order flow is picking up into April here. Are you able to ship very quickly against that, or does this build for more of a Q3 ramp? Or just maybe give us a sense of how the quarters play out as this weather-related issue recedes?

This is referring to the Industrial Gas business for DNS. In packaged gas, the lead times are in the two-week to eight-week time frame, generally.

For bulk shipments, the lead times are in the 4-week to 12-week lead time, generally, although there are customer tanks on the ground that, when they call for installation, they can take delivery in a week. So the average lead time on those could also be in the four- to six-week time frame.

If this trend of improving order activity from the very low levels of January and February continues on, it can be reflected in the second quarter as well as the third quarter.

Okay, great. Thank you.

Greg McKinley, Dougherty and Company

Thank you.

I wonder if we could talk about the environment for BioMedical and your expectations for recovery in the second half of the year? My recollection is, looking back, there is a notion that industry was destocking equipment heading into this competitive bidding process, as service providers weren't quite sure who would continue to serve clients after that.

Now we've had those contracts awarded, and BioMedical has been still somewhat lumpy the last couple quarters or challenged. How much of a recovery in that segment are you expecting in your guidance? And can you give us some color as to why you feel that that will unfold?

Clearly, we're not happy and didn't forecast appropriately where the business would be. It's been a challenging period with uncertainty. And several large customers have gone through ownership changes, so it's been a dynamic environment.

We are expecting, in the second half of the year, improvements of perhaps 13% to 20% in volume. But the market still is unsettled.

And that's both a US issue, and then there have been several countries in Europe where there are large tenders that are supposedly close to being awarded, which would provide that volume. But the actual release dates seem to be slipping.

Okay.

Moving away from BioMedical, this year you're breaking ground on your expanded China facility. Of course, you just got done expanding your Wisconsin facility. Is there a degree of, call it, overhead absorption?

I'm just trying to think about has this capacity expansion weighed on 2014 earnings in a way that as we look to those facilities getting utilized, we could see some real margin expansion that might be masked with this year's capacity additions?

Clearly, in Distribution and Storage in North America, we've added significant capacity over the past year. With the soft volumes that we had in the first quarter, that capacity hasn't been utilized. So, yes, there's an element of overhead associated with it.

By the same token, we see industrial demand improving through the year and continued growth in LNG demand across the full range of Distribution and Storage projects. I'm pleased to have the capacity, and we think we'll be able to respond quickly to customer demand with both excellent lead times and excellent value.

Greg, it would be the same thing in our E&C business as we ramp up the new furnace. There's going to be, obviously, some inefficiencies as we get that up and running and online.

There are some additional costs that will be absorbed into that business or have absorbed already. We'll continue until we get it up in full production. That's another factor.

The China facility really hasn't started yet in terms of that reduction or that [technical difficulty] the early stages. We might see some of that later in the year; but keep in mind, it's a separate facility. It's not the existing Changzhou facility that we have.

And we are going to be freeing capacity up in our Changzhou facility as we get the Wuxi operation for DNC up and running as we go into second and third quarter.

The point is, as you asked the question, are there going to be some costs absorbed because of the ramp-up at these different facilities? Absolutely.

Yes. Okay, thank you.

And then what color can you provide -- China grew exceptionally strong in the first half of last year, slowed down following the price reforms. And then it seems to have shown some order activity maybe a little more quickly earlier this year than my sense was what it was expected.

What is your outlook for the remainder of the year? Is there any intelligence around what the future price reforms are expected or how quickly you think the market will start responding to these NS4 emissions standards?

Or maybe you believe that's already happening. I'm just curious what your thoughts are there.

I think we are seeing improvements in demand and activity from the third and fourth quarter of last year. And the anticipation is that we'll progressively improve through the year.

Okay. Thank you.

Kathryn Thompson, Thompson Research.

Hi. Thanks for taking my questions today.

The first question is on the E&C segment. There are a certain number of projects that carried inherently lower margins. Where do you stand in terms of the project flow-through in terms of those lower-margin orders?

And it would be helpful if you could quantify in terms of revenues that are remaining and the average margin for those remaining lower-margin projects.

There were two projects cited for baseload LNG. The first of those, we completed shipments in April. So there is no backlog left or margin in backlog left anticipated for that project. It was perhaps at 97% complete at the end of the first quarter.

The second project is roughly at 40% completion and pending customer change orders, should ship in the first half of next year, the final train.

What's the magnitude of that second order?

It would have roughly $60 million left in backlog.

Okay. And average margin?

Probably in the 10% range.

Okay. Thank you, that's helpful.

Shifting into the backlog -- and I apologize. I got on the call slightly later; so if you covered this, apologies on my end.

In thinking about the $10 million to $20 million that may or may not be backed out of the orders, how frequently are backlogs canceled? This is obviously bigger in magnitude. But put in relative sense historically, the frequency, the magnitude, and the reasoning for those larger cancellations.

It's quite exceptional. I would say that we typically experience significantly less than 5% of our backlog being canceled, perhaps as low as 1% or 2%.

I think to get to a notable number from memory of, say, over $5 million, I would have to go back to the 2007 time period. So it's an unusual event for us.

With this particular customer, the outcome is still uncertain as to what the impact is in terms of actual backlog cancellation and also the profit impact. There are a number of moving parts to it and a number of options being considered.

Are you able to clarify the reasoning for the change?

Yes.

A significant customer announced that as part of reduction in their capital spending plan, they were delaying the implementation of two liquefiers.

Okay.

And then finally, on SG&A, how should we think about modeling SG&A forward across guidance, either on a dollars basis or on a percentage of total sales?

It really should be in the low $50 millions over the next three quarters. That's our current expectation.

Okay. That's helpful. Thank you.

Chase Jacobson, William Blair

Hi, good morning.

Good morning.

Another question on the E&C margin.

I think in your prepared comments, you mentioned something about change orders in the quarter in that business. Can you clarify that? And did that have a benefit to gross margin in the quarter?

Yes.

Under percentage completion accounting, when there is a change in the work scope, we start charging for the additional costs immediately when we are aware of them. But we don't recognize improved revenue, and hence, improved margin, until we have an agreed change order from the customer.

We talked about last quarter that the margins were impacted by increased costs associated with changes that were not yet recognized by change orders from the customer. As we work forward in the second quarter, we have been able to recognize some of those change orders.

Okay. So maybe another little benefit in the second quarter?

Then looking at the demand and the revenue there, you mentioned a couple small and midscale LNG projects that you're doing feed for. Can you give any insight as to your expectation of a larger award timing?

And how important is backlog growth in that business to see revenue growth later in the year and into 2015? I know we are still early year in 2014; but it's a long cycle business and backlog is flat year over year. Any color on that?

Yes, these are -- first, it's very difficult to call the timing on major awards. Second, the gating factor for probably lead time is in the 26 weeks for time period; for heat exchangers, something in the 40-week time period; 40- or 50-week time period for large cold boxes.

Depletion of backlog over the next two quarters doesn't impact 2014 results, but it certainly impacts late 2014, early 2015 results.

Got you. I appreciate that. Just one more on the DNS side.

You mentioned that awards in China in DNS were better than you had expected. What does that mean for the 15% to 20% revenue growth expectation you gave us last quarter for sales in that business?

Tact.

Okay, thank you.

Pavel Molchanov, Raymond James

Thanks.

Can I ask a high-level question about LNG exports? Since you last did the earnings call, I think another two LNG export projects in the US got DOE approval. And we've been talking about this theme for probably over a year now.

Any movement, as far as you can tell, on getting into some of these potential developments as they move towards FID?

We are certainly involved in discussions and quotations on at least two, and early-stage discussions on more than two of the projects. We don't anticipate awards in 2014 for the ones we're working on.

Is that just based on timing of reaching FID from the operator's perspective?

Correct

Okay.

And then back to China, you've alluded in the past two issues that PetroChina and management shakeup, et cetera. When do you think that subsides?

We are still executing on-orders for PetroChina. Things are stabilizing, although some of the projects are being handled at joint venture companies that are associated with PetroChina.

We anticipate, with respect to PetroChina, later in the year 2015, but we are seeing increased attention and activity with CNOOC- or Sinopec-related companies picking up some of the slack or encouraging developments in building out LNG infrastructure in different parts of the country.

All right. Appreciate it.

Bill Priebe, Geneva Capital Management.

Good morning.

The BioMedical area, obviously, for many on the call, is not the primary reason to buy the stock. We understand that. Yet, it's really struggled with demand for quite some time.

You've talked about running down inventories and buyers' concerns over the healthcare rollout and what it means.

But beyond that, have you looked at the internal effectiveness of your sales force, ways to cut costs? I just wonder, I think some on the call are getting weary of quarter after quarter where it more or less drags down some of your operations.

Just address that area more fully and give us an idea of when we can expect a meaningful improvement in momentum.

Okay. The business is going through a significant transition, as globally, but particularly North America and Europe, there is pressure on reimbursement for respiratory therapy. That has led to the market gravitating to lower-cost forms of respiratory therapy, particularly oxygen concentrators that don't require delivery of liquid oxygen.

Going back two years, over 80% of our sales in the respiratory therapy market were for liquid oxygen, which required deliveries. We saw that and invested in companies that manufacture concentrators, both home and portable concentrators that are wearable.

That was an appropriate move because the liquid oxygen therapy, which was our strength, has been diminished by over 50% in the last few years with the acquisitions of the portable concentrators and stationary concentrators making up for that difference.

The shakeout as part of Medicare reimbursement cuts is still going on. It's taken longer than we anticipated.

We are doing significant work to improve our operational efficiency and lean the organization out so that we're positioned for what, ultimately, is still a growing market in terms of patients to be able to successfully be a major player in that.

Yes, we've been disappointed, as investors have, in the way the market has reacted. But we think we're approaching it properly, both in terms of controlling costs and preserving a future market-leading position.

Real quick interjection, one little follow-up.

Do you have any feeling if this turnaround, based on whatever assumptions you're making regarding federal regulations and state regulations and how the major players are reacting, that you could start to see improvement in the third and fourth quarters? Or is that too optimistic?

We believe because of operational improvements, we will be able to show improvements in the third and fourth quarter, yes.

However, I'm becoming more circumspect based on my past years' ability to forecast what's happening in that market. But we will address it both from the standpoint of making sure we have the right products, but also having the appropriate cost structure.

Thank you very much.

Dennis [Yip], Daiwa Securities

Hi, good morning.

I am enjoying this from Hong Kong. I would like to ask two questions about China.

The first is, can you give us some color about all the backlog of the first Q 2014? Year over year, is there any increase of that or drop? This is the first question.

The second question is about the subsidy of the LNG power issues. Do you see there would be more orders from this part? Do have any projection of that? That's the questions. Thank you.

We had significant first-quarter and second-quarter orders from PetroChina in 2013. We've had a broader base of orders in 2014.

I would anticipate that our backlog is down slightly from what it was in the first quarter as a result of those large orders hitting late in the quarter. I don't have the number immediately at hand.

With respect to your question on the subsidies towards ship building, because they do involve subsidies in the cost of ships, I would anticipate that that will significantly develop the marine market demand in China. There are sufficient liquefiers to supply that demand, but you do have to remember that you're working within ship construction cycles.

The government regulation and incentive has been announced. There is typically a period of 6 to 12 months to understand the regulation and to actually have the subsidies be available.

And then you have whatever the ship construction time -- lead times will be, which I would just say roughly would be in the 6 to 18 months.

It's not something you're going to see impact 2014 sales dramatically, except perhaps for marine bunkering stations. In terms of ship construction, I would look to 2015, 2016.

Thank you very much.

Another question is about your competitors. CIMC has recently aggressively to get the EPC contract to build the big LNG storage tank. Do you think you will focus more on working, cooperating with the city gas operators and also the big three oil majors to get more EPC orders going forward?

I'm not familiar with the CIMC announcement as to what spas, tanks were involved. Whether that was normal, vacuum-insulated tanks or larger site-erected tanks.

I do anticipate opportunities for us in the shop-fabricated vacuum-insulated storage tanks that we manufacture, yes.

Okay. Thank you very much. That is all of my questions.

Alex Potter, Piper Jaffray

Hi, this is Winnie asking a question on behalf of Alex.

I think it was mentioned that Chinese orders grew more than expected. We were wondering if you can comment on the margins of these order. Are they higher or lower than the historical business in China?

Across the board, they were probably slightly lower than the second half of last year due to mix. But, I would say they're all in the low 20%s gross margin range.

Great. Thank you.

To follow up on that, is it possible to quantify the amount of LNG orders that were received in China? It was said it was higher than expected, but how much was it?

No, we don't report that separately.

Okay, great. Thank you.

(Operator Instructions)

Greg McKinley, Dougherty & Company

Thanks.

Sam, how would you characterize the cadence of the small-scale LNG market in North America? Obviously, there have been a number of projects in the last nine months that you've been involved with. And my understanding is that there's many other small projects being talked about.

Is that market continuing to develop as you and others might have anticipated, or is it accelerating? Any color there would be helpful. Thank you.

I would say the quotation activity and inquiry activity level is at or above expectations.

In order to go forward, the challenge has been, unlike traditional baseload LNG, where you don't go to final investment decision or go forward until you have all state contracts in 20 years or 75% or 80% of the output. These require making assumptions as to how quickly you'll build customer demand and customer commitments. And at the current level of overall infrastructure buildout, that's challenging.

The process from a feed study, if you will, or a firm quotation, to moving forward with a Board of Directors decision to build a liquefier and commencing construction has been more variable than we anticipated. But we do see good progress being made with a number of orders booked, as we've announced, and several more in the offing.

Thank you.

Thank you.

I'm showing no further questions at this time. I would like to turn the conference back over to Sam Thomas for closing remarks.

Thank you.

We're positive about the long-term fundamental drivers for our business and are committed to meet the demands in the LNG, petrochemical, air separation, industrial gas, healthcare, Iife sciences, and environmental markets we serve.

We continue to make progress on our facility expansions and are excited about our ability to provide superior service and value to our customers.

Finally, we believe a positive trend is unfolding in the global LNG market as in China, and now in the US, we're seeing an increasing number of smaller regional and local entrepreneurs enter the market.

We're well suited to meet this new demand, and we're excited to serve these customers with quality products, service, and dependability that we can deliver day in, day out.

Thank you, everyone, for listening today. Good-bye.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.